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Pennsylvania General Energy, Inc. (Wilson Hollow Field) - Ruling, May 3, 2001

Ruling, May 3, 2001

STATE OF NEW YORK:DEPARTMENT OF ENVIRONMENTAL CONSERVATION

In the Matter

of

the Application of Pennsylvania General Energy, Inc. for
Permits from the Department of Environmental Conservation

RULING ON ISSUES AND PARTY STATUS

May 3, 2001

DEC Application No. DMN-01-1

Summary

This ruling addresses the proposed issues for adjudication regarding the Staff's request for a Commissioner's Order for field wide spacing and integration rules for the Wilson Hollow Field. The ruling also addresses the requests for party status made herein. The permit hearing procedures under Title 6 of the New York State Official Compilation of Codes, Rules and Regulations, Part 624, ("6 NYCRR Part 624") govern the proceeding. The Applicant and the DEC Staff are parties to the hearing under the DEC permit hearing procedures. Petitions for party status were received from Buck Mountain Associates ("Buck Mountain"), Columbia Natural Resources ("CNR"), John Young, James and Julie Young ("Youngs") and Todd and Lynne Wetherill. The petition of Todd and Lynne Wetherill was denied on April 4, 2001. The remaining petitions for party status are denied, as more fully addressed herein.

Upon my review of the record in this matter, I conclude that no issues require adjudication. A total of nine issues were proposed for adjudication and they will be addressed in detail below.

Background

Pennsylvania General Energy, Inc. ("PGE") proposes to operate producing wells for natural gas in an area designated as the Wilson Hollow Field. To date, five wells have been drilled in the Field and the majority are in operation. Wilson Hollow Field is located almost entirely in Steuben County, Town of Hornby. A small portion lies within Chemung County, Town of Catlin.

Pursuant to the New York State Environmental Conservation Law ("ECL"), Article 23, and 6 NYCRR Part 553, the Department of Environmental Conservation ("DEC" or "DEC Staff") proposes that the Commissioner of the DEC issue an order establishing field wide spacing rules that will result in the efficient and economical development of the natural gas pool in the Wilson Hollow Field. The DEC regulates the development, production and utilization of natural resources within the State, including natural gas. It is the policy of the DEC to prevent waste of the resource(s) while protecting the correlative rights of all landowners and the public.(1) The DEC is responsible for establishing spacing units for each natural gas pool and for specifying the location of gas wells within the unit(s).(2)

Pursuant to Article 23 of the ECL, the DEC and PGE entered into a written Stipulation regarding the Wilson Hollow Field dated December 27, 2000. This Stipulation provides for the creation of unit sizes and shapes and the spacing of wells to ensure that all affected interest owners receive a fair and equitable compensation upon issuance of a final Commissioner's Order. ECL 23-0501 directs that the DEC shall issue an order establishing the spacing units and well locations. DEC Staff has also indicated that the integration of interests in spacing units is necessary to carry out the policy provisions of ECL section 23-0301. The ECL directs that such an order shall result only after a public hearing is held.

Terminology

Certain of the terms used in this report are defined here. "Spacing units'' are established by Department order pursuant to ECL 23-0501, which requires that they be of approximately uniform size and shape for the entire oil or gas pool and that they shall not be smaller than the maximum area that can be efficiently and economically drained by one well. "Owner" is defined in ECL 23-0101 as the person (in turn, broadly defined) who has the right to drill into and produce from a pool and to appropriate the oil or gas he produces for himself or others. This ownership generally is either a working interest or a royalty interest or both. A landowner royalty interest owner, is entitled to a certain amount of oil or gas, or the value thereof, free and clear, at no cost to himself. The customary royalty is 1/8 of the value of the oil or gas produced. The statute calls for a royalty equal to the lowest royalty fraction contained in any lease within the unit, and in any event, not less than 1/8. A working interest owner, usually the operator, is entitled to the remaining oil or gas, usually 7/8 of the value of the oil or gas. The ECL provides for voluntary or compulsory integration of interests in spacing units and operating units. The oil or gas produced from a spacing unit or operating unit shall be allocated to the separately owned tracts in the unit according to agreement of the interested parties. If there is no agreement, the Department is required to determine the value of each tract for the development of oil and gas and allocate the production attributed to each tract in the proportion of the value of that tract to the value of all tracts in the unit. Unless there is specific evidence indicating one tract has a higher value than another, this allocation is usually done on the basis of surface acreage and is expressed as the participation factor. An oil or gas "pool" is defined in ECL 23-0101.6 as an underground reservoir containing a common accumulation of oil or gas or both; each zone of a geological structure, which is completely separated from any other zone in the same structure, is a pool. "Field'' is defined in 23-0101.1 as the general surface area underlain by one or more pools.

