gas shall have been discovered within the lands leased: Provided, That the rental paid for any one year shall be credited against the royalties as they accrue for that year. "The Secretary of the Interior, for the purpose of more properly conserving the oil or gas resources of any area, field, or pool, shall also require that leases hereafter issued be conditioned upon an agreement by the lessee to operate under such a cooperative or unit plan for the development and operation of any such area, field, or pool as he may approve or prescribe. "Leases hereafter issued under this section shall be for a period of five years and so long thereafter as oil or gas is produced in paying quantities when the lands to be leased are not within any known geological structure of a producing oil or gas field, and for a period of ten years and so long thereafter as oil or gas is produced in paying quantities when the lands to be leased are within any known geological structure of a producing oil or gas field: Provided, That no such lease shall be deemed to expire by reason of suspension of prospecting, drilling, or production pursuant to any order of the said Secretary: Provided further, That no lease on lauds not within any known geological structure of a producing oil or gas field shall be issued if the Secretary shall find upon certification to him by the Director of the Geological Survey that there is no reasonable prospect of the discovery of oil or gas on the lands for which application is made: And provided further, That the person first making application for the lease of any lands not within any known geological structure of a producing oil or gas field who is qualified to hold a lease under this Act shall, during the period of thirty days after the filing of such application be entitled to a preference right over others to a lease of such lands without competitive bidding. "Leases issued prior to July 1, 1935, under the authority of this Act shall continue for a period of twenty years with the preferential right in the lessee to renew the same for successive periods of ten years upon such reasonable terms and conditions as may be prescribed by the Secretary of the department having jurisdiction thereof, unless otherwise provided by law at the time of the expiration of such periods: Provided, That any such lease that has become the subject of a cooperative or unit plan of development or operation, or other plan for the conservation of the oil and gas of a single area, field, or pool, which plan has the approval of the Secretary of the department or departments having jurisdiction over the Government lands included in said plan as necessary or convenient in the public interest, shall continue in force beyond said period of twenty years until the termination of such plan: Provided further, That said Secretary or Secretaries shall report all leases so continued to Congress at the beginning of its next regular session after the date of such continuance. "Any cooperative or unit plan of development and operation, which includes lands owned by the United States, shall contain a provision whereby authority, limited as therein provided, is vested in the Secretary of the department or departments having jurisdiction over such land to alter or modify from time to time in his discretion the rate of prospecting and development and the quantity and rate of production under said plan. The Secretary of the Interior is authorized whenever he shall deem such action necessary or in the public interest, with the consent of lessee, by order to suspend or modify the drilling or producing requirements of any oil and gas lease not subject to such a cooperative or unit plan, and no lease shall be deemed to expire by reason of the suspension of production pursuant to any such order. "Whenever it appears to the Secretary of the Interior that wells drilled upon lands not owned by the United States are draining oil or gas from lands or deposits owned in whole or in part by the United States, the Secretary of the Interior is hereby authorized and empowered to negotiate agreements whereby the United States or the United States and its permittees, lessees, or grantees shall be compensated for such drainage. Whenever the average daily production of the oil wells on an entire leasehold or on any tract or portion thereof segregated for royalty purposes shall not exceed ten barrels per well per day, the Secretary of the Interior, for the purpose of encouraging the greatest ultimate recovery of oil and in the interest of conservation of natural resources, is authorized to reduce the royalty on future production when in his judgment the wells cannot be successfully operated upon the royalty fixed in the lease. The provisions of this paragraph shall apply to all oil and gas leases issued under this Act, not included in an approved cooperative or unit plan of development and operation. "Any lease issued after July 1, 1935, under the provisions of this section, except those earned as a preference right as provided in section 14 hereof, shall be subject to cancelation by the Secretary of the Interior after thirty days' notice upon the failure of the lessee to comply with any of the provisions of the lease, unless, or until, the land covered by any such lease is known to contain valuable deposits of oil or gas. Such notice in advance of cancelation shall be sent the lease owner by registered letter directed to the lease owner's record post-office address, and in case such letter shall be returned as undelivered, such notice shall also be posted for a period of thirty days in the United States land office for the district in which the land covered by such lease is situated, or in the event that there is no district land office for such leased land, then in the post office nearest such land. Leases covering lands known to contain valuable deposits of oil or