NDIC May Allocate Production Under N.D.C.C. § 38-08-04(1)(c), but Must Modify Spacing/Pooling Orders with Notice and Hearing Before Reallocating Beyond Unit Boundaries

I. Introduction

Case: Garaas v. NDIC, 2026 ND 25 (N.D. Feb. 5, 2026).
Parties: Jonathan T. Garaas and David Garaas, as trustees of three family trusts (collectively, “the Trusts”), appealed an order of the North Dakota Industrial Commission (“NDIC”) that favored NDIC and Petro-Hunt L.L.C. (“Petro-Hunt”), the operator of a lease-line horizontal well.
Background: The dispute arose from NDIC’s treatment of production from a horizontal “lease-line” well drilled in a 2,560-acre “overlapping” spacing unit (Order No. 30323), where a portion of that overlapping unit included only one section (Section 19) of an older 1,280-acre “base” spacing unit comprised of Sections 19 and 20 (Order No. 13922). NDIC Order No. 33453 allowed production attributed to Section 19 within the overlapping unit to be further shared with Section 20 under the base-unit pooling concept—reducing the Trusts’ royalty share tied to acreage in Sections 18/19.

Key issues:

  • Whether NDIC had statutory authority to allocate production from an overlapping spacing unit to interests tied to a base spacing unit not wholly contained within the overlapping unit.
  • Whether NDIC “regularly pursued its authority” when it issued Order No. 33453—particularly regarding notice, procedure, and the constraints of its own prior pooling orders.
  • Whether attorney’s fees were warranted under N.D.C.C. § 28-32-50.

II. Summary of the Opinion

The North Dakota Supreme Court reversed the district court and vacated NDIC Order No. 33453.

  • Authority: NDIC does have statutory authority to allocate production “from any field, pool, or area” under N.D.C.C. § 38-08-04(1)(c), which the Court interpreted as a broad, independent allocation power not limited to marketing districts.
  • Limits/procedure: NDIC nevertheless did not regularly pursue its authority because the applicable pooling orders—Order No. 13922 (base unit) and Order No. 30323 (overlapping unit)—did not authorize the reallocation NDIC approved, and Order No. 30323 expressly disclaimed modifying other pooling orders or requiring reallocation. The Court concluded NDIC’s action effectively enlarged the well’s effective unit without an application to modify spacing/pooling orders and without adequate notice and participation opportunities for all affected owners, raising due process concerns.
  • Fees: Attorney’s fees were denied because NDIC did not act “without substantial justification” under N.D.C.C. § 28-32-50(1).

III. Analysis

A. Precedents Cited

1. Standard of review for NDIC orders

  • Liberty Petroleum Corp. v. NDIC, 2024 ND 183, ¶ 6, 11 N.W.3d 851: The Court reiterated its “very limited” review and the governing statutory standard under N.D.C.C. § 38-08-14(3): NDIC orders are sustained if NDIC “regularly pursued its authority” and findings are supported by law and “substantial and credible evidence.” This framing mattered because the Trusts’ winning argument did not depend on reweighing evidence; it depended on legal authority and procedure (“regularly pursued”).

2. Exhaustion and NDIC’s role as initial factfinder in correlative-rights disputes

  • Garaas as Co-Trs. of Barbara Susan Garaas Fam. Tr. v. Petro-Hunt, L.L.C. ("Garaas I"), 2024 ND 34, ¶¶ 1, 15-16, 3 N.W.3d 156: The Court relied on its earlier exhaustion holding to contextualize why the allocation dispute belonged at NDIC first. While Garaas I required an agency record on correlative-rights and order-interpretation issues, this appeal tested whether NDIC’s resulting order conformed to statutory authority and required procedure.
  • Dominek v. Equinor Energy L.P., 2022 ND 211, ¶¶ 14-15, 17, 982 N.W.2d 303: This was central. In Dominek, the Court held N.D.C.C. § 38-08-08(1) “does not contemplate” allocation among multiple, overlapping spacing units and, standing alone, does not command such allocation. Here, the Court used Dominek to reject NDIC’s and Petro-Hunt’s attempt to root cross-unit reallocation in the “deemed produced from such tract” language of § 38-08-08(1).
  • Vogel [v. Marathon Oil Co.], 2016 ND 104, ¶ 36, 879 N.W.2d 471: Cited (via Garaas I) for the principle that agency proceedings can create the necessary record and findings before judicial review—again underscoring NDIC’s first-instance role, but not insulating NDIC from later review for statutory and procedural compliance.
  • Dominek v. Equinor Energy L.P., No. 1:19-cv-288, 2023 WL 3742825 (D.N.D. May 31, 2023): Cited (via Garaas I) as an example of courts declining jurisdiction when claims fall within NDIC’s jurisdiction and administrative remedies were not exhausted.

