AN OIL-LAND LAW 443

An Oil-Land Law

.BY GE9RGE OTIS SMITH, WASIIINGTON, D. C"

(New York Meeting, February, 1914)

Introduction
THAT an oil-land law is t.hemost needed item in the proposed program
of mineral-land legislation follows, from the fact that" Congress has never
enacted a law really applicable to petroleum and natural gas. The action
of Congress in 1897 in authorizing entry of oil lands under the placer law,
enacted 27 years before for the mining of gold in surface gravels, was
plainly only makeshift legislation. Naturally the provisions of this
placer law with its requirement of discovery as a prerequisite to location
are nothing less than absurd when applied to petroleum depositshundreds
or thousands of feet beneath the surface. Other reasons which render
oil-land legislation an urgent necessity arise first from the large acreage of
lands believed to be valuable for their deposits of oil and gas and therefore
withdrawn by Executive order from all entry_pending the enactment of
an appropriate law for their disposition-a withdrawal that has been
specially ratified by Congress in the case of one State, Utah-and second
from the exceptional importance of this resource to the nation, the large
industrial worth of petroleum, and indeeu its paramount value to the
navy,not being suspected 17 years ago when Congress last legislated
upon this subject. . .
Mineral land of this type is also well adapted to serve for purposes of
illustration in discussing the general principles that demand recognition
in legislative reform. Most of the issues invol ved in the c·onsideration of
oil-land legislation are clean-cut, and essential differences of opinion will
be seen to be based upon radical divergence in economic theory rather
than upon conflicting views concerning unimportant details.
For the last five years or more the geologists of the Federal Survey
have discussed' this su'bject and preRared memorandums and' reports on
the various bills introduced in Congress. Most of the provisions sug-
gested in the present outline have been under consideration at one time
or another during that period, and many of the statements which follow
can be said to represent the consensus of opinion among those of us who,
both in the field and in the office, have given special attention to the public
oil lands.
444

Purpose
Stated concisely"the purpose of an oil-landlaw should be to promote
development, with the aim of insuring the highest percentage of extrac-
tion at the lowest cost to the COJ;lsumer, and during the longest period
consistent with fully meetIng market demands. This is a' somewhat
complex ideal, in ,that it jncl~des full recovery, minimum costs, and
production responsive to the market; yet these are the practical ends to
be desired by operator and public alike.
Except in the special· case of certain limited areas, 'now selected from
the larger reserves which were originally set apart for the Federal purpose
tJf . insuring a future oil supply for the use of the American navy, there
should be no idea of reservation of this nat~lral resource in the sense of
postponing its use. We knQw that the present generation needs fuel oil,
gasoline, kerosene, and lubricating oils: On the other hand, there should
beno artificial stimulation or encouragement of speculative activity, such
a.S will lead to overproduction and waste; for we may expect that other
generations will need, and will make good use of, whatever petroleum
deposits we leave undeveloped.
An oil-land law should aim to p~rmit full regulation of development
rather than to provide large revenues. Not profit but control is the pri-
mary purpose; and the beneficiary of wise legislation is to be the public
in its capacity as consumer rather than as taxpayer. With low prices
as the desired end, and low costs as the necessary means, caution should
be exercised not to saddle upon the development any conditions or terms
of land tenure that will involve unnecessary burdens.
To meet this purpose of public control-control only as a means, not
an end in itself-the leasing system is pre-eminently the logical one; and
its applicability to the oil lands remaining in public ownership is not a
matter of theory; for the traveler in the California oil fields needs only
to look in any direction from the withdrawn areas to see adjacent lands
to which the government has granted patent being operated under
lease)lold. There is no possible difference in either theory or practice
between leasing public oil lands and leasing private oil lands, except that
in the former case the public shares in the profit as landowner, and should
also write into the lease conditions that are favorable to successful develop-
ment and that therefore permit prices satisfactory to the consumer. In
the long run, low costs can come only through successful operation ; and,
to be successful, oil production, like other business ventures, needs to be
attractive to the highest type of operating skill, backed by not over-timid
capital. Thus fair prOfits to operator and just prices to consumer are
far from being antagonistic elements in the proposition, but on the con-
trary are essential to the ideal results sought. Some of the conditions
favorable to safe and economic development will now be discussed.
 AN OIL-LAND LAW 445