gas shall be canceled only in the manner provided in section 31 of this Act. "SEC. 28. That rights-of-way through the public lands, including the forest reserves of the United States, may be granted by the Secretary of the Interior for pipe-line purposes for the transportation of oil or natural gas to any applicant possessing the qualifications provided in section 1 of this Act, to the extent of the ground occupied by the said pipe line and twenty-five feet on each side of the same under such regulations and conditions as to survey, location, application and use as may be prescribed by the Secretary of the Interior and upon the express condition that such pipe lines shall be constructed, operated, and maintained as common carriers and shall accept, convey, transport, and/or purchase without discrimination, on a 100 per centum volume-measurement basis, oil and/or natural gas produced from Government lands in the vicinity of the pipe line in such proportionate amounts as the Secretary of the Interior may, after a full hearing with due notice thereof to the interested parties and a proper finding of facts, determine to be reasonable: Provided, That the Government shall in express terms reserve and shall provide in every lease of oil lands hereunder that the lessee, assignee, or beneficiary, if owner, or operator or owner of a controlling interest in any pipe line or of any company operating the same which may be operated accessible to the oil derived from lands under such lease, shall at reasonable rates and without discrimination accept and convey the oil of the Government or of any citizen or company not the owner of any pipe line, operating a lease or purchasing gas or oil under the provisions of this Act: Provided further, That no right-of-way shall hereafter be granted over said lands for the transportation of oil or natural gas except under and subject to the provisions, limitations, and conditions of this section. Failure to comply with the provisions of this section or the regulations and conditions prescribed by the Secretary of the Interior shall be ground for forfeiture of the grant by the United States District Court for the district in which the property, or some part thereof, is located in an appropriate proceeding." SEC. 2. (a) That the Secretary of the Interior is authorized to issue new leases to lessees holding oil or gas leases under any of the provisions of this Act at the time this amendatory Act becomes effective, such new leases to be in lieu of the leases then held by such lessees and to be at a royalty rate of not less than 121⁄2 per centum in amount or value of the production and upon such other terms and conditions as the Secretary of the Interior shall by general rule prescribe. (b) Nothing contained in this amendatory Act shall be construed to affect the validity of oil and gas prospecting permits or leases previously issued under the authority of the said Act of February 25, 1920, as amended, and in existence at the time this amendatory Act becomes effective, or impair any rights or privileges which have accrued under such permits or leases. SEC. 3. That the provisions of this amendatory Act shall not be in force and effect until July 1, 1935. The CHAIRMAN. I shall ask the clerk of the committee to read you the report to this committee on this bill of Mr. Greever's; and then, if you choose, we would like to hear from you, Mr. Greever, after the report is read for the benefit of the members. The clerk of the committee will proceed to read the report. (Thereupon the clerk read the report as follows:) Hon. RENÉ L. DEROUEN, THE SECRETARY OF THE INTERIOR, Chairman Committee on the Public Lands, House of Representatives. MY DEAR MR. DEROUEN: I am in receipt of your letter of February 11 requesting a report on H. R. 5530, a bill to amend an act entitled "An act to promote the mining of coal, phosphate, oil, oil shale, gas and solium on the public domain approved February 25, 1920 (41 Stat. 437, U. S. C., title 30, secs. 185, 221, 223, and 226), as amended," generally known as the "Mineral Leasing Act." The bill amends the provisions of the 1920 act relating to oil and gas, particularly sections 13, 14, 17, and 28. In reporting on this bill I desire to submit certain fundamental facts for consideration by your committee. Under the general custom of leasing lands for the discovery and production of oil and gas from the early days of the industry, the lessee pays the lessor a bonus in cash for the privilege of leasing and a percentage royalty on production obtained. The amount of bonus and royalty paid for private lands has been a matter for trading between the interested parties. For public lands the percentage royalty has most generally been fixed by law or regulation and the bonus determined by competitive bidding. In most cases a royalty of 121⁄2 percent, plus a cash bonus in dollars per acre, has been the result, though royalties of 16% percent are not uncommon and higher royalties have been obtained under exceptional conditions. Royalties of less than 121⁄2 percent have been practically unknown in the industry. Sections 13 and 14 of the act of February 25, 1920, made a departure by way of experiment from this long-standing custom. Taken together, they provide that an applicant for unproven Federal lands may obtain a permit to prospect for oil and gas and, if successful, may obtain a lease for not less than one-fourth of the permit area at a royalty of 5 percent and preference right to a lease for the remainder at a royalty of not less than 121⁄2 percent. No rental or other holding charge for land under permit was authorized. The purposes of this legislation were to encourage prospecting, to provide a reward in the form of an exceptionally low royalty to an operator who was successful in prospecting operations, and to recoup to the United States for loss under this low (5 percent) royalty