Section 23-0901. Compulsory integration and unitization in oil and natural gas pools and fields

1.  Compulsory integration and unitization in oil pools and fields and
  in natural gas pools and fields shall be subject to  the  provisions  of
  this  section  with  subdivision  3  to  be  specifically  applicable to
  integration within individual spacing units, and subdivisions 4  through
  12  to be specifically applicable to unit operation of an entire pool or
  part thereof.
    2. The department shall not make any order requiring  the  integration
  of  interests  in  any  spacing  unit  or  requiring  the development or
  operation of any field, pool or part thereof as a unit unless it  finds,
  after  detailed  study  and  analysis,  notice  and  hearing,  that  the
  integration  of  interests  in  spacing  units,  under  conditions  then
  existing  in  this  state,  or  in  the field or pool to be affected, is
  necessary to carry out the policy provisions of section 23-0301 of  this
  article.
    3.  In  the  absence  of voluntary integration as permitted by section
  23-0701 of this article and after finding as required by  subdivision  2
  of  this  section,  the  department  shall make an order integrating all
  tracts or interests in the spacing unit for development  and  operation.
  Each  such integration order shall be upon terms and conditions that are
  just and reasonable and subject to the following:
    a. As used in this section or otherwise in this article, to the extent
  applicable to oil and gas wells:
    (1) "Integrated non-participating owner" or "non-participating  owner"
  means  an  owner  who  elects  to  reimburse  the  well operator, out of
  production proceeds, for such owner's proportionate share of the  actual
  well  costs  of  the  initial well in a spacing unit and be subject to a
  risk penalty, and complies with all of the requirements for integration,
  including the  terms  of  integration,  as  specified  in  an  order  of
  integration  issued pursuant to the compulsory integration provisions of
  this section. The non-participating owner shall receive the  full  share
  of production attributable to such owner's proportionate interest in the
  spacing  unit  following  the  recoupment  by  the  well operator of the
  owner's proportionate share of the actual well costs plus a risk penalty
  of two hundred percent of the share of the actual well  costs  allocable
  to  such  owner.  In  the  case  of  a  leased tract, a royalty shall be
  deducted from the non-participating owner's share of  production,  which
  shall  not  be  subject  to  charges  or  costs, but shall be separately
  calculated and paid to the non-participating  owner  on  behalf  of  the
  royalty owner as follows:
    (i) During the recovery of the actual well costs, 1/16 or 6.25%,
    (ii)  During  the recovery of the first 100% of the risk penalty, 3/32
  or 9.38%,
    (iii) During the recovery of the second 100% of the risk penalty,  the
  lowest  royalty fraction set forth in an existing lease in the unit, but
  no less than 1/8 or 12.5%.
    Nothing in this subparagraph relieves any lessee of its obligation  to
  pay,  from  the  commencement  of  production, any remaining royalty and
  overriding royalty owed under the terms of its lease.
    (2) "Integrated participating owner" or "participating owner" means an
  owner who elects to participate in the initial well in a  spacing  unit,
  pays  all  costs  associated with participation and complies with all of
  the requirements for participation, including the terms of  integration,
  specified  in  an order of integration issued pursuant to the compulsory
  integration provisions of this section.
    (3) "Integrated royalty owner" means an owner who has  either  elected
  to be an integrated royalty owner or who does not elect to become either

  a  participating  owner  or  a  non-participating  owner. The integrated
  royalty owner shall receive a royalty equal to the lowest royalty in  an
  existing  lease  in  the  spacing unit, but no less than one-eighth. The
  integrated  royalty  owner shall have no obligation to the well operator
  or any other owner for any charges, taxes or fees  associated  with  the
  operation  of  the oil or gas well and, notwithstanding any other law to
  the contrary, shall not be liable by reason of the owner's status as  an
  integrated  royalty owner for any claims for personal injury or property
  damage suffered by any person relating to the drilling and operation  of
  the well.
