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Glodes Corners Road Field (Columbia NR) - Interim Decision, February 25, 2000

Interim Decision, February 25, 2000

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

New York File Number DMN-1

INTERIM DECISION OF THE COMMISSIONER

February 25, 2000

INTERIM DECISION

This Interim Decision addresses the interlocutory appeals filed by Columbia Natural Resources, Inc., ("Columbia"), the Department's Division of Mineral Resources, (the "Staff"), the United States Department of Interior, Bureau of Land Management, (the "Bureau") and Robert Curry. Responsive appeals were filed on November 15, 1999. Replies were filed on November 29, 1999. These appeals were taken on various October 28, 1999 rulings made by Administrative Law Judge ("ALJ") Frank Montecalvo, concerning the Department Staffs' proposal to establish field-wide rules for spacing of oil and gas wells, and to order the integration of interests within the resulting spacing units.

Background

Staff moved for an Order to require Columbia to: (a) immediately place the proceeds of production from its existing wells attributable to parcels not leased within the proposed spacing units in an interest bearing escrow account; (b) pay royalties to its existing lessors based on proposed spacing units submitted at hearing and on the oil and gas lease agreements in effect, pending issuance of a final Order of the Commissioner; and (c) subsequently distribute all such escrow funds on the basis of the Commissioner's Order establishing the spacing units.

Alternatively, Staff moved for an Order, without further notice or proceedings, to: (a) shut-in(1) the production of oil or gas from the subject field wells draining oil or gas from beneath leased and unleased premises without fair and adequate compensation to the owners of the minerals; and (b) suspend the transportation of oil or gas products from Columbia's wells in the subject field.

The parties to the proceeding have offered numerous perspectives in their appeals regarding the Department's authority on these matters, whether escrow of funds is necessary, whether a shut in should be ordered and other matters. The arguments will not be repeated here; rather, they will be treated in summary fashion.

Public Policy and Statutory Authority

Preliminarily, I will address the Department's authority and public policy with respect to protecting correlative rights, preventing waste and using a shut-in order to achieve the goals of the statute. I reject the arguments on appeal asserting that the Department lacks authority to escrow royalties for the purposes of protecting correlative rights.

Additionally, upon review of prior Commissioner Orders, it is clear that the practice of the Department was (and is) to protect correlative rights through the escrow of funds. (See, Matter of Hartsville Field, Order 70-2, October 30, 1970; Matter of Wyckoff Field, Order 67-3A, July 18, 1968; Matter of Blue Tail Rooster Field, Order 69-2, August 28, 1969). Official Notice is herein taken of these Orders.

The policy declaration in ECL Article 23, when read in concert with the overall statutory scheme provided in the accompanying ECL Article 23, Titles 5,7 and 9 applicable to oil and gas wells, and the broad authorities contained in ECL §§ 3-0301 and 1-0101, establish an adequate basis for the Department to undertake its duties.

Specifically, the declaration of policy affecting oil and gas development, its production and utilization in such a manner as will, inter alia, prevent waste and protect the correlative rights of all owners and the rights of all persons, including landowners and the general public, provides authority enabling the Department to carry out its statutory obligations. (See, ECL § 23-0301). Additionally, the implementing regulations contain the regulatory criteria to carry out the intent of the statute. (See, e.g., 6 NYCRR Part 550.1). When all of these statutory and regulatory provisions are read in panoptic overview, they embody a framework within which the Department operates to develop the State's oil and gas natural resources, to guard the rights of citizens who may be adversely impacted by gas and oil development and production, and to prevent waste of oil and gas resources. Prevention of waste is a key component of the oil and gas program.

Nowhere in the appeals does the prevention of waste issue specifically arise. While no party explicitly stated such, it is the Department's obligation to ensure the effective and complete recovery of oil and gas, i.e., to prevent waste. The Department accomplishes this through well spacing and modifications thereof to ensure the maximum amount of product is extracted efficiently by setting spacing based on drainage and to prevent the dissipation of reservoir energy, which would further decrease the ultimate recovery of the remaining oil and gas resources within the field. The Department may move to prevent waste using its Summary Abatement powers in ECL § 71-0301. (See, e.g., Berea Oil and Gas Corporation, et al., Summary Abatement Order, March 7, 1984). The ultimate goals of a well spacing hearing are to prevent waste and to protect correlative rights.

