US private oil and natural gas royalties: estimates and policy relevance

• DOI: http://doi.org/10.1111/opec.12052
• Date: 01 March 2016
• Author: Randal R Rucker,Timothy Fitzgerald
• Published date: 01 March 2016

US private oil and natural gas royalties:

estimates and policy relevance

Timothy Fitzgerald* and Randal R Rucker**

*Assistant Professor, Department of Agricultural Economics and Economics, Montana State University,

Box 172920, Bozeman, MT 59717-2920, USA. Email: timothy.fitzgerald@montana.edu

**Professor, Department of Agricultural Economics and Economics, Montana State University, Box

172920, Bozeman, MT 59717-2920, USA

Abstract

Widespread ownershipof oil and natural gas resources by private individuals is unique to the United

States. The owner’s share is typicallyspecified as a g ross revenueroyalty. We develop estimates of

income from production of privately owned minerals. Focusing on onshore resources in the conti-

nental United States, we determine that the share of total oil and natural gas production attributable

to privatelyowned minerals has been approximately 75 per cent in recent years. Wefind that average

private royalty rates in recent yearswere 13.5 per cent for oil and 11.8 per cent for natural gas, and

that private royalty income from oil and gas production was $21–22 billion in 2011 and 2012.We

then briefly discuss four current policy issues upon which our estimates havebearing: exports of liq-

uefied natural gas and crude oil, effects of refinery and pipeline constraints, state and federal tax

policy,and regulation of technology.

1. Introduction

The United States is the only country in the world with widespread private ownership of

minerals.This private ownership has made many US citizens rich throughout the country’s

history from strikes of hydrocarbon resources as well as precious metals and other miner-

als. As the United States enjoys a Renaissance of oil production, the ownership of oil and

natural gas resources has reemerged as an important factor in determining the course of

the energy industry. Policy barriers to the development of federal minerals have limited

possible expansion of production from this source.1Private oil and gas ownership,on the

other hand, is acknowledgedto be an impor tant contributor to innovations in the develop-

ment of unconventional resources and the technologies used to produce them (Yergin,

2011). Little is known, however, about the aggregate value of privatemineral interests or

the annual income derived from them. Private minerals typically are extracted under the

provisions of leases with developers that specify the royalty rate to be paid on the gross

revenues from the production of oil and natural gas. In this paper, weestimate private oil

and natural gas royalty gross incomes in recent years, for the continental United States and

the individual states therein.

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To preview the estimates that we discuss and develop below, in 2012, total gross rev-

enues from oil and natural gas production were about $224 billion for all US onshore pro-

duction. Our calculations suggest that more than three-quarters of these revenues ($175

billion) were from private minerals, and that private royalty owners werepaid $22 billion

in gross compensation for their mineral property.2At the state level, the largestprivate oil

and gas royalties were received (in descending order) from production inTexas, Califor-

nia, Louisiana and Oklahoma. These are states with a high proportion of private minerals,

and all are among the largest-producing states. If private royaltiesare expressed as a pro-

portion of total personal income in a state, a somewhat different ranking of the top states is

revealed: North Dakota, Wyoming, Oklahoma and Texas.

The leading role of the United States in worldwide oil and gas production and technol-

ogy development is often attributed to the institution of private ownership that provides

companies with willing partners for development of resources (Wang and Krupnick,

2013).3Our analysis and estimates providevaluable complements to two recently released

studies, one of which (Weberet al., 2013) estimates payments from natural gas production

and wind energy to farm operators to be $2.3 billion in 2011. The second study (IHS,

2013) estimates the total contribution to gross domestic product (GDP) of unconventional

oil and gas resources at $284 billion in 2012. As we discuss below, the fact that our esti-

mates lie between these other estimates is appropriate, giventhe different objectives of the

studies.

The approach we adopt to estimate revenues from privately owned oil and natural gas

production is to start with aggregate annual US oil and natural gas production and price

data. We use those data to estimate average revenue, then net out production and revenues

from federal and state-owned minerals and attribute the remainder to privatelyowned min-

erals. The final step of our process is to use estimates of average royalty rates on private

leases to determine the royalty income received byprivate mineral owners.

Specific issues that arise with our approach are discussed in detail below to allow the

reader to understand the strengths and weaknesses of our estimates. Briefly,there are two

important data shortcomings in our process. First, although we were able to obtain data

from some states regarding production and revenues from their state-owned mineral

rights, other states were not able to provide us with this information. For the latter states,

we use information from similar states to estimate production and revenues from state-

owned minerals. Second, very little information is available on the share of revenues that

ultimately goes to the individual owners of those private mineral rights. We employ two

methods for estimating the share of gross revenues received byroyalty owners. The first of

these methods is based on anecdotal information regarding royalty rates, while the second

is based on average royaltyrates in private leases located in Montana.

In Section 2 below, we present background information that provides context for

the estimates that follow. We develop and present our estimates of production, value and

OPEC Energy Review March 2016 ©2016 Organization of the Petroleum Exporting Countries

4Timothy Fitzgerald and Randal R Rucker