    (4)  "Risk  penalty"  means  the  percentage  applied to well costs to
  reimburse the well operator for the risk involved with  the  exploration
  for  and  development of a well or the percentage applied to other costs
  that are subject to recoupment and a risk penalty, as  provided  herein.
  At  any  time  during  a  risk penalty phase, an owner subject to a risk
  penalty may pay  to  the  well  operator  the  full  amount  subject  to
  recoupment by the well operator, to terminate the risk penalty phase and
  be  eligible  for  other  opportunities  for  participation  as provided
  herein.
    (5) "Well costs" means the costs incurred or estimated to be  incurred
  by  the  well  operator in relation to the drilling, completion, and the
  installation of surface equipment, other than as described in item E  of
  clause  (ii)  of  subparagraph  1  of  paragraph  c of this subdivision,
  including,  without  limitation,  surveying,  drill  site   preparation,
  leasing  of surface rights and access roads pertinent to the drill site,
  construction  of  access  roads,  permitting,   drilling,   stimulation,
  testing,  well  logging, drilling insurance, plugging and abandonment of
  the well, environmental mitigation costs associated  with  drilling  and
  any  other  costs  associated  with  the foregoing that the operator has
  incurred or anticipates incurring, including  a  reasonable  charge  for
  supervision of the foregoing activities.
    b.  If  upon  issuance  of  a  well permit by the department, the well
  operator does not control all owners within  the  spacing  unit,  either
  through  lease  or voluntary agreement, the department shall schedule an
  integration hearing.
    c. The well operator shall, no later than thirty  days  prior  to  the
  date  of  the  integration  hearing scheduled by the department, provide
  actual notice of the  hearing  to  all  uncontrolled  owners  wholly  or
  partially   within   the  spacing  unit  and  shall  provide  notice  by
  publication in a form and manner prescribed by the department. Prior  to
  or  contemporaneously  with such notice, the well operator shall provide
  to the department the well operator's estimate of those well costs  that
  the  owners electing to participate shall be required to pay to the well
  operator prior to or at the integration hearing based  on  each  owner's
  proportionate  share  of  such  costs and a list of each tract wholly or
  partially within the spacing unit, the acreage attributable thereto, the
  percentage interest  of  the  total  spacing  unit  of  each  tract,  an
  indication  of  whether the tract is controlled by the well operator and
  the names and addresses of the uncontrolled owners. If applicable,  such
  list  shall  also identify each tract where the owners remain unknown or
  cannot be located after diligent efforts by the well  operator.  To  the
  extent  an owner cannot be determined after diligent efforts by the well
  operator and such owner is integrated as an  integrated  royalty  owner,
  the  well  operator  shall  hold  the royalty percentage payable to such
  integrated royalty  owner  in  an  interest  bearing  account  for  such
  integrated  royalty  owner until the owner is located or the property is
  deemed abandoned, whichever comes first.

    (1) The notice of hearing to each uncontrolled owner shall be made  in
  a form prescribed by the department, and shall include:
    (i)  An  election  form, as prescribed by the department, granting the
  uncontrolled owner the right to elect to be integrated into the  spacing
  unit    as    an   integrated   participating   owner,   an   integrated
  non-participating owner or an integrated royalty owner. Such form  shall
  set  forth  the  well operator's good faith estimate of those well costs
  which the owners electing to be integrated as participating owners  will
  be  responsible  for  paying to the well operator prior to conclusion of
  the integration hearing, based on each owner's  proportionate  share  of
  such  costs,  and  confirm that if an uncontrolled owner does not make a
  timely election and does not timely comply with all of the  requirements
  to  be  either  a participating owner or a non-participating owner, that
  such uncontrolled owner shall be integrated into the spacing unit as  an
  integrated royalty owner.
