acreage pools. In fact, the practices of the major oil companies in acquiring spreads differ in various areas and among different companies. Some companies place more reliance on geology than do others. In determining the location for a test well, some ignore surface geology and rely upon the logs of wells already drilled. If a potential producing area is perfectly flat, or if the structural geology is obscure for some other reason, a major company may send out its scouts with instructions to take one, two, or more, quarter sections of land in each township in that area.

Many of the major companies differ widely in opinion as to oil possibilities in certain areas and on specific tracts of land. It is said that the famous Seminole oil field in Oklahoma and other existing large producing fields were once looked upon with disfavor by many geologists, and, consequently, by the major oil companies that employed these geologists. As a result of this lack of definiteness as to the location of oil or gas, certain major companies invest huge sums of money in a given area while others consider the area absolutely condemned and will not buy or lease a single acre in it. Since disagreements constantly occur among the most eminent geologists, the only potential areas that can confidently be rejected by a cooperative mineral acreage pool are those areas that are unanimously condemned or, at least, nearly unanimously condemned.

The controlling factors in determining which acreage should be or should not be accepted in a particular pool are: (1) Existing geological data, (2) state of development of the oil industry in the area, (3) status of leasing activity in the area, and (4) need by the pool for one or more tracts of land in the area in question in order to give the cooperative pool what might be considered a desirable spread.

To assure the members of a particular pool that their interests will not be dissipated or reduced by accepting, for the pool, lands with less potential value, requires trained leadership and the help of a highgrade staff of geologists and other specialists in different phases of the oil business. So far as possible, the pools should select their tracts on the basis of information that is as scientific as that used by any of the major oil companies.

In spite of every precaution that may be taken, most of the pooled acreage undoubtedly will be nonproductive. There is no known way in which farmers in any one pool can be assured that only lands having petroleum-producing potentialities that equal or exceed those of their own lands, will be pooled. The mere fact that all of the acreage pooled is potential in character means that no definite certain valuation can be placed on any one tract. As a single unit, a small tract of possible or probable producing land may have little or no value; but as part of a large spread of acreage in the path of possible and probable production, each unit of land in the pool, as shown above, may become a valuable asset.

10. SIZE OF POOLS

The number of units should be kept within reasonable limits in order that the handling of the pool may not become unwieldy. If too many units are accepted by any one pool, the psychological effect may be bad. The owner of a headright or share of stock in a pool consisting of 3,000 shares would receive one three-thousandth part of the proceeds, but the owner of a share of stock in a pool consisting of

50,000 shares would receive only one fifty-thousandth part of the proceeds. Although the relative return per share might be the same, a farmer is likely to understand better and take more interest in the smaller pool. The minimum number of tracts in the pool, however, should be large enough to give what the oil industry considers a good spread, whether the land is in one block or is scattered over several States.

The question of whether the tracts should comprise a solid block of acreage or a checkerboard of acreage in many areas, does not appear to lend itself to any one answer. In the immediate vicinity of production it might be distinctly desirable to accept only contiguous tracts in any one pool, whereas it might be decidedly disadvantageous to follow that practice in areas remote from any lease play or production. If the cost of organization is assumed by the pool members, it might be wise policy to limit the size of a pool to one location. If, on the other hand, the expense for organizing and completing pools is assumed by a corporation in exchange for a percentage of the income that may be derived from pooled acreage, it would seem that the choice as to whether the spread should be a block or a checkerboard of acreage. might be left with the corporation.

Possible statutory provisions that might prevent a pool located in one State from pooling mineral rights in several States might limit the activities of a pool. Although alien ownership of mineral rights is not restricted in the petroleum-producing States of the Southwest, this phase of the problem must be studied in greater detail before a program of cooperative pooling of mineral rights can be projected into other regions of the United States.

The fact that the size of land-ownership units differs in the various States suggests the need for organizing any given pool to issue stock (or what usually are called headrights) on the basis of different acreage units. The ownership of a section of land in Texas, for example, is about as common as is the ownership of an 80-acre tract in Oklahoma. A pool should be set up to meet these local situations.

