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Glodes Corners Road Field (Columbia NR) - Ruling on Motion to Produce Wells and Escrow Royalty Proceeds, November 30, 1999

Ruling on Motion to Produce Wells and Escrow Royalty Proceeds, November 30, 1999

STATE OF NEW YORK : DEPARTMENT OF ENVIRONMENTAL CONSERVATION

In the matter of

the proposed order of field-wide well spacing rules and the integration of interests
pursuant to Environmental Conservation Law (ECL) §§23-0501 and 23-0901 for the

GLODES CORNERS ROAD FIELD,
STEUBEN COUNTY, NEW YORK

RULING
on Motion to Produce Wells and Escrow Royalty Proceeds

File No. DMN 99-1

(Glodes Cors. Rd. Field)

The Motion and Proceedings

With reference to the pending proceedings to establish field-wide spacing rules for natural gas and oil wells and to integrate interests within proposed spacing units in the Glodes Corners Road Field (the "Field"), Columbia Natural Resources, Inc. ("Columbia") has moved for an Order from the Commissioner which authorizes (1) the immediate commencement of production and sale of gas from Columbia's Covert No. 2 (A.P.I. #31-101-22768) and Ballam-Carter No. 1 (A.P.I. #31-101-22769) Wells (collectively the "Wells") within the Field ; (2) the placement of all sales proceeds attributable to the royalty interest in said Wells in an interest-bearing escrow account for the benefit of affected royalty owners and unleased parties; and (3) the subsequent disbursement of all such escrowed funds on the basis of a final Commissioner's Order establishing Spacing Units and integrating interests within such Spacing Units, all as agreed to by the New York State Department of Environmental Conservation (the "Department") Division of Mineral Resources Staff (the "Staff") and Columbia in a Stipulation executed on November 23, 1999. By letter dated November 24, 1999, the Staff stated that they did not intend to reply to said motion. Copies of the aforesaid Stipulation were attached to Columbia's motion papers and to the Staff's letter.

Summary of the Reasons for the Motion

Although Columbia has made the motion and presented the arguments for the relief requested, by virtue of their Stipulation and statement that they did not intend to reply, it is understood that both the Staff and Columbia agree upon the reasons for requesting the relief presented below.

ECL § 23-0501 [Well Spacing in Oil and Natural Gas Pools and Fields] paragraph (8) states:

"After the date of the notice for a hearing called to establish spacing units, no additional well shall be commenced for production from the pool until the order establishing spacing units has been made, unless the commencement of the well is authorized by order of the department." [emphasis supplied by the undersigned].

Columbia states that it began drilling Covert No. 2 on May 14, 1999, and that it completed the well and has been awaiting pipeline connection since June 8, 1999. Columbia also states that it began drilling Ballam-Carter No. 1 on June 11, 1999, and completed same and has been awaiting pipeline connection since September 21, 1999.

Because the two wells both lie within the proposed Field boundary and were not both drilled and produced prior to the May 19, 1999, notice of hearing to establish spacing units in the Field, Columbia contends that authorization by a Commissioner's Order is now required by ECL §23-0501(8) before production may commence.

Columbia states that the Wells are currently ready for pipeline connection and gas sales. Columbia projects that gross revenues from the Wells will average approximately $90,000 per month (inclusive of 1/8th royalty shares) during the 1999-2000 winter heating season. Columbia contends that given the six-year high of wellhead prices, if it were permitted to commence production now, both the benefits to affected property owners and the return on Columbia's significant risk capital investment (some $13 million in Steuben and Schuyler counties) would be maximized.

Columbia points out that hearings on this field were held June 22, 1999, and that while the undersigned's October 28, 1999 Rulings and Order contemplate further proceedings prior to a Final Order on the Field, they do not reflect any substantive or significant issue concerning Columbia's right to produce gas from wells in the Field. Columbia argues that on its right to produce, the only interested parties are Columbia and the Department.

