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Northern Oil and Gas, Inc. v. Continental Resources, Inc.

United States District Court, D. Montana, Billings Division

September 27, 2017

NORTHERN OIL AND GAS, INC., and NORTHWEST FARM CREDIT SERVICES, FLCA, Plaintiffs,
v.
CONTINENTAL RESOURCES, INC., Defendant.

          ORDER

          TIMOTHY J. CAVAN UNITED STATES MAGISTRATE JUDGE.

         This case originated from a dispute concerning competing oil and gas leases covering a tract of land in Richland County, Montana. Plaintiffs Northern Oil and Gas, Inc. ("Northern") and Northwest Farm Credit Services, FLCA ("NWFCS") originally brought this action against Defendant Continental Resources, Inc. ("Continental"), seeking, inter alia, a declaration that Continental's lease had expired and that Northern's lease was valid. Northern and NWFCS invoked this Court's diversity jurisdiction under 28 U.S.C. § 1332. With the parties' written consent, this case was assigned to the undersigned for all purposes. (Doc 23.)

         Presently pending before the Court are cross-motions for summary judgment filed by Northern (Doc. 82) and Continental (Doc. 84). Both parties are seeking a determination of the extent to which Northern is required to participate in the costs associated with drilling an oil well in Richland County. The Court heard oral argument on these motions on September 14, 2017. For the reasons discussed below, the Court grants Northern's motion and denies Continental's motion.

         I. Pertinent Facts

         On September 29, 2008, NWFCS, as lessor, granted an Oil and Gas Mining Lease covering the west half of Section 10, Township 24 North, Range 52 East, M.P.M., Richland County, Montana (the "Leased Premises"), in favor of Diamond Resources, Inc., as lessee (the "Continental Lease"). The Continental Lease was for a five-year primary term, which expired on September 29, 2013. On November 9, 2012, Diamond Resources, Inc., assigned the Continental Lease to Continental, effective September 29, 2008.

         On May 8, 2013, Continental filed an application with the Montana Board of Oil and Gas Conservation ("Montana Board"), requesting an order permitting the drilling of a well, known as the Sterling 1-3H Well (or the "Well"), within a temporary spacing unit consisting of Sections 3 and 10, Township 24 North, Range 52 East. The temporary spacing unit included the Leased Premises. On June 6, 2013 the Montana Board granted Continental's Application and permitted the drilling of the Sterling 1-3H Well.

         As explained by Continental in its brief, an operator drilling in a pooled area is required under Mont. Code Ann § 82-11-202 to send all leasehold interest owners a notice of intent to drill, an estimated cost of drilling, and an offer to allow the owners to participate in the well by sharing in the well costs. (Doc. 89 at 4.) An interest owner who elects to participate will share in its proportionate amount of drilling and production expenses, and also receive its share of income attributable to their interest, if any. Id. An owner who refuses to participate in the well - or in industry parlance, declines to "consent" - does not pay expenses, and does not receive revenue from the well until drilling and production expenses have been recovered from revenues and a penalty has been recovered by the consenting owners. Id. at 4-5.

         At the time the drilling permit was granted in June 2013, Northern indisputably held a leasehold interest in the E/2 of Section 10, Township 24 North, Range 52 East. That lease covered a total of thirty-two net mineral acres, equating to a gross unit working interest of 3.643319% (the "3.6% Lease"). In accordance with the statutory procedure under § 82-11-202, Continental sent Northern a well proposal and authorization for expenditure ("AFE") on August 15, 2013, seeking Northern's commitment to participate in the drilling of the Sterling 1-3H Well. By letter dated September 13, 2013, Northern communicated its desire to participate. (See Doc. 86-1.) On September 18, 2013, Continental commenced drilling operations on the Sterling 1-3H Well in the E/2 of Section 3, Township 24 North, Range 52 East.

         Approximately six weeks after drilling operations started, NWFCS granted Northern a new lease covering the W/2 of Section 10, Township 24 North, Range 52 East (henceforth, the "Northern Lease") on October 28, 2013. This lease covered the same tract previously covered under the Continental Lease.

