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Allocation of rights over offshore oil and gas resources : a study of the legal systems in force in the… Crommelin, Michael 1972

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ALLOCATION OF RIGHTS OVER  OFFSHORE OIL AND GAS RESOURCES A study of the l e g a l systems i n f o r c e i n the Uni t e d S t a t e s , the United Kingdom, Canada and A u s t r a l i a . by MICHAEL CROMMELIN B.A., LL.B. (Hons.), U n i v e r s i t y of Queensland. A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS i n the F a c u l t y of Law We accept t h i s t h e s i s as conforming to the r e q u i r e d standard THE UNIVERSITY OF BRITISH COLUMBIA September, 1972 In p r e s e n t i n g t h i s t h e s i s in p a r t i a l f u l f i l m e n t o f the requirements f o r an advanced degree at the U n i v e r s i t y o f B r i t i s h Columbia , I agree that the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e for reference and s tudy. I f u r t h e r agree tha t pe rmiss ion fo r ex t ens ive copying o f t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the Head o f my Department o r by h i s r e p r e s e n t a t i v e s . I t i s understood that copying or p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l ga in s h a l l not be a l lowed wi thout my w r i t t e n p e r m i s s i o n . Department o f LAW The U n i v e r s i t y o f B r i t i s h Columbia Vancouver 8, Canada D a t e September 26. 1972. A B S T R A C T This t h e s i s i s concerned w i t h one aspect of government management regimes f o r o f f s h o r e o i l and gas - the a l l o c a t i o n of r i g h t s over these r e s o u r c e s . • The method by which r i g h t s may be a c q u i r e d , the scope of the r i g h t s , and the terms and c o n d i t i o n s upon which they are obtained are matters of great s i g n i f i c a n c e i n determining the o v e r a l l e f f e c t i v e n e s s of a management regime. Four c o a s t a l n a t i o n s have been chosen f o r study. They are the U n i t e d S t a t e s of America, the U n i t e d Kingdom of Great B r i t a i n and Northern I r e l a n d , Canada and A u s t r a l i a . The systems adopted by these c o u n t r i e s f o r a l l o c a t i o n of o f f s h o r e o i l and gas r i g h t s are s i m i l a r i n t h a t they r e l y mainly upon p r i v a t e e n t e r p r i s e f o r the development of the r e s o u r c e s , but otherwise t h e r e are c o n s i d e r a b l e d i f f e r e n c e s . I n the f i r s t p l a c e , the t h e s i s c o n t a i n s a b r i e f s t a t e -ment of the nature and e x t e n t of the r i g h t s of c o a s t a l n a t i o n s over o f f s h o r e o i l and gas resources a t i n t e r n a t i o n a l law. This i s to provide the b a s i c framework w i t h i n which the management regimes of the f o u r c o u n t r i e s must operate. Secondly, there i s a d e t a i l e d d e s c r i p t i o n of the a l l o c a t i o n systems i n each of the f o u r c o u n t r i e s , w i t h s p e c i a l a t t e n t i o n being given to the h i s t o r i c a l background of the laws which e s t a b l i s h the systems, to the p r o v i s i o n s of those laws, and t o the p r a c t i c a l o p e r a t i o n of the systems. F i n a l l y , there i s a comparative assessment of the systems i n terms of s p e c i f i c o b j e c t i v e s which should form the b a s i s of a government management regime f o r o f f s h o r e o i l and gas. Supervisor CONTENTS page L i s t of Tables (v) CHAPTER 1. INTRODUCTION 1 CHAPTER 2. NATIONAL RIGHTS TO EXPLOIT OFFSHORE OIL AND GAS RESOURCES 4 CHAPTER 3. THE UNITED STATES OF AMERICA 13 A. Of f s h o r e O i l and Gas Resources 13 B. Background of the Outer C o n t i n e n t a l S h e l f Lands Act of 1953 15 C. The Outer C o n t i n e n t a l S h e l f Lands Ac t of 1953 25 (a) B a s i c P r o v i s i o n s 25 (b) S t a t e d Management O b j e c t i v e s 27 (c) E x p l o r a t i o n 30 (d) A l l o c a t i o n of P r o d u c t i o n R i g h t s 33 (e) Revenues from O i l and Gas Operations 46 ( f ) Revenue from Income T a x a t i o n 49 CHAPTER 4. THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND 55 A. Offshore O i l and Gas Resources 55 B. Development of the U n i t e d Kingdom Petroleum Code 57 ( i i i ) page C. The U n i t e d Kingdom O f f s h o r e Petroleum Code 64 (a) B a s i c P r o v i s i o n s 64 (b) St a t e d Management O b j e c t i v e s 67 (c) E x p l o r a t i o n 71 (d) A l l o c a t i o n of P r o d u c t i o n R i g h t s 73 (e) Revenues from O i l and Gas Operations 93 ( f ) Revenue from Income T a x a t i o n 94 CHAPTER 5. CANADA 98 A. Offshore O i l and Gas Resources 98 B. Background to the Canadian Off s h o r e Petroleum L e g i s l a t i o n 100 C. The Canadian F e d e r a l O f f s h o r e Petroleum Code 107 (a) B a s i c P r o v i s i o n s 107 (b) S t a t e d Management O b j e c t i v e s 110 (c) E x p l o r a t i o n 112 (d) A l l o c a t i o n of P r o d u c t i o n R i g h t s 122 (e) Revenues from O i l and Gas Operations 133 ( f ) Revenue from Income Ta x a t i o n 134 CHAPTER 6. AUSTRALIA 140 A. Off s h o r e O i l and Gas Resources 140 B. Background to the Petroleum (Submerged Lands) Act 1967 143 C. The Petroleum (Submerged Lands) Act 1967 151 (a) B a s i c P r o v i s i o n s 151 (b) St a t e d Management O b j e c t i v e s 155 ( i v ) page (c) E x p l o r a t i o n 157 (d) A l l o c a t i o n of P r o d u c t i o n R i g h t s 170 (e) Revenues from O i l and Gas Operations 179 ( f ) Revenue from Income Taxation 181 CHAPTER 7. ASSESSMENT 186 A. Management O b j e c t i v e s 187 B. C o n t i n u i n g Government C o n t r o l 197 C. Maximum Government Revenue 217 CHAPTER 8. CONCLUSION 248 B i b l i o g r a p h y 249 (v) LIST OF TABLES page 3.1 Revenues from Offshore O i l and Gas Operations, 1954- A p r i l 1, 1968. 48 6.1 Commonwealth Subsidy Payments to O i l and Gas E x p l o r a t i o n , 1957-1970. 169 6.2 Gippsland Basin R o y a l t i e s . 180 ( v i ) A C K N 0 • VL E D G E K E N T My i n t e r e s t i n t h i s s u b j e c t was f i r s t sparked by Dr. A.R. Thompson of the F a c u l t y of Law, U n i v e r s i t y of B r i t i s h Columbia, and he has s i n c e a t a l l times g i v e n me very generous and w i l l i n g a s s i s t a n c e w i t h my r e s e a r c h and w r i t i n g , which I have a p p r e c i a t e d very much. As w e l l , I wish to thank Dr. A.D. S c o t t of the Department of Economics, U n i v e r s i t y of B r i t i s h Columbia, f o r r e a d i n g an e a r l i e r d r a f t of the manuscript and o f f e r i n g many v a l u a b l e comments, and P r o f e s s o r J.M. M c l n t y r e , of the F a c u l t y of Law, U.B.C. Many ot h e r s have helped me i n my search f o r m a t e r i a l , and of these I would s p e c i f i c a l l y l i k e t o mention Mr. Raymond C o u l t e r , Deputy S o l i c i t o r , U.S. Department of the I n t e r i o r , Mr. Robert B. Krueger, A t t o r n e y a t Law, Los Angeles, Hr. Jack Evans of the U n i t e d Kingdom Department of Trade and I n d u s t r y , and Mr. K.O. Bradshaw, S e c r e t a r y t o the Senate S e l e c t Comm-i t t e e on O f f s h o r e Petroleum Resources ( A u s t r a l i a ) . A very s p e c i a l word of g r a t i t u d e i s due to Ros, my w i f e , f o r t y p i n g a manuscript which o f t e n appeared e n d l e s s . 1. CHAPTER 1. INTRODUCTION. The l a s t d e c a d e h a s s e e n t h e b e g i n n i n g o f a new e r a i n man's q u e s t f o r o i l a n d g a s - t h e o f f s h o r e e r a . A d v a n c e s i n m a r i n e t e c h n o l o g y h a v e made t h i s p o s s i b l e b y a l l o w i n g t h e s e a r c h t o s p r e a d f r o m t h e s h a l l o w w a t e r s o f c o a s t a l z o n e s t o t h e e d g e o f t h e o c e a n d e p t h s . W i t h t h i s t r e n d c e r t a i n t o c o n t i n u e i n t h e f u t u r e , t h e o i l a n d g a s p o t e n t i a l o f o f f s h o r e r e g i o n s i s e n o r m o u s . T h i r t y - s e v e n c o a s t a l n a t i o n s h a v e a l r e a d y d i s c o v e r e d o f f s h o r e o i l o r g a s . R e s e r v e s a r e a p p r o x i m a t e l y 100 b i l l i o n b a r r e l s a n d c u r r e n t p r o d u c t i o n i s 88 m i l l i o n b a r r e l s p e r d a y , a m o u n t i n g t o 2 0 % a n d 1 8 % r e s p e c t i v e l y o f t h e w o r l d t o t a l . I t h a s b e e n e s t i m a t e d t h a t b y 1980 o f f s h o r e r e g i o n s c o u l d a c c o u n t f o r a s much a s 5 0 % o f t h e 1 w o r l d p r o d u c t i o n o f o i l a n d g a s . D e v e l o p m e n t o f t h e s e r e s o u r c e s r e q u i r e s e n l i g h t e n e d g o v e r n m e n t management. The b e n e f i t s t o b e d e r i v e d a r e g r e a t b u t t h e c o s t s , i n t e r m s o f f o r e g o n e g o v e r n m e n t r e v e n u e , i n e f f i c i e n t l y u t i l i z e d r e s o u r c e s a n d d e g r a d a t i o n o f t h e m a r i n e e n v i r o n m e n t , may a l s o be s u b s t a n t i a l . T he 1 O i l a n d G a s J o u r n a l , May 1, 1 9 7 2 , 1 2 9 , 196 2 . government of a c o a s t a l n a t i o n i s faced w i t h the c h a l l e n g e of d e v i s i n g the optimum management regime f o r o f f s h o r e o i l and gas resources w i t h i n i t s j u r i s d i c t i o n . The r i g h t s of a c o a s t a l n a t i o n over these resources are d e r i v e d from i n t e r n a t i o n a l law. An important c h a r a c t e r -i s t i c of these r i g h t s i s t h a t they accrue to the n a t i o n as a whole, w i t h the r e s u l t t h a t the reso u r c e s are e n t i r e l y s u b j e c t to p u b l i c ownership or c o n t r o l . The government i s giv e n the o p p o r t u n i t y of adopting a s i n g l e , comprehensive system of p u b l i c law f o r the management of these r e s o u r c e s . The s u b j e c t of t h i s d i s s e r t a t i o n i s the s t a r t i n g p o i n t of a management regime - the a l l o c a t i o n of r i g h t s over o f f s h o r e o i l and gas r e s o u r c e s . The methods by which r i g h t s may be a c q u i r e d , the scope of the r i g h t s , and the terms and c o n d i t i o n s upon which they are obtained are matters of g r e a t s i g n i f i c a n c e i n determining the o v e r a l l e f f e c t i v e n e s s of a management regime. Four c o a s t a l n a t i o n s w i l l be c o n s i d e r e d , the U n i t e d S t a t e s of America, the Un i t e d Kingdom of Great B r i t a i n and Northern I r e l a n d , Canada and A u s t r a l i a . The systems adopted by these c o u n t r i e s f o r a l l o c a t i o n of o f f s h o r e o i l and gas r i g h t s are s i m i l a r i n t h a t they r e l y mainly upon p r i v a t e e n t e r p r i s e f o r the development of the r e s o u r c e s , but otherwise there are 3. c o n s i d e r a b l e d i f f e r e n c e s . F i r s t l y , there w i l l be a b r i e f statement of the nature and extent of the r i g h t s of c o a s t a l n a t i o n s over o f f s h o r e o i l and gas resources a t i n t e r n a t i o n a l law. Then the systems f o r a l l o c a t i o n of p r i v a t e r i g h t s i n the f o u r c o u n t r i e s w i l l be d e s c r i b e d i n d e t a i l , w i t h s p e c i a l a t t e n t i o n being given to the h i s t o r i c a l background of the laws which e s t a b l i s h the systems, to the p r o v i s i o n s of these laws, and to the p r a c t i c a l o p e r a t i o n of the systems. Next, a chapter w i l l be devoted to a comparative assessment of the systems i n terms of s p e c i f i c o b j e c t i v e s which should form the b a s i s of a management regime f o r o f f s h o r e o i l and gas r e s o u r c e s . F i n a l l y , t h e r e w i l l be a s h o r t c o n c l u s i o n . 4 CHAPTER 2. NATIONAL RIGHTS TO E X P L O I T OFFSHORE O I L AND  GAS RESOURCES. P r i o r to 1945, there was no i n t e r n a t i o n a l l y r e c o g n i z e d r i g h t to e x p l o i t o f f s h o r e resources of the seabed or s u b s o i l o u t s i d e a n a t i o n ' s t e r r i t o r i a l sea. However, by 1945 marine technology had progressed to a stage where p r o d u c t i o n of o i l and gas l y i n g beyond the t e r r i t o r i a l sea was f e a s i b l e , and i n t e r e s t i n such p r o j e c t s heightened, p a r t i c u l a r l y i n the U n i t e d S t a t e s . On September 28, 1945, P r e s i d e n t Truman i s s u e d a now famous p r o c l a m a t i o n , t h a t the Government of the U n i t e d S t a t e s regards the n a t u r a l resources of the s u b s o i l and sea bed of the c o n t i n e n t a l s h e l f beneath the hig h seas but contiguous to the coasts of the U n i t e d S t a t e s as a p p e r t a i n i n g to the U n i t e d S t a t e s , s u b j e c t to i t s j u r i s d i c t i o n and c o n t r o l . 1 T h i s p r o c l a m a t i o n provided impetus f o r a number of c l a i m s by other c o a s t a l n a t i o n s to areas adjacent to t h e i r coast l i n e s , but these c l a i m s had no uniform b a s i s . I t was not u n t i l the U n i t e d N a t i o n s ' Conference on the Law of the Sea, h e l d i n Geneva, S w i t z e r l a n d , i n 1958, th a t the r i g h t s of c o a s t a l n a t i o n s to the n a t u r a l resources of the adjacent c o n t i n e n t a l s h e l f were c l a r i f i e d to any reasonable degree. 1 Pr o c l a m a t i o n No. 2667, 59 S t a t . 884. 5. The Geneva Conference adopted four conventions, the 2 Convention on the T e r r i t o r i a l Sea and the Contiguous Zone, 3 the Convention on the C o n t i n e n t a l S h e l f , the Convention on the High Seas, 4 and the Convention on F i s h i n g and Conservation of the L i v i n g Resources of the High Seas. 5 The Convention on the T e r r i t o r i a l Sea and the Contiguous Zone r e c o g n i z e s t h a t the s o v e r e i g n t y of a c o a s t a l n a t i o n extends beyond i t s l a n d t e r r i t o r y and i t s i n t e r n a l waters, to i t s t e r r i t o r i a l sea.** This s o v e r e i g n t y i s e x e r c i s a b l e i n r e s p e c t of the waters of the t e r r i t o r i a l sea, the seabed and s u b s o i l below, 7 and the a i r space above, and thus a l l o w s the e x p l o i t a t i o n of o i l and gas re s o u r c e s . I t i s as complete a s o v e r e i g n t y as t h a t e x e r c i s a b l e by a n a t i o n i n r e s p e c t of i t s l a n d t e r r i t o r y , except f o r s p e c i f i e d r e s e r v a t i o n s , such as the r i g h t of s h i p s of a l l n a t i o n s to innocent passage through g the t e r r i t o r i a l sea. This Convention i n c l u d e s d e t a i l e d p r o v i s i o n s f o r determining the b a s e l i n e from which the 2 U.N. doc. A/CONF. 13/L. 52, adopted A p r i l 27, 1958. 3 U.N. doc. A/CONF. 13/L. 55, adopted A p r i l 26, 1958. 4 U.N. doc. A/CONF. 13/L. 53 and c o r r . l , adopted A p r i l 27,1958. 5 U.N. doc. A/CONF. 13/L. 54 and A d d . l , adopted A p r i l 26,1958.' 6 A r t i c l e 1.1. 7 A r t i c l e 2. 8 A r t i c l e s 14-23. 6 t e r r i t o r i a l sea i s measured ( t h a t i s , the boundary l i n e between land and i n l a n d waters on the one hand, and the 9 ' t e r r i t o r i a l sea on the o t h e r ) , but no agreement co u l d be reached among the n a t i o n s p a r t i c i p a t i n g at the Conference upon the breadth of the t e r r i t o r i a l sea, and t h i s i s s u e , 10 remains unresolved. The Convention on the C o n t i n e n t a l S h e l f provides t h a t a c o a s t a l n a t i o n may e x e r c i s e " s o v e r e i g n r i g h t s " over the s h e l f " f o r the purpose of e x p l o r i n g i t and e x p l o i t i n g i t s 11 n a t u r a l r e s o u r c e s . " These r i g h t s are e x c l u s i v e , i n the sense t h a t i f a c o a s t a l n a t i o n does not e x e r c i s e them, no one e l s e i s e n t i t l e d to do so without the express consent of t h a t n a t i o n . Furthermore, these r i g h t s do not depend i n any way upon occupation of the c o n t i n e n t a l s h e l f , or upon pro c l a m a t i o n . 9 A r t i c l e s 3-13. 10 The U n i t e d S t a t e s , the Uni t e d Kingdom and A u s t r a l i a p r e s e n t l y c l a i m t e r r i t o r i a l seas of three m i l e s , although the Uni t e d S t a t e s has i n d i c a t e d i t s w i l l i n g -ness to work f o r a new i n t e r n a t i o n a l t r e a t y extending the t e r r i t o r i a l sea to twelve m i l e s . Canada r e c e n t l y enacted l e g i s l a t i o n i n c r e a s i n g i t s c l a i m from three to twelve m i l e s ; The T e r r i t o r i a l Sea and F i s h i n g Zones Amendment, R.S.C. 1970,c.45. A m a j o r i t y of South American c o a s t a l n a t i o n s c l a i m t e r r i t o r i a l seas of 200 m i l e s , and t h i s concept i s now supported by Spain, Y u g o s l a v i a and the Peoples' R e p u b l i c of China. 11 A r t i c l e 2. 7. The r i g h t s e x e r c i s a b l e by a c o a s t a l n a t i o n over the c o n t i n e n t a l s h e l f are more r e s t r i c t e d than the r i g h t s over the t e r r i t o r i a l sea. I n the f i r s t p l a c e , a c o a s t a l n a t i o n i s s a i d to have "sov e r e i g n r i g h t s " over the c o n t i n e n t a l s h e l f , as compared w i t h " s o v e r e i g n t y " i n r e s p e c t of the t e r r i t o r i a l sea. The former e x p r e s s i o n emphasises t h a t the r i g h t s over the c o n t i n e n t a l s h e l f are l i m i t e d to those which are l i n k e d w i t h the s p e c i f i e d purposes of e x p l o r a t i o n and e x p l o i t a t i o n of n a t u r a l r e s o u r c e s . Secondly, the r i g h t s of a c o a s t a l n a t i o n over the c o n t i n e n t a l s h e l f do not extend to the s u p e r j a c e n t waters, which r e t a i n the 12 l e g a l s t a t u s of h i g h seas, or to the a i r s p a c e above. T h i r d l y , r e s t r i c t i o n s are placed on the r i g h t s of a c o a s t a l n a t i o n to e x p l o r e the c o n t i n e n t a l s h e l f and e x p l o i t i t s n a t u r a l r e s o u r c e s . I t may not unreasonably impede the l a y i n g or maintenance of submarine c a b l e s or p i p e l i n e s 13 on the c o n t i n e n t a l s h e l f ; i t s a c t i v i t i e s must not r e s u l t i n any " u n j u s t i f i a b l e i n t e r f e r e n c e " w i t h n a v i g a t i o n , f i s h i n g , or the c o n s e r v a t i o n of the l i v i n g resources of the sea, nor any " i n t e r f e r e n c e " w i t h "fundamental" oceano-gr a p h i c or other s c i e n t i f i c r e s e a r c h c a r r i e d out w i t h 12 A r t i c l e 3. 13 A r t i c l e 4. 8. 14 the i n t e n t i o n of open p u b l i c a t i o n . F i n a l l y , i f i t e x e r c i s e s i t s r i g h t s to e x p l o r e the c o n t i n e n t a l s h e l f and e x p l o i t i t s n a t u r a l r e s o u r c e s , a c o a s t a l n a t i o n i s p l a c e d under a p o s i t i v e o b l i g a t i o n to take " a l l a p p r o p r i a t e measures" f o r the p r o t e c t i o n of the l i v i n g resources of 15 the sea from "harmful agents". " N a t u r a l r e s o u r c e s " c o n s i s t of the "mineral and other n o n - l i v i n g resources of the seabed and s u b s o i l together 16 w i t h l i v i n g organisms belonging to sedentary s p e c i e s " ; a c c o r d i n g l y , they i n c l u d e o f f s h o r e o i l and gas. The Convention d e f i n e s the extent of the " c o n t i n e n t a l s h e l f " , as f o l l o w s : ( a ) . . . t h e seabed and s u b s o i l of the submarine areas adjacent to the coast but o u t s i d e the area of the t e r r i t o r i a l sea, to a depth of 200 metres o r , beyond t h a t l i m i t , to where the depth of the superjacent waters admits of the e x p l o i t a t i o n of the n a t u r a l resources of the s a i d areas; ( b ) . . . t h e seabed and s u b s o i l of s i m i l a r submarine areas adjacent to the coast of i s l a n d s . 17 The ambiguity of t h i s d e f i n i t i o n u n d e r l i n e s the f a c t t h a t there i s no g e n e r a l l y accepted i n t e r n a t i o n a l view as to 14 A r t i c l e 5.1. 15 A r t i c l e 5.7. 16 I b i d . 17 A r t i c l e 1. 9 how f a r seaward the l i m i t s of n a t i o n a l j u r i s d i c t i o n over seabed resources should extend. Some n a t i o n s have attached l i t t l e importance to the " e x p l o i t a b i l i t y " t e s t i n the d e f i n i t i o n of the c o n t i n e n t a l s h e l f , and have proposed t h a t the 200 metres i s o b a t h be considered the outer l i m i t of n a t i o n a l j u r i s d i c t i o n . Others have claimed t h a t the p l a i n meaning of the d e f i n i t i o n i s t h a t i t i n c l u d e s the e n t i r e c o n t i n e n t a l margin, provided t h a t e x p l o i t a b i l i t y of n a t u r a l resources i s e s t a b l i s h e d . I n re c e n t y e a r s , w i t h the r a p i d development of o f f s h o r e d r i l l i n g technology, t h i s q u e s t i o n of the seaward l i m i t s of r i g h t s e x e r c i s a b l e by c o a s t a l n a t i o n s has become a very important i s s u e . R e s o l u t i o n s passed by the Unit e d Nations General Assembly i n 1969 c a l l e d f o r the convening of a f u r t h e r conference on the law of the sea i n order to a r r i v e a t a " c l e a r , p r e c i s e and i n t e r n a t i o n a l l y accepted d e f i n i t i o n of the area of the sea-bed and ocean f l o o r which l i e s beyond n a t i o n a l j u r i s -18 d i c t i o n " , and demanded t h a t n a t i o n s r e f r a i n from a l l a c t i v i t i e s of e x p l o i t a t i o n of the n a t u r a l resources of the seabed and s u b s o i l of areas beyond the l i m i t s of n a t i o n a l 19 j u r i s d i c t i o n . There have a l s o been motions c a l l i n g f o r the e s t a b l i s h m e n t of an i n t e r n a t i o n a l regime to ad m i n i s t e r 18 24 U.N. GAOR a t U.N. doc. A/2574A (1969). 19 24 U.N. GAOR at U.N. doc. A/2574D (1969). 10. r e s o u r c e s beyond n a t i o n a l U n i t s . I n May 1970, P r e s i d e n t Nixon announced a new U n i t e d S t a t e s oceans p o l i c y , which proposed a t r e a t y t o l i m i t e x i s t i n g r i g h t s of c o a s t a l n a t i o n s over the c o n t i n e n t a l s h e l f to ar e a s up to the 200 metres i s o b a t h , the e s t a b -l i s h m e n t of a " t r u s t e e s h i p zone" i n areas seaward of the l i m i t s of n a t i o n a l j u r i s d i c t i o n e x t e n d i n g t o the edge of the c o n t i n e n t a l margin, and the development of i n t e r -n a t i o n a l machinery to a d m i n i s t e r the e x p l o i t a t i o n of the 21 seabed r e s o u r c e s o f the ocean depths. The U n i t e d N a t i o n s has schedu l e d a c o n f e r e n c e on the law o f the sea f o r 1973. A t p r e s e n t , the 86-member permanent Committee on the P e a c e f u l Uses of the Sea-Bed and the Ocean F l o o r beyond the l i m i t s of N a t i o n a l J u r i s -d i c t i o n i s p r e p a r i n g d r a f t t r e a t y a r t i c l e s f o r c o n s i d e r -a t i o n a t t h i s c o n f e r e n c e . A r t i c l e 6 of the Convention on the C o n t i n e n t a l S h e l f c o n t a i n s p r o v i s i o n s f o r d e t e r m i n i n g , where the same 20 The f i r s t of these was the Ma l t a p r o p o s a l , U.N. doc. A/6695, August 18, 1967. 21 Wkly. Comp. P r e s i d e n t i a l Docs., May 25, 1970. 11 c o n t i n e n t a l s h e l f i s adjacent to two or more n a t i o n s , the boundary l i n e d e f i n i n g the l i m i t s of j u r i s d i c t i o n of each n a t i o n . This boundary l i n e i s to be f i x e d by agreement between the n a t i o n s . I n the absence of agree-ment, c e r t a i n formulae are to apply, u n l e s s s p e c i a l circumstances r e q u i r e otherwise. I n the case where the n a t i o n s have coasts which l i e o p p o s i t e each o t h e r , the boundary i s the median l i n e , every p o i n t of which i s e q u i d i s t a n t from the n e a r e s t p o i n t s of the b a s e l i n e s from which the breadth of the t e r r i t o r i a l sea i s measured. I n the case where the n a t i o n s are adjacent to one another, the boundary i s determined by a p p l i c a t i o n of the p r i n c i p l e of e q u i d i s t a n c e from the n e a r e s t p o i n t s of the b a s e l i n e s from which the breadth of the t e r r i t o r i a l sea i s measured. 22 I n the North Sea C o n t i n e n t a l S h e l f Cases, the I n t e r -n a t i o n a l Court of J u s t i c e h e l d t h a t A r t i c l e 6 of the Convention on the C o n t i n e n t a l S h e l f was not p a r t of custom-ary i n t e r n a t i o n a l law. I n i s s u e i n the cases were the boundaries of the c o n t i n e n t a l s h e l f between West Germany and Denmark, and between West Germany and the Netherlands. Denmark and the Netherlands were p a r t i e s to the Convention, but West Germany was not. In these circumstances, the 22 (1969) I.C.J. 3 12 Court h e l d t h a t the f o l l o w i n g r u l e s were a p p l i c a b l e : (1) d e l i m i t a t i o n i s to be e f f e c t e d by agreement i n accordance w i t h e q u i t a b l e p r i n c i p l e s , and t a k i n g account of a l l the r e l e v a n t circumstances, i n such a way as to leave as much as p o s s i b l e to each P a r t y a l l those p a r t s of the c o n t i n e n t a l s h e l f t h a t con-s t i t u t e a n a t u r a l p r o l o n g a t i o n of i t s l a n d t e r r i t o r y i n t o and under the sea, without encroachment on the n a t u r a l p r o l o n g a t i o n of the land t e r r i t o r y of the o t h e r ; (2) i f , i n the a p p l i c a t i o n of the preceding sub-paragraph, the d e l i m i t a t i o n leaves to the P a r t i e s areas t h a t o v e r l a p , these are to be d i v i d e d between them i n agreed p r o p o r t i o n s o r , f a i l i n g agreement, e q u a l l y , unless they decide on a regime of j o i n t j u r i s d i c t i o n , user, or e x p l o i t a t i o n f o r the zones t h a t o v e r l a p or any p a r t of them. 23 The importance of t h i s judgment l i e s i n the emphasis placed by the Court upon the c o n t i n e n t a l s h e l f as a n a t u r a l p r o l o n g a t i o n of the l a n d t e r r i t o r y of a c o a s t a l 24 n a t i o n . 23 I b i d . , 53. 24 I b i d . 13. CHAPTER 3. THE UNITED STATES OF AMERICA. A. Offshore O i l and Gas Resources. J u r i s d i c t i o n over the n a t u r a l resources of the seabed and s u b s o i l o f f s h o r e from the U n i t e d S t a t e s i s d i v i d e d between the c o a s t a l s t a t e s and the U n i t e d S t a t e s . The c o a s t a l s t a t e s are e n t i t l e d to "lands beneath n a v i g a b l e i w aters", which c o n s i s t of the submerged lands seaward from t h e i r coasts f o r a d i s t a n c e of three g e o g r a p h i c a l m i l e s and, i n the case of F l o r i d a and Texas, f o r a d i s t a n c e of three marine leagues i n the G u l f of Mexico. A l l other r i g h t s over o f f s h o r e n a t u r a l resources are vested i n the Un i t e d S t a t e s . The areas of the c o n t i n e n t a l s h e l f l y i n g seaward of the "lands beneath n a v i g a b l e waters", which f a l l under the j u r i s d i c t i o n of the U n i t e d S t a t e s , are h e r e a f t e r r e f e r r e d to as the "outer c o n t i n e n t a l s h e l f l a n d s " , to d i s t i n g u i s h them from the areas s u b j e c t to c o a s t a l s t a t e s ' j u r i s d i c t i o n . The s i z e of the Uni t e d S t a t e s ' outer c o n t i n e n t a l s h e l f lands depends, of course, upon the i n t e r p r e t a t i o n given to the d e f i n i t i o n of the c o n t i n e n t a l s h e l f i n the Geneva 1 The Submerged Lands Act of 1953, 67 S t a t . 29. 14. Convention. The area of the seabed and s u b s o i l from e s t a b l i s h e d s t a t e l i m i t s to the 200 metres i s o b a t h i s 850,000 square m i l e s , and the area from s t a t e l i m i t s to the 2 2,500 metres i s o b a t h i s 1,329,000 square m i l e s . As the lan d area of the Un i t e d S t a t e s and i t s t e r r i t o r i e s i s 3,615,000 square m i l e s , the outer c o n t i n e n t a l s h e l f lands add a f u r t h e r r e s o u r c e p o t e n t i a l of e i t h e r 23% or 36%, 3 depending upon the seaward boundary adopted. The proved resources of o i l and gas i n the outer c o n t i n e n t a l s h e l f lands of the Uni t e d S t a t e s , t a k i n g the 2,500 metres i s o b a t h as the seaward boundary, are s i x b i l l i o n b a r r e l s of o i l and 40 t r i l l i o n c u b i c f e e t of gas. P r o s p e c t i v e r e s e r v e s , however, are very many times these 4 f i g u r e s . These resources appear d e s t i n e d to assume an i n c r e a s i n g l y s i g n i f i c a n t r o l e i n the Un i t e d S t a t e s ' domestic p r o d u c t i o n of o i l and gas. The Department of the I n t e r i o r 2 Krueger, Robert B., "The Background of the D o c t r i n e of the C o n t i n e n t a l S h e l f and the Outer C o n t i n e n t a l S h e l f Lands A c t " , 10 N a t u r a l Resources J o u r n a l 442, 451 (1970). 3 I b i d . 4 O i l and Gas J o u r n a l , J u l y 10, 1972, 37. For a d e t a i l e d assessment of proved and undiscovered mineral r e s e r v e s on the U.S. outer c o n t i n e n t a l s h e l f l a n d s , see the r e p o r t of the U.S. G e o l o g i c a l Survey, Department of the I n t e r i o r , "Energy Resources i n the Uni t e d S t a t e s " , USGS C i r c u l a r 650 (1972). 15. has estimated t h a t by 1980 approximately 30% of the o i l requirements of the n a t i o n and 40% of the gas requirements, 5 w i l l come from the outer c o n t i n e n t a l s h e l f lands. B. Background of the Outer C o n t i n e n t a l S h e l f Lands Act of 1953. The f i r s t o f f s h o r e o i l w e l l s i n the Un i t e d S t a t e s were d r i l l e d from wharves extending over the ocean i n the Summer-land f i e l d near Santa Barbara, C a l i f o r n i a , i n 1897. By 1906 there were 189 o f f s h o r e producing w e l l s i n t h i s f i e l d being operated by 14 companies, none of which had any t i t l e to the 7 seabed and s u b s o i l . At t h i s stage, however, n e i t h e r the g U n i t e d S t a t e s nor C a l i f o r n i a r a i s e d any o b j e c t i o n . I n 1921, C a l i f o r n i a enacted a petroleum l e a s i n g s t a t u t e , and from t h i s time onwards i s s u e d l e a s e s along i t s c o a s t , 5 Krueger, o p . c i t . note 2. 6 Krueger, Robert B., "The Development and A d m i n i s t r a t i o n of the Outer C o n t i n e n t a l S h e l f Lands of the U n i t e d S t a t e s " , 14 Rocky Mountain M i n e r a l Law I n s t i t u t e 643, 662 (1968). 7 C o u l t e r , Raymond C., " A d m i n i s t r a t i o n of M i n e r a l L e a s i n g on the U n i t e d S t a t e s Outer C o n t i n e n t a l S h e l f " , present-a t i o n b e f o r e the Royal Commission on B a r r i e r Reef Petroleum D r i l l i n g , Commonwealth of A u s t r a l i a , June, 1971, V o l . l A , 1-11. (Mr. C o u l t e r i s Deputy S o l i c i t o r , U n i t e d S t a t e s Department of the I n t e r i o r . ) 8 I b i d . 16. without any o p p o s i t i o n from the United S t a t e s government. Moreover, C a l i f o r n i a was not the o n l y s t a t e to c l a i m j u r i s d i c t i o n over the submerged lands adjacent to i t s coast. I n 1886, L o u i s i a n a had d e c l a r e d t h a t the water bottoms, i n c l u d i n g the bottoms of the Gulf of Mexico w i t h i n s t a t e 10 boundaries, were the p r o p e r t y of L o u i s i a n a . I n 1938, L o u i s i a n a passed a s t a t u t e extending i t s boundaries to a 11 d i s t a n c e of 2 7 m i l e s from the low water mark. While a r e p u b l i c , Texas had d e c l a r e d i t s boundaries to extend three marine leagues i n t o the G u l f of Mexico, and i n 1846 had passed a r e s o l u t i o n c l a i m i n g an e x c l u s i v e r i g h t to 12 the s o i l w i t h i n i t s boundaries. I n 1919, Texas extended the p r o v i s i o n s of an e x i s t i n g s t a t u t e governing e x p l o i t -a t i o n of m i n e r a l s upon s t a t e lands to submerged lands i n 13 the G u l f of Mexico w i t h i n i t s j u r i s d i c t i o n . L o u i s i a n a and Texas a l s o i s s u e d o i l and gas l e a s e s over 9 I b i d . 10 Krueger, o p . c i t . note 6, 676. 11 I b i d . , 677; Act 55 of 1938. 12 I b i d . 13 I b i d . , Gen. Laws Tex. 36 L e g i s . 2d C a l l e d Sess. 51. 17 submerged lands claimed to be w i t h i n t h e i r boundaries, and 14 s u b s t a n t i a l p r o d u c t i o n was obtained i n the shallower waters. Mo a c t i o n was taken by the f e d e r a l government to c h a l l e n g e the r i g h t of the s t a t e s to e x p l o i t the resources of the sub-merged lands u n t i l 1937 when a r e s o l u t i o n was i n t r o d u c e d i n t o the Senate r e c i t i n g f e d e r a l ownership of the submerged 15 lands w i t h i n three m i l e s of the coast l i n e . This r e s o l u t i o n was passed by the Senate, but not by the House of Represent-a t i v e s . I n the years f o l l o w i n g , s e v e r a l more r e s o l u t i o n s were placed b e f o r e Congress, some sup p o r t i n g f e d e r a l owner-s h i p , others opposing i t , but none r e c e i v e d C o n g r e s s i o n a l a p p r o v a l . On October 19, 1945, the Attorney-General of the Un i t e d S t a t e s f i l e d an o r i g i n a l s u i t i n the Supreme Court a g a i n s t the State of C a l i f o r n i a , seeking a d e c l a r a t i o n t h a t the U n i t e d S t a t e s was the owner i n fee simple o f , or possessed of paramount r i g h t s i n and powers over, the l a n d s , m i n e r a l s , and other t h i n g s of value u n d e r l y i n g the P a c i f i c Ocean, l y i n g sea-ward of the o r d i n a r y low-water mark on the coas t of C a l i f o r n i a and o u t s i d e of the i n l a n d waters of the S t a t e , extending seav/ard three n a u t i c a l m i l e s and bounded on the north and south, r e s p e c t i v e l y , by the northern and south-ern boundaries of the S t a t e of C a l i f o r n i a . 16 14 C o u l t e r , op. c i t . note 7, Vol..lA, 1-12. 15 Krueger, o p . c i t . note 6, 677. 16 C o u l t e r , o p . c i t . note 7, V o l . l A , 1-25. 18. The Supreme Court, i n a d e c i s i o n handed down on January 17 23, 1947, found i n favour of the U n i t e d S t a t e s . The Court h e l d t h a t the U n i t e d S t a t e s was possessed of "paramount r i g h t s i n , and f u l l dominion and power over" the lands claimed. The b a s i s of t h i s d e c i s i o n was t h a t the concept of s o v e r e i g n t y over the t e r r i t o r i a l sea had not developed at the time when the o r i g i n a l c o l o n i e s formed the Union. When t h i s concept was re c o g n i z e d l a t e r by i n t e r n a t i o n a l law, a l l r i g h t s a c q u i r e d thereby accrued to the U n i t e d S t a t e s , and not to the c o a s t a l s t a t e s . S t a t e s e n t e r i n g the Union subsequently were admitted upon an equal f o o t i n g w i t h the. o r i g i n a l s t a t e s , and so any r i g h t s h e l d i n r e l a t i o n to the t e r r i t o r i a l sea were deemed to be t r a n s f e r r e d to the U n i t e d S t a t e s upon admission. S u i t s were then f i l e d a g a i n s t L o u i s i a n a and Texas, and 18 s i m i l a r r u l i n g s were obtained. The Supreme Court h e l d t h a t the L o u i s i a n a case r a i s e d no new i s s u e s other than the width of the submerged lands claimed by the s t a t e . I n the Texas case, the Court r e c o g n i z e d t h a t before j o i n i n g the Union Texas had passed a s t a t u t e c l a i m i n g a boundary three marine leagues from i t s coast i n the G u l f of Mexico, but h e l d t h a t 17 U.S. v. C a l i f o r n i a , 332 U.S. 19, 804 (1947). 18 U.S. v. L o u i s i a n a , 339 U.S. 699 (1950). U.S. v. Texas, 339 U.S. 707 (1950). 19 upon admission to the Union, Texas had t r a n s f e r r e d a l l i t s n a t i o n a l s o v e r e i g n t y to the U n i t e d S t a t e s , and t h i s t r a n s f e r i n c l u d e d a l l r i g h t s over submerged l a n d s . Proponents of the s t a t e s ' r i g h t s cause c o n c e n t r a t e d t h e i r a t t e n t i o n on Congress a f t e r these d e c i s i o n s , and r e s o l u t i o n s and l e g i s l a t i o n to r e t u r n the submerged l a n d s w i t h i n the t h r e e - m i l e l i m i t to the c o a s t a l s t a t e s were i n t r o d u c e d i n every s e s s i o n of Congress b e g i n n i n g J a n u a r y 19 1948. On August 1, 1946, P r e s i d e n t Truman had v e t o e d one 20 such b i l l which had been passed by Congress. On May 29, 21 1952, he v e t o e d another. D u r i n g the 1952 p r e s i d e n t i a l e l e c t i o n campaign, G e n e r a l Eisenhower s t a t e d t h a t he would approve such a measure, i f i t were a g a i n passed by 22 Congress. S h o r t l y a f t e r P r e s i d e n t Eisenhower's i n a u g u r -a t i o n i n January 1953, Congress passed the Submerged Lands 23 24 A c t , which was approved by the P r e s i d e n t on May 22, 1953. 19 Krueger, o p . c i t . note 6, 679. 20 H.R.Res. 225, 79th Cong., 2d Sess.; H.Doc. No.765, 79th Cong., 2d Sess.; 92 Cong. Rec. 10660. 21 S.J.Res. 20, 82d Cong., 2d Sess.; S.Doc. No.139, 92d Cong., 2d Sess.; 93 Cong. Rec. 6257. 22 C o u l t e r , o p . c i t . note 7, V o l . l A , 11-13,14. 23 67 S t a t . 29. 24 C o u l t e r , o o . c i t . note 7, V o l . l A , 11-13,14. 20 The Submerged Lands Act vested both t i t l e to and ownership of "lands beneath n a v i g a b l e waters", and the n a t u r a l resources w i t h i n such lands and waters, i n the r e s p e c t i v e c o a s t a l s t a t e s , and granted these s t a t e s "the r i g h t and power to manage, a d m i n i s t e r , l e a s e , develop, and use the s a i d lands and n a t u r a l r e s o u r c e s " . The "lands beneath n a v i g a b l e waters, were d e f i n e d as (1) beds of n o n t i d a l n a v i g a b l e waters, up to the high-water l i n e , (2) beds of t i d a l waters, extending from the l i n e of mean high t i d e seaward three g e o g r a p h i c a l m i l e s from the coast l i n e , and beyond t h a t l i m i t to the s t a t e boundary i f t h a t boundary was f u r t h e r seaward than three m i l e s and had p r e v i o u s l y been approved by Congress, or e x i s t e d as such when the s t a t e became a member of the Union, and (3) a l l f i l l e d - i n , made, or r e c l a i m e d lands which 25 f o r m e r l y had met the preceding c o n d i t i o n s . However, "lands beneath n a v i g a b l e waters" was not to be i n t e r -preted as extending from the coast l i n e more than three g e o g r a p h i c a l m i l e s i n t o the A t l a n t i c or P a c i f i c Oceans, or more than three marine leagues i n t o the Gulf of 2 6 Mexico. Furthermore, the r i g h t s of the U n i t e d S t a t e s seaward of the "lands beneath n a v i g a b l e waters" were 25 S e c t i o n 2 ( a ) . 26 S e c t i o n 2 ( b ) . 21. e x p r e s s l y p r e s e r v e d . The Submerged Lands A c t d i d not end c o n t r o v e r s y over o f f s h o r e n a t u r a l r e s o u r c e s . F i r s t , the c o n s t i t u t i o n a l i t y o f the s t a t u t e was c o n t e s t e d i n the Supreme C o u r t , but 2 8 w i t h o u t s u c c e s s . Then, a s e r i e s of s u i t s were i n s t i t u t e d t o determine the p r e c i s e meaning of s e v e r a l p r o v i s i o n s of the a c t . The Supreme C o u r t was c a l l e d upon to d e c i d e the seaward b o u n d a r i e s of the " l a n d s beneath n a v i g a b l e 29 waters" v e s t e d i n the Mexican G u l f s t a t e s . The C o u r t h e l d t h a t Texas had e n t e r e d the Union w i t h a boundary f o r domestic purposes o f t h r e e leagues from the c o a s t , and t h i s boundary was e n t i t l e d to r e c o g n i t i o n under the Submerged Lands A c t . L o u i s i a n a , however, had i t s boundary a t the s h o r e - l i n e upon a d m i s s i o n to the Union and so was e n t i t l e d o n l y to the g e n e r a l g r a n t of a t h r e e - m i l e b e l t of submerged l a n d s . M i s s i s s i p p i and Alabama a l s o f a i l e d to e s t a b l i s h any h i s t o r i c r i g h t s beyond the t h r e e - m i l e l i m i t . F l o r i d a , on the o t h e r hand, was s u c c e s s f u l i n i t s c l a i m t h a t Congress, i n r e a d m i t t i n g F l o r i d a to 27 S e c t i o n 9. 28 Alabama v. Texas,et a l . , and Rhode I s l a n d v. L o u i s i a n a . e t a l . , 347 U.S. 272 (1954). 29 U.S. v. L o u i s i a n a , e t a l . , 363 U.S. 1 (1960). U.S. v. F l o r i d a , e t a l . . 363 U.S. 121 (1960). 22. r e p r e s e n t a t i o n i n the Congress a f t e r the C i v i l War, had approved the a r t i c l e of i t s new c o n s t i t u t i o n d e s c r i b i n g a boundary three leagues from land i n the Gulf of Mexico, and thus was e n t i t l e d to an extended grant under the Submerged Lands A c t . The next s e r i e s of cases i n v o l v e d the q u e s t i o n of the l o c a t i o n of the coast l i n e from which the "lands beneath n a v i g a b l e waters" were to be measured. On May 17, 1965, the Supreme Court handed down an o p i n i o n i n the C a l i f o r n i a case, s t i l l pending from 1947, which s e t f o r t h the p r i n c -30 l p l e s to be adopted i n determining the coast l i n e . Two matters were i n v o l v e d . One was the l o c a t i o n of the l i n e of o r d i n a r y low water, which marked the seaward l i m i t of s t a t e t i d e l a n d s . The Court h e l d t h i s to be the low-water l i n e as shown on o f f i c i a l c h a r t s of the coast. The other was the l o c a t i o n of the outer l i m i t of i n l a n d waters. The Court r e s o l v e d t h i s q u e s t i o n by adopting the p r o v i s i o n s of the 1958 Geneva Convention on the T e r r i t o r i a l Sea and 31 Contiguous Zone, which had e s t a b l i s h e d c r i t e r i a f o r the d e t e r m i n a t i o n of i n l a n d waters and the b a s e l i n e s from which 30 U.S. v. C a l i f o r n i a , 382 U.S. 448 (1966). 31 U.N. doc. A/CONF 13/L. 52, adopted A p r i l 27, 1958. This Convention was r a t i f i e d by the U n i t e d Sta t e s on March 24, 1964, and became e f f e c t i v e on September 10, 1964. 23 the t e r r i t o r i a l seas of n a t i o n s were to be measured. The o p i n i o n s t a t e d t h a t the l e g a l p r i n c i p l e s by which the coast l i n e was d e f i n e d had not been w e l l e s t a b l i s h e d a t the date of enactment of the Submerged Lands A c t , but had s i n c e been c l a r i f i e d by t h i s Convention. This case was f o l l o w e d by proceedings to determine 32 the coast l i n e s of L o u i s i a n a and Texas. I n 1956, i n order to a l l o w o i l and gas development to continue o f f -shore from L o u i s i a n a without w a i t i n g f o r the l o c a t i o n of L o u i s i a n a ' s c o a s t l i n e to be determined, the U n i t e d S t a t e s and L o u i s i a n a had entered i n t o an agreement, w i t h -out p r e j u d i c e to any u l t i m a t e r i g h t s of the p a r t i e s . T h i s agreement d i v i d e d the o f f s h o r e area i n t o f o u r zones, allowed L o u i s i a n a to l e a s e i n Zone 1, and allowed the U n i t e d S t a t e s to l e a s e i n Zones 2, 3, and 4. However, there were r e s t r i c t i o n s upon l e a s i n g i n Zone 2, and the r e c e i p t s from Zones 2 and 3 were to be impounded, pend-i n g a f i n a l d e t e r m i n a t i o n of r i g h t s . By 1969, these impounded funds had accumulated to over one b i l l i o n d o l l a r s . 3 3 32 U.S. v. L o u i s i a n a , e t a l . , (Texas Boundary Case) 394 U.S. 1 (1969); U.S. v. L o u i s i a n a , e t a l . , ( L o u i s i a n a Boundary Case), 394 U.S. 11 (1969). 33 C o u l t e r , o p . c i t . note 7, V o l . l A , 11-46. 24 I n determining the coa s t l i n e of L o u i s i a n a , the Supreme Court adopted the p r i n c i p l e s a p p l i e d by i t i n the C a l i f o r n i a case, but a l s o found t h a t there were some f a c t u a l i s s u e s t h a t c o u l d not be r e s o l v e d without e v i d e n t i a r y h e a r i n g s , and r e f e r r e d these to a S p e c i a l Master. So f a r as Texas was concerned, the Court h e l d t h a t the s t a t u t o r y boundary of the R e p u b l i c of Texas as i t e x i s t e d i n 1845, when Texas became a member of the Union, was the r e l e v a n t boundary f o r measuring the l i m i t of the grant under the Submerged Lands A c t . In A p r i l , 1969, f o l l o w i n g upon the issu a n c e by the S t a t e of Maine of a permit which purported to grant ex-c l u s i v e o i l and gas e x p l o r a t i o n r i g h t s to approximately 3.3 m i l l i o n acres of submerged lands extending almost 100 m i l e s o f f s h o r e , the U n i t e d S t a t e s f i l e d a s u i t i n the Supreme Court to s e t t l e the q u e s t i o n of f e d e r a l - s t a t e r i g h t s over submerged lands i n the A t l a n t i c Ocean, naming 34 a l l the east coast s t a t e s as defendants. This a c t i o n i s s t i l l pending. There i s a l s o another a c t i o n a w a i t i n g d e t e r m i n a t i o n , which r a i s e s the i s s u e of f e d e r a l - s t a t e 35 r i g h t s to the submerged lands i n Cook I n l e t . 34 U.S. v. Maine,et a l . , No.35, O r i g i n a l . 35 U.S. v. A l a s k a , No.A-45-67, U.S. D i s t r i c t Court f o r the D i s t r i c t of A l a s k a . 25. I n s p i t e of these u n r e s o l v e d q u e s t i o n s , the d i v i s i o n o f r i g h t s with r e s p e c t to submerged l a n d s between c o a s t a l s t a t e s and the U n i t e d S t a t e s has been c l a r i f i e d c o n s i d e r a b l y s i n c e the f i r s t C a l i f o r n i a case i n 1947. B a s i c a l l y , these r i g h t s are v e s t e d i n the U n i t e d S t a t e s , but Congress, by v i r t u e of the Submerged Lands A c t of 1953, has g r a n t e d these r i g h t s w i t h i n s p e c i f i e d l i m i t s to the c o a s t a l s t a t e s . Beyond these l i m i t s , the r i g h t s remain i n the U n i t e d S t a t e s . C. The Outer C o n t i n e n t a l S h e l f Lands A c t of 1953. (a) B a s i c P r o v i s i o n s . On August 7, 1953, about two and one h a l f months a f t e r the enactment of the Submerged Lands A c t , 36 the Outer C o n t i n e n t a l S h e l f Lands A c t of 1953 was passed by Congress and r e c e i v e d the a s s e n t o f the P r e s i d e n t . T h i s A c t was d e s i g n e d to p r o v i d e a s t a t u t o r y framework under which the n a t u r a l r e s o u r c e s of the f e d e r a l o f f s h o r e a r e a s c o u l d be a d m i n i s t e r e d , e x p l o r e d and developed. The o f f s h o r e areas to which the Outer C o n t i n e n t a l S h e l f Lands A c t a p p l i e s are " a l l submerged l a n d s l y i n g seaward and o u t s i d e of the a r e a of l a n d s beneath n a v i g a b l e waters as d e f i n e d i n s e c t i o n 2 of the Submerged Lands A c t . . . , 36 67 S t a t . 642 26 and of which the s u b s o i l and seabed a p p e r t a i n to the U n i t e d S t a t e s and are s u b j e c t to i t s j u r i s d i c t i o n and c o n t r o l " . T h i s statement i s broad enough to encompass the " c o n t i n e n t a l s h e l f " as i t i s d e f i n e d by A r t i c l e 1 of the 1958 Geneva 37 C o n v e n t i o n on the C o n t i n e n t a l S h e l f . The s t r u c t u r e of the Outer C o n t i n e n t a l S h e l f Lands A c t i s s i m p l e . I n the f i r s t p l a c e , i t e s t a b l i s h e s the b a s i c 38 o u t l i n e f o r a system of a l l o c a t i o n o f o i l and gas r i g h t s . T h i s o u t l i n e c o n t a i n s o n l y the e s s e n t i a l s of the system: 39 l e a s e s must be i s s u e d c o m p e t i t i v e l y ; the minimum r o y a l t y 40 41 i s f i x e d a t 12^%; the maximum l e a s e a r e a i s 5760 a c r e s ; the term of a l e a s e i s s p e c i f i e d , a t " f i v e y e a r s and so l o n g t h e r e a f t e r as o i l or gas may be produced from the a r e a i n p aying q u a n t i t i e s , or w e l l r e w orking o p e r a t i o n s as 42 approved by the S e c r e t a r y are conducted t h e r e o n . " I n the second p l a c e , t h e r e i s a g r a n t to the S e c r e t a r y of the I n t e r i o r of broad a u t h o r i t y to implement the a l l o c a t i o n 37 U.N. doc. A/CONF. 13/L 55, adopted A p r i l 26, 1958. 38 S e c t i o n 5 ( a ) ( 1 ) . 39 S e c t i o n 8 ( a ) . 40 I b i d . 41 S e c t i o n 8 ( b ) . 42 I b i d . 27. system by i s s u i n g r e g u l a t i o n s d e a l i n g w i t h a l a r g e number of s p e c i f i e d matters, i n c l u d i n g the p r e v e n t i o n of waste and c o n s e r v a t i o n of the n a t u r a l resources of the outer 43 c o n t i n e n t a l s h e l f lands. An important advantage of t h i s s t r u c t u r e i s the f l e x i b i l i t y i n h e r e n t i n i t . I n a d d i t i o n t o these b a s i c p r o v i s i o n s , the Outer C o n t i n e n t a l S h e l f Lands Act extends Un i t e d S t a t e s ' j u r i s d i c t i o n and law to 44 the outer c o n t i n e n t a l s h e l f l a n d s , preserves p r e - e x i s t i n g 45 s t a t e l e a s e s , and s e t s out pro c e d u r a l and enforcement 46 r u l e s . (b) Stated Management O b j e c t i v e s . The Outer C o n t i n e n t a l S h e l f Lands A c t does not l i s t the o b j e c t i v e s which are t o be a t t a i n e d by the management of o f f s h o r e o i l and gas res o u r c e s . However, P u b l i c Law 88-606, which e s t a b l i s h e d a P u b l i c Land Lav; Review Commission to study e x i s t i n g laws and procedures r e l a t i n g t o the a d m i n i s t r a t i o n of the p u b l i c lands of the Uni t e d S t a t e s , d e c l a r e d i t t o be the p o l i c y of Congress t h a t "the p u b l i c lands of the U n i t e d S t a t e s s h a l l be (a) r e t a i n e d and managed or (b) disposed 43 S e c t i o n 5 ( a ) ( 1 ) . 