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Empirics of Resource Extraction

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Swissotel Chicago, Zurich E
Hosted By: Association of Environmental and Resource Economists
  • Chair: Judson Boomhower, Stanford University

Regional Windfalls or Beverly Hillbillies? Local and Absentee Ownership of Oil and Gas Royalties

Timothy Fitzgerald
,
Texas Tech University
Jason Brown
,
Federal Reserve Bank of Kansas City
James Sears
,
Montana State University
Jeremy Weber
,
University of Pittsburgh

Abstract

The impact of the technological shock to oil and gas production inthe broader economy is important but not well-understood, in part because the distribution of gains is not clear. One important pathway for gains is royalty payments. We empirically study local versus absentee ownership of private gross royalty interests, using over 2 million private leases located across 17 states to characterize local leasing markets and estimate royalty payments from production during the period 2000–2013. We find local capture of oil and gas royalties varies widely, and suggest that accounting for institutional structure is imperative for properly identifying economic impacts. For example, absentee ownership of mineral rights at the state level in our sample ranged from 8 to 72 percent.

Accounting for where royalties are received has important implications for long-term economic performance with and without natural resource extraction. When absentee ownership dominates, this renders the producing region similar to a colony, which has recognized long-term economic effects (Acemoglu et al. 2005). Absentee ownership is one important measure that may differentiate “good” and “bad” institutions that affect measures of the resource curse (Mehlum et al. 2006, Michaels 2011). A region with a low degree of absentee ownership receives a large share of the royalties that are generated. Our findings regarding absentee ownership help explain the apparent resource curse in western regions of the United States (James and Aadland 2011, Haggerty et al. 2014), a country with strong institutions.

Using our royalty flow estimates, we employ an econometric model to show that local royalty income flows on average are two to four times larger than wages earned from drilling activity. These results suggest a more significant role for royalties than employment gains, which have been the primary focus of economic research to date (Fleming et al. 2015).

The Effect of Land Ownership on Oil and Gas Production: A Natural Experiment

Eric Edwards
,
Utah State University
Trevor O'Grady
,
College of New Jersey
David Jenkins
,
Apache Corporation

Abstract

We examine oil and gas drilling on federal, state, and private lands in the Wyoming checkerboard by comparing permitting delays and price responsiveness. These lands were alternatively allocated to private owners at the square-mile section via the Pacific Railroad Acts between 1862 and 1871, and two of every 36 sections, numbers 16 and 36, to state governments under the General Land Ordinance of 1785. Prior to 1970, we find all three types of lands see similar delays in the time from permit submission to first drilling. However, from 1970 onwards, and especially as a result of the shale boom after 2003, well drilling on federal and to a lesser extent state land is delayed relative to wells on private land. The results suggest that bureaucratic delay has a significant effect on whether a well is drilled: post-2003 around 37% of federal wells that receive permits are never drilled versus only 17% for private wells. To test how this delay affects production, we examine the price elasticity of drilling, finding evidence that drilling on private land is more price-responsive: average drilling elasticities for gas wells in the checkerboard are around 0.78, but when separated by land type, drilling on private land is more responsive to price.

When Are Resources Curses and Blessings? Evidence From the United States 1880-2012

Karen Clay
,
Carnegie Mellon University

Abstract

Following Sachs and Warner (1995, 1997), the relationship between natural resources and growth has attracted extensive attention from economists and policymakers. One challenge in terms of understanding the relationship between natural resources and economic growth is that the literature is large and reaches different conclusions about the existence of a curse and, for papers that find a curse, the conditions under which a curse may exist. This paper uses new state-level panel datasets spanning 1880-2012 to investigate the relationship between natural resources and growth in the context of the American states. The paper has four main findings. First, the relationship between growth and natural resources varies across types of natural resources – agriculture, fossil fuels, and other minerals – and over time. In some periods the relationship is negative and in other periods it is positive or not statistically significantly different from zero. Second, the effect of resources on growth differs depending on whether the change is an increase or a decrease in the resource and whether the economy is in a period of low growth or not. Third, for the period 1980-2000, a period that is widely studied, whether one finds evidence of a resource curse is highly sensitive to specification. Time series results differ depending on time intervals (decadal or annual), the type of natural resource, whether changes in resources are measured in total value or value added, and whether effects are allowed to differ in the South and non-South. Fourth, we can replicate many of the findings from previous studies of the resource curse in the United States. The divergent findings are largely due to the use of different dependent variables, measures of resources, estimation techniques, and time frames.

Interfirm Learning and Environmental Pollution: Evidence From the Bakken Oil Boom

Ian Lange
,
Colorado School of Mines
Michael Redlinger
,
State of Alaska
Peter Maniloff
,
Colorado School of Mines

Abstract

Prior researchers have documented learning-by-doing at both a firm level and in interfirm relationships (Kellogg (2011), Benkard (2000)). Learning has typically been measured by an increase in per-unit profits. We extend this literature in two ways: by analyzing the effect of learning on environmental releases, and by testing for the mechanism of interfirm learning. <br />
<br />
Our analysis focuses on learning to drill in the Bakken oil field during the fracking boom of 2005-2014. This context is ideal for two reasons. First, fracking involves a rich set of firm relationships – a lead firm (or operator) subcontracts with separate companies for both vertical and horizontal drilling. This provides rich variation in the experience levels of firms, firm pairs, and firm triads. Second, oil production has clear measures of costs and environmental outcomes. By examining this context, we can robustly identify the impacts of firm and interfirm learning on both profits and the environment. <br />
<br />
We conduct three analyses. First we regress a measure of well cost, the rate of drilling in feet per day, on measures of firm and interfirm experience as well as control variables. Daily drilling rig rental is one of the largest costs of constructing a new well. This analysis shows evidence of learning and interfirm learning to reduce costs. Next we regress the number of environmental incidents during drilling on firm and interfirm learning. This analysis shows that unobservable firm-pair characteristics are an important predictor of environmental incidents, but experience working together is not. Finally, we use a plausibly exogenous shock to oil prices (the 2008 oil price drop) to show when firms end relationships, they preferentially end newer relationships than older ones. This suggests that learning by doing, and not learning about match quality, causes the observed improvements in drilling costs.
Discussant(s)
James Feyrer
,
Dartmouth College
Ryan Kellogg
,
University of Chicago
Hunt Allcott
,
New York University
Judson Boomhower
,
Stanford University
JEL Classifications
  • Q3 - Nonrenewable Resources and Conservation