Dallas HYSTAD and Phylis A. Hystad, Appellees, v. INDUSTRIAL COMMISSION of the State of North Dakota in the Matter of the Proper Spacing for the Development of the Poe-Red River, McKenzie County, North Dakota, and Exeter Exploration Company, Appellants.
Civ. No. 11044.
Supreme Court of North Dakota.
June 19, 1986.
389 N.W.2d 590
Rolfstad, Winkjer, McKennett & Stenehjem, Williston, for appellees; argued by Kent Reierson. Appearance by Dean Winkjer.
Lawrence Bender, Asst. Atty. Gen., North Dakota Indus. Com‘n, State Capitol, Bismarck, for appellant Industrial Com‘n of the State of N.D.
Fleck, Mather, Strutz & Mayer, Bismarck, for appellant Exeter Exploration Co.; argued by John W. Morrison.
MESCHKE, Justice.
The Industrial Commission of North Dakota (Commission) and Exeter Exploration Company (Exeter) appeal from a district
The Poe-Red River Pool underlies seven sections of land in McKenzie County, North Dakota.1 In late 1981 and early 1982, three wells were drilled2 in the pool. Pursuant to
Dallas and Phylis Hystad4 petitioned the Commission for a rehearing, asserting that the Commission overlooked certain statutory spacing provisions and that there was no evidence to support the Commission‘s decision for 640-acre spacing units on the three sections with existing wells. Following a rehearing at which the issues were briefed and argued but no additional evidence was presented, the Commission entered an order, dated October 17, 1984, affirming its July 19 order.
The Hystads appealed the Commission‘s order to district court and Exeter was permitted to intervene. The district court reversed the part of the order establishing spacing units of 640 acres with a second allowable well on the three sections with existing wells and entered a judgment establishing 320-acre spacing units for the entire seven section pool. Exeter and the Commission appealed.
The standard of review on appeals from an order of the Commission is specifically provided in
“‘Our review of the factual basis of administrative agency orders is a three-step process: (1) Are the findings of fact supported by substantial evidence? (2) Are the conclusions of law sustained by the findings of fact? (3) Is the agency decision supported by the conclusions of law? [Citations omitted.]
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““This court, however, has indicated its reluctance to substitute its own judgment for that of qualified experts in matters entrusted to administrative agencies.’
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““We have defined “substantial evidence” as “such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” [Citations omitted.] “[I]t must be enough to justify, if the trial were to a jury, a refusal to direct a verdict when the conclusion sought to be drawn from it is one of fact for the jury.” [Citations omitted.] This is something less than the weight of the evidence, and the possibility of drawing two inconsistent conclusions from the evidence does not prevent an administrative agency‘s finding from being supported by substantial evidence. [Citation omitted.]‘” 307 N.W.2d at 842.
The Hystads contend that insofar as the Commission‘s proper spacing order retained 640-acre spacing units with a second allowable well on the three sections of land, the order was not authorized by law. The Hystads’ argument is premised on defining a “zone” as a “stratigraphic interval”5 and
Exeter and the Commission assert that the term “zone” as used in
The standard for uniform size and shape spacing units is provided in
“1. When necessary to prevent waste, to avoid the drilling of unnecessary wells, or to protect correlative rights, the commission shall establish spacing units for a pool. Spacing units when established shall be of uniform size and shape for the entire pool, except that when found to be necessary for any of the purposes above mentioned, the commission is authorized to divide any pool into zones and establish spacing units for each zone, which units may differ in size and shape from those established in any other zone.” [Emphasis added.]
The standard of a reasonably uniform spacing plan throughout the pool is also repeated in Sections
The plain language of that statute authorizes the Commission to deviate from spacing units of uniform size and shape only when it finds that such a deviation is necessary to prevent waste, to avoid drilling unnecessary wells, or to protect correlative rights. The existence of different stratigraphic intervals is not a statutory requirement for the Commission to order different size or shape spacing units. The context of the language authorizes the Commission to divide a pool into geographic zones. If a zone were interpreted as a stratigraphic interval, the Commission would have the authority to divide a pool into stratigraphic intervals. However, a stratigraphic interval exists because of the geologic composition of the earth, and the Commission cannot create a stratigraphic interval if it does not exist because of the earth‘s geologic composition.
We also note that the legislative history supports this interpretation of the term “zone” as referring to a geographic area in this context.
“The requirement that spacing units must be of uniform size and shape for ‘the pool as a whole’ favors the correlative rights doctrine. On the other hand, a strict ‘uniform size and shape’ requirement might unduly burden an owner if his property or lease is not advantageously located on the structure or should happen to be in the gas-cap area of an oil pool. Recognizing these probabilities, the Model Act provides that the regulatory body may zone the area of the pool and establish spacing units of uniform size and shape within each zone. Thus, spacing of a pool becomes a flexible tool for carrying out the purposes of the Act.
