Fracking: another episode in the struggle for mineral rights

Tapping coal seam gas reserves has been among the most challenging political issues around the world.  Perhaps because the mineral extracted is new, those ranged against such activities can mobilise opposition, invent new dangers from a novel form of mining.  It builds on the general opposition to fossil fuels that the motley crew comprising “a clutch of scientists, a theologian and a rugby player are among them”. These have provided a handy target for Malcolm Turnbull to slap down and anoint himself as the noble pragmatist ion contrast to his ideologically motivated predecessor.

Politicians are seeking ways of allowing fracking to achieve wider support.  They are faced with a pincer attack from the Alan Jones spearheaded farmers – especially the affluent second home hobby farmers – seeking to avoid incursions into their tranquility and the usual environmental anti-producers.  In the US, even the EPA under a green stranglehold has been unable to find any risk from fracking

The tragic suicide of a Queensland farmer, apparently as a result of his failure to prevent fracking has led to a new push.  Warren Truss is arguing that farmers should have the right to veto exploration and exploitation of gas on their property.

This is a thorny issue regarding property rights.  The English and the American common law parted company over ownership of the sub surface minerals on land about 200 years ago.  While the US stuck with the notion cuius est solum, eius est usque ad coelum et ad infernos (whoever’s is the soil, it is theirs all the way to Heaven and all the way to the depths below) at least regarding the undersoil, English common law took away the mineral rights.  Australian law has followed this.

Although giving the landowner title to the land provides a common interest between the miner and the farmer and thereby avoids ownership conflict, there are serious disadvantages.  Chief among these is that the existence of minerals is very rare and their discovery requires considerable skill.  Once discovered they are often extremely valuable.

But the discovery normally owes nothing to the surface landowner, who would, in the case of a successful find obtain a windfall.  So if the owner had the mineral rights, and was able to extract, say, 50 per cent of the value, that would mean that the cost of exploration doubles.  Obviously there would be a lot less of it.

The Australian mining regime vests ownership in the state but does so only until a discovery is made, in which case its ownership is transferred to the finder.  Of course, the state will take a share of the value as royalty, and gradually that share has increased as governments have become increasingly rapacious.  The system of “finders’ keepers” has also become less certain with heritage, aboriginal land rights, increasing environmental restraints and so on.  But, at least until recently, it led Australia to be punching massively above its weight in terms of global exploration activity.

Having had the governments take the mineral rights, it is impossible to contemplate them being returned to the landowner – that would give the landowner an unconscionable windfall at the expense of the nation as a whole.  This is recognised by Warren Truss, who says,

Access to prime agricultural land should only be allowed with the farmer’s agreement – the farmer should have the right to say yes or no to coal seam gas exploration and extraction on their property.

A moment’s consideration reveals this to be a restoration of the mineral rights to the farmer who can hold-out to prevent exploitation of the resource except by demanding a major share.  That might solve the clash of rights issue but it would mean a serious erosion of the productivity of exploration capital and a depletion of exploration activity.

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36 Responses to Fracking: another episode in the struggle for mineral rights

  1. Driftforge

    My thoughts would be to make available to landowners a packaged manner in which to lease the mineral rights to their property.

    If they want to hold those rights, they can pay the cost of doing so. And once they are paying an ongoing cost for doing so, they have a joint interest in seeing exploration take place. You may actually see an uptick in exploration…

    Make it simple to lease the mineral rights for property you own. Then leave the choice to do so or not to the owner.

  2. Rob MW

    “Although giving the landowner title to the land provides a common interest between the miner and the farmer……………………”

    Correction Alan – this should read: “Although giving the landowner title to the land provides a ‘Tenant’ in common interest or ‘reservation’ between the Crown (or State) and the farmer…………..”

  3. Diesal

    Having a foot in both camps I am in favour of moving towards the American system of the landowner holding the mineral rights. However the loss to the taxpayer could be captured by levying taxes on the windfall profits coming to the land owner. The reason I favour the Texan approach in particular is the smaller blocks encourage wildcatting and low cost wells with more exploration resulting g from the proliferation of leases.

