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The Midlands of England contain large areas of important oil lands, which,however, will not become of commercial importance for at least 5 years, becausethe ownership of the oil has become a political issue. In Great Britain, exceptin certain special areas, all minerals, except for gold and silver, belong tothe surface owner. The leasing of minerals on the large estates is a verycomplicated business, as the family solicitors have many forms and formalitiesthat must be observed. In the case of one of the large estates, the principalrevenues of which for several hundred years have been from coal leases, theaverage time between the agreement on terms for a coal lease and the signing ofthe same has been 8 years. In 1916, one coal lease on this estate had beenpending for 15 years, and was still unsigned, although the important terms hadbeen agreed upon 15 years previously.
Under war conditions, and considering the extreme importance that theproduction of petroleum in England would have had, such delays could not betolerated. Most of the British landlords, relying on the almost universalopinion of their own countrymen that there were no commercial deposits ofpetroleum in Great Britain, were prepared to give all their oil rights to thegovernment, but they feared that such action might establish a precedent withrespect to coal. For years the Labor Party and extreme radicals have protestedagainst the payment of royalties to landlords on coal. The government,therefore, introduced a bill taking over all the oil rights and providing forthe payment of a small royalty to the landlords, to safeguard the principle ofcompensation in case the coal mines should ever be nationalized. The provisionof this bill, with respect to the payment of royalty to landlords, was defeatedby a vote of 44 to 35 in a night session of the House of Commons on Oct. 25,1917, when most of the members were absent, but when a group of labor membersand extreme radicals were present.
For more than 2500 years, natural gas issues in the Surakhany district ofthe Apsheron peninsula were the object of pilgrimages by fire worshippers andHindoos from Burma and India. Even as late as 1890, Hindoo priests conductedceremonies in a temple at Surakhany, which probably replaced a more ancientone; but later, the visits of the pilgrims were prohibited in order to checkthe spread of Asiatic diseases in that region.
For centuries, limited supplies of oil have been abstracted from shallowexcavations in the Caspian oil belt and dispatched into the interior of Asiaand elsewhere for medicinal and industrial purposes. Statistics show a yield of37,400 bbl. in 1863, but only since 1869 has there been serious development; inthat year the yield was 203,000 bbl. At that time, hand digging was supplantedby drilling, and the enormous wells that resulted from tapping sources hithertobeyond the reach of operators completely demoralized the industry for a time,owing to inadequate outlets for the products.
The early activities in this area were greatly hindered by annoying taxation,monopolies, imperial land grants, etc., but when these were revoked oradjusted, in 1877, the industry sprang into prominence and, between 1898 and1901, the Baku fields produced practically one-half of the world's supply ofoil.
Within a few miles of Baku lie the two richest oil fields in the world; viz.,the Balakhany-Saboontchy-Romany and the Bibi-Eibat, the latter constitutingalmost a suburb of the city. For many years the gasoline obtained in therefineries of the Baku area was burned in pits, being considered an undesirableproduct, and until 1870 the residue also was destroyed, its value as a fuel notbeing recognized. Kerosene was the main product sought by the refiners. It wasshipped across the Caspian Sea and up the Volga to the industrial centers ofRussia. Only on the completion of the Baku-Batoum railway did the Baku oilfields secure important commercial communication with the outside world throughthe medium of the Black Sea. The first tank steamer was successfully launchedon the Caspian in 1879, by Messrs. Nobels, for transporting oil in bulk insteadof in barrels. In 1905, an 8-in. pipe line to Batoum was completed; this wascapable of transporting to seaboard 8,000,000 bbl. of kerosene per annum.
This paper makes no claim to any new idea; it simply reviews the TreasuryDepartment Regulations pertaining to the practical application of depreciationand depletion and other allowances governing taxation of oil and gasproperties. Other methods may be existent, but as they may not conform to thelegal status they must be discarded.
In complying with the present laws governing the industry with regard totaxation and the allowable deductions therefrom, the following considerationsare essential: Depletion, depreciation, amortization, other allowances, anditems not deductible.
