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 postoffice 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. Lease scovering 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.

Present: Senators Wagner (chairman), Pittman, Adams, Murray, Cutting, and Carey.

The CHAIRMAN. The committee will come to order. We have under consideration today Senate bill 1772, introduced by Senator O'Mahoney. Senator O'Mahoney is not well, and probably will not be able to be here this morning, but suggested that we continue the hearing in his absence. He probably will be able to be here tomorrow morning.

Mr. Poole, are you going to have charge of the witnesses for the Government?

Mr. POOLE. Yes, Senator; I am.

The CHAIRMAN. Are you going to present the evidence?

Mr. POOLE. If it is the desire of the committee we are ready to go ahead with our case,

The CHAIRMAN. Very well. You may proceed.

STATEMENT OF RUFUS G. POOLE, ASSISTANT SOLICITOR, DEPARTMENT OF THE INTERIOR, WASHINGTON, D. C.

Mr. POOLE. Mr. Chairman, the Solicitor's office has made an analysis of this bill, and has set out the principal changes which have been made or that would be made by this proposed bill in the Leasing Act of February 25, 1920 in a descriptive draft and statement. This draft shows the new matter which is being added to the law and the present provisions of the law which would be deleted. I have several copies of that draft and statement here, and if it is the desire of the committee, I would be glad to distribute them to the members.

Senator ADAMS. That is the statement dated February 26?
Mr. POOLE. No, Senator.

Senator ADAMS. I see it is marked "Solicitor's Office, Department of the Interior. Explanatory Statement."

Mr. POOLE. Yes; I do not think that it is dated, Senator.

Senator ADAMS. Then there is a letter addressed to Senator Wagner, chairman of the committee.

Mr. POOLE. That is right. That is a copy of the report made by the Interior Department on the bill.

The CHAIRMAN. I was about to suggest that that letter, perhaps, ought to precede Mr. Poole's statement in the record. Do Senators wish to have that letter from the Secretary of the Interior read? Senator ADAMS. I suggest that the chairman read it. The CHAIRMAN. Very well; I will read the letter [reading]: DEPARTMENT OF THE INTERIOR, Washington, February 26, 1935.

Hon. ROBERT F. WAGNER,

Chairman Committee on Public Lands and Surveys,

United States Senate.

MY DEAR SENATOR WAGNER: I am in receipt of your letter of February 12 requesting a report on S. 1772, 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, 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 a 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 one-fourth 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 122 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 propspecting 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 three-fourths of permit areas has averaged only about 141⁄2 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 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 per cent 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 121⁄2 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 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 121⁄2 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 as to 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 approximately 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 geological party at work, may take advantage of his knowledge of their presence and hurriedly file applicantion 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 com petition. 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), authorizes 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 field 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 n the public interest and I respectfully urge that it receive favorable consideration. Sincerely yours,

HAROLD L. ICKES, Secretary of the Interior.

Senator ADAMS. Mr. Chairman, I think perhaps it ought to be noted in the record that the Secretary of the Interior is quite in error in his statement in reference to the Teapot Dome lease. The records of this committee in the year 1924 disclosed a state of facts quite at variance with what he says. He states in his letter that the lease for Teapot Dome was a lease of land upon territory that was not known producing territory. As a matter of fact, the territory was known to be oil-producing territory, and the excuse which was given was that it was being drained, and it was necessary to grant the leases in order to prevent the Salt Creek field draining the known area of Teapot Dome.

Senator CAREY. They are still granting them, also.

Senator ADAMS. The Interior Department never did understand that situation.

The CHAIRMAN. Is the Secretary correct in his statement that under competitive bidding this lease could have been sold for a considerable amount of money?

Senator ADAMS. Yes; because it was known oil territory; not because it was not.

Senator PITTMAN. I think the Secretary said the lease was granted under those circumstances at that time because it was not on a known oil structure. As I read the letter I do not think he says that it was not known oil land, but it was granted under leases because it was supposed to be off a known oil structure.

Senator MURRAY. He is referring there to a geological structure. Senator PITTMAN. Yes. I think he is criticizing the action taken at that time.

Senator ADAMS. There was a saddle in the structure, but it was all a part of the accepted, recognized geological structure.

The CHAIRMAN. I think the letter sustains Senator Adams' view, The Secretary says:

The lease for Teapot Dome was for land not within the known structure of a producing field, and was entered into without competition.

You may proceed, Mr. Poole.

Mr. POOLE. Mr. Chairman, with your permission I should first like to make a brief analysis of what this bill does, and then set out also in brief what the Department of the Interior is prepared to show in substantiation of our recommendation that this bill be passed as amended.

As the report and bill indicate, only sections 13, 14, 17, and 28 of the 1920 Mineral Leasing Act are being amended. Those sections deal exclusively with oil and gas development on the public domain. Under the provisions of section 13 of the law as it now stands the Secretary is authorized to grant applicants prospecting permits for periods of 2 years which entitles the holders to prospect for oil and gas upon not to exceed 2,560 acres of public domain not loacted within any known geologic structure of a producing oil or gas field. The same section also provides for extensions where diligence has been shown by the permittee, for an additional period not exceeding 2 years.