When state lands are located within a known geological structure of a producing oil or gas field, as determined pursuant to section 27-554, the lands shall be leased only by sealed bids, as follows:
1. Upon receipt of an application to lease any of such lands or whenever, in the opinion of the department, there is a demand for the purchase of leases of the lands, the department shall offer the tract or tracts for lease to the highest qualified bidder submitting a sealed bid, on the basis of a cash bonus.
2. The department shall publish a call for sealed bids twice in a newspaper of general circulation in the state, the last publication to be not less than fifteen days prior to the date fixed for opening the bids. All bids, together with a certified check in the amount of the bonus bid, shall be submitted to the department at the capitol, and opened at the office of the department at the time specified. On or before December 1 each year, the department shall designate by general order the newspaper in which the publications shall be made during the following calendar year. The successful bidder shall pay the cost of the publication and the reasonable expenses of the sale.
3. The publication shall contain a description of the land proposed to be leased, the time when the bids will be received and opened, the royalty to be demanded which the department shall fix prior to call for bids at not less than twelve and one-half per cent, and an annual rental to be demanded in the amount of one dollar per acre for each year.
4. The publication shall set forth the form of lease which the successful bidder will be required to execute. In lieu of publishing the form of lease in its entirety the publication may specify the form of lease by designating the form number of lease on file with the department, copies of which shall be furnished any person on request.
5. 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 such unit agreement.
6. 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:
(a) If oil or gas is not being produced from the leased premises at the expiration of the primary term of the lease, 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 on 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.
(b) 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.
(c) If for any reason production of oil or gas from the leased lands ceases after the primary term or any extension, 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.
7. The lease may 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 interests of the state.
8. 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.
9. Each lease shall provide that any combination, understanding or agreement entered into by the lessee, written, verbal or otherwise, for the purpose of delaying the 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 paragraph 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.
10. 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 and 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.
11. Before offering any state lands for lease under sealed bids the department shall determine the tract or tracts into which the lands shall be divided for leasing purposes. Each tract shall contain not less than one quarter section of land and not more than two sections of land, but a tract containing less than one quarter section of land may be leased if the tract is segregated from other state lands not then subject to oil and gas lease. All tracts shall be in reasonably compact form.
12. The department shall reserve the right to reject any and all bids on each offer for lease and to again offer the tract or tracts for lease if the bids received are not acceptable to the department.
13. Before acceptance of any bid for a lease under this section, the department shall establish to its satisfaction the responsibility of the bidder.
14. The department shall return all checks accompanying rejected bids.