Why Invest In Oil & Gas Royalties?

ROYALTY BASICS

Royalty interests are as old as oil & gas exploration. Royalty interests are essentially rental payments,

paid as a percentage of production, by oil & gas producers such as Exxon, Shell and Chesapeake to

royalty owners. Royalty owners also enjoy payments for new production from any additional wells

drilled and completed on their property.

Royalty owners are not responsible for costs or risks associated with monthly upkeep, exploration

or development on their property. Instead, royalty owners simply receive their monthly percentage

share of revenue from currently producing wells.

Institutions historically have invested in royalties for long lived cash flow and to profit from rising

commodity prices. Stanford University, Yale, Alaska Endowment Fund, the Baptist Foundation, and

General Motors are well known royalty buyers.

SUPPLY & DEMAND

World population influences energy use more than any other factor. As of May 2008, the world's

population is believed to be 6.7 billion people. The world's population at its current growth rate is

expected to reach nearly 9 billion by the year 2050. This population growth is roughly equivalent to

adding the entire population of the earth in 1948.

The International Energy Agency (IEA) recently issued a sharp downward revision of its oil-supply

forecast. The IEA is concerned that aging oil fields and reduced oil industry investment in new

production means that global production could struggle to surpass 100 million barrels a day over

the next two decades.

The U.S. Department of Energy commissioned the Hirsch Report to determine the timing and

effects of "Peak Oil" and to develop proposals to mitigate the crisis. "Peak Oil" will occur when the

world's oil production fails to meet liquid fuel demand.

The solution is straightforward and massive: Oil producers must create a vast sustainable infrastructure

for the production and distribution of liquid fuels to meet growing world demand. The worldwide

infrastructure cost is expected to exceed $20 trillion over the next twenty years.

If you believe that US oil companies will continue to have a solid economic incentive to maximize

domestic production then royalty owners should benefit from the price of oil and gas, politically

stable production locations, accessible and safe infrastructure and the possibility of significant

enhanced oil recovery.