44 S e c t i o n s 3,4. 45 S e c t i o n 6. 46 S e c t i o n s 9, 10, 12-17. 28. o f , a l l i n a manner to provide the maximum b e n e f i t f o r 47 the general p u b l i c " . So f a r as the outer c o n t i n e n t a l s h e l f lands are concerned, t h i s broad goal has not been o f f i c i a l l y t r a n s l a t e d i n t o a set of more s p e c i f i c o b j e c t i v e s . The P u b l i c Land Lav/ Review Commission, i n i t s r e p o r t to the 48 P r e s i d e n t of June, 1970, recommended as f o l l o w s : P u b l i c l a n d agencies should be r e q u i r e d to plan land uses to o b t a i n the g r e a t e s t net p u b l i c b e n e f i t . Congress should s p e c i f y the f a c t o r s to be considered by the agencies i n making these d e t e r m i n a t i o n s , and an a n a l y t i c a l system should be developed f o r t h e i r a p p l i c a t i o n . " 49 However, Congress has not y e t s p e c i f i e d the f a c t o r s t o be consid e r e d by the S e c r e t a r y of the I n t e r i o r i n managing the outer c o n t i n e n t a l s h e l f lands to o b t a i n the g r e a t e s t net p u b l i c b e n e f i t . I n a study of the outer c o n t i n e n t a l s h e l f lands of the U n i t e d S t a t e s , c a r r i e d out under c o n t r a c t w i t h the P u b l i c Land Lav; Review Commission by Nossaman, Waters, 47 78 S t a t . 982, s e c t i o n 1. 48 One T h i r d of the Nation's Land, Washington, D.C. June 1970. 49 Recommendation 2, i b i d . , 45. 29 S c o t t , Krueger and Riordan, a t t o r n e y s of Los Angeles, the general p o l i c y o b j e c t i v e of maximum b e n e f i t to the general p u b l i c was found to be a composite of the f o l l o w i n g more s p e c i f i c p o l i c y o b j e c t i v e s , which emerged from a c o n s i d e r a t i o n of the v a r i o u s t r e a t i e s , s t a t u t e s and a d m i n i s t r a t i v e pronouncements r e g a r d i n g the U n i t e d S t a t e s ' o f f s h o r e : 1. E f f i c i e n t r esource management - the o b j e c t i v e of best e f f e c t i n g the prudent use of resources through t h e i r i n t e l l i g e n t management by the f e d e r a l government. 2 . The encouragement of p r i v a t e p a r t i c i p a t i o n - the o b j e c t i v e of p e r m i t t i n g q u a l i f i e d r e s p o n s i b l e r e p r e s e n t a t i v e s of the p r i v a t e s e c t o r to p a r t i c i p a t e i n the development of outer c o n t i n e n t a l s h e l f r e s o u r c e s . 3. The maximization of revenue to the f e d e r a l government - the o b j e c t i v e of e f f e c t i n g the g r e a t e s t d i r e c t f i n a n c i a l r e t u r n to the resour c e owner. 4. The encouragement of m u l t i p l e use of resources -the o b j e c t i v e of c o - o r d i n a t i n g management of the v a r i o u s resources and uses of the c o n t i n e n t a l s h e l f to minimize c o n f l i c t s . 5. The advancement of knowledge and the development of technology - the o b j e c t i v e of l e a r n i n g more about the o f f s h o r e and i t s resources and a c h i e v i n g the t e c h n o l o g i c a l c a p a b i l i t y to s a f e l y permit the s c i e n t i f i c e x p l o r a t i o n and resource development. 6. The p r o t e c t i o n of environmental q u a l i t y - the o b j e c t i v e of p r e s e r v i n g , and i n some cases r e s t o r i n g , 50 Study of Outer C o n t i n e n t a l Shelf  S t a t e s , Nossaman, V/aters, S c o t t , Los Angeles, C a l i f o r n i a , October Lands of the Un i t e d Krueger and Riordan, 1 9 6 8 . 30. the n a t u r a l c o n d i t i o n of the environment. 51 (c) E x p l o r a t i o n . The Outer C o n t i n e n t a l S h e l f Lands Act provides f o r both g e o l o g i c a l and g e o p h y s i c a l e x p l o r a t i o n : Any agency of the U n i t e d S t a t e s and any person a u t h o r i z e d by the S e c r e t a r y may conduct g e o l o g i c a l and g e o p h y s i c a l e x p l o r a t i o n s i n the outer C o n t i n e n t a l S h e l f , v.'hich do not i n t e r f e r e w i t h or endanger a c t u a l o p e r a t i o n s under any l e a s e maintained or granted pursuant to t h i s A c t , and which are not unduly harmful to a q u a t i c l i f e i n such area". 52 As of June, 1971, there had been no r e g u l a t i o n s i s s u e d under t h i s p r o v i s i o n , but such r e g u l a t i o n s were then 53 under c o n s i d e r a t i o n by the Department of the I n t e r i o r . However, the S e c r e t a r y has given general a u t h o r i z a t i o n f o r g e o l o g i c a l and g e o p h y s i c a l e x p l o r a t i o n on a l l areas of the 54 outer c o n t i n e n t a l s h e l f l a n d s . P r i v a t e persons and c o r p o r a t i o n s who wish to conduct e x p l o r a t i o n o p e r a t i o n s are r e q u i r e d to o b t a i n a permit, a p p l i c a t i o n s f o r which are a d m i n i s t e r e d by the U.S. G e o l o g i c a l Survey. There i s 55 no charge f o r e x p l o r a t i o n permxts. 51 Krueger, Robert B., "An E v a l u a t i o n of the P r o v i s i o n s and P o l i c i e s of the Outer C o n t i n e n t a l S h e l f Lands A c t " , 10 N a t u r a l Resources J o u r n a l 763, 764-5 (1970). The author i d e n t i f i e s the source of each of the l i s t e d o b j e c t i v e s . 52 S e c t i o n 11. 53 C o u l t e r , o p . c i t . note 7, V o l . I B . , V I I I - 2 . 54 I b i d . , V o l . I B , V I I I - 4 . 55 I b i d . , V o l . I B , V I I I - 5 . 31 The terms and c o n d i t i o n s of permits d i f f e r s l i g h t l y from r e g i o n to r e g i o n . In a l l cases, however, permits are n o n - e x c l u s i v e w i t h r e s p e c t to the area i n which o p e r a t i o n s are a u t h o r i z e d . A l s o , each i n d i v i d u a l g e o l o g i c a l or geo-p h y s i c a l o p e r a t i o n must r e c e i v e p r i o r approval from the r e g i o n a l o f f i c e of the G e o l o g i c a l Survey. The only d r i l l i n g allowed i s core d r i l l i n g , which i n v o l v e s the d r i l l i n g of narrow, shallow holes i n t o the upper l a y e r of the e a r t h ' s 5 6 c r u s t to e x t r a c t rock samples f o r g e o l o g i c a l examination. Although the Outer C o n t i n e n t a l S h e l f Lands Act does not r e q u i r e d i s c l o s u r e of the r e s u l t s of g e o l o g i c a l and geo-p h y s i c a l e x p l o r a t i o n a c t i v i t i e s to f e d e r a l agencies, the terms of permits i s s u e d do r e q u i r e t h a t s p e c i f i e d data be 5 7 f u r n i s h e d . The U.S. G e o l o g i c a l Survey has provided t h a t samples and r e l a t e d data obtained from g e o l o g i c a l e x p l o r a t i o n be made a v a i l a b l e to i t f o r i n s p e c t i o n and examination; i n a d d i t i o n , permits f o r i n d i v i d u a l g e o l o g i c a l surveys o f t e n p r o v i d e t h a t a g e o l o g i c a l survey i n s p e c t o r be present dur i n g the o p e r a t i o n s , and h i s v i s u a l o b s e r v a t i o n s and i n s p e c t i o n s of core samples are recorded i n r e p o r t s f i l e d w i t h the 56 I b i d . , V o l . I B , V I I I - 1 . 5 7 Study of the Outer C o n t i n e n t a l S h e l f Lands of the U n i t e d S t a t e s , o p . c i t . n o t e 50, V o l . 1 , 184. G e o l o g i c a l Survey. On the has not been requested from 59 Survey. other hand, g e o p h y s i c a l data permittees by the G e o l o g i c a l The P u b l i c Land Law Review Commission recommended t h a t the U n i t e d S t a t e s government take steps to o b t a i n more i n f o r m a t i o n r e l a t i n g to the outer c o n t i n e n t a l s h e l f l a n d s , i n the f o l l o w i n g terms: The F e d e r a l Government should undertake an expanded o f f s h o r e program of c o l l e c t i o n and d i s s e m i n a t i o n of b a s i c g e o l o g i c a l and g e o p h y s i c a l data. As p a r t of t h a t program, i n f o r m a t i o n developed under e x p l o r a t i o n permits should be f u l l y d i s c l o s e d to the Government i n advance of Outer C o n t i n e n t a l S h e l f l e a s e s a l e s . However, i n d u s t r y e v a l u a t i o n s of raw data should be t r e a t e d as p r o p r i e t a r y and excluded from mandatory d i s c l o s u r e . 60 The r e g u l a t i o n s under c o n s i d e r a t i o n by the Department of the I n t e r i o r f o r governing e x p l o r a t i o n o p e r a t i o n s on the outer c o n t i n e n t a l s h e l f lands would r e q u i r e the h o l d e r of a g e o p h y s i c a l permit to submit a l l or any p o r t i o n of h i s processed i n f o r m a t i o n and data i n a format and q u a l i t y s u i t a b l e f o r i n t e r p r e t a t i o n to the G e o l o g i c a l Survey,.as 58 I b i d . , 1 8 5 . 59 I b i d . 60 One T h i r d of the Nation's Land, o p . c i t . note 48, 193 (recommendation 77). 33. and when requested by the Su p e r v i s o r . This p r o v i s i o n 62 has, however, a t t r a c t e d c o n s i d e r a b l e i n d u s t r y o p p o s i t i o n . (d) A l l o c a t i o n of P r o d u c t i o n R i g h t s . The Outer C o n t i n e n t a l S h e l f Lands A c t s e t s out the s o l e means of a l l o c a t i o n of o i l and gas p r o d u c t i o n r i g h t s over outer c o n t i n e n t a l s h e l f lands; the A ct d e c l a r e s t h a t "mineral l e a s e s . . . s h a l l be maintained 6 3 or i s s u e d o n l y under the p r o v i s i o n s of t h i s subchapter." S e c t i o n 8 of the Act c o n t a i n s the r e l e v a n t procedure to be adopted: (a)...the S e c r e t a r y of the I n t e r i o r i s a u t h o r i z e d to grant to the h i g h e s t r e s p o n s i b l e q u a l i f i e d b i d d e r by c o m p e t i t i v e b i d d i n g under r e g u l a t i o n s promulgated i n advance, o i l and gas l e a s e s on submerged lands of the outer C o n t i n e n t a l Shelf...The b i d d i n g s h a l l be (1) by sealed b i d s , and (2) a t the d i s c r e t i o n of the S e c r e t a r y , on the b a s i s of a cash bonus wi t h a r o y a l t y f i x e d by the S e c r e t a r y a t not l e s s than 12^ per centum i n amount or value of the p r o d u c t i o n saved, removed or s o l d , or on the b a s i s of r o y a l t y , but a t not l e s s than the per centum above mentioned, w i t h a cash bonus f i x e d by the S e c r e t a r y . The p r a c t i c e adopted by the S e c r e t a r y to date has been to i s s u e a l l l e a s e s w i t h a o n e - s i x t h r o y a l t y , on the b a s i s 61 S e c t i o n 252. 1 4 ( c ) ; C o u l t e r , op. c i t . note 7, V o l . I B , V I I I - 1 5 . 62 C o u l t e r , o p . c i t . note 7, V o l . I B , V I I I - 1 6 . 63 S e c t i o n 4 ( a ) ( 1 ) . 34. of cash bonus b i d d i n g . However, the P u b l i c Land Law Review Commission recommended t h a t : ( f ) l e x i b l e methods of p r i c i n g should be encouraged, r a t h e r than the present e x c l u s i v e r e l i a n c e on bonus b i d d i n g p l u s a f i x e d r o y a l t y . 65 There has a l s o been support f o r r o y a l t y b i d d i n g from some s e c t i o n s of the o i l and gas i n d u s t r y . A c c o r d i n g l y , the Department of the I n t e r i o r plans to i s s u e some o i l and gas l e a s e s i n December 1972, o f f s h o r e from L o u i s i a n a i n the G u l f of Mexico, on the b a s i s of r o y a l t y b i d d i n g w i t h f i x e d cash 6 6 bonus. T h i s s a l e i s to be t r e a t e d as an experiment. The S e c r e t a r y of the I n t e r i o r may permit a r e d u c t i o n of r o y a l t i e s i f the l e a s e cannot be operated s u c c e s s f u l l y at the 6 7 s t a t u t o r y minimum of 12%%. However, there has been no a p p l i c a t i o n t o the S e c r e t a r y f o r t h i s r e l i e f s i n c e l e a s i n g 68 a c t i v i t y on outer c o n t i n e n t a l s h e l f lands began i n 1954. The r e q u i r e d q u a l i f i c a t i o n s f o r persons to h o l d l e a s e s are s e t out i n the r e g u l a t i o n s under the Outer C o n t i n e n t a l 64 C o u l t e r , o p . c i t . note 7, V o l . l A , IV-45. 65 One T h i r d of the Nation's Land, o p . c i t . note 48, 192 (recommendation 75). 66 O i l and Gas J o u r n a l , June 26, 1972, 34. 67 S e c t i o n 5 ( a ) ( 1 ) . 68 One T h i r d of the Nation's Land, o p . c i t . note 48, 192. S h e l f Lands A c t : M i n e r a l l e a s e s i s s u e d pursuant to s e c t i o n 8 of the ac t may be h e l d o n l y by c i t i z e n s of the Unit e d S t a t e s over 21 years of age, a s s o c i a t i o n s of such c i t i z e n s , S t a t e s , p o l i t i c a l s u b d i v i s i o n s of a S t a t e , or p r i v a t e , p u b l i c or mu n i c i p a l C o r p o r a t i o n s o r g a n i z e d under the lav/s of the Un i t e d S t a t e s or of any S t a t e or T e r r i t o r y t h e r e o f . " 69 Thus, even though f o r e i g n n a t i o n a l s and c o r p o r a t i o n s are not permi t t e d to h o l d l e a s e s , they are f r e e to use domestic c o r p o r a t i o n s owned or c o n t r o l l e d by them t o do so. The Department of the I n t e r i o r has depended mainly on c o m p e t i t i v e b i d d i n g to determine the value of t r a c t s o f f e r e d 70 f o r l e a s e . However, the Department has rec o g n i z e d the importance of s e t t i n g minimum acceptable b i d s , i f l e a s e s are 71 to be s o l d on terms t h a t y i e l d a f a i r r e t u r n . A c c o r d i n g l y , s i n c e 1959 the Department has made i n c r e a s i n g e f f o r t s to 72 a p p r a i s e the value of t r a c t s p r i o r to l e a s i n g . This has been e a s i e s t i n r e l a t i o n to drainage s a l e s (the s a l e s of lan d i n danger of being d r a i n e d by p r o d u c t i o n on adjacent 7 l a n d s ) , as a c t u a l data from d r i l l h o les nearby may be used. 69 43 C.F.R. s e e s . 3 3 0 0 . 1 . 70 C o u l t e r , o p . c i t . n o t e 7, V o l . l A , I V - 4 9 . 71 I b i d . , V o l . l A , I V - 4 8 . 72 I b i d . . V o l . l A , I V - 4 9 . 73 I b i d . . V o l . l A , I V - 5 3 . 36. The f i r s t attempt to determine minimum ac c e p t a b l e b i d s on new area s a l e s was made on the June 1967 Louisana s a l e , u s i n g a procedure developed f o r a previous drainage s a l e . However, i t was found t h a t the a v a i l a b l e g e o l o g i c data was 74 too xncomplete f o r t h i s to be done s u c c e s s f u l l y . A more comprehensive system was developed f o r the 1968 Santa Barbara s a l e . The system i n v o l v e d s e l e c t i n g a t r a c t f o r which adequate g e o l o g i c and e n g i n e e r i n g data were a v a i l -a b l e , and u s i n g i t as a base a g a i n s t which to compare o t h e r s . The system took into. 1 account many of the economic f a c t o r s t h a t a f f e c t the value of t r a c t s , such as g e o l o g i c p r o b a b i l i t y of d i s c o v e r y , v a l u e of petroleum, i n i t i a l p r o d u c t i o n per w e l l , f i e l d d e c l i n e r a t e , s i z e of r e s e r v o i r , c a p i t a l i n v e s t -ment, expected r a t e of r e t u r n , probable w e l l depth, water depth, o p e r a t i n g c o s t , development time and o t h e r s . I n the Department's view, however, the system s u f f e r e d from the i n h e r e n t weakness t h a t a v a i l a b l e data was not s u f f i c i e n t to estimate the amount of o i l and gas l i k e l y to be present i n each t r a c t , the most c r i t i c a l element i n e s t a b l i s h i n g the 75 value of each l e a s e . 74 I b i d . , V o l . l A , IV-50,51. 75 I b i d . , V o l . l A , IV-51,52. 37 The Department of the I n t e r i o r found t h a t i n the Santa Barbara s a l e the c a l c u l a t e d minimum b i d s were lower than the winning b i d s , but ther e was a s t a t i s t i c a l l y s i g n i f i c a n t c o r r e l a t i o n between the c a l c u l a t e d and the a c t u a l b i d s . The c o e f f i c i e n t of c o r r e l a t i o n was s i m i l a r i n the Texas s a l e l a t e r i n 1968. Furthermore, i n both the Santa Barbara and the Texas s a l e s , the companies' nominations were much more s i g n i f i c a n t than the g e o l o g i c r a t i n g s assigned f o r minimum b i d purposes i n p r e d i c t i n g the b i d s r e c e i v e d . T h i s was a t t r i b u t e d to the f a c t t h a t the nominations r e f l e c t the g r e a t amount of g e o l o g i c data obtained by the companies i n p r i o r e x p l o r a t i o n o p e r a t i o n s , but not possessed 76 by the Department of the I n t e r i o r . In a l l l e a s e o f f e r i n g s the S e c r e t a r y of the I n t e r i o r r e t a i n s the r i g h t to r e j e c t b i d s a t h i s d i s c r e t i o n . Bids below the minimum a c c e p t a b l e b i d s t a t e d i n the n o t i c e of l e a s e s a l e are g e n e r a l l y r e j e c t e d as not complying w i t h the terms of the n o t i c e . However, under present p r a c t i c e b i d s h i g h e r than the p r e s c r i b e d minimum are o f t e n r e j e c t e d as w e l l . S e v e r a l f a c t o r s are taken i n t o account i n r e j e c t i n g such b i d s ; g e o l o g i c a l and economic e v a l u a t i o n s performed 76 I b i d . , V o l . l A , IV-52. The system of company nominations i s d e s c r i b e d i n f r a , 38-40. 3 8 . by the U.S. G e o l o g i c a l Survey; a n a l y s i s of company o p e r a t i o n a l performance i n the past; p r i o r h i s t o r y of the p a r t i c u l a r t r a c t o f f e r e d ; o v e r a l l performance of the bi d d e r at the s a l e ; and economic analyses performed by 77 the s t a f f of the Bureau of Land Management. The P u b l i c Land Law R e v i s i o n Commission noted t h a t approximately 5% of high b i d s have been r e j e c t e d by the S e c r e t a r y , and a l s o t h a t the r a t i o of r e j e c t i o n s to acceptances of b i d s has been i n c r e a s i n g a t r e c e n t s a l e s . The S e c r e t a r y has not f o l l o w e d the p r a c t i c e of a s s i g n i n g reasons f o r any p a r t i c u l a r r e j e c t i o n . The Commission recommended t h a t the S e c r e t a r y should r e t a i n t h i s d i s c r e t i o n to r e j e c t b i d s , but t h a t he should be r e q u i r e d to s t a t e h i s reasons f o r r e j e c t i o n . F u r t h e r , the S e c r e t a r y ' s d e c i s i o n t o r e j e c t b i d s should be s u b j e c t to j u d i c i a l review o n l y i f 7 i t can be shown to be a r b i t r a r y and an abuse of d i s c r e t i o n . The Outer C o n t i n e n t a l S h e l f Lands Act c o n t a i n s no r e f e r e n c e to the s i z e or t i m i n g of l e a s e s a l e s . The r e g u l a t i o n s promulgated under the Act pro v i d e t h a t l e a s e s 77 I b i d . , V o l . l A , IV-54,55. 78 One T h i r d of the Nation's Land, o o . c i t . note 48, 192 (recommendation 75). 39. s h a l l be i s s u e d c o m p e t i t i v e l y upon " r e q u e s t s d e s c r i b i n g a reas and e x p r e s s i n g an i n t e r e s t i n l e a s i n g m i n e r a l s " or upon a c a l l " f o r nominations of t r a c t s f o r the l e a s i n g of 79 m i n e r a l s i n s p e c i f i c a r e a s . " I n p r a c t i c e , the system developed whereby the o i l and gas i n d u s t r y c a r r i e d out g e o l o g i c a l and g e o p h y s i c a l e x p l o r a t i o n o p e r a t i o n s , and then submitted r e q u e s t s to the Bureau of Land Management f o r any p r o m i s i n g a r e a s to be o f f e r e d f o r l e a s e . When the Bureau o f Land Management was of the o p i n i o n t h a t s u f f i c i e n t i n t e r e s t e x i s t e d i n an a r e a to warrant a l a n d s a l e , the Bureau i s s u e d o f f i c i a l l e a s i n g maps showing the a r e a to be l e a s e d i n terms d e s i g n a t e d t r a c t s , and c a l l e d f o r nominations from i n d u s t r y o f t r a c t s to be o f f e r e d . The Bureau then d e c i d e d which t r a c t s i n the a r e a s h o u l d be put up f o r b i d s , p r i m a r i l y on the b a s i s of the nominations ^ ^ . J O . 80 r e c e i v e d from i n d u s t r y . P r i o r to 1962 n e a r l y a l l the t r a c t s nominated were o f f e r e d f o r s a l e . However, the number of t r a c t s nominated and the f r e q u e n c y of nominations have tended to i n c r e a s e , and when the nominations began to cover l a r g e a r e a s , the Bureau of Land Management found i t n e c e s s a r y to s e l e c t 79 43 C.F.R. sec. 3301.3. 80 C o u l t e r , o p . c i t . note 7, V o l . l A , IV-10-14. 40 among them, i n order to keep s a l e s to a s i z e judged to 81 b r i n g about the most e f f e c t i v e c o m p e t i t i o n . T r a c t s e l e c t i o n has been based upon the f o l l o w i n g f a c t o r s : the number of times each t r a c t was shot ( s e i s m i c e x p l o r a t i o n ) ; the number of times each t r a c t was nominated; the p o t e n t i a l o f f e r e d by each t r a c t f o r adding to t e c h n o l o g i c a l knowledge about the a rea; the p o t e n t i a l o f f e r e d by each t r a c t f o r adding to t e c h n o l o g i c a l knowledge about p r o d u c t i o n c a p a b i l -82 i t i e s i n deep water; and t e c h n i c a l d a t a , when a v a i l a b l e . The maximum s i z e of i n d i v i d u a l l e a s e t r a c t s on the outer c o n t i n e n t a l s h e l f lands i s l i m i t e d by the Outer C o n t i n e n t a l 83 S h e l f Lands Act to 5,760 a c r e s . There i s no r e s t r i c t i o n , though, upon the number of l e a s e s t h a t may be a c q u i r e d by a person or company, and the Department of the I n t e r i o r has found t h a t companies do tend to b i d on contiguous 84 t r a c t s i n order to i n c r e a s e the s i z e of areas h e l d . Although the Department of the I n t e r i o r may o f f e r t r a c t s of l e s s than 5,760 a c r e s , the normal p r a c t i c e has 81 I b i d . , V o l . l A , IV-15. 82 I b i d . 83 S e c t i o n 8 ( b ) . 84 C o u l t e r , o p . c i t . note 7, V o l . l A , IV-17. 41. been to o f f e r f u l l b l o c k s i n new area s a l e s . A f u l l block i s 5,760 acres i n a l l areas except o f f s h o r e from L o u i s i a n a , 85 where i t i s 5,000 acre s . However, i n the 1968 Texas s a l e , 64 p a r t i a l b l o c k s were o f f e r e d to see how t h i s would a f f e c t revenue and p a r t i c i p a t i o n by small companies. T h i r t y - s i x of the p a r t i a l b l o c k s r e c e i v e d b i d s , but only e i g h t of these were from small o p e r a t o r s . Furthermore, the average p r i c e b i d per acre f o r the p a r t i a l b l o c k s was $210 compared w i t h $1,159 per acre f o r the whole b l o c k s . The Department of the I n t e r i o r concluded from t h i s experiment t h a t o p e r a t o r s are not i n c l i n e d to pay premium p r i c e s f o r improved t r a c t s t h a t are too s m a l l to o f f e r much chance of a p r o f i t a b l e d i s c o v e r y . The most v a l u a b l e l e a s e to the i n v e s t o r i s one s u f f i c i e n t l y l a r g e t o g i v e him c o n t r o l over a p r o d u c i b l e accumulation of o i l . Furthermore, from the p o i n t of view of the Department, small t r a c t s mean a g r e a t e r number of l e a s e s to s u p e r v i s e , and add to the problems of u n i t i z a t i o n 86 where s e v e r a l t r a c t s are on the one producing s t r u c t u r e . The t o t a l acreage o f f e r e d i n new area s a l e s has v a r i e d w i d e l y , r a n g i n g from a low of 540,000 acres i n the 1968 Santa Barbara s a l e to a h i g h of 3,679,000 acres i n the 85 I b i d . 86 I b i d . 42. s p l i t L o u i s i a n a and Texas s a l e s h e l d on March 13 and March 16, 1962. The l a r g e 1962 o f f e r i n g brought a r e l a t i v e l y low average number of b i d s per t r a c t and low average b i d s per a c r e , and thus gave r i s e t o concern about the p o s s i b l e e f f e c t o f the s i z e of the s a l e on bonus revenues. A c c o r d i n g -l y , subsequent s a l e s have been reduced i n s i z e , and have y i e l d e d b i d s on a l a r g e r percentage of the t r a c t s t o g e t h e r 87 w i t h a h i g h e r average b i d per a c r e . For f u t u r e l e a s e s a l e s , the Department of the I n t e r i o r proposes t o implement a f i v e - y e a r l e a s e s a l e s c h e d u l e . The Department a l s o p l a n s to take the f o l l o w i n g s t e p s t o h e l p a s s u r e o r d e r l y l e a s i n g and development of o u t e r c o n t i n e n t a l s h e l f l a n d s : accumulate b a s i c g e o p h y s i c a l d a t a , and economic d a t a r e l a t e d to supply and demand; use c o l l e c t e d data to improve t r a c t s e l e c t i o n p r o c e d u r e s ; improve pre and p o s t s a l e g e o l o g i c , e n g i n e e r i n g and economic e v a l u a t i o n p rocedures; study a l t e r n a t i v e l e a s i n g systems and b i d d i n g methods; dev e l o p p r o c e d u r es f o r c o n s i d e r a t i o n of environmental p r o t e c t i o n ; p a r t i c i p a t e i n management of l e a s e e x p l o r a t i o n -88 development and p r o d u c t i o n . Under the proposed f i v e - y e a r l e a s e s c h e d u l e , t h e r e w i l l 87 I b i d . , V o l . l A , IV-7. 88 I b i d . , V o l . l A , IV-7,8. 43 be two s a l e s each year, i n s p r i n g and i n the f a l l , thus r e g -u l a r i z i n g the t i m i n g of l e a s e s a l e s , as recommended by the " 89 P u b l i c Land Law Review Commission. The b a s i c steps t h a t w i l l be f o l l o w e d i n the l e a s e schedule are: (a) f o r e c a s t demand on a n a t i o n a l and r e g i o n a l b a s i s ; (b) f o r e c a s t supply from areas other than outer c o n t i n e n t a l s h e l f l a n d s , on a n a t i o n a l and r e g i o n a l b a s i s ; (c) estimate the needed supply from outer c o n t i n e n t a l s h e l f lands on a r e g i o n a l b a s i s ; (d) estimate the a v a i l a b l e resources of outer c o n t i n e n t a l s h e l f l a n d s ; (e) develop a p r e l i m i n a r y schedule of l e a s e s a l e s by area to y i e l d needed p r o d u c t i o n and su p p o r t i n g r e s e r v e s ; ( f ) a d j u s t the p r e l i m i n a r y s a l e schedule to c o n s i d e r f u r t h e r f a c t o r s such as environmental s e n s i t i v i t y , 90 m u l t i p l e use c o n f l i c t s , and p u b l i c h e a r i n g procedures. T h i s would amount to a comprehensive management scheme f o r o i l and gas resources of the outer c o n t i n e n t a l s h e l f l a n d s . On January 1, 1970, P r e s i d e n t Nixon signed the N a t i o n a l 91 Environmental P o l i c y Act. S e c t i o n 102 of t h i s a c t r e q u i r e s a l l agencies of the U n i t e d S t a t e s government to i n c l u d e i n 89 One T h i r d of the Nation's Land, o p . c i t . note 48, 192. (recommendation 75). 90 C o u l t e r , o p . c i t . note 7, V o l . l A , IV-8. 91 83 S t a t . 852. 44. every recommendation or r e p o r t on proposals f o r l e g i s -l a t i o n and other major f e d e r a l a c t i o n s s i g n i f i c a n t l y a f f e c t i n g the q u a l i t y of the human environment a d e t a i l e d statement on the f o l l o w i n g matters: (a) the environmental impact of the proposed a c t i o n , (b) any adverse environmental e f f e c t s which cannot be avoided should the proposal be implemented, (c) a l t e r n a t i v e s to the proposed a c t i o n , (d) the r e l a t i o n s h i p between l o c a l s hort-term uses of man's environment and the maintenance and enhancement of l o n g -term p r o d u c t i v i t y , and (e) any i r r e v e r s i b l e and i r r e t r i e v a b l e commitments of resources which would be i n v o l v e d i n the pro-posed a c t i o n should i t be implemented. In December 1971, the Department of the I n t e r i o r was f o r c e d to c a n c e l a s a l e of l e a s e s o f f s h o r e from L o u i s i a n a , a f t e r b i d s f o r the l e a s e s had been submitted, when a f e d e r a l c o u r t r u l e d t h a t the impact statement which had been prepared i n r e s p e c t of the s a l e was inadequate, i n t h a t i t gave i n s u f f i c i e n t c o n s i d e r a t i o n to a l t e r n a t i v e s to the proposed a c t i o n . T h i s i n t u r n caused the delay of a f u r t h e r l e a s e s a l e , o r i g i n a l l y scheduled f o r May 1972. The Department of the I n t e r i o r now int e n d s to ho l d these s a l e s i n August and December 1972, r e s p e c t i v e l y . More d e t a i l e d impact statements w i l l be prepared p r i o r to each s a l e , and hearings w i l l be conducted to a s c e r t a i n the 45. views of i n t e r e s t e d p a r t i e s . The term of o i l and gas l e a s e s i s provided by the Outer C o n t i n e n t a l S h e l f Lands Act: An o i l and gas l e a s e . . . s h a l 1 . . . be f o r a p e r i o d of f i v e years and as long t h e r e a f t e r as o i l or gas may be produced from the area i n paying q u a n t i t i e s , or d r i l l i n g or w e l l reworking o p e r a t i o n s as approved by the S e c r e t a r y are conducted thereon. 93 I t has been s t a t e d t h a t the purpose of the primary term i s to encourage e x p l o r a t i o n o n l y , and t h a t the Department of the I n t e r i o r has shown i t s e l f to be q u i t e reasonable i n p e r m i t t i n g d e l a y of f u r t h e r development of a l e a s e where the need f o r o i l and gas does not e x i s t , or there i s no 94 present means f o r i t s e x t r a c t i o n or t r a n s p o r t a t i o n . The Outer C o n t i n e n t a l S h e l f Lands Ac t provides t h a t an o i l and gas l e a s e s h a l l " c o n t a i n such r e n t a l p r o v i s i o n s and other terms and p r o v i s i o n s as the S e c r e t a r y may provide 95 a t the time of o f f e r i n g the l e a s e f o r s a l e . " A c c o r d i n g l y , the r e n t a l and minimum r o y a l t y , which have always been e s t a b l i s h e d at the same amount, are s p e c i f i e d i n each 92 O i l and Gas J o u r n a l , A p r i l 1 0 , 1972, 87. 93 S e c t i o n 8 ( b ) ( 2 ) . 94 Krueger, o p . c i t . note 6, 711. 95 S e c t i o n 8 ( b ) ( 4 ) . 46 n o t i c e of o i l and gas l e a s e s a l e . R e ntal i s pai d p r i o r to d i s c o v e r y of o i l and gas on the l e a s e d area, and minimum r o y a l t y i s p a i d a f t e r d i s c o v e r y . I f there i s p r o d u c t i o n and the a c t u a l r o y a l t y i s l e s s than the minimum r o y a l t y , then the l e s s e e must pay the d i f f e r e n c e i n order to meet the minimum r o y a l t y . The d o l l a r amounts of r e n t a l s and minimum r o y a l t i e s have v a r i e d from s a l e to s a l e , but have always been uniform f o r a l l t r a c t s o f f e r e d a t a p a r t i c u l a r s a l e . The most common amount has been $3 per acre. However, at two s a l e s the f i g u r e has been $5 per a c r e , and a t f o u r 96 s a l e s i t was s e t a t $10 per acre. I t would appear t h a t , w i t h due r e g a r d t o the magnitude of the other c o s t s of p r o d u c t i o n of o i l and gas from outer c o n t i n e n t a l s h e l f l a n d s , n e i t h e r the r e n t a l nor the minimum r o y a l t y are of a s u f f i c i e n t s i z e to p r o v i d e any i n c e n t i v e towards e a r l y 97 e x p l o r a t o r y d r i l l i n g or p r o d u c t i o n . (e) Revenue from O i l and Gas Operations. T o t a l r e c e i p t s to the U n i t e d S t a t e s government from o i l and gas o p e r a t i o n s on outer c o n t i n e n t a l s h e l f lands have been very s u b s t a n t i a l , and are growing. These r e c e i p t s f a l l i n t o f i v e c a t e g o r i e s : (1) bonus payments; (2) r o y a l t y payments; (3) r e n t ; 96 C o u l t e r , o p . c i t . note 7, V o l . l A , IV-64. 97 Krueger, o o . c i t . note 6, 711. 47. (4) minimum r o y a l t i e s ; and (5) s h u t - i n gas payments. Table 3.1 l i s t s r e c e i p t s by category and year, from 1954 to A p r i l 1, 1968. The bonus payments l i s t e d f o r 1968 are r e c e i p t s from the l e a s e s a l e i n the Santa Barbara Channel, o f f s h o r e from C a l i f o r n i a , on February 6, 1968. R o y a l t y payments, r e n t , minimum r o y a l t i e s and s h u t - i n gas payments f o r 1967 are estimates o n l y . 4 8 . TABLE 3 .1 REVENUES FROM OFFSHORE OIL AND GAS OPERATION'S, 1954 - A P R I L 1 , 1 9 6 8 . Bonus R o y a l t y Minimum S h u t - i n Gas T o t a l Year Payments Payments Rent R o y a l t i e s Payments R e c e i p t s Thousands of D o l l a r s 1954 1 3 9 , 7 5 5 2 , 7 4 9 3 , 8 0 5 87 1 4 6 , 3 9 6 1955 1 0 8 , 5 2 8 5 ,140 3 , 3 5 6 122 1 1 7 , 1 4 6 1956 7 ,630 3 , 9 5 6 80 1 1 , 6 6 6 1957 1 1 , 3 9 1 3 ,220 69 110 1 4 , 7 9 0 1958 1 7 , 4 2 3 2 , 3 7 7 184 121 2 0 , 1 0 5 1959 8 9 , 7 4 7 2 6 , 5 4 0 2 , 2 4 2 171 85 1 1 8 , 7 8 5 1960 2 8 2 , 6 4 2 3 6 , 8 0 8 3 , 5 8 3 317 49 3 2 3 , 3 9 9 1961 4 6 , 7 3 3 3 , 0 6 1 314 37 5 0 , 1 4 5 1962 4 8 9 , 4 8 1 6 5 , 2 5 5 8 , 4 0 0 518 62 5 6 3 , 7 1 6 1963 1 2 , 8 0 8 7 5 , 3 7 4 8 , 7 2 3 689 53 9 7 , 6 4 7 1964 9 5 , 8 7 5 8 6 , 5 3 6 9 , 7 8 6 820 46 1 9 3 , 0 6 3 1965 9 9 , 6 5 6 8 , 5 0 3 1 ,073 38 1 0 9 , 2 7 0 1966 2 0 9 , 2 0 0 1 3 2 , 8 5 0 6 , 705 1 ,367 42 3 5 0 , 1 6 4 1967 5 1 0 , 0 7 9 1 5 2 , 2 9 0 1 7 , 4 7 4 a l ^ O O 1 4 2 1 6 7 0 , 8 8 s 1 1968 6 0 3 , 2 0 4 N.A. N.A. 6 0 3 , 2 0 4 'OTAL 2 , 5 4 1 , 3 1 9 7 6 6 , 3 7 5 7 5 , 1 9 1 6 , 5 2 2 974 3 , 3 9 0 , 3 8 1 Source: F i g u r e s e x t r a c t e d from Tables 8 -24 to 8 - 2 7 appearing i n Chapter 8 of the Study of Outer C o n t i n e n t a l S h e l f Lands  of the Uni t e d S t a t e s , Nossaman, Waters, S c o t t , Krueger & Ri o r d a n , Los Angeles, October 1 9 6 8 . 1 Estimates by Uni t e d S t a t e s G e o l o g i c a l Survey. 49 ( f ) Revenue from Income Ta x a t i o n . The other d i r e c t means by which revenue i s r a i s e d by the U n i t e d S t a t e s government from o f f s h o r e o i l and gas o p e r a t i o n s i s t a x a t i o n of the income of producers. I t i s not p o s s i b l e , however, to quote f i g u r e s f o r t h i s , as companies engaged i n o f f s h o r e o p e r a t i o n s are almost i n v a r i a b l y engaged i n onshore oper-a t i o n s as w e l l , and t h e i r t a x a t i o n r e t u r n s do not i d e n t i f y the source of income earned. A l l t h a t can be done i s to mention the p r i n c i p l e s upon which t a x a t i o n i s assessed. D o m e s t i c a l l y earned income from o i l and gas p r o d u c t i o n i s s u b j e c t t o the same r a t e s of t a x a t i o n as i s d o m e s t i c a l l y earned t a x a b l e income from any other source. These r a t e s are 22% on a l l t a x a b l e income, the normal tax r a t e , p l u s 98 26% on a l l t a x a b l e income over $25,000, the s u r t a x r a t e . However, s p e c i a l p r o v i s i o n s apply i n r e l a t i o n to the amount and t i m i n g of deductions t h a t an o i l and gas producer may make from h i s gross income i n determining h i s t a x a b l e income. These p r o v i s i o n s f a l l i n t o two general c a t e g o r i e s : (1) the o p t i o n to use e i t h e r a percentage of gross income or a pro r a t a share of c e r t a i n c a p i t a l i z e d c o s t s as a measure of d e p l e t i o n , and (2) the o p t i o n to deduct c e r t a i n c a p i t a l o u t l a y s as a c u r r e n t expense or to c a p i t a l i z e them 98 I n t e r n a l Revenue Code, s e c t i o n 6072(b); Reg. sec. 1. 6072-2. 50 99 f o r gradual recovery through the d e p l e t i o n allowance. The f i r s t of these i s g e n e r a l l y known as the " d e p l e t i o n allowance". I t i s the annual deduction t h a t an o i l and gas producer i s e n t i t l e d to make from gross income earned by the o i l and gas o p e r a t i o n s to take account of the f a c t t h a t o i l and gas d e p o s i t s are a wasting a s s e t (as i s any d e p r e c i a b l e p i e c e of machinery used i n a manufacturing process.) The deduction allowed i s the l a r g e r of (a) a pro r a t a f r a c t i o n , equal to the r a t i o of the year's p r o d u c t i o n to estimated t o t a l p r o d u c t i o n over the l i f e t i m e of the o i l and gas d e p o s i t s , of the c a p i t a l i z e d c o s t s of the d e p o s i t s e x c l u s i v e of d e p r e c i a b l e o u t l a y s , or (b) 22% of the gross value of p r o d u c t i o n from the d p o s i t s d u r i n g the year, p r o v i d e d t h i s does not exceed 50% of net income c a l c u l a t e d b e f o r e deducting the d e p r e c i a t i o n allowance. The former a l t e r n a t i v e , known as c o s t d e p l e t i o n , does not d i f f e r i n p r i n c i p l e from the usual treatment of c a p i t a l consumption i n other i n d u s t r i e s , but the l a t t e r , known as percentage d e p l e t i o n , amounts to a s p e c i a l concession f o r the o i l and gas i n d u s t r y . 99 McDonald, Stephen L., " D i s t i n c t i v e Tax Treatment of Income from O i l and Gas P r o d u c t i o n " , 10 N a t u r a l Resources J o u r n a l 97 (1970). 100 I b i d . , 100. 51 The e f f e c t i v e percentage d e p l e t i o n r a t e f o r the t y p i c a l producer i s l e s s than the a c t u a l r a t e of 22%. In e x e r c i s i n g the o p t i o n of percentage d e p l e t i o n the producer f o r f e i t s the r i g h t to separate deductions f o r c e r t a i n c a p i t a l i z e d c o s t s . In a d d i t i o n , the requirement t h a t the d e p l e t i o n allowance not exceed 50% of the producer's net income reduces the e f f e c t i v e allowance i n some cases, as does the requirement t h a t the producer c a l c u l a t e the allowance s e p a r a t e l y f o r each o i l and gas p r o p e r t y . One w r i t e r has c a l c u l a t e d t h a t when the percentage d e p l e t i o n r a t e was 27%% (as i t was from 1926 t o 1969), the average e f f e c t i v e net b e n e f i t from e x e r c i s -i n g the o p t i o n of percentage d e p l e t i o n was approximately O O C .c • 101 23% of gross income. The second category of s p e c i a l p r o v i s i o n a p p l i c a b l e to income from o i l and gas p r o d u c t i o n r e l a t e s d i r e c t l y to the t i m i n g of deductions r e f l e c t i n g two major types of expense, but a l s o a f f e c t s i n d i r e c t l y the amount of such a l l o w a b l e deductions. The two types of expense are i n t a n g i b l e development c o s t s , which i n c l u d e the i n t a n g i b l e c o s t s of d r i l l i n g p r o d u c t i v e w e l l s and p r e p a r i n g them f o r p r o d u c t i o n , (such as expenditures f o r l a b o u r , m a t e r i a l s , s u p p l i e s and 101 I b i d . , 101. 52 r e p a i r s ) , and dry h o l e c o s t s , the c o s t s i n c u r r e d i n u n s u c c e s s f u l e x p l o r a t i o n . The o i l and gas producer has the o p t i o n of e i t h e r c a p i t a l i z i n g these c o s t s , and r e c o v e r i n g them through d e p l e t i o n , or w r i t i n g them o f f as a c u r r e n t expense. There are two advantages gained by expensing c o s t s , provided t h a t the producer has s u f f i c i e n t t a x a b l e income to cover them. The f i r s t i s i n imputed i n t e r e s t s a v i n g , c a l c u l a t e d a t the d i s c o u n t r a t e adopted by the producer f o r h i s o p e r a t i o n s . The second i s an i n c r e a s e i n the value of percentage d e p l e t i o n . I f c a p i t a l i z e d , these c o s t s are r e c o v e r a b l e only through d e p l e t i o n ; but i f expensed, they are r e c o v e r a b l e i n a d d i t i o n to d e p l e t i o n . Thus the net b e n e f i t of percentage d e p l e t i o n - the a l l o w a b l e d e p l e t i o n i n excess of the a l t e r n a t i v e cost-based d e p l e t i o n -i s i n c r e a s e d by the e l e c t i o n to expense i n t a n g i b l e develop-ment and dry h o l e c o s t s . The only e x c e p t i o n to t h i s i s where the expensing of c o s t s reduces net income to a p o i n t where the percentage d e p l e t i o n , c a l c u l a t e d on the b a s i s of 22% of gross income, exceeds the l i m i t a t i o n of 102 50% of net income. 1 102 I b i d . , 102. 53. The s p e c i a l p r o v i s i o n s r e l a t i n g to the amount and t i m i n g of deductions t h a t an o i l and gas producer may make i n c a l c u l a t i n g t a x a b l e income r e s u l t i n a lo w e r i n g of the e f f e c t i v e r a t e of t a x a t i o n of income from o i l and gas p r o d u c t i o n r e l a t i v e to the r a t e a p p l i c a b l e to income earned from other a c t i v i t i e s . Kow much the e f f e c t i v e r a t e i s lowered depends, of course, upon the p a r t i c u l a r circumstances of each o i l and gas producer. I f a producer grows r a p i d l y , i n c r e a s i n g each year i t s c o s t s capable of being c u r r e n t l y expensed, i t may succeed i n postponing income tax i n d e f i n i t e l y . A l a t e r s a l e of a developed pro p e r t y upon which tax has been postponed w i l l o n l y 103 a t t r a c t c a p i t a l gains t a x , a t a maximum r a t e of 25%. One f u r t h e r deduction i s a v a i l a b l e to o i l and gas producers engaged i n i n t e r n a t i o n a l o p e r a t i o n s . R o y a l t i e s p a i d to f o r e i g n governments may i n c e r t a i n circumstances be c l a s s i f i e d as f o r e i g n income t a x , and may then be app-. . 104 l x e d as a c r e d i t a g a i n s t U n i t e d S t a t e s tax l i a b i l i t y . T h i s has a s i g n i f i c a n t r e s u l t i n reducing the e f f e c t i v e r a t e of t a x a t i o n of income of i n t e r n a t i o n a l o i l and gas producers. I t has been s t a t e d t h a t Standard O i l Company 103 I b i d . , 104. 104 I n t e r n a l Revenue Code, s e c t i o n s 901-905. 54 of New J e r s e y , the l a r g e s t U n i t e d S t a t e s o i l company, had an e f f e c t i v e income tax r a t e of only 3.8% over the f i v e year p e r i o d 1962-1966, w h i l e the 22 l a r g e s t U n i t e d S t a t e s o i l companies averaged s l i g h t l y more than 6% , . . 105 d u r i n g tne same p e r i o d . 105 113 Cong. Rec. 24310 (1967) (Remarks of Senator P r o x m i r e ) , quoted i n Kead, Walter J . , "The System of Government S u b s i d i e s to the O i l I n d u s t r y " , 10 N a t u r a l Resources J o u r n a l 113, 122 (1970). 55 CHAPTER 4. THE UNITED KINGDOM OF GREAT BRITAIN AND  NORTHERN IRELAND. A. Offs h o r e O i l and Gas Resources. The North Sea has r e c e n t l y been r a t e d "Target N o . l " i f o r the world petroleum i n d u s t r y . The U n i t e d Kingdom, w i t h j u r i s d i c t i o n over the resources of the seabed and s u b s o i l of more than h a l f the North Sea, i s t h e r e f o r e i n a very f a v o u r a b l e p o s i t i o n to j o i n the ranks of the l a r g e o i l and gas producing n a t i o n s . E x p l o r a t i o n i n the U n i t e d Kingdom s e c t o r of the North Sea began i n earnest as l a t e as 1964, but a l r e a d y more than f i v e hundred e x p l o r a t i o n , a p p r a i s a l and p r o d u c t i o n w e l l s have been d r i l l e d , each c o s t i n g between h a l f a 2 m i l l i o n and a m i l l i o n pounds. Moreover, f o l l o w i n g upon the r e c e n t g r a n t i n g of more l i c e n c e s i n both the North Sea and the C e l t i c Sea, t h i s a c t i v i t y i s expected to i n c r e a s e g r e a t l y i n the next two years. 1 O i l and Gas J o u r n a l , May 1, 1972, 129. 2 Barran, S i r David, "Future of North Sea O i l " , address r e p o r t e d i n the Petroleum Times, March 24, 1972. ( S i r David Barran i s r e t i r i n g chairman of S h e l l Transport and Trading Co.Ltd.). 56 D i s c o v e r i e s to date have been most encouraging by world standards. F i v e commercial gas f i e l d s have been found, West S o l e , Leman Bank, I n d e f a t i g a b l e , Hewett, and V i k i n g . O i l has a l s o been d i s c o v e r e d , by B r i t i s h Petroleum ( F o r t i e s f i e l d ) , S h e l l - E s s o (Auk and Brent f i e l d s ) , Amoco-Gas C o u n c i l (Montrose f i e l d ) , P h i l l i p s (Josephine f i e l d ) , and Hamilton B r o t h e r s . The F o r t i e s , Auk and Brent f i e l d s have been d e c l a r e d capable of commercial p r o d u c t i o n . The l a r g e s t of these, the F o r t i e s f i e l d , seems capable of producing 3 400,000 b a r r e l s of o i l per day, and proven r e s e r v e s are 4 c u r r e n t l y estimated to be 1,500 m i l l i o n b a r r e l s of o i l . The U n i t e d Kingdom government has announced t h a t present d i s c o v e r i e s of o i l c o u l d l e a d to p r o d u c t i o n of 500,000 b a r r e l s per day by 1975, one q u a r t e r of c u r r e n t consumption, and t h a t t h i s should r i s e to 1.5 m i l l i o n b a r r e l s per day by 1980.^ However, i t has been r e p o r t e d t h a t some c i v i l s e rvants are p r i v a t e l y e s t i m a t i n g t h a t p r o d u c t i o n should reach much higher l e v e l s by 1980 and 1985, the more c a u t i o u s e x p e c t i n g 3 m i l l i o n b a r r e l s per day by 1980 and 5 m i l l i o n b a r r e l s per day by 1985, w h i l e 3 O i l and Gas J o u r n a l , January 10, 1972, 78. 4 O i l and Gas J o u r n a l , May 1, 1972, 198. 5 The Times, Thursday, March 16, 1972. 57. the b o l d e r a r e p r e d i c t i n g l e v e l s of p r o d u c t i o n double or t r e b l e t h e s e f i g u r e s . The impact t h a t such p r o d u c t i o n w i l l make upon the U n i t e d Kingdom with i t s enormous d e f i c i t i n domestic energy s u p p l y w i l l c e r t a i n l y be d r a m a t i c . B. Development of the U n i t e d Kingdom Petroleum Code. The onshore search f o r o i l and gas i n the U n i t e d Kingdom has never been- s t r i k i n g l y s u c c e s s f u l . The f i r s t c o n s i s t e n t and s c i e n t i f i c e x p l o r a t i o n attempt, between 1918 and 1922, was prompted by war-time e x p e r i e n c e s and was f i n a n c e d by the government. The l e g i s l a t i o n g o v e r n i n g o i l and gas o p e r a t i o n s was the Petroleum ( P r o d u c t i o n ) 7 A c t , 1918, which p r o h i b i t e d e x p l o r a t i o n or p r o d u c t i o n except pursuant to a l i c e n c e i s s u e d by the M i n i s t e r of M u n i t i o n s . E l e v e n w e l l s were d r i l l e d , on ten d i f f e r e n t s t r u c t u r e s , a t a c o s t of about 564,000 pounds. Only one w e l l gave r i s e to commercial p r o d u c t i o n , and t h i s a t a v e r y low r a t e . 6 The Economist, Saturday, A p r i l 1, 1972. 7 8 and 9 Geo. 5, c h a p t e r 52. 8 Brunston, R.G.W., "Indigenous Petroleum and N a t u r a l Gas i n B r i t a i n " , p u b l i s h e d i n Hepple, P e t e r , ed. , The Petroleum I n d u s t r y i n the U n i t e d Kingdom, London, The I n s t i t u t e of Petroleum, 1966, 5,8. 58 The government d i s c o n t i n u e d e x p l o r a t i o n i n 1922, and prospects of d i s c o v e r i e s were not good enough to a t t r a c t p r i v a t e e n t e r p r i s e . One of the f a c t o r s t h a t tended to discourage p r i v a t e investment was t h a t o i l and gas r i g h t s remained vested i n o r d i n a r y fee simple l a n d h o l d e r s , so t h a t complicated l e g a l and commercial n e g o t i a t i o n s were r e q u i r e d before any l a r g e - s c a l e e x p l o r a t i o n programme co u l d be i n s t i t u t e d . By 1934, the government recog n i z e d the i n c r e a s i n g importance of o i l , and the disadvantages a s s o c i a t e d w i t h almost complete dependence upon imported s u p p l i e s . I n order to s t i m u l a t e i n t e r e s t i n p r i v a t e e x p l o r a t i o n , 9 P a r l i a m e n t enacted the Petroleum (Production) A c t , 1934. This s t a t u t e vested a l l petroleum o c c u r r i n g i n i t s n a t u r a l c o n d i t i o n i n Great B r i t a i n i n the Crown, w i t h the e x c e p t i o n of petroleum t h a t may be produced under the terms of the three l i c e n c e s s u b s i s t i n g a t t h i s time, and gave the Crown the e x c l u s i v e r i g h t of " s e a r c h i n g and b o r i n g f o r and g e t t i n g 10 such petroleum." The Act d i d not extend to Northern I r e l a n d . The Board of Trade on be h a l f of the Crown v/as empowered to grant l i c e n c e s to search and bore f o r and get 9 24 and 25 Geo. 5, chapter 36. 10 I b i d . , s e c t i o n 1. 