§ 23-0901 — Compulsory integration and unitization in oil and natural gas pools and fields

§ 23-0901. Compulsory integration and unitization in oil and natural gas\n pools and fields.\n 1. Compulsory integration and unitization in oil pools and fields and\nin natural gas pools and fields shall be subject to the provisions of\nthis section with subdivision 3 to be specifically applicable to\nintegration within individual spacing units, and subdivisions 4 through\n12 to be specifically applicable to unit operation of an entire pool or\npart thereof.\n 2. The department shall not make any order requiring the integration\nof interests in any spacing unit or requiring the development or\noperation of any field, pool or part thereof as a unit unless it finds,\nafter detailed study and analysis, notice and hearing, that the\nintegration of interests in spacing units, under conditions then\nexisting in this state, or in the field or pool to be affected, is\nnecessary to carry out the policy provisions of section 23-0301 of this\narticle.\n 3. In the absence of voluntary integration as permitted by section\n23-0701 of this article and after finding as required by subdivision 2\nof this section, the department shall make an order integrating all\ntracts or interests in the spacing unit for development and operation.\nEach such integration order shall be upon terms and conditions that are\njust and reasonable and subject to the following:\n a. As used in this section or otherwise in this article, to the extent\napplicable to oil and gas wells:\n (1) "Integrated non-participating owner" or "non-participating owner"\nmeans an owner who elects to reimburse the well operator, out of\nproduction proceeds, for such owner's proportionate share of the actual\nwell costs of the initial well in a spacing unit and be subject to a\nrisk penalty, and complies with all of the requirements for integration,\nincluding the terms of integration, as specified in an order of\nintegration issued pursuant to the compulsory integration provisions of\nthis section. The non-participating owner shall receive the full share\nof production attributable to such owner's proportionate interest in the\nspacing unit following the recoupment by the well operator of the\nowner's proportionate share of the actual well costs plus a risk penalty\nof two hundred percent of the share of the actual well costs allocable\nto such owner. In the case of a leased tract, a royalty shall be\ndeducted from the non-participating owner's share of production, which\nshall not be subject to charges or costs, but shall be separately\ncalculated and paid to the non-participating owner on behalf of the\nroyalty owner as follows:\n (i) During the recovery of the actual well costs, 1/16 or 6.25%,\n (ii) During the recovery of the first 100% of the risk penalty, 3/32\nor 9.38%,\n (iii) During the recovery of the second 100% of the risk penalty, the\nlowest royalty fraction set forth in an existing lease in the unit, but\nno less than 1/8 or 12.5%.\n Nothing in this subparagraph relieves any lessee of its obligation to\npay, from the commencement of production, any remaining royalty and\noverriding royalty owed under the terms of its lease.\n (2) "Integrated participating owner" or "participating owner" means an\nowner who elects to participate in the initial well in a spacing unit,\npays all costs associated with participation and complies with all of\nthe requirements for participation, including the terms of integration,\nspecified in an order of integration issued pursuant to the compulsory\nintegration provisions of this section.\n (3) "Integrated royalty owner" means an owner who has either elected\nto be an integrated royalty owner or who does not elect to become either\na participating owner or a non-participating owner. The integrated\nroyalty owner shall receive a royalty equal to the lowest royalty in an\nexisting lease in the spacing unit, but no less than one-eighth. The\nintegrated royalty owner shall have no obligation to the well operator\nor any other owner for any charges, taxes or fees associated with the\noperation of the oil or gas well and, notwithstanding any other law to\nthe contrary, shall not be liable by reason of the owner's status as an\nintegrated royalty owner for any claims for personal injury or property\ndamage suffered by any person relating to the drilling and operation of\nthe well.\n (4) "Risk penalty" means the percentage applied to well costs to\nreimburse the well operator for the risk involved with the exploration\nfor and development of a well or the percentage applied to other costs\nthat are subject to recoupment and a risk penalty, as provided herein.\nAt any time during a risk penalty phase, an owner subject to a risk\npenalty may pay to the well operator the full amount subject to\nrecoupment by the well operator, to terminate the risk penalty phase and\nbe eligible for other opportunities for participation as provided\nherein.