1. 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

2. North Dakota Industrial Commission (“NDIC”)
What is the Commission all about?
Makeup of the NDIC
History and organization - NDAC §
Governor
Attorney General
Agriculture Commissioner

3. Department of Mineral Resources
NDCC Section
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.

4. NDIC Oil and Gas Division
Director – Lynn Helms
Assistant Director – Bruce Hicks

5. 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 of the North Dakota Administrative Code
NDCC Ch gives the NDIC jurisdiction of oil and gas exploration and production

6. 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.

7. Application Process Notice
NDCC Section (1) requires notice either in accordance with NDCC Chapter (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 (2) provides that except in contested cases with a specific named respondent, notice is to be given by publication

8. Notice Exceptions to notice by publication are:
Contested cases with a specific named respondent
Exception locations
Compulsory unitization
Due Process Implications

9. 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

10. 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

11. Affidavits NDAC Section 43-02-03-88.1
Certain routine matters can be handled by filing affidavit instead of presenting witnesses and exhibits
Poolings

12. Hearing Process Presided over by Hearing Examiner NDIC Staff
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

13. Petitions for Reconsideration and Appeals
NDCC Sections and
Generally NDCC Chapter procedures apply
Appeal to the state district court in the county where the lands lie

14. 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 (2)
“Uniform size” unless zones of spacing are necessary to protect correlative rights, prevent waste, or prevent the drilling of unnecessary wells. NDCC Section (1)

15. 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

16. Common Disputes Unitization disputes
Usually relate to designation of operator, unit boundaries, unit formula, or method of operation

17. Common Disputes Pooling disputes Penalty issues
Adequate opportunity to elect, reasonable offer to lease

18. Spacing
NDCC Section – “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

19. 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

20. 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 (4)
Reasonably uniform pattern

21. Spacing Drilling unit vs. Spacing Unit NDAC Section 43-02-03-18
Statewide well location rule
NDCC Section (3) and NDAC Section
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

22. Spacing Drilling unit vs. Spacing Unit continued Drilling unit Orders
Stand-up, on-pattern 1280’s for most of undrilled Bakken area

23. 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

24. Pooling of Spacing Units
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)

25. 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

26. Pooling of Spacing Units
NDCC Section
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

27. 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 “non- consent penalty” or “risk-compensation”
NDCC Section provides for risk penalty
200% for lessee under oil and gas lease
50% for unleased mineral owner

28. Pooling of Spacing Units
Non-consent Penalty
NDCC Section
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 non- participating owner a risk penalty …”
Neither the right to recover nor the amount of risk penalty is discretionary with Commission

29. Pooling of Spacing Units
Non-consent Penalty
Right of owner to “elect”
NDAC Section 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

30. 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 (1)
“acreage weighted average royalty”
Alternative 16% royalty
Pooled after July 31, 2009
Operator’s election to pay 16% or acreage weighted average

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. Unitization Compulsory Units
Allocation – NDCC Section (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

38. Unitization Compulsory Units
Allocation – NDCC Section (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

39. 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

40. 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

41. Unitization Unit Operating Agreement
Govern rights between working interest owners
How decisions are made and costs are borne

42. NDIC Resources NDIC Oil and Gas Division website - tremendous resource

43. Tribal Tax Agreement Three Affiliated Tribes Oil and Gas Tax Agreement
Authorized by NDCC Chapter
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

44. 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

45. 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

46. 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