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Posts Tagged ‘North Dakota Oil & Gas Law’

South Dakota Weighs in on the Dormant Mineral Laws

Posted on: May 21st, 2014
by David Ganje

A recent South Dakota Supreme Court decision, Holsti v. Kimber, 2014 S.D. 21, has shed light on two areas of the state’s dormant or abandoned mineral interests act (see South Dakota Codified Laws § 43-30A et. al.): first, what constitutes “use” (S.D.C.L. § 43-30A-3) and “nonuse” (S.D.C.L. § 43- 30A-2) of a mineral interest in order for a claimant to keep ownership; and second, who may claim and exercise that “use.”    North and South  Dakota’s Dormant/Lapsed Mineral Act are substantially similar.  This case adds to the body of case law discussing this important natural resources law. Though some questions remain unanswered following the decision, the Court’s decision discusses what a mineral interest owner may do to prevent lapse of one’s mineral interest and what a mineral interest owner may do to maintain his interest in a mineral estate. This case is the first time the South Dakota Court has addressed head on the state’s dormant mineral interest law.

South Dakota defines a mineral interest as “any interest, in oil, gas, coal, clay, gravel, uranium, and all other minerals of any kind and nature, whether created by grant, assignment, exception, reservation, or otherwise, owned by a person other than the owner of the surface estate.” (S.D.C.L. § 43-30A-1 (emphasis added)). A mineral interest is considered abandoned if it is “unused” for twenty-three years (twenty years in North Dakota) and a statement of claim is not recorded within that time. (S.D.C.L. § 43-30A-2; N.D.C.C. § 38-18.1-02). Upon abandonment, the surface estate owner may succeed to the mineral interest of another claimant, and unite the two estates. (S.D.C.L. § 43-30A-6).

In order to maintain ownership of a mineral interest and avoid lapse, the mineral interest must be “used.” (See S.D.C.L. § 43-30A-3). “Use” under the statute may include any one of eight statutorily defined “uses.” (Id.) One such “use” relevant to this case, includes:

 

Any conveyance, valid lease, mortgage, assignment, order in an estate settlement proceeding, inheritance tax determination affidavit, termination of life estate affidavit, or any judgment or decree that makes specific reference to the mineral interest is recorded . . . .

 

(S.D.C.L. § 43-30A-3(4)). It is the burden of the mineral interest holder to maintain his interest. (See Holsti, 2014 S.D. 21 at ¶ 12 (citing Texaco, Inc. v. Short, 454 U.S. 516, 529-30 (1982)). Upon lapse, the burden shifts to the surface estate owner (the landowner) to take steps to succeed in the mineral interest. (See S.D.C.L. § 43-30A-6). In Holsti, the issue before the Court was whether the mineral interest holders fulfilled their burden to maintain their interest in the mineral estate. (See ¶ 11).

The facts of the case: in 1967, Severt Kvalhein (“Kvalhein”) conveyed real property to Gordan Holsti and recorded the deed. (Holsti at ¶ 2). In the sale, Kvalhein reserved fifty percent of the mineral rights for himself. (Id.). Two years later, in 1969, Kvalhein died and his estate was devised to eight heirs, each heir taking a one-eighth interest in the minerals. (Id.).

In 2007, Mr. Holsti conveyed his surface estate to his sons (“the Holstis”). (Id. at ¶ 3). In December 2011, the Holstis published a notice of lapse of mineral interest in the official county newspaper in accordance with the statutes to recover mineral interests. (Id.; see S.D.C.L. § 43-30A-6.). No one responded by recording a statement of claim asserting ownership of the mineral interest. (Holsti, at ¶ 3). The Holstis filed a quiet title action in May 2012 alleging abandonment of the mineral interest due to “nonuse.” (Id. at ¶ 4).

Kvalhein heirs (“the heirs”) answered and rejected the argument that the mineral interest was abandoned. (Id. at ¶ 5). In their defense, the heirs referenced several 1978 oil and gas leases, a 1994 statement of claim by one of the heirs, and two mineral deeds recorded by one of the heirs in 1998 and 2011. (Id.).

