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The Market for Privately Owned Mineral Rights in the US Shale Context: A Dynamic Approach
Abstract
One of the unique aspects of the US shale boom is that firms have purchased most mineral rights from thousands of small landowners. Though several studies have focused on cross-sectional aspects of these leases, none study their dynamics. Incorporating several aspects of the unique US context, I develop and simulate a model of depletable mineral rights that matches several key aspects of data on leasing and drilling in the US Eagle Ford shale.
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We present a generalization of the standard random‐search model of unemployment in which firms hire multiple workers and in which the hiring process is time‐consuming as well as costly. We follow Stole and Zwiebel (1996a, 1996b) and assume that wages are determined by continuous bargaining between the firm and its employees. The model generates a nontrivial dispersion of firm sizes; when firms' production technologies exhibit decreasing returns to labor, it also generates wage dispersion, even when all firms and all workers are ex ante identical. We characterize the steady‐state equilibrium and show that, with a suitably chosen distribution of ex ante heterogeneity across firms, it is consistent with several important stylized facts about the joint distribution of firm size, firm growth, and wages in the U.S. economy. We also conduct a numerical investigation of the out‐of‐steady‐state dynamics of our model. We find that the responses of unemployment and of the vacancy‐to‐unemployment ratio to a shock to labor productivity can be somewhat more persistent than in the Mortensen–Pissarides benchmark where each firm employs a single worker.
This paper documents exploratory drilling activity on offshore wildcat oil and gas leases in the Gulf of Mexico that were sold between 1954 and 1990, with emphasis on the period before 1980. For each year of the lease, we study the determinants of the decision whether or not to begin exploratory drilling, and the outcome of any drilling activity. Our results indicate that equilibrium predictions of plausible noncooperative models are reasonably accurate, and more descriptive than those of cooperative models of drilling timing. We discuss why noncooperative behavior may occur, and the potential gains from coordination.
Optimal control theory is a technique being used increasingly by academic economists to study problems involving optimal decisions in a multi-period framework. This textbook is designed to make the difficult subject of optimal control theory easily accessible to economists while at the same time maintaining rigour. Economic intuitions are emphasized, and examples and problem sets covering a wide range of applications in economics are provided to assist in the learning process. Theorems are clearly stated and their proofs are carefully explained. The development of the text is gradual and fully integrated, beginning with simple formulations and progressing to advanced topics such as control parameters, jumps in state variables, and bounded state space. For greater economy and elegance, optimal control theory is introduced directly, without recourse to the calculus of variations. The connection with the latter and with dynamic programming is explained in a separate chapter. A second purpose of the book is to draw the parallel between optimal control theory and static optimization. Chapter 1 provides an extensive treatment of constrained and unconstrained maximization, with emphasis on economic insight and applications. Starting from basic concepts, it derives and explains important results, including the envelope theorem and the method of comparative statics. This chapter may be used for a course in static optimization. The book is largely self-contained. No previous knowledge of differential equations is required.
We show that oil production from existing wells in Texas does not respond to price incentives. Drilling activity and costs, however, do respond strongly to prices. To explain these facts, we reformulate Hotelling's (1931) classic model of exhaustible resource extraction as a drilling problem: firms choose when to drill, but production from existing wells is constrained by reservoir pressure, which decays as oil is extracted. The model implies a modified Hotelling rule for drilling revenues net of costs and explains why production is typically constrained. It also rationalizes regional production peaks and observed patterns of price expectations following demand shocks.
This study explores factors driving tract-level heterogeneity in the quality of leases executed by property owners who transfer their mineral rights to firms that drill for and extract natural gas. The data set consists of tract-level aggregates of lease terms, our measures of lease quality, and tract-level census data from the leases. We find that higher-quality leases are negatively correlated with higher concentration of minority households when controlling for census-tract-level characteristics. Based on the findings, we propose policies to reduce observed heterogeneity in the quality of leases and, subsequently, to reduce residents' exposure to negative effects of nearby well sites. Copyright © 2015 Northeastern Agricultural and Resource Economics Association.
We study how much private mineral owners capture geologically-driven advantages in well
productivity through a higher royalty rate. Using proprietary data from nearly 1.8 million leases,
we estimate that the six major shale plays generated $39 billion in private royalties in 2014.
There is limited pass-through of resource abundance into royalty rates. A doubling of the
ultimate recovery of the average well in a county increases the average royalty rate by 1 to 2
percentage points (a 6 to 11 percent increase). Thus, mineral owners benefit from resource
abundance primarily through a quantity effect, not through negotiating better lease terms from
extraction firms. The low pass-through likely reflects a combination of firms exercising market
power in private leasing markets and uncertainty over the value of resource endowments.
