Liberty Petroleum Corp. v. N. Dakota Indus. Comm'n

1

2024 ND 183

Liberty Petroleum Corporation, Appellant v. North Dakota Industrial Commission, and Burlington Resources Oil & Gas Co. LP, Appellees and Continental Resources, Inc., and XTO Energy, Inc., Respondents

No. 20240022

Supreme Court of North Dakota

September 26, 2024

Appeal from the District Court of McKenzie County, Northwest Judicial District, the Honorable Robin A. Schmidt, Judge.

Joshua A. Swanson, Fargo, ND, for appellant.

David P. Garner, Bismarck, ND, for appellee North Dakota Industrial Commission.

Wade C. Mann (argued) and Zachary R. Eiken (appeared), Bismarck ND, for appellee Burlington Resources Oil & Gas Co. LP.

OPINION

McEvers, Justice.

[¶1] Liberty Petroleum Corporation ("Liberty") appeals from a judgment affirming North Dakota Industrial Commission ("NDIC") orders approving a plan of unitization. We affirm, concluding NDIC did not exceed its authority misapply the law, or authorize an unconstitutional taking and made findings and conclusions sustained by the law and by substantial and credible evidence.

I

[¶2] In January 2022, Burlington Resources Oil & Gas Co. LP ("Burlington") petitioned NDIC in Case No. 29224 for an order providing for the unitized management, operation, and further development of the Haystack Butte (Bakken Pool) Unit ("HBU"), located in McKenzie County, North Dakota; approving the plan of unitization for the HBU; and vacating applicable spacing orders. Burlington alleged "[u]nitization will allow wells to be drilled without regard to the spacing unit boundaries that would otherwise restrict the length and location of horizontal wellbores." Along with its petition, Burlington submitted a proposed unit agreement and a proposed unit operating agreement. Burlington filed a second petition in Case No. 29225 seeking an order from NDIC finding the plan of unitization was approved by lessees and royalty owners owning the required percentage of working interest and royalty interest within the HBU.

[¶3] Liberty objected to the petitions. Liberty holds federal oil and gas leases and owns working interests in the HBU. Prior to petitioning, the HBU consisted of multiple spacing units. Burlington and Continental Resources, Inc. ("Continental") operated 19 wells on these spacing units. Liberty's working interests were in six of the spacing units, which is where 11 of the wells were drilled. Liberty elected to participate in seven of the wells, and declined to participate in four of the wells (the "non-consent wells"). Three of the four non-consent wells were located in spacing units that had additional wells in which Liberty elected to participate. Because Liberty declined to participate in the non-consent wells, it did not pay for its reasonable actual share of costs for drilling and operating the non-consent wells. Under N.D.C.C. § 38-08-08(3)(a), Liberty was assessed a risk penalty equal to 200% of its share of the costs of drilling the well, which "may be recovered out of, and only out of, production from the pooled spacing unit." At the time of the petitions, Liberty had an outstanding payout balance for the non-consent wells.

[¶4] The proposed unit operating agreement provided for how outstanding payout balances on non-consent wells committed to the HBU would be paid off. Article 11.8 stated that a working interest owner's pre-unitization payout balance shall be "satisfied out of proceeds from the sale of Unitized Substances attributable to the affected Tract." Liberty objected to Article 11.8, arguing it would "unfairly and inequitably" take revenue from the wells it elected to participate in to satisfy the penalty balances on the non-consent wells. Liberty requested Article 11.8 "be modified to provide that only revenue attributable to each non-consent well on a tract be used to pay off the existing non-consent penalties."

[¶5] In March 2022, NDIC held a hearing on the petitions. Three of Burlington's experts testified at the hearing; both Burlington and Liberty were represented by counsel. In June 2022, NDIC issued Order No. 31792 in Case No. 29224 approving the unit agreement and unit operating agreement (together, "plan of unitization"), including Article 11.8. NDIC found that the plan for unitization is in the public interest, protective of correlative rights, and reasonably necessary to increase the ultimate recovery of oil and gas and prevent waste. NDIC rejected Liberty's arguments against Article 11.8, concluding that "[p]roduction from the wells in the Unit area is no longer distributed on a spacing unit basis, it is distributed to each 'tract' within the Unit area regardless of where it was produced." In December 2022, NDIC issued Order No. 31793 in Case No. 29225 finding the necessary approvals from owners in the HBU had been provided and ordering the plan of unitization to be effective on January 1, 2023. On January 6, 2023, Liberty appealed the two NDIC orders to the district court. The court affirmed the orders and entered judgment dismissing the appeal.

