TO AMEND SECTIONS 17 AND 27 OF THE GENERAL LEASING ACT OF FEBRUARY 25, 1920, AND FOR OTHER PURPOSES

JUNE 14, 1930.-Committed to the Committee of the Whole House on the state of the Union and ordered to be printed

Mr. COLTON, from the Committee on the Public Lands, submitted the following

REPORT

[To accompany H. R. 12811]

The Committee on the Public Lands, to whom was referred the bill (H. R. 12811), to amend sections 17 and 27 of the general leasing act of February 25, 1920, and for other purposes, having considered the same, report it favorably to the House with the recommendation that it do pass with the following amendments:

Page 1, line 4, after "437)", insert the following "(U. S. C. title 30, sec. 226)".

Page 3, line 9, after "(44 Stat. 373)", insert "(U. S. C. Supp. title 30, sec. 184)".

Page 6, line 13, strike the words "absolute and uncontrolled". Page 6, line 25, strike out the words "absolute and uncontrolled". The sections of the general leasing act which the proposed legislation will amend appear below. Those words appearing in brackets are the amendments as contained in this measure.

SEC. 17. That all unappropriated deposits of oil or gas situated within the known geologic structure of a producing oil or gas field and the unentered lands containing the same, not subject to preferential lease, may be leased by the Secretary of the Interior to the highest responsible bidder by competitive bidding under general regulations to qualified applicants in areas not exceeding six hundred and forty acres and in tracts which shall not exceed in length two and one-half times their width, such leases to be conditioned upon the payment by the lessee of such bonus as may be accepted and of such royalty as may be fixed in the lease, which shall not be less than 121⁄2 per centum in amount or value of the production, and the payment in advance of a rental of not less than $1 per acre per annum thereafter during the continuance of the lease, the rental paid for any one year to be credited against the royalties as they accrue for that year. Leases shall be 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 Interior, unless otherwise provided by law at the time of the expiration of such periods [; Provided, That

any lease heretofore or hereafter issued under this act that has become the subject of a cooperative or unit plan of development or operation of a single oil or gas pool, which plan has the approval of the Secretary of the Interior as necessary or convenient in the public interest, shall continue in force beyond said period of twenty years until the termination of such plan: And provided further, That the Secretary of the Interior shall report all leases so continued to Congress at the beginning of its next regular session after the date of such continuance]. Whenever the average daily production of any oil well shall not exceed ten barrels per day, the Secretary of the Interior is authorized to reduce the royalty 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 shall apply to all oil and gas leases made under this act.

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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 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 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. For the purpose of assuring the continuous protection of the interests of the public and of the United States the terms and

operation of any such plan shall at all times be subject to the approval of the Secretary of the Interior who is thereunto authorized in his absolute and uncontrolled discretion to establish, alter, change, or revoke drilling, producing, and royalty requirements, and otherwise to make such regulations in connection with the institution and operation of any such cooperative or unit plan as he may deem necessary or proper to assure the proper protection of such interests; and if the Secretary of the Interior at any time shall have reason to believe that the continued operation of any such cooperative or unit plan is for any reason prejudicial to the interests of the public or of the United States he is hereby authorized to revoke such plan in whole or in part, or to permit its continued operation upon such altered terms and conditions as he may in his absolute and uncontrolled discretion deem advisable].

The general leasing law of 1920 fails to meet an economic situation not foreseen 10 years ago. The petroleum business in 1920 was less than half its present size, and changes in practice in the course of that growth are to be expected, especially in view of the present general acceptance of the conservation policy by the oil industry itself. As stated by the Federal Oil Conservation Board in its recent report to the President, the most promising method of effectively promoting conservation and economy is the unit-operation plan by voluntary agreement.

Without amendment, however, the Federal leasing law prevents a lessee on Government land from cooperating with his neighbors in conservation measures taken for the benefit of each and every party in interest-private owners and lessees, Government owner and lessees, and the general public which uses the oil and gas. The Government lessee, by virtue of the present conditions in his lease under this law is a poor neighbor, even though he wishes to unite in a plan of cooperative endeavor. The proposed amendments would permit such participation but in no wise compel it.

The two amendments proposed in H. R. 12811 affect the workings of the leasing law only as to lessees in a single pool coming voluntarily under a cooperative plan duly approved by the Secretary of the Interior as in the public interest. The requirements of existing or future leases are changed only when desired by such lessees; the new legislation is permissive, providing a desirable flexibility in these requirements, but in no sense are any changes mandatory upon the Government lessees. While not permitting cooperation in development, the general leasing law does, however, already provide for cooperation in transportation and refining, so there is a precedent for authorization of cooperative endeavor.

The proviso to be added to section 17 of the general leasing act simply extends the term of any lease coming under a cooperative or unit plan which is in the public interest. This extension of term is necessary because the development and operation of a unit oil and gas pool under such a plan will be conducted on a basis of engineering considerations regardless of property lines. Securing the largest possible ultimate recovery of oil and gas from the whole field at the lowest cost will mean a longer life for the field and the life of the plan will necessarily be the life of the field and this should likewise be the life of each and every lease, private or Government, included in the cooperative plan. Moreover, with such a plan conceived as a conservation measure, it is, in fact, hoped and expected that the life of an oil field, developed and operated without the haste and waste of competitive drilling, will exceed the 20 years provided in the leasing law. Without the assurance of a tenure beyond 20 years, haste and

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consequent waste would be encouraged if not enforced upon the lessee by his anxiety to get all he can while he can. This amendment is essential to the plan of unit operation.

