February 13, 1942 MARGOLD, Solicitor: There was submitted informally to this office a letter addressed to Mr. Charles F. Jackson, chief of the Mining Division of the Bureau of Mines, from Mr. John B. Muskat, Associate Attorney, dated December 9, 1941, which raises the question whether the Government, before exploring for coal on land as to which a prospecting permit has been issued to prospect for that same mineral under the Leasing Act of February 25, 1920 (41 Stat. 437, 30 U. S. C. A. sec. 181 et seq.), should enter into an agreement with the prospecting permittee. The letter also raises similar subsidiary questions as to the need for the Government entering into agreements with applicants for permits and leases, under the same act, on land to be explored by the Government. The immediate case covered by the letter to Mr. Jackson refers to two exploration agreements with the Government, dated September 23, 1941, signed by the parties other than the Government, and now awaiting signature for the Government. One agreement purports to be with Arthur E. Moreton and associates, who are the owners of certain coal prospecting permits issued in 1940; although since the letter was written, a further permit was issued to Arthur E. Moreton on December 17, 1941 (Serial No. 062919). The other agreement purports to be with Margaret N. Wilson and Utah Steel Corporation, and involves a coal prospecting permit now owned by that corporation and a pending application for a lease based upon an expired permit. The lands covered by the coal prospecting permits and lease application are in the Manti National Forest, Sanpete County, Utah, and are owned in fee by the United States; other lands covered by the agreements are owned in fee by, or under lease to, the other parties to the agreements. Because of the anomalous situation presented by the need of the Government to explore lands on which it has already arranged for exploration by a private party, it is difficult to solve the problem of the proper legal relationship equitably to the private party and consistently with the national interest. A prospecting permittee is in a sense an agent of the Government to explore for the mineral covered by his permit (51 L. D. 416). If the prospecting is not diligently executed, the permit should be revoked (30 U. S. C. sec. 183). If prospecting is diligently executed and a discovery is made, the permittee becomes entitled to a lease without competitive bidding as a reward for his discovery (30 U. S. C. sec. 201). However, if the prospecting is carried on with due diligence and nevertheless it is desirable for the Government to prospect for the same mineral according to its own methods, my conclusion is that some agreement should be executed by the Government and the permittee adjusting the interests of the parties. Under the regulations of the Department (43 CFR sec. 193.19) and the terms of the prospecting permit (43 CFR sec. 193.22), a coal prospecting permittee is given the exclusive right to explore for coal. The question evidently has not been raised previously whether this right is exclusive even against the Government. However, a reasonable argument can be made that it is exclusive even in that case. Prospecting permits evidently are used only on Federal and State lands. The cases dealing with them analogize the permits to private leases which give the right to the lessee to prospect for minerals (Aronow v. Bishop, 86 P. (2d) 644 (Mont. 1938) and cases cited therein). Such leases are said to be exclusive even against the owner of the land (Summers Oil and Gas, perm. ed., sec. 432). The permit gives the permittee a valuable right, since the permit may ripen into a lease (Witbeck v. Hardeman, 51 F. (2d) 450 (C. C. A. 5, 1931)). This valuable right is destroyed if the Government makes its own discovery, benefit of which is not given to the permittee. These considerations lead to the conclusion that the Government should respect the right granted to the permittee by obtaining the consent of the permittee to exploration by the Government for the same mineral. Moreover, aside from these considerations of law, I understand that, as a matter of administration, it may be desirable to obtain production of any coal discovered through a lease to the permittee without competitive bidding, thus avoiding unnecessary public disclosure of information which may be deemed strategic in time of war. My recommendation is that a special form of exploration agreement be executed between the Government and the permittee which will adjust their interests definitely and equitably. The permittee on his part will want to know, in giving his consent to exploration by the Government, how discovery by the Government will affect his preferential right to a lease. The Government on its part should make definite the advantages it will receive if it bears the burden of work from which the permittee will profit. The adjustment of interests involves administrative determinations upon which the Bureau of Mines and the General Land Office may wish to act and consult. My suggestions for such adjustment are as follows: The Government would agree to inform the permittee of the results of its explorations and to allow the permittee a preferential right to lease the lands to develop all coal discovered, whether by the Government or by the permittee, provided certain conditions of cooperation were met by the permittee, and with the understanding that the lease would provide for higher rentals and royalties and other February 13, 1942 appropriately revised requirements in so far as it covered coal discovered by the Government. The conditions of cooperation might be that the permittee will make available his mine workings and the prospecting equipment which he has available for use on the land, that he will continue his explorations so long as they do not interfere with the work of the Government, and that he will undertake such reasonable exploratory activities as the Government may direct. In case of disagreement as to the reasonableness of any such direction, the decision of the Secretary of the Interior would be final. I have embodied the foregoing suggestions in a revised form of the exploration agreement, which is attached hereto for your consideration. The revision extends to the opening statement and paragraphs 1, 2, 3, 5, 8, and 9 and omits paragraph 14. Paragraph 3 has been transposed to become paragraph 7. A related question raised by the letter to Mr. Jackson concerns the necessity for an agreement where an application for a lease is pending, based upon discoveries made under a prior permit. Under the Leasing Act of 1920 the applicant has a right to a coal lease on the lands, more perfect and valuable than that of a holder of a permit prior to discovery, and I recommend that an