Cycling, pooling, and unitization of oil and gas.

(1) The department may consider the need for the operation as a unit of an entire field, or of any pool or pools, portion or portions, or combinations thereof within a field, for the production of oil or gas, or both, and other minerals which may be associated and produced therewith, in order to avoid the drilling of unnecessary wells, otherwise to prevent waste, or to increase the ultimate recovery of the unitized minerals by additional recovery methods.

(2) The department shall issue an order requiring unit operation if it finds that:

(a) Unit operation of the field, or of any pool or pools, portion or portions, or combinations thereof within the field, is reasonably necessary to prevent waste, to avoid the drilling of unnecessary wells, or to increase the ultimate recovery of oil or gas by additional recovery methods;

(b) The estimated additional cost incident to the conduct of such operation will not exceed the value of the estimated additional recovery of oil or gas; and

(c) The additional recovery of oil or gas does not adversely interfere with the storage or recovery of natural gas within a natural gas storage reservoir.

The phrase “additional recovery methods” as used herein includes, but is not limited to, the maintenance or partial maintenance of reservoir pressures; recycling; flooding a pool or pools, or parts thereof, with air, gas, water, liquid hydrocarbons, any other substance, or any combination thereof; or any other method of producing additional hydrocarbons approved by the department.

(3) The order shall be fair and reasonable under all the circumstances, shall protect the rights of interested parties, and shall include:

(a) A description of the area embraced, termed the “unit area” and a description of the pool or pools, or portions thereof, affected and lying within the unit area.

(b) A statement of the nature of the operations contemplated.

(c) A method of allocation among the separately owned tracts in the unit area of all the oil or gas, or both, produced from the unit pool within the unit area and not required in the conduct of such operation or unavoidably lost, such method of allocation to be on a formula that is fair and equitable and that will protect the correlative rights of all interested parties.

(d) A provision for adjustment among the owners of the unit area (not including royalty owners) of their respective investments in wells, tanks, pumps, machinery, materials, equipment, and other things and services of value attributable to the unit operations. The amount to be charged unit operations for any such item shall be determined by the owners of the unit area (not including royalty owners). However, if said owners of the unit area are unable to agree upon the amount of such charges or upon the correctness thereof, the department shall determine the amount. The net amount charged against the owners of a separately owned tract shall be considered expense of unit operation chargeable against such tract. The adjustment provided for herein may be treated separately and handled by agreements separate from the unitization agreement.

(e) A provision that the costs and expenses of unit operation, including investment, past and prospective, be charged to the separately owned tracts in the same proportions that such tracts share in unit production. The expenses chargeable to a tract shall be paid by the person not entitled to share in production free of operating costs and who, in the absence of unit operation, would be responsible for the expense of developing and operating such tracts, and such person’s interest in the separately owned tract shall be primarily responsible therefor. The obligation or liability of such persons in the several, separately owned tracts for the payment of unit expense shall at all times be several, and not joint or collective. The unit operator shall have a first and prior lien upon:

1. The leasehold estate, exclusive of the royalty interest provided thereby, and upon unleased oil and gas rights, exclusive of one-eighth interest therein, in and to each separately owned tract; and

2. The interest of the owners thereof in and to the unit production and all equipment in possession of the unit,

to secure the payment of the amount of the unit expense charged to and assessed against such separately owned tract.

(f) The designation of, or a provision for the selection of, a unit operator. The conduct of all unit operations by the unit operator and the selection of a successor to the unit operator shall be governed by the terms and provisions of the unitization agreements.

(g) A provision that when the full amount of any charge made against any interest in a separately owned tract is not paid when due by the person or persons primarily responsible therefor, then all of the oil and gas production allocated to the interest in default in such separately owned tract, upon which operator has a lien, may be appropriated by the unit operator and marketed and sold for the payment of such charge, together with interest at a rate of 6 percent per annum. The remaining portion of the unit production, or the proceeds derived therefrom, allocated to each separately owned tract shall in all events be regarded as royalty to be paid to the owners, free and clear of all unit expense and free and clear of any lien therefor. The owner of any overriding royalty, oil and gas payment, or other interest who is not primarily responsible for the unpaid obligation shall, to the extent of any payment or deduction from his or her share, be subrogated to all the rights of the unit operator with respect to the interest or interests primarily responsible for such payment. Any surplus received by the operator from any such sale of production shall be credited to the person or persons from whom it was deducted, in the proportion of their respective interest.

(h) The time the unit operation shall become effective and the manner in which, and the circumstances under which, the unit operation shall terminate.

(4) An order requiring unit operation shall not become effective unless and until:

(a) A contract incorporating the unitization agreement has been signed or ratified or approved in writing by the owners of at least 75 percent in interest as costs are shared under the terms of the order and by 75 percent in interest as production is to be allocated to the royalty owners in the unit area. If any entity owns both royalty interests and interests responsible for costs, such party may vote as an owner responsible for costs or as a royalty owner, at his or her election, but not as both, and the entity’s interest that is not voted shall be excluded in calculating the percentages of consent and nonconsent.

