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Eight and one-half inch hole will be drilled from surface to the Lovington Sand member of the San Andres at approximately 500 feet with cable tools. Logs will be run at total depth. If commercial production is indicated, approxi. mately 500 feet of 442'', 9.5#, J-55, new casing will be run and cemented. Prospective productive zones will be perforated and fracture treated for evaluation.

The District Engineer approved the request on the same day and notified the appellant of his action by letter dated the next day. The appellant began to drill at 4:00 p.m., January 30, 1963, and continued drilling until February 18, 1963. The well, having then been drilled to a depth of 500 feet without results, was abandoned as a dry hole.

On March 20, 1963, the land office notified the appellant that the lease had expired on January 31, 1963, by operation of law. Standard appealed, alleging that the lease had been extended for two years pursuant to section 4(d) of the act of September 2, 1960, amending the Mineral Leasing Act, supra, 74 Stat. 790, 30 U.S.C. $ 226-1(d) (Supp. IV, 1963). From the affirmance of the land office decision, the appellant has taken this appeal.

Section 4(d) provides:

Any lease issued prior to the enactment of the Mineral Leasing Act Revision of 1960 which has been maintained in accordance with applicable statutory requirements and regulations and which pertains to land on which, or for which under an approved cooperative or unit plan of development or operation, actual drilling operations were commenced prior to the end of its primary term and are being diligently prosecuted at that time shall be extended for two years and so long thereafter as oil or gas is produced in paying quatities.

The appellant contends that it has met the statutory conditions and has earned a 2-year extension.

The decisions appealed from, however, held that the appellant had not met the standard set out in Associate Solicitor's opinion M-36657 (July 17, 1963), which requires that to qualify as actual drilling operations drilling must be conducted in such a way as to be an effort which one seriously looking for oil and gas could be expected to make in that particular area, given existing knowledge of geologic and other factors normally considered when drilling for oil and gas.

The Division of Appeals pointed out, as had the manager, that all the discoveries of oil or gas within the same township and range had been made at depths of more than 7,000 feet and that water had been tapped at 500 feet, that logs of eight wells drilled in the area showed no signs of oil at the depth of the San Andres formation, and that the San Andres is one of the established sources of fresh water in a delineated artesian water basin. Therefore the decision concluded that the drilling was not a reasonable attempt to find oil or gas.

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July 1, 1964

The appellant contends that the decision is erroneous for either of two reasons. First, it urges that it was making a serious and diligent

a effort to find oil and gas within the test set out by the Division of Appeals. Second, it argues that all that the statute demands of the lessee is that he commence and continue drilling operations through the time that the lease would otherwise have expired and that it has satisfied this requirement.

After careful consideration, we have concluded that the mere conducting of drilling operations is not enough but that, as was said in Associate Solicitor's opinion M-36657, supra, drilling operations to extend a lease must have a reasonable prospect

of success. In somewhat similar circumstances it was held that the lessee must

* * * have the good faith intention to pursue *** the drilling of * * * [a] well to such depth as an ordinarily prudent operator would have drilled under the same or similar circumstances in search of oil or gas in paying quantities. Geier-Jackson, Inc. v. James, 160 F. Supp. 524, 530 (E.D. Tex. 1958).

This test cannot be met by a lessee's assertion or demonstration that he acted in good faith, for, while good faith is essential to the validity of a lessee's actions, it does not relieve him of the necessity of meeting an objective standard. The disposition of the public lands cannot depend solely upon a lessee's or other claimant's state of mind. In determining the validity of mining claims, for example, the Department has explicitly held that an objective standard must be met, i.l., that a claimant must show that he had found minerals of such a character that a person of ordinary prudence would be justified in the further expenditure of his labor and means with a reasonable prospect of success in developing a valuable mine. In deciding whether a reasonable man would proceed with further investment, the fact that the claimant in good faith is willing and eager to go ahead does not of itself prove that he has made a valuable discovery."

The final issue, then, is whether the appellant was proceeding as an ordinarily prudent operator would have under the same or similar circumstances in a search for oil or gas in paying quantities.

In its brief on appeal, Standard has offered what it says would be the testimony of a qualified expert geologist to explain the drilling of the test well. It points out that exploration has been slow and expensive in western Eddy County where the leased land is located,

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1 United State& v. J. 8. Devenny, A-30031 (June 19, 1964); United States v. Richard L. and Nellie V. Effenbeck, A-29113 (January 15, 1963); United States v. Ben Fullingim and John Tinkle, A-28850 (September 18, 1962); United Statea v. Santiam Copper Mines, Inc., A-28272 (June 27, 1960).

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that a discovery sufficient to stimulate exploration was only made recently, that it has drilled eight wells in the province and contributed to eight more without obtaining a return, that in December 1962 it had attempted to obtain economical production from an abandoned Pennsylvanian test drilled by Odessa Natural Gasoline Company in sec. 8, T. 21 S., R. 23 E., on a farmout from Standard, and that, although the original well had penetrated a massive Wolfcamp dolomite from 6,000-6,250 feet, mechanical difficulties prevented testing below 837 feet.

It continues with reference to the various types of exploration it has carried out in the area, and then says that it was faced with the expiration of lease L.C. 065300. The Permian Premier sand, it goes on, was among the multi-objectives in western Eddy County. It states that oil production from this member occurs in north central and northeastern Eddy County, that the nearest production from the Premier is the Atoka Field, about 25 miles away, but that a show of oil was recorded in a contribution well in sec. 36, T. 19 S., R. 24 E., in 1959. However, it continues, an Abo reef test in sec. 3, T. 20 S., R. 24 E., plugged back for completion in the Premier, was perforated from 310–375 feet and fractured with 10,000 gallons of lease crude and 15,000 pounds of sand with no success.

