United States District Court, D. Montana, Billings Division
NORTHERN OIL AND GAS, INC., and NORTHWEST FARM CREDIT SERVICES, FLCA, Plaintiffs,
CONTINENTAL RESOURCES, INC., Defendant.
TIMOTHY J. CAVAN UNITED STATES MAGISTRATE JUDGE.
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.)
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.
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,
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
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.
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.
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.
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.
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
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.
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.
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.
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.)
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.)
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.)
argues that Northern should be prohibited from taking a
non-consent position with respect to the Northern Lease.
(Doc. 85 at 2.)
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.
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 ...