Capturing Rents from Natural Resource Abundance: Private Royalties from U.S.

Onshore Oil and Gas Production

Jason P. Brown1, Timothy Fitzgerald2 and Jeremy G. Weber3

1 Federal Reserve Bank of Kansas City2 Montana State University

3 University of Pittsburgh

The views expressed are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City, the Federal Reserve System, Montana State University, or the University of Pittsburgh.

Background• Shale formations are located primarily on private

lands.

• Oil and gas companies must gain access via private lease contracts with mineral rights owners.

• In 2012, energy companies owed private mineral owners more than $30 billion in gross royalties (Fitzgerald, 2014)

2

Background• On-going research on the local economic

implications from boom in domestic oil & gas production.

• Boom is expected to yield large returns to mineral right owners.

• Income and wealth effects will depend on productivity of the play and local ownership

3

4

From the Field: Effects of Royalty Payments

A royalty-funded barn renovation in Bradford County, PA

5

A royalty-funded tractor upgrade in Bradford County, PA

6

Research Questions

• How large are private royalty income flows from the major shale plays?• particularly to local economies

• How competitive are leasing markets?– Do mineral owners in more geologically

productive areas receive higher royalty rates?

7

Data

• Leasing data are from DrillingInfo• Nearly 1.8 million private leases from around the

country• Only active leases are considered • 16 states, 558 counties in total

• Production data from state agencies; price data from the EIA

8

Royalty Income Estimates

• Use county-level data on the value of production, royalty rates, and local ownership shares to estimate– Total royalty income for six major plays in 2014– local royalty income

• Compare royalties to:• Government transfer payments• Federal farm commodity programs

Royalty Rates and Local Ownership Shares by Play

Bakke

n

Eagle

Ford

Haynesv

ille

Marcell

us

Niobrara

Permian

0%

5%

10%

15%

20%

25%

Aver

age

Roya

lty R

ate

Source: Authors’ calculations9

Bakke

n

Eagle

Ford

Haynesv

ille

Marcell

us

Niobrara

Permian

0%

10%

20%

30%

40%

50%

60%

Loca

l Ow

ners

hip

Shar

e

10

The six major plays generated an estimated $39 billion in royalties in 2014.

1 BEA REIS; 2 2012 USDA-NASS Census of Agriculture

Source: Authors’ calculations

Shale PlayIncome ($/ per capita) Bakken Eagle Ford Haynesville Marcellus Niobrara PermianRoyalty income 27,414 12,007 1,811 431 739 9,768

Local royalty income 4,148 2,942 398 236 224 1,161

Govt. transfers 1 6,455 6,712 8,345 9,146 5,652 6,997

Federal farm payments2 587 33 10 9 44 186

11

Empirical Assessment of Competition in Leasing Market

• With homogenous parcels within a county, zero profits imply:

• Rearranging and taking logs:

• Basis for estimation

• Perfect competition implies β = 1

12

Estimating Ultimate Recovery• Estimate geologically-driven spatial variation

of – use coefficients from a regression based on

county-level data on production, shale thickness, and the number of wells in each age category

• Undoubtedly measured with error

• Use log of avg. shale depth in a county to instrument for

13

Main Results• First stage: A 1% increase in depth associated

with a 0.69% increase in EUR– Our EUR estimates closely track EIA estimates

• Second stage: A 10% increase in EUR is associated with 0.2% decrease in share of value of production going to the firm– Doubling the EUR for the average well increases the

average royalty rate by 2 percentage points (an 11% increase).

14

Conclusion

• The six major shale plays generated an estimated $39 billion in royalty payments in 2014.

• Mineral owners benefit from resource abundance primarily through owning more resources, not through negotiating better lease terms.

15

Shale Plays

Source: Energy Information Agency