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County Line Field - Ruling for Motion for Stay, June 23, 2003

Ruling for Motion for Stay, June 23, 2003

STATE OF NEW YORK : DEPARTMENT OF ENVIRONMENTAL CONSERVATION

In the Matter of the Proposed Field-wide Spacing and Integration Rules
for the County Line Field, pursuant to ECL Article 23 and 6 NYCRR
Parts 550 through 559

RULING ON MOTION
FOR STAY

June 23, 2003

DMN Project No. DMN-02-5

Summary

The Department of Environmental Conservation ("DEC") Staff has proposed issuance of an Order which would establish field-wide spacing and integration rules for the County Line natural gas field, located in Steuben, Chemung and Schuyler Counties. A legislative hearing and an issues conference on the proposal took place on March 25 and 26, 2003, respectively. On May 29, 2003, the DEC Staff moved for a stay of the issuance of a ruling that would identify the issues for the adjudicatory hearing, to allow additional time for the DEC General Counsel to prepare a declaratory ruling on questions related to issues proposed in the present hearing. An intervenor in the hearing opposed the stay unless it was expanded to include staying a ruling on a motion made by DEC Staff on March 25, 2003. The DEC Staff's motion for a stay is granted. I will also reserve ruling on the DEC Staff's March 25 motion.

Background

By notice dated February 20, 2003, the DEC scheduled a hearing on the proposed establishment of field-wide spacing and integration rules for a natural gas field known as the County Line Field. The acreage designated as the County Line Field is located in the Towns of Catlin, Dix, Montour, and Hornby. Pursuant to Part 553 of Title 6 of the Official Compilation of Codes, Rules and Regulations of the State of New York ("6 NYCRR Part 553"), the DEC Staff proposed that the DEC Commissioner issue an order establishing the spacing and integration rules. The DEC is responsible for establishing spacing units for oil and natural gas pools and fields, pursuant to Environmental Conservation Law ("ECL") Section 23-0501, in order to carry out the policy provisions of ECL 23-0301.

Fairman Drilling Company ("Fairman") and East Resources, Inc. began development of the Field in July 2000. In May 2002, Pennsylvania General Energy Corp. ("PGE") commenced drilling operations in the Field. Fairman's and PGE's interests have been conveyed to Fortuna Energy, Inc. ("Fortuna"), 1519 Olean-Portville Road, Olean, New York 14760. On December 30, 2002, the DEC Staff entered into a stipulation with the developers of the field which includes provisions pertaining to field-wide spacing and procedures for future wells. The stipulation is binding on Fortuna as successor to the earlier developers of the field.

In order to ensure that all affected interest owners receive fair and equitable compensation upon issuance of a final spacing order, the DEC required that Fairman and PGE escrow royalties generated as a result of this production, which Fortuna has agreed to continue and maintain. Five production units are proposed in the Field. Some production units contain a small number of unleased parcels where the right to develop the oil and/or natural gas has not been conveyed to Fortuna.

The hearing began with a legislative (public comment) hearing on the evening of March 25, 2003 in Painted Post, New York. The hearing continued on the following day with an issues conference for discussion of what issues, if any, may require adjudication and which parties would participate in an adjudicatory hearing regarding the proposal. The hearing is being held pursuant to the procedures in 6 NYCRR Part 624 (Permit Hearing Procedures).

Two petitions for party status in an adjudicatory hearing were received at the address specified in the notice of hearing and by the March 20, 2003 due date for such petitions. These were a petition submitted by Allan R. Lipman, Esq., of the law firm of Lipman and Biltekoff, on behalf of Western Land Services, Inc., Alan T. Stephens and his wife Darcie J. Stephens, and a petition submitted by Anne A. McLaughlin and William E. McLaughlin on their own behalf. An additional petition was received on March 21, 2003 from Buck Mountain Associates.

Among other issues proposed in the petitions for party status, Western Land Services and the Stephens identified the following: whether the Stephens tract should be included in the field, whether Western Land Services is entitled to a share of the working interest of production, whether DEC "exceeds the scope of its authority by entering into a pre-hearing Stipulation with Fortuna, "whether the "100% penalty provision as set forth in ECL §23-0901(3)" is applicable to Western Land Services, and whether "the working interest share of production owned by WLS should be held in escrow by Fortuna pending a final order in this proceeding." (Petition for party status, pages 44 - 45.) Buck Mountain Associates proposed as an issue alleged inconsistencies, between the Stipulations and the Department's order concerning another field, concerning money to be held in escrow and how the amount of royalty payments should be determined. The DEC Staff and Fortuna argued that no issues have been proposed that require adjudication. Under the procedures of 6 NYCRR Part 624, I would make a ruling that identifies what, if any, issues require adjudication and the parties that would participate in the adjudicatory hearing.

At the issues conference, the DEC Staff requested a ruling that would allow DEC Staff to immediately prepare and complete a Commissioner's Decision and Order establishing units and releasing royalties generated by production to date in the County Line Field. This request was based upon the DEC Staff's position that the petitions for party status do not raise any issues requiring adjudication. The request was stated in a letter dated March 25, 2003 from John K. Dahl, Director of the Bureau of Oil and Gas Regulation. I reserved ruling on this motion because issues had been proposed that could potentially affect multiple units in the field, a situation different from that in the hearing about the Quackenbush Hill Field in which a similar motion had been granted with respect to some of the units in the field (Transcript, p. 203). In the Quackenbush Hill Field hearing, no issues were proposed concerning four units. The ruling that allowed preparation of a Decision and Order in that hearing was limited to the four uncontested units (Matter of Quackenbush Hill Field, ALJ Ruling, January 8, 2002).

