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ning Post expense, for instance, was that the Saturday Evening Post utilized the second-class mails to get great quantities of papers from Philadelphia to Chicago or Seattle, for instance, advertising on the first page a subscription price of $1.50 per year, and then peddling them out at 5 cents apiece. That justifies the adverse statement that Mr. Moore has read, and it is no wonder that this committee wants to stop that sort of privilege. That is what the leading business men are complaining about.

Mr. HAWLEY. Suppose the deficit is $90,000,000? Would the provision that you have been referring to, if enacted into law, earn that $90,000,000?

Mr. JOHNSON. I am frank to say that I have not had time to carry the whole thing out on an estimate of the number of papers circulated outside of the counties of publication by the 24,000 publications in the United States, but I am satisfied that the plan I propose is heavy enough to raise a good large sum.

Mr. HAWLEY. Would it raise more than we are raising now by the other system?

Mr. JOHNSON. By getting a report from the newspapers of the number of subscribers outside of the counties, together with the other data involved here, it would be easy to make an estimate to a nicety. Mr. HELGESON. You made a suggestion along the line of taxing advertising. Of course, the county newspaper would have a very low rate for advertising as compared with the advertising rate of the big paper.

Mr. JOHNSON. That could be carried right along with the record as to the number of subscribers.

Mr. HELGESON. The advertising rate, of course, is based on the subscriptions.

Mr. JOHNSON. Yes, sir. Owing to the difficulty that the smaller newspapers are having-600 of them dropped out last year I would exempt the papers from tax on advertising up to 5,000 circulation. If a man has 5,000 subscribers, then charge enough for the advertising to represent a fair percentage on his production as a war tax. As I understand it, the newspapers of the United States and all the magazines are assisting the Government in every way possible, and they are willing to stand any sort of equitable tax.

Mr. HELGESON. I think everybody agrees that the newspapers are rendering good service.

Mr. TREADWAY. Is it your suggestion that we should incorporate here the bill now before the Post Office Committee?

Mr. JOHNSON. I would be glad if you would. My bill can only be referred to the Post Office Committee.

Mr. TREADWAY. You do not think that it is a subject that is properly before this committee?

Mr. JOHNSON. Only for this reason, that when I introduce the bill it is referred to the Committee on the Post Office and Post Roads. Mr. TREADWAY. The whole zone system arose out of a revenue bill. Mr. JOHNSON. Yes.

Mr. TREADWAY. I wanted to make sure that I understood you correctly. As I understand it, your bill is before the Post Office Committee?

Mr. JOHNSON. Yes. The zone system came about in connection with a revenue bill in an effort to equalize second-class postage. As the revenue bill finally became a law, the zone system was made applicable to the advertising pages in newspapers, making it an uncertain and unfair proposition-that is, making it partly a provision for the collection of revenue and partly a provision for the equalizing of rates. Now, as I said, I do not see why advertising should not be made the subject of a war tax all along the line, covering street-car advertising and every other sort of advertising, provided that tax is not so heavy as to stop advertising, which is a very vital thing in making the wheels go around in the United States.

I thank the committee for according me this hearing.

STATEMENT OF MR. WALTER E. KELLY, PRESIDENT OF THE MANHATTAN OIL CO., 27 CEDAR STREET, NEW YORK CITY.

Mr. KELLY. Mr. Chairman and gentlemen of the committee, I am the president of the Manhattan Oil Co., a producer of crude petroleum. It is my purpose to deal with the proposition of depletion as it now affects oil and gas lands, and more particulary oil lands. Mr. TREADWAY. Would you mind stating how large a concern the Manhattan Oil Co. is?

Mr. KELLY. We hold approximately 5.200 acres, and the production is about 1,200 barrels per day. The stock is really nominal. The capitalization is nominal in view of the value of the assets. It is $60,000.

Mr. TREADWAY. Where is the land?

Mr. KELLY. The land is principally under the jurisdiction of the Interior Department, the leases being on land of the Osage Indians. The oil and gas rights were segregated for the Osage Tribe, and we received leases from the Osage Tribe with the approval of the Ser retary of the Interior.

Mr. MOORE. In what States are those lands located?

