2005 Arizona Revised Statutes - Revised Statutes §27-555  Lease of state lands not located within known geological structure of producing oil and gas field; application; lease extension; provisions of lease; withdrawal of lands from leasing

A. When state lands are not located within any known geological structure of a producing oil and gas field, as determined pursuant to section 27-554, the person making the first application for the lease shall be issued a lease covering the lands without competitive bidding.

B. The noncompetitive leases shall provide for the payment by the lessee of a royalty of twelve and one-half per cent of the oil, gas and other hydrocarbons produced and saved from the leased premises or, at the option of the department, the market value of such products determined at the price prevailing on the day the product is run into a pipeline or otherwise removed from the leased premises.

C. Royalties, including shut-in gas royalties, reserved to the state on production from any state lands leased pursuant to this article and committed to a unit plan of development by virtue of a unit agreement shall be paid only on that portion of production allocated to such state lands or any part of the state lands, pursuant to the terms and conditions of the unit agreement.

D. The leases shall provide for the payment in advance of an annual rental of one dollar per acre per year for each year of the primary term of the lease. All leases shall provide for a minimum rental of forty dollars per year.

E. Each lease issued under this section shall be for a primary term of five years and as long thereafter as oil or gas is produced in paying quantities from the lands covered by the lease, except that:

1. If oil or gas is not being produced from the leased premises at the expiration of the primary term of the lease, the lessee shall have a right to an extension of the term of the lease for an additional term of five years and as long thereafter as oil or gas is produced in paying quantities from the leased premises by paying each year in advance double the rental payable during the primary term of the lease, except that the lessee will have no further right to any additional extension for successive terms. In the exercise of such right, the provisions of section 27-556 relating to sales made upon competitive bidding by sealed bid shall not apply in any case, but all such extensions shall be upon the terms and conditions contained in the original lease, except that the rental for the extended term shall be as provided in this paragraph, and except further that the rental for the extended term of any lease amended pursuant to subsection L of this section shall be as provided in that subsection.

2. If oil or gas is not being produced from the leased premises at the expiration of the primary term of the lease or any extension of the lease pursuant to paragraph 1, but the owner of the lease is diligently engaged in drilling, completion or reworking operations, the lease continues in force for a period of two years from the date in which the lease would have otherwise expired and as long thereafter as oil or gas is produced in paying quantities from the lands. If oil or gas is produced from any such well or any other well drilled during any two year extension, the lease shall continue in force after such two year extension as long as oil or gas is produced in paying quantities from the leased premises, except that rental requirements at the beginning of any lease extension shall be at the rate in existence at that time.

3. Oil or gas that is produced from any part of a unit in which state lands are included by virtue of a unit agreement and that is allocated to all or any part of such state lands pursuant to the terms and conditions of the unit agreement is deemed to be produced from the state lands or that part of the state lands to which the production is allocated.

4. If for any reason production of oil or gas from the leased lands ceases after the primary term or after extension of the lease, the lease shall not terminate if the lessee commences drilling, completion or reworking operations on the land within ninety days from cessation of production, and if drilling, completion or reworking operations are conducted with reasonable diligence, the lease shall remain in force as long thereafter as such drilling, completion or reworking operations are conducted or as long thereafter as oil or gas is produced in paying quantities from the leased lands, but in no event to extend beyond two years if production is not restored.

F. Each lease shall provide that the state's royalties shall be computed after deducting any oil or gas reasonably used in operations on the lease.

G. The leases shall contain other terms and provisions, not inconsistent with the provisions of this article or other laws of the state, as in the opinion of the department are for the best interest of the state. The lease shall not contain any provision for a premium, tax, fee or other assessment other than the application fees, rentals and royalties provided in statute. Application fees, rentals, royalties or other charges shall be based upon the application fees, rentals, royalties or other charges as provided in statute in effect at the time that the completed application is received by the department.

H. Not more than two thousand five hundred sixty acres of land confined to an area of six miles square shall be included in any one lease. The lands shall be in as compact a body as possible but may include noncontiguous land within the six mile area if the maximum acreage of contiguous land is not available.

I. Each lease shall provide that any combination, understanding or agreement entered into by the lessee, written, verbal or otherwise, for the purpose of delaying discovery or development of oil or gas is an illegal practice, and that upon legal determination thereof shall constitute grounds for cancellation of the lease. In the event of such an illegal practice, appropriate proceedings may be instituted by the attorney general against the lessee in the county in which the land or any part thereof is located. A cooperative or unit plan entered into pursuant to this article or any other conservation statute of this state shall not be held to violate this subsection or any other statute of this state prohibiting monopolies or acts, arrangements, contracts, combinations or conspiracies in restraint of trade or commerce on account of operations conducted under such a plan.

J. Applications for noncompetitive leases shall be in writing addressed to the department and shall contain a description of the lands sufficient to identify them, the name and address of the applicant, and shall be accompanied by a filing fee of twenty-five dollars and the rental payment for the first year. Each application shall be stamped when received by the department with a stamp showing the day and hour when received. If valid applications covering the same lands are filed simultaneously, the department shall provide by general regulation for a drawing between the applicants to determine which shall be entitled to a lease of the lands. If the lease is not issued, the rental payment shall be refunded to the applicant.

K. The department may withdraw from leasing any specific area of land not located within any known geological structure of a producing oil and gas field when it appears that the withdrawal is in the interest of the state, but no lands shall be withdrawn by the department without the consent of a committee composed of the governor, who shall be chairman, the attorney general, and the dean of the college of mines of the university of Arizona. The committee shall consider the proposed withdrawal presented by the department and determine whether the withdrawal shall be permitted. The land, after being withdrawn from leasing, may again be offered for leasing at any time the department deems in the best interests of the state, subject to the advice and consent of the committee provided for in this section, and pursuant to notice as the committee deems necessary.

L. The owner of any state oil and gas lease issued by the department and maintained in good standing according to the terms and conditions of the lease and all applicable statutes and regulations shall have the right to elect at any time to have such lease amended to contain the same term and extension provisions and the same provisions relating to unit operations and unit agreements which have been or may be approved by the state land commissioner as are provided by law for state oil and gas leases upon filing a written notice of such election with the department. Upon such written notice to the department the lease term and extension provisions and the provisions relating to unit operations and unit agreements shall be deemed amended. The lease as amended shall include all other provisions, except those providing for rents, contained in the original lease and shall bear the same commencement date as the original lease. The lease as amended shall require the payment in advance of an annual rental of one dollar fifty cents per acre per year for each year of any extension of the lease beyond the primary term of the lease, except extensions of the primary term based upon the production of oil or gas.