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Where these conditions exist, it would be to the public interest and greatly enhance the value of the related public properties if the privately owned lands could be acquired by granting an exchange, not to exceed equal values of national forest land or stumpage in the same State, in the manner provided by the act of March 20, 1922, which now has been in operation for a period of 15 years and which fully safeguards all interests concerned. By previous acts Congress has granted similar authority in relation to all national forests in the State of Montana and to a number of specified national forests in other States.

In my opinion the bill H. R. 5282 would serve a useful purpose and be to the public interest, consequently, it has my approval and I recommend its favorable consideration by your committee. Very sincerely yours,

H. A. WALLACE, Secretary. O

AMENDING THE OIL AND GAS LEASING ACT OF 1920

May 13, 1935.-Committed to the Committee of the Whole House on the state

of the Union and ordered to be printed

Mr. GREEVER, from the Committee on the Public Lands, submitted

the following

REPORT

[To accompany H. R. 5530)

The Committee on the Public Lands, to whom was referred the bill (H. R. 5530), to amend an act entitled “An Act to promote the mining of coal, phosphate, oil, oil shale, gas, and sodium on the public domain”, approved February 25, 1920 (41 Stat. 437; U. S. C., title 30, secs. 185, 221, 223, and 226), as amended, after careful consideration, reports favorably thereon with the recommendation that the bill do pass the House with the following committee amendments:

Page 2, lines 24 and 25, page 3, line 1, beginning with the word Provided" strike out all of the language up to and including the figure "1935", and substitute in lieu thereof the following:

Provided, That all permits outstanding on the effective date of this amendatory Act, which on said date shall not be subject to cancellation for violation of the law or operating regulations and which have theretofore been extended by the Secretary of the Interior, shall be and the same are hereby extended until December 31, 1936, subject to the applicable conditions of such prior extensions: And provided further, That the Secretary of the Interior is hereby authorized, in his discretion, to extend for an additional period of not to exceed one year any permit on which diligence has been exercised during the extension period hereby granted but no extension of any permit beyond December 31, 1937, shall be granted under authority of this Act or any other Act.

The purpose of this amendment is to afford full and adequate protection to equities that have been earned on outstanding permits and to provide a specific limitation for all future permit extensions. Some permits with substantial equities now outstanding have about reached the limit of life allowed by existing law and additional authorization for extension is desirable. It also seems desirable that an extension period should be given directly by the law itself to bridge over the period of adjustment which will necessarily occur between the termination of issuance of new permits and the final period in which leases will be issued only by public offer.

The amendment descriminates between permits on which equities have been earned and recognized by prior extensions and those on which equities have not heretofore been adjudicated. To the former class it gives a definite further period of extension, while to the latter it provides for extension by the Secretary of the Interior. It also authorizes said Secretary on showing of diligence to grant a further period of 1 year to deserving permittees but will have the effect of terminating all permits on December 31, 1937.

Page 5, line 8, after the word “Act”, change the period to a colon and insert the following:

And provided further, That no such lease shall be subject to the acreage limitations of section 27 of this Act, as amended, until one year after the discovery of valuable deposits of oil or gas thereon: And provided further, That an applicant for any such prospecting permit whose application is pending on the date of the passage of this Act shall have the right within six months thereafter to have his application for permit considered as an application for lease under section 17 hereof, otherwise his application shall be rejected.

The second amendment accomplishes two things. First, it allows permittees under the old law to convert their permits into leases under the new law without becoming subject to the acreage limitation of section 27 until 1 year after the conversion is made. This is necessary in order to protect the contractural obligations between permittees and their operators. Second, it affords protection to applicants for prospecting permits whose applications are pending when the bill becomes effective by allowing them 6 months within which to have their applications considered under the new legislation.

Page 7, lines 16, 17, and 18, beginning with the word “under" strike out all of the language up to and including the word “prescribe", and substitute in lieu thereof the following: under such resonable cooperative or unit plan for the development and operation of any such area, field, or pool as said Secretary may determine to be practicable and necessary or advisable, which plan shall adequately protect the correlative right of all parties in interest, including the United States.

This amendment liberalizes the language of the bill by requiring that any cooperative or unit plan to which a lessee shall be committed must be reasonable in its terms and shall adequately protect the correlative rights of all parties in interest.

In brief, this bill, with the foregoing amendments, makes four prinprincipal changes in the law regulating the leasing of oil and gas on the public domain.

1. Repeals the authority of the Secretary of the Interior to issue prospecting permits after July 1, 1935, and to extend permits beyond December 31, 1937. Provides for the leasing of both proven and unproven public domain lands at a minimum royalty of not less than 12% percent nor more than 25 percent, and at an annual acreage rental of not less than 25 cents.

2. Provides that such oil and gas leases shall be for a period of 5 years on unproven lands and for a period of 10 years on proven lands and so long after such respective periods as oil or gas is produced in paying quantities.

3. Requires that leases hereafter issued be conditioned upon an agreement by the lessee to operate under such reasonable cooperative or unit plan of development as the Secretary may approve or prescribe.

4. Requires grantees of rights-of-way for pipe-line purposes over the public land to accept, transport, or purchase oil and gas produced

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on Government lands on a 100-percent volume measurement basis in such proportionate amounts as the Secretary of the Interior determines to be reasonable.

Further facts concerning the proposed legislation are set forth in the favorable report of the Secretary of Interior under date of February 26, 1935, which report is hereinbelow set out in full and made a part of this report, as follows:

DEPARTMENT OF THE INTERIOR,

Washington, February 28, 1935. Hon. RENÉ L. DEROUEN, Chairman Committee on the Public Lands,

House of Representatives. MY DEAR MR. DE ROUEN: 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 sodium on the public domain' approved February 25, 1920 (41 Stat. 437, U. S. C., title 30, Becs. 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 1272 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 12% 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 a preference right to a lease for the remainder at a royalty of not less than 1242 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 1244 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 operator, reserving to himself the “reward for discovery” and oftentimes a cash bonus in addition. This royalty and bonus, rightful 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 development. Furthermore, royalty obtained on preference-right leases to the remaining threefourths of permit areas has averaged only about 14%percent, 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 1.30 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 1272 percent and upward, afforded about four-fifths of the revenue. In 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.

The proposed amendments to sections 13 and 14 nullify the experimental legislation of 1920 and 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 1242 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 oil 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 leased 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. În particular it offers an invitation and encouragement to him who in public-land 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 s 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.

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