It is definitely understood that depletion is the loss or exhaustion sustainedin the continuous operating of an oil and gas property, and that each unit ofoil or gas taken out reduces the value of the property until its finalexhaustion. Depletion applies only to the natural deposits of oil and gas dueto their removal in the course of exploitation of any property.
Depreciation is defined to cover the waste of assets due to exhaustion, wearand tear, and obsolescence of the physical property, and is separate anddistinct from depletion; its allowance is that amount which should be set asidefor the taxable year in such sums as for the useful life of the property willsuffice to repay its original cost - or its value as of Mar. 1, 1913, ifacquired by the taxpayer before that date - less the salvage value at the endof such useful life.
Amortization is allowed for such facilities as were built or acquired on orafter Apr. 6, 1917, for the production of articles contributing to theprosecution of the war and, in the case of vessels, those built and acquiredafter that date. The amount to be extinguished, in general, is the excess ofthe unextinguished or unrecovered cost of the property over its maximum valueunder stable post-war conditions.
Claims for amortization must be unmistakably differentiated in the returns fromall other claims of depreciation. The taxpayer is also required to furnish fullinformation with the claims for amortization to the full satisfaction of theCommissioner. Further reference is directed to the specific rules andregulations for making these claims.
The term oil property, in this discussion, includes any type of easement orgrant under which petroleum might be produced; it ranges from the mere right todrill on undeveloped wildcat acreage up to a fully developed oil property. Thevalues of an oil property, as thus defined, vary widely according to the usefor which it is intended, whether it is from the viewpoint of the speculator,the fraudulent stock promoter, the refiner and pipe-line owner, or the oilproducer.
The market value of a property is usually a combination of some two or more ofthese influences, and occasionally a combination of all of them, but we preferto treat each viewpoint as distinct from the others, allowing the reader tomake his own combination in such proportions as his inclination and propertyseem to require. This paper will treat the subject from the viewpoint of theoil producer. However, the other influences have such bearing on the cost ofproperty to the producer and on the price he might obtain by its sale as towarrant brief discussion of them.
Speculation, particularly lease speculation, is a parasitic growth on the oilindustry, healthy enough, but of no economic value. The class of propertyusually dealt in for this purpose is the undeveloped lease. Its speculativevalue may have some relation to its probable productive value, but mostfrequently this value is the product of temporary excitement due to localdevelopment. The lease speculator, seeking out the trend of development orsecuring early information regarding a proposed test or a new discovery,immediately secures leases whose market value will be increased when theexistence of such development becomes more widely known. His profits are purelyunearned increment. Not proposing to spend money in exploration, he can affordto compete in purchase with the operator, who, in addition to bonus paid, mustspend large sums in testing out his own acreage and that of the nearbyspeculator as well. It has a tendency to compel unduly high bonuses.
The theory that the ratio of fixed carbon in pure coals is an invariable index of incipient metamorphism in both surface and underground rocks and that it may be applied in defining the limits of petroleum, advanced by David White,l has been received with keen interest by many petroleum geologists. Detailed isocarb maps have been prepared of the Pennsylvanian area of North Texas and Eastern Oklahoma by M. L. FuIIer. 2 A similar map of the coal-bearing area of West Virginia is given here. An isocarb 3 is a line showing an equal fixed-carbon percentage, pure coal basis; the term has been proposed by David White to supersede a less expressive nomenclature. The term carbon ratio is applied to the percentage of carbon in pure coal after water and ash have been eliminated. As a comparatively small number of analyses have been made on this basis, it is usually necessary to compute the ratio by dividing the fixed rarbon of the proximate analysis by the sum of the fixed carbon and volatile matter of the same analysis.
This paper is not intended as a scientific discussion of the combustion ofoil but is written from the standpoint of an operator who has the experienceand qualifications necessary to guide others in producing the most economicalresults in the use of liquid fuels. Oil, in this paper, usually means petroleumor its products but incidental reference is made to other liquid and gaseousfuels, so that the term may be considered as referring to all liquid andgaseous hydrocarbons in comparison with solid fuels, as coal and wood. However,only a few of the principal factors in the use of oil as a fuel can begiven.
