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Gadeco, LLC v. Industrial Commission of State

Supreme Court of North Dakota

May 14, 2013

Gadeco, LLC, Appellant
v.
Industrial Commission of the State of North Dakota and Slawson Exploration Company, Appellees

Appeal from the District Court of Mountrail County, Northwest Judicial District, the Honorable Richard L. Hagar, Judge.

Ariston E. Johnson (argued) and Dennis E. Johnson (on brief), P.O. Box 1260, Watford City, N.D. 58854-1260, for appellant.

Hope L. Hogan, Assistant Attorney General, for appellee Industrial Commission of the State of North Dakota. Lawrence Bender (argued), Amy L. De Kok (on brief) and Michael D. Schoepf (on brief), for appellee Slawson Exploration Company.

OPINION

Crothers, Justice.

[¶ 1] In Gadeco LLC v. Industrial Comm'n, 2012 ND 33, ¶¶ 19-21, 812 N.W.2d 405, we reversed an Industrial Commission order authorizing Slawson Exploration Company to assess a 200 percent risk penalty against Gadeco, LLC, for failing to accept Slawson's invitation to participate in the Coyote 1-32H well within 30 days, and we remanded to the Commission to explain its decision. On remand, the Commission determined Slawson's invitation to Gadeco to participate in the Coyote 1-32H well complied with regulatory requirements and authorized Slawson to assess a 200 percent risk penalty against Gadeco. Gadeco appeals from a district court judgment affirming the Industrial Commission's order on remand. We affirm.

I

[¶ 2] In Gadeco, we outlined the legal background for authorization of a risk penalty, and we described the factual circumstances underlying the Commission's authorization of a 200 percent risk penalty against Gadeco for failing to accept Slawson's invitation to participate in the Coyote 1-32H well within 30 days:

"Slawson and Gadeco are owners of oil and gas leasehold interests in a section of real property located in Mountrail County which comprises the spacing unit for the Coyote 1-32H well. On July 8, 2009, Slawson sent to Gadeco and to other working interest owners in the spacing unit invitations to participate in the cost of drilling and completing the well. The letter stated:
"Slawson Exploration Company, Inc., proposes to drill the Coyote #1-32H well from a surface location in the SWSE of Section 32-152N-92W, Mountrail County, North Dakota. This well will test the Bakken formation and will be drilled to an approximate total vertical depth not to exceed 10, 500 feet, with a single lateral terminating in the N2NE of Section 32. This is a 640-acre spacing unit comprised of the above-referenced section. The estimated spud date for the Coyote #1-32H is August 25, 2009.
"A recent records check indicates that you have a leasehold interest in this spacing unit, and you are offered participation in the Coyote #1-32H well based upon your ownership. Please indicate your election to participate in this well in the space provided at the end of this letter.
"In the event you do not elect to participate in the drilling of the Coyote #1-32H well, Slawson plans to impose a risk penalty in accordance with North Dakota law. You may object to the risk penalty by filing an application or request for hearing with the North Dakota Industrial Commission.
"If you choose to participate in this well, please sign the attached AFE (authority for expenditure) with costs of $2, 707, 375 DHC (dry hole costs) and $4, 219, 256 completed. Return this letter and AFE within 30 days by mail, e-mail, or fax....
"On July 15, 2009, Slawson sent another letter to Gadeco and the other working interest owners stating:
"Please note the surface location and estimated spud date of the Coyote #1-32H well have changed (proposal originally sent under letter dated July 8, 2009). The new information is listed below:
"The new surface location is NWNE of Section 5-151N-92W, Mountrail County, North Dakota. The bottom hole location remains the same--N2NE of Section 32-152N-92W.
"The estimated spud date has changed to September 27, 2009 (originally August 25, 2009).
"On August 19, 2009, Gadeco signed and returned the invitation, electing to participate in the well and sending a check for $338, 421.87 for its proportionate share of expenses. On August 20, 2009, Slawson acknowledged receipt of the election and check, but returned the check to Gadeco explaining '[s]ince this proposal was received by Gadeco, LLC, on July 10, 2009, the 30-day election period expired on Monday, August 10, 2009.'
"In November 2009, Slawson filed an application with the Commission requesting an order pooling all interests in the well's spacing unit and authorizing recovery of a 200 percent risk penalty against Gadeco as a nonparticipating owner under N.D.C.C. § 38-08-08(3)(a). Gadeco objected to assessment of the risk penalty and, following a hearing, the Commission pooled all interests and authorized Slawson to impose the 200 percent risk penalty. In authorizing assessment of the risk penalty, the Commission stated:
"(10)... Gadeco believes its election was timely and argues Slawson's invitation was invalid because the location of the well and spud date were amended. Gadeco argues Slawson was required to revise the AFE and confirm the spacing unit had not changed. Slawson responded that its letter to Gadeco received on July 17, 2009, indicated the only change was the surface location and the spud date. Slawson further indicated the AFE was not revised because the new location would be drilled from an existing well site and that savings would offset any additional drilling and completion costs. Slawson stated it actually spent approximately $3.4 million on drilling and completion costs on the Coyote #1-32H well, much below the estimated costs of $4.2 million.
"(11) The Commission concludes Slawson has complied with NDAC Section 43-02-03-16.3 and that because Slawson failed to receive Gadeco's election by August 10, 2009, the risk penalty may be ...

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