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Robert Sherrill’s ACCIDENTAL PRESIDENT List Price $5.00 Our Price $4.50 William Manchester’s THE DEATH OF A PRESIDENT List Price $10.00 Our Price $ 9.00 and postage. GARNER AND SMITH-1 B.CSTORE 2116 Guadalupe, Austin, Texas, 78705 KENNEDY FeQ FULBRIGHT Fluorescent, genuine peel-off bumperstrip stock. 2 for 25c 10 for $1 150 for $10 1,000 for $50 Texas Division Citizens for Kennedy-Fuibright P.O. Box 1056 Austin, Texas 78767 funds for capital spending and needs to borrow only 2%. Likewise with the supposed risks which the large oil companies take, about which the A.A.P.G. annually stages a ritual dance with fearsome shalako figures intended to awe the public. It is true enough that less than one in six wildcat wells drilled in the United States is completed as a producerbut it is the independents who drill 75% of wells in the wildcat category; the large oil companies studiedly avoid them. The risk is quite different in terms of the success ratio of all oil wells drilled, which means wildcat and development categories combined. In this case, three out of every five wells drilled are successful, and as the large oil companies drill most of the development wells, their ratio of success is considerably better than 60%, but exceedingly difficult to uncover. The A.A.P.G., which has published statistics for exploratory drilling with grim relish since 1938, has never divulged comparable figures for development wells, nor has any other source in the oil industry that I know of. My own calculations show that in 1964 \(when the success ratio for development wells drilled in the United States were successful. This is a truth only too well suppressed. SINCE MORE OF THE TRUTH has escaped from behind the public relations screen about the issue of the depletion allowance, the large oil companies antici pate the first battle with the public interest there, and they have stationed their pickets and outposts overseas in a defensive perimeter as far from the central body as possible. For if any one has not heard by now, the international oil companies get deple 12 The Texas Observer tion on their foreign reserves, which are vastly cheaper and easier to find, at the same rate as for reserves at home. In recent years the hard-pressed independents have begun, however, to attack the outposts at the jealously guarded perimeter. In the past, a scrap or two tossed discreetly to the leaders of the hungry pack has been enough to silence the rest, at least for a while. By August, 1965, however, the independents were in a condition too desperate to repress their cries of pain, and one of their trade organizations, the Texas Independent Producers and Royalty Owners mittee meetings which reportedly erupted in fist fights, came out publicly for the elimination of depletion on foreign reserves. Thereupon two members who are among the largest independents in the state, Mike Halbouty and Jake Hamon, resigned. Ramon resigned quietly first, and Halbouty, beaten to the punch, followed with a much larger uproar in the press. Halbouty charged TIPRO with “divisive tactics” which threatened to pull the roof in on the entire industry and continued to vent his anger in what the TIPRO president described as “vicious public attacks.” “The most hallowed tradition in TIPRO,” said its president, “is the right of dis., sent . . .” Dissent indeed. Somehow, the uproar suddenly fell quiet. But this unprecedented revolt which had erupted in public set the tongues of independents wagging. Only that previous March the Texas legislature had passed S.B. 2, the oil and gas compulsory pooling bill. This authorized the Texas Railroad Commission to compel the owner of a small tract of land to contribute it, at the behest of an oil operator, to the formation of a tract large enough to drill a well under standard spacing rules. Formerly, case law and practice had permitted each landowner to have a well on his tract, no matter if undersized. In a sense, S.B. 2 farmed out the state’s right of eminent domain to whoever has the economic power to coerce another. Advocates of the bill cited reasons of conservation and better economics, and the major oil companies backed the bill heavily. So did TIPRO, and so did Halbouty, who had carried on a personal campaign for the bill for several years and publicly claimed his share of the credit when it was passed. Landowners and many independents opposed the bill; and some of these recalled that neither Hamon nor Halbouty had been averse to small-tract drill BUMPERSTRIPS: ing in their early days, when each depended heavily on major companies for farmouts. Now: the new alliance. Suppressio veri: So who is independent? AN INDEPENDENT, properly speaking, is a person whose income from oil production provides him with both a living and with operating expenses, and the latter must be large enough to permit independent investment to the extent of leasing acreage for his own account when he needs to. \(A consultant, effectively, is an independent financial ability to lease is a critical factor, because the key to the enigma I posed earlier is the second important fact about major oil companies. Suppressio veri: Exploration for the large companies means to hold as much unproductive acreage under lease as possible. This is a form of investment banking, with depletion to boot ; for whenever an independent drills, or can be baited to drill, on some small tract nearby at his own expense, the company can follow suit with development wells at minimized risk and with full depletion, as we have seen. In 1963, a year when unproductive acreage under lease had already declined for the third year running, 381.6 million acres were under lease by the oil and gas industry in 33 states. In Texas, unproductive acreage under lease amounted to 43% of the entire area of the state. The bulk of the acreage was leased, of course, to major companies. Generally speaking, whenever an oil prospect is turned up in the independent segment of the oil industry, since the land is under lease to a major company, the independent must go, hat in hand, to a major for “a farmout.” \(The consultant typically goes there because he couldn’t afford to alternate checkerboard tracts to which the independent operator earns rights if he and finds production. If he succeeds, the company benefits from development drilling on the adjoining tracts; if he fails, the company has gained additional information at no expense. In the early days of farmouts, the division of acreage was often 50% to the wildcat operator. Current farmouts give the wildcatter a drastically reduced fraction of the acreage, and this has been true for many years. In addition, nearly all major companies keep a 1/16th of any production which the wildcatter may find on his own tractwhich is something like the right to start a chess game with an extra pawn on every one of your opponent’s squares, since a 1/16th of production is usually the most that a consultant can keep for his efforts anyway. To its credit, Continental Oil is the only company which to my knowledge and as a matter of general policy does not burden the independent in this manner. At the opposite extreme, Texaco is so grasping that independents and other majors, equally, hate to deal with it. These three facts, the control of acreage, the tiny fraction farmed out, and the burden imposed on the tracts earned, explain much of why independents discover 85% of new reserves annually and keep