Negotiations of Oil and Gas Auxiliary Lease Clauses: Evidence from Pennsylvania’s Marcellus Shale

Abstract

Oil and gas lease negotiations provide mineral owners the opportunity to negotiate for both compensation and auxiliary clauses that may protect their health and properties. We use optical character recognition to assemble a novel dataset of compensation and specific clauses in nearly 60,000 leases signed in the Marcellus Shale Play of Pennsylvania. We leverage the dataset to produce three main findings. First, contrary to the standard utility maximization model, we find a positive relationship between compensation and clauses. Second, we find that as development of the shale play progressed over time, compensation rose and leases became more likely to contain environmentally protective clauses. Third, we find that compensation and the presence of clauses have a weak relationship with the geologic productivity of nearby wells. Together, our findings indicate that oil and gas firms simultaneously make concessions by raising compensation and approving clauses, but these concessions do not depend on geologic productivity. This suggests that some mineral owners, such as those that are high-income or from more socially organized communities, have the skills or resources to negotiate for more favorable leases all-around and point to similar environmental justice concerns identified in other shale plays.

The role of commercial energy payments in agricultural producer income

“…Using natural gas leasing data, Timmins and Vissing (2022) found that Hispanic landowners had fewer environmental protections in their natural gas royalty contracts. Similarly, Harleman et al (2022) found that high-income landowners had the resources to negotiate more favorable oil and gas agreements.…”

“…41 The effect, however, was small; a 10-percent increase in farm wealth was associated with about a one-tenth of 1-percent increase in the likelihood of receiving payments relative to the average of 3.5 percent. Nonetheless, the finding suggests that wealthier operators may have more resources to negotiate energy leases (Harleman et al, 2022). The finding also implies that less wealthy farms are not disproportionately entering into energy leases to diversify income, while wealthier farms may be using energy income as one of many sources of diversification.…”

“…Harleman et al (2022) found that high-income landowners had more resources to negotiate more favorable energy leases. They did not report an education effect.…”