Continental Resources, Inc. v. Farrar Oil Co.

• Decision Date: 27 February 1997
• Docket Number: No. 960328,960328
• Court: North Dakota Supreme Court
• Parties: 136 Oil & Gas Rep. 83, 1997 ND 31 CONTINENTAL RESOURCES, INC., an Oklahoma Corporation, Plaintiff and Appellee, v. FARRAR OIL COMPANY, a Delaware Corporation, Defendant and Appellant. Civil

Page 841

559 N.W.2d 841

136 Oil & Gas Rep. 83, 1997 ND 31

CONTINENTAL RESOURCES, INC., an Oklahoma Corporation, Plaintiff and Appellee, v. FARRAR OIL COMPANY, a Delaware Corporation, Defendant and Appellant.

Civil No. 960328.

Supreme Court of North Dakota.

Feb. 27, 1997.

Lawrence Bender of Pearce & Durick, Bismarck, for Plaintiff and Appellee. Submitted on brief.

Sonna M. Anderson of Anderson & Anderson, Bismarck, and James R. Cox, Enid, OK, for Defendant and Appellant. Submitted on brief.

MESCHKE, Justice.

¶1 Farrar Oil Company appealed a summary judgment declaring Continental Resources, Inc. may rightfully drill a horizontal oil and gas well through the designated subsurface formation of Farrar's separate leasehold within a force-pooled spacing unit of the Cedar Hills-Red River "B" field in Bowman County, North Dakota. We agree with the trial court that the compulsory pooling order authorizes the well and precludes Farrar's claim of subsurface trespass. We affirm.

¶2 Continental holds oil and gas leases on the northwest and southeast quarters of section 17, Township 131 North, Range 103 West, Bowman County, North Dakota, within zone II of the the Cedar Hills-Red River "B" oil field. Farrar holds oil and gas leases on the northeast and southwest quarters of the same section. In September 1995, the Industrial Commission established temporary spacing in zone II of this field to be a maximum of two horizontal wells for each 640 acre unit.

¶3 With this spacing ordered, Continental proposed to Farrar to drill the Hollingsworth No. 1-17 horizontal well in this section. The well would begin at a surface location in the northwest corner of Continental's northwest quarter, drill vertically to a depth of 9,200 feet, "kick off" with a horizontal leg for 4,385 feet at an azimuth of 153.5 degrees south-southeast through the Red River "B" formation under the northwest and southwest quarters, and end at a point nearly 2,640 feet from the west section line and 660 feet from the south section line. ¹ Farrar refused the offer.

¶4 Continental petitioned the Industrial Commission to compel pooling of all interests for the proposed well in section 17. On October 5, 1995, the Commission ordered the forced pooling of all oil and gas interests in section 17 for the development and operation of the unit.

¶5 The pooling order directed, effective on the date of first operations, the operator of a well in section 17 to conduct its operations to protect correlative rights; directed the operator to share with all interest owners, without unnecessary expense, their just, equitable, and proportionate share of production; directed each working interest owner to reimburse the operator for a proportionate share of reasonable actual costs of the well, plus a reasonable charge for supervision; and authorized the operator, if it carried a nonparticipating lessee's share of costs, to recover a risk penalty from the nonparticipating lessee. The order reserved power to the Commission to determine proper costs in the event of any dispute.

¶6 Despite this forced pooling order, Farrar continued to resist development. Farrar notified Continental that it would treat any penetration of its leasehold by the horizontal well bore as an illegal subsurface trespass.

¶7 Continental sued Farrar for a declaratory judgment that its proposed horizontal well would not be a subsurface trespass of Farrar's leasehold. Farrar counterclaimed for a declaration that the well would trespass its leasehold. Continental moved for summary judgment, and both sides agreed no disputed material fact existed.

¶8 The trial court concluded the Industrial Commission's forced pooling order was a proper exercise of the state's police power that superseded the property law of trespass. The court ruled, if Continental complied with the rules and regulations of the Industrial Commission in drilling the well, the forced pooling order would preclude any claim by Farrar against Continental for a subsurface trespass even though the horizontal hole would transect much of Farrar's leased formation in the southwest quarter. We agree.

