Revenues from Oil and Gas Extraction

Nations that have vast oil and gas reserves and that effectively oversee their development can derive many benefits from their extraction. Not only can extractive industries create numerous jobs and contribute significantly to economic growth, they can also be a significant source of revenues for governments. These revenues, in the form of royalties, lease payments, and other fees paid by private companies, can be spent to support government programs or to reduce public debt, or they can be saved for future generations.

Depending on natural resource reserves, industry development, and market conditions, revenues from oil and gas extraction can make up a large portion of a national or regional economy. For example, in Newfoundland and Labrador, offshore oil royalties of $1.7 billion represented approximately 27 percent of the province’s revenues in the 2014–15 fiscal year. This proportion can be even higher in other resource-rich jurisdictions, such as Russia (50 percent), Nigeria (70 percent), or Saudi Arabia (90 percent).

However, government revenues from oil and gas extraction can vary greatly from one year to the next, depending on the state of the world’s economy, energy demand, resource prices, exchange rates, the development of the industry in each region, and other factors. Figure 1 illustrates this variation for Newfoundland and Labrador, where offshore oil royalties were only $65 million in the 2002–03 fiscal year when the industry was still young, before multiplying 43 times to $2.8 billion by the 2011–12 fiscal year as production increased, and finally falling to approximately $550 million in 2015–16 as international oil prices plummeted. From a high of 39 percent in the 2012–13 fiscal year, offshore oil royalties were expected to represent less than 10 percent of the province’s budget in 2016–17, forcing the government to make spending cuts and to seek new revenue sources to compensate for its lost royalty revenues.

Similar boom and bust cycles have been common in the history of the oil and gas sector and will continue in the future as production and demand change and markets adapt to new circumstances. Accordingly, governments have to consider this variation and uncertainty when they make decisions about how best to derive revenues from national or regional oil and gas reserves. Royalties and the other main types of revenues that governments can collect from oil and gas extraction are described next.

Figure 1

The Rise and Fall of Offshore Oil Revenues for the Government of Newfoundland and Labrador, 2003–2015

Source: CBC News, 13 April 2016, Royalty Bust Brings Pain to Newfoundland and Labrador, with data from Newfoundland and Labrador Public Accounts. (Reproduced under CBC licensing)

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