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Amy Dalrymple, Forum News Service, Published January 30 2014

UPDATED: Industrial Commission approves oil mega-unit

BISMARCK – An oil drilling proposal that drew opposition from many mineral owners moved forward Wednesday in a split vote with Gov. Jack Dalrymple objecting.

The North Dakota Industrial Commission voted 2-1 to approve a proposal from QEP Energy Co. to develop 25,000 acres in McKenzie County as one large drilling unit known as the Grail-Bakken Unit.

But individual mineral owners will still have the final say. QEP needs 60 percent approval from mineral owners and working interest owners in the unit.

Lynn Helms, director of the Department of Mineral Resources, recommended approval because QEP estimates it will be able to recover an additional 2.7 million barrels of oil by developing the area as a large unit.

All mineral owners in the unit would share in every well according to a formula. Helms said he was recommending approval after his staff revised QEP’s formula to better protect the rights of individual owners.

But Dalrymple said he favors 1,280-acre spacing units, which are most traditional

in the Bakken, unless a large unit provides a significant opportunity to reduce the impact on the land.

“We really don’t see the world as being made up of 25,000-acre units in North Dakota,” Dalrymple said. “At some point, your pool of petroleum needs to have something to do with the legal description that you have, that you own.”

Dalrymple said he has concerns about the fairness for those owners who already have producing oil wells and would later be brought into the unit.

Helms said the Oil and Gas Division revised the proposal to address that, Helms said.

Agriculture Commissioner Doug Goehring, who supported the proposal along with Attorney General Wayne Stenehjem, said he favored the unit because it would involve drilling fewer wells, better allow for development of pipelines and reduce the impact on the land.

In December 2011, the three Industrial Commission members unanimously supported a 31,000-acre unit in Dunn County known as the Corral Creek-Bakken Unit. In that case, Helms recommended approval because developing the area as a unit had less impact on Little Missouri State Park and kept well pads out of the river’s flood plain.

The unit proposed for McKenzie County, however, does not have similar topographical challenges, Helms said.

And while QEP said in its petition the unit would allow the company to drill fewer wells and reduce the impact on the land, Helms said during the hearing “the footprint change is pretty small.”

Both Dalrymple and Stenehjem will have the opportunity to vote on the unit proposal again as members of the Land Board. The state owns 6 percent of the minerals in the unit.

“This is precedent setting. I don’t know why if we are doing this, why would we not do the next three or four 25,000-acre units that come in?” Dalrymple said. “It should be the same principle for everyone.”

Fargo attorney Sean Foss, who was among those who participated in a hearing on the proposal in November, questioned why the Oil and Gas Division would revise QEP’s proposal rather than reject it if it didn’t adequately protect mineral owners. Foss also questioned why the public was not given an opportunity to comment on the revised proposal.

“It’s somewhat concerning that it sounds like the decision is being made on the basis of what the Oil and Gas Division did behind the scenes,” said Foss, who had another attorney attend the hearing on his behalf.

Foss’s client, Ed Vanover of Bismarck, is a mineral owner who has existing oil wells in the unit and worries that by pooling all of the spacing units together, his ultimate return will be diminished. However, Foss had not seen the revised proposal and did not know its details.

Helms said he and other staff members wrestled with whether to recommend denying the proposal on the basis that it did not protect owners’ rights. However, Helms said they decided the revision could guide other operators on creating large units with regard to preventing waste and protecting rights.