II

[¶6] Our review of NDIC orders is "very limited." Black Hills Trucking, Inc. v. N.D. Indus. Comm'n, 2017 ND 284, ¶ 10, 904 N.W.2d 326.

The standard of judicial review of Commission orders is set forth in N.D.C.C. § 38-08-14(3), which provides that "[o]rders of the commission must be sustained by the district court if the commission has regularly pursued its authority and its findings and conclusions are sustained by the law and by substantial and credible evidence." This Court applies the same standard of review in appeals from district court involving orders of the Commission. See Amoco Prod. Co. v. North Dakota Indus. Comm'n, 307 N.W.2d 839, 842 (N.D. 1981). The "substantial evidence" test "is something less" than the greater weight of the evidence and the preponderance of the evidence tests, and differs from the usual standard of review for administrative decisions under N.D.C.C. § 28-32-46. Hanson v. Industrial Comm'n, 466 N.W.2d 587, 590 (N.D. 1991). "Substantial evidence is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion," and we "accord greater deference to Industrial Commission findings of fact than we ordinarily accord to other administrative agencies' findings of fact." Id. The Commission's decisions on questions of law are fully reviewable on appeal. See Imperial Oil of North Dakota, Inc. v. Industrial Comm'n, 406 N.W.2d 700, 702 (N.D. 1987).

Black Hills, at ¶ 10.

[¶7] This Court has said that "we generally defer to an administrative agency's reasonable interpretation of its governing statutes and rules." Black Hills, 2017 ND 284, ¶ 19. The United States Supreme Court recently held that "courts need not and under the [federal Administrative Procedure Act] may not defer to an agency interpretation of the law simply because a statute is ambiguous." Loper Bright Enters. v. Raimondo, 144 S.Ct. 2244, 2273 (2024). This case does not involve the interpretation of a federal statute under the federal Administrative Procedure Act. Nor have the parties argued the statutes involved in this case are ambiguous. Because we conclude that the relevant statutes are unambiguous in this context, we need not reevaluate our precedent in light of Loper Bright.

III

[¶8] Liberty argues NDIC exceeded its authority and misapplied the law by approving Article 11.8 of the unit operating agreement, which authorizes payment of pre-unitization risk penalty balances out of the share of unit production and revenues allocated to its working interests in four tracts of the HBU in violation of N.D.C.C § 38-08-08(3). Under N.D.C.C. § 38-08-08(3)(a), the risk penalty is recovered out of the production from the pooled spacing unit:

In addition to any costs and charges recoverable under subsections 1 and 2, if the owner of an interest in a spacing unit elects not to participate in the risk and cost of drilling a well thereon, the owner paying for the nonparticipating owner's share of the drilling and operation of a well may recover from the nonparticipating owner a risk penalty for the risk involved in drilling the well. The recovery of a risk penalty is as follows:

a. If the nonparticipating owner's interest in the spacing unit is derived from a lease or other contract for development, the risk penalty is two hundred percent of the nonparticipating owner's share of the reasonable actual costs of drilling and completing the well and may be recovered out of, and only out of, production from the pooled spacing unit, as provided by section 38-08-10, exclusive of any royalty or overriding royalty.

(Emphasis added.) See also Gadeco, LLC v. Indus. Comm'n, 2012 ND 33, ¶¶ 4-6, 812 N.W.2d 405 (discussing purpose and history of risk penalties under N.D.C.C. § 38-08-08).

[¶9] NDIC and Burlington argue the creation of the HBU under unitization, and termination of the spacing units, means N.D.C.C. § 38-08-09.4 governs the collection of risk penalties. Under N.D.C.C. § 38-08-09.4(3)(a), the risk penalty is recovered out of the production from the unit:

Upon and subject to such terms and conditions as to time and legal rate of interest as may be fair to all concerned reasonable provision must be made in the plan of unitization for carrying or otherwise financing owners who are unable to promptly meet their financial obligations in connection with the unit and, in addition to the unit expense assessed against each tract and chargeable to each owner, the recovery of a risk penalty from each owner electing not to participate in the unit expense. The recovery of the risk penalty is as follows:

a. If the nonparticipating owner's interest in the unit is derived from a lease or other contract for development, the risk penalty is two hundred percent of the nonparticipating owner's share of the unit

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