“The Model Act also permits the regulatory body to consider the fact that spacing units for a gas-cap zone should be larger than for an oil zone. Under the act other bases for zoning, such as pay sand thickness or recoverable hydrocarbons in place, may also be used. Generally, spacing units are now established by regulatory bodies after considering testimony concerning average information about the pool as a whole. The testimony on spacing is generally designed to prove the expected recovery of oil or gas from an average unit of pool volume. The spacing units on the fringes of the pool often do not contain the average amount of pool volume. The result, particularly in states adhering to flat per-well allowables, is excessive and disproportionate withdrawals and discrimination in favor of wells drilled on spacing units underlaid by the thinner pay sections. With authority to zone a pool, the regulatory body can, and no doubt would, eliminate this violation of correlative rights by providing closer spacing in areas of maximum pay sand thickness and wider spacing in areas of thinner pay sand thickness.” [Emphasis added.] Walker, Discussion: A Model Oil and Gas Conservation Law, supra, at 283.
This discussion recognizes the authority of the Commission to zone an “area” of the pool and establish uniform size and shape spacing units within each zone and, further, that that type of spacing is a flexible tool for carrying out the purposes of the Act and, in particular, protecting correlative rights.6
We believe that, within the context of the language of
The Commission and Exeter contend that, pursuant to
“4. An order establishing units for a pool shall cover all lands determined or believed to be underlaid by such pool, and may be modified by the commission from time to time to include additional areas determined to be underlaid by such pool. When found necessary for the prevention of waste, or to avoid the drilling of unnecessary wells, or to protect
correlative rights, an order establishing spacing units in a pool may be modified by the commission to increase or decrease the size of spacing units in the pool or any zone thereof, or to permit the drilling of additional wells on a reasonably uniform plan in the pool, or any zone thereof, or an additional well on any spacing unit thereof.” [Emphasis added.]
Upon discovery of oil or gas in a pool not covered by a spacing order, the Commission may enter an order for temporary spacing for the development of the pool.
We conclude that, when entering its initial proper spacing order, the Commission may divide a pool into geographic zones, and establish different sized or shaped spacing units in each zone, including the drilling of additional wells within one zone on the spacing unit first established in a temporary spacing order. However, since the primary statutory requirement is units “of uniform size and shape for the entire pool,” the Commission‘s authority to establish zones with different unit provisions for one pool requires express findings that such a spacing order is necessary to prevent waste, to avoid drilling unnecessary wells, or to protect correlative rights.
In the instant case, the parties concede that the non-uniform size spacing units were based on the Commission‘s determination that such spacing units were necessary to protect correlative rights. Prevention of waste and avoidness of unnecessary drilling were not involved. Thus, our analysis requires consideration of “correlative rights,” a term not defined in our statutes providing for regulation of gas and oil production activities nor is the term defined in the regulations of the commission.
In Amoco Production Co. v. North Dakota Indus. Comm‘n, supra, 307 N.W.2d at 842, fn. 4, we referred to the following definition of correlative rights:
“4. ‘Correlative rights
“‘[T]he opportunity afforded, so far as it is practicable to do so, to the owner of each property in a pool to produce with-
out waste his just and equitable share of the oil or gas, or both, in the pool; being an amount, so far as can be practically determined, and so far as can practicably be obtained without waste, substantially in the proportion that the quantity of recoverable oil or gas, or both, under such property bears to the total recoverable oil or gas, or both, in the pool, and for such purposes to use his just and equitable share of the reservoir energy.’ Nev.Rev.Stat. § 522.020(2) . There appear to be two aspects of the doctrine of correlative rights: (1) as a corollary of the rule of capture, each person has a right to produce oil from his land and capture such oil or gas as may be produced from his well, and (2) a right of the land owner to be protected against damage to a common source of supply and a right to a fair and equitable share of the source of supply. When a legislature or administrative body regulates production practices to protect against waste, it may also regulate to insure an equitable distribution of the source of supply. There is some dispute over the power of the state to regulate production practices to insure an equitable distribution of the source of supply, apart from waste. See Treatise § 204.6. Williams & Meyer, Manual of Oil & Gas Terms (4th ed. 1976).”