59 petroleum, f o r such c o n s i d e r a t i o n (by way of r o y a l t y or otherwise) as determined by the Board of Trade w i t h the consent of the Treasury,., and upon such other terms and 11 c o n d i t i o n s as the Board of Trade thought f i t . Before g r a n t i n g any l i c e n c e s , the Board of Trade was d i r e c t e d to make r e g u l a t i o n s governing the e x e r c i s e of these powers. E x p l o r a t i o n under t h i s new system began i n 1936, and the next year gas was d i s c o v e r e d at Eskdale i n Y o r k s h i r e . T h i s d i s c o v e r y was s m a l l , though, and was not used commercially u n t i l 1960. Gas v/as a l s o d i s c o v e r e d i n 1937 13 a t Cousland, near Edinburgh. I n l a t e r y e a r s , gas d i s c o v e r -i e s have been made a t Calow i n De r b y s h i r e , a t Trumfleet i n 14 Y o r k s h i r e , and a t I r o n v i l l e i n Nottinghamshire. I n each case, however, r e s e r v e s have been s m a l l . 11 I b i d . , s e c t i o n 2. 12 I b i d . , s e c t i o n 6. The r e g u l a t i o n s made were: Petroleum (Production) R e g u l a t i o n s 1936 (S.R.&O. 1936/426), amended by the Petroleum (Production)(Amendment) R e g u l a t i o n s 1954 ( S . I . 1954/1378), and the Petroleum (Production)(Amendment) R e g u l a t i o n s 1957 ( S . I . 1957/1967). 13 Cooper, Bryan and G a s k e l l , T.F., North Sea O i l - The  Great Gamble, London, Heinemann, 1966, 11. 14 Hinde, P e t e r , Fortune i n the North Sea, London, G.T.Foulis and Co., 1966, 2. 60 O i l was found i n 1939 a t E a k r i n g , near Nottingham. F u r t h e r o i l d i s c o v e r i e s have s i n c e been made i n t h i s v i c i n i t y , and the r e g i o n has remained the major onshore producer of o i l i n Great B r i t a i n , w i t h 72 w e l l s producing 15 about 800 b a r r e l s a day. Smaller f i e l d s have been found a t Gainsborough, L i n c o l n s h i r e , i n 1958, and a t Kimmeridge, Dorset, i n 1 9 5 9 . 1 6 N e a r l y 900 onshore w e l l s have been d r i l l e d i n Great B r i t a i n s i n c e e x p l o r a t i o n bagan. The search has covered many p a r t s of the country, p a r t i c u l a r l y the West Midlands, the south of England, and Sc o t l a n d . On the whole, r e s u l t s have been most d i s a p p o i n t i n g . G e o l o g i s t s now agree t h a t i t i s u n l i k e l y t h a t there are any r e a l l y b i g onshore o i l f i e l d s i n Great B r i t a i n , although the search i s c o n t i n u i n g 17 i n the hope of f i n d i n g s m a l l e r f i e l d s . L i c e n c e s were granted under the Petroleum (Production) A c t , 1934, f o r the e x p l o r a t i o n of the seabed and s u b s o i l beneath the t e r r i t o r i a l sea of Great B r i t a i n . However, no d i s c o v e r i e s of o i l or gas were made i n these areas. 15 Cooper and G a s k e l l , o p . c i t . note 13, 11. 16 I b i d . 17 I b i d . 61 This f a c t o r , together w i t h the r e c o r d of g e n e r a l l y u n s u c c e s s f u l onshore e x p l o r a t i o n , tended to discourage p r i v a t e e n t e r p r i s e from seeking o i l and gas f u r t h e r o f f s h o r e . However, t h i s a t t i t u d e changed r a p i d l y a f t e r the d i s -covery i n 1959 of a huge n a t u r a l gas f i e l d near S l o c h t e r e n i n the Dutch province of Groningen, o n l y twelve m i l e s i n l a n d from the North Sea coast. Subsequent e x p l o r a t i o n and development showed t h a t the S l o c h t e r e n f i e l d was one of the l a r g e s t i n the w o r l d , w i t h r e s e r v e s of about 60 t r i l l i o n 18 c u b i c f e e t of gas. The prospect of s i m i l a r accumulations of gas, and perhaps o i l as w e l l , beneath the waters of the North Sea caused i n t e r e s t i n e x p l o r a t i o n o f f s h o r e from the U n i t e d Kingdom to mount q u i c k l y . One matter t h a t needed to be r e s o l v e d before o f f s h o r e o p e r a t i o n s c o u l d begin was the l i m i t s of n a t i o n a l j u r i s -d i c t i o n over seabed and s u b s o i l resources i n the North Sea, the E n g l i s h Channel, and the C e l t i c Sea. Boundaries i n the North Sea were of g r e a t e s t importance, f o r t h i s was where the main o i l and gas i n t e r e s t l a y . The North Sea i s surrounded by seven n a t i o n s ; the U n i t e d Kingdom, Norway, 18 Hinde, o p . c i t . note 14, x i i i . The e x p r e s s i o n " t r i l l i o n " i s used here to denote one m i l l i o n m i l l i o n , as i s the case i n the U n i t e d S t a t e s and France. 62. Denmark, the F e d e r a l R e p u b l i c of Germany, the Netherlands, Belgium and France. The 1958 Geneva Convention on the C o n t i n e n t a l S h e l f provided the framework f o r d e f i n i n g the l i m i t s of j u r i s d i c t i o n of these n a t i o n s i n the North Sea, although most were not a t t h i s time p a r t i e s to the Conven-19 t i o n . By a p p l y i n g the median l i n e p r i n c i p l e i n A r t i c l e 6(1) of the Convention, the Un i t e d Kingdom was able to determine approximately the l i m i t s of i t s j u r i s d i c t i o n , and then proceed w i t h the l i c e n s i n g of petroleum e x p l o r a t i o n and p r o d u c t i o n without w a i t i n g f o r f i n a l agreements w i t h the other n a t i o n s to be concluded. A c c o r d i n g l y , on A p r i l 15, 1964, the U n i t e d Kingdom 20 Pa r l i a m e n t passed the C o n t i n e n t a l S h e l f Act 1964. T h i s Act vested i n the Crown " a l l r i g h t s e x e r c i s a b l e by the U n i t e d Kingdom o u t s i d e t e r r i t o r i a l waters w i t h r e s p e c t to the seabed and s u b s o i l and t h e i r n a t u r a l r e s o u r c e s " . 19 The U n i t e d Kingdom was the twenty-second n a t i o n to r a t i f y the Convention, which came i n t o f o r c e on June 10, 1964 upon t h i s r a t i f i c a t i o n . At t h i s time Denmark was the only other n a t i o n b o r d e r i n g the North Sea to have r a t i f -i e d the Convention, and, of the remaining n a t i o n s , only Germany and the Netherlands had signed the Convention: Dam, Kenneth W., " O i l and Gas L i c e n s i n g and the North Sea", 8 J o u r n a l of Law and Economics 51, 53 (1965). 20 1964 chapter 29. 21 I b i d . , s e c t i o n 1 ( 1). 63 P r o v i s i o n was made f o r areas i n which such r i g h t s are e x e r c i s a b l e to be designated from time to time by Order 22 i n C o u n c i l . So f a r as o i l and gas were concerned, the p r o v i s i o n s of the Petroleum (Production) A c t , 1934 r e l a t i n g to the g r a n t i n g of l i c e n c e s , and the power to make r e g u l a t i o n s governing these matters, were extended to such 23 designated areas. I t was e x p r e s s l y d e c l a r e d t h a t n o t h i n g i n the C o n t i n e n t a l S h e l f A ct 1964 should be taken to r e s t r i c t the powers of the Pa r l i a m e n t of Northern I r e l a n d to make 24 laws w i t h i n i t s competence. An Order i n C o u n c i l of May 12, 1964 designated the 25 f i r s t o f f s h o r e area under the C o n t i n e n t a l S h e l f A c t . Re g u l a t i o n s to govern a l l aspects of o f f s h o r e o i l and gas 2 6 e x p l o r a t i o n were promulgated the same day. These r e g -u l a t i o n s were a p p l i c a b l e to t e r r i t o r i a l waters as w e l l as to designated areas beyond. They remained i n f o r c e u n t i l August 8, 1966, when new r e g u l a t i o n s were adopted to 22 I b i d . , s e c t i o n 1(8). 23 I b i d . , s e c t i o n 1(3). 24 I b i d . , s e c t i o n 12. 25 C o n t i n e n t a l S h e l f ( D e s i g n a t i o n of Areas) Order 1964 S.I. 1964 No.697. 26 Petroleum ( P r o d u c t i o n ) ( C o n t i n e n t a l S h e l f and T e r r i t -o r i a l Sea) Re g u l a t i o n s 1964, S.I. 1964 No.708. 64. r e g u l a t e both onshore and o f f s h o r e petroleum 2 8 These r e g u l a t i o n s , as amended i n 1971, are C. The U n i t e d Kingdom Offshore Petroleum Code. (a) B a s i c P r o v i s i o n s . The U n i t e d Kingdom petroleum code 29 c o n s i s t s of two s t a t u t e s , the Petroleum (Production) A c t , 1934, and the C o n t i n e n t a l S h e l f Act 1964, together w i t h the r e g u l a t i o n s c u r r e n t l y i n f o r c e thereunder, the Petroleum (Production) R e g u l a t i o n s 1966 and the Petroleum (Production) (Amendment) R e g u l a t i o n s 1971. These s t a t u t e s and r e g u l a t i o n s apply to onshore areas i n Great B r i t a i n , to the seabed and s u b s o i l beneath the t e r r i t o r i a l waters of Great B r i t a i n , and to the seabed and s u b s o i l of designated areas of the c o n t i n e n t a l s h e l f which, a c c o r d i n g to the Convention on the C o n t i n e n t a l S h e l f , f a l l w i t h i n the j u r i s d i c t i o n of the U n i t e d Kingdom. The s t r u c t u r e of the petroleum code i s simple. Apart 27 The petroleum (Production) R e g u l a t i o n s 1966, S.I. 1966 No.898. 28 S.I. 1971 No.814. 29 The Petroleum (Production) Act (Northern I r e l a n d ) 1964, (1964 chapter 28), r e g u l a t e s o i l and gas oper a t i o n s i n Northern I r e l a n d . This s t a t u t e w i l l not be c o n s i d e r e d here. 27 o p e r a t i o n s . s t i l l i n f o r c e . from the minor exceptions noted e a r l i e r , both onshore and 30 o f f s h o r e o i l and gas resources are vested i n the Crown. E x p l o r a t i o n f o r and p r o d u c t i o n of these resources are c a r r i e d on under l i c e n c e s i s s u e d by the r e l e v a n t M i n i s t e r , 31 a c t i n g on b e h a l f of the Crown. Since 1934 the r e l e v a n t M i n i s t e r has been, i n t u r n , the S e c r e t a r y f o r Mines, the M i n i s t e r of Power, the M i n i s t e r of Technology, and now the Se c r e t a r y of S t a t e f o r Trade and I n d u s t r y . L i c e n c e s are of two types, one f o r e x p l o r a t i o n and the other f o r p r o d u c t i o n . The S e c r e t a r y of S t a t e i s given a very wide d i s c r e t i o n i n i s s u i n g both e x p l o r a t i o n and p r o d u c t i o n l i c e n c e s . I n f a c t , t h e r e would appear to be only three l i m i t s placed upon the e x e r c i s e of t h i s d i s c r e t i o n . F i r s t l y , b efore g r a n t i n g any l i c e n c e , the S e c r e t a r y of S t a t e must make r e g u l a t i o n s p r e s c r i b i n g c e r t a i n s p e c i f i e d matters, as f o l l o w s : (a) the manner i n which and the persons by whom a p p l i c a t i o n s f o r l i c e n c e s . . . may be made; (b) the fees to be p a i d on any such a p p l i c a t i o n ; (c) the c o n d i t i o n s as to the s i z e and shape of areas i n r e s p e c t of which l i c e n c e s may be granted; (d) model c l a u s e s . . . t o be i n c o r p o r a t e d i n any such 30 24 & 25 Geo. 5, chapter 36, s e c t i o n 1; 1964 chapter 29 s e c t i o n 1. 31 24 & 25 Geo. 5, chapter 36, s e c t i o n 2; 1964 chapter 29, s e c t i o n 1. 66 l i c e n c e unless the S e c r e t a r y of S t a t e t h i n k f i t to modify or exclude them i n any p a r t i c u l a r case; 32 A l l such r e g u l a t i o n s are to be l a i d b e f o r e both Houses of Pa r l i a m e n t as soon as p o s s i b l e a f t e r they are made, and may 33 be a n n u l l e d by r e s o l u t i o n of e i t h e r House. Secondly, E n g l i s h common law r e q u i r e s t h a t a s t a t u t o r y d i s c r e t i o n be 34 reasonably and p r o p e r l y e x e r c i s e d . T h i r d l y , the S e c r e t a r y f o r S t ate i s prevented from a c c e p t i n g any improper induce-35 ment i n e x e r c i s i n g h i s d i s c r e t i o n . The r e g u l a t i o n s c u r r e n t l y i n f o r c e go no f u r t h e r than r e q u i r e d by s t a t u t e . They d e f i n e the areas to which they 3 6 apply, the persons who are e n t i t l e d to apply f o r l i c e n c e s , the maximum and minimum s i z e s of onshore l i c e n c e s and the method by which the S e c r e t a r y of S t a t e s h a l l d e signate the 32 24 & 25 Geo. 5, chapter 36, s e c t i o n 6 ( 1 ) ; 1964 chapter 29, s e c t i o n 1. 33 24 & 25 Geo. 5, chapter 36, s e c t i o n 6 ( 2 ) ; 1964 chapter 29, s e c t i o n 1. 34 Southam, John, "A Survey of the Law R e l a t i n g to the E x p l o i t a t i o n , Transmission and D i s t r i b u t i o n of N a t u r a l Gas from the C o n t i n e n t a l S h e l f of the Uni t e d Kingdom," 4 N a t u r a l Resources Lawyer 841, 843 (1971). 35 P r e v e n t i o n of C o r r u p t i o n A c t , 1906, 6 Edw. 7, chapter 34. 36 The Petroleum (Production) R e g u l a t i o n s 1966, s e c t i o n 3. 37 I b i d . , s e c t i o n 4. 67. s i z e of o f f s h o r e l i c e n c e s , the form of a p p l i c a t i o n s f o r 39 l i c e n c e s , and the fees to be paid upon making such 40 a p p l i c a t i o n s . Model c l a u s e s to be i n c o r p o r a t e d i n each type of l i c e n c e are l i s t e d i n the schedules to the r e g -u l a t i o n s , but the S e c r e t a r y of S t a t e r e t a i n s the d i s c r e t i o n to modify or exclude any of these c l a u s e s i n any p a r t i c u l a r 41 case. I t i s these c l a u s e s t h a t c o n t a i n the terms and c o n d i t i o n s t h a t are important to the l i c e n s e e , such as the s i z e and d u r a t i o n of the l i c e n c e , the r i g h t s a c q u i r e d t h e r e -under, and the c o n s i d e r a t i o n to be p a i d t h e r e f o r . (b) Stated Management O b j e c t i v e s . The U n i t e d Kingdom government appears to have taken the view t h a t the p u b l i c i n t e r e s t i n o f f s h o r e o i l and gas resources c o u l d best be served by encouragement of the r a p i d development of commercial p r o d u c t i o n . I m p l i c i t i n t h i s view i s the d e c i s i o n t h a t the b e n e f i t s to be d e r i v e d from such a p o l i c y , namely improvement i n the U n i t e d Kingdom balance of payments p o s i t i o n , s t i m u l a t i o n of the domestic economy, r e d u c t i o n i n unemployment, a measure of independence from 38 I b i d . , s e c t i o n s 6,7. 39 I b i d . , s e c t i o n 5. 40 I b i d . , s e c t i o n 11. 41 I b i d . . s e c t i o n 10. 68 f o r e i g n s u p p l i e s of o i l and cas, and revenues from t a x -a t i o n of income earned i n p r o d u c t i o n o p e r a t i o n s , outweigh the government revenues t h a t could have been obtained from the s a l e of o i l and gas r i g h t s . P r i o r to the award of the f i r s t s e r i e s of l i c e n c e s under the Petroleum ( P r o d u c t i o n ) ( C o n t i n e n t a l S h e l f and T e r r i t o r i a l Sea) R e g u l a t i o n s 1964, the M i n i s t e r of Power announced the c r i t e r i a t h a t would be adopted i n i s s u i n g the l i c e n c e s : F i r s t , the need to encourage the most r a p i d and thorough e x p l o r a t i o n and economical e x p l o i t a t i o n of petroleum resources on the c o n t i n e n t a l s h e l f . Second, the requirement t h a t the a p p l i c a n t f o r a l i c e n c e s h a l l be i n c o r p o r a t e d i n the U n i t e d Kingdom and the p r o f i t s of the o p e r a t i o n s s h a l l be taxed here. T h i r d l y , i n cases where the a p p l i c a n t i s a foreign-owned concern, how f a r B r i t i s h o i l companies r e c e i v e e q u i t a b l e treatment i n t h a t country. F o u r t h l y , we s h a l l look at the programme of work of the a p p l i c a n t and a l s o a t the a b i l i t y and resources to implement i t . F i f t h l y , we s h a l l look a t the c o n t r i b u t i o n the a p p l i c a n t has a l r e a d y made and i s making towards the development of resources of our c o n t i n e n t a l s h e l f and the development of our f u e l economy g e n e r a l l y . 42 The very general nature of these c r i t e r i a prevents them from amounting to a p r e c i s e statement of management o b j e c t i v e s , but they appear to emphasize the time f a c t o r as being the c r u c i a l i s s u e i n the development of o f f s h o r e o i l and gas. 42 692 K.C. Deb. (5th Ser.) 897 (1964). 69. The c r i t e r i a s t a t e d by the M i n i s t e r of Power p r i o r to the second round of l i c e n s i n g i n 1965 were v i r t u a l l y unchanged ( d e s p i t e a change i n government), w i t h the e x c e p t i o n t h a t one new f a c t o r was added: I s h a l l a l s o take i n t o account any proposals which may be made f o r f a c i l i t a t i n g p a r t i c i p a t i o n of p u b l i c e n t e r p r i s e i n the development and e x p l o i t a t i o n of the r e s o u r c e s of the c o n t i n e n t a l s h e l f . 43 I t was not suggested a t t h i s stage, hov/ever, t h a t t h i s f a c t o r would be regarded as having any o v e r r i d i n g f o r c e . I n J u l y , 1969, p r i o r to the t h i r d round of l i c e n s i n g , the i s s u e of p a r t i c i p a t i o n by publicly-owned c o r p o r a t i o n s was s t r e s s e d . The M i n i s t e r of Power announced t h a t , f o r l i c e n c e s i n the I r i s h Sea, i t was to be a " s t r i n g e n t c r i t e r i o n " t h a t a p p l i c a t i o n s p r o v i d e f o r p a r t i c i p a t i o n by the Gas C o u n c i l or the N a t i o n a l Coal Board, through d i r e c t p a r t n e r s h i p or o p t i o n s or other a c c e p t a b l e arrange-ments agreed to by the p a r t i e s . I t was a l s o announced t h a t the government would welcome an a p p l i c a t i o n whereby the Gas C o u n c i l would a c t as operator i n a l i m i t e d area i n the I r i s h Sea, so t h a t the p u b l i c c o r p o r a t i o n c o u l d g a i n the necessary experience to equip i t to play an even more a c t i v e r o l e i n the f u r t h e r development of the U n i t e d 43 716 H.C. Deb. (5th Ser.) 1579 (1965) 70. Kingdom c o n t i n e n t a l - s h e l f . For l i c e n c e s i n the North Sea, c r i t e r i a s i m i l a r to those used f o r the second round would apply , though w i t h some added preference f o r groups i n v o l v i n g the Gas C o u n c i l , the N a t i o n a l Coal Board and 44 other B r i t i s h i n t e r e s t s . However, i n the f o u r t h and most re c e n t round of l i c e n s i n g ( f o l l o w i n g upon another change of government), the c r i t e r i o n of p a r t i c i p a t i o n by publicly-owned c o r p o r a t -i o n s was dropped a l t o g e t h e r . The Petroleum (Production) R e g u l a t i o n s 1966 were amended to a l l o w cash bonus b i d d i n g 45 f o r s p e c i f i e d a reas, and t h i s method of a l l o c a t i o n was used f o r f i f t e e n b l o c k s . I n r e s p e c t of the great m a j o r i t y of b l o c k s o f f e r e d f o r l i c e n s i n g , though, the system of d i s c r e t i o n a r y a l l o c a t i o n was r e t a i n e d , and the c r i t e r i a announced by the S e c r e t a r y of S t a t e f o r Trade and I n d u s t r y as being r e l e v a n t to the i s s u e of these l i c e n c e s d i f f e r e d l i t t l e from those f i r s t adopted i n 1964: (a) where a body c o r p o r a t e i n c o r p o r a t e d i n a country o u t s i d e the U n i t e d Kingdom holds a c o n t r o l l i n g i n t e r e s t i n the a p p l i c a n t , the extent to which e q u i t a b l e r e c i p -r o c a l treatment i s accorded i n such other country; (b) the e x t e n t to which the a p p l i c a n t w i l l f u r t h e r the 44 1699 H.C. Deb. (5th Ser.) 1735 (1969). 45 Petroleum (Production)(Amendment) R e g u l a t i o n s 1971. 7 1 thorough and r a p i d e x p l o r a t i o n of the o i l and gas resources of the United Kingdom C o n t i n e n t a l S h e l f , p a r t i c u l a r a t t e n t i o n being paid t o the f i n a n c i a l and t e c h n i c a l a b i l i t y of the a p p l i c a n t to c a r r y out an a c c e p t a b l e work programme, d e t a i l s of which w i l l be c a l l e d f o r when r e q u i r e d d u r i n g the c o n s i d e r a t i o n of the a p p l i c a t i o n s ; (c) e x p l o r a t i o n work a l r e a d y done by or on b e h a l f of the a p p l i c a n t which i s r e l e v a n t to the areas a p p l i e d f o r ; (d) where the a p p l i c a n t a l r e a d y holds a p r o d u c t i o n l i c e n c e or l i c e n c e s , h i s o v e r a l l performance to date; (e) the e x t e n t of the c o n t r i b u t i o n which the a p p l i c a n t has made or i s p l a n n i n g to make to the economy of the U n i t e d Kingdom i n c l u d i n g the s t r e n g t h e n i n g of the U n i t e d Kingdom balance of payments and the growth of i n d u s t r y and employment. 46 I t would appear t h a t encouragement of r a p i d development of o f f s h o r e o i l and gas resources continues to be the major management o b j e c t i v e behind these c r i t e r i a . (c) E x p l o r a t i o n . To search f o r o i l and gas o f f s h o r e from the U n i t e d Kingdom, a person i s r e q u i r e d to o b t a i n an 47 e x p l o r a t i o n l i c e n c e , which may be granted by the S e c r e t a r y of S t a t e , upon such terms and c o n d i t i o n s as he may t h i n k 48 f i t . The area covered by an e x p l o r a t i o n l i c e n c e may be the whole or any p a r t of the submerged lands l y i n g sea-ward 46 London Gazette, Tuesday June 22, 1971. 47 1964 chapter 29, s e c t i o n 1. 48 1964 chapter 29, s e c t i o n 1, 24 & 25 Geo. 5 chapter 36, s e c t i o n 2. 72. not s u b j e c t to a p r o d u c t i o n or a f t e r the e x p l o r a t i o n The normal terms and c o n d i t i o n s of an e x p l o r a t i o n l i c e n c e a r e s e t out i n Schedule 5 to the Petroleum ( P r o d u c t i o n ) R e g u l a t i o n s 1966, a l t h o u g h the S e c r e t a r y of S t a t e may modify or e x c l u d e such terms and c o n d i t i o n s i n any p a r t i c u l a r c a s e . ^ The r i g h t s d e r i v e d under a l i c e n c e are 51 n o n - e x c l u s i v e . They i n c l u d e the r i g h t s t o c a r r y out geo-l o g i c a l and g e o p h y s i c a l s u r v e y s , and, s u b j e c t to o b t a i n i n g the p r i o r c o n s e n t of the S e c r e t a r y of S t a t e , to c a r r y out e x p l o r a t o r y d r i l l i n g to a depth not e x c e e d i n g 350 metres 52 ( u n l e s s s p e c i a l a p p r o v a l i s o b t a i n e d f o r deeper d r i l l i n g ) . 53 The term of an e x p l o r a t i o n l i c e n c e i s t h r e e y e a r s , and the c o n s i d e r a t i o n to be p a i d upon the g r a n t i n g of a l i c e n c e i s l e f t to be determined by the S e c r e t a r y of S t a t e w i t h the consent of the T r e a s u r y 5 4 ( c u r r e n t l y t h i s i s 1000 pounds). 49 Petroleum ( P r o d u c t i o n ) R e g u l a t i o n s 1966, s e c t i o n 8. 50 I b i d . , s e c t i o n 10. 51 Schedule 5, c l a u s e 2. 52 Schedule 5, c l a u s e 3. 53 Schedule 5, c l a u s e 4. 54 Schedule 5, c l a u s e 6. of the low-water mark which are l i c e n c e , whether g r a n t e d b e f o r e l i c e n c e . 73 The ho l d e r of an e x p l o r a t i o n l i c e n c e i s r e q u i r e d to keep i n the United Kingdom accurat e r e c o r d s of a l l i n f o r m -a t i o n obtained from e x p l o r a t i o n o p e r a t i o n s , both g e o l o g i c a l and g e o p h y s i c a l , and i s f u r t h e r r e q u i r e d to f u r n i s h a l l such i n f o r m a t i o n to the S e c r e t a r y of St a t e from time to t i m e . 5 5 This i n f o r m a t i o n i s to be t r e a t e d by the S e c r e t a r y of 5 6 St a t e as c o n f i d e n t i a l . (d) A l l o c a t i o n of P r o d u c t i o n R i g h t s . The Petroleum (Pro-duction) R e g u l a t i o n s 1966, as amended by the Petroleum (Production)(Amendment) R e g u l a t i o n s 1971, h e r e a f t e r r e f e r r e d to as the " R e g u l a t i o n s " , p r o v i d e t h a t the S e c r e t a r y of S t a t e f o r Trade and I n d u s t r y may p u b l i s h a n o t i c e i n the London Gaze t t e , the Edinburgh Gazette and the B e l f a s t G a z e t t e , i n v i t i n g a p p l i c a t i o n s f o r p r o d u c t i o n l i c e n c e s i n r e s p e c t 57 of s p e c i f i e d o f f s h o r e areas. Such a p p l i c a t i o n s are to be 5 8 made i n the form set out i n Schedule 2 t o the R e g u l a t i o n s , which i n the case of c o r p o r a t i o n s r e q u i r e s d i s c l o s u r e of the pl a c e of c e n t r a l management and c o n t r o l , u s u a l r e s i d e n t i a l address and n a t i o n a l i t i e s of d i r e c t o r s , c a p i t a l s t r u c t u r e , 55 Schedule 5, c l a u s e s 12-14. 56 Schedule 5, c l a u s e 15 (as amended 1971). 57 R e g u l a t i o n s , s e c t i o n 7. 58 R e g u l a t i o n s , s e c t i o n 5. 74. and a l l h o l d i n g s of not l e s s than 5% i n number or value of any c l a s s of i s s u e d c a p i t a l . A l l a p p l i c a t i o n s must be accompanied by the a p p r o p r i a t e f e e , c a l c u l a t e d i n accord-59 ance wi t h s e c t i o n 11 (2) of the R e g u l a t i o n s . The t e r r i t o r i a l seabed of Great B r i t a i n and the areas of the c o n t i n e n t a l s h e l f which have been designated by Order i n C o u n c i l pursuant to the C o n t i n e n t a l S h e l f Act 1964 have been d i v i d e d i n t o r e c t a n g u l a r b l o c k s measuring 12 degrees of l o n g i t u d e by 10 degrees of l a t i t u d e , each c o v e r i n g an area approximately 250 square k i l o m e t r e s . An a p p l i c a t i o n f o r a p r o d u c t i o n l i c e n c e may be i n r e s p e c t of i 60 one or more b l o c k s . The f i r s t awards of p r o d u c t i o n l i c e n c e s were made i n September, 1964, when 52 l i c e n c e s c o v e r i n g 346 b l o c k s were i s s u e d to 22 l i c e n s e e s . The l i c e n c e s ranged from one to ten b l o c k s i n s i z e . Many of the l i c e n s e e s were groups of companies, i n most cases u n r e l a t e d , so t h a t some 52 d i f f e r e n t c o r p o r a t i o n s or other l e g a l e n t i t i e s 59 200 pounds plus an a d d i t i o n a l 5 pounds f o r every b l o c k a f t e r the f i r s t 10 a p p l i e d f o r . 60 R e g u l a t i o n s , s e c t i o n 7. were named i n the l i c e n c e s . Two months l a t e r , a f u r t h e r l i c e n c e i n r e s p e c t of two b l o c k s vas i s s u e d to G r i z z l y -Petroleum (U.K.) L t d . 6 2 The a c t u a l procedure adopted by the M i n i s t r y of Power i n making these awards has not been p u b l i s h e d , but one w r i t e r has succeeded, from c o n v e r s a t i o n s w i t h i n t e r e s t e d persons both w i t h i n and o u t s i d e the government of the 6 3 U n i t e d Kingdom, i n p i e c i n g together an account, upon which the f o l l o w i n g i s based. There were s e v e r a l a p p l i c a t i o n s , on the average of about e i g h t f o r each b l o c k , f o r l i c e n c e s i n the area o p p o s i t e the S l o c h t e r e n gas f i e l d , w h i l e there were few or no a p p l i c a t i o n s f o r c e r t a i n other b l o c k s o f f e r e d . I n the cases where there was a c o n c e n t r a t i o n of a p p l i c a t i o n s , the M i n i s t r y f i r s t made a p r o v i s i o n a l a l l o c a t i o n f o r i t s own purposes. I n the process of t h i s a l l o c a t i o n i t excluded from f u r t h e r c o n s i d e r a t i o n a l l a p p l i c a n t s who co u l d be r e j e c t e d on the b a s i s of the e s t a b l i s h e d c r i t e r i a , quoted 61 M i n i s t r y of Power Release No.4328, September 17, 1964. 62 Cooper and G a s k e l l , o p . c i t . note 13, 56. 63 Dam, op. c i t . note 19, 59-60. 76. e a r l i e r . For example, a p p l i c a n t s who d i d not have the r e q u i s i t e f i n a n c i a l r esources to c a r r y out a d r i l l i n g programme, but had a p p l i e d o n l y i n the hope of s e l l i n g t h e i r l i c e n c e at a p r o f i t , were excluded a t t h i s p o i n t . The p r o v i s i o n a l a l l o c a t i o n s s t i l l l e f t , however, s e v e r a l a p p l i c a n t s f o r the most coveted b l o c k s . These a p p l i c a n t s were asked to submit a d e t a i l e d statement of r e l a t i v e p r e f e r e n c e s as among d i f f e r e n t b l o c k s and d i f f -e r e n t combinations of b l o c k s . This statement was to be more d e t a i l e d than the r a t h e r rudimentary statement of preferences submitted by some a p p l i c a n t s w i t h the o r i g i n a l a p p l i c a t i o n s , and was to take i n t o account only the b l o c k s p r o v i s i o n a l l y a l l o c a t e d . The M i n i s t r y c o u l d thereby reduce the number of a l l o c a t i o n d e c i s i o n s to the e x t e n t t h a t the h i g h e r preferences of some a p p l i c a n t s c o i n c i d e d w i t h the lower preferences of o t h e r s . More s i g n i f i c a n t , however, was the M i n i s t r y ' s request f o r a statement of each a p p l i c a n t ' s work programme f o r the b l o c k s f o r which i t was s t i l l i n the running. I t came to be known t h a t the M i n i s t r y expected much more a c t i v e 64 Supra, 68. 77 d r i l l i n g programmes i n areas t h a t were wid e l y sought a f t e r than i n l e s s popular areas. Indeed, by a process which i s none too c l e c r , a "going p r i c e " came to be known f o r each area. This going p r i c e was i n terms of such t h i n g s as hole s d r i l l e d and e x p l o r a t i o n work undertaken. An a p p l i c -ant who was u n w i l l i n g to pay the going p r i c e c o u l d not expect t o be awarded a l i c e n c e . Where an a p p l i c a n t ' s work programme f o r a p a r t i c u l a r b l o c k seemed i n s u f f i c i e n t to the M i n i s t r y , d i r e c t n e g o t i a t i o n s were entered i n t o , t o a s c e r t a i n the extent to which the a p p l i c a n t was pre-pared t o i n c r e a s e i t s commitment. In t h i s way, i t appears t h a t the M i n i s t r y was ab l e t o i n t r o d u c e an element of c o m p e t i t i o n i n t o work programmes. However, an a p p l i c a n t ' s work programme was s p e c i f i e d f o r each l i c e n c e r a t h e r than f o r each b l o c k , and s i n c e the l i c e n c e s v a r i e d g r e a t l y i n number of b l o c k s covered, i t would not have been easy to compare the work programmes submitted by d i f f e r e n t a p p l i c a n t s . The c o m p e t i t i v e element may thus have served more to e s t a b l i s h a general minimum of work r e q u i r e d than to determine the a l l o c a t i o n of l i c e n c e s on a b a s i s s i m i l a r to an a u c t i o n system. I t would seem t h a t the element of a d m i n i s t r a t i v e d i s c r e t i o n remained d e c i s i v e throughout the a l l o c a t i o n 78 process. T h i s i s borne out by the awards themselves. Approximately 30% of the b l o c k s went to B r i t i s h o i l 6 5 i n t e r e s t s , and a f u r t h e r 10% went to Canadian i n t e r e s t s . I t has been suggested t h a t even more than 30% of the 6 6 most sought a f t e r b l o c k s went to B r i t i s h a p p l i c a n t s , and t h a t B r i t i s h Petroleum, i n which the U n i t e d Kingdom government holds a 48% i n t e r e s t , was g i v e n " l i c e n c e s f o r perhaps the l a r g e s t number of b l o c k s " , i n "what g e o l o g i s t s have always co n s i d e r e d to be the most ' p r o s p e c t i v e ' area 6 7 of B r i t a i n ' s l a r g e share of the North Sea-bed." D i s -c o v e r i e s of both o i l and gas s i n c e 1964 support t h i s c o n c l u s i o n , as B r i t i s h Petroleum and S h e l l have played prominent r o l e s . I n August, 1965, the M i n i s t e r of Power i n v i t e d a p p l i c -a t i o n s f o r a second group of l i c e n c e s . The areas o f f e r e d were b l o c k s o f f e r e d i n the f i r s t round and not taken up, areas of the t e r r i t o r i a l seabed where e x p l o r a t i o n l i c e n c e s granted under land r e g u l a t i o n s had e x p i r e d and were not being renewed, a narrow s t r i p between p r e v i o u s l y l i c e n s e d 65 M i n i s t r y of Power Release No.4327, September 17, 1964. 66 "North Sea: Les Jeux Sont F a i t s " , 212 Economist 1141 (1964), quoted i n Dam, o p . c i t . note 19, 57. 67 "At the F i r s t Try", 216 Economist 1237 (1965), quoted i b i d . 79. areas and the r e c e n t l y - a g r e e d boundary w i t h Norway, Denmark and the N e t h e r l a n d s , an area o f f the south coast of England near Dover, the e a s t e r n h a l f of the I r i s h Sea, and an 68 area extending round the Orkneys and Shetlands. The 69 t o t a l number of b l o c k s on o f f e r was 1106. In November, 70 1965, 37 l i c e n c e s c o v e r i n g 127 b l o c k s were i s s u e d . The procedure adopted by the M i n i s t r y of Power i n awarding these l i c e n c e s was e s s e n t i a l l y i d e n t i c a l w i t h t h a t used i n the f i r s t round, although a more d e t a i l e d statement of r e l a t i v e p r eferences among b l o c k s was sought from each a p p l i c a n t a t the o u t s e t . Again, work programmes were sought o n l y a f t e r a p r o v i s i o n a l a l l o c a t i o n had been made. 7^ The a d d i t i o n a l c r i t e r i o n used i n making these awards, the preference f o r p a r t i c i p a t i o n by the publicly-owned c o r p o r a t i o n s , was s i g n i f i c a n t i n the r e s u l t . The Gas C o u n c i l , which i n the f i r s t round of l i c e n s i n g had a 68 Hinde, o p . c i t . note 14, 80. 69 Press N o t i c e , Department of Trade and I n d u s t r y , June 22, 1971. 70 I b i d . 71 Dam, o p . c i t . note 19, 60. 8 0 . 31% share i n a group of a p p l i c a n t s made up of Amoco, Amerada and Texas Eastern ( a l l U n i t e d S t a t e s ' owned companies), i n c r e a s e d i t s p a r t i c i p a t i o n i n t h a t group to 50% f o r the second round, and the group was awarded s e v e r a l l i c e n c e s . Furthermore, the N a t i o n a l Coal Board r e c e i v e d from G u l f and A l l i e d Chemical " o p t i o n s to p a r t i c i p a t e i n any l i c e n c e s granted to them, s u b j e c t t o the necessary powers being c o n f e r r e d on the Board by 72 P a r l i a m e n t " . G u l f and A l l i e d Chemical were a l s o s u c c e s s f u l a p p l i c a n t s . The i n c r e a s e d p a r t i c i p a t i o n by the p u blicly-owned c o r p o r a t i o n s r a i s e d the h o l d i n g s of B r i t i s h i n t e r e s t s from the f i r s t round f i g u r e of 30% to 73 3 7% i n the second round. The t h i r d round of l i c e n s i n g was completed e a r l y i n 74 1970. As s t a t e d p r e v i o u s l y , p a r t i c i p a t i o n by one of the publiciy-owned c o r p o r a t i o n s was a p r e - r e q u i s i t e to the o b t a i n i n g of a l i c e n c e i n the I r i s h Sea, and B r i t i s h i n t e r e s t s r e c e i v e d p reference i n the North Sea. In a l l , 157 b l o c k s were o f f e r e d , and 34 l i c e n c e s c o v e r i n g 101 72 Statement of the M i n i s t e r of Power, 721 H.C. Deb. (5th Ser.) 518 (1965), quoted i b i d . , 61. 73 I b i d . 74 Suora, 69. 8 1 . b l o c k s were i s s u e d . On June 22, 1971, the S e c r e t a r y of S t a t e f o r Trade and I n d u s t r y i n v i t e d a p p l i c a t i o n s f o r p r o d u c t i o n l i c e n c e s i n 7 6 r e s p e c t of 436 b l o c k s . This o f f e r caused a great deal of excitement w i t h i n the o i l and gas i n d u s t r y , as by t h i s time there had been f o u r o i l d i s c o v e r i e s i n the U n i t e d Kingdom s e c t o r of the North Sea, one i n the Netherlands s e c t o r , and c o n f i r m a t i o n t h a t d i s c o v e r i e s i n the Norwegian 77 s e c t o r had produced a commercial o i l f i e l d . Another reason f o r i n t e r e s t was the change i n c r i t e r i a to be a p p l i e d i n awarding l i c e n c e s . A l l p r e f e r e n t i a l treatment f o r the publicly-owned c o r p o r a t i o n s was abandoned, but more i m p o r t a n t l y , f o r the f i r s t time, 15 of the b l o c k s on o f f e r were to be awarded by c o m p e t i t i v e tender. These 15 b l o c k s were a l l i n the e a s t e r n r e g i o n of the U n i t e d Kingdom s e c t o r of the North Sea, i n the v i c i n i t y of e x i s t i n g o i l and gas d i s c o v e r i e s . The remaining b l o c k s were to be awarded by the process adopted f o r previous 75 Press N o t i c e , Department of Trade and I n d u s t r y , June 22, 1971. 76 London Gazette, June 22, 1971. 77 E k o f i s k O i l f i e l d . 82. rounds of l i c e n s i n g . With r e s p e c t to the 15 b l o c k s o f f e r e d f o r c o m p e t i t i v e tender, the S e c r e t a r y of S t a t e r e s e r v e d the r i g h t to r e j e c t the h i g h e s t or any other tender, on a l l or any of the f o l l o w i n g grounds: (a) where the tender has been submitted by a body c o r p o r a t e , a c o n t r o l l i n g i n t e r e s t i n which i s h e l d by a body c o r p o r a t e i n c o r p o r a t e d i n a country o u t s i d e the United Kingdom, i f he i s not s a t i s f i e d t h a t e q u i t a b l e r e c i p r o c a l treatment i s accorded i n such other country; (b) where the a p p l i c a n t has not observed a l l or any of the p r o v i s i o n s [ r e g u l a t i n g submission of t e n d e r s ] ; (c) i f he i s not s a t i s f i e d t h a t the a p p l i c a n t has a t h i s d i s p o s a l the necessary t e c h n i c a l resources to c a r r y out a work programme competently; (d) f o r any other reason, i n which case the reason f o r doing so w i l l be g i v e n t o the a p p l i c a n t on request. 79 Subject to t h i s r i g h t of the S e c r e t a r y of S t a t e , l i c e n c e s were to be awarded to the h i g h e s t b i d d e r s . I n the event of the h i g h e s t or other a c c e p t a b l e tenders being e q u a l , the tenderers concerned were to be given the o p p o r t u n i t y -C 4- • • • 4- -i • 80 of a c c e p t i n g a j o i n t l i c e n c e . The i n t r o d u c t i o n of c o m p e t i t i v e t e n d e r i n g as a means 78 79 80 London Gaz e t t e , June 22, 1971. I b i d . I b i d . 83. of a l l o c a t i n g p r o d u c t i o n l i c e n c e s provoked a l a r g e l y u n e n t h u s i a s t i c response from the o i l i n d u s t r y . O p p o s i t i o n was v o i c e d on three grounds; f i r s t l y , t h a t money spent on purchasing l i c e n c e s would be u n a v a i l a b l e f o r d r i l l i n g , thus causing a slower r a t e of d i s c o v e r y and eventual p r o d u c t i o n ; secondly, t h a t c o m p e t i t i v e t e n d e r i n g would favour a p p l i c a n t s w i t h p l e n t y of cash but l i t t l e i n the way of crude o i l s u p p l i e s , who o f t e n l a c k the t e c h n i c a l 81 e x p e r t i s e to e x p l o i t d i s c o v e r i e s s u c c e s s f u l l y ; and t h i r d l y , t h a t the d i s c r e t i o n of the S e c r e t a r y of S t a t e 8 2 to r e j e c t b i d s was too wide. The U n i t e d Kingdom government, however, regarded the e x e r c i s e as an experiment, and can only have been very s a t i s f i e d w i t h the r e s u l t s . The 15 b l o c k s a t t r a c t e d 78 b i d s from 31 d i f f e r e n t a p p l i c a n t s , most of whom c o n s i s t e d of groups of companies. The t o t a l value of the 78 b i d s was more than 135 m i l l i o n pounds, w h i l e i n d i v i d u a l tenders ranged from 21 m i l l i o n pounds, submitted by S h e l l - E s s o f o r b l ock 211/21 i n the f a r n o r t h - e a s t e r n r e g i o n of the North Sea, down to 3,200 pounds, submitted by C h i e f t a i n E x p l o r a t i o n f o r block 21/14. I n f a c t the tenders, a l l of 81 82 F i n a n c i a l Times, June 23, 1971. The Economist, June 26, 1971. 84. which were made p u b l i c by the government, demonstrated very w e l l the d i f f e r e n c e i n value placed upon p a r t i c u l a r b l o c k s by d i f f e r e n t a p p l i c a n t s . The b i d of 21 m i l l i o n pounds by S h e l l - E s s o f o r block 211/21 was more than 12.6 m i l l i o n pounds higher than the second b i d f o r the same b l o c k , which was submitted by M o b i l . The lowest b i d 8 3 f o r t h i s b l o c k was only 25,600 pounds. On August 25, 1971, f i v e days a f t e r tenders had been opened, the S e c r e t a r y of S t a t e f o r Trade and I n d u s t r y accepted the h i g h e s t tenders submitted f o r each of the 15 b l o c k s . These tenders were worth i n excess of 37.2 m i l l i o n pounds to the U n i t e d Kingdom government. The major o i l companies were prominent among the s u c c e s s f u l b i d d e r s . However, these companies have always played a very important r o l e i n the search f o r o i l and gas i n the North Sea, and so i t i s d i f f i c u l t to say whether the c o m p e t i t i v e t e n d e r i n g system favoured them as compared w i t h the s m a l l e r companies. In f a c t , i t seems t h a t most of the b i d s were r e c e i v e d from the same groups of companies t h a t had p r e v i o u s l y been formed to c a r r y out e x p l o r a t i o n i n the North Sea. Of the 31 groups t h a t submitted tenders, 83 O i l and Gas J o u r n a l , August 30, 1971, 28. 85. 2 3 had no p a r t i c i p a t i o n by the major o i l companies. Furthermore, 11 of the 15 s u c c e s s f u l b i d s were made by j o i n t - v e n t u r e groups. Both the N a t i o n a l Coal Board and 84 the Gas C o u n c i l were p a r t i c i p a n t s i n s u c c e s s f u l groups. Of the 421 b l o c k s o f f e r e d f o r a l l o c a t i o n w i thout tender, 92 a p p l i c a t i o n s i n v o l v i n g over 200 c o r p o r a t i o n s and other l e g a l e n t i t i e s were r e c e i v e d f o r l i c e n c e s cover-8 5 i n g 271 b l o c k s . A f t e r a p r e l i m i n a r y a l l o c a t i o n among a p p l i c a n t s who s a t i s f i e d the announced c r i t e r i a , n e g o t i a t -i o n s between the M i n i s t r y of I n d u s t r y and a p p l i c a n t s concerning work programmes again played an important r o l e i n f i n a l awards. The l i c e n c e s i s s u e d i n the southern b a s i n of the North Sea were announced on December 22, 1971; 19 l i c e n c e s c o v e r i n g 35 b l o c k s (or p a r t t h e r e o f ) were awarded to 11 a p p l i c a n t s . B r i t i s h i n t e r e s t s r e c e i v e d 43% of the t o t a l t e r r i t o r y i n v o l v e d . Although publicly-owned c o r p o r a t i o n s r e c e i v e d no e x p l i c i t p r e f e r e n c e s , both the N a t i o n a l Coal Board and the Gas C o u n c i l were among the s u c c e s s f u l 84 I b i d . 85 Press N o t i c e , Department of Trade and I n d u s t r y , December 22, 1971. 86 a p p l i c a n t s . The l i c e n c e s awarded i n the remaining r e g i o n s , the northern b a s i n of the North Sea, the C e l t i c Sea and west of the Shetlands and Orkneys were announced on March 15, 1972. On t h i s o c c a s i o n 246 l i c e n c e s c o v e r i n g 282 b l o c k s went to 75 a p p l i c a n t s . Again B r i t i s h i n t e r e s t s p a r t i c i p -ated to the extent of 43%, w i t h the N a t i o n a l Coal Board and the Gas C o u n c i l prominent. The s i g n i f i c a n c e t h a t work programmes had i n these awards was u n d e r l i n e d when the M i n i s t e r of I n d u s t r y , who made the announcement, emphasised t h a t a t l e a s t 224 e x p l o r a t i o n w e l l s i n v o l v i n g an investment of over 200 m i l l i o n pounds are to be d r i l l e d 8 7 w i t h i n the l i c e n c e areas over the next s i x years. The other p o i n t of i n t e r e s t was the award of two l i c e n c e s to I r a n ' s state-owned N a t i o n a l I r a n i a n O i l Company i n p a r t n e r -go s h i p w i t h 3 r i t i s h Petroleum. The term of a pr o d u c t i o n l i c e n c e appears i n Clause 3 of the Model Clauses a p p l i c a b l e to o f f s h o r e p r o d u c t i o n 86 I b i d . 87 Press N o t i c e , Department of Trade and I n d u s t r y , March 15, 1972. 88 O i l and Gas J o u r n a l , March 20, 1972, 26. 87 l i c e n c e s , and i n i t i a l l y i s s i x years. However, Clause 5 of the Model Clauses g i v e s the l i c e n s e e an o p t i o n , s u b j e c t to due performance of the c o n d i t i o n s of the l i c e n c e , to continue the l i c e n c e i n f o r c e f o r a f u r t h e r 40 years i n r e s p e c t of not more than h a l f of the o r i g i n a l l i c e n c e area. Although both these c l a u s e s may be v a r i e d by the S e c r e t a r y of S t a t e p r i o r to the issuance of any l i c e n c e , there i s no r e c o r d of a p r o d u c t i o n l i c e n c e being i s s u e d to date on other than these terms. The r u l e s governing the s i z e and shape of the area to be surrendered gave r i s e to a c o n t r o v e r s y i n 1970 when the i n i t i a l term of the f i r s t l i c e n c e s i s s u e d e x p i r e d . Clause 7 of the Model Clauses then r e q u i r e d t h a t the area to be surrendered should "be bound by l i n e s which unless they are boundaries of the area o r i g i n a l l y comprised i n the l i c e n c e run e i t h e r due North and South or due East and West." The M i n i s t r y of Power took the view t h a t these words r e q u i r e d each l i c e n c e area to be d i v i d e d by one s i n g l e l i n e , running e i t h e r north-south or east-west, and co u l d not be d i v i d e d by a number of l i n e s . This view was s t r o n g l y opposed by l i c e n s e e s , e s p e c i a l l y those h o l d i n g l i c e n c e s c o n s i s t i n g of more than one bl o c k . I n the end 89 R e g u l a t i o n s , Schedule 4. 88. r e s u l t the l i c e n s e e s ' view p r e v a i l e d , provided t h a t surrendered areas were of reasonable s i z e and shape, and were bounded by l i n e s of l a t i t u d e and l o n g i t u d e which 90 f o l l o w e d whole minutes. In 1971, when the R e g u l a t i o n s were amended, Clause 7 was a l t e r e d so t h a t i t now s e t s out c l e a r l y the surrender r u l e s . Both r e t a i n e d and surrendered areas must be (a) bounded by minute l i n e s of l a t i t u d e and l o n g i t u d e each extending a t l e a s t two minutes, (b) not l e s s than one-quarter of the area of a whole b l o c k , and (c) separated from s i m i l a r areas by c o r r i d o r s a t l e a s t two minutes wide. The importance of the surrender p r o v i s i o n s i n the p r o d u c t i o n l i c e n c e terms i s i l l u s t r a t e d by the f a c t t h a t i n 1970, when the f i r s t l i c e n c e h o l d e r s had to surrender a t l e a s t h a l f of the area of t h e i r l i c e n c e s , 60,000 square k i l o m e t r e s , amounting to about 75% of the o r i g i n a l l i c e n c e a r e a s , was r e t u r n e d to the Crown. Much of t h i s has s i n c e been r e - o f f e r e d by the government i n the f o u r t h round of 91 1 i c e n s m g . The c o n s i d e r a t i o n payable upon the award of a product-90 Southam, o p . c i t . note 34, 845. 91 Oilweek, J u l y 5, 1971, 6. 89 i o n l i c e n c e , apart from the tender p r i c e i n the case of l i c e n c e s awarded by c o m p e t i t i v e b i d d i n g , i s made up of r e n t a l s and r o y a l t i e s . An i n i t i a l r e n t a l of 45 pounds per square k i l o m e t r e of the l i c e n c e area i s payable immediately upon the grant of a l i c e n c e , but no f u r t h e r r e n t a l s are payable d u r i n g the remainder of the s i x year term. I f the o p t i o n to continue the l i c e n c e i n f o r c e i n r e s p e c t of up to h a l f of the l i c e n c e area i s e x e r c i s e d , a r e n t a l of 50 pounds per square k i l o m e t r e of r e t a i n e d area i s charged f o r the f i r s t year a f t e r e x e r c i s e of the o p t i o n , and t h e r e a f t e r r e n t a l s i n c r e a s e a t the r a t e of 30 pounds per square k i l o m e t r e per year u n t i l an annual sum of 350 pounds per square k i l o m e t r e per year i s payable. This i s undoubtedly designed to encourage l i c e n s e e s t o surrender any area which they are unable to e x p l o r e adequately, or which they f e e l has poor prospects f o r d i s c o v e r y of o i l or gas. Clause 6 of the Model Clauses a l l o w s surrender of any p a r t of a l i c e n c e area d u r i n g the 40 year c o n t i n u a t i o n p e r i o d , upon not l e s s than s i x months' n o t i c e i n w r i t i n g being given to the S e c r e t a r y of S t a t e . The r o y a l t y r a t e a p p l i c a b l e to a l l p r o d u c t i o n of o i l 92 London Ga z e t t e , June 22, 1971. 90. and gas from o f f s h o r e l i c e n c e s i s 12%%. Again, t h i s r a t e may be a l t e r e d by the S e c r e t a r y of S t a t e p r i o r to the award of any l i c e n c e , but i n the f o u r rounds of l i c e n s i n g so f a r the 12%% r a t e has been c o n s i s t e n t l y a p p l i e d . The S e c r e t a r y of S t a t e does not have the power to vary the r o y a l t y r a t e a f t e r the l i c e n c e has been i s s u e d . A l l r e n t a l s payable d u r i n g the 40 year c o n t i n u a t i o n p e r i o d 93 may be deducted from r o y a l t i e s p a i d on p r o d u c t i o n . S e c t i o n 4 of the R e g u l a t i o n s places r e s t r i c t i o n s upon who may apply f o r a p r o d u c t i o n l i c e n c e . A p p l i c a n t s must be "persons who are c i t i z e n s of the U n i t e d Kingdom and C o l o n i e s and are r e s i d e n t i n the U n i t e d Kingdom or who are bodies c o r p o r a t e i n c o r p o r a t e d i n the Un i t e d Kingdom". I n p r a c t i c e t h i s has not place d any o b s t a c l e i n the way of f o r e i g n i n t e r e s t s w i s h i n g to apply f o r l i c e n c e s , as such i n t e r e s t s have taken the step of i n c o r p o r a t i n g a s u b s i d i a r y company i n the U n i t e d Kingdom. The reason f o r the r e s t r i c t i o n would seem to be to ensure t h a t a l l l i c e n s e e s are r e s i d e n t s of the United Kingdom and are s u b j e c t to i t s income tax laws i n t h a t c a p a c i t y . Clause 32 of the Model Clauses c o n t a i n s a covenant 93 I b i d . 