Mr. STEWART. That is partly offset by royalties, and perhaps when that structure begins producing the royalty may get somewhere around $3,000. It is certain that it will not go up to $12,000.

Mr. MOTT. As I understand you, the Department required you to enter into a unit operation agreement wherein you would have to pay $12,000.

Mr. STEWART. Yes; or rental on whatever the acreage was.

Mr. MOTT. What would be the effect of such a requirement on you to come under a $12,000 unit plan of operation? Would you lose your investment that you put into the well?

Mr. STEWART. I am not prepared to say at the moment whether we would voluntarily cancel that if such a requirement were made, or whether we would go to court on it, or, in order to get along with the Department, try to make some other arrangement. My own notion would be that we would be better off to cancel that land in which we do not have vested rights.

Mr. MOTT. I want to ask you what would be your loss on that, the entire $100,000.

Mr. STEWART. Yes; it would be just about equal to that. I should say the well cost about $75,000. It is located so far out that we had to build a road up to it. Then the geological work and other work cost somewhere around $20,000 or $25,000. We would, of course, keep the land on which the well is drilled but would lose most of the structure.

Mr. MASSINGALE. What is the law in that country in regard to offset wells?

Mr. STEWART. We are bound here by the departmental regulations as to conservation. If we produced this well, we would have to drill another well across the line unless we would pay a compensating royalty, based upon the difference in the royalty between the two pieces.

Mr. MASSINGALE. It is about like it is generally in oil and gas regions?

Mr. STEWART. Yes; there is no difficulty about that. Operators do not object to drilling offset wells.

Mr. MASSINGALE. If offset wells were drilled there they would probably be drilled on what you call the "B" lease?

Mr. STEWART. It depends on what the unit operation agreement would be.

Mr. MASSINGALE. Is that not where the value of some kind of control would come to the Government of the United States?

Mr. STEWART. The Government already has control, Congressman, to bring about conservation

Mr. MASSINGALE (interposing). I understand that.

Mr. STEWART (Continuing). And to regulate the rate of flow and prevent the draining of Government land.

The thing I am objecting to here is the requirement that the lessee be required to take something when he does not know what it is and which he will not recognize when he gets it.

Mr. MOTT. Is that the only objection you have to the bill?

Mr. STEWART. No, sir; but that is the objection I wanted to voice here.

The other objections I have in mind have already been discussed by others, by Mr. Jackson and by Mr. Tallman.

I was interested in Mr. Steele's remarks. I agree with him thoroughly on the matter of certainty.

As a representative of an operating company, I might say that our interest in this bill is very largely to have it definite and certain enough and to have it workable enough so we can go ahead and comply with it.

Mr. MOTT. What was the matter with the old act?

Mr. STEWARt. It was indefinite and uncertain.

Mr. Moтт. I mean the one that this undertakes to amend.

Mr. STEWART. The act of February 25, 1920 ?

Mr. MOTT. Yes.

Mr. STEWART. There was too much uncertainty in it.

Mr. MOTT. Too much uncertainty?

Mr. STEWART. Yes.

Mr. MoTT. And the amendments proposed to the act of 1920 you think make it more uncertain?

Mr. STEWART. That same uncertainty is carried into this bill to even a greater extent.

Mr. RICH. Would the proposal made by Mr. Jackson the other day to take the place of this bill be your idea of trying to solve this situation?

Mr. STEWART. I think for the benefit of everybody concerned, the United States, the lessees, the permittees, and everybody, that this action should immediately be taken by Congress to protect the permits that otherwise will expire within 8 days from now, under a bill like the one Mr. Ayres introduced. Then careful study should be given to the matter.

Mr. RICH. Was the bill that Mr. Ayres introduced the one that Mr. Jackson read the other day?

Mr. STEWART. Yes; I believe it was. Then I would suggest that a careful investigation be made of this matter, so that you can see exactly what the situation is, and then a permanent leasing bill can be enacted after such an investigation is made.

Mr. MOTT. Do I understand that it requires congressional action to stop the expiration of the permits that expire within 8 days? Mr. STEWART. That might bring on a little legalistic discussion. Mr. MOTT. Is there any statutory reason why they cannot be extended after they expire?

Mr. STEWART. There is difference of opinion on that; lawyers disagree on it. If you had time to consider the extension acts referred to by Mr. Tallman, I think you will find that a permit could ultimately exist for 15 years from its date of issuance. However, it is a question whether the various extension acts that were passed by Congress in the past did not merely provide that permits may be extended for 2 or 3 years from that date.

Mr. MOTT. But there is some question about it?

Mr. STEWART. Very great question.

Mr. MOTT. As to whether, without congressional action, these permits may expire by statutory limitation?

Mr. STEWART. Congressional action would make it definite and certain, and would also relieve a tremendous amount of clerical work in the Department.

