NORTH DAKOTA
INDUSTRIAL COMMISSION
OIL AND GAS DIVISION
PROCESS, PROCEDURE AND REGULATION
National Association of Division Order Analysts
North Dakota Regional Seminar
Denver, CO – April 11-12, 2012
Wade Mann
Crowley Fleck PLLP
Bismarck, North Dakota
www.crowleyfleck.com
wmann@crowleyfleck.com
North Dakota Industrial
Commission (“NDIC”)
• What is the Commission all about?
• Makeup of the NDIC
• History and organization - NDAC § 43-01-01-01
• Governor
• Attorney General
• Agriculture Commissioner
Department of Mineral
Resources
• NDCC Section 38-08-04.2
•
The industrial commission is authorized to appoint a director of mineral
resources who shall serve at the pleasure of the commission. The
director of mineral resources shall carry out the duties of the director of
oil and gas along with the duties of director of mineral resources. The
commission may set the salary of the director of mineral resources. The
commission may delegate to the director of oil and gas all powers the
commission has under this title and under the rules enacted under this
title.
NDIC Oil and Gas Division
•
Director – Lynn Helms
•
Assistant Director – Bruce Hicks
Regulation of Oil and Gas in ND
• Regulation of Oil and Gas Resources
• Governed by North Dakota Century Code Title 38
• Primarily in NDCC Chapter 38-08
• North Dakota Industrial Commission (“NDIC”)
•
rules relating to oil and gas exploration and
development are set forth in Article 43-02 of the
North Dakota Administrative Code
NDCC Ch. 38-08 gives the NDIC jurisdiction of oil
and gas exploration and production
North Dakota Oil and Gas
Regulatory Policy
• NDIC is guided by the following statutory
policy mandate:
•
It is hereby declared to be in the public interest to foster, to encourage, and to
promote the development, production, and utilization of natural resources of oil
and gas in the state in such a manner as will prevent waste; to authorize and to
provide for the operation and development of oil and gas properties in such
a manner that a greater ultimate recovery of oil and gas be had and that the
correlative rights of all owners be fully protected; and to encourage and to
authorize cycling, recycling, pressure maintenance, and secondary recovery
operations in order that the greatest possible economic recovery of oil and gas
be obtained within the state to the end that the landowners, the royalty owners,
the producers, and the general public realize and enjoy the greatest possible
good from these vital natural resources.
Application Process
•
Notice
•
•
NDCC Section 38-08-11(1) requires notice either in
accordance with NDCC Chapter 28-32 (i.e. personal
service) or by publication in the Bismarck Tribune and
newspaper of general circulation in the county where
the lands lie, at the election of the Commission
NDAC Section 43-02-03-90(2) provides that except in
contested cases with a specific named respondent,
notice is to be given by publication
Notice
• Exceptions to notice by publication are:
• Contested cases with a specific named respondent
• Exception locations
• Compulsory unitization
• Due Process Implications
Monthly Hearings
•
Commission has published hearing schedule
• Includes hearing dates and deadline for filing
applications (“Docket closing date”)
• Docket closing date is generally about one month
•
before the hearing date
i.e. Docket closing date (deadline for filing application)
for May 30 and 31, 2012 hearings is April 27, 2012
• Hearings generally held the last week of the
•
month
Two days of regularly scheduled hearings
Telephonic Testimony
• Requires written request in advance of hearing –
generally include in application rather than as
separate request
•
•
•
Two business days for applicant, three business days for
any other party
Policy not to use telephonic testimony in contested
Requires attorney or other representative to be present
in the hearing room and affidavit to be filed after
testimony is given
Affidavits
• NDAC Section 43-02-03-88.1
• Certain routine matters can be handled by filing
affidavit instead of presenting witnesses and
exhibits
• Poolings
Hearing Process
• Presided over by Hearing Examiner
• Procedural hearing examiner – handles
•
•
procedural and legal formalities
Does not conduct any questioning on substantive
issues
Assistant Attorney General
• NDIC Staff
• Conduct all of the questioning on substantive
•
issues in application
Generally 3-5 NDIC staff present at hearings
Petitions for Reconsideration
and Appeals
• NDCC Sections 38-08-13 and 38-08-14
• Generally NDCC Chapter 28-32 procedures apply
• Appeal to the state district court in the county
where the lands lie
Common Disputes
• Size of spacing unit
• Mineral owners vs. operator
• Competing operators
• Issue is which size spacing unit will result in
“efficient and economical development of the pool
as a whole” NDCC Section 38-08-07(2)
• “Uniform size” unless zones of spacing are necessary
to protect correlative rights, prevent waste, or prevent
the drilling of unnecessary wells. NDCC Section 3808-07(1)
Common Disputes
• Operatorship
• NDAC Section 43-02-03-16.1
• Recognizes that majority owner/largest owner should
•
usually be operator
Exceptions related to relative ability of contestants and
contractual obligations
Common Disputes
• Unitization disputes
• Usually relate to designation of operator, unit
boundaries, unit formula, or method of operation
Common Disputes
• Pooling disputes
• Penalty issues
• Adequate opportunity to elect, reasonable offer to
lease
Spacing
• NDCC Section 38-08-07 – “when necessary to
•
prevent waste, to avoid the drilling of
unnecessary wells, or to protect correlative
right”
Modifies rule of capture
• Texaco v. Industrial Commission of State of North
Dakota, 448 N.W.2d 621 (N.D. 1989)
• Uniform size and shape for a pool
• Zones
Spacing
• Temporary vs. Proper Spacing
• Temporary – upon discovery of pool
• Proper – 18 months after tempory
• Either temporary or proper is subject to
modification
• Amoco Production Co. v. North Dakota Industrial
•
Commission, 307 N.W.2d 839 (N.D. 1981); Hystad v.
