PEER INFORMATION EFFECTS IN CONTRACT NEGOTIATIONS: EVIDENCE FROM OIL AND GAS LEASES

摘要

OverviewAn essential element of an oil and gas company’s operations is the right to explore and extract minerals, whichrequires companies to sign leases with mineral rights owners. In a competitive and volatile energy market we expectthe terms of these leases to be determined by at least three factors:1. supply factors, i.e., the geological and productive potential of the acreage being leased;2. market factors, i.e., the revenue potential dictated by anticipated oil and natural gas prices, as well as thelevel of competition among energy producers; and3. information factors, on which this study focuses.Information factors come in two forms: market and non-market information. Market information reflectsthe state of the market for leases, including appropriate contract terms. As mineral rights owners (i.e., lessors)observe ongoing leasing activity in their community, they form more precise estimates about the value of their ownmineral rights. Entering lease negotiations with more precise information is expected to yield negotiation outcomesthat better reflect fair or reasonable terms and compensation for lessors. This in return yields more favorable termsfor informed lessors than for uninformed (or unsophisticated) lessors.Non-market information reflects individual or subjective exposure to local drilling activities among lessors.For instance, individuals living near existing drilling pads are better aware of potential environmental consequencesof drilling activities, and are more likely to ask for compensation with regards to any associated negativeexternalities during their lease negotiations.In our project, we isolate and identify these information effects to estimate their magnitude. Understanding howinformation filters through the negotiations process is important for interpreting the welfare effects of energycontracts (Hendricks et al., 1993) and understanding the cost side of energy company operations (Kellogg, 2014).We focus on two channels through which information can affect the outcomes of lease negotiations: localinformation flows and idiosyncratic exposure to industry activities. Because geographic proximity facilitatesinformation flows, we expect that lessors who live in the same community (“insiders”) will be better informed aboutcurrent market conditions (i.e., outcomes of recent lease negotiations) than lessors who live outside that community(“outsiders”). Better-informed parties should be able to negotiate more favorable lease terms. At the same time,individuals residing near an existing well are more likely to be exposed to environmental and auditory effects oflocal drilling activity. Presence of such negative externalities makes these “exposed” individuals more likely tonegotiate stricter (i.e., more favorable) lease development terms. Our two-stage identification strategy exploitsgeographic variation in lessor locations while controlling for the location of leased acreage:1. Suppose we observe two leased properties in close geographic proximity but with one of the two lessors(i.e., owners of mineral rights associated with these properties) residing outside the community. Theoutsider will have limited access to information about the market for leases within the community and weexpect this to be reflected in the terms included in the outsider’s lease. We hypothesize that better access toinformation will allow an insider to negotiate higher bonuses, higher royalty rates, shorter primary leaseterms, and more favorable contract clauses.2. However, these observed differences between insider-contracts and outsider-contracts cannot be attributedonly to market information. This is because the outsider may also have less prior exposure to drillingactivity (when, e.g., living in an outside community with very little oil and gas production). Idiosyncraticnon-market information will therefore also play a role in contract outcomes. We isolate the non-marketcomponent by observing two different insiders with only one residing near an existing well. We expectboth insiders to have the same access to market information but different perceptions about the effects ofdrilling activity due to their differing exposures. All else equal, the difference in lease terms between thesetwo insiders will then reflect the non-market information component, which should roughly amount tocompensation required for any associated negative externalities of mineral development.Being able to isolate these different informational asymmetries will give us a better understanding of howinformation affects relative bargaining positions of energy market players and negotiation outcomes. Significant increase in leasing activity that led to the U.S. shale boom and the subsequent bust in leasing activity spurred by the2014 oil price collapse provides us with a well-packaged natural experiment for testing our hypotheses.MethodsWe use optical character recognition (OCR) and text parsing methods to extract the specific variables of interest ineach contract, i.e., bonus payments, royalty rates, and primary terms. We geocode physical locations of lessors,lessees, and leased properties to calculate physical distances of lessors from their respective leased properties as wellas the closest active well (as measure of exposure) at the time the lease is signed.Utilizing recent developments in textual and semantic analysis allows us to identify differences in leaseterms and conditions (other than bonus payments, royalty rates, and primary terms).1 We apply topic models (LatentDirichlet Allocation or LDA (Bleiet al., 2003; Grifiths and Steyvers, 2004)) that have been used to identify themesor topics in written texts in various fields of law, economics, and finance (e.g., Livermore et al., 2015; Ganglmairand Wardlaw, 2015; Hoberg and Lewis, 2015). This helps us classify clauses and identify those that are more or lessfavorable to the lessor.ResultsResults are forthcoming.ConclusionsIn this research we focus on identifying the value of information in oil and gas contract negotiations. Informationalasymmetries have an important impact on the relative bargaining positions of energy market players andnegotitaions outcomes. Being able to identify these impacts and quantify the value of gained information will helpus to understand how to get to more efficient negotiation processes and outcomes and shed light on a variety ofimportant questions in the field of negotiation and contract economics.