Yesterday’s FT story repeated one of the consistent themes conventional wisdom uses to explain why shale gas in Europe won’t work:
Another big obstacle is property rights. In the US, private individuals own the minerals underneath their land: in Europe, they are generally owned by the state. Persuading governments to let oilmen exploit their resources can be hard: US companies say it takes them a year to permit a well in Poland, compared with a few months in the US.
This angle was first rolled out in the Oxford Institute of Energy Studies study “Can Unconventional Gas be a Game Changer in European Gas Markets”, from 2010, which has since, in politically correct fashion, been recycled by Bernstein Research, Deutsche Bank, and finally Pøyry Consulting who told Ofgem that shale gas won’t be a game changer for the UK. All these august “experts” become the new conventional wisdom, despite them all parroting the same mistaken, misinformed but most of all, simply out of date theme of the OIES. Time constrained or unimaginative researchers, journalists and industry insiders who have a lot vested emotionally or financially in perpetuating the climate change problem instead of actually solving ,it find the initial research. This is a classic example of confirmation bias, seeking facts supporting a comfortable consultancy position of endlessly discussing climate change but not actually doing anything about it. The bias seekers see research coming from the powerful name brand of Oxford, and soon yet another urban myth of shale gas becomes so widespread that everyone accepts it. But does the property rights conventional wisdom stand up any better than other myths of shale gas?
Firstly, this isn’t a beat up the feckless socialist Europeans angle: the US is unique in property rights. Rights belong to the Crown in Canada or Australia for example and the lack of them hasn’t appeared to have held back extractive industries.There is confusion over how property rights in the US make it more attractive for a landowner to be given lump sums and royalties per acre for the mineral rights, which would indeed provide some incentive. The misunderstanding of the FT reporter is that if individual land owners had the incentive to sell their rights wells would be popping up like mushrooms all over Europe. However owning the rights and having the planning permission to construct the wells are entirely separate. The planning process, as anyone in Europe can attest, is a nightmare, but it does eventually end and isn’t an issue cured by the property rights fairy.
Secondly, and this sounds especially counter-intuitive to the political wisdom, concentrating tens of thousands of potential mineral rights under state ownership in this case is actually efficient. In the US, absolutely every landowner has a financial interest in the oil or gas under their property. The sweeping statement is complicated by pointing out that sometimes the surface and mineral rights have been separated, which makes rights even more entangled. For example, original mineral rights may have been sold decades ago and are now separate. At the time they were worthless, but now those rights may have legally accrued to several separate heirs. If a gas company extracted gas without paying or spending a lot of effort finding them, the penalties on the arrival of the prodigal grandsons could be expensive. This is a bit like the lottery, because thanks to directional drilling, people could be several miles away from a rig and still get royalties. In fact you could end up getting royalites whether you want them or not thanks to eminent domain laws.That leads to bizarre situations as in Dimock Pennsylvania where 13 property owners suing Cabot Petroleum contend their land is being poisoned. One of the litigants receives royalty cheques that made them a millionaire several times over although they object to fracking. Not only do they recycle the money to lawyer fees to fund the cause, without a hint of irony they built a huge McMansion on their poisoned land. Where Europe is crowded, we could easily have ten property owners on half an acre – the royalty cheques might not cover the expense of the stamp.
Everywhere else outside the US, governments own mineral rights and all the drillers need is the right to access it. But with directional drilling the actual amount of land required could be as little as 5 acres out ten square miles, so most people would be out of luck and drillers can be picky within certain parameters. I can’t begin to tell you the amount of Blackpool Hillbillies dreams of people I’ve destroyed from those who contact me about offering their land to shale gas drillers. This makes me question whether or not the FT missed a key point right from paragraph one:
The company (Chevron)has been quietly buying up huge swaths of land across eastern Europe, an area it believes could be the next great frontier for shale gas exploration.
Chevron may be getting shale gas concessions from governments, but it isn’t paying either them or landowners for them and neither is anyone else. This story from West Virginia gives an idea of the flip side, what happens when one must contact every possible mineral rights owner:
Roughly three years ago, Marion County Clerk Janice Cosco started to notice something unusual. The number of people in the courthouse’s record room kept growing – and growing and growing. Soon, she realized that the room couldn’t handle any more people.
“One day, I went down to the record room and it was packed,” Cosco said. “They were shoulder to shoulder.”
Cosco and her staff were witnessing the flood of lawyers, brokers and abstractors coming to the area to research property records for Marcellus Shale drilling. And as gas companies increased their drilling interest in West Virginia, activity in the courthouse increased.
All this activity doesn’t come cheap:
The visible impact of the workers has translated into a financial impact as well. Although examining records is free, printing and copying are not. Marion County charges $1.50 for the first two printed pages, and $1 per page thereafter, which is set by West Virginia Code. The money goes into the county’s general fund.
In past years, that money didn’t amount to much, but from Jan. 1 to June 30, 2012, the county collected $317,000 in copy and printing fees. Colasessano said one company alone printed $30,000 worth of documents in just five days.
To keep track of the enormous volume of fees, the county created an account system for individual users. The fees can be paid at the courthouse, or a bill can be sent to the responsible party. The clerk’s office has created 282 accounts so far, and 200 are regularly active.
Copying fees are nothing compared to fees lawyers are taking. Which leads to what is to me an inescapable concusion, non Oxonian that I am:
This is an expense that Europe doesn’t have. This actually makes the lack of mineral right ownership not a problem but a plus.
The European way is constantly hounding ministries to get off their butts and make a decision about giving a license. One should think that since this is a license for the state to print money via royalties and taxes at zero investment costs to themselves, this would be attractive. In Poland it is, but in the UK, the government feels so rich they have no incentive to collect taxes and fracking remains under perpetual study. The UK hasn’t given out an onshore oil or gas license for over four years, and they’re in no hurry – so secure in their judgement is a government informed by expert opinion from Oxford Institute of Energy Studies, Pøyry, Bernstein, Ofgem and of course, what they read in the FT.