3. Administrative “authority” is limited to legislative grant

  • Kirkpatrick v. N.D. Dep't of Transp., 2023 ND 190, ¶¶ 11-12, 996 N.W.2d 640: Used to define “jurisdiction” in administrative law as including the agency’s “scope of authority under statute,” and to emphasize “authority” as the “official right or permission to act.”
  • First Bank of Buffalo v. Conrad, 350 N.W.2d 580, 584 (N.D. 1984) and Heier v. N.D. Dep't of Corr. & Rehab., 2012 ND 171, ¶ 18, 820 N.W.2d 394: These anchor the foundational proposition that agencies are “creatures of statute” and possess only powers granted expressly or by necessary implication—used to reject Petro-Hunt’s “not forbidden” theory of agency power.
  • Env't Law & Policy Ctr. v. N.D. Pub. Serv. Comm'n, 2020 ND 192, ¶ 11, 948 N.W.2d 838 and Matter of Nebraska Pub. Power Dist., 330 N.W.2d 143, 149 (N.D. 1983): Cited to reinforce that even broad regulatory mandates do not create unlimited power; the agency must point to legislative authorization.

4. Statutory interpretation methodology

  • State by & through Workforce Safety & Ins. v. Questar Energy Servs., Inc., 2017 ND 241, ¶ 11, 902 N.W.2d 757 and Mosser v. Denbury Res., Inc., 2017 ND 169, ¶ 13, 898 N.W.2d 406: These cases supported the Court’s “fully reviewable” approach to questions of law and the priority of statutory text in discerning legislative intent.
  • State v. Berkley, 2025 ND 134, ¶ 18, 24 N.W.3d 69: Used for the ordinary conjunctive meaning of “and,” which drove the Court’s grammatical analysis of N.D.C.C. § 38-08-04(1)(c) (two independent grants of authority).

5. Oil-and-gas specific framework: spacing, pooling, correlative rights

  • Gadeco, LCC, v. NDIC, 2012 ND 33, ¶ 4, 812 N.W.2d 405: Cited for NDIC’s spacing authority and the purposes of spacing (prevent waste, avoid unnecessary wells, protect correlative rights).
  • Slawson v. NDIC, 339 N.W.2d 772, 774 (N.D. 1983): Cited for the purposes of pooling—preventing physical and economic waste and protecting correlative rights across a reservoir.

6. “Regularly pursued its authority” and remedies

  • Reile v. State by & through Workforce Safety & Ins., 2025 ND 6, ¶ 13, 16 N.W.3d 212: Cited for the proposition that whether an agency exceeded its statutory authority is a question of law fully reviewable on appeal—supporting the Court’s willingness to vacate Order No. 33453 on procedural/authority grounds.

B. Legal Reasoning

1. The Court’s two-step framing: (i) power exists, (ii) power was misused procedurally

The Court carefully separated (a) whether NDIC had a source of authority to allocate production across a “field, pool, or area,” from (b) whether NDIC exercised that authority in a way consistent with its governing statutes, its existing orders, and minimum procedural protections.

2. Why N.D.C.C. § 38-08-08(1) could not carry NDIC’s allocation order

NDIC’s Order No. 33453 relied on pooling concepts under N.D.C.C. § 38-08-08(1) and a longstanding NDIC “practice” regarding overlapping spacing units. The Supreme Court rejected § 38-08-08(1) as the legal basis for cross-unit allocation for two related reasons:

  • Textual limitation: § 38-08-08(1) repeatedly speaks in terms of “the spacing unit” being pooled and ensuring each owner’s equitable share “in the spacing unit.” The Court read this as limiting allocation to interests within the pooled unit’s boundaries.
  • Binding precedent: The Court invoked Dominek v. Equinor Energy L.P. to reaffirm that § 38-08-08(1) “simply does not contemplate” multiple overlapping units and does not itself supply an allocation rule between them.

3. Why N.D.C.C. § 38-08-04(1)(c) does provide broad allocation authority

The decisive statutory move in this opinion is the Court’s interpretation of N.D.C.C. § 38-08-04(1)(c). The Court parsed the clause structure to conclude it contains two independent grants:

  1. General allocation authority: “To limit and to allocate the production of oil and gas from any field, pool, or area …”
  2. Additional marketing-district authority: “… and to establish and define … marketing districts … and to limit and allocate the production … for each separate marketing district.”

By treating the marketing-district language as “supplemental, not restrictive,” the Court held NDIC possesses a general statutory authority to allocate production beyond the more familiar contexts of proration within a unit or within marketing districts—at least as a matter of raw statutory power.

4. Why NDIC still lost: it did not “regularly pursue its authority”

Having found a statutory foothold in § 38-08-04(1)(c), the Court turned to whether NDIC exercised that power properly. The Court’s core procedural/structural points were:

  • Pooling orders controlled and did not authorize cross-unit reallocation:
    • Order No. 13922 pooled the base unit (Sections 19 & 20) only for wells “drilled in that spacing unit.” It did not govern production from wells drilled elsewhere.
    • Order No. 30323 pooled the overlapping unit for the lease-line well and contained an express limitation: “This order does not modify, amend or alter previous pooling orders for other spacing units or require the reallocation of production … by any existing pooling orders or any pooling agreements.” The Court read this as an affirmative barrier to NDIC’s later attempt (via Order No. 33453) to force redistribution to Section 20 under the base unit.
  • NDIC’s action functionally enlarged the effective unit without using the statutory modification process: The Court reasoned that by approving allocation to acreage outside the lease-line unit, NDIC effectively expanded the well’s allocation footprint beyond existing spacing boundaries. Yet NDIC did not proceed via a spacing modification application under N.D.C.C. § 38-08-07(4).
  • Due process concerns (notice and opportunity to participate): Without an application to modify existing orders, affected owners outside the overlapping unit could be deprived of proper notice and participation. The Court treated this as a failure to comply with “fundamental notions of due process,” which, in turn, meant NDIC did not “regularly pursue its authority.”