Mr. KELLY. In the State of Oklahoma. I might say, also, that we have some few additional leases in the State of Kansas, and some other holdings which are undeveloped at the present time.

Mr. MOORE. You said that the capital stock of your company was nominal?

Mr. KELLY. I meant that it was nominal in view of the value of the assets held.

Mr. MOORE. What are the assets?

Mr. KELLY. The assets depend largely upon the value of the leases, which, of course, is always problematical, because you can not say ahead how much oil you have. In addition to that, there is the equipment.

Mr. MOORE. Is there any way by which you can estimate the value of the assets?

Mr. KELLY. I should say that according to an appraisal made under ordinary market conditions it would be worth, perhaps, $3,000,000.

Mr. MOORE. That is not in actual property, but in rights?

Mr. KELLY. It is in rights, and, of course, that goes to the very gist of the question I want to discuss.

Mr. MOORE. Does your company hold title to any of this land? Mr. KELLY. No, sir.

Mr. MOORE. You simply lease the land?

Mr. KELLY. Yes, sir; we simply lease it; and those leases are for as long a time as oil or gas are found in paying quantities.

Mr. TREADWAY. Is the stock of your company dealt in on any stock exchange?

Mr. KELLY. No, sir; it is a close corporation, the stock being held entirely by my father. He is the holder of all of the capital stock. The CHAIRMAN. How much money have you actually put into the business?

Mr. KELLY. I'should say approximately $600,000.

The CHAIRMAN. And you think that the property you purchased. for $600,000 is worth about $3,000,000?

Mr. KELLY. I should think so; yes, sir.

The CHAIRMAN. How long has your company been in existence? Mr. KELLY. The company has been in existence since 1909. The point just raised goes to the gist of the argument I would like to make. We claim here that there has been a distinction made in the law between owners in fee of oil property and those owners who are lessees. I suppose that, by way of preface, it might be well to refer briefly to the conditions we encounter in oil operations. It is impossible to tell from any surface indications just where oil can be found. While it is true that geologists in late years have assisted us somewhat by their researches, by showing where oil can not be found, and even going further and showing us that there are certain structures which seem favorable, yet the only way that you can finally determine whether oil is under a given piece of land is to put down your drill. Now, it is obvious that that condition causes the business to be very hazardous from the financial standpoint. It is not even like mining for solid minerals, because the miner for solid minerals, after doing a certain amount of development work, can know to some extent, at least, what he has ahead of him and can make his financial calculations accordingly. But in a new field where you are prospecting for oil the percentage of dry holes is very much in the majority. I do not know that there are any exact statistics on that subject. In new localities, or, as they term it, wildcat territory, of course, here and there there is an operator who is fortunate in bringing oil in an oil deposit.

From that time on the field gradually becomes a proven field, but even in the proven territory there is a very considerable percentage of dry holes, and those dry holes, of course, represent a total loss, except for the salvage of the equipment that is used in drilling them. That equipment, or a certain part of it, can be taken out and used again in drilling subsequent wells. However, it is a very hazardous business, even in a field that has been proven. Even after a field has been proven, and the operator has a certain number of wells, he has to contend with the continual decline of those wells. Now, a well at the outset declines rather rapidly, and there is a very material drop in the curve of production during the first few months of its life. If the decline is less rapid there, it is, nevertheless, certain, so that at the end of a given period you may be sure that there is no more oil left in that particular well. You are dealing not only with

a wasting product, but also with a fugitive product, because oil is found in sands and strata beneath the earth. That condition results in your neighbor being able to put down a well and taking oil from the same reservoir that you are taking oil from beneath your land without your being able to stop him in any way. So that the development of oil lands by the operator is dependent on quite a degree of diligence.

