No Risk No Reward: The Liberty v. NDIC Decision Holds That Risk Penalties Can be Recovered from Total Unit Production By: D. Bradley Gibbs
In Liberty Petro. Corp. v. N.D. Indus. Comm’n , 1 the Supreme Court of North Dakota addressed whether nonconsent risk penalties must be assessed on a well-by-well basis or can be recovered from overall unit production. The court agreed with the North Dakota Industrial Commission’s (“NDIC’s”) approval of a unit plan that allowed risk penalties to be recovered from unit production as opposed to limiting recovery to the specific nonconsent well.
The Haystack JOA provided that the operator could recover risk penalties out of unitized production – including the prior outstanding balances due on the 4 nonconsent wells. In other words, under the JOA, the operator could withhold production from the 7 consent wells to satisfy Liberty’s penalty balances on the 4 nonconsent wells. Liberty, on the other hand, argued that penalties could only be recovered from production from the specific nonconsent well in which the penalty accrued. Anything else, Liberty argued, was “unfair and inequitable” and even a constitutional regulatory taking. Rejecting Liberty’s arguments, the NDIC approved the Haystack UA and JOA, finding that the unitization as proposed was in the public interest, protected correlative rights, and maximized production of oil and gas. The NDIC based this reasoning on the fact that production from the wells in the unit area is no longer attributable to individual wells and spacing units, but instead is attributable to the tracts in the unit on a pro rata acreage basis. Liberty appealed this decision to the district court who affirmed the NDIC’s decision. On appeal to the Supreme Court, the issue was narrowly framed as whether pre-unitization risk penalty balances can be recovered out of subsequent unit production or must be recovered at the well level.
I.
Background & Unitization
In 2022, Burlington Resources Oil & Gas Co. LP (“Burlington”) filed for unitization with the NDIC, creating the Haystack Butte Unit (the “Haystack Unit”) in McKenzie County, North Dakota. The goal of unitization was to allow wells to be drilled without regard to prior drilling and spacing unit (“DSU”) boundaries that would restrict the length and location of horizontal wellbores. As part of the application process, Burlington submitted a proposed unit agreement (the “Haystack UA”) and a proposed unit operating agreement (the “Haystack JOA”). Liberty Petroleum Corporation (“Liberty”) contested the unitization.
Prior to the plan of unitization, the Haystack
Unit area consisted of multiple DSUs with 19 producing wells. Liberty owned a working interest in 6 of the DSUs containing 11 of the producing wells. Liberty had elected to participate in 7 of the 11 wells and was “nonconsent” in the remaining 4 wells. Notably, 3 of the 4 nonconsent wells were located in DSUs that also had wells where Liberty was participating. Liberty had been assessed a 200% risk penalty for each nonconsent well under the North Dakota Compulsory Pooling Statute, 2 and had an outstanding drilling, completion, and risk penalty balance at the time of the petition for unitization.
II.
How are Past Risk Penalties Assessed?
Chapter 38-08 of the North Dakota Century Code (“Control of Oil and Gas Resources”) creates separate but similar compulsory pooling schemes for: (i) pooled units (for example a 2-section or “1280” DSU); and (ii) larger reservoir-based unitized
[1] 11 N.W.3d 851 (N.D. 2024). [2] N.D. Cent. Code § 38-08-08.
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G rowth T hrough E ducat i on - A pr i l / M ay / J une 2025
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