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on future production when in his judgment the wells can not be successfully operated upon the royalty fixed in the lease. The provisions of this [paragraph] section shall apply.

SEC. 27. That no person, association, or corporation, except as herein provided, shall take or hold coal, phosphate, or sodium leases or permits during the life of such leases or permits in any one State exceeding in aggregate acreage two thousand five hundred and sixty acres for each of said minerals; no person, association, or corporation shall take or hold at one time oil or gas leases or permits exceeding in the aggregate seven thousand six hundred and eighty acres granted hereunder in any one State, and not more than two thousand five hundred and sixty acres within the geologic structure of the same producing oil or gas field; and no person, association, or corporation shall take or hold at one time any interest or interests as a member of an association or associations or as a stockholder of a corporation or corporations holding a lease or leases, permit or permits, under the provisions hereof, which, together with the area embraced in any direct holding of a lease or leases, permit or permits, under this act, or which, together with any other interest or interests as a member of an association or associations or as a stockholder of a corporation or corporations holding a lease or leases, permit or permits, under the provisions hereof for any kind of mineral leases hereunder, exceeds in the aggregate an amount equivalent to the maximum number of acres of the respective kinds of minerals allowed to any one lessee or permittee under this act. Any interests held in violation of this act shall be forfeited to the United States by appropriate proceedings instituted by the Attorney General for that purpose in the United States district court for the district in which the property, or some part thereof, is located, except that any ownership or interest forbidden in this act which may be acquired by descent, will, judgment, or decree may be held for two years and not longer after its acquisition: Provided, That nothing herein contained shall be construed to limit sections 18, 18a, 19, and 22 or to prevent any number of lessees under the provisions of this act from combining their several interests so far as may be necessary for the purposes of constructing and carrying on the business of a refinery, or of establishing and constructing as a common carrier a pipe line or lines of railroads to be operated and used by them jointly in the transportation of oil from their several wells, or from the wells of other lessees under this act, or the transportation of coal or to increase the acreage which may be acquired or held under section 17 of this act: Provided further, That any combination for such purpose or purposes shall be subject to the approval of the Secretary of the Interior on application to him for permission to form the same: : And provided further, That for the purpose of more properly conserving the natural resources of any single oil or gas pool or field, permittees and lessees thereof and their representatives may unite with each other or jointly or separately with others in collectively adopting and operating under a cooperative or unit plan of development or operation of said pool or field, whenever determined and certified by the Secretary of the Interior to be necessary or advisable in the public interest, and the secretary of the Interior is thereunto authorized in his discretion, with the consent of the holders of leases or permits involved, to establish, alter, change, or revoke drilling, producing, and royalty requirements of such leases or permits, and to make such other regulations with reference to such leases and permits with like consent on the part of the lessee of lessees and permittees in connection with the institution and operation of any such cooperative or unit plan as he may deem necessary or proper to secure the proper protection of such interest: And provided further, That when any permit has been determined to be wholly or in part within the limits of a producing oil or gas field which permit has been included, with the approval of the Secretary of the Interior, in a unit operating agreement or other plan under this act the Secretary of the Interior may issue a lease for the area of the permit so included in said plan without further proof of discovery: Provided further, That the Secretary of the Interior is hereby authorized, on such conditions as he may prescribe, to approve operating, drilling, or development contracts made by one or more permittees or lessees, in oil or gas permits or leases with one or more persons, associations, or corporations, whenever in his discretion and regardless of acreage limitations, provided for in this act, conservation of natural products or the public convenience or necessity may require it or the interests of the United States may be best subserved thereby: And provided further, That if any of the lands or deposits leased under the provisions of this act shall be subleased, trusteed, possessed, or controlled by any device permanently, temporarily, directly, indirectly, tacitly, or in any manner whatsoever, so that they form a part of, or are in anywise controlled by any combination in the form of an unlawful trust, with consent of lessee, or form the subject of any contract or conspiracy in restraint of trade in the mining or selling of coal,