The Court looked to whether the Kvalheim heirs had a valid mineral interest at all. The trial court had decided they did not have a valid interest because no document was recorded evidencing transfer of the mineral interests to the heirs and reasoned that “use” of a mineral interest could only be done by a “record owner.” (See id. at ¶ 9). The Supreme Court rejected that reading of the statute, and found that the heirs did not need a recorded written document conveying Kvalheim’s mineral interest to them. (Id. at ¶ 15).  The Court found the Kvalheim’s last will and testament, though unrecorded, was sufficient to convey the mineral interest to the heirs upon Kvalheim’s death. (Id., at ¶ 15; S.D.C.L. § 43-30A-1).

Once the Court determined the heirs had an interest in the mineral estate, it next turned to whether or not that interest had been abandoned due to “nonuse,” or if the heirs had satisfied the law’s “use” requirements. (Holsti, at ¶ 16). The circuit court found the 1978 oil and gas leases recorded by the heirs were insufficient because they did not make specific reference to the mineral deed recorded by Kvalheim in 1967. (Id.). The Supreme Court disagreed. (Id.). Because the language of the statute does not specifically use the words “record holder” or “original deed” the Court held the only two requirements for a recorded oil and gas lease to satisfy “use” were: 1) a specific reference to the mineral interest in question and 2) recording in the county register of deeds office. (Id.). Because the heirs’ oil and gas leases specifically referred to the legal description of the minerals and because the leases were recorded in the proper county’s register of deeds office, the Court found the leases to be sufficient as “use.” (Id.). (In a similar 2013 case decided by the North Dakota Supreme Court, Estate of Christeson v. Gilstad, the North Dakota Court also found that a legal mineral interest owner by inheritance, but not a record owner, could record an oil and gas lease to preclude abandonment of the mineral interest. (829 N.W.2d 453 (N.D. 2013)).

By exercising their rights as mineral interest holders and recording oil and gas leases in 1978, the Kvalheim heirs reset the clock back to zero on the twenty-three year test for abandonment. (See SDCL 43-30A-2). Therefore, from the last recorded lease in 1978, the heirs had twenty-three years in which the surface estate owners could not claim abandonment. Before the expiration of this twenty-three years (1978-2001), two Kvalheim heirs recorded documents sufficient to toll the clock again: in 1994, one heir recorded a valid statement of claim (Holsti, at ¶ 18); and in 1998 and 2011 two mineral deeds were recorded conveying the mineral interest between heirs. (Id. at ¶ 17). The Court found both the statement of claim and mineral deeds constituted a “use” under the law and precluded abandonment. (Id. at ¶ 17-18). The Court did not decide and instead remanded to the circuit court an additional issue: whether these two “uses” by some of the Kvalhein heirs were sufficient to preserve the other six heir’s mineral interests. (Id. at ¶ 19).

In their holding, the Court discussed who may be a mineral interest holder and what they may do to satisfy the burden of “using” their mineral estate. This clarification is to the benefit of mineral interest holders because non-record holders, that is parties who claim mineral interest rights but have no deed of record, may still protect their interests (it nevertheless a better practice to record an interest).

 