    (ii)  A copy of the proposed order of integration, which shall include
  the proposed terms of integration applicable to integrated participating
  owners and integrated non-participating owners. The  proposed  order  of
  integration  shall  include  the  following  terms  in  addition  to any
  applicable risk penalty:
    A. The owner shall be liable for its proportionate share of all  costs
  and  expenses,  including  taxes, and claims of third parties related to
  the well, operations thereon and in conjunction therewith, and shall  be
  entitled  to  its  proportionate  share of all benefits therefrom. If an
  owner's share of production is subject  to  a  risk  penalty,  the  well
  operator  shall  establish a risk penalty account for such owner and all
  costs, expenses  and  benefits  attributable  to  such  owner  shall  be
  reflected in the penalty account;
    B.  The  well  operator  shall  hold  any  funds  paid by the owner or
  recouped through the risk  penalty  attributable  to  the  plugging  and
  abandonment costs of the well, as estimated prior to the drilling of the
  well,  in  an interest bearing account until such funds are required and
  utilized for such purpose;
    C. The owner shall be liable for and shall indemnify all other persons
  participating in the development  of  the  well,  whether  participating
  owners,  non-participating  owners  or  otherwise,  including  the  well
  operator, from and  against  all  claims  arising  out  of  the  owner's
  non-payment  of  rentals, royalties and other payments or burdens on the
  oil and gas rights that such owner contributes to the spacing  unit  and
  from and against all claims associated with the loss or failure of title
  to the oil and gas rights the owner contributes to the spacing unit;
    D.  The well operator shall have a first lien on the production of the
  owner to pay any outstanding costs, expenses  or  claims  and  the  well
  operator  shall  be  entitled to withhold and retain for the purposes of
  set off any revenue or production owed or due  to  the  owner  under  an
  order  of  integration.  Nothing in this paragraph shall affect the well
  operator's right to collect any outstanding  amounts  incurred  nor  the
  right  of  any fee owner of oil and gas interests to collect any amounts
  owed under the terms of any lease from such owner. The exercise  of  any
  remedy  shall  not  preclude  the  well  operator from seeking any other
  remedies available under the law;
    E. Whether or not the owner is subject to a  risk  penalty,  the  well
  operator  shall  submit to the owner a written authority for expenditure
  of  the  estimated  costs  associated  with  the  construction  of   any
  facilities  not  included  in well costs beyond the surface equipment at
  the wellhead to the first point of interconnection with other facilities
  that commingle production from a group of wells that includes the  well,
  including,  but not limited to, pipe, compression, processing, treating,

  dehydrating or separating equipment,  fixtures,  related  buildings  and
  other   equipment.  The  owner  shall  have  thirty  days  to  elect  to
  participate and pay its proportionate share of such estimated cost,  the
  failure  of  which shall be deemed to be an election by the owner not to
  participate. If the owner elects not to participate or is deemed to have
  elected not to participate, the  well  operator  shall  be  entitled  to
  retain  for  its own account all of the owner's share of production from
  the well until the well operator has recouped from the net  proceeds  of
  the owner's share of production the owner's share of the actual costs of
  the  facilities,  plus  a  risk  penalty  of one hundred percent of such
  costs. Any such amounts shall be added to the risk penalty  account  for
  such owner;
    F. If the owner is not subject to a risk penalty, the owner shall have
  the  right  to take its share of gas or oil production in kind and shall
  be  responsible  for  its  transportation  and  marketing   arrangements
  downstream  of  the  facilities  constructed  pursuant to item E of this
  clause. The owner's election to take in kind must  be  conveyed  to  the
  well operator no later than fourteen days prior to first production from
  the  well  or  upon seventy-five days written notice to well operator at
  any time following  first  production  from  the  well  subject  to  the
  expiration of any existing contracts;
    G. If the owner is not subject to a risk penalty and does not take its
  share  of  gas or oil production in kind, the well operator shall market
