Continental Shelf,° representing approximately 12 
per cent of the total annual value of crude oil 
extracted in the United States. 
Offshore production accounts for 16 per cent 
of total world production. Comparing U.S. pro- 
duction of $1.0 billion with the estimated 1968 
investment of $2.35 billion shown in Table 1, the 
offshore yield has yet to match the very large 
ocean expenditures by oil companies. Of the $4.0 
billion of bonus and rental payments for offshore 
sites paid to date, $3.3 billion were paid to the 
U.S. Government and $0.7 billion to the States. 
The $1.85 billion of royalties paid to date, 
however, was divided equally between the States 
and U.S. Government.’ Table 2 indicates the 
relative position of the United States in offshore 
oil activity throughout the free world and also 
reveals the industry’s rapid growth since 1960. 
C. Nature of the Industry 
The number and character of the companies in 
the industry defy concise description. At least 30 
to 35 U.S. oil companies are involved in offshore 
production, supported by hundreds of contractors 
who provide services for a large portion of the 
work done at sea. A small percentage of these 
contractors is controlled by the oil companies 
through majority stockholdings. Because of high 
operating risks and the large capital outlays re- 
quired, most companies producing oil offshore are 
large corporations. However, several small com- 
panies have formed groups to operate jointly 
offshore. Unlike offshore gas, the transmission of 
oil through pipelines is usually performed by the 
production companies. 
D. Problems and Recommendations 
Oil economics is a complex subject—not only 
from the standpoint of domestic production but 
also in regard to world production and import 
restrictions. The price of oil has been at a 
relatively stable level in the United States in the 
past. In the future, however, as demand ap- 
proaches conventional supply capability, the price 
5 U.S. Bureau of Mines. 
®Richard J. Howe (Esso Production Research Co.), 
“Petroleum Operations in the Sea—1980 and Beyond,” 
Ocean Industry, August 1968, p. 29. 
"Ibid. 
V-24 
will be affected by costs of offshore production, 
alternative domestic sources, and U.S. import 
restrictions. This Panel has not attempted to 
analyze the oil industry in detail but has concen- 
trated on problems of the U.S. offshore oil 
industry and desirable adjustments to the present 
regulatory framework in light of higher offshore 
risks. 
Much capital is involved in recovering oil from 
the ocean bottom. Existing platforms in the Gulf 
of Mexico cost between $1 and $6 million 
depending on water depths and location, whereas 
site preparation costs on land are minimal. In 
addition, costs of operating over water are two to 
four times those on land, and offshore pipelines 
generally cost two to four times those onshore. 
One recent analysis of the costs of producing in 
a model field under actual conditions off Louisi- 
ana indicated that present-value net profit (using a 
nine per cent discount rate) dropped to only nine 
cents per barrel at ocean depths of 400 feet 
compared to 33 cents at 100 feet and 50 cents 
onshore.® No finding or bonus costs were included 
in this example because of variations from field to 
field. Moreover, a field of better-than-average size 
was assumed. It should be noted that the profits 
generated in deep water (nine cents) are not 
generally sufficient even to pay for either explora- 
tion or bonus costs. This example suggests that 
additional attention may be required for the 
problems related to the greater offshore depths in 
order to insure a continuing and healthy rate of 
activity in exploration and production. 
1. Timing of Federal Lease Sales 
The system of offshore lease sales is a complex 
subject now under intensive study by the Public 
Land Law Review Commission and the Department 
of the Interior. The competition in recent oil lease 
sales indicates the system is working reasonably 
well, but some aspects of the present policy should 
be altered. 
The timing of Federal lease sales has been 
erratic. Notice of sales well ahead of time would 
greatly aid industry budgeting, would enable the 
industry to improve its utilization of capital, 
83_E. Wilson (Shell Oil Co.), “Economics of Offshore 
Louisiana,” presented before the Louisiana-Arkansas Divi- 
sion of the Mid-Continent Oil and Gas Assn., Sept. 12, 
1967. 