Interim Order regarding Proceeds and Royalties

New York once adhered to the rule of capture. (See, Wagner v. Mallory, 169 NY 501, 62 NE 584). The underlying premise of this rule is that any oil or gas captured belongs to the person who retrieves it. New York's minimum well spacing rules for wells is intended to provide a modicum of protection against waste and consequently provide a measure of correlative rights protection, effectively modifying the rule of capture. (See, Article 3-A, 1963, predecessor to ECL Article 23).

Staff here seeks to explicitly protect correlative rights by having Columbia set aside monies to pay landowner royalties to persons who may be so entitled after establishing spacing units after the hearing. This request is the preferred option sought by Staff, and alternatively, Staff requests a shut-in order to protect correlative rights. It appears there are property owners who have refused to enter into a lease arrangement with Columbia, who either own parcels under which oil and gas may be drained by Columbia's operation, or who believe that their acreage is being drained and would not be part of the proposed units. Should spacing and integration of interests occur concerning these properties as a result of these proceedings, I find that such property owners would be entitled to a royalty. In addition, it should be noted that Columbia has modified its spacing of the field since the start of this proceeding.

The appeals argue for and against escrow, or for escrow to be applied retroactively in time. I decline to issue a shut in order as Staff requested and find that escrow of funds must occur; however, not retroactively since no new or modified spacing units have at this point been established (note that minimum well spacing does not create de jure spacing units). Since this hearing's purpose is to establish new or to modify existing spacing units, given the Department's broad authority to protect correlative rights, escrowing of funds is an appropriate tool to protect the correlative rights of all mineral rights owners within the spacing units to be determined.(2) Therefore, Columbia must create an escrow account and place all landowner royalty interest funds in the escrow account for all wells subject to this hearing. These funds will be distributed to the participating landowners based on the spacing units and lease agreements. The effective date to begin such escrow will be 10 days after the date of this Interim Decision.

Miscellaneous

The hearing is legislative in nature at this point and has not entered into an adjudicatory phase. Adjudication is only necessary to resolve material factual conflicts, i.e., those which materially refute the bases for Staff's decision. Where no material factual conflicts exist, no further hearing is required. The ALJ, after reviewing the submissions, will determine whether and to what degree adjudication is necessary.

The ALJ has directed that pre-filed testimony be filed to complete the well spacing hearing. The appeals and responsive papers reveal concern over the protection and/or treatment of confidential information submitted or to be submitted by Columbia to the Department Staff, which is subject to the public review associated with a public hearing. It is essential that a full and complete record be made to ensure adequate information is available to render a decision in accordance with the Department's statutory mandate. However, the mechanics of the hearing and its procedural trappings are within the province of the ALJ. The ALJ will take the necessary precautions to make sure confidential information is protected, whether through an in camera proceeding, executive session or other device to ensure confidentiality as necessary. It is expected that the confidentiality issue, including any redetermination thereof, will be expeditiously handled. Any redetermination of confidentiality on the subject case, if required, will be held before the ALJ, as the ALJ's office has authority to decide any redetermination of confidentiality. (See, 6 NYCRR Part 616).

Conclusion

This case is remanded to the ALJ for continued hearing consistent with this Interim Decision.

For the New York State Department of Environmental Conservation
_____________/s/_____________
By: John P. Cahill, Commissioner
Albany, New York

Dated: February 25, 2000

1 Shut-in means to close down a producing well temporarily, for repair, cleaning out, building up reservoir pressure, lack of market, etc. Williams and Meyers, Manual of Oil and Gas Terms, Tenth Edition (1997).

2 The Department's responsibility is the protection of correlative rights and not to participate in the negotiation of lease agreements.

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