Oil and Natural Gas Royalties

The facts about the U.S. royalty collection system
U.S. oil and natural gas companies take their payments to the government for acquisition, exploration and production of leases on federal lands and in federal waters seriously. We are committed to working with all parties to improve any perceived inadequacies in the system.

 Fact Sheet
Size: 130 KB | Date: June 23, 2009 | License: Free

What are royalties?
Unless a landowner wants to develop his property himself, a landowner can lease the land to another person for development of minerals, such as oil and natural gas. In return for those development rights, anyone operating under a lease and recovering oil and gas customarily pays the landowner a royalty, an agreed upon share of the minerals being developed.

Where the lands are federal lands, federal statutes require that the party producing the oil and gas pay the U.S. Department of the Interior royalties based on the value of the oil and gas actually produced. For onshore federal leases, the Minerals Lands Leasing Act prescribes the share or royalty rate as 1/8 the value of production; for offshore leases, the Outer Continental Shelf Lands Act prescribes the royalty rate as 1/6 the value of production.

How are royalties calculated?
On federal lands the royalty share of the value produced can be paid in dollars or in kind, at the election of the Department of the Interior’s Minerals Management Service (MMS).

If the MMS wants its royalties in dollars, the lessee applies the 1/6 or 1/8 royalty rate to the actual or imputed proceeds it received from sale, less deductions for post-production costs such as transportation away from the lease. For example, if a barrel of crude oil produced from an onshore lease were sold at the lease for $24, the royalty due would be 1/8 of the selling price or $3. If the MMS wants its royalties in kind, the producer works out an arrangement for delivery of the 1/6 or 1/8 royalty share at a time and place prescribed by the MMS.

Given the huge volume of oil and natural gas produced, the diversity of marketing arrangements and other factors, the MMS publishes regulations and other guidance material that prescribe the details of royalty compliance. Basically, the MMS requires the producer to pay royalties within 30 days of production, while adhering to prescribed accounting standards, keeping adequate records and filing detailed monthly reports.

Does everyone producing oil and gas on federal lands pay the same royalty?
No. While federal mineral leasing statutes prescribe onshore and offshore royalty rates, there are exceptions. For example, the Secretary of the Department of the Interior may upon application of a lessee reduce the royalty rate for good cause. (e.g., where operating conditions have driven costs very high, or where the useful production life of the well is being approached).

In a given year, how much does the Minerals Management Service collect in federal royalties?
According to the MMS, annual revenues from federal onshore and offshore (OCS) mineral leases are one of the federal government’s largest sources of non-tax income. In 2000, the MMS collected $5 billion in oil and gas royalties. The bulk of this ($4 billion) came from offshore production, with natural gas production generating 60 percent of the royalty revenue. For federal onshore lands, gas production generated over 70 percent of the almost $1 billion in royalties. The MMS also collected over $1 billion in bonus bids and rental payments to bring the total federal revenue collected by MMS from oil and gas leasing to approximately $6.3 billion. In addition, Indian lands, separate from federal onshore lands, generated about $200 million in revenues for Indian tribes. Please see the MMS website for more information on royalties paid for oil and gas produced from federal or Indian lands.

How are federal royalty revenues distributed?

How royalties (and other revenue) get distributed depends on the status of the land from which it was produced. For example, the royalties from federal offshore lands are distributed differently than federal onshore lands. Moreover, the distribution of royalties from federal onshore lands varies depending on their status (public domain lands, acquired lands, Alaska Native Lands, etc.).

Making the question even more difficult is that government reports generally lump all mineral revenue together when discussing disbursements. That said, the largest recipient of mineral revenue is the US Treasury, which receives over half of the revenue. The Land and Water Conservation fund, which acquires and provides funds to maintain parklands, receives about $900 million each year. In 2000, states received about $660 million from oil and gas activities on federal lands, over $400 million of this was from oil and gas royalties. These categories, US Treasury, Land and Water Conservation Fund, and states, represent the three largest recipients of federal mineral revenue.