lease broker, on sight after 60 days, the amount stipulated in the lease. In this way the broker ties up the farmer's land for 60 days. If he is able to sell the lease at a profit within that period, the farmer is paid; otherwise, the lease is returned and the farmer has lost his opportunity to lease his land owing to the termination of what is called "the lease play."

The farmer not only is the victim of unscrupulous promoters, but he is quite as often the victim of his own lack of knowledge. He has no advance information as to when a play will start. Many farmers sell a part of their mineral rights for nominal sums just before drilling is begun.

It is an established fact among oil operators that during recent years the big money in royalties, particularly in the newer fields, has been made by others than the landowners, and that, as a class, farmer landowners have benefited far too little from their mineral rights. Even when dealing with honest operators this may occur. For example, an oil play may last only a few weeks or it may take several years to develop. A farmer who is experiencing difficulty in maintaining his equity in his property, because of crop failure, low prices for farm products, or other reasons, is tempted to sell his royalty rights at the first opportunity. He is not in position to profit by the fact that under proper organization and direction he could safely capitalize his mineral rights, and figuratively speaking, engage in "two-dimension" farming. As a consequence, even if his royalty is not practically lost to unscrupulous agencies, it gets into the hands of buyers and scouts for large royalty companies at a nominal price before drilling operations are begun and before such royalty rights begin to bring high prices on the market. If a farmer is in position to retain his mineral rights, he will find that their value increases as the test well nears completion. The test well may come in as a producer or it may prove to be another dry hole. If it is a dry hole the owner of the lease discontinues payment of rentals. If it is a producer the royalty values in the vicinity get a big play.

But as the oil or gas reservoir has definite boundaries, the farmers who hold royalty rights are still facing a chance that is not taken by the lease owners. These owners operate only after they have reduced their risk by acquiring all land in a particular block, or a big spread, or a checkerboard, over large areas of potential producing acreage.

The peculiarity of the petroleum industry places the individual landowner at a serious disadvantage. If he fails to lease his land, and if he wants results, he is forced to finance costly drilling operations 13 on his own land and to take the chance of not locating a producing well. Without money of his own it is next to impossible for him to get a financing agency to risk its money on one tract of land. Potential mineral acreage has a speculative market value which fluctuates according to its proximity to actual development and to the attention given it by producing groups. If a farmer leases his land he

18 "The cost of drilling ranges from a few hundred dollars for some of the shallowest wells in the East to nearly $500,000 for some of the deepest wildcats of the West, but the average cost of all wells up to Jan. 1, 1929, was less than $12,000 each. The average cost of wildcats wells ranged from $5,326 in the Lima-Indiana field to $43,335 in the California field, and averaged $19,410 for the country as a whole. The average cost of proved-area wells ranged from $3,405 for Lima-Indiana to $40,239 for California, averaging $11,190 for the country as a whole. Deep wells are costly to drill, even in proved areas. Wells to below 7,000 feet in the California fields commonly cost more than $200,000. On the other hand, wells less than 2,000 feet in the eastern fields rarely exceed $5,000." (Petroleum in the United States and Possessions, by Ralph Arnold and William J. Kemnitzer, 1931, p. 28.)

119032-S. Doc. 93, 72-1-2

is at a further disadvantage because he can not always compel the drilling of offset wells on his land while the oil or gas is being drained from under his land through neighboring wells. Unless he has the advantage of organized bargaining, under existing conditions, the only way in which he can be sure to realize anything from his mineral rights is by selling them outright to well-informed persons who are farsighted and discerning enough to acquire large spreads of such rights in the path of development and who can afford to assume the risks involved.

It is apparent, therefore, that the average individual farmer in an area that may eventually be very productive has but small chance to get any cash returns of consequence unless he is in a position to have his potential royalty interests effectively managed. This emphasizes the need for organization to secure and manage effectively the mineral rights of farmers.

EVOLUTION AND RESULTS OF OSAGE INDIAN COOPERATIVE MINERAL RIGHTS POOL

The Osage Indian mineral rights pool is the classic example of successful cooperation in the pooling and management of potential mineral resources. The States of Texas and Oklahoma, in the management of State-owned lands, provide other examples of pooling mineral rights that have proved successful. But since the Osage pooling plan embodies the best features of the other pooling plans, the methods of only this pool will be outlined.