\n (5) "Well costs" means the costs incurred or estimated to be incurred\nby the well operator in relation to the drilling, completion, and the\ninstallation of surface equipment, other than as described in item E of\nclause (ii) of subparagraph 1 of paragraph c of this subdivision,\nincluding, without limitation, surveying, drill site preparation,\nleasing of surface rights and access roads pertinent to the drill site,\nconstruction of access roads, permitting, drilling, stimulation,\ntesting, well logging, drilling insurance, plugging and abandonment of\nthe well, environmental mitigation costs associated with drilling and\nany other costs associated with the foregoing that the operator has\nincurred or anticipates incurring, including a reasonable charge for\nsupervision of the foregoing activities.\n b. If upon issuance of a well permit by the department, the well\noperator does not control all owners within the spacing unit, either\nthrough lease or voluntary agreement, the department shall schedule an\nintegration hearing.\n c. The well operator shall, no later than thirty days prior to the\ndate of the integration hearing scheduled by the department, provide\nactual notice of the hearing to all uncontrolled owners wholly or\npartially within the spacing unit and shall provide notice by\npublication in a form and manner prescribed by the department. Prior to\nor contemporaneously with such notice, the well operator shall provide\nto the department the well operator's estimate of those well costs that\nthe owners electing to participate shall be required to pay to the well\noperator prior to or at the integration hearing based on each owner's\nproportionate share of such costs and a list of each tract wholly or\npartially within the spacing unit, the acreage attributable thereto, the\npercentage interest of the total spacing unit of each tract, an\nindication of whether the tract is controlled by the well operator and\nthe names and addresses of the uncontrolled owners. If applicable, such\nlist shall also identify each tract where the owners remain unknown or\ncannot be located after diligent efforts by the well operator. To the\nextent an owner cannot be determined after diligent efforts by the well\noperator and such owner is integrated as an integrated royalty owner,\nthe well operator shall hold the royalty percentage payable to such\nintegrated royalty owner in an interest bearing account for such\nintegrated royalty owner until the owner is located or the property is\ndeemed abandoned, whichever comes first.\n (1) The notice of hearing to each uncontrolled owner shall be made in\na form prescribed by the department, and shall include:\n (i) An election form, as prescribed by the department, granting the\nuncontrolled owner the right to elect to be integrated into the spacing\nunit as an integrated participating owner, an integrated\nnon-participating owner or an integrated royalty owner. Such form shall\nset forth the well operator's good faith estimate of those well costs\nwhich the owners electing to be integrated as participating owners will\nbe responsible for paying to the well operator prior to conclusion of\nthe integration hearing, based on each owner's proportionate share of\nsuch costs, and confirm that if an uncontrolled owner does not make a\ntimely election and does not timely comply with all of the requirements\nto be either a participating owner or a non-participating owner, that\nsuch uncontrolled owner shall be integrated into the spacing unit as an\nintegrated royalty owner.\n (ii) A copy of the proposed order of integration, which shall include\nthe proposed terms of integration applicable to integrated participating\nowners and integrated non-participating owners. The proposed order of\nintegration shall include the following terms in addition to any\napplicable risk penalty:\n A. The owner shall be liable for its proportionate share of all costs\nand expenses, including taxes, and claims of third parties related to\nthe well, operations thereon and in conjunction therewith, and shall be\nentitled to its proportionate share of all benefits therefrom. If an\nowner's share of production is subject to a risk penalty, the well\noperator shall establish a risk penalty account for such owner and all\ncosts, expenses and benefits attributable to such owner shall be\nreflected in the penalty account;\n B. The well operator shall hold any funds paid by the owner or\nrecouped through the risk penalty attributable to the plugging and\nabandonment costs of the well, as estimated prior to the drilling of the\nwell, in an interest bearing account until such funds are required and\nutilized for such purpose;\n C. The owner shall be liable for and shall indemnify all other persons\nparticipating in the development of the well, whether participating\nowners, non-participating owners or otherwise, including the well\noperator, from and against all claims arising out of the owner's\nnon-payment of rentals, royalties and other payments or burdens on the\noil and gas rights that such owner contributes to the spacing unit and\nfrom and against all claims associated with the loss or failure of title\nto the oil and gas rights the owner contributes to the spacing unit;\n D. The well operator shall have a first lien on the production of the\nowner to pay any outstanding costs, expenses or claims and the well\noperator shall be entitled to withhold and retain for the purposes of\nset off any revenue or production owed or due to the owner under an\norder