Thus, correlative rights includes interdependent rights and duties of each landowner in the common source of supply. Each landowner is entitled to a just and equitable share of oil or gas in the pool; however, that right is limited by the landowner‘s duty to all the other owners of interests in the common source of supply not to damage or take an undue proportion of the oil or gas from that common source of supply. Dodds v. Ward, 418 P.2d 629 (Okla.1966); 1 Summers, Oil and Gas, Section 63 (1954). The physical characteristics and reservoir dynamics of the common source of supply necessitate the use of highly technical geological and economic information to determine the extent of correlative rights. 1 Summers, Oil and Gas, Section 63 (1954). This information necessarily includes, if reasonably practicable, the physical size, shape, and location of the common source of supply relative to each owner‘s tract of land.
In Larsen v. Oil & Gas Conservation Comm‘n, 569 P.2d 87, 92 (Wyo.1977), the Wyoming Supreme Court recognized the following minimum findings necessary to determine the extent of correlative rights in the context of prescribing the shape of spacing units:
“(1) the amount of recoverable oil in the pool; (2) the amount of recoverable oil under the various tracts; (3) the proportion that #1 bears to #2; and (4) the amount of oil that can be recovered without waste. See Continental Oil Co. v. Oil Conservation Commission, 70 N.M. 310, 373 P.2d 809. These findings were not made in this case. Without such findings, a reviewing court has no way to determine whether the owner of each property has been afforded the opportunity to produce without waste, so far as it is reasonably practicable, his just and equitable share of the oil in the pool (§ 30-216(i)). In other words, it cannot determine whether correlative rights are being protected. As the court said in the Continental Oil case:
““... That the extent of the correlative rights must be determined before the commission can act to protect them is manifest.’
“We will, therefore, require that the Commission make such findings, insofar as it is reasonably practicable to do so.” See also Balkovatz, Practice and Procedure Before Oil and Gas Commissions—Some Nuts and Bolts, 25 Rocky Mtn.Min.L.Inst., 14-10–14-19 (1979).
We recognize that findings on these factual questions may not always be practicable for a pool in the early stages of development, [Grace v. Oil Conservation Commission of New Mexico, 87 N.M. 205, 531 P.2d 939 (1975)]; however, these factual questions suggest an appropriate focus for determining a just and equitable share of a common source of supply which is in
In this respect, the Commission is an administrative agency subject to the Administrative Agencies Practice Act.
In the instant case, the Commission‘s July 19, 1984 order stated, in part:
“(2) That geological and engineering evidence presented to the Commission relative to the matter of well spacing indicates that the Poe-Red River Gas Pool, as classified and defined in this order, should be developed on a pattern of one well to 320 acres in order to drain efficiently the recoverable hydrocarbons from said pool, assure rapid development, avoid the drilling of unnecessary wells, and prevent waste in a manner that will protect correlative rights.
“(3) That proper 320-acre spacing in the Red River Pool in this field will result in the efficient and economical development of the field as a whole and will operate so as to prevent waste and provide maximum ultimate recovery, will avoid the drilling of unnecessary wells, and will protect correlative rights.
“(4) That Commission Order No. 2708 set the temporary spacing for the Poe-Red River Pool on 640-acre spacing.
“(5) That proceeds from the sale of hydrocarbons from current Poe-Red River Pool wells have been shared by interests in the entire section.
“(6) That to protect correlative rights, sections with Poe-Red River producers should remain spacing units with a second well allowed to be drilled on them.”
The Commission‘s October 19, 1984 order provided, in part:
“(7) That the Hystad # 15-2 and the Hystad # 11-31 wells have produced substantial quantities of hydrocarbons and the owners of interests in the 640-acre spacing units for the wells, as provided by Order # 2708 [temporary spacing order], have shared in the proceeds from such production. And further, in order for the owners of interests in the sections to receive their just and equitable share, such owners should continue to share in the production of the first well, as well as the production from the second well on the section.”
These findings establish a deviation from the uniform size spacing unit throughout the pool “to protect correlative rights;” however, the findings do not elab-
Accordingly, we reverse and remand the case to the district court with instructions to remand to the Industrial Commission for further findings of fact and if appropriate, the presentation of additional evidence in accordance with this opinion.
ERICKSTAD, C.J., LEVINE, J., and PEDERSON*, S.J., concur.
VANDE WALLE, Justice, concurring specially.
