The researchers analyzed the prices and productivity of 846 privately negotiated leases and 428 auctioned leases during the recent shale boom, from 2005 to 2016. They find that auctioned leases earned about 40 percent larger up-front payments than negotiated leases did, and that auctioned leases produced 60 percent more output.
While it might seem intuitive that companies bidding against each other in a formal process would raise the final lease price, it isn’t a foregone conclusion that auctions necessarily perform better. In theory, a savvy landowner could get a similar price by simply using private offers as bargaining chips in private negotiations, the researchers point out. Auctions also introduce costs that could keep some companies from entering the fray.
“If it takes time to figure out how valuable a lease is, it effectively costs money for firms to enter an auction. The highest-value bidder might not participate,” which could result in a lower price than in a negotiation, Covert says.
Nevertheless, the data show that auctions performed substantially better. Combining the effects of increased up-front payments and royalties on higher output, the researchers find that auctioned leases ultimately paid landowners about $350,000 more than the average, similarly sized negotiated leases did—$1.2 million, rather than $850,000.