Opinion ID: 1979901
Heading Depth: 1
Heading Rank: 2

Heading: unitization in south dakota

Text: South Dakota's oil and gas conservation law appears at SDCL chapter 45-9. SDCL 45-9-1 declares the purpose of this law: It is hereby declared that it is the public interest to foster, to encourage, and to promote the development, production, and unitization of natural resources of oil and gas in the state of South Dakota in such a manner as will 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 be had and that the correlative rights of all owners be fully protected; and to encourage, to authorize, and to provide for cycling, recycling, pressure maintenance, and secondary recovery operations in order that the greatest possible economic recovery of oil and gas be obtained within the state to the end that the landowners, the royalty owners, the producers, and the general public realize and enjoy the greatest possible good from these vital natural resources. Waste is defined at SDCL 45-9-2(1) as: (a) physical waste, as that term is generally understood in the oil and gas industry; (b) the inefficient, excessive or improper use of, or the unnecessary dissipation of reservoir energy; (c) the inefficient storing of oil and gas; (d) the drilling of unnecessary wells; (e) the locating, spacing, drilling, equipping, operating, or producing of any oil and gas well or wells in a manner that causes, or tends to cause, reduction in the quantity of oil and gas ultimately recoverable from a pool under prudent and proper operations, or that causes or tends to cause unnecessary or excessive surface loss or destruction of oil and gas; (f) the underground or above ground waste in the production or storage of oil and gas, however caused, and whether or not defined in other subdivisions hereof. SDCL 45-9-3 states, in pertinent part: The waste of oil and gas is prohibited; ... No clearer mandate to the Board could exist. As mentioned earlier, SDCL 45-9-1 also requires that correlative rights be fully protected. The protection of correlative rights is defined at SDCL 45-9-2(15): `Protect correlative rights' means that the action or regulation by the board should afford a reasonable opportunity to each person thereto to recover or receive the oil and gas in his tract or tracts or the equivalent thereof, without being required to drill unnecessary wells or to incur other unnecessary expense to recover or receive such oil or gas or its equivalent. The statutes governing the issuance of an order for the unit operation of a pool (unitization) appear at SDCL 45-9-37 through 45-9-52, inclusive. Of particular interest in the instant case are:  SDCL 45-9-38, requiring the Board to order unitization if it finds that unitization is reasonably necessary to substantially increase the ultimate recovery of oil and gas, and that the value of the estimated additional recovery exceeds the cost of the secondary recovery/unitization operations;  SDCL 45-9-39, which lists the requirements of the Board's unitization order;  SDCL 45-9-40, which requires approval of the plan for unit operations prescribed by the Board by 75% of the royalty owners and of the working interest owners;  SDCL 45-9-45, which allows the Board to establish unit operations on less than the whole of a pool, when the conduct of those operations will not have an adverse effect on other portions of the pool. The utilization of secondary recovery techniques is an extremely costly venture. The cost of injecting a substance into the earth hundreds of feet below the surface to increase the pressure in a producing oil zone must be weighed against the value of the increased amount of oil produced under those conditions. The entire pool is affected by secondary recovery techniques. This means that every well producing oil from that pool will be affected by the increased pressure and will benefit by producing an increased amount of oil. This is why the costs of these techniques should be spread over the entire pool. Because unitization requires unanimity between a large group of mineral owners, problems arise. As pointed out by Williams and Meyers, Oil and Gas Law, § 910, n. 6 (1983), the chance nature of the oil business tends to make that unanimity impossible: It has long been urged that efficiency in the development and operation of oil and gas reservoirs and the prevention of waste of recoverable hydrocarbons require that such reservoirs be developed and operated as a unit without regard to surface boundaries. To achieve the maximum objectives of such a unitization program it is necessary that all persons having an interest in the program area become subject to the agreement. Without statutory compulsion, however, unanimity is frequently impossible to obtain. The principal obstacle to full, voluntary agreement is the problem of dividing the proceeds of production. If development of the area sought to be unitized is incomplete, there is a certain amount of gambler's instinct to be overcome; some lessors and lessees may be inclined to rely on the possibility that their interests lie in the most favorable part of the producing structure and to take their chances that the entire production from their land will be more valuable than an undivided interest in production from a much larger unitized tract. (Footnotes omitted) As can be seen by a review of South Dakota's unitization statutes and the purpose of unitization in general, the Board's duties when considering a unitization application are two-fold; first, it must authorize oil and gas operations to be conducted in a reasonable manner in order to prevent waste. Second, it must protect the correlative rights of all persons with a legal interest in the oil and/or gas. These duties have been characterized as a balancing act in Gilmore v. Oil and Gas Conservation Commission, 642 P.2d 773, 779 (Wyo.1982), a case involving an administrative appeal of a unitization order: .... substantial waste cannot be countenanced by a slavish devotion to correlative rights. We are faced with a delicate balancing problem between prevention of waste and correlative rights, but prevention of waste is of primary importance. See also: Denver Producing and Refining Company v. State, 199 Okl. 171, 184 P.2d 961 (1947), another administrative appeal: In striking a balance between conservation of natural resources and protection of correlative rights, the latter is secondary and must yield to a reasonable exercise of the former. The appeal of a unitization order is a case of first impression in South Dakota. (Indeed, Application of Kohlman, 263 N.W.2d 674 (S.D.1978), is the only other case of an administrative appeal of an oil or gas order.) Therefore, the Board's duty in considering a unitization application must be viewed in light of the State's statutes and the underlying purpose of unitization itself; it must be viewed as the balancing problem it is, a balancing between the waste of oil in the pool (wasted because it is unrecoverable unless secondary or enhanced recovery operations are initiated) and the protection of everyone's correlative rights  Koch's as well as the appellants'.