on onefourth of the permit area by a relatively higher royalty on three-fourths of the area. These purposes were perhaps commendable, but the experiment has signally failed to accomplish what was expected of it. Speculation rather than prospecting has been expedited. No urgent need for Government subsidy for prospecting on the public domain exists or has existed. The reward for successful prospecting, the difference between the special royalty of 5 percent, and the customary royalty of 121⁄2 percent, 16% percent, or more, in practice has not gone to an operator who expended money in search of oil on the permit area but, in general, to a promoter lease broker, or speculator who sold his prospecting rights to the real lease broker, or speculator who sold his prospecting rights to the real operator, reserving to himself the reward for discovery and oftentimes a cash bonus in addition. This royalty and bonus, righful property of the United States as owner of the mineral deposits, has been granted by the terms of the experimental legislation of 1920 to those who have done little or nothing toward the development. Furthermore, royalty obtained on preference,-right leases to the remaining three-fourths of permit areas has averaged only about 141⁄2 per cent, far too little to make up for the prodigal subvention involved in the grant of 5-percent royalty on one-fourth the permit area. In the fiscal year 1934 the average royalty received for oil and gas leases on public lands was 11.30 percent, or less than the lowest customary royalty under commercial leases. This was due solely to the unprecedented 5-percent lease provision of section 14. Thirty-seven percent of the oil production from Government lands, being at 5-percent royalty, produced only about a seventh of the total revenue from oil and gas royalties; while 59 percent of the oil production, at royalty of 122 percent and upward, afforded about four-fifths of the revenue. terms of cash, this subsidy to the promoter in that year cost the State and Federal Governments more than $1,000,000 and since the passage of the Leasing Act in 1920 has amounted to about $10,000,000. In The proposed amendments to sections 13 and 14 nullify the experimental legislation of 1920 and if one proviso is eliminated they would establish the customary practice of having the royalty and/or bonus of prospective as well as proven oil and gas lands determined by competitive bidding. This practice has long obtained in the Department of the Interior with respect to oil leases for Indian lands and has proven to be eminently satisfactory to all parties interested in bona fide prospecting and development. The proposal substantially eliminates speculation in oil and gas rights obtained free from the Government, a practice not only permitted but actually encouraged under the act of 1920. Provision is properly made in the bill for the recognition and protection of the holders of valid outstanding prospecting permits, and it is further provided that permits in good standing may be exchanged for leases under the new system subject to conditions prescribed in the bill. Outstanding leases are unaffected, though it is provided that a lessee may, if he so desires, exchange an outstanding lease for a lease under the act as amended. It is also provided that the Secretary of the Interior may issue new leases at a royalty rate of not less than 122 percent and upon such other terms and conditions as he may prescribe, in lieu of leases now held. All valid existing rights are therefore most carefully protected. Oil and gas leases issued under the 1920 law are for a term of 20 years with a preference right to renewal for successive periods of 10 years on such terms and conditions as the Secretary of the Interior may impose. There being no assurance of tenure or terms beyond the first 20-year period lessees attempt to produce all possible oil and gas within that period. In the case of oil and gas leases on private lands it is customary to grant leases for a definite period of time and so long thereafter as oil or gas is produced in paying quantities. A lessee may thus adjust his rate of production to the market demand without fear of loss. The cost of drilling wells and the hazards involved in developing cil and gas leases are great. In view of the existing overproduction of crude oil and the necessity for curtailing production from a few percent to as much as 80 percent or more of the potential productive capacity of wells it seems only reasonable that the term of the lease should be for the productive life of the wells thereon, thus avoiding the necessity of producing all oil possible within a prescribed term regardless of conditions in the industry. In this connection it is noted that the proposed legislation in section 17 provides for leases for a 5-year period and so long thereafter as oil or gas is produced in paying quantities when the lands leased are not within any known geological structure of a producing oil or gas field, and for leases for a 10-year period and so long thereafter as oil or gas is produced in paying quantities when the lands leases are within any known geological structure of a producing oil or gas field. In my opinion there is no necessity to distinguish as to lease periods between leases within or without the geological structure of a producing oil or gas field, and in order to avoid unnecessary complexities of administration I suggest that this clause be modified to provide for the same initial lease period, either 5 years or 10 years, whichever Congress considers appropriate. In the same proposed section it is very appropriately provided that leases shall not be issued for lands on which there is no reasonable prospect for the discovery of oil or gas. The proviso in section 17 that gives an applicant for lease of lands not within the known structure of a producing field a