John W. Morrison Wade C. Mann

  1995 – 5000 horizontal wells in U.S. ◦  “As much as ten billion barrels” of domestic

incremental recovery predicted   2011 EIA Report ◦  24 billion barrels of oil and 750 TCF of gas

  2012 – ◦  Industry estimates 24 billion barrels will be

recovered from the Bakken alone ◦  Baker Hughes North America Rig Count – July 6,

2012   1077 horizontal out of 1877 total rigs - 57%

  Typical JOA ◦  Contract area ◦  Designation of operator ◦  Allocation of expenses and production ◦  Conduct of initial operation and subsequent

operations ◦  Collection of payments due operator ◦  Limitations on abandonment of wells and

conveyances of interests

  Alternative to JOA? ◦  Compulsory pooling statutes   “opportunity to recover or receive, without unnecessary

expense, his just and equitable share”   Participate   Surrender working interest for bonus   Carried subject to penalty   Carried at no penalty – “free ride”

  AOGC Form ◦  Typical pooling order options are to participate

subject to administratively prescribed form of operating agreement or be carried subject to 400% penalty   Exhibit “B” deemed lease   Exhibit “E” gas balancing agreement   Exhibit “H” gas marketing agreement

  Pooling statutes provide for “payment of the costs of development and operation”

  If disputed, agency “shall determine the proper costs”

  Regulatory orders are judicial or quasi-judicial ◦  Res judicata – finality attaches ◦  Modification generally requires change of

conditions ◦  Express reservation of continuing jurisdiction to

resolve cost disputes ◦  Implied authority to modify pooling orders to

accommodate subsequent events   Benion v. ANR Production Company – Utah, 1991

  Agencies are not courts ◦  No jurisdiction to settle private disputes   Contract interpretation   Title disputes

  Resolving disputes over pooling orders can involve private issues ◦  Constantin v. Martin – 10th Circuit, Oklahoma, 1954   Whether ORR is entitled to share of gas in kind ◦  Morgan v. Oklahoma Corporation Commission –

Oklahoma, 2011   No jurisdiction to determined whether surface use was

reasonable

  Come Big or Stay Home, LLC v. EOG Resources, Inc. – North Dakota, 2012 ◦  Operator conditioned well information on JOA or

separate non-disclosure agreement ◦  Agency had declined to exercise jurisdiction ◦  Separate action brought in state district court   Not an appeal from agency orders

  North Dakota Supreme Court affirmed summary judgment ◦  No implied agreement ◦  No joint venture or cotenancy ◦  No “non-contractual” right to receive information

and therefore no conversion   Did not expressly address agency’s

jurisdiction

  “in the event of any dispute as to the costs of dri l l ing and operating the well , the commission shall determine the proper costs”

  K i r k ma n v . Ok l a ho ma Co rp o r a t i o n Commission – Oklahoma, 1983 ◦  Two part analysis   Was expenditure required?   Was the cost reasonable?

  New Dominion LLC v. Mason – Oklahoma, 2009 ◦  Limited to “actual expenditure” of operator ◦  Operator can’t charge fee equal to that charged to

third parties for salt water disposal

  AFE issues ◦  AFE’s under JOA are “at best a good faith estimate”   Signing AFE commits party to proportionate share of

actual costs   M&T Incorporated v. Fuel Resources Development

Company – U.S. District Court, Colorado, 1981 ◦  Cost estimates included in a pooling order are “a

projection of reasonable expenses” and do not constitute a “Commission-fixed limit of liability”   Crest Resources & Exploration Corporation v.