(b) A contract incorporating the required arrangements for operations has been signed or ratified or approved in writing by the owners of at least 75 percent in interest as costs are shared,

and the department has made a finding to that effect either in the order or in a supplemental order. Both contracts may be encompassed in a single document. In the event the required percentage interests have not signed, ratified, or approved the said agreements within 6 months after the date of such order, or within such extended period as the department may prescribe, it shall be automatically revoked.

(5)(a) The department, by entry of new or amending orders, may from time to time add to unit operations portions of pools not theretofore included, may add to unit operations new pools or portions thereof, and may extend the unit area as required. Any such order, in providing for allocation of production from a unitized zone of the unit area, shall first allocate to such pool or pools or portion thereof so added a portion of the total production of oil or gas, or both, from all pools affected within the unit area, as enlarged, and not required in the conduct of unit operations or unavoidably lost; such allocation to be based on a formula for sharing that is considered to treat each tract and each owner fairly and equitably during the remaining course of unit operations. The production so allocated to such added pool or pools or portions thereof shall be allocated to the separately owned tracts which participate in such production on a fair and equitable basis. The remaining portion of unit production shall be allocated among the separately owned tracts within the previously established unit area in the same proportions as those specified prior to the enlargement unless such proportions are shown to be erroneous by data developed subsequent to the former determination, in which event the errors shall be corrected. Orders promulgated under this section shall become operative at 7 a.m. on the first day of the month next following the day on which the order becomes effective.

(b) An order promulgated by the department shall not become effective unless and until:

1. All of the terms and provisions of the unitization agreement relating to the extension or enlargement of the unit area or to the addition of pools or portions thereof to unit operations have been fulfilled and satisfied and evidence thereof has been submitted to the department.

2. The extension or addition effected by such order has been agreed to in writing by the owners of at least 75 percent in interest as costs are shared in the area or pools or portions thereof to be added to the unit operation by such order and by 75 percent in interest as production is to be allocated to the royalty owners in the area or pools or portions thereof to be added to the unit operations by such order and evidence thereof has been submitted to the department. If any entity owns both royalty interests and interests responsible for costs, such party may vote as an owner responsible for costs or as a royalty owner, at his or her election, but not as both, and the entity’s interest that is not voted shall be excluded in calculating the percentages of consent and nonconsent.

In the event both of the requirements specified in subparagraphs 1. and 2. are not fulfilled within 6 months after the date of such order, or within such extended period as the department may prescribe, it shall be automatically revoked.

(6) When the contribution of a separately owned tract with respect to any unit pool has been established, such contribution shall not be subsequently altered except to correct a mathematical or clerical error that caused the tract contribution to be erroneous, unless an enlargement of the unit is effected. No change or correction of the contribution of any separately owned tract shall be given retroactive effect, but appropriate adjustment shall be made for the investment charges as provided in this section.

(7) The portion of unit production allocated to a separately owned tract within the unit area shall be deemed, for all purposes, to have been actually produced from such tract, and operations with respect to any unit pool within the unit area shall be deemed, for all purposes, to be the conduct of operations for the production of oil or gas, or both, from each separately owned tract in the unit area.

(8) Subsections (1)-(7) shall apply only to field or pool units, and shall not apply to the unitization of interests within an individual drilling unit.

(9) All orders requiring integration, pooling, cycling, repressuring pressure maintenance, or secondary recovery operations shall be upon terms and conditions that are just and reasonable, will afford to the owner of each tract the opportunity to recover his or her just and equitable share of the oil and gas in the pool without unnecessary expense, and, as to individual drilling units, will prevent or minimize reasonably avoidable drainage from each unit which is not equalized by counterdrainage. The portion of the production allocated to the owner of each tract included in unit operation formed by a unit operation order shall, when produced, be considered as if it had been produced from such tract by a well drilled thereon. In the event such integration or pooling is required, the operator designated by the department to develop and operate the unit operation shall have the right to charge against each other owner’s interest in the production from the wells drilled by such designated operator the actual expenditures required for such purpose, not in excess of what are reasonable, including a reasonable charge for supervision, and the operator shall have the right to receive the first production from such wells drilled by him or her thereon which otherwise would be delivered or paid to the other parties jointly interested in the drilling of the well so that the amount due by each of them for his or her share of the expense of drilling, equipping, and operating the well may be paid to the operator of the well out of production, with the value of production calculated at the market price in the field at the time such production is received by the operator or placed to his or her credit. In the event of any dispute relative to such costs, the division shall determine the proper cost. In the event a dry hole should be drilled on an individual drilling unit, no liability for any part of the cost of drilling said well shall attach to any person or persons by reason of the unit operation order of the department.