§ 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.