What is a royalty in mining and oil?
A payment to the owner of the resource, usually the state, for every tonne or barrel taken out of the ground. It is owed even when the project makes no profit.
In most countries minerals and hydrocarbons belong to the state, not to the owner of the land above them. A company that extracts them pays the state for the privilege. The simplest form of payment is a royalty.
A royalty is calculated on production. It can be a fixed amount per tonne or, more often, a percentage of the sale value. Because it is based on output and not on profit, the government collects from the first shipment, long before the company has recovered its investment.
That makes royalties popular with treasuries and unpopular with investors, who prefer taxes on profit. Many countries now use sliding scales in which the rate rises with the commodity price. When you read that a government is reviewing its mining code, the royalty rate is usually the clause being fought over.
- Based on
- Volume or sales value, not profit
- Paid to
- The resource owner, which in most countries is the state
Explainers describe how things generally work. They are not advice for a specific project or country. See our editorial policy.