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Archive for the ‘North Dakota Law’ Category

Does ‘All’s Well That Ends Well’ Apply To An Oil And Gas Lease?

Posted on: February 19th, 2016
by David Ganje

In oil and gas leases, a shut-in royalty provision is essential to protect the interests of lessors and Operators alike. An Operator is the business responsible for the drilling, completion, and production operations of a well and the physical maintenance of the leased property. Oil and gas lessors like shut-in provisions because they provide that some money continues without the act of suing the Operator to start producing again or get out. Operators like shut-in provisions because they provide a path to maintaining the lease when “the market” makes production ill-advised.

As important as these provisions are for the parties, there are difficulties drafting these terms into an oil and gas lease. For an unprepared lessor, an inadequate shut-in provision allows a non-producing well to sit on his land, shut-in, for years while providing little or nothing to the lessor. For an unprepared Operator, an inadequate shut-in provision forces a lose/lose decision between bad money paid out during new production or losing both the lease and the well that took big bucks to negotiate and complete. For example, what is a fair shut-in period? 3 years? 1 year? Even leases with adequate shut-in provisions have problems in legal interpretation, and in such cases the state code should stand ready with answers. States have woefully inadequate road maps to cover these situations.

New York law requires that production continue with some consistency beyond the primary leasing term. Still, there are some important unknowns that the legislature and the courts have yet to make clear. New York courts have held that “If…there is no production and it is reasonable from the facts to determine that production has finally ceased, then the lessor may recover possession of his lands free of the lease.” But, “temporary cessation of production does not terminate the lease.” What exactly is a final ceasing of production? How long can production cease before it is no longer ‘temporarily’ so? Mechanical issues with wells can last for years, especially if not properly managed – and economic issues can make production untenable for even longer. Complicating this issue, New York courts have implied that these rules only apply when the Operators are not prevented from production by forces outside of their control (which can include market conditions). So how long can lessors be stuck with a non-producing well on their land that the Operators claim has only ‘temporarily’ ceased production because of outside forces? Answer: it is presently unclear.

Where there is no good statutory roadmap, it is vital for all parties to protect their interests with proper shut-in provisions when agreeing to an oil and gas lease. New York must fix their sparse guidance on oil and gas leases that extend past the primary leasing term. Vague statutes that force disagreeing parties into court in order to fill in the legislature’s gaps are not the answer. Astute lessors and Operators can protect their interests by writing a thorough shut-in provision. These matters are too important to be left to hand-me-down, boilerplate lease language.

David Ganje. David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in New York. The website is Lexenergy.net

Does Eminent Domain Apply to Water Rights?

Posted on: February 7th, 2016
by David Ganje

Does Eminent Domain Apply to Water Rights?

Eminent domain is one of the toughest and most controversial legal powers available to a government. The doctrine of eminent domain allows a governmental body to convert privately owned land to another use, often over the objections of the current landowner. This process is commonly known as ‘condemning the land.’ There are rules, of course. A private landowner must be paid “just compensation” for the condemnation of their land. I have written several blog articles regarding the matter of just compensation. Further, the land that is to be taken must be taken to further a beneficial public use.

The ability to exercise eminent domain is so powerful that it almost always remains a final legal option left to state and government bodies. In North Dakota, a little-known law allows private citizens to exercise eminent domain. North Dakota law states that “The United States, or any person, corporation, limited liability company, or association [may] exercise the right of eminent domain to acquire for a public use any property or rights existing when found necessary for the application of water to beneficial uses.” Private citizens as well as corporations may exercise the immense power of eminent domain – but only when it comes to using water for a beneficial use.

North Dakota evaluates whether or not a citizen is able to put water to a beneficial use through a permit system. The law requires “any person, before…appropriating waters of the state…, shall first secure a water permit from the state engineer.” There are few sources of water (groundwater, surface water, river water, etc.) within the limits of the state that are not subject to such a water permit. The power of eminent domain can only be harnessed in order to put water to a beneficial use. For this reason, a citizen cannot successfully exercise eminent domain without first having a water permit.

The right of eminent domain may come into play when a private citizen or corporation wants to use water for a beneficial use, but needs access to land they don’t own in order to access water. What is a beneficial use? North Dakota law is intentionally vague on this subject. It says beneficial use is the use of water for “a purpose consistent with the best interest of the people of the state.”