It is for this reason, moreover, that the development of that industry in this country has taken place in the form of leases. The average oil operator who goes out in the country where there has beensome discovery can not afford to pay large sums to buy property outright, and it is also a generally known thing that 'it is very seldom that the owner of a piece of property, with his lack of experience in the business, develops that property as oil or gas property. Now, as you can see, by reason of the lease arrangement the owner himself takes none of the risk; the operator, who is the lessee, taking it all. If the operator is successful the owner receives his royalty, and that brings us really to the consideration of the type of lease which is used in the oil-producing industry. This lease is considerably different from any contract used in any other form of industry, and I have made a notation here of the salient provisions, although the details vary in different parts of the country according to the difference in State laws, but the main provisions are the same. The term is generally for a given number of years, three or five, or whatever the parties may agree on, and as long thereafter as oil and gas are found in paying quantities. There is also an initial bonus paid in many cases, but that is a matter of agreement between the lessor and lessee. The lessee is usually bound to complete one or more wells within a given period, or, in default of completing those wells, to pay a rental for the privilege of deferring the completion until the end of a stated

term.

He could, in any event, defer it beyond that stated term, so that if the lease is for three years and as long as oil is found in paying quantities, he only has that three years in which to prospect. If he fails to discover oil within that time, then all the rights go back to the lessor and the lease comes to an end.

Mr. MOORE. Is that the universal system of leasing?

Mr. KELLY. Yes; that is the usual form. As I say, whether a man is drilling one well, two wells, or three wells is a matter of agreement between him and the lessor, but the general scheme is the same throughout the country.

Mr. MOORE. The lease runs for three years on the present basis. Mr. KELLY. Yes, sir. The lease, as I have said, terminates if the prospective well is not found before the expiration of that time, but if the prospective well is found at that point an estate vests in the lessee, and, therefore, he is entitled to all the oil and gas that may be found underneath those premises upon the payment of the one-eighth royalty, or whatever royalty is agreed upon. One-eighth is usually the royalty agreed upon, but there are other rates. We pay one-sixth in the Osage Nation, and I think there are some cases where they pay one-tenth. That is regulated by local conditions.

The nature of the interest, respectively, of the owner and lessee before the discovery of oil leaves no doubt that the owner's right is

a much higher one, because the owner can wait as long as he likes to develop that property and prospect it at his leisure, whereas the lessee only has three years and must complete his operations before his lease terminates.

So far as this depletion question is concerned, we are not very much concerned with that proposition, because it is obvious that once oil is discovered there can be no depletion. What we look to, then, is the interest, respectively, of the owner and the lessee after the discovery of oil. We find that the owner's right really remains what it was before. He has a right to all the oil and gas beneath the surface of that particular land, but, again, it is a peculiar right which is distinguished from any other legal title that I know of, for he has no title to any specific oil or gas until he brings it to the surface and reduces it to possession. In other words, it is a mere naked thing to say that he has title to some oil beneath the surface which may be drawn from beneath the surface by an adjoining operator.

Mr. STERLING. Does not the State law regulate the distance from the partition lines of the lands?

Mr. KELLY. It does in some cases.

Mr. STERLING. Where the wells shall be located?

Mr. KELLY. It does in some cases; yes, sir. As to the property on which we are operating in Oklahoma the Department of the Interior has promulgated regulations which regulate that.

Mr. STERLING. That is so in Illinois.

Mr. KELLY. Yes; that is the usual provision. But even if they are located, as they generally are, some 200 feet back of the boundary line, it is the usual thing to find a pool large enough so that if you drew a line down through the surface it would connect that reservoir. The result is that if an adjoining owner puts down a well, even some distance removed from the boundary line, he is bound to take your oil if you do not offset him within a reasonable time.

Mr. WHITE. Is it not a fact that the Interior Department requires an operator to offset a well?

Mr. KELLY. I have not charged my memory with that particular point, but I believe that is the case. I may say that is generally done. Mr. WHITE. In self-defense?

Mr. KELLY. Yes. Of course, there are isolated cases where some company may have more capital than another and may have very favorable conditions and be able to put down more line wells than another man or company.

Mr. WHITE. As a matter of fact, those regulations grew out of the fact that the large companies were doing that as against other companies?

Mr. KELLY. I can not think, offhand, of a specific instance, but I have heard that there were some such instances. But that is the condition which exists. The owner is bound, in self-defense, irrespective of regulations, State laws, or what not, to put down his wells and continue his work with a reasonable degree of diligence or he will not get oil.

The particular point that I want to address myself to is just this: That after a lessee has put in a producing well he has the right to all the oil and gas beneath those premises for as long as that oil and gas can be found. Now, that is all that the owner has. It is true

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