Proceedings

As required by statute, the DEC Staff requested that a public hearing be held prior to the issuance of the Commissioner's Order. A combined Notice of Negative Declaration and Notice of Public Hearing dated February 23, 2001, was published in the internet publication, Environmental Notice Bulletin ("ENB") on February 28, 2001 and in the Corning Leader on March 7th and March 11th, 2001. Copies of the Notice were also sent to the persons identified as interested parties and to Steuben and Chemung counties and the towns and villages where the Field is located.

Pursuant to the Notice, a public hearing was held on April 10, 2001 at the Holiday Inn, Highways 15 & 17, Painted Post, New York, commencing at 7:00 p.m. DEC Staff appeared by Arlene J. Lotters, Esq., senior attorney, Kathleen Sanford, Thomas Noll and Bradley J. Field, DEC Division of Mineral Resources. PGE appeared by David Lind, general manager. DEC Staff and PGE gave a brief presentation regarding the project. Seven members of the public spoke after the presentations. The county attorney for Steuben County spoke in favor of the proposed Order. The remaining six speakers raised questions about the Wilson Hollow Field project. No one spoke against establishing the Field or drilling in the Field. The hearing concluded at approximately 8:00 p.m.

The issues conference was convened at 9:00 a.m. on April 11, 2001 at the Holiday Inn in Painted Post. 6 NYCRR Part 624 allows for participation at the issues conference by DEC Staff and the Applicant (PGE). Also, those seeking party or amicus status pursuant to 6 NYCRR 624.4 may participate. The Notice of Public Hearing directed that those seeking party or amicus status file a written request to the Administrative Law Judge ("ALJ") by April 2, 2001. Petitions for party status were filed by the following: Todd and Lynne Wetherill who have an unleased parcel in the Field, Columbia Natural Resources which has a business relationship with PGE related to this project, Buck Mountain Associates and John Young and James and Julie Young who are also owners of unleased parcels in the Field. The Young petitions were filed after the April 2, 2001 deadline, on April 9,2001. On April 11, 2001 Christopher Denton, Esq., filed a request for amicus status. The Petition of Todd and Lynne Wetherill was denied by letter dated April 4, 2001 as it failed to state a substantive and significant issues and other meet the requirements of Part 624.

DEC Staff appeared at the issues conference by Arlene J. Lotters, Thomas Noll, Kathleen Sanford and Bradley J. Field, Division of Mineral Resources. PGE appeared by John H. Heyer, Esq. and David Lind. Buck Mountain appeared by counsel, Charles Edward Fagan, Esq. and Vincent Stalis, owner. CNR appeared by counsel, Christopher Wallace, Esq. No appearance was made by the Youngs.

The Department, as lead agency, has reviewed the establishment of field wide spacing rules and the integration of interests within units for the Wilson Hollow Field in accordance with the criteria set forth in 6 NYCRR 617.7 and has determined that the establishment of field wide spacing and integration rules within the units will have no significant adverse impact on the environment.

Standards for identifying issues for adjudication

The purpose of the issues conference is to obtain sufficient information to determine who should be afforded party status and whether substantive or significant issues exist which require adjudication. Substantive and significant are defined at 6 NYCRR 624.4(c)(2 & 3). An issue is substantive if there is sufficient doubt about the applicant's ability to meet statutory or regulatory criteria applicable to the project, such that a reasonable person would require further inquiry. An issue is significant if it has the potential to result in the denial of a permit, a major modification to the proposed project or the imposition of significant permit conditions in addition to those proposed in the draft permit. In order to establish that adjudicable issues exist, "an intervener must demonstrate to the satisfaction of the Administrative Law Judge that the Applicant's presentation of facts in support of its application do not meet the requirements of the statute or regulations. The offer of proof can take the form of proposed testimony, usually that of an expert, or the identification of some defect or omission in the application. Where the proposed testimony is competent and runs counter to the Applicant's assertions an issue is raised. Where the intervener proposes to demonstrate a defect in the application through cross-examination of the Applicant's witnesses, an intervener must make a credible showing that such a defect is present and likely to affect permit issuance in a substantial way. In all such instances a conclusory statement without a factual foundation is not sufficient to raise issues." (In the Matter of Halfmoon Water Improvement Area, Decision of the Commissioner dated April 2, 1982). Subsequent decisions of the Commissioner have provided additional interpretations of this standard

