Slawson v. North Dakota Indus. Com'n, 10424

• Citation: 339 N.W.2d 772
• Decision Date: 31 October 1983
• Docket Number: No. 10424,10424
• Parties: Donald C. SLAWSON, Plaintiff and Appellee, v. NORTH DAKOTA INDUSTRIAL COMMISSION, Defendant and Appellant. Civ.
• Court: North Dakota Supreme Court

Page 772

339 N.W.2d 772

Donald C. SLAWSON, Plaintiff and Appellee, v. NORTH DAKOTA INDUSTRIAL COMMISSION, Defendant and Appellant.

Civ. No. 10424.

Supreme Court of North Dakota.

Oct. 31, 1983.

Fleck, Mather, Strutz & Mayer, Bismarck, for plaintiff and appellee; argued by John Morrison, Bismarck.

Douglas L. Johnson, Asst. Atty. Gen., N.D. Industrial Commission, State Capitol, Bismarck, for defendant and appellant; argued by Douglas L. Johnson.

Zuger & Bucklin, Bismarck, for the Mineral Owners. Appearance by Thomas O. Smith, Bismarck.

ERICKSTAD, Chief Justice.

This is an appeal from a district court judgment reversing that portion of a Commission order providing for a 1/8th cost free royalty interest to owners of unleased mineral interests within a pooled unit. We reverse.

In 1978, Agnes Ceglowski executed an oil and gas lease covering certain minerals in the SW 1/4 of Section 4, Township 158 North, Range 103 West, in Williams County, North Dakota. The minerals in the SW 1/4 of Section 4 are owned by the successors in interest of Agnes Ceglowski. The minerals in the SE 1/4 of Section 4 are owned by the United States of America in trust for the heirs of Marje Belgrade.

The 4-1 Tribal well was commenced in the SE 1/4 of Section 4 in June, 1980, and completed as a producing well by Donald C. Slawson, operator, in September, 1980. On April 28, 1981, the Commission established the Climax Field, consisting of the S 1/2 of Section 4, which was designated as the spacing unit for the 4-1 Tribal well.

On March 24, 1982, some of the successors in interest of Agnes Ceglowski [hereafter Mineral Owners] applied to the Commission for an order pooling all interests in the S 1/2 of Section 4. An earlier attempt by Slawson at voluntary pooling was unsuccessful. Evidence at the hearing indicated that the Mineral Owners' lease, under which Slawson apparently had a working interest, had expired or terminated at some point after the well was completed. The Commission found that the Mineral Owners' mineral interests in the spacing unit were unleased. All the parties have treated the mineral interests as unleased, as will we.

On May 21, 1982, the Commission issued its order pooling all the oil and gas interests in the S 1/2 of Section 4. Among other things, the order provided:

"(4) That any unleased interests within the spacing unit shall be treated as cost free royalty interests as to 1/8 thereof and as working interests as to the remaining 7/8 of the unleased interest."

Slawson appealed to the district court, which concluded that the Commission is without statutory authority to enter that portion of the order quoted above. This appeal was then lodged from the judgment.

While all of the parties have stated the issues on appeal slightly differently, they can be stated as follows:

1. Whether the Commission has authority to treat unleased mineral interests as cost free interests as to 1/8th thereof when entering a forced pooling order pursuant to Section 38-08-08, N.D.C.C.

2. Whether failure to grant a cost free interest to an unleased mineral owner would violate either the due process clause or the equal protection clause of either the North Dakota Constitution or the United States Constitution.

The standard of review applicable to orders of the Commission is stated in Section 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 treat unleased mineral interests as cost free interests as to any portion thereof is a question of law. Administrative agency decisions on questions of law are fully reviewable on appeal. Northern States Power Co. v. Hagen, 314 N.W.2d 278 (N.D.1982).

