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.
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