The hearing notice provided guidance on petitions for party status by citing the foregoing regulatory sections of Part 624, and other information specifically related to this project:

Status as a full party or amicus will be accorded ONLY to those persons who provide a clear demonstration of their challenge to the field wide spacing and integration rules proposed by the DEC for the Wilson Hollow Field and support said challenge with sufficient scientific support and/or statutory challenges that are related to the project. Acceptable scientific support would include, but is not limited to: seismic and/or geologic data, reservoir engineering analysis and well testing results specific to the Wilson Hollow Field.(emphasis added)

John Young and James & Julie Young

The petitions for party status of the Youngs were addressed first. Both DEC Staff and PGE opposed the petitions based on the late filing as well as the content of the petition. DEC Staff submitted a letter dated April 10, 2001 from Bradley J. Field, detailing its opposition to the Young petitions. The Youngs (John and James are brothers) own unleased parcels in the Wilson Hollow Field. They contend that the Rice and Jimerson units should be combined since the wells in those units are communicating. (3) Staff requested, and PGE agreed to, perform a stimulation treatment on the Rice well to increase its flow rate and reserves. This resulted in increasing the gas production rates of Rice from 8% of the Jimerson well to production rates approximating those of the Jimerson well "...in terms of their relative proposed unit sizes."(4) Staff further concluded that there has been no proof submitted that the Rice well would be prematurely abandoned or that combining the two wells would provide a benefit to the parcel owners in the units. The Youngs submitted no scientific support for their position. (Youngs did not appear at the issues conference to address the opposition of DEC Staff.)

Based on the foregoing, I am denying the Youngs' petitions for party status. Not only have the petitions been filed late, (5) the Youngs have failed to appear at the issues conference. Moreover, any concerns of the Youngs is resolved by DEC Staff technical review of their contention.

Columbia Natural Resources

CNR filed a petition dated March 30, 2001 seeking party status. CNR argues that it is a mandatory party due to its business relationship with PGE relating to the Wilson Hollow Field. In the alternative, CNR seeks party status pursuant to Part 624.5(b). I will first address the issue of whether CNR is a mandatory party by virtue of its business relationship with PGE.

CNR claims that since it owns a 25% interest in all PGE wells in the Wilson Hollow Field, it is a mandatory party. At the issues conference it was confirmed that all drilling permits with respect to the Wilson Hollow Field have been issued to PGE, as the sole applicant. CNR is not a lessee with respect to any of the oil and gas rights within the Wilson Hollow Field. Also, CNR and PGE both stated that while a business relationship does exist between the two companies relating to the Wilson Hollow Field, CNR has no authority or rights with respect to the distribution of royalties. CNR is not a party to the Stipulation of December 27, 2000 between DEC and PGE. 6 NYCRR 624.5(a) states that only DEC staff and the applicant are mandatory parties to the permit proceedings. Since CNR is not the applicant for the permits here, it is not a mandatory party.

CNR also requests party status pursuant to section 624.5(b) which contains the required contents of the petition for party status. CNR acknowledges that it is in agreement with the terms of the December 27, 2000 Stipulation between PGE and DEC and it agrees that a Commissioner's Order should be issued accordingly. CNR has raised no issue for adjudication. Therefore, the only basis for CNR to be granted party status under 624.5 is that CNR can "... make a meaningful contribution to the record regarding a substantive and significant issue raised by another party" AND "a demonstration of adequate environmental interest."(6) I find no CNR contribution to be made as no substantive and significant issue has been raised. Accordingly, the petition of CNR for party status is denied.

