POOLING AND UNITIZATION METHODS ACROSS SHALE BASINS (OR LACK THEREOF): OVERVIEW OF POOLING AND UNITIZATION IN NORTH DAKOTA1
| Jurisdiction | United States |
(May 2014)
POOLING AND UNITIZATION METHODS ACROSS SHALE BASINS (OR LACK THEREOF): OVERVIEW OF POOLING AND UNITIZATION IN NORTH DAKOTA1
Shareholder
Fredrikson & Byron, P.A.
Bismarck, North Dakota
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AMY L. DE KOK is shareholder with Fredrikson & Byron, P.A. and works out of its Bismarck, ND office. Amy is a member of the firm's Litigation, Energy and Oil & Gas groups. She represents clients in all aspects of complex commercial and civil litigation, with a particular emphasis on oil and gas matters and related litigation, such as complex real property and contract disputes. Amy regularly appears in North Dakota state and federal district and appellate courts.
I. Introduction: Nature of Oil and Gas and the Rule of Capture.
As the United States Supreme Court recognized in Brown v. Spilman, 155 U.S. 665, 669-70 (1895), oil and gas, unlike most subsurface minerals such as coal and similar hard-rock mineral deposits, are fluid, and migrate from areas of high pressure to areas of lower pressure within the reservoir, or pool, in which they are found.2 As a result, oil and gas do not easily fit within the general notions of "ownership in place" applied to coal and other hard-rock minerals.3 Rather, traditionally, the ownership of oil and gas resources was governed by the "rule of capture." The "rule of capture" in its simplest, most straightforward form holds that "the owner of a tract of land acquires title to the oil and gas which he produces from wells drilled thereon, though it may be proved that part of such oil or gas migrated from adjoining lands."4 The rule made it economically imperative that each mineral owner drill his land and produce as rapidly as possible or otherwise risk that an adjacent owner would drain the land.5 In general, a cotenant may not remove minerals from the land concurrently owned without the consent of his concurrent owners. Historically, unless the statute or regulations of the state conservation agency provide otherwise, the default rules of cotenancy generally apply. That is, a cotenant may not remove minerals from the land concurrently owned without the consent of his concurrent owners.6
II. Conservation Legislation: Well Spacing, Pooling, and Unitization.
To protect adjacent owners, avoid waste, and maximize production in its oil fields, most producing states, including North Dakota, have adopted conservation legislation. A primary
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feature in most conservation statutes is the imposition of spacing requirements, which limit the number of wells that can be drilled within a specified acreage.7 There are generally two types of spacing rules. "Lineal" rules prescribe setback distances between a well and other points, including, but not limited to, other wells, governmental section boundaries, and certain structures.8 The other type of spacing rules is generally referred to as "density" rules, which set a minimum amount of acreage within which a single well may be located.9
In addition to spacing requirements, many producing states promulgated laws allowing pooling or unitization of tracts and interests for the efficient development of oil and gas. Indeed, the concept of pooling emerged out of well spacing and density requirements as the impetus to pool mineral interests is often driven by spacing rules which may otherwise prevent an owner from being able to produce the oil or gas underlying his property.10 In order to ensure that all owners in a spacing unit get their fair share of production from the well(s) in a spacing unit, the ownership interests in the unit may be integrated, or "pooled." In many jurisdictions, pooling and unitization establish a contractual or statutory form of cotenancy among the parties who have the right to produce oil and gas in the spacing or drilling unit.11 While the concepts of pooling and unitization are related and often used interchangeably, they are separate and independent concepts. "Pooling" generally describes the joining together of small tracts or portions of tracts of land for the purpose of having sufficient acreage to receive a well drilling permit, and for the purpose of sharing production by interest owners in such a pooled unit.12 Unitization, or unit operations, on the other hand, refers to the consolidation of mineral or leasehold interests covering all or part of a common source of supply.13 The primary function of unit operations is to maximize production by efficiently draining the reservoir, utilizing the best engineering techniques that are economically feasible.14
