B-154769, AUG. 31, 1964

B-154769, AUG. 31, 1964

TO THE SECRETARY OF THE INTERIOR:

REFERENCE IS MADE TO A LETTER DATED JULY 20, 1964, FROM THE ADMINISTRATIVE ASSISTANT SECRETARY, RELATIVE TO AN APPEAL BY ELLIOTT, INCORPORATED, ROSSWELL, NEW MEXICO, THE SUCCESSOR IN INTEREST OF L. E. ELLIOTT, CHALLENGING AFFIRMANCE BY THE DIRECTOR OF THE BUREAU OF LAND MANAGEMENT OF THE ACTION TAKEN BY THE LAND OFFICE AT SANTA FE, NEW MEXICO, IN DEMANDING PAYMENT OF $6,579.42, WHICH REPRESENTS THE DIFFERENCE BETWEEN MINIMUM ROYALTY AND REGULAR RENTAL FOR SEVEN YEARS OF THE EXTENDED TERM OF OIL AND GAS LEASE (LAS CRUCES 069053), PLUS MINIMUM ROYALTY FOR THE LAST YEAR OF THE PRIMARY FIVE-YEAR TERM OF THE LEASE FOR WHICH NEITHER RENTAL NOR ROYALTY WAS PAID.

THE LEASE WAS EXECUTED AS OF AUGUST 1, 1949, FOR 1,458.23 ACRES UNDER THE NONCOMPETITIVE LEASING PROVISIONS OF SECTION 17 OF THE MINERAL LEASING ACT OF FEBRUARY 25, 1920, AS AMENDED BY SECTION 3 OF THE ACT OF AUGUST 8, 1946, 60 STAT. 951, SECTION 226 OF TITLE 30, U.S.C. 1952 EDITION. THE TERM OF THE LEASE WAS FOR A PERIOD OF FIVE YEARS AND "SO LONG THEREAFTER AS OIL OR GAS IS PRODUCED IN PAYING QUANTITIES.' THE LESSEE WAS GRANTED THE RIGHT TO SURRENDER THE LEASE SUBJECT TO THE MEETING OF CERTAIN SPECIFIED OBLIGATIONS, AND THE LEASE COULD HAVE BEEN EXTENDED UNDER THE STATUTE FOR AN ADDITIONAL FIVE-YEAR PERIOD IF THE LANDS COVERED BY IT WERE NOT ON THE EXPIRATION DATE OF THE LEASE "WITHIN THE KNOWN GEOLOGIC STRUCTURE OF A PRODUCING OIL OR GAS FIELD OR WITHDRAWN FOR LEASING.' ALSO, UNDER THE STATUTE, THE LESSEE WOULD HAVE BEEN ENTITLED TO AN EXTENSION OF THE LEASE FOR A PERIOD OF TWO YEARS OR SO LONG THEREAFTER AS OIL OR GAS WAS PRODUCED IN PAYING QUANTITIES, IF THE LANDS COVERED THEREBY WERE WITHIN THE KNOWN GEOLOGIC STRUCTURE OF A PRODUCING OIL OR GAS FIELD AT THE EXPIRATION DATE OF THE PRIMARY TERM OF THE LEASE AND DRILLING OPERATIONS WERE BEING DILIGENTLY PROSECUTED ON SUCH EXPIRATION DATE.