5. Attorney’s fees: reversal is not enough

Even though the Trusts won vacatur of the order, the Court declined fees under N.D.C.C. § 28-32-50(1) because the record did not establish NDIC acted “without substantial justification.” The Court thus distinguished legal error/procedural irregularity from sanction-worthy agency behavior.

C. Impact

1. Clarified statutory basis for allocation across broader “areas”

The opinion establishes a significant interpretive holding: N.D.C.C. § 38-08-04(1)(c) independently authorizes NDIC to allocate production from “any field, pool, or area,” and that authority is not confined by the marketing-district language. This will likely be cited in future disputes where NDIC seeks allocation tools not neatly limited to one spacing unit.

2. But allocation authority is constrained by procedure and by NDIC’s own orders

The decision simultaneously warns that broad statutory authority does not permit end-runs around:

  • the modification mechanisms of the spacing statute (N.D.C.C. § 38-08-07(4)),
  • the notice-and-hearing architecture for pooling and related orders (N.D.C.C. § 38-08-08(1)), and
  • limiting language NDIC inserted into prior pooling orders (here, Order No. 30323’s express non-modification/non-reallocation clause).

3. Practical consequences for operators and mineral owners in lease-line development

  • Operators: If an operator wants production from a lease-line well (in an overlapping unit) to be shared with owners in an underlying base unit outside that overlapping unit, this case signals the operator likely must pursue a procedurally proper path—potentially including applications to modify spacing/pooling orders—rather than relying on informal “practice” or post hoc “clarification” orders.
  • Mineral/royalty owners: Owners affected by reallocations can frame challenges not only as “wrong allocation,” but as structural defects: conflicts with existing orders, lack of a proper modification application, and inadequate notice implicating due process.
  • NDIC drafting going forward: NDIC may respond by drafting future overlapping-unit pooling orders with explicit cross-allocation rules (if it chooses to do so), and by ensuring the procedural vehicle fits the relief requested—especially where allocation effectively changes unit boundaries or who shares in production.

IV. Complex Concepts Simplified

  • Spacing unit: The geographic area NDIC assigns to a well for drilling and production accounting. It defines “who shares” in production from a particular well under NDIC’s regulatory scheme.
  • Pooling: A legal mechanism that combines separately owned mineral/lease interests within a spacing unit so owners share in production (and often costs) in proportion to their interests, avoiding wasteful drilling and protecting “correlative rights.”
  • Overlapping (lease-line) spacing unit: A spacing unit created to allow a horizontal well to be drilled along a boundary (“lease-line”), often to recover resources that would otherwise be stranded by setback rules. It can geometrically overlap with preexisting spacing units.
  • Base unit: The earlier spacing unit already established for the reservoir; here, Sections 19 and 20 together.
  • Setback limitation: A restriction keeping wells a minimum distance from unit boundaries, intended to reduce immediate “drainage” from adjacent units and protect correlative rights.
  • Correlative rights: Each owner’s right to a fair opportunity to produce their equitable share of oil and gas from a common reservoir without waste or unfair drainage.
  • “Regularly pursued its authority”: A judicial-review requirement meaning NDIC must not only have power in the abstract, but must exercise it through correct statutory procedures, within its legal mandate, and consistent with due process.
  • Vacatur: The court nullifies the agency order, restoring the parties to the legal status quo before the order (subject to any further proceedings NDIC may properly conduct).

V. Conclusion

Garaas v. NDIC delivers a dual rule with major implications for North Dakota oil-and-gas regulation:

  • Substantive authority confirmed: NDIC has broad statutory power under N.D.C.C. § 38-08-04(1)(c) to allocate production from “any field, pool, or area,” including in contexts involving overlapping spacing units.
  • Procedural discipline enforced: NDIC cannot implement cross-unit reallocations in a manner that conflicts with existing pooling orders or effectively expands unit participation without using proper modification processes and ensuring notice and participation consistent with due process. Failure to do so means NDIC has not “regularly pursued its authority,” warranting vacatur.
  • Fee-shifting constrained: Even when NDIC is reversed, attorney’s fees require a further showing that NDIC acted without substantial justification.

In the broader legal context, the opinion strengthens textual statutory interpretation and administrative-law regularity as checks on regulatory “practice,” while leaving NDIC room—if it proceeds correctly—to address real correlative-rights and stranded-resource concerns created by setbacks and lease-line development.