Industrial Commission, 389 N.W.2d 590 (N.D. 1986)
“Collateral estoppel” or “res judicata” is loosely applied
Spacing
• Vertical – correlation to depth
• Rectangular – 40 acres, 80 acres, 160 acres, 320
acres, 640 acres
•
• “Diagonal rule”
Horizontal – correlation to lateral length
• Rectangular – 640 acres, 1280 acres, 2560 acres
• Infill wells (additional wells on spacing unit)
• Allowed by NDCC Section 38-08-07(4)
• Reasonably uniform pattern
Spacing
• Drilling unit vs. Spacing Unit
• NDAC Section 43-02-03-18
• Statewide well location rule
• NDCC Section 38-08-07(3) and NDAC Section
43-02-03-18.1
• Exception location – legal location would not produce
in paying quantities, surface conditions would
substantially add to burden or hazard of drilling, or
when otherwise necessary to protect correlative rights,
prevent waste, or effect a greater ultimate recovery of
oil or gas, or when surface issues
Spacing
• Drilling unit vs. Spacing Unit continued
• Drilling unit Orders
•
Stand-up, on-pattern 1280’s for most of undrilled
Bakken area
Pooling of Spacing Units
• Terminology
• “Pooling” – consolidating the interests in a
•
spacing unit for purposes of drilling and
production
“Unitization” – consolidating the interests in a pool
(or portion thereof)
• Typically for “enhanced production”
• Secondary or Tertiary production
• Waterfloods
• High Pressure Air Injection
• CO2
Pooling of Spacing Units
• Pooling
• Required to prevent an unconstitutional taking of
property
• Spacing – restricts right to drill in a reservoir
• Pooling ensures all in a spacing unit get their fair share of
production from the well(s) allowed to be drilled on the
spacing unit
• Spacing does not pool in North Dakota
• Schank v. North American Royalties, 201 N.W.2d 419
(N.D. 1972)
Pooling of Spacing Units
• Methods of Pooling
• Voluntary Pooling Agreement
• Requires joinder by all mineral/royalty owners and
working interest owners
• Declaration of Pooling
• Requires pooling authority in oil and gas leases
•
• Restrictions on exercise
Forced Pooling/Compulsory Integration
Pooling of Spacing Units
• NDCC Section 38-08-08
• Spacing Unit
• Separately owned tracts or separately owned interests
•
within tracts
Absence of voluntary pooling
• Continental Resources, Inc. v. Farrar Oil Co., 550
•
N.W.2d 841, 1997 ND 31 – authorized by police
power
Texaco v. Industrial Commission of North Dakota,
448 N.W.2d 621 (N.D. 1989) - retroactive to date
of first production
Pooling of Spacing Units
• Non-consent Penalty
• Risk of drilling operations
•
Not fair that one party incur all the risk and other
parties benefit from that act
• Compensation for taking risk in form of “nonconsent penalty” or “risk-compensation”
•
NDCC Section 38-08-08 provides for risk penalty
• 200% for lessee under oil and gas lease
• 50% for unleased mineral owner
Pooling of Spacing Units
• Non-consent Penalty
• NDCC Section 38-08-08
•
Provides in part that “if the owner of an interest in a
spacing unit elects not to participate in the risk and
cost of drilling a well thereon, the owner paying for the
non-participating owner’s share of the drilling and
operations of a well may recover from the nonparticipating owner a risk penalty …”
• Neither the right to recover nor the amount of risk penalty
is discretionary with Commission
Pooling of Spacing Units
• Non-consent Penalty
• Right of owner to “elect”
•
NDAC Section 42-03-02-16.3 establishes
requirements for invitation to participate
• Location and depth of well
• Itemization of estimated drilling costs
• AFE or Authorization for Expenditure
• Spud date
• Response date
• 30 days
• Notice of intent to collect risk penalty and right to object
• May be required to file a petition for a hearing to object
Pooling of Spacing Units
• Unleased mineral owners – Special Issues
• “Cost free royalty share”
•
Unleased mineral owners entitled to a cost-free royalty
before payout – NDCC Section 38-08-08(1)
• “acreage weighted average royalty”
• Alternative 16% royalty
• Pooled after July 31, 2009
• Operator’s election to pay 16% or acreage weighted
average
Pooling of Spacing Units
• Unleased mineral owners – Special Issues
• Right to lease
•
Additional prerequisite to recovery of penalty is a
reasonable offer to lease
• Need not be the highest or best offer in the spacing unit
• “Professional mineral owners” are not entitled to any better
•
offer than any other mineral owner
Communications between oil company and mineral owner
cannot be misleading or contain inaccuracies
Unitization
• Voluntary Units
• NDCC Section 38-08-09
•
•
Recognizes validity of voluntary unit agreements
Binding only upon those who execute
• Early cases recognize policy of state to promote