Referring specifically to lease L.C. 065300, Standard of Texas says the Premier sand was believed to be an objective, that, though the yield per well might be small, the areal extent could be large, that the Premier sand has not been thoroughly tested, that free oil has been reported from a shallow zone in a well some nine miles east of lease L.C. 065300. Appellant says it found a good oil stain, fluorescence and oil cut in the sand in the well drilled in sec. 18 from 410-425 feet.” Its first loation for a well site, it continues, was in the SE14NW14 sec. 7, T. 21 S., R. 23 E., but it was immediately changed to the NW14NE14 sec. 18 when it was discovered that there was a water well nearby and that damages would have to be paid to gain access.

In conclusion, the appellant contends that the well was drilled to extend a lease, that the Premier is a legitimate objective, and that the original location in section 7 was selected to obtain shallow structural control but was changed because it was inaccessible without payment of $1,000 for land damages and because a water well was nearby.

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2 The Regional Oil and Gas Supervisor, Roswell, New Mexico, has obtained from Standard of Texas a description by a geologist employed by Standard of sample cuttings from the well. The description of the oil stain is as follows: “this is a good live oil stain but it appears to be due primarily to contamination."

July 1, 1964

The Director of the Geological Survey has reviewed the appellant's arguments and has supplied the following comments:

The first discovery well in the Indian Basin area was the Williamson No. 1 well in the SW14NE14 sec. 19, T. 21 S., R. 23 E., completed in January 1962 for an initial potential of 21,000 m.c.f. of gas per day from the Upper Pennsylvanian 7,060–7,270 feet. This well is located only 1,980 feet from the south boundary of lease L.C. 065300. Two other gas wells have been completed in sections 22 and 23 at depths of over 7,000 feet. These wells and four other dry wells in the area of the well in L.C. 065300 penetrated the San Andres without encountering shows of oil and gas in the formation which well 18–18 tested. Furthermore, the San Andres is known to contain fresh water in the area and is one of the established sources of fresh water in a delineated artesian water basin. The original site for the well was only a quarter mile north of a water well 425 feet deep; the actual site is one-half mile south of it. In fact, water was encountered in

. well 18–18 at a depth of 410 to 415 feet and the water level could not be lowered at a bailing rate of 25 gallons per minute, which is a rate good enough for an average fresh water well.

The Director points out that if Standard of Texas had desired to test the Permian Premier sand it could have done so readily in December 1962 when it reentered the Odessa Natural Gasoline Company well in section 8 which is only 2,950 feet from well 18–18. At that time, he says, the hole was open to 837 feet and the casing was cemented below the base of the Premier so the appellant could have perforated and tested the Premier.

Upon due consideration of all these factors, we have concluded, as did the Director, that the potential oil and gas zones were reasonably indicated as underlying the leasehold by information available far enough in advance of the expiration date of L.C. 065300 to permit the planning of a Pennsylvanian test well. With the information available at the time of drilling of well 18–18, a prudent operator looking for oil and gas would have drilled a Pennsylvanian well on lease L.C. 065300 in the S1, of sec. 18 near the 21,000 m.c.f. Pennsylvanian gas well in the SW14NE14 sec. 19 rather than drilling near a windmill water well to test a formation which is producing fresh water at the windmill location and elsewhere in the area.

The well Standard drilled is 25 miles from the Atoka field which has the nearest Premier production. The nearest Pennsylvanian production is within a half mile of lease L.C. 065300. In view of these facts, it is concluded that the drilling of well 18–18 to a depth of 500 feet in the Permian Premier sand was not a drilling operation which would have been conducted by one seriously looking for oil and gas in that area, given existing knowledge of geologic and other factors normally considered when drilling for oil and gas. Accordingly, it was proper to hold that lease L.C. 065300 had not been extended.

740-673-64

The facts as to lease N.M. 04881 are practically identical. It was issued on April 1, 1951, and, absent a further extension, expired on February 28, 1963. On February 18, 1963, the appellant filed a notice of intention to drill a well designated as 19–7 in the NW14XE14 sec. 7, T. 22 S., R. 23 E., N.M.P.M., into the San Andres formation to a depth of 500 feet, a site approximately five miles south of well 18–18. Drilling operations began on February 28, 1963, and continued to March 19, 1963, to a depth of 509 feet. On March 21, 1963, the well was plugged. The drilling reports show that the Premier sand was encountered at 312 feet, the San Andres at 407 feet, and the Lovington at 472 feet, with water being produced from the San Andres.

In its brief, the appellant offers essentially the same arguments in support of this well as it did for well 18-18. In addition, it states that the oil shows encountered in well 18–18 encouraged it to drill another well to evaluate the zone in western Eddy County. As we have stated above, the Geological Survey indicates that this staining was the result of contamination.

The Survey has also pointed out that there are four water wells within a distance of from 312 to 512 miles north, northwest, southwest, and southeast from well 19–7, which are producing from the San Andres formation. Two of the wells are abandoned oil tests plugged back and converted to water wells.

In addition, a well one mile north was completed as a Pennsylvanian gas well prior to the drilling of well 19–7. It had no shows of oil in the Premier. The Survey knows only one well in western Eddy County that has had an actual show of oil in the Premier sand and that well is 111,2 miles to the northeast. In a report dated July 10, 1963, the Regional Oil and Gas Supervisor listed 16 wells drilled through the San Andres formation in the vicinity of well 19–7 and completed prior to the date of drilling well 19–7 in which wells no commercial shows of oil and gas were found in the San Andres or overlying beds.

For the same reasons set out in the consideration of L.C. 065300, it is our conclusion that, under the criterion discussed above, the appellant could not reasonably have expected to find oil and gas

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