91. by the l i c e n s e e not to assign, or p a r t w i t h any of the r i g h t s g r a n t e d by the l i c e n c e i n r e l a t i o n to the whole or any p a r t of the l i c e n c e a r e a , or g r a n t any s u b - l i c e n c e i n r e s p e c t of any such r i g h t s , w i t h o u t the consent of the S e c r e t a r y of S t a t e i n w r i t i n g . Breach of t h i s covenant r e n d e r s the l i c e n c e s u b j e c t t o r e v o c a t i o n by the S e c r e t a r y 94 of S t a t e . T h i s i s to p r e v e n t s p e c u l a t i o n i n l i c e n c e s , e s p e c i a l l y the v a s t m a j o r i t y which have been awarded by a d m i n i s t r a t i v e d i s c r e t i o n . No reas o n s have been g i v e n by the U n i t e d Kingdom government f o r c h o o s i n g t o d i v i d e the o f f s h o r e areas i n t o b l o c k s of the s i z e s e l e c t e d . P r i o r t o t h i s d e c i s i o n , the 95 o i l companies sought b l o c k s of l a r g e r a r e a . I t has been suggested t h a t s m a l l e r b l o c k s were d e c i d e d upon i n o r d e r t o s i m p l i f y the l i c e n c e a l l o c a t i o n p r o c e s s , f o r w i t h s m a l l e r b l o c k s more l i c e n c e s c o u l d be awarded to 96 more a p p l i c a n t s . To some degree the q u e s t i o n of the •size o f b l o c k s i s unimportant, as l i c e n c e s may be g r a n t e d c o v e r i n g one or more b l o c k s , and s u r r e n d e r p r o v i s i o n s and work commitments a p p l y to the l i c e n c e as a whole, 94 95 95 Clause. 33, i:Odel C l a u s e s . Dam, o p . c i t . note 19, 55. I b i d . , 68-69. 92. not to each block t h e r e i n . During the f i r s t three rounds of l i c e n s i n g , many l i c e n c e s comprising m u l t i p l e b l o c k s were i s s u e d . However, t h i s was not the case i n the most r e c e n t round, when a s u b s t a n t i a l m a j o r i t y of l i c e n c e s covered one block only. R e c e n t l y , t h e r e f o r e , the s i z e of b l o c k s has become an important i s s u e , and i t seems l i k e l y t h a t i t w i l l remain so i n the f u t u r e , as the t o t a l area a v a i l a b l e f o r l i c e n s i n g decreases. The o i l i n d u s t r y ' s a t t i t u d e t h a t the b l o c k s are too small i s not e a s i l y s u p p o r t a b l e , e s p e c i a l l y i n view of U n i t e d S t a t e s ' o f f s h o r e experience. The h o l d e r of a s i n g l e - b l o c k l i c e n c e who e x e r c i s e s h i s o p t i o n to continue h i s l i c e n c e i n f o r c e a f t e r the i n i t i a l s i x year term may r e t a i n an area of 125 square k i l o m e t r e s (approximately 50 square m i l e s ) , which i s very l a r g e compared to the area granted to a l e s s e e on the U n i t e d S t a t e s outer c o n t i n e n t a l s h e l f , which i s nine square m i l e s . Furthermore, Clause 19 of the Model Clauses p r o v i d e s f o r the u n i t development of o i l or gas f i e l d s which extend beyond the boundary of any one l i c e n c e a r e a , i f the S e c r e t a r y of S t a t e c o n s i d e r s t h i s to be i n the n a t i o n a l i n t e r e s t to secure maximum recovery. U n i t development should overcome any problems encountered i n the d i s c o v e r y of a p a r t i c u l a r l y l a r g e o i l or gas f i e l d . 93 The f o u r rounds of l i c e n s i n g to date i l l u s t r a t e t h a t the U n i t e d Kingdom government has not f o l l o w e d any con-s i s t e n t p o l i c y w i t h regard to t i m i n g and s i z e of l i c e n c e o f f e r i n g s . I n s t e a d , these matters would appear to have been d i c t a t e d r a t h e r more by the l e v e l of i n t e r e s t shown by the o i l and gas i n d u s t r y i n d i f f e r e n t o f f s h o r e areas, and the obvious d e s i r e of the U n i t e d Kingdom government to encourage development of o f f s h o r e o i l and gas resources as r a p i d l y as p o s s i b l e . (e) Revenues from O i l and Gas Operations. F i g u r e s are not a v a i l a b l e to compare revenues r a i s e d by way of tenders, r o y a l t y payments and r e n t a l s , and i n any event, i t i s u n l i k e l y t h a t any comparison of t h i s nature would be u s e f u l at such an e a r l y stage i n the U n i t e d Kingdom's o f f s h o r e o i l and gas h i s t o r y . The v a l u e of the 15 tenders accepted f o r the l i c e n c e s a l l o c a t e d by c o m p e t i t i v e b i d d i n g was 37,213,654 pounds, a f i g u r e l a r g e enough to ensure t h a t the U n i t e d Kingdom government w i l l g i v e s e r i o u s c o n s i d e r a t i o n to t h i s method of a l l o c a t i o n i n the f u t u r e . None of the o f f s h o r e o i l f i e l d s have reached the stage of commercial p r o d u c t i o n to date, and so no r o y a l t i e s have been paid on t h i s account. The government has, however, r e c e i v e d r o y a l t i e s i n r e s p e c t of gas p r o d u c t i o n from the V;est S o l e , I n d e f a t i g a b l e , Leman Bank 94. and Hewett f i e l d s . Despite the number of l i c e n c e s i s s u e d i n the f o u r rounds, r e n t a l s would not amount to a very l a r g e f i g u r e . Only one r e n t a l payment i s to be made d u r i n g the i n i t i a l s i x year term, a t the r a t e of approximately 11,250 pounds per block. Fewer than 1000 b l o c k s have been s u b j e c t to p r o d u c t i o n l i c e n c e s f o r an i n i t i a l term, and a very much sm a l l e r number are p r e s e n t l y covered by l i c e n c e s which have been continued beyond the i n i t i a l term, so t h a t i t would appear t h a t the t o t a l revenue r a i s e d from r e n t a l s to date would amount to l e s s than o n e - t h i r d of t h a t p a i d to the government by the 15 s u c c e s s f u l tenderers i n August 1971. In any event, i t seems c l e a r t h a t the purpose of the r e n t a l requirement i s to encourage surrender of unexplored or u n p r o s p e c t i v e l i c e n c e areas, and i s not to r a i s e revenue. ( f ) Revenue from Income T a x a t i o n . To date i t has been the p o l i c y of the United Kingdom government to o b t a i n d i r e c t revenue from o i l and gas o p e r a t i o n s by means of r o y a l t y payments on p r o d u c t i o n and t a x a t i o n of the income of 97 producers. Income from o i l and gas p r o d u c t i o n i s s u b j e c t 97 Hamilton, A d r i a n , "A Confused Debate on L i c e n s i n g and Tax", The F i n a n c i a l Times, Monday May 22, 1972, 17. 95 t a x a t i o n as income from any other of c o r p o r a t i o n s , the tax r a t e i s 99 The C a p i t a l Allowances Act 1968 c o n s o l i d a t e s a l l c a p i t a l allowances a v a i l a b l e i n r e s p e c t of expenditure on wasting a s s e t s . There are e i g h t d i f f e r e n t k i n d s of expenditure f o r which deductions are granted, and expend-i t u r e on "mines, o i l w e l l s and other m i n e r a l d e p o s i t s of a v/asting n a t u r e " forms one of these c a t e g o r i e s . D i f f e r -ent r u l e s apply to each cat e g o r y , but t h e i r general e f f e c t i s s u b s t a n t i a l l y the same; over a c e r t a i n p e r i o d which d i f f e r s f o r each category, the o r i g i n a l e x p e n d i t u r e , l e s s , i n most cases, any sum recouped by way of s a l e or o t h e r w i s e , w i l l be allowed as a deduction from p r o f i t s or a g a i n s t other income of the taxpayer. I n the case of o i l and gas producers, c a p i t a l a l l o w -ances are granted f o r c a p i t a l expenditures i n c u r r e d i n 98 Finance Act 1972, s e c t i o n 62. 99 1968 chapter 3. 100 Whiteman, Peter G., and Wheatcroft, G.S.A., Income Tax and Surtax, London, Sweet and Maxwell, 1971, 10-01. to the same r a t e s of source. I n the case / 98 c u r r e n t l y 40%. 96 connection w i t h the working of o i l or gas w e l l s . Tnree c l a s s e s of expenditure are d i s t i n g u i s h e d . The f i r s t of these i s expenditure on e x p l o r a t i o n f o r and t e s t i n g of o i l and gas d e p o s i t s , and on winning access t h e r e t o , f o r which the c a p i t a l allowance i s c a l c u l a t e d by m u l t i p l y i n g the expenditure ( l e s s any other allowances) by 1/20 or ( i f g r e a t e r ) the f r a c t i o n — , where A i s the output from the o i l or gas d e p o s i t s i n the t a x a t i o n p e r i o d and 102 B i s f u t u r e estimated output from the d e p o s i t s . The second c l a s s i s expenditure on the c o n s t r u c t i o n or demo-l i t i o n of any works which are l i k e l y to be of l i t t l e or no val u e when the o i l or gas d e p o s i t s are no longer worked, f o r which an i n i t i a l allowance of 40% of the expenditure i s g i v e n , and allowances i n l a t e r years are c a l c u l a t e d u s i n g 103 the same formula as t h a t a p p l i c a b l e to the f i r s t c l a s s . The t h i r d c l a s s i s c a p i t a l expenditure on the a c q u i s i t i o n of an o i l and gas pro p e r t y to be worked i n the U n i t e d Kingdom, f o r which the allowance i s based on a f r a c t i o n of the r o y a l t y v a l ue of output from the property i n the 101 C a p i t a l Allowances A ct 1968, s e c t i o n s 52-66, Schedules 5 and 6. 102 Whiteman and vvheatcroft, o p . c i t . note 100, 10-50. 103 I b i d . 97. t a x a t i o n p e r i o d . Expenditure on u n s u c c e s s f u l e x p l o r -a t i o n may a l s o be deducted i n f u l l at the time when the e x p l o r a t i o n i s abandoned. The f e a t u r e of these p r o v i s i o n s of the C a p i t a l A l l o w -ances Act which d i s t i n g u i s h e s them from t h e i r c o u n t e r p a r t s i n the U n i t e d S t a t e s i s t h a t a l l c a p i t a l allowances are 1 l i m i t e d to the amount of the o r i g i n a l , a c t u a l e x p e n d i t u r e , and thus the o n l y concession t h a t may be a v a i l a b l e to o i l and gas producers i s the a b i l i t y to a c c e l e r a t e the w r i t i n g o f f of some c l a s s e s of c a p i t a l expenditure. The main area i n which a c c e l e r a t i o n i s p o s s i b l e i s expenditure on c o n s t r u c t i o n of f i x e d works, where an i n i t i a l allowance of 40% i s g i v e n . T h i s , v;hile i t i s a c o n s i d e r a b l e c o n c e s s i o n , can not be compared wi t h percentage d e p l e t i o n i n the U n i t e d S t a t e s , and i s not i n c o n s i s t e n t with l i k e concessions 10 7 granted to other i n d u s t r i e s . 104 I b i d . 105 C a p i t a l Allowances Act 1968, s e c t i o n 62. 106 I b i d . , s e c t i o n 60(3). 107 For example, expenditure on machinery and p l a n t i s given an i n i t i a l allowance of 30%. 98. CHAPTER 5. CANADA. A. O f f s h o r e O i l and Gas Resources. Canada has been a r e l a t i v e l y l a t e e n t r a n t i n t o the f i e l d of o f f s h o r e o i l and gas e x p l o r a t i o n . To the end of 1967, o n l y f i v e o f f s h o r e w e l l s had been d r i l l e d , three o f f the e a s t , c o a s t and two o f f the west. Undoubtedly, one of the major reasons f o r t h i s was t h a t s i n c e 1947, Canada had developed an important onshore o i l and gas i n d u s t r y which s t i l l today has s h u t - i n c a p a c i t y . I n r e c e n t y e a r s , though, the pace of o f f s h o r e a c t i v i t y has quickened c o n s i d e r a b l y . The r e g i o n t h a t has a t t r a c t e d the most i n t e r e s t i s the east coast where to date there have been 33 w e l l s d r i l l e d on the S c o t i a n S h e l f east of Nova S c o t i a , 11 on the Grand Banks o f f s h o r e from Newfoundland, one o f f the c o a s t of Labrador, and two i n the Gulf of St. 2 Lawrence. These w e l l s have produced two s i g n i f i c a n t d i s c o v e r i e s of o i l and gas on the S c o t i a n S h e l f , one by M o b i l on Sable I s l a n d and the other by S h e l l i n an o f f s h o r e w e l l , together w i t h s e v e r a l shows of o i l and gas i n other 1 Oilweek, February 21, 1972, 76. 2 Oilweek, May 15, 1972, 33. 99 w e l l s on the S c o t i a n S h e l f and the Grand Banks. On the west c o a s t , 14 w e l l s have been d r i l l e d , but without success. S i m i l a r l y , the one w e l l d r i l l e d so f a r i n Hudson Bay f a i l e d to encounter o i l or gas. In the f a r n o r t h , no o f f s h o r e w e l l s have yet been d r i l l e d . However, the Mackenzie D e l t a , where s e v e r a l important d i s c o v e r i e s of o i l and gas have been made r e c e n t l y , l i e s on the southern r i m of the Beaufort B a s i n , which extends f o r a c o n s i d e r a b l e d i s t a n c e under the Beaufort Sea. One company, I m p e r i a l , plans to c o n s t r u c t two o f f s h o r e i s l a n d s designed to be used as d r i l l i n g p l a t -3 forms f o r use i n t h i s area i n 1973. Moreover, the sedimentary b a s i n s beneath the A r c t i c I s l a n d s , where P a n a r c t i c O i l s has d i s c o v e r e d o i l and gas, a l s o extend o f f s h o r e , and d r i l l i n g w i l l undoubtedly proceed from the i s l a n d s to the sea. The Canadian Petroleum A s s o c i a t i o n has estimated t h a t the hydrocarbon p o t e n t i a l of Canada's c o n t i n e n t a l s h e l f out to the 200 metres i s o b a t h i s 56 b i l l i o n b a r r e l s of o i l and 336 t r i l l i o n c u b i c f e e t of gas, which e x p l a i n s the c u r r e n t excitement a s s o c i a t e d w i t h the o f f s h o r e search. Furthermore, Canada regards the 200 metres i s o b a t h as an a r t i f i c i a l l i m i t to be placed upon n a t i o n a l j u r i s d i c t i o n , p a r t i c u l a r l y i n the case of i t s own c o n t i n e n t a l s h e l f , which 3 Oilweek, February 21, 1972, 76. 100 extends to water depths of more than 450 metres o f f the Labrador c o a s t , about 500 metres i n the Beaufort Sea, and about 650 metres o f f the A r c t i c I s l a n d s . Canadian re p -r e s e n t a t i v e s a t the U n i t e d Nations have put forward the concept t h a t a c o a s t a l n a t i o n should e x e r c i s e e x c l u s i v e r i g h t s over mineral r e s o u r c e s out to the l i m i t of the c o n t i n e n t a l margin, which i n c l u d e s both the c o n t i n e n t a l s h e l f and the c o n t i n e n t a l slope to the p o i n t where i t 4 meets the ocean depths. I f t h i s idea i s accepted a t i n t e r n a t i o n a l law the p o t e n t i a l of Canada's o f f s h o r e o i l and gas r e s o u r c e s w i l l be even g r e a t e r . B. Background to the Canadian Offshore Petroleum L e g i s l a t i o n . The o f f s h o r e search f o r o i l and gas i n Canada has been conducted t o date i n a c l i m a t e of competing c l a i m s to o f f -shore j u r i s d i c t i o n by the Dominion and the c o a s t a l p r o v i n c e s . A c c o r d i n g l y , i t has not been uncommon f o r companies to take out two e x p l o r a t i o n t i t l e s i n r e s p e c t of a p a r t i c u l a r a rea, one from the Dominion and the other from the c o a s t a l province 4 Crosby, D.G. ( D i r e c t o r , Resource Management and Con s e r v a t i o n Branch, Department of Energy, Mines and Resources), "Aspects of Offshore M i n e r a l Resource Management", a paper d e l i v e r e d to the 26th Annual Conference of The Chemical I n s t i t u t e of Canada, H a l i f a x , Nova S c o t i a , June 2, 1971. 101 concerned, ana to c a r r y out o p e r a t i o n s i n compliance with the terms of both. In 1965 the i s s u e of j u r i s d i c t i o n came to a head i n r e l a t i o n to the west coas t r e g i o n . At t h i s time t e n s i o n s between the f e d e r a l and p r o v i n c i a l governments r u l e d out any prospect of an immediate p o l i t i c a l s e t t l e m e n t , so the f e d e r a l government r e f e r r e d the i s s u e to the Supreme Court of Canada,^ promising to n e g o t i a t e f o l l o w i n g the d e c i s i o n of the Court. The f o l l o w i n g questions were asked: 1. In r e s p e c t of the l a n d s , i n c l u d i n g the m i n e r a l and other n a t u r a l r e s o u r c e s , of the sea bed and s u b s o i l seaward from the o r d i n a r y low-water mark on the coast of the mainland and the s e v e r a l i s l a n d s of B r i t i s h Columbia, o u t s i d e the harbours, bays, e s t u a r i e s , and other s i m i l a r i n l a n d waters, to the outer l i m i t s of the t e r r i t o r i a l sea of Canada, as d e f i n e d i n the T e r r i t o r i a l Sea and F i s h i n g Zones A c t , S t a t u t e s of Canada 1964, Chapter 22, as between Canada and B r i t i s h Columbia, (a) Are the s a i d lands the property of Canada or B r i t i s h Columbia ? (b) Has Canada or B r i t i s h Columbia the r i g h t to e x p l o r e and e x p l o i t the s a i d lands ? (c) Has Canada or B r i t i s h Columbia l e g i s l a t i v e j u r i s d i c t i o n i n r e l a t i o n to the s a i d lands ? 2. In r e s p e c t of the mineral and other n a t u r a l resources of the sea bed and s u b s o i l beyond t h a t p a r t of the t e r r i t o r i a l sea of Canada r e f e r r e d to i n Question 1, to a depth of 200 metres o r , beyond t h a t l i m i t , to where the depth of the superjacent waters admits of the e x p l o i t a t i o n of the mineral and other n a t u r a l resources of the s a i d areas, as between Canada and B r i t i s h Columbia, 5 P.C. 1965-750, A p r i l 26, 1955. 102. (a) Has Canada or B r i t i s h Columbia the r i g h t to -expl o r e and e x p l o i t the s a i d mineral and other n a t u r a l resources ? (b) Has Canada or B r i t i s h Columbia l e g i s l a t i v e j u r i s d i c t i o n i n r e l a t i o n to the s a i d mineral and other n a t u r a l resources ? In i t s answer handed down on November 7, 1967, the g Supreme Court decided each q u e s t i o n i n favour of Canada. The reasons given were (a) t h a t the t e r r i t o r y of B r i t i s h Columbia extends to the low-water mark, but not beyond, (b) t h a t because l e g i s l a t i v e j u r i s d i c t i o n i n r e l a t i o n to the mineral and other n a t u r a l resources of the seabed and s u b s o i l of both the t e r r i t o r i a l sea and the c o n t i n e n t a l s h e l f i s not a l l o c a t e d to the provinces under any of the heads of s e c t i o n 92 of the B r i t i s h North America A c t , i t must be deemed to f a l l to the Dominion under the "peace, order and good government" and the r e s i d u a r y powers p r o v i s i o n s of s e c t i o n 91, and (c) t h a t because the r i g h t s to the reso u r c e s i n q u e s t i o n are d e r i v e d from i n t e r n a t i o n a l law, they are e x e r c i s a b l e by the Dominion. The d e c i s i o n of the Supreme Court d i d not determine f i n a l l y the matter of j u r i s d i c t i o n over o f f s h o r e r e s o u r c e s . In the f i r s t p l a c e , the d e c i s i o n was given upon a r e f e r e n c e 6 [1967] S.C.R. 792, 65 D.L.R. 353. 1 0 3 . to the Court, and so was a d v i s o r y o n l y , not having the s t a t u s of a l e g a l l y b i n d i n g precedent. In the second p l a c e , as the r e f e r e n c e r e l a t e d only to B r i t i s h Columbia, i t can not be regarded as c o n c l u s i v e w i t h r e s p e c t to the other c o a s t a l p r o v i n c e s . Newfoundland, f o r example, may r e p r e s e n t a s p e c i a l case. The Court i n i t s d e c i s i o n on the r e f e r e n c e emphasised t h a t the t e r r i t o r y of B r i t i s h Columbia at no stage extended beyond the low-water mark of the P a c i f i c Ocean. I f Newfoundland can show t h a t i t had ownership of or j u r i s d i c t i o n over i t s o f f s h o r e resources when i t j o i n e d the c o n f e d e r a t i o n i n 1949, the r e s u l t c o u l d be d i f f e r e n t . T h i r d l y , a t a f e d e r a l - p r o v i n c i a l conference i n J u l y 1965, the then Prime M i n i s t e r of Canada, Mr. Pearson, promised t h a t the f e d e r a l government would proceed by way of n e g o t i a t i o n to reach agreement wi t h the p r o v i n c e s on the q u e s t i o n of o f f s h o r e j u r i s d i c t i o n i r r e s p e c t i v e of what the Court should decide i n the then pending r e f e r e n c e . A c c o r d i n g l y , none of the c o a s t a l p r o v i n c e s , not even B r i t i s h Columbia, has accepted the Court's o p i n i o n as b i n d i n g , and Quebec, Newfoundland and the Maritime Provinces have d e c l a r e d t h a t i t has no b e a r i n g whatsoever upon t h e i r o f f s h o r e c l a i m s . F o u r t h l y , the terms of the r e f e r e n c e i d e n t i f i e d the resources i n q u e s t i o n as being those "out-s i d e the harbours, bays, e s t u a r i e s and other s i m i l a r i n l a n d waters" of B r i t i s h Columbia. This l e f t e n t i r e l y open the 104. i s s u e of what waters are i n f a c t i n c l u d e d w i t h i n t h i s d e s c r i p t i o n , and what r u l e s are to be a p p l i e d i n drawing the seaward boundary of any province. F i n a l l y , the o p i n i o n d i d not decide the s t a t u s of Sable I s l a n d , the s i t e of an important o i l and gas d i s c o v e r y . The f e d e r a l government cl a i m s t h a t t h i s i s l a n d became p a r t of the p r o p e r t y of Canada upon the enactment of the B r i t i s h North America A c t , under the t h i r d schedule to s e c t i o n 108 of t h a t A c t . Nova S c o t i a m a i n t a i n s t h a t the p r o p e r t y which the Dominion ac q u i r e d i n Sable I s l a n d was f o r n a v i g a t i o n a l purposes o n l y , 7 and t h a t a l l other r i g h t s remain w i t h Nova S c o t i a . In December 1968, Prime M i n i s t e r Trudeau acknowledged the u n d e r t a k i n g t h a t had been given e a r l i e r by Mr. Pearson, and announced the terms upon which the f e d e r a l government g would c a r r y i t out. Mr. Trudeau r e f e r r e d to the l i m i t a t i o n s i n h e r e n t i n the a d v i s o r y o p i n i o n of the Supreme Court, and p a r t i c u l a r l y to the d i f f i c u l t i e s i n v o l v e d i n drawing p r e c i s e boundary l i n e s along the c o a s t s of the p r o v i n c e s , 7 Beauchamp K., Crommelin M., and Thompson A.R., "Canada's Offshore Problems", paper presented to the Eleventh Annual Petroleum Law Seminar h e l d by the Canadian P e t r o l -eum Law Foundation a t J a s p e r , A l b e r t a , June 13-17, 1972; t h i s paper i s to be p u b l i s h e d i n the forthcoming e d i t i o n of the A l b e r t a Law Review. 8 Statement i n the House of Commons by the Prime M i n i s t e r on O f f s h o r e M i n e r a l R i g h t s , Monday, December 2, 1968. 1 0 5 . c h a r a c t e r i z e d as they are by deep i n d e n t a t i o n s , s t r a i t s , i s l a n d s and i n l e t s . The s o l u t i o n o f f e r e d was to use the geod e t i c g r i d system to draw "mineral resource a d m i n i s t r a t i o n l i n e s " , always w e l l w i t h i n the area of Dominion o f f s h o r e j u r i s d i c t i o n as l a i d down i n the Supreme Court o p i n i o n . These l i n e s are not the " b a s e l i n e s " from which Canada's t e r r i t o r i a l sea i s measured under i n t e r n a t i o n a l law, but l i e seaward of these b a s e l i n e s , to ensure t h a t they do not impinge upon the i n t e r n a l waters of the p r o v i n c e s . The f e d e r a l government would a d m i n i s t e r a l l o f f s h o r e m i n e r a l r i g h t s seaward from the m i n e r a l resource a d m i n i s t r a t i o n l i n e s , and o f f e r e d to work out i n c o n j u n c t i o n w i t h each of the c o a s t a l p r o v i n c e s a method whereby each province would a d m i n i s t e r any o f f s h o r e m i n e r a l r i g h t s under f e d e r a l j u r i s -d i c t i o n on the landward s i d e of the l i n e s . Revenues from o p e r a t i o n s on the landward s i d e of the l i n e s would go to the p r o v i n c e a d m i n i s t e r i n g the o p e r a t i o n s . Revenues from o p e r a t i o n s conducted on the seaward s i d e of the l i n e s would be placed i n a s i n g l e n a t i o n a l p o o l , from which h a l f the revenues would be made a v a i l a b l e to the provinces concerned, on any b a s i s t h a t was ac c e p t a b l e to the governments of the p r o v i n c e s . This s o l u t i o n has not proved acceptable to the c o a s t a l p r o v i n c e s . I n 1968 B r i t i s h Columbia passed B.C. Reg. 105/68 106. under section 89(g) of the Petroleum and Natural Gas Act 1965, c o n s t i t u t i n g a l l seabed resources i n the t e r r i t o r i a l sea and the continental shelf l y i n g offshore from B r i t i s h Columbia a p r o v i n c i a l Crown reserve. Nova Scotia has r e c e n t l y introduced B i l l 124 i n i t s 1972 Session of the L e g i s l a t i v e Assembly whereby the marine area, defined as the seabed and subsoil of any area covered by seawater, the subsoil of Sable Island and a l l minerals i n c l u d i n g o i l and gas s i t u a t e therein, i s declared to be, and to have been at a l l times, vested i n the Crown i n the r i g h t of the province. I t i s understood that Newfoundland i s preparing s i m i l a r l e g i s l a t i o n . Quebec has maintained a consistent p o s i t i o n that i t owns the resources offshore from i t s coast, g and has ignored the f e d e r a l government's o f f e r . I t has been reported that the Premiers of Quebec, Newfoundland and the Maritime Provinces have r e c e n t l y agreed to work out a united f r o n t on offshore mineral resources with which to confront the federal government. 'without withdrawing from t h e i r p o s i t i o n that the provinces are e n t i t l e d to j u r i s d i c t i o n i n t h i s matter, the Premiers decided that a " s u i t a b l e regional agency" with representation from the f i v e provinces and the Dominion "would be d e s i r a b l e " to administer c e r t a i n aspects of the offshore o i l and gas industry. A continuing 9 Beaucharnp et a l , op. c i t . note 7. 107 committee, c o n s i s t i n g of three r e p r e s e n t a t i v e s from each p r o v i n c e , has been e s t a b l i s h e d to prepare d e t a i l e d pro-10 p o s a l s implementing t h i s agreement. U n t i l a p o l i t i c a l l y a c c e p t a b l e s o l u t i o n i s achieved i n r e l a t i o n to j u r i s d i c t i o n over o f f s h o r e mineral r e s o u r c e s , the present u n c e r t a i n t y w i l l p e r s i s t . T h i s i s not a s e r i o u s disadvantage to companies at the e x p l o r a t i o n stage, as i t i s not d i f f i c u l t to comply w i t h the requirements of both the Dominion and the r e l e v a n t p r o v i n c e . However, the re c e n t d i s c o v e r i e s of o i l and gas o f f the east c o a s t suggest t h a t i t w i l l not be long before p r o d u c t i o n i s a p o s s i b i l i t y , and when t h i s stage i s reached, the pressure f o r ' a f i n a l s o l u t i o n w i l l be st r o n g . C. The Canadian F e d e r a l Offshore Petroleum Code. (a) B a s i c P r o v i s i o n s . The Canadian f e d e r a l o f f s h o r e petroleum 11 code comprises the Canada O i l and Gas Land R e g u l a t i o n s , 12 the Canada O i l and Gas D r i l l i n g and P r o d u c t i o n R e g u l a t i o n s , 10 The Sun (Vancouver), Thursday, August 3, 1972. 11 SOR/61-252, as amended by SOR/63-91, 64-436, 66-156, 66-363, 66-486, 66-569, 67-342, 67-379, 67-614, 68-368, 69-29, 69-415, and 71-662. 12 SOR/61-253. 108. and the O i l and Gas P r o d u c t i o n and Conservation Act. The Canada O i l and Gas Land Re g u l a t i o n s govern the g r a n t i n g of o i l and gas t i t l e s , w h i l e the Canada O i l and Gas D r i l l i n g and P r o d u c t i o n R e g u l a t i o n s r e g u l a t e the d r i l l i n g f o r and pr o d u c t i o n of o i l i.nd gas; both are made under the 14 15 T e r r i t o r i a l Lands Act and the P u b l i c Lands Grants A c t . The O i l and Gas P r o d u c t i o n and Cons e r v a t i o n A ct e s t a b l i s h e s a c o n s e r v a t i o n regime. A l l are a p p l i c a b l e to the Yukon T e r r i t o r y and the Northwest T e r r i t o r i e s , and to a l l lands t h a t belong to the Crown i n the r i g h t of Canada or i n r e s p e c t of which the Crown i n the r i g h t of Canada has the r i g h t to dispose of or e x p l o i t the m i n e r a l s t h e r e i n , i n c l u d i n g submerged l a n d s . The f e d e r a l o f f s h o r e petroleum code i s , t h e r e f o r e , merely a p a r t of the f e d e r a l petroleum code which i s a p p l i c a b l e to a l l Dominion l a n d s , whether onshore or o f f s h o r e . The a d m i n i s t r a t i o n of the f e d e r a l petroleum code i s d i v i d e d between the Department of I n d i a n A f f a i r s and Northern Development and the Department of Energy, Mines 13 14 15 R.S.C. 1970, chapter 0-4. R.S.C. 1970, chapter T-6. R.S.C. 1970, chapter P-29. 109 and Resources a c c o r d i n g to a l i n e of demarcation which gives the former the lands n o r t h of the 60th p a r a l l e l and the n o r t h -ern o f f s h o r e areas, and the l a t t e r the east and west coast 16 o f f s h o r e a r e a s , i n c l u d i n g Hudson Bay and Hudson S t r a i t . The Canada O i l and Gas Land R e g u l a t i o n s , h e r e a f t e r c a l l e d the " R e g u l a t i o n s " , set up a three-stage system of o i l and gas t i t l e s . The f i r s t t i t l e i s an e x p l o r a t o r y l i c e n c e , which g i v e s the holder the r i g h t to e x p l o r e f o r o i l and gas upon a l l lands to which the R e g u l a t i o n s a p p l y , which are r e f e r r e d to as "Canada l a n d s " . This r i g h t i s n o n - e x c l u s i v e . The next t i t l e i s an e x p l o r a t o r y permit, which g i v e s the ho l d e r the r i g h t to conduct more comprehensive e x p l o r a t i o n o p e r a t i o n s i n c l u d i n g e x p l o r a t o r y d r i l l i n g w i t h i n the area covered by the permit. The h o l d e r of a permit i s a l s o e n t i t l e d to apply f o r a grant of an o i l and gas l e a s e over a s p e c i f i e d p a r t of the permit area. These r i g h t s a c q u i r e d by a permit h o l d e r are e x c l u s i v e , but they do not preclude the h o l d e r of an e x p l o r a t o r y l i c e n c e from e x e r c i s i n g the r i g h t s a f f o r d e d by the l i c e n c e w i t h i n the permit area. The t h i r d t i t l e i s an o i l and gas l e a s e , which a l l o w s p r o d u c t i o n from w i t h i n the l e a s e area. I t i s granted f o r renewable 21-year terms and, when a permit holder has 16 P.C. 1965-2284 (50R/66-9). 110. s e l e c t e d l e a s e s from w i t h i n the permit area which comply w i t h the requirements of shape and. maximum s i z e , the remainder of the permit area i s r e t u r n e d to the Crown f o r d i s p o s i t i o n by s a l e . (b) Stated Management O b j e c t i v e s . The Canadian government has not s t a t e d the o b j e c t i v e s which i t has set out to achieve by the f e d e r a l petroleum code. An examination of the code, 0 however, r e v e a l s a number of i n c e n t i v e s o f f e r e d to encourage the search f o r o i l and gas. Among these are the l e n g t h of the terms of permits and l e a s e s , the c r e d i t s allowed f o r e x p l o r a t i o n expenditures on d e p o s i t s and r e n t a l s , and the r i g h t to group permits i n f u l f i l l i n g e xpenditure r e q u i r e -ments. Two i n c e n t i v e s i n p a r t i c u l a r suggest t h a t the Canadian government has decided as a matter of p o l i c y to forego revenue from o i l and gas p r o d u c t i o n i n order to encourage more r a p i d e x p l o r a t i o n ; these are the reduced r o y a l t i e s payable d u r i n g the e a r l y years of p r o d u c t i o n , 17 and the o p t i o n o f f e r e d to permit h o l d e r s , u n t i l r e c e n t l y , to take out l e a s e s over the whole of the permit area and thus avoid the requirement of s u r r e n d e r i n g a p o r t i o n to the Crown, i n exchange f o r the payment of an a d d i t i o n a l 17 This o p t i o n was suspended in.1970, but i s p r e s e n t l y under review by the f e d e r a l government and seems l i k e l y to be r e i n s t a t e d ; i n f r a , 128-129. 111. r o y a l t y upon o i l and gas produced from l e a s e s taken up i n excess of the i n i t i a l e n t i t l e m e n t . In a d d i t i o n , the 18 Northern M i n e r a l E x p l o r a t i o n A s s i s t a n c e R e g u l a t i o n s o f f e r g rants of up to 40% of e x p l o r a t i o n c o s t s i n c u r r e d upon Canada lands a d m i n i s t e r e d f o r o i l and gas purposes by the Department of I n d i a n A f f a i r s and Northern Development, which grants are to be repayable i f and when p r o d u c t i o n i s o b t a i n e d . I n 1960, the Department of Northern A f f a i r s and N a t i o n a l Resources commissioned Dr. G.D.Quirin, an o i l economist, to undertake a study on "Economics of O i l and Gas Development i n Northern Canada". Dr. Q u i r i n concluded t h a t "low c o s t o i l " i n the n o r t h was not merely d e s i r a b l e , but was 19 mandatory i f e x p l o r a t i o n and p r o d u c t i o n were to be achieved. I t i s suggested t h a t t h i s c o n c l u s i o n r e i n f o r c e d i n d u s t r y demands f o r the i n c e n t i v e s o f f e r e d by the R e g u l a t i o n s , which were promulgated s h o r t l y a f t e r the r e p o r t was completed. These i n c e n t i v e s , w i t h the e x c e p t i o n of the e x p l o r a t i o n subsidy o f f e r e d by the Northern M i n e r a l E x p l o r a t i o n 18 SOR/66-404. 19 Q u i r i n , G.David, "Economics of O i l and Gas Development i n Northern Canada", i s s u e d under the a u t h o r i t y of the M i n i s t e r of Northern A f f a i r s and N a t i o n a l Resources, Ottawa, January 1962, chapter 8. 112. A s s i s t a n c e R e g u l a t i o n s , apply to o f f s h o r e o p e r a t i o n s conducted o f f the east and west coasts and i n Hudson Bay, as w e l l as to northern onshore and o f f s h o r e o p e r a t i o n s . (c) E x p l o r a t i o n . The R e g u l a t i o n s provide t h a t no person s h a l l c a r r y out e x p l o r a t o r y work f o r o i l and gas upon 20 Canada lands except as a u t h o r i z e d by the R e g u l a t i o n s . The f i r s t requirement f o r a person w i s h i n g to e x p l o r e f o r o i l and gas i s an e x p l o r a t i o n l i c e n c e . Any i n d i v i d u a l who i s 21 years of age or o l d e r , or any c o r p o r a t i o n e n t i t l e d to c a r r y on business i n any p r o v i n c e , may apply f o r a l i c e n c e . L i c e n c e s are i s s u e d i n the d i s c r e t i o n of s p e c i f i e d o f f i c e r s w i t h i n the Department of I n d i a n A f f a i r s and Northern Development and the Department of Energy, Mines and Resources, a c c o r d i n g to the area i n r e s p e c t of which the l i c e n c e i s sought. These o f f i c e r s are r e f e r r e d to i n the R e g u l a t i o n s as the " C h i e f " and the " O i l C o n s e r v a t i o n 22 Engineer". The maximum term of a l i c e n c e i s one year, 20 21 22 S e c t i o n 2 3 ( 1 ) . S e c t i o n 24. S e c t i o n 2 5 ( 1 ) . 113. 23 but i t i s renewable. The fee payable upon issuance i s 24 25 $25. A l i c e n c e i s not t r a n s f e r a b l e . The ho l d e r of a l i c e n c e i s e n t i t l e d to enter upon and use the s u r f a c e of any Canada lands i n order to (a) make g e o l o g i c a l or g e o p h y s i c a l examinations, (b) c a r r y out a e r i a l mapping, or (c) i n v e s t i g a t e the subsurface. Where Canada lands have been disposed of i n any way by the Crown, the consent of the o c c u p i e r or an order f o r e n t r y from an a r b i t r a t o r must f i r s t be o b t a i n e d , but t h i s r e s t r i c t i o n does not apply where the o c c u p i e r i s o n l y the ho l d e r of 2 6 an e x p l o r a t i o n permit or an o i l and gas l e a s e . A l i c e n s e e i s not allowed to d r i l l a w e l l deeper than 1000 f e e t without the p r i o r consent of the permit h o l d e r or l e a s e h o l d e r i f the land i s i n c l u d e d i n a permit or l e a s e , or the C h i e f 2 7 xf the land xs not so i n c l u d e d . An e x p l o r a t i o n l i c e n c e a f f o r d s the ho l d e r no p r i o r r i g h t s i n r e s p e c t of o i l or gas which may be d i s c o v e r e d . 23 S e c t i o n 25(2). 24 Schedule A. 25 S e c t i o n 25(3). 26 S e c t i o n 26. 27 S e c t i o n 27. 114. In order to a c q u i r e such r i g h t s , a person must o b t a i n an e x p l o r a t i o n permit or an o i l and gas l e a s e . Permits are granted by the M i n i s t e r of the r e l e v a n t Department. The Reg u l a t i o n s l a y down two d i f f e r e n t procedures to be f o l l o w e d by the M i n i s t e r i n i s s u i n g permits. Where the lands i n r e s p e c t of which a permit i s sought have not p r e v i o u s l y been h e l d under permit or l e a s e , the M i n i s t e r may grant a permit upon a p p l i c a t i o n made i n accordance w i t h the R e g u l a t i o n s , provided he i s s a t i s f i e d t h a t e x p l o r a t o r y work w i l l be c a r r i e d out i n the permit 2 8 area. I t seems t h a t the M i n i s t e r has a d i s c r e t i o n i n d e c i d i n g whether or not to i s s u e a permit to a q u a l i f i e d a p p l i c a n t . T his d i s c r e t i o n has been e x e r c i s e d to withdraw general areas from a p p l i c a t i o n f o r permit; i n January 1971, the M i n i s t e r f o r Energy, Mines and Resources announced t h a t no f u r t h e r permits would be i s s u e d i n the Georgia S t r a i t r e g i o n between Vancouver I s l a n d and mainland B r i t i s h Columbia, and t h i s ban has been extended r e c e n t l y to the e n t i r e west coast area. Apart from t h i s , however, the p r a c t i c e has been f o l l o w e d of i s s u i n g permits to q u a l i f i e d a p p l i c a n t s s t r i c t l y on a " f i r s t - c o m e f i r s t - s e r v e d " b a s i s , and i n d u s t r y has come to expect the g r a n t i n g of a permit 28 S e c t i o n 30. 115 to the f i r s t q u a l i f i e d a p p l i c a n t as a matter of course. T h i s i s demonstrated by the f a c t t h a t d e s p i t e the general withdrawal of the west coa s t companies are s t i l l f i l i n g a p p l i c a t i o n s f o r permits i n t h i s area, presumably on the understanding t h a t p r i o r i t y w i l l be g i v e n to such a p p l i c -a t i o n s should the ban be l i f t e d . However, b e f o r e a p e r m i t may be i s s u e d i n r e s p e c t of l a n d s t h a t have been h e l d under a p e r m i t or l e a s e which has e x p i r e d , been c a n c e l l e d or s u r r e n d e r e d , the M i n i s t e r must c a l l f o r t e n d e r s f o r the purchase of the p e r m i t . A c a l l f o r t e n d e r s must be a d v e r t i s e d , and must s t a t e the 2 terms and c o n d i t i o n s upon which the p e r m i t w i l l be i s s u e d . Such terms and c o n d i t i o n s may be e i t h e r (a) a cash bonus, whereby the s u c c e s s f u l t e n d e r e r w i l l pay a f i x e d sum of money to the Crown, i n a d d i t i o n to complying w i t h a l l the p r o v i s i o n s of the R e g u l a t i o n s , or (b) an e x p l o r a t o r y work bonus, whereby the s u c c e s s f u l t e n d e r e r w i l l d e p o s i t with the C h i e f money, bonds or an approved note of a v a l u e equal to the amount t h a t the t e n d e r e r undertakes to spend on e x p l o r a t o r y work i n the p e r m i t a r e a , i n a d d i t i o n to comply-30 i n g with a l l the p r o v i s i o n s of the R e g u l a t i o n s . The 29 S e c t i o n 32. 30 O i l and Gas Land Order No.1-1962, SOR/62-367, as amended by SOR/65-26, 67-253, and 69-53; s e c t i o n 3. 1 1 6 . M i n i s t e r r e t a i n s the r i g h t to r e f u s e to accept any tender. Where tenders have been c a l l e d f o r a permit and no tender i s r e c e i v e d w i t h i n the r e q u i r e d time, the M i n i s t e r may dispose of the lands by permit i s s u e d upon a p p l i c a t i o n . Where the tenders are r e c e i v e d but none i s accepted the 31 M i n i s t e r may make f u r t h e r c a l l s f o r tenders. An i n t e r e s t i n a permit may be t r a n s f e r r e d o n l y w i t h the approval of the C h i e f ; any such t r a n s f e r must be 32 r e g i s t e r e d xn accordance wxth the Regulatxons. A permit h o l d e r must a l s o h o l d a l i c e n c e before he may c a r r y out e x p l o r a t o r y work w i t h i n the permit area, but i s giv e n the a d d i t i o n a l r i g h t of d r i l l i n g f o r o i l and gas, and producing these substances f o r t e s t purposes. Furthermore, s u b j e c t to the surrender p r o v i s i o n s which w i l l be d e s c r i b e d 33 i n d e t a i l l a t e r i n t h i s c h apter, a permit h o l d e r has the e x c l u s i v e o p t i o n to o b t a i n an o i l and gas le a s e i n r e s p e c t 34 of the lands i n c l u d e d i n the permxt area. 31 S e c t i o n 3 2 . 32 S e c t i o n s 7 2 , 74 . 33 I n f r a . 124 . 34 S e c t i o n s 3 4 , 3 5 . 117. A permit may cover one g r i d area or one-half of a 35 g r i d area. A g r i d area south of the 70th p a r a l l e l i s bounded by l i n e s of l a t i t u d e 10 minutes apart and l i n e s of l o n g i t u d e 15 minutes a p a r t , whereas a g r i d area n o r t h of 70 i s bounded by l i n e s of l a t i t u d e 10 minutes apart and 3 6 l i n e s of l o n g i t u d e 30 minutes apart. G r i d areas vary i n s i z e owing to the convergence of m e r i d i a n s ; f o r example, they comprise l e s s than 64,000 acres o f f the n o r t h e r n t i p of Labrador and more than 95,000 acres south of Nova 37 S c o t i a . There i s no l i m i t p laced upon the number of permits t h a t may be h e l d c o n c u r r e n t l y by one person. The term of o f f s h o r e permits i s s i x y e a r s , w i t h the e x c e p t i o n t h a t permits n o r t h of the 70th p a r a l l e l which were i s s u e d p r i o r to 1968 have a term of 8 years and, i f they were i s s u e d before J u l y 1, 1967, a l s o have a f r e e 3 8 e x t e n s i o n of one year. A permit may be renewed f o r s u c c e s s i v e p e r i o d s of one y e a r , up to a l i m i t of s i x 39 renewals. Where an uncompleted w e l l i s being d r i l l e d 35 S e c t i o n 33. 36 S e c t i o n 5. 37 Crosby, O P . c i t . note 4. 38 S e c t i o n 36. 39 S e c t i o n 38. 118. at the end of the f i n a l renewal p e r i o d , the C h i e f may grant temporary extensions of the permit of up to 90 days 40 each to a l l o w completion of the w e l l . A permit may be 41 surrendered to the Crown at any time. The R e g u l a t i o n s r e q u i r e a permit h o l d e r to c a r r y out e x p l o r a t i o n work w i t h i n the permit area d u r i n g the term of the permit. Schedule B to the R e g u l a t i o n s s e t s out the expenditure t h a t must be made w i t h i n designated p e r i o d s from the date of issuance of the permit, i n order to f u l f i l l t h i s o b l i g a t i o n . Both the t i m i n g and the e x t e n t of t h i s e x p enditure vary s l i g h t l y a c c o r d i n g to whether an o f f s h o r e permit i s l o c a t e d (a) north of the 70th p a r a l l e l , (b) south of the 70th p a r a l l e l and west of the 90th m e r i d i a n , or (c) south of the 70th p a r a l l e l and east of the 90th m e r i d i a n . I n the f i r s t two cases, the t o t a l expenditure r e q u i r e d f o r the o r i g i n a l term of a permit and s i x extensions amounts to $2.65 per a c r e , w h i l e i n the t h i r d case the t o t a l e xpenditure i s $2.70 per acre. A permit h o l d e r i s r e q u i r e d to d e p o s i t w i t h the C h i e f , before each of the p e r i o d s i n which expenditure i s r e q u i r e d , bonds or an approved note 40 S e c t i o n 39. 41 S e c t i o n 37. 119. of value equal to the expenditure f o r t h a t p e r i o d ; the p o r t i o n of the d e p o s i t equal to the a l l o w a b l e expenditure 43 a c t u a l l y made du r i n g the p e r i o d i s afterwards r e t u r n e d . Several concessions are made to permit h o l d e r s by the Reg u l a t i o n s i n c a l c u l a t i n g the amount of a l l o w a b l e expend-i t u r e made i n any p e r i o d . Where the C h i e f has designated a w e l l as an e x p l o r a t o r y deep t e s t w e l l , the a l l o w a b l e 44 expenditure f o r t h a t w e l l i s twice the a c t u a l expenditure. C e r t a i n expenditures made o u t s i d e a permit area may never-t h e l e s s be i n c l u d e d i n a l l o w a b l e expenditure f o r the permit. A permit h o l d e r may, w i t h the consent of the C h i e f , group permit areas not exceeding 2,500,000 acres which are contiguous or l i e wholly or p a r t l y w i t h i n a c i r c l e having a r a d i u s of 100 m i l e s , and t h e r e a f t e r any a l l o w a b l e expenditure made on any permit area w i t h i n the group may be a p p l i e d to any or a l l of the permit areas w i t h i n the 46 group. 42 S e c t i o n 41. 43 S e c t i o n 42. 44 S e c t i o n 47. 45 S e c t i o n s 46, 48. 46 S e c t i o n s 49, 50. 120 The t o t a l work o b l i g a t i o n s contained i n o f f s h o r e permits i s s u e d to June 1971, assuming a l l were h e l d f o r the f u l l term, amounted to approximately $1,750 m i l l i o n . About h a l f of t h i s was i n r e s p e c t of permits o f f the east c o a s t . I t was estimated at t h i s time t h a t by the end of 1971, some $185 m i l l i o n would have been spent on o f f s h o r e e x p l o r a t i o n , approximately $130 m i l l i o n of t h i s being o f f 4 - V , * . 4 - 4 7 the east c o a s t . Comprehensive d i s c l o s u r e p r o v i s i o n s apply to a l l o p e r a t i o n s conducted i n o f f s h o r e areas. I n the f i r s t p l a c e , the h o l d e r of a l i c e n c e , permit or l e a s e must g i v e p r i o r n o t i c e to the O i l Con s e r v a t i o n Engineer of proposed e x p l o r -a t o r y work, s t a t i n g the purpose, nature, l o c a t i o n and 48 t i m i n g of the work. Secondly, the hol d e r of a l i c e n c e must supply to the C h i e f , upon completion of any e x p l o r a t o r y work, copies of maps showing the area i n v e s t i g a t e d , and i n f o r m a t i o n obtained as to the presence of water, c o a l , 49 g r a v e l , sand or other p o t e n t i a l l y u s e f u l m i n e r a l s . T h i r d l y , the h o l d e r of a l i c e n c e , permit or l e a s e i s r e -q u i r e d to f u r n i s h to the C h i e f copies of a l l a e r i a l 47 Crosby, o p . c i t . note 4. 48 S e c t i o n 52. 49 S e c t i o n 28. photographs, d e t a i l e d g e o l o g i c a l and g e o p h y s i c a l r e p o r t s of any area i n v e s t i g a t e d , and r e p o r t s of a l l other surveys conducted; a l i c e n s e e must do t h i s upon completion of any e x p l o r a t o r y work, w h i l e a permittee or l e s s e e must do so a t t h r e e - y e a r l y i n t e r v a l s and upon t e r m i n a t i o n of the permit or l e a s e . The C h i e f may a l s o request a l i c e n s e e , permittee or l e s s e e to supply f a c t u a l i n f o r m a t i o n and data t h a t i s 51 r e l e v a n t f o r the i n t e r p r e t a t i o n of any e x p l o r a t i o n survey. N e v e r t h e l e s s , w h i l e these d i s c l o s u r e p r o v i s i o n s are wide, they r e f e r o n l y to raw e x p l o r a t i o n d a t a , and not to i n t e r p r e t a t i o n s of i t or r e s e a r c h conducted upon the b a s i s of i t . I n f o r m a t i o n s u p p l i e d i n accordance w i t h the R e g u l a t i o n s i s c o n f i d e n t i a l f o r s p e c i f i e d p e r i o d s of time, depending upon the c l a s s of i n f o r m a t i o n concerned. I n f o r m a t i o n r e l a t i n g to a development w e l l may be r e l e a s e d 30 days a f t e r the complet i o n , suspension or abandonment of the w e l l , w h i l e i n f o r m a t i o n upon an e x p l o r a t o r y w e l l may not be r e l e a s e d f o r two years. G e o l o g i c a l and g e o p h y s i c a l survey i n f o r m a t i o n may not be r e l e a s e d f o r two years a f t e r the e x p i r y of the permit or l e a s e c o v e r i n g the area where 50 S e c t i o n s 28, 54, 106. 51 S e c t i o n 54(4). 