THE ORGANIZATION AND MANAGEMENT OF FARMERS' POOLS

Effective organization with experienced management is necessary to give farmers needed bargaining power in the disposition of their potential mineral resources. If it is conceded that cooperative pools offer the soundest basis for the necessary organization, the question arises as to how such pools can best be brought about and be provided with suitable management.

POOL ORGANIZATION AND MANAGEMENT BY FARMERS THEMSELVES

An organization formed, owned, and controlled by the farmers themselves has the advantage of simplicity and directness of farmer control. Such a pool, set up in conformity with favorable permissive State or Federal legislation, and without direct Government aid, may be regarded as the most desirable type of organization if, and when, it can successfully achieve the basic purpose, namely, protection of the farmers' mineral rights and the obtaining of maximum returns from their mineral resources.

119032-S. Doc. 93, 72–1—3

The extent to which this form of cooperative action may be expected to be successful in the near future, however, is somewhat uncertain. Cooperative experience in pooling mineral rights is not extensive. To many farmers it constitutes a new field of joint action. Moreover, there are certain basic differences between this field of cooperation and those fields in which a large number of farmers have become accustomed to working together for their mutual advantage.

Oil and gas developments are uncertain. Farmers who obligate themselves to pay salaries and other expenses for organizing and managing their pools necessarily assume the risk of losing what they have advanced to the pool without obtaining any return. Another difficulty with direct farmer management of pools arises from the fact that the acreage included should in most instances embrace scattered tracts in widely separated areas. This tends to complicate the problem of direct organization and management by the membership.

Many farmers who own potential mineral resources will no doubt be deterred from joining a pool if the outlays for management and operation are in any degree heavy while the question of returns remains problematical. It should be possible for a group of farmers who initiate a pool, to find an individual, perhaps a member of the pool, or an incorporated agency, able and willing to assume the risk of financing the organization and management costs in return for a contract giving a stipulated percentage of any income from the pool, when and if such income accrues. Under such a plan membership could be solicited and desirable acreage signed up under assurances to prospective members that they assume no financial responsibility but merely assign a part of their mineral rights to the pool and thereby obtain the privilege of sharing in any pool income from leases, and from royalties if oil is discovered on any part of the pool acreage.

After several pools have been organized, either by means of funds subscribed by the pool members or advanced by some individual or individuals who assume these outlays in return for a stipulated interest in the pool, it may be possible to bring about a federation or consolidation of two or more existing pools. In most cases such an arrangement should reduce the overhead cost of management per unit of acreage included. It might also, if found desirable, be made a means of increasing the spread of acreage in which each member has an interest.

FEDERAL ORGANIZATION AND MANAGEMENT

The Federal Government might undertake to develop and manage pooling programs as in the case of the Osage Indian Pool. Although in many respects this pool offers a desirable pattern, the organization of farmer pools must, of necessity, be somewhat different. The Indians were wards of the Government at the time the pool was organized. All acreage in the reservation was included in the pool. There was no selection of acreage for any purpose. These conditions greatly simplified the problem of pool organization and management as a Government enterprise. As applied to the type of farmer pool discussed here, there are practical objections to the Federal Government acting as a management agency.

STATE ORGANIZATION AND MANAGEMENT

Each State might undertake the responsibility of organizing and managing pools within its boundaries. Assuming that all States in which farmers own potential mineral-producing acreage would adopt effective programs to establish sound pooling organizations, there might be fewer objections to this plan than to Federal organization and management. It is not probable, however, that the various States where such pools are needed will adopt supervisory or regulatory measures or go to the expense of establishing offices to sponsor any given type of pooling organization. The cost of maintaining offices for this work in several States would perhaps collectively exceed the cost of a Federal agency. State organization and management would also be hampered by the fact that a pool that would meet the needs of the farmers most effectively may in many cases be interstate in character.