The Osage Indian Reservation, located in Osage County, Okla., consists of 1,470,549.04 acres, of which 1,465,350.51 acres had been allotted by June 30, 1931. In 1896, when the Federal Government announced its intention to allot to individual members of the tribe, the lands which, until then, had been held in common, many saw in this allotment plan an opportunity to acquire mineral rights in regard to which the majority of Indians were uninformed.

One of the far sighted members of the tribe, John Palmer, developed the idea that unless steps were taken to reserve mineral rights under lands subject to allotment, the majority of the members of this tribe might lose vast potential mineral wealth to outsiders. He argued that only the surface rights of the land should be allotted and that, since no one knew where oil or gas or other minerals would be found, it was unfair to divide potential mineral wealth until it had been mined. He is said to have argued that "he who takes less than his share of the tribal wealth is a fool and he who takes more is a thief."

Vice President Charles Curtis, then a Representative in Congress, was appealed to and at his instance Congress passed a bill which effectively secured the mineral rights to, and equitably distributed the proceeds from such rights among, the 2,229 members of the tribe.

The act of Congress approved June 28, 1906, entitled "An act for the division of lands and funds of the Osage Tribe of Indians," provides, under section 3 thereof, "That the oil, gas, coal, and other minerals upon said allotted lands shall become the property of the individual owner of said land at the expiration of 25 years from April 8, 1906, unless otherwise provided for by act of Congress, and leases for such minerals may be made by the Osage Indians through their Tribal council with the approval of the Secretary of the Interior under

such rules and regulations as he may prescribe, the royalty to be paid to the Osage Tribe under any mineral lease so made shall be fixed by the President of the United States and disbursed to enrolled members, or their heirs, per capita, at stated intervals after deducting expense of supervision and office maintenance." 14

This act of Congress made it possible for the Osage Indians to benefit from desirable lease and drilling contracts which they might not have received without organization. One of the rulings provided that one-sixth of the oil royalty must accrue to the Osage Indian Tribe for wells on any quarter section or fractional quarter section of land which produces less than an average of 100 barrels daily for a calendar month, and one-fifth oil royalty must accrue if average production is more than 100 barrels.

When two concerns applied for 300,000 acres for gas leases, the Secretary of the Interior directed that oil and gas technologists from the United States Bureau of Mines make investigations in the oil and gas fields to determine desirable terms of leases. Public hearings were held to get the viewpoints of prospective lessees. On the basis of these investigations and hearings the rate of 3 cents per thousand cubic feet of gas was determined to be a fair rate.

Gas leases being used to-day provide that where gas is used for extraction of gasoline, a specific royalty must be paid on gasoline so produced, and that the gas not used for such operating purposes must be sold, and of the amount sold, the stipulated royalty of 3 cents per thousand cubic feet must be paid.

Prior to 1916, when this new rate was first established, the Osage Indian Tribe received approximately $12,000 per annum as gas royalty, whereas under the new arrangement, at 3 cents per thousand cubic feet, the royalty for the first year was approximately $798,000. Gas leases provide for change in royalty at the end of 5-year periods; and, at the expiration of each such period, the Department of the Interior causes a further investigation to be made.

Up until November 9, 1918, oil and gas leases were sold for cash; after that date regulations were modified to permit payment of 25 per cent on the day of sale and the balance within three years from the date of the approval of the lease, with interest at 5 per cent. On February 2, 1922, the terms of sale of oil leases were further modified to permit lessees, on "producing leases" (leases on land actually producing oil), to mortgage drilling equipment and to secure notes given to cover deferred payments of lease bonuses. The policy of permitting lessees to mortgage producing leases as security for notes was rescinded on April 26, 1929. Now only two classes of security are acceptable-Government bonds and corporate surety.