IN ACCORDANCE GENERALLY WITH THE STATUTORY PROVISIONS, IT WAS AGREED THAT, IF THE LANDS ARE WHOLLY OUTSIDE THE KNOWN GEOLOGIC STRUCTURE OF A PRODUCING OIL OR GAS FIELD, A RENTAL OF $0.50 PER ACRE WOULD BE PAID FOR THE FIRST LEASE YEAR, NO RENTAL WOULD BE PAID FOR THE SECOND AND THIRD LEASE YEARS, A RENTAL OF $0.25 PER ACRE WOULD BE PAID FOR THE FOURTH AND FIFTH LEASE YEARS, AND A RENTAL OF $0.50 PER ACRE WOULD BE PAID FOR THE SIXTH AND EACH SUCCEEDING LEASE YEAR. BEGINNING WITH THE FIRST LEASE YEAR AFTER 30 DAYS' NOTICE THAT ALL OR PART OF THE LAND IS INCLUDED IN SUCH A STRUCTURE AND FOR EACH YEAR THEREAFTER, PRIOR TO A DISCOVERY OF OIL OR GAS, A RENTAL CHARGE OF $1 PER ACRE WOULD BE MADE. THE SPECIFIED RATE FOR ROYALTY ON PRODUCTION WAS 12-1/2 PERCENT AND A MINIMUM ROYALTY OF $1 PER ACRE WAS MADE PAYABLE TO THE GOVERNMENT IN LIEU OF RENTAL AT THE EXPIRATION OF EACH LEASE YEAR AFTER DISCOVERY OR, IF THERE WAS PRODUCTION, THE DIFFERENCE BETWEEN THE ACTUAL ROYALTY PAID DURING THE LEASE YEAR AND THE PRESCRIBED MINIMUM ROYALTY WOULD BE PAYABLE BY THE LESSEE TO THE GOVERNMENT. WITH RESPECT TO THE MINIMUM ROYALTY FEATURE OF THE LEASE, IT IS PROVIDED IN THE ACT OF AUGUST 8, 1946, THAT "A MINIMUM ROYALTY OF $1 PER ACRE IN LIEU OF RENTAL SHALL BE PAYABLE AT THE EXPIRATION OF EACH LEASE YEAR BEGINNING ON OR AFTER A DISCOVERY OF OIL OR GAS IN PAYING QUANTITIES ON THE LANDS LEASED.'

IT IS REPORTED THAT A PRODUCTION OIL AND GAS WELL WAS COMPLETED ON THE LEASE ON MAY 5, 1952, AND THAT BY MEMORANDUM OF JUNE 18, 1952, THE GEOLOGICAL SURVEY DETERMINED THAT THE 40-ACRE TRACT ON WHICH THE WELL WAS LOCATED WAS WITHIN THE KNOWN GEOLOGIC STRUCTURE OF A PRODUCING OIL AND GAS FIELD. THE LESSEE THEREAFTER PAID A MINIMUM ROYALTY OF $1 PER ACRE ON THE LEASED PREMISES FOR THE FOLLOWING LEASE YEAR WHICH EXTENDED TO AUGUST 1, 1953. SUBSEQUENTLY, THE FLOW OF OIL AND GAS CEASED AND EFFORTS TO INDUCE A RENEWED FLOW WERE UNSUCCESSFUL. ACCORDINGLY, ON JUNE 15, 1954, AFTER THE WELL HAD BEEN PLUGGED AND ABANDONED, THE GEOLOGICAL SURVEY CHANGED ITS DETERMINATION OF THE EXISTENCE OF A KNOWN GEOLOGIC STRUCTURE AND NOTIFIED THE MANAGER OF THE SANTA FE LAND OFFICE OF THIS ACTION.

ON JUNE 28, 1954, AFTER RECEIPT OF NOTICE OF THE REDETERMINATION BY THE GEOLOGICAL SURVEY, THE LESSEE FILED A REQUEST FOR A FIVE-YEAR EXTENSION OF THE LEASE ACCOMPANIED BY AN ADVANCE PAYMENT OF RENTAL FOR THE SIXTH LEASE YEAR IN THE AMOUNT OF $0.50 PER ACRE. THE LEASE WAS ASSIGNED TO ELLIOTT, INC., ON FEBRUARY 1, 1956, AND ON JUNE 3, 1959, ONE 45-ACRE TRACT OF THE LEASED PREMISES WAS ASSIGNED TO ARNOLD S. BUNTE. THAT ASSIGNMENT WAS MADE EFFECTIVE AS OF JULY 1, 1959. THE PARENT AND THE NEW SEGREGATED LEASE WERE EXTENDED FOR A PERIOD OF TWO YEARS AND BOTH LEASES EXPIRED ON JUNE 30, 1961.

