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Capturing rents from natural resource abundance: private royalties from U.S. onshore oil and gas production

Listed author(s):
  • Brown, Jason

    ()

    (Federal Reserve Bank of Kansas City)

  • Fitzgerald, Timothy
  • Weber, Jeremy G.

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.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 15-4.

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Length: 48 pages
Date of creation: 01 Jun 2015
Handle: RePEc:fip:fedkrw:rwp15-04
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  1. Vissing, Ashley, 2015. "Private Contracts as Regulation: A Study of Private Lease Negotiations Using the Texas Natural Gas Industry," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 44(2), August.
  2. Douglas K. Reece, 1978. "Competitive Bidding for Offshore Petroleum Leases," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 369-384, Autumn.
  3. Philip A. Haile, 2001. "Auctions with Resale Markets: An Application to U.S. Forest Service Timber Sales," American Economic Review, American Economic Association, vol. 91(3), pages 399-427, June.
  4. T. Anderson, Soren & Kellog, Ryan & W. Salant, Stephen, "undated". "Hotelling under Pressure," Discussion Papers dp-14-20, Resources For the Future.
  5. Fabio Ravagnani, 2008. "Classical Theory and Exhaustible Natural Resources: Notes on the Current Debate," Review of Political Economy, Taylor & Francis Journals, vol. 20(1), pages 79-93.
  6. repec:fip:fedkrw:rwp2013-07 is not listed on IDEAS
  7. Boskin, Michael J, et al, 1985. "New Estimates of the Value of Federal Mineral Rights and Land," American Economic Review, American Economic Association, vol. 75(5), pages 923-936, December.
  8. James W. McKie, 1960. "Market Structure and Uncertainty in Oil and Gas Exploration," The Quarterly Journal of Economics, Oxford University Press, vol. 74(4), pages 543-571.
  9. Kirsten Hardy & Timothy W. Kelsey, 2015. "Local income related to Marcellus shale activity in Pennsylvania," Community Development, Taylor & Francis Journals, vol. 46(4), pages 329-340, October.
  10. Hendricks, Nathan P. & Janzen, Joseph P. & Dhuyvetter, Kevin C., 2012. "Subsidy Incidence and Inertia in Farmland Rental Markets: Estimates from a Dynamic Panel," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(3), December.
  11. Barrett E. Kirwan, 2009. "The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 138-164, 02.
  12. Hendricks, Kenneth & Porter, Robert H, 1996. "The Timing and Incidence of Exploratory Drilling on Offshore Wildcat Tracts," American Economic Review, American Economic Association, vol. 86(3), pages 388-407, June.
  13. Milgrom, Paul & Weber, Robert J., 1982. "The value of information in a sealed-bid auction," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 105-114, June.
  14. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
  15. Marchand, Joseph & Weber, Jeremy, 2015. "The Labor Market and School Finance Effects of the Texas Shale Boom on Teacher Quality and Student Achievement," Working Papers 2015-15, University of Alberta, Department of Economics.
  16. John L. Pender & Jeremy G. Weber & Jason P. Brown, 2014. "Sustainable Rural Development and Wealth Creation," Economic Development Quarterly, , vol. 28(1), pages 73-86, February.
  17. Vissing, Ashley, 2015. "Private Contracts as Regulation: A Study of Private Lease Negotiations Using the Texas Natural Gas Industry," Agricultural and Resource Economics Review, Cambridge University Press, vol. 44(02), pages 120-137, August.
  18. Hendricks, Kenneth & Porter, Robert H, 1988. "An Empirical Study of an Auction with Asymmetric Information," American Economic Review, American Economic Association, vol. 78(5), pages 865-883, December.
  19. Jeremy G. Weber & Jason Brown & John Pender, 2013. "Rural wealth creation and emerging energy industries: lease and royalty payments to farm households and businesses," Research Working Paper RWP 13-07, Federal Reserve Bank of Kansas City.
  20. repec:aen:journl:eeep4_1_ikonnikova is not listed on IDEAS
  21. Hendricks, Kenneth & Porter, Robert H & Tan, Guofo, 1993. "Optimal Selling Strategies for Oil and Gas Leases with an Informed Buyer," American Economic Review, American Economic Association, vol. 83(2), pages 234-239, May.
  22. Hayne E. Leland, 1978. "Optimal Risk Sharing and the Leasing of Natural Resources, with Application to Oil and Gas Leasing on the OCS," The Quarterly Journal of Economics, Oxford University Press, vol. 92(3), pages 413-437.
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