122. the survey was conducted. The f i r s t o f f s h o r e permits were i s s u e d to Mobil i n the summer of 1960; they comprised 1.1 m i l l i o n acres surrounding and i n c l u d i n g Sable I s l a n d . S h e l l obtained permits over most of the S c o t i a n S h e l f upon two a p p l i c a t i o n s i n 1963 and 1964. A l s o i n 1964, Amoco and I m p e r i a l obtained permits c o v e r i n g v a s t areas of the Grand Banks; these permits were l a t e r pooled. I n 1966, Tenneco took up permits s t r e t c h i n g o f f s h o r e from the coast of Labrador i n t o r e l a t i v e l y deep 53 water. Today, more than a m i l l i o n square miles of o f f -54 shore areas are covered by p e r m i t s , and the east c o a s t r e g i o n i n p a r t i c u l a r i s v i r t u a l l y b l a n k eted. (d) A l l o c a t i o n of P r o d u c t i o n R i g h t s . P r o d u c t i o n of o i l or gas from Canada lands i s p r o h i b i t e d except as a u t h o r i z e d 55 by the R e g u l a t i o n s . Although the ho l d e r of a permit may produce o i l or gas f o r t e s t purposes, i n order to have commercial p r o d u c t i o n i t i s necessary to o b t a i n an o i l and gas l e a s e . 52 S e c t i o n 107. 53 Oilweek, May 15, 1972, 27-32. 54 Crosby, o c . c i t . note 4. 55 S e c t i o n 23(2). 123 A permit h o l d e r i s e n t i t l e d , upon a p p l i c a t i o n to the M i n i s t e r , to the grant of a l e a s e . Such an a p p l i c a t i o n may be made a t any time d u r i n g which the permit i s i n f o r c e . There i s , however, one r e s t r i c t i o n upon t h i s r i g h t to a l e a s e ; the M i n i s t e r must be s a t i s f i e d t h a t the ho l d e r of the l e a s e w i l l be a Canadian c i t i z e n over 21 years of age, who w i l l be the b e n e f i c i a l owner of the l e a s e , or a c o r p o r a t i o n i n c o r p o r a t e d i n Canada. I n the l a t t e r case the c o r p o r a t i o n must (a) have at l e a s t 50% of i t s i s s u e d shares owned b e n e f i c i a l l y by Canadians, or (b) have i t s shares l i s t e d on a rec o g n i z e d Canadian stock exchange, and a l l o w Canadian c i t i z e n s an o p p o r t u n i t y to p a r t i c i p a t e i n the f i n a n c i n g or ownership of the c o r p o r a t i o n , or (c) be a wholly-owned s u b s i d i a r y of another c o r p o r a t i o n which complies 5 6 w i t h one of these requirements. One w r i t e r has taken the view th a t i t i s u n l i k e l y t h a t t h i s r e s t r i c t i o n has i n f a c t d i m i n i s h e d f o r e i g n investment i n the o i l and gas i n d u s t r y , but has merely caused a r e - o r g a n i z a t i o n of the cor p o r a t e 57 forms used by i n t e r n a t i o n a l companies i n Canada. The C h i e f may r e q u i r e a permit holder to apply f o r a 5 6 S e c t i o n 55. 57 Thompson, A.R., "Sovereignty and N a t u r a l Resources A Study of Canadian Petroleum L e g i s l a t i o n " , 4 U.B.C. Law Review (No.2) 161, 170 (1970). 124. l e a s e i f he i s of the o p i n i o n t h a t a w e l l c o n t a i n s o i l or gas i n commercial q u a n t i t i e s . The permit h o l d e r has a r i g h t of appeal from such an order to the M i n i s t e r , but f a i l i n g a s u c c e s s f u l appeal, must comply w i t h the order 5 8 w i t h i n 12 months. The maximum area which may be i n c l u d e d i n a l e a s e 5 granted to a permit h o l d e r i s one-half of the permit area. The remainder r e v e r t s to the Crown upon the grant of the 60 l e a s e . However, i n order to pro v i d e f o r the case where a permit h o l d e r a p p l i e s i n i t i a l l y f o r a l e a s e c o v e r i n g l e s s than h i s maximum e n t i t l e m e n t , the C h i e f i s given the power to a l l o w the permit h o l d e r to r e t a i n s e c t i o n s of the permit area under permit, provided t h a t such s e c t i o n s are not 61 i n c l u d e d i n or contiguous to the l e a s e . V/hen a p p l y i n g f o r a l e a s e , the h o l d e r of a permit may s e l e c t the area to be i n c l u d e d i n the l e a s e , s u b j e c t to c e r t a i n r e s t r i c t i o n s . The Re g u l a t i o n s d i v i d e each g r i d area i n t o s e c t i o n s ; there are 60, 80, or 100 s e c t i o n s i n a 58 S e c t i o n s 66-68. 59 S e c t i o n 56. 60 S e c t i o n 61(1). 61 S e c t i o n 61(2). 125. g r i d area, depending upon i t s g e o g r a p h i c a l l o c a t i o n . The l e a s e area s e l e c t e d by a permit h o l d e r must c o n s i s t of q u a d r i l a t e r a l b l o c k s of s e c t i o n s not l a r g e r than f i v e s e c t i o n s by three s e c t i o n s or four s e c t i o n s by f o u r s e c t i o n s i f the permit h o l d e r a p p l i e s f o r the f u l l e n t i t l e m e n t of one-half of the permit area; however, the b l o c k s may measure s i x s e c t i o n s by three s e c t i o n s i f the permit holder a p p l i e s f o r a l e a s e over not more than 40% of the permit area. Since the area of a s e c t i o n i s approximately one square m i l e , the maximum areas of b l o c k s are about 15, 16 and 18 square m i l e s , depending upon the shape of block chosen. There i s a l s o a requirement t h a t s e l e c t e d b l o c k s must corner one another, g i v i n g r i s e t o a chequer-board p a t t e r n , or must be separated from one another by a c o r r i d o r 6 3 w i t h a width of a t l e a s t one s e c t i o n . To date, no o f f s h o r e l e a s e s have been i s s u e d under the Re g u l a t i o n s . However, three l e a s e s e l e c t i o n s have r e c e n t l y been made by permit h o l d e r s i n the Mackenzie D e l t a and the S c o t i a n S h e l f r e g i o n s , and these i l l u s t r a t e how the pro-cedure operates. 62 S e c t i o n 7. 63 S e c t i o n 60. 126. The f i r s t of these was made by I m p e r i a l O i l from s i x permits i n the Mackenzie D e l t a . I m p e r i a l chose 50% of the t o t a l permit area i n b l o c k s ranging from one to s i x t e e n s e c t i o n s . The R e g u l a t i o n s do not r e q u i r e the c o r n e r i n g of b l o c k s or the surrender of a c o r r i d o r between b l o c k s where the b l o c k s are chosen from d i f f e r e n t , though a d j o i n i n g , permit areas. I m p e r i a l r e l i e d upon t h i s to apply f o r lea s e s over two areas, c o n t a i n i n g 24 and 25 s e c t i o n s r e s p e c t i v e l y , which areas c o n t a i n three of the d i s c o v e r y w e l l s d r i l l e d to date. I n t h i s r e g i o n each s e c t i o n c o n t a i n s over 750 acres. The m a j o r i t y of the l e a s e areas chosen are on l a n d , but 64 some extend northwards i n t o the Beaufort Sea. The second s e l e c t i o n was made by Mobil-Tetco from s e v e r a l a d j o i n i n g permits on the S c o t i a n S h e l f . I n the case of one permit an 18 s e c t i o n block was chosen, thereby r e d u c i n g the t o t a l l e a s e area a p p l i e d f o r t o 40% of t h a t permit; i n a l l other cases a 50% s e l e c t i o n was made. Here a l s o some c o n s i d e r a b l e areas were b l a n k e t e d , one comprising 30 s e c t i o n s or more than 27,000 a c r e s , by choosing contiguous b l o c k s from a d j o i n i n g permit areas. 64 Oilweek, A p r i l 17, 1972. 6 5 Oilweek, Hay 29, 1972. 127 The t h i r d was by G u l f - M o b i l i n the Mackenzie D e l t a . From three permit areas comprising 180 s e c t i o n s , G u l f -M o b i l a p p l i e d f o r l e a s e s i n r e s p e c t of 75 s e c t i o n s , i n -c l u d i n g two a d j o i n i n g b l o c k s of 16 s e c t i o n s each which together cover an area of more than 24,000 acres i n the v i c i n i t y of the p e r m i t t e e s ' gas-condensate d i s c o v e r y a t Parsons Lake. Lands t h a t have been h e l d under a permit or lease-which has e x p i r e d , been c a n c e l l e d or surrendered, may be disposed of by the M i n i s t e r i n a v a r i e t y of ways. As mentioned e a r l i e r i n t h i s c h apter, the M i n i s t e r may c a l l 6 7 tenders f o r the purchase of a permit over the lands. I n s t e a d , the M i n i s t e r may use the powers given to him by s e c t i o n 58 of the R e g u l a t i o n s and c a l l tenders f o r the purchase of a l e a s e , or grant a l e a s e without c a l l i n g tenders. The terms and c o n d i t i o n s upon which such a l e a s e i s granted l i e w i t h i n the d i s c r e t i o n of the M i n i s t e r ; presumably, he may r e q u i r e payment of a cash bonus, pay-ment of a cash bonus p l u s an undertaking to d r i l l a w e l l , an undertaking to c a r r y out s p e c i f i e d work i n the l e a s e a r e a , or payment of a bonus r o y a l t y upon p r o d u c t i o n . I f 66 I b i d ; O i l and Gas J o u r n a l , June 5, 1972. 67 Supra, 115. 1 2 8 . the M i n i s t e r i n v i t e s tenders f o r the purchase of a l e a s e , he i s not ob l i g e d ' to accept the h i g h e s t or any b i d r e c e i v e d . On October 12, 1961, O i l and Gas Land Order No.1-1961 5 8 was made under s e c t i o n 58 of the R e g u l a t i o n s . The e f f e c t of t h i s order was to g i v e the holder of a permit who had s e l e c t e d a l e a s e from the permit area a p r e f e r e n t r i g h t f o r 60 days to apply t o the M i n i s t e r f o r the grant of a f u r t h e r l e a s e , under s e c t i o n 58, over t h a t p a r t of the permit area which had been surrendered to the Crown. The c o n s i d e r a t i o n payable i n r e s p e c t of t h i s grant was an a d d i t i o n a l r o y a l t y upon p r o d u c t i o n from the f u r t h e r l e a s e . The a d d i t i o n a l r o y a l t y r a t e f o r o f f s h o r e o i l rose p r o g r e s s i v e l y w i t h i n c r e a s i n g monthly p r o d u c t i o n from a minimum of 5% to a maximum of 10% and the a d d i t i o n a l r a t e f o r o f f s h o r e gas was 5%. 69 I n 1970, the order was revoked, befo r e i t had been u t i l i z e d by any permit h o l d e r s . This r e v o c a t i o n drew stron g o p p o s i t i o n from i n d u s t r y , and the f e d e r a l government undertook to review the procedures governing l e a s e s e l e c t -i o n s , and to r e v i s e the R e g u l a t i o n s . I t i s expected t h a t 68 SOR/61-461, as amended by SOR/61-540. 69 SOR/70-184. 129. the r e v i s e d r e g u l a t i o n s w i l l be announced l a t e r t h i s year and t h a t they w i l l c o n t i nue the p r e f e r e n t r i g h t i n some form. I n the meantime, permit h o l d e r s t h a t have r e c e n t l y made l e a s e s e l e c t i o n s , I m p e r i a l , H o b i l - T e t c o and G u l f - M o b i l , have a l l requested t h a t the f e d e r a l government r e s e r v e t h e i r r i g h t s to o b t a i n f u r t h e r l e a s e s from t h e i r permit areas, i n the event of Land Order No.1-1961 being r e i n s t a t e d . The h o l d e r of a l e a s e i s given the r i g h t to c a r r y out e x p l o r a t o r y work and d r i l l w e l l s i n the l e a s e area, and to produce any o i l or gas or any substance e x t r a c t e d i n a s s o c i a t i o n w i t h o i l or gas from the l e a s e area; i n order to e x e r c i s e t h i s r i g h t , however, the l e a s e h o l d e r must 70 a l s o be i s s u e d w i t h a c u r r e n t e x p l o r a t o r y l i c e n c e . The c o n s i d e r a t i o n payable i n exchange f o r the grant of a l e a s e , a p a r t from any a d d i t i o n a l c o n s i d e r a t i o n p a i d f o r the purchase of a l e a s e i s s u e d pursuant to the M i n i s t e r ' s s p e c i a l powers, c o n s i s t s of an annual r e n t a l and a r o y a l t y upon p r o d u c t i o n . The r e n t a l f o r the f i r s t year i s f i f t y c ents per acre of land under l e a s e , and f o r subsequent 70 S e c t i o n 59 130 years i s a d o l l a r per acre. However, a f t e r the f i r s t year of the l e a s e term and the d i s c o v e r y of o i l or gas i n commercial q u a n t i t i e s , the r e n t a l may be reduced u n t i l commercial p r o d u c t i o n begins. C r e d i t s allowed a g a i n s t r e n t a l are (a) excess a l l o w a b l e expenditures i n c u r r e d on the permit area before the g r a n t i n g of the l e a s e , and (b) a l l o w a b l e expenditures on the e x p l o r a t i o n work c a r r i e d out on the l e a s e area a f t e r the l e a s e i s granted, but befo r commercial p r o d u c t i o n . Moreover, l e a s e s t h a t l i e w i t h i n a c i r c l e having a r a d i u s of 24 m i l e s , and which cover an area of not more than 250,000 a c r e s , may be grouped i n 7 order to d e r i v e the maximum b e n e f i t from these r e d u c t i o n s . However, i n any year r e d u c t i o n s may not exceed one-half 73 of the r e n t a l otherwise payable i n t h a t year. The b a s i c r o y a l t y r a t e upon p r o d u c t i o n of o i l or gas from o f f s h o r e l e a s e s i s 10%. During the e a r l y years of the l e a s e term, though, t h i s r a t e i s reduced to 5%. The p e r i o d d u r i n g which t h i s reduced r a t e a p p l i e s i s the f i r s t f i v e years of commercial p r o d u c t i o n , or the f i r s t 36 months, i n aggregate, d u r i n g which o i l or gas i s produced, whichever 71 S e c t i o n 79. 72 S e c t i o n 91. 73 S e c t i o n s 80, 81. 1 3 1 . i s the s h o r t e r . Furthermore, the Governor i n C o u n c i l may reduce the r o y a l t y r a t e by such amount and f o r such p e r i o d as he c o n s i d e r s a d v i s a b l e , i f he i s of the o p i n i o n 75 t h a t a r e d u c t i o n would p r o l o n g commercial p r o d u c t i o n . F i n a l l y , the r o y a l t y p a i d under a l e a s e d u r i n g any year may be deducted from the r e n t a l payable i n r e s p e c t o f t h a t l e a s e f o r the su c c e e d i n g y e a r . * 7 6 The h o l d e r of a l e a s e may be r e q u i r e d to d r i l l a w e l l to the s a t i s f a c t i o n of the M i n i s t e r upon the l e a s e a r e a a t any time a f t e r the e x p i r y of the f i r s t t h r e e y e a r s o f the l e a s e term. I f such a w e l l i s not c a p a b l e of commercial p r o d u c t i o n , the M i n i s t e r may, one year a f t e r abandonment or c o m p l e t i o n of the w e l l , o r d e r the l e s s e e to d r i l l a 77 f u r t h e r w e l l . Where a l e s s e e i s p r o d u c i n g o i l or gas c o m m e r c i a l l y , the C h i e f may order the d r i l l i n g of f u r t h e r development w e l l s on the l e a s e a r e a , and the p r o d u c t i o n of o i l or gas f o r as long as the l e a s e area may do so 78 c o m m e r c i a l l y . 74 S e c t i o n 86. 75 S e c t i o n 88. 76 S e c t i o n 85. 77 S e c t i o n 89, 90. 78 S e c t i o n 94. 132. The b a s i c term of a l e a s e i s 21 y e a r s . However, a l e a s e s h a l l be renewed f o r s u c c e s s i v e p e r i o d s of 21 y e a r s , i f the area of the l e a s e i s , i n the o p i n i o n of the M i n i s t e r , c a p a b l e of p r o d u c i n g o i l or gas, and i f the l e s s e e has complied w i t h the terms of the l e a s e and the p r o v i s i o n s 80 of the R e g u l a t i o n s . Furthermore, when commercial p r o -d u c t i o n b e g i n s from a l e a s e a r e a , the l e s s e e i s e n t i t l e d t o have the l e a s e r e i s s u e d f o r a f u r t h e r term of 21 years from the date of commencement of commercial p r o d u c t i o n , p r o v i d e d t h a t t h e r e has been compliance wi t h the terms of 81 the l e a s e and the p r o v i s i o n s of the R e g u l a t i o n s . A renewed or r e i s s u e d l e a s e i s s u b j e c t to such c o n d i t i o n s as the M i n i s t e r may o r d e r , and to the r e g u l a t i o n s i n f o r c e a t the date of renewal or r e i s s u a n c e , w i t h the e x c e p t i o n t h a t the r o y a l t y payable under a r e i s s u e d l e a s e i s the same as the r o y a l t y r e q u i r e d t o be p a i d under the o r i g i n a l 81 l e a s e . An i n t e r e s t i n a l e a s e may be t r a n s f e r r e d o n l y w i t h the consent of the C h i e f , and the t r a n s f e r i s r e q u i r e d 8 3 to be r e g i s t e r e d . The h o l d e r of a l e a s e may s u r r e n d e r 79 S e c t i o n 62. 80 S e c t i o n 63. 81 S e c t i o n 64. 82 S e c t i o n 65. 83 S e c t i o n s , 7 2 - 7 7 . 133 i t , i n whole or i n p a r t , at any time. (e) Revenues from O i l and Gas Operations. Since no o f f s h o r e l e a s e s have been i s s u e d to date, and no commercial pro d u c t i o n of o i l or gas has been achieved, the f e d e r a l government has r e c e i v e d no s i g n i f i c a n t revenues from o f f s h o r e o i l and gas o p e r a t i o n s . I t would seem, though, t h a t commercial p r o d u c t i o n may be p o s s i b l e w i t h i n the near f u t u r e . The revenues t h a t w i l l then be generated w i l l depend l a r g e l y upon the nature of the r e v i s e d r e g u l a t i o n s to be i s s u e d l a t e r t h i s year governing s e l e c t i o n of l e a s e areas. I f Land Order No.1-1961 i s r e i n s t a t e d , the f e d e r a l government w i l l reduce c o n s i d e r a b l y i t s o p p o r t u n i t y to o b t a i n revenue from the s a l e of l e a s e s over r e l i n q u i s h e d permit areas. The l e v e l of i n t e r e s t i n o f f s h o r e o i l and gas, e s p e c i a l l y o f f the east coast and i n the Beaufort Sea, i s s u f f i c i e n t -l y high f o r one to p r e d i c t c o n f i d e n t l y t h a t t h i s revenue i s p o t e n t i a l l y g r e a t . The Prudhoe Bay l e a s e s a l e of September 1969, which r a i s e d over $900 m i l l i o n f o r the S t a t e of A l a s k a , supports t h i s view. On the other hand, re i n s t a t e m e n t of Land Order No.l would r e s u l t i n h i g h e r r o y a l t i e s r e c e i v e d upon p r o d u c t i o n . E i t h e r way, the main sources of revenue w i l l be payments made f o r the purchase 84 S e c t i o n 78. 1 3 4 . of l e a s e s and r o y a l t y payments; r e n t a l s w i l l tend to be r e l a t i v e l y s t a b l e and c o m p a r a t i v e l y s m a l l , i n view of the low r e n t a l r a t e and numerous c r e d i t s a v a i l a b l e . ( f ) Revenue from Income Ta x a t i o n . Canadian income tax l e g i s l a t i o n has always o f f e r e d concessions to the o i l and gas i n d u s t r y as an i n c e n t i v e f o r investment. The r e c e n t l y -enacted Tax Reform A c t ^ continued t h i s t r a d i t i o n , although i t caused some changes i n the nature of the concessions a v a i l a b l e i n the f u t u r e , so t h a t at present the i n d u s t r y i s i n the process of t r a n s i t i o n from the o l d to the amended concessions. Income earned from o i l and gas o p e r a t i o n s i s s u b j e c t to the same r a t e s of t a x a t i o n as income from any other 86 source. 85 1970-71 chapter 63. 86 The tax r a t e s a p p l i c a b l e to c o r p o r a t i o n income are as f o l l o w s ; (a) 1972, 50%; (b) 1973, 49%; (c) 1974, 48%; (d) 1975, 47%; (e) 1976 and subsequent t a x a t i o n y e a r s , 46%. A r e d u c t i o n of 7% of the tax otherwise payable i s a p p l i c a b l e to the p e r i o d January 1, 1972 to December 31, 1972; i b i d . , s e c t i o n 123. There i s a l s o an abatement of 10% of a c o r p o r a t i o n ' s t a x a b l e income earned i n any of the ten p r o v i n c e s , and a f t e r 1976 w i l l be a f u r t h e r abatement of 15% of a c o r p o r a t i o n ' s t a x a b l e p r o f i t s from mineral r e s o u r c e s ; i b i d . , s e c t i o n 124. These re p r e s e n t a p a r t i a l withdrawal from the income tax f i e l d by the Dominion to a l l o w the provinces to apply t h e i r own income and mining taxes. The concessions to the o i l and gas i n d u s t r y take the form of s p e c i a l deductions which may be made from gross income i n c a l c u l a t i n g t a x a b l e income. Since 1949 the i n d u s t r y has been e n t i t l e d to deduct o i l and gas e x p l o r -a t i o n and development expenses on a c u r r e n t b a s i s , w i t h an u n l i m i t e d c a r r y o v e r of such c o s t s i n excess of annual income, and i n a d d i t i o n a percentage d e p l e t i o n allowance 8 7 has been d e d u c t i b l e s i n c e the 1930's. A c o r p o r a t i o n whose p r i n c i p a l business i s o i l or gas p r o d u c t i o n and r e l a t e d a c t i v i t i e s may deduct the c o s t s of e x p l o r a t i o n and development i n Canada from income earned, b e f o r e any deduction f o r d e p l e t i o n , i n the year when these c o s t s were i n c u r r e d , and may c a r r y forward i n d e f i n i t e l y any undeducted c o s t s . T h is i s provided f o r by s e c t i o n 66(3) of the Tax Reform A c t , and i s unchanged from the p r o v i s i o n s of the previous l e g i s l a t i o n . Taxpayers who do not meet the " p r i n c i p a l b u s i n e s s " t e s t may deduct the g r e a t e r of (a) 20% of the aggregate e x p l o r a t i o n and development expenses i n c u r r e d i n Canada before the end 87 KcDonald, John G., "Federal Income Tax a f f e c t i n g the Mining and Petroleum I n d u s t r i e s " , paper presented to the Eleventh Annual Petroleum Law Seminar h e l d by the Canadian Petroleum Law Foundation at J a s p e r , A l b e r t a , June 13-17, 1972; t h i s paper i s to be p u b l i s h e d i n the forthcoming i s s u e of the A l b e r t a Law Review. of the c u r r e n t t a x a t i o n year, and (b) the taxpayer's income f o r the t a x a t i o n year from o i l and gas o p e r a t i o n s i n Canada. This o p t i o n was i n t r o d u c e d by the Tax Reform A c t , the previous l e g i s l a t i o n a l l o w i n g a deduction o n l y to the extent of income from Canadian o i l and gas o p e r a t i o n s . Canadian e x p l o r a t i o n and development expenses are d e f i n e d as d r i l l i n g or e x p l o r a t i o n expenses, i n c l u d i n g general g e o l o g i c a l or g e o p h y s i c a l expenses, i n c u r r e d i n 88 r e s p e c t of e x p l o r i n g or d r i l l i n g f o r o i l or gas i n Canada. The c o s t of a c q u i r i n g any o i l or gas p r o p e r t y i s deduct-i b l e as a Canadian e x p l o r a t i o n and development expense; an o i l or gas property i s d e f i n e d as any r i g h t , l i c e n c e , or p r i v e l e g e to e x p l o r e f o r , d r i l l f o r , or take o i l or gas i n Canada, any o i l or gas w e l l i n Canada, and any 89 r e n t a l or r o y a l t y d e r i v e d therefrom. This deduction has been a v a i l a b l e s i n c e 1962. Any amount r e c e i v a b l e upon the s a l e of an o i l or gas property i s i n c l u d i b l e 90 i n the income of the vendor f o r the year of s a l e . 88 89 90 S e c t i o n 66(15)(b). S e c t i o n 6 6 ( 1 5 ) ( b ) ( i i i ) . S e c t i o n 59. 137. The p o l i c y behind the immediate d e d u c t i b i l i t y of e x p l o r a t i o n and development expenses i s to ensure th a t no tax w i l l be payable u n t i l a l l e x p l o r a t i o n and development 91 c o s t s have been recovered. This concession a f f o r d s o i l or gas producers an imputed i n t e r e s t saving upon the amount of t h e i r e x p l o r a t i o n and development expenses. The Tax Reform Act pro v i d e s t h a t percentage d e p l e t i o n allowances s h a l l not be a v a i l a b l e as deductions a f t e r the end of 1976. At present, a taxpayer who operates an o i l and gas w e l l may deduct i n computing h i s income f o r a t a x a t i o n year o n e - t h i r d of h i s p r o d u c t i o n p r o f i t s f o r t h a t year; p r o d u c t i o n p r o f i t s are the aggregate p r o f i t s reason-a b l y a t t r i b u t a b l e to the p r o d u c t i o n of o i l or gas from the 92 w e l l . A f t e r 1975, percentage d e p l e t i o n allowances w i l l be r e p l a c e d by "earned d e p l e t i o n " . For every $3 of e l i g i b l e e xpenditures made a f t e r November 7, 1969, the taxpayer earns the r i g h t to deduct $1 of d e p l e t i o n i n computing h i s ta x a b l e income a f t e r 1976. The maximum earned d e p l e t i o n which may be deducted i n any year i s o n e - t h i r d of pr o d u c t i o n p r o f i t s f o r the year, but unclaimed d e p l e t i o n may be c a r r i e d 91 92 Benson, E.J., Summary of 1971 Tax Reform L e g i s l a t i o n , Income Tax R e g u l a t i o n s , reg. 1201. 46. 138. 93 forward i n d e f i n i t e l y f o r f u t u r e deductions. E l i g i b l e expenditures f o r c a l c u l a t i n g earned d e p l e t i o n i n c l u d e most of the c a t e g o r i e s of Canadian e x p l o r a t i o n and development expenses, w i t h two n o t a b l e e x c e p t i o n s : (a) the c o s t of a c q u i s i t i o n of o i l and gas p r o p e r t i e s , and (b) c o s t s i n c u r r e d i n the p r o v i s i o n of " s o c i a l c a p i t a l " f a c i l i t i e s 94 such as houses, roads, a i r p o r t s and docks. Under the previous l e g i s l a t i o n a non-operator of an o i l or gas w e l l was allowed a deduction of 25% of the 95 income r e c e i v e d i n r e s p e c t of h i s i n t e r e s t i n the w e l l . A f t e r 1976 t h i s deduction a l s o w i l l be r e p l a c e d by a 96 deduction based upon earned d e p l e t i o n . Non-operators who do not i n c u r e l i g i b l e expenditure (and i t i s important here that p r o p e r t y a c q u i s i t i o n c o s t s are not i n c l u d e d i n e l i g i b l e expenditure) w i l l no longer be allowed any deduct-i o n f o r d e p l e t i o n . A l s o under the previous l e g i s l a t i o n , shareholders of 93 McDonald, o o . c i t . note 87. 94 I b i d . 95 Income Tax R e g u l a t i o n s , reg. 1202. 96 McDonald, o o . c i t . note 87. 139. a c o r p o r a t i o n r e s i d e n t i n Canada were allowed to deduct 10%, 15% or 20% of o r d i n a r y d i v i d e n d s r e c e i v e d where p r o f i t s of the c o r p o r a t i o n from o i l or gas exceeded 25%, 50% and 75% r e s p e c t i v e l y of the c o r p o r a t i o n ' s t o t a l income. 97 This deduction i s not a v a i l a b l e a f t e r 1971. A deduction i n r e s p e c t of earned d e p l e t i o n amounts to a s m a l l e r c o n c e s s i o n than a deduction f o r percentage d e p l e t i o n . N e v e r t h e l e s s , d e s p i t e i t s somewhat m i s l e a d i n g t i t l e , earned d e p l e t i o n i s s t i l l a concession to the o i l and gas i n d u s t r y , f o r whatever sum i s u l t i m a t e l y deducted, t h a t sum i s deducted t w i c e , f i r s t as an a c c e l e r a t e d e x p l o r -a t i o n and development expense, and then as earned d e p l e t i o n . The concession amounts, t h e r e f o r e , to a d i r e c t l e s s e n i n g of the tax burden placed upon the o i l and gas i n d u s t r y , geared to the l e v e l of expenditure upon e x p l o r a t i o n and development work. A company t h a t i n c r e a s e s i t s a c t i v i t i e s i n those f i e l d s from year to year may achieve a c o n s i d e r a b l e r e d u c t i o n i n income tax. 97 I b i d . 140. CHAPTER 6. AUSTRALIA. A. Offshore O i l and Gas Resources. In s p i t e of i t s s h o r t e r h i s t o r y , the o f f s h o r e search f o r o i l and gas i n A u s t r a l i a has to date been more success-f u l than the onshore search. Although almost h a l f the land area of A u s t r a l i a and Papua-New Guinea i s occupied or under-1 l a i n by sedimentary r o c k s , onshore d i s c o v e r i e s of o i l and gas have been few. Furthermore, d i s c o v e r i e s t h a t have been made have been small by world standards, and t h e i r l o c a t i o n f a r from e x i s t i n g markets has added c o n s i d e r a b l y t o the c o s t s of commercial p r o d u c t i o n . The f i r s t o i l f i e l d i n A u s t r a l i a capable of commercial p r o d u c t i o n was d i s c o v e r e d i n 1961 near Moonie, Queensland. The i n i t i a l r e c o v e r a b l e r e s e r v e s of t h i s and nearby f i e l d s were only 21.6 m i l l i o n b a r r e l s , and a l r e a d y over 16 m i l l i o n b a r r e l s of these have been produced. In 1964 o i l was di s c o v e r e d on Barrow I s l a n d , o f f the coas t of Western A u s t r a l i a . Reserves of t h i s f i e l d , p a r t of which extends 1 Petroleum Search i n A u s t r a l i a , a p u b l i c a t i o n of the Fetroleum I n f o r m a t i o n Bureau ( A u s t r a l i a ) . The 30 major sedimentary basins t h a t have been mapped cover an area of approximately 1.7 m i l l i o n square m i l e s . 141. o f f s h o r e , were 200 m i l l i o n bar a l s o d i s c o v e r e d i n the Norther known as Mereenie, has r e s e r v e b a r r e l s , but i t s remoteness ha 3 pr o d u c t i o n . More r e c e n t l y , on been made i n the Dongara f i e l d Moomba-Gidgealpa f i e l d s i n Sou pr o d u c t i o n has commenced from s m a l l . r e l s . The same year o i l was n T e r r i t o r y . T h i s f i e l d , s i n excess of 60 m i l l i o n s prevented commercial shore d i s c o v e r i e s of o i l have , i n Western A u s t r a l i a , and the th A u s t r a l i a , and commercial both, although r e s e r v e s are N a t u r a l gas d i s c o v e r i e s have a l s o been made onshore, at Roma i n Queensland i n 1960, where i n i t i a l r e c o v e r a b l e r e s e r v e s are 2 50,000 m i l l i o n c u b i c f e e t , a t Moomba-Gidgealpa i n 1963, where r e s e r v e s are 1,400,000 m i l l i o n c u b i c f e e t , a t Dongara i n 1964 where r e s e r v e s are 500,000 m i l l i o n c u b i c f e e t , and at Mereenie a l s o i n 1964, where 4 re s e r v e s are i n excess of 500,000 m i l l i o n c u b i c f e e t . P i p e l i n e s now t r a n s p o r t gas to Brisbane, A d e l a i d e and Pe r t h and an important c o n t r a c t has r e c e n t l y been signed 2 Reoort from the Senate S e l e c t Committee on Off-Shore  Petroleum Resources, Commonwealth Government P r i n t i n g O f f i c e , Canberra, 1971, para. 3.78. 3 I b i d . 4 O i l and A u s t r a l i a , 1970: The F i g u r e s Behind the F a c t s , a p u b l i c a t i o n of the Petroleum I n f o r m a t i o n Bureau ( A u s t r a l i a ) . 142. f o r the supply of gas from the Moomba-Gidgealpa f i e l d s to Sydney, provided t h a t s u f f i c i e n t r e s e r v e s are e s t a b l i s h e d by the c u r r e n t d r i l l i n g programme. Very l a r g e d i s c o v e r i e s of o i l and gas, however, have been made o f f s h o r e . The most important of these are the Barr a c o u t a , H a l i b u t , M a r l i n , K i n g f i s h and Snapper O i l and gas f i e l d s , a l l l o c a t e d i n the Gippsland Basin s e v e r a l m i l e s o f f s h o r e from the V i c t o r i a n c o a s t . The i n i t i a l r e c o v e r a b l e r e s e r v e s of these f i e l d s are 1,580 m i l l i o n b a r r e l s of o i l 5 and 8,300,000 m i l l i o n c u b i c f e e t of gas. O i l produced from these f i e l d s a t present i s about 70% of A u s t r a l i a ' s t o t a l requirements, but t h i s f i g u r e i s expected to f a l l as the 7 demand f o r o i l i n A u s t r a l i a r i s e s . Gas from these f i e l d s i s piped to Melbourne and other V i c t o r i a n c i t i e s . D i s c o v e r i e s of gas have a l s o been made on the North West S h e l f , about 80 m i l e s o f f s h o r e from Western A u s t r a l i a . The operator f o r the f i e l d has s t a t e d t h a t a c o n s e r v a t i v e estimate of r e s e r v e s i s 5,000,000 m i l l i o n c u b i c f e e t , and 5 Reoort, o o . c i t . note 2, para. 3.78. 6 O i l and A u s t r a l i a , 1970: The F i g u r e s Behind the F a c t s , O P . c i t . note 4. 7 Avery, E r i c N., "APEA's F i r s t Decade, A Challenge to I t s Second", A u s t r a l a s i a n O i l and Gas, May 1972, 23. 143. the a c t u a l f i g u r e could be much hig h e r . The absence of a nearby market f o r t h i s gas has so f a r prevented t h i s f i e l d from being developed commercially, but n e g o t i a t i o n s 9 are i n progress f o r the s a l e of l i q u i f i e d gas. The A u s t r a l i a n c o n t i n e n t a l s h e l f i s one of the l a r g e s t i n the w o r l d , c o v e r i n g almost one m i l l i o n square m i l e s and 10 v a r y i n g i n width from about 20 to more than 150 m i l e s . Over 600,000 square m i l e s of the s h e l f are regarded as 11 p r o s p e c t i v e o i l and gas areas. Most of the p r o s p e c t i v e areas are s t i l l v i r t u a l l y unexplored, and so i t appears very l i k e l y t h a t f u t u r e o f f s h o r e e x p l o r a t i o n w i l l r e s u l t i n f u r t h e r d i s c o v e r i e s of o i l and gas. I n d u s t r y o p i n i o n i n A u s t r a l i a i s t h a t the most promising e x p l o r a t i o n areas l i e o f f s h o r e . B. Background to the Petroleum (Submerged Lands) Act 1967. O f f s h o r e e x p l o r a t i o n f o r o i l and gas was of l i t t l e 8 O i l and Gas J o u r n a l , January 31, 1972, 54. 9 Dewhurst, J.D., "The E n e r g e t i c S e v e n t i e s " , A u s t r a l i a n O i l and Gas, May 1972, 17. 10 A u s t r a l i a Handbook 1971, an A u s t r a l i a n News and I n f o r m a t i o n Bureau P u b l i c a t i o n , Canberra, 1971, 1. 11 Petroleum Search i n A u s t r a l i a , . o p . c i t . note 1. 144. importance i n A u s t r a l i a u n t i l 1960, when the Broken H i l l P r o p r i e t a r y Company L i m i t e d (BHP), through i t s s u b s i d i a r y Hematite E x p l o r a t i o n Pty. L t d . , took up o f f s h o r e permits from the South A u s t r a l i a n , Tasmanian and V i c t o r i a n govern-ments, extending over an area of approximately 66,000 12 square m i l e s . This r a i s e d the i s s u e of f e d e r a l - s t a t e j u r i s d i c t i o n over o f f s h o r e areas, and i n June 1962 the f i r s t of s e v e r a l meetings was h e l d between the Common-wealth M i n i s t e r f o r N a t i o n a l Development and the s t a t e s ' M i n i s t e r s f o r Mines, to d i s c u s s o f f s h o r e o i l and min e r a l 13 r i g h t s . P r e l i m i n a r y d i s c u s s i o n s o n l y were h e l d a t t h i s meeting, pending examination of the c o n s t i t u t i o n a l questions 14 i n v o l v e d by the r e s p e c t i v e A t t o r n e y s - G e n e r a l . The second M i n i s t e r i a l meeting was h e l d i n January 1964, and by t h i s time the s t a t e s had decided t h a t they should c o n t r o l o f f s h o r e o i l and mi n e r a l r i g h t s , but t h a t c o n f l i c t w i t h the Common-15 wealth over thxs i s s u e should be avoided "at any c o s t " . On A p r i l 17, 1964, the Commonwealth M i n i s t e r f o r 12 Report, o p . c i t . note 2, para. 3.26. 13 I b i d . , para. 4.4. 14 I b i d . 15 Livermore, J.B.R., Evidence, May 3, 1968; I b i d . , para. 4.6. 145. N a t i o n a l Development and the s t a t e s ' M i n i s t e r s f o r Mines met once a g a i n , t h i s time w i t h the r e s p e c t i v e A t t o r n e y s -1 6 General. By t h i s time i n t e r e s t i n o f f s h o r e o i l and gas e x p l o r a t i o n had reached a peak, wi t h the announcement by BHP t h a t Esso E x p l o r a t i o n A u s t r a l i a I n c . (Esso) would 17 j o i n t h a t company i n i t s o f f s h o r e o p e r a t i o n s . At t h i s meeting i t was r e c o g n i z e d t h a t both the Commonwealth and the s t a t e s were anxious t o a v o i d l i t i g a t i o n as the means f o r r e s o l v i n g t h e i r c o n f l i c t i n g c o n s t i t u t i o n a l c l a i m s over o f f s h o r e areas. A c c o r d i n g l y , agreement was reached t h a t a n a t i o n a l s o l u t i o n t o the problem of o f f s h o r e o i l and gas e x p l o r a t i o n and e x p l o i t a t i o n was necessary. The M i n i s t e r s r e s o l v e d t h a t w i t h o u t p r e j u d i c e to the c o n s t i t -u t i o n a l c l a i m s of the Commonwealth and the s t a t e s , there should be an agreement upon j o i n t arrangements over the whole o f f s h o r e seabed i n r e l a t i o n to e x p l o r a t i o n f o r and e x p l o i t a t i o n of o i l and gas, but t h i s should not be taken as a precedent f o r s o l v i n g problems of other resources 18 i n these areas. N e g o t i a t i o n s to s e t t l e the terms of t h i s agreement 16 17 18 I b i d . , para. 4.7. I b i d . , para. 2.27. I b i d . , para. 4.7. 146. took a f u r t h e r three years. One of the concerns of the governments of the Commonwealth and the s t a t e s was t h a t t i t l e s over o f f s h o r e areas t h a t had a l r e a d y been granted by the s t a t e s and t e r r i t o r i e s under t h e i r e x i s t i n g l e g i s -l a t i o n would be honoured. F i n a l l y , n e g o t i a t i o n s were 19 concluded a t a M i n i s t e r ' s meeting on A p r i l 7, 1967, I n the meantime, Esso-BHP had d i s c o v e r e d the Barracouta o i l and gas f i e l d and the M a r l i n gas f i e l d i n the Gippsland b a s i n w i t h i n t h i r t y m i l e s of the V i c t o r i a n c o a s t , and the pressure to i s s u e p r o d u c t i o n t i t l e s i n r e s p e c t of these d i s c o v e r i e s w i t h the l e a s t p o s s i b l e delay was an important 20 f a c t o r encouraging f i n a l i z a t i o n of the n e g o t i a t i o n s . I t i s a l s o i n t e r e s t i n g to note t h a t w i t h i n f o u r months of t h i s agreement being reached, Esso-BHP had d i s c o v e r e d two very much l a r g e r o i l f i e l d s i n the Gippsland b a s i n , K i n g f i s h and H a l i b u t . The agreement was executed by the Commonwealth and the s i x s t a t e s on October 16, 1967. I t s f u l l t i t l e i s Agreement  r e l a t i n g to the E x p l o r a t i o n f o r , and the E x p l o i t a t i o n o f , the Petroleum Resources, and c e r t a i n other Resources, of the C o n t i n e n t a l S h e l f of A u s t r a l i a and of c e r t a i n T e r r i -19 I b i d . , para. 4.22. 20 I b i d . , para. 4.16. 147. t o r i e s of the Commonwealth and of c e r t a i n other Submerged  Land. In many r e s p e c t s i t amounts to a unique event i n the h i s t o r y of Commonwealth-state r e l a t i o n s i n A u s t r a l i a , and furthermore, i t would appear to have no c o u n t e r p a r t i n e i t h e r the U n i t e d S t a t e s or Canada. The main f e a t u r e s of the Agreement are t h a t the govern-ments which are p a r t i e s to i t undertake to l e g i s l a t e w i t h r e s p e c t to a l l o f f s h o r e o i l and gas o p e r a t i o n s i n i d e n t i c a l 21 terms, and f u r t h e r undertake not to amend the l e g i s l a t i o n 22 so enacted u n l e s s a l l governments agree to the amendment. Moreover, the governments undertake not to make, amend or r e p e a l r e g u l a t i o n s under the l e g i s l a t i o n except i n acc o r d -23 ance wi t h an agreement among them a l l . The A u s t r a l i a n t e r r i t o r i a l seabed and c o n t i n e n t a l s h e l f are d i v i d e d i n t o "adjacent areas", one a p p e r t a i n i n g to each s t a t e and c o a s t a l t e r r i t o r y . The Commonwealth l e g i s l a t i o n i s a p p l i c a b l e to a l l adjacent areas, whereas each s t a t e s t a t u t e a p p l i e s o n l y to the p a r t i c u l a r adjacent area l y i n g o f f s h o r e from i t s coast. The boundaries of a l l 21 Clauses 3, 4. 22 Clause 6. 23 Clause 7. 148. the adjacent areas are d e f i n e d i n the Second Schedule to the Commonwealth s t a t u t e , and the Second Schedule to each s t a t e a c t c o n t a i n s a d e f i n i t i o n of t h a t s t a t e ' s area. The seaward boundaries are d e f i n e d i n r e l a t i o n to p o i n t s of s t a t e d l a t i t u d e and l o n g i t u d e , whereas the landward boundary i n each case i s the c o a s t l i n e a t mean low water. However, these boundaries are s u b j e c t to the o v e r r i d i n g p r o v i s i o n t h a t the adjacent areas extend o n l y t o (a) areas of t e r r i t o r i a l waters and (b) areas of superjacent waters of the c o n t i n e n t a l s h e l f . T h i s has two r e s u l t s ; f i r s t l y , t h a t i n t e r n a l waters as r e c o g n i z e d by i n t e r n a t i o n a l law are not i n c l u d e d i n the adjacent areas; and secondly, t h a t the seaward boundaries of the adjacent areas are i n f a c t determined by the i n t e r n a t i o n a l law d e f i n i t i o n of the l i m i t s 24 of n a t i o n a l j u r i s d i c t i o n over the c o n t i n e n t a l s h e l f , to the extent t h a t these l i m i t s f a l l w i t h i n the Second Schedule boundaries. The l a t t e r have been drawn f a r o f f s h o r e to take account of the ambulatory nature of the l i m i t s of n a t i o n a l j u r i s d i c t i o n , as p r e s e n t l y d e f i n e d by the Convention on 25 the C o n t i n e n t a l S h e l f . 24 Supra, 8-10. 25 Finemore, J.C., " O i l and Gas I n c l u d i n g P i p e l i n e s (With P a r t i c u l a r Reference to Off-Shore Operations", p u b l i s h e d i n The Law of Mining i n A u s t r a l i a , a s e r i e s of l e c t u r e s arranged by the Committee f o r Post Graduate S t u d i e s i n the Department of Law, U n i v e r s i t y of Sydney, 1969. 149. The Agreement provides f o r c o n s u l t a t i o n between Commonwealth and s t a t e governments p r i o r to the g r a n t , renewal, v a r i a t i o n or t r a n s f e r of a l l o f f s h o r e o i l and 2 6 gas t i t l e s . The Commonwealth i s to take account of c e r t a i n of i t s c o n s t i t u t i o n a l f u n c t i o n s , namely: tra d e and commerce, e x t e r n a l a f f a i r s , t a x a t i o n , defence, l i g h t -houses, l i g h t s h i p s , beacons and buoys, f i s h e r i e s and p o s t a l , t e l e g r a p h i c , t e l e p h o n i c and other l i k e s e r v i c e s , but no 2 7 o t h e r s . I f the Commonwealth gives a d e c i s i o n i n c o n s i s t e n t w i t h the a c t i o n proposed by the s t a t e , i t i s to s p e c i f y the r e s p o n s i b i l i t y or r e s p o n s i b i l i t i e s w i t h r e s p e c t to which the d e c i s i o n i s g i v e n , u n l e s s i t i s " i n the n a t i o n a l i n t e r e s t " 2 8 not to do so. The s t a t e i s to accept and g i v e e f f e c t t o a d e c i s i o n of the Commonwealth wit h r e s p e c t to one of the 29 s p e c i f i e d r e s p o n s i b i l i t i e s . A c o n d i t i o n may be i n c l u d e d i n a permit or l i c e n c e r e q u i r i n g t h a t a l l or any petroleum produced be r e f i n e d i n the s t a t e i n whose adjacent area the p r o d u c t i o n l i c e n c e i s l o c a t e d . P r i o r c o n s u l t a t i o n between the Commonwealth 26 Clause 11(1). 27 Clause 1 1 ( 2 ) , ( 3 ) . 28 Clause 11(4). 29 Clause 11(5). 150 and the s t a t e concerned i s r e q u i r e d , but the Commonwealth i s not e n t i t l e d to r e f u s e to a l l o w i n c l u s i o n of the c o n d i t i o n "unless i t i s reasonable i n the n a t i o n a l i n t e r e s t to do so having regard to the economic and e f f i c i e n t e x p l o i t -a t i o n , p r o c e s s i n g and use of the petroleum resources to 30 which the requirement v/ould r e l a t e . I t i s c o n c e i v a b l e t h a t the c o n s t i t u t i o n a l i t y of such a c o n d i t i o n c o u l d be c h a l l e n g e d i n the c o u r t s , as s e c t i o n 92 of the A u s t r a l i a n c o n s t i t u t i o n r e q u i r e s t h a t i n t e r s t a t e t r a d e and commerce s h a l l be " a b s o l u t e l y f r e e " . No doubt w i t h t h i s i n mind, the governments of the Commonwealth and the s t a t e s annexed a Memorandum of Understanding to the Agreement, dated October 16, 1967, s t a t i n g t h a t [ t ] h e Governments are agreed t h a t they w i l l encourage and w i l l not seek to r e s t r i c t [ t r a d e between the S t a t e s , and between the S t a t e s and the T e r r i t o r i e s forming p a r t of the Commonwealth] and w i t h t h a t i n view they w i l l c o n f er from time to time as any of them req u e s t s . They d e c l a r e t h e i r common i n t e n t i o n not to d i s c r i m i n a t e a g a i n s t any such t r a d e . The Agreement a l s o p r o v i d e s f o r the sh a r i n g of revenues from o f f s h o r e o i l and gas p r o d u c t i o n between the Common-wealth and the s t a t e i n whose adjacent area the p r o d u c t i o n l i c e n c e i s l o c a t e d . The Commonwealth i s to r e c e i v e a 30 Clause 14. 151 r o y a l t y of 4% on p r o d u c t i o n , w h i l e a l l remaining r o y a l t i e s , between 6% and 8*j%, together w i t h a l l moneys other than 31 r o y a l t i e s , are to go to the s t a t e . The preamble to the Agreement c o n t a i n s a d e c l a r a t i o n t h a t the Commonwealth and the s t a t e s are not, by the Agreement, de r o g a t i n g from t h e i r r e s p e c t i v e c o n s t i t u t i o n a l powers. This d e c l a r a t i o n i s r e i n f o r c e d by the f i n a l c l a u s e of the Agreement which reads: 26. The Governments acknowledge t h a t t h i s Agreement i s not intended to c r e a t e l e g a l r e l a t i o n s h i p s j u s t -i c i a b l e i n a Court of Law but d e c l a r e t h a t the Agreement s h a l l be construed and given e f f e c t to by the p a r t i e s i n a l l r e s p e c t s a c c o r d i n g to the t r u e meaning and s p i r i t t h e r e o f . The continuance of the Agreement thus depends not upon any r i g h t to enforce i t s p r o v i s i o n s , but upon continued accept-ance of i t by a l l the p a r t i e s . C. The Petroleum (Submerged Lands) Act 1967. (a) B a s i c P r o v i s i o n s . The p r i n c i p a l s t a t u t e passed by the Commonwealth Pa r l i a m e n t i n accordance w i t h the terms of the Agreement i s the Petroleum (Submerged Lands) Act 31 Clauses 19, 22. 152. 1967. Examples of s t a t e l e g i s l a t i o n corresponding to t h i s s t a t u t e are the Petroleum (Submerged Lands) A c t 1967 3 3 ( V i c t o r i a ) , and The Petroleum (Submerged Lands) Act of 1967 (Queensland).^ 4 H e r e a f t e r , the Petroleum (Submerged Lands) Act 1967 (Cwth.) and the corresponding s t a t e s t a t u t e s w i l l be r e f e r r e d to as the "Submerged Lands A c t s " . Sub-s i d i a r y Commonwealth l e g i s l a t i o n was a l s o enacted to de a l w i t h s p e c i f i c matters such as r o y a l t i e s , r e n t a l s , f e e s , 35 and the Ashmore and C a r t i e r I s l a n d s . The Submerged Lands A c t s , c o n t a i n i n g as they do sub-s t a n t i a l l y i d e n t i c a l p r o v i s i o n s , e s t a b l i s h a s i n g l e code of o i l and gas law, a p p l i c a b l e throughout a l l the adjacent areas. T his common code i s a d m i n i s t e r e d i n each adjacent 3 6 area by a "Designated A u t h o r i t y " , who i n the case of 32 No.118 of 1967; amended by the Petroleum (Submerged Lands) Act 1968, No.l of 1968. 33 No.7591. 34 No.36 of 1967. 35 Petroleum (Submerged L a n d s ) ( R o y a l t y ) Act 1967, No.119 of 1967; Petroleum (Submerged L a n d s ) ( E x p l o r a t i o n Permit Fees) Act 1967, No.120 of 1S67; Petroleum (Submerged L a n d s ) ( P r o d u c t i o n L i c e n c e Fees) Act 1967, No.121 of 1967; Petroleum (Submerged L a n d s ) ( P i p e l i n e L i c e n c e Fees) Act 1967, No.122 of 1967; Petroleum (Submerged Lands) ( R e g i s t r a t i o n Fees) Act 1967, No.123 of 1967; Petroleum (Ashmore and C a r t i e r I s l a n d s ) Act 1967, No.124 of 1967. 36 P a r t I I I of the Agreement. the s t a t e s i s the M i n i s t e r f o r Mines. The Designated A u t h o r i t y i s the a d m i n i s t e r i n g a u t h o r i t y f o r both the Commonwealth and the s t a t e l e g i s l a t i o n a p p l i c a b l e i n each adjacent a r e a , and every a c t i o n taken by him i s taken t w i c e , once pursuant to each p r i n c i p a l s t a t u t e . For example, the holder of an e x p l o r a t i o n permit over a s p e c i f i e d area i n f a c t o b t a i n s two permits i n r e s p e c t of t h a t a r e a , a Commonwealth and a s t a t e permit, each i n the same terms, p r i n t e d on the one p i e c e of paper. I n order to s i m p l i f y a d m i n i s t r a t i o n , the Submerged Lands A c t s d i v i d e the a djacent areas i n t o g r a t i c u l a r b l o c k s , each b l o c k measuring f i v e minutes of l a t i t u d e by 37 f i v e minutes of l o n g i t u d e . In n o r t h e r n r e g i o n s these b l o c k s have an area of about 30 square m i l e s , but t h i s i s reduced to about 2 3 square m i l e s i n the most s o u t h e r l y areas. The Submerged Lands Ac t s e s t a b l i s h a t w o - t i e r system of t i t l e s a p p l i c a b l e to o f f s h o r e o i l and gas o p e r a t i o n s . The f i r s t t i t l e o btained i s an e x p l o r a t i o n permit, which g i v e s the h o l d e r an e x c l u s i v e r i g h t to e x p l o r e f o r o i l and gas i n the area s p e c i f i e d . Upon d i s c o v e r y of o i l or gas 37 Submerged Lands A c t s , s e c t i o n 17 (Cwth.). 