The proviso to be added to section 27 gives the Secretary of the Interior discretionary power in adjusting certain operating requirements of existing law to meet the new conditions. Again, these changes do not modify any lease except on the initiative of the lessee himself, but the amendment permits lessees of Government oil lands to join in a cooperative or unit plan and provides the means of such participation. The unit plan of development disregards property lines so that the unit drilling program probably would violate most if not all drilling requirements. Likewise, the sharing of output among the owners or holders of the lands comprising the field is not to be determined by the facts of well location and distribution among the land holdings, which feature again requires the power to change both producing and royalty requirements. The net benefit expected, however, will be smaller expenditures by lessese and larger returns to both lessees and lessors.

The Secretary of the Interior represents the general public as the consumer of natural resources, as well as the Federal Government, in its capacity of landowner. This function of protecting the public interest is specifically referred to in the grant to the Secretary of the Interior of the power of initial approval of the plan and of continuing approval of its operation, with the added power of correcting anything found at any time to be prejudicial to the public interest. However, any unit-operation agreement would apply only to a single oil pool which commonly is a relatively small production unit in the country's oil business, and any tendency toward monopoly is hardly to be anticipated as a result of such purely local cooperation.

While a score or more of unit-operation plans are already in force in several States, with savings of millions of dollars already effected, none of these equals the possibilities of one field in which the plan, now under active consideration by the parties in interest, can not be put into force without Government participation authorized by the amendments to the general leasing act now proposed. This is the reason of urgency in passing H. R. 12811.

The Kettleman Hills field in California is one of the world's greatest reservoirs of oil and gas. The oil is of the highest grade, about 90 per cent gasoline as it comes from the well, and the accompanying gas is rich in gasoline content. Thirty per cent of the lands in the proven portion of this field are publicly owned and under lease from the Government. By a voluntary agreement of Government lessees and private owners and lessees, there is in force at Kettleman Hills a program of controlled drilling and waste prevention, which terminates in July, 1931. In the meantime, there is an active effort to formulate a plan of unit operation, which can not be adopted without legislation authorizing the Government lessees to participate.

The most spectacular economic development of the present year in the United States is the expansion in long-distance transportation. of natural gas. Pipe lines are now being laid for 400 and 500 miles. from gas field to market, and one just financed approaches 1,000 miles in length. One pipe line, 250 miles long, has already been completed from the Kettleman Hills field to San Francisco and neigh

boring cities and another larger one is now being laid paralleling · for the most part the first one.

This widespread appreciation of natural gas as an industrial and domestic fuel makes any waste at the source something to be avoided in every possible way. At Kettleman Hills the present waste of valuable gas from the six wells now producing, approaches 400,000,000 feet a day. At field prices, this continuing waste represents a value of about $25,000 each and every day. But worse than this loss is the obvious fact that none of the 400,000,000 feet escaping each day into the air can ever be used by San Francisco, Los Angeles, or other California cities. Indeed, unless some cooperative plan of unit operation is agreed upon for the Kettleman Hills before July 1, 1931, when the present "armistice" is concluded, the old campaign of competitive struggle may be expected to be resumed, and not only 6 wells but 40 wells would immediately be wasting into the air larger volumes of natural gas and adding oil to the present surplus stocks, already a heavy burden and source of waste. In that event, the rich Kettleman Hills field would become the world's most conspicuous spendthrift of natural wealth.

It is to meet this actual situation in one oil field in which the Government is a large landholder that the Public Lands Committee regards the two amendments to the general leasing law as urgently needed. It is expected that these provisions to meet new conditions will be found also desirable and beneficial in other of the public-land States, even though possibly on a smaller scale than in California.

A letter addressed to the chairman of the Public Lands Committee and signed by the Secretary of the Interior contains a draft of the bill and sets out reasons and the purpose of the proposed legislation. This letter is herein set out in full for the information of the House. DEPARTMENT OF THE INTERIOR,

Hon. DoN B. COLTON,

Chairman Committee on the Public Lands,

House of Representatives.

Washington.

MY DEAR MR. COLTON: The present importance of preventing the physical and economic waste resulting from competitive, unregulated activity in oil and gas fields is generally recognized, and it has been suggested to me in connection with several unit and cooperative plans submitted that the policy of orderly development can be substantially served and the interests of the United States fully protected by the enactment of appropriate legislation authorizing the Secretary of the Interior, with suitable safeguards, formally to approve such plans and make essential modifications of customary lease terms.

Aside from the general good to be obtained, development and operation of oil fields under such plans will result in lower costs to the producer, greater ultimate recovery of oil and gas, larger royalty returns to the Government, through the increased recovery of oil and gas, and most important, will tend to the avoidance of waste in time of overproduction now constantly occurring from so-called checkerboard, town-lot, or property-line drilling.

In order to clothe the Secretary of the Interior with the necessary legislative authority it is suggested that section 17 of the act of February 25, 1920 (41 Stat. 437), be amended to read as follows, the underscored matter being the proposed addition to the section in its present form:

"SEC. 17. That all unappropriated deposits of oil or gas situated within the known geologic structure of a producing oil or gas field and the unentered lands containing the same, not subject to preferential lease, may be leased by the Secretary of the Interior to the highest responsible bidder by competitive bidding under general regulations to qualified applicants in areas not exceeding six hundred and forty acres and in tracts which shall not exceed in length two and one-half times their width, such leases to be conditioned upon the payment by