Kohlman, Application of, No. 12082

CourtSouth Dakota Supreme Court
Writing for the CourtZASTROW
Citation263 N.W.2d 674
PartiesApplication of Paul KOHLMAN from the Board of Natural Resource Development.
Decision Date20 March 1978
Docket NumberNo. 12082

Page 674

263 N.W.2d 674
Application of Paul KOHLMAN from the Board of Natural
Resource Development.
No. 12082.
Supreme Court of South Dakota.
March 20, 1978.

Page 675

Donn Bennett of Mueller & Bennett, Belle Fourche, for appellants Depco, Inc. and Hanover Planning Co., Inc.

E. D. Mayer of Riter, Mayer, Hofer & Riter, Pierre, for respondent Paul Kohlman.

William J. Janklow, Atty. Gen., Pierre, for respondent Bd. of Natural Resource Development.

ZASTROW, Justice.

This is an appeal from the judgment of the circuit court modifying the compulsory pooling order of the Board of Natural Resource Development.

On August 13, 1973, the Board of Natural Resource Development for the State of South Dakota (Board) entered an order establishing an oil and gas spacing unit known as Buffalo Field. This field is comprised of the land area described as Section 19, Township 23 North, Range 5 East of the Black Hills Meridian, Harding County, South Dakota. This spacing unit is a short section bordering on the North Dakota-South Dakota line and contains slightly in excess of 400 acres. This spacing unit was created at the request of one of the owners of oil rights in that area, namely, Depco, Inc., the appellant herein. The owners of natural resource rights in this land area are Paul Kohlman, respondent, who holds the oil and gas lease on a 40-acre tract located in the extreme southeast corner of the spacing unit, and Depco, Inc., and its partner, Hanover Planning Co., Inc. (hereinafter collectively referred to as Depco), who control the oil and gas leases on the balance of 371.68 acres in the spacing unit. Establishing this area as a spacing unit necessarily limited the number of wells in that unit to one. Kohlman made no objection to the spacing unit order of August 1973, entered by the Board.

Following the establishment of the spacing unit, Depco indicated a desire to drill a well therein, and for maximum recovery potential desired to place the drill site on the 40-acre tract leased by Kohlman. The parties attempted to negotiate a voluntary arrangement regarding the payment of drilling expenses, the sharing of the proceeds, and all other requirements necessary between the owners of the land in the spacing unit, pursuant to SDCL 45-9-30. All attempts to a voluntary agreement failed; thereafter, Depco applied under SDCL 45-9-31 to the Board for a compulsory pooling order.

Pursuant to that application, notice of hearing was given and a hearing was held on April 11, 1974. Oral testimony was given by Depco's officers and Kohlman; following the hearing, written briefs were submitted by both parties. On May 29, 1974, the Board entered its Pooling Order No. 1-74, the order in dispute in this appeal. The order gave Kohlman the option of prepaying Depco a proportionate share of the estimated costs of drilling the well, or:

"b) That the operator (Depco) is hereby authorized to withhold the following costs and charges from production:

The pro rata share of reasonable well costs attributable to each nonconsenting working interest owner who has not paid his share of estimated well costs within 30 days from the date the schedule of estimated well costs is furnished to him. As a charge for the risk involved in the drilling of the well, 100 percent of the prorata share of reasonable well costs attributable to each nonconsenting working interest owner who has not paid his share of estimated well costs within 30 days from the date the schedule of estimated well costs is furnished to him. Such charges shall be exclusive of a royalty of not more than 1/8 of production occurring to the royalty owner."

This type of provision is referred to in the oil and gas industry as a "compensation for risk," "risk compensation," "risk bonus," or "risk penalty." It is intended to relieve the nondrilling interest owner from having to advance his proportionate share of the drilling costs but provide extra compensation from production (if oil is found) to the drilling party who has advanced the entire drilling costs and who would absorb the entire cost of a "dry hole."

Page 676

The trial court held that the Board has exceeded its statutory authority in providing for the risk compensation and ordered the pooling order modified to delete subdivision (b).

The issue in this appeal is whether or not the Board is authorized to provide for "risk compensation" in a compulsory pooling order under SDCL 45-9-33.

SDCL 45-9-32 sets the requirements of a compulsory pooling order as follows:

"Each such pooling order shall authorize the drilling, equipping, and operation of a well on the spacing unit; shall provide who may drill and operate the well; shall prescribe the time and manner in which all the owners in the spacing unit may elect to participate therein; and shall make provision for the payment by all those who elect to participate therein of the reasonable actual cost thereof, plus a reasonable charge for supervision and interest."