(After informal discussion :)

Mr. ROBINSON. Let us arrange it so that we will have the first thing tomorrow 45 minutes to hear witnesses on the pending bill before us, on which we are now holding a hearing, and then at a quarter to 11 o'clock we will go into executive session on Mr. Ayers' bill.

(Thereupon the committee adjourned to meet tomorrow, Tuesday, Apr. 23, 1935, at 10 a. m.)

AMENDING THE OIL AND GAS LEASING ACT OF 1920

TUESDAY, APRIL 23, 1935

HOUSE OF REPRESENTATIVES,
COMMITTEE ON THE PUBLIC LANDS,

Washington, D. C.

The committee met at 10 a. m., Hon. J. W. Robinson presiding. Mr. ROBINSON. The committee will be in session. Is there anyone here who wants to testify on this bill?

Mr. FREEMAN. I want to take just a few minutes, if the chairman please.

Mr. ROBINSON. Give your name and how long a time you will want. Mr. FREEMAN. I think 10 minutes will be amply sufficient.

STATEMENT OF EDWARD M. FREEMAN, REPRESENTATIVE OF MID-CONTINENT OIL & GAS ASSOCIATION

Mr. FREEMAN. My name is Edward M. Freeman. I appear as the representative of Mid-Continent Oil & Gas Association. I merely want to discuss one or two points that were mentioned in the course of yesterday's hearing.

One of the Congressmen raised the question as to what the situation was with reference to the possibility of drainage by wells on a 5-percent lease area of oil from the "B" lease, out of the same permit. In other words, after discovery is made, and the land has been leased, part at 5 percent and part at a minimum of 122 percent, and upward, according to the sliding scale.

There is no possibility whatever under the existing regulations, or indeed under the terms of the lease itself, that the Government could suffer any loss by drainage through the "A" lease of oil which underlay the "B" lease. The reason for that is that each lease carries drilling obligations. Each lease provides that the lessee shall drill a number of wells on the lease equal to the number of 40-acre tracts. There is also an express provision of offsetting. In other words, the lessee agrees by the very terms of his lease to offset on the "B" lease any well on the land in the "A" lease, or on any other land which would drain the "B" lease.

Then, in addition to the express provisions of the lease itself, the Department has worked out a theory of compensatory royalties. There are times when it is to the advantage of the Government and of the lessees also not to drill, because of a condition of overproduction, and in such cases the Government has permitted, and in some cases encouraged, the lessee not to drill, provided the lessee pays to the Government an amount estimated by the Government itself as

being adequate to compensate the Government for any loss which it might otherwise suffer.

By the express provisions of the operating regulations one of the duties of the Geological Survey is to estimate any loss that might be caused to the United States by drainage through the "A" lease of oil that underlies the "B" lease.

Mr. DEMPSEY. Mr. Chairman, may I ask the gentleman a question?

Mr. ROBINSON. Mr. Dempsey.

Mr. DEMPSEY. I think he confused the question which the Congressman asked the witness yesterday.

Mr. FREEMAN. I refer to that.

Mr. DEMPSEY. I understood the question to be, what would the result be, if one well was drilled on the "A" lease part of the acreage, and no other well is drilled, would there be drainage under the unit plan?

Mr. FREEMAN. Under the unit plan?

Mr. DEMPSEY. Yes.

Mr. FREEMAN. Assuming that a unit plan was in effect, the very terms of the unit plan would allocate the production from any well, no matter where located, to all the participating area.

Mr. DEMPSEY. They were speaking of royalty.

Mr. FREEMAN. That would be protected too. The Government would, of course, in agreeing to the unit plan, specify or agree to some plan whereby production from any well, anywhere in the unit, would be allocated to every acre within the participating acreage according to some formula, and the Government would then receive the specified royalty from whatever production was allocated to the "A" lease land. In other words, the very point of the unit is it makes no difference from what well the oil comes, the total production from the participating area, regardless of the location of the wells, is allocated to all the acreage within the participating area. Mr. DEMPSEY. So that the oil would not carry the minimum royalty, even though it were on the "A" lease?

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Mr. FREEMAN. That would depend entirely on the plan. I think the Government has approached the problem several ways. Sometimes the royalties are the same as though there were no unitization, but applicable not to the actual production but to the production that is allocated to the "A" lease and "B" lease acreage, respectively. In other cases they hodge-podge the royalty, so to speak, that is, they arrive at any average which would apply to all the acreage, regardless of whether ordinarily it would be "A" lease or "B" lease.

Mr. DEMPSEY. You just said if the oil is produced, on a "B" lease, that automatically that would carry the higher royalty. Would not the same be true if it were reversed, if produced on "A" lease?

Mr. FREEMAN. It would, aside from a unit plan, but if there is a unit plan, of course, as I say, there is an allocation of the production to acreage under whatever formula the plan provides. Whether the royalties remain distinctly "A" and "B" depends on the agreement. Sometimes it does, and sometimes the royalty is averaged between the two by the Secretary.

Mr. DEMPSEY. Let me ask you another question, which I am asking for information. Under the unit plan, how do you determine