In economics, rent is a surplus value after all costs and normal returns have been accounted for, i.e. the difference between the price at which an output from a resource can be sold and its respective extraction and production costs, including normal return. This concept is usually termed economic rent but when referring to rent in natural resources such as coastal space or minerals, it is commonly called resource rent. It can also be conceptualised as abnormal or supernormal profit.
In practice, identifying and measuring (or collecting) resource rent is not straightforward. At any point in time, rent depends on the availability of information, market conditions, technology and the system of property rights used to govern access to and management of resources.
Rent can be categorised into different kinds depending on how it is created. In general one can distinguish three different kinds of rent, which can also occur together: differential, scarcity, and entrepreneurial rent. [1]
A landowner who holds oil or mineral rights to his property may transfer those rights under a license to another party. [2] In exchange for allowing another party to extract resources, the landowner receives either a resource rent or a "license fee" based on the value of the resources sold. [3] [4] When the government owns the resource, the transaction often must comply with statutory and regulatory requirements.
The calculation of the value of oil and gas royalties involves estimating future revenues based on recent production trends. [5] [6] A common method is to take the average monthly income for the last three months and use that as a basis for forecasting. [7] [8]
In the United States, simple ownership of mineral rights is possible, and royalty payments to individuals are quite common. [9] [10] Local taxing authorities may levy a severance tax on non-renewable natural resources extracted or withdrawn within their authority. The federal government receives royalties for mining on federal lands, which is managed by the Bureau of Ocean Energy Management, Regulation and Enforcement, formerly the Minerals Management Service.
An example from Canada's northern territories is the federal rules on royalties for oil in border lands. [11] [12] [13] The royalty rate begins at 1% of gross sales for the first 18 months of commercial production and increases by 1% every 18 months up to a maximum of 5% until initial costs are recovered, after which the royalty rate is set at 5% of gross sales or 30% of net sales. Thus, the risks and profits are shared between the Government of Canada (as the owner of the resources) and the oil developer. This attractive royalty rate is designed to incentivize oil and gas exploration in Canada's remote frontier areas, where costs and risks are higher than elsewhere.