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PAN AMERICAN PETROLEUM CORP. v. UDALL

March 15, 1961

PAN AMERICAN PETROLEUM CORPORATION, Plaintiff,
v.
Stewart L. UDALL, Defendant



The opinion of the court was delivered by: MCLAUGHLIN

McLAUGHLIN, District Judge.

This is an action to recover certain compensatory oil royalties paid under protest. There is no dispute as to the material facts, which were introduced at trial by stipulation and exhibits.

 Plaintiff is an oil producer, being lessee under a number of oil leases with restricted Indians of the Fort Berthold Indian Reservation in North Dakota.

 In 1953, Plaintiff brought in a producing well on the land of one Woodrow Star (the well being hereafter referred to as the Star well). The Star tract was adjacent to the land of another Indian, Ella Many Ribs, with whom Plaintiff also had a lease, but on whose land no well was at this time drilled.

 In 1955, the Secretary of the Interior, through his delegate, notified Plaintiff that henceforth it would be required to pay to Ella Many Ribs compensatory royalties in an amount based on 100% Of the production of the Star well.

 Subsequently, in January, 1956, the amount of compensatory royalty was reduced to an amount based on one half of the combined total production of the Star well, together with a well located on another adjacent property, that of New Year Many Ribs.

 Plaintiff protested each of these assessments, contending that the royalties should be based on no more than 3/16 of the production of the Star well. An arrangement was entered into between the parties to the effect that royalty payments in the amount assessed by the Interior Department would be paid by Plaintiff and all funds in excess of an amount based on 3/16 of the production of the Star well, some $ 11,578.62, would be deposited in escrow, to abide the outcome of this suit. This arrangement was adhered to until 1957, when a well was drilled on the Ella Many Ribs tract, thus eliminating the need for further payments.

 In the oil industry compensatory royalties are royalties paid to a landowner whose land lies adjacent to a producing well, but on whose land no well has been drilled. They are intended to compensate the landowner for losses suffered due to subterranean drainage of oil from his land resulting from the adjacent producing well. They are an alternative to the drilling of a so- called 'offset well' to recover the oil before it drains away.

 In this case there is no question that some compensatory royalties should have been assessed. The lessor, Ella Many Ribs, is a restricted Indian, whose leases are subject to approval by the Secretary of the Interior or his delegate. Both the lease itself and the applicable Interior Department Regulations (hereafter referred to as Regulations) provide as follows for estimation and payment of compensatory royalties:

 'Lease

 '(b) Wells -- (1) To drill and produce all wells necessary to offset or protect the leased land from drainage by wells on adjoining lands not the property of the lessor, or in lieu thereof, to compensate the lessor in full each month for the estimated loss of royalty through drainage. * * *'

 'Regulations

 'The lessee shall drill diligently and produce continuously from such wells as are necessary to protect the lessor from loss of royalty by reason of drainage, or in lieu thereof, with the consent of the (Regional Oil and Gas supervisor, he must pay a sum estimated to reimburse the lessor for such loss of royalty the sum to be computed monthly by the supervisor.' 30 C.F.R. 221.21(c)

 'The supervisor shall * * * estimate drainage and compute the losses to the lessor resulting therefrom * * * The lessor shall render monthly to the lessee * * * statements showing * * * the loss by drainage or waste and the ...


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