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Fracking: Anatomy of a Free Market Failure

by Guest • January 12, 2012 @ 11:02 am

By Robin Hahnel

A recent New York Times article reported that rural landowners who had signed leases with gas and oil companies exchanging drilling rights on their property for royalty payments have discovered that they may have been misled. Many are  now experiencing buyers regret. A review of more than 111,000 leases, addenda and related documents by The New York Times revealed:

  • Fewer than half the leases require companies to compensate landowners for water contamination after drilling begins. And only about half the documents have language that lawyers suggest should be included to require payment for damages to livestock or crops.
  • Most leases grant gas companies broad rights to decide where they can cut down trees, store chemicals, build roads and drill. Companies are also permitted to operate generators and spotlights through the night near homes during drilling.
  • In the leases, drilling companies rarely describe to landowners the potential environmental and other risks that federal laws require them to disclose in filings to investors.
  • Most leases are for three or five years, but at least two-thirds of those reviewed by The Times allow extensions without additional  approval from landowners. If landowners have second thoughts about drilling on their land or want to negotiate for more money, they may be out of luck.

If all this sounds reminiscent of ex post revelations about predatory lending in the housing market that contributed to our recent housing bubble and crash, it should. It is the classic tale of fast-talking salesmen working for well-heeled companies taking advantage of  disadvantaged individuals who are less than fully informed about the options presented to them. (more…)

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