Midstream Regulatory Issues in North Dakota By John W. Morrison 1

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1 Midstream Regulatory Issues in North Dakota By John W. Morrison 1 The provision of midstream services to oil and gas producers in North Dakota through third-party providers is relatively new. Since the discovery of oil in 1951, North Dakota has been predominantly an oil producing state. Although substantial volumes of casinghead gas have always been produced in association with oil, production of natural gas from gas reservoirs has been fairly limited. For the first fifty years of production in North Dakota, the vast majority of oil produced in the state was sold, either at the wellhead or at one of several sales or delivery points in or near the place of production, to the state s principal oil refinery in Mandan, North Dakota, or was delivered into one of several interstate pipelines for delivery either into Cushing, Oklahoma, or Clearbrook, Minnesota. Although substantial volumes of oil were trucked by third party transporters, most oil gathering systems were traditionally owned and operated either by the purchaser or the operator of the interstate pipeline system. Casinghead gas typically contains substantial volumes of liquid hydrocarbons, water, and other substances and requires processing and treating before the remaining gas, or residue gas, can be sold into a gas pipeline in interstate commerce. Gas processing plants and affiliated gathering systems were constructed to meet the needs of production, sometimes by a principal producer or a group of producers and sometimes by an independent gas processor. After peaking at approximately 140,000 barrels of oil per day in 1984, state production declined to less than 100,000 barrels of oil per day by Since then, horizontal drilling and 1 John W. Morrison is a partner at the law firm of CrowleyFleck PLLP in its Bismarck, North Dakota. The views included in this paper reflect those of the author alone, and not those of CrowleyFleck PLLP for any client of CrowleyFleck PLLP. This paper does not constitute legal advice.

2 hydraulic fracturing in the Bakken formation has increased the daily production to more than 900,000 barrels of oil per day in August, The Director of the Department of Mineral Resources recently predicted that daily oil production could increase to as much as 1.6 million barrels of oil per day. These dramatic increases in production rates have resulted in a wide variety of new oil and gas marketing activities, which in turn have resulted in a substantially increased demand for independent third party mid-stream services including oil and gas gathering, transportation, processing, and marketing. Despite the number and variety of mid-stream services being demanded and provided in the state, the state s regulatory framework has remained fairly static, and many of the mid-stream services are substantially unregulated in North Dakota. North Dakota has two different state-wide statutory and regulatory schemes which affect the oil and gas midstream industry. One is a public utility/common carrier system which addresses the responsibilities and duties of a provider to serve the industry and the public. The other is a siting system which addresses the impact of the construction and operation of midstream facilities on the environment and welfare of the citizens of North Dakota. The following provides an overview of the statutes and regulations as well as a brief discussion of the nature of local ordinances and regulations which may affect midstream providers in North Dakota. Common Carrier/Public Utility Regulation North Dakota law contains a very broad, inclusive definition of a common carrier or a common pipeline carrier. Common carriers include: 1. Any person owning, operating or managing any pipeline for the transportation of crude petroleum, gas, coal or carbon dioxide to or for the public for hire; 2

3 2. Any person engaged in the business of transporting crude petroleum, gas, coal or carbon dioxide by pipeline; 3. Any person owning, operating, managing, or participating therein, under any lease, contract, or agreement or arrangement of any kind, any pipeline for the transportation of crude petroleum, gas or coal bought from others from any place of production to any distributing, refining, or marketing center or reshipping point; 4. Any person engaged in the business of producing, purchasing, transporting for hire or transporting for sale, natural gas which is transported through pipelines acquired by the exercise of eminent domain; 5. Any person made a common carrier by or under the terms of a contract with or in pursuance of the laws of the United States. 2 Any third party midstream provider probably falls within one of the first three paragraphs set forth above. Such an entity likely either transports crude or gas to or for the public for hire, is engaged in the business of transporting crude oil or gas by pipeline, or owns or operates a pipeline for the transportation of crude oil or gas bought from others from any place of production to any refining or marketing center or reshipping point. A producer that owns its own gathering facilities may be able to successfully claim that it does not fall within any of these classes and therefore is not a common carrier. In many cases, however, the final criterion will capture many gathering systems. The United States has extensive surface holdings in western North Dakota, most notably the Little Missouri Grasslands which largely consists of interests acquired by the United States in the 1930 s through the Bankhead Jones Act and administered by 2 Section , N.D.C.C. 3

