proximately 81 percent of the land, Standard Oil Co. of California owns the rest.

The field is operated under a unit plan contract, which was drawn up, agreed to by Congress and placed in effect in 1944.

Under that contract the Navy controls the rate of production from the entire reserve. In other words, in that instance, because of this special contract, Standard is not permitted to remove their oil to the detriment of the United States.

Mr. ANDREWS. How do you keep them from doing that?

Captain LOVELL. We have people out there in my office who say they can only produce so many barrels.

Mr. ANDREWS. Limited production?

Captain LOVELL. Yes, sir.

Mr. ANDREWS. Are you producing any oil on reserve No. 1? Captain LOVELL. Yes, sir. At the present time Naval Petroleum Reserve No. 1 is producing approximately 12,000 barrels of oil per day.

Mr. ANDREWS. Is that about the same level of production that Standard Oil Co. operates on the adjoining property?

Captain LOVELL. No, sir. If they were turned loose they could produce by themselves something in the neighborhood of 50,000 barrels per day.

Mr. WEAVER. If they only own a third of it they should not be producing more than a third.

Captain LOVELL. That is why I say that figure, against the 200,000 we are capable of doing. This production from Naval Petroleum Reserve No. 1 is necessary to protect the oil reservoirs and to prevent the ultimate loss of oil.

The production from the shallow zone, which is most of the production that is going on out there, is to prevent water from encroaching in the oil sand in one area of the zone, to prevent oil from migrating into water sands in another area of the zone and to obtain data on reservoir behavior so that we can make shifts in production from individual wells to prevent this loss, complete loss out of the oil.

In other words, what we are taking out of Naval Petroleum Reserve No. 1 would be lost, ultimately, if we did not take it out.

Mr. FLOOD. You will wind up like Mother Hubbard, open the cupboard and it will be bare.

Captain LOVELL. No, sir. We know we have more oil there now than we thought we had 40 years ago.

Mr. FLOOD. You are living right.

Mr. FORD. Is this a satisfactory arrangement which precludes the problem that arose in oil reserve No. 3?

Captain LOVELL. Yes, sir.

Mr. ANDREWS. This is done under an act of Congress?

Captain LOVELL, Yes, sir. Under the United States Code and the actual contract; consultations were held on the contract with the Armed Services Committees of both Houses and they approved it; the President approved it and this is the contract under which we are operating.

OPERATIONS AT RESERVE NO. 2

Mr. ANDREWS. What about reserve No. 2? Who are your neighbors there?

Captain LOVELL. There are several different companies-I do not have the names right at hand.

Mr. ANDREWS. Do they own the land?

Captain LOVELL. Most of those are leases.

Mr. ANDREWs. From the Government?

Captain LOVELL. They are leases that were in effect or prior leases and these are successors to them.

Mr. ANDREWs. When were those leases made?

Captain LOVELL. They were mining claims made back in the early 1900's before the area was set aside as a naval petroleum reserve.

OPERATORS ON LANDS ADJACENT TO RESERVE NO. 2

Mr. ANDREWS. Supply for the record the names of the companies who are drilling on lands adjacent to your reserve No. 2.

(The information requested follows:)

Oil operators on lands adjacent to Naval Petroleum Reserve No. 2: Standard Oil Co. of California, Texaco, General Petroleum, Richfield Oil Co., Jergens Petroleum Co., Central National Bank of Oakland, Taft Investment Co., Honolulu Oil Corp., Tidewater Oil Co., Union Oil Co. of California, E. & B. Heyler, Quality Oil Co., Ethel McLennon, Streeter & Royden, Doyle Petroleum Co., W. L. Adkisson, C.C.M.O. Oil Co., Murvale Oil Co., California Commercial Drilling, V. G. Hutchins, Vista Grande, Roberta Hawkhurst, Shell Oil Co., Mark Morris, Connel, and Sunset Oil Co.

The Standard Oil Co. owns in fee approximately one-third of the lands adjacent to Naval Petroleum Reserve No. 2.

Do you have any wells operating at No. 2?

Captain LOVELL. All of our lands there are also leased out for commercial operation. There are wells being drilled, being produced, but we do not pay for them.

The Government is merely the lessor.