Chronological Timeline of Events

Kvalheim & heirs/Defendants

Holsti/Plaintiff

1967: Severt Kvalhein conveyed real property to Gordan Holsti, but reserved 50% of the mineral rights for himself. The deed was recorded in Harding County, South Dakota.
1969: Severt Kvalhein died, and devised his estate to his eight heirs; therefore, each heir individually inherited 6.25% of the property’s total mineral interest.
1978: Multiple oil and gas leases were recorded in Harding County by several of Kvalhein’s heirs (including: Nina Grev and Sylvia & Jerome Hjelmeland).
1994: Nina Grev, a Kvalhein heir, filed and recorded in Harding County a statement of claim related to the mineral interest.
1996: Gordon Holsti published a notice of lapse of mineral interest in the official Harding County newspaper once a week for three weeks, which notices and affidavit were recorded in the Harding County Register of Deeds Office.
1998: Jerome Hjelmeland, a Kvalhein heir, conveyed his 6.25% mineral interest to his wife, Sylvia Hjelmeland, by “Mineral Deed” which was recorded in Harding County.
2007: Gordon Holsti conveyed his surface estate to his sons, John and Mark (“the Holstis).
June 2011: Sylvia Hjelmeland conveyed her 6.25% mineral interest to her two children, Katherine and Gregory, and recorded the deed in Harding County.
December 2011: The Holstis published a notice of lapse of mineral interest in the official Harding County newspaper, once a week for three weeks, as required. No notice was mailed to Kvalheim, because he died in 1969 a single man. No inquiry was made into who was the owner of Kvalheim’s mineral interest following his death.
May 2012: The Holstis brought a quiet title action alleging Kvalheim’s mineral interest lapsed due to nonuse and that Gordan had succeeded Kvalheim’s mineral interest in 1996 due to his published notice of lapse; or, alternatively, that they had succeeded Kvalheim’s mineral interest in 2011 based on their publication of the notice of lapse.

AAPL Southwest Land Institute

Posted on: April 23rd, 2014
by David Ganje

 

Institute Covers:

  • Executive Rights vs Nonexecutive Rights: The Increasing Duty of the Nonexecutive Mineral Owner
  • Production of Horizontal Wellbores & Pertinent Case Law
  • Legal Update: Recent Developments in Non-Regulatory Oil & Gas Law
  • Ethics
  • Dormant/Abandoned Mineral Rights
  • The Klotzman Complaint: Allocating Well Permitting
  • Joint Operating Agreements: Recent Developments and Horizontal Modifications

 

Institute Information:

The day begins with on-site registration and a breakfast spread at 7:30 am, and presentations will begin at 8:30 am. The program includes a buffet lunch.

 

Materials Provided:

  • Seminar Guide

 

Course Agenda

Monday, April 28th

 

  • 8:00 am – Registration/Continental breakfast
  • 8:30  – Opening Remarks (Christopher Halaszynski, AAPL)
  • 8:40  – “Executive vs Nonexecutive Rights: The Increasing Duty of the Nonexecutive Mineral Owner” (Lane Brown, Freeman Mills PC)
  • 9:40  – “Production of Horizontal Wellbores & Pertinent Case Law” (Kimberly Puckett, Brashier, Crosby, PLLC)
  • 10:40 – BREAK
  • 11:00 – “Legal Update: Recent Developments/Non-Regulatory Oil & Gas Law” (Jonathan Baughman, McGinnis, Lochridge & Kilgore LLP)
  • Noon – BUFFET LUNCH
  • 12:45 pm – “Ethics” (Rob Shultz, Independent Landman)
  • 1:30 – BREAK
  • 1:45 – “Dormant/Abandoned Mineral Rights” (David Ganje, Attorney at Law)
  • 2:45 – “The Klotzman Complaint: Allocation Well Permitting” (David Gross, Attorney at Law)
  • 3:45 – BREAK
  • 4:00 – “Joint Operating Agreements: Recent Developments and Horizontal Modifications” (Paul Westbrook, Harris, Finley & Bogle, PC
  • 5:00 – ADJOURN

*Note: Schedule subject to change

The Utility and Controversy of Disposal Wells

Posted on: March 24th, 2014
by David Ganje

                        The Utility and Controversy of Disposal Wells

Greater attention, rightfully, is now paid in the oil patch to our first natural resource: water. From all fronts affected, parties are more aware of the proper stewardship of water.  This stewardship does not come without controversy. That famous Geo-hydro geologist Mark Twain was correct:  Whiskey is for drinking, water is for fighting. The North Dakota State Water Commission projects the amount of water needed for developing a Bakken Formation well for natural gas production at approximately three acre feet. The required water must come from a freshwater source. With the oil patch growth through 2019, Bakken wells could require as much as 51,000 acre feet (a.f.) of water. The general uses of water in the oil patch include well drilling and completion, well production, the so called use of maintenance water which requires fresh water sources, and after-production. I will focus this article on the management and disposal of used water in the ‘after production phase’ which water is often referred to as produced water or saltwater. The other important aspects of water uses, as well as tribal regulations and water law, will be left for another discussion.

