Application of Koch Exploration Co.

• Decision Date: 14 May 1986
• Docket Number: 14854,Nos. 14853,No. 2-78 and A,No. 1-83,2-78 and A,1-83,s. 14853
• Citation: 387 N.W.2d 530
• Parties: In the Matter of the Application of KOCH EXPLORATION COMPANY For an Order Providing For the Unit Operation of the South Buffalo Red River Unit, Harding County, South Dakota: and To Amend the Board's Oil and Gas Orderll Previous Board Orders Pertaining To Spacing in Buffalo Field, Harding County, South Dakota, To Provide For One Hundred Sixty (160) Acre Spacing Units For the South Buffalo Red River Unit, Harding County, South Dakota: Oil and Gas Order
• Court: South Dakota Supreme Court

Page 530

387 N.W.2d 530

In the Matter of the Application of KOCH EXPLORATION COMPANY For an Order Providing For the Unit Operation of the South Buffalo Red River Unit, Harding County, South Dakota: and To Amend the Board's Oil and Gas Order No. 2-78 and All Previous Board Orders Pertaining To Spacing in Buffalo Field, Harding County, South Dakota, To Provide For One Hundred Sixty (160) Acre Spacing Units For the South Buffalo Red River Unit, Harding County, South Dakota: Oil and Gas Order No. 1-83.

Nos. 14853, 14854.

Supreme Court of South Dakota.

Argued Sept. 10, 1985.

Decided May 14, 1986.

Roxanne Giedd, Asst. Atty. Gen., Pierre, for South Dakota Board of Minerals and Environment; Mark V. Meierhenry, Atty. Gen., Pierre, on brief.

Jon Mattson of Driscoll, Mattson, Rachetto & Christensen, Deadwood, for appellants Dave Penn, Sherman Teigen, John Mattson, William C. Kirkwood, d/b/a Kirkwood Oil Co. and Viable Resources, Inc.

Reed C. Richards of Richards & Richards, Deadwood, for appellants Kathryn Ann Hight and Alyce Smolnikar.

Scott Sumner and Robert D. Buettner of Banks & Johnson, Rapid City, for appellee Koch Exploration Co.

HERTZ, Acting Justice.

STATEMENT OF FACTS

This appeal involves the propriety of the Board of Minerals and Environment's (Board) grant of appellee Koch Exploration Company's (Koch) application for unitization of a portion of the Buffalo Oil Field located in Harding County, South Dakota. We affirm.

In order to understand the nature of this appeal it is helpful to be cognizant that when oil is initially discovered, it flows or is pumped to the surface via wells, assisted by natural pressure existing in the subsurface. This process is termed "primary" recovery of oil. As the natural pressure dissipates, oil production declines. Production can sometimes be restored by injecting water (termed "secondary" recovery) or other substances, in this case air, (termed "tertiary or enhanced" recovery) through wells to restore or increase pressure. This restoration is expensive and oftentimes can only be made cost effective if various owners of tracts of land consolidate their resources in order to maximize their return of oil. This consolidation occurs via what is termed unitization. Unitization may be voluntary or involuntary. If involuntary it is termed compulsory unitization, defined in Williams and Meyers, Oil and Gas Law, Manual of Terms, at 800-801 (1983), as:

The bringing together, as required by law or a valid order or regulation, of separately owned tracts (or separate interests therein) into a unit constituting all or some portion of a producing reservoir and a joint operation of such unit....

.... In general, under these statutes, a state regulatory agency is given authority to impose unitization on a pool or part thereof as against the objection of a small minority interest if a proposed plan has been approved by a requisite majority (e.g., 75 percent) of the owners of operating interests and certain non-operating interests....

To achieve the maximum objectives of a unitization program it is necessary that all persons having an interest in the program area become subject to the agreement. Without statutory authority compulsions, however, unanimity is frequently impossible to obtain. The principal obstacle to full, voluntary agreement is the problem of dividing the proceeds of production. Even under a compulsory unitization statute, the problem of dividing the proceeds of production creates considerable difficulty inasmuch as most compulsory unitization statutes require prior agreement of a substantial majority of the persons interested in the area to be unitized to a unitization plan, and agreement must be reached by such persons on such matters as division of the proceeds of development before the regulatory commission may act upon the plan.

Pursuant to SDCL 45-9-38, the Board has the authority to order the compulsory unitization of various tracts "if it finds that (1) such operation is reasonably necessary to increase substantially the ultimate recovery of oil and gas; and (2) the value of the estimated additional recovery of oil or gas exceeds the estimated additional cost incident to conducting such operations." The tracts usually encompass a common reservoir of oil called a pool. Furthermore, SDCL 45-9-45 provides that the order for unitization "may provide for unit operations on less than the whole of a pool...."

