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Envirogas Inc. - Decision and Order, November 2, 1993

Decision and Order, November 2, 1993

STATE OF NEW YORK : DEPARTMENT OF ENVIRONMENTAL CONSERVATION

In the Matter

- of -

the Application of ENVIROGAS INC. for the establishment and,
if necessary, the unitization of a spacing unit for the H. Henderson No. 1 well
located in the Town of Elma, Erie County.

DECISION AND ORDER

WHEREAS:

  1. Pursuant to a Notice of Hearing issued on August 3, 1993, an adjudicatory hearing was held before Administrative Law Judge ("ALJ") William J. Dickerson on September 1, 1993 in the Elma Town Hall, 1910 Bowen Road, Elma, New York.
  2. Upon review of ALJ Dickerson's Hearing Report (copy attached), I concur in its Findings, Conclusions and Recommendations.

NOW, THEREFORE, have considered this matter and being duly advised, and having found that the granting of a variance from the statewide spacing provisions of 6 NYCRR Part 553.1 and the integration of interests in the proposed spacing unit for the Medina Group surrounding the H. Henderson No. 1 natural gas well in the Town of Elma, Erie County, is necessary, under the conditions existing in the unit, to carry out the policy provisions of the Environmental Conservation Law ("ECL") 23-0301, it is ORDERED that:

  1. A spacing unit is hereby established in the Medina Group consisting of 50.15 acres surrounding the H. Henderson No. 1 well in the Town of Elma, Erie County as shown on Exhibit Nos. 2 and 2A submitted at the hearing. No other oil or gas well shall be drilled within this spacing unit.
  2. All operations, including the operation of the well, on any portion of the spacing unit covered by this order shall be deemed for all purposes the conduct of such operations upon each separately owned tract in the spacing unit by the owner or several owners thereof. That portion of the production allocated to each tract included in the spacing unit covered by this order shall, when produced, be deemed for all purposes to have been produced from such tract by a well drilled thereon.
  3. Unless voluntary integration of interests is accomplished pursuant to the provisions of ECL 23-0701 within a period of not less that 90 nor more than 120 days from the date of this Order, compulsory integration of interests within the spacing unit pursuant to the provisions of subdivision 3 of ECL 23-0901 shall become effective 121 days from the date of this Order. If during that time period, Lucy Grzegorczak accepts a one time payment of $1500 in lieu of her proportionate share of the one eighth royalty interest over the life of the well, then her proportionate share of the royalty interest shall revert to and be retained by the Applicant and compulsory integration of interests within the spacing unit shall become effective 121 days from the date of this Order.
  4. The landowners within the unit shall be entitled a share of the royalty interest of one eighth of the production from the H. Henderson No. 1 well in the proportion that the acreage they own bears to the total acreage in the unit, as more specifically set forth in Finding No. 6 of the Hearing Report, except as provided for in Paragraph III.
  5. Envirogas Inc. shall be the unit operator and is hereby authorized to equip and operate the H. Henderson No. 1 well for the production of natural gas. As the unit operator, Envirogas Inc. shall be entitled to the seven eighths working interest share of the production from the H. Henderson No. 1 well.
  6. The cost of $115,000 for drilling and completing the H. Henderson No. 1 and connecting it to a pipeline is a reasonable cost for this well. The operating costs set forth in Finding No. 7 of the hearing report are also reasonable.
  7. Envirogas Inc., as unit operator, shall file a copy of this order with the Erie County Clerk and shall submit proof of such filing to the Department's Division of Mineral Resources within 30 days of effective date of this Order.

IN WITNESS WHEREOF: the Department of Environmental Conservation has caused this Order to be signed and issued and has filed the same with all maps, plans, reports and other papers relating thereto in its office in the County of Albany, New York this 2nd day of November, 1993.

For the New York State Department
of Environmental Conservation

_____________/s/_____________
By: THOMAS C. JORLING, COMMISSIONER

STATE OF NEW YORK
DEPARTMENT OF ENVIRONMENTAL CONSERVATION

50 Wolf Road
Albany, New York 12233-1550

In the Matter

- of the -

Application of ENVIROGAS INC. for a variance from the well spacing provisions of
6 NYCRR Part 553.1 and the establishment and, if necessary, the unitization of
a well spacing unit for the proposed H. Henderson No. 1 natural gas well which is to be located
in the Town of Elma, Erie County.