During hydraulic fracturing – commonly known as fracking – water mixed with industrial chemicals and proppants (a mix of sand or ceramic particles) are forced into the well system to release oil and gas. The waste water from the process is the so called produced water or salt water. Produced water is the largest volume by-product from an oil and gas well.  Along with the chemicals used during the drilling produced water is highly saline, usually 10 times that of ocean water. Its improper use or disposal would damage soil productivity or pollute near-surface water aquifers used for irrigation and drinking water. North Dakota statutes specifically prohibit this remaining produced water from polluting any freshwater supply in the state. Disposal wells are the most common final method for removal of unusable produced water or saltwater.  North Dakota currently has 470 active saltwater disposal wells.  The well process involves injecting the produced saltwater and associated wastes into naturally occurring subsurface formations called confining geologic zones.  As technology advances the industry has other non-well options for produced water management. Such technology includes obtaining fracking water from saline groundwater sources, or from municipal waste water. A fresh water source such as an aquifer must be allowed to replenish itself (recharge), so the careful stewardship and use of water in the oil patch continually relevant. Let us look at the current practice of disposal well procedures and issues.

Upon returning to the surface there are two common methods of handling produced water:

  1. Re-injection into the oil-producing formation for enhancing oil and gas production
  2. Injection into an underground formation that naturally contains saltine water. This second method is also known as Salt Water Disposal (SWD) which are also called disposal wells.

SWD is considered the most economic final disposal method. The U.S. Environmental Protection Agency classify these wells as class II wells used to inject fluids associated with oil and natural gas production operations.

Under the guidelines of the Underground Injection Control Program established by the federal Drinking Water Safe Act, North Dakota has imposed regulations:

(a)              for pits and ponds containing saltwater liquids and brines produced by the hydraulic fracturing operations

(b)              Governing the process of underground injection wells.  A technical permit application is required for these SWD wells.

A disposal well must go through an application and approval process.  This is also called the siting of a well.  The information the state studies from an application is comprehensive and involves detailed geologic data.  A disposal well must also complete a mechanical integrity test before it becomes properly permitted and can operate. Information and data which must be submitted, and reviewed, before the state would approve an SWD well permit application include:

  1. Geologic name of lowest known fresh water zone
  2. A plat depicting the area and detailed description of the location, well name, and operator of all wells in the area of review. The area wide plat must include: nearby injection wells, producing wells, plugged wells, abandoned wells, drilling wells, dry holes, and water wells. The plat must also show seismic faults, if known or suspected
  3. Testing and recording the original bottom-hole injection of the well
  4. A description of the proposed injection program
  5. A quantitative analysis from the two nearest fresh water wells
  6. A written notice to all landowners within the area of review who must be notified of the proposed injection well.
  7. This notice informs the landowners that comments or objections may be submitted
  8. Schematic drawings of the well bore and surface facility construction.

The controversy surrounding salt water disposal wells concern spills, potential leaks and earthquakes. Spills occur. These events are saltwater surface spills not related to the disposal well or to the well integrity of a properly permitted well. Spills happen because of human error and bad equipment.   As with all Bakken oil and gas production procedures, it can be said: most in the industry do it right, but some just do it.  Saltwater spills occur on the surface, and are often a mechanical malfunction or error in human judgment. The risk of a spill from a saltwater disposal well is not from a properly permitted well itself.  When a spill occurs it is usually during the act of storing or delivering wastewater to the disposal well. Consider for example that there are 470 active operating disposal wells in North Dakota, but more than 2100 saltwater pipelines, and it is easier to understand that the ‘getting to the well’ is where problems arise. New rules have recently been promulgated by the Industrial Commission for ‘underground gathering pipelines’.  These regulations will address the construction and deconstruction [shutdown] of saltwater service pipelines.