Innovation-spurred growth in oil and gas production from shale formations led the U.S. to become the global leader in producing oil and natural gas. Because most shale is on private lands, drilling companies must access the resource through private lease contracts that provide a share of the value of production – a royalty – to mineral owners. We investigate the competitiveness of leasing markets by estimating how much mineral owners capture geologically-driven advantages in well productivity through a higher royalty rate. We estimate that the six major shale plays generated $39 billion in private royalties in 2014, however, there is limited pass-through of resource abundance into royalty rates. A doubling of the ultimate recovery of the average well in a county increases the average royalty rate by 2 percentage points (an 11 percent increase). The low pass-through is consistent with firms exercising market power in private leasing markets, and with uncertainty over the value of resource endowments. The finding suggests that policies affecting the cost of extraction likely have little effect on the share of the value of production captured by mineral owners.
We present a generalization of the standard random-search model of unemployment in which firms hire multiple workers and in which the hiring process is time-consuming as well as costly. We follow Stole and Zwiebel (1996a,b) and assume that wages are determined by continuous bargaining between the firm and its employees. This gener-ates a non-trivial dispersion of firm sizes; when firms' production technologies exhibit decreasing returns to labor, it also generates wage dispersion, even though all firms and all workers are ex ante identical. We characterize the steady-state equilibrium of the model; some important special cases are characterized in closed form. We also characterize the out-of-steady state dynamics of employment and wages in response to productivity shocks. Firms can respond to shocks on both an intensive margin (a change in the intensity of vacancy posting of incumbent firms) and extensive margin (a change in the number of active firms); we show that both margins, as well as whether there are decreasing returns to labor at the firm level, are important for the qualitative behavior of the unemployment rate and of the distribution of employment and wages across firms. When there are decreasing returns to labor and free entry of firms, the responses of unemployment and of the vacancy to unemployment ratio to a shock to labor productivity are significantly more persistent than in the Mortensen-Pissarides benchmark. The persistence is caused by a novel mechanism arising from an inter-action of two key elements of our model: new entrant firms are small for some time because hiring is time-consuming and they pay high wages because of bargaining; this drives up wages for other firms and slows down job creation.
We present a generalization of the standard Diamond-Mortensen-Pissaridessearch model of unemployment in which there is both an intensive and extensive margin of employment creation. In our model, each firm can invest to gain access to a production technology with diminishing returns to labor and then post vacancies in order to recruit workers. Entry by new firms corresponds to the extensive margin of employment creation, while job creation by existing firms captures the intensive margin. As in the baseline Diamond-Mortensen- Pissarides search model and theories of the firm developed by Stole and Zwiebel (1996a,b) and Wolinsky (2000), wages are determined by continuous bargaining between the firm and its employees. We characterize the steady-state equilibrium in this class of models and dis- cuss the implications of various different types of shocks on the equilibrium unemployment rate.
To harness the full power of computer technology, economists need to use a broad range of mathematical techniques. In this book, Kenneth Judd presents techniques from the numerical analysis and applied mathematics literatures and shows how to use them in economic analyses. The book is divided into five parts. Part I provides a general introduction. Part II presents basics from numerical analysis on R^n, including linear equations, iterative methods, optimization, nonlinear equations, approximation methods, numerical integration and differentiation, and Monte Carlo methods. Part III covers methods for dynamic problems, including finite difference methods, projection methods, and numerical dynamic programming. Part IV covers perturbation and asymptotic solution methods. Finally, Part V covers applications to dynamic equilibrium analysis, including solution methods for perfect foresight models and rational expectation models. A web site contains supplementary material including programs and answers to exercises.
Optimal control theory is a technique being used increasingly by academic economists to study problems involving optimal decisions in a multi-period framework. This textbook is designed to make the difficult subject of optimal control theory easily accessible to economists while at the same time maintaining rigour. Economic intuitions are emphasized, and examples and problem sets covering a wide range of applications in economics are provided to assist in the learning process. Theorems are clearly stated and their proofs are carefully explained. The development of the text is gradual and fully integrated, beginning with simple formulations and progressing to advanced topics such as control parameters, jumps in state variables, and bounded state space. For greater economy and elegance, optimal control theory is introduced directly, without recourse to the calculus of variations. The connection with the latter and with dynamic programming is explained in a separate chapter. A second purpose of the book is to draw the parallel between optimal control theory and static optimization. Chapter 1 provides an extensive treatment of constrained and unconstrained maximization, with emphasis on economic insight and applications. Starting from basic concepts, it derives and explains important results, including the envelope theorem and the method of comparative statics. This chapter may be used for a course in static optimization. The book is largely self-contained. No previous knowledge of differential equations is required.
