Getting approval for hydrocarbon exploitation in the “tight” formations of coal seam gas and shale oil is proving problematic with great inhibitions in place in NSW and an outright ban in Victoria. In Queensland things are progressing better and in the USA, in spite of all the inhibitants put in place by the Obama administration, unconventional gas and oil production is a beacon in an otherwise flagging economy.
In the AFR this morning, an article by Ben Potter and an editorial,“Share gas spoils with landowners”, suggests part of the value in newly discovered minerals be given to the landowner. (Interestingly, the on-line version of the editorial is headed Time to split gas rights with land holders). The term “spoils” in the editorial infers that mineral discoveries are the outcome of lucky finds. This is not so. The discoveries and wealth mineral finds bring take skill, effort and expenses as well as good fortune to, in effect, create. Clearly designated and tradeable property rights are crucial to wealth creation. But until value in property assets are discovered the assets should remain unowned. Once valuable discoveries are made – whether new mineral wealth or new inventions, the asset value becomes the property of the discoverer (with a mining lease) or inventor (with a patent).
This gives the best incentives for those with the appropriate skills to seek out new discoveries and innovations.
Gifting some of the value of a new discovery to parties that have not contributed to the search process means rewarding people with windfall gains. More importantly, by diluting the benefits of those involved in the effort, it will reduce the incentive to search for wealth.
It is because of this that landowners do not have title to mineral wealth that may lie beneath their soils. They are of course fully compensated from any costs and disturbances the parallel activity of mining might impose upon them and the mining activity is fully assessed to ensure against untoward externalities.
But providing benefits to landowners in response to political pressures is a reward to rent-seeking pressures. Weakening of the search incentive aside, it will do little to deter landowners from inhibiting exploration by engaging in hold-out activity once there is evidence of potential value beneath their land.