Relinquishing Riches: Auctions vs Informal Negotiations in Texas Oil and Gas Leasing

Key Takeaways:

• Oil and gas resources are spread throughout large sections of the United States, primarily beneath privately-owned land.
• In sharp contrast to the rest of world, landowners in the United States usually own the mineral rights on their land. To turn minerals into revenues, landowners must partner with oil and gas companies by signing mineral leases with them.
• Most landowners use an informal “negotiation” process to choose a contracting partner and agree upon terms. Existing survey evidence suggests that many landowners are prematurely entering into lease agreements, without shopping around for the best deals, researching the process, or consultation with a lawyer. In contrast, state and federal governments use auctions to choose contracting partners and set mineral lease prices.
• Using data from Texas between 2005 and 2016, this study compares outcomes from negotiated lease agreements on private land with leases on similar public land that are sold through open and competitive auctions.
• The authors find that auctions generate upfront payments that are 67 percent higher than those in negotiated transactions. For the average negotiated lease, this difference is worth more than $200,000. In total, auctions could have generated hundreds of millions of dollars in additional upfront payments than negotiations did.
• Auctioned mineral leases are also much more productive than negotiated leases. They are more likely to be drilled and produce about 44 percent more output. This greater productivity increases industry output, and increases landowner revenues by about $250,000 per lease.
• Because most private land is leased using informal and decentralized negotiations, there may be large private and public benefits from using auctions instead of negotiations in the broader population of U.S. mineral leasing.