(1) Prior to the end of the third year and of each succeeding year of the primary term of a geothermal resources lease, the lessee shall either commence or continue diligent exploration or pay a delayed exploration penalty.

(2) Each lease shall include provisions for the diligent exploration of the leased resources until there is production in commercial quantities from the state lands subject to lease, and failure to perform such exploration may subject the lease to termination. Diligent exploration means exploration operations on or related to the leased lands, including without limitation geochemical surveys, heat flow measurements, core drilling, or drilling of a test well. A report of all exploration operations and expenditures must be submitted to the director at the close of each lease year. Beginning with the fourth year of the primary lease term, and each year thereafter, exploration operations, to qualify as diligent operations, must entail expenses during that year equal to at least 4 times the lease rental for the same year. Exploration expenses incurred during any year of the primary lease term in excess of those required herein may be credited toward diligent exploration during subsequent years of the primary lease term.

(b) Payment of delayed exploration penalty shall be as follows:

(i) for the fourth year of the primary term of the lease $2.00 per acre per year.

(ii) for the remainder of the primary term of the lease an amount per acre per year as determined by the board. The delayed exploration penalty for the fifth and succeeding years of the primary term of the lease shall continue at the rate of $2.00 per acre per year unless the board notifies the lessee not less than 60 days before the commencement of the next lease year that payment at a different rate is required or permitted; provided that if the lessee shall apply for a hearing thereon within 10 days after receipt of notice, the determination of a different delayed exploration penalty rate shall become final only after such hearing has been held, and the rate determined by the board has been affirmed.

(d) Upon failure of the lessee to either commence or continue diligent exploration or to pay the required exploration penalty, the board shall terminate the lease as of the end of the annual period of the lease in which the failure to so commence or to continue exploration or to so pay occurs. Any such termination of the lease shall be 60 days after notice to the lessee of the board's proposed action, and after hearing thereon if the lessee so requests in writing within 30 days.