Buck Mountain Associates

Buck Mountain filed a petition for party status dated March 26, 2001. Buck Mountain owns no property within the Field. Its only relationship to the Field is that it entered into an oil and natural gas rights lease agreement on or about February 27, 2001 with James F. Griswold. It was learned during the issues conference that Mr. Griswold is one of 5 owners of a parcel within the Field that is 0.87 acres. The remaining owners of this parcel have entered into a lease agreement with PGE for the oil and natural gas rights. Buck Mountain's only relationship to this Field is a lease interest for the oil and natural gas rights signed by one of 5 owners of a parcel that is less than one acre in size. According to DEC Staff, this interest amounts to 0.006% of the total Field acreage.(7)

Buck Mountain proposed six issues for adjudication. It addressed only one of the issues at the issues conference. It relied on its written submission as to all other issues.

The issue addressed at the conference related to royalty payments for those subject to compulsory integration. Article 23 of the ECL provides for a royalty payment to any unleased parcel when there is compulsory integration. ECL 23-0901 details what that royalty payment shall be. All agree that the Stipulation correctly applies ECL Article 23. ECL 23-0901 provides for a royalty payment equal to the lowest royalty fraction contained in any lease within the unit, and in any event, not less than 1/8.

Although the details of Buck Mountain's lease with Mr. Griswold were not revealed, Buck Mountain implies that it has entered into a lease agreement that requires it to pay a higher royalty to Mr. Griswold(8) than it will receive if the terms of the Stipulation are incorporated into a Commissioner's Order. Buck Mountain is challenging the fairness of ECL 23-0901 in this circumstance. Buck Mountain does not challenge the Stipulation of December 27, 2000 as being contrary to the law. It simply disagrees with the statute and its fairness in light of a lease agreement Buck Mountain has entered into with Mr. Griswold. Buck Mountain provides no legal authority that allows for royalty payments different from those directed by ECL 23-0901.

Fairness of the statute is not a matter to be adjudicated. Accordingly, the proposed issue is denied.

Buck Mountain also claims that it is an operator as defined by statute and in the Stipulation. PGE and DEC Staff disagree. Operator is defined in the Stipulation as "a person, natural or artificial, engaged in the business of drilling, producing and/or operating wells for oil and/or natural gas." Buck Mountain claims that it is an operator by virtue of its lease with Mr. Griswold. Buck Mountain was questioned as to the specifics of its lease agreement with Mr. Griswold. Counsel for Buck Mountain described it as a standard oil and gas lease and that it has the "full array of standard operator producer rights..."(9) Buck Mountain offers only this lease with Mr. Griswold as proof of its "operator" status. No suggestion was made that Buck Mountain has ever drilled or engaged in the business of drilling, producing or operating wells. I find no rational basis for finding that Buck Mountain is an operator as defined by statute.

The remaining issues presented by Buck Mountain are outlined in its March 26, 2001 submission. I will address them individually. The first issue raised by Buck Mountain related to production revenue, calculating royalty payments for unleased parcels and the terms of payment of royalties. I have addressed the royalty payment calculation above.

Buck Mountain requests that production revenue be defined for purposes of those subject to compulsory integration. Those parcels subject to compulsory integration will be paid a royalty that is equal to the lowest royalty fraction contained in any lease within the unit, and in event, not less than 1/8. Buck Mountain may benefit from whatever lease is negotiated by the others. Buck Mountain is seeking a definition of production revenue that may differ from a negotiated definition contained in the leases. Despite Buck Mountains assertion that DEC Staff should intervene in matters between private parties, the DEC can not, and should not oversee and/or direct private property owners lease agreements. Accordingly, I find no issue that requires adjudication regarding production revenues with respect to Buck Mountain's claim. As to the terms of royalty payments, the Stipulation and statutes allow for unleased parcels to receive the same terms of payments as the negotiated leases provide. So, unleased parcel owners are deriving benefits obtained by those who negotiated leases.

The second written issue identified in the petition is the royalty payment, which was addressed above. The third issue of Buck Mountain challenges compulsory integration and record production by the operator, PGE. Buck Mountain argues that it has a contract with Mr. Griswold that requires it to disclose information that may or may not be made available by PGE. Buck Mountain claims that since it steps into the shoes of Mr. Griswold based upon its lease with him, it will be the one receiving all required disclosure from PGE and, that disclosure may not be sufficient. Again, Buck Mountain is objecting to the Stipulation and proposed Order because it has entered into a lease agreement that has placed obligations on Buck Mountain that it may not be able to meet. Buck Mountain's lease obligations