         Continental disputed the validity of the Northern Lease. Continental maintained that it began drilling operations on Sterling 1-3H Well prior to the end of the lease's primary term, which, according to Continental's interpretation of the lease, served to extend the term of the lease beyond the primary term. Northern asserted, however, that while Continental may have commenced drilling in an adjoining parcel within the temporary spacing unit, it did not began drilling operations on the leased premises before the expiration of the primary term. Thus, Northern maintained, the Continental lease expired on September 29, 2013. Nevertheless, what is particularly relevant to the parties' present motions is that, after the Northern lease was granted, Continental never sent Northern or NWFCS a well proposal or AFE requesting consent to participate in the operation of the Sterling 1-3H Well with respect to the Northern lease.

         On March 26, 2014, Continental filed an Application with the Montana Board requesting an Order declaring all of Sections 3 & 10-24N-52E as a permanent spacing unit for production. (See Doc. 86-2.) On May 1, 2014, the Montana Board entered an Order, granting Continental's Application and designating all of Sections 3 & 10-24N-52E a permanent spacing unit for production of oil from the Sterling 1-3H Well. Also on May 1, 2014, the Montana Board issued an Order that "all interests in the permanent spacing unit comprised of all of Sections 3 & 10, T24N-R52E are hereby pooled on the basis of surface acreage for production of Bakken/Three Forks Formation oil and associated gas." Northern also participated in the proceedings before the Montana Board. In its findings, the Board specifically recognized that Continental and Northern had "an ongoing dispute as to the effective leasehold coverage" of their competing leases. (See Doc. 86-5 at 2.) The Board's findings also reflect that the parties acknowledged that the Board's order made "no findings with respect to which lease may provide effective leasehold coverage, " and the parties further acknowledged that Continental was "not authorized to recoup non-consent penalties... absent further order of the Board." Id.

         Northern filed the instant lawsuit on July 14, 2014. Northern sought to quiet title to the disputed leasehold interest in its name, and also sought money damages for lost oil and gas production revenues derived from the interest. (Doc. 1.) This Court ultimately entered an Order on the parties' cross-motions for summary judgment on May 31, 2016 (Doc. 70), holding in pertinent part that the Continental Lease expired by its terms on September 29, 2013, and holding the Northern Lease to be valid.

         Having determined the validity of the parties' leasehold interests, the sole remaining issue in this action is whether Northern should be forced to participate in the costs of drilling and operation for the Sterling 1-3H Well with respect to the Northern Lease as a consenting owner, or whether Northern maintains the right to make an election as to whether it does or does not consent to participate with respect to that share.

         II. Parties' Arguments

         A. Northern

         Northern argues that it should not be required to consent to Continental's drilling operation with respect to its interest in the Northern Lease. (Doc. 83 at 2.) Northern makes several arguments in support of its position.

         First, Northern argues that the only contract between Northern and Continental is Northern's undisputed consent to participate with respect to the 3.6% Lease, and Continental cannot unilaterally expand the interests covered under that contract to impose an additional consent upon Northern with respect to the Northern Lease. (Id. at 6-7.)

         Next, it argues that Continental had a statutory remedy available to it, insofar as it simply could have sent an AFE or amended well proposal to Northern to bind Northern to a consent position. Northern maintains that Continental's failure to do so does not justify imposing an election on Northern at this time. (Id. at 6-9.)

         Finally, Northern argues that Continental is judicially estopped from taking its present position due to the position it adopted before the Montana Board. Specifically, Northern asserts that Continental assented to the inclusion of the language prohibiting Continental from assessing a non-consent penalty against Northern absent further action from the Montana Board. (Id. at 9-14.)

         B. Continental

         Continental argues that Northern should be prohibited from taking a non-consent position with respect to the Northern Lease. (Doc. 85 at 2.)

         Continental's primary argument is that it would be inequitable to permit Northern to adopt a non-consent position at this time. Continental asserts that Northern's prior conduct evinced its intent to participate in the Well, but Northern changed that position after the price of oil dropped and it learned that the production of the Sterling 1-3H Well was less than anticipated. Continental explains that oil production is an inherently risky enterprise, and allowing Northern to wait until the Well's production capabilities are known (referred to in the industry as "riding the well down") removes the risk associated with a timely decision to consent. Accordingly, argues Continental, Northern should be estopped from adopting a non-consent position merely because it knows now that such a position is more favorable. Instead, Northern should be forced to consent, thereby accepting its share of the expenses in developing the Well.

         Continental also disputes Northern's characterization of Continental's argument as seeking to expand the existing contract covering the 3.6% Lease. Continental argues that there simply is no contract contemplating the Northern Lease, so the Court ...


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