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June 3, 1964

the practice of the Department, where it believed that railroad grant lands did not pass because of their mineral character, to bring charges against the railroad and to hold a hearing on the charges. Central Pacific Railway Company, 46 L.D. 435 (1918); United States v. Central Pacific Railway Company, 49 L.D. 250 (1922); Southern Pacific Railroad Company, 52 L.D. 419 (1928). At the hearing, the Department had the obligation of presenting a prima facie case that the lands were mineral in character whereupon the burden shifted to the railroad to show by a preponderance of the evidence that the lands, or any part thereof, were not mineral in character. Central Pacific Railway Company, supra; United States v. Central Pacific Railway Company, supra; see United States v. Southern Pacific Co., 251 U.S. 1,14 (1919).

The case last cited, United States v. Southern Pacific Co., sets forth the criteria for determining whether land is mineral in character. It is not essential that there be an actual discovery of mineral on the land. It is sufficient to show only that known conditions are such as reasonably to engender the belief that the land contains mineral of such quality and in such quantity as to render its extraction profitable and justify expenditures to that end. Such belief may be predicated upon geological conditions, discoveries of minerals in adjacent land and other observable external conditions upon which prudent and experienced men are shown to be accustomed to act.

The bona fides of the original purchase from the railroad is also a matter to be determined at a hearing.

Since the decisions below invoked the wrong principles in rejecting Southern Pacific's applications and erroneously denied the right to a hearing, the decisions must be set aside and the cases remanded for further consideration and action as indicated in this decision.

Therefore, pursuant to the authority delegated to the Solicitor by the Secretary of the Interior (210 DM 2.2A (4) (a): 24 F.R. 1318), the decisions appealed from are set aside and the cases remanded for further consideration and action consistent with this decision.

ERNEST F. HOM,

Assistant Solicitor'.

MURPHY CORPORATION

A-29849

Decided June 3, 1964 Oil and Gas Leases: Royalties—Oil and Gas Leases: Extensions-Oil and

Gas Leases: Termination-Oil and Gas Leases: Rentals Oil and Gas

Leases: Unit and Cooperative Agreements An oil and gas lease on land within the known geologic structure of a

producing gas field which attains a minimum royalty status because of inclusion in the participating area of a producing gas unit but on which

737-97564

3

there is no producing or producible well and which is subsequently extended as a consequence of the termination of the unit reverts to a rental status and is subject to the automatic termination provision of the act of July 29, 1954.

APPEAL FROM THE BUREAU OF LAND MANAGEMENT

Murphy Corporation has appealed to the Secretary of the Interior from a decision dated October 8, 1962, by which the Division of Appeals of the Bureau of Land Management affirmed a decision of the land office at Denver, Colorado, requiring the payment of minimum royalty for the eleventh lease year of its noncompetitive oil and gas lease Colorado 02406, beginning May 1, 1961, and ending April 30, 1962.

The lease was issued for a 5-year term effective May 1, 1951, and was subsequently extended for a second 5-year term, at which time it became subject to the automatic termination provision added to section 31 of the Mineral Leasing Act by the act of July 29, 1954, 68 Stat. 585, as amended, 30 U.S.C. $ 188(b) (Supp. IV, 1963). On July 16, 1956, the land office approved a partial assignment of the lease effective August 1, 1956, the new segregated lease being designated as Colorado 02406-A. Between the date of approval and the effective date, a gas well was completed on July 26, 1956, on the assigned acreage included in 02406-A. The Geological Survey reported on August 23, 1956, that the discovery was deemed to be that of a new field and that effective July 26, 1956, all the land in 02406-A and part of the land retained in 02406 were believed to be within the known geologic structure of a producing field. Later other partial assignments were made out of the parent lease.

On March 1, 1958, the land in the parent lease and lease 02406-A was committed to the Gillam Draw unit agreement and was included in the participating area of the unit. Subsequently, the unit was terminated as of January 1, 1961. On March 9, 1961, the Denver land office, to which the lease records had been transferred from the Geological Survey, notified the lessees affected by the termination of the Gillam Draw Unit that, because of the termination of the unit, their leases had been extended for two years from October 13, 1960, the date on which production ceased in the unit, and would be effective to October 13, 1962, unless relinquished.

Murphy Corporation paid the minimum royalty for the parent lease for the tenth lease year before the expiration of that lease year on April 30, 1961, but made or offered no payment of minimum royalty for the eleventh lease year. On March 27, 1962, the land office requested payment of $1 per acre for the eleventh year of the parent lease on the ground that the lease had not terminated automatically on May

1 The land office seems to have assumed that the unit was terminated immediately upon cessation of production despite the action of the Geological Survey indicating that the fermination was effective as of January 1, 1961,

June 3, 1964 1, 1961, for nonpayment of rental for the reason that it had retained its minimum royalty status. Murphy Corporation then paid the minimum royalty for the eleventh lease year, relinquished the lease, and appealed from the decision requiring the royalty payment for the eleventh year.

The Division of Appeals held that because the lease had become subject to payment of minimum royalty through inclusion in the participating area of the producing unit it was not subject to automatic termination for failure to pay annual rental in advance and that it did not revert to a rental status on termination of the unit because a minimum royalty status, having attached, continues so long as the lease remains in existence.

In its appeal to the Secretary, the appellant contends that the lease was automatically terminated by operation of law on May 1, 1961, for want of a rental payment because there was then no well capable of producing oil or gas in paying quantities on the leased premises, relying upon the language of the departmental decision in United Manufacturing Co., 65 I.D. 106, 115 (1958), interpreting the act of July 29, 1954, supra.

