CHAPTER 2 STATE SPACING AND JURISDICTION OVER CONSERVATION
| Jurisdiction | United States |
(Jan 1990)
STATE SPACING AND JURISDICTION OVER CONSERVATION
Crowley, Haughey, Hanson, Toole & Dietrich
Billings, Montana
§ 2.01 Introduction
§ 2.02 Historical Perspective
[A] Concerns of the Mineral Owner — Rules of Capture and Offset Drilling
[B] Concerns of the State — Conservation Legislation
[1] Interstate Oil Compact
[2] Waste Prevention and Protection of Correlative Rights
[3] The Rocky Mountain States — Colorado, Montana, North Dakota, Utah, and Wyoming
[a] The Role of Well Location & Well Spacing Rules
[b] Pooling
[C] Concerns of the Federal Government — A Mineral Owner
[1] Development of the Mineral Leasing Act of 1920
[2] Operating Regulations
[3] A Preference for Unitized Operations
§ 2.03 Conservation Regulation on the Public Domain
[A] Concept of Concurrent Jurisdiction — Federal and State
[1] Congressional Deference to State Regulation?
OR
[2] Congressional Preemption?
[3] The Judicial Coin Flip
§ 2.04 Conservation Regulation on Indian Lands
§ 2.05 The Best Solution — Memorandums of Understanding
[Page 2-2]
§ 2.01 Introduction
He had bought a large map representing the sea, Without the least vestige of land:
And the crew were much pleased when they found it to be
A map they could all understand.
"What's the good of Mercator's North Poles and Equators,
Tropics, Zones and Meridian lines?"
So the Bellman would cry: and the crew would reply,
"They are merely conventional signs!"1
The snark that flitted about in Lewis Carroll's imagination has much in common with the concepts of "federal preemption" and "state-assumed jurisdiction over conservation of oil and gas" which operators, state commissions and BLM officials have sought to capture and tame for purposes of display in the zoo of well-defined principles applicable to the pooling and unitization of federal leaseholds. Evidence of the difficulties encountered in trapping such snarks continues to abound:
[A] The Dragon Trail Federal Exploratory Unit in Rio Blanco County, Colorado was approved by the USGS on July 10, 1959. Some thirty years later, the unit operator obtained permits from the BLM to drill four unit wells upon federal oil and gas leaseholds. An application for approval of the locations was then filed with the Colorado Oil and Gas Conservation Commission as the footages of the locations from the exterior boundaries of the unit were less than those specified by with the state-wide well location rule.2 The BLM filed an "Intervention" to the
[Page 2-3]
application, in essence requesting that the application be dismissed for lack of state jurisdiction, because, "As agreed to by and between the BLM and the Commission, all spacing and development requirements established by the state will be considered vacated as they apply to the unitized area. This vacation of spacing should include Rule 318. The Commission does not have the authority to prevent the drilling of unit wells pursuant to this rule."3 The BLM advanced the proposition that it, "...utilizes federal regulatory statute 43 CFR 3162.5-2 to determine if unit well locations are a sufficient distance away from the boundary of the unit agreement."4 The matter was resolved short of the hearing process, partially on the basis of operator/protestant negotiations,5 and apparently partially because neither the Colorado Commission nor the BLM were anxious to butt heads and delay matters to the detriment of the operator's drilling plans.6
[Page 2-4]
[B] The Blackleaf federal exploratory gas unit agreement covering lands in Teton County, Montana, was approved by the USGS in 1980. The Montana Board of Oil and Gas Conservation approved the agreement (without ordering compulsory unitization) in 1981, and suspended the operation of statutory and regulatory well spacing requirements as to all but unit boundary tract wells.7 Participating area "A" as revised was approved by the BLM in 1982. In 1985 an unleased, uncommitted fee mineral owner within the unit boundaries but just outside revised participating area "A", made application to the Montana Board of Oil and Gas Conservation for the establishment of a state spacing unit which would allow her to share in production from a producing unit well (drilled upon a fee lease committed to the unit agreement) within the revised participating area. The BLM informed the Montana Board during its hearing upon the application that it was the considered decision of that agency after technical review of testing and production data that the area it had approved as revised participating area "A" constituted all of the acreage being effectively drained by the producing wells located therein. The Montana Board initially delineated the Blackleaf Unit Field as being comprised of two 320 acre spacing units encompassing lands solely within participating area "A".8 However, the mineral owner was granted a rehearing of the matter,9 and upon
[Page 2-5]