  4. A H

    Having mineral rights belong to the landholder is by far preferable. Landholders will be checked by market forces if they attempt to extract excessive royalties.

  5. IRFM

    Sort of right Mr Moran, Having operated under both systems in USA and Australia, they have their strengths and weaknesses. In terms of exclusive rights it is better in Australia but in terms of actual sovereign risk the USA model is streets ahead for the reasons mentioned by Mr Moran. Most USA leaseholders will sign up on more or less standard terms for a standard lease agreement. As a result the lessors already have a strong awareness of their legal position. Roughly the leaseholder will get a 12.5% gross royalty. With no centralized ownership the spoils are distributed uneveny through the various communities. This distrubutes wealth away from the cities and has lead to a better population distribution in the USA. Consequently the USA operators, with their legions of specialist land men, do a better job than here.

  6. Driftforge

    The downside to mineral right automagically belonging to the landowner is that it increases the cost of land for any other use, i.e agriculture.

    Having the rights vest in the government avoids that issue.

    Having them available to the landowner on the other hand, undercuts the whole argument.

  7. Entropy

    If the cocky wants the mineral rights and thus veto rights, they should pay for them. At present the value of the land for agricultural purposes does not reflect the value of potential mineral and petroleum rights.

  8. Pyrmonter

    Having had the governments take the mineral rights, it is impossible to contemplate them being returned to the landowner – that would give the landowner an unconscionable windfall at the expense of the nation as a whole.

    For most of Australia this is a half-truth, in that minerals were never granted to settlers who took up land for agriculture (or pastoralism or other primary production activity). What many of these activists are seeking is clearly a windfall; they should be resisted as much as anyone else who wants government to hand over valuable taxpayer assets. Privatize the rights by all means: but do so by competitive tender to extract the greatest possible value for taxpayers, not in the interest of either the miners or the farmers.

  9. Rob MW

    “If the cocky wants the mineral rights and thus veto rights, they should pay for them.”

    Now fuck off:

    “The Government’s philosophy is to remove the right to coal that these people have had since the early 1800s. These people have no chance because of the Government’s regression to old-fashioned socialism. How can people have faith in the Government? How can they be confident that their properties will not be next to go because they are lucky or because their lands might be worth something to the State? But there is something in this State that is worthless, and that is the word of this Government. In September 1995, referring to the Coal Compensation Board annual report to the Parliament, the Minister for Mineral Resources said:

    The Carr Labor Government has made a firm commitment to the coal compensation scheme . . . claimants whose coal lies outside a colliery holding may choose either compensation or restitution of their coal rights.”

  10. nerblnob

    When did coal seam gas extraction become synonymous with fracking?

  11. Pickles

    One day some enterprising farmer might run the argument in a Land Court somewhere that the highest and best use of the “farm” is now a “gas field” and have it valued as such. Of course the “mineral rights” would not come into the valuation equation, just the location and the right to park their stuff on the surface above the gas. The mere thought would cause disruption (which is now good) and a successful outcome would cause utter chaos (which must be better).

  12. Shy Ted

    When I was a prospector, albeit not CSG, the farmers were relatively easy to negotiate with. The Aboriginal Land Councils not so, seeing it their role to oppose, oppose and oppose again until the free money was excessive. Weren’t interested in jobs, training or employment, just free money.

  13. Snoopy

    Shy Ted, at least money is simple. Much easier than committing to jobs and then battling ’employment market failure’ (cough) forever and a day.

  14. don coyote

    What would the situation be when a gas field (for example) extends over multiple farms, and the deposit can be extracted from any of the properties?

