Friday, December 23, 2005

Shallow gas coalbed methane/Property Rights

I will try to show one where well defined property rights and a bidding process could result in better outcomes for all.

Let us go to the great state of Alaska. First the State of Alaska owns all the subsurface mineral rights and only leases these rights out to developers (or groups that show commitment to developing the resources).

So what happened was that the State was approached by Jack Ekstrom, of Evergreen Resources and secured the mineral rights for around 300,000 acres around/in Matsu Valley. Once the surface rights owners (land owners) found out about this they were upset that some outside interest could come in and take something they felt was theirs. Although they had little to stand on that all deeds spell out that they don't own the subsurface rights and the State clearly makes this clear also. This is one reason that the PDF(Permanent Dividend Fund) was created.

What came next was all of the horror stories about contamination, disruption in transporting, noise and commotion of the drilling apparatus, etc. And this led for the need for regulations and more regulations. This was partly due to most of the regulations pertained to deep oil wells. Scandals and back dealing was surmised. So instead of the market allowing voices to be heard, it went first to the legislative and executive branches by getting regulations to prevent what could happen. Also there was much outcry about the State buying back the leases and voiding the contract on some lands. And this then led to the judicial by trying to block the deals.

The Commons has a post on the "Coasean transactions".

Also of note "Science and Economics Work Together Toward Environmental Improvement"
I'll let the full story speak for itself--but I like the last line: "If you don't even have incentives, how can you get people to look after the environment?"

So let us back up. When the state saw there was interest in developing coalbed methane wells, they should have opened up the whole process to everyone that wanted to be involved. While the state has the interest in developing its resources, it should realize that if the market thinks it is a good venture then it will happen through various mechanisms. The state should be less concerned if a lease will actually be used or not, but more concerned that the open market can make these decisions.

As the State has concerns about transactions costs, they could look at ways of getting the bidders together in the most efficient ways (internet-does ebay work as a model?). When dealing with one bidder (Evergreen Resources) the transactions costs were low. But just because something is more difficult does not give excuse to not do it (KELO?).

The exact amount I am not sure of the leases but I remember that it was close to $1/acre/year. What is the value to a farmer not to have the wells on his farm? What would be the value to an environmentalist to not have the wells in sensitive wildlife areas? Now of course since the people that own the surface rights would also own the leases, the Coase theory could hold true.

Evergreen Resources would now either buy up subsurface rights on lands that had no bid or decide to what level they wanted to bid based on the research that had been done already. Instead of one interest in the process to determine where was the best choices to drill, we would have all interests at the bargaining table (environmentalists, farmers, land owners, speculators, investors, NGO's, other government agencies, cooperatives and Native Corporations).

The choices to where to drill now becomes easier for Evergreen. Instead of a single map of best places to drill with the threat of retaliation by the land owners, they face two maps overlaid with value to not drill and value to drill. Of course if ER discovers a hot spot (high probability of profitable reserves) then they would go to the owners of the lease and negotiates a deal that benefits both parties.

Links of note:
Alaska’s latest development stir


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