Mr. FLOOD. The Bureau of Public Roads will step in and condemn Mr. Andrews' house tomorrow morning at 9 o'clock to build a silly highway. Do you know of any place in the history of this naval reserve business where the U.S. Government ever discussed the right of condemnation?

Captain LOVELL. Yes, sir.

Mr. FLOOD. To preserve and protect its flanks?

Captain LOVELL. In the early part of World War II, President Roosevelt wrote a letter to the Secretary of the Navy stating that if a satisfactory arrangement could not be made with Standard Oil Co. of California, then they should proceed with condemnation of Standard's lands.

Subsequently, a satisfactory arrangement was made and the condemnation proceedings did not go through.

REVENUES AND EXPENSES, 1916-60

Mr. FORD. I would like to have in the record the revenues which have been derived for the last 10 years from the various petroleum

reserves.

Captain LOVELL. We have here for the record the revenues since the inception of the reserves going back to 1916.

Mr. FORD. Do you have it on an annual basis or is it a total?

Captain LOVELL. Only for fiscal year 1960 is all we have here. The other is readily obtainable.

Mr. FORD. Let's get the revenues, if you have them available, from the inception on an annual basis.

(The information requested follows:)

Statement of income and expenses naval petroleum and oil shale reserves

1 Income through 1952 is on a calendar year basis; thereafter on a fiscal year basis. Expenses are all on fiscal year basis.

Mr. ANDREWS. On page 4, from 1916 through fiscal year 1960 the naval petroleum reserve produced a net income of $78.3 million. During fiscal year 1960, the net income from the reserve was $11.9 million. All income is deposited in the U.S. Treasury and is not available for direct funding of operations of the naval petroleum oil shale reserves. Mr. MAHON. Mr. Chairman, would you yield?

Mr. ANDREWS. Yes.

Mr. MAHON. Some questions have been raised here, Captain, in regard to the law affecting these petroleum reserves and in regard to the operation of the reserves.

You have a General Counsel of the Navy and I wish you would see that this transcript is checked by him or someone in his shop and that you insert a statement at this point in the record commenting as best you are able to on these questions which have arisen. Will you do that?

Captain LOVELL. Yes, sir. The Judge Advocate General of the Navy is the law officer who handles our business.

Mr. MAHON. You be sure that this record is studied and that the questions which have been raised here are answered as well as you are able to answer them. We will make a survey of this situation and see what more needs to be done.

Captain YOUNGBLOOD. There are provisions in the Naval Petroleum Reserve Act by which the Government could protect its property by

contracting, entering into agreements, compensating people not to drill; but there is no law that will prevent a man from drilling adjacent to our property.

Mr. FLOOD. I know that. I want to know, going back to the first chapter of Blackstone, why this is not larceny and why not further than that, this is not disposal for profit of Government assets. There is no question about what it is.

COMMENTS ON LEGAL QUESTIONS RAISED

Mr. MAHON. Those are some of the questions which you will want

to cover.

(Comments on the review of the record follows:)

This record has been reviewed by Office of the Judge Advocate General of Navy, and listed below are the principal questions raised and the answers thereto.

1. Now, what is the law? I am not interested in what the State law is. This is Federal property. Do you mean to tell me *** there is no law, or if you need it why haven't you asked for it, on a Federal reserve?

Answer. The law of capture is a court-made law, but it is as firmly fixed as the law of the land. At common law, the offset drilling rule, or the rule of capture, as recognizing a means of protecting against adverse drainage, may be stated as follows: An owner of land which is being drained by the operation of wells on adjuacent property cannot enjoin the further operation of the offending wells, and cannot recover damages from the operator thereof, but must protect his interests as best he can by producing from offset wells drilled on his own land (Oil and gas law, vol. 1, Texas Law Review, p. 393).

There is no Federal law or statute applicable to this point. In the administration of the oil and gas lands and leases the Departments of the Interior and Navy follow this rule.

2. Do you mean there has been a deficiency? Why hasn't some administration, why hasn't some proper committee or commission, why hasn't the U.S. Navy come to the Congress of the United States and said, "We need this kind of protection. You figure out how we get it."

Answer. So far as this office has been able to determine, neither the Department of the Navy nor the Department of the Interior has ever questioned the application of the rule of capture as not being applicable to Government lands as a general rule of property. It has been considered reasonable in the administration of the oil and gas lands of the Government, and consequently no request has ever been made of the Congress to undertake any legislative program on the subject.