The present, and prospective, high price of coal is causing users of fuel torenew inquiry as to the merits of other forms of fuel for industrial purposes.Crude oil (petroleum) is proving to be one of the world?s most valuable mineralresources. The recent discovery that oil underlies a considerable area of theUnited States, Mexico, and other parts of the world to a greater extent thanwas formerly believed and the large production of some of the wells in theseareas shows the probable quantity of fuel oil that may now be available.Through the energy of Lord Cowdrey, who was one of the pioneers of the oilindustry in Mexico, oil has been discovered in England; some prominentgeologists believe that it may be found in quantity in Great Britain.
For years, oil has been known to be of great value in the manufacture ofmetals. It has proved incomparable in forge shops, steel foundries,heat-treating furnaces, and wherever accuracy of temperatures is essential, orwhere a maximum output is desired as well as quality of metal. In some types ofequipment, the output produced with oil as fuel is double that obtained withcoal and at a reduction of 50 per cent. in the cost of the fuel. For example,in drop-forging plants, the metal is always waiting for the man when oil isused as fuel, whereas with coal, the man must wait for the metal to becomesufficiently heated.
It has only been since January, 1919, that the oil supply could be relied onfor boiler service, owing to the war conditions and the inability to get oiltankers for the delivery of the oil from Mexico to Atlantic ports; but now aconstant supply is assured, and many manufacturers are installing it in theirpower plants.
SO FAR as the elementary composition of petroleum is known, it may be briefly stated. Petroleum consists principally of a few series of hydrocarbons, with admixtures of sulfur, nitrogen, and oxygen derivatives in comparatively minute proportions, which may be regarded as impurities to be removed in the preparation of commercial products. But as each series is represented by many homologs, in the aggregate, crude petroleum is an extremely complex mixture of hydrocarbons and their derivatives. In part, these hydrocarbons individually conform in structure to the system of synthetic hydrocarbons whose structure is well defined and represented by the typical series C"H 2,, 2, C"H2", the series C"H 2,,_2, C"H 2n - 4, the members of which have not been sufficiently studied to establish their structure, and the series C"H 2,,-6 composed of the aromatic group, benzene and its homologs. Hydrocarbons of greater density contained in the portions of petroleum that cannot be distilled without decomposition doubtless have less hydrogen than is represented by these formulas. C. in vacuum, it is evident that someis not much above 360 0 other method than distillation must be devised for their separation if anything further is to be learned concerning their individual constitution. CLASSIFICATION OF PETROLEUMS There is such a wide variation in the composition of petroleum from different fields, it would seem possible to make a classification on this basis were it not that no single variety is entirely free from hydrocarbons contained in others. Such a classification has been suggested of the exceptionally pure Pennsylvania petroleum, the sulfur oil from Trenton limestone and other sources, the California oil with its large amount of nitrogen (quinoline) derivatives, and the Russian oil, composed chiefly of the naphthene hydrocarbons. Both theoretically and commercially, there is a corresponding difference in quality between such light oils as those of the Appalachian fields, some of them composed to the extent of 50 per cent.
All strata not yielding oil or gas in commercial quantities or acorresponding amount of water may be called dry in a wide sense. In petroleumgeology, however, we may exclude all sands of too low or fine porosity to yieldgaseous or fluid contents to the hole drilled in the sand before any originalpressure that its contents may be under is disturbed. Most rocks are of thisclass and they are not reservoirs in our definition; their ?dryness? is whollya matter of course. What are the contents of the pores or what is the exactporosity of such rocks is of almost no concern to us, for economically they are?dry.?
What does interest us is the content of a rock having sufficient porosity andthe pores of sufficient size to yield oil or gas in commercial quantities, ifthey were present under original pressure. Dryness of these reservoirs is amatter of supreme practical importance. Three views current as to such drynessseem, to me, to apply in a few cases only. It is the purpose of this paper togive reasons for this position and for believing that, in ordinary sedimentaryrocks, there is only rarely a reservoir of competent porosity and undisturbedpressure that is dry in the sense of not yielding water, oil, or gas when firstpenetrated.
