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Battle Royal for Oil: The California Tidelands

Hale Champion
(California Director of Finance in the Pat Brown administration, from 1960-1966)
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 theatrical politics.

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]

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