3. Why does the law of capture, which applies to jurisdictions, apply to U.S. preserves?

A. It has been administratively considered by various government agencies that the rule of capture applies to U.S. lands as a general rule of property because it has been sanctioned by the Federal and State courts since 1889, when the rule was first evolved in the case of Westmoreland and Cambria Natural Gas Company v. DeWitt, 130 Pa. St. 235, 18 Atl. 724.

4. I would like to know how this (i.e. the custom and practice of the oil industry) was superimposed upon the U.S. Government. Who gave birth to this custom and usage, to whose advantage is it? Is it equally to the advantage of the United States?

A. The basic background for the rule of capture is that the owner of a tract of land acquires title to the oil or gas which he produces from wells drilled thereon, though the production may have migrated or been drained from adjoining lands. It has been "superimposed upon" (recognized by) the United States as a rule of property. It is equally to the advantage of the Government as it is to private citizens.

5. What can be done by an act of Congress? Regardless of what the law of any State might be where a Federal preserve is located, we are not controlled by that. What can be done to establish and define jurisdiction, and what can be done by science if anything, and by law, if anything to prevent this from being done, insofar as our preserves are concerned?

A. So far as the naval petroleum reserves are concerned, the United States is by statute authorized to contract with owners and lessees inside or adjoining the reserves for conservation of the oil in the ground, or for compensation for estimated drainage in lieu of drilling or operating offset wells. Also, as to privately owned lands inside Naval Petroleum Reserve No. 1, the Government has the right of acquisition. 10 U.S.C. 7424.

The right of acquisition is not applicable to Naval Petroleum Reserve No. 3 (Teapot Dome) in Wyoming. When drainage from this reserve was discovered, all facets of the action to take were explored and, in consultation with the Armed Services Committees of the Congress, it was decided to undertake the Navy's own offset drilling operation. The contract for drilling and producing these wells, and the necessity therefor, was reviewed by the Attorney General and approved by the President.

Under certain geological conditions, it is considered possible to inject water under pressure, through a line of wells, to inhibit oil from migrating across that line. This could be a very expensive thing; the injection wells have to be drilled, a water supply has to be developed, piping and pumping installations have to be made, and then there are continuing operating costs for the water supply system and the high-pressure injection pumps. The Navy did consider such an engineering solution to the current problem at Teapot Dome and discussed it with research scientists of the Bureau of Mines. It was the conclusion of these scientists that the low permeability of the Shannon sand and the myriad of geological faults in the area would make it infeasible to establish an underground water barrier along the eastern boundary of NPR No. 3. Under the different geological conditions that exist along the southeastern perimeter of NPR No. 1, a successful water injection program is being conducted to prevent the migration of shallow zone oil off of that reserve.

6. I want to know, going back to the first chapter of Blackstone, why this is not larceny and why not further than that, this is not disposal for profit of Government assets.

A. It is not larceny because of the legitimate right an adjacent landowner or lessee has to drill and produce wells. It is not disposal for profit of Government assets because any oil produced on adjacent land is not Government assets. As a matter of technology, reflected in the law, oil and gas are more analogous to water rights in flowing streams than to solid minerals such as coal, iron, etc., in place. Regardless of the theory of ownership applicable in any particular jurisdiction it is the universal rule that an owner of oil bearing lands has no absolute ownership of the oil or gas under his land until it is produced and brought to the surface. An adjacent owner, therefore, is exercising a legal right in producing whatever oil comes out of his well regardless of its origin. As soon as the oil passes onto his land it becomes his. The practical and legal answer to the problem of how to protect the rights of a landowner in his oil and gas is offset drilling.

Even if Congress were to enact a law decreeing that the Federal Government is henceforth the absolute owner of all oil and gas under Federal Reserves and that any adjoining owner is guilty of larceny if he drains off Federal oil, such a law would be of doubtful legality and would present practical difficulties of enforcement. An adjacent owner could present a serious contention that such a law in effect deprives him of his constitutional rights in that it is a taking of his property without due process.

As a practical matter, except in an unusual situation not present at Reserve No. 3, proof of the identity and quantity of oil being drained from Federal land to the extent necessary to satisfy the burden in a criminal case, would be almost impossible without the drilling and producing of offset wells such as are now utilized as a practical protection.