California Tidelands Oil Royalties
In this document, royalties for oil produced in the
California Tidelands are discussed. Royalties percentages
from 5% to 94.1% have existed in the California
The text of the current laws governing extraction of
public-owned oil are
California hires oil extractors by leasing
tracts of the tidelands. The leasing is traditionally done
via an auction, where extractors submit `bids,'; nominally,
the lease goes to the highest bidder, and the money in
the bid is paid to California and called a `Cash Bonus'.
The last time a tidelands lease was issued in California
was in 1968; the Santa Barbara Oil Spill of 1969
in effect stopped further leasing.
The actual lease agreement between California and
the oil extractor specifies a fraction, or `royalty,'
of the extracted oil, or equivalant dollars,
that California will retain.
The first California Law concerning tidelands royalties
took force in 1921. Two types of leases were recognized:
`wildcat' and `proven'. Roughly, wildcat leases are in
areas without existing oil production, and proven are near
existing production. The details of this distinction have
The 1921 law specified a 5% royalty for wildcat leases,
and a negotiated royalty, at no less than 12.5%, for proven
leases. About 100 permits to extract were issued under the
1921 law, until a moratorium on new leases was issued on
January 17, 1929. The dominant causes of the moratorium
seem to have been concern for industrialization of the coast,
disputes over the wildcat vs. proven distinction, and perhaps
concern over draining of State-controlled tideland oil fields
from shore-based slant drilled wells.
Leasing did not start again until the State Lands Act passed
in 1938. However, between 1933 and 1937, about 80 `easements' to
extract tidelands oil via slant drilling from land were granted.
A `sliding' royalty, where the percentage increased with amount
of oil extracted per day, was introduced in these easements.
The average royalty was 13%.
Apparently, some felt that the easements were granted on a favorable
basis to the Standard Oil Company, and State Finance Director Arlin R.
Stockburger was accused of incompetence or corruption. The State
Lands Act established the State Lands Commission to address this
problem, at least in part.
The commission consists of 2 elected officials,
the Lieutenant Governor and the State Controller, in addition to
the State Finance Director. The State Lands Commission must approve
all tidelands leasing.
Between 1938 and 1955, the Commission issued all new leases
with a sliding royalty scale. The average royalty for leases granted
in that time period was 35%; in contrast, the average
royalty between 1921 and 1945 was 12.6%.
In 1955, a desire for increased oil development in California
led to the passage of the Cunningham-Shell Tidelands act.
One aspect of this act was the establishment of the Santa Barbara
Sanctuary, where oil extraction was restricted, from Sheffield
Drive in Montecito to the UCSB campus in Goleta.
Another aspect of the Cunningham-Shell act was a change in royalties.
The royalty for a `wildcat' lease was lowered to a flat 12.5%.
In fact, one lease near Summerland (PRC 1823) was granted on
this basis. Platforms Hazel and Hilda, which are present still,
but are moribund, extracted from this lease.
A sliding scale for proven leases was specified in the Cunningham-Shell
act. The royalty was based on the oil production on a per well per
day basis. If a well
produced less than 60 barrels per day (bpd), California
retained 1/6, or 16.7%, of the oil extracted; if more than 60 bpd
was produced, the royalty increased, to 25% at 100 bpd,
40% at 200 bpd, 50% at 300 bpd, 62.5% at 500 bpd, 75% at 1000 bpd,
85% at 1700 bpd, and so on up to 100% for infinite bpd.
Dissatisfaction with the original wildcat lease royalty led to a 1957
amendment of the Cunningham-Shell act. It appears that all the leases
established through 1968, when leasing stopped, were made on the
basis of the 1957 amendment to the Cunningham-Shell act.
The 1957 wildcat royalty was increased to a sliding scale,
slightly different than the
sliding scale used for proven leases. Under the wildcat sliding scale,
California retained 1/6, or 16.7% of the oil if 100 bpd or less were
produced, 28.6% if 200 bpd were produced, 37.6% if 300 bpd were
produced, and 50% if 500 bpd or more were produced.
In the Santa Barbara area, the leases produced by
platforms Holly (PRC 3120 and 3242, off Ellwood),
and Heidi and Hope (PRC 3133, 3150, and 4000, off Carpinteria)
were all granted under this wildcat sliding scale royalty.
In the case of Holly, California retained 36% of the
oil produced between 1966 and 1993. Mobil Oil used an argument
of the unprofitability of Holly to renegotiate
leases PRC 3120 and 3242 in 1994, and now California retains only 1/6
of the oil produced at Holly.
Had the sliding scale been used to determine Holly's
royalties in 1994, California would have retained $1,120,000
more of the oil value than the 1/6 royalty allowed.
For Mobil's proposed Clearview Project, Mobil has suggested
that California adjust the boundary of lease PRC 3242 eastward,
to encompass a proven reserve off the UCSB campus.
They also suggest that the 1/6 royalty be extended to extraction
from the proven reserve off UCSB.
Using the oil price projections of a Mobil-hired consultant,
and assuming that Mobil's 1/6 royalty for Clearview were approved,
California would retain a total of $886 million between 2001
and 2028, at the 1/6 royalty. At 1994 prices, California
would retain $274 million.
If the sliding scale for proven leases is applied to the
proposed Clearview project, California would retain a royalty
of 61.1%. With the Mobil consultant's price projections,
California would retain a total of $2.98 billion between 2001
and 2028, and $1.01 billion at 1994 prices, if the proven
sliding scale is used.
Mobil has publicly argued that the 1/6 royalty is
standard in the industry. Outside California, that may be true.
Excerpts from a 1955 article
on oil extraction in the California Tidelands.
Krueger, Robert B., `State Tidelands Leasing in California,' UCLA Law
Review, 5 (1958) 427.
Bartley, Ernest R., `The Tidelands Oil Controversy,' University of
Texas Press, Austin, 1953.
`Economic Impacts of the Clearview Project,' prepared for Mobil Exploration
and Producing, Inc. by the UCSB Economic Forecast Project, April 20, 1995