Private Contracts as Regulation: A Study of Private Lease Negotiations Using the Texas Natural Gas Industry

Over the past twenty years, natural gas firms have increasingly combined large-scale hydraulic fracturing, horizontal drilling, and three-dimensional seismic surveying to access natural gas stored in tight-shale formations. This technological combination increases the amount of resource available for extraction while minimizing the drilling footprint because firms can reach a greater number of mineral acres using a single bore hole and horizontal drilling. Before drilling such wells, the companies must negotiate and sign leases with individual owners of subsurface mineral rights to obtain the legal right to access the minerals (unlike federal ownership of subsurface minerals, which is common in the western United States). These technologies also have allowed firms to drill in increasingly urban areas. Consequently, firms have obtained leases for minerals underlying subdivisions and other relatively densely populated areas. However, the oil and natural gas regulations enforced by states generally were written prior to development of these technologies. They were designed to regulate an industry that drilled only in rural areas with little interaction with people living in houses near the well sites and may not sufficiently protect urban households from negative consequences of nearby drilling.Mineral leases are residents' first line of defense against negative consequences of drilling, and a review of the quality of the leases in providing such protection identified considerable variation. Leases can restrict how extraction firms operate by, for example, restricting surface access, requiring restoration of the surface once drilling is complete, and limiting the types of chemicals used and noise levels generated during extraction.We find a significant amount of variation in the terms of mineral-right leases signed by Texas natural gas extraction firms. We characterize the leases as high-quality when they provide significant protection for residents and as lowquality when they impose significant disamenities on residents and mostly favor extracting firms.Lease negotiations in Texas are largely unregulated. Drilling for, transporting, and selling natural gas are governed by local, state, and federal regulations, but private lease negotiations are restricted only in terms of when royalty payments are issued to lessors and information the firms must disclose to owners of the mineral rights. State regulators are responsible for enforcing regulations that protect ground and surface water from contamination and for undertaking remediation in response to excessive negligence1 on the part of firms. However, many aspects of drilling operations, including truck traffic, noise, and air pollution, are not regulated by the state or the federal government, and control of the mineral estate via leases allows firms to lay gathering pipelines, build roads, and use surface water for wells with no recourse for the owner of the mineral estate as long as the activities are deemed necessary. The extension of drilling into relatively urban areas increases the number of leases that must be signed and exposes more households to the negative consequences of close proximity to natural gas wells. Consequently, the terms of leases negotiated between extraction firms and individual owners of mineral estates are increasingly important for residents seeking to avoid or mitigate consequences that are permissible under existing state and federal regulations.We explore census-tract-level2 characteristics that could influence variations in the quality of mineral-right leases using data for leases by natural gas firms in Tarrant County, Texas. In particular, we explore whether heterogeneity across census tracts in racial and ethnic concentrations is related to the quality of the leases. Ideally, these characteristics do not affect the quality of leases signed. However, even when we control for measures of income, wealth, split estates, and timing, we find that leases from tracts with larger concentrations of black and Hispanic residents are, on average, of lower quality than leases from other tracts and that leases from areas with a high concentration of Hispanics rate poorly across a larger number of categories. …