preference right thereto without competition, in its present form, is believed to be subversive of the public interest. In particular it offers an invitation and encouragement to him who in publicland parlance is called a "sooner." Such an individual, for example, seeing a geologic party at work, may take advantage of his knowledge of their presence and hurriedly file application and substantially without expense or effort obtain a preference right, to the disadvantage of persons who are in good faith making expensive preliminary investigations. If preference right is to be given to anyone, it should be limited to those who by substantial effort have acquired a claim to equitable consideration. Furthermore, it is believed that opportunity for competitive bidding should be given in every case so that there may be no basis for charges of collusion or favoritism in the granting of leases. An appraised value may be set as the lowest acceptable bonus or royalty; but if the value is low and the lease turns out to be highly productive, charges of improper action are almost sure to be made unless the appraised value is subjected to the test of competition. The lease for Teapot Dome was for land not within the known structure of a producing field and was entered into without competition. It has been claimed that under competitive bidding this lease could have been sold for a million dollars or more. I suggest that this proviso be eliminated. The act of March 4, 1931 (46 Stat. 1523), authorized the Secretary of the Interior to approve unit plans of development and operation, and the bill adds a further provision requiring the Secretary of the Interior to reserve the right in issuing new leases to approve or prescribe cooperative or unit plans of development and operation for the purpose of more properly conserving the oil and gas resources of any field or pool. This provision will tend to encourage development and operation of fields under unit or cooperative plans of development and is believed to be in the public interest. The bill vests in the Secretary of the Interior authority to negotiate agreements whereby the United States or its permittees, lessees, or grantees will be compensated for drainage of oil or gas caused by wells drilled upon lands not owned by the United States. This provision is desirable in order to protect adequately the interests of the Federal Government. In section 28, as amended, it is required that applicants for rights-of-way for pipe-line purposes not only operate the pipe line as a common carrier, but also accept, convey, transport, and or purchase without discrimination on a 100percent-volume measurement basis all oil and/or natural gas produced from Government lands in such proportionate amounts as the Secretary of the Interior may determine to be reasonable. Section 28 of the original act provides that pipe lines crossing Government lands must be operated as common carriers, and the proposed amendment would expand this provision to require that withdrawals of oil and/or natural gas produced from wells on Government or private lands be made in such proportionate amounts as are determined to be fair and equitable. The necessity for such a provision has been apparent for some time. In several cases gas lands of the United States have been subjected to drainage because pipe-line companies or others in control of a filed have failed or refused to transport or purchase gas produced from wells on public lands, while at the same time they are transporting and/or purchasing gas from wells on adjoining private lands. The proposed amendment to section 28 also requires that the volume of all oil or natural gas transported or purchased be measured on a 100-percent volume basis; that is to say, the standard of measurement now recognized for the purpose of computing royalties on production from public lands must be adhered to by all pipe lines operating on public lands. It is my considered opinion that this bill, modified in section 17 as indicated, is in the public interest, and I respectfully urge that it receive favorable consideration. Sincerely yours, Secretary of the Interior. The CHAIRMAN. Mr. Greever, would you care to make any remarks? We have just read the report from the Interior Department, and if you choose to make any remarks, we will be glad to hear from you. STATEMENT OF HON. PAUL R. GREEVER, REPRESENTATIVE FROM WYOMING Mr. GREEVER. Mr. Chairman, briefly, this bill is brought about by the fact that all extensions of permits up to the present time, under the act of February 25, 1920-I believe that all of them have been extended no later than the 1st day of May 1935. Is that correct, Mr. Poole? Mr. POOLE. That is correct. Mr. GREEVER. The 1st day of May of this year. It became apparent sometime ago that if there were to be no further extensions, there should be some law here that would stabilize the production from, and drilling on, oil and gas lands. There are two things, I might say, that this bill does which I am very much interested in and have always thought, for many years, should be done, which was to operate on a lease basis rather than on a permit basis. For instance, in the State of Wyoming, the school lands there are operated on the lease basis. Twelve and one-half percent royalty, or more, is customary, according to the terms. Lands, of course, that are privately owned, everywhere, are operated on the lease basis. The minimum royalties provided in those permits on land, and on the school lands in our State, are 12%1⁄2 percent; whereas, under this law, the Government has been receiving 5-percent royalties upon what is known as preferred acreage; that is, 640 acres, we will say, out of 2,560 acres, or 160 acres out of 640 acres or lesser acreage. The moneys that are received from the royalties go to three funds: 10 percent of it goes into the Treasury of the United States; 37% |