Court Opinion

ID: 9398259
Source: CourtListenerOpinion
Date Created: 2023-05-30 17:08:07.817049+00
Date Added: 2024-06-11T17:19:21.128706
License: Public Domain

FILED
                                                                  IN THE OFFICE OF THE
                                                               CLERK OF SUPREME COURT
                                                                       MAY 30, 2023
                                                                STATE OF NORTH DAKOTA

                  IN THE SUPREME COURT
                  STATE OF NORTH DAKOTA

                                2023 ND 101

Blue Steel Oil and Gas, LLC,                                    Appellant
      v.
North Dakota Industrial Commission,
Slawson Exploration Company, Inc. and
White Butte Oil Operations, LLC,                                Appellees

                                No. 20220359

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

AFFIRMED.

Opinion of the Court by Crothers, Justice.

Zachary E. Pelham, Bismarck, ND, for appellant.

Steven B. Nelson, Bismarck, ND, for appellee North Dakota Industrial
Commission.

Lawrence Bender (appeared) and Spencer D. Ptacek (on brief), Bismarck, ND,
for appellees Slawson Exploration Company, Inc. and White Butte Oil
Operations, LLC.
                  Blue Steel Oil and Gas v. NDIC, et al.
                              No. 20220359

Crothers, Justice.

[¶1] Blue Steel Oil and Gas appeals from a district court judgment affirming
a North Dakota Industrial Commission order subjecting it to a risk penalty. We
affirm the Commission’s order finding Slawson made a good-faith invitation to
lease or participate, and concluding Blue Steel is subject to a risk penalty.

                                      I

[¶2] Blue Steel is the owner of an unleased oil and gas interest in the Clarks
Creek-Bakken Pool, McKenzie County. In 2012, the Commission pooled all
pertinent oil and gas interests in the Clarks Creek-Bakken formation for the
development and operation of a spacing unit. That unit—The Jore Federal
Spacing Unit—has the capacity for 24 wells. White Butte Oil Operations, LLC
operates ten wells that have been completed in the spacing unit. White Butte
is a company affiliated with Slawson Exploration Company, Inc., and which
operates oil wells on the Fort Berthold Indian Reservation.

[¶3] In August 2019, Slawson sent Blue Steel a proposal to participate in four
wells, but Blue Steel did not return an election to participate. After Slawson
sent a proposal, Reeves Dalton, the co-founder of Blue Steel, and Chris
Manning, landman for Slawson, spoke on the phone. At the hearing, Manning
testified Dalton stated he did not want to lease his interest. Dalton gave
conflicting testimony, stating he expressed interest in leasing. The Commission
did not make findings on Dalton’s or Manning’s credibility, did not decide what
actually transpired during the telephone call, and did not weigh how the call
may have impacted the written invitations to participate.

[¶4] In October 2019, Slawson sent Blue Steel a proposal to participate in two
wells. Blue Steel did not return an election to participate or accept the
opportunity to lease. Nor does the record show Dalton or any other person
acting on behalf of Blue Steel contacted Slawson about the invitations. Slawson
began the risk penalty process for the six wells.

                                      1
[¶5] In August 2021, Blue Steel applied to the Commission for an order
finding Blue Steel was not subject to a risk penalty because Slawson failed to
make a proper invitation to participate and a good-faith attempt to lease. In
December 2021, the Commission held a hearing on the application. In
February 2022, the Commission issued an order denying Blue Steel’s
application, finding Slawson met the good-faith attempt to lease requirement.
In March 2022, Blue Steel appealed to the district court, which affirmed the
Commission’s decision. Blue Steel timely appealed to this Court.

                                      II

[¶6] Blue Steel argues the Commission erred when it concluded Slawson
could impose a risk penalty on Blue Steel. In particular, Blue Steel claims the
Commission erred by finding Slawson made a good-faith attempt to obtain
Blue Steel’s interest without first providing a proposed lease “containing a
primary term, a per-acre bonus, a royalty rate, and other clauses.”

[¶7] Our standard for reviewing Commission orders is well established:

             “The standard of judicial review of Commission orders is set
      forth in N.D.C.C. § 38-08-14(3), which provides that orders 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.
      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. 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. The
      Commission’s decisions on questions of law are fully reviewable on
      appeal. The Commission’s findings of fact must be sufficient to
      enable this Court to understand the basis for its decision. Even in
      subject areas that entail administrative expertise, that expertise
      must be directed toward the statutory standards set forth by the

                                      2
      legislature so that reviewing courts may have the benefit of that
      expertise. If the reasons given do not enable us to understand the
      basis for the decision, the Commission’s decision cannot be
      sustained.”

Gadeco, LLC v. Industrial Commission of North Dakota, 2012 ND 33, ¶¶ 15-
16, 812 N.W.2d 405 (cleaned up).

[¶8] An operator of oil and gas wells can impose a statutory penalty on
mineral owners who do not lease or participate in the risks and cost of drilling.
N.D.C.C. § 38-08-08(3)(c). That subsection provides:

      “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 and completing the well only if the paying owner has made
      an unsuccessful, good-faith attempt to have the unleased
      nonparticipating owner execute a lease or to have the leased
      nonparticipating owner join in and participate in the risk and cost
      of drilling the well.”

Id.

[¶9] Commission regulations detail how an operator may impose a risk
penalty on a mineral owner:

      “An owner may recover the risk penalty under the provisions of
      subsection 3 of North Dakota Century Code section 38-08-08,
      provided the owner gives, to the owner from whom the penalty is
      sought, a written invitation to participate in the risk and cost of
      drilling a well, including reentering a plugged and abandoned well,
      or the risk and cost of reentering an existing well to drill deeper or
      a horizontal lateral. If the nonparticipating owner’s interest is not
      subject to a lease or other contract for development, an owner
      seeking to recover a risk penalty must also make a good-faith
      attempt to have the unleased owner execute a lease.”

