Hystad v. Industrial Com'n, 11044

• Decision Date: 19 June 1986
• Docket Number: No. 11044,11044
• Citation: 389 N.W.2d 590
• Parties: Dallas HYSTAD and Phylis A. Hystad, Appellees, v. INDUSTRIAL COMMISSION of the State of North Dakota in the Matter of the Proper Spacing for the Development of the Poe-Red River, McKenzie County, North Dakota, and Exeter Exploration Company, Appellants. Civ.
• Court: North Dakota Supreme Court

Page 590

389 N.W.2d 590

Dallas HYSTAD and Phylis A. Hystad, Appellees, v. INDUSTRIAL COMMISSION of the State of North Dakota in the Matter of the Proper Spacing for the Development of the Poe-Red River, McKenzie County, North Dakota, and Exeter Exploration Company, Appellants.

Civ. No. 11044.

Supreme Court of North Dakota.

June 19, 1986.

Rolfstad, Winkjer, McKennett & Stenehjem, Williston, for appellees; argued by Kent Reierson. Appearance by Dean Winkjer.

Lawrence Bender, Asst. Atty. Gen., North Dakota Indus. Com'n, State Capitol, Bismarck, for appellant Industrial Com'n of the State of N.D.

Fleck, Mather, Strutz & Mayer, Bismarck, for appellant Exeter Exploration Co.; argued by John W. Morrison.

MESCHKE, Justice.

The Industrial Commission of North Dakota (Commission) and Exeter Exploration Company (Exeter) appeal from a district court judgment reversing in part a Commission order establishing spacing units in the Poe-Red River Pool. The issues relate to the Commission's statutory authority to order different size spacing units for a pool when it enters its initial order establishing proper spacing, and whether an order for such spacing units was supported by substantial and credible evidence. We conclude that the Commission has the authority to order different size spacing units for a pool in its initial proper spacing order when necessary to prevent waste, to avoid the drilling of unnecessary wells, or to protect correlative rights. Within the exercise of its administrative judgment, however, the Commission must satisfactorily explain why different size spacing units are necessary to accomplish one or more of those objectives. Because the Commission has not satisfactorily explained its decision, we reverse and remand for further proceedings.

The Poe-Red River Pool underlies seven sections of land in McKenzie County, North Dakota. ¹ In late 1981 and early 1982, three wells were drilled ² in the pool. Pursuant to Section 43-02-03-18(3), N.D.A.C., ³ the Commission entered an order, dated April 13, 1982, establishing temporary spacing units of 640 acres for the pool. The Commission held a hearing to consider proper spacing on November 22, 1983. Because there was insufficient reservoir and production data from the three wells to establish proper spacing, the Commission continued the temporary order. Following a hearing on July 9, 1984, the Commission entered an order, dated July 19, 1984, establishing proper spacing for the pool at 320 acres for the four sections without existing wells and 640 acres with a second allowable well for the three sections with existing wells. (See fn. 2).

Dallas and Phylis Hystad ⁴ petitioned the Commission for a rehearing, asserting that the Commission overlooked certain statutory spacing provisions and that there was no evidence to support the Commission's decision for 640-acre spacing units on the three sections with existing wells. Following a rehearing at which the issues were briefed and argued but no additional evidence was presented, the Commission entered an order, dated October 17, 1984, affirming its July 19 order.

The Hystads appealed the Commission's order to district court and Exeter was permitted to intervene. The district court reversed the part of the order establishing spacing units of 640 acres with a second allowable well on the three sections with existing wells and entered a judgment establishing 320-acre spacing units for the entire seven section pool. Exeter and the Commission appealed.

The standard of review on appeals from an order of the Commission is specifically provided in Section 38-08-14, N.D.C.C., and requires affirmance if (1) the Commission has regularly pursued its authority, and (2) the Commission's findings and conclusions are sustained by the law and by substantial and credible evidence. Amoco Production Co. v. North Dakota Indus. Comm'n, 307 N.W.2d 839 (N.D.1981), where we also said:

" 'Our review of the factual basis of administrative agency orders is a three-step process: (1) Are the findings of fact supported by substantial evidence? (2) Are the conclusions of law sustained by the findings of fact? (3) Is the agency decision supported by the conclusions of law? [Citations omitted.]

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" 'This court, however, has indicated its reluctance to substitute its own judgment for that of qualified experts in matters entrusted to administrative agencies.'

