[Clearview] [H.N.] [HEP] [Physics] [UCSB]

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 Tidelands.

The text of the current laws governing extraction of public-owned oil are here.

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 been controversial.

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.

Primary references:

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 (unpublished).

[Clearview] [H.N.] [HEP] [Physics] [UCSB]