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ROLE OF STATE REGULATION

State government (i.e., the state legislature) has enacted laws to direct the exploration and development of minerals. These statutes are intended to supplement the structure of the oil and gas industry that is based on mineral leases and other contractual arrangements.  The majority of these statutory requirements direct the operation of the oil companies; they do not impose requirements on the mineral and surface owners. Some of the requirements for the oil companies, however, impact the relationships among the oil companies, mineral owners and surface owners. 

This web page discusses several (but certainly not all) of the state mandates.  The emphasis is on those requirements whose implementation impacts surface and mineral owners.  This site does NOT discuss all the state and federal regulations a mineral developer must attend to during exploration and development of minerals.  Those topics are beyond the scope of this discussion. 

The North Dakota Legislature has directed the Industrial Commission to administer many of these statutes and to create (promulgate) necessary regulations.

Industrial Commission

The legislative goals of these statutes include promoting development of oil and gas, preventing waste, enhancing recovery of oil and gas, protecting the correlative rights of all owners, and encouraging practices that enhance secondary recovery for the benefit of surface owners, mineral owners, oil companies, and the general public (based on N.D.C.C. §38-08-01). The Industrial Commission describes its goals as conserving the State’s natural resources, preventing waste of oil and gas resources, and protecting the correlative rights of all owners of crude oil and natural gas (based on N.D.A.C. §43-02-03-02).

Responsibilities of the Industrial Commission include (based on N.D.A.C. chap. 43-20-03):

• Issue and oversee permits to drill, recomplete, drill horizontally, and other activities
• Maintain records of wells
• Assure drill holes are plugged
• Locate oil wells
• Pool mineral rights
• Unitize well fields
• Regulate surface activities of oil companies
• Regulate production of oil and gas
• Protect surface and ground water resources
• Regulate “field” processing and transportation of extracted oil and gas

Responsibilities also include oversight of royalty statements, stripper wells, workovers, secondary recovery, horizontal drilling, and exploration (see N.D.A.C. chaps. 43-02-06, 43-02-08 through -12). Regulation of exploration is primarily to protect surface owners (N.D.C.C. §38-11.1-02). The other topics on this list impact mineral owners, but are beyond the scope of the discussion of this web site.

In North Dakota, the drilling of exploration and development wells and the production of oil and gas is regulated by the Industrial Commission. Specifically, the Commission has the authority to regulate (1) the drilling, producing, and plugging of wells; (2) the chemical treatment of wells; (3) the spacing and density of wells; (4) operations to increase the ultimate recovery of wells; and (5) the disposal of salt water and oil field wastes. The Commission also has the authority to limit and to allocate the production of oil and gas from any well or reservoir. Although these regulations provide some protection to owners of mineral rights and to related surface rights, lease negotiations are necessary to cover situations not covered by statute or regulation.

Well Spacing and Pooling

Oil and gas wells must be drilled in accordance with state oil and gas conservation regulations. Among the more important conservation regulations are spacing and density regulations and compulsory pooling.

N.D.A.C. §43-02-03-18:  well spacing

Spacing and density regulation limits the number of wells that may be drilled into an oil or gas reservoir by establishing drilling units (also called spacing units). The Industrial Commission establishes the size of drilling units for each reservoir (e.g., a minimum of 320 acres or a surveyed half section). Spacing prevents the waste of oil, gas, reservoir energy, and money that may result if too many wells are drilled into a given reservoir. In any given area, there may be more than one oil reservoir at one level, or there may be a number of separate oil reservoirs stacked at different geological levels. Thus, spacing and density regulations vary from reservoir to reservoir.

The need for pooling arises when a given drilling unit is comprised of two or more tracts or mineral interests. Pooling joins together all tracts and interests in a drilling unit to allow for drilling and to share the costs and benefits of development.  Together, spacing, density regulation and pooling helps assure that all mineral owners have an opportunity to capture a fair share of the oil and gas in a common reservoir.

