Factors affecting bonus bids for oil and gas leases in the Williston Basin

Governments receive several revenue streams from companies that hold and operate oil and gas leases on public lands. These revenues vary in their timing and certainty. When the profitability of the resources increases, governments are tempted to increase their fiscal terms to capture the upside on future production. Do policies aimed at capturing these additional future revenues result in lower prepayments for development rights? If so, what is the effect? Understanding producer response to increased terms and the other factors that influence bonus bids can help governments maximize the net return for mineral development on public lands.;This study analyzes the relationship between royalty rates and bonus bids for oil and gas parcels auctioned by the state of North Dakota over the past five years. The study uses multiple regression analysis and a spatial-autoregressive with spatial-autoregressive disturbances (SARAR) model to examine the spatial lag of bonus bids while allowing for disturbances to be generated by the spatial-autoregressive process. The results indicate that higher royalty rates generally reduce bonus bids. The study also provides evidence that the effects vary by the type of oil resource. Higher royalty rates reduce bonus bids for conventional oil resources but fail to reduce bonus bids for continuous oil resources. This suggests that governments may capture additional royalties in continuous oil areas without jeopardizing bonus bid revenue.