Many states, in response to the mounting oil and gas cases, enacted compulsory pooling statutes aimed at preserving mineral rights and creating more efficient means of production. Pooling essentially combines all oil and gas interests in a field into one drilling unit on acreage large enough to support a well under state spacing rules. Under this scheme, each owner and the developer (assuming there is just one developer) receives their agreed upon share of the output. Compulsory pooling, however, comes into play when an owner or developer is reluctant to play nice. In some states, holdout landowners are typically presented with three options: 1) contribute to the cost of the well and share in the profits; 2) do not contribute, but share in the profits after a penalty is subtracted for risk aversion; or 3) receive a minimum royalty payment. There is no opting out.
Compulsory pooling in North Dakota is governed by section 38-08-08 of the ND Century Code. Titled "Integration of fractional tracts," the statute authorizes the North Dakota Oil and Gas Division to enter an order pooling all mineral interests upon the application of any interested person when there is no voluntary pooling. The statute does allow for reasonable notice and hearing, prior to any order, to ensure any agreement reached is "just and reasonable."
Opponents of compulsory pooling have included landowners who would rather drill on their own property and parties contesting just how fair and equitable compulsory pooling is. In North Dakota, section 38-08-08 is a part of the Oil and Gas Conservation Act that sought to balance the competing interests of landowners and operators. Well, what if one party does not wish to share in the working interest? What is fair and equitable when one party sits back and lets the others do the work, and then shares in the profits? What about private eminent domain issues? Texaco Inc. v Industrial Commission of State of North Dakota, 448 N.W.2d 621 (N.D. 1989), dealt with a mineral lease holder appealing a lower court decision that affirmed a compulsory pooling order. Texaco, the appellant, and another party (Thompson) failed to agree to lease and joint operating terms. The Commission entered a retroactive pooling order, dated back to the beginning of operations, and ordered the Thompson to reimburse Texaco for his "proportionate share of the reasonable actual cost of drilling and operating the well." Texaco's argument was: Thompson contributed nothing to the operation and should not receive a retroactive share of the interest produced from Texaco's well, located on Texaco's "solely owned leasehold." Thus, the Commission's decision resulted in "an unlawful confiscation of Texaco's property and a taking of its property without due process."
The North Dakota Supreme Court affirmed the lower court's ruling based in part on credible evidence that Thompson had applied for a compulsory pooling order. The analysis in reaching the decision included reasoning that "unless the Commission can issue pooling orders retroactive to the date of first operations, an adjoining landowner may not receive his just and equitable share in a pool, thereby confiscating his property without due process. The application, however, came nearly a year after negotiations had broken down between Texaco and Thompson. The Texaco decision left me with a number of questions. For example, how can this be just and reasonable? Can future parties simply apply for a pooling order a year after the breakdown of negotiations in order to serve their own interests? On the plus side, Texaco was awarded a reimbursement—but the Court did not express an opinion on the Commission's failure to address how or when Thompson was to pay up.
Compulsory pooling is a useful tool in oil field management to prevent waste and preserve correlative rights, especially in a majority rules situation involving a number of parties to the order; however, it is not without its issues.
No comments:
Post a Comment