154. i n commercial q u a n t i t i e s , the holder may then apply f o r , and w i l l be granted, a p r o d u c t i o n l i c e n c e i n r e s p e c t of the d i s c o v e r y . The important terms and c o n d i t i o n s upon which t i t l e s may be a c q u i r e d , such as maximum and minimum areas, d u r a t i o n , r o y a l t i e s , r e n t a l s and f e e s , are con-t a i n e d i n the Submerged Lands A c t s . I t i s intended t h a t the day-to-day o p e r a t i o n s of o f f s h o r e e x p l o r e r s and pro-ducers should be governed by r e g u l a t i o n s promulgated under the A c t s , but to date no such r e g u l a t i o n s have been f i n a l l y agreed upon by the seven governments. In the meantime, such o p e r a t i o n s are conducted i n accordance w i t h d i r e c t i o n s i s s u e d by the Designated A u t h o r i t y under s e c t i o n 101 of the Submerged Lands A c t s . Holders of o f f s h o r e e x p l o r a t i o n t i t l e s granted before the Submerged Lands Ac t s came i n t o f o r c e were given the o p t i o n of c o n t i n u i n g to e x p l o r e f o r o i l and gas i n accord-3 8 ance wi t h the terms of those t i t l e s , or making a p p l i c -a t i o n s f o r the grant of permits c o v e r i n g the areas s u b j e c t 39 to those t i t l e s . Those who chose the l a t t e r course r e c e i v e d permits of f u l l - t e r m d u r a t i o n , i r r e s p e c t i v e of 38 I b i d . , s e c t i o n 143 (Cwth.). 39 I b i d . , s e c t i o n 144 (Cwth.). 155. the time remaining under t h e i r previous e x p l o r a t i o n t i t l e s . Where a company h e l d an e x p l o r a t i o n t i t l e c o v e r i n g an area g r e a t e r than the maximum all o w e d f o r a permit, i t was allowed to take out a s e r i e s of new permits c o v e r i n g the whole of the o r i g i n a l a r e a , each c a r r y i n g i t s own work o b l i g a t i o n s . The p r o d u c t i o n l i c e n c e s t h a t had been i s s u e d i n 1967 by the V i c t o r i a n government i n r e s p e c t of the Barracouta and M a r l i n f i e l d s took e f f e c t , when the Submerged Lands A c t s came i n t o f o r c e , as p r o d u c t i o n l i c e n c e s under those 41 A c t s . The h o l d e r of the Barrow I s l a n d p r o d u c t i o n l e a s e , i s s u e d i n February 1967, was given the r i g h t to apply f o r a p r o d u c t i o n l i c e n c e under the Submerged Lands Ac t s i n 42 r e s p e c t of the o f f s h o r e areas covered by the l e a s e . (b) Stated Management O b j e c t i v e s . The Submerged Lands Act s c o n t a i n no statement of management o b j e c t i v e s f o r o f f s h o r e o i l and gas r e s o u r c e s , and none nave been expressed by the seven governments t h a t agreed to enact t h i s l e g i s -l a t i o n . 40 41 42 Report, o o . c i t . note 2, 10.47. Submerged Lands A c t s , s e c t i o n 146 (Cwth.). I b i d . , s e c t i o n 148 (Cwth.). 156 However, there have been i n d i c a t i o n s t h a t the govern-ments were prepared to s a c r i f i c e p o t e n t i a l revenue from p r o d u c t i o n i n order to encourage e x p l o r a t i o n . A f t e r a meeting between Commonwealth and s t a t e s ' M i n i s t e r s on June 30, 1966, at which the r o y a l t y to be paid upon p r o d u c t i o n of o f f s h o r e o i l and gas was d i s c u s s e d , the A c t i n g M i n i s t e r f o r N a t i o n a l Development s t a t e d t h a t the M i n i s t e r s regarded the 10% r a t e , which had been agreed upon f o r the f i r s t 21 years of a p r o d u c t i o n l i c e n c e , as an " i n c e n t i v e " r a t e , and noted t h a t i t was lower than the r a t e a p p l i c a b l e to p r o d u c t i o n from o f f s h o r e r e g i o n s of 43 both the U n i t e d Kingdom and the U n i t e d S t a t e s . Furthermore, the p r o v i s i o n s of the Submerged Lands Ac t s which a l l o w a d i s c o v e r e r of o i l or gas to e l e c t to pay an a d d i t i o n a l r o y a l t y of between 1% and 2%% upon p r o d u c t i o n i n s t e a d of s u r r e n d e r i n g any b l o c k s i n the l o c a t i o n d e c l a r e d i n r e s p e c t 44 of the d i s c o v e r y have been j u s t i f i e d on the ground t h a t the a u c t i o n i n g of surrendered b l o c k s would reduce the 45 o v e r a l l c a p i t a l a v a i l a b l e f o r e x p l o r a t i o n . 43 Report, o o . c i t . note 2, para. 9.9. 44 The procedure by which a l o c a t i o n i s d e c l a r e d i s d e s c r i b e d i n f r a , 170-172. 45 Report, o o . c i t . note 2, para. 12.99. 157. (c) E x p l o r a t i o n . The Submerged Lands Acts p r o h i b i t e x p l o r -a t i o n f o r o i l and gas i n the adjacent areas except by the ho l d e r of an e x p l o r a t i o n permit, or as otherwise provided by the A c t s . 4 6 A permit i s granted i n r e s p e c t of a s p e c i f -i e d area, and g i v e s the h o l d e r e x c l u s i v e e x p l o r a t i o n r i g h t s 47 withxn t h a t area. The power to grant e x p l o r a t i o n permits i s vested by the Submerged Lands Ac t s i n the Designated A u t h o r i t y . The f i r s t step i n the procedure to be f o l l o w e d i s f o r the Designated A u t h o r i t y to i n v i t e , by p u b l i c n o t i c e , a p p l i c -4 a t i o n s f o r the grant of permits i n r e s p e c t of named b l o c k s . A p p l i c a t i o n s must be accompanied by p a r t i c u l a r s of the a p p l i c a n t ' s proposed work programme and expenditure, the t e c h n i c a l q u a l i f i c a t i o n s of the a p p l i c a n t , the t e c h n i c a l a d v i c e a v a i l a b l e to the a p p l i c a n t , and the f i n a n c i a l r esources a v a i l a b l e to the a p p l i c a n t ; they may a l s o s e t out "any other matters t h a t the a p p l i c a n t wishes the Designated 49 A u t h o r i t y to c o n s i d e r " . The Designated A u t h o r i t y may then grant permits to whichever a p p l i c a n t s he chooses, i n h i s 46 Submerged Lands A c t s , s e c t i o n 19 (Cwth.). 47 I b i d . , s e c t i o n 28 (Cwth.). 48 I b i d . , s e c t i o n 20(1) (Cwth.). 49 I b i d . , s e c t i o n 21(1) (Cwth.). 158. d i s c r e t i o n . 'Where an a p p l i c a t i o n f o r a permit i s made i n r e s p e c t of one or more b l o c k s t h a t p r e v i o u s l y formed p a r t of a p r o d u c t i o n l i c e n c e or a l o c a t i o n d e c l a r e d i n r e s p e c t of a d i s c o v e r y , the a p p l i c a t i o n must a l s o s p e c i f y the amount t h a t the a p p l i c a n t i s prepared to pay to the Designated A u t h o r i t y to secure the grant of a permit. ^ The Designated A u t h o r i t y r e t a i n s the same wide d i s c r e t i o n i n t h i s case i n the g r a n t i n g of permits. With rega r d to any area f o r which a p p l i c a t i o n s f o r permits have been i n v i t e d but no permit has been granted, the Designated A u t h o r i t y may g i v e p u b l i c n o t i c e of t h i s f a c t , and t h e r e a f t e r may r e c e i v e a p p l i c a t i o n s f o r permits 51 without f u r t h e r p u b l i c i n v i t a t i o n or n o t i c e . A p p l i c a t i o n s lodged a t t h i s l a t e r stage must c o n t a i n the same in f o r m -a t i o n as i n v i t e d a p p l i c a t i o n s . The Designated A u t h o r i t i e s i n d i f f e r e n t s t a t e s have e x e r c i s e d t h e i r power to grant e x p l o r a t i o n permits accor d i n g to d i f f e r e n t p r i n c i p l e s . In the case of New South V/ales, 50 I b i d . , s e c t i o n 23(4)(d) (Cwth.). 51 I b i d . , s e c t i o n 20(3) (Cwth.). no t r a n s i t i o n a l permits were i s s u e d , as the terms of a l l p r e v i o u s l y - i s s u e d e x p l o r a t i o n t i t l e s had e x p i r e d b e f o r e the Submerged Lands Acts came i n t o f o r c e . I n 1969, the Designated A u t h o r i t y p u b l i s h e d a n o t i c e i n v i t i n g a p p l i c -a t i o n s f o r permits i n r e s p e c t of the e n t i r e adjacent area of New South Wales, and permits have s i n c e been i s s u e d i n 52 response to a p p l i c a t i o n s r e c e i v e d from time to time. I n the case of Queensland, there were s e v e r a l e x p l o r a t i o n t i t l e s s t i l l c u r r e n t when the Submerged Lands Acts came i n t o o p e r a t i o n , and new permits were i s s u e d f o r these. In October 1968, when the Designated A u t h o r i t y i n v i t e d a p p l i c a t i o n s f o r f u r t h e r p e r m i t s , approximately 40% of the adjacent area was w i t h h e l d from a p p l i c a t i o n . The areas i n r e s p e c t of which a p p l i c a t i o n s were i n v i t e d made up a chequerboard p a t t e r n , and v a r i e d i n number of b l o c k s i n each permit from 33 i n h i g h l y p r o s p e c t i v e areas to 387 i n re g i o n s c o n s i d e r e d u n p r o s p e c t i v e . The reason given f o r v.'ithholding a l a r g e s e c t i o n of the adjacent area was to enable b e t t e r d e c i s i o n s to be made i n the f u t u r e on the a l l o c a t i o n of p e r m i t s , based on the response made to the f i r s t i n v i t a t i o n . Queensland r e c e i v e d 41 a p p l i c a t i o n s f o r p ermits. One area a t t r a c t e d 19 of these, and another r e c e i v e d 11; no a p p l i c a t i o n s were made f o r permits over 52 Report, o o . c i t . note 2, para. 7.57. 160 seven of the areas o f f e r e d . The Designated A u t h o r i t y d i d not have to decide among competing a p p l i c a n t s , however, as the i s s u e of a l l permits has been d e f e r r e d pending the r e p o r t of the J o i n t Royal Commissions on the q u e s t i o n of 53 petroleum d r i l l i n g i n the B a r r i e r Reef area. On the whole, though, there has been l i t t l e o p p o r t u n i t y f o r the Designated A u t h o r i t i e s to experiment i n the g r a n t i n g of p e r m i ts. On A p r i l 1, 1969, when the Submerged Lands Act s were proclaimed, the o f f s h o r e area s u b j e c t to e x p l o r -a t i o n t i t l e s p r e v i o u s l y i s s u e d by the s t a t e s or t e r r i t o r i e s 54 was 743,80 3 square m i l e s , about 75% of the t o t a l . Most of these t i t l e s have been r e p l a c e d by new permits pursuant to the t r a n s i t i o n a l p r o v i s i o n s , ^ and these w i l l remain i n f o r c e without area r e d u c t i o n u n t i l 1974. The sum of $1,000 must be pai d w i t h each a p p l i c a t i o n f o r a permit; $900 i s r e t u r n e d i f the a p p l i c a t i o n i s 5 6 u n s u c c e s s f u l . The ho l d e r of a permit must pay to the 53 I b i d . , paras. 10.74-80. 54 I b i d . , para. 10.45. 55 Submerged Lands A c t s , P a r t I I I , D i v i s i o n 7, s e c t i o n s 141-149 (Cwth.). 56 I b i d . , s e c t i o n 21 (Cwth.). 161 Designated A u t h o r i t y an annual fee of S 1 0 0 or S5 per b l o c k , 57 whichever i s the a r e a t e r . The r i g h t s c o n f e r r e d by a permit are e x p l o r a t o r y r i g h t s o n l y , but i n c l u d e the r i g h t to d r i l l f o r e x p l o r a t i o n 5 8 purposes. The ho l d e r of a permit a l s o r e c e i v e s a p r e f e r e n t 59 r i g h t to a p r o d u c t i o n l i c e n c e upon d i s c o v e r y of o i l or gas. A permit i s granted s u b j e c t to such c o n d i t i o n s as the Designated A u t h o r i t y t h i n k s f i t and s p e c i f i e s i n the p e r m i t . 6 ^ Of great importance among these c o n d i t i o n s are those s p e c i f y i n g the work programme and expenditure commit-61 ment. N e g o t i a t i o n s as to these c o n d i t i o n s f r e q u e n t l y take p l a c e between the Designated A u t h o r i t y and an a p p l i c a n t f o r a permit before the permit i s granted, and i n the case where there are s e v e r a l a p p l i c a n t s f o r a permit over the one area, proposed work programmes and expenditures may determine which a p p l i c a n t i s s u c c e s s f u l . An a p p l i c a n t to 57 Petroleum (Submerged L a n d s ) ( E x p l o r a t i o n Permit Fees) Act 1967, s e c t i o n 4. 58 Submerged Lands A c t s , s e c t i o n 21 (Cwth.). 59 I b i d . , s e c t i o n 43 (Cwth.). 60 I b i d . , s e c t i o n 33(1) (Cwth.). 61 I b i d . , s e c t i o n 33(2) (Cwth.). 162. whom a permit i s granted must provide s e c u r i t y i n the sum of $5,000 f o r compliance with the c o n d i t i o n s of the 62 permit, and the Designated A u t h o r i t y i s empowered to 6 3 c a n c e l a permit upon f a i l u r e to comply w i t h a c o n d i t i o n . The Submerged Lands Acts provide f o r a maximum area 64 f o r a permit of 400 b l o c k s . The minimum i s u s u a l l y 16 b l o c k s , but t h i s may be reduced i f fewer than 16 b l o c k s are a v a i l a b l e i n a r e g i o n , or i n the d i s c r e t i o n of the Desig-nated A u t h o r i t y . ^ 6 6 The term of a permit i s s i x years. I n a d d i t i o n , a 61 permit may be renewed f o r s u c c e s s i v e p e r i o d s of f i v e y e a r s , as of r i g h t i f the ho l d e r has complied w i t h the c o n d i t i o n s of the permit, the Submerged Lands A c t s , and the r e g u l a t i o n s , or i n the d i s c r e t i o n of the Designated A u t h o r i t y i f there 68 has not been t h i s compliance. However, upon each renewal 62 I b i d . , s e c t i o n s 22(1), 114 (Cwth.). 53 I b i d . , s e c t i o n 105 (Cwth.). 64 I b i d . , s e c t i o n 21(1) (Cwth.). 65 I b i d . , s e c t i o n s 21(2), 20(2) (Cwth.). 66 I b i d . , s e c t i o n 21 (Cwth.). 67 I b i d . 68 I b i d . , s e c t i o n 32 (Cwth.). a permit h o l d e r must surrender a t l e a s t h a l f the number 69 of blocks covered by tne permit. The b l o c k s i n r e s p e c t of which the permit i s renewed must c o n s t i t u t e a s i n g l e area or a number of d i s c r e t e areas, each block having a t l e a s t one s i d e i n common w i t h t h a t of another b l o c k , and each area comprising a t l e a s t 16 b l o c k s , u n l e s s fewer 70 than 16 b l o c k s are r e t a i n e d . A t r a n s f e r of a permit i s of no f o r c e u n t i l i t has been approved by the Designated A u t h o r i t y . The Designated A u t h o r i t y has no power to approve a t r a n s f e r unless i t i s an a b s o l u t e t r a n s f e r of the whole of the t r a n s f e r o r ' s 71 i n t e r e s t i n the permit. The Submerged Lands Acts r e q u i r e the holder of a permit to f u r n i s h to the Designated A u t h o r i t y , upon r e q u e s t , " i n f o r m a t i o n o r . . . documents r e l a t i n g to petroleum e x p l o r -72 a t i o n o p e r a t i o n s " . Any person i n p o s s e s s i o n of such i n f o r m a t i o n or documents may a l s o be r e q u i r e d to a t t e n d 69 I b i d . , s e c t i o n 70 I b i d . , s e c t i o n 71 I b i d . , s e c t i o n 72 I b i d . , s e c t i o n 31(1) (Cwth.). 31(2)-(5) (Cwth.). 78 (Cwth.). 115 (Cwth.). 164. b e f o r e the Designated A u t h o r i t y or other s p e c i f i e d person and answer q u e s t i o n s , upon oath i f r e q u i r e d , or produce the 73 documents. These p r o v i s i o n s have been i n t e r p r e t e d by the Chairman of the A u s t r a l i a n Petroleum E x p l o r a t i o n A s s o c i a t i o n as being wide enough to r e q u i r e permit h o l d e r s to d i s c l o s e a l l i n f o r m a t i o n , not o n l y raw e x p l o r a t i o n data, but i n t e r p r e t -74 a t i o n s of i t and r e l a t e d r e s e a r c h . I t xs not known whether Designated A u t h o r i t i e s have e x e r c i s e d t h e i r power to i t s f u l l e s t e x t e n t . The Designated A u t h o r i t y may a t any time make a v a i l a b l e to a M i n i s t e r of a s t a t e such i n f o r m a t i o n obtained from permit h o l d e r s . The Designated A u t h o r i t y may a l s o , a f t e r the elapse of a s p e c i f i e d time, p u b l i s h l i m i t e d c a t e g o r i e s of t h i s i n f o r m a t i o n , which r e l a t e to "the seabed or sub-s o i l , or to petroleum, i n a b l o c k , but not i n c l u d i n g any matter co n t a i n e d i n a r e p o r t , r e t u r n or document t h a t i n the o p i n i o n of the Designated A u t h o r i t y . . . i s a c o n c l u s i o n drawn, i n whole or i n p a r t , from, or an o p i n i o n based, i n 75 whole or xn p a r t , on any such i n f o r m a t i o n . " The time t h a t i s s p e c i f i e d i s f i v e years i n the case of a permit 73 I b i d . , s e c t i o n s 115, 116 (Cwth.). 74 Report, o o . c i t . note 2, para. 7.92. 75 Submerged Lands A c t s , s e c t i o n 118 (Cwth.). 165. t h a t continues i n f o r c e , and immediately i n the case of a permit t h a t i s surrendered or c a n c e l l e d . S i m i l a r d i s c l o s u r e and p u b l i c a t i o n p r o v i s i o n s are a p p l i c a b l e to the h o l d e r s of p r o d u c t i o n l i c e n c e s and p i p e l i n e l i c e n c e s , although i n these cases the s p e c i f i e d time i s one year i f the l i c e n c e remains i n f o r c e . I n d u s t r y has ob j e c t e d s t r o n g l y to the requirement t h a t i n t e r p r e t a t i o n s of data and o p i n i o n s be d i s c l o s e d ; f e a r s have a l s o been expressed th a t i n f o r m a t i o n s u p p l i e d to the Designated A u t h o r i t y may not be kept c o n f i d e n t i a l . The Submerged Lands Ac t s a l s o p r o v i d e f o r the g r a n t i n g of two types of temporary e x p l o r a t i o n t i t l e , c a l l e d s p e c i a l p r o s p e c t i n g a u t h o r i t i e s and access a u t h o r i t i e s . S p e c i a l p r o s p e c t i n g a u t h o r i t i e s are granted where the Designated A u t h o r i t y has i n v i t e d a p p l i c a t i o n s f o r e i t h e r a permit or a l i c e n c e i n r e s p e c t of b l o c k s p r e v i o u s l y forming p a r t of a p r o d u c t i o n l i c e n c e or l o c a t i o n , to enable p r o s p e c t i v e a p p l i c a n t s to ex p l o r e the b l o c k s before s u b m i t t i n g t h e i r a p p l i c a t i o n s . The maximum term of a s p e c i a l p r o s p e c t i n g a u t h o r i t y i s s i x months, and i t does not e n t i t l e the holder 166. to d r i l l a w e l l . Access a u t h o r i t i e s are granted to the ho l d e r of e i t h e r a permit or a l i c e n c e , to enable the hol d e r to c a r r y out e x p l o r a t i o n o p e r a t i o n s i n an area o u t s i d e h i s permit or l i c e n c e area. The nature of the proposed e x p l o r a t i o n o p e r a t i o n s must be s p e c i f i e d i n an a p p l i c a t i o n f o r an access a u t h o r i t y , which i s granted f o r s p e c i f i e d purposes o n l y . D r i l l i n g of a w e l l i s not 77 pe r m i t t e d . The Commonwealth government s u b s i d i s e s c e r t a i n e x p l o r -a t i o n o p e r a t i o n s f o r o i l and gas under the Petroleum Search Subsidy Scheme. This scheme was i n i t i a t e d i n 1957 to 78 encourage search f o r o i l and gas by s t r a t i g r a p h i c d r i l l i n g . I n 1959, the scheme was broadened so as to make g e o p h y s i c a l 79 surveys e l i g i b l e f o r subsidy as w e l l . I n 1964, the scheme was f u r t h e r extended to i n c l u d e o p e r a t i o n s on the c o n t i n e n t a l , , . 80 s h e l f . The d e t a i l s of the scheme have been a l t e r e d from time 76. I b i d . , s e c t i o n 111 (Cwth.). 77 I b i d . , s e c t i o n 112 (Cwth.). 78 Petroleum Search Subsidy Act 1957, No.90 of 1957. 79 Petroleum Search Subsidy Act 1959, No.60 of 1959. 80 Petroleum Search Subsidy Act 1964, No.57 of 1964. 167 to time, but a t present i t operates as f o l l o w s : the c o n t r o l l i n g l e g i s l a t i o n i s the Petroleum Search Subsidy 81 Act 1959-1969. Subsidy i s payable on e x p l o r a t i o n d r i l l -i n g and g e o p h y s i c a l survey work, c a r r i e d . o u t i n A u s t r a l i a or i n a submarine area i n the v i c i n i t y of A u s t r a l i a . However, areas w i t h i n p a r t i c u l a r d i s t a n c e s of a d i s c o v e r y of o i l or gas are excluded from subsidy. An a p p l i c a n t f o r subsidy must f i r s t o b t a i n the approval of the M i n i s t e r f o r N a t i o n a l Development f o r the proposed o p e r a t i o n s , and then en t e r s i n t o an agreement w i t h the M i n i s t e r on b e h a l f of the Commonwealth f o r the payment of the subsidy. The terms of t h i s agreement l i e w i t h i n the d i s c r e t i o n of the M i n i s t e r . I f a commercial d i s c o v e r y i s made, subsidy i s repayable. The normal subsidy r a t e i s 30% of the c o s t of the approved o p e r a t i o n s . However, s i n c e 1969 the sub-s i d y has been reduced f o r o f f s h o r e o p e r a t i o n s c a r r i e d out by companies having l e s s than 51% A u s t r a l i a n e q u i t y owner-s h i p ; such companies r e c e i v e subsidy at a r a t e which i s the product of the normal r a t e and the percentage of e q u i t y owned by A u s t r a l i a n s . Operations c a r r i e d out pursuant to j o i n t venture arrangements a l s o r e c e i v e subsidy which i s reduced i n p r o p o r t i o n to the n o n - A u s t r a l i a n 81 No.60 of 1959, as amended by: No.74 of 1961, 1964, No.43 of 1967, and No.38 of 1969. No.57 of 168. 8 2 ownership of any of the j o i n t v e n t u r e r s . Terms which are i n c l u d e d i n a l l s u b s i d y agreements r e q u i r e d i s c l o s u r e of e x p l o r a t i o n i n f o r m a t i o n to the M i n i s t e r of N a t i o n a l Development, and i n p a r t i c u l a r , r e q u i r e the s u p p l y to the M i n i s t e r of c o r e s and c u t t i n g s o b t a i n e d i n e x p l o r a t i o n d r i l l i n g o p e r a t i o n s . I n a c c o r d -ance w i t h p o l i c y announced i n 1961, t h i s i n f o r m a t i o n i s r e l e a s e d to the p u b l i c s i x months a f t e r the c o m p l e t i o n of 83 any o p e r a t i o n . T o t a l s u b s i d i e s p a i d by the Commonwealth under the Petroleum Search Subsidy Scheme amount to more than $102 m i l l i o n . T a b l e 6.1 l i s t s the f i g u r e s i n more d e t a i l . These f i g u r e s s e r v e as a u s e f u l guide to the l e v e l of e x p l o r a t i o n a c t i v i t y i n A u s t r a l i a i n d i f f e r e n t y e a r s , s i n c e n e a r l y a l l companies a p p l y f o r s u b s i d y i f the e x p l o r a t i o n 84 o p e r a t i o n i s e l i g i b l e f o r i t . 82 Report, o p . c i t . note 2, paras. 11.24-29. 83 I b i d . , p a r a . 10.189. 84 O i l and Gas i n A u s t r a l i a , ANZ p u b l i c a t i o n , 1970, 24, quoted i b i d . , p a ra. 3.69. 169. TABLE 6.1 COMMONWEALTH SUBSIDY PAYMENTS TO OIL AND GAS EXPLORATION 1 9 5 7 - 1 9 7 0 . Year Amount ($) 1 9 5 7 - 6 2 1 1 , 9 7 2 , 0 0 0 1963 1 0 , 5 1 9 , 2 0 8 1964 9,121,910 1965 1 0 , 4 1 2 , 8 4 2 1966 1 0 , 1 5 4 , 1 6 9 1967 1 0 , 3 2 6 , 5 8 7 1968 1 3 , 8 0 5 , 4 8 4 1969 1 4 , 9 1 1 , 3 5 1 1970 1 1 , 2 3 7 , 0 0 0 TOTAL 1 0 2 , 4 6 0 , 5 5 1 Source: Reoort from the Senate S e l e c t Committee on Offshore Petroleum Resources, 1 9 7 1 , para. 3 1 7 0 . (d) A l l o c a t i o n of P r o d u c t i o n R i g h t s . O i l and gas may be produced commercially o f f s h o r e only by the holder of a 8 5 p r o d u c t i o n l i c e n c e . There are two methods by which a l i c e n c e may be o b t a i n e d ; f i r s t l y , a permit holder who d i s c o v e r s o i l or gas w i t h i n the permit area i s e n t i t l e d as of r i g h t to the grant of a l i c e n c e i n r e s p e c t of the 8 6 d i s c o v e r y ; and secondly, the Designated A u t h o r i t y may i s s u e a l i c e n c e over one or more b l o c k s which a t one time were i n c l u d e d i n a l i c e n c e or a l o c a t i o n which has s i n c e 8 7 been surrendered or c a n c e l l e d . A d i s c o v e r y of o i l or gas i n a permit area i s to be 88 n o t i f i e d immediately to the Designated A u t h o r i t y , who may r e q u i r e the permit h o l d e r to take steps to e v a l u a t e 89 the d i s c o v e r y . F o l l o w i n g such a d i s c o v e r y , the permit h o l d e r may nominate a block to form the c e n t r e of a l o c a t i o n to be d e c l a r e d i n r e s p e c t of the d i s c o v e r y . A l o c a t i o n i s a group of nine b l o c k s , r e c t a n g u l a r i n shape, each s i d e 85 Submerged Lands A c t s , s e c t i o n 39 (Cwth.). 86 I b i d . , s e c t i o n 43 (Cwth.). 87 I b i d . , s e c t i o n 47 (Cwth.). 88 I b i d . , s e c t i o n 34 (Cwth.). 89 I b i d . , s e c t i o n 35 (Cwth.). 171 measuring t h r e e b l o c k s . I f the permit h o l d e r f a i l s to nominate a b l o c k upon which to base a l o c a t i o n , a f t e r b e i n g r e q u e s t e d to do so by the D e s i g n a t e d A u t h o r i t y , the 90 D e s i g n a t e d A u t h o r i t y may nominate such a b l o c k . T h i s i s to ensure t h a t t h e r e i s no undue d e l a y i n moving from the e x p l o r a t i o n to the p r o d u c t i o n s t a g e . Once a l o c a t i o n has been d e c l a r e d , the permit h o l d e r i s g i v e n an o p t i o n i n the s e l e c t i o n o f a p r o d u c t i o n l i c -ence. The f i r s t c o u r s e open i s to a p p l y f o r a l i c e n c e 91 c o v e r i n g f i v e of the n i n e b l o c k s i n the l o c a t i o n , i n which case the s t a n d a r d r o y a l t y r a t e of 10% w i l l a p p l y to 92 p r o d u c t i o n from t h a t l i c e n c e . These f i v e b l o c k s a r e r e f e r r e d to as the p e r m i t h o l d e r ' s p r i m a r y e n t i t l e m e n t , and the l i c e n c e i s s u e d i n r e s p e c t of these b l o c k s i s c a l l e d a primary l i c e n c e . The second c o u r s e open to the p e r m i t h o l d e r i s to a p p l y f o r a l i c e n c e over more than f i v e 93 b l o c k s i n the l o c a t i o n , i n which case the r o y a l t y r a t e which w i l l a p p l y to a l l p r o d u c t i o n w i l l be determined 90 I b i d . , s e c t i o n 36 (Cwth.). 91 I b i d . , s e c t i o n 40(1) (Cwth.). 92 Petroleum (Submerged L a n d s ) ( R o y a l t y ) A c t , s e c t i o n 5. 93 Submerged Lands A c t s , s e c t i o n 40(3) (Cwth.). 172. by the Designated A u t h o r i t y , between 11% and 12%%. Blocks a p p l i e d f o r i n excess of the primary e n t i t l e m e n t are r e f e r r e d to as the secondary e n t i t l e m e n t , and the l i c e n c e granted i n r e s p e c t of them i s c a l l e d a secondary l i c e n c e . However, i t i s important to note t h a t i f a permit ho l d e r a p p l i e s f o r a l i c e n c e over h i s secondary e n t i t l e m e n t , the a d d i t i o n a l r o y a l t y as determined by the Designated A u t h o r i t y a p p l i e s to p r o d u c t i o n from both the primary and the secondary l i c e n c e areas. The permit h o l d e r i s given a p e r i o d of two years from the date of d e c l a r a t i o n of the l o c a t i o n to s e l e c t b l o c k s to form a l i c e n c e . This p e r i o d may a l s o be extended, i n 95 the d i s c r e t i o n of the Designated A u t h o r i t y , to f o u r years. Any b l o c k s w i t h i n the l o c a t i o n t h a t are not s e l e c t e d f o r a l i c e n c e w i t h i n t h i s p e r i o d are e x c i s e d from the permit 96 are a , and r e v e r t to the Crown. Where a d i s c o v e r y w e l l i s used as the b a s i s f o r d e c l a r -i n g a l o c a t i o n , no other w e l l i n t h a t l o c a t i o n may be used as the b a s i s f o r d e c l a r i n g another l o c a t i o n , unless the 94 I b i d . , s e c t i o n 42 (Cwth.). 95 I b i d . , s e c t i o n 40(4) (Cwth.). 96 I b i d . , s e c t i o n 46 (Cwth.). 173. Designated A u t h o r i t y so approves i n s p e c i a l circumstances. T h i s i s to prevent assessment w e l l s being used f o r the d e c l a r a t i o n of l o c a t i o n s , l e a d i n g to the g r a n t i n g of f u r t h e r l i c e n c e s i n r e s p e c t of the one producing s t r u c t u r e . The second method by which l i c e n c e s may be obtained i n v o l v e s c o m p e t i t i v e b i d d i n g . Where a l i c e n c e has been surrendered or c a n c e l l e d as to a b l o c k , or a permit has been surrendered or c a n c e l l e d as to a block t h a t was i n -cluded i n a l o c a t i o n , the Designated A u t h o r i t y i s given the power to dispose of the b l o c k s i n q u e s t i o n by one of two methods: he may i n v i t e a p p l i c a t i o n s f o r permits pur-98 suant to s e c t i o n 23 of the Submerged Lands A c t s , or he may i n v i t e a p p l i c a t i o n s f o r l i c e n c e s pursuant to s e c t i o n 47. There i s o n l y one r e s t r i c t i o n placed upon h i s c h o i c e ; b e f o r e he can i n v i t e a p p l i c a t i o n s f o r l i c e n c e s i n r e s p e c t of b l o c k s t h a t were p r e v i o u s l y i n c l u d e d i n a l o c a t i o n , he must be of the o p i n i o n t h a t there i s o i l or gas w i t h i n these b l o c k s . An i n v i t a t i o n under s e c t i o n 47 must s p e c i f y the type of c o m p e t i t i v e b i d d i n g to be employed, e i t h e r cash bonus 97 I b i d . , s e c t i o n 36(3) (Cwth.). 98 Supra, 158. 174. 99 b i d d i n g or r o y a l t y b i d d i n g . I f the Designated A u t h o r i t y decides upon r o y a l t y b i d d i n g , he may a l s o s t i p u l a t e t h a t a f i x e d cash sum be paid i n a d d i t i o n by the s u c c e s s f u l 100 b i d d e r . Where a p p l i c a t i o n s are i n v i t e d under s e c t i o n 47 but none are r e c e i v e d w i t h i n the nominated time, or no l i c e n c e i s granted i n response to the a p p l i c a t i o n s t h a t are r e c e i v e d , the Designated A u t h o r i t y may g i v e p u b l i c n o t i c e of t h i s f a c t , and t h e r e a f t e r without i n v i t a t i o n r e c e i v e f u r t h e r a p p l i c a t i o n s i . 101 f o r l i c e n c e s . A p p l i c a t i o n s f o r l i c e n c e s under s e c t i o n 47 may be accepted or r e j e c t e d i n the d i s c r e t i o n of the Designated 102 A u t h o r i t y . No p r i n c i p l e s are s t a t e d i n the Submerged Lands Act to govern the e x e r c i s e of t h i s d i s c r e t i o n . The r i g h t s c o n f e r r e d by a o p e r a t i o n s f o r the recovery of a r e a , to e x p l o r e f o r o i l and g l i c e n c e are to c a r r y on o i l and gas i n the l i c e n c e as i n the l i c e n c e area, and to 99 Submerged Lands A c t s , s e c t i o n 47(2) (Cwth.). 100 I b i d . , s e c t i o n 47(3) (Cwth.). 101 I b i d . , s e c t i o n 47(4) (Cwth.). 102 I b i d . , s e c t i o n 49 (Cwth.). 175. c a r r y on such o p e r a t i o n s and execute such works i n the . . . 103 T T l i c e n c e area as are necessary f o r chose purposes. Upon recovery of any o i l and gas by a l i c e n c e h older i n the l i c e n c e a r e a , the o i l and gas becomes the property of the l i c e n c e h o l d e r . The term of a l i c e n c e i s 21 years. However, where a l i c e n c e h o l d e r has complied w i t h the c o n d i t i o n s of the l i c e n c e and the p r o v i s i o n s of the Submerged Lands Ac t s and r e g u l a t i o n s , the l i c e n c e may be renewed as of r i g h t f o r a second term of 21 y e a r s , and i n the d i s c r e t i o n of the Designated A u t h o r i t y f o r f u r t h e r p e r i o d s determined by the Designated A u t h o r i t y , each not exceeding 21 years. Where at the end of the i n t i t i a l term of the l i c e n c e the h o l d e r has not complied w i t h the c o n d i t i o n s of the l i c e n c e or the p r o v i s i o n s of the Submerged Lands Acts or r e g u l a t i o n s , renewal l i e s w i t h i n the d i s c r e t i o n of the Designated Author-. , 105 i t y . A l i c e n c e i s granted s u b j e c t to such c o n d i t i o n s as the 103 104 105 I b i d . , s e c t i o n 52 (Cwth.). I b i d . , s e c t i o n 127 (Cwth.). I b i d . , s e c t i o n s 53-55 (Cwth.). 176 Designated A u t h o r i t y t h i n k s f i t and s p e c i f i e s i n the 106 l i c e n c e . The annual expenditure requirement i s , however, provided f o r by s e c t i o n 57 of the Submerged Lands A c t s . I n the f i r s t year of the term of the l i c e n c e the h o l d e r must spend, on o p e r a t i o n s conducted w i t h i n the l i c e n c e a rea, an amount c a l c u l a t e d by m u l t i p l y i n g the sum of $100,000 by the number of b l o c k s comprising the l i c e n c e area. I n each subsequent year, a s i m i l a r expenditure i s to be made, but the value of o i l and gas recovered from the l i c e n c e area i n the preceding year i s d e d u c t i b l e from the annual expend-i t u r e commitment. The Designated A u t h o r i t y may, i f he i s s a t i s f i e d t h a t s p e c i a l circumstances e x i s t to j u s t i f y h i s doing so, exempt a l i c e n c e h older from compliance w i t h the 10 7 expenditure requirement i n any year of the l i c e n c e term. The Designated A u t h o r i t y , upon the grant of a l i c e n c e , may r e q u i r e the p r o s p e c t i v e holder to lodge s e c u r i t y i n the sum of $50,000 f o r compliance w i t h the c o n d i t i o n s of the l i c e n c e . A l i c e n s e e may a t any time, w i t h the consent of the 106 I b i d . , s e c t i o n 56 (Cwth.). 107 I b i d . , s e c t i o n 57(4) (Cwth.). 108 I b i d . , s e c t i o n s 43, 114 (Cwth.). 177 Designated A u t h o r i t y , surrender a l i c e n c e i n whole or i n p a r t . The Designated A u t h o r i t y i s not to g i v e h i s consent unless the holder has complied w i t h the c o n d i t i o n s of the l i c e n c e and the p r o v i s i o n s of the Submerged Lands 109 A c t and r e g u l a t i o n s . Moreover, the Designated A u t h o r i t y i s empowered to cancel a l i c e n c e where the holder has f a i l e d to comply w i t h the c o n d i t i o n s of the l i c e n c e , a d i r e c t i o n i s s u e d by the Designated A u t h o r i t y , or a pro-110 v i s i o n of the Submerged Lands Acts or r e g u l a t i o n s . Another most important power given to the Designated A u t h o r i t y i s to c o n t r o l , w i t h i n h i s d i s c r e t i o n , the r a t e 111 of recovery of o i l and gas from any l i c e n c e area. An annual r e n t a l i s payable to the Designated A u t h o r i t y i n r e s p e c t of each l i c e n c e area. This fee i s c a l c u l a t e d a t the r a t e of 53,000 f o r each of the b l o c k s to which the 112 l i c e n c e r e l a t e s a t the commencement of each year. The r o y a l t y r a t e of 10% (where a permit holder s e l e c t s 109 I b i d . , s e c t i o n 104 (Cwth.). 110 I b i d . , s e c t i o n 105 (Cwth.). 111 I b i d . , s e c t i o n 58 (Cwth.). 112 Petroleum (Submerged L a n d s ) ( P r o d u c t i o n L i c e n c e Fees) Act 1967, s e c t i o n 4. 178. h i s primary e n t i t l e m e n t o n l y ) or of between 11% and 12%% (where a permit h o l d e r s e l e c t s p a r t or a l l o f h i s secondary e n t i t l e m e n t as w e l l ) a p p l i e s f o r the i n i t i a l term of the l i c e n c e . The r a t e a p p l i c a b l e to a l i c e n c e g r a n t e d by way of renewal i s the r a t e f i x e d by the governments of the Commonwealth and the s t a t e s , and agreed to by the r e s p e c t i v e P a r l i a m e n t s , p r i o r to the renewal; i f no new r a t e i s f i x e d , the r a t e i s t h a t a p p l i c a b l e under the 113 l i c e n c e b e f o r e renewal. Where the Desi g n a t e d A u t h o r i t y i s s a t i s f i e d t h a t the r a t e o f r e c o v e r y of o i l and gas from a w e l l has become so reduced t h a t , h a v i n g r e g a r d t o the a p p l i c a b l e r a t e of r o y a l t y , f u r t h e r r e c o v e r y of o i l and gas from t h a t w e l l would be uneconomic, the Desi g n a t e d A u t h o r i t y may reduce the a p p l i c a b l e r a t e o f r o y a l t y f o r such p e r i o d 114 as he may t h i n k f i t . To 1971, f o u r p r o d u c t i o n l i c e n c e s had been g r a n t e d , each of these b e i n g i n r e s p e c t o f a d i s c o v e r y made by the permit h o l d e r , BHP. The f o u r f i e l d s a re B a r r a c o u t a , M a r l i n , H a l i b u t and K i n g f i s h , a l l i n the G i p p s l a n d B a s i n . BHP s e l e c t e d i t s f u l l secondary e n t i t l e m e n t i n each case, with the r e s u l t t h a t each l i c e n c e c o v e r s n i n e b l o c k s . The 113 Petroleum (Submerged L a n d s ) ( R o y a l t y ) A c t 1967, s e c t i o n 5. 114 I b i d . , s e c t i o n 6. 179. r o v a l t v r a t e s a c l i c a b l e (Barracouta and M a r l i n ) 115 and 12%% ( H a l i b u t and K i n g f i s h ) . Under a j o i n t venture arrangement between BHP•and Esso r e l a t i n g to the e x p l o r a t i o n of s e v e r a l permit areas h e l d by BHP, Esso became e n t i t l e d to a 50% i n t e r e s t i n a l l l i c e n c e s o b t a i n e d . (e) Revenues from O i l and Gas O p e r a t i o n s . T h e . p r i n c i p a l source of revenues from o f f s h o r e o i l and gas o p e r a t i o n s to date has been r o y a l t i e s p a i d on p r o d u c t i o n from the f o u r G i ppsland b a s i n f i e l d s . T o t a l r o y a l t i e s to June 1971 were $18,858,173. I t has been a n t i c i p a t e d t h a t o i l pro-d u c t i o n from these f i e l d s f o r the f i n a n c i a l year 1971/72 would exceed 100 m i l l i o n b a r r e l s , and t h a t r o y a l t i e s on t h i s c o uld be i n excess of $23 m i l l i o n , of which about $7.5 m i l l i o n would be payable to the Commonwealth and approximately $15.5 m i l l i o n would be payable to the s t a t e 11S of V i c t o r i a . Table 6.2 shows r o y a l t i e s paid by year, to the Commonwealth and V i c t o r i a . No f i g u r e s are a v a i l a b l e f o r annual fees pa i d on permits and l i c e n c e s , but such payments would be s m a l l , as compared to r o y a l t i e s . 115 Report, OP. c i t . note 2, para. 12.55. 116 I b i d . , paras. 9.173-174. 180. TABLE 6.2 GIPPSLAND BASIN ROYALTIES. Year Commonwealth V i c t o r i a T o t a l ($) 1968- 69 360 1,167 1,527 1969- 70 475,492 2,006,155 2,481,647 1970- 71 5,015,982 11,359,017 16,374,999 TOTAL 5,491,834 13,366,339 18,858,173 Source: Report from the Senate S e l e c t Committee on Offsh o r e Petroleum Resources, 1971, para. 9.174. 181. ( f ) Revenue from Income Ta x a t i o n . In 1968, the Income 117 Tax Assessment Act was amended to pr o v i d e t h a t persons or c o r p o r a t i o n s d e r i v i n g income from or i n connection w i t h o f f s h o r e o i l and gas o p e r a t i o n s i n the v i c i n i t y of A u s t r a l i a would be l i a b l e to A u s t r a l i a n income t a x , and would be t r e a t e d i n the same way under the Assessment Act as persons 118 or c o r p o r a t i o n s c a r r y i n g out s i m i l a r o p e r a t i o n s onshore. Froducers of o i l and gas are assessed f o r income tax purposes on the same b a s i s as other taxpayers. Two methods are a p p l i c a b l e , depending upon whether the taxpayer i s or i s not a r e s i d e n t of A u s t r a l i a . A company i n c o r p o r a t e d i n A u s t r a l i a i s a r e s i d e n t f o r t a x a t i o n purposes, and so i s a company i n c o r p o r a t e d elsewhere t h a t c a r r i e s on business i n A u s t r a l i a and has e i t h e r i t s c e n t r a l management and c o n t r o l i n A u s t r a l i a or i t s v o t i n g power c o n t r o l l e d by 119 shareholders who r e s i d e i n A u s t r a l i a . A r e s i d e n t company i s s u b j e c t to A u s t r a l i a n income tax on income from a l l 120 sources, whether i n or out of A u s t r a l i a , s u b j e c t to p r o v i s i o n s which g i v e r e l i e f a g a i n s t double t a x a t i o n of 117 1936, No.27 (as amended). 118 Income Tax Assessment Act (No.4) 1968, No.87 of 1968. 119 Income Tax Assessment Act 1936-1972, s e c t i o n 6(1). 120 I b i d . , s e c t i o n 25(1). 182. income which the company may d e r i v e and pay tax on i n 121 anotner country. A non-resxdent company i s s u b j e c t to A u s t r a l i a n tax only on income t h a t has a source i n Aust-12 2 r a l i a . The c u r r e n t r a t e of company tax i s 47>|%. However, producers of o i l and gas are given s p e c i a l concessions by way of deductions from gross income i n c a l c u l a t i n g a s s e s s a b l e income. The most important of these concessions i s the deduction f o r "unrecouped c a p i t a l 123 expenditure". This c o n s i s t s of s p e c i f i e d c a t e g o r i e s of c a p i t a l expenditure i n c u r r e d by the taxpayer i n c a r r y i n g out o i l and gas o p e r a t i o n s , l e s s any of t h i s expenditure l a t e r recovered by the taxpayer (e.g. upon s a l e of a s s e t s ) and any subsidy r e c e i v e d by the taxpayer i n r e s p e c t of the expenditure. The s p e c i f i e d c a t e g o r i e s of c a p i t a l expend-i t u r e are broad; they are c a p i t a l expenditure i n c u r r e d i n c a r r y i n g on p r o s p e c t i n g or mining o p e r a t i o n s f o r the purpose of d i s c o v e r i n g or o b t a i n i n g petroleum, c a p i t a l expenditure on p l a n t necessary f o r c a r r y i n g on these mining or p r o s p e c t i n g o p e r a t i o n s , and c a p i t a l expenditure 121 122 123 I b i d . , D i v i s i o n 19. I b i d . , s e c t i o n 25(1). I b i d . , s e c t i o n 124DF. 1 8 3 . on the a c q u i s i t i o n of p r o s p e c t i n g or mining r i g h t s . Three items are e x p r e s s l y excluded: expenditure on o i l and gas t r a n s m i s s i o n l i n e s (although g a t h e r i n g l i n e s are not ex c l u d e d ) , expenditure on s h i p s , r a i l w a y r o l l i n g stock and road v e h i c l e s used i n t r a n s p o r t i n g o i l and gas, and 125 r e f i n i n g p l a n t . In general terms then, c a p i t a l expend-i t u r e s f o r which the deduction i s allowed i n c l u d e a l l a c q u i s i t i o n , e x p l o r a t i o n and development e x p e n d i t u r e s , but do not extend t o the t r a n s p o r t a t i o n or r e f i n i n g stage of o p e r a t i o n s ( f o r "which other s p e c i a l tax treatment i s g i v e n ) . A petroleum p r o s p e c t i n g company may e l e c t to forego i n favour of i t s shareholders i t s e n t i t l e m e n t to deduct some or a l l of i t s unrecouped c a p i t a l expenditure. This happens when the company r e c e i v e s share c a p i t a l s u b s c r i p -t i o n s from A u s t r a l i a n r e s i d e n t shareholders which i t then expends on p r o s p e c t i n g or mining f o r petroleum. I f the company lodges an a p p r o p r i a t e d e c l a r a t i o n w i t h the Commiss-i o n e r of T a x a t i o n , r e s i d e n t shareholders can deduct t h e i r c a p i t a l s u b s c r i p t i o n s i n a s c e r t a i n i n g t h e i r t a x a b l e income, and the company's unrecouped c a p i t a l expenditure i s reduced 124 I b i d . , s e c t i o n s 124DB, 124DD. 125 I b i d . , s e c t i o n 124DD. 184. c o r r e s p o n d i n g l y . The deduction a l l o w a b l e f o r unrecouped c a p i t a l expend-i t u r e i n any year i s l i m i t e d to the amount of the pro-ducer's a s s e s s a b l e income t h a t i s d e r i v e d from the s a l e of o i l and gas won i n A u s t r a l i a and o f f s h o r e , a f t e r deduct-127 i n g a l l other a l l o w a b l e deductions. Unrecouped c a p i t a l expenditure which i s not deducted i n one year may be c a r r i e d forward f o r f u t u r e deductions. As an i n c e n t i v e f o r investment i n companies engaged i n petroleum o p e r a t i o n s , there i s an exemption from tax f o r d i v i d e n d s , whether d e r i v e d by r e s i d e n t or non-resident s h a r e h o l d e r s , p a i d out of income which i s i t s e l f exempt from tax through deduction of unrecouped c a p i t a l expend-. , 128 i t u r e . The e f f e c t of an immediate deduction being allowed f o r unrecouped c a p i t a l expenditure i s to g i v e companies t h a t have reached the p r o d u c t i o n stage an imputed i n t e r e s t s aving upon the amount of deductions made. For the company 125 I b i d . , s e c t i o n 77D. 127 I b i d . , s e c t i o n 124DG. 128 I b i d . , s e c t i o n 4 4 ( 2 ) ( d ) ( i ) . 185. t h a t has conducted e x t e n s i v e o p e r a t i o n s , t h i s saving i s l a r g e ; i t i s e s p e c i a l l y s i g n i f i c a n t to a company engaged c o n t i n u o u s l y i n e x p l o r a t i o n and development, p a r t i c u l a r l y i f c a p i t a l expenditures are r i s i n g from year to year. The r e s u l t of t h i s concession has been t h a t a company t h a t d i s c o v e r s o i l or gas does not pay tax on income d e r i v e d from p r o d u c t i o n u n t i l such time as i t has f u l l y absorbed i t s a l l o w a b l e c a p i t a l expenditure e i t h e r by way of deduct-ions f o r t h a t expenditure a g a i n s t a s s e s s a b l e income or by 129 t r a n s f e r r i n g deductions to i t s r e s i d e n t shareholders. 129 Reoort, o o . c i t . note 2, para. 9.73. 186. CHAPTER 7. ASSESSMENT. The. preceding chapters i l l u s t r a t e how q u i t e d i f f e r e n t methods may be adopted by governments f o r the management of o f f s h o r e o i l and gas r e s o u r c e s , and i n p a r t i c u l a r f o r the a l l o c a t i o n of r i g h t s over these resources. I t i s of l i m i t e d v a l u e , though, to compare these methods without f i r s t c o n s i d e r i n g the o b j e c t i v e s sought to be achieved by each. I d e a l l y , each management regime should be examined i n terms of i t s own o b j e c t i v e s , w i t h c r i t i c i s m d i r e c t e d towards the o b j e c t i v e s themselves i f i n a p p r o p r i a t e , and the ext e n t to which the regime f a l l s s h o r t of a c h i e v i n g them. U n f o r t u n a t e l y , the governments of the U n i t e d S t a t e s , the Un i t e d Kingdom, Canada and A u s t r a l i a have been r e l u c t a n t t o s t a t e s p e c i f i c o b j e c t i v e s f o r the management of t h e i r o f f s h o r e o i l and gas r e s o u r c e s , so t h a t any attempt to proceed i n t h a t way would i n v o l v e a good deal of s p e c u l a t i o n . I n s t e a d , the approach t h a t has been adopted i s to develop a s e t of o b j e c t i v e s which are i m p l i c i t i n the nature of o f f s h o r e o i l and gas r e s o u r c e s , and then to use these as the b a s i s f o r assessment of the e f f e c t i v e n e s s of the d i f f e r e n t management regimes. 187. A. Management O b j e c t i v e s . The i n t e r n a t i o n a l c h a r a c t e r of o f f s h o r e o i l and gas resources has meant t h a t c o a s t a l n a t i o n s have a c q u i r e d not only r i g h t s but a l s o o b l i g a t i o n s i n r e l a t i o n to them. As mentioned p r e v i o u s l y , these o b l i g a t i o n s i n c l u d e the pre-v e n t i o n of p o l l u t i o n , the p r e s e r v a t i o n of n a v i g a t i o n and f i s h i n g r i g h t s , and the p r o v i s i o n of access to o f f s h o r e areas f o r s c i e n t i f i c i n v e s t i g a t i o n . An important o b j e c t i v e of a management regime f o r these resources must t h e r e f o r e be the f u l f i l l m e n t of these i n t e r n a t i o n a l o b l i g a t i o n s . On the n a t i o n a l l e v e l , the s t a r t i n g p o i n t f o r the f o r m u l a t i o n of management o b j e c t i v e s i s the p u b l i c owner-s h i p of o f f s h o r e o i l and gas res o u r c e s . This r e q u i r e s t h a t the u l t i m a t e goal i n the management of these resources must be the p u b l i c b e n e f i t . I t w i l l be r e c a l l e d t h a t the U n i t e d S t a t e s Congress has d e c l a r e d i t s p o l i c y to be t h a t "the p u b l i c lands of the U n i t e d S t a t e s s h a l l be (a) r e t a i n e d and managed or (b) disposed o f , a l l i n a manner to provide 2 the maximum b e n e f i t f o r the general p u b l i c " . This should a l s o be the case i n the Uni t e d Kingdom, Canada and A u s t r a l i a . 1 Supra, 7-8. 2 Supra. 28. 