Capturing Rents from Natural Resource Abundance: Private Royalties from U.S. Onshore Oil & Gas Production

Abstract

Innovation-spurred growth in oil and gas production from shale formations led the U.S. to become the global leader in producing oil and natural gas. Because most shale is on private lands, drilling companies must access the resource through private lease contracts that provide a share of the value of production – a royalty – to mineral owners. We investigate the competitiveness of leasing markets by estimating how much mineral owners capture geologically-driven advantages in well productivity through a higher royalty rate. We estimate that the six major shale plays generated $39 billion in private royalties in 2014, however, there is limited pass-through of resource abundance into royalty rates. A doubling of the ultimate recovery of the average well in a county increases the average royalty rate by 2 percentage points (an 11 percent increase). The low pass-through is consistent with firms exercising market power in private leasing markets, and with uncertainty over the value of resource endowments. The finding suggests that policies affecting the cost of extraction likely have little effect on the share of the value of production captured by mineral owners.