N.D.Admin.Code § 43-02-03-16.3(1).

[¶10] What constitutes a good-faith attempt is not defined by statute or
regulation. Nor has the Commission defined the phrase “good-faith attempt.”

                                        3
Here, the Commission stated, “Many factors can come in to play in deciding
whether the standard is met, and those varying factors should be examined in
each case to determine whether the statutory obligation is met. The facts in
this case will be examined to determine whether Slawson has fulfilled its
statutory obligation.”

[¶11] The Commission rejected Blue Steel’s claim a proposed lease was
required as part of an offer to participate. Before doing so, the Commission
expressed a preference that the operator should provide the owner with a
written lease proposal. However, the Commission concluded that the
circumstances in this case required “further examination.” The Commission
also stated:

            “The Commission declines to define ‘a good-faith attempt to
     have a lease executed’ but acknowledges there are different levels
     of experience among unleased mineral owners and while a written
     lease proposal that includes a primary term, a per-acre bonus, and
     a royalty rate may be appropriate for very inexperienced mineral
     owners in simple leasing situations, there are circumstances,
     especially in complicated leasing situations such as exists in this
     matter before the Commission, and/or where lessor input is
     necessary before specific terms can be properly included, where a
     different approach may be appropriate to get to a written lease
     proposal that includes the aforementioned items.

            “While a written lease proposal that includes a primary
     term, a per-acre bonus, and a royalty rate provides important
     information to make an informed decision on whether the paying
     owner made a good-faith attempt to have the unleased owner
     execute a lease, the Commission does not believe it is necessary in
     all situations.”

[¶12] The Commission also found Dalton is the co-founder and member-
manager of Blue Steel and Blue Steel’s parent company, Vintage. Dalton is an
experienced landman. Blue Steel has participated with Slawson and leased
mineral interests to Slawson. Slawson sent Blue Steel multiple invitations to
participate.

                                     4
[¶13] The Commission reviewed facts in this case, focusing on Dalton’s
involvement in earlier offers to participate in the Jore Federal Spacing Unit
wells. That history showed that Dalton acted as a member-manager for
Vintage and Blue Steel when those companies chose to participate in the first
four wells drilled in the spacing unit. The Commission found Dalton was
representing Blue Steel when it did not respond to Slawson’s invitations to
participate in the next six wells drilled in the unit. From these facts, the
Commission concluded:

             “It is clear that Dalton knew, or should have known, what
      the alternative option to receive a lease offer language in Slawson’s
      invitations meant, what he had to do in order to participate, what
      he had to do in order to receive a lease offer, and what it meant if
      he did not respond.

            “Dalton, as member-manager for Blue Steel, did not object to
      Slawson’s lease offer details language in its invitations when he
      received and elected to participate in the Jore (Federal) #1-12H,
      Jore (Federal) #12-12TFH, and Jore (Federal) #13-12TF2H wells,
      when at the time Blue Steel was an unleased mineral interest
      owner owning the Wolff minerals and could have leased said
      minerals to Slawson instead of participating.”

[¶14] The Commission considered it important that the invitations received by
Blue Steel from Slawson contained specific language: “If you would like to
pursue this alternative, please indicate so in the space provided in the election
ballot and provide the requested contact information before the end of the 30-
day election period. A representative from Slawson will then contact you with
assignment or lease offer details.” The invitation also stated, “Please indicate
your interest in this alternative on the election ballot and provide your contact
information in order that we may contact you before the end of the 30-day
election period with any assignment or lease offer details.” Blue Steel did not
object to the invitations or request clarification about what was required by
the invitation.

[¶15] Based on the facts of this case, and given our standard for reviewing the
Commission’s findings, the Commission did not err in finding Slawson made
Blue Steel a good-faith attempt to lease or participate in operation of the wells.

                                        5
We therefore affirm because the Commission has regularly pursued its
authority, and its findings and conclusions are sustained by the law and
supported by substantial and credible evidence.

                                     III

[¶16] Blue Steel argues the Commission erred when it concluded Blue Steel
was subject to a risk penalty because Slawson failed to give Blue Steel a full
30 days to review Slawson’s proposed lease, and to decide whether to accept or
decline the invitations to participate or lease.

[¶17] Blue Steel’s argument that Slawson failed to give them 30 days relies on
N.D.Admin.Code § 43-02-03-16.3(1)(b). That provision requires “[a]n election
to participate must be in writing and must be received by the owner giving the
invitation within thirty days of the participating party’s receipt of the
invitation.” Id. We reject Blue Steel’s argument. First, this provision does not
require that the invitation include a proposed lease or lease terms. Second,
because we affirm the Commission’s conclusion that a proposed lease was not
required for Slawson to make a good-faith attempt, we similarly conclude the
Commission did not err in finding Blue Steel was not entitled to have a full 30
days to review a lease proposal together with the invitations to participate.

                                      IV

[¶18] We have considered Blue Steel’s remaining arguments and conclude they
are either without merit or unnecessary to our decision. We affirm the district
court judgment affirming a North Dakota Industrial Commission order
subjecting Blue Steel to a risk penalty.

[¶19] Jon J. Jensen, C.J.
      Daniel J. Crothers
      Lisa Fair McEvers
      Jerod E. Tufte
      Douglas A. Bahr

                                       6