1 8 8 The r o l e of a government i n p r o v i d i n g the maximum p u b l i c b e n e f i t from o f f s h o r e o i l and gas resources i s t w o f o l d . I n the f i r s t p l a c e , i t must a c t as the a r b i t e r of s o c i a l v a l u e s , e s t a b l i s h i n g and m a i n t a i n i n g a set of p o l i c i e s which r e s o l v e those i s s u e s of c h o i c e t h a t are i n a d e q u a t e l y c a t e r e d f o r i n a market economy. Secondly, i t must a c t w i t h i n the framework of these p o l i c i e s l i k e a p r i v a t e owner of r e s o u r c e s , and seek to maximize t h e i r present economic v a l u e . Any scheme which i s adopted f o r the management of o f f s h o r e o i l and gas r e s o u r c e s whether i t i n v o l v e s e x p l o i t a t i o n , p r e s e r v a t i o n or some compromise between the two, r e s u l t s i n both b e n e f i t s and c o s t s f o r the p u b l i c . Only some of these are taken i n t o account i n a market economy. O i l and gas recovered and labour and c a p i t a l expended are traded i n the market and thereby r e c e i v e a p r i c e which may be used to i n d i c a t e b e n e f i t s and c o s t s . On the other hand, improvement i n a country's balance of t r a d e p o s i t i o n , i n c r e a s e d employment of labour and c a p i t a l and r e g i o n a l economic development are s o c i a l b e n e f i t s which l i e o u t s i d e the market, and thus r e l y upon government a c t i o n f o r t h e i r r e a l i z a t i o n . These b e n e f i t s (and corresponding c o s t s ) can u s u a l l y be assigned a value i n economic terms. A t h i r d category of b e n e f i t s and c o s t s l i e o u t s i d e the market and do not lend themselves to economic 189. e v a l u a t i o n . Examples are provided by common property resources which are not s u b j e c t to p r i v a t e ownership or c o n t r o l , but r e q u i r e c o l l e c t i v e a c t i o n i n order to assume a c o n t i n u i n g v a l u e . The sea i s an abundant r e s p o s i t o r y of common pro p e r t y r e s o u r c e s , such as sp e c i e s of f i s h and p l a n t l i f e , n a v i g a t i o n r i g h t s , r e c r e a t i o n o p p o r t u n i t i e s and n a t u r a l beauty. O f f s h o r e o i l and gas o p e r a t i o n s i n e v i t a b l y have an e f f e c t upon such r e s o u r c e s . However, the p u b l i c nature of these resources prevents any e f f e c t s upon them from e n t e r i n g i n t o a p r i v a t e o i l and gas ope r a t o r ' s computation of b e n e f i t s and c o s t s , so to t h i s e x t e n t they are ne g l e c t e d . N e v e r t h e l e s s , they are important i n the c a l c u l a t i o n of p u b l i c b e n e f i t s and c o s t s from o f f s h o r e o i l and gas o p e r a t i o n s , and a government must take them i n t o account. A government must a s s i g n to common pr o p e r t y resources a s o c i a l v a l u e , which i s dependent upon p u b l i c a t t i t u d e s towards them, and i s a r r i v e d at through the p o l i t i c a l process. Several of the more s p e c i f i c p o l i c y o b j e c t i v e s i d e n t i f i e d w i t h r e s p e c t to management of o f f s h o r e o i l and gas resources i n the Un i t e d S t a t e s demonstrate the government's r o l e i n p l a c i n g s o c i a l values upon c e r t a i n non-market b e n e f i t s and c o s t s . These are the encouragement of p r i v a t e p a r t i c i p -a t i o n i n the development of these r e s o u r c e s , the encourage-ment of m u l t i p l e use of r e s o u r c e s , the advancement of know-190. ledge and the development of technology, and the p r o t e c t i o n 3 of environmental q u a l i t y . I n Canada there i s evidence of f e d e r a l government p o l i c y to use o i l and gas reso u r c e s to promote r e g i o n a l economic development, p a r t i c u l a r l y i n the 4 no r t h . I n the U n i t e d Kingdom the government appears to have placed importance upon improvement of the country's balance 5 of trade p o s i t i o n . Another area i n which government i n t e r v e n t i o n i s r e q u i r e d i n order to p r o v i d e the maximum p u b l i c b e n e f i t from o f f s h o r e o i l and gas resources i s the a l l o c a t i o n of resources among d i f f e r e n t time p e r i o d s , the ch o i c e between the present and the f u t u r e . One of the c o s t s i n c u r r e d i n e x p l o i t i n g r e s o u r c e s today i s the present value of the b e n e f i t s t h a t c o u l d have been obtained by e x p l o i t i n g them i n the f u t u r e , termed "user c o s t " by one w r i t e r . ^ User c o s t i s not n e g l e c t e d by entrepeneurs i f they are allowed to choose t h e i r own r a t e of e x p l o i t a t i o n , but t h e i r time p r e f e r e n c e s , expressed as the d i s c o u n t r a t e s used i n c a l c u l a t i n g the 3 Suora, 29. 4 Supra, 110-112. 5 Supra, 67-68. 6 S c o t t , A.D., N a t u r a l Resources: The Economics of Conserv a t i o n , Toronto, U n i v e r s i t y of Toronto P r e s s , 1955. 1 9 1 . present value of f u t u r e b e n e f i t s and c o s t s , are u n l i k e l y to c o i n c i d e w i t h t h a t of s o c i e t y as a whole. This may be due to many f a c t o r s such as i m p e r f e c t i o n s i n the c a p i t a l market, government t a x a t i o n p o l i c i e s and r i s k , which w i l l be compensated f o r i n the time preferences of entrepeneurs. The s o c i a l d i s c o u n t r a t e , on the other hand, i s determined as an e t h i c a l q u e s t i o n by s o c i e t y ' s a t t i t u d e towards the f u t u r e . A government's r o l e as a r b i t e r of s o c i a l values must have a pl a c e i n a management regime f o r o f f s h o r e o i l and gas re s o u r c e s . I t r e q u i r e s t h a t an o b j e c t i v e of such a regime be c o n t i n u i n g government c o n t r o l of the resources. Stated i n n e g a t i v e terms, a regime should not g i v e r i s e to such r i g i d i t y t h a t the government can no longer e x e r c i s e i t s f u n c t i o n of t a k i n g account of c u r r e n t s o c i a l a t t i t u d e s . An important aspect of t h i s o b j e c t i v e i s r e t e n t i o n of the o p t i o n to promote d i f f e r e n t government p o l i c i e s i n the f u t u r e . The values placed by s o c i e t y upon v a r i o u s p u b l i c b e n e f i t s and c o s t s a r i s i n g from o f f s h o r e o i l and gas o p e r a t i o n s are s u b j e c t to c o n s i d e r a b l e change from time to time, by v i r t u e of t h e i r nature. The l o s s of the a b i l i t y to take account of change r e s u l t s i n a management regime which i s no longer capable of p r o v i d i n g the maximum p u b l i c b e n e f i t . 192 The second r o l e of the government i n p r o v i d i n g the maximum p u b l i c b e n e f i t from o f f s h o r e o i l and gas resources i s to maximize t h e i r present economic v a l u e , s u b j e c t to the p o l i c i e s adopted to take account of s o c i a l b e n e f i t s and c o s t s . I n a c l o s e d economy t h i s i m p l i e s t h a t the resources should be managed so as to generate economic r e n t s w i t h the g r e a t e s t p o s s i b l e present v a l u e . I n t h i s way the government s a t i s f i e s the requirements of e f f i c i e n c y i n the a l l o c a t i o n of labour and c a p i t a l to the r e s o u r c e s , and ensures t h a t the r e s o u r c e s pro-duce maximum revenue. E q u i t y demands t h a t the economic r e n t s be c o l l e c t e d i n f u l l by the government on b e h a l f of the pub-l i c , the owners o f the r e s o u r c e s . In an open economy, however, the management of the r e s o u r c e s so as to produce the maximum economic r e n t s does not r e s u l t i n an e f f i c i e n t a l l o c a t i o n of labour and c a p i t a l because the s o c i a l c o s t of f a c t o r s of pro-d u c t i o n s u p p l i e d from o u t s i d e the economy i s zero. I n these circumstances the best t h a t a government can do i s seek to maximize the present value of i t s revenue from o f f s h o r e o i l and gas r e s o u r c e s . At the same time the a l l o c a t i o n of f a c t o r s of p r o d u c t i o n to these r e s o u r c e s from w i t h i n the economy should be r e g u l a t e d to ensure t h a t marginal r e t u r n s do not f a l l below those obtained i n other s e c t o r s of the economy. I t i s c l e a r t h a t the economies of the U n i t e d Kingdom, Canada and A u s t r a l i a are open i n so f a r as the o i l and gas 193. p r o d u c t i o n s e c t o r i s concerned, w i t h foreign-owned com-panies s u p p l y i n g a s u b s t a n t i a l p r o p o r t i o n of the f a c t o r s of p r o d u c t i o n . I n the Un i t e d S t a t e s f o r e i g n ownership i s not s i g n i f i c a n t , but the economy i s open n e v e r t h e l e s s . Many of the companies engaged i n o f f s h o r e o p e r a t i o n s i n the Uni t e d S t a t e s , though domestically-owned, are i n f a c t i n t e r n a t i o n a l companies w i t h investments i n s e v e r a l c o u n t r i e s . C a p i t a l which i s not i n v e s t e d i n U n i t e d S t a t e s o p e r a t i o n s i s un-l i k e l y to be i n v e s t e d i n s t e a d i n another s e c t o r of the Uni t e d S t a t e s economy, but w i l l probably be i n v e s t e d i n o i l and gas o p e r a t i o n s o u t s i d e the Uni t e d S t a t e s . A c c o r d i n g l y , i n a l l f o u r c o u n t r i e s the government should a c t w i t h i n the framework of i t s p o l i c i e s to o b t a i n the maximum government revenue from o f f s h o r e o i l and gas resources r a t h e r than to seek to maximize economic r e n t s . In summary, the s p e c i f i c o b j e c t i v e s t h a t should form the b a s i s of a management regime f o r o f f s h o r e o i l and gas resources are (1) f u l f i l l m e n t of the i n t e r n a t i o n a l o b l i g a t i o n s assoc-i a t e d w i t h the n a t i o n a l r i g h t s over the r e s o u r c e s , (2) c o n t i n -uing government c o n t r o l over the r e s o u r c e s , and (3) s u b j e c t t o government p o l i c y d e c i s i o n s , maximization of the present value of government revenue from the re s o u r c e s . The f i r s t and second of these are r e l a t e d , i n t h a t a management regime t h a t i s capable of a c h i e v i n g the second o b j e c t i v e w i l l a l s o be 194 a b l e to achieve the f i r s t , so long as the government regards compliance w i t h i n t e r n a t i o n a l o b l i g a t i o n s as a fundamental p o l i c y requirement. A c c o r d i n g l y , the systems adopted i n the U n i t e d S t a t e s , the U n i t e d Kingdom, Canada and A u s t r a l i a f o r a l l o c a t i o n of r i g h t s over o f f s h o r e o i l and gas resources w i l l be analysed i n terms of the second and t h i r d o b j e c t i v e s o n l y . Before doing so, however, i t i s important to n o t i c e the r e l a t i o n s h i p between these o b j e c t i v e s . I f p r i v a t e e n t e r p r i s e i s allowed to p a r t i c i p a t e i n the development of o f f s h o r e o i l and gas r e s o u r c e s , the degree of c o n t r o l r e t a i n e d by the government may a f f e c t the amount of government revenue t h a t these r e s o u r c e s can produce. To take an extreme case, r e -t e n t i o n of complete c o n t r o l by the government would mean t h a t a c q u i r e d p r i v a t e r i g h t s c o u l d be a l t e r e d a t any time. The u n c e r t a i n t y present i n such a system would discourage i n v e s t -ment, and cause a r e d u c t i o n i n revenue produced. T h i s would not present a problem i f development of o f f s h o r e o i l and gas resources was c a r r i e d out e x c l u s i v e l y by p u b l i c e n t e r p r i s e . However, t h i s i s not the case i n any of the four c o u n t r i e s c o n s i d e r e d here, and i t may be expected t h a t p r i v a t e e n t e r -p r i s e w i l l c o n t i nue to p l a y an important r o l e i n the f u t u r e . Therefore, the o b j e c t i v e of c o n t i n u i n g government c o n t r o l must be m o d i f i e d somewhat to reduce i t s impact upon the l e v e l of government revenue produced. 195 There are two stages of the management process at which government p o l i c y may be i n t r o d u c e d ; p r i o r to the g r a n t i n g of p r i v a t e r i g h t s over the r e s o u r c e s , and duri n g the term of these r i g h t s . I n t r o d u c t i o n of p o l i c y requirements d u r i n g the term of p r i v a t e r i g h t s o f t e n amounts to a l t e r a t i o n of these r i g h t s , and thus g i v e s r i s e to u n c e r t a i n t y . R i g h t s are not a l t e r e d , however, i f p o l i c y requirements are determined p r i o r to the g r a n t i n g of the r i g h t s , and so t h i s i s a p r e f e r -able time f o r seeking to achieve the o b j e c t i v e of government c o n t r o l . P r i o r to the g r a n t i n g of p r i v a t e r i g h t s over o f f s h o r e o i l and gas r e s o u r c e s , no e x e r c i s e of i n g e n u i t y can be s u f f i c i e n t to achieve the o b j e c t i v e of c o n t i n u i n g government c o n t r o l i f the d u r a t i o n of these r i g h t s i s e x c e s s i v e . A long term d u r i n g which p r i v a t e r i g h t s may not be a l t e r e d without i n -c u r r i n g the c o s t of f u t u r e u n c e r t a i n t y and l o s s of confidence r e s u l t s i n the l o s s of the o p t i o n to take account of changes i n s o c i a l a t t i t u d e s . A c c o r d i n g l y , the disadvantages a s s o c i a t e d w i t h the i n t e r -r e l a t i o n s h i p of the two o b j e c t i v e s of c o n t i n u i n g government c o n t r o l and maximization of government revenue are avoided by a system which promotes the f i r s t o b j e c t i v e p r i o r to the a l l o c a t i o n of p r i v a t e r i g h t s , which l i m i t s these r i g h t s i n 1 9 6 . d u r a t i o n , and which a l t e r s them afterwards i n except-i o n a l circumstances on l y . The a c t u a l p o l i c i e s adopted by a government to take account of c e r t a i n p u b l i c b e n e f i t s and c o s t s a l s o have an e f f e c t upon the amount of government revenue t h a t may be obtained from the r e s o u r c e s . For example, i f a government r e q u i r e s o f f s h o r e o p e r a t o r s to i n s t a l l p o l l u t i o n p r e v e n t i o n equipment, the added c o s t of o p e r a t i o n s w i l l be r e f l e c t e d i n reduced revenue r e c e i v e d by the government i n the f u t u r e . T h i s i s as i t should be, f o r the revenue foregone i s one of the c o s t s of the b e n e f i t s obtained from the p o l i c y of p r o t e c t i o n of the marine environment. Therefore, t h e r e i s no need to modify the o b j e c t i v e s of c o n t i n u i n g government c o n t r o l and maximization of government revenue on t h i s account. What should be emphasised, though, i s t h a t government revenues foregone i n implementing p o l i c i e s are hidden c o s t s , i n t h a t they are never r e c e i v e d by the government and i n some circumstances may never be q u a n t i f i e d a c c u r a t e l y . The danger here i s t h a t the f u l l s i g n i f i c a n c e of these c o s t s w i l l never be e v a l u a t e d , perhaps by the govern-ment, and c e r t a i n l y by the p u b l i c . They p r o v i d e t h e r e f o r e an i n c e n t i v e f o r economic i n e f f i c i e n c y , p a r t i c u l a r l y i n the case of p o l i c i e s such as r e g i o n a l economic development and improvement of trade balances which may u s u a l l y be 197 achieved by a l t e r n a t i v e means i n v o l v i n g a s c e r t a i n a b l e c o s t s . B. C o n t i n u i n g Government C o n t r o l . The a l l o c a t i o n systems f o r o f f s h o r e o i l and gas r i g h t s i n the U n i t e d S t a t e s , the U n i t e d Kingdom, Canada and A u s t r a l i a p r o v i d e f o r the e x e r c i s e of government c o n t r o l i n d i f f e r i n g degrees. The most e f f e c t i v e system i n terms of t h i s o b j e c t i v e i s t h a t of the U n i t e d S t a t e s , w h i l e Canada has the l e a s t e f f e c t i v e system. In the U n i t e d S t a t e s and the U n i t e d Kingdom the important r i g h t s are a c q u i r e d i n one stage, w i t h a l e a s e i n the U n i t e d S t a t e s and a p r o d u c t i o n l i c e n c e i n the U n i t e d Kingdom. E x p l o r a t i o n t i t l e s i n both c o u n t r i e s are not s i g n i f i c a n t ; they a f f o r d the h o l d e r l i m i t e d r i g h t s , and the government r e t a i n s wide powers to determine the c o n d i t i o n s upon which they are i s s u e d and to s u p e r v i s e o p e r a t i o n s conducted thereunder." 7 In Canada and A u s t r a l i a a two-stage procedure i s employed, w i t h e x c l u s i v e e x p l o r a t i o n r i g h t s l e a d i n g to 7 Supra, 30-31, 72. 198. p r o d u c t i o n r i g h t s . An e x p l o r a t o r y permit i n Canada i s the forerunner of a l e a s e ; an e x p l o r a t o r y l i c e n c e does not provide a t h i r d stage because the r i g h t s obtained under a g l i c e n c e are n o n - e x c l u s i v e . In A u s t r a l i a the two stages are represented by an e x p l o r a t i o n permit and a p r o d u c t i o n 1icence. Although adequate government c o n t r o l may be e x e r c i s e d under e i t h e r a one-stage or a two-stage system, i n p r a c t i c e the former encourages such c o n t r o l whereas the l a t t e r does not. Under both systems a government i s r e q u i r e d to dec i d e , e i t h e r e x p r e s s l y or i m p l i c i t l y , whether o i l and gas product-i o n should be allowed i n a p a r t i c u l a r o f f s h o r e area and i f so the c o n d i t i o n s upon which p r o d u c t i o n i s to be allowed. I n a one-stage system the time at which t h i s d e c i s i o n must be made i s c l e a r ; i t i s p r i o r to the a l l o c a t i o n of o i l and gas r i g h t s . I n a two-stage system the q u e s t i o n a r i s e s whether t h i s d e c i s i o n should be made before the f i r s t stage or the second. There i s a n a t u r a l tendency f o r i t to be l e f t u n t i l the second stage when e x p l o r a t i o n has produced g r e a t e r i n f o r m a t i o n about the o i l and gas p o t e n t i a l of the area i n i s s u e . However, a f t e r the a l l o c a t i o n of e x p l o r a t i o n r i g h t s i n a two-stage system a government 8 Supra, 112-113 199 l o s e s i t s o p p o r t u n i t y to d e c i d e a g a i n s t o i l and gas p r o -d u c t i o n w i t h o u t a l t e r i n g a c q u i r e d r i g h t s . In both Canada and A u s t r a l i a the h o l d e r of an e x p l o r a t i o n t i t l e has the r i g h t to o b t a i n a p r o d u c t i o n t i t l e over s e l e c t e d areas upon 9 f u l f i l l m e n t of c e r t a i n c o n d i t i o n s ; the government does not r e t a i n a d i s c r e t i o n to r e f u s e such an a p p l i c a t i o n . The government must t h e r e f o r e d e c i d e the q u e s t i o n b e f o r e the f i r s t s t a g e , the a l l o c a t i o n of e x p l o r a t i o n r i g h t s . Two m a t t e r s , however, make a d e c i s i o n a t t h i s time very d i f f i c u l t . E x p l o r a t i o n r i g h t s are u s u a l l y i s s u e d i n r e s p e c t of e x t e n s i v e a r e a s a l l o f which must be c o n s i d e r e d by the government i n making i t s d e c i s i o n because i t i s not known where p r o d u c t i o n w i l l l a t e r be o b t a i n e d . I n a d d i t i o n , i n the p e r i o d of time between the a l l o c a t i o n of e x p l o r a t i o n r i g h t s and p r o d u c t i o n r i g h t s the a t t i t u d e of the p u b l i c t o o i l and gas p r o d u c t i o n may change c o n s i d e r a b l y and i f the government's d e c i s i o n i s to be the r i g h t one i t must a c c u r a t e l y p r e d i c t such change. I t i s t h e r e f o r e submitted t h a t a one-stage system f o r a l l o c a t i n g r i g h t s i s to be p r e f e r r e d to a two-stage system, i n so f a r as the e x e r c i s e of government c o n t r o l i s concerned. Three methods have been adopted i n p r a c t i c e f o r a l l o c a t -i n g o f f s h o r e o i l and gas r i g h t s ; these a r e c o m p e t i t i v e s a l e , 9 Supra, 123-125, 170-172. 200 a d m i n i s t r a t i v e d i s c r e t i o n and f r e e e n t r y . The Un i t e d S t a t e s 10 has r e l i e d e x c l u s i v e l y on the f i r s t of tnese, the Un i t e d Kingdom has used mainly the second but has experimented 11 12 w i t h the f i r s t , A u s t r a l i a has used tne second and 13 Canada the t h i r d . I t has been argued i n the Un i t e d Kingdom t h a t admin-i s t r a t i v e d i s c r e t i o n a l l o w s g r e a t e r e x e r c i s e of government c o n t r o l than c o m p e t i t i v e s a l e . I n the f o u r rounds of l i c e n s i n g conducted there t o date, government i n f l u e n c e has been s t r o n g . This i s i l l u s t r a t e d by the i n c r e a s i n g p a r t i c i p a t i o n by U n i t e d Kingdom companies i n l i c e n c e awards. The c l a i m has a l s o been made t h a t a l l o c a t i o n by a d m i n i s t r a t -i v e d i s c r e t i o n has enabled the government to implement i t s p o l i c y of r a p i d e x p l o r a t i o n of o f f s h o r e areas by f r e e i n g f o r e x p l o r a t i o n the c a p i t a l t h a t would otherwise have been spent upon purchasing p r o d u c t i o n l i c e n c e s . N e v e r t h e l e s s , there i s no reason why use of the compet-i t i v e s a l e method should prevent a government from e x e r c i s i n g 10 Supra, 11 Supra, 12 Supra, 13 Supra, 33-34. 74-84. 157- 160. 114-115. 201 c o n t r o l to whatever degree i s r e q u i r e d . C o n t r o l may be a s s u r e d by p r e s c r i b i n g i n advance of each s a l e s p e c i a l c o n d i t i o n s upon which o f f s h o r e o i l and gas r i g h t s w i l l be a l l o c a t e d . These c o n d i t i o n s may d e a l w i t h any matter of government p o l i c y and i f p r o p e r l y drawn may be j u s t as e f f e c t i v e as a d m i n i s t r a t i v e d i s c r e t i o n i n e n s u r i n g the i m p l e m e n t a t i o n of p o l i c y . The U n i t e d S t a t e s has such a procedure. The S e c r e t a r y of the I n t e r i o r may i s s u e r e g u l a t i o n s under the Outer C o n t i n e n t a l S h e l f Lands A c t on matters such as the e l i g i b -14 i l i t y of a p p l i c a n t s f o r l e a s e s and the p r e v e n t i o n of waste 15 and c o n s e r v a t i o n of o f f s h o r e n a t u r a l r e s o u r c e s . These r e g u l a t i o n s may be amended from time to time to take account o f changes i n government p o l i c y . U s u a l l y they d e s c r i b e m atters of g e n e r a l a p p l i c a t i o n r a t h e r than s p e c i a l c o n d i t i o n s f o r a p a r t i c u l a r l e a s e . However, the S e c r e t a r y of the I n t e r i o r may a l s o announce s p e c i a l c o n d i t i o n s a t the time 16 of o f f e r i n g a l e a s e f o r s a l e . T h i s p r a c t i c e a l l o w s con-s i d e r a b l e f l e x i b i l i t y i n t a k i n g account of government p o l i c y on a l e a s e by l e a s e b a s i s . 14 Supra, 35. 15 Supra, 27. 16 Supra, 45. 202. In the U n i t e d Kingdom the S e c r e t a r y o f State f o r Trade and I n d u s t r y has the power to vary the model c l a u s e s c o n t a i n i n g the c o n d i t i o n s upon which p r o d u c t i o n l i c e n c e s 17 are i s s u e d . The government may use t h i s power befor e i n v i t i n g a p p l i c a t i o n s f o r l i c e n c e s to p r e s c r i b e s p e c i a l c o n d i t i o n s , and thus e x e r c i s e c o n t r o l over o f f s h o r e areas on a f l e x i b l e b a s i s i r r e s p e c t i v e of the a l l o c a t i o n procedure adopted. S p e c i a l c o n d i t i o n s may r e s e r v e p a r t i c u l a r areas f o r a p p l i c a t i o n by U n i t e d Kingdom companies or by p u b l i c l y -ov.ned c o r p o r a t i o n s , or may encourage r a p i d e x p l o r a t i o n by s p e c i f y i n g minimum work requirements. A c c o r d i n g l y , the o b j e c t i v e of c o n t i n u i n g government c o n t r o l does not suggest t h a t o f f s h o r e o i l and gas r i g h t s should be a l l o c a t e d by a d m i n i s t r a t i v e d i s c r e t i o n r a t h e r than by c o m p e t i t i v e s a l e . E i t h e r method i s capable of a c h i e v i n g the o b j e c t i v e i f p r o p e r l y used. 18 The p r a c t i c e of f r e e e n t r y as f o l l o w e d i n Canada, however, i s q u i t e i n c o n s i s t e n t with government c o n t r o l . I n the f i r s t p l a c e the government does not r e t a i n the power 17 Supra, 67. 18 Free e n t r y i s now r e s t r i c t e d by the p r a c t i c a l c o n s t r a i n t t h a t the m a j o r i t y of p r o s p e c t i v e o f f s h o r e areas are under permit. 203. to decide which areas s h a l l be devoted to o i l and gas o p e r a t i o n s a t any p a r t i c u l a r time. This d e c i s i o n i s l e f t e n t i r e l y to i n d u s t r y . Secondly, the only method l e f t by which the government may e x e r c i s e any c o n t r o l i s amendment of the r e g u l a t i o n s a p p l i c a b l e to o f f s h o r e o i l . and gas o p e r a t i o n s . This i s a cumbersome procedure which i s u n s u i t e d to c o n t i n u i n g c o n t r o l . R e g u l a t i o n s u s u a l l y have general r a t h e r than s p e c i f i c a p p l i c a t i o n . Moreover, they 1 9 x n v i t e problems about r e t r o a c t i v e e f f e c t . The management regimes f o r o f f s h o r e o i l and gas resources i n a l l f o u r c o u n t r i e s s a c r i f i c e c o n t i n u i n g government c o n t r o l to a s u b s t a n t i a l degree by a l l o c a t i n g p r i v a t e r i g h t s f o r e x c e s s i v e l y long terms. What i s an adequate term i s a d i f f i c u l t q u e s t i o n to answer, but depends f i n a l l y upon the value t h a t a government pl a c e s upon r e t e n t i o n of f u t u r e o p t i o n s i n r e s o u r c e management. S e l e c t i o n of the term of o f f s h o r e o i l and gas r i g h t s i n v o l v e s economic consequences. I f r i g h t s are a l l o c a t e d by c o m p e t i t i v e s a l e one of the p r i n c i p a l f a c t o r s determining the p r i c e p a i d i s the term of the r i g h t s . A government must forego revenue i n order to r e t a i n f u t u r e o p t i o n s . In t h i s r e g a r d , however, i t i s 19 Thompson, A.R.,"Sovereignty and N a t u r a l Resources -A Study of Canadian Petroleum L e g i s l a t i o n " 4 U.B.C. Law Review ( p a r t 2) 161 (1970). 204 important to re c o g n i z e t h a t p r i v a t e e n t e r p r i s e d i s c o u n t s f u t u r e b e n e f i t s and c o s t s i n accordance w i t h time p r e f e r -ence i n c a l c u l a t i n g the present value of r i g h t s which are o f f e r e d f o r s a l e , and so a f t e r a p e r i o d of time which depends upon the d i s c o u n t r a t e employed the present value of the c o s t to a government of r e t a i n i n g f u t u r e o p t i o n s w i l l be s m a l l . This p e r i o d i s very much s h o r t e r than the terms of o f f s h o r e o i l and gas r i g h t s i n the f o u r c o u n t r i e s ; f o r example, i f a d i s c o u n t r a t e of 15% i s assumed f o r p r i v a t e e n t e r p r i s e , the present v a l u e of l a r g e b e n e f i t s and c o s t s o c c u r r i n g as c l o s e as ten years hence w i l l be a small p r i c e f o r a government to pay f o r the o p p o r t u n i t y to r e v i s e i t s management p o l i c i e s a t t h i s time. The above c o n s i d e r a t i o n s deal w i t h the c a p a c i t y of an a l l o c a t i o n system f o r a l l o w i n g the e x e r c i s e of c o n t i n u i n g government c o n t r o l . Whether or not such c o n t r o l i s e x e r c i s e d i n p r a c t i c e may be a d i f f e r e n t matter e n t i r e l y , and t h i s w i l l now be d i s c u s s e d i n r e l a t i o n to each country. The trend i n the Uni t e d S t a t e s has been towards i n -c r e a s i n g government c o n t r o l over o f f s h o r e o i l and gas res o u r c e s . Since 1962 the Department of the I n t e r i o r has re f u s e d to o f f e r f o r s a l e a l l of the t r a c t s nominated by i n d u s t r y and has adopted a procedure f o r s e l e c t i o n of the 205 m o s t a p p r o p r i a t e a r e a s f o r o i l and g a s o p e r a t i o n s . The D e p a r t m e n t a l s o p r o p o s e s t o c o n d u c t f u t u r e l e a s e s a l e s a c c o r d i n g t o a n a n n o u n c e d f i v e - y e a r s c h e d u l e , w i t h e a c h s a l e t o b e p r e c e d e d b y a d e t a i l e d i n v e s t i g a t i o n o f s u p p l y a n d demand f a c t o r s f o r o i l a n d g a s a n d t h e p r o d u c t i o n 21 p r o s p e c t s o f o f f e r e d a r e a s . The p r e p a r a t i o n b y t h e D e p a r t m e n t o f a n i m p a c t s t a t e m e n t b e f o r e e a c h s a l e a s 22 r e q u i r e d b y t h e N a t i o n a l E n v i r o n m e n t a l P o l i c y A c t s h o u l d e n s u r e t h a t a d e q u a t e c o n s i d e r a t i o n i s g i v e n t o e n v i r o n m e n t a l b e n e f i t s a n d c o s t s , p a r t i c u l a r l y i f p u b l i c h e a r i n g s a r e c o n d u c t e d a s p a r t o f t h i s p r o c e d u r e . The t e r m o f a l e a s e , h o w e v e r , ( f i v e y e a r s a n d s o l o n g t h e r e a f t e r a s o i l a n d g a s 2 3 may b e p r o d u c e d i n p a y i n g q u a n t i t i e s ) , d i m i n i s h e s t h e p r o s p e c t o f f u t u r e g o v e r n m e n t c o n t r o l . The i n i t i a l t e r m i s n o t e x c e s s i v e a n d h a s t h e d e s i r a b l e r e s u l t o f e n c o u r a g i n g r a p i d e x p l o r a t i o n a n d s u r r e n d e r o f n o n - p r o d u c t i v e a r e a s , b u t t h e c o n t i n u a t i o n p e r i o d i s t o o l o n g , e s p e c i a l l y s i n c e t h e r e i s no p r o c e d u r e w h e r e b y t h e g o v e r n m e n t may a l t e r t h e c o n d i t i o n s o f a l e a s e d u r i n g i t s t e r m w i t h o u t a f f e c t i n g a c q u i r e d r i g h t s . 20 S u p r a , 4 0 . 21 S u p r a , 4 2 - 4 3 . 22 S u p r a , 4 3 - 4 5 . 23 S u o r a , 4 5 . 206. Government c o n t r o l has been very e v i d e n t at the a l l o c -a t i o n stage i n the U n i t e d Kingdom. The procedure by which p r o d u c t i o n l i c e n c e s have been i s s u e d , upon a p p l i c a t i o n s r e c e i v e d i n response to p u b l i c i n v i t a t i o n s s p e c i f y i n g a v a i l a b l e b l o c k s , has allowed the government to r e t a i n the power to make the f i n a l d e c i s i o n on whether o i l and gas o p e r a t i o n s should be conducted i n p a r t i c u l a r areas. The government has a l s o e x e r c i s e d c o n s i d e r a b l e c o n t r o l i n the s e l e c t i o n of the s u c c e s s f u l a p p l i c a n t s f o r l i c e n c e s awarded by a d m i n i s t r a t i v e d i s c r e t i o n , although no s p e c i a l c o n d i t i o n s were announced f o r the 15 l i c e n c e s awarded by p u b l i c tender and the h i g h e s t b i d f o r each l i c e n c e was accepted by the 24 S e c r e t a r y of S t a t e f o r Trade and I n d u s t r y . However, i t seems t h a t the development of a d e t a i l e d management system f o r o f f s h o r e o i l and gas resources l i k e t h a t i n the U n i t e d S t a t e s has been of secondary importance to the encouragement of r a p i d e x p l o r a t i o n . A glance at a North Sea map showing o i l and gas t i t l e s confirms t h a t i n l e s s than e i g h t years the U n i t e d Kingdom government has i s s u e d p r o d u c t i o n l i c e n c e s c o v e r i n g a s u b s t a n t i a l p r o p o r t i o n of the t o t a l o f f s h o r e area w i t h i n i t s j u r i s d i c t i o n , i n c l u d i n g 24 Supra, 84. 207. almost a l l of the more promising r e g i o n s . Far from f o l l o w i n g any p o l i c y of r e t a i n i n g areas f o r l a t e r use i n accordance w i t h f u t u r e p o l i c y requirements, the government has been w i l l i n g to i n v i t e a p p l i c a t i o n s f o r l i c e n c e s over many more b l o c k s than i n d u s t r y has had any i n t e r e s t i n e x p l o r i n g . In 1965 a p p l i c a t i o n s were i n v i t e d i n r e s p e c t of 1106 b l o c k s c o v e r i n g more than a m i l l i o n square m i l e s , 2 6 but only 37 l i c e n c e s v/ere i s s u e d over 127 b l o c k s . As r e c e n t l y as 1971 when i n t e r e s t i n the North Sea was a t a peak, 150 of the 421 b l o c k s o f f e r e d f o r l i c e n c e r e c e i v e d 27 no a p p l i c a t i o n s . The a l l o c a t i o n of so many l i c e n c e s i n such a s h o r t p e r i o d r e s u l t s i n a c o n s i d e r a b l e r e d u c t i o n i n the o p p o r t u n i t y f o r government c o n t r o l over o f f s h o r e o i l and gas resources i n the f u t u r e . T h i s s i t u a t i o n i s m i t i g a t e d somewhat by the p r o v i s i o n r e q u i r i n g surrender of a t l e a s t h a l f of a l i c e n c e area upon e x p i r y of the i n i t i a l s i x - y e a r l i c e n c e term, but i t i s the l i c e n c e h o l d e r and not the government who s e l e c t s the area to be r e t a i n e d under l i c e n c e . The term d u r i n g which the l i c e n c e continues i n f o r c e i n r e s p e c t of 25 O i l and Gas J o u r n a l , May 1, 1972 (North Sea Lease Map). 26 Supra, 79. 27 Supra, 85. 208 the r e t a i n e d a r e a i s 40 y e a r s , i r r e s p e c t i v e of whether o i l 2 8 or gas i s produced. There i s no p r o v i s i o n f o r amendment of the c o n d i t i o n s of a l i c e n c e w h i l e i t remains i n f o r c e . T h e r e f o r e , between 1964 and 1971 the U n i t e d Kingdom govern-ment r e l i n q u i s h e d c o n t r o l over the most p r o s p e c t i v e areas of the North Sea w i t h i n i t s j u r i s d i c t i o n u n t i l the year 2010 a t the v e r y e a r l i e s t . The Canadian p o s i t i o n i s even worse. The f r e e e n t r y system has a l l o w e d companies to o b t a i n e x p l o r a t o r y p e r m i t s over a l l the p r o m i s i n g o f f s h o r e a r e a s . Although the f i r s t 29 o f f s h o r e p e r m i t s were not i s s u e d u n t i l 1960 the e a s t and west c o a s t r e g i o n s , the B e a u f o r t Sea and the A r c t i c I s l a n d s o f f s h o r e a r e a a r e a l r e a d y c o v e r e d by p e r m i t s which extend i n t o v e r y c o n s i d e r a b l e water depths. With the e x c e p t i o n of 30 the r e c e n t west c o a s t withdrawal and the s u s p e n s i o n of 3 f r e e e n t r y i n r e l a t i o n t o a s m a l l area o f f the e a s t c o a s t , t h e r e i s no e v i d e n c e of any attempt t o e x e r c i s e c o n t r o l over the a l l o c a t i o n of o i l and gas r i g h t s over t h i s v a s t o f f s h o r e a r e a . 28 Supra, 87. 29 Supra, 122. 30 Supra, 114. 31 I n f r a , 226. 209 The t e r n of the r i g h t s t h a t have been i s s u e d i n t h i s way i s u n b e l i e v a b l y l o n g , r e s u l t i n g i n a l o s s by the Canadian government of the o p p o r t u n i t y to e x e r c i s e c o n t r o l over the o f f s h o r e o i l and gas resources u n t i l w e l l i n t o the 21st century. The i n i t i a l term of a permit i s s i x years 32 and exte n s i o n s are a v a i l a b l e f o r a f u r t h e r s i x years. The holder of a permit i s e n t i t l e d as of r i g h t to the grant of a l e a s e over h a l f the permit area a t any time d u r i n g which the permit i s i n f o r c e , there being no requirement of 33 p r i o r d i s c o v e r y of o i l or gas. The term of a l e a s e i s 34 21 years. A c c o r d i n g l y , upon the i s s u e of a permit the government l o s e s the o p p o r t u n i t y to e x e r c i s e c o n t r o l over the o i l and gas resources contained i n h a l f the permit area f o r a p e r i o d of up to 33 years. When commercial p r o d u c t i o n begins from a l e a s e area the l e s s e e i s e n t i t l e d to have the l e a s e r e i s s u e d f o r a f u r t h e r term of 21 years 35 from the date of commencement of commercial p r o d u c t i o n . At t h i s p o i n t the l e a s e i s made s u b j e c t to such c o n d i t i o n s as the M i n i s t e r may order and to the r e g u l a t i o n s which are then i n f o r c e , and so the government r e g a i n s an o p p o r t u n i t y 32 Suora, 117. 33 Supra. 123. 34 Supra. 132. 35 I b i d . 210 to e x e r c i s e some c o n t r o l . However, s i n c e the government i s bound to r e i s s u e the l e a s e and s i n c e the r o y a l t y to be paid on p r o d u c t i o n remains unchanged, t h i s c o n t r o l i s c l e a r l y l i m i t e d . I n the extreme case where commercial p r o d u c t i o n begins from a l e a s e i n the f i n a l year of i t s i n i t i a l term, the p e r i o d d u r i n g which the government l o s e s s u b s t a n t i a l c o n t r o l over the area s t r e t c h e s 54 years from the date when a permit over the area was i s s u e d . Even then, however, complete c o n t r o l i s not regained. A l e s s e e i s e n t i t l e d to have a l e a s e renewed f o r s u c c e s s i v e p e r i o d s of 21 years as long as the l e a s e area i s i n the o p i n i o n of the M i n i s t e r 3 6 capable of producing o i l or gas. A renewed l e a s e i s s u b j e c t to such c o n d i t i o n s i n c l u d i n g r o y a l t y as the M i n i s t e r may order and to the r e g u l a t i o n s i n f o r c e a t the date of renewal, which a l l o w s the government a s u b s t a n t i a l measure of c o n t r o l , but the b a s i c c h o i c e between o i l and gas pr o d u c t i o n and a l t e r n a t i v e use of the area i s l e f t to the l e s s e e . The only f a c t o r which serves to reduce t h i s huge l o s s of f u t u r e c o n t r o l i s the requirement t h a t a permit holder surrender to the Crown a t l e a s t h a l f of the permit area when an a p p l i c a t i o n i s made f o r a l e a s e over the remaining 36 I b i d . 211 area. The area to be i n c l u d e d i n the l e a s e i s s e l e c t e d by the permit h o l d e r , who thus r e t a i n s the i n i t i a t i v e i n d e c i d i n g which area i s to r e v e r t to the Crown, but n e v e r t h e l e s s t h i s surrender p r o v i s i o n g i v e s the Canadian government an oppor-t u n i t y to r e - e s t a b l i s h c o n t r o l over p a r t of the o f f s h o r e area c u r r e n t l y under permit. However, w h i l e i t remained i n f o r c e the concession given to permit h o l d e r s by O i l and Gas Land Order No.1-1961 to o b t a i n a f u r t h e r l e a s e over the surrender-38 ed area e f f e c t i v e l y removed t h i s o p p o r t u n i t y . I f the government a c t s as expected and r e i n s t a t e s t h i s c oncession i n the r e v i s e d r e g u l a t i o n s i t w i l l s u f f e r a l o s s of f u t u r e c o n t r o l over i t s o f f s h o r e o i l and gas resources which i s v i r t u a l l y complete f o r very many years to come. The only means l e f t by which c o n t r o l may be e x e r c i s e d w i l l i n v o l v e e x p r o p r i a t i o n of acqu i r e d r i g h t s . The A u s t r a l i a n system f o r a l l o c a t i n g o f f s h o r e o i l and gas r i g h t s has not r e s u l t e d i n the same f a i l u r e to e x e r c i s e government c o n t r o l as the Canadian system, although there has been no attempt to manage these resources i n any comprehensive way as i n the U n i t e d S t a t e s . 37 Suora, 124. 38 Supra, 128. 212. F r e e e n t r y has not been a p p l i e d i n i s s u i n g e x p l o r a t i o n p e r m i t s . The Designated A u t h o r i t i e s have i n s t e a d used a d m i n i s t r a t i v e d i s c r e t i o n . I n v i t a t i o n s have been p u b l i s h e d s e e k i n g a p p l i c a t i o n s f o r p e r m i t s i n r e s p e c t of named b l o c k s , and p e r m i t s have then been awarded on the b a s i s of the 39 i n f o r m a t i o n c o n t a i n e d i n the a p p l i c a t i o n s r e c e i v e d . There have been s u b s t a n t i a l d i f f e r e n c e s among the s t a t e s as to the p r o p o r t i o n of the t o t a l o f f s h o r e a r e a made a v a i l a b l e f o r p e r m i t s , showing a d e s i r e to e x e r c i s e c o n t r o l i n v a r y i n g 40 d egrees. I n a d d i t i o n , the power of a D e s i g n a t e d A u t h o r i t y t o i s s u e p e r m i t s s u b j e c t t o such s p e c i a l c o n d i t i o n s as he 41 t h i n k s f i t and s p e c i f i e s i n the p ermit has a l l o w e d sub-s t a n t i a l government c o n t r o l to be e x e r c i s e d a t t h i s s t a g e . As i n Canada, the use of a two-stage system f o r a l l o c a t i n g r i g h t s has c u r t a i l e d the o p p o r t u n i t y f o r government c o n t r o l a t the p r o d u c t i o n l i c e n c e s t a g e . However, two f e a t u r e s of the A u s t r a l i a n system a r e i m p o r t a n t . A p ermit h o l d e r i s e n t i t l e d t o the g r a n t of a l i c e n c e o n l y upon d i s c o v e r y of o i l or gas, and the s i z e o f a l i c e n c e i s s u e d i n r e s p e c t of a d i s c o v e r y i s r e s t r i c t e d t o f i v e b l o c k s i f the p ermit 39 Supra, 157-158. 40 Supra. 158-159. 41 Supra. 161. 213 h o l d e r ' s primary e n t i t l e m e n t i s taken up and to nine i f 42 h i s secondary e n t i t l e m e n t i s s e l e c t e d as w e l l . Although l a r g e i n i t s e l f a l i c e n c e area w i l l u s u a l l y r e p r e s e n t only a small f r a c t i o n of the t o t a l permit area. A l s o , w h i l e the most imoortant c o n d i t i o n s of a l i c e n c e such as a r e a , term, annual expenditure requirement, r o y a l t i e s and r e n t a l are contained i n the Submerged Lands A c t s , the Designated A u t h o r i t y has the power to i n c l u d e such f u r t h e r c o n d i t i o n s as he t h i n k s f i . t , ^ 3 and t h i s a l l o w s the government a small measure of c o n t r o l . The term of o f f s h o r e o i l and gas r i g h t s i n A u s t r a l i a i s so e x c e s s i v e as to cause a s u b s t a n t i a l l o s s of f u t u r e government c o n t r o l over these resources i n p a r t i c u l a r areas. The term of a permit i s s i x years and there are an u n l i m i t e d 44 number of renewals f o r s u c c e s s i v e p e r i o d s of f i v e y ears. Upon each renewal, however, a permit h o l d e r must surrender 45 at l e a s t h a l f of the area then under permit. This p r o v i s -i o n i s very important i n a l l o w i n g the government to r e g a i n c o n t r o l over o f f s h o r e areas, and may be c o n t r a s t e d w i t h 42 Supra, 171-173. 43 Supra, 175. 44 Suora, 162-163. 45 I b i d . 214. the Canadian s i t u a t i o n . The term of a l i c e n c e i s 21 y e a r s , and t h i s may be renewed as of r i g h t f o r a f u r t h e r 21 A 6 years. ' A c c o r d i n g l y , the government does not have the r i g h t to terminate a l i c e n c e u n t i l 42 years a f t e r i t was granted, and the permit from which a l i c e n c e was s e l e c t e d may have been i n .force f o r a c o n s i d e r a b l e p e r i o d beforehand. The government may, however, amend the a p p l i c a b l e r o y a l t y 47 r a t e p r i o r to the renewal of a l i c e n c e . The d e c i s i o n by the governments of the Commonwealth and the s t a t e s to a l l o w the h o l d e r s of o f f s h o r e e x p l o r a t i o n t i t l e s granted before the Submerged Lands Ac t s came i n t o f o r c e to o b t a i n permits i n r e s p e c t of the whole of the 48 area covered by these t i t l e s caused c o n s i d e r a b l e l o s s of government c o n t r o l over o f f s h o r e o i l and gas re s o u r c e s . T r a n s i t i o n a l permits were i s s u e d c o v e r i n g approximately 49 75% of the t o t a l o f f s h o r e a r e a , and i t w i l l be 1974 bef o r e any surrender i s due. Even then the most promising o f f s h o r e areas w i l l remain s u b j e c t to permits i s s u e d before the present a l l o c a t i o n system came i n t o o p e r a t i o n . 46 Supra t 175. 47 Suora, 178. 48 Sucra, 154-155. 4 9 Supra, 160. 215. The c o n s t i t u t i o n a l concept u n d e r l y i n g the A u s t r a l i a n system has a f f e c t e d the e x e r c i s e of government c o n t r o l i n a manner which i s not a p p l i c a b l e to the other c o u n t r i e s . The Agreement reached between the Commonwealth and the s t a t e s avoided the n e c e s s i t y f o r immediate d e t e r m i n a t i o n of f e d e r a l - s t a t e r i g h t s and r e s p o n s i b i l i t i e s w i t h r e s p e c t to o f f s h o r e o i l and gas r e s o u r c e s , ^ However, so f a r as other o f f s h o r e resources are concerned the i s s u e i s s t i l l clouded. The u n c e r t a i n t y present i n t h i s s i t u a t i o n means t h a t adequate c o n s i d e r a t i o n of the p u b l i c b e n e f i t s and c o s t s to be d e r i v e d from these resources i s u n l i k e l y . Government c o n t r o l cannot be e x e r c i s e d p r o p e r l y because c o n s t i t u t i o n a l r e s p o n s i b i l i t y i s i n doubt. The Senate S e l e c t Committee which i n v e s t i g a t e d q u e s t i o n s r e l a t e d to o f f s h o r e o i l and gas resources concluded t h a t the f a i l u r e to r e s o l v e the q u e s t i o n of where a u t h o r i t y 51 l i e s i n o f f s h o r e areas i s not i n the n a t i o n a l i n t e r e s t . One of the reasons put forward f o r t h i s c o n c l u s i o n deserves q u o t a t i o n here: In r e s p e c t of matters such as p r o t e c t i o n and conserv-a t i o n of n a t u r a l f e a t u r e s and resources of the o f f - s h o r e waters and the o f f - s h o r e sea-bed, the q u e s t i o n of who has a u t h o r i t y or r e s p o n s i b i l i t y to a c t i s unknown. In 5 0 Supra, 145-147. 51 Report from the Senate S e l e c t Committee on Off-Shore  Petroleum Resources, Commonwealth Government P r i n t i n g O f f i c e , Canberra, 1971, para. 6.338. areas of p u b l i c and p o l i t i c a l c o n t r o v e r s y - i n t o which q u e s t i o n s of c o n s e r v a t i o n and p o l l u t i o n have moved - the i n a b i l i t y to i d e n t i f y p o l i t i c a l respons-i b i l i t y i s as u n s a t i s f a c t o r y as the i n a b i l i t y , because of d i s p u t e d and u n c e r t a i n power, to i n i t i a t e a c t i o n or a u t h o r i t a t i v e l y to d i s c l a i m r e s p o n s i b i l i t y . This must be the s i t u a t i o n w h i l e the c o n s t i t u t i o n a l q u e s t i o n i s unresolved. 52 The terms of the Agreement i t s e l f a l s o promote r i g i d i t y . The Submerged Lands Act and any r e g u l a t i o n s made thereunder are not to be amended except pursuant to a f u r t h e r agree-ment between the governments of the Commonwealth and the s t a t e s . 5 " ^ T h i s requirement m u l t i p l i e s the d i f f i c u l t i e s i n the path of f u t u r e amendments, and thus reduces the l i k e l i -hood t h a t the l e g i s l a t i o n and r e g u l a t i o n s w i l l remain respon i v e to s o c i a l a t t i t u d e s . These d i f f i c u l t i e s have a l r e a d y been i l l u s t r a t e d . I n 1969 the seven governments agreed to amend the p r o v i s i o n s of the Submerged Lands Acts d e a l i n g w i t h the a p p l i c a t i o n of general laws i n the adjacent areas, but more than two and a h a l f years l a t e r the agreed amend-ments had been enacted o n l y by the p a r l i a m e n t s of South 54 A u s t r a l i a and Western A u s t r a l i a . 52 I b i d . 53 Suora, 147. 54 Report, o p . c i t . note 51, paras. 6.279-280. 217 C. Maximum Government Revenue. D i f f e r e n t methods and combinations of methods are used i n the f o u r c o u n t r i e s f o r o b t a i n i n g government revenue from o f f s h o r e o i l and gas re s o u r c e s . The p r i n c i p a l methods are c o m p e t i t i v e s a l e , r o y a l t y payments, r e n t a l payments and income tax assessments. These w i l l be considered i n t u r n to determine t h e i r e f f e c t i v e n e s s i n maximizing the govern-ment revenue from the r e s o u r c e s , and then the a l l o c a t i o n systems f o r o f f s h o r e o i l and gas r i g h t s i n the four c o u n t r i e s w i l l be assessed i n terms of t h i s o b j e c t i v e . A l l o c a t i o n of o f f s h o r e o i l and gas r i g h t s by c o m p e t i t i v e s a l e w i l l i n theory produce the maximum revenue from these resources f o r the government. Entrepeneurs w i l l c a l c u l a t e the p r i c e t h a t they are w i l l i n g to pay to a c q u i r e the r i g h t s o f f e r e d f o r s a l e , and i f the market f o r the r i g h t s i s t r u l y c o m p e t i t i v e , the h i g h e s t p r i c e b i d w i l l be e q u i v a l e n t to the maximum p o s s i b l e revenue. A l l o c a t i o n by t h i s method a l s o promotes economic e f f i c i e n c y s i n c e the entrepeneur who ob t a i n s o i l and gas r i g h t s w i l l be the one who can develop the resources most e f f i c i e n t l y and i s thus able to b i d the hi g h e s t p r i c e f o r the r i g h t s . A l a c k of c o m p e t i t i o n f o r a c q u i s i t i o n of the r i g h t s 218. w i l l s e r i o u s l y i m p a i r the e f f e c t i v e n e s s of t h i s method i n o b t a i n i n g maximum government revenue, as o p e r a t o r s w i l l not be r e q u i r e d to b i d t h e i r h i g h e s t p r i c e i n o r d e r to a c q u i r e the r i g h t s . T h i s has been c o n f i r m e d i n the U n i t e d S t a t e s i n a study of the f a c t o r s which determine the s i z e of the h i g h b i d f o r l e a s e s . ^ The r e l a t i o n s h i p between the h i g h b i d and the f o l l o w i n g f a c t o r s was a n a l y s e d : the s i z e o f the h i g h - b i d d e r f i r m ; the t o t a l v a l u e of subsequent o i l and gas p r o d u c t i o n from the l e a s e a r e a ; the c o r p o r a t e s t r u c t u r e of the h i g h - b i d d e r , whether a s i n g l e b i d d e r or a j o i n t v e n t u r e r ; the number of a c r e s i n the l e a s e a r e a ; the number of b i d s r e c e i v e d f o r the l e a s e ; and the e s t i m a t e d water depth over the l e a s e a r e a (as an i n d i c a t o r of p r o d u c t i o n c o s t s ) . The c o n c l u s i o n of t h i s study was t h a t of a l l these v a r i a b l e s the number of b i d d e r s s u b m i t t i n g b i d s f o r an a r e a was the most important determinant of the h i g h - b i d amount -the g r e a t e r the number of b i d d e r s , the h i g h e r the h i g h b i d . There i s no way of d e t e r m i n i n g o b j e c t i v e l y what c o n s t i t -u t e s an adequate number of b i d d e r s to ensure c o m p e t i t i o n . E x p e r i e n c e i n the U n i t e d S t a t e s has shown, however, t h a t one or two b i d s f o r a l e a s e a r e a a r e not s u f f i c i e n t , and t h a t 5 5 Study of the Outer C o n t i n e n t a l S h e l f Lands of the U n i t e d  S t a t e s , Nossaman, Waters, S c o t t , Krueger and R i o r d a n , Los A n g e l e s , C a l i f o r n i a , October 1968, para. 8.20. 