Negotiations of oil and gas auxiliary lease clauses: Evidence from Pennsylvania’s Marcellus Shale

Abstract

Oil and gas lease negotiations provide mineral owners with the opportunity to negotiate for both compensation and clauses that may protect their health and the enjoyment of their properties. We use optical character recognition to assemble the most comprehensive dataset to date on royalty rates and clauses in nearly 60,000 leases signed in Pennsylvania’s Marcellus Shale. We leverage our data to produce three descriptive findings. First, we find a positive relationship between royalty rates and the prevalence of protective clauses. Second, we find that as development of the shale play progressed over time, royalty rates rose and leases became more likely to contain several protective clauses. Third, we find that royalty rates and the presence of protective clauses bear a weak relationship with the geologic productivity of nearby wells, explained by few firms competing in geographically segregated leasing markets. Some leases simultaneously containing higher royalty rates and more protective clauses suggests that there is a bargaining surplus in leasing markets, though our results do not identify the mechanism through which the surplus is allocated. The allocation appears not to depend on the productivity of the mineral estate, and may instead reflect mineral owners’ differing preferences, negotiating skills, legal resources, and access to information. By documenting 43 clauses found in shale leases and their prevalence — more than double the number identified in past research — we provide critical information that can help mineral owners overcome information asymmetries and increase transparency and equity in leasing markets.