4 the Forest Service. 3 Other surface interests have been acquired and managed by other agencies, including the Corps of Engineers, the Bureau of Land Management, the Fish and Wildlife Service. Pipeline rights of way across all federal lands other than National Park Service lands, lands held in trust for Indians or Indian tribes, or lands on the Outer Continental Shelf, are obtained from the Bureau of Land Management pursuant to Section 28 of the Mineral Leasing Act of That act provides in part that all pipelines and related facilities authorized thereunder shall be constructed, maintained, and operated as common carriers. 5 So in the unlikely event that a gathering or transmission line escapes classification as a common carrier under the first four paragraphs set forth above, it may well be captured under the final paragraph. Common pipeline carriers are required to receive and transport crude oil and gas delivered to it without discrimination. 6 A common pipeline carrier may not discriminate between shippers in regard to facilities furnished, services rendered, or rates charged under the same or similar circumstances and capacity must be apportioned equitably. 7 Common carriers are required to make and publish their tariffs under such rules and regulations as may be prescribed by the commission. 8 The PSC has the power to establish and enforce rates or charges and regulations for gathering, transporting, loading and delivering crude oil or gas upon petition by any person showing substantial interest in the subject matter. 9 A common pipeline 3 7 U.S.C et seq U.S.C Id. at (r). 6 Section , N.D.C.C. 7 Section , N.D.C.C. 8 Section , N.D.C.C. The commission refers to the Public Service Commission ( PSC ), which consists of three elected members who are elected on a state-wide basis to a sixyear staggered term. The PSC has not promulgated and rules or regulations regarding the tariffs of common carriers. 9 Section , N.D.C.C. 4

5 carrier that has filed its acceptance of the provisions of the common carrier law with the PSC is statutorily authorized to exercise the power of eminent domain. 10 Under this statutory scheme, most gathering systems in North Dakota are potentially subject to a broad range of regulation intended primarily to require the non-discriminatory carriage. Historically, common carriers have not been actively regulated in North Dakota. The PSC has not promulgated a regulatory system requiring the filing of tariffs. Some operators do file tariffs and some do not. To date, the PSC has not taken any action to require common carriers to file tariffs or other service terms. As a result, the regulation of common carriers is largely a complaint system. Upon petition by any person with a substantial interest, which likely includes producers of oil or gas in the vicinity of a gathering system, the PSC has the clear authority to set rates and terms of service and to prevent discriminatory practices. The PSC has more extensive regulatory authority over public utilities. A public utility includes any entity engaged or employed in this state to furnish its product or services to the public generally which is statutorily subject to the jurisdiction of the commission. 11 Common pipeline carriers, which include most, if not all, third party gatherers, are statutorily subject to the jurisdiction of the commission. If a common pipeline carrier furnishes its product or services to the public generally it is a public utility Section , N.D.C.C. 11 Section , N.D.C.C. 12 In Eckre v. Public Service Commission, 247 N.W.2d 656 (N.D.1976), the North Dakota Supreme Court held that any common pipeline carrier was required to obtain a certificate of public convenience and necessity because Section (3) provided that any entity engaged or employed in any business enumerated in Title 49 was a public utility and Section provided that any public utility was required to obtain a certificate of public convenience and necessity ( PC&N ) before beginning construction or operation of a utility plant or system. In 1977, Section was amended to apply only to electric utilities and Chapter , 5

6 A public utility is required to obtain a certificate of public convenience and necessity ( PC&N ) from the PSC before beginning construction or operation of a public utility system. 13 Factors to be considered in granting a PC&N include the need for the service, the fitness and ability of the applicant to provide the service, the effect on other public utilities, the adequacy of the proposed service, and the technical, financial and managerial ability of the applicant. 14 Once a PC&N is granted the utility must furnish such service as shall promote the safety, health, comfort and convenience of patrons, employees, and the public and the service must be adequate, convenient, just and reasonable. 15 Rates must be just and reasonable and unreasonable preferences or advantages are prohibited. 16 Rates are required to be filed with the PSC and, upon complaint or its own initiative, the Commission may order a hearing on any increase or decrease in any rate. 17 In general terms, the rates earned by a public utility must be sufficient to enable it to make a fair rate of return on the fair value of property used to provide service to the public, as measured by the rate of return made at the same time and in the same general part of the country on investments in other business undertakings with like risks and uncertainties. 18 Energy Conversion and Transmission Facility Siting Act In addition to the common carrier/public utility obligations set forth above, North Dakota requires every energy conversion facility and transmission facility to comply with the which includes the additional criteria of furnish[ing] it product or services to the public generally was created to govern utilities other than electric utilities and motor carriers. 13 Section , N.D.C.C. 14 Section , N.D.C.C. 15 Section , N.D.C.C. 16 Sections , , N.D.C.C. 17 Sections , , N.D.C.C. 18 Northern States Power Company v. Public Service Commission, 13 N.W.2d 779 (1944). 6