III. Spacing and Setback Rules in North Dakota.
North Dakota law regulates the number of wells that can be drilled through spacing. North Dakota's spacing statute, N.D.C.C. § 38-08-07 , modifies the "rule of capture" by authorizing the Industrial Commission of North Dakota (hereinafter, the "Commission")15 to
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limit the number of wells that can be drilled in a particular pool.16 The Commission establishes a spacing unit and prescribes the number of wells that can be drilled to ensure efficient and effective development.17 Historically, only one well was allowed per spacing unit. However, recently, many jurisdictions, including North Dakota, permit multiple wells in each spacing unit. Although the Commission has broad authority in establishing spacing units, N.D.C.C. § 38-08-07 provides certain requirements that the Commission must adhere to. For instance, N.D.C.C. § 38-08-07 requires that spacing units established by the Commission must be uniform in size and shape for the entire pool.18 However, the Commission is expressly authorized to divide any pool into zones and establish spacing units for each zone.19 Units within each such zone may differ in size and shape from those established in any other zone, if necessary to prevent waste, avoid the drilling of unnecessary wells, or protect correlative rights.20 The size and shape of spacing units as set by the Commission are to be such as will result in the efficient and economical development of the pool as a whole.21 Although not always the case, the most common spacing units for horizontal wells drilled in North Dakota are either 640-acre spacing units or 1280-acre spacing units. An order by the Commission setting a spacing unit for a pool must specify the size and shape of each unit and the location of the permitted well thereon in accordance with a reasonably uniform spacing plan.22 The Commission is authorized by statute to enter upon application, an order permitting a well to be drilled at a location other than that prescribed by a spacing order under certain circumstances;23 however, in such cases, the Commission is required to include in its order suitable provisions to prevent the production from the spacing unit of more than its just and equitable share of the oil and gas in the pool.24 Finally, an order establishing spacing units for a pool must cover all lands determined or believed to be underlaid by such pool,
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and may be modified by the Commission from time to time to include additional areas determined to be underlaid by such pool.25
While the North Dakota Legislature has declared it to be in the public interest to foster, encourage and promote the development, production and utilization of natural resources of oil and gas in such a manner as to prevent waste, it has also declared that the correlative rights of all owners, including landowners, are to be fully protected.26 To this end, in addition to spacing rules, the North Dakota Legislature has passed certain "set back" requirements that operators must adhere to in drilling oil and/or gas wells. For instance, unless waived by the owner or the Commission determines that the well location is reasonably necessary to prevent waste or to protect correlative rights, the Commission may not issue a drilling permit for an oil or gas well that will be located within five hundred feet of an occupied dwelling.27 If a well to be drilled within one thousand feet of an occupied dwelling is permitted, the Commission may impose conditions on the permit which are reasonably necessary to minimize impact to the owner of the occupied dwelling.28 Moreover, for wells permitted on new pads built after July 31, 2013, the dwelling owner may request that the location of all flares, tanks, and treaters utilized in connection with the permitted well be located at a greater distance from the occupied dwelling than the oil and gas well bore.29 In addition to the requirements set by statute, the Commission has issued a Drilling Permit Review Policy, which requires the director of the Oil and Gas Division, prior to issuing a permit to drill, to consider the proximity of the proposed location to following: (1) lakes (with water surfaces of 640 acres or more); (2) near-surface coal, sand, or gravel deposits; unstable soils or areas with a high potential for soil instability; (3) a natural drainage; (4) a military facility; (5) a plugged and/or abandoned well; (6) 33 feet of any section line which has not been closed or within 200 feet of the centerline of a state or federal highway; (7) a city's extra-territorial boundary; (8) a county, state, or federally designated historic site, a public recreation area, or a wildlife management area; and, (9) any other areas or geographical formations the director deems appropriate.30 If a proposed location is located within the proximity to any one of these items, the director may attach additional stipulations to the permit, which he or she deems necessary.31
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IV. Pooling in North Dakota
If a state limits the number of wells that can be drilled, as North Dakota does, it must provide some sort of sharing of production. This provision for sharing is often referred to as "pooling" or in some instances as "integration."32 Pooling can be accomplished voluntarily or by compulsion through state...
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