The Annual Report of the Osage Indian Agency for 1921 stated that oil produced in the Osage field was being purchased by 15 companies, a number of which paid a premium of 10 cents to 40 cents. over posted market prices for oil produced in mid-continent field. On July 7, 1922, the Department of the Interior ruled that thereafter, when settling for oil, the price demanded and received should be the price at which not less than a majority of the oil of similar

By congressional amendments to the act of 1906 approved Mar. 3, 1921, and Mar. 2, 1929, the period for which the potential minerals referred to were reserved to the tribe was extended to Apr. 8, 1946, and Apr. 8, 1958, respectively.

gravity had sold for during the period in question in the mid-continent field.

Oil and gas leases now provide that before beginning operations lessees shall pay the surface owner $100 for each well located on cultivated land or land suitable for cultivation, and $35 for each well located on land not suitable for cultivation. If the location site exceeds 11⁄2 acres in area additional charges are made. Lessees are also liable for all damage to crops and improvements, and for all other damage occasioned by operations. An act of March 3, 1921, permits surface owners, if dissatisfied with damages granted, to appeal to courts without the consent of the Secretary of the Interior.

Leases require a lessee to drill one well to Mississippi line (or lesser depth if oil is found in paying quantities before that geological stratum is reached), within 12 months of date of approval. In case equipment can not be obtained, the Secretary of the Interior may extend the time for payment of annual rental of $1 per acre for each year's delay. On January 15, 1921, the Department of the Interior issued an order permitting suspension of drilling in unproven areas in consideration of a payment of $1 per acre per annum.

On June 30, 1931, according to the annual report of the superintendent of the Osage Agency, there were 9,695 producing oil wells and 437 producing gas wells on the reservation, in addition to 3,201 abandoned wells and 2,937 dry holes. The fact that 2,937 wells, or 18.1 per cent of all wells drilled to that date, were dry holes indicates that the nature of operations on the reservation was no less speculative than on other potential producing areas owned by farmers.

As a consequence of effectively pooling their mineral interests in 1896, the 2,229 members of the tribe (or the heirs of each taken as a group) shared equally in the total of $241,546,289.82 received from all oil and gas sources up to June 30, 1931. (Table 3.) The efficient management of their pooled mineral interests suggested by the extremely desirable terms of leases sold to private oil operators is emphasized by the fact that $109,902,384.70, or 45 per cent of the total income from all oil and gas sources, was obtained in bonuses (money paid in addition to nominal rental fees for the right to lease land). In fact, bonuses paid amounted to slightly more than the total of all oil royalties ($109,795,553.97). Without the collectivebargaining power made possible through adequate cooperative organization, there is slight question but that the bonuses would have totaled only a nominal sum.

The exact cost to the Federal Government agencies of managing the pooled rights of the Osage Indian Tribe is not known. According to figures made available by the superintendent of the Osage Agency, more than 97 per cent of the total proceeds from pooled mineral rights has been distributed among or reserved for the 2,229 Osage Indians or their heirs.

TABLE NO. 3.-Income received by the Osage Tribe of Indians from all oil and gas sources since the first discovery well on the reservation in 1901 through the fiscal year ended June 30, 19311

1 Report dated Aug. 29, 1931, from D. D. Murphy, Superintendent Osage Indian Agency, Pawhuska, Okla., to the Commissioner of Indian Affairs, Washington, D. C. (Narrative section of the annual report for Osage Indian Agency for the fiscal year 1931.)

ADVANTAGES OF COOPERATIVELY ORGANIZED EFFORT

There are many differences between the situation of the Indians as wards of the Government and the situation of the farmers who own potential petroleum resources, but it is believed that the general idea of cooperative pooling of mineral rights developed by the Osage Tribe can be adapted to meet the situation of farmers who own potential petroleum resources. Through the proper type of pooling organization the average farmer may derive many benefits which would not accrue to him without organization.

Collective bargaining power obtained from such organization should bring the farmer better lease terms and drilling contracts, as a result of which he would obtain higher bonuses, rentals, and royalties. In this way he would liquefy what otherwise, to him, is a frozen asset. By so doing he would place himself in a position to receive a more or less steady income from pooled mineral rights. With his mineral rights secured in a cooperative pool, the farmer would have a business stake in the natural resources of the country upon which he could realize an income in much the same manner as does a large royalty corporation that has millions back of it.15 Whether this income may be

15 The term "mineral rights" in the remaining parts of this report refers to rights of potential petroleum resources, unless otherwise indicated.