Leases for the extraction and removal of oil and gas deposits may be made by the commission to the highest qualified bidder, or joint bidders, as provided in this chapter. Such a lease shall include all oil and gas deposits in the leased land and be for a term of 20 years and for so long thereafter as gas or oil is produced in paying quantities from the leased land, or lessee shall be diligently conducting production, drilling, deepening, repairing, redrilling or other necessary lease or well maintenance operations on the leased land. Any lease heretofore issued under this chapter for a term of 20 years, or any renewal or extension thereof, may at any time or times prior to its expiration be extended upon such terms and conditions and for such period of time as the commission deems for the best interests of the state or as the Legislature may provide; provided further, that upon the lessee’s timely application therefor the commission may issue a new lease in exchange for any lease issued for a term of 20 years, or any renewal or extension thereof; such new lease shall be issued at the same royalty and upon the same terms and conditions as the lease for which it is exchanged, unless the commission and the lessee shall otherwise agree, except that the term of such exchange lease shall be for a term of five years and for so long thereafter as oil or gas is produced in paying quantities or lessee shall be conducting production, drilling, deepening, repairing, redrilling or other necessary lease or well maintenance operations on the leased land.

When state lands, including tide and submerged lands, are offered for lease by the commission, the commission shall specify a sliding scale royalty on oil commencing at not less than 16²/₃ percent up to a maximum percentage specified in the invitation to bid to be paid on the average production of oil per well per day under such lease, and a royalty of not less than 16²/₃ percent as specified in the invitation to bid on dry gas, natural gasoline, and other products extracted and saved from the gas produced under such lease, except gas used for lease use or reinjection into the leased lands. Such royalties shall be paid in kind or as a percentage of the current market price at the well of, and of any premium or bonus paid on, the production removed or sold from the leased land, subject to an annual rental payable in advance of not less than one dollar ($1) for each acre of land subject to the lease at the rental date. Unless the commission decides to reject all bids pursuant to Section 6836, the lease of the parcel or tract which is the subject of the bid shall be awarded to the qualified bidder who undertakes to pay the highest cash bonus in addition to satisfying all other provisions of the lease.

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As alternatives to the procedures set forth in the preceding paragraph, the commission, if it so provides in the invitation to bid, may: (1) specify a sliding scale royalty on oil commencing at 16²/₃ percent up to a maximum percentage specified in the invitation to bid, to be paid on the average production of oil per well per day under such lease, and a royalty of not less than 16²/₃ percent as specified in the invitation to bid on dry gas, natural gasoline, and other products extracted and saved from the gas produced under such lease, except gas used for lease use or reinjection into the leased lands, and award the lease of the parcel or tract which is the subject of the bid to the qualified bidder who bids the highest factor to be applied to the scale of oil royalties specified in the offer to bid, in addition to satisfying all other provisions of the lease, unless the commission decides to reject all bids pursuant to Section 6836; or (2) specify that bidding shall be on the basis of a flat rate of royalty and award the lease of the parcel or tract which is the subject of the bid to the qualified bidder who undertakes to pay the highest flat rate of royalty, but not less than 16²/₃ percent, on oil, to be paid on the production of oil under such lease, and a royalty of not less than 16²/₃ percent as specified in the invitation to bid on dry gas, natural gasoline, and other products extracted and saved from the gas produced under such lease, except gas used for lease use or reinjection into the leased lands, unless the commission decides to reject all bids pursuant to Section 6836; or (3) specify, with respect to a proposed lease for the extraction of gas, that bidding shall be on the basis of a flat rate or royalty, and award the lease of the parcel or tract which is the subject of the bid to the qualified bidder who undertakes to pay the highest flat rate of royalty, but not less than 16²/₃ percent, on dry gas, natural gasoline, and other products extracted and saved from the gas produced under such lease, except gas used for lease use or reinjection into the leased lands, unless the commission decides to reject all bids pursuant to Section 6836; or (4) as an additional alternative, the commission, if it so provides in the invitation to bid, may award the lease of the parcel or tract which is the subject of the bid to the qualified bidder who undertakes to pay the highest percentage of net profits derived from oil, dry gas, and other products extracted under the lease, in addition to satisfying all other provisions of the lease, unless the commission decides to reject all bids pursuant to Section 6836, and under such alternative, an annual rental of not less than one dollar ($1) for each acre of land subject to the lease shall be payable in advance on the rental date. Under alternatives (1), (2), and (3), the royalties shall be paid in kind or as a percentage of the current market price at the well of the production removed or sold from the leased lands, subject to an annual rental payable in advance of not less than one dollar ($1) for each acre of the land subject to the lease at the rental date.

Except in the case of net profits leases under alternative (4), no allowance may be made for the cost of oil treatment, dehydration, or transportation of royalty oil on leases let subsequent to January 1, 1977.

If, at any time or from time to time, before or after the expiration of the primary term of such lease, the leased lands cease to produce oil or gas, the lease shall; nevertheless, continue in full force and effect if within six months after the cessation of production, or such longer period of time as the commission may authorize, lessee shall commence and thereafter prosecute with reasonable diligence drilling, deepening, repairing, redrilling or other operations for the purpose of restoring production of oil or gas from the leased lands.

(Amended by Stats. 1976, Ch. 834.)