phosphate, oil, oil shale, gas, or sodium entered into by the lessee, or any agreement or understanding, written, verbal, or otherwise, to which such lessee shall be a party, of which his or its output is to be or become the subject, to control the price or prices thereof or of any holding of such lands by any individual, partnership, association, corporation, or control, in excess of the amounts of lands provided in this act, the lease thereof shall be forfeited by appropriate court proceedings: And provided further, That nothing in this act shall be construed as affecting existing leases within the borders of the naval petroleum reserves or agreements concerning operations thereunder or in relation to the same, but the Secretary of the Navy is hereby authorized, with the consent of the President, to enter into agreements such as those provided for herein, which agreements shall not, unless expressed therein, operate to extend the term of any lease affected thereby.

As indicated above, this measure amends the law known as the general leasing act of February 25, 1920, so as to permit what is known as unit development of oil or gas leases on the public domain. This policy was expressed in the act approved July 2, 1930, but was terminated on the 31st of January, 1931. At the time this law was enacted the policy was considered doubtful, therefore a limitation was placed in the law which automatically terminated it on the above mentioned date. However, it is now desirable that we make this policy of unit development of oil or gas leases permanent.

A large number of leases are given within a certain geological structure or area which is gas or oil producing. Under the present law each separate locator or lessee or permittee is obliged to drill within the bounds of his particular lease, and if another drills adjacent to him, he is obliged to put down offset wells. Thus a very large and unnecessary expense is incurred in the drilling of the needless wells for the working of the entire claim. The provisions of this bill will reduce the cost of carrying on the development necessary to take oil out of the claim.

Under the provisions of this proposed measure the Secretary of the Interior is authorized at all times either to extend or restrict the amount of oil or gas which would prevent an excessive supply from flooding the market. At the present time when an enormous production of both oil and gas is encountered, so that for the immediate future the market is glutted, an arrangement to have the work done. systematically and to put the material out as the market demands is impossible because those lessees or permittees adjoining can limit production. This bill gives the Secretary of the Interior authority to restrict or extend production in such cases.

This measure further authorizes the approval by the Secretary of the Interior of operating, drilling, or development contracts by permittees or lessees, regardless of acreage limitations, whenever the policy of conservation or the public necessity or convenience will be promoted. This departure is intended to permit pipe-line companies to enter into contracts with permittees or lessees in number sufficient to justify the construction of such pipe-lines and to finance the same. A letter addressed to the chairman of the House Committee on the Public Lands sets forth the attitude of the Secretary of the Interior with reference to this unit plan of developing oil or gas leases on the public domain. This letter is herein set out in full for the information of the House.

DEPARTMENT OF THE INTERIOR,
Washington, January 14, 1931.

The CHAIRMAN COMMITTEE ON THE PUBLIC LANDS,

House of Representatives.

MY DEAR MR. CHAIRMAN: The act of July 3, 1930 (Public No. 527, 71st. Cong.), amended sections 17 and 27 of the mineral leasing act by vesting in the Secretary of the Interior authority to approve agreements for unit development or operation of any single oil and gas pool and to that purpose to modify and extend existing Government leases. These amendments expire at midnight of January 31, 1931. The act also provides that the Secretary of the Interior shall report to Congress all leases so continued, under the authority granted by this amendment. I have before me a final unexecuted draft of agreement for the unit operation of Kettleman Hills North Dome oil and gas field in California, approved as to form by the land and lease holders and which I have also approved as to form. Upon its receipt here after execution by the parties to it, I will formally approve it as being necessary and advisable in the public interest. A copy is transmitted herewith. In making this report to you I can go further than the formal language required by the act and state that this unit operation agreement is not only advisable but is essential to the proper conservation of this great field. The potential daily gasoline production from Kettleman Hills exceeds the entire present gasoline production of California, and the proper handling of such a prolific source of motor fuel is vital to the national defense, Inasmuch, however, as this unit plan involves very large values and affects the most productive known field of the public domain, I have considered it advisable to give to Congress an opportunity to examine the plan and if it disagrees with the action taken by the department, to disaffirm that action. Accordingly, my certificate of approval when signed will include the following condition:

"If the act of July 3, 1930, under which this approval is certified, shall be repealed on or before January 31, 1931, this approval and certificate shall be void and of no effect."

