SIC 6792 Oil Royalty Traders

SIC 6792

This industry classification includes establishments primarily engaged in investing in oil and gas royalties or leases, or fractional interest therein.

NAICS CODE(S)

523999

Miscellaneous

533110

Owners and Lessors of Other Non-Financial Assets

Companies in the oil royalty trading industry invest in oil and gas royalties and leases. Besides investing for third parties, they may also buy and sell interests for themselves. According to the U.S. Census Bureau, in 2002 there were approximately 330 establishments that received revenues from oil and gas royalties, which totaled more than $330 billion. Global demand for oil and gas were increasing rapidly during the mid-2000s, with estimates that demand could jump by over 35 percent by 2025, the United States oil and gas industry was seeking more viable sites for exploration, drilling, and production. Although many private landowners held royalty leases, the federal government was, by far, the largest owner of lands containing oil and gas reserves.

An oil and gas lease is a contract between a mineral owner and the company that wants to extract oil and gas deposits. The lease specifies the length of time that the company is allowed to mine the mineral owner's deposits, rental payments, advance compensation for exclusive drilling rights, and other terms of the agreement. A typical rental payment is usually a relatively small amount, ranging from $1 to $10 annually per acre. This rental payment, which is also called a deferred drilling payment, serves to legally maintain the lease contract when the company is not actively drilling. This rental payment is not what generates high income for the mineral owner. The big money comes if oil or gas is actually found on the land.

The mineral lease also specifies royalties. The royalty is the percentage of revenues that the company pays to the mineral owner in the event that gas and petroleum is actually extracted from the land. Royalties vary from 10 percent to as high as 25 percent of total oil and gas revenues before any associated drilling expenses are subtracted.

Because the true value of a royalty interest is unknown before the company drills for oil and gas, investing in royalties and leases can be a highly speculative endeavor. Royalty owners often sell part of their interests to reduce their exposure to risk or to generate cash. Royalty investment companies that buy and sell such royalties are trying...