The portion of the act of July 29, 1954, upon which the appellant relies provides that:

upon failure of a lessee to pay rental on or before the anniversary date of the lease, for any lease on which there is no well capable of producing oil or gas in paying quantities, the lease shall automatically terminate by operation of law * *

In United Manufacturing Co., supra, the Department was not concerned with the situation presented here. The leases involved there had always been in a rental paying status and were not and had not been unitized. The lessees sought to escape application of the automatic termination provision upon their failure to pay the rental on the ground that the leased premises contained valuable deposits of oil or gas, although not a producing well or well capable of production. But in the case now under consideration, it is not disputed that there was no well on the leased premises capable of production which would save the lease from automatic termination for failure to pay rent if rental was required. Clearly, the lease was bound to terminate by

, operation of law for failure to pay rental if rental was owed. The question to be determined on this appeal is whether the lessee was liable for annual payments of minimum royalty after the unit was terminated or whether the termination of the producing unit caused this lease to revert from a minimum royalty status to a rental status.

Under the Mineral Leasing Act, as amended, all leases of land not within any known geologic structure of a producing oil or gas field are conditioned

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upon payment by the lessee of a rental of not less than 50 cents per acre for each year of the lease. Each year's lease rental shall be paid in advance, 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. $ 17(d), 74 Stat. 782 (1960), 30 ('.S.C. § 226(d) (Supp. IV, 1963).?

With respect to leases committed to unit agreements, the statute provides that

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* * * The minimum royalty * * under any lease that has become subject to any cooperative or unit plan of development or operation, or other plan that contains a general provision for allocation of oil or gas, shall be payable only with respect to the lands subject to such lease to which oil or gas shall be allocated under such plan. * * * $ 17(j), 74 Stat. 784, 30 V.S.C. $ 226(j) (Supp. IV, 1963).

In the event of termination of the unit or the exclusion of any land there from, the Mineral Leasing Act, as amended, provides :

* * * Any lease which shall be eliminated from any such approved or prescribed plan, * * * and any lease which shall be in effect at the termination of any such approved or prescribed plan, * * * unless relinquished, shall continue in effect for the original term thereof, but for not less than two years, and so long thereafter as oil or gas is produced in paying quantities. $ 17(j), 74 Stat. 78.1 (1960), 30 U.S.C. & 226(j) (Supp. IV, 1963).

It is thus apparent that the appellant's lease acquired a minimum royalty status when it was committed to the Gillam Draw Unit and was included in the participating area. And it was clearly entitled to the 2-year extension which the land office allowed on termination of the unit.

The conclusion that lease 02406 was bound by the minimum royalty provision after termination of the unit is based on the proposition that once a lease obtains production it becomes so obligated and remains so thereafter even though production ceases and it no longer has a well capable of production. Solicitor's opinion M-36405 (June 13, 1957); Solicitor's opinion M_36531 (Supp.) (July 20, 1959), overruled on other grounds, Solicitor's opinion M-36629, 69 I.D. 110 (1962). These opinions, however, were concerned only with the obligations of the lease on which the discovery was made. Here we must consider whether the same rule applies to a lease other than the discovery lease or to a part of the same lease which becomes separated from the part on which the discovery is made.

In the latter situation, which is the more common, it has been the practice that where because of discovery a lease has become obligated to pay a minimum royalty of $1 per acre in lieu of rental lands on which there is no discovery well and which are assigned out of the lease become freed from the obligation to pay minimum royalty. See

2 In 1958 when the Gillam Draw Unit was effected, the rental rates were different but, in other respects, the statute was the same.

June 8, 1964

Roy M. Eidal, Kern County Land Company, A-29300 (February 19, 1962); VI Bureau of Land Management Manual 2.1.37A.

Somewhat akin to this situation is one in which a unitized lease on which there is no producing well is first included within a participating area and then excluded from it. While we have not found any ruling on the point, we believe that, following the precedent of the partial assignment situation, unitized lease acreage removed from a participating area would no longer be subject to the minimum royalty obligation. This view would seem to be required by the statute and the regulation which specifically provide that minimum royalty shall be paid only on participating acreage. Mineral Leasing Act, as amended, § 17(j), supra; 43 CFR, 1964 Supp., 3125.2. The statutory restriction would appear to apply as well to lands subsequently excluded from a participating area as to lands never included within it.

Thus, there are at least two situations in which lands at one time subject to the minimum royalty obligation are freed from it by subsequent events. The facts in this appeal, we believe, constitute a third exception from the general rule. The dissolution of a unit agreement, which, of course, terminates the participating area dependent on it, is a far more drastic action than either a partial assignment or a modification of a participating area and it severs the relationship of the lands as effectively as do the other procedures.

Accordingly, when the unit agreement was terminated, lease 02106 reverted to a rental status and the rental for the eleventh year became payable no later than May 1, 1961, the anniversary date of the lease. Upon the lessee's failure to make the required payment, the lease automatically terminated. Thus it is incorrect to hold that the lessee remained obligated to pay a minimum royalty.

Therefore, pursuant to the authority delegated to the Solicitor by the Secretary of the Interior (210 DM 2.2A (4) (a); 24 F.R. 1348), the decision appealed from is reversed and the case remanded for further proceedings consistent herewith.

ERNEST F. HOM,

Ном Assistant Solicitor.

CLAIM OF BILL POWERS

TA-271 (Ir.)

Decided June 8, 1964

Corts: Discretionary Functions
A decision not to place culverts under an irrigation lateral, made at the policy

and planning level, when no danger from this method of construction is apparent or realized, and a contrary decision would affect the feasibility of the project, is a discretionary act within the meaning of the discretionary function exception of the Federal Tort Claims Act.

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