HEARING REPORT

William J. Dickerson

Administrative Law Judge

Proceedings

Pursuant to a Notice of Hearing published in the Department's Environmental Notice Bulletin on August 11, 1993 and in the East Aurora Bee on August 12, 1993 a public hearing was held before William J. Dickerson, Administrative Law Judge at 10:00 A.M. on September 1, 1993, in the Town of Elma Town Hall, 1910 Bowen Road, Elma, New York 14059 to consider the application of Envirogas Inc., One Grimsby Drive, Hamburg, New York 14075 (the "Applicant").

The Applicant requested a variance from the well spacing provisions of 6 NYCRR Part 553.1 and the establishment and, if necessary, the unitization of a well spacing unit for the proposed H. Henderson natural gas well which is to be located in the Town of Elma, Erie County pursuant to Sections 23-0501 and 23-0901 of the Environmental Conservation Law and Part 553 of Title 6 of the Official Compilation of Codes, Rules and Regulations of the State of New York ("6 NYCRR"). The stenographic record was received on September 17, 1993 and the record was closed on that date.

The Department of Environmental Conservation (the "Department"), as lead agency pursuant to Environmental Conservation Law ("ECL") Article 8 (State Environmental Quality Review Act) ("SEQRA") and the companion regulations in 6 NYCRR Part 617, determined that the proposed action would not have a significant effect on the environment and issued a Negative Declaration on July 20, 1993.

The Applicant was represented at the hearing by Alan J. Laurita, Esq., Vice President. The Department Staff was represented by Arlene J. Lotters, Esq., Senior Attorney.

Position of the Applicant

The Applicant had been unable to lease all lands within 660 feet of the proposed well location, in particular a 3.8 acre parcel of land owned by Mrs. Lucy Grzegorczak. The Applicant seeks a variance from the provisions of 6 NYCRR Part 553.1 to allow the well to be drilled less than 660 feet from any boundary line of the Grzegorczak property. The Applicant also requests the establishment and, if necessary, the unitization of a spacing unit for the proposed H. Henderson No. 1 natural gas well.

Position of the Department Staff

The Department Staff recommends that the variance be granted and the proposed spacing unit be established for the H. Henderson No. 1 natural gas well. The Department Staff also recommends in the absence of voluntary integration, that an order providing for the compulsory integration of the unit be issued which designates the Applicant as the working interest operator and which allows either the payment of the proportionate share of the one eighth royalty interest to Mrs. Grzegorczak or payment of a one time lump sum payment of $1500 in lieu of continuing royalty payments.

Findings of Fact

  1. The Applicant proposes to drill the H. Henderson No. 1 well to a total depth of 1,428 feet at a location 775 feet west of Schwartz Road and 1,165 feet north of Clinton Road in the Town of Elma, Erie County. This location is approximately 250 south of the southern boundary line of the property owned by Lucy Grzegorczak. The well location and the route of the proposed access road to the well from Schwartz Road were chosen because of the wetness of the southern portion of the H. Henderson property. At the time of the field inspection of the proposed drilling location by the Applicant and Mr. Henderson, the southern portion of the property was under water.
  2. There are four wells in the general vicinity of the proposed H. Henderson No. 1 well location. The G. Cotton No. 1 well is located 1,700 feet northeast; the Mathis No. 1 well is located 2,660 feet southeast; the Zieziula No. 1 is located 2,650 feet southwest and the Piotrowski No. 1 well is located 1,650 feet west southwest of the proposed H. Henderson No. 1 well location. The nearest well operated by the Applicant is the A. Polisano No. 1 well which is located 2,350 feet southeast of the proposed H. Henderson No. 1 well location.

    Based on geophysical logs from the Applicant's A. Polisano No. 1 well, the proposed H. Henderson No. 1 well is expected to produce natural gas from the Grimsby and Whirlpool sandstones of the Medina Group.

    [ALJ Note: The Medina Group consists of four sands or sandstone units; the Medina, the Thorold, the Grimsby and the Whirlpool.]