exploration agreement, appropriately modified, be used to obtain his consent to exploration by the Government. Similarly, where an applicant for an extension of a permit has made substantial improvements or investments under the permit through diligent drilling or other exploratory operations, and is otherwise entitled under the regulations to an extension of the permit for the completion of such operations, a similar agreement providing for cooperative exploratory work should be made with him. Since an agreement may be terminated by notice by the Government, it may be terminated in the event any application is denied or any permit is revoked. A further question raised by the letter to Mr. Jackson is whether an agreement is necessary where a person has only applied for a permit and such a permit has not yet been granted. In such case the applicant has no claim of right against the Government. He is seeking a privilege the Government has no obligation to grant. The same is true of an applicant for an extension of a permit who has not already undertaken substantial exploratory work under the permit. The regulations permit but do not guarantee extensions in such cases (43) CFR sec. 193.25). If the Government intends to investigate the area upon which such applications are pending, the applications should be denied. In order that the actions of the Department may be coordinated in this situation, I suggest that the Bureau of Mines inform the 1 Attachment referred to may be found in the files of the Solicitor's Office. [Ed.] General Land Office promptly of decisions made as to areas of land, in which the Government owns the fee or the mineral rights, which it expects to explore for minerals. The recommendations made herein for execution of exploration agreements with prospecting permittees and applicants for leases based on discoveries made under a permit relate only to cases where the Government intends to explore for the mineral covered by the permit. The Government need not obtain the consent of any permittee to explore for minerals not covered by the permit since the minerals belong to the Government and since, in any case, the exploration for other minerals is permitted under the reservation in every permit of the right to permit easements for the working of the land under authority of the Government (30 U. S. C. sec. 186; 53 I. D. 508.) In this particular case the two exploration agreements of September 23, 1941, must, in any event, be re-executed. In the first place, both agreements recite as authority the Strategic Materials Act of June 7, 1939 (53 Stat. 811). However, the exploration in this case is not being carried on under the authority of that act, since coal has not been designated as a strategic material. The authority for the exploration is the appropriation in the First Supplemental National Defense Appropriations Act, 1942, approved August 25, 1941 (55 Stat. 669), which provides for the investigation of raw material resources for western steel production. This appropriation expressly provides for exploration of the amount and quality of coking coals essential to expanding steel production. In the second place, these agreements have not been properly executed. Arthur E. Moreton should execute the agreement on behalf of himself and his associates, in accordance with the designation in the agreement of the party of the second part. Similarly, the Utah Steel Corporation should execute the agreement as a corporation and not by its individual stockholders. In the re-execution of these agreements I recommend that the lands now under coal prospecting permits or covered by the pending application for a lease be eliminated from the agreements which cover lands of which the parties of the second part are the owners or lessees. The permit lands can then be covered by the special exploration agreements proposed. In view of the necessity for coordination between the Bureau of Mines and the General Land Office in the matters discussed in this memorandum, I suggest that exploration agreements entered into with prospecting permittees and permit and lease applicants be routed through the General Land Office before they are executed for the Government by the Bureau of Mines. HABENDUM AND PAYMENT PROVISIONS IN OIL AND GAS LEASE ON CHOCTAW INDIAN LAND Opinion, February 13, 1942 INDIAN OIL AND GAS LEASE-CANCELATION AFTER PRIMARY TERM-PRODUCTION FROM GAS WELL IN PAYING QUANTITIES SHUT-IN GAS WELLS CAPABLE OF PRODUCTION-GAS WELL RENTAL. Where a lease is for a term of 10 years and as much longer thereafter as oil or gas is found in paying quantities, and where the development of only one gas well in paying quantities is sufficient to continue the life of the lease, the lease is not subject to cancelation after the expiration of the primary term if there is a gas well thereon capable of producing gas in such quantities upon which the required royalty of $300 per annum is paid, even though such well is shut in because of market conditions and gas is not sold therefrom. Where payment is made by the lessee of $300 annual royalty on one shut-in gas well, which payment continues the life of the lease, he may pay $100 annual rental on a second shut-in gas well under the provision in the lease providing for forfeiture of an unprofitable gas well unless a $100 annual rental is paid for retaining gas producing privileges. MARGOLD, Solicitor: You [Secretary of the Interior] have requested my opinion on certain basic questions presented to you by the Geological Survey, through the Office of Indian Affairs, concerning the interpretation of lease No. 37992, contract 127ind-858, Susan Riddle, Choctaw Indian allotment 15694, upon which decisions are desired in order that the proper royalty accounting may be made. The lease in question is dated May 31, 1918, and was approved by the Department on July 18, 1918. The assignment by the original lessee, The Quinton Spelter Company, to the Utilities Oil Production Corporation, pertaining to the W12 NE1⁄44 Sec. 12, T. 7 N., R. 18 E., Ind. M., was approved by the Department on October 11, 1929. The lease is for a term of "ten years from the date of the approval hereof by the Secretary of the Interior, and as much longer thereafter as oil or gas is found in paying quantities, * Development of the oil and gas deposits underlying the lease consisted of two dry gas wells completed in 1918 and 1921, which were producing until March 1930, when they were shut in. The open flow of each well is approximately 200,000 cubic feet per day and the shut-in pressure is approximately 150 pounds per square inch. Gas from well No. 1 was sold prior to its being shut in during March 1930. Gas from well No. 2 was never sold but was used only for lease operations. Since the wells were shut in the lessee has continued to pay royalty for |