1. Gardner writes of some Kentucky sands, ?There has never been present anysalt water or other water in the sand.? Absence of water cannot demonstratethis position. It is necessary to show that the rocks were not laid down inwater, but in air, and that they became so enclosed, while still above thewater-table of the ground water, that water has not been able to enter since.Most of these sands, and certainly the productive limestones, were deposited inwater; and such sands as have been commercially productive show no reason forbelieving that the overlying shale or limestone was not laid down progressivelyfrom one direction and in water that would have flooded it. No adequateexplanation has been offered for this hypothesis, which is so inherentlyimprobable.
2. Reeves urges that ?sands originally water filled may have been drained oftheir water and not filled when later covered.?
Production and Marine Transportation
Although the work on which this paper is based was carried on by the writeras Special Commissioner of the Petroleum Department of the Mexican Government,the opinions expressed are only his personal views for which the MexicanGovernment can in no way be held responsible. Notwithstanding that theappointment covers all phases of the so-called petroleum question, as the onequestion of immediate importance was that relating to taxation, it was decidedto devote all the time to this phase of the work.
The present report has been divided into two closely related parts, the firstdealing with the production and marine transportation of Mexican petroleum, andthe second, with the Mexican taxation on petroleum and its products.
The writer wishes to acknowledge the loyal cooperation rendered by Mr. M. C.Ehlen, who had charge of the statistical work, and by Miss S. Stern and Messrs.E. P. Heiles and J. E. Morrissey.
The aim throughout the work has been to pave the way for a thoroughunderstanding between the Mexican Government and the oil operators and topresent a true and clear statement of facts relating to the questions atissue.
Mexican Oil Fields Development
The salient features in the development of the Mexican oil fields may besummarized as follows:
1901. First commercially productive well in Ebano field.
1902. Tehuantepec field came in; Diaz Government granted concession to Pearson& Son on practically all Federal lands along the Gulf of Mexico.
1907. First producing well in the Furbero field.
1908. Dos Bocas well caught fire, advertising tremendous productivity ofSouthern oil fields of Mexico.
No oil territory in the world has been so rich in large producing wells, ina comparatively small area, as the Baku field. Particularly is this true of theBibi Eibat field, which formerly produced millions of ?poods? of ?gusher,? oras it is called in Russia, ?fountain? oil. The Bibi Eibat and Balachany fieldshave been exhausted of gas and ruined by water, but , the Surachany andBenegadi fields are still fountain territories and many outlying districts thathave only been prospected produce rich fountains.
The method of controlling fountains, or gushers, is the result of growth, alongwith the Russian system of drilling, where large diameters and riveted casinghave been in vogue. The screw casing is seldom used except to exclude water.Formerly the method of finishing wells and the condition of the casing at thetop of the well would not permit the use of gates, manifolds, and connectionsas is standard elsewhere.
The life of the flowing wells is very short, particularly those 10 in. (25 cm.)or more in diameter, which produce large quantities of sand and often flow forbut a few days and are then a complete loss. More than 1,000,000 poods in 24hr. have been claimed in several instances, but in no case was the flow formore than a few days.
The oil sands of this district are free uncemented sands and vary in thicknessfrom paper thin to a maximum of 10 ft. (3 m.). The sands are interlaid withstrata of soft clay. In spite of this, the practice has been to drill into suchsands and produce from the open hole without screen or liners. Sometimes thecasing is set below the oil sand but in this case holes from 2? to 3 in. indiameter are drilled opposite the oil sand, which would not have the effect ofa screen.
Fig. 1 is an outline of the fountain shield ready for the control of afountain. It is composed of an inner and an outer covering made from roughboards. The framework is made of rough round poles. When a light flow isexpected, only the inner lining is built; and when the fountain comes inunexpectedly, it is often possible to build only the outer cover. The bridge isfor the purpose of renewing the blocks as they become worn by the flow. Thelower block, as here shown, is made of hardwood and is bolted to the crossbeamswith brass bolts. The grain end is toward the flow. The upper block, as shownhere, is made of cast steel and is also bolted to the cross beam with brassbolts.