SDCL 45-9-33 provides that alternatives are to be given to those working interest owners who elect not to participate in the risk and cost of drilling prior to production. The alternatives are stated in SDCL 45-9-33 as follows:

"If requested each such pooling order shall provide for one or more just and equitable alternatives whereby an owner who does not elect to participate in the risk and cost of the drilling and operation of a well may elect to surrender his leasehold interest to the participating owners on some reasonable basis and for a reasonable consideration which if not agreed upon, shall be determined by the board, or may elect to participate in the drilling and operation of the well, on a limited or carried basis upon terms and conditions determined by the board to be just and reasonable." (emphasis added)

The question of a nonparticipating, working interest owner sharing in the risk of drilling the well is discussed in 5 Summers, Oil and Gas, § 974:

"The majority of compulsory pooling statutes...

To continue reading

Request your trial
12 practice notes
  • Oahe Conservancy Subdistrict v. Janklow, No. 13277
    • United States
    • South Dakota Supreme Court
    • July 15, 1981
    ...prescribe a policy, standard, or rule for the guidance of the Board in carrying out the legislative purposes. Application of Kohlman, 263 N.W.2d 674 SDCL 46-17-2 states: It is the intent of this chapter and chapter 46-18 to relate, reasonably and equitably, the financing of water resources ......
  • Application No. 5189-3 to Extend Time, Matter of, No. 17097
    • United States
    • Supreme Court of South Dakota
    • April 24, 1991
    ...exercise some degree of discretion in construing its obligations under a statutory grant of authority. See In re Application of Kohlman, 263 N.W.2d 674 (S.D.1978). The Board's interpretation of the "exigent circumstances" provision is consonant with legislative intent and not beyo......
  • Bennion v. ANR Production Co., No. 900473
    • United States
    • Supreme Court of Utah
    • October 21, 1991
    ...way to allocate risks and balance the diverse interests involved in the pooling of oil and gas interests. See Application of Kohlman, 263 N.W.2d 674, 678-79 (S.D.1978). Taken as a whole, forced pooling in general "prevents waste," provides for "a greater ultimate recovery of ......
  • State Division of Human Rights, ex rel. Ewing v. Prudential Ins. Co. of America, No. 12414
    • United States
    • Supreme Court of South Dakota
    • November 30, 1978
    ...the legislative purposes in detail and to exercise the administrative power to regulate and control. Application of Kohlman, 1978, S.D., 263 N.W.2d 674; Clem v. City of Yankton, 1968, 83 S.D. 386, 160 N.W.2d 125; Boe v. Foss, 1956, 76 S.D. 295, 77 N.W.2d 1. The legislature's policy is clear......
  • Request a trial to view additional results
12 cases
  • Oahe Conservancy Subdistrict v. Janklow, No. 13277
    • United States
    • South Dakota Supreme Court
    • July 15, 1981
    ...prescribe a policy, standard, or rule for the guidance of the Board in carrying out the legislative purposes. Application of Kohlman, 263 N.W.2d 674 SDCL 46-17-2 states: It is the intent of this chapter and chapter 46-18 to relate, reasonably and equitably, the financing of water resources ......
  • Application No. 5189-3 to Extend Time, Matter of, No. 17097
    • United States
    • Supreme Court of South Dakota
    • April 24, 1991
    ...exercise some degree of discretion in construing its obligations under a statutory grant of authority. See In re Application of Kohlman, 263 N.W.2d 674 (S.D.1978). The Board's interpretation of the "exigent circumstances" provision is consonant with legislative intent and not beyo......
  • Bennion v. ANR Production Co., No. 900473
    • United States
    • Supreme Court of Utah
    • October 21, 1991
    ...way to allocate risks and balance the diverse interests involved in the pooling of oil and gas interests. See Application of Kohlman, 263 N.W.2d 674, 678-79 (S.D.1978). Taken as a whole, forced pooling in general "prevents waste," provides for "a greater ultimate recovery of ......
  • State Division of Human Rights, ex rel. Ewing v. Prudential Ins. Co. of America, No. 12414
    • United States
    • Supreme Court of South Dakota
    • November 30, 1978
    ...the legislative purposes in detail and to exercise the administrative power to regulate and control. Application of Kohlman, 1978, S.D., 263 N.W.2d 674; Clem v. City of Yankton, 1968, 83 S.D. 386, 160 N.W.2d 125; Boe v. Foss, 1956, 76 S.D. 295, 77 N.W.2d 1. The legislature's policy is clear......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT