The following form is designed as the "Development Form." It may be used by the commissioner for oil and gas leases on lands classified as restricted lands and categorized as Premium:

"Lease No. ......

Application No. ......

OIL AND GAS LEASE

(Development Form)

This agreement, dated ...... , 19 ... , between the state of New Mexico, acting by and through its commissioner of public lands, hereinafter called the "lessor", and .................................., whose address is ..........................................., hereinafter called the "lessee",

Witnesseth:

Whereas, the lessee has filed in the office of the commissioner of public lands an application for an oil and gas lease covering the lands hereinafter described and has tendered therewith the required first payment; and

Whereas, all of the requirements of law relative to the application and tender have been duly complied with;

Therefore, in consideration of the premises as well as the sum of ............ dollars ($ ......), the same being the amount of the tender above mentioned, and the further sum of $ ...... filing fee, and of the covenants and agreements hereinafter contained, the lessor does hereby grant, demise, lease and let unto the said lessee, exclusively, for the sole and only purpose of exploration, development and production of oil or gas (including carbon dioxide and helium), or both thereon and therefrom with the right to own all oil and gas so produced and saved therefrom and not reserved as royalty by the lessor under the terms of this lease, together with rights-of-way, easements and servitudes for pipelines, telephone lines, tanks, power houses, stations, gasoline plants and fixtures for producing, treating and caring for such products and housing and boarding employees and any and all rights and privileges necessary, incident to or convenient for the economical operation of said land, for oil and gas, with right for such purposes to the free use of oil, gas, casing-head gas or water from said lands, but not from lessor's water wells, and with the rights of removing either during or after the term hereof, all and any improvements placed or erected on the premises by the lessee, including the right to pull all casing, subject, however, to the covenants and conditions hereinafter set out, the following described land situated in the county of ............, state of New Mexico, and more particularly described as follows:

Line

SUBDIVISION

Sec.

Twp.

Rge.

Acres

Institution

1

2

3

4

5

6

7

Said lands having been awarded to lessee and designated as Tract No. ...... at a public sale held by the commissioner of public lands on ......, 19 ...

To have and to hold said land, and all the rights and privileges granted hereunder, to and unto the lessee for a primary term of five years from the date hereof, and as long thereafter as oil and gas, or either of them, is produced in paying quantities from said land by lessee, subject to all of the terms and conditions as hereinafter set forth.

In consideration of the premises, the parties covenant and agree as follows:

1. Subject to the free use without royalty, as hereinbefore provided, the lessee shall pay the lessor as royalty ...... (not less than three-sixteenths nor more than one-fifth) part of the oil produced and saved from the leased premises or the cash value thereof, at the option of the lessor, such value to be the price prevailing the day oil is run into a pipeline, if the oil be run into a pipeline, or into storage tanks, if the oil is stored.

2. Subject to the free use without royalty, as hereinbefore provided, at the option of the lessor at any time and from time to time, the lessee shall pay the lessor as royalty ...... (not less than three-sixteenths nor more than one-fifth) part of the gas produced and saved from the leased premises, including casing-head gas. Unless said option is exercised by lessor, the lessee shall pay the lessor as royalty ...... (not less than three-sixteenths nor more than one-fifth) of the cash value of the gas, including casing-head gas, produced and saved from the leased premises and marketed or utilized, such value to be equal to the net proceeds derived from the sale of such gas in the field; provided, however, the cash value for royalty purposes of carbon dioxide gas and of hydrocarbon gas delivered to a gasoline plant for extraction of liquid hydrocarbons shall be equal to the net proceeds derived from the sale of such gas, including any liquid hydrocarbons recovered therefrom.

Notwithstanding the foregoing provisions, the lessor may require the payment of royalty for all or any part of the gas produced and saved under this lease and marketed or utilized at a price per m.c.f. equal to the maximum price being paid for gas of like kind and quality and under like conditions in the same field or area or may reduce the royalty value of any such gas (to any amount not less than the net proceeds of sale thereof, in the field) if the commissioner of public lands shall determine such action to be necessary to the successful operation of the lands for oil or gas purposes or to encouragement or [of] the greatest ultimate recovery of oil or gas or to the promotion or conservation of oil or gas or in the public interest.

This lease shall not expire at the end of the primary term hereof if there is a well capable of producing gas in paying quantities located upon some part of the lands embraced herein, or upon lands pooled or communitized herewith, where such well is shut-in due to the inability of the lessee to obtain a pipeline connection or to market the gas therefrom, and if the lessee timely pays an annual royalty on or before the annual rental paying date next ensuing after the expiration of ninety days from the date said well was shut-in and on or before said rental date thereafter. The payment of said annual royalty shall be considered for all purposes the same as if gas were being produced in paying quantities and upon the commencement of marketing of gas from said well or wells the royalty paid for the lease year in which the gas is first marketed shall be credited upon the royalty payable hereunder to the lessor for such year. The provisions of this section shall also apply where gas is being marketed from said leasehold premises and through no fault of the lessee, the pipeline connection or market is lost or ceases, in which case this lease shall not expire so long as said annual royalty is paid as herein provided. The amount of any annual royalty payable under this section shall equal twice the annual rental due by the lessee under the terms of this lease but not less than three hundred twenty dollars ($320) per well per year; provided, however, that any such annual royalty for any month beginning on or after ten years from the date hereof shall equal four times the annual rental due by the lessee under the terms of this lease but not less than two thousand dollars ($2,000) per well per year; provided further, that no annual royalty shall be payable under this section if equivalent amounts are timely paid pursuant to another lease issued by lessor and if such other lease includes lands communitized with lands granted hereunder for the purpose of prorationally sharing in the shut-in well. Notwithstanding the provisions of this section to the contrary, this lease shall not be continued after five years from the date hereof for any period of more than ten years by the payment of said annual royalty unless, for good cause shown, the commissioner of public lands, in his discretion, grants such a continuance.

3. Lessee agrees to make full settlement on the twentieth day of each month for all royalties due the lessor for the preceding month, under this lease, and to permit the lessor or its agents, at all reasonable hours, to examine lessee's books relating to the production and disposition of oil and gas produced. Lessee further agrees to submit to lessor annually upon forms furnished by lessor, verified reports showing lessee's operations for the preceding year.

4. An annual rental at the rate of $ ...... per acre shall become due and payable to the lessor by the lessee, upon each acre of the land above described and then claimed by such lessee and the same shall be due and payable in advance to the lessor on the successive anniversary dates of this lease, but the annual rental on any assignment shall in no event be less than forty dollars ($40.00).

In the event the lessee shall elect to surrender any or all of said acreage, he shall deliver to the lessor a duly executed release thereof and in event said lease has been recorded then he shall upon request furnish and deliver to the lessor a certified copy of a duly recorded release.

5. The lessee may at any time by paying to the lessor all amounts then due as provided herein and the further sum of forty dollars ($40.00), surrender and cancel this lease insofar as the same covers all or any portion of the lands herein leased and be relieved from further obligations or liability hereunder, in the manner as hereinbefore provided. Provided, this surrender clause and the option herein reserved to the lessee shall cease and become absolutely inoperative immediately and concurrently with the institution of any suit in any court of law or equity by the lessee, lessor or any assignee, to enforce this lease, or any of its terms expressed or implied.

6. All payments due hereunder shall be made on or before the day such payment is due, at the office of the commissioner of public lands in Santa Fe, New Mexico.

7. The lessee with the consent of the lessor shall have the rights to assign this lease in whole or in part. Provided, however, that no assignment of an undivided interest in the lease or in any part thereof nor any assignment of less than a legal subdivision shall be recognized or approved by the lessor. Upon approval in writing by the lessor of an assignment, the assignor shall stand relieved from all obligations to the lessor with respect to the lands embraced in the assignment and the lessor shall likewise be relieved from all obligations to the assignor as to such tracts, and the assignee shall succeed to all of the rights and privileges of the assignor with respect to such tracts and shall be held to have assumed all of the duties and obligations of the assignor to the lessor as to such tracts.

8. In the event a well or wells producing oil or gas in paying quantities should be brought in on adjacent land which is draining the leased premises, lessee shall drill such offset well or wells as a reasonably prudent operator would drill under the same or similar circumstances, provided that no such offset well shall be required if compensatory royalties are paid pursuant to an agreement between the lessor and the lessee.

9. The lessee agrees to notify the lessor of the location of each well before commencing drilling thereon, to keep a complete and accurate log of each well drilled and to furnish a copy thereof, verified by some person having actual knowledge of the facts, to the lessor upon the completion of any well, and to furnish the log of any unfinished well at any time when requested to do so by the lessor.

If any lands embraced in this lease shall be included in any deed or contract of purchase outstanding and subsisting issued pursuant to any sale made of the surface of such lands prior to the date of this lease, it is agreed and understood that no drilling operation shall be commenced on any such lands so sold unless and until the lessee shall have filed a good and sufficient bond with the lessor as required by law, to secure the payment for such damage to the livestock, range, water, crops or tangible improvements on such lands as may be suffered by the purchaser holding such deed or contract of purchase, or his successors, by reason of the developments, use and occupation of such lands by such lessee. Provided, however, that no such bond shall be required if such purchaser shall waive the right to require such bond to be given in the manner provided by law.

10. In drilling wells, all water-bearing strata shall be noted in the log, and the lessor reserves the right to require that all or any part of the casing shall be left in any nonproductive well when lessor deems it to the interest of the beneficiaries of the lands granted hereunder to maintain said well or wells for water. For such casing so left in wells the lessor shall pay to the lessee the reasonable value thereof.

11. Lessee shall be liable and agree to pay for all damages to the range, livestock, growing crops or improvements caused by lessee's operations on said lands. When requested by the lessor the lessee shall bury pipelines below plow depth.

12. The lessee shall not remove any machinery or fixtures placed on said premises, nor draw the casing from any well unless and until all payments and obligations due the lessor under the terms of this agreement shall have been paid or satisfied. The lessee's right to remove the casing is subject to the provision of Paragraph 10 above.

13. Upon failure or default of the lessee to comply with any of the provisions or covenants hereof, the lessor is hereby authorized to cancel this lease and such cancellation shall extend to and include all rights hereunder as to the whole of the tract so claimed, or possessed by the lessee, but shall not extend to, nor affect the rights of any other lessee or assignee claiming any portion of the lands upon which no default has been made; provided, however, that before any such cancellation shall be made, the lessor shall mail to the lessee, so defaulting, by registered or certified mail, addressed to the post office address of such lessee as shown by the records of the state land office, a notice of intention of cancellation specifying the default for which cancellation is to be made, and if within thirty days from the date of mailing said notice the said lessee shall remedy the default specified in said notice, cancellation shall not be made.

14. If this lease shall have been maintained in accordance with the provisions hereof and if at the expiration of the primary term provided for herein oil or gas is not being produced on said land but lessee is then engaged in bona fide drilling or reworking operations thereon, this lease shall remain in full force and effect so long as such operations are diligently prosecuted and, if they result in the production of oil or gas, so long thereafter as oil and gas in paying quantities, or either of them, is produced from said land; provided, however, such operations extending beyond the primary term shall be approved by the lessor upon written application filed with the lessor on or before the expiration of said term, and a report of the status of all of such operations shall be made by the lessee to the lessor every thirty days and a cessation of such operations for more than twenty consecutive days shall be considered as an abandonment of such operations and this lease shall thereupon terminate.

If during the drilling or reworking of any well under this section, lessee loses or junks the hole or well and after diligent efforts in good faith is unable to complete said operations, then within twenty days after the abandonment of said operations, lessee may commence another well within three hundred thirty feet of the lost or junked hole or well and drill the same with due diligence.

Operations commenced and continued as herein provided shall extend this lease as to all lands as to which the same is in full force and effect as of the time said drilling operations are commenced; provided, however, this lease shall be subject to cancellation in accordance with Paragraph 13 hereof for failure to pay rentals or file reports which may become due while operations are being conducted hereunder.

15. Should production of oil and gas or either of them in paying quantities be obtained while this lease is in force and effect and should thereafter cease from any cause after the expiration of five years from the date hereof, this lease shall not terminate if lessee commences additional drilling or reworking operations within sixty days after the cessation of such production and shall remain in full force and effect so long as such operations are prosecuted in good faith with no cessation of more than twenty consecutive days, and if such operations result in the production of oil or gas in paying quantities, so long thereafter as oil or gas in paying quantities is produced from said land; provided, however, written notice of intention to commence such operations shall be filed with the lessor within thirty days after the cessation of such production, and a report of the status of such operations shall be made by the lessee to the lessor every thirty days, and the cessation of such operations for more than twenty consecutive days shall be considered as an abandonment of such operations and this lease shall thereupon terminate.

16. Lessees, including their heirs, assigns, agents and contractors shall at their own expense fully comply with all laws, regulations, rules, ordinances and requirements of the city, county, state, federal authorities and agencies, in all matters and things affecting the premises and operations thereon which may be enacted or promulgated under the governmental police powers pertaining to public health and welfare, including but not limited to conservation, sanitation, aesthetics, pollution, cultural properties, fire and ecology. Such agencies are not to be deemed third party beneficiaries hereunder, however this clause is enforceable by the lessor in any manner provided in this lease or by law.

17. Should lessor desire to exercise its rights to take in-kind its royalty share of oil, gas or associated substances or purchase all or any part of the oil, gas or associated substances produced from the lands covered by this lease, the lessee hereby irrevocably consents to the lessor exercising its right. Such consent is a consent to the termination of any supplier/purchaser relationship between the lessor and the lessee deemed to exist under federal regulations. Lessee further agrees that it will require any purchaser of oil, gas or associated substances to likewise waive any such rights.

18. Lessor reserves a continuing option to purchase at any time and from time to time, at the market price prevailing in the area on the date of purchase, all or any part of the minerals (oil and gas) that will be produced from the lands covered by this lease.

19. Lessor reserves the right to execute leases for geothermal resource development and operation thereon; the right to sell or dispose of the geothermal resources of such lands; and the right to grant rights-of-way and easements for these purposes.

20. All terms of this agreement shall extend to and bind the heirs, executors, administrators, successors and assigns of the parties hereto.

In witness whereof, the party of the first part has hereunto signed and caused its name to be signed by its commissioner of public lands thereunto duly authorized, with the seal of his office affixed, and the lessee has signed this agreement the day and year first above written.

STATE OF NEW MEXICO

By .............................................................

Commissioner of Public Lands, Lessor

......................................................(Seal)."

Lessee

History: 1978 Comp., § 19-10-4.3, enacted by Laws 1985, ch. 195, § 5.

Cross references. — For commissioner of public lands, see 19-1-1 NMSA 1978.

Net proceeds royalty obligation. — The net proceeds royalty obligations contained in the 1931 (Laws 1930, ch. 18, § 2) and 1947 (Laws 1947, ch. 200, § 1) lease forms are unambiguous as a matter of law and lessees under such leases are entitled to recover some post-production costs associated with making gas marketable. ConocoPhillips Co. v. Lyons, 2013-NMSC-009, 299 P.3d 844.

Free use clause. — Under the free use clauses contained in the 1931 (Laws 1930, ch. 18, § 2) and 1947 (Laws 1947, ch. 200, § 1) lease forms, lessees are entitled to the free use of field and plant fuel so long as the fuel is used in the operation of the lease. Field and plant fuels are not subject to royalty payments because they are post-production costs that lessees remit to post-production service providers for the development and production of the leased premises and are neither sold nor saved by lessees. ConocoPhillips Co. v. Lyons, 2013-NMSC-009, 299 P.3d 844.

Drip condensate. — The royalty obligations contained in the 1931 (Laws 1930, ch. 18, § 2) and 1947 (Laws 1947, ch. 200, § 1) lease forms are limited by their respective free use clauses and do not require royalties to be paid on lessees' use of drip condensate to the extent that lessees do not derive proceeds from such use. Lessees are only obligated to pay royalties on the use of drip condensate to the extent that lessees receive proceeds from such use. ConocoPhillips Co. v. Lyons, 2013-NMSC-009, 299 P.3d 844.

Deduction of costs of post-production services provided by lessees' affiliates. — Under the 1931 (Laws 1930, ch. 18, § 2) and 1947 (Laws 1947, ch. 200, § 1) lease forms, in calculating lessee's royalty obligations, the deduction of costs of post-production services that are provided by lessees' affiliates must be reasonable. ConocoPhillips Co. v. Lyons, 2013-NMSC-009, 299 P.3d 844.

Maximum price provision. — The maximum price provision contained in the 1947 (Laws 1947, ch. 200, § 1) lease form does not affect lessees' ability to deduct post-production costs. It provides the commissioner with the authority to require that lessees deduct their post-production expenses from the maximum price being paid for gas of like kind and quality in the same field or area. ConocoPhillips Co. v. Lyons, 2013-NMSC-009, 299 P.3d 844.

Effect of production in portion of premises on rights of partial assignee. — Where oil and gas lease from commissioner of public lands provided that if oil and gas were produced in paying quantities within 10-year period, which time had been allowed lessee to produce oil and gas, lease might be continued in force as long as oil or gas should be produced, and portion of lease was assigned, assignee succeeded to all rights of original lessee, and on producing oil in portion of lease not covered by assignment, assignee had right to continue lease in force, subject to implied covenant to perform the development work. State ex rel. Shell Petroleum Corp. v. Worden, 1940-NMSC-038, 44 N.M. 400, 103 P.2d 124.

