Split-Estate Negotiations: The Case of Coal-Bed Methane

Coal-bed methane is an emerging contributor to the US energy supply. Split estates, where landowners control the surface and the energy companies lease the rights to the underground gas from the federal government, often impede successful negotiations for methane extraction. We provide an extensive form representation of the dynamic game of the negotiation process for subsurface access. We then solve for a set of Nash equilibrium outcomes associated with the split estate negotiations. By examining the optimal offers we can identify methods to improve the likelihood of negotiations that do not break down and result in the gas developer resorting to the use of a bond. We examine how changes in transaction costs or entitlements will affect the outcomes, and support our finds with anecdotal evidence from actual negotiations for coal-bed methane access.