The purposes of pooling are to prevent the physical and economic waste that accompany the drilling of unnecessary wells and to protect the correlative rights ¹ of landowners over a reservoir. 6 H. Williams and C. Meyers, Oil and Gas Law Sec. 901, p. 3 (1981 Ed.). See also, 1 R. Myers, The Law of Pooling and Unitization Sec. 8.01(2), p. 256 (1967 Ed.). These purposes are reflected in Sec. 38-08-01, N.D.C.C., which provides, in relevant part:

"38-08-01. Declaration of policy. It is hereby declared to be in the public interest to ... 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 and that the correlative rights of all owners be fully protected; ..."

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

"38-08-08. Integration of fractional tracts.

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.... For the purposes of this section and section 38-08-10, any unleased mineral interest pooled by virtue of this section shall be entitled to a cost-free royalty interest equal to the acreage weighted average royalty interest of the leased tracts within the spacing unit, but in no event shall the royalty interest of an unleased tract be less than a one-eighth interest. The remainder of the unleased interest shall be treated as a lessee or cost bearing interest. Any unleased mineral interest pooled prior to July 1, 1983, shall be entitled to the cost-free royalty interest and working interest as provided in this section from and after July 1, 1983. ²

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.... If one or more of the 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, upon complying with the terms of section 38-08-10, 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. All the oil and gas subject to the lien shall be marketed and sold and the proceeds applied in payment of the expenses secured by such lien as provided for in section 38-08-10."

Section 38-08-10, N.D.C.C., provides:

"38-08-10. Development and operating costs of integrated fractional tracts. A person to whom another is indebted for expenses incurred in drilling and operating a well on a drilling unit required to be formed as provided for in section 38-08-08, may, in order to secure payment of the amount due, fix a lien upon the interest of the debtor in the production from the drilling unit or the unit area, as the case may be, by filing for record, with the register of deeds of the county where the property involved, or any part thereof, is located, an affidavit setting forth the amount due and the interest of the debtor in such production. The person to whom the amount is payable may, at the expense of the debtor, store all or any part of the production upon which the lien exists until the total amount due, including reasonable storage charges, is paid or the commodity is sold at foreclosure sale and delivery is made to the purchaser. The lien may be foreclosed as provided for with respect to foreclosure of a lien on chattels."

The Commission and the Mineral Owners argue that the broad discretion afforded the Commission by Sec. 38-08-08(1), N.D.C.C., includes authority to provide in pooling orders that unleased interests within a spacing unit be treated as cost free interests as to 1/8th thereof.

Slawson, on the other hand, argues that the broad discretion granted in Sec. 38-08-08(1), N.D.C.C., is limited by Secs. 38-08-08(2) and 38-08-10, N.D.C.C., so that an unleased mineral owner's entire interest is subject to the statutory lien for costs and expenses.

Slawson argues that the Commission's order is an attempt to establish by administrative action a lessor-lessee relationship where none exists. We disagree. Under a conventional oil and gas lease, a mineral owner reserves unto himself a royalty interest and conveys unto the lessee a working interest. The right to the royalty interest, however, does not rise from the lease, but from ownership of the minerals. ³ Because he owns the minerals, a mineral owner has a royalty interest or its equivalent whether or not he has executed a lease. A lease only conveys to a lessee a portion of the lessor's interest other than the royalty interest retained.

In speaking of compulsory pooling statutes, the writer in 5 Summers Oil and Gas Sec. 951, p. 57 (1966 Ed.) says that, "In all, a royalty share for the forcibly integrated owner of royalty, or royalty equivalent if the land is unleased, is payable on an expense free basis, for that is the nature of royalty." The same writer says that:

"... If successful in obtaining production, [the drilling party in a compulsory pooling situation] then may recover proportionate actual outlays for drilling, completion costs and cumulative expenses prior to participation by the non-drilling parties. Royalty interests, being expense free, participate in production from inception and if greater than the usual one-eighth apparently are an additional hazard to the drilling party's payout...." 5 Summers Oil and Gas Sec. 974, p. 123 (1966 Ed.).

The expense free nature of a royalty interest, whether or not the mineral interest is the subject of a lease, is...