IN AUGUST 1961 OUR DALLAS REGIONAL OFFICE QUESTIONED THE PROPRIETY OF THE ACTION TAKEN BY THE SANTA FE LAND OFFICE IN ACCEPTING DURING THE LAST SEVEN YEARS OF OPERATIONS UNDER THE LEASE RENTALS AT THE RATE OF $0.50 PER ACRE, INSTEAD OF DEMANDING PAYMENT OF A MINIMUM ROYALTY OF $1 PER ACRE FOR EACH LEASE YEAR. THE DIFFERENCE INVOLVED, WHEN ADDED TO THE PAYMENT OF MINIMUM ROYALTY DUE FOR THE FIFTH LEASE YEAR FOR WHICH NEITHER RENTAL NOR MINIMUM ROYALTY HAD BEEN PAID, AMOUNTED TO THE SUM OF $6,579.42. THE SANTA FE LAND OFFICE MADE DEMAND UPON THE PRINCIPAL LESSEE FOR PAYMENT OF THAT AMOUNT, THE LESSEE APPEALED AND THE APPEAL WAS DENIED BY THE DIRECTOR OF THE BUREAU OF LAND MANAGEMENT, WITH ADVICE THAT THE LESSEE HAD THE RIGHT TO MAKE A FURTHER APPEAL TO YOU IN ACCORDANCE WITH EXISTING REGULATIONS.

IT IS STATED IN THE LETTER OF JULY 20, 1964, THAT THE LESSEE PRODUCED AND SOLD OIL DURING JULY 1952, THE LAST MONTH OF THE THIRD LEASE YEAR, THAT ROYALTY WAS PAID ON THIS PRODUCTION AND ON ADDITIONAL PRODUCTION DURING THE MONTHS OF AUGUST, SEPTEMBER AND DECEMBER 1952, AND JULY 1953, THE LAST MONTH OF THE FOURTH LEASE YEAR. AFTER THE END OF THE FOURTH LEASE YEAR, THE LESSEE PAID THE BALANCE DUE AS A MINIMUM ROYALTY FOR THAT YEAR.

THE QUESTION IS PRESENTED AS TO WHETHER THE LEASE COULD BE HELD TO HAVE GONE OFF A MINIMUM ROYALTY STATUS AFTER PRODUCTION CEASED AND THE WELL WAS PLUGGED AND ABANDONED APPARENTLY DURING THE FIFTH LEASE YEAR, PARTICULARLY IN VIEW OF THE GEOLOGICAL SURVEY'S REMOVAL ON JUNE 15, 1954, OF THE 40- ACRE TRACT IN THE LEASE FROM ITS PREVIOUSLY DETERMINED KNOWN GEOLOGIC STRUCTURE. ON THAT POINT, IT IS REPORTED THAT THERE IS NO PROVISION IN THE LEASING STATUTE, DEPARTMENTAL REGULATIONS OR THE LEASE ITSELF FOR CESSATION OF MINIMUM ROYALTY PAYMENTS DURING THE LIFE OF THE LEASE WHERE A DISCOVERY HAS PLACED THE LEASE IN A MINIMUM ROYALTY STATUS. IT IS SUGGESTED THAT NO IMPLICATION CAN BE READ IN THE STATUTE THAT MINIMUM ROYALTY PAYMENTS ARE TO CONTINUE ONLY SO LONG AS THERE IS PRODUCTION ON THE LEASE OR A WELL CAPABLE OF PRODUCING. ALSO REFERENCE IS MADE TO SOLICITOR'S OPINION M-36405 OF JUNE 13, 1957, AS INDICATIVE OF THE DEPARTMENTAL BELIEF THAT ONCE A LEASE GOES ON A MINIMUM ROYALTY BASIS IT REMAINS ON THAT BASIS UNTIL THE LEASE TERMINATES, REGARDLESS OF THE CESSATION OF PRODUCTION.

A SECOND QUESTION IS PRESENTED AS TO WHETHER MINIMUM ROYALTIES WOULD BE PAYABLE TO THE GOVERNMENT UNDER THE EXTENDED PERIODS OF THE LEASE, CONSIDERING THAT THE ORIGINAL FIVE-YEAR EXTENSION WAS REQUESTED AND GRANTED IN THE APPARENT BELIEF BY BOTH LESSOR AND LESSEE THAT THE CHANGE IN STRUCTURE DETERMINATION ALSO RESTORED THE LEASE TO A RENTAL STATUS AT LEAST INSOFAR AS ANY EXTENDED PERIOD OF THE LEASE WAS CONCERNED.

