1. Capturing Rents from Natural Resource Abundance: Private Royalties from U.S. Onshore Oil and Gas Production Jason P. Brown 1, Timothy Fitzgerald 2 and Jeremy G. Weber 3 1 Federal Reserve Bank of Kansas City 2 Montana State University 3 University of Pittsburgh The views expressed are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City, the Federal Reserve System, Montana State University, or the University of Pittsburgh.

2. Background Shale formations are located primarily on private lands. Oil and gas companies must gain access via private lease contracts with mineral rights owners. In 2012, energy companies owed private mineral owners more than $30 billion in gross royalties (Fitzgerald, 2014) 2

3. Background On-going research on the local economic implications from boom in domestic oil & gas production. Boom is expected to yield large returns to mineral right owners. Income and wealth effects will depend on productivity of the play and local ownership 3

4. From the Field: Effects of Royalty Payments 4 A royalty-funded barn renovation in Bradford County, PA

5. 5 A royalty-funded tractor upgrade in Bradford County, PA

6. Research Questions How large are private royalty income flows from the major shale plays? particularly to local economies How competitive are leasing markets? – Do mineral owners in more geologically productive areas receive higher royalty rates? 6

7. Data Leasing data are from DrillingInfo Nearly 1.8 million private leases from around the country Only active leases are considered 16 states, 558 counties in total Production data from state agencies; price data from the EIA 7

8. Royalty Income Estimates Use county-level data on the value of production, royalty rates, and local ownership shares to estimate – Total royalty income for six major plays in 2014 – local royalty income Compare royalties to: Government transfer payments Federal farm commodity programs 8

9. Royalty Rates and Local Ownership Shares by Play Source: Authors’ calculations 9

10. The six major plays generated an estimated $39 billion in royalties in 2014. 10 1 BEA REIS; 2 2012 USDA-NASS Census of Agriculture Source: Authors’ calculations Shale Play Income ($/ per capita)BakkenEagle FordHaynesvilleMarcellusNiobraraPermian Royalty income 27,41412,0071,8114317399,768 Local royalty income 4,1482,9423982362241,161 Govt. transfers 1 6,4556,7128,3459,1465,6526,997 Federal farm payments 2 5873310944186

11. Empirical Assessment of Competition in Leasing Market 11

12. Estimating Ultimate Recovery 12

13. Main Results First stage: A 1% increase in depth associated with a 0.69% increase in EUR – Our EUR estimates closely track EIA estimates Second stage: A 10% increase in EUR is associated with 0.2% decrease in share of value of production going to the firm – Doubling the EUR for the average well increases the average royalty rate by 2 percentage points (an 11% increase). 13

14. Conclusion The six major shale plays generated an estimated $39 billion in royalty payments in 2014. Mineral owners benefit from resource abundance primarily through owning more resources, not through negotiating better lease terms. 14

15. Shale Plays Source: Energy Information Agency 15