Oil and gas land speculators — parasites or propellants?

Roderick says speculators add to competition for leases, accelerating the pace of leasing and exploration; Boyd says some tie up valuable leases for years

Steve Sutherlin

PNA Managing Editor

Some say land speculators tie up valuable oil and gas leases and unduly occupy the courts and state agencies; others say speculators are a vital catalyst in Alaska’s oil and gas lease market.

Naysayers argue the speculator doesn’t add value to leases by exploring and developing it. Instead, they sell off interest in their leases in the form of working interests and production overrides.

Ken Boyd, former director of the Alaska Division of Oil and Gas, told PNA leases are expensive to explore and develop. Speculators buy leases with no “real intention” of shooting seismic or drilling, reselling interest in their leases to “dentists in Florida.

Also, Boyd said, speculators don’t buy enough leases to cover a prospective field: “A one-lease oilfield in Alaska is unlikely.”

One of the worst effects of land speculation is that leases are tied up for years with no action, Boyd said.

“The state leases its land in good faith, with the expectation that the lease will be explored and developed,” he said.

Speculators resort to various mechanisms to hang onto leases, including lawsuits, Boyd said.

But Boyd said the impact of land speculators is not entirely negative.

“Speculators keep oil companies on their toes,” Boyd said. “Speculation carries a stigma, but it’s not always a bad thing.”

A common strategy for speculators is to buy flank acreage, or acreage adjacent to other leases, Boyd said.

Frequently oil companies will overbuy to protect themselves and keep speculators out. Over time the companies will drop excess leases. They just stop paying rent.

The extra leasing action is not necessarily a windfall for the state, Boyd said. The real money is in royalties which are paid on production.

But the state has earned in the neighborhood of $2 billion over time on leases, he said.“We can’t sit around and wait for BP to decide where we’re going to go next,” said Jack Roderick, author of “Crude Dreams, A Personal History of Oil and Politics in Alaska.”

“There will be a new wave of little guys; maybe we’ll find a new basin.”

Roderick said speculators add to the competition for leases which accelerates the pace of prospecting and leasing.

Roderick, who has been an oil and gas lease speculator himself, published the “Alaska Scouting Service,” a periodic mimeographed report on oil and gas leasing activity, in the 1950s.

Roderick told PNA small investors and smaller companies have been the catalyst that helped launch the oil industry in Alaska.

In the early days, he said, leases were awarded by lottery rather than to the highest bidder. That structure encouraged the participation of small investors and required oil companies to deal with individual investors to obtain desired acreage.

Oil companies often recruited investors before a sale to enter the lottery for parcels the company wanted to obtain. If the small investors were successful, the oil company would develop the tract, and the investors would get a pre-arranged override on the oil or gas produced from the lease’s wells.

The Alaska leasing program is forgiving of speculators, Boyd said. Leases are relatively affordable. Often, the minimum bid is $5 per acre. Speculators frequently bid in the $5 per acre to $10 per acre range.

The size of the lease parcels is small, with a three-mile by three-mile maximum size; a speculator can buy in relatively affordable chunks of 5,760 acres or less.

But leaseholders have ongoing expenses.

Following the initial bid, there is rent to pay. The rate is $1 per acre for the first year, with an increase of 50 cents per acre each year until the rate reaches the maximum of $3 per year.

“The lease is yours, generally speaking, for seven years,” Boyd said. When the leases expire, they go back to the state. It is impossible to extend leases now without doing some work, Boyd said. The lessee must explore or drill and eventually produce.

Speculators frequently buy on the edge of unitized fields. The speculator’s gamble is that the lease interest can be sold for a profit.

Some buyers base their acquisitions on extensive research; some don’t.

“Some buyers don’t have any data at all, just a hope and a prayer,” Boyd said.

Speculators often offer land to owners of adjacent leases, perhaps trying to hang onto an override for themselves.

The override is interesting. It is a private arrangement, which is not tracked by the government, Boyd said.

While an award of a working interest is an assignment of interest in the lease that is recorded, the state has no interest in the creation of the overriding royalty interest. The state knows who the leaseholders are, but it doesn’t know who holds overrides on the leases, or how many override deals are in place throughout the state.

NEXT WEEK: PNA talks to oil and gas lease investors from Fairbanks.