Mining News

The Case for Private Ownership of Mineral Rights

Posted by Alana Wilson on 1/7/2014 1:30:57 PM

By John L. Dobra and David Newman

One of the things suggested in a recent editorial in The Economist on hydraulic fracturing of shale deposits, or “fracking,” in Great Britain suggests there are two sources of resistance to it. The first is environmental – the dislike of hydrocarbons and the “Not In My Back Yard” or NIMBY factor. The second source of resistance is actually a lack of incentives: in Great Britain and in most of the rest of the world mineral rights are owned by national governments which would receive any royalties generated instead of local governments, so local residents oppose it. The Economist is partially right, but they miss part of the story.

The situation in Canada and the United States are different. In Canada mineral rights belong to the provinces which lease minerals to producers and receive royalties. Consequently, the second part of The Economist’s article does not apply to Canada. In the U.S. there is a mixed system where surface owners can also own – have possessory rights that they can sell, bequest, and otherwise transfer – the mineral rights. However, significant portions (about 31%) of U.S. mineral rights are owned by the federal government (frackwire). But these federally owned non – fuel minerals can be staked and claimed by prospectors who acquire private rights to them. In any event, non – fuel mineral production in the U.S. comes from privately owned mineral rights and, although shale yields oil and natural gas, it was considered a common rock when the Mineral Leasing Act (which covers oil, gas, coal and other common minerals like sand and gravel on federally owned land) was passed in 1920.

National ownership of minerals has led, in some cases, to what is known as the “resource curse,” where economic fortunes are dependent upon unstable commodity prices. Canada and Australia are notable exceptions, but in many cases national ownership of mineral rights has resulted in the enrichment of political elites – think Saudi Arabia and the rest of the Persian Gulf countries, Venezuela, Zimbabwe, etc.

There is perhaps no better evidence of the beneficial effects of private ownership of mineral rights than the case of fracking. In the U.S., fracking is primarily occurring on private land because private individuals or companies own the mineral rights not the federal government. In some instances, homeowners are approached by private companies who want to lease mineral rights from them in exchange for a royalty (frackwire). In other instances, homeowners are battling developers for mineral rights that they or previous owners of their property have sold (Reuters & triplepundit). In Canada, to The Economist’s point, fracking has been going on for half a century (as in the U.S.) because, in part, the provinces derive revenue from it.

Whether fracking continues on public land in the U.S. is a matter of intense debate. The Bureau of Land Management (BLM) has proposed updating federal regulations for fracking on public land, but these proposed regulations are being met with opposition by the public and certain organizations such as the Sierra Club and The Energy Collective. The proposed BLM regulations governing fracking “may actually apply to many landowners, whose homes sit atop natural gas reserves technically owned by the government” (frackwire).

Because there has been heated debate over fracking on public lands in the US and in countries where the government owns most or all of the mineral rights, fracking has, in some instances, become more of a political issue rather than an economic issue. From an economic perspective, there are laws in the U.S. which support the extraction of minerals, such as oil and gas (triplepundit). “Private ownership of subsurface rights are a frequently cited structural advantage for oil and gas development in the US” (Common-Resources). However, the tension between the economic perspective and public opinion is obvious when President Obama stated “that America would develop resources like natural gas without putting the health and safety of our citizens at risk” (Sierra Club). New York has a moratorium on fracking, which is “driven by a highly skeptical public” (Common-Resources), and the National Resources Defense Council is “urging the administration to immediately place a moratorium on fracking on public lands. A moratorium is essential to protect communities, drinking water sources, and our natural resources from the uncontrolled fracking dangers of polluted air, toxic waste, contaminated water, and more” (The Energy Collective). Therefore, fracking has become a political issue due to concerns about the environment and the health of people living in the U.S.

States that have embraced fracking such as the Dakotas, Texas, Oklahoma and Pennsylvania are states where privately owned mineral rights are the norm. And, in the case of the last three states, they have had extensive historical oil and gas development on private land with privately owned mineral rights.

John L. Dobra, Ph.D. is an Associate Professor of Economics, Director of the Natural Resource Industry Institute at the University of Nevada, Reno, and a Senior Fellow at the Fraser Institute. David Newman is a student assistant.




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