Conditions Promoting Development

First, any oil-land law, whether providing for disposal of the land by
sale or of the deposit by lease, should contain a provision granting exclu-
sive occupancy for purposes of exploration.. Prospecting for oil involves
large expenditures; ~nd the inherent defect of the old placer law, when
applied to oil land, was this absence of protection prior to discovery.
The area necessary to encourage this expensive exploration and the period
essential to its acco~plishment are details to be determined, with the
recognition that geographic and geologic differences exist which render
advisable some latitude in administering different fields, so that a maxi-
mum area is all that should be fixed by law. There should be kept in
mind also the need on the one hand of enforcing purposeful endeavor and
yet on the othe~ of avoiding any requirement of non-productive" assess-
ment work." The prospecting permits would terminate by forfeiture
because of inadequate prosecution of development work or by failure to
discover oil within the s~atutory period, or, in the case of discovery before .
its expiration, the permit would ripen into a lease. .
The area to be covered by the lease must necessarily be the whole or
a part of that included under the preceding permit, the granting of the
larger area being p'ossibly a wise method of rewarding a discovery of the
"wildcat" type. The period of the lease could be indeterminate, the
life of the pool furnishing the natural limitation upon the period of
operation. Requirements of drilling should be liberal en~ugh to provide
little more than what would constitute the natural response to market
conditions. A more stringent requirement, however, should be that of
compliance with all waste and water regulations imposed under the police
power of the State.

Terms of Lease
Recognition by, the lawmaker of the existence of large geologic and
'commercial differences in oil fields should lead him to fix the rate of
royalty only within wide limits, or leave it wholly to executive discretion.
Further, as market prices and operation costs may both be expected to
change, provision needs to be made for- a varying royalty rate. Thus,
with the declining yield of any particular p~ol, unless there should be a
corresponding increase in price, the point would be reached when the
margin between cost and receipts would disappear, even before the wells
ceased to yield oil, so that further operation would require a reduction in
royalty rate. This type of a sliding royalty would permit ,the largest
possible ultimate yield.
Even though not fixed' for the purpose of revenue, the royalty rates
in the developed fields would approximate those fixed by private lessors,
446 AN OIL-LAND LA'w

so that the returns from public oil-land leases might be large, and could
well be divided between National and State treasuries.

Prevention of Monopoly

The primary purpose of low cost to thec'onsumer may not be attained

by simply keeping down production cost, unless some measure of safe-
guard is provided against the possible results of monopoly. Agreements
between operators either to restrict production or to raise prices may be
prevented In two ways under leasehold. Transfer of lease should be
conditioned upon the approval of the Secretary of the Interior, and an
anti-bowbinationprovisoin the lease should carry the penalty of immedi-
ate forfeiture of the lease, allowing, however, the opportunity of a court
appeal, the government to be secured by bond for the full value of the oil
produced during the period covered by the litigation.
Another condition in the lease that might be thought to possess a
. beneficial influence on prices would be, with the royalty under an oil
lea,se in theory a royalty in kind~ the reservation to the lessor of an option
to take the oil itself rather .than its equivalent at market prices. If a
large acreage of public oil land were operated under lease, the govern-
ment itself might thus be one of the larger possible factors in the
market and exercise a positive influence in keeping prices expressive of
true conditions ()f producti()n rather than of a manipulated market.
At least, if the government could not thus protect the general public, it
would insure its own supply for Federal use,

Resume

An oil-land law should provide for exploration under a permit which

fully protects the prospector, and for operation under a lease which
favors the operator by a reasonable royalty adjustable to actual condi-
e

tions, and by provisions which permit low costs but prevent the imposi-
ti~)ll of unduly high prices on the consumer.

DISCUSSION

EUGENE COSTE, Toronto, Canada.~I am interested in' what Dr.

Smith has said, and in the fact, that you are working earnestly in the
United States toward a g()od oil-land law, which is certainly very much
needed. Nothing could foster· the oil industry in those parts controlled
by the Federal government more than a good law.
 AN OIL-LAND LAW 447