The executed instrument has not yet reached Washington but because of the shortness of time remaining before the act of July 3 expires, I am transmitting the final draft of the agreement for your consideration.

In brief, the plan contemplated by this agreement is as follows: North Dome Kettleman Hills, as you know, is checkerboarded by the fee land holdings of the Standard Oil Company of California (derived from a railroad land grant of alternate sections) and Government sections, all of which are now under lease. In addition, there are certain areas, praticularly on the edges of the field, which are owned in fee by interests other than the Standard Oil Co. If the entire field were organized under one unit the Standard Oil Co. would control it. Both the Standard Oil Co. and the Department of the Interior have wished to avoid this result. Consequently, the plan calls for the creation of two units, one composed of Standard Oil holdings and the other composed of Government area, plus private fee holdings other than the Standard Oil. It is contemplated that these two units will operate in cooperation with each other under a renewable operating agreement which will eliminate offset drilling with its attendant excess cost and waste of gas, and provide production by both units from those horizons which will produce the maximum of oil with the minimum waste of gas.

The so-called Government unit will be operated by an association incorporated under the laws of California in which the Government lessees will own interests in proportion to their acreage. The Government lessees will contribute to the cost of development, and will share in profits of the association in that ratio.

The individual titles of the lessees are retained by them, but the association will become the operating company on all of the leases.

The plan adopts a report of an engineering subcommittee which marked out two areas on the dome-one the area now accepted as fully proven (referred to as the "red line" area) and the other the area within the approximate productive limits (referred to as the "blue line" area). Within the first 10 years the blue line is subject to change, but thereafter it is to remain fixed and all lands within it are to share and share alike in contributions and distribution of benefits. Each lessee is given the right to drill exploratory wells and prove any acreage outside the blue line which he believes to be productive; but the association may extend the blue line to include the area so proven; and take over his well upon paying the lessee twice its cost. In other words, an incentive is given to the exploration of the border of the field at private risk but with the association retaining control of production if the exploration is successful.

It is provided that for the year 1931 the figure of 50,000 barrels for the entire field (approximately half this for the association) will be regarded as the nominal production of the field, and that thereafter the directors of the association shall endeavor to make Kettleman Hills North Dome production proportionate to the ratio borne by the Kettleman Hill oil reserves to the oil reserves of the State of California. This objective will, of course, be subject to the authority of the State in the matter of proration and enforcement of the conservation laws of the State.

The effort to avoid waste of gas and conform production to the needs for gasoline may be expected to prolong greatly the productive life of the field. Provision has therefore been made to extend the life of all leases so long as the agreement remains in effect.

The agreement provides that operations shall be conducted without wastage of gas prohibited by Federal or State laws and shall be in conformity with the operating regulations of the department.

Government royalties have been adjusted so as to put a premium on low conservative production with its accompanying minimum of waste. In other words, as long as the content of the field is maintained for future use by low present production the Government royalty rate will be relatively low; but when production from the field is stepped up to a point of maximum utilization of its output the Government demands and will secure a proportionate share of the benefit through relatively high royalties.

