Gadeco, LLC v. Indus. Comm'n of State

• Decision Date: 29 May 2013
• Docket Number: No. 20120344.,20120344.
• Citation: 2013 ND 72,830 N.W.2d 535
• Parties: GADECO, LLC, Appellant v. INDUSTRIAL COMMISSION OF the STATE of North Dakota and Slawson Exploration Company, Appellees.
• Court: North Dakota Supreme Court

830 N.W.2d 535

2013 ND 72

GADECO, LLC, Appellant

v.INDUSTRIAL COMMISSION OF the STATE of North Dakota and Slawson Exploration Company, Appellees.

No. 20120344.

Supreme Court of North Dakota.

May 14, 2013.

Rehearing Denied May 29, 2013.

Ariston E. Johnson (argued) and Dennis E. Johnson (on brief), Watford City, N.D., for appellant.

Hope L. Hogan, Assistant Attorney General, Bismarck, N.D., for appellee Industrial Commission of the State of North Dakota.

Lawrence Bender (argued), Amy L. De Kok (on brief) and Michael D. Schoepf (on brief), Bismarck, N.D., for appellee Slawson Exploration Company.

CROTHERS, Justice.

[¶ 1] In Gadeco LLC v. Industrial Comm'n, 2012 ND 33, ¶¶ 19–21, 812 N.W.2d 405, we reversed an Industrial Commission order authorizing Slawson Exploration Company to assess a 200 percent risk penalty against Gadeco, LLC, for failing to accept Slawson's invitation to participate in the Coyote 1–32H well within 30 days, and we remanded to the Commission to explain its decision. On remand, the Commission determined Slawson's invitation to Gadeco to participate in the Coyote 1–32H well complied with regulatory requirements and authorized Slawson to assess a 200 percent risk penalty against Gadeco. Gadeco appeals from a district court judgment affirming the Industrial Commission's order on remand. We affirm.

I

[¶ 2] In Gadeco, we outlined the legal background for authorization of a risk penalty, and we described the factual circumstances underlying the Commission's authorization of a 200 percent risk penalty against Gadeco for failing to accept Slawson's invitation to participate in the Coyote 1–32H well within 30 days:

“Slawson and Gadeco are owners of oil and gas leasehold interests in a section of real property located in Mountrail County which comprises the spacing unit for the Coyote 1–32H well. On July 8, 2009, Slawson sent to Gadeco and to other working interest owners in the spacing unit invitations to participate in the cost of drilling and completing the well. The letter stated:

“Slawson Exploration Company, Inc., proposes to drill the Coyote # 1–32H well from a surface location in the SWSE of Section 32–152N–92W, Mountrail County, North Dakota. This well will test the Bakken formation and will be drilled to an approximate total vertical depth not to exceed 10,500 feet, with a single lateral terminating in the N2NE of Section 32. This is a 640–acre spacing unit comprised of the above-referenced section. The estimated spud date for the Coyote # 1–32H is August 25, 2009.

“A recent records check indicates that you have a leasehold interest in this spacing unit, and you are offered participation in the Coyote # 1–32H well based upon your ownership. Please indicate your election to participate in this well in the space provided at the end of this letter.

“In the event you do not elect to participate in the drilling of the Coyote # 1–32H well, Slawson plans to impose a risk penalty in accordance with North Dakota law. You may object to the risk penalty by filing an application or request for hearing with the North Dakota Industrial Commission.

“If you choose to participate in this well, please sign the attached AFE (authority for expenditure) with costs of $2,707,375 DHC (dry hole costs) and $4,219,256 completed. Return this letter and AFE within 30 days by mail, e-mail, or fax....

“On July 15, 2009, Slawson sent another letter to Gadeco and the other working interest owners stating:

“Please note the surface location and estimated spud date of the Coyote # 1–32H well have changed (proposal originally sent under letter dated July 8, 2009). The new information is listed below:

“• The new surface location is NWNE of Section 5–151N–92W, Mountrail County, North Dakota. The bottom hole location remains the same—N2NE of Section 32–152N–92W.

“• The estimated spud date has changed to September 27, 2009 (originally August 25, 2009).

“On August 19, 2009, Gadeco signed and returned the invitation, electing to participate in the well and sending a check for $338,421.87 for its proportionate share of expenses. On August 20, 2009, Slawson acknowledged receipt of the election and check, but returned the check to Gadeco explaining ‘[s]ince this proposal was received by Gadeco, LLC, on July 10, 2009, the 30–day election period expired on Monday, August 10, 2009.’