  15. Norman Church

    As somebody who comes from a mining state, I find the controversy a little baffling. Pastoralists and farmers in WA often grumble about exploration and mining activities enough to extract ‘compensation’ for the adverse impact of these activities on their land but most people here would understand that resources are going to be sterilised if they are given a right of veto. In truth, the approval procedures established by mining legislation have ample protections for land holders and strike an appropriate balance between extractive and other activities such as agriculture. There may be an argument to be made for the state to share a portion of the royalty received with land holders although I am far from convinced about the merits of that position. As others have already noted, the land grant to did not come with the minerals. Perhaps a small percentage is justifiable as a lubricant to smooth the way of increased economic activity and can be labelled as compensation for disruption or some such euphemism. A final point. I have said it before but if state governments in the East make the deliberate decision to sterilise their natural resources to appease special interest groups (however well-heeled and vocal) , they should not expect to continue to receive 70% of WA’s GST revenue to make up the shortfall. The Communist Grants Commission must explicitly penalise behaviour of this nature to send the appropriate economic signal to state governments.

  16. Rob MW

    “A final point. I have said it before but if state governments in the East make the deliberate decision to sterilise their natural resources to appease special interest groups (however well-heeled and vocal)……….”

    “The Communist Grants Commission……………….”

    The irony begetting ignorant comprehension, must be a WA thing.

  17. Norman Church

    “The irony begetting ignorant comprehension, must be a WA thing.”

    Struck a sore point, did I Rob MW?

  18. Joe

    most people here would understand that resources are going to be sterilised if they are given a right of veto.

    a) What does that even mean?
    b) Yes, because the U.S.A. has no mining due to prohibition from land owners?

  19. Rob MW

    “Struck a sore point, did I Rob MW?”

    No mate not at all. I suppose you do know the difference between a communist and expressing pigeonhole envy, then again perhaps not. Try the comprehension bit, it might help with your attributable taxation fallacies that stick out of the ass of your strawman.

  20. Robert Crew

    I agree with Entropy and Driftforge. The land-owners have had centuries of benefit from the lower land values from the unbundling of mineral rights from land rights – lower capital requirements, less interest burden, greater opportunities to invest their capital in land improvements, etc. Since in most if not all cases they never paid for the mineral rights, they are not entitled to them and should pay a windfall tax on any unearned rights if they stand to benefit financially. It should also be noted that to the extent land-owners are able to ‘lock the gate’, the rest of the country will suffer economically as land is used for less productive purposes.

  21. Norman Church

    Rob MW, ah, I see. You are deliberately ignoring the substance of my comments and seeking to draw out a false inconsistency in my post in order to mount an ad hominen attack. Very sophisticated, I must say. I don’t think you can be serious in thinking that you are making a strong point in suggesting that my post displays a lack of understanding of the distinction between a communist and pigeon hole envy. I think what you are trying to say is that I am being hypocritical in using a little joke label of the Communist Grants Commission for the Commonwealth Grants Commission whilst having a dig at anti-CSG protestors. But for a charge of hypocrisy to work, one must compare like with like. The fact is that the citizens of WA are well and truly entitled to complain about the GST distribution because it is their GST payments which are being diverted elsewhere under a system which creates perverse incentives for poor political behaviour and bad economic outcomes. By way of contrast, those demanding a pay out for the extraction of minerals or petroleum underground are seeking payment for, and to control the extraction of, minerals which have never belonged to them. However, strongly they may feel about the matter, they are largely simply rent seekers and NIMBYs. I leave aside those who have legitimate complaints abut the manner in which mining or extractive activities create an actual adverse impact on agricultural activities to which compensation and mitigation strategies are properly directed.

  22. Rob MW

    “Since in most if not all cases they never paid for the mineral rights,……..”

    Bullshit, if the minerals were not included (listed) as a reservation back the Crown or Government on the Title then they paid for the minerals when they paid for the Title. If the minerals were mistakenly not listed as a reservation by the seller it is hardly the buyers fault. That’s why the States set up ‘Assurance Funds’.

    “………..and should pay a windfall tax on any unearned rights if they stand to benefit financially.”

    Has anybody even hinted that normal taxation rules not be applied ? You make a profit you pay tax – windfall gain is taken as capital gains tax, unless you are inferring that a mineral resource rent tax be reintroduced, and business profit is taxed at corporate tax rates. FMD !