In this article we examine the effect of private information and information externalties on the ex post efficiency of investment in oil exploration. We show that too much drilling tends to occur if firms believe that the area is likely to contain a sizeable pool of oil, and too little drilling occurs if the opposite is true. Bargaining with well-defined property rights to the information externality can eliminate underinvestment, but overinvestment remains a problem because firms have an incentive not to disclose their private information.
The authors consider a wide number of applications of an intrafirm bargaining game within organizations where employees and the firm engage in wage negotiations. Under their presumption that contracts cannot bind employees to the organization, the resulting stable wage and profit profiles give rise to an objective function for the firm that places weight on inframarginal profits in an economically significant manner. The authors in turn employ this methodology to explore applications of organizational design, hiring and capital decisions, training and cross-training, the importance of labor and asset specificity, managerial hierarchies, preferences for unionization, responses to competition, and internal capital budgeting. Copyright 1996 by American Economic Association.
We survey the microfoundations, empirical evidence and estimation issues underlying the aggregate matching function. Several microeconomic matching mechanisms have been suggested in the literature with some successes but none is generally accepted as superior to all others. Instead, an aggregate matching function with hires as a function of vacancies and unemployment has been successfully estimated for several countries. The Cobb-Douglas restrictions with constant returns to scale perform well. Recent work has utilized disaggregated data to go beyond aggregate estimates, with many refinements and suggestions for future research.
This paper surveys the microfoundations, empirical evidence, and estimation issues underlying the aggregate matching function. There is no consensus yet on microfoundations but one is emerging on estimation. An aggregate, constant returns, Cobb-Douglas matching function with hires as a function of vacancies and unemployment has been successfully estimated for several countries. Recent work has utilized disaggregated data to go beyond aggregate estimates, with many refinements and suggestions for future research. The paper discusses spatial aggregation issues, and implications of on-the-job search and of the timing of stocks and flows for estimated matching functions.
This paper documents exploratory drilling activity on offshore wildcat oil and gas leases in the Gulf of Mexico sold between 1954 and 1980. The authors calculate the empirical drilling hazard function for cohorts in specific areas. For each year of the lease, they study the determinants of the decision whether to begin exploratory drilling and their relationship to the outcome of any drilling activity. Their results indicate that equilibrium predictions of plausible noncooperative models are reasonably accurate and more descriptive than those of cooperative models of drilling timing. The authors discuss why noncooperative behavior may occur and the potential gains from coordination. Copyright 1996 by American Economic Association.
We present a new methodology for studying the problem of intra-firm bargaining, based on the notion that contracts cannot
commit the firm and its agents to wages and employment. We develop and analyse a general non-cooperative multilateral bargaining
framework between the firm and its employees and consider outcomes which are immune to renegotiations by any party. Equilibrium
firm profits are characterizable as both a weighted average of a neo-classical (non-bargaining) firm's profits and a generalization
of Shapley value for a corresponding cooperative game. Furthermore, the resulting payoffs induce economically significant
distortions in the firm's input and organizational-design decisions.
This paper examines federal auctions for leases on the Outer Continental Shelf in the light of the predictions of the first-price, sealed-bid, common-values model of auctions. The authors find that the data strongly support the model for auctions in which one bidder is better informed than the other bidders. The evidence for auctions in which bidders have noisy, but qualitatively similar, information is less conclusive but is consistent with a model in which each bidder does not know either the actual or potential number of bidders on a lease. Copyright 1987 by Blackwell Publishing Ltd.
The economics of exhaustible resources. The journal of political economy
- H Hotelling
Hotelling, H., (1931). The economics of exhaustible resources. The journal of political economy, 137-175.
Shale gas leases: Is bargaining efficient and what are the implications for homeowners if it is not?
- Timmins
Timmins, C., and Vissing A. (2014). Shale gas leases: Is bargaining efficient and what are the implications for homeowners
if it is not?
Regional windfalls or beverly hillbillies? local and absentee ownership of oil and gas royalties
- J P Brown
- T R Fitzgerald
- J G Weber
- J Searsx
Brown, J. P., Fitzgerald T. R., Weber J. G., and Searsx J. (2016). Regional windfalls or beverly hillbillies? local and
absentee ownership of oil and gas royalties.
Regional windfalls or beverly hillbillies? local and absentee ownership of oil and gas royalties
- Brown
The economics of exhaustible resources
- Hotelling
Hotelling under pressure
- Anderson
Search with multi-worker firms. Theoretical Economics
- Acemoglu