areas covering a common source of supply. The Compulsory Pooling Statute authorizes a risk penalty on leased working interest owners in the amount of 200% of the nonparticipating owner’s share of the reasonable actual costs of drilling and completing the well. The Pooling Statute goes on to state that the risk penalty may be recovered “out of, and only out of, production from the pooled spacing unit .” 3 Similarly, the Compulsory Unitization Statute authorizes a risk penalty on leased working interest owners in the amount of 200% of the nonparticipating owner’s share of the unit expense. The Unitization Statute then provides that the 200% risk penalty can be “recovered out of, and only out of, production from the unit. ” 4 Article 11.8 of the Haystack JOA similarly states that risk penalties shall be satisfied out of proceeds from the sale of Unitized Substances attributable to the affected tract.
to prior NDIC Order No. 32353 (the “Twin City Technical Case”) that had ruled that risk penalties on nonconsent wells can only come out of that specific well’s production. The court also rejected Liberty’s argument that Article 11.8 of the Haystack JOA was an unconstitutional taking under the United States and North Dakota Constitutions. So-called “total regulatory takings” occur when regulations completely deprive an owner of all economically beneficial use of their property. To the contrary, Liberty continued to own its own working interests and be credited with its share of production while the production pays down its penalty balance. Per the court, “[t]his is not a situation where Liberty is not receiving any economic benefit for its interest – rather, this is a situation where Liberty is receiving a different economic benefit than what it would prefer.” 6 Finally, the court deferred to the NDIC order itself, holding that its findings were supported by substantial and credible evidence, and contained fair, reasonable, and equitable provisions. The NDIC’s decision (1) was in the public interest and reasonably necessary to increase ultimate recovery, prevent waste, and protect correlative rights, (2) complied with Chapter 38-08 of the Century Code, and (3) was for the common good. The court also noted that under its deferential standard of review, it “accord[s] greater deference to Industrial Commission findings of fact than we ordinarily accord to other administrative agencies’ findings of fact.” 7
III.
The Supreme Court Takes a Broad View on Recovering Risk Penalties
Neither the Compulsory Pooling Statute nor the Compulsory Unitization Statute specifically address recovering a risk penalty that accrued in a spacing unit that was later made part of a larger unitized area. However, the court found that “unit expense,” as used in the Unitization Statute has a broad meaning, covering “any and all cost and expense in the conduct and management of its affairs or the operations carried on by it.” 5 Thus, the court held that under the Unitization Statute and Article 11.8 of the Haystack JOA, the prior risk penalties can be satisfied out of proceeds from the sale of unit production. An analysis of the Compulsory Pooling Statute leads to a similar result. The statute allows for recovery of a risk penalty on nonconsent wells from production from the pooled spacing unit. The Statute does not state that the risk penalty must be recovered from a specific well. Therefore, under either Statute risk penalties are assessed and recovered at the unit level regardless of whether a non-operator has consented and/or is being carried in one or more wells. The court declined to defer
IV.
Takeaway
This holding allows operators more flexible accounting procedures when it comes to calculating payout thresholds at the DSU or unitized level. It may be particularly useful for situations where a party has consented to some wells and is being
[3] Id. at § 38-08-08(3)(a). [4] Id. at § 38-08-09.4(3)(a). [5] N.D. Cent. Code § 38-08-09.13(4). [6] 11 N.W.3d 851, 858. [7] Id at 861.
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N at i onal A ssociation of D i v i s i on O rder A nalys t s
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