MONTANA BOARD OF OIL AND GAS CONSERVATION-----NORTH DAKOTA INDUSTRIAL COMMISSION-----WASTE PREVENTION IN THE BIG SKY COUNTRY
| Jurisdiction | United States |
(Jan 1997)
MONTANA BOARD OF OIL AND GAS CONSERVATION-----NORTH DAKOTA INDUSTRIAL COMMISSION-----WASTE PREVENTION IN THE BIG SKY COUNTRY
Crowley, Haughey, Hanson, Toole & Dietrich
Billings, Montana
MONTANA
The Montana Board of Oil and Gas Conservation ("Board") was created contemporaneously with Montana's adoption1 of the model conservation code suggested by the Interstate Oil Compact Commission in 1950.2
The Board is a quasi-judicial board attached to the Department of Natural Resources and Conservation for administrative support only,3 and the exercise of its quasi-judicial, quasi-legislative, licensing, and policy making functions is independent from, and without the approval or control of the Department.4 The seven members of the Board serve staggered terms, and are appointed by the Governor. The members include industry representatives, mineral owner and surface owner representatives, and members at large. One member must be an attorney.5
The Montana Conservation Act6 varied significantly from the IOGCC Model Act in deleting any reference to "correlative rights" in describing the Board's authority. The Montana Supreme Court remedied the latter situation, finding that such rights must be
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considered by the Board in its waste prevention activities.7
The 1953 Conservation Act provided Montana's fledgling conservation agency with basic well spacing and compulsory pooling authority as tools to be utilized in the prevention of waste, but omitted any compulsory unitization authority. The Act was amended in 1969 to provide for compulsory unitization.8
The Montana Conservation Act, and the Board's rules and orders are incorporated into oil and gas leases as a matter of law.9
Well-Siting (Temporary Spacing Units) and Drilling Permits
Early on the Board adopted a statewide "drilling unit" concept to govern the location of wells in unspaced "wildcat" areas. With drilling economics as the backdrop, exclusive one-well areas comprising governmental survey subdivisions, or multiples' of such subdivisions, dependent upon the depth of the target formation, were established with setbacks from the boundaries thereof for the location of the well.
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In 1993, the Montana Legislature did away with the "drilling unit" designation, and provided by amendment to the Oil and Gas Conservation Act's spacing statute that statewide units would be "temporary spacing units."10 The present statewide rule of the Board provides for locations upon quarter-quarter sections (40 acres) with 330 foot setbacks for oil wells less than 6,000 feet in depth, quarter section (160 acre) temporary spacing units with 660 foot setbacks for oil wells from 6,000 to 11,000 feet in depth, and temporary spacing units comprising two contiguous quarter sections (stand-up or lay-down, at operator choice) with 320 foot setbacks for oil wells in excess of 11,000 feet in depth. Wildcat gas wells are to be drilled upon governmental sections (640 acres) with 990 foot setbacks, regardless of depth.11
The Board has provided for wildcat horizontal well siting by allowing operators to select up to four contiguous vertical well temporary units that would apply for the depth of the target formation(s) and designate the same as the temporary unit for the proposed horizontal well.12 The applicable setback is the same as that for vertical wells to the same depth, the setback to be measured from the unit exterior boundary to the point where the horizontal bore either enters or terminates in the target formation.