I would like to make one or twobbjections, if I may call them so,

to Dr. Smith's statements. Heis, I think, in favor of making a too-
complicated
\
law. I would prefer a simple law, rather than one that is
complicated, even though it is not so good. The fact of its simplicity
makes up for its imperfections./ I do not see the use or necessity of first
issuing a permit to prospect oiHands and then afterward a lease. You
cannotexplore oillaIld, except in the one way, K>Y drilling weIrs, and there-
fore I think it would be bj:ltter for everybody concerned if the law were
such that an applicant could get his final lease promptly without going
through the form of getting a permit first, the lease for which land may
not be lssued later. You cannot expect anyone to spend much money
on simply a prospecting permit, his title not being sufficiently secured.
I will cite an instance of that. In Canada we have regulations;
not law regulating F:ederalland, but Orders in Council; that is, the govern-
ment makes certain regulations, called in this case "Petroleum Regu-
lations." Up to a short time ago an applicant could tender $5, and he
could hold up 1,920 acres of land for one month. :Quring that month
he had to pay 25c. an acre, and then he would get his lease. A lot of
speculators took advantag,e of that provision, and paid $5, never intend-
ing to pay the 25c. ani acre, just to have a sort oCa title for one month,
and they would hold up the bona fide oil men who wanted to get the land
for drilling. Thousands upon thousands:~o(!acres were. plastered in
that way. .
The Interior Department got into such a tangle that they finally
saw the point which I had brought totheir attention vainly years before,
and they now have changed the regulations; now you .must pay
25c. an acre at the time you make your application for tue land, and
this payment insures one an absolute title for 21 years, and is renewable
for another 21 years, provided, of course, one meets the other obligations
of the lease. There is no doubt that this new regulation, which insures
one a'good title lease right in the start, and which will prevent the specu-
lator from coming in and holding up oil lands, will be much to the benefit
of the bona fide operator who intends to spend thousands of ,dollars on
his lease. All he wants is to get a simple but safe title, with no pro-
visions left to the administrative officers to decide whether he will be per-
mitted to go on after spending much time and money. Law is made by
Congress here, and I should have no such matters left to the discretion
of departmental or governmental officers; and anything that arises 'in
the way of dispute should be settled by judges in the courts.
While this is true, the law should incorporate all the safeguards
possible. And whether there should be a royalty or a rent paid, it1matters
not. It works well both ways, and makes very little difference. But
there should be a strong condition of 'drilling, so that there would be no
mere speculation. In Canada the government remits the second and
448 AN OIV-LANDLAW

third' yeats' rentals, which are50c: anactej on proofthat rnoremoney than

the rentals due has been spent in drilling. There is no royalty; Oll the
contrary, the government is offering a bounty. The remittance of the
second and third years' rentals; if you can show that your expenditures
have at least equaled these rentals in the work of actual drilling, is a
good provision, as' it lets y'ou put your money into. wells, which are, of
course, the ultimatesour,ce of all wealth in oil fields. Besides there is
a CUffillulsory provision in the leases that you 'must be drilling a well on
every three sections after 15 months from the. date of tile lease.
DAVIDT. DAY, Washington, D. C.-I want to ask one question of
Mr: Coste. In this country we are becoming embarrassed by the
foreign ownership of American oil lands, and it is generally understood
that some protection is being arranged in the disposal of Canadian land
by regulation or by law. I would like to hear something on that point.
EUGENE COSTE.-The changes made in that respect are so recent
tha,t I am not quite' certain of their purport. But I think the only
change that has been made lately is that there are provisions that the
Board of Directors of a company acquiring oil lands from the government
should have a majority of their members residing in Canada, and a few
matters of that kind. In the recent regulations the majority of the
Board of Directors must even be Canadians or Englishmen. A similar
provision was already in the lawsd the Province of Ontario. While
l;am speaking about oil laws and'inining laws I might remark that in
Gauada we are in about the same fix' as you are here in regard to our
mining laws. That is, Imean the Federal laws, We have had good laws
in the Province of Ontario and the older Provinces, but in Saskatchewan,
Atberta, Manitoba, and the Northwestern Provinces, which are still
under Federal law, we have a~ yet no mining law, and we have only
regulitlons by Order in Council. That has been most detrimental to
the industry, and very hard on mining men, as these regulations are
made by a clerk jn -the office of the Department of the Interior who
knows nothing about mining and are then passed on through the
Minister of the Interior to the Council, and the result is,that you have
something that is absolutely ludicrous, just like the provision mentioned
ab17ve where by paying $5 one could get 1,920 acres of land from the
government, and hold it for a month, and after that month lapsed he
c\lu1d. pay another, $5 and hold another 1,920 acres for another month.
Then five or ten people could get together and hold these lands from
month to month simply by paying $5 a month for each -1,920 acres.
Some' definite, clear and simple title lease for the bona fide applicant who
real}ywants to go to work, at so much an acre,with drilling provisions,
is alI-that is wanted. Butfcir these operators the title should be ab-
solute, without any possibility of impeachment. ·If 1 had my way the
leases issued would be only a half page in length, giving the applicant
 AN O~L-LAND LAW 449
title, absolute title, and requiring from him. so much rental per acre,
and so much work in drilling, and that is all .
. HENNEN JENNINGS, Washi~gton,D. C.-1 think Mr. Smith was with
us yesterday when we discussed mining laws, and the confusion and un-
certainty that have arisen in connection with the laws of the apex. I
think unintentionally he is putting elements of uncertainty. jn these
suggestions which may develop troubles· akin to those which were
discussed yesterday. .
I am entirely sympathetic with a lease that is in the nature of a
practical owne.r;ship, that people can rely upon.. But ~1 do not believe
in backing and filling or giviIlg the government any power to back and
fill in dealing with people who start to develop a large enterprise. You
should make up your mind as to what the government is willing to do
, at the start in a given locality; and if you want a lease system, make it
fixed' and determined, and not leave it to the discretion and periodic
adjustment of officials; it was shown yesterday in our discussion, that
even with honesty of purpose and ability the scientific opinions of men
vary as knowledge increases and ,facts accumulate. .
I entirely agree with the fundamental aim set forth by Mr. Smith,
that the consumer should obtain the oil at a minimum price, but with
minimum Iwaste.
The gentleman who has just spoken [Dr. Coste] of the Canadian
practice seems to be perfectly sound in his recommendations, and
they are in accordance with the. practice which I have been accustomed
. to see work most satisfactorily on a large scale in South Africa. The
leasing system of the gold mines in South· Africa is a definite thing,
You know your rights and risks from the start and your lease is negoti-.
able. You are prevented from tying up land for speCUlative purposes
I