Corporation Commission – Oklahoma, 1980

  JOA ◦  Operator has “right … but not the obligation” to

purchase or market non-operators’ oil and gas ◦  Non-operators have the right to take in kind ◦  Gas Balancing Agreement – Exhibit “E”   In kind   Cash

  No JOA ◦  Pooling statutes generally don’t require operator to

market ◦  Notable exceptions   Arkansas AOGC –

  Gas Balancing Agreement and Gas Marketing Agreement   Oklahoma Natural Gas Market Sharing Act

  Owners not subject to gas balancing agreement have right to share in sale of production by operator or other owner

  McCall v. Chesapeake Energy - Oklahoma, 2007   Not applicable if JOA exists   Approved pass through of 3% marketing charge paid to

affiliate

  Production imbalances ◦  Hunt Oil Co. v. Batchelor –Louisiana, 1994   Commission order requiring balancing in kind affirmed ◦  Weiser-Brown Oil Co. v. Samson Resources – 8th

Circuit, applying Arkansas law, 1992   No contractual right to in-kind, limited to accounting

as a co-tenant ◦  Beren v. Harper Oil Company - Oklahoma, 1975   Cash balancing approved “under the particular facts of

this case

  Production imbalance ◦  Harrell v. Samson Resources – Oklahoma, 1978   Cash balancing ◦  Doheny v. Wexpro – 10th Circuit, Wyoming, 1992   In-kind balancing

  JOA ◦  Operator removed “for cause”   1977 and 1982 – “fails or refuses to carry out duties”   1989 – “gross negligence or willful misconduct” and

“material breach or inability to meet … standards … or perform its obligations”

◦  Successor chosen by two or more parties with majority

  No JOA ◦  Hold Oil v. Corporation Commission - Oklahoma,

1987   Agency has continuing jurisdiction to remove operator ◦  Crest Resources v. Corporation Commission -

Oklahoma , 1980   Operator can’t delegate status without sanction by

agency ◦  North Dakota regulations   Rebuttable presumption that party who, together with

its supporters, owns a majority of interest is entitled to permit and operatorship

  JOA – ◦  Parties have obligation to act “in good faith”   No independent cause of action

  No JOA ◦  Joint venture –   Fiduciary duties and joint and several liability

◦  Oklahoma –   Hebble v. Shell Western E & P, Inc. - 2010

  Operator of a spacing unit or field wide unit has fiduciary duty to other owners

  2012 House Bill No. 2654 –   “reasonably prudent operator” but no “fiduciary duty,

quasi-fiduciary duty, or other similar special relationship”

  Subsurface Trespass and Hydraulic Fracturing   Subsurface Trespass and Drilling from Off-

Unit Locations

  Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.2d 1, 6 (Tex. 2008) ◦  No actual injury proven   Damages from drainage by hydraulic fracturing are

precluded by the rule of capture.

  Majority rationale ◦  Owner claiming drainage from fractures afforded

recourse and had other remedies available ◦  Allowing claim would infringe on Railroad

Commission’s duty of regulating production ◦  Unwise for courts to alter the rule of capture on

which industry and its regulation have relied for decades ◦  Reluctance to regulate by common law a process in

place for over 60 years which neither the Legislature or Commission had seen fit to regulate

  Continental Resources, Inc. v. Farrar Oil Company, 559 N.W.2d 841 (N.D.1997) ◦  Addressed rule of capture and the modification of

traditional property law principles by State’s oil and gas conservation act ◦  Property rights not absolute   Subject to the police power of the State to impose

restrictions on private rights that are necessary for the general welfare of all

◦  Property law of trespass may be superseded

  Egeland v. Continental Resources, Inc., 616 N.W.2d 861 (N.D. 2000) ◦  Court reluctant to insert itself into a regulated area

in a manner that could hinder development ◦  Court explained that penalizing the use of force

pooling “would inhibit use of a statutory procedure designed to implement the strong public policy of fostering the efficient development and use of the state’s oil and gas resources.” ◦  Consistent with analysis in Egeland and Farrar,

North Dakota likely to follow approach of majority in Garza

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  Who must grant easement, lease or other right to use? ◦  Surface Owner? ◦  Mineral Estate Owner?

  Ownership of mineral estate does not equate with ownership of subsurface stratum ◦  Own the opportunity to recover and produce the oil

and gas ◦  Don’t actually own the land beneath the surface

  Pore Space Statutes ◦  Reflect limited nature of mineral estate owner’s

control over subsurface stratum   Consider impact use of adjoining surface may

have on ability of mineral owner in tract to develop ◦  Mineral estate dominant ◦  Accommodation doctrine