Sliding Royalties For Oil And Gas Wells (e361b919-5284-4114-9b57-7b56671fc55b)

Discussion of the paper of ROSWELL H. JOHNSON, presented it the San Francisco meeting, September, 1915, And printed in Bulletin No. 102, June, 1915, pp. 1291 to 1294. WILLIAM A. WILLIAMS, San. Francisco, CaI.-A sliding. scale of royalties was proposed to the Department of the Interior in connection with the fixing of royalties to be charged upon oil leases made on the Osage Reservation in Oklahoma. The possibility of evasion and difficulty of enforcement required close inspection to satisfy all interests, particularly in connection with the exemption from royalty on oil to equal maintenance and interest on the junk. Mr. Johnson discusses the block method, the period method, and the cumulative method, and favors the adoption of the cumulative method with a proviso that the wells should be permitted to be pumped until the gross income is as low as the maintenance cost, which would mean exemption from royalty on the smallest wells. He recommends that depth be the variable factor upon which the sliding royalty is based and suggests that on partially developed territory in the Osage, the royalty be one-sixth for oil wells averaging less than 2,000 ft. in depth, one-eighth for wells from 2,000 to 3,000 ft., and one-twelfth above 3,000 ft.; for the rest of the Osage he suggests one-eighth above 2,800 ft. and one-twelfth below that depth. The net result, if Mr. Johnson's suggestions had been accepted in the Osage, would have been to reduce the then existing rate of royalty and considerably increase the cost of administration. The difficulties in determining the size of wells to be exempt and the possibility of obtaining oil at different depths in the same well might lead to complications which are avoided by charging a flat royalty as now universally charged throughout the United States. It is not uncommon to reduce the royalty when the production of the wells becomes unprofitable at an existing rate of royalty, accomplishing very much the same results as Mr. Johnson has attempted to accomplish by the cumulative royalties, and probably in a manner far more satisfactory to the operator and the lessor. A. C. MCLAUGHLIN, San Francisco, Cal.-The net revenue of the well depends, first, on the cost of production; second, on the amount of oil produced; therefore it would be impossible under Mr. Johnson's system to set a royalty which would be fair to all concerned. If it is impossible to set it at the beginning, it is certainly further impossible to do it from day to clay. I think it is entirely impracticable of application.