  3. Based on production data from the A. Polisano No. 1 well, the proposed H. Henderson No. 1 well is estimated to have ultimate recoverable reserves of about 134 MMCF (million cubic feet) of natural gas over an expected 25 year life of the well. This estimated production volume is typical for an Erie County Medina gas well. Based on both production data and the geophysical logs from the A. Polisano No. 1 well, the drainage area of the well affected by that production is approximately 38 acres.
  4. At the time of the hearing, the Applicant held leases on all of the parcels of land within the proposed unit except for the 3.80 acre parcel owned by Lucy Grzegorczak. This parcel constitutes 7.5773 per cent of the proposed unit. The Applicant offered a non-drilling lease to Mrs. Grzegorczak. A non-drilling lease grants oil and gas rights only and does not grant any surface rights. There are no other working interest owners within the proposed unit.

    [ALJ Note: Under a non-drilling lease, the Applicant would not have any right to enter on the leased property but the lease would provide for the payment of the landowner's proportionate share of the 1/8 royalty interest from the oil or gas produced from the unit.]

  5. The leases held by the Applicant grant to the Applicant the right to pool or consolidate the acreage covered by the lease with other land, lease or leases to form an oil and gas unit. The Applicant has submitted a Declaration of Pooling to form a unit known as the Envirogas Inc. H. Henderson No. 1 for the production of natural gas. The total acreage under lease to the Applicant within the proposed unit constitutes 92.4227 per cent of the proposed unit.
  6. The proposed unit consists of a rectangular area approximately 1,370 feet from north to south and approximately 1,645 feet from east to west and contains 50.15 acres as shown on Exhibit Nos. 2 and 2A submitted at the hearing. The owners of the 1/8 royalty interest within the proposed unit, the breakdown of the acreage within the proposed unit and the percentage of the unit that each parcel contains is as follows:
    Landowner Acres % of Unit
    Harry W. & Euphemia Henderson 25.10 50.0498
    Robert A. & Phyllis A. Sweeney 8.75 17.4477
    Kurt A. & Cheryl M. Vogel 12.50 24.9252
    Lucy Grzegorczak 3.80 7.5773
    Total 50.15 100
  7. The total estimated cost of drilling and completing the H. Henderson No. 1 well and connecting it to a pipeline is $115,000. This cost is consistent with the cost of other wells drilled by the Applicant in the area. The anticipated monthly operating costs has two components. The fixed component would be approximately $440 per month during the first two years of production from the well after which it would decrease to $180 per month. The variable component is based on the rate of production from the well and is expected to be 12 1/2 cents per MCF (thousand cubic feet) over the life of the well.
  8. The Applicant has calculated the expected royalty payments accruing to the property owned by Lucy Grzegorczak over the anticipated 25 year life of the well and the present value of the Grzegorczak royalty interest using a ten per cent discount rate. The full present value is $1910. The acquisition of working interests and royalty interests in gas well are usually purchased for between fifty and fifty seven per cent of the present value. In lieu of making royalty payments over the 25 year life of the well, the Department Staff recommends that the Applicant offer Lucy Grzegorczak a one time lump sum payment of $1,500 in total satisfaction of her proportionate share of the one eighth royalty interest from the proposed well. Acceptance of the offer would in effect result in integration of the Grzegorczak royalty interest with the other royalty interests in the unit.

Discussion:

It is the policy of the State of New York to regulate the development, production and utilization of natural resources of oil and gas in such a manner as will prevent waste; to authorize and to provide for the operation and development of oil and gas properties in such a manner that a greater ultimate recovery of oil and gas may be had, and that the correlative rights of all owners and the rights of all persons including landowners and the general public may be fully protected. [ECL s 23-0301]

6 NYCRR Part 553.1 establishes statewide spacing requirements which require that an oil or gas well cannot be located closer than 660 feet from the boundary line of a lease or integrated leases. As noted above, the proposed well location is located approximately 250 feet from the boundary line of the Grzegorczak property. Unless an exception or variance from the statewide well spacing requirements is granted, the well cannot be drilled as proposed.