Traditionally the landowner who desires the use of a water source, having first secured a state permit, will negotiate an easement with the landowner who owns the land on which the water sits. But this does not always work out. Such was the case in Mougey Farms v. Kaspari, a 1998 North Dakota Supreme Court case. The plaintiff, Mougey, owned farmland neighboring the defendant Kaspari’s land. Kaspari’s land also bordered the Sheyenne River. Mougey wanted to use the Sheyenne River as a water supply to irrigate his land. To that purpose Mougey approached Kaspari to negotiate a lease of his land in order to build a water transport system connecting Mougey’s irrigation system to the Sheyenne River. Kaspari agreed, the two signed a lease, and the irrigation system was built across Kaspari’s land without incident. The lease began in 1979 and continued for almost seventeen years.

In 1996 Kaspari informed Mougey that the lease would not be renewed, and Mougey would no longer be allowed to transport water from the Sheyenne River to Mougey’s farmland. This left Mougey without a source of water for irrigation. Mougey brought suit with an eminent domain claim against Kaspari’s land – in other words, he brought a suit to condemn the part of Kaspari’s land on which the water pipeline stood, asking for the right to continue piping water from the river to his irrigation system. Though this argument was rejected in the lower court, the North Dakota Supreme Court held that “irrigation of farmland under a perfected water permit issued by the State Engineer is a beneficial use of water consistent with the best interests of the people of North Dakota, which we conclude satisfies the ‘public use’ requirement.” The Supreme Court of North Dakota held that a private citizen could exercise the power of eminent domain in order to condemn part of his neighbor’s land, so long as the condemnation was in support of an approved public use of water.

The law lays out what public uses trigger the right of eminent domain. It states, “oil, gas, coal, and carbon dioxide pipelines and works” and the plants for supplying the above, together with “lands, buildings, and all other improvements” needed to for the purpose of “generating, refining, regulating, compressing, transmitting, or…development and control” are all public uses capable of triggering eminent domain.

The question is whether or not use of water fits a category. Is the use one that supports “generating, refining, regulating, compressing, transmitting,” or “development and control” of oil and/or natural gas? This issue may be considered regarding one of the most important uses of water in the oil and gas industry, hydraulic fracturing. There are parallels that can be drawn between the use of water for irrigation seen in Mougey Farms and the use of water for hydraulic fracturing.

Energy developers and landowners should be aware of this eminent domain statute and the possibility of its use. Both parties need to remember that when water rights are involved in a public use, the prospect of eminent domain is conceivable. The North Dakota Supreme Court teaches us that the ‘eminent domain of water statute’ allows individuals or companies to acquire for public use property when found necessary for using water for beneficial purposes.

David Ganje. David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. The website is Lexenergy.net

In North Dakota you can talk to the dead

Posted on: January 27th, 2016
by David Ganje

In North Dakota one can give legal notice by mail to a deceased individual, even though he long ago went to that great oil patch in the sky. It is something out of a Charles Dicken’s novel. You can communicate and give notice to the dead. A landowner seeking to claim mineral interests may recover the deceased’s mineral interests by giving notice by US mail to an address long ago abandoned — and legally so, according to the Dormant Mineral Act.

The North Dakota Supreme Court, in ruling on the Dormant Mineral Act, stated that “…no reasonable inquiry was required where the surface owner mailed the notice of lapse to the mineral interest owners’ address which was of record in 2007, even though the mineral interest owners had died in 1980 and 1999, respectively.” When an individual who owned mineral interests in North Dakota dies, they and their heirs may be out of luck if death never kept up the “current address” in the county recorder’s office.

The Supreme Court in an important recent case called Capps also stated, “…the address of record need not be the mineral interest owner’s correct address for the mailing of the notice of lapse to satisfy the statutory requirement.” In other words, a landowner may serve a notice to recover mineral interests by US mail when mailed to the deceased’s last address in the records and thereby obtain minerals formerly owned by the deceased.

Both the legislature and the courts are attempting to make it easier for surface owners to clear title and reclaim lost mineral rights. The Supreme Court in Capps held that “this Court made it clear that when the mineral interest owners of record are deceased, the notice must still be mailed to the address of the deceased owners of record.” In my practice I have done this. The postman must think I am nuts. This rule derives from the intent to encourage mineral development and extraction.

The Court ruled that the surface owner was not required to conduct a reasonable inquiry into an actual address of a mineral owner even when the owner knew they were deceased. The Court determined that it was immaterial whether the surface owner had actual knowledge of the death of the party notified by mail the party who was the record owner of the mineral interests and the person to whom the statutory notices had been mailed. The Court stated that any heirs of the deceased would have received notice if the deceased had recorded notice of their current addresses. The Court also held that the constitutional safeguards of due process and adequate notice do not apply to the non-litigation Dormant Mineral Act used by the landowners in the Capps case.

