A Great Place to Hunt for Oil

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I don't need to tell you that the United States is a good place to do business in general. (We rank No. 4 in the World Bank's rankings, behind Singapore, New Zealand, and Hong Kong). What may be less well-known is what a fantastic place it is to be in the oil and gas business.

Given the antagonism the industry faces from certain political corners, that statement might surprise you. But one feature of the U.S. regulatory regime is so favorable that it trumps all of the bad will toward Big Oil.

The key is our country's treatment of mineral rights. To the best of my knowledge, the United States is unique in the world in that oil, gas, and other subsurface goodies belong to private individuals, rather than the state or sovereign. (There is a great short paper posted on the website of Swift Energy (NYSE: SFY  ) about the history of mineral rights ownership in this country, detailing Texas salt wars and the Fremont family's tussle with the courts in California). Hard as it may be for us Yanks to believe, Canada and Australia's mineral rights technically belong to Queen Elizabeth II. In reality, that means the rights are controlled by government bureaucrats.

Canada and Australia are fine places to do business, as ExxonMobil (NYSE: XOM  ) , Apache (NYSE: APA  ) , or Quicksilver Resources (NYSE: KWK  ) would attest, but they both happen to have low corruption and conducive regulatory environments. As you get further away from the most business-friendly countries, mineral rights sitting in state hands can lead to real uncertainty for companies and their investors.

Ask Harvest Natural Resources (NYSE: HNR  ) about that one some day. The company has had an "interesting" experience in Venezuela (is there any other kind?), and investors have heavily discounted the firm's reserves as a result. Harvest is understandably redirecting its cash flow to exploration activities elsewhere in the world, in hopes of redefining the company.

When weighing whether to invest in a domestically-focused E&P like XTO Energy (NYSE: XTO  ) or a traveling man like Talisman Energy (NYSE: TLM  ) , this matter of mineral rights is an important one to keep in mind.

Harvest Natural Resources is a Fool favorite, ranking a full five stars in Motley Fool CAPS. Think the firm's poised to make a big splash in a new hydrocarbon basin? See what other Fools have to say, and weigh in with your opinion right here.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool owns shares of XTO Energy and has a disclosure policy.

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  • Report this Comment On October 22, 2009, at 12:42 AM, coralreefton wrote:

    While much of the mineral tenure in America is privately owned, various federal departments, states and cities own significant acreages. Airport authorities and the like often control their minerals.

    In Canada, Federal control of mineral rights devolved to the provinces in 1935. The percentage of crown versus freehold ownership varies, from virually nil to 80%, generally increasing from east to west as early settlers were often granted mineral rights with their surface title.

    In Alberta for example approximately 30% of the annual budget is derived from oil and gas royalty revenues, meaning corporate and personal taxes are amongst the lowest in North America with no sales tax.

    International exploration turns not so much on who owns the mineral rights, but the political stability, as some governments are more prone to 'expropriation without compensation' of a companies assets than others. Russia is high on the list.

    Talisman is a well diversified senior Canadian producer capable of absorbing such an action in one of their international ventures. Many smaller players are not, however if they connect, it is a bases loaded home run for shareholders.

    Low natural gas prices - terrible of shareholders, a great economic stimulus for consumers.

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