Accordingly, a step scale of royalties for oil has been included in the agreement, as to B leases (preference right leases) in substitution for the present sliding scale. A leases (5 per cent mandatory leases) are left with royalty rates unchanged. Under the proposed step scale the royalty will be 121⁄2 per cent until total production from the association acreage exceeds 15,000 barrels per day. When production is over 15,000 but not over 30,000 barrels the royalty rate on the entire quantity produced will be 16% per cent. When the quantity is between 30,000 and 60,000 barrels, 20 per cent; between 60,000 and 110,000, 25 per cent; over 110,000 33% per cent. On this basis it is estimated that at an average royalty rate of 25 per cent on B leases a field life at least 36 years would be assured. It is hoped that a longer life at a lower rate of production will be promoted by the lower royalty rates in the lower production brackets.

Comparison of royalty returns to the Government from the present sliding scale and the proposed step scale depend on number and capacity of wells, speed of production, ultimate capacity and other unknown and at present unknowable factors. Under assumptions regarded as reasonable, however, it is estimated that the step scale royalty arrangement may result in a reduction of about onequarter, or an estimated 66,000,000 barrels of royalty oil. This diminution in quantity may reasonably be expected to be offset at least in part by increased ultimate yield from the field by more conservative production methods. Furthermore, increased value of the oil produced in a longer period of diminishing reserves and higher values rather than in a shorter period of forced production and depressed prices should go far toward maintaining royalty returns at full level. Any data available here will be furnished with pleasure, and the officers of the department will be available to add any details which you may desire.

Very truly yours,

RAY LYMAN WILBUR.

A letter addressed to the chairman of the Senate Committee on Public Lands and Surveys expresses the opinion of the Secretary of the Navy with reference to this proposed legislation and suggests an amendment which has been incorporated in the bill as reported to the House. This letter is also made a part of this report and appears below:

NAVY DEPARTMENT, Washington, February 25, 1981.

The CHAIRMAN COMMITTEE ON PUBLIC LANDS AND SURVEYS,

United States Senate, Washington, D. C. MY DEAR MR. CHAIRMAN: Replying further to the committee's letter of February 12, 1931, transmitting the bill (S. 6128) to amend sections 17 and 27 of the

general leasing act of February 25, 1920 (41 Stat. 437; U. S. C., title 30, secs. 184 and 226), as amended, I have the honor to inform you as follows:

The main purposes of the bill are to remove the existing limitations and restrictions as to time and acreage involved in oil'leases, permit collective operation and cooperative or unit plan of development, and to automatically extend for the life of a single pool or area present oil leases that have become the subject of cooperative or unit plans of development or operation.

The Navy Department has no criticism to offer concerning the provisions of the bill so far as it affects leases on public lands other than naval petroleum reserves. However, it is deeply concerned over the effect its provisions may have on its existing leases within the naval petroleum reserves. This concern has heretofore been made known to you by my letter of January 31, 1931, wherefrom I beg to quote the following pertinent language:

66* * * I am writing to say that while I am fully committed to unit operation as a national policy and anticipate notable conservation therefrom, I am charged with the protection of the Navy's interest which is to preserve in the naval petroleum reserves a maximum quantity of oil in the ground until needed for national defense. May I point out that the bill as drawn would, in effect, extend present leases from the present 20-year period to the life of the particular pool regardless of whether it is or may be to the Navy's interests to do so, and would give to present lessees new and valuable rights adverse to the interests of the Government in the naval petroleum reserves.

"I am writing therefore to request that you bear in mind the Navy's interest when amendments are being prepared. I do not of course desire to have the Navy excluded from all participation in unit operation; but I think the Secretary of the Navy should be left free to commit the Navy to such unit operation only when such action will not be detrimental to the policy above expressed."

In order to more clearly set forth the Navy Department's viewpoint I have to recommend that there be added to this bill at the end thereof the following proviso:

"Provided further, That nothing in this act shall be construed as affecting existing leases within the borders of the naval petroleum reserves and the Secretary of the Navy is hereby empowered, with the assent of the President, to enter into such leases or agreements, herein referred to, as in his judgment will conserve the interests of the Navy."

Sincerely yours,

O

C. F. ADAMS, Secretary of the Navy.

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