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Horob v. Zavanna, LLC

Supreme Court of North Dakota

August 23, 2016

v.
v.
Zavanna, LLC, Wiser Oil Company, CSX Oil Corporation, Petro Hunt, LLC, Atlantic Richfield Co. assigned to BP American Production Company, Mid-Continent Energy Investors, LP, Huntington Natural Resources, Texas Gas Exploration, Westport Oil & Gas Company, Empire Drilling Company, Gene McCutchin, John Klemer, Lamar Hunt, Caroline Hunt Schoelkopf f/k/a Caroline Hunt Sands, Estate of Loyd B. Sands, William Herbert Hunt Trust Estate, Farrar Oil Co., Mary K. Harris, Steven H. Harris Family Limited Partnership, Forest Oil Corp., A.G. Golden, Mary S. Golden, Great American Drilling Partnership-1, Great American Drilling Exploration Corp., Atropos Exploration Co., Al-Aquitaine, Inc. f/k/a Aquitaine Oil Corp., Panda Exploration, Inc., Adobe Resources Corp., Prince Minerals, Ltd., Prince Minerals II, Ltd., Texas Gas Exploration, Ltd., Western Exploration, Ltd., Mid-Continent Energy, Inc., Spring Creek Exploration and Production, LLC, Vintage Oil & Gas, LLC, Sierra Resources, Inc., Internos, Inc., Pradera Del Notre, Inc., David D. Peterson, Atropos Exploration, Inc., Richie V. Matchette, Split Creek Enterprises, LLC, Wild Basin Oil & Gas, Onyx Energy, LLC, Cody Oil and Gas, Mountain View Energy, Crystal BGF, LP, Anglin Oil, LLC, Pearson Oil & Gas, LLC, Serenity, LLC, Sundance Energy, Bakken Caballeros, Rutter Enterprises, Weisser Oil, Eagle River Ventures, Ulmer Energy, Liberty Resources, River Bend, Keybridge Resources, LLC, Denbury Onshore, and Energen Resources Corp., Defendants Zavanna, LLC, Petro Hunt, LLC, Atlantic Richfield Co. assigned to BP American Production Company, John Klemer, William Herbert Hunt Trust Estate, Mary K. Harris, Steven H. Harris Family Limited Partnership, Spring Creek Exploration and Production, LLC, Vintage Oil & Gas, LLC, Sierra Resources, Inc., Internos, Inc., Pradera Del Notre, Inc., Split Creek Enterprises, LLC, Wild Basin Oil & Gas, Onyx Energy, LLC, Cody Oil and Gas, Mountain View Energy, Crystal BGF, LP, Anglin Oil, LLC, Pearson Oil & Gas, LLC, Serenity, LLC, Sundance Energy, Bakken Caballeros, Rutter Enterprises, Weisser Oil, Eagle River Ventures, Ulmer Energy, River Bend, Keybridge Resources, LLC, and Energen Resources Corp., Appellees Sandra Horob, Steven Poeckes, Steve Shae, Mike Shae, and Paul Shae, Plaintiffs and Appellants

         Appeal from the District Court of Williams County, Northwest Judicial District, the Honorable Paul W. Jacobson, Judge.

          Joshua A. Swanson, for plaintiffs and appellants.

          Michael D. Schoepf (argued) and Lawrence Bender (on brief), 1133 College Drive, Suite 1000, Bismarck, N.D. 58501, for defendants and appellees Zavanna, LLC, Petro Hunt, LLC, Atlantic Richfield Co. assigned to BP American Production Company, John Klemer, Mary K. Harris, Steven H. Harris Family Limited Partnership, Spring Creek Exploration and Production, LLC, Vintage Oil & Gas, LLC, Sierra Resources, Inc., Internos, Inc., Pradera Del Notre, Inc., Split Creek Enterprises, LLC, Wild Basin Oil & Gas, Onyx Energy, LLC, Cody Oil and Gas, Mountain View Energy, Crystal BGF, LP, Anglin Oil, LLC, Pearson Oil & Gas, LLC, Serenity, LLC, Sundance Energy, Bakken Caballeros, Rutter Enterprises, Weisser Oil, Eagle River Ventures, Ulmer Energy, River Bend, Keybridge Resources, LLC, and Energen Resources Corp.