Pooling may occur by voluntary agreement or by compulsory pooling. The pooling clause, discussed on another page, allows the company to pool the mineral owner’s interest. Mineral owner's may want to delete the pooling clause from the mineral lease if the mineral owner is not willing to relinquish control of the pooling decisions to the oil company.  With the clause deleted, the oil company will need to work with adjacent mineral owners to develop an agreeable pooling arrangement.  If a mineral owner unreasonably refuses to pool, the company can seek compulsory pooling from the Commission.

N.D.C.C. §38-08-08: authorizes voluntary pooling, authorizes compulsory pooling, application, notice, hearing, allocation of cost, imposition of risk penalty,

N.D.A.C. §43-02-03-88.1:  application to pool, hearing, and decision

N.D.A..C §43-02-03-16.3: recovery of risk penalty

The Commission must first hold a public pooling hearing after public notice has been given. After the hearing, the Commission will issue the pooling order which must provide for the just and reasonable division of the proceeds from production from the well in the drilling unit among all of the interest owners. Any well drilled in this pooled area or any other pooled area must conform to applicable Commission regulations.

Pooling necessarily enlarges the company's implied right to make reasonable use of the leased land in that the company can use any land within the unit to facilitate development of the unit. Moreover, the owner on whose land the well is situated will experience the full burden of surface use, but will only receive a proportionate share of benefits. However, this is simply a necessary side effect of spacing and density regulation and pooling, and but for drilling limitations, surface use would be far more intense as companies would then be free to drill as many wells at they wish.

Because of pooling, the company benefits by being able to “save” or perpetuate several leases with one well. But this problem is minimized if landowners confine their leases to small tracts and if the pooling clause is deleted.

Unitization

Similar to pooling, the Industrial Commission also regulates unitization, that is, the joining together of various mineral interests in a specific reservoir to increase the ultimate recovery of oil and gas. This process may involve pressure-maintenance or re-pressuring operations, cycling operations, etc.

N.D.C.C. §38-08-09, et seq

For example, assume that 40 wells are producing oil and gas from a single reservoir. The owners of interests in this reservoir may agree that flooding the reservoir with water will increase the ultimate recovery of oil and gas. This may involve plugging some wells, converting others to water injection wells, and producing the remainder. For this to be fair to all interest owners, the entire reservoir would have to be pooled so that each interest owner in the reservoir would receive its fair share. The pooling of interests in an entire or substantial portion of a common reservoir is called unitization.  Unitization may be either voluntary or compulsory, but before the Commission may order compulsory unitization, there must be substantial voluntary agreement among the various interest owners. If the required level of voluntary agreement is achieved, the Commission may then force the remaining interest owners to unitize.

In general, the orders set forth by the Commission pertaining to a requested plan of unitization must protect and safeguard the respective rights of the persons affected. More specifically, the plan must prevent waste and, with reasonable probability, result in the increased recovery of oil and gas from that reservoir. Also, the costs of unitization must not exceed the value of the additional oil and gas recovered.  Any company holding an interest in a common reservoir may propose a plan for unitization and request Commission approval; however, before unit operations may be conducted, at least 60 percent of the owners of interests in the area to be unitized must consent to the unit plan and agreement.

Risk Penalty

Introduce risk penalty

Regulations of Oil Company that Impact Surface Owner

Introduce and then link to Surface Owners' Considerations

• Notify surface owners of planned exploration and drilling activities
• Compensate surface owner for damages to the surface
• Do not interfere with adjacent surface owners
• Do not adverse impact water resources

  N.D.C.C. chap. 38-11.1

Next Pages

The discussion thus far has briefly described the exploration and production process, the relationship between the mineral and surface owners, and the regulatory role of the North Dakota Industrial Commission.  It is time to discuss considerations for the mineral owners and surface owners.

Last Updated July 30, 2010

E-Mail agecinf@ndsuext.nodak.edu
Published by Agribusiness and Applied Economics
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