by a definite fixed monthly charge per claim area. . The area under
exploitation pays a higher license than the ground unworked, but this
has a lease tax that makes it a burden and detriment to hold unless
provision is being made for its early exploitation. Whyis liot a similar
, system possible and desirable in petroleum leases?' Make the area
of holding generous, but with constant fixed, unalterable term payuients
for all ground held, whether worked or not, and with a definite but not
excessive royalty per barrel for all oil extracted. The royalty might
vary for each district, but when once fixed it should not be changed.
I will not go further into detail, but I will ask MLSmith to consider
the possibility of amending his suggestions to meet some of the views
which have been expressed.
GEORGE OTIS Sl\l:ITH.-With regard to the suggestion by Dr. Coste
and also the suggestion from Mr. Jennings, I agree that we should have
a simple law which should Jead to a simplified contract. I have sUg~
gested a law that in certain terms might vary with different conditions.
VOL. XLVIII.-29 .
450 AN OIL-LAND LAW

Ihave notsugg{lsted a contract which would vary after the contract was
entered into; except that I have suggested a sliding scale of royalty in
orde(to protect, not th~ government but the operator.
It would be a sliding downward scale, in order to continue operation
under more favorable circumstances, rather than to fcrce the stoppage
oioH production because it would not pay the cost of production plus
the royalty, as fixed in the contract. I do not believe there is any
suggestion made in Washington to have anything less definite than the
ordinary contract which is made in business.
I absolutely agree with Mr. Jennings. I said in my-paper yesterday
that any uncertainty involves an unnecessary expense in operation and
financing, and therefore it should be avoided. The reason for having
a· perlllit,and having it followed by a deed, is because a prospecting
permit should be for a larger acreage than that. which is to be written
into a lease.
The suggestion under consideration by the Secretary~of the Interior,
and by the Chairmen of the two Congressional Committees, referred to by
Senator Walsh in yesterday's session, is to pr:ovide a permit for an area
which will be four times the grant to the successful- prospector. III
other words, if you take 640 acres under a permit, you will receive in
fee simple title to 160 acres; the remaining three-quarters of the square
mile being available for leases under definite terms, fixed by the
government, by' or before the time of the lease.
Under those conditions I think it is necessary to have a permit as
well as the later granting of title, both in fee simple and on a leasehold.
I say so because it is more favorable to the prospect<;>r. I think
that with ·the government as the lessor it will work out better than with
a lease from a private individual.
Ihave faith in the integrity and the sincerity of government officials,
as or:dinary American citizens. I will say furt.b.er that I believe the oil
m~n of California have as much confidence in government officials as
they have in some of the landlords who have secured title from the
government simply to impose hard conditions on the real oil men who
.operate under leases secured from oil men who are not producing oil
men.