STATE LAW REGIMES: BAKKEN AND MIDCONTINENT REGION (NORTH DAKOTA, KANSAS AND OKLAHOMA)
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STATE LAW REGIMES: BAKKEN AND MIDCONTINENT REGION (NORTH DAKOTA, KANSAS AND OKLAHOMA)
Crowley Fleck PLLP
Bismarck, North Dakota
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JOHN W. MORRISON, JR., is a Partner in the Crowley Fleck PLLP Bismarck, ND office. He has been a shareholder in the Bismarck firm of Fleck, Mather & Strutz, Ltd. since 1986. He practices in the area of natural resources, public utilities and commercial law, and regularly represents clients in both litigation matters in state and federal courts and before state and federal administrative agencies, including the North Dakota Industrial Commission, the North Dakota Public Service Commission, the North Dakota Tax Department and the Bureau of Land Management. Mr. Morrison received his Bachelor of Arts from Mary College and his Juris Doctorate from the University of North Dakota School of Law. Before entering private practice in 1981, he worked for the North Dakota Legislative Council, the North Dakota State Land Department, and the North Dakota Attorney General's Office. He is a co-author of "Lobbying, PACs and Campaign Finance" (West 1996-2008), and has authored "Regulation of Gas Gathering Systems," 39 Rocky Mtn. Min. L. Inst. 18-1 (1993); "Doing the Lateral Lambada: Negotiating the Technical and Legal Challenges of Horizontal Drilling" 43 Rocky Mtn. Min. L. Inst. 601 (1997).
Many states have mandatory pre-drilling agreements and other requirements for notice, negotiation, and siting of surface disturbances with surface owners. This paper provides a review of North Dakota, Kansas, and Oklahoma laws administered by oil and gas regulators related to surface use and impacts, including bonding and adjacent property owner issues.
I. North Dakota
Prior to 1979, North Dakota followed the general common law doctrine which held that an oil and gas lessee, either as a result of an express grant contained in an oil and gas lease or as a necessarily implied grant, had the right to use so much of the surface estate as was reasonably necessary to develop the mineral estate,2 subject to the obligation to accommodate the interests of the surface owner which requires a balancing of the interests of the mineral owner and surface owner when alternatives are shown to exist.3 However, while the common law doctrine held that a lessee had no obligation to compensate the surface owner for damages in the absence of excessive use or perhaps wanton or negligent destruction of the surface estate,4 the North Dakota Supreme Court expressly declined to address whether mineral developers should be held strictly liable for damage to the surface estate.5
As a consequence of a dramatic increase in oil and gas activity in the 1970s resulting from the oil embargos and unrest in the Middle East, the North Dakota legislature in 1979 enacted the oil and gas production damage compensation act, codified as Chapter 38-11.1 of the North Dakota Century Code (the "Act"). In 1951, Indiana by statute imposed strict liability on a mineral developer for damages to the surface of land, improvements and growing crops.6 North
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Dakota, however, was the first state to impose notice and other procedural requirements on a mineral developer.
Almost immediately, the constitutionality of the Act was challenged and the Act was upheld against claims that it was an invalid exercise of the police power, constituted an impairment of contract, and constituted a taking without just compensation.7
A. Applicability of Act
Chapter 38-11.1 applies only to oil and gas operations8 and applies to "drilling operations" which are broadly defined as drilling activities and "production and completion activities ensuing from the drilling which require entry upon the surface."9 Since 1983, the Act has also applied to geophysical and seismograph exploration activities.10
B. Notice of Operations
Under the Act, two separate notices to surface owners are required to be provided. Except as discussed below with respect to notice of geophysical operations, all notices are required to be provided to "any person who holds record title to the surface of the land as an owner."11 Seven days' notice is required before entry on the land for staking, surveying and other activities that do not "disturb the surface."12 This notice, which is frequently referred to as "notice of staking," must include contact information for the mineral developer, a "sketch" of the approximate location of the proposed drilling site, and an offer to discuss and agree to consider accommodating any proposed changes to the plan.13 The notice of staking is intended to facilitate cooperation between the developer and the surface owner in locating wells.