Do disposal wells contaminate water wells and aquifers? The question is more properly stated:  Do disposal wells fail or leak? Thousands of disposal wells have been permitted in the U.S.  In 2012 a company called Halek Operating ND LLC was fined civilly and charged criminally by the Industrial Commission for illegal action and operating a disposal well after having been ordered to shut-in the well. In that case, among other things, the administrative law judge also found that the company had operated the disposal well without first completing a mechanical integrity test on the well. The state found no damage to aquifers from the illegal activity.  I know of no failures or leaks from properly permitted disposal wells located in North Dakota and South Dakota in my lifetime. And information from both states’ regulatory agencies report that such events have not occurred.

Do disposal wells cause earthquakes? Thousands of disposal wells have been permitted in the U.S. The state of Arkansas is in a region of the continent that has recognized natural earthquake activity. Because the Arkansas Oil and Gas Commission thought that disposal wells may have been causing or aggravating earthquakes in the state it ordered a study. After the study was completed in 2011 the state regulatory authority established a moratorium on new and on operating disposal wells in an area that resulted in the closure of 4 of the state’s 700 disposal wells. Natural earthquakes are more likely to occur of course in earthquake-prone geology. A region prone to natural earthquakes is more likely to be the place where a quake caused or affected by a disposal well might occur. The Bakken and Williston basin are not known as  geologically earthquake-prone areas of the continent, and the state permitting process does not authorize active disposal wells near a fault line. I know of no earthquakes caused by properly permitted disposal wells in North Dakota and South Dakota in my lifetime. And information from both states’ regulatory agencies report that such events have not occurred.

 

David Ganje of Ganje Law Offices practices natural resources, environmental and commercial law.     The website:  lexenergy.net           The contents of this article are intended for general information purposes only and are not intended as legal advice.

Waste Water Injection Well

Posted on: March 8th, 2014
by David Ganje

Will Texas Send Another Trend To The Bakken?

 

             Texas often leads the way in American oil and gas law.  Currently, the Texas Supreme Court is wrestling with a wastewater injection well case that may send precedential shockwaves across the nation. North Dakota (ND) maintains approximately 470 disposal wells.  Oral argument on the Texas case was held in January. This is the second time the Texas Supreme Court has been asked to review the same case.  FPL Farming Ltd. v. Envtl. Processing Sys., L.C. involves a landowner bringing a trespass claim concerning a wastewater injection well used to dispose of non oil and gas waste.  The landowner alleges the well is causing the migration of the injected wastewater into the landowner’s property some 8,000 feet below the surface. The landowner also claims that migrating wastewater is damaging the quality of the aquifer. The wastewater well was dug about 400 feet from the landowner’s property. 

 

     Will this second bite at the Texas apple by the Texas Supreme Court affect the Bakken?  I have some comments about such a possible outcome:  1.While not argued actively in the Texas court appeal briefs, the court record in that case shows a settlement payment made to, as well as a signed pre-well settlement agreement by, the landowner. A pre-well settlement was reached based on an objection filed by the landowner at the prior well permit application hearing.  2. ND has an established set of oil and gas regulations and water law that actively manages groundwater. ND law asserts public ownership of much of ND’s water resources including aquifers. By contrast Texas grants more private rights of ownership to subsurface water.  3. ND follows the heaven to hell ownership principal of land in which everything above and everything below the surface is owned by the surface owner. This rule of law is however not absolute. ND has addressed  the concept of subsurface trespass in a hydrofracking context in the Farrar case.  In that case the ND Court determined that state public policy in favor of the development of natural resources trumped a claim for trespass filed by a nonconsenting mineral rights holder.  4. The alleged harm to the landowner’s aquifer in the Texas case is based upon conjectural extrapolations, and is not in the nature of ‘hard evidence’ as we say on the street. At oral argument one of the judges stated, “I’m having a hard time wrapping my head around the issue of how much would be owed and when it would be owed.”

     While ND courts have in the past looked at Texas oil and gas precedent, my comments suggest that ND may not be as eager to follow any new precedent coming out of the FPL case.

 

 

David Ganje of Ganje Law Offices practices natural resources, environmental and commercial law in North Dakota and South Dakota. Web:  lexenergy.net