rehearing the Board reduced the field to two 280 acre spacing units, with the applicant's mineral acreage outside the participating area included within the spacing unit for the participating area well.10
§ 2.02 Historical Perspective
[A] Concerns of the Mineral Owner — Rules of Capture and Offset Drilling
Every oil and gas law text book and general commentary has noted the judicial struggles to find appropriate governing property concepts that attended landowner attempts to emulate Colonel Drake's discovery of a commercial means of extracting oil from the earth. The rights of neighbors vis a vis the oil and gas exploration activities of each came down early on to the following proposition:
What then has been held to be the law? It is this, as we understand it, every landowner or his lessee may locate his wells wherever he pleases, regardless of the interests of others. He may distribute them over the whole farm or locate them only on one part of it. He may crowd the adjoining farms so as to enable him to draw the oil and gas from them. What then can the neighbor do? Nothing; only go and do likewise. He must protect his own oil and gas. He knows it is wild and will run away if it finds an opening and it is his business to keep it at home.11
As mineral owners and their lessees proceeded to operate under these judge-made rules, developments in related arenas began to shape the beginnings of oil and gas conservation laws. As more became known of the physical characteristics of oil and gas and the reservoirs that contained them, concern over unfettered production lead to regulatory intervention.
[Page 2-6]
[B] Concerns of the State — Conservation Legislation
The authority of a state to deal with waste under its police power, and by so doing also protect the rights of owners within an oil and gas reservoir, was upheld by the United States Supreme Court in 1900:
...as to gas and oil the surface proprietors within the gas field all have the right to reduce to possession the gas and oil beneath. They could not be absolutely deprived of this right which belongs to them without a taking of private property. But there is a coequal right in them all to take from a common source of supply the two substances which in the nature of things are united, though separate. It follows from the essence of their right and from the situation of the things as to which it can be exerted, that the use by one of his power to seek to convert a part of the common fund to actual possession may result in an undue proportion being attributed to one of the possessors of the right to the detriment of the others, or by waste by one or more to the annihilation of the rights of the remainder. Hence it is that the legislative power, from the peculiar nature of the right and the objects upon which it is to be exerted, can be manifested for the purpose of protecting all the collective owners, by securing a just distribution, to arise from the enjoyment, by them, of their privilege to reduce to possession, and to reach the like end by preventing waste.12
[1] Interstate Oil Compact
Public demand for petroleum products, coupled with the discovery of fields like the East Texas Field, created oil and gas production disasters.13 Although a number of the petroleum producing states had rudimentary conservation laws in place, prior to the mid-1920's few of those states were in a position of excess production. However, within the next few years, the picture changed dramatically. "Giant" discoveries in team with inadequate control laws and a relatively large volume of imports visited the industry with more oil than could be used or stored.
[Page 2-7]
Economic chaos followed [oil gluts caused by rampant over production] with the posted price for oil in East Texas falling as low as 10 cents per barrel. Production from town lot drilling in Oklahoma City extended to the grounds of the state capitol. It is said that the noise was so great that the windows of the legislative halls had to be closed so that deliberations on amendments to oil and gas laws could be heard. Governor Murray declared martial law August 4, 1931, closing down the Field from August 5 to October 10, 1931 and Governor Sterling of Texas 'finding that a state of insurrection existed declared martial law on August 17, 1931 ... to shut in temporarily all the wells in the East Texas Field, and to preserve order.'14
It was during this period of time that suggestions were made that federal control of the oil and gas industry would be the appropriate solution. However, several attempts to pass legislation through Congress were unsuccessful, "because of the belief that the prevention of waste of oil and gas is a function of the states."15 Pursuant to a suggestion of the then-Secretary of the Interior, the concept of an interstate compact to further petroleum conservation was pursued by the governors of several producing states. The Interstate Oil Compact was...
To continue reading
Request your trial