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" 'We have defined "substantial evidence" as "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." [Citations omitted.] "[I]t must be enough to justify, if the trial were to a jury, a refusal to direct a verdict when the conclusion sought to be drawn from it is one of fact for the jury." [Citations omitted.] This is something less than the weight of the evidence, and the possibility of drawing two inconsistent conclusions from the evidence does not prevent an administrative agency's finding from being supported by substantial evidence. [Citation omitted.]' " 307 N.W.2d at 842.

The Hystads contend that insofar as the Commission's proper spacing order retained 640-acre spacing units with a second allowable well on the three sections of land, the order was not authorized by law. The Hystads' argument is premised on defining a "zone" as a "stratigraphic interval" ⁵ and the language of Section 38-08-07(1), N.D.C.C., that spacing units be of uniform size and shape throughout the pool unless the Commission divides the pool into "zones" and establishes spacing units of differing size and shape for each "zone." The Hystads contend that because there was no evidence of different stratigraphic intervals in the Poe-Red River pool, there was no basis for spacing units of a non-uniform size or shape.

Exeter and the Commission assert that the term "zone" as used in Section 38-08-07(1), N.D.C.C., refers to geographic area rather than stratigraphic interval.

Section 38-08-07, N.D.C.C., deals with the Commission's authority to set spacing units and provides in subdivision (2) that "the size and shape of spacing units are to be such as will result in the efficient and economic development of the pool as a whole."

The standard for uniform size and shape spacing units is provided in Section 38-08-07(1), N.D.C.C.:

"1. When necessary to prevent waste, to avoid the drilling of unnecessary wells, or to protect correlative rights, the commission shall establish spacing units for a pool. Spacing units when established shall be of uniform size and shape for the entire pool, except that when found to be necessary for any of the purposes above mentioned, the commission is authorized to divide any pool into zones and establish spacing units for each zone, which units may differ in size and shape from those established in any other zone." [Emphasis added.]

The standard of a reasonably uniform spacing plan throughout the pool is also repeated in Sections 38-08-07(3) and (4), N.D.C.C.

The plain language of that statute authorizes the Commission to deviate from spacing units of uniform size and shape only when it finds that such a deviation is necessary to prevent waste, to avoid drilling unnecessary wells, or to protect correlative rights. The existence of different stratigraphic intervals is not a statutory requirement for the Commission to order different size or shape spacing units. The context of the language authorizes the Commission to divide a pool into geographic zones. If a zone were interpreted as a stratigraphic interval, the Commission would have the authority to divide a pool into stratigraphic intervals. However, a stratigraphic interval exists because of the geologic composition of the earth, and the Commission cannot create a stratigraphic interval if it does not exist because of the earth's geologic composition.

We also note that the legislative history supports this interpretation of the term "zone" as referring to a geographic area in this context. Section 38-08-07, N.D.C.C., is part of North Dakota's law for the conservation of oil and gas and was originally enacted in 1953. 1953 N.D.Sess. Laws, Ch. 227, Sec. 8. The legislative materials relating to the enactment of Chapter 38-08, N.D.C.C., state that it was based upon "the model act prepared by the Interstate Oil Compact Commission with amendments up to 1951." 1953 Report of Legislative Research Committee, Senate Bill 32, p. 66. The materials available to the 1953 Legislature included an article discussing the model act. Walker, Discussion: A Model Oil and Gas Conservation Law, 26 Tul.L.Rev. 267 (1952). As pertinent to the Commission's authority to establish spacing units, that article provides:

"The requirement that spacing units must be of uniform size and shape for 'the pool as a whole' favors the correlative rights doctrine. On the other hand, a strict 'uniform size and shape' requirement might unduly burden an owner if his property or lease is not advantageously located on the structure or should happen to be in the gas-cap area of an oil pool. Recognizing these probabilities, the Model Act provides that the regulatory body may zone the area of the pool and establish spacing units of uniform size and shape within each zone. Thus, spacing of a pool becomes a flexible tool for carrying out the purposes of the Act.

"The Model Act also permits the regulatory body to consider the fact that spacing units for a gas-cap zone should be larger than for an oil zone. Under the act other bases for zoning, such as pay sand thickness or recoverable hydrocarbons in place, may also be used. Generally, spacing units are now established by regulatory bodies after considering testimony concerning average information about the pool as a whole. The testimony on spacing is generally designed to prove the expected recovery of oil or gas from an average unit of pool volume. The spacing units on the fringes of the pool often do not contain the average amount of pool volume. The result,...