of integration. Nothing in this paragraph shall affect the well\noperator's right to collect any outstanding amounts incurred nor the\nright of any fee owner of oil and gas interests to collect any amounts\nowed under the terms of any lease from such owner. The exercise of any\nremedy shall not preclude the well operator from seeking any other\nremedies available under the law;\n E. Whether or not the owner is subject to a risk penalty, the well\noperator shall submit to the owner a written authority for expenditure\nof the estimated costs associated with the construction of any\nfacilities not included in well costs beyond the surface equipment at\nthe wellhead to the first point of interconnection with other facilities\nthat commingle production from a group of wells that includes the well,\nincluding, but not limited to, pipe, compression, processing, treating,\ndehydrating or separating equipment, fixtures, related buildings and\nother equipment. The owner shall have thirty days to elect to\nparticipate and pay its proportionate share of such estimated cost, the\nfailure of which shall be deemed to be an election by the owner not to\nparticipate. If the owner elects not to participate or is deemed to have\nelected not to participate, the well operator shall be entitled to\nretain for its own account all of the owner's share of production from\nthe well until the well operator has recouped from the net proceeds of\nthe owner's share of production the owner's share of the actual costs of\nthe facilities, plus a risk penalty of one hundred percent of such\ncosts. Any such amounts shall be added to the risk penalty account for\nsuch owner;\n F. If the owner is not subject to a risk penalty, the owner shall have\nthe right to take its share of gas or oil production in kind and shall\nbe responsible for its transportation and marketing arrangements\ndownstream of the facilities constructed pursuant to item E of this\nclause. The owner's election to take in kind must be conveyed to the\nwell operator no later than fourteen days prior to first production from\nthe well or upon seventy-five days written notice to well operator at\nany time following first production from the well subject to the\nexpiration of any existing contracts;\n G. If the owner is not subject to a risk penalty and does not take its\nshare of gas or oil production in kind, the well operator shall market\nthe owner's share of production from the well ratably with its own share\nof production from the well for the account of the owner. The well\noperator shall pay the owner based on the price received by the well\noperator for production in the general area less (I) the owner's\nproportionate share of all costs incurred by the well operator for\ntransporting, treating, processing, or otherwise making the production\nmarketable, and (II) a marketing fee not to exceed five percent of the\nsales price of the production;\n H. The well operator shall be entitled to propose and conduct a\nsubsequent operation on a well, meaning any reworking, sidetracking,\ndeepening, re-completing or plugging back of the well or the drilling of\na lateral or an infill well in the formation for which the unit was\ncreated. Owners shall be provided with a written authorization for\nexpenditure of the estimated costs of the subsequent operation. An owner\nshall not be entitled to participate in a subsequent operation as long\nas the owner is in a risk penalty phase. If a subsequent operation is\nproposed while an owner is in a risk penalty phase, the owner's\nproportionate share of the actual cost of the subsequent operation plus\ntwo hundred percent of such actual costs shall be added to the risk\npenalty account for such owner. The owner not in a risk penalty phase\nshall have thirty days to elect and pay its proportionate share of the\nestimated costs, unless a drilling rig is on location, in which event\nnotice of a subsequent operation may be given by telephone and the owner\nshall have forty-eight hours, exclusive of Saturday, Sunday and legal\nholidays, to make an election and thirty days to pay the owner's\nproportionate share of costs. The failure of any such owner to elect and\npay in a timely manner shall be deemed an election by the owner not to\nparticipate in the subsequent operation. If such owner elects or is\ndeemed to have elected not to participate in the subsequent operation,\nthe well operator shall be entitled to retain all of the owner's\nproportionate share of production from the well until the well operator\nhas recouped the proportionate share of the actual costs of the\nsubsequent operation attributable to such owner, plus two hundred\npercent of such actual costs;\n I. The well operator, on behalf of the owner, shall be entitled to\nconduct all acts associated with the well and necessary facilities\nrelated thereto, including without limitation: conducting title\nexamination and curative work on the tracts included in the spacing\nunit; arranging for contract services or employees of the well operator,\nat the customary salaries, wages and benefits of such employees, to\noversee the operation and maintenance of the well and the facilities in\nthe production unit associated with the well; arranging for and\nmaintaining required financial security for well bonds and insurance;\ndischarging litigation, claims of third parties and disputing tax\nassessments; developing and implementing emergency responses and dealing\nwith catastrophic events; and arranging for the storage, transporting\nand disposal of produced water, by-products or refuse associated with\nproduction and maintenance facilities; and\n J. Other terms may be included in the order of integration if the\ndepartment determines such terms are reasonably required to further the\npolicy objectives of section 23-0301 of this article.