Liability for damages. — Persons performing seismographic work upon state land with consent of mineral lease holders and commissioner of public lands are liable for damages caused to holders of grazing leases on the land, since, under Subdivision 11 of form lease found in this section, mineral lease holder would be liable for such damages. Tidewater Associated Oil Co. v. Shipp, 1954-NMSC-129, 59 N.M. 37, 278 P.2d 571.

Notice of intent to cancel lease by certified mail. — The commissioner of public lands fulfills the statutory requirement for notice to terminate a lessee's interest in an oil and gas lease when he sends a notice of intent to cancel by certified mail. Abbott v. Armijo, 1983-NMSC-065, 100 N.M. 190, 668 P.2d 306.

Public policy. — It is the public policy as shown by the oil and gas leasing laws to promote development and production of oil and gas and it was not contemplated by the legislature that a lessee be deprived of his right to develop fully a well begun in good faith merely because he was attempting to determine the extent of the production possible at a depth less than he contemplated drilling in order to test the productivity of the area. 1953 Op. Att'y Gen. No. 53-5650.

Use of form not required of other state agencies. — The form for leasing oil and gas lands belonging to agencies other than the office of the commissioner of public lands need not comply with the terms and conditions of this section, even where such leases are offered through the facilities of the commissioner as an accommodation to another state agency. 1980 Op. Att'y Gen. No. 80-10.

Surrender of lease and reapplication. — Once a lessee has surrendered his lease as provided for under Subdivision 5, the commissioner may refuse to accept an application for a new lease made by the same party. 1945 Op. Att'y Gen. No. 45-4659.

Rental on assignment of lease. — Annual rental to be charged assignee of oil and gas lease is same as that of original lessee, and for secondary term the rental is double that of primary term. 1937 Op. Att'y Gen. No. 37-1597.

Production on part benefits whole. — If production has been obtained in a unit area the production inures to the benefit of all tracts contained in the unit area; under the form oil and gas lease all of the tracts contained in a lease are perpetuated for as long after the term of the lease as oil or gas in paying quantities is produced from said land by the lessee. 1953 Op. Att'y Gen. No. 53-5708.

As does drilling on part. — The commencement of drilling on any part of a unit area prior to the expiration of the secondary term would extend the secondary term on all tracts included in the unit area and would be considered the same as though a well had been commenced on each tract in such unit area. 1953 Op. Att'y Gen. No. 53-5708.

Expiration of lease prior to drilling. — Drilling operations may not be made upon a second well in the event the approved operation is completed without production where the drilling operations have not been begun on the second well prior to the expiration date of the second term. 1953 Op. Att'y Gen. No. 53-5650.

Purpose of extension. — Extension of lease beyond its secondary term is for such period of time as required to conclude bona fide drilling in which lessee was engaged at expiration of the secondary term at which time lease terminates if oil or gas are not found, but if this drilling operation results in production, then the lease is continued for as long as oil and gas, or either of them, is produced from said land in paying quantities. 1949 Op. Att'y Gen. No. 49-5230.

Application for continuation. — Under Subdivision 16 (now 14) a lessee may make application in writing before expiration of the secondary term for a continuation of the term if engaged in bona fide drilling or reworking operations. 1949 Op. Att'y Gen. No. 49-5230.

Commissioner may insert covenant compelling reasonable development of the leased premises for oil and gas. 1941 Op. Att'y Gen. No. 41-3835.

Law reviews. — For note, "State Regulation of Oil and Gas Pools on State, Federal, Indian and Fee Lands," see 2 Nat. Resources J. 355 (1962).

Am. Jur. 2d, A.L.R. and C.J.S. references. — 38 Am. Jur. 2d Gas and Oil § 283.

Implied duty of oil and gas lessee to protect against drainage, 18 A.L.R.4th 14.

Remedy for breach of implied duty of oil and gas lessee to protect against drainage, 18 A.L.R.4th 147.

Production on one tract as extending term on other tract where one mineral lease conveys oil or gas rights in separate tracts for as long as oil or gas is produced, 35 A.L.R.4th 1167.

Construction and application of "Mother Hubbard" or "cover-all" clause in gas and oil lease or deed, 80 A.L.R.4th 205.