Justice Meschke, for the majority, in a well-written opinion, has thoroughly analyzed the applicable statutes of our oil and gas conservation Act and I agree with most of what he has written. I do not agree that the findings of fact are so inadequate
Appellate courts often believe findings of fact prepared by trial courts and administrative agencies should be better. Aside from that, however, I believe the findings are minimally adequate for the purpose, although they do not provide us with a detailed explanation of the Commission‘s rationale. Those findings, as recited in the majority opinion, indicate that because all the mineral owners of the 640 acres included in the temporary spacing order shared in the production of the well, they should all continue to share in the production of the existing well and current wells to be drilled on the spacing unit. It is uncontested that one well will adequately drain only 320 acres. Therefore, one well could not adequately drain 640 acres although all the mineral owners of the 640-acre spacing unit shared in production. That cannot be undone. The Commission‘s position obviously is that in order to protect correlative rights in the future all owners should continue to share in the production of all wells on the 640-acre spacing unit. Were a second well to be drilled in which only the owners under that 320 acres would share—but who also had shared in the proceeds of the original well on the 640 acres—the unfairness becomes apparent. It appears obvious to me from the findings and conclusions that this is the Commission‘s method of protecting correlative rights. That task is far from an exact science and the scales may not weigh evenly.
The majority opinion recognizes that orders of the Commission are to be sustained if the Commission has regularly pursued its authority and its findings and conclusions are sustained by the law and by substantial and credible evidence.
“Mr. Bender: ... would it protect correlative rights if a well is drilled in the N/2 of 2 and only the people in the N/2 of 2 would be able to share the production when they‘ve had an opportunity to share in the production of the well in the S/2 of 2?
“Ceci Searls: It would be designed that if we get the 640 acres for the existing wells, that a well drilled in the N/2 of 2 would be shared equally by everyone in the 640 acres. Just as the well in the S/2 has been.
“Mr. Fleck: But, his question is if you didn‘t do that would that be fair?
“Ceci Searls: Would that be fair?
“Mr. Fleck: Would that be protecting correlative rights if you let the N/2 owners get all the royalty out of that after they‘ve shared down here.
“Ceci Searls: No. I don‘t think it would.
“Mr. Winkjer: Just one if I may follow-up on that. But you‘re talking about that the N/2 of Section—that a well in the N/2 of Section 2 may not be drilled. You know, if you were to tell us today that you were going to drill a well in the N/2 of Section 2 we‘d have no objection to your plan or the other half of either of these other sections. But it is the uncertainty, the speculativeness of having dual spacing within the same field and sharing oil with parcels of property that are not contributing that creates the problem. We‘ll go along with the—with this issue if you‘ll give us a commitment as to when these other wells will be drilled, or the leases for those other 320 acre tracts be given up and let the landowners then go out and do their own marketing to protect their correlative rights.”
Additional dialogue between counsel for the respective parties and members of the staff of the Commission leave little doubt that the rationale is to protect correlative rights by requiring all who shared in the
The findings thus are adequate for me to understand the reasoning of the Commission in this regard. However, I am not convinced from the findings that in this instance it necessarily follows that correlative rights are being protected. The temporary order of the Commission proved to be incorrect in that we now know that one well will drain only 320 acres rather than 640 acres. Thus mineral owners shared in the production of a well who should not have shared therein. But an order requiring that a second well drilled on the 640-acre spacing unit should be shared in by all the mineral owners in that spacing unit is not, alone, a sufficient basis for a conclusion that correlative rights will be protected. Unless there are findings by the Commission, based on evidence before it, that there are sufficient reserves to justify the drilling of a second well on the unit in which the Hystads would share, I do not believe correlative rights would be protected. If, in fact, there will be no second well drilled because of marginal reserves or because of other factors known to the Commission from the evidence before it, the order before us only perpetuates the inequity created as a result of the temporary spacing order permitting mineral owners whose property is not drained by the well on the Hystads’ property to continue to share in that well.
It may be that a second well on the spacing unit would produce in as large or greater quantities than the current well, but the Hystads have indicated they are willing to risk the possibility that another well will be drilled in the spacing unit from which they would not share in the production. Although their preference is not decisive, it is their correlative rights, along with those of other mineral owners in the spacing unit, which are to be protected.
The Commission may have adopted a per se presumption that in each instance in which the Commission reduces the spacing in a field in which wells have been drilled and in which there are spacing units with diverse mineral ownership that the type of order here at issue will be entered to protect correlative rights. Although such an order has some ease of decision-making, it should not necessarily be determinative where, such as here, there is objection to that presumption. I agree with Justice Meschke that the decision in Larsen v. Oil & Gas Conservation Comm‘n, 569 P.2d 87 (Wyo.1977), has much to recommend it, although I am not convinced that such information is always available to the Commission.
I cannot determine from the findings nor, for that matter, the evidence before the Commission, the specific testimony necessary to a determination of these concerns and I therefore concur with the remand for the purpose of receiving additional evidence and making further findings.
LEVINE, J., concurs.
PEDERSON, Surrogate Justice, sitting in place of GIERKE, J., disqualified.