\n (2) Within twenty-one days of receiving notice of the integration\nhearing, each uncontrolled owner shall provide to the well operator and\nthe department its election as to whether it chooses to be integrated as\na participating owner, a non-participating owner or an integrated\nroyalty owner. Failure of an uncontrolled owner to elect to be\nintegrated as a participating owner, a non-participating owner or an\nintegrated royalty owner and to pay the amount specified in the notice\nby the date of the hearing, or to make any election, shall result in the\nowner being integrated as an integrated royalty owner. Nothing contained\nin this section shall preclude any person from entering into a lease or\nother voluntary agreement at any time prior to the hearing.\n d. If substantive and significant issues are raised during the\nintegration hearing, the department shall schedule an adjudicatory\nhearing.\n e. If no substantive and significant issues are raised at the hearing,\nthe department shall issue a final order of integration confirming the\nstatus of all uncontrolled owners in the spacing unit as participating\nowners, non-participating owners or integrated royalty owners; the terms\nof integration; the acreage attributable to each owner and the\nproportion such acreage bears to the entire spacing unit; and the\nroyalty applicable to each integrated royalty owner. Such order shall be\nrecorded by the well operator in the office of the county clerk in the\ncounty or counties where the spacing unit is wholly or partially located\nand such order shall be final and binding upon the well operator, all\nowners and their heirs, successors and assigns.\n f. All operations including, but not limited to, the commencement,\ndrilling, or operation of a well or the existence of a shut-in well upon\nany portion of a spacing unit covered by an order of integration shall\nbe deemed for all purposes the conduct of such operations upon each\nseparately owned tract in the spacing unit by the owner or several\nowners thereof. That portion of the production allocated to each tract\nincluded in a spacing unit covered by an order of integration shall,\nwhen produced, be deemed for all purposes to have been produced from\nsuch tract by a well drilled thereon.\n 4. The department upon its own motion may, and upon the application of\nany interested person shall, hold a hearing to consider the need for the\noperation as a unit of an entire pool or part thereof.\n 5. The department shall make an order providing for the unit operation\nof a pool or part thereof if it finds that such operation is reasonably\nnecessary to increase substantially the ultimate recovery of oil and\ngas, and the value of the estimated additional recovery of oil or gas\nexceeds the estimated additional cost incident to conducting such\noperation. The order shall be upon terms and conditions that are just\nand reasonable and shall prescribe a plan for unit operations that shall\ninclude:\n a. A description of the unitized area, termed the unit area.\n b. A statement of the nature of the operations contemplated.\n c. An allocation to the separately owned tracts in the unit area of\nall the oil and gas that is produced from the unit area and is saved,\nbeing the production that is not used in the conduct of operations on\nthe unit area or not unavoidably lost. The allocation shall be in accord\nwith the agreement, if any, of the interested parties. If there is no\nsuch agreement, the department shall determine the value, from evidence\nintroduced at the hearing, of each separately owned tract in the unit\narea, exclusive of physical equipment, for development of oil and gas by\nunit operations, and the production allocated to each tract shall be the\nproportion that the value of each tract so determined bears to the value\nof all tracts in the unit area.\n d. A provision for the credits and charges to be made in the\nadjustment among the owners in the unit area for their respective\ninvestments in wells, tanks, pumps, machinery, materials, and equipment\ncontributed to the unit operations.\n e. A provision providing how the expenses of unit operations,\nincluding capital investment, shall be determined and charged to the\nseparately owned tracts and how said expenses shall be paid.\n f. A provision, if necessary, for carrying or otherwise financing any\nperson who is unable to meet his financial obligations in connection\nwith the unit, allowing a reasonable interest charge for such service.\n g. A provision for the supervision and conduct of the unit operations,\nin respect to which each person shall have a vote with a value\ncorresponding to the percentage of the expenses of unit operations\nchargeable against the interest of such person.