Monday, July 10, 2017

Royalties Can Make You Rich -- WSJ -- July 10, 2017


Later, 8:59 p.m. Central Time: see first comment for an interesting story regarding royalties; how they can affect trusts/estates.

Original Post

One study estimated that in 2012 private owners earned some $22 billion in royalties.

Link here.
One often-overlooked benefit of the U.S. energy boom: The federal government receives billions of dollars in royalties annually. Thanks to property rights, so do millions of Americans. Over the past decade, for example, Cabot Oil & Gas Corp. has dished out $1 billion in royalties and $500 million in signing bonuses to Pennsylvania landowners in Susquehanna and Wyoming counties.
In fiscal 2016, Washington collected $3.9 billion in royalties from oil and gas production on federal land and offshore—and that’s down from $6.6 billion in 2015, according to a new report from the Government Accountability Office. Lower energy prices contributed to the decline, but so did the Obama administration’s roadblocks on drilling-permit applications.
The Congressional Research Service reports that federal lands produced 1.57 million barrels of crude oil a day in 2008. By 2015 that had risen 25% to 1.955 million. But over the same period production on nonfederal land more than doubled from 3.467 million barrels a day to 7.46 million.
The contrast was starker for natural gas. Federal lands produced 6,471 billion cubic feet in 2008, but that number shrank to 4,594 billion by 2015. Over the same period production on nonfederal lands grew from 14,523 billion cubic feet to 24,143 billion.
The difference is even more pronounced when you realize that the royalty rate is typically much higher on state and private land. Oil and gas producers are required to pay 12.5% to drill on federal land. Royalties on state land are usually in the range of 16% to 18%. In Texas, the largest producer, the typical rate is 25%. Royalties on private land often reflect the state rate.
Why would producers flock to state or private land rather than cheaper federal land? Because time is money. The Bureau of Land Management took an average of 307 days in 2011 to process applications for drilling permits. States can give approval within a few months. 
Based on what I see at the NDIC, it looks like North Dakota can process applications in less than one month in established drilling areas.

Much, much more at the link.

Pennsylvania fracks; New York state bans fracking. New York City's subways are in a world of hurt.

Hold that thought. A writer who knows the Bowman, ND, area very, very well, pointed out these facts regarding royalties and Bowman County:
  • on Federal land the royalty money is split 50/50 (50% to federal government; 50% to the county)
  • county royalties can only be used for infrastructure; no salaries paid with royalties
During the boom, Bowman County (a very small county in southwestern ND) used royalties to help pay for:
  • a 300 X 20 ft  indoor rodeo building (at the fair grounds );
  • a new addition on the county court house;
  • a new county garage/building;
  • a fairly large school addition (the school had no building debt); and,
  • the county buildings were paid for before they were built
  •  that is what OIL royalty does (that I know of) in a county with less than 3,800 people, in 13 years


  1. Here's an interesting tale of royalties.

    When the Texas & Pacific Railroad Company constructed a railroad across Texas in the latter part of the 19th century, it received about 2 million acres of land in west Texas as part of its compensation. Those lands were put into an entity named the Texas Pacific Land Trust, and share certificates to the trust were sold to the public through the New York Stock Exchange.

    In 1954 the Texas and Pacific Land Trust sold the mineral rights under those two million acres to TXL Oil Corporaton (which was acquired by Texaco in 1991, which in turn was acquired by Chevron in 2002), but retained a 1/16 non-participating royalty under 377,777 acres, and a 1/128 non-participating royalty interest under 85,414 acres.

    The Texas and Pacific Land Trust still exists today and still owns those royalty interests. It is still traded on the NY Stock Exchange.

    Most of the acreage is in the Delaware Basin, but a small part is in the Midland Basin. Another part is outside the Permian Basin.

    When the Wolfbone play began in 2005 in the Delaware Basin, the Texas Pacific Land Trust stock certificates went from about $10 a share to about $40. But the big jump occurred in 2012 when the shale play began in the Permian Basin. Since then the stock went from $40 to $300.

    So overall there has been about a 3,000% appreciation in the price of the stock certificates over the last ten years. And Chevron hasn’t even began drilling shale wells on the acreage in any significant way yet.

    Here's a graph of the performance of the stock certificates on the New York Stock Exchange since the 1970s.