THE VALIDITY OF THE INITIAL AND SUBSEQUENT LEASE EXTENSIONS IS ALSO QUESTIONED AND A FURTHER QUESTION IS RAISED AS TO WHETHER, IN THE PARTICULAR CIRCUMSTANCES, THE MATTER SHOULD BE TREATED AS ONE INVOLVING A MUTUAL MISTAKE PERMITTING RESCISSION AND SETTLEMENT WITH THE LESSEE ON THE BASIS OF THE BENEFITS OBTAINED BY THE LESSEE DURING THE PERIODS OF SUCH EXTENSIONS. IN THAT REGARD, INFORMATION HAS BEEN REQUESTED AS TO WHETHER SUCH BENEFITS PROPERLY MAY BE MEASURED BY THE RENTAL PAYMENTS RECEIVED FROM THE LESSEE.

THE SOLICITOR'S OPINION (M-36405 OF JUNE 13, 1957) CONCERNS AN ATTEMPT ON THE PART OF A LEASEE TO OBTAIN AN APPORTIONMENT OF A MINIMUM ROYALTY PAYMENT MADE IN ADVANCE FOR A SUBSEQUENT LEASE YEAR, DURING WHICH THE LEASE WAS TERMINATED BY OPERATION OF LAW, SO THAT A PART OF THE ADVANCE PAYMENT COULD BE APPLIED AGAINST A DEFICIENCY IN PAYMENT OF ROYALTY FOR A PRIOR LEASE YEAR, FOLLOWING THE COMPLETION IN PAYMENT OF ROYALTY FOR A PRIOR LEASE YEAR, FOLLOWING THE COMPLETION OF PRODUCTIVE WELL ON THE LEASED PREMISES. PRODUCTION HAD CEASED DURING THE FIRST MONTH OF THE LAST LEASE YEAR BUT IT APPEARED THAT SUCH CESSATION DID NOT HAVE THE EFFECT OF RELIEVING THE LESSOR FROM AN OBLIGATION TO PAY A FULL-YEAR MINIMUM ROYALTY FOR CONTINUING OPERATIONS DURING ANY PART OF THE LAST LEASE YEAR. THIS SITUATION IS NOT COMPARABLE TO THE ONE HERE INVOLVED, ALTHOUGH, IN ADDITION TO INDICATING THAT A YEARLY MINIMUM ROYALTY IS NOT SUBJECT TO APPORTIONMENT ON A MONTHLY BASIS IN THE CASE OF A LEASED TERMINATED PRIOR TO THE END OF ANY LEASE YEAR, THE SOLICITOR HELD THAT THE MINIMUM ROYALTY PROVISION OF SECTION 17 OF THE MINERAL LEASING ACT OF 1920, AS AMENDED, BECOMES EFFECTIVE AFTER PRODUCTION IN PAYING QUANTITIES IS OBTAINED AND REMAINS IN EFFECT SO LONG AS THE LEASE SUBSISTS REGARDLESS OF WHETHER IT IS THEREAFTER POSSIBLE TO CONTINUE PRODUCTION.

THIS VIEW OF THE MATTER IS CONSIDERED PROPER WITH REFERENCE TO OPERATIONS DURING THE PRIMARY FIVE-YEAR TERM OF A NONCOMPETITIVE OIL AND GAS LEASE. HOWEVER, IT IS OUR OPINION THAT A RECLASSIFICATION OF THE LEASED LANDS IN THIS CASE TO EXCLUDE THEM FROM "A KNOWN GEOLOGIC TRUCTURE" WOULD HAVE BEEN NECESSARY TO PERMIT AN EXTENSION OF THE LEASE FOR AN ADDITIONAL PERIOD OF FIVE YEARS, AND THAT SUCH RECLASSIFICATION WOULD BE CONTROLLING ON THE QUESTION AS TO WHETHER ROYALTIES INSTEAD OF MINIMUM RENTALS WERE TO BE PAID DURING THE ENTIRE EXTENDED TERM OF THE LEASE IF NO DISCOVERY OF OIL OR GAS IN PAYING QUANTITIES WAS MADE AFTER THE PRIMARY TERM OF THE LEASE.