  23. Norman Church

    Joe, I can understand that you may look to the US system and assume that land holders in Australia can be expected to behave in a sufficiently moderate and commercially sensible fashion to enable a similar system to develop which facilitates exploration and mining activity. However, there are established bench marks in the US and the law of capture applies to contiguous fields in most jurisdictions to prevent land holders seeking to hold petroleum companies to ransom. Just as inventors of IP often have totally unrealistic ideas about what they should receive from commercialisation , so it often proves to be the case that land holders think that they should get a massive pay day from exploration activity. All this achieves is a deadlock that prevents exploration if the land holder has a right of veto and thinks he can hold out. There is also the point that many land holders can be overly influenced by special interest groups that have a savagely anti-CSG and mining ethos. I remain of the view that these decisions are best controlled by the state through the well-establishes systems under mining and petroleum legislation. However, as I said in my earlier post, I accept that there may be an argument for the state to smooth the path by setting up a ‘compensation’ system for land holders.

  24. Rob MW

    “But for a charge of hypocrisy to work, one must compare like with like. The fact is that the citizens of WA are well and truly entitled to complain about the GST distribution because it is their GST payments which are being diverted elsewhere under a system which creates perverse incentives for poor political behaviour and bad economic outcomes.

    Yep that works for me. Just wondering what complaining about the gst has do with property rights and mining rights however. Memo to self – must complain to Alan about this more than obvious WA omission.

    Anything else ?

  25. Joe

    Just as inventors of IP often have totally unrealistic ideas about what they should receive from commercialisation , so it often proves to be the case that land holders think that they should get a massive pay day from exploration activity. All this achieves is a deadlock that prevents exploration if the land holder has a right of veto and thinks he can hold out. There is also the point that many land holders can be overly influenced by special interest groups that have a savagely anti-CSG and mining ethos. I remain of the view that these decisions are best controlled by the state through the well-establishes systems under mining and petroleum legislation.

    Yes, locking up vast quantities of resources – just like it does in the U.S.A. Wait, no it doesn’t, only the federal and state governments lock up land in the U.S.A.
    This blind reliance on the state to do the right thing is just stupid.

  26. Neenee

    From each (state) according to his its ability, to each (state) according to his (its) need.

    Communist Grants Commission– seems correct.

  27. Tel

    Just as inventors of IP often have totally unrealistic ideas about what they should receive from commercialisation , so it often proves to be the case that land holders think that they should get a massive pay day from exploration activity.

    Because farmers are all a bit, you know thicky stupid dumb dumbs. And why should and self respecting mining company need to negotiate? Totally beneath them, just get government to give thicky farmer a good whack.

    All this achieves is a deadlock that prevents exploration if the land holder has a right of veto and thinks he can hold out.

    So if one farmer wants to “hold out” by which I think you mean “do farming n stuff”, that farmer must be stupid. And if all the farmers want to “do farming” it’s not because the price is wrong, it’s because they are all stupid, don’t know what’s in their own best interest.

    No wonder thicky farmer decides to try his luck with agrarian socialism… he’s so dumb he can’t even figure out that capitalism is all about protection of property rights!

  28. Norman Church

    Tel – your characterisation. Not mine.

  29. Rob MW

    Tel – eggzactly………….lol

  30. Norman Church

    This blind reliance on the state to do the right thing is just stupid.

    It is not blind reliance. It is based on actual experience of a system that has worked well and achieved good economic results, at least in my part of the world. Given the importance of energy and natural resources to Australia’s economy and public finances, I believe that we would be tinkering with that system at our peril. The reality is that extractive industries can and do co-exist with agriculture when the existing system of Crown ownership of minerals and petroleum is administered in a sensible fashion.

  31. motherhubbard'sdog

    At the moment, farmers often don’t even have a say in what happens on top of their land. Witness all the confiscation of rights by banning farmers from clearing, even down to the local councils barring farmers from removing fire hazards near their homes.

  32. Dr Faustus

    Consequently the USA operators, with their legions of specialist land men, do a better job than here.

    On the money with your post IRFM.

    To me, the major land management problem in Australia has been the suddenness, size and scale of the Queensland CSG development, combined with the fact that it has been driven by a small handful of operators driven by the imperatives of LNG projects. Despite the huge scale of CSG/shale/basin centred gas in the US, nothing like this has been attempted anywhere in the world.

