Royalty and Lease Payments:
Local Economic Implications from Energy Contracts
Energizing the U.S. Economy: Rural America at the
Epicenter of America’s Future
October 29, 2015
Jason Brown
Senior Economist
The views expressed are those of the presenter and do not necessarily reflect
the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
Converting Natural Resources to Cash
• Energy production has offered new opportunities to
create rural wealth
• Exploiting oil and gas endowments or harnessing wind
converts natural resources into cash payments to labor,
governments, and land and mineral right owners
• Six major plays produced over $211 billion in oil and gas
in 2014, 1.2% of U.S. GDP
• Estimated O&G royalty payments of $39 billion to
private mineral right owners
2
Background
• Energy development is subject to boom and bust cycles
• Changes in commodity prices (oil, natural gas) or energy
policy (renewables)
• Capture of economic value of energy development is key
for local economies
• Distribution of costs vs. benefits of development varies
within and across regions
• Participating vs. non-participating land and mineral right
owners
3
The Issue
• On-going debate about the local economic
implications from energy development
• A boom may yield large returns to land and mineral
right owners, but for how long?
• Income and wealth effects depend on
• intensity and duration of development
• local ownership
• potential externalities (e.g., pollution, congestion,
infrastructure)
4
Let’s Make a Deal
• Most development is on located on private lands
• 75% of onshore oil and gas development (Fitzgerald, 2014)
• Over 98% of wind development (AWEA)
• Energy developers must enter into legal agreements with land and
mineral right owners
• Contracts establish what owners will receive
• Lease payments – fixed annual payment
• Bonus payments – upfront onetime payment
• Royalty payments – regular payments based upon value of production
• Payments increase wealth by increasing
• Savings vs. consumption
• And (potentially) household asset values, notably land
5
Typical Wind Leases
• Wind option agreement (Aakre and Haugen)
• $2 to $10 per acre for 3 to 5 years
• Like a bonus payment
• Development phase and beyond (Windustry)
• lease is typically 20 to 25 years
• Fixed annual lease payment is most common
• Per turbine payments range from $2,000 to $10,000 (and/or)
• Royalty – 3 to 5% of value of electricity produced
• In 2014, leases paid around $180 million to landowners
(AWEA)
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Typical O&G Leases
• Leasing contracts signed before development begins
• Gives company the right but not obligation
• Avg. bonus payment of $200 per acre
• Term is usually 3 to 5 years
• Lease remains in effect as long as production continues
• Royalty rates vary across and within regions
• Avg. around 18%
• 13.5% (PA) – 21.5% (LA)
Source: Drilling Info; Brown, Fitzgerald and Weber (2015)
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Farm Households Receiving Energy Payments
• Totaled $2.3 billion dollars in 2011 (oil, gas and wind)
• Roughly half of the largest Federal farm support program in
2011
• In 2011, 3.4 percent of all farms received payments
( ~74,000 total farms)
• Payments were most common in the Plains states
• About half of farms with payments specialize in raising beef
cattle
• Some farm households received large energy payments
• Average $30,613 vs. median $7,000 payment
Source: 2011 Agricultural Resource Management Survey, Version 1.
Weber, Brown and Pender (2014)
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Energy Payments to Farm Households by Region, 2011
Region
Median
Energy
Payment
Percentage of
farms
receiving
payments
Percentage of
total energy
payments
Percentage of
total
government
farm payments
Atlantic
$4,400
2.4
21.0
11.8
South
$5,000
1.1
2.5
13.9
Midwest
$1,079
2.0
3.8
30.8
Plains
$7,859
8.0
61.5
29.2
West
$13,000
2.5
11.2
14.3
Continental U.S.
$7,000
3.4
100
100
Source: 2011 Agricultural Resource Management Survey, Version 1.
Weber, Brown and Pender (2014)
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Wealth Effects for Farm Households
• Most of the wealth effect is from higher land values
• Total farm household wealth increased by estimated $7.7
billion in 2011
• $1.7 billion from saving payments
• $6 billion from higher land values
• For land values, a dollar of energy payments increases
land values by $2.60
• Smaller than estimates of the capitalization of farm program
payments, $4.94 to $5.35 on a per acre basis
• Lower capitalization could be from lower quality land being
leased more frequently
Source: Weber, Brown and Pender (2014)
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Selected Shale Plays
Source: Energy Information Administration
11
Value of Production & Royalty Rates by Play, 2014
25%
60
50
40
30
20
10
0
Average Royalty Rate
Value of Production ($ Billions)
70
20%
15%
10%
5%
0%
Source: Brown, Fitzgerald and Weber (2015)
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Local Ownership & Local Value of Production, 2014
60%
40%
30%
20%
10%
0%
Local Value of Production ($ Billions)
Local Ownership Share
50%
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Source: Brown, Fitzgerald and Weber (2015)
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O&G Royalty Income Estimates, 2014
Bakken
Royalty income ( $
27,770
per capita)
Local royalty
income ($ per
4,202
capita)
Govt. transfers ($
6,455
per capita)1
Federal farm
payments ($ per
587
2
capita)
1 BEA
Eagle Ford
Shale Play
Haynesville Marcellus
Niobrara Permian
12,008
1,764
429
780
9,946
2,942
387
235
236
1,183
6,712
8,345
9,146
5,652
6,997
33
10
9
44
186
REIS; 2 2012 Census of Agriculture
A one percentage point reduction in royalty rate negotiated would reduce local
royalty income per capita $16 to $250 across the plays
Source: Brown, Fitzgerald and Weber (2015)
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Conclusion
• Recent energy development may generate significant wealth for some
in rural areas
• How much wealth depends upon intensity and duration of
development and local ownership
• Royalties and lease payments vary substantially
• across regions
• within regions
• over time
• Suggests that land and mineral right owners likely view payments as
temporary vs. permanent
• implications for how they are spent or saved
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References
•
Aakre, D. and Haugen, R. 2009. Wind Turbine Lease Considerations for Landowners. NDSU Extension
Service. EC-1394.
•
AWEA, 2013. Public lands and wind energy. Available at:
http://www.awea.org/Issues/Content.aspx?ItemNumber=858
•
AWEA, 2015. Wind was largest source of new electricity in 2014. Available at:
http://www.awea.org/MediaCenter/pressrelease.aspx?ItemNumber=7294
•
Brown, J.P., Fitzgerald, T. and Weber, J.G. 2015. Capturing Rents from Natural Resource Abundance:
Private Royalties from U.S. Onshore Oil and Gas Production. RWP 15-04, Federal Reserve Bank of
Kansas City.
•
Fitzgerald, T. 2014. Importance of Mineral Rights and Royalty Interests for Rural Residents and
Landowners. Choices 4th Quarter.
•
Weber, J.G, Brown, J.P. and Pender, J.L. 2014. Rural Wealth Creation and Emerging Energy Industries.
In: Rural Wealth Creation, Pander, J.L., Weber, B.A., Johnson, T.G. and Fannin, J.M. (eds.) Routledge, pg.
167-184.
•
Windustry. 2009. Wind Energy Easements and Leases: Compensation Packages. Available at:
http://d3n8a8pro7vhmx.cloudfront.net/windustry/legacy_url/944/Compensation-2009-0706.pdf?1421782808
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