Michael Giberson
PERC’s Shawn Regan argues in favor of allowing environmental groups to bid in federal auctions for oil and gas development leases, a way to help ensure that use of federal lands reflects both the value of energy resource exploitation and the value of protecting those lands from development. The theory is that if environmental groups highly value the opportunity to prevent oil and gas development on a piece of federal land, they’ll put in a high bid. The project would only get leased for development if a resource developer submitted an even higher bid. Let the market decide!
I like the idea, a little more competition won’t hurt, but a few issues need cleaning up first.
Regan said current rules keep environmental groups from participating because of requirements that leaseholders develop the minerals or lose their lease. It isn’t clear from his short piece whether there are specific exclusions in Bureau of Land Management leases or in the auction rules that explicitly bar such participation, or whether he’s referring to relatively standard language in oil and gas leases under which the lease expires if the company doesn’t develop the resource within a set period. Typically, a mineral rights owner leases the development rights because they want the resources developed and the associated royalty payments. When a company holding the lease does not develop the property, the mineral owner wants to be able to shift the development rights to someone who will. If this kind of leasing restriction is the issue, then the leases may need to be rewritten to allow the leaseholder to hold the development rights by use of the environmental values. (Similar to holding water rights to protect in-stream flows rather than by consumption.)
A related issues comes up: If an oil and gas company secures the lease through auction, it has a few years to begin development and so long as development begins in time typically the lease continues for as long as the company continues operations. Operations may last 20 or 25 years, possibly longer, but not forever. So how long should a lease last if an environmental group wants to hold development rights by use of its environmental values?
NOTE: Regan’s piece was also posted at Grist. See also Regan’s earlier piece for PERC Reports, and our earlier comment here on that piece highlighting the possibility of an oil developer and environmental group working together on bidding and resource development.
I’m glad you posted on this; I had the article open for several days, and you beat me to it!
I’d only add the comparison to the rules governing participation in the EPA Acid Rain Program, the now pretty-much defunct sulfur dioxide emissions permit market. In that case, part of the bargaining in determining the market rules was allowing the large coal-fired electricity generators to be grandfathered in and not have to purchase initial permit allocations, in return for which one of the rules they allowed was for participation by non-SO2-generating agents. The rule allowing for such participation enabled charities, law school classes, 5th grade classes, individuals to bid for the permit to emit a ton of SO2 and retire it, which, if they submit a high enough bid, is a welfare-enhancing outcome.
I think Shawn’s point is analogous to that experience. But you are right about the design issues you discuss.
Yeah, I had it open too for a few days, but was shutting down my laptop for an hour or so and decided to post it first rather than trust that I’d get it back up and post later.
Why should environmental groups get to buy leases with better terms than real buyers? Is that because of their greater purity and dedication to Mother Gaia? Shouldn’t they be required to make payments in lieu of royalties if they don’t develop the property?
Oil companies don’t pay royalties if they don’t develop the property either. The up-front payment for the lease is for the right to develop, the royalty payments are a share of the proceeds from any oil or gas extracted and sold. Environmental groups only want to lease the “right to develop.”
But there are some interesting issues here. It is easy to see that if the royalty rate is higher, then expected net value of development is lower and so oil companies would bid lower. If the royalty is low, the expected value of development is higher and oil companies would bid higher. Royalty rates don’t affect the bid price of an environmentalist that expects to not develop the property.
So what is the right royalty rate?