CHAPTER 12 STATUTORY UNITIZATION: SIGNIFICANT LEGAL ISSUES

• Jurisdiction: United States

Oil and Gas Conservation Law and Practice
(Sep 1985)
CHAPTER 12
STATUTORY UNITIZATION: SIGNIFICANT LEGAL ISSUES
JANE FLECK RUMANOV
FLECK, MATHER, STRUTZ & MAYER, LTD.
BISMARCK, NORTH DAKOTA

TABLE OF CONTENTS

SYNOPSIS

Page

I. Introduction

II. Significant Legal Issues

A. General Prerequisites of Statutory Unitization

B. Requirement of Notice

C. Implied Covenants and the Duty to Unitize

1. Duty to Engage in Enhanced Recovery

2. Implied Duties to Develop, Explore and Protect

3. Jurisdiction: Judicial and Administrative Competition Over Implied Covenants

D. Liability for Unit Operations

1. Surface Damage

2. Displacement of Fluids

III. Role of the Lawyer Representing the Unit Operator Proposing Unitization

A. Introduction

B. Meeting of Working Interest Owners

C. Working Interest Owner Consent, Joint Engineering Committee, and Feasibility Study

D. Land Committee

E. Working Interest Owners Committee

F. Legal Committee

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G. Plan of Unitization

1. Unit Agreement

2. Unit Operating Agreement

H. Royalty Owner Ratification

I. The Unitization Hearing and Post Hearing

IV. Conclusion

Addendum

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I.INTRODUCTION ^*

Oil and gas are produced from natural underground reservoirs that were formed and exist without regard to rights of real property and the ownership of minerals. The laws of real property have impeded the efficient recovery of oil and gas by artificially carving a reservoir into diversely owned units. A reservoir, however, is a natural unit developed most effectively as a whole without regard to property lines but with the aim of benefiting all interest owners.¹

The energy drive which forces oil or gas through permeable reservoir rock to a well bore is common throughout the reservoir. The exploitation of such energy by production of oil and gas from a well ultimately diminishes its availability to facilitate production from other wells.

Depletion of the reservoir energy occurs naturally in primary recovery where operators, armed with property rights granted by their lessors, compete aggressively to produce oil and gas. The race to drill has legal approbation by virtue of the

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"rule of capture."² Such an untempered flurry of activity, however, results in the unnecessary drilling of wells, premature decline in reservoir energy and violation of the correlative rights of interest owners.³

Modern conservation law was developed to resolve the problems inherent in the unrestricted development and recovery of oil and gas by the promulgation by the states of administrative rules regulating the spacing of wells and the production of hydrocarbons.⁴

Primary recovery produces only a fraction of the oil and gas in place in a reservoir. Recovery in the primary phase decreases as the reservoir energy diminishes although it can be increased by artificially supplementing the reservoir energy by the

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injection of fluids or implementation of other technological methods of enhanced recovery.⁵ Efforts to supplement the reservoir energy by fluid injection or other processes are generally

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termed secondary recovery operations.⁶ Techniques of secondary recovery generally affect the entire reservoir and are usually feasible only if the reservoir is operated as a single unit. The term, unitization, refers to the process of combining diversely owned interests in a given reservoir for the purpose of eradicating the restrictions of property lines and promoting the operation of the reservoir as a whole.⁷

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The legal artifice of unitization has been described by one practitioner as follows:

By this creature of their talents, lawyers can thus make legal and therefore feasible the only treatment of a reservoir that conservation regards as logical.⁸

Unitization can be accomplished by voluntary agreement between the interest owners or, in at least 27 states, by statutory or compulsory unitization.⁹

Because of a certain enmity inherent in the relations among competing working interest and royalty interest owners, it is often difficult to accomplish voluntary unitization.¹⁰ The

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problems in reaching such an agreement are directly exacerbated by the extent of the fractionalized ownership in the reservoir. Statutory unitization was a needed legislative solution to the problem of dealing with owners who refuse to unitize despite the public, as well as the private, benefit in unitization.¹¹

