Economic Analysis of Oyster Lease Dynamics in Louisiana

Walter R. Keithly, Jr.

Richard F. Kazmierczak, Jr.

The Role of Private Leases and Public Seed Grounds

• Louisiana generally leads the nation in oyster harvest: Represents a combination of production from private leases (approx. 80%) and pubic seed grounds (20%).

• Public seed grounds serve other functions: primarily the transplant of “seed” oyster to private leases where it is subsequently harvested for the market.

• The combination of leasing and public seed grounds has led to a stable environment for oyster harvesting activities, including encouraging industry investment (preservation, rehabilitation, and expansion of existing and potential oyster grounds).

Relevant Leasing Legislation

• La Revised Statute La.R.S. 56:3(B) entitles the state to ownership of

“…beds, bottoms of rivers, streams, bayous, lagoons, lakes, bays, sounds, and inlets bordering on or connecting with the Gulf of Mexico, within the jurisdiction of the state, including all oysters and other shellfish and parts thereof, either naturally or cultivated and all oysters in the shell after they are caught or taken.”

• The statute also states that ownership “shall be under exclusive control of the Wildlife and Fisheries Commission.”

Relevant Leasing Legislation (continued)

• Louisiana’s production is derived from a combination of production from leases and public seed grounds:

• La.R.S.56:428 : Gives the lessee exclusive use of water bottoms and provides that a lease is heritable and transferable (leases are of a 15-year duration and the current leaseholder has the right of renewal when the lease expires);

• The rental rate, set by legislation from the 1989 Louisiana legislative session, is set at two dollars per year (when leasing was first introduced in the early 1900’s the rental rate was set at one dollar per acre and was increased in the mid-1970s to the current two dollars per acre)

The Issue

Conflicts between oyster leasing activities and coastal restoration activities;

Caernarvon lawsuit; Subsequent conflicts (moratorium); There is a belief that some leases, unproductive in nature,

are being taken and held for speculative purposes;

A Quick Overview of Oyster Harvesting Activities

Louisiana Annual Oyster Production, 1960-2005

0

2

4

6

8

10

12

14

16

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

public grounds

private leases

Million Lbs

Current Value of Louisiana Oyster Production, 1960-2005

0

5

10

15

20

25

30

35

40

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

Current Value ($ mill)

public ground s

private leases

Deflated Value of Louisiana Oyster Production, 1960-2005

0

5

10

15

20

25

30

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

Deflated Value ($ mill)

public grounds

private leases

Louisiana Dockside Oyster Prices, 1960-2005

0

0.5

1

1.5

2

2.5

3

3.5

4

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

$/lb

Current Price

Deflated Price

Acres of Leased Waterbottoms, 1960-2005

0

50

100

150

200

250

300

350

400

450

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

acres (thousands)

Oyster Production Per Acre, 1960-2005

0

20

40

60

80

100

120

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

lbs/acre

Current and Deflated Value Per Acre of

Leased Waterbottom

0

20

40

60

80

100

120

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

$/acre

deflated value

current value

Other Income Generating Activities

• Revenues from oil-and-gas related activities along the coast:

– Non-seismic activities

– Seismic activities

Methodology for Estimating Non-seismic Activity Compensation

• Interview landmen throughout the region (provides information on compensation by lease number);

• Pre-impact assessments (provides the population of leases that will be impacted by lease number);

• Merge the two data sets;

• Pre-impact assessments also contain other relevant information:

– standing crop of oysters

– amount of different bottom types (mud, reef, etc)

Estimated Damage Payments for Non-Seismic Activities

2004:Productive $3.7 millionNon-productive $4.9 millionTOTAL $8.6 million

2005:Productive $3.5 millionNon-productive $4.6 millionTOTAL $8.1 million

Average Estimated Payment Per Lease

• Estimated payment per lease of approximately $11.8 thousand;

• Little difference in payment per lease as to whether the lease was productive.

• Non-productive leases equaled 56% of the total leases receiving compensation (68% from Avenal considered non-productive)

Total Estimated Payments From Non-seismic Activities

Conservative Estimate More Likely Estimate

2004 $8.6 million $12.1 million

2005 $8.1 million $11.3 million

Payment per leased acre:

2004 $22 per acre $31 per acre

2005 $21 per acre $29 per acre

Methodology for Estimating Seismic Activity Compensation

• First, we obtained a sample of payments associated with these activities;

• To estimate the number of leases that may be impacted, we obtained data from LDNR on leases that were within the boundaries of all coastal seismic activities;

• Percentage of leases within boundaries that would receive compensation estimated to be between 75% and 100%;

Total Estimated Payments From Seismic Activities

Lower estimate Upper estimate

$2.04 mill. $2.73 mill.

Per leased acre payments:

$5.20 per acre $6.90 per acre

Total Estimated Payments From Seismic and Non-seismic Activities

Conservative Estimate Upper-Bound Estimate

2004/05 $10.4 million $14.4 million

Per leased acre compensation:

2004/05 $26 per acre $37 per acre

Relationship Between Oyster Harvesting Income and Oil-and-Gas Compensation

• Net income from oyster harvesting activities estimated to be $31 per acre in 2004-05 (upper-bound estimate);

• Estimated total payments to lease holders from oil-and-gas activities estimated to equal $26 to $37 per acre;

• Hence, relatively clear that payments to leaseholders in 2004-05 from oil-and-gas activities equal or exceeds net income. In some years, payments likely exceed gross income;

Returning to the Main Issue (Is There Speculation?)

• Are individuals rational in their behavior?

I Will Let You Decide

Thank You