Motion for Stay

On May 29, 2003, the DEC Staff submitted the present motion requesting that the issues ruling be held in abeyance in light of the pending petition for a declaratory ruling currently before the General Counsel of the Department of Environmental Conservation. The petition referred to in the DEC Staff's motion is a July 9, 2002 petition for declaratory ruling submitted by Western Land Services, Inc., seeking an interpretation of ECL 23-0901(3). The DEC Staff stated that the legal issues presented in the petition are similar to the questions currently pending in the present proceeding, and that the DEC Staff has been advised to expect that the General Counsel will issue the declaratory ruling by mid-summer 2003. The DEC Staff argued that the requested postponement would not prejudice the well operator nor any of the persons who requested party status in the hearing. The DEC Staff's motion papers stated that the motion has no bearing upon Staff's earlier (March 25) motion for a ruling allowing immediate preparation of a Decision and Order.

The May 29, 2003 motion for a stay also noted that a combined CPLR Article 78 and Declaratory Judgment action was filed in Supreme Court, Chemung County, in the matter of Caflisch v. Crotty (Index No. 03-1579), seeking to reverse the Commissioner's Decision and Order in the Quackenbush Hill Field matter. Argument before the Supreme Court, Chemung County is scheduled for July 24, 2003. This case involves a legal issue that was also the subject of argument at the issues conference in the present proceeding.

Western Land Services ("WLS") replied to the motion for a stay, by letter dated June 2, 2003. WLS objected to the stay unless the stay is expanded to include the DEC Staff's March 25, 2003 request for a ruling allowing the DEC Staff to prepare a Decision and Order. WLS stated its understanding that the General Counsel will issue a declaratory ruling this summer in response to two petitions from WLS. A copy of the second petition, dated September 17, 2002, was attached with WLS's response. WLS described the second petition as addressing the methodology used by the DEC to establish spacing units and argued that the declaratory ruling could affect the County Line Field proposal.

On June 6, 2003, Fortuna responded to the motion for a stay. Fortuna did not take a clear position in support of or opposition to the DEC Staff's May 29 motion, but requested that I "issue a ruling, at the least, establishing units and allowing the distribution of escrowed royalties to those landowners who are entitled to the same." Fortuna argued that the landowners should not be denied their rightful interest in the accrued royalties currently held in escrow, that WLS is "a non-party without an interest in the unit," and that its arguments are in derogation of the rights of the landowners entitled to royalty payments.

The issues proposed in the petitions for party status in the County Line Field hearing overlap with those that are the subject of the petitions for declaratory rulings. The declaratory ruling may resolve, or at least clarify, legal issues in the hearing. Thus, it is reasonable to stay issuance of the issues ruling until after the anticipated date on which the declaratory ruling would be available. To do so would also avoid the possibility of my making a ruling that is inconsistent with the General Counsel's declaratory ruling, and would be consistent with the recent ruling in the pending hearing on the Terry Hill South Field (Project No. DMN-02-03, ALJ Ruling, June 5, 2003). Since the declaratory ruling is expected in mid-summer, this stay would not unduly delay the hearing on the County Line Field proposal. The stay will not be indefinite, however.

There is no indication that Fortuna nor the intervenors would be prejudiced by this stay, if it also includes staying a decision on the DEC Staff's March 25, 2003 request. As stated above, I reserved ruling on this request in view of the proposed issues. It would be premature for me to rule on the request for an immediate Decision and Order prior to making an issues ruling, since there is a dispute about whether there are substantive and significant issues that require adjudication. That dispute would be resolved by the issues ruling, which would identify what issues, if any, need to be adjudicated. If I were to grant the March 25 request, I would in effect be making an issues ruling, finding no adjudicable issues.

With regard to Fortuna's arguments about prejudice to the landowners whose royalties are in escrow, the proposed issues have the potential of affecting both the amount of royalties to be paid to individual landowners and the list of persons whose lands are within the proposed units. I do not have the authority to establish the units and release the escrow, although I could authorize the DEC Staff to prepare the document through which the Commissioner would do this if the Commissioner decided to do so. I would not recommend that the Commissioner establish the units at this time since many questions remain unresolved. In addition, based upon statements made at the issues conference by the exploration manager of Fortuna's parent company, the existing wells in County Line Field may not have produced much gas to date (March 26, 2003 transcript, pp. 130 - 132). While this question was not discussed with reference to the May 29 motion, the record thus far suggests that the amount in escrow may not be large and there is no indication that the landowners would receive large payments if the units were established in the near future.

As to Fortuna's assertion that Western Land Services is a non-party without an interest in the unit, I have not yet made a ruling that grants or denies party status (this is usually included with the issues ruling), and one of WLS's proposed issues is whether land on which it has a lease should be included in the Youmans unit. The fact that these two questions are not resolved at the present stage of the hearing does not support Fortuna's arguments.

Ruling: The May 29, 2003 motion, requesting that the issues ruling be held in abeyance in light of the pending petition for a declaratory ruling currently before the General Counsel, is granted to the extent that the ruling will be held in abeyance until the declaratory ruling is issued or until August 22, 2003, whichever is first. Any application to extend the stay must be sent to me, with a copy to the persons on the interim service list, on or before August 8, 2003. In addition, I continue to reserve ruling on DEC Staff's March 25, 2003 request for a ruling allowing for immediate preparation of a Commissioner's Decision and Order.

/s/
Susan J. DuBois
Administrative Law Judge

Albany, New York
June 23, 2003

TO: Arlene J. Lotters, Esq.
John H. Heyer, Esq.
Allan R. Lipman, Esq.
Vincent C. Stalis
Anne A. McLaughlin

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