Mineral Rights, Natural Gas, and Their Economic Effects.

Mineral Rights: Natural Gas

By: Michael Sanchez

Real Estate 5311 Blog Post

According to the United States Census data, approximately 485,000 new one-family homes were sold in 2008. Of the 485,000 homes sold in 2008, 266,000 were sold in the South region of the United States alone, or over 50%. Usually when someone thinks of a family purchasing a home, they only consider the land and the structure on top of the land; rarely ever do they consider what may lie beneath the land they have purchased. Back before the days of drilling and mining; before natural resources such as oil, gas, gold, coal…etc… became a commercial process, owners would obtain a fee simple interest in the complete property. These would individually be called “surface rights” and “mineral rights”. This complete property ownership is called a “fee simple estate”. A person who owns mineral rights to a specific property may in turn sell, lease, or give the rights to the associated minerals to another entity. This is very common in the United States, and rights to real estate (mineral and surface), are often shared amongst multiple owners. This complete property ownership is unique to the United States, and a small amount of other countries. In most other countries, the rights to the natural resources beneath one’s land belong to the government and the property owner only receives the surface rights.

Mineral Rights: Local Impacts, the Barnett Shale.

Have you noticed the natural gas wells that have appeared sporadically around the area? Many of these have appeared alongside freeways and even around DFW airport. More than 6,000 natural gas wells have sprouted up in the North Texas area! This is largely a result of new technology that has enabled natural gas companies to started drilling into a huge natural gas reservoir called the Barnett Shale. The Barnett shale is huge source of natural gas that stretches over 16 to 21 North Texas counties! It covers about 6,000 square miles and is currently the second largest producing on-shore domestic natural gas field in the United States. Many North Texas residents, universities and commercial property owners are benefiting from associated mineral leases and royalties related to the Barnett shale mining. This lease gives the associated mining company the rights to test and (for a sum of money based on various factors) mine the minerals under the property owners land for a specified period of time. Payments to the owners of the mineral rights are known as royalty payments. This works in a similar way with owners who own the right to coal, oil…etc…

The impacts of the Barnett Shale to the North Texas area have been largely positive. The Barnett Shale has created about 70,000 jobs in the North Texas area, and the economic impact of the Barnett Shale to the North Texas area was significant. The estimated economic output in 2008 was estimated at $11 Billion. Even with the economic collapse this year, the impact remains strong for 2009 at $6.5 Billion. The main contributor to the decrease in oil production is the collapse in oil and gas prices; since reaching their peak in October of 2009, they have decreased around 70 percent. Although natural gas production and prices are forecasted to gradually increase through the year, they are still estimated to be around 40% lower by year end. The Barnett Shale is largely considered long-term resource in the North Texas area, one that will continue to create and maintain jobs through the region, which will contribute to the local economy for years.

Negative Issues: Externalities As a Result of Natural Gas Drilling

As with everything, there are always two sides – especially when it comes to natural resource exploitation. The drilling for natural gas does result in some negative externalities that the surrounding communities will have to deal with. North Texas Natural gas pipeline companies have received negative feedback from nearby property owners that are apprehensive about the impacts the oil rigs will have. Pipelines are often extremely intrusive and require a large amount of land to be laid properly. Furthermore, the pipeline companies are able to use eminent domain powers in order to seize property for the routing of pipelines, due to it being labeled as a “public good”. Other negative externalities include wastewater disposal, traffic from related vehicles, noise, property values, as well as many others. Steps are being taken by state legislation to limit to impact that natural gas exploitation will have. Over a dozen bills have been introduced to give cities and residents more power to deal with the eminent domain issues, pipeline placement, wastewater disposal, truck traffic and other issues stemming from drilling activities. These externality "costs", must be weighed against the associated royalties one may receive by owning a particular set of mineral rights.

Natural Gas: Present and Future

Obviously, natural gas shales exist in other parts of the world other than North Texas. Due to the variations of rock formations and density between the surface and the gas shale, it is often cost prohibitive to drill for natural gas. As new technologies are developed and perfected, the cost to drill and pump the gas out of the earth are becoming less and less. The spike in natural resource prices in 2008 also assisted in companies recouping their drilling costs due to the high price of gas and oil, and thus made the drilling of previously cost prohibitive gas shales more affordable from an economic standpoint. A good example of this can be seen with the Barnett Shale in the North Texas area. However, with the decline of oil and gas prices, coupled with the unprecedented economic collapse of 2008-2009, many oil companies were forced to scale back production. With the demand for natural gas being significantly less than it was last year, North America producers are currently facing a significant oversupply until the demand for natural gas returns to what it once was. This will undoubtedly have an impact on natural gas prices in the near future, which could have a positive or negative effect depending on who you are. Consumers always enjoy inexpensive energy prices, however the producers will be suffering from a loss in profits and having to scale back production and growth until the demand returns.

The Future of Natural gas production remains a mystery to many speculators. Even though it’s easy to say that it will undoubtedly increase due to the world becoming more industrialized; the consensus shift from natural resources to more renewable types of energy as a result of the spike in energy prices in 2008 are becoming more and more commonplace. Crude oil and natural gas, and the associated mineral rights to them may see itself as a dying industry in the near future.

References:

United States Census Data. New One-Family Houses Sold. 2008. <http://www.census.gov/const/soldann.pdf>

Mineral Rights: Basic information about mineral, surface, oil and gas rights. © 2005-2009. <http://geology.com/articles/mineral-rights.shtml>

The Barnett Shale. © 1990-2008. <http://www.thebarnettshale.com/>

Picture of Barnett Shale obtained from: <http://blumtexas.blogspot.com/>

Picture of Natural Gas Rig obtained from: http://image.examiner.com/images/blog/wysiwyg/image/drilling_cropped.jpg

Picture of Stove obtained from: <http://images-cdn01.associatedcontent.com/image/A1369/136940/300_136940.jpg>

Picture of National Natural Gas Map obtained from: <http://www.aapg.org/explorer/2006/11nov/shale_playmap.jpg>

Jim Fuquay. “Barnett Shale impact forecast to be 40% lower in 2009”. Fort Worth Star Telegram. April 4 2009. <http://www.star-telegram.com/business/story/1253207.html>

Dave Montgomery. “Texas Legislature considers bill to allow drillers to use highway rights of way”. Ft. Worth Star Telegram. <http://www.star-telegram.com/business/story/1298748.html >April 3 2009.

Jim Fuquay. “Natural gas producers face North American oversupply until demand returns, study says”. Fort Worth Star Telegram. <http://www.star-telegram.com/business/story/1277322.html > March 29, 2009.