Battle Royal for Oil: The California Tidelands
(California Director of Finance in the Pat Brown administration,
The Reporter 12/29/55 (Volume 13, Number 11, pp. 21-24)
[initial sections omitted... they describe the 1911 grant
of Long Beach Harbor from California to the City of Long
Beach, the 1953 Federal Tidelands Oil Act, which granted
the resources out to the 3 mile limit to states, and
a spring 1955 California Supreme Court ruling that
took back resources from Long Beach... (note: I do
not know how Long Beach's rights were resolved)]
A Matter of Arithmetic
With these arguments and political forces working
for Long Beach, how did it get into its present predicament?
And why is the city less than an even bet to get out
with a compromise at all satisfactory to its leaders?
There is the usual complex of reasons, some more important,
some less, but all interestingly illustrative of what
goes on behind the bipartisan scenery of California's
One can be put in the form of a simple exercise in
arithmetic. Long Beach pioneered some of the toughest
oil leases in the world, and has, for many years, been
collecting an average of about sixty per cent of the
net return from oil produced out of its properties.
Thus, if Long Beach retains control of its offshore
oil fields, it stands to realize at least sixty per cent
of the income, the operating oil companies getting
forty per cent or less. Using the rough $2 billion
estimate (a very conservative one) of the value of
the Long Beach reserves, that means the city would
get $1.2 billion, the oil companies $800 million.
[Note: $2 billion in 1955=$11.4 billion today;
$1.2 billion in 1955=$6.8 billion today,
$800 million in 1955=$4.6 billion today]
Now the State of California, for reasons that have
never been very rigorously examined in public, has
been content with about twenty-five per cent of the
net return in the leasing of its tidelands properties.
Even the other ``proved'' areas being opened up for
exploitation elsewhere along the coast since the state
won a clear title in 1953 are being leased on the same
basis. This means that about seventy-five per cent
goes to the oil companies.
If we apply those percentages to the $2 billion again,
it looks as if the State of California would get
$500 million and the oil companies $1.5 billion.
The situation is, of course, not quite that simple.
No situation involving oil ever is. There are
existing Long Beach leases on some of the reserves
which the state would presumably honor. But all
new leases would be under state regulations and
percentages. And when the old Long Beach leases
ran out, the oil industry would at long last be
rid of the onerous Long Beach percentages that have
cost them dear when cited at lease-bargaining tables
around the globe. It hardly seems necessary to
suggest whom most of the oil companies would prefer
as the landlord in Long Beach harbor.
Oil-industry preference is at least as important
in California's government as it is in Washington.
Translated, this means that the oil industry's wishes
are often controlling. The only explanation offered
for the state's lower revenue percentages is that the
state has always believed in encouraging private
enterprise to the nth degree. Certain provisions
in the leasing laws would seem to indicate further
that the state has a curious preference for encouraging
private enterprise that is already well heeled.
A comparison of the Long Beach and state bidding
systems illustrates this point. The Long Beach
lease bid requires only that interested parties
specify what percentage of the revenue will be paid
to the city in royalties if drilling on the property
involved is successful. In some instances the resulting
royalties to Long Beach have gone above eighty-five
per cent. The state takes a very different approach,
setting one sliding scale of royalties for all bidders
by law. The only competitive factor is the so-called
bonus, and the bidder offfering the highest bonus
gets the lease. If no oil is found on the property
thus leased, the bidder is out the amount of the bonus
anyway. If, however, oil is found, he need pay only
the state's modest royalty scale, ranging upward from
16 2/3 per cent depending on the volume of production.
And the producer, not the state, makes all the decisions
about the volume of production.
Under bonus bidding, the wildcatters and small independents,
who would be happy to pay large royalties, lose out
before a well is ever drilled. They just cannot afford
to meet the bonus bids of the titans, subsidiaries of titans,
and the combination of titans. The last leases issued
by the state covered a ``proved'' area of 3,282 acres
off Huntington Beach, brought total cash bonuses of
$5,183,842 [note, =$29.6 million in 1995 dollars]--
too much for the small operators. For the big oil
companies, the situation is very different. Even
if they should realize nothing from these bonus payments --
and that is not likely -- they would be able to absorb
the loss without undue suffering by dipping into the
profits from producing wells on other state-owned lands,
profits made ample by the state's low royalty demands.
[article continues, discussing the prospects for
Long Beach retaining rights to the oil]