Imperial Oil of North Dakota, Inc. v. Industrial Com'n of State

• Decision Date: 28 May 1987
• Docket Number: A,No. 2818,No. 11222,2818,11222
• Citation: 406 N.W.2d 700
• Parties: IMPERIAL OIL OF NORTH DAKOTA, INC. and Target Energies, Inc., Appellants, v. INDUSTRIAL COMMISSION OF The STATE of North Dakota In the Matter of a Hearing Called On a Motion of the Commission to Consider the Application of Flying J Exploration and Production, Inc. for an Order Resolving a Dispute as to the Reasonable Actual Cost of Drilling and Operating the # 4-35 Skjelvik Well, located in the N/2 of Section 35, Township 150 North, Range 97 West, McKenzie County, North Dakota, as Provided in Orderppellee, and Flying J Exploration & Production, Inc., Intervenor & Appellee. Civ.
• Court: North Dakota Supreme Court

Page 700

406 N.W.2d 700

IMPERIAL OIL OF NORTH DAKOTA, INC. and Target Energies Inc., Appellants, v. INDUSTRIAL COMMISSION OF The STATE of North Dakota In the Matter of a Hearing Called On a Motion of the Commission to Consider the Application of Flying J Exploration and Production, Inc. for an Order Resolving a Dispute as to the Reasonable Actual Cost of Drilling and Operating the # 4-35 Skjelvik Well, located in the N/2 of Section 35, Township 150 North, Range 97 West, McKenzie County, North Dakota, as Provided in Order No. 2818, Appellee and Flying J Exploration & Production, Inc., Intervenor & Appellee.

Civ. No. 11222.

Supreme Court of North Dakota.

May 28, 1987.

Rolfstad, Winkjer, McKennett & Stenehjem, Williston, for Imperial Oil of North Dakota, Inc.; argued by Dean Winkjer.

Marvin L. Kaiser, Williston, for Target Energies, Inc.

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

Fleck, Mather, Strutz & Mayer, Bismarck, for Flying J Exploration & Production, Inc.; argued by John Morrison.

ERICKSTAD, Chief Justice.

Imperial Oil of North Dakota, Inc. (Imperial), and Target Energies, Inc. (Target), appealed from a district court judgment affirming an Industrial Commission (Commission) order determining that interest is a reasonable actual cost of drilling and operating a well and that Flying J Exploration and Production, Inc. (Flying J), was entitled to recover interest from Imperial and Target at an annual rate of 12.72 percent on their proportionate shares of the cost of drilling and operating the Skjelvik # 4-35 well. We reverse and remand.

In September 1981, the Skjelvik # 4-35 well was completed as a Red River producer. On November 17, 1981, the Commission entered an order setting temporary spacing for the development of the North Fork-Red River Pool at one well to 320 acres. Imperial and Target did not agree with Flying J, the operator of the well and spacing unit, to share in the cost of drilling and operating the well.

On July 1, 1982, the Commission entered an order pooling all interests for the development and operation of the spacing unit for the Skjelvik # 4-35. In resolving a dispute as to whether or not interest is an actual cost of drilling and operating the Skjelvik # 4-35 well, the Commission entered an order on May 17, 1985, in which it found:

"(10) That the applicant [Flying J] presented evidence that from May 1, 1981, to October 10, 1984, during the time period of the drilling, completing and pay-out of the Skjelvik # 4-35 well, the applicant had an average outstanding debt obligation of $2,228,718, incurring an average interest expense of $283,478, yielding a weighted average annual interest rate of 12.72 percent."

The Commission also found:

"(g) that in the drilling and operating of an oil and gas well, the cost of money is not considered an unnecessary expense.

"(h) that the charge of interest on an unpaid debt is a reasonable actual cost in the drilling and operating of a well.

"(i) that the inclusion of a charge of interest on the unpaid balance of a working interest's share of the cost of a well in addition to the cost of drilling and operating such well is just and reasonable.

"(j) that the applicant submitted substantial credible evidence indicating that in drilling and operating the Skjelvik # 4-35 well, interest was an actual cost."

The Commission ordered that Flying J was entitled to reimbursement of interest from Imperial and Target at an annual rate of 12.72 percent on their proportionate shares of the cost of drilling and operating the well.

Imperial and Target appealed to the district court, which affirmed the Commission's order. Imperial and Target appealed from the district court judgment and have raised issues relating to (1) failure of Commission members to hear the evidence and to specify the evidence relied upon; (2) retroactivity of pooling orders; (3) whether or not interest is an actual cost of drilling and whether or not there was evidence that Flying J was charged or paid any interest; and (4) a remand for consideration of new evidence.

