Essays on the Economics of the Natural Gas Leasing Market

Natural gas extraction is a prevalent and growing source of energy supply in the United States and around the world, and the focus of my research is understanding the natural gas leasing market that allows firms to amass rights to the mineral estate from which they extract natural gas. In Texas, a major source of natural gas resources, the mineral rights are privately owned, and firms must negotiate with private landowners for the rights to drill for and extract those minerals. The negotiated leases are legally binding contracts that restrict firm behavior during the drilling and production phases of natural gas well development. The leases that firms and landowners sign are critical in protecting them against exposure to health risks and the other negative features of drilling activity (noise, disruption, etc.). The research presented quantifies the value of these leasing contracts and models the leasing market between firms and landowners bilaterally negotiating the contents of the leases. The first piece studies a mechanism that models how firms negotiate with individual landowners and identifies the observable characteristics driving their decision-making, both where to sign a lease and with which landowner. The second piece captures the value of more protective leasing contracts for the landowners using a property value hedonic method. The third piece explores whether the leasing quality is equitably distributed across all types of households living in Tarrant County Texas, my area of study. Below I detail the the methods and questions addressed by each chapter individually.

As a consequence of technological innovation in the oil and natural gas industry over the last 20 years, firms have increased access to oil and natural gas reserves trapped in tight-shale formations. New wells are now drilled in more densely populated regions. In the first chapter, the lease negotiations between firms and landowners are modeled as a two-sided, one-to-many matching model where firms' preferences over sets of parcels are complementary. With this model, I study the direct and indirect effects of firms' geographic market concentrations. Firms value concentration directly because it shortens the time between leasing mineral rights and profiting from natural gas sales. Lease concentration also has an indirect effect: firms with higher concentrations are able to sign less costly leases, suggesting that concentration leads to market power. I use the estimated model to analyze the effects of changes in the market structure and policies that restrict the quality of leases signed. I am able to predict the effects of these policies on firms' and landowners' values of negotiating, and the changes in the spatial distributions of leasing behavior. I find that homogeneous and high quality leases increase landowners' values, while the effect for firms is ambiguous, and overall, fewer leases are signed when all leases are restricted to be homogeneous.

Royalty payments are a potential source of benefit to homeowners, and contractual restrictions on firms' drilling and production activities that are negotiated in leases are an important tool by which the industry is regulated. This chapter demonstrates how the value of lease clauses to homeowners can be recovered from the hedonic price gradient in the market for split-estate houses. Additionally, we show how split-estate status can be recovered from lease records and transaction data using string matching techniques. However, we note that the distribution of split-estate house prices is truncated, which may engender selection bias. We show how the dual-gradient hedonic model can be used to recover an expression for the willingness-to-pay for lease clauses using the full-estate housing market. Combining data describing both the full and split housing markets overcomes any potential selection problems and yields consistent estimates of the willingness-to-pay for lease clauses. Our hedonic results provide a measure of the benefits to homeowners from the regulations negotiated in leases and suggest that factors affecting the outcomes of lease negotiations will have pecuniary impacts on homeowners. Further, we use our willingness-to-pay measures to construct an index of lease clause quality that is used to test an environmental justice hypothesis: are there significant differences in lease quality across race groups after conditioning upon income and other observable factors.

Finally, the third chapter explores factors driving the tract-level, heterogeneity in lease quality for mineral rights owners transferring their mineral rights to natural gas firms for the purpose of drilling and extracting natural gas. The data consists of tract-level aggregates of lease terms, our measures of lease quality, and tract-level census data from leasing. We find that greater lease quality is negatively correlated with higher concentrations of minority households when controlling for tract-level characteristics. Based on our findings, we propose policies reducing the observed heterogeneity in lease quality, and subsequently, reduce exposure to the negative effects of living nearby active well sites.