THE RECLASSIFICATION OF JUNE 15, 1954, APPEARS TO HAVE BEEN BASED UPON A REASONABLE DETERMINATION THAT THE DISCOVERY MADE BY THE LESSEE WAS OF SUCH MINOR SIGNIFICANCE AS TO REQUIRE THE CONCLUSION THAT THE DEPARTMENT WAS NOT REQUIRED TO CONTINUE IN EFFECT THE ORIGINAL DETERMINATION THAT THE LANDS COVERED BY THE LEASE WERE WITHIN THE KNOWN GEOLOGIC STRUCTURE OF A PRODUCING OIL OR GAS FIELD WHEN THE ORIGINAL TERM OF THE LEASE HAD EXPIRED. OTHERWISE, AND DEPENDING UPON WHETHER THE LESSEE COULD QUALIFY FOR AN INDEFINITE EXTENSION OF THE LEASE PERIOD UPON A SHOWING THAT DRILLING OPERATIONS WERE BEING DILIGENTLY PROSECUTED ON THE EXPIRATION DATE OF THE PRIMARY LEASE PERIOD, ANY FURTHER LEASING OF THE LANDS COULD NOT HAVE BEEN MADE EXCEPT ON A COMPETITIVE BIDDING BASIS AS REQUIRED UNDER THE FIRST PARAGRAPH OF THE AMENDED SECTION 17 OF THE MINERAL LEASING ACT OF 1920. WE DOUBT THAT IT WOULD HAVE BEEN POSSIBLE TO OBTAIN REASONABLE OFFERS IF THE BIDDERS IN THAT EVENT WERE FULLY INFORMED OF THE RESULTS OF DRILLING OPERATIONS MADE BY THE PREVIOUS NONCOMPETITIVE LESSEE, OR THAT THE CONGRESS OVER INTENDED TO RESTRICT YOUR DEPARTMENT IN THE MATTER OF MAKING REASONABLE CLASSIFICATIONS OR RECLASSIFICATIONS OF LANDS AVAILABLE FOR OIL AND GAS EXPLORATION PURPOSES.

ORDINARILY, WHERE A LESSEE EXERCISES A RIGHT TO OBTAIN AN EXTENSION OF HIS LEASE, IT IS TO BE PRESUMED THAT RENTAL OR OTHER CONSIDERATION PAYABLE UNDER THE PRIMARY TERMS OF THE LEASE WOULD CONTINUE IN EFFECT DURING THE EXTENDED PERIOD. THUS, IT MIGHT BE ARGUED THAT THE NONCOMPETITIVE LEASING STATUTE HERE INVOLVED CONTEMPLATED THE CONTINUANCE OF MINIMUM ROYALTY PAYMENTS REGARDLESS OF ANY CHANGE MADE IN THE CLASSIFICATION OF THE LEASED LANDS BEFORE THE END OF THE INITIAL FIVE-YEAR PERIOD OF THE LEASE. HOWEVER, IN OUR OPINION, SUCH CONSTRUCTION OF THE STATUTE WOULD ACCOMPLISH IN THIS CASE AN UNREASONABLE AND IMPROBABLE RESULT SUCH AS MAY NOT PROPERLY BE ASSUMED TO HAVE BEEN THE INTENTION OF THE CONGRESS.

ACCORDINGLY, WE DO NOT CONSIDER THE EXTENSIONS OF THE LEASE GRANTED IN THIS CASE TO HAVE BEEN INVALID IN ANY RESPECT, ALTHOUGH MADE WITH THE APPARENT UNDERSTANDING THAT MINIMUM ROYALTIES WOULD NOT BE CHARGED UNLESS AND UNTIL A NEW DISCOVERY OF OIL OR GAS IN PAYING QUANTITIES WAS MADE. APPEARS THAT THE LESSEE IS INDEBTED TO THE UNITED STATES ONLY FOR THE MINIMUM ROYALTY PAYMENT DUE FOR THE FIFTH LEASE YEAR. WE MIGHT ADD THAT AN ATTEMPTED RESCISSION OF THE LEASE EXTENSIONS ON THE DOUBTFUL GROUND OF A MUTUAL MISTAKE OF LAW APPARENTLY WOULD NOT BE TO THE ADVANTAGE OF THE GOVERNMENT, SINCE THE RECORD FAILS TO SHOW THAT THE LESSEE OBTAINED ANY TANGIBLE BENEFITS FROM OPERATIONS SUBSEQUENT TO THE END OF THE PRIMARY TERM OF THE LEASE.