Court Opinion

ID: 9738084
Source: CourtListenerOpinion
Date Created: 2023-08-26 19:42:17.424821+00
Date Added: 2024-06-11T07:24:03.659390
License: Public Domain

MESCHKE, Justice,
dissenting.
Interest on debt for drilling and operating an oil well can be a “reasonable actual cost” for the Industrial Commission to allocate to fractional operating interests which are involuntarily pooled under N.D.C.C. § 38-08-08. Therefore, I respectfully dissent.
In regulating oil and gas development, the North Dakota Industrial Commission must pool “all interests in the spacing unit for the development and operations [of a well] ... [i]n the absence of voluntary pooling, ...” N.D.C.C. § 38-08-08. The order “shall be upon terms and conditions that are just and reasonable,” affording each interest owner “the opportunity to recover ... without unnecessary expense, his just and equitable share.” Id. The Commission must provide “for the payment of the reasonable actual cost” of the drilling and operation of the well, “plus a reasonable charge for supervision.” Id. In the vocabulary of the oil business, an involuntarily pooled interest in North Dakota is a “carried interest,” since the well operator has only “a lien on the share of production ... accruing to the interest of each of the other owners for the payment of his proportionate share of such expenses.” Id.1
Thus, in North Dakota, an operator who drills a well without complete voluntary pooling has recourse only to a nonparticipants’ share of production from that well, and no other way to obtain contribution to its costs. To begin with, then, there is little or no incentive for a fractional operating interest to voluntarily pool because that person has nothing to gain over involuntary pooling. Consider Superior Oil Co. v. Humble Oil & Refining Company, 165 So.2d 905 (La.Ct.App.1964).
There is no reason to confine the meaning of the statutory phrase “reasonable actual cost.” There is ample reason to recognize a practical and reasonable interpretation where the phrase is coupled with instructions to the regulatory agency to set “just and reasonable” terms and to afford each owner “his just and equitable share.” We should give great weight to a reasonable construction of a regulatory statute adopted by the administrative agency charged with enforcement of the statute. “This court, ... has indicated its reluctance to substitute its own judgment for that of qualified experts in matters entrusted to administrative agencies:” Amoco Production Co. v. North Dakota Ind. Comm., 307 N.W.2d 839, 842 (N.D.1981). “Where the subject matter is of a technical nature, the *705expertise of the administrative agency is entitled to respect;” Triangle Oilfield Services, Inc. v. Hagen, 373 N.W.2d 413, 415 (N.D.1985). While an administrative decision on a question of law is fully reviewable on appeal, Slawson v. North Dakota Industrial Commission, 339 N.W.2d 772, 774 (N.D.1983), each ingredient of “reasonable actual cost” ought to be a matter of fact for determination by the Industrial Commission.
Nothing in our precedents is antagonistic to treating interest on debt as a cost of commercial activities. To the contrary, we have often recognized interest on related debt as a proper cost in computing damages in contract matters. Berg v. Hogan, 322 N.W.2d 448 (N.D.1982); Hall GMC, Inc. v. Crane Carrier Co., 332 N.W.2d 54 (N.D.1983). We should also do so in this commercial field. See Nantt v. Puckett Energy Co., 382 N.W.2d 655, 660 (N.D.1986).
We do agree with Chief Justice Erickstad that Wood Oil Co. v. Corporation Commission, 268 P.2d 878 (Okla.1954) did not decide whether an operator could ever recover interest from a carried owner under Oklahoma’s forced pooling statutes. Wood Oil did not allow the recovery of interest, where there was no evidence about interest paid, but this case is different.
Here, there was evidence that Flying J had interest expense on debt for the drilling and operating of the Skjelvik #4-35 well. The comptroller for Flying J testified as an expert on petroleum accounting and computed annual borrowing costs of Flying J. He submitted an exhibit showing the “actual effective annual borrowing costs” of Flying J for 1981 through 1984, explained that it represented the “actual out-of-pocket costs of money” to Flying J, and concluded that its average borrowing cost was 12.72%. The only detracting evidence was that Flying J paid the interest to its parent company, rather than an outside creditor.
From this evidence, the Commission determined that “the charge of interest on an unpaid debt is a reasonable actual cost in the drilling and operating of a well,” that the inclusion of interest “on the unpaid balance of a working interest’s share of the cost of a well ... is just and reasonable,” and that Flying J “submitted substantial credible evidence indicating that in drilling and operating the Skjelvik # 4-35 well, interest was an actual cost.”
Scholarly discussion about interest, as an allocable cost in regulatory forced pooling, is skimpy. The opinion of the Chief Justice suggests that legal scholars look at interest not as a cost factor but rather as 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) ] or as a “nonconsent penalty” [6 H. Williams and C. Meyers, Oil and Gas Law § 944, p. 673 (1986). I disagree with these characterizations of the observations of those scholars.
Anderson’s article addresses a different issue (although it is also one that was argued on this appeal), whether forced pooling should be retroactive to the date of first production, and analyzes decisions (including Wood Oil, supra), making pooling orders non-retroactive. He points up the unfairness of non-retroactivity, “unless one justifies the ruling as a penalty for the failure of the nonparticipating working interest owners to participate upfront in the drilling venture.” 58 N.D.L.Rev. at 563. He urges that pooling be treated as “retroactive to the date of first production” as the simplest solution to assure just and equitable sharing of production. Anderson goes on to say:
“If a penalty for failing to participate upfront in the drilling venture is deemed suitable, a penalty could be superimposed over this initial allocation. For example, the nonparticipating working interest owner could be assessed a risk capital charge over and above the actual drilling and completion expenses. The amount of the charge could be based on the state’s producer/dry-hole ratio for ‘wildcat’ or ‘development’ wells, or it could simply be the prime rate of interest plus a specified percent.” Id. at 567.
*706This statement contemplates something very substantial, “over and above the actual ... expenses,” without excluding interest on related debt from those “actual expenses.”
Similarly, the reference to a “nonconsent penalty” in 6 H. Williams and C. Meyers, Oil and Gas Law § 944, p. 673 (1986), should be considered in its context. It occurs in a section about “options afforded owners of operating interests.” The authors report that Oklahoma courts have approved “nonconsent penalties” of 50 to 100% of the carried participants share of the cost, in addition to actual costs, and that many voluntary pooling agreements as well as some compulsory pooling statutes provide for such substantial non-consent penalties. See, for example, Holmes v. Corporation Commission, 466 P.2d 630 (Okla.1970) sustaining an order imposing a 250% non-consent penalty. Williams and Meyers do not focus on interest on debt as an ingredient of actual costs.
One law review article, Swan and Hal-lock, The Comparisons, Contrasts, and Effects of Compulsory Pooling Statutes, 28 Rocky Mountain Mineral Law Institute 911 (1983), does identify interest on related debt as an item of actual cost, while describing the commercial context of forced pooling. This article points out that “the issue most important to the ‘owners’ who have the right to drill is how the burdens and risks of development will be divided among them. Often it is the only real issue.” Id. at 935.
Swan and Hallock observe that “a wide variety of treatment is given to the owner who chooses not to participate.” Id. at 937. They summarize:
“Some statutes provide that his share will be paid out of production. Alternatively, other statutes say that he can participate on a limited or carried basis. Some states charge a non-participant with a ‘non-consent’ penalty. Many which do not, could. All states should. Such penalties are routine in voluntary agreements.”
A number of states are identified as authorizing or imposing non-consent penalties ranging from 100% to 200%, over and above actual costs:
“These penalties, at first glance, seem to unduly penalize a non-participant who didn’t want to drill a well in the first place. They are, however, less severe than the penalties knowledgeable operators agreed to voluntarily for similar ventures. Without a non-consent penalty, no compulsory pooling order would be ‘just and reasonable’ in the sense of including terms which reasonable men would insist upon and agrée to in a voluntary agreement entered into for the same purpose. This is true whether the statute specifically allows or requires such a penalty, or merely requires just, fair, equitable, or reasonable terms.” Id. at 941.
These authors conclude:
“The terms of a compulsory pooling should therefore be as close as possible to those which reasonable and well-informed parties would agree to for themselves under the same facts and circumstances.” Id. at 945.
Specifically, in commenting on Wood Oil, supra, Swan and Hallock discuss interest as a cost factor:
“It seems, however, that the designated operator should be entitled to recover interest on money spent by him for the benefit of all in accordance with a pooling order. If he had not had to borrow the money on his own credit both for his share and the nonparticipant’s share, he could have invested what he put up for his uncooperative partner. The failure to allow reasonable interest in these days gives a non-consenting owner an undeserved free ride.’” Id. at 936. (emphasis added.)
I believe Swan and Hallock write convincingly and sensibly on the subject. See also, Application of Kohlman, 263 N.W.2d 674 (S.D.1978) which approved a 100% risk compensation in addition to actual costs as “reasonable under the circumstances,” holding that authority to set risk compensation is necessarily implied and reasonably necessary to effectuate the *707power and duty of the regulatory board in South Dakota to impose compulsory pooling.
When viewed in the larger context of “nonconsent penalties” and “risk capital charges” ranging up to 300% in addition to sharing actual costs, annual interest of 12.72% as an actual cost charged to the fractional operating ownerships of Imperial and Target is surely reasonable. To me, it is a “reasonable actual cost” which the Commission can allocate.
Therefore, I would affirm the decision of the Industrial Commission on this issue.

. "A fractional interest in oil and gas property, usually a lease, the holder of which has no personal obligation for operating costs, which are to be paid by the owner or owners of the remaining fraction, who reimburse themselves therefor out of production, if any. The person advancing the costs is the carrying party and the other is the carried party....
“The details of a carrying agreement vary considerably, e.g., whether the operator (the party who is putting up the cost of development) has control of the oil and the right to sell it or the carried party can sell his part of the oil; whether the carried interest is to be carried for the initial development purchase only of the operation or for the life of the lease; whether interest is to be charged and, if so, the rate; who would own the equipment, such as pipe, motors and pumps, if and when production ceased; ...” Oil and Gas Terms, Williams and Meyers, Matthew Bender (New York 1984).