Royalty payment

A royalty is a payment made by one party, the licensee or franchisee to another that owns a particular asset, the licensor or franchisor for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation. A royalty interest is the right to collect a stream of future royalty payments.

A license agreement defines the terms under which a resource or property are licensed by one party to another, either without restriction or subject to a limitation on term, business or geographic territory, type of product, etc. License agreements can be regulated, particularly where a government is the resource owner, or they can be private contracts that follow a general structure. However, certain types of franchise agreements have comparable provisions.

A landowner with petroleum or mineral rights to their property may license to another party rights to extract those resources in exchange for a resource rent, or a royalty on the value of the resources sold. When a government owns the resource in question, the transaction is often subject to legal and regulatory requirements.

In the United States, fee simple ownership of the mineral is possible by a private individual, therefore payments of mineral royalties to private citizens occurs quite often. Local taxing authorities may impose a severance tax on the unrenewable natural resources extracted (or severed) from within their authority. The Federal Government receives royalties on production on federal lands, managed by the Bureau of Ocean Energy Management, Regulation and Enforcement, formerly the Minerals Management Service.

An example from Canada's north is the federal Frontier Lands petroleum royalty regime. The royalty rate is determined as an incremental rate from 1–5% of gross revenues until costs have been recovered, at which point the royalty rate increases to 30% of net revenues or 5% of gross revenues. In this manner risks and profits are shared between the government of Canada (as resource owner) and the petroleum developer. This attractive royalty rate is intended to encourage oil and gas exploration in the remote Canadian frontier lands where costs and risks are higher than other locations.

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