219 three or more b i d s are l i k e l y to provide c o m p e t i t i o n . The importance of c o m p e t i t i o n i n making the s a l e of o f f s h o r e o i l and gas r i g h t s an e f f e c t i v e method of maximiz-i n g government revenue emphasises two other matters. The f i r s t of these i s t h a t the government must r e t a i n the r i g h t to r e j e c t the high b i d submitted f o r an area where the government i s of the o p i n i o n t h a t c o m p e t i t i o n i n the b i d d i n g i s inadequate. This i n t u r n r e q u i r e s t h a t the government should make the best p o s s i b l e independent e v a l u a t i o n of each area b e f o r e o f f e r i n g i t f o r s a l e , so t h a t i t i s i n a p o s i t i o n to judge whether or not there has been s u f f i c i e n t c o m p e t i t i o n i n the b i d d i n g . The r e s e r v e p r i c e determined by the government f o r each area should never be l e s s than the user c o s t i f the present value of government revenue from o i l and gas o p e r a t i o n s i n a l l time periods i s to be maximized. The second matter i s t h a t the t o t a l area o f f e r e d a t any s a l e should not be so l a r g e as to cause a r e d u c t i o n i n c o m p e t i t i o n i n the b i d d i n g . I n the U n i t e d S t a t e s i t has been found necessary to l i m i t the t o t a l area o f f e r e d at 57 each s a l e i n order to p r o v i d e adequate c o m p e t i t i o n . 56 I b i d . 57 Suora, 41-42. 220. Even i f c o m p e t i t i o n i s present i n the b i d d i n g f o r o i l and gas r i g h t s the p r i c e s o f f e r e d by entrepeneurs w i l l i n c o r p o r a t e a s u b s t a n t i a l d i s c o u n t f o r u n c e r t a i n t y . This has the e f f e c t of reducing government revenue a c t u a l l y r e c e i v e d below the maximum. I t i s t h e r e f o r e important t h a t a government take whatever steps are p o s s i b l e to reduce the u n c e r t a i n t y a s s o c i a t e d w i t h o f f s h o r e o i l and gas o p e r a t i o n s . To some ex t e n t u n c e r t a i n t y i s i n e v i t a b l e because the presence of o i l or gas i n a p a r t i c u l a r area and the q u a n t i t y of any d e p o s i t can not be determined a c c u r a t e l y u n t i l an e x t e n s i v e d r i l l i n g programme has been completed. However, the l o s s of government revenue caused by d i s c o u n t i n g f o r t h i s type of u n c e r t a i n t y i s p a r t i a l l y compensated f o r by revenue obtained from the s a l e of areas which l a t e r are found to c o n t a i n no o i l or gas. Other types of u n c e r t a i n t y may be reduced by government a c t i o n . One course t h a t a government may adopt i s to a c q u i r e e x p l o r a t i o n data r e l a t i n g to an area b e f o r e i t i s o f f e r e d f o r s a l e . This may be done i n s e v e r a l ways. A Government may conduct i t s own e x p l o r a t i o n o p e r a t i o n s , or may c o n t r a c t w i t h a p r i v a t e company f o r such o p e r a t i o n s to be c a r r i e d out on i t s b e h a l f . U n c e r t a i n t y i n the s a l e of areas could then be reduced to a c e r t a i n degree by p u b l i c -a t i o n of d e t a i l e d e x p l o r a t i o n data i n advance of the s a l e . T h i s procedure would a l s o be a p a r t i a l answer to a c r i t i c i s m o f t e n made of the one-stage a l l o c a t i o n system, namely t h a t i t encourages economic waste by r e q u i r i n g d u p l i c a t i o n of e x p l o r a t i o n o p e r a t i o n s . In a d d i t i o n a government should a c q u i r e a l l e x p l o r a t i o n data obtained by p r i v a t e operators before each s a l e . I t i s d o u b t f u l t h a t t h i s data Should be p u b l i s h e d a t t h i s stage, f o r to do so would s e r i o u s l y discourage p r i v a t e e x p l o r a t i o n . N e v e r t h e l e s s , t h i s i n f o r m a t i o n i s of great importance to a government even though i t may not be used to reduce u n c e r t a i n t y . I f a government i s t o a d m i n i s t e r p u b l i c resources e f f e c t i v e l y i t must have a t l e a s t the same degree of knowledge about these resources as p r i v a t e o p e r a t o r s . For example, t h i s knowledge i s v i t a l i n the d e t e r m i n a t i o n of r e s e r v e p r i c e s and the e s t i m a t i o n of hidden c o s t s i n c u r r e d i n gov-ernment p o l i c i e s . A f u r t h e r method by which a government may reduce u n c e r t a i n t y w i t h r e s p e c t to some areas r e q u i r e s adoption of a planned approach to the s a l e of o i l and gas r i g h t s , i n i t i a l l y o f f e r i n g some b l o c k s only i n a p a r t i c u l a r r e g i o n and r e t a i n i n g other b l o c k s f o r s a l e at a l a t e r date when the r e s u l t s of e x p l o r a t i o n on the f i r s t b l o c k s are a v a i l a b l e . A government which a l t e r s a cquired r i g h t s d u r i n g the term of those r i g h t s w i l l cause u n c e r t a i n t y i n the minds of entrepeneurs and thus a heavy d i s c o u n t i n g of f u t u r e p r i c e s o f f e r e d f o r o i l and gas r i g h t s . Entrepeneurs w i l l be placed i n a p o s i t i o n where i n c a l c u l a t i n g the amount to be b i d f o r r i g h t s they must take account of the p o s s i b i l i t y t h a t the r i g h t s w i l l be a l t e r e d again by f u t u r e government a c t i o n . Even i f such a c t i o n i s not repeated, government revenue w i l l be l o s t because the d i s c o u n t i n g of p r i c e s i s based upon the e x p e c t a t i o n and not the a c t u a l occurrence of change. I t i s t h e r e f o r e important t h a t a government which seeks to maximize revenue by c o m p e t i t i v e s a l e of o i l and gas r i g h t s d ecide upon an a p p r o p r i a t e term f o r those r i g h t s and r e f r a i n from modifying them d u r i n g t h a t term. There are s e v e r a l d i f f e r e n t methods of c o m p e t i t i v e s a l e of o i l and gas r i g h t s . These i n c l u d e cash bonus b i d d i n g , d e f e r r e d bonus b i d d i n g , r o y a l t y b i d d i n g and work commitment b i d d i n g . The cash bonus system as used f o r U n i t e d S t a t e s outer c o n t i n e n t a l s h e l f lands and i n a r e c e n t experiment by the Un i t e d Kingdom government has the advantage of o f f e r i n g a stro n g i n c e n t i v e to the s u c c e s s f u l b i d d e r to e x p l o r e and develop the area i n order to get an e a r l y r e t u r n on the c a p i t a l i n v e s t e d . I t i s a l s o a simple method to a d m i n i s t e r . There a r e , however, disadvantages. I t i s frequently-argued i n the Un i t e d S t a t e s t h a t cash bonus b i d d i n g reduces the e f f e c t i v e n e s s of c o m p e t i t i o n because the sums of money necessary to purchase a l e a s e are beyond the reach of s m a l l e r o p e r a t i o n s . I t i s even s a i d t h a t payment of cash bonuses pl a c e s a heavy s t r a i n on the f i n a n c i a l resources of the major o i l companies and thus i n h i b i t s the e x p l o r a t i o n of ac q u i r e d areas. This l a t t e r c l a i m i n p a r t i c u l a r i s d i f f i c u l t to accept as i t ign o r e s the o p p o r t u n i t y t h a t major o i l companies have to borrow funds i n the c a p i t a l market. N e v e r t h e l e s s , i t may be t r u e t h a t the s m a l l e r companies are r e s t r i c t e d i n t h e i r borrowing powers and are thereby placed at a disadvan-tage. I f t h i s were so i t would be expected t h a t the major o i l companies would c o n s i s t e n t l y be ab l e to submit higher b i d s f o r l e a s e s than the s m a l l e r companies. However, the h i s t o r y of l e a s i n g on the U n i t e d . S t a t e s outer c o n t i n e n t a l s h e l f lands p r o v i d e s no evidence t h a t t h i s has been the case. In r e c e n t years t h e r e has been a trend i n the Uni t e d S t a t e s towards the grouping of s e v e r a l companies i n t o j o i n t 5 8 Study of the Outer C o n t i n e n t a l S h e l f Lands of the Uni t e d S t a t e s , o p . c i t . note 55, para. 8.20. 224. ventures to b i d f o r o f f s h o r e l e a s e s . This trend seems l i k e l y to have reduced c o m p e t i t i o n where the j o i n t v e n t u r e r s c o n s i s t e d of major o i l companies which had the f i n a n c i a l r e sources to b i d alone f o r l e a s e s , but has probably i n c r e a s e d c o m p e t i t i o n to the extent t h a t i t has allowed s m a l l e r compan-, . . , 59 l e s to o l d . A more s e r i o u s disadvantage of the cash bonus system of c o m p e t i t i v e s a l e a r i s e s from the d i s c o u n t r a t e employed by entrepeneurs i n c a l c u l a t i n g the present value of o f f s h o r e o i l and gas r i g h t s . I f entrepeneurs use a h i g h e r d i s c o u n t r a t e than the s o c i a l d i s c o u n t r a t e , the s i z e of cash bonus b i d s w i l l be l e s s than the present s o c i a l v a l u e of the maximum government revenue t h a t the resources are capable of produc-i n g . This seems l i k e l y to be the case i n c o u n t r i e s w i t h developed economies such as the U n i t e d S t a t e s , the U n i t e d Kingdom, Canada and A u s t r a l i a , although p a r t i c u l a r economic circumstances could a r i s e i n which the government of one of these c o u n t r i e s adopts a very high s o c i a l d i s c o u n t r a t e and thus b e n e f i t s from the divergence i n time preference. Under the d e f e r r e d bonus b i d d i n g system an entrepeneur pays the s a l e p r i c e i n i n s t a l m e n t s and r e t a i n s the o p t i o n 59 I b i d . , para. 8.17. 225. to surrender the r i g h t s and d i s c o n t i n u e the payments a t any time. The p o i n t made i n favour of t h i s system i s t h a t i t encourages p a r t i c i p a t i o n by s m a l l e r companies which have d i f f i c u l t y i n borrowing funds, thereby i n c r e a s i n g the l e v e l of c o m p e t i t i o n i n b i d d i n g . The system a l s o reduces the n e c e s s i t y of d i s c o u n t i n g b i d s to take account of u n c e r t a i n t y because the o p e r a t o r has the o p p o r t u n i t y to withdraw from the area b e f o r e the f u l l purchase p r i c e i s p a i d . Moreover, r a p i d e x p l o r a t i o n i s encouraged because i t i s the operator's goal to d e l i n e a t e the o i l and gas r e s e r v e s i n an area before f u t u r e i n s t a l m e n t s of the purchase p r i c e f a l l due. However, t h i s system appears to be more d i f f i c u l t to a d m i n i s t e r than a system of cash bonus b i d d i n g . S p e c u l a t i v e b i d d i n g i s encouraged because prospects of l o s s are reduced, and t h i s r e s u l t s i n o v e r - b i d d i n g and frequent surrender of r i g h t s 'without proper e v a l u a t i o n of o i l and gas r e s e r v e s . R o y a l t y b i d d i n g i s a l s o advocated on the ground t h a t i t avoids the l a r g e c a p i t a l d r a i n caused by payment of cash bonuses. N e v e r t h e l e s s , t h i s method of a l l o c a t i n g o i l and gas r i g h t s has numerous drawbacks. F i r s t l y , i t i s d i f f i c u l t to a d m i n i s t e r i n p r a c t i c e , e s p e c i a l l y i n a s i t u a t i o n where d i f f e r e n t o p e r a t o r s are producing from the same s t r u c t u r e a t d i f f e r e n t p r o d u c t i o n and r o y a l t y r a t e s . The h i g h e s t 226. r o y a l t y operator i s f o r c e d to abandon p r o d u c t i o n on economic grounds before operators on lower r o y a l t y r a t e s . Secondly, there i s the frequent p o s s i b i l i t y t h a t entrepeneurs w i l l o v e r - b i d , s i n c e no cash o u t l a y i s r e q u i r e d i n order to o b t a i n r i g h t s . Where there i s o v e r - b i d d i n g commercial pro-d u c t i o n w i l l not be economic without a r e d u c t i o n i n r o y a l t y below the r a t e b i d , even though o i l or gas i s d i s c o v e r e d i n p r o d u c i b l e q u a n t i t i e s . T h i r d l y , high r o y a l t y b i d s r e s u l t i n premature abandonment of p r o d u c t i o n areas and thus s i g n i f i c a n t economic waste. The only a l t e r n a t i v e to t h i s i s a government r e d u c t i o n of r o y a l t y r a t e s below the amount b i d , a procedure which i n e v i t a b l y r e s u l t s i n c o n s i d e r a b l e a d m i n i s t r a t i v e d i f f i c u l t y . The system of work commitment b i d d i n g i n v o l v e s entrepen-eurs o f f e r i n g an amount which i s not to be p a i d to the government but i n s t e a d i s to be spent i n a s p e c i f i e d p e r i o d upon approved e x p l o r a t i o n o p e r a t i o n s . T h i s method has been used to a l l o c a t e e x p l o r a t o r y permits over a l i m i t e d area o f f the east coast of C a nada.^ I t i s designed to encourage r a p i d 60 In October 1966 an area of the S c o t i a n S h e l f to the South of Newfoundland was withdrawn from o r d i n a r y a p p l i c a t i o n f o r permit: SOR 66/486, which i n s e r t e d s e c t i o n 32A i n the Canada O i l and Gas Land R e g u l a t i o n s . Two months l a t e r tenders were i n v i t e d f o r permits i n the area on the b a s i s of expenditure upon e x p l o r a t o r y work to be performed d u r i n g the i n i t i a l term of the permit: Canada Gazette P a r t 1, 4080-4081, December 24, 1966. Awards were made i n February 1967. 227. e x p l o r a t i o n f o r o i l and gas. 'When compared wi t h cash bonus b i d d i n g , however, there seems l i t t l e economic j u s t -i f i c a t i o n f o r i t . An entrepeneur who o b t a i n s o i l and gas r i g h t s by payment of a cash bonus has taken i n t o account i n s u b m i t t i n g h i s b i d the c o s t of e x p l o r i n g the area i n the most e f f i c i e n t way p o s s i b l e . Any g r e a t e r expenditure on e x p l o r a t i o n i n v o l v e s economic waste. Use of the work commit-ment method f o r a l l o c a t i n g o i l and gas r i g h t s w i l l t h e r e f o r e produce one or both of two r e s u l t s : economic i n e f f i c i e n c y or excess p r o f i t s earned by s u c c e s s f u l b i d d e r s . Two types of b i d d i n g procedure are a v a i l a b l e f o r use i n the c o m p e t i t i v e s a l e of o f f s h o r e o i l and gas r i g h t s . These are o r a l a u c t i o n and s e a l e d b i d s . One w r i t e r has determined t h a t where the s t r u c t u r e of the buying i n d u s t r y i s monopson-i s t i c or o l i g o p s o n i s t i c and c o m p e t i t i o n i s u n r e l i a b l e , s e a l e d b i d d i n g i s the more a p p r o p r i a t e method s i n c e i t i n t r o d u c e s the unknown f a c t o r of who may appear as a b i d d e r , 61 and how much he may b i d i n h i s s i n g l e o p p o r t u n i t y . This i s c l e a r l y demonstrated i n o f f s h o r e o i l and gas b i d d i n g i n the U n i t e d S t a t e s and the U n i t e d Kingdom by the wide d i f f -erences which o f t e n e x i s t between h i g h e s t and n e x t - h i g h e s t 61 Mead, Walter J . , " N a t u r a l Resource P o l i c y - O r a l A u c t i o n versus Sealed B i d s " , 7 N a t u r a l Resources J o u r n a l 194, 223 (1967). 228 b i d s , known by i n d u s t r y as "money l e f t on the t a b l e " . There a r e , however, problems a s s o c i a t e d w i t h the sealed b i d method. Entrepeneurs hate to leave money on the t a b l e , and i t i s c l e a r t h a t value estimates f o r o i l and gas r i g h t s are commonly adjusted to take account of the expected degree 6 3 of c o m p e t i t i o n . This emphasises t h a t where c o m p e t i t i o n f o r o i l and gas r i g h t s i s inadequate i t i s e s s e n t i a l f o r the government to make an independent e v a l u a t i o n of a l l r i g h t s o f f e r e d f o r s a l e . I t a l s o suggests t h a t the government should not announce the s i z e of any b i d s other than the h i g h e s t f o r each l e a s e a r e a ; t h i s p r a c t i c e has been s c r u p u l -o u s l y f o l l o w e d i n A l b e r t a , and should a t l e a s t have the e f f e c t of making i t more d i f f i c u l t f o r entrepeneurs to e v a l u a t e the b i d d i n g s t r a t e g i e s of c o m p e t i t o r s . The other problem w i t h the method of sealed b i d s i s t h a t o p e r a t o r s must c a l c u l a t e the amount of each b i d f o r a l l areas o f f e r e d without knowing 62 Examples of United S t a t e s experience are quoted i n the Study of the Outer C o n t i n e n t a l S h e l f Lands of the United  S t a t e s , o p . c i t . note 55, para. 8.16. A s p e c t a c u l a r United Kingdom example i s d e s c r i b e d supra, 84. 63 Head, o p . c i t . n o t e 59, 211. A s t r a t e g y which may be used i n b i d d i n g f o r o f f s h o r e o i l and gas r i g h t s which takes account of the p r o b a b i l i t y t h a t any b i d w i l l be s u c c e s s f u l i n c a l c u l a t i n g the s i z e of that b i d i s developed i n 3rown, K e i t h C., B i d d i n g f o r Offshore O i l , Toward an Optimal S t r a t e g y , D a l l a s , Southern Methodist U n i v e r s i t y P r e s s , 1969. 229. which i f any w i l l be s u c c e s s f u l . I f an entrepeneur i s c o n s t r a i n e d by l i m i t e d c a p i t a l resources t h i s w i l l r e s u l t e i t h e r i n b i d s being made upon fewer areas than otherwise or i n r e d u c t i o n of the s i z e of some b i d s . The way to avo i d t h i s i s to ensure t h a t the t o t a l area o f f e r e d at a p a r t i c u l a r s a l e i s not so l a r g e as to i n h i b i t c o m p e t i t i o n , and then to r e c e i v e b i d s f o r d i f f e r e n t b l o c k s on a staggered b a s i s , w i t h r e s u l t s announced p r o g r e s s i v e l y . Otherwise, more complex procedures may be adopted. These i n c l u d e contingency b i d d i n g , where an entrepeneur may b i d d i f f e r e n t amounts f o r a p a r t i c -u l a r l e a s e a c c o r d i n g to whether or not b i d s submitted by him f o r other areas are s u c c e s s f u l , and " s l i d i n g " b i d s , where an entrepeneur may rank the order i n which h i s b i d s are to be accepted a c c o r d i n g to h i s own p r i o r i t i e s , w i t h a l i m i t upon the t o t a l c a p i t a l committed. This l a t t e r procedure i s used s u c c e s s f u l l y i n A l b e r t a . R o y a l t y payments are not an e f f e c t i v e means of o b t a i n i n g the maximum government revenue from o i l and gas res o u r c e s . The maximum government revenue i n any case depends upon four f a c t o r s , the q u a n t i t y of o i l or gas produced, the r a t e of p r o d u c t i o n , the c o s t s of d i s c o v e r y and pr o d u c t i o n of the o i l or gas, and the p r i c e f o r which the o i l or gas i s s o l d . A r o y a l t y payment c a l c u l a t e d upon the gross value of pro-d u c t i o n takes account of q u a n t i t y and p r i c e , but ignore s 230. the other two f a c t o r s . A s i i d i n g - s c a l e r o y a l t y which i n c r e a s e s w i t h i n c r e a s i n g p r o d u c t i o n r a t e may a l s o take account of the r a t e of p r o d u c t i o n , but c o s t s are s t i l l o verlooked. A s i i d i n g - s c a l e r o y a l t y c a l c u l a t e d upon the net value of p r o d u c t i o n does i n c l u d e c o n s i d e r a t i o n of c o s t s , but there i s no reason to assume t h a t the percentage taken by the r o y a l t y r e p r e s e n t s the s u r p l u s of revenue over c o s t s ( i n c l u d -i n g normal p r o f i t s ) . Even i f i t were p o s s i b l e to c a l c u l a t e the r o y a l t y r a t e -which when a p p l i e d to pr o d u c t i o n from a p a r t i c u l a r f i e l d was j u s t high enough to r a i s e the maximum government revenue o b t a i n a b l e from t h a t f i e l d , t h i s r a t e would not be a p p l i c a b l e to another f i e l d where r e s e r v e s , p r o d u c t i o n r a t e and c o s t s were d i f f e r e n t . Furthermore, the use of r o y a l t y payments to o b t a i n government revenue may r e s u l t i n economic i n e f f i c i e n c y . A f i x e d r o y a l t y assessed upon the gross value of p r o d u c t i o n w i l l cause the shut-down of a producing f i e l d when the value of p r o d u c t i o n i s no longer high enough to pay the r o y a l t y and provide a r e t u r n f o r the operator of the f i e l d . Thus o i l or gas may be l e f t i n the ground which i s capable of being produced commercially and gen e r a t i n g revenue f o r the government i f the a p p l i c a b l e r o y a l t y r a t e were lower. A r o y a l t y assessed upon the net value of p r o d u c t i o n i s a d i s i n c e n t i v e f o r operators to minimize p r o d u c t i o n c o s t s . 2 3 1 N e v e r t h e l e s s , t h e r e may be an advantage i n a government u s i n g r o y a l t y payments as one means of r a i s i n g revenue. R o y a l t y payments are r e c e i v e d contemporaneously w i t h p r o d u c t -i o n of o i l or gas, and so t h e r e i s no need to d i s c o u n t f u t u r e b e n e f i t s or c o n s i d e r any d i v e r g e n c e between an entre p e n e u r ' s d i s c o u n t r a t e and the s o c i a l d i s c o u n t r a t e . Where the s o c i a l d i s c o u n t r a t e i s lower than an entre p e n e u r * s d i s c o u n t r a t e i t w i l l be i n the government's i n t e r e s t to r e c e i v e some revenue from r o y a l t y payments r a t h e r than a l l i n the form of cash bonuses. A s l i d i n g - s c a l e r o y a l t y which r i s e s with i n c r e a s i n g r a t e of p r o d u c t i o n w i l l cause a government to r e c e i v e more of i t s revenue i n the form of r o y a l t y payments than w i l l a f i x e d - r a t e r o y a l t y . A c c o r d i n g l y , the same argument t h a t j u s t i f i e s the use of a r o y a l t y suggests t h a t the s l i d i n g -s c a l e type i s p r e f e r a b l e to the f i x e d - r a t e type. The i n c r e m e n t a l r a t e employed i n a s l i d i n g - s c a l e r o y a l t y s h o u l d be de s i g n e d to take account of the i n f l u e n c e t h a t the r a t e of p r o d u c t i o n has upon the p r e s e n t v a l u e of o i l and gas r i g h t s . Two o i l f i e l d s - w i t h s i m i l a r r e c o v e r a b l e r e s e r v e s but d i f f e r e n t r a t e s of p r o d u c t i o n w i l l have d i f f e r -ent p r e s e n t v a l u e s . The reason f o r t h i s i s not c o s t s , f o r these w i l l p r o b a b l y be s i m i l a r i n each c a s e , but the f a c t 232. t h a t b e n e f i t s from the f i e l d w ith the lower r a t e of pro-d u c t i o n w i l l be subjected to higher d i s c o u n t i n g i n c a l c u l -a t i n g present value. Therefore the incremental r a t e of a s i i d i n g - s c a l e r o y a l t y may approach the d i s c o u n t r a t e used by the p r i v a t e operators without causing any r e d u c t i o n i n the r a t e of p r o d u c t i o n below the maximum a l l o w a b l e . A gross r o y a l t y i s to be p r e f e r r e d to a net r o y a l t y as a means of o b t a i n i n g government revenue. Apart from the d i s i n c e n t i v e e f f e c t of a net r o y a l t y , there i s c o n s i d e r a b l e complexity encountered i n s p e c i f y i n g a l l o w a b l e c o s t s . The economic i n e f f i c i e n c y aspect of a gross r o y a l t y may be avoided by p r o v i d i n g f o r a r e d u c t i o n i n r o y a l t y r a t e i n the d i s c r e t i o n of the government when t h i s i s necessary to ensure continued p r o d u c t i o n of o i l or gas from a marginal f i e l d . There i s a l i m i t , though, upon how f a r a government should be prepared to reduce a r o y a l t y r a t e . Government revenue from continued o p e r a t i o n s must exceed the s o c i a l v a l u e of a p p l y i n g the resources and f a c t o r s of p r o d u c t i o n to t h e i r best a l t e r n a t i v e use (which may i n c l u d e s o c i a l user c o s t ) , otherwise a r e d u c t i o n i n r o y a l t y r a t e i s unwarranted. A r e n t a l imposed a t a f i x e d r a t e per u n i t area of land s u b j e c t to o i l and gas r i g h t s i s i n no way r e l a t e d to the 233. maximum government revenue o b t a i n a b l e from o i l and gas resources. The economic impact of a r e n t a l i s upon r a t e of p r o d u c t i o n . A very high r e n t a l has the e f f e c t of encouraging an operator to produce more r a p i d l y than o t h e r -wise i n order to d i s c o n t i n u e paying the r e n t a l as soon as p o s s i b l e . I n unexplored areas such a r e n t a l encourages more r a p i d e x p l o r a t i o n , or perhaps r e l i n q u i s h m e n t of any area con s i d e r e d to be un p r o s p e c t i v e , f o r the same reason. Assessment of o f f s h o r e o i l and gas operators f o r income tax does not provide an e f f e c t i v e means whereby the govern-ment may o b t a i n the maximum revenue from development of the re s o u r c e s . I n the f i r s t p l a c e , o v e r a l l economic e f f i c i e n c y r e q u i r e s t h a t o f f s h o r e o i l and gas ope r a t o r s be taxed on the same b a s i s as other i n d u s t r i e s , a p a rt from any subsidy awarded to the o i l and gas i n d u s t r y i n order to promote a p a r t i c u l a r government p o l i c y . I f the income tax system i s to be used to o b t a i n revenue r e p r e s e n t i n g the s o c i a l v a l u e of o f f s h o r e o i l and gas resources i t would t h e r e f o r e be necessary t h a t the income of operators be taxed upon a s p e c i a l b a s i s , e i t h e r by i m p o s i t i o n of tax at a higher r a t e than t h a t a p p l i c a b l e to other i n d u s t r i e s or by use of d i f f e r e n t methods f o r c a l c u l a t i n g t a x a b l e income. H i s t o r i c -a l l y i t has not been the p r a c t i c e i n the United S t a t e s , the Un i t e d Kingdom, Canada or A u s t r a l i a to use the income tax 234 system to achieve s p e c i a l purposes of t h i s type. I f o i l and gas operators wer'e assessed f o r income tax at a higher r a t e than companies engaged i n other i n d u s t r i e s the r e s u l t would be no d i f f e r e n t i n p r i n c i p l e to the imposit-i o n of a r o y a l t y upon the net value of p r o d u c t i o n , and so would s u f f e r from the same shortcomings of i n a b i l i t y to o b t a i n maximum government revenue, d i s i n c e n t i v e to minimize c o s t s and d i f f i c u l t y of a d m i n i s t r a t i o n . The s i z e of i n d i v i d u a l areas o f f e r e d by a government f o r c a r r y i n g out o i l and gas o p e r a t i o n s may have an impact upon government revenue. Operators are most i n t e r e s t e d i n a c q u i r i n g r i g h t s over an e n t i r e p r o d u c i b l e accumulation of o i l and gas and w i l l a d j u s t the p r i c e t h a t they are w i l l i n g to pay f o r an area ac c o r d i n g to the p r o b a b i l i t y of a c h i e v i n g t h i s r e s u l t . I f the areas o f f e r e d by a government are very small there w i l l be a r e d u c t i o n i n government revenue as ope r a t o r s take account of the c o m p l e x i t i e s i n u n i t development of a f i e l d . This r e s u l t has been i l l u s t r a t -ed i n U n i t e d S t a t e s o f f s h o r e l e a s i n g p r a c t i c e , where the average b i d s per acre f o r p a r t i a l b l o c k s have been s i g n i f -~4 i c a n t l y lower than those f o r f u l l b l o c k s . On the other 64 Supra, 41. 235 hand, i f the areas o f f e r e d are too l a r g e operators w i l l be f o r c e d to buy acreage i n which they have no i n t e r e s t i n order to a c q u i r e an a t t r a c t i v e prospect. Again government revenue w i l l be a d v e r s e l y a f f e c t e d . The a p p r o p r i a t e s i z e f o r i n d i v i d u a l areas must t h e r e f o r e take account of the geo-l o g i c a l nature of the o f f s h o r e r e g i o n , and w i l l probably be determined onl y a f t e r t r i a l and e r r o r . This q u e s t i o n of the optimum s i z e of an i n d i v i d u a l area must be d i s t i n g u i s h e d from the p o l i c y of r e s t r i c t i n g the t o t a l area t h a t may be a c q u i r e d by a p a r t i c u l a r o p e r a t o r . No such p o l i c y has been adopted w i t h r e s p e c t to o f f s h o r e o i l and gas r e s o u r c e s by the governments of any of the f o u r c o u n t r i e s c o n s i d e r e d here, although i t has been a p p l i e d to the a c q u i s i t i o n of f e d e r a l onshore o i l and gas r i g h t s i n the U n i t e d S t a t e s . The b e n e f i t to be d e r i v e d from such a p o l i c y ( i f s u c c e s s f u l l y implemented, and U n i t e d S t a t e s experience p o i n t s out the d i f f i c u l t i e s i n t h i s regard) i s avoidance of monopsonistic behaviour i n o i l and gas p r o d u c t i o n . However, there i s a c o s t i n c u r r e d i n terms of reduced c o m p e t i t i o n i n the a c q u i s i t i o n of r i g h t s from the government, and so a l o s s of revenue. From the f o r e g o i n g i t i s e v i d e n t t h a t the only method of r a i s i n g government revenue from o f f s h o r e o i l and gas 2 3 6 . resources which s a t i s f i e s the requirement of maximization, i s the c o m p e t i t i v e s a l e of o i l and gas r i g h t s . Furthermore, the most e f f i c i e n t c o m p e t i t i v e s a l e procedure i s the i n v i t -a t i o n of cash bonus b i d s submitted by sealed tender. The important d e f e c t s t h a t may be present i n t h i s system are l a c k of c o m p e t i t i o n and u n c e r t a i n t y . A c c o r d i n g l y , a govern-ment must take steps to minimize such d e f e c t s . The worst e f f e c t s of l a c k of c o m p e t i t i o n may be avoided by the govern-ment's e s t a b l i s h i n g of r e s e r v e p r i c e s by an independent a p p r a i s a l process. U n c e r t a i n t y may be reduced i n many ways, i n c l u d i n g adoption of a c o n s i s t e n t p o l i c y of n o n - i n t e r f e r e n c e w i t h a c q u i r e d r i g h t s , government a c q u i s i t i o n and p u b l i c a t i o n of e x p l o r a t i o n d a t a , and the o f f e r i n g of r i g h t s i n i t i a l l y on a chequer-board or c o r r i d o r b a s i s . However, a government should not r e l y e x c l u s i v e l y upon c o m p e t i t i v e s a l e to o b t a i n revenue from o f f s h o r e o i l and gas r e s o u r c e s . I n c o u n t r i e s where the s o c i a l d i s c o u n t r a t e i s lower than the r a t e employed by entrepeneurs i n c a l c u l a t i n g the p r i c e s o f f e r e d f o r r i g h t s , i t i s i n the s o c i a l i n t e r e s t f o r the government t o o b t a i n some of i t s revenue from a s l i d i n g - s c a l e r o y a l t y upon p r o d u c t i o n . Furthermore, i m p o s i t i o n of a r o y a l t y has an added advantage i n t h a t i t t r a n s f e r s a p r o p o r t i o n of the r i s k i n h e r e n t i n o f f s h o r e o i l and gas o p e r a t i o n s from the p r i v a t e s e c t o r to 2 3 7 the government and thus improves the prospects f o r com-p e t i t i o n i n the p r i v a t e s e c t o r . 6 5 Rental payments should o n l y be employed i f government p o l i c y i s to encourage more r a p i d e x p l o r a t i o n and e x p l o i t -a t i o n , and surrender of unprospective areas. I n order to achieve t h i s end, r e n t a l payments must be h i g h . O f f s h o r e o i l and gas ope r a t o r s should be assessed f o r income tax on the same b a s i s as companies engaged i n s i m i l a r i n d u s t r i e s , but government revenue r a i s e d i n t h i s way should not be regarded as forming p a r t of the s o c i a l value of the re s o u r c e s . One f u r t h e r matter r e q u i r e s c o n s i d e r a t i o n before the a l l o c a t i o n systems i n the four c o u n t r i e s are assessed i n terms of the o b j e c t i v e of maximizing government revenue. This i s the q u e s t i o n of i n c e n t i v e s o f f e r e d to the o f f s h o r e o i l and gas i n d u s t r y . The importance of i n c e n t i v e s i n the present c o n t e x t l i e s i n the f a c t t h a t they o f t e n cause a r e d u c t i o n i n the revenue a c c r u i n g to a government. 65 Gardner, B.Delworth, "Toward a D i s p o s a l P o l i c y f o r F e d e r a l l y Owned O i l S h a l e s " , p u b l i s h e d i n Gaffney, Mason ( e d . ) , E x t r a c t i v e Resources and T a x a t i o n , M i l -waukee, U n i v e r s i t y of Wesconsin P r e s s , 1 9 6 7 , 169. 238 Four types of i n c e n t i v e s w i l l be d i s c u s s e d ; these are a "give-away" system f o r o i l and gas r i g h t s i n place of c o m p e t i t i v e s a l e , r o y a l t y r e d u c t i o n , income tax concessions and d i r e c t subsidy f o r s p e c i f i e d o p e r a t i o n s . Each w i l l be consid e r e d i n terms of e f f e c t i v e n e s s and c o s t i n promoting a d e s i r e d p o l i c y . A "give-away" system f o r o i l and gas r i g h t s such as has been adopted i n the U n i t e d Kingdom i n the m a j o r i t y of cases and i n Canada and A u s t r a l i a , r e q u i r e s the complete abandon-ment of the o b j e c t i v e of maximizing government revenue, and thus i m p l i e s both economic i n e f f i c i e n c y and s o c i a l i n e q u i t y . I t i s d i f f i c u l t to determine the c o s t s of such an i n c e n t i v e to s o c i e t y because the foregone revenue i s never r e c e i v e d by the government. There can be l i t t l e doubt, though, t h a t the c o s t i s enormous. The best i n d i c a t i o n of t h i s i s pro-v i d e d by the U n i t e d Kingdom experience of r e c e i v i n g over 37.2 m i l l i o n pounds from the r e c e n t s a l e of 15 p r o d u c t i o n 6 6 l i c e n c e s i n the North Sea; one can o n l y wonder how much government revenue was foregone on the 389 l i c e n c e s a l l o c -ated on the a d m i n i s t r a t i v e d i s c r e t i o n b a s i s . The e f f e c t i v e n e s s of a give-away system i n a c c e l e r a t i n g 66 Supra, 84. 239 e x p l o r a t i o n i s s u b j e c t to doubt. O i l and gas op e r a t o r s who a c t upon a r a t i o n a l economic b a s i s w i l l be w i l l i n g to i n v e s t i n an area o n l y when i t appears p r o f i t a b l e to do so. The p r i n c i p a l f a c t o r s determining p r o f i t a b i l i t y are not the c o s t of o p e r a t i o n s or the c o s t of o i l and gas r i g h t s but the l i k e l i h o o d of f i n d i n g o i l or gas i n commercial q u a n t i t i e s , the a v a i l a b i l i t y of markets and the development of the technology r e q u i r e d f o r e x p l o r a t i o n and e x p l o i t a t i o n . U n t i l these l a t t e r f a c t o r s are s a t i s f i e d the q u e s t i o n of c o s t i s l a r g e l y i r r e l e v e n t . I t i s t r u e t h a t o i l and gas r i g h t s may have no v a l u e , and i f t h i s i s the case c o m p e t i t i v e s a l e i s i m p o s s i b l e . There may a l s o be a s i t u a t i o n where r i g h t s have no v a l u e but a r e d u c t i o n i n c o s t i s j u s t s u f f i c i e n t to encourage an entrepeneur t o commence e x p l o r a t i o n . This would be a marginal s i t u a t i o n though, and would t h e r e f o r e be u n l i k e l y to p e r s i s t . Once the prospects of an area improve to the p o i n t where o i l and gas r i g h t s do take on a value a give-away system w i l l r e s u l t i n l o s s of p o t e n t i a l government revenue w i t h l i t t l e i f any a c c e l e r a t i o n of the r a t e of e x p l o r a t i o n . The d i s t r i b u t i o n a l i n e q u i t y i n h e r e n t i n a give-away system f o r o i l and gas r i g h t s i s h i g h l i g h t e d by s p e c u l a t i o n i n those r i g h t s . S p e c u l a t i v e gains take the place of gov-ernment revenue t h a t c o u l d have been obtained i f the r i g h t s 240 had been s o l d c o m p e t i t i v e l y . They a l s o i n d i c a t e t h a t a give-away system does not e f f e c t i v e l y r e s u l t i n the ex-p e n d i t u r e upon i n c r e a s e d e x p l o r a t i o n o p e r a t i o n s of the moneys t h a t would otherwise have been p a i d to the govern-ment i n a c q u i r i n g o i l and gas r i g h t s . A r e d u c t i o n i n r o y a l t i e s i s not an i n c e n t i v e a t a l l i f o i l and gas r i g h t s are a l l o c a t e d by c o m p e t i t i v e s a l e , f o r r o y a l t i e s are merely one f a c t o r taken i n t o account by entrepeneurs i n s u b m i t t i n g b i d s f o r r i g h t s . I f r o y a l t y r e d u c t i o n i s combined w i t h a system of f r e e o i l and gas r i g h t s then i t does amount to an i n c e n t i v e . A gain, the c o s t of t h i s i n c e n t i v e i s hidden, as foregone government revenues are never r e c e i v e d . I t i s an i n d i r e c t i n c e n t i v e , p a i d to s u c c e s s f u l producers r a t h e r than to e x p l o r e r s , and i t s e f f e c t i v e n e s s i n encouraging e x p l o r a t i o n i s t h e r e f o r e d i f f i c u l t t o judge. Income tax concessions do not amount to an i n c e n t i v e i f o i l and gas r i g h t s are s o l d c o m p e t i t i v e l y ; the government merely r e c e i v e s revenue i n a d i f f e r e n t form at a d i f f e r e n t time. Of course, t h i s i s not the case under a give-away system of a l l o c a t i n g r i g h t s . I n t h i s s i t u a t i o n , as w i t h r o y a l t y r e d u c t i o n , the c o s t of the i n c e n t i v e i s d i f f i c u l t to assess, and the i n c e n t i v e i s paid to producers r a t h e r 241. than e x p l o r e r s . The i n c r e a s e d r e t u r n on c a p i t a l i n v e s t e d i n the o i l and gas i n d u s t r y as a r e s u l t of the i n c e n t i v e would have the e f f e c t of a t t r a c t i n g more investment than ot h e r w i s e , but a d e t a i l e d study of the i n d u s t r y would be r e q u i r e d to determine j u s t how much. D i r e c t subsidy of p a r t i c u l a r o p e r a t i o n s has two advantages over other i n c e n t i v e s . F i r s t l y , the c o s t of the i n c e n t i v e i s apparent. Secondly, s i n c e the subsidy i s d i r e c t , the r a t e of payment of subsidy may be v a r i e d to produce the r e q u i r e d l e v e l of o p e r a t i o n s . As w i t h other i n c e n t i v e s , i f o i l and gas r i g h t s are disposed of by c o m p e t i t i v e s a l e , the l e v e l of subsidy w i l l be r e f l e c t e d i n the b i d s submitted f o r r i g h t s . I t i s t h e r e f o r e concluded t h a t the most e f f i c i e n t type of i n c e n t i v e t h a t may be o f f e r e d by a government i s d i r e c t subsidy of d e s i r e d o p e r a t i o n s . O i l and gas r i g h t s should not be a l l o c a t e d f r e e u n l e s s attempts a t c o m p e t i t i v e s a l e have demonstrated t h a t they have no present v a l u e . Even then, a l l o c a t i o n s should be s t r i c t l y l i m i t e d to what i s r e q u i r e d to o b t a i n more i n f o r m a t i o n about the prospects of o i l or gas d i s c o v e r i e s i n p a r t i c u l a r areas. The U n i t e d S t a t e s system f o r a l l o c a t i o n of o f f s h o r e o i l 242. and gas r i g h t s i s the most e f f e c t i v e of the f o u r c o n s i d e r e d here i n terms of the o b j e c t i v e of maximizing the government revenue obtained from these r e s o u r c e s . I t i s the o n l y system which uses c o m p e t i t i v e s a l e f o r a l l important r i g h t s . The r e c e n t e f f o r t s t h a t have been made to ensure t h a t the 6 7 l e v e l of c o m p e t i t i o n i s adequate i n the b i d d i n g f o r r i g h t s have undoubtedly c o n t r i b u t e d to the e f f e c t i v e n e s s of the system. However, these e f f o r t s have been hampered by a l a c k of g e o l o g i c data a v a i l a b l e to the government. 6 8 In a d d i t i o n , the government co u l d reduce the degree of u n c e r t a i n t y present i n c a l c u l a t i n g b i d s by c o l l e c t i o n and p u b l i c a t i o n of g e o l o g i c data. In a h i g h l y developed economy such as t h a t of the U n i t e d S t a t e s i t i s very l i k e l y t h a t the d i s c o u n t r a t e employed by o f f s h o r e o i l and gas o p e r a t o r s i s c o n s i d e r a b l y h i g h e r than the s o c i a l d i s c o u n t r a t e . I f t h i s i s so, the government has f a i l e d to maximize revenue by i s s u i n g l e a s e s s u b j e c t to a f i x e d r o y a l t y r a t h e r than on a s l i d i n g - s c a l e . I t i s d i f f i c u l t to see any j u s t i f i c a t i o n f o r the enormous income tax concessions provided to o f f s h o r e o i l 67 Suora, 35-37. 68 I b i d . 243. and gas ope r a t o r s i n the United S t a t e s . C e r t a i n l y these concessions have not had the same e f f e c t on government revenue as they would have had i f l e a s e s were i s s u e d on a b a s i s other than c o m p e t i t i v e s a l e , but n e v e r t h e l e s s g r e a t e r economic e f f i c i e n c y would be achieved by t a x i n g operators on the same b a s i s as companies engaged i n s i m i l a r i n d u s t r i e s . The U n i t e d Kingdom a l l o c a t i o n system has not sought to maximize government revenue from o f f s h o r e o i l and gas res o u r c e s . The l o s s of revenue r e s u l t i n g from the use of a d m i n i s t r a t i v e d i s c r e t i o n would appear to be only p a r t l y compensated f o r by the promotion of such p o l i c i e s as a c c e l e r a t e d e x p l o r a t i o n and i n c r e a s e d domestic p a r t i c i p -a t i o n . There can be no doubt t h a t i n r e c e n t years p r o d u c t i o n l i c e n c e s a l l o c a t e d by a d m i n i s t r a t i v e d i s c r e t i o n have had a value f a r exceeding the c o s t s of work programmes r e q u i r e d to be c a r r i e d out. F a i l u r e by the government to s e l l the r i g h t s at t h i s value has r e s u l t e d i n a d i s t r i b u t i o n of government revenue among o f f s h o r e o i l and gas ope r a t o r s as excess p r o f i t s . The s a l e of block 211/21 f o r 21 m i l l i o n 69 pounds i n August 1971 provides a s t r i k i n g i l l u s t r a t i o n . I f t h i s block had been a l l o c a t e d by a d m i n i s t r a t i v e d i s c r e t i o n 69 Suora, 83. 244. i t i s i n c o n c e i v a b l e t h a t any operator would have under-taken to spend t h i s sum on e x p l o r a t i o n . Furthermore, the -payment of such a l a r g e p r i c e f o r t h i s b l ock has not delayed e x p l o r a t i o n plans which i n c l u d e the d r i l l i n g of a w e l l b e f o r e the end of 1972. The U n i t e d Kingdom government should a l s o c o n s i d e r adoption of a s l i d i n g - s c a l e r o y a l t y . The w i l l i n g n e s s of the government to date to forego revenue completely suggests t h a t i t should not be too d i f f i c u l t to forego some cash bonus payments i n exchange f o r higher f u t u r e r o y a l t i e s . T h i s should a l s o a s s i s t the p o s i t i o n of s m a l l e r companies w i s h i n g to p a r t i c i p a t e i n the b i d d i n g f o r o f f s h o r e o i l and gas r i g h t s , as a g r e a t e r p r o p o r t i o n of government revenue would be o b t a i n e d i n the form of r o y a l t y payments at the time of p r o d u c t i o n , and i n i t i a l cash bonuses would be c o r r e s p o n d i n g l y lower. The Canadian a l l o c a t i o n system has been q u i t e i n e f f e c t -i v e i n maximizing government revenue. Not only have o f f s h o r e o i l and gas r i g h t s been i s s u e d v i r t u a l l y f r e e of charge, but o p e r a t o r s have a l s o r e c e i v e d i n c e n t i v e s i n the form of reduced r o y a l t y r a t e s and income tax concessions. The s p e c u l a t i o n t h a t occurred i n o f f s h o r e o i l and gas r i g h t s i n the Beaufort Sea and A r c t i c I s l a n d s r e g i o n a f t e r the Prudhoe 245 Bay o i l and gas d i s c o v e r i e s i n 1968 provides a c l e a r answer to any attempt to j u s t i f y Canadian p o l i c i e s at t h i s time on the grounds t h a t these i n c e n t i v e s were necessary, or t h a t they were e f f e c t i v e i n promoting government p o l i c i e s . O f f -shore o i l and gas r i g h t s had a c o n s i d e r a b l e value which because of the government's f a i l u r e to adopt a c o m p e t i t i v e s a l e system accrued to entrepeneurs who obtained permits on a f r e e e n t r y b a s i s . The promulgation of O i l and Gas Land Order No.1-1961 provides f u r t h e r evidence t h a t the Canadian government has not attempted to o b t a i n the maximum revenue from o f f s h o r e o i l and gas re s o u r c e s . The requirement t h a t a permit h o l d e r surrender a t l e a s t h a l f the permit area upon making an a p p l i c a t i o n f o r a l e a s e gave the government an o p p o r t u n i t y to o b t a i n c o n s i d e r a b l e revenue by c o m p e t i t i v e s a l e of the 70 r e l i n q u i s h e d area. The l o s s of t h i s o p p o r t u n i t y i s the c o s t of the i n c e n t i v e provided by the Order. The i n c r e a s e d revenue t h a t the government w i l l o b t a i n from the a d d i t i o n a l r o y a l t y imposed upon p r o d u c t i o n from t h i s area i s u n r e l a t e d to the maximum t h a t could have been r a i s e d by c o m p e t i t i v e s a l e . 70 Suora, 127-128 246. The A u s t r a l i a n a l l o c a t i o n system a l s o does not have the c a p a c i t y f o r c a p t u r i n g the maximum government revenue from o f f s h o r e o i l and gas r e s o u r c e s . The use of a d m i n i s t r a t i v e d i s c r e t i o n p r e c l u d e s the c o m p e t i t i v e s a l e of r i g h t s . The o n l y p r o v i s i o n f o r c o m p e t i t i v e s a l e i s i n r e s p e c t of a surrendered b l o c k which p r e v i o u s l y formed p a r t of a l o c a t i o n 71 or a l i c e n c e , but the l i k e l i h o o d of such surrender i s reduced by the o p t i o n given to permit h o l d e r s to a c q u i r e a l i c e n c e over the whole of a l o c a t i o n i n exchange f o r the 72 payment of an a d d i t i o n a l r o y a l t y . However, there i s more evidence i n A u s t r a l i a than i n Canada of an attempt by the government to o b t a i n revenue from o f f s h o r e o i l and gas r e s o u r c e s . Although c o n s i d e r a b l e income t a x concessions are given to o f f s h o r e o i l and gas producers i n the form of immediate deduction of c a p i t a l 73 e x p e n d i t u r e s , the A u s t r a l i a n government has not acceded to strong i n d u s t r y pressure i n favour of i n t r o d u c i n g a d e p l e t i o n allowance. A l s o , there i s no r e d u c t i o n i n A u s t r a l i a of the i n i t i a l r o y a l t y r a t e payable i n r e s p e c t of o f f s h o r e o i l and gas d i s c o v e r i e s , as there i s i n Canada. 71 72 73 Supra, 173. Suora, 171-172. Suora, 182-185. 247. I n s t e a d , the A u s t r a l i a n government has endeavoured to encourage e x p l o r a t i o n by d i r e c t subsidy of s p e c i f i e d 74 o p e r a t i o n s , a more e f f i c i e n t and undoubtedly l e s s co type of i n c e n t i v e . 74 Supra, 168-159. 248 CHAPTER 8. CONCLUSION. The management of o f f s h o r e o i l and gas resources presents c o n s i d e r a b l e d i f f i c u l t i e s , and among these i s the problem of d e v i s i n g an a p p r o p r i a t e system f o r a l l o c a t i n g p r i v a t e r i g h t s . A s a t i s f a c t o r y s o l u t i o n to t h i s problem w i l l only be found a f t e r r e s e a r c h and exp e r i m e n t a t i o n . Even then, m o d i f i c a t i o n s w i l l be r e q u i r e d from time to time i n response to changing s o c i a l v a l u e s . N e v e r t h e l e s s , the b e n e f i t s to be gained f o r s o c i e t y from an e f f e c t i v e management regime f o r these resources are l a r g e enough to j u s t i f y strenuous e f f o r t s to overcome the d i f f i c u l t i e s . R e c o g n i t i o n of t h i s f a c t i s the v i t a l f i r s t step t h a t a government must take. 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