¶9 Farrar's appellate argument is perfunctory:

Without question, there will be a physical trespass of the borehole in the Hollingsworth # 1-17 well upon the leasehold interests of FARRAR. Neither the Spacing Order nor the Pooling Order entered by the Commission affecting the lands involved in this case deal with the question of trespass. It is therefore incumbent upon this Court to decide whether or not the "police power" of this State may be exerted by the Commission in enforcement of the North Dakota Oil and Gas Conservation Act to the extent necessary to supersede the private property law relating to trespass.

Without citing any precedent from elsewhere, Farrar frames the question, "as a matter of first impression in this state," to be "whether or not the 'police power' of this state may be exerted by the Commission in the enforcement of the North Dakota Oil and Gas Conservation Act to the extent necessary to supersede the private property law [of] trespass."

¶10 In the beginning of the industry, oil and gas development was largely governed by traditional property law concepts, and the rule of capture prevailed. 1 Bruce M. Kramer & Patrick H. Martin The Law of Pooling and Unitization § 2.01 (3d ed.1996) (ch. 2, The Rule of Capture). It was thought that oil, like water, flowed in underground streams, and the law analogized the ownership of oil to the ownership of water and wild animals that could be captured when they crossed one's property. Id. Capturing oil and gas that migrated from another's land was lawful, but the property law of trespass precluded drilling into the subsurface of another's land to extract oil and gas. Id.

¶11 A subsurface trespass remains defined that way:

The bottoming of a well on the land of another without his consent. Subsurface trespass results from the drilling of a "slant" or DIRECTIONAL WELL (q.v.), which may be intentional or inadvertent. Since subsurface trespass is as wrongful as surface trespass, the same liability attaches, viz., damages in the amount of the value of the oil produced.

Howard R. Williams & Charles J. Meyers, Manual of Oil and Gas Terms 1211 (8th ed.1991). "The widespread adoption of the rule of capture, combined with judicial reluctance to substantially modify the rule, created significant problems for the oil and gas industry." Kramer & Martin, § 2.02. Yet the framework of the law was largely changed through extensive legislation.

While not all of the vast state regulatory programs can trace their history to the ramifications of the rule of capture, the laws relating to the prevention of waste and the compulsory pooling and unitization of oil and gas reservoirs would not have developed as rapidly and as completely had not the rule of capture gained such a strong foothold in the oil and gas jurisprudence.

Once the states, through their conservation statutes, modified the common-law rule of capture, the adoption of pooling and unitization regulatory programs was inevitable.

Id. (footnote omitted). Virtually all states that produce oil and gas have adopted comprehensive conservation statutes.

¶12 Like other states, the North Dakota legislature recognized that traditional property law principles contributed to inefficiency and waste in oil and gas development, and so enacted an Act for the Control of Gas and Oil Resources in 1953. See NDCC ch. 38-08. This Resources Act declares it is

in the public interest to foster, to encourage, and to promote the development, production, and utilization of natural resources of oil and gas in the state 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 of oil and gas be had....

NDCC 38-08-01. The Act for the Control of Gas and Oil Resources equipped the Industrial Commission with comprehensive powers to regulate oil and gas development.

¶13 The Commission has "authority over all persons and property, public and private, necessary to enforce effectively the provisions of" the Resources Act. NDCC 38-08-04. The Commission is empowered to determine whether "waste" exists or is imminent, and has the general authority to "adopt and to enforce rules and orders to effectuate the purposes and the intent of" the Resources Act. NDCC 38-08-04(5). Recognizing important physical factors affecting oil and gas production, the Commission is empowered to fix spacing units for a pool "[w]hen necessary to prevent waste, to avoid the drilling of unnecessary wells, or to protect correlative rights...." NDCC 38-08-07(1). Under NDCC 38-08-07(3), the Commission may fix spacing units for a pool by orders that "specify the size and shape of each unit and the location of the permitted well thereon in accordance with a reasonably uniform spacing plan."

¶14 The Commission has power to compulsorily pool all interests in the spacing unit for development and operations. NDCC 38-08-08(1).

Each such pooling order ... must be upon terms and conditions that are just and reasonable, and that afford to the owner of each tract or interest in the spacing unit the opportunity to recover or receive, without unnecessary expense, his just and equitable share. Operations incident to the drilling of a well upon any portion of a spacing unit covered by a pooling order must be deemed, for all purposes, the conduct of such operations upon each separately owned tract in the drilling unit by the several owners thereof. That portion of the production allocated to each tract included in a spacing unit covered by a pooling order must, when...