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

42 Pages Posted: 1 Apr 2019

See all articles by Thomas Covert

Thomas Covert

University of Chicago - Booth School of Business

Richard Sweeney

Boston College - Department of Economics

Date Written: March 2019

Abstract

This paper compares outcomes from informally negotiated oil and gas leases to those awarded via centralized auction. We use data on all contractual characteristics and production outcomes for a class of state-owned mineral rights overlying newly discovered shale formations in Texas, between 2005 and 2016. On roughly three quarters of this land, the Texas Relinquishment Act of 1919 authorizes private individuals who own surface-only rights to negotiate mineral leases on behalf of the public in exchange for half of the proceeds. The remainder are allocated via centralized auctions. Using variation from this natural experiment, we find that almost a century after leasing mechanisms were assigned, auctioned leases generate 67% larger up-front payments than negotiated leases do. The two mechanisms also allocate mineral rights to different oil and gas companies, and leases allocated by auction are 44% more productive. These results are consistent with theoretical intuitions that centralized, formal mechanisms, like auctions, outperform decentralized and informal mechanisms, in both seller revenues and allocative efficiency. Our findings have important implications for the more than $3 trillion of minerals owned by private individuals in the US, the vast majority of which transact in informal and decentralized settings.

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Suggested Citation

Covert, Thomas and Sweeney, Richard, Relinquishing Riches: Auctions vs Informal Negotiations in Texas Oil and Gas Leasing (March 2019). NBER Working Paper No. w25712. Available at SSRN: https://ssrn.com/abstract=3363450

Thomas Covert (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Richard Sweeney

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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