Energy Royalties

Overview

The energy industry collects royalties on the licensing of tangible assets, usually natural resources. For example, the owner of a petroleum well may license a firm to extract, treat and market her petroleum in exchange for a royalty payment. These royalties are typically charged as a percentage of gross revenue resulting from the use of an asset and currently comprise 1.7% of U.S. GDP.

Different industries use different terms to refer to natural resource royalties: in economic terms, they’re referred to as a “resource rent”; in the mineral, natural gas and oil industries they’re known as “mineral leases”; in the forestry industry they’re known as "stumpage".

Government and Resources

Governments often own many natural resources, and the terms of government licenses and royalties are typically regulated.  In the United States, the federal government owns about 28% of all land, and resource royalties on that land are managed by the Department of Interior (DOI). Royalties are paid to the federal government and a portion is then distributed to states. In fiscal year 2012 the U.S. government collected over $12 billion in mineral royalties, distributing $2.1 billion to state governments.

Most countries consider nonrenewable resources like oil, coal and minerals to be a public good and do not allow them to be privately owned. However, United States citizens have the right to fee simple land ownership, meaning that they may own both the surface of their property and everything above and below it, including all natural resources. The extraction of nonrenewable resources from land may be subject to taxation (called a severance tax) at the state and local level, but not at the federal level.

Related Articles

The Tax Foundation on Federal Mineral Royalty Disbursements

Geology.com on Mineral Rights

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