The Buffalo Oil Field lies in the northwest portion of Harding County and has produced oil since the mid-1950's. Production decreased substantially over the years, however, and in 1978 Koch obtained a unitization order allowing it to begin a multi-million dollar experimental "enhanced oil recovery" program in a small portion of the Buffalo field, termed the North Buffalo Unit. Due to the success of this program, Koch gained approval of two expansions to the North Buffalo Unit so that it now contains some 7,600 acres. Oil production in the southern portion of the field also decreased, and on December 22, 1982, Koch sought to establish a second enhanced oil recovery operation in the Buffalo field, denominated the South Buffalo Red River Unit. As previously stated, authority to grant such a request is vested in the Board. Board scheduled a hearing concerning Koch's application for February 17, 1983. Notice of the hearing was published on January 27, 1983, in the Daily Capital Journal published in Pierre, South Dakota, and in the Nation's Center News published in Buffalo, Harding County, South Dakota. The hearing took place as scheduled. Present or represented by counsel were appellants Dave Penn, Sherman Teigen, Jon Mattson, William C. Kirkwood, d/b/a Kirkwood Oil Company, Viable Resources, Inc., Kathryn Ann Hight, Alyce Smolnikar and appellee Koch. Appellants sought to exclude certain tracts from the unit because they felt they were not receiving their fair share of oil allocation and revenue. Koch opposed such exclusion and presented testimony that if appellants' tracts were deleted, appellants would be in a position to recover oil made available to them only by reason of the enhanced oil recovery operations without having to pay their share of the expense of such enhanced recovery. At the close of the testimony Board ordered the parties to submit proposed findings of fact and conclusions of law for consideration at the March meeting. At that meeting Board adopted Koch's proposals with some minor changes.

The Board entered its order, Oil and Gas Order No. 1-83, approving and establishing the South Buffalo Red River Unit effective as of 7:00 a.m. on June 1, 1983.

Appellants made application to the Board for a rehearing, which the Board denied after hearing evidence and oral argument at its April meeting.

Appellants then noticed an appeal of Order 1-83 to the circuit court. The trial court affirmed in part and remanded to the Board for a determination as to whether any parties exist who have property interests within the unitization area who did not receive due notice of the Koch application for unitization. As to appellants, the judgment provides the appellants are bound by Order 1-83 and are limited in their participation in the remand proceedings to matters involving new evidence or new issues that are introduced.

On January 9 and 11, 1985, the various appellants appealed this matter to the Supreme Court. At the same time, the Board initiated the remanded hearing pursuant to the circuit court's judgment. The Board found that all but two persons received constitutionally sufficient notice. The Board then determined to hold the hearing for the two remaining mineral owners in abeyance pending the decision on this appeal. The remand hearing held by the Board, after notice of appeal was filed, was a nullity since the Board had lost jurisdiction pending the outcome of the appeal to this court. We, therefore, conclude this appeal is from a final judgment.

UNITIZATION IN SOUTH DAKOTA

South Dakota's oil and gas conservation law appears at SDCL chapter 45- 9. SDCL 45-9-1 declares the purpose of this law:

It is hereby declared that it is the public interest to foster, to encourage, and to promote the development, production, and unitization of natural resources of oil and gas in the state of South Dakota in such a manner as will prevent waste; to authorize and to provide for the operation and development of oil and gas properties in such a manner that a greater ultimate recovery be had and that the correlative rights of all owners be fully protected; and to encourage, to authorize, and to provide for cycling, recycling, pressure maintenance, and secondary recovery operations in order that the greatest possible economic recovery of oil and gas be obtained within the state to the end that the landowners, the royalty owners, the producers, and the general public realize and enjoy the greatest possible good from these vital natural resources.

"Waste" is defined at SDCL 45-9-2(1) as:

(a) physical waste, as that term is generally understood in the oil and gas industry;

(b) the inefficient, excessive or improper use of, or the unnecessary dissipation of reservoir energy;

(c) the inefficient storing of oil and gas;

(d) the drilling of unnecessary wells;

(e) the locating, spacing, drilling, equipping, operating, or producing of any oil and gas well or wells in a manner that causes, or tends to cause, reduction in the quantity of oil and gas ultimately recoverable from a pool under prudent and proper operations, or that causes or tends to cause unnecessary or excessive surface loss or destruction of oil and gas;

(f) the underground or above ground waste in the production or storage of oil and gas, however caused, and whether or not defined in other subdivisions hereof.

SDCL 45-9-3 states, in pertinent part:

"The waste of oil and gas is prohibited; ..."

No clearer mandate to the Board could exist.

As mentioned earlier, SDCL 45-9-1 also requires that correlative...