“In November 2009, Slawson filed an application with the Commission requesting an order pooling all interests in the well's spacing unit and authorizing recovery of a 200 percent risk penalty against Gadeco as a nonparticipating owner under N.D.C.C. § 38–08–08(3)(a). Gadeco objected to assessment of the risk penalty and, following a hearing, the Commission pooled all interests and authorized Slawson to impose the 200 percent risk penalty. In authorizing assessment of the risk penalty, the Commission stated:

“(10) ... Gadeco believes its election was timely and argues Slawson's invitation was invalid because the location of the well and spud date were amended. Gadeco argues Slawson was required to revise the AFE and confirm the spacing unit had not changed. Slawson responded that its letter to Gadeco received on July 17, 2009, indicated the only change was the surface location and the spud date. Slawson further indicated the AFE was not revised because the new location would be drilled from an existing well site and that savings would offset any additional drilling and completion costs. Slawson stated it actually spent approximately $3.4 million on drilling and completion costs on the Coyote # 1–32H well, much below the estimated costs of $4.2 million.

“(11) The Commission concludes Slawson has complied with NDAC Section 43–02–03–16.3 and that because Slawson failed to receive Gadeco's election by August 10, 2009, the risk penalty may be assessed against Gadeco's leasehold interests.”

2012 ND 33, ¶¶ 9–12, 812 N.W.2d 405.

[¶ 3] The district court reversed the Commission's decision holding that, after sending the July 8, 2009 invitation to participate, Slawson changed three of the five requirements for an invitation—the location of the well, the itemization of estimated costs, and the approximate spud date. SeeN.D. Admin. Code § 43–02–03–16.3(1). The court determined the changed facts required that Slawson provide Gadeco with a new invitation to participate in the Coyote 1–32H well.

[¶ 4] In Gadeco, we reversed and remanded to the Commission, stating:

“The Commission's decision in this case does not explain how it reached the conclusion that the risk penalty could be assessed, except to note Slawson ‘complied’ with the pertinent regulations and Gadeco's election was untimely because it was not received by Slawson by August 10, 2009. There can be no serious dispute that changes were made to the original invitation to participate. Although the Commission and Slawson argue the changes were not material or substantial, the decision fails to explain that the Commission was employing this standard, let alone why it did not deem the changes to be material or substantial.

“The argument that immaterial or insubstantial changes do not necessitate a new amended invitation to participate is compatible with the administrative requirements for the ‘estimated’ costs and the ‘approximate’ spud date under N.D. Admin. Code § 43–02–03–16.3(1)(a)(2) and (3). The administrative requirement for the location of the well does not call for an estimation or an approximation. SeeN.D. Admin. Code § 43–02–03–16.3(1)(a)(1). But even if immaterialor insubstantial deviations from the administrative requirements that do not refer to estimations or approximations are allowable, seeN.D.C.C. § 31–11–05(24) (‘The law disregards trifles.’), the Commission and Slawson have offered no explanation why, in view of the changes that were made, Gadeco's ten-day tardiness in accepting the invitation and forwarding its share of the costs is not an equally immaterial and insubstantial deviation. Moreover, the Commission might well have based its decision on other unspecified factors.

“The Commission must provide some indication that it is complying with the law before a reviewing court can afford any deference to its decisions. See Hystad [v. Indus. Comm'n], 389 N.W.2d [590,] 598 [ (N.D.1986) ]. Although the district court ruled a new invitation to participate was necessary ‘because of changes in three of the five things required’ under the administrative regulation, a reviewing court needs to know the reasons for the Commission's decision before the court can intelligently rule on the issues. Because the Commission's findings are insufficient to enable us to understand the basis for its decision, we reverse the judgment and remand to the Commission for the preparation of findings of fact that reveal the basis for its decision.”

2012 ND 33, ¶¶ 19–21, 812 N.W.2d 405.

[¶ 5] On remand, the Commission again authorized Slawson to assess a 200 percent risk penalty against Gadeco, ruling Slawson's invitation to participate complied with the regulatory requirements for a valid invitation to participate and Gadeco failed to accept the invitation within 30 days of receipt:

“Requiring the invitation to participate to include the location of the proposed or existing well and its proposed depth and objective zone will allow working interest owners to conduct an evaluation as to the economic potential of the project. The Commission believes the crucial well location is the ‘completion location’ (the interval of the well bore that hydrocarbons are produced from), not the surface location, hence the requirement of the well's proposed depth and objective zone. Slawson made it very clear in their [July 15, 2009] letter Gadeco received July 17, 2009, that the only change was the surface location and the spud date, therefore the completion location did not change. The Commission notes it is becoming commonplace for multi-well sites to be drilled in the Bakken play and there is a considerable amount of cost savings...