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Energy resource funds

Hydrocarbon Engineering,

As non-renewable resources are collected from oil, gas and coal production, there is a good opportunity for states to collect revenue via taxation. Natural resource permanent funds are revenues earned from taxing the extraction of energy resources and are set aside by national, state and local governments for strategic or long term use. Similar to an endowment, states typically only spend the earnings and investment gains from these funds, as expenditure of principal is usually prohibited unless authorises by legislative approval or constitutional amendments.

Eight US states have permanent funds primarily funded by coal, oil or gas tax revenues. Many of these funds also include funding from royalties and leases on public lands granted to a state by the federal government at the time of statehood, such as permanent school or permanent university funds. Today however, the US$37.2 billion fund is predominantly dependent on revenue received from oil and gas development on state lands.

The funds

The Alaska Permanent Fund was created in 1976 and holds US$52 billon, exceeding the balance of national funds of major oil and gas producers such as Venezuela, Mexico and Angola. As in Alaska, constitution amendments in the 1970s created permanent funds in New Mexico and Wyoming. In Wyoming, the largest coal producer in the US, the Permanent Mineral Trust Fund consists of all severance tax revenue derived from coal, oil, gas and other minerals. The fund’s income is annually distributed to support the state general fund. New Mexico’s Severance Tax Permanent Fund sets aside a portion of severance tax revenue to support the general fund, as well as public education and infrastructure development.

In between the energy price spikes of the 1970s and 2000s, Alabama and Louisiana created permanent funds in response to oil and gas offshore production opportunities. The discovery of significant natural gas reserves in 1978 prompted the creation of the Alabama Trust Fund. Initially capitalised by a legal settlement over oil and gas royalties, the Louisiana Education Quality Trust Fund was created in 1986 to support primary, secondary, and higher education programs across the state.

Permanent funds have recently been created in several states in response to the rapid growth of tight oil and shale gas production. In 2010, North Dakota voters authorised the North Dakota Legacy Fund to reserve 30% of total revenue collected from taxes on oil and gas production, including tight oil produced in the Bakken Region. In March last year, the West Virginia Future Fund was created to reserve a portion of shale gas revenue from activity in the Marcellus Region, as well as from other production in the state, for strategic purposes.

Among the eight states, the majority of permanent funds supplement general government expenditures. Alaska’s permanent fund is unique in its annual distributions of income earnings to state residents.

Edited from press release by Claira Lloyd

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