\n h. The time when the unit operations shall commence, and the manner in\nwhich, and the circumstances under which, the unit operations shall\nterminate.\n i. Such additional provisions as are found to be appropriate for\ncarrying on the unit operations, and for the protection or adjustment of\ncorrelative rights.\n 6. No order of the department providing for unit operations shall\nbecome effective unless and until the plan for unit operations\nprescribed by the department has been approved in writing by the owners\nof sixty percent or more in interest as the costs of such unit\noperations are shared under the order of the department, and by owners\nof record of a like percentage of a one-eighth royalty interest in and\nto the unit area, and the department has made a finding, either in the\norder providing for unit operations, or in a supplemental order, that\nthe plan for unit operations has been so approved by the required number\nof owners and royalty owners. If the plan for unit operations has not\nbeen so approved by owners and royalty owners at the time the order\nproviding for unit operations is made, the department shall upon\napplication and notice hold such supplemental hearings as may be\nrequired to determine if and when the plan for unit operations has been\nso approved. If the owners and royalty owners, or either, owning the\nrequired percentage of interest in the unit area do not approve the plan\nfor unit operations within a period of six months from the date on which\nthe order providing for unit operations is made, such order shall cease\nto be of force and shall be revoked by the department.\n 7. An order providing for unit operations may be amended by an order\nmade by the department, in the same manner and subject to the same\nconditions as an original order providing for unit operations, provided\n a. if such an amendment affects only the rights and interests of the\nowners, the approval of the amendment by the royalty owners shall not be\nrequired, and\n b. no such order of amendment shall change the percentage for\nallocation of oil and gas as established for any separately owned tract\nby the original order, except with the consent of all persons owning\ninterest in such tract.\n 8. The department, by an order, may provide for the unit operation of\na pool or a part thereof that embraces a unit area established by a\nprevious order of the department. Such order, in providing for the\nallocation of unit production, shall first treat the unit area\npreviously established as a single tract, and the portion of the unit\nproduction so allocated thereto shall then be allocated among the\nseparately owned tracts included in such previously established unit\narea in the same proportions as those specified in the previous order.\n 9. Oil and gas allocated to a separately owned tract shall be deemed,\nfor all purposes, to have been actually produced from such tract, and\nall operations, including, but not limited to, the commencement,\ndrilling, or operation of a well upon any portion of the unit area shall\nbe deemed for all purposes the conduct of such operations upon each\nseparately owned tract in the unit area by its several owners. The\noperations conducted pursuant to the order of the department shall\nconstitute a fulfillment of all the express or implied obligations of\neach lease or contract covering lands in the unit area to the extent\nthat compliance with such obligations cannot be had because of the order\nof the department.\n 10. Oil and gas allocated to any tract, and the proceeds from the sale\nthereof, shall be the property and income of the several persons to\nwhom, or to whose credit, the same are allocated or payable under the\norder providing for unit operations.\n 11. No division order or other contract relating to the sale or\npurchase of production from a separately owned tract shall be terminated\nby the order providing for unit operations, but shall remain in force\nand apply to oil and gas allocated to such tract until terminated in\naccordance with the provisions thereof.\n 12. Except to the extent that the parties affected so agree, no order\nproviding for unit operations shall be construed to result in a transfer\nof all or any part of the title of any person to the oil and gas rights\nin any tract in the unit area. All property, whether real or personal,\nthat may be acquired in the conduct of unit operations hereunder shall\nbe acquired for the account of the owners within the unit area, and\nshall be the property of such owners in the proportion that the expenses\nof unit operations are charged.\n 13. Any person taking title by operation of law to any oil and gas\ninterests integrated into a spacing unit pursuant to an order of\nintegration, shall take such interests subject to the terms and\nconditions of the final order of integration issued by the department\nduly recorded in accordance with the provisions of this section and\nshall be subject to all liabilities and benefits associated therewith,\nunless such person, within sixty days of the taking of such interest,\nelects to be an integrated royalty owner and notifies the well operator\nof such election.\n