2. By acquiring large blocks of land for drilling a test well, or wells, regardless of geological conditions.
3. By purchasing offsets to drilling wells regardless of geological conditions.
4. By making systematic surveys of areas to determine whether or not the geological conditions are favorable, and then taking such land under the guidance of the geologist.
This latter system is becoming more generally employed, as the value of applied geology is appreciated, but some companies do not use this system. Many companies, however, employ all four methods.
Royalty.—Leases on prospective oil lands are generally obtained on a royalty basis.
These leases are taken with the understanding that a royalty in oil is given to the owner of the land.
Royalties are regulated largely by custom. In the Eastern and Mid-Continent states the standard royalty is is of the gross oil obtained. In California ;f3 was long considered the proper royalty, but h is now the standard royalty there. Royal ties depend upon the risk involved in drilling. In somes case or i2 o is a good royalty to pay, or even less, dependent upon the risk involved.
Sliding Royalties.—Sliding royalties are applied in some cases. Under a sliding royalty, the royalty is large for wells above a certain size and decreases as the wells decrease in size. Such a royalty may be as high as M for wells over 300 bbls., Yi for wells over 200 up to 300 bbls., for wells over 100 bbls. and up to 200 bbls., for wells over 50 bbls. and up to 100 bbls., for wells of 25 bbls. to 50 bbls., and 310 for wells under 25 bbls. This is merely an example of a sliding royalty.
The Federal Government is putting a sliding-royalty scheme into operation for leases under the Leasing Act of February, 1920. Sliding royalties are not, however, in general use.
Typical Lease.—A typical lease is presented on page 21. This lease, known as Producers 88, is considered one of the fairest used by oil men.
The intent of any good lease is absolute fairness for both sides. If the lessee or lease holder makes money then the owner of the property makes money. If the lessee cannot make a profit
the owner makes nothing. On the other hand conditions must not be too onerous for the lessee to fulfill nor too lax so the land owner will suffer neglect.
It is important to realize that oil men spend millions of dollars every year in rentals for leased lands and in drilling dry-holes. These rentals and drilling expenses must be paid from the gross returns on the property.
The acquisition of probable lands generally results in the expenditure of large sums of money for development.
Probable or proven lands are sometimes obtained under drilling contracts with the owners who hold valuable leases and have insufficient funds for development, or have more land than they can develop.
Titles.—The leasing and handling of oil lands demand the most careful scrutiny of titles. It is surprising what seemingly unimportant trifles, overlooked when obtaining lands before oil has been discovered, may lead to serious lawsuits later, and also the consequent loss of a valuable lease. Competent lawyers should pass on all titles. Lease men in obtaining lands should use every diligence to see that proper signatures are obtained and are properly witnessed.
The vicious law suits to wrest possession of valuable Indian lands at Cushing, Oklahoma from the lessees cost the United States Government much time and money. The noted Tommy Atkins case reads like a romance. When it is realized that at least four different Tommy Atkins were produced as the real owner some idea of the complications may be gained.
Contests over the possession of Cimmarron River Bed leases led to a three-cornered fight between the lessors who held that their land extended to the middle of the stream, the State of Oklahoma which held that the River Bed land was State land, and the United States Government which held that the stream was navigable and, therefore, the land was Federal land and under Federal jurisdiction. At Cushing the private owners held that their land boundaries extended to the center of the stream.