  the owner's share of production from the well ratably with its own share
  of production from the well for the  account  of  the  owner.  The  well
  operator  shall  pay  the  owner based on the price received by the well
  operator for production  in  the  general  area  less  (I)  the  owner's
  proportionate  share  of  all  costs  incurred  by the well operator for
  transporting, treating, processing, or otherwise making  the  production
  marketable,  and  (II) a marketing fee not to exceed five percent of the
  sales price of the production;
    H. The well operator shall  be  entitled  to  propose  and  conduct  a
  subsequent  operation  on  a  well, meaning any reworking, sidetracking,
  deepening, re-completing or plugging back of the well or the drilling of
  a lateral or an infill well in the formation  for  which  the  unit  was
  created.  Owners  shall  be  provided  with  a written authorization for
  expenditure of the estimated costs of the subsequent operation. An owner
  shall not be entitled to participate in a subsequent operation  as  long
  as  the  owner  is in a risk penalty phase. If a subsequent operation is
  proposed while an  owner  is  in  a  risk  penalty  phase,  the  owner's
  proportionate  share of the actual cost of the subsequent operation plus
  two hundred percent of such actual costs shall  be  added  to  the  risk
  penalty  account  for  such owner. The owner not in a risk penalty phase
  shall have thirty days to elect and pay its proportionate share  of  the
  estimated  costs,  unless  a drilling rig is on location, in which event
  notice of a subsequent operation may be given by telephone and the owner
  shall have forty-eight hours, exclusive of Saturday,  Sunday  and  legal
  holidays,  to  make  an  election  and  thirty  days  to pay the owner's
  proportionate share of costs. The failure of any such owner to elect and
  pay in a timely manner shall be deemed an election by the owner  not  to
  participate  in  the  subsequent  operation.  If such owner elects or is
  deemed to have elected not to participate in the  subsequent  operation,
  the  well  operator  shall  be  entitled  to  retain  all of the owner's
  proportionate share of production from the well until the well  operator
  has  recouped  the  proportionate  share  of  the  actual  costs  of the
  subsequent operation  attributable  to  such  owner,  plus  two  hundred
  percent of such actual costs;

    I.  The  well  operator,  on behalf of the owner, shall be entitled to
  conduct all acts associated  with  the  well  and  necessary  facilities
  related   thereto,   including   without  limitation:  conducting  title
  examination and curative work on the  tracts  included  in  the  spacing
  unit; arranging for contract services or employees of the well operator,
  at  the  customary  salaries,  wages  and benefits of such employees, to
  oversee the operation and maintenance of the well and the facilities  in
  the  production  unit  associated  with  the  well;  arranging  for  and
  maintaining required financial security for well  bonds  and  insurance;
  discharging  litigation,  claims  of  third  parties  and  disputing tax
  assessments; developing and implementing emergency responses and dealing
  with catastrophic events; and arranging for  the  storage,  transporting
  and  disposal  of  produced water, by-products or refuse associated with
  production and maintenance facilities; and
    J. Other terms may be included in the  order  of  integration  if  the
  department  determines such terms are reasonably required to further the
  policy objectives of section 23-0301 of this article.
    (2) Within twenty-one days of  receiving  notice  of  the  integration
  hearing,  each uncontrolled owner shall provide to the well operator and
  the department its election as to whether it chooses to be integrated as
  a participating  owner,  a  non-participating  owner  or  an  integrated
  royalty  owner.  Failure  of  an  uncontrolled  owner  to  elect  to  be
  integrated as a participating owner, a  non-participating  owner  or  an
  integrated  royalty  owner and to pay the amount specified in the notice
  by the date of the hearing, or to make any election, shall result in the
  owner being integrated as an integrated royalty owner. Nothing contained
  in this section shall preclude any person from entering into a lease  or
  other voluntary agreement at any time prior to the hearing.
    d.  If  substantive  and  significant  issues  are  raised  during the
  integration hearing,  the  department  shall  schedule  an  adjudicatory
  hearing.
