POLICY OF THE BOARD OF UNIVERSITY AND SCHOOL LANDS FOR THE
ENFORCEMENT OF 1979 OIL AND GAS LEASE FORM PROVISIONS
RELATING TO OFFSET WELLS

SECTION 1. DEFINITIONS. As used in the policy statement the following definitions shall apply:
(a) "Board" shall mean the Board of University and School Lands which is composed of the Governor, Secretary of State, Attorney General, State Treasurer, and Superintendent of Public Instruction, as provided in Chapter 15-01 of the North Dakota Century Code.
(b) "Commissioner" shall mean the Commissioner of University and School Lands as provided for in Chapter 15-02 of the North Dakota Century Code.
(c) "Lessee" shall mean the lessee of state-owned mineral land which is within one thousand (1,000) feet of a well drilled and producing in commercial quantities from mineral land owned by another or from adjacent state-owned mineral land leased at a lesser royalty.
(d) "Rules" shall mean the rules of the Board of University and School Lands under chapter 85-06-06.

SECTION 2. OFFSET OBLIGATIONS OF LESSEE. If an oil and/or gas well has been drilled and is producing in commercial quantities from mineral land owned by another or from adjacent state-owned mineral land leased at a lesser royalty, which well is within one thousand (1,000) feet of the state-owned mineral land, the lessee of the state-owned mineral land shall, within one hundred and twenty (120) days after completion of such well, exercise one of the following options:
(a) Diligently begin in good faith the drilling of a corresponding offset well on the leased premises, or on lands pooled therewith;
(b) Agree with the board to pay a compensatory royalty in lieu of the drilling of an offset well;
(c) Release the leased acreage to avoid the offset requisites; or,
(d) Apply to the Commissioner for a waiver of the offset obligation.

SECTION 3. NOTIFICATION OF BREACH. If the Commissioner determines that any lessee of state-owned mineral land has failed to exercise one of the options as set forth in Section 2, the Commissioner may proceed under the rules to terminate the lease.

SECTION 4. WAIVER OF OFFSET OBLIGATION ELECTION. If the lessee elects to make application for a waiver of the offset obligation, the lessee shall submit to the Commissioner, within thirty (30) days of the request for a waiver, geological, engineering or other evidence in the form of a narrative and/or maps which, in the opinion of the lessee, indicates that an additional well need not be drilled to reasonably develop or protect the state-owned mineral land from drainage due to the well located within one thousand (1,000) feet on adjacent mineral land. Failure to submit the data during the time period required shall result in cancellation of the lease in accordance with the rules.

SECTION 5. COMPENSATORY ROYALTY ELECTION. If a lessee elects to pay a compensatory royalty, the lessee shall submit to the Commissioner, within thirty (30) days of the date such election is made, a proposed compensatory royalty agreement based on the estimated drainage area of the well located within one thousand (1,000) feet of the state-owned mineral land. The estimated drainage area shall be accompanied by geological, engineering, or other data in the form of a narrative and/or maps which form the basis for the drainage computation. Failure to submit the data during the time period required shall result in cancellation of the lease in accordance with the rules.

SECTION 6. COMPENSATORY ROYALTY CALCULATION. Where it is determined by the Commissioner that a compensatory royalty agreement is necessary to protect state-owned mineral land from drainage, and the proposed compensatory royalty agreement of the lessee is rejected, the Commissioner shall enter into a compensatory royalty agreement based on the following formula:

  Drainage Factor   X   Royalty Rate of State Lease   X   Actual Volumes Run From the Offset Well   X   Sales Value   =   Monthly Compensatory Royalty Due  

The drainage factor shall be determined by calculating the percentage of state-owned mineral land located within the area of a circle surrounding the offset well located within one thousand (1,000) feet of the state-owned minerals, where the area of such a circle is equal to the area of the spacing unit for the well. The sales value shall be calculated on the basis of the price per barrel and/or MCF of oil and/or gas sold of like kind, quality, and character from other State of North Dakota wells in the field/pool/area. The volume of runs shall be determined from the records of the North Dakota Industrial Commission. The lessee shall be billed by the Commissioner each month for the compensatory royalty due and shall have thirty (30) days from the receipt of billing to make payment to the Commissioner. Any compensatory royalty not paid when due shall be subject to the penalties provided by the rules.

SECTION 7. DECISION OF COMMISSIONER. The Commissioner, after a review of the data required to be submitted in Section 4 and 5, may:
(a) Request that the lessee supply additional data to support:

(1) The request for a waiver of the offset obligation; or,
(2) The proposed compensatory royalty agreement submitted by the lessee;
 (b) Grant a waiver of the offset obligation;
(c) Approve the proposed compensatory royalty agreement of the lessee;
(d) Require the lessee to pay compensatory royalties as provided in Section 6;
(e) Cancel the lease in accordance with the rules; or,
(f) Take such other action as the Commissioner may deem appropriate including the acceptance of a release either in whole or in part as to all or less than all strata included in the lease.

SECTION 8. NOTICE OF COMMISSIONER'S DECISION. The Commissioner shall notify the lessee of the Commissioner’s decision. The lessee shall have ten (10) days from the date of the notice to notify the Commissioner that they wish to appeal the Commissioner’s decision to the Board of University and School Lands. The Commissioner shall notify the lessee at least ten (10) days prior to the meeting at which the Board shall address the appeal.

SECTION 9. PRE-EXISTING WELLS. In the event there is a well that had been drilled within 1000 feet of state-owned minerals prior to when it is being leased, the Commissioner shall advertise the state-owned minerals showing the Commissioner’s decision as to the offset obligation or compensatory royalty factor.

SECTION 10. APPEAL OF COMMISSIONER'S DECISION. Any lessee objecting to the decision of the Commissioner may appear before the Board and request that the Board reject the decision of the Commissioner. The Board shall review the Commissioner’s decision and any data presented by the lessee and thereafter may: (a) Affirm the recommendation of the Commissioner;
(b) Grant a waiver of the offset obligations;
(c) Cancel the lease in accordance with the rules; or,
(d) Take such other action as the Board may deem appropriate including the acceptance of a release either in whole or in part as to all or less than all strata included in the lease.

SECTION 11. WAIVER OF OFFSET OBLIGATION BY COMMISSIONER. Notwithstanding any of the provisions herein, the Commissioner is hereby granted the authority to waive any obligations as set forth in Section 2 for a period not to exceed one year.

SECTION 12. ECONOMIC CONSIDERATIONS. Notwithstanding any of the provisions herein, the economics of drilling an offset well to prevent drainage shall not be considered by the Commissioner or the Board. If it is determined that state-owned mineral land is being drained, the drilling of an offset well, compensatory royalties or lease cancellation will be sought regardless of the economics of drilling a protective well.

SECTION 13. EXTENSIONS OF TIME. Notwithstanding any of the provisions herein, the Commissioner or the Board may, at their discretion, grant reasonable extensions of time for taking any action required herein.

History
Adopted: April 2, 1987
Revised: Nov. 10, 1994