The Capps case illustrates the growing body of law that makes it easier to develop and reclaim mineral rights.

David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. View the original article at the Bismarck Tribune – Brakken Breakout

Minneapolis Star Tribune – N.D. oil sinks to $20 per barrel

Posted on: January 16th, 2016
by David Ganje

N.D. oil sinks to $20 per barrel with more bankruptcies expected as drilling activity declines - Photo by JIM GEHRZ

N.D. oil sinks to $20 per barrel with more bankruptcies expected as drilling activity declines

More bankruptcies are expected as drilling declines due to low prices.
By David Shaffer Star Tribune

Oil industry experts have been making dire predictions of $20 per barrel oil. In North Dakota, they’re now reality, prompting warnings of more bankruptcies and less drilling in 2016.

Although the U.S. domestic crude oil benchmark is higher — $29.64 per barrel — Bakken producers must sell at a discount because of the region’s limited oil pipelines and the higher cost of alternate shipping methods.

On Friday, North Dakota light sweet crude dropped to $20 per barrel at the wellhead, the lowest price since 2002, the state Department of Mineral Resources said. That’s one-fifth of what North Dakota producers got in early 2012, when the Bakken oil boom was at its peak.

Now, just 49 drilling rigs are operating in the state, less than a quarter of the number at the peak.

The department’s director, Lynn Helms, said the state’s oil industry is “running on empty” and quoted a verse from Jackson Browne’s song of that name during his monthly “Director’s Cut” conference call.

“We are down in the bottom of the bottom of the tank in terms of cash flow and capital,” Helms said of the state’s oil producers, two of which are in bankruptcy.
Helms said he expects another company to file bankruptcy shortly, and four or five more failures could be down the road. He didn’t name the companies.

“We have looked at … production, wells and situations and tentatively think there are four or five more [companies] at these oil prices that are going to run to the end of their financial rope by the end of 2016,” said Helms.

Seven of the 10 largest North Dakota oil producers reported losses in the third quarter, including the top three, Whiting Petroleum, Continental Resources and Hess Corp.

Two smaller producers, Samson Resources of Tulsa, Okla., and American Eagle Energy, filed for bankruptcy reorganization last year.

Despite the grim outlook, North Dakota reported a 0.4 percent increase in oil production for November, to nearly 1.18 million barrels per day. Natural gas production also rose slightly. The state’s peak oil production was more than 1.2 million barrels per day in December 2014.

But Helms said that at current crude oil prices, the number of drilling rigs could drop to 30 in 2016.

At that rate, North Dakota would barely stay above 1 million barrels per day at the end of 2016, and eventually would fall below that level, he added.

Oil prices also are affecting how much crude is shipped on oil trains, many of which pass through Minnesota on their way to East Coast refineries. About 41 percent of the state’s oil moved on trains in November, down from 47 percent in October, said Justin Kringstad, director of the North Dakota Pipeline Authority, which tracks crude oil shipping.

Most of North Dakota oil now is being shipped to market via pipelines, a reversal of earlier trends that favored rail. The economics of oil trains hinge partly on the price of oil on U.S. coasts being several dollars higher than the midcontinent price. Thanks to that price difference, refiners have been willing to pay the extra cost of shipping Bakken oil by rail.

But Kringstad said the differential “has essentially been eliminated,” a change driven partly by the revival of U.S. oil exports. “We expect that differential to be negligible for the near term,” he said, making the economics of crude-by-rail more challenging.

Helms said one of the state’s largest producers believes oil prices will recover later in 2016, a reference to recent comments by Harold Hamm, chief executive of Continental Resources. Hamm told the Wall Street Journal this week that he expects crude oil to double in price by the end of the year because supplies won’t keep up with demand.

If the gloomier outlook holds true, and more North Dakota producers file for bankruptcy, it could affect royalty recipients and vendors beyond the state’s borders, said David Ganje, a Rapid City, S.D., attorney who practices natural resources law in North Dakota and South Dakota.

“It is a very diverse industry and 48 percent of the royalty owners live out of state,” added Ganje, who said he has represented royalty recipients in Minnesota, Wisconsin and other states.

Although royalty holders have legal protections, he said, bankruptcy cases can slow down payments on oil and gas leases. Often, the oil producer in bankruptcy tries to retain the leases, reorganize and keep operating, he added. Sometimes the leases are sold, which can benefit royalty recipients if the new owner is better capitalized, he said.