    e. If no substantive and significant issues are raised at the hearing,
  the  department  shall issue a final order of integration confirming the
  status of all uncontrolled owners in the spacing unit  as  participating
  owners, non-participating owners or integrated royalty owners; the terms
  of   integration;  the  acreage  attributable  to  each  owner  and  the
  proportion such acreage bears  to  the  entire  spacing  unit;  and  the
  royalty applicable to each integrated royalty owner. Such order shall be
  recorded  by  the well operator in the office of the county clerk in the
  county or counties where the spacing unit is wholly or partially located
  and such order shall be final and binding upon the  well  operator,  all
  owners and their heirs, successors and assigns.
    f.  All  operations  including,  but not limited to, the commencement,
  drilling, or operation of a well or the existence of a shut-in well upon
  any portion of a spacing unit covered by an order of  integration  shall
  be  deemed  for  all  purposes  the conduct of such operations upon each
  separately owned tract in the spacing  unit  by  the  owner  or  several
  owners  thereof.  That portion of the production allocated to each tract
  included in a spacing unit covered by an  order  of  integration  shall,
  when  produced,  be  deemed  for all purposes to have been produced from
  such tract by a well drilled thereon.
    4. The department upon its own motion may, and upon the application of
  any interested person shall, hold a hearing to consider the need for the
  operation as a unit of an entire pool or part thereof.
    5. The department shall make an order providing for the unit operation
  of a pool or part thereof if it finds that such operation is  reasonably
  necessary  to  increase  substantially  the ultimate recovery of oil and
  gas, and the value of the estimated additional recovery of  oil  or  gas

  exceeds  the  estimated  additional  cost  incident  to  conducting such
  operation. The order shall be upon terms and conditions  that  are  just
  and reasonable and shall prescribe a plan for unit operations that shall
  include:
    a. A description of the unitized area, termed the unit area.
    b. A statement of the nature of the operations contemplated.
    c.  An  allocation  to the separately owned tracts in the unit area of
  all the oil and gas that is produced from the unit area  and  is  saved,
  being  the  production  that is not used in the conduct of operations on
  the unit area or not unavoidably lost. The allocation shall be in accord
  with the agreement, if any, of the interested parties. If  there  is  no
  such  agreement, the department shall determine the value, from evidence
  introduced at the hearing, of each separately owned tract  in  the  unit
  area, exclusive of physical equipment, for development of oil and gas by
  unit operations, and the production allocated to each tract shall be the
  proportion that the value of each tract so determined bears to the value
  of all tracts in the unit area.
    d.  A  provision  for  the  credits  and  charges  to  be  made in the
  adjustment among the owners  in  the  unit  area  for  their  respective
  investments  in wells, tanks, pumps, machinery, materials, and equipment
  contributed to the unit operations.
    e.  A  provision  providing  how  the  expenses  of  unit  operations,
  including  capital  investment,  shall  be determined and charged to the
  separately owned tracts and how said expenses shall be paid.
    f. A provision, if necessary, for carrying or otherwise financing  any
  person  who  is  unable  to meet his financial obligations in connection
  with the unit, allowing a reasonable interest charge for such service.
    g. A provision for the supervision and conduct of the unit operations,
  in respect to  which  each  person  shall  have  a  vote  with  a  value
  corresponding  to  the  percentage  of  the  expenses of unit operations
  chargeable against the interest of such person.
    h. The time when the unit operations shall commence, and the manner in
  which, and the circumstances under  which,  the  unit  operations  shall
  terminate.
    i.  Such  additional  provisions  as  are  found to be appropriate for
  carrying on the unit operations, and for the protection or adjustment of
  correlative rights.
