Relinquishing Riches: Auctions vs "Wild West" Negotiations in Texas Oil and Gas Leasing

with Thom Covert

Abstract

This paper compares the outcomes from informally negotiated oil and gas leases to those awarded via auction. We use detailed data on all contractual characteristics and production outcomes for the universe of publicly owned mineral rights in Texas between 2005 and 2016. For 35% of these mineral parcels, the Relinquishment Act of 1919 authorizes the private surface owners to negotiate leases on behalf of the public, in exchange for half of the proceeds, while the remainder are allocated in centralized auctions. Using variation from this natural experiment, we find that decades later, parcels allocated via auction garner 32 percent larger up-front payments than negotiated transactions do. We also document that the two mechanisms allocate mineral rights to different firms, and that leases allocated by auction are more productive, although the evidence here is weaker. These results are consistent with a strand of the mechanism design literature predicting superior seller revenues and allocative efficiency for auctions compared with other mechanisms. Our findings also have important implications for the more than $2 trillion of minerals owned by private individuals in the US.

Draft available upon request