7 Energy Conversion and Transmission Facility Siting Act. 19 With respect to oil and gas, a conversion facility includes any gas processing plant capable of processing one hundred million cubic feet or more of gas per day and any refinery capable of refining fifty thousand barrels or more of liquid hydrocarbons per day. 20 Transmission facilities include any gas or liquid transmission line and associated facilities designed for or capable of transporting gas liquid hydrocarbon products, or carbon dioxide. 21 The statute does not directly define a transmission line, but instead provides that a transmission line does not include an oil or gas pipeline gathering system. The term gathering system is not directly defined, but instead the statute provides that a gathering system includes the pipelines and associated facilities used to collect oil from the lease site to the first pipeline storage site where pressure is increased for further transport, or pipelines and associated facilities used to collect gas from the well to the gas processing facility at which end-use consumer quality gas is produced, with or without the addition of odorant. 22 The Siting Act contemplates a single-step process for a conversion facility resulting in a certificate of site compatibility and a two-step process for transmission facilities in which first a certificate of corridor compatibility is obtained defining a corridor within which the facility must be located is defined and then a route permit is issued identifying the route within the approved corridor. 23 As a practical matter, the common practice is to request a waiver of procedures and time schedules and consolidate the applications and hearings for the corridor and 19 Chapter 49-22, N.D.C.C. 20 Section (5), N.D.C.C. 21 Section (12), N.D.C.C. 22 Id. 23 Sections , , , N.D.C.C. 7

8 route for any transmission facility. 24 Pursuant to statutory requirement, the PSC has promulgated rules identifying exclusion areas and avoidance areas which must be considered in any siting proceeding. 25 The areas include national and state parks, recreation areas, unique and prime farmland, areas critical to threatened or endangered animal or plant species, historical resources, woodlands and wetlands, and similar areas. The rules also incorporate more indirect selection criteria and policy criteria. A public hearing is required to be held in the county or counties where the project lies, although the PSC may hold a consolidated hearing if more than one county is involved. 26 A certificate of site compatibility does not preempt or supersede any local land use ordinances unless the PSC makes a finding that the local land use ordinances are unreasonably restrictive in view of existing technology, factors of cost or economics, or needs of consumers. 27 Because an application must address all of the exclusion and avoidance areas, policy criteria, and selection criteria, the documents are comprehensive documents that take a considerable amount of time to prepare. To address plant and animal species and historic resources, conduct of the necessary surveys may be affected by weather or seasonal conditions which can substantially delay the completion of applications. One issue that has received a fair amount of attention in recent years is the extent to which facilities in place before 1975, when the Siting Act was enacted, are grandfathered and the extent to which construction can occur on previously permitted sites without the need for further hearing. In 2009, the statute was amended to provide that activities conducted wholly within the footprint of a facility constructed prior to April 9, 1975 or a previously issued certificate or 24 See, Section , N.D.C.C. 25 Section , N.D.C.C.; Sections and , N.D.A.C. 26 Section , N.D.C.C. 27 Section , N.D.C.C. 8

9 permit and which do not affect any known exclusion or avoidance area do not require a permit so long as the utility provides a certification to the PSC that the activity will not affect any known exclusion or avoidance area and that the utility will comply with all laws, rules and orders. No PSC approval of the certification is required. If an avoidance area will be affected, the certification procedure may still be used but approval of the PSC will be required. 28 Local Zoning North Dakota law authorizes cities and counties to enact zoning ordinances to regulate the use of real property. 29 Many cities and counties in western North Dakota have enacted comprehensive zoning ordinances. 30 In some ordinances, oil and gas gathering systems are either permitted uses or special uses in some districts, but gas processing plants, tanks, farms, and similar facilities may require conditional use permits. Many zoning ordinances also require building permits for certain structures, and under some ordinances pouring concrete footings is enough to subject field equipment to the requirement of building permits. A siting certificate or permit under the Siting Act does not supersede or preempt and local land use ordinance or regulations unless the PSC specifically finds that the local regulations are unreasonably restrictive in views of existing technology, factors of cost or economics, or needs of consumers regardless of their location See, generally, (5), N.D.C.C. 29 See, generally, Chapters and 11-33, N.D.C.C. 30 See, for example, Williston Ordinance 613 (the Zoning Ordinance of the City of Williston ); Chapter XV of the Watford City, North Dakota Code of Ordinances; the McKenzie County Zoning Ordinance. 31 Section , N.D.C.C. 9