    6. No order of the department  providing  for  unit  operations  shall
  become   effective  unless  and  until  the  plan  for  unit  operations
  prescribed by the department has been approved in writing by the  owners
  of  sixty  percent  or  more  in  interest  as  the  costs  of such unit
  operations are shared under the order of the department, and  by  owners
  of  record  of a like percentage of a one-eighth royalty interest in and
  to the unit area, and the department has made a finding, either  in  the
  order  providing  for  unit operations, or in a supplemental order, that
  the plan for unit operations has been so approved by the required number
  of owners and royalty owners. If the plan for unit  operations  has  not
  been  so  approved  by  owners  and royalty owners at the time the order
  providing for  unit  operations  is  made,  the  department  shall  upon
  application  and  notice  hold  such  supplemental  hearings  as  may be
  required to determine if and when the plan for unit operations has  been
  so  approved.  If  the  owners and royalty owners, or either, owning the
  required percentage of interest in the unit area do not approve the plan
  for unit operations within a period of six months from the date on which
  the order providing for unit operations is made, such order shall  cease
  to be of force and shall be revoked by the department.

    7.  An  order providing for unit operations may be amended by an order
  made by the department, in the same  manner  and  subject  to  the  same
  conditions as an original order providing for unit operations, provided
    a.  if  such an amendment affects only the rights and interests of the
  owners, the approval of the amendment by the royalty owners shall not be
  required, and
    b. no  such  order  of  amendment  shall  change  the  percentage  for
  allocation  of oil and gas as established for any separately owned tract
  by the original order, except with the consent  of  all  persons  owning
  interest in such tract.
    8.  The department, by an order, may provide for the unit operation of
  a pool or a part thereof that embraces a  unit  area  established  by  a
  previous  order  of  the  department.  Such  order, in providing for the
  allocation  of  unit  production,  shall  first  treat  the  unit   area
  previously  established  as  a single tract, and the portion of the unit
  production so allocated  thereto  shall  then  be  allocated  among  the
  separately  owned  tracts  included  in such previously established unit
  area in the same proportions as those specified in the previous order.
    9. Oil and gas allocated to a separately owned tract shall be  deemed,
  for  all  purposes,  to have been actually produced from such tract, and
  all  operations,  including,  but  not  limited  to,  the  commencement,
  drilling, or operation of a well upon any portion of the unit area shall
  be  deemed  for  all  purposes  the conduct of such operations upon each
  separately owned tract in the unit  area  by  its  several  owners.  The
  operations  conducted  pursuant  to  the  order  of the department shall
  constitute a fulfillment of all the express or  implied  obligations  of
  each  lease  or  contract  covering lands in the unit area to the extent
  that compliance with such obligations cannot be had because of the order
  of the department.
    10. Oil and gas allocated to any tract, and the proceeds from the sale
  thereof, shall be the property and income  of  the  several  persons  to
  whom,  or  to  whose credit, the same are allocated or payable under the
  order providing for unit operations.
    11. No division order or  other  contract  relating  to  the  sale  or
  purchase of production from a separately owned tract shall be terminated
  by  the  order  providing for unit operations, but shall remain in force
  and apply to oil and gas allocated to such  tract  until  terminated  in
  accordance with the provisions thereof.
    12.  Except to the extent that the parties affected so agree, no order
  providing for unit operations shall be construed to result in a transfer
  of all or any part of the title of any person to the oil and gas  rights
  in  any  tract in the unit area. All property, whether real or personal,
  that may be acquired in the conduct of unit operations  hereunder  shall
  be  acquired  for  the  account  of the owners within the unit area, and
  shall be the property of such owners in the proportion that the expenses
  of unit operations are charged.
    13. Any person taking title by operation of law to  any  oil  and  gas
  interests  integrated  into  a  spacing  unit  pursuant  to  an order of
  integration,  shall  take  such  interests  subject  to  the  terms  and
  conditions  of  the  final order of integration issued by the department
  duly recorded in accordance with the  provisions  of  this  section  and
  shall  be  subject to all liabilities and benefits associated therewith,
  unless such person, within sixty days of the taking  of  such  interest,
  elects  to be an integrated royalty owner and notifies the well operator
  of such election.