Notice of other "drilling operations" is required to be given at least twenty days before the commencement of the drilling operations.14 If the contemplated drilling operations are planned to be commenced within 20 days of the termination date of a mineral lease, the required notice may be given at any time before commencement. The notice must include a plat map showing the proposed location, a "sufficient disclosure of the plan or work and operations to enable the surface owner to evaluate the effect of drilling operations on the surface owner's use of the property," and a form prepared by the director of the oil and gas division.15
While geophysical operations constitute "drilling operations" under the Act, notice of geophysical operations is addressed in a separate chapter and the "operator of the land" is required to be given notice of the approximate time schedule and location of the planned
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geophysical activity at least seven days before the commencement of geophysical operations.16 For geophysical operations, the "operator of the land" is the "surface owner or the surface owner's tenant of the land upon or within one-half mile of the land."17
The federal district court for the District of North Dakota has held that under the pre-2011 version of the Act, providing the surface owner with an estimate of the amount of land which would be occupied and the approximate length of the drilling operations was sufficient, noting that under the pre-2011 version the operator was not required to negotiate with the surface owner over the use of the surface estate.18 Under the 2011 amendments, the mineral developer is expressly obligated to offer to "discuss and agree to consider accommodating any proposed changes to the proposed plan of work and oil and gas operations before commencement of the ...operations."19
Both the notice of staking and the notice of drilling operations are required to be delivered to the surface owner by "registered mail or hand delivery" at the address shown in the records of the county treasurer's office and is deemed to have been received seven days after mailing by registered mail or immediately upon hand delivery.20
Nothing in the Act prohibits simultaneous delivery of the notice of staking and notice of drilling operations. However, the notice of staking is required prior to entry upon the land to stake a well. If the mineral developer can provide sufficient information to the surface owner to allow the surface owner to evaluate the effect of the operation without entry upon the surface to stake a well, there appears to be no reason why the seven-day period and the twenty-day period cannot be combined.
The obligation to provide notice of staking and notice of drilling operations may be "waived by mutual agreement of both parties."21 In the absence of a waiver, failure to give notice entitles the surface owner to seek punitive damages as well as actual damages.22
Unlike other states with similar statutes, the North Dakota Act does not require the posting of any bond or other security to gain access to the surface. Assuming the operator can establish the existence of facts entitling the operator to access the surface estate under the rights of the dominant mineral estate owner through either an interest in an oil and gas lease covering the lands on which the well pad or other surface disturbance will be located or the right to operate a pooled spacing unit23 and establish that the operator has complied with the notice
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requirements of the Act (including the making of an offer to settle damages as discussed below), the operator would likely be granted preliminary injunctive relief by a North Dakota court. While a court could always condition the granting of equitable relief on the furnishing of adequate security, there is no explicit statutory mechanism requiring the posting of a bond to cover anticipated surface damages.
C. Damages
Under the North Dakota statute, a mineral developer is obligated to pay the surface owner a sum of money equal to the amount, if any, of lost land value, lost use of and access to the land, and lost value of improvements caused by drilling operations.24 The damages are to cover the losses sustained by both the surface owner and the surface owner's tenant, but are to be paid to the surface owner, and in the absence of an agreement, a tenant is entitled to recover a share of damages from the surface owner.25 Damages may be calculated "by any formula mutually agreeable" between the developer and the owner, but the owner must be compensated for harm caused by exploration only by a single sum. The statute also explicitly provides that payments "only cover land directly affected by drilling operations."26
As originally enacted, the same statute required payment of compensation for "loss of agricultural production and income" and the surface owner was allowed to elect to be paid damages other than exploration damages in annual installments.27 After disputes arose between mineral developers and surface owners over whether owners were entitled to annual payments, the Act was amended in 2011 and now includes a...
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