ORGANIZATION AND MANAGEMENT BY PRIVATE CORPORATIONS

A private corporation may organize and manage one or more pools under contract with farmers. Under the terms of such contracts the corporation may be obligated to pay all the expenses of organization and management of the pools in exchange for title to a certain undivided part of the mineral rights acquired. Several corporations are operating on this basis to-day in the mid-continent oil field. They receive title to a minimum of 25 per cent of the mineral rights acquired by the pools. They are not required to conform to certain conditions regarded as advantageous to cooperative pools and to which reference is made in this report.

One objection that has been raised to this arrangement, from the farmers' point of view, is the fact that such a corporation will in all probability capitalize the interest it acquires under its contract with the pools, and sell the capital stock to the public. With a 25 per cent interest in pooled acreage thus represented by negotiable stock, there is a possibility that a major part of this stock may be controlled by interests unsympathetic with the farmer and the cooperative movement. Although it may not be probable that an agency unfriendly to the farmer would purchase control of outstanding stock for the purpose of preventing the pool from leasing any part of its 75 per cent undivided interest in pooled mineral rights, the mere possibility of such an occurrence in any pooling program warrants serious consideration. This objection may be lessened or perhaps removed by placing restrictions on the sale or negotiability of the capital stock of the corporation.

PRIVATE ORGANIZATION AND MANAGEMENT UNDER FEDERAL

SUPERVISION

The Federal Government might undertake to provide a certain measure of supervision and control over mineral rights pools and over corporations created for the purpose of organizing and managing such pools. This might require statutory provisions for the incorporation of pools, or of management corporations, under Federal law, or it might be found possible in return for the advantage of obtaining Federal approval of a given pool, or managing corporation

to bind it to stipulated standards even though incorporated under State law.

In any case this assumes that prospective pool organizers, or corporations for the organization and management of farmers' pools, will adopt methods, plans, and contract forms formulated or approved by the Federal Government. It is also assumed that the personal record of the organizers themselves will be scrutinized by the Federal agency charged with supervision.

The approval, by an authorized agency of the Federal Government, of pools or of management corporations, would presumably give them a decided advantage over any rival organizations in signing up desirable acreage and, in the case of a corporation, in obtaining pool management contracts. It would tend to insure the prospective members of the pool or pools that their interests had been duly considered and that they were reasonably safeguarded in the mineralrights contracts that they were asked to sign. It also should give the pool better credit standing.

Federal approval and supervision would also presumably reduce the cost of promoting pools, because of its tendency to lessen sales resistance to a pooling program. Hence the organizing and managing corporation if there is one, as well as the pool members, might profit by such an arrangement.

It has been suggested that the Federal Government might set up a revolving fund for the purpose of making loans to the pools or to the organization and management corporations. This might in some respects simplify the problem of supervision since various conditions deemed essential to an equitable pooling plan could be made a condition of the loan contract.

The security for Federal loans to pools or to management corporations would have to be the pooled mineral rights, represented by either the rights themselves or by some paper or contract giving legal claim to the income from such rights. That the value of such security would be difficult to appraise may be inferred from what has been said earlier in this report about the uncertainty in oil developments. Such loans would necessarily mean that the Federal Government would assume a somewhat speculative risk. For the Government to engage in regulating and financing of mineral rights pools raises important questions of public policy.

SUMMARY AND CONCLUSIONS

There is no certain way to locate oil and gas in advance of the drill. Authorities appear to agree, however, that there are about 1,000,000,000 acres of possible and probable oil-producing lands in the United States. It is also generally agreed that, with the exception of the potential producing area held by Federal and State Governments, farmers own the largest part of this area.

It is a well-established fact that most of the farmer landowners, who once owned the mineral rights in the major producing fields, sold or leased their rights for mere pittances compared with what the rights proved to be worth. The farmer is not in position to keep informed as to the development of the oil industry. The highly speculative nature of the enterprise, the high cost of drilling for oil or gas, and other characteristics of the production and marketing