    In the US, the industry has grown up organically over 150 years. It’s complex, has thousands of operators, who work with the rule of capture, a vast array of private royalties, tiny tract sizes (and, usually, long, secure tenure) and competitive infrastructure everywhere. Projects are developed and operated on a human scale – a few wells at a time – and just as you say, managed on the ground by specialist land men who understand their landowners, who in turn understand (and often work in) the industry.

    Here, we have four huge projects operated by four large companies (five if you count APLNG as two) with no experience in drilling, completing and bringing thousands of unconventional wells on line in the space of a few years to fill three separate LNG plants. Land management has been under-resourced and has featured fairly desperate ‘just get it done and move on’ compromises by fairly inexperienced people – backfilling against activist campaigners and politicians – dealing with misinformed people with limited interest in the developments.

    Little surprise that there is now a serious (?) national political discussion around effectively dumping the entire Australian resources tenure system overnight.

  33. Rob MW

    “It is not blind reliance. It is based on actual experience of a system that has worked well and achieved good economic results, at least in my part of the world.”

    How would you fucking know when you have never experienced any results, economic or otherwise, of an alternative ?

  34. wreckage

    Farmers getting the mineral rights outright would indeed be a windfall at this point. However they must either own the rights or be given the option to buy the rights.

    I predict this will increase exploration, not decrease it; but in any case having the government own all minerals is wrong, and combined with vegetation laws leaves farmers owning fuck all: they do not own the minerals below, the vegetation upon, the water that hits, their land… only a few inches of topsoil, and only under sufferance.

    If our system is better than the US, why have they consistently been beating the absolute shit out of us for our entire history? They have exploited their energy and mineral wealth far more effectively, and at far greater benefit to the local populations, leading to far greater acceptance of mining and exploration!

    Right now, if a rural community is found to posses unexpected mineral wealth, they cannot be certain of gaining any benefit. They do so only because mining corporations are generally pretty nice, at least compared to State governments, who take possession of much of the profit, to pay for bullshit light rail and other absurdities.

    No, the US system is superior, and that is to be expected, since it better protects the individual’s rights.

    Prosperity isn’t a compromise weighed against strong rights, it’s an outcome of them. Environmental outcomes, again, are better ensured by strengthening property rights.

    There is simply no argument here except, how to make a fair transition. That would be by permitting farmers to buy the mineral rights for their property, whereafter the rights would be bundled irrevocably to the property; or by allowing them to lease the mineral rights at a fixed rate.

  35. Dale Stiller

    Alan, thanks for this look at property rights and the tension between the property right of the title holder and the mineral or petroleum crown reservation which through the granting of a lease gives the right to extract the resource to a company.

    The commentary appearing in the media about what has become commonly called, ‘the right to say no’, is mostly from Federal politicians and the view of those that hold the land title mostly agriculture producers is yet to be heard. And no, Alan Jones does not represent the majority of this demographic.

    I believe that perhaps the dialog has gone one step too far in that ‘the right to say no’ does not have to change who has the mineral right and who receives the royalty. Have you considered that there has been in the past an erosion of the property right of the title holder that they have no longer have a choice of negotiation with a resource company.

    It has been less of a problem in the past because agricultural production cannot exist where there is a mine and the company is required to purchase the title(s) before the granting of a mineral lease. But with the more recent CSG industry there is this notion of coexistence advanced whereby the title holder is expected to fit their traditional land use around a new industry overlaid across the landscape.

    Government policy, access code regulation and sections of various resources Acts compulsory requires landowners to negotiate with a resource company. Currently Governments try to pass off negotiations with resources companies as “just another commercial negotiation” and some are good negotiators and some not so good. This is smoke and mirrors because in any standard commercial negotiation both parties have the option to walk away. Landowners in resource legislation have no such option. They are tied to the negotiation table against a very large company who does have the freedom to walk away from negotiation.

    The average landowner isn’t after the mineral right but rather the right to a fair commercial negotiation that will not disadvantage the landowner.

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