secondary recovery
•
Syverson v. North Dakota Industrial Commission, 111
N.W.2d 128 (N.D. 1961)
• Voluntary units valid and binding, improper to inject on
tract that is not fully committed
Unitization
• Compulsory Units
• Allowed if reasonably necessary to carry on
pressure maintenance or re-pressuring
operations, cycling operations, water flooding
operations, or any combination thereof, “or any
other form of joint effort calculated to substantially
increase the oil and gas from the common source
of supply” NDCC Section 38-08-09.1
Unitization
• Compulsory Units
•
Special procedures are required
•
•
•
Copy of petition including proposed plan of unitization must
be mailed to all owners 45 days before the hearing
Copy of all technical exhibits must be filed with the
Commission 45 days before the hearing
Plan of unitization must be ratified or approved by owners
of 60% of the royalty interest and 60% of the working
interest
•
Can occur after the Commission approves the unit, but must
then occur within 6 months after Commission order approving
the unit
Unitization
• Compulsory Units
• Once approved by the NDIC and ratified by 60%
of royalty and working interest owners, effective
against all interests included within the unit area
Unitization
• Compulsory Units
• Allocation of expenses and production
•
•
All “tracts” within the unit bear their share of the
expenses of developing and operating the unit and
receive their share of revenues from production
Allocation is based on production and reservoir
characteristics instead of just surface acreage
Unitization
• Compulsory Units
• Allocation – NDCC Section 38-09-04(2) – factors
•
Two Phase Formula Preference
• Phase I – intended to approximate what would be
recovered by individual spacing units without unitization
• Emphasis on current production rates, remaining
primary production
• Stays in effect until “trigger” is met
• “Trigger” is the estimated volume of oil that would
have been recovered under primary production – i.e.
without the unit
Unitization
• Compulsory Units
• Allocation – NDCC Section 38-09-04(2) – factors
•
Two Phase Formula Preference
• Phase II – begins when trigger is reached, intended to
approximate contribution to secondary (tertiary) recovery
• More emphasis on “reservoir” characteristics – net feet
of pay, original oil in place, etc.
• Correlation between such factors and contribution to
secondary recovery
Unitization
• Expansion of Units
• NDCC Section 38-08-09.9
•
•
•
Governs enlargement of units
Method for avoiding necessity of getting expansion
ratified by all owners in existing area
Typical unit agreement requires that in the event of
expansion, the ratio of ownership in the existing unit
not be changed
• Existing unit is typically treated as a single tract in an
expanded unit
Unitization
• Unit Agreements
• Govern rights between all owner (royalty and
•
•
•
working interest) within the unit
Approved by the NDIC
Standardized forms
“Federal Units” – more than 10% of unit (surface
acreage basis) owned by the United States
• Must use Federal Unit Agreement form prescribed by
BLM
Unitization
• Unit Operating Agreement
• Govern rights between working interest owners
•
How decisions are made and costs are borne
NDIC Resources
• NDIC Oil and Gas Division website - tremendous resource
• https://www.dmr.nd.gov/oilgas/
Tribal Tax Agreement
• Three Affiliated Tribes Oil and Gas Tax
Agreement
• Authorized by NDCC Chapter 57-51.2
•
Generally imposes an effective tax rate for all Trust
lands of 11.5%:
• 5% gross production tax on oil
• Flat tax of $0.04 per mcf escalated on gas
• 6.5% extraction tax on oil
Tribal Tax Agreement
• Three Affiliated Tribes Oil and Gas Tax
Agreement
• 50% of tax revenues collected by the State on
•
•
Trust lands paid over to Three Affiliated Tribes
Effective tax rate on Fee lands is 5% for the first
60 months and then 11.5%
Three Affiliated Tribes receives 20% of the taxes
on fee land
Tribal Tax Agreement
• Three Affiliated Tribes Oil and Gas Tax
Agreement
• Provides that Three Affiliated Tribes will not levy
any taxes or fees on oil or gas activity or interests
within the reservation other than a one-time
$60,000 TERO fee on each well and a “tribal
application fee” of $40,000 on each well
considered to be on Trust lands
•
Well considered to be “on Trust Land” and subject to
the $100,000 permit fee if a majority of the lands
included within the spacing unit are trust lands
Tribal Tax Agreement
• Three Affiliated Tribes Oil and Gas Tax
Agreement
• Terminable by either party upon 30 days notice to
•
the other
Provides that any well drilled during the term of
the agreement would be subject to taxes under
the Agreement for the life of the well