          Nicholas P. Laurent (on brief), 808 Nueces Street, Austin, TX 78701, for defendant and appellee Vintage Oil & Gas, LLC.

          John W. Morrison, Jr. (on brief) and Paul J. Forster (on brief), P.O. Box 2798, Bismarck, N.D. 58502-2798, for defendants and appellees Petro Hunt, LLC, and William Herbert Hunt Trust Estate.

          OPINION

          CROTHERS, JUSTICE

         [¶ 1] Sandra Horob, Steven Poeckes, Steve Shae, Mike Shae and Paul Shae, the successors to the interests of John and Bernice Shae ("Horob plaintiffs"), appeal from a summary judgment deciding ownership of an oil and gas lease in favor of the successors to the interest of the William Herbert Hunt Trust Estate (collectively "defendants") and declaring the lease did not terminate and remains in effect. We affirm, concluding the lease remains in effect under a communitization agreement with the United States.

         I

         [¶ 2] John and Bernice Shae owned oil, gas and other mineral interests in Williams County. In 1969 the Shaes leased their interests to the William Herbert Hunt Trust Estate ("Shae lease"). The Shae lease covers a 1, 057.72-acre area and states it will remain in force for ten years and as long thereafter as oil or gas is produced. The Shae lease also contains a cessation of production clause:

"If, prior to discovery of oil, liquid hydrocarbons, gas or their respective constituent products, or any of them, on said land or on land pooled therewith, lessee should drill and abandon a dry hole or holes thereon, or if, after discovery of oil, liquid hydrocarbons, gas or their respective constituent products, or any of them, the production thereof should cease from any cause, this lease shall not terminate if lessee commences additional drilling or reworking operations within sixty (60) days thereafter."

         [¶ 3] The Rolfstad well was drilled on a spacing unit containing part of the Shae property and began producing oil in 1979. In 1987 the operator of the well, Wiser Oil Company, signed a communitization agreement with the United States to pool federal oil and gas leases that cannot be independently developed with other leases. The 160-acre communitized area includes the Rolfstad well and 40 acres (21.61 net) of the Shae lease. The agreement states it will remain in force for two years "and for so long as communitized substances are, or can be, produced from the communitized area in paying quantities[.]" The agreement contains a cessation of production clause similar to the lease stating it "shall not terminate upon cessation of production if, within sixty (60) days thereafter, reworking or drilling operations on the communitized area are commenced and are thereafter conducted with reasonable diligence during the period of nonproduction." The agreement also states "production pursuant to this agreement shall be deemed to be... production as to each lease committed hereto."

         [¶ 4] Continental Resources, Inc., has operated the Rolfstad well since 2001. [1] According to a monthly well production report the Rolfstad well did not produce oil from April 2004 through September 2004, November 2006 through January 2007 and December 2010 through February 2011. Continental resumed production and paid royalties under the Shae lease to the Horob plaintiffs or their predecessors after each lapse in production.

         [¶ 5] In October 2011 Defendant Zavanna, LLC, began drilling Bakken oil and gas wells on or pooled with the Shae lease property. Two wells in particular, the Panther well and the Beagle well, produced over 375, 000 barrels of oil through November 2014. Zavanna paid royalties to the Horob plaintiffs for the production and sale of oil from the Panther and Beagle wells. In May 2013 Zavanna began drilling thirteen additional Bakken wells on or pooled with the Shae lease property.

         [¶ 6] After learning of the Rolfstad well's most recent lapse in production from December 2010 through February 2011, the Horob plaintiffs sued the defendants in November 2013, claiming the Shae lease expired under the cessation of production clause as early as 2004 because oil production lapsed for at least 60 consecutive days and drilling or reworking operations were not commenced. Defendants moved for summary judgment, arguing the cessation of production clause was not triggered because Continental timely restored production to the well without needing to commence additional drilling or reworking operations. Defendants also argued the lease remained in effect under the terms of the communitization agreement, and the Horob plaintiffs ratified the lease by accepting royalty payments after the lapses in production.

         [¶ 7] The district court granted the defendants' motions for summary judgment concluding the Shae lease remained in effect because the cessation of production clause was not triggered. The court alternatively concluded the lease remained in effect under the communitization agreement and because the ...


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