Columbia also notes that while the undersigned denied on October 28, 1999, the Department's motion to escrow certain royalties from nine of the eleven existing wells in the Field (which denial has been appealed by Staff), Columbia and Staff have agreed in their Stipulation upon a royalty escrow plan for the two particular wells here. Therefore Columbia requests a Commissioner's Order without delay and without consideration of an interim public hearing.

Columbia contends that the public hearings previously noticed and held, and the continuing nature of the proceedings, afforded and continue to afford all affected parties an opportunity to offer evidence and opinion with respect to the substantive and significant issues related to the spacing of wells and the integration of interests within the Glodes Corners Road Field. Columbia contends that the interests and correlative rights of any and all affected parties will be fully protected by the escrow of all royalties attributable to the Covert No. 2 and Ballam-Carter No. 1 Wells and the on-going Field proceedings.

Discussion

I find that the requested relief is justified and, in the interest of clarity and expediency, recommend below that the Commissioner issue the requested order, even though it is not clear to me that such an order is required. The reasons given above for granting the relief expeditiously are compelling. Essentially, authorizing production now with the agreed upon escrow arrangement not only will preserve the interests of the affected persons during the pendency of the hearing, but also will potentially maximize the value of said interests, due to the prevailing market conditions and season.

The proposal here is distinguishable from and does not have the concerns connected with Staff's June 11, 1999, proposal in three important respects. First, the Staff and Columbia agree upon the relief. Second, the relief would preserve interests rather than transfer them from one party to another (the authority for which would be questionable). Third, there is no potential disruption to existing cash flow. The proposed impacts to individual property rights that called for a special hearing on Staff's June 11, 1999 motion are not sought here. Also, the arrangement proposed here appears to be consistent with prior Department practice, based on the cases cited in my ruling on the prior motion.

It is not clear to the undersigned that an order is actually required because of the wording of both ECL §23-0501(8) and 6 NYCRR Part 552, and the lack of copies of Columbia's permits in the record (i.e., it is not clear what the Staff may have previously authorized). Staff may have the flexibility to control this type of situation themselves, without need for a Commissioner's order. Section 552.1 requires a permit before certain well operations are commenced. Section 552.2(d) provides: "If prior to the commencement of operations, spacing unit are applied for or are pending, the department may suspend the permit. ... " (emphasis supplied). With such language, if Staff have already permitted a well, Staff appear to have the discretion to either allow the well to go into production (by not suspending the permit), or to suspend the permit and either await the final spacing order or an interim Commissioner's order. Since ECL §23-0501(8) speaks of a "commencement of the well" rather than commencement of production without defining when "commencement of the well" occurs, it appears to have allowed for the implementation of that provision in the manner found in §552.2(d). Regardless, since the Staff do not dispute that a Commissioner's order is required here, I will assume that such is the case.

Ruling and Recommendation

For the reasons stated above, Columbia's motion, with the acquiescence of Staff, is granted. This matter is hereby referred to the Commissioner for the granting of an Order:

(1) authorizing Columbia to immediately commence production operations and gas sales from its Covert No. 2 and Ballam-Carter No. 1 Wells without an interim public hearing, and

(2) requiring Columbia to set aside and place into an interest-bearing escrow account all sales proceeds attributable to the royalty interests in the Covert No. 2 and Ballam-Carter No. 1 Wells, and

(3) directing Columbia to disburse such escrowed funds to property owners at such time and on the basis of the Commissioner's final Order establishing Spacing Units and integrating interests within such Spacing Units in the Glodes Corner's Road Field, all as set forth in the Stipulation executed by the Department Staff and Columbia attached hereto as "Exhibit A."

November 30, 1999
Albany, New York

_____________/s/_____________
By: Frank Montecalvo,
Administrative Law Judge

Attachment: "Exhibit A" - Stipulation of November 23, 1999

To: Service List attached

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