Oklahoma was the first state to enact comprehensive regulations covering unitization, promulgating its statute in 1945 and amending it in 1951.¹² Both the original statute and its 1951 amendment survived constitutional challenge.¹³ Several states have since followed, uniformly recognizing that the maximum recovery of hydrocarbons is most efficiently accomplished through unitization. In fact, it has been proposed by one scholar that unitization should not merely be an election accomplished voluntarily or by statutory proceedings, but should be mandatorily imposed upon all owners at a certain point in a field's history:

Statutes and regulations should go beyond mere encouragement and facilitation; they should require unitization of every oil reservoir within a reasonable time following discovery. Furthermore, unit operation should supplant all present regulations (e.g., of well spacing and production rates) except those designed to protect other resources from damage by oil operations.

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Unit operation, with the indicated qualification, is a sufficient instrument of conservation.¹⁴

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Although unitization statutes have been ruled constitutional on the rationale that individual rights must yield to the greater public interest,¹⁵ there have been certain problems. This paper addresses several issues relevant to unitization proceedings and the conduct of unit operations. Section II(A) discusses general statutory prerequisites to unitization as well as matters that a unit proponent must fully explore at a unitization hearing. Section II(B) analyzes the constitutional requirement of notice, recent cases that have faced the issue of lack of notice, as well as the effect of deficient notice on a unitization order. Section II(C) addresses the implications of the implied covenant to engage in enhanced recovery operations as well as a lessee's continuing obligation to perform all implied covenants during unitization operations. Although the modification, termination or dissolution of statutory units is beyond the scope of this article, Section II(C) does discuss whether a regulatory agency is conferred with jurisdiction to determine and remedy disputes arising out of breach of implied covenants. Section II closes at subsection (D) with a discussion of a unit operator's liability for surface damage or damage to producing horizons beneath lands outside the unit. Section III will highlight the role of lawyers representing a unit operator forming a unit and will offer some practical suggestions to practitioners.

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II. SIGNIFICANT LEGAL ISSUES

A. GENERAL PREREQUISITES OF STATUTORY UNITIZATION

Compulsory unitization statutes differ to a certain degree.¹⁶ Generally, all states provide that the purposes for which a regulatory agency may order unitization are (1) greater ultimate recovery of oil and gas, (2) prevention of waste and drilling of unnecessary wells, and (3) protection of correlative rights.¹⁷

Several states do not delineate any specific requirements to be met or provisions to be included in the application for unitization.¹⁸ Those states which have promulgated requirements for the hearing application commonly provide for the following:

(1) description of the area to be unitized with an attached plat;

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(2) list of the persons and their addresses who own interests in the area to be unitized;

(3) description of the proposed unit operations;

(4) attachment of a copy of the unit plan;

(5) general recitation of facts required to be found by the conservation commission prior to issuance of a unitization order.¹⁹

North Dakota Century Code Section 38-08-09.3(4) is typical providing as follows:

The petition shall set forth a description of the proposed unit area with a map or plat thereof attached, must allege the existence of the facts required to be found by the commission as hereinabove provided and shall have attached thereto a proposed plan of unitization applicable to such proposed unit area and which the petitioner or petitioners consider to be fair, reasonable, and equitable.

The allegations to include in the application, which also provide the jurisdictional basis for the commission's order, are also found in North Dakota Century Code Section 38-08-09.3 , a provision which is again typical of several other states:

If upon the filing of a petition therefor and after notice and hearing, all in the form and manner and in accordance with the procedure and requirements hereinafter provided, the commission shall find:

1. That the unitized management, operation, and further development of a unit source of supply of oil and gas or portion thereof is reasonably necessary in order to effectively carry on pressure-maintenance or repressuring operations, cycling operations, water flooding operations, or any combination thereof, or any other form of joint effort calculated to substantially increase the ultimate recovery of oil and gas from the unit source of supply;

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2. That one or more of said unitized methods of operation as applied to such unit source of supply or portion thereof are feasible, will prevent waste and will with reasonable probability result in the increased recovery of substantially more oil and gas from the unit source of supply than would otherwise be recovered;

3. That the estimated additional cost, if any, of conducting such operations will not exceed the value of the additional oil and gas so recovered; and

4. That such...