A growing conflict over energy grips America's 51st state, a vast frontier that has no inhabitants and few laws but enormous pools of untapped wealth.
This extra state is the outer continental shelf and slope that stretches from the coastlines to the deep seabed. It is altogether about half the size of the lower 48 states -- and according to the U.S. Geological Survey, it contains up to 98 billion barrels of oil, three times current U.S. proven reserves, plus perhaps a 20-year supply of natural gas.
The conflict involves the way the government leases oil and gas drilling rights in this watery expanse.
Critics say that the leasing system is anti-competitive, and has turned the public domain offshore into a private preserve for only the largest oil companies. They complain that the oil companies have been able to buy the publicly owned oil and gas offshore for less than its true value. They think that the government itself should do exploratory drilling (as one controversail regulation would now permit), the better to fix the value of the drilling rights it sells before it sells them.
Congress last year amended the Outer Continental Shelf Act in part to meet these criticisms. Most leasing in the past has been done by what is called bonus bidding. The right to drill on a tract goes to the company or group willing to pay the highest lump-sum "bonus" in advance. The government keeps the advance payment no matter what happens; afterward, if oil or gas is found, the companies also pay the Treasury a fixed royalty of 16.67 percent of the product's selling price.
Because smaller companies cannot afford to put up much in advance, Congress directed that on some tracts other methods be tried. But regulations spelling out these other methods are still being written, and how much effect the amended act will have remains in doubt.
Critics of bonus bidding are a diverse lot.They include defenders of the smaller oil companies like Sen. Lloyd M. Bentsen (D-Tex.), who said during last year's OCS debate, "The American citizen receives very little from what may be an extremely valuable oil and gas discovery on his land."
They also include such critics of the entire oil industry as James Flug of Energy Action, who says the United States should treat oil more as a public commodity, as other governments do. "Unlike most other countries in the world, the United States permits the major oil companies to keep the bulk of the revenues," Flug says.
The industry disagrees, saying that the government has taken back 70 percent of everything the companies earn from OCS oil and gas. Since production began on the OCS, the companies have earned $33.3 billion, as of the beginning of the year, and paid the government $25.4 billion in bonuses, royalties and rent.
"A lot of people are doing a lot of arithmetic on us," says Conoco's Hank Hill. "The government takes no risk and gets a billion dollars from lease sales a year. That's a good deal. These people also forget about all the properties that don't pay out."
Central to all OCS arguments is the question of risk.
Oilmen brim with talk about the chances they take offshore, spending up to $10 million on each well. They talk about the string of dry holes in the Baltimore Canyon, and the infamous Destin Dome sale off Florida where an Exxon-led consortium lost $632 million.
The numbers are also forbidding: only one out of nine wildcat wells hits oil, and some oilmen insist that only one out of 50 will produce a commercial-scale bonanza.
Still Exxon, Mobil, Texaco, and Shell and the other majors keep queuing up for the OCS "crapshoot," as they call it.
The reason is that the odds improve drastically the more wells they drill.
Fortune magazine has said, "The amount of risk in the oil business declines dramatically as the number of separate drilling ventures increases." The business journal went on to tell its investment-minded readers, "Oil exploration as practiced by the large companies is not an especially risky business."
Interior Department OCS analyst Theodore Heintz sides with the oilmen on this point. They earn "on the order of 9 or 10 percent," Heintz says, citing a USGS-commissioned study of 1,023 leases through 1969. "That is not an excessive rate or return."
The debate doesn't end there, however.
Robert Kalter, a Cornell resource economist and former head of the Energy Department's OCS leasing office, says, "What the companies have conveniently ignored is the value of oil and gas they have not produced yet. They may have given the government 70 percent up front, but that number is fictitious."
Kalter's reasoning is simple: it takes five to eight years after oil and gas are discovered to bring them into production and paying off. Further, he says, since oil and gas prices have risen dramatically since the 1973 Arab oil embargo, old discoveries increase in value while they await production.
The General Accounting Office, in a succession of reports, has said there is "no assurance" that the Treasury is receiving "fair market value" on its leases offshore.
Analyzing the first leases off California, for example, the congressional watchdogs found that 91 percent of the tracts put up for sale had not been sufficiently evaluated.
Amendments to require test-drilling in lease areas before sale were kept out of the OCS bill passed last year, under pressure from oil interest. However, Dr. William Menard, head of the USGS, has gone ahead with a proposed regulation that would allow government-supervised groups of oil companies to drill test wells on tracts before they are leased. The Interior Department, in turn, would have access to the results.
The major companies bitterly oppose this. "You can imagine the reluctance of the Congress to let tracts go if we have found oil before the sale," Exxon vice president John L. Loftis Jr. has said.
The arguments over whether alternative bidding systems are needed to stimulate competition are just as heated.
Marc Schildkraut of the Federal Trade Commission says, "Clearly one problem is whether there is enough competition in the bidding." Interior Department data indicate that, through 1977, the four largest oil companies won 39 percent of the leases put up for sale, and that 58 percent of the leases went to the eight largest oil companies.
At the Justice Department, attorney Michael Reed says, "Our system to date relies heavily on big cash bonuses, and it tends to favor the major oil companies. If you didn't require as much cash up front, and have larger royalties afterwards, you can attract smaller companies."
Trends in bidding, however, are not encouraging: until 1972 tracts up for bids received an average of 3.5 bids apiece. But since the 1973 Arab embargo, this has dropped to an average of 2.77.
Interior's Heintz, however, points out that most oil found on the OCS has been on tracts that had five of more bids. His point: there is indeed competition where oil is likely to be found. Some administration officials, however, are troubled by these arguments, saying that the small independent companies account for only 10 percent of the total offshore investment.
While Congress had ambitiously set out to reform the rules and regulations controlling oil and gas in the 51st state, and in particular to test alternate bidding methods, the majority of the tracts will still be sold by bonus bidding.
The new proposed systems under review are:
A sliding-scale royalty, with Treasury payments rising from 16.67 percent to as much as 60 percent as production and profitability of the wells increase.
Royalty bidding, a system that has been tried without great success, using a fixed cash bonus bid and a competitive "bid" royalty offered by the companies.
And profit-sharing, which would require the companies to give the Treasury either a fixed or a variable percentage of their net profits. Unlike royalty payments, profit-sharing assessments would not be based on the companies' gross revenues.
Last June the GAO said that "disagreements between the departments" have caused unnecessary delays. Flug goes much further, saying Interior is perpetuating the bonus bidding system favored by the major oil companies and calling it a "a real scandal and disaster area."
Kalter, the former leasing chief at DOE, offers a more dispassionate view. "So far the jury's still out on whether the bill has changed things," he says.