The purpose of the industry-sponsored 1993 amendment to the spacing statute creating temporary spacing units was twofold: The first intention was to permit all owners within the temporary unit to share in production from the date of first runs, rather than just the drillsite owner via application of the rule of capture. Prior to the amendment, the Board treated its statewide drilling units as well-location units only13 , and in forced (compulsory) situations following permanent spacing the Board would not make a forced pooling order effective any earlier than
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the date of the permanent spacing unit order for the well. This approach led to inequities, as permanent spacing may take place months after first sales of production.14
The second purpose for the legislation was to provide a mechanism for the imposition of risk refusal penalties for failure to join in a wildcat well.15
The 1993 amendment to the spacing statute clarified and enlarged the Board's authority with respect to granting exceptions to either well setbacks for temporary spacing units, or field well location rules for permanent spacing units. Such exceptions require application, notice and Board hearing, can be granted for any "reason...the requirement to drill the well at the authorized location on the spacing unit would be inequitable or unreasonable," may be conditioned to avoid advantage over other producers, and must be conditioned to prevent production from the spacing unit from being more than its just and equitable share of the producible oil and gas in the pool.16
The practice of seeking special temporary spacing units as an alternative to obtaining an order authorizing an exception location within a "regular" temporary spacing unit has become quite common since the 1993 amendment to the spacing statute. The statute appears to permit such practice,17 and the centering of the temporary unit upon the proposed well location has at least the appearance of including all lands likely to be drained by the well within such unit.
The Board routinely grants applications for such special
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temporary units18 , but has included within the orders granting the same the requirement that the applicant file an application for permanent spacing within a given number of days following well completion (usually from 90 to 120 days).19 ,20
The Board was also given authority in the 1993 amendment to increase or decrease the size of a temporary unit, or permit the drilling of an infill well within a temporary unit.21
Based upon the authority contained in the 1993 amendment to the spacing statute, the Board has granted requests for special spacing units for multiple formations, with operator ability to drill either a vertical or a horizontal well with multiple laterals in the same formation, and commingle production from such multiple laterals in the same formation.22 The 1993
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amendment has indeed given the Board cutting edge spacing authority.
Unlike North Dakota, Montana has not recently experienced "land rush" attempts to obtain drilling permits, with multiple applicants for the same temporary or permanent spacing unit. Accordingly, Montana presently does not provide a regulatory mechanism for determining priority among applicants. However the Board Staff has indicated that a "first-come, first-served" rule will be applied to fully completed applications for permit to drill, with one exception. If a present permit holder applies for a "renewal" of the permit before its term expires, any "top" filings for a new permit received prior to expiration will be treated as second in time. As noted, there are no published standards to guide the Board's determination in this regard.
Notice of applications for wildcat (undelineated field) wells must be published,23 and if a demand to be heard (for reasons other than concerns subject to Montana's Surface Damage and Disruption Act payments24 ) is received within 10 days after the publication, the matter will be referred to a full Board
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hearing.25 Approved and issued drilling permits remain in full force and effect for a period of six months from the date of issuance.26
Permanent Spacing
The Board will not enter a permanent spacing order until such time as a producing well has been established by at least perforation within the formation sought to be permanently spaced. More often than not, the permanent spacing will mirror the temporary spacing unit for the well.27 However, there is one important aspect of permanent spacing that the Montana Board has not yet faced.
Section 3 of the spacing statute28 deals solely with permanent spacing units, and provides:
Permanent spacing units do not need to be uniform in size or shape but must result in the efficient and economic development of the pool as a whole. In establishing permanent spacing units, the acreage to be embraced within a unit and the shape of the unit must be determined by the board based upon evidence introduced at the hearing. The board may divide a pool into zones and establish spacing units for each zone if necessary for a purpose mentioned in subsection (1) [waste prevention, avoid the drilling of unnecessary wells, and protection of correlative rights] or to facilitate production through the use of innovative drilling and completion methods. The spacing units within the zone may differ in size and shape from spacing units in any other zone but may not be smaller than the area that can be efficiently and economically
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drained by one well.
This section gives the Board authority to deal with the different drainage patterns of vertical and increasing-popular horizontal wells in fields where the drilling and completion techniques of both types are present. The current play in the southwestern section of the Williston Basin which involves the drilling of horizontal wells in the Red River formation "B" zone, will likely, in both Montana and North Dakota, find horizontal wells along side vertical wells in older, traditional vertical well fields. The subsection quoted above provides the Montana Board with the ability to harmonize the different drainage patterns in a way that will protect correlative rights.
Given the Board's present practice of not requiring that wells drilled upon statewide temporary units at a "legal" location be...
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