Bankruptcy in the Bakken

Posted on: January 11th, 2016
by David Ganje

Bankruptcy in the Bakken

Oil and gas production is a result of two basic factors: economics and technology. Economics means the costs of production and distribution. The price of oil is an essential element of the economics of production. One economic risk is bankruptcy. A bankruptcy filing, however, is not the same as a “funeral.” People believe what they want to believe. When I taught bankruptcy law, one of the harder things to get across to the students was the fact that a bankruptcy filing is not automatically “the end.” Nevertheless, several of the law students still came into the class carrying that attitude. One should keep in mind that even if a liquidation bankruptcy case is filed, production in the final analysis often continues. The particular chapter of the bankruptcy code filing, North Dakota property law, as well as state and federal regulations all affect a bankruptcy case. There are as many facets to a bankruptcy case as there are facets on a movie star’s wedding ring, however, in this article I will discuss basically the impact of a bankruptcy filing on the typical lessor and royalty holder.

First let us review a couple of things to watch for concerning a possible bankruptcy filing. If you are the lessor or royalty holder and think a producer may be a bankruptcy candidate, there are steps that can be taken. Your attorney can access the so-called watch list as well as access public records for delisted public companies. And a slow, or no, payment of royalties is also a red flag. But do not panic if a bankruptcy filing occurs. The royalty holder should put his energy into keeping good paperwork and records. This will make a bankruptcy experience tolerable.

Property rights created by an oil and gas lease are treated differently in the various states. In North Dakota, the oil and gas lease gives the lessor a real property interest with real property rights. According to the 1986 North Dakota Supreme Court case Nantt v. Puckett Energy Company, “[o]il and gas leases are interests in real property” and have been considered such since 1951. Although an oil and gas lease is not a lease in a landlord and tenant sense, in North Dakota, an operating lease is treated under bankruptcy law as an “unexpired lease.” In Van Sickles v. Hallmark & Associates, a 2013 case, the North Dakota Supreme Court decided that an oil and gas lease in a bankruptcy case must comply with the requirements set forth in section 365 of the bankruptcy code.

Many operators who file bankruptcy are in arrears on royalty payments. A new law goes into effect at the end of February in North Dakota that allows a royalty holder to file a security lien when the royalty has not been paid when due. The royalty owner must file the lien with the state and record the lien in the county where the well is located within 90 days of production to have a lien. With good records and timely filing and recording, mineral interest owners can gain a secured position in a bankruptcy proceeding. This greatly increases a royalty holder’s chances of a full recovery because secured creditors are paid before unsecured creditors.

In bankruptcy, the debtor must either assume or reject an unexpired lease of the debtor. A debtor may not accept only the favorable parts of an executory contract. If the lease is assumed and not in default, the royalty holder can rest easy, because an oil and gas lease must be assumed in full. The royalty owner will continue to reap the benefits of the contract. If the lease is in default, the debtor must cure the default in order to keep the lease. Therefore, if a bankrupt debtor is delinquent on royalty payments, the debtor must pay the back royalties if they want to assume the lease. Either way, the royalty owner gets paid, at least eventually. However, the bankruptcy court must approve any assumption of a lease. In this circumstances, the court will look to whether the lease is a valuable asset to the debtor and whether its preservation is sufficiently important. A royalty holder or lessor may also request that the court order the debtor to decide whether to assume or reject the lease within a specified period of time. A bankruptcy court can rule that preventing further delay with respect to assumption or rejection is in the best interest of all the parties.

Following a bankruptcy, a royalty holder or lessor may find themselves with the new option of leasing to a different producer. If a debtor elects to reject an oil and gas lease, the lease is no longer valid and the mineral interest is again available on the open market. Another way this could happen is if a producer is in default of the lease agreement. The North Dakota legislature states in N.D.C.C. Sec. 47-16-39.1 that the obligation to pay royalties is “of the essence” in an oil and gas lease and that breach of the obligation “may constitute grounds for cancellation of the lease.” If a mineral owner shows a bankruptcy court that equity requires it, the court may cancel the contract and the mineral owner may then lease to another party. In addition to the statute, some lease agreements contain a provision allowing a landowner to terminate the lease under certain conditions. This avoids the equity power of the court in favor of contract language regarding cancellation. If the terms of the lease are breached in this way, a landowner may be able to terminate the existing lease and sign a lease with another producer.