In our view, the dispositive issue is whether or not Sec. 38-08-08, N.D.C.C., allows the operator of a well to recover interest from nonconsenting owners as part of the reasonable actual cost of drilling and operating a well. We conclude that it does not.

The standard of review applicable to the Commission's order is stated in Sec. 38-08-14(4), N.D.C.C.:

"Orders of the commission shall be sustained if the commission has regularly pursued its authority and its findings and conclusions are sustained by the law and by substantial and credible evidence."

Whether or not the Commission has the authority to order a nonconsenting owner to pay interest to the operator of a well under Sec. 38-08-08, N.D.C.C., is a question of law. "Administrative agency decisions on questions of law are fully reviewable on appeal." Slawson v. North Dakota Industrial Commission, 339 N.W.2d 772, 774 (N.D.1983).

Section 38-08-08, N.D.C.C., provides in relevant part:

"1. ... In the absence of voluntary pooling, the commission upon the application of any interested person shall enter an order pooling all interests in the spacing unit for the development and operations thereof. Each such pooling order shall be made after notice and hearing, and shall 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....

"2. Each such pooling order shall make provision for the drilling and operation of a well on the spacing unit, and for the payment of the reasonable actual cost thereof by the owners of interests in the spacing unit, plus a reasonable charge for supervision. In the event of any dispute as to such costs the commission shall determine the proper costs. If one or more owners shall drill and operate, or pay the expenses of drilling and operating the well for the benefit of others, then, the owner or owners so drilling or operating shall, ..., have a lien on the share of production from the spacing unit accruing to the interest of each of the other owners for the payment of his proportionate share of such expenses...."

Neither the Commission nor Flying J has asserted a longstanding Commission practice of awarding interest as a cost in contested proceedings. The Commission relies upon Wood Oil Co. v. Corporation Commission, 268 P.2d 878 (Okla.1954) for the proposition that the operator of a well may recover interest from nonconsenting owners as part of the reasonable actual cost of drilling and operating a well. The Commission argues that the court in Wood Oil Co. "correctly held that interest on the operator's own funds should not be charged since there was no evidence that interest was paid or that the incurring of interest was necessary to obtain production." The Commission also argues that the court in Wood Oil Co. "recognized that if the operator had been required to pay interest to develop the well and presented evidence of this cost, as in the present case, such costs could be recovered from the carried interest owners." We disagree. The court in Wood Oil Co. decided only that an operator who did not show that it was charged or paid any interest or that such expense was necessary to obtain production could not recover interest from a carried owner:

"Wood Oil next complains that the Commission's order herein appealed from did not allow it interest on the operating cost of the well in determining the amount that should be paid by Toklan as its proportionate share of such cost. No authority is cited in support of such claim for interest, ... In addition, Toklan points out that the Conservation Law has never authorized an interest charge, unless such charge is conceivably included or contemplated in the term 'cost of the development and operation' as used in the 1945 and 1947 Amendments, supra, and that the meaning of said term is therein restricted to 'the actual expenditures required * * * '. We think Toklan's argument is sound. There was no evidence introduced before the Commission to show that Wood Oil was charged or paid any interest on the funds it used in operating this well or that such expense was in any way necessary to obtaining the production now impounded in the hands of the crude oil purchaser. In view of these considerations we must therefore conclude that the Commission committed no error in refusing, by its order, to add such a charge to the well's actual operating cost for the purpose of the adjustment of obligations between the parties contemplated in said order." Wood Oil Co. v. Corporation Commission, supra, 268 P.2d at 885.

The court in Wood Oil Co. did not decide the broader issue of whether or not an operator could ever recover interest from a carried owner.

In our view, Sec. 38-08-08, N.D.C.C., does not authorize the Commission to order a nonconsenting owner to reimburse the operator of a well for interest on the nonconsenting owner's proportionate share of the cost of drilling and operating a well. An interest charge is in the nature of a "risk capital charge" [O. Anderson, Compulsory Pooling In North Dakota: Should Production Income And Expenses Be Divided From Date Of Pooling, Spacing, Or "First Runs?", 58 N.D.L.Rev. 537, 567 (1982) ], a "nonconsent penalty" [6 H. Williams and C. Meyers, Oil and Gas Law Sec. 944, p. 673 (1986) ], or a "risk penalty" [H.B. 1655, 49th Legislative Assembly (1985) (failed to pass) ], which the legislature has not authorized. ¹ Absent a statute to the contrary, we believe that interest expense incurred by an operator in the drilling and operation of a well, like extraordinary royalty interests, is "an additional hazard to the drilling party's payout" [5 Summers Oil and Gas Sec. 974, p. 123 (1966 Ed.) ] in situations where a...