ECL 23-0501 requires that an order establishing a spacing unit shall specify the size and shape of the unit which will result in the efficient and economic development of the pool and shall cover all lands determined or believed to be underlaid by such pool. No unit shall be smaller than the maximum area that can be efficiently and economically drained by one well. An order establishing a spacing unit shall specify the procedure to be followed for compulsory integration of interests within the individual spacing unit consistent with the provisions of subdivisions 2 and 3 of 23-0901. The order also shall provide for a time interval of not less than 90 days, nor more than that which the Department regards as consistent with the objectives of well spacing and unitization, during which voluntary integration pursuant to 23-0701 shall be permitted before the compulsory integration procedure of subdivision 3 of 23-0901 becomes effective. Each integration order shall be upon terms that are just and reasonable.

ECL 23-0901 requires the Department to find, after detailed study and analysis, notice and hearing, that the integration of interests in a spacing unit, under conditions then existing in the state, or in the field or pool affected, is necessary to carry out the policy provisions of ECL 23-0301 set forth above, prior to making any order requiring the integration of interests in any spacing unit.

Conclusions

  1. In this particular case, because the Applicant does not hold leases on all properties within 660 feet of the proposed H. Henderson No. 1 well, a variance from the statewide spacing requirements of 6 NYCRR Part 553.1 is required so that the proposed well can be drilled. In order to prevent waste and to provide for the greater ultimate recovery of natural gas, a variance should be granted from the 660 foot setback requirement of 6 NYCRR Part 553.1.
  2. If the well is capable of producing natural gas in commercial quantities, the establishment of a spacing unit and the integration of the interest within the unit is necessary so that the well can be produced and the policy of the State as set forth in ECL s 23-0301 can be carried out. An Order should be issued establishing a spacing unit for the H. Henderson No. 1 well consisting of 50.15 acres, as more particularly described in Exhibit Nos. 2 and 2A received at the hearing. Such a unit will encompass all lands underlain by the Medina Group which will drain to the well and, based on the data from the Applicant's A. Polisano No. 1 well, will not be smaller than the maximum area drained by the H. Henderson No. 1 well. The Order should be conditioned to require that if the Applicant determines that the H. Henderson No. 1 well is not successful, the Applicant should immediately notify the Department in writing and within 60 days provide documentation that the H. Henderson No.1 well has been properly plugged and abandoned.
  3. The compulsory integration of all tracts and interests within the spacing unit will be necessary to carry out the policy of the State, especially with respect to providing for the greater ultimate recovery of natural gas and protecting the correlative rights of the owners (operators) and landowners.
  4. The order should provide for the operation of the well by Envirogas Inc. as the operator of the unit by virtue of the fact that Kidder Exploration Inc. holds 92.4227 % of the working interest of the proposed unit. There are no other operators in the proposed unit. The order should also provide that the owners of the royalty interests within the unit shall participate in the royalty income from the unit well in the relation that the acreage owned by each individual landowner bears to the total acreage in the unit as set forth in Finding No. 6 except as provided below.
  5. The order should provide for a time interval of not less than 90 days, nor more than 120 days, during which voluntary integration pursuant to 23-0701 shall be permitted before the compulsory integration procedure of subdivision 3 of 23-0901 becomes effective. If during that time period, Lucy Grzegorczak accepts a one time payment in the amount of $1500 in lieu of her proportionate share of the one eighth royalty interest over the life of the well, then her proportionate share of the royalty interest shall revert to and be retained by the Applicant. Such a payment would be just and equitable to Lucy Grzegorczak and the other royalty interest owners in the unit. The compulsory integration of interests within the unit should become effective 121 days from the date of the order.
  6. The total costs of the well are set forth in Finding No. 7 and are reasonable for this type of well.

Recommendation

In view of the foregoing Findings of Fact, Discussion and Conclusions, I recommend that the Department grant the requested variance from the statewide spacing requirements, issue an Order establishing a 50.15 acre spacing unit for the Medina Group for the H. Henderson No. 1 well and providing for the compulsory integration of interests within the unit as described above. The order should provide for the option described above for Lucy Grzegorczak to accept a one time payment in lieu of receiving her proportionate share of the one eighth royalty interest over the production life of the well.

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