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In re Petition of Luff Exploration Co.

Supreme Court of South Dakota

May 6, 2015

IN THE MATTER OF THE PETITION OF LUFF EXPLORATION COMPANY, DENVER, COLORADO, FOR AN ORDER POOLING ALL INTERESTS IN A SPACING UNIT FOR THE SOUTH MEDICINE POLE HILLS FIELD DESCRIBED AS THE E/2 OF SECTION 33 AND THE W/2 OF SECTION 34, TOWNSHIP 23 NORTH, RANGE 4 EAST AND THE NW/4 OF SECTION 3 AND THE NE/4 OF SECTION 4, TOWNSHIP 22 NORTH, RANGE 4 EAST, HARDING COUNTY, SOUTH DAKOTA, AND TO AUTHORIZE THE RECOVERY OF RISK COMPENSATION IN ADDITION TO THE PRO RATA SHARE OF REASONABLE ACTUAL COSTS FROM THE INTEREST OF ANY LESSEE OR UNLEASED MINERAL OWNER WHO ELECTS NOT TO PARTICIPATE IN THE RISK AND COST OF DRILLING AND COMPLETING A WELL ON SAID SPACING UNIT; AND FOR OTHER RELIEF AS THE BOARD DEEMS APPROPRIATE

Argued February 18, 2015.

APPEAL FROM THE CIRCUIT COURT OF THE SIXTH JUDICIAL CIRCUIT HUGHES COUNTY, SOUTH DAKOTA.

SCOTT SUMNER Rapid City, South Dakota Attorney for appellant Linda Golden.

JOHN W. MORRISON of Crowley Fleck, PLLP, Bismarck, North Dakota and BRETT M. KOENECKE of May, Adam, Gerdes & Thompson, LLP, Pierre, South Dakota, Attorneys for appellee Luff Exploration Company.

RICHARD M. WILLIAMS, Assistant Attorney General Pierre, South Dakota Attorneys for appellee, South Dakota Department of Environment and Natural Resources

HONORABLE MARK BARNETT, Judge. GILBERTSON, Chief Justice, and SEVERSON, WILBUR, and KERN, Justices, concur.

OPINION

Page 5

HONORABLE MARK BARNETT, Justice

[¶1] Linda Golden owned a mineral

Page 6

interest that was within a " spacing unit" [1] in which Luff Exploration Company desired to drill for oil. Because Golden rejected Luff's offer to lease her mineral interest or participate in the cost of drilling, Luff petitioned the South Dakota Board of Minerals and Environment (Board) to " compulsory pool" [2] the mineral interests in the spacing unit. Luff also sought " risk compensation" [3] from Golden. Over Golden's objection, the Board granted Luff's petition for compulsory pooling and risk compensation, and the circuit court affirmed. On appeal to this Court, Golden argues that the Board erred in failing to order a time and manner for Golden to elect to participate in the well by paying her proportionate share of the cost of drilling, equipping, and operating the well. Golden also argues that Luff was not entitled to risk compensation. We reverse and remand.

Facts and Procedural History

[¶2] The Secretary of the Department of Environment and Natural Resources (DENR) issued an order that established a 960-acre spacing unit for oil drilling in the South Medicine Pole Hills field in the Red River B reservoir in Harding County. Golden owned a 50% mineral interest in two lots--totaling eighty acres--in that spacing unit. Luff planned to drill a horizontal well for oil, and Golden was the only mineral owner in the spacing unit who had not leased her interest or agreed to participate with Luff in the cost of the well.

[¶3] Golden and Luff had a pre-existing relationship regarding oil and gas production. Luff operated another well in which Golden was an unleased mineral owner. Golden chose not to lease or participate in the prior well and was forced to pool ...


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