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.
The National Association of Royalty Owners, a trade group, estimates that eight million to 12 million people receive royalties from oil and gas production nationwide. A 2013 studyby Timothy Fitzgerald and Randal Rucker, economists at Montana State University, estimated that in 2012 private owners earned some $22 billion in royalties. Production on private lands has since increased significantly.
Mr. Fitzgerald and others estimated later that six major shale plays generated $39 billion in private royalties in 2014. Some will receive a small fortune, while others—me included, thanks to my grandfather, who left me some mineral rights—may earn enough for a dinner date every few months.
But there’s hope for more. “So much of our land was closed to development,” President Trump observed in a recent energy speech. “We’re opening it up.” If he makes good on that promise, it will give the economy a major boost, along with millions of royalty owners.
Although leases for federal land include a lower than fair market royalty rate of 12.5% which is obviously attractive to the industry, the fact remains that only a small fraction of public lands lie within the boundaries of economic unconventional basins. The rest of those lands may make for a good talking point but is of zero value to oil & gas companies. Development of the public lands within the established basins will only serve to prolong the era of depressed prices for oil and natural gas. There may come a time in the future where the debate over opening public lands to exploration and production makes sense, this is not that time.