CHAPTER 13 FORT BERTHOLD: A "REAL WORLD" INDIAN LAW OIL AND GAS DEVELOPMENT CASE STUDY

• Jurisdiction: United States

Indian Law and Natural Resources: The Basics and Beyond (Sep 2017)
CHAPTER 13
FORT BERTHOLD: A "REAL WORLD" INDIAN LAW OIL AND GAS DEVELOPMENT CASE STUDY
Neil G. Westesen
Partner
Crowley Fleck PLLP
Bozeman, MT
Joshua B. Cook
Partner
Crowley Fleck PLLP
Billings, MT

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NEIL G. WESTESEN is a Litigation Partner in the Crowley Fleck PLLP's Bozeman office. He has also served on the Firm's three-person Executive Committee for several years, and was the firm's Managing Partner from 2011 through 2016. Neil's litigation practice focuses on construction law where he represents architects, engineers, owners, contractors, and sureties. He has a significant Indian law practice representing industry clients in negotiations with and litigation against Indian tribes. He has also represented various product manufacturers in both product liability litigation and dealer defense cases. He has also represented several attorneys in legal malpractice defense matters. He is currently working extensively on a major piece of environmental litigation.

JOSHUA B. COOK is a partner in Crowley Fleck PLLP's Energy, Environment, and Natural Resource Department, and is based in the firm's Billings, Montana office. His primary areas of practice are Indian law, and mining, and oil and gas law. Joshua assists clients with mineral development projects on Indian lands and challenges to tribal jurisdiction, and handles complex mining matters, including patented and unpatented claim disputes, large-scale due diligence of both mining and oil and gas properties, property acquisitions and dispositions, title examinations, and permitting and environmental issues. Joshua has significant experience working with tribal agencies, especially TERO, handling contract disputes, and defending clients from tribal enforcement actions. He also assists pipeline, transmission line, and mineral development companies with right-of-way issues and condemnation proceedings. Joshua serves as a member of the American Exploration and Mining Association and the Nevada and Wyoming Mining Associations, and works on the Legislative Committee of the Montana Mining Association. He is on the Special Institutes Committee of the Rocky Mountain Mineral Law Foundation, and is a reporter for the Foundation's Newsletter and an update author for the American Law of Mining 2d. Joshua graduated with his Juris Doctorate from Gonzaga University School of Law in Spokane, Washington. During law school, he clerked for the Washington State Court of Appeals, served on the Moot Court Honors Council, and led Gonzaga's National Trial Team. Before law school, Joshua worked in the mining industry where he located mining claims on public domain lands throughout Nevada and California. Joshua obtained his Bachelor of Science Degree in Business Management and Finance from Brigham Young University in 2007.

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I. INTRODUCTION AND FACTUAL BACKGROUND

Natural Resource development in Indian Country is nothing new. The Foundation has hosted numerous Special Institutes on the topic over the years and it has been the subject of some excellent scholarship by academics and practitioners alike. Rarely, however, has Indian Country seen development as massive, and as intense, as the boom taking place within the Fort Berthold Reservation in northwestern North Dakota. The scale and pace of that development has created new challenges that bring into sharp, practical focus some of the typically more theoretical topics that arise in any Indian Law discussion. This paper, and the accompanying panel discussion, will highlight just a few of the issues that have arisen. Building on some of the other presentations, and the expertise and insights from the panel, it will provide some practical guidance based on how industry, the State of North Dakota, and the Three Affiliated Tribes are handling this unique situation.

The Bakken Shale Formation primarily lies in Northwestern North Dakota with some activity spreading into Eastern Montana.¹ While activity in the Bakken started in the early 2000's, activity accelerated in late 2007, just as the national economy begun to plummet. By January of 2012, there were nearly 200 drilling rigs in North Dakota, over twenty times as many as there were in January of 2002.²

North Dakota's economy was small throughout the 20^th century, with a population which had peaked at 681,000 in 1930.³ While North Dakota's Gross Domestic Product (GDP) remained stagnant through most of the 20^th century, it grew by 120% between 1997 and 2014.⁴ Mineral production, which includes oil and gas, increased from 2% of the state's GDP to 15%.⁵ The increase in oil and gas production nearly doubled the state GDP between 2005 and 2015 as the State's GDP grew from $26.5 billion to $49.5 billion.⁶ What makes this phenomenon even more significant is North Dakota's GDP continued to grow throughout the Great Recession, while that of the total country fell.⁷ Before the boom, there were fewer than 100 oil and gas wells being completed each year. By contrast, more than 2,000 oil wells were completed in 2013 alone.⁸

State tax collections increased dramatically between 2004 and 2014, growing from $1 billion to nearly $6 billion over that 10 year span.⁹ Over half of this tax revenue growth resulted from two oil and gas production taxes, the Oil Extraction Tax and the Gross Production Tax.¹⁰ The combined annual revenue from these taxes went from only $73 million in 2004, to $3.2

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billion in 2014.¹¹ In fact, over half of the State's entire tax revenue in 2014 came from oil and gas taxes alone. Effectively, North Dakota had more per person tax revenue in 2013 and 2014 than any other state in the Nation.¹²

The Bakken differs economically and geographically from most other shale formations in part because it is located in an area with significantly fewer people.¹³ For example, the Bakken's population density is only one fourth of another booming shale formation, the Permian Basin.¹⁴ Additionally, there is no large city near the heart of the Bakken.¹⁵ Due to low population densities and local resources, as compared to other shale formations, the region was unprepared to absorb the influx of activity and people an oil boom brings.¹⁶ The area lacked municipal infrastructure and housing.¹⁷ The local governments were strained by the increase in demand for government services, yet had minimal additional revenue because of the existing tax structures.¹⁸ This problem was recently addressed by the North Dakota legislature which enacted legislation to funnel a portion of the revenue generated by the Oil Extraction and Gross Production taxes specifically to the communities impacted by the activity that generated the revenue.¹⁹ The North Dakota legislature also allocated $1.1 billion to local governments and adjusted revenue allocation formulas to help return some of the funds to the local governments which had taken on significant financial risk to create infrastructure to support the Bakken.²⁰ This change is expected to reduce local government debt and support long term sustainability within local communities.

The Fort Berthold Reservation, found in the heart of the Bakken, is home to the Three Affiliated Tribes: the Mandan, Hidatsa, and Arikara. Tribal enrollment is at 10,249 members and approximately 4,053 of these members reside on the Reservation. Approximately 600,000 of the Reservation's nearly 1,000,000 acres lies atop the Bakken Shale Formation.²¹ The Bureau of Indian Affairs manages 343,000 allotted and 80,000 tribal acres in trust within the exterior boundaries of the Reservation.

Over 1700 oil and gas leases have been approved by the Bureau of Indian Affairs on the Fort Berthold Reservation.²² From the beginning of the boom in 2008 to 2010, over $179 million was paid to the Three Affiliated Tribes and their members for oil and gas leasehold interests.²³ Those numbers have continued to grow. As of July, 2014, the tribal government had received $249 million in oil tax revenue just for the preceding 12 months. The Tribes also

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receive per-barrel royalties from oil companies for the right to pump oil from tribal land. Beneficial owners of individual trust allotments receive their own payments as well. State and federal records suggest that these total payments have been in the billions of dollars.

In 2014, production from the Fort Berthold Reservation exceeded 270,000 barrels per day and accounted for nearly 30% of North Dakota's entire oil production. If the Fort Berthold Reservation were a State, it would be the No. 7 oil producing state in the country. Recent figures confirm this scale of production. Presently, North Dakota produces in excess of 1,000,000 barrels per day, down from an all-time high of 1,227,483 barrels per day in December of 2014, but still a very large amount of production. As of June, 2017, there were 13,915 producing wells, a new all-time high in that category. Specific to Fort Berthold, as of June, 2017, there were 14 active drilling rigs, 216,017 barrels of oil per day being produced, 131,401 coming from trust land and 84,617 from fee land, and 1,688 active wells with 507 approved drilling permits for an additional 1,552 future wells.²⁴

In 2000, 28% of the Reservation's population lived in poverty and 40% were jobless.²⁵ Since then, jobs have increased and the level of poverty has decreased as tribal members have seen an increase in oil royalties.²⁶ In addition, the Tribes have been able to collect taxes via the North Dakota's oil and gas production taxes discussed above.²⁷ In 2013, the Tribes and the North Dakota Legislature came to an agreement that they would split tax revenue from the oil wells on reservation land 50/50.²⁸ This was a substantial increase for the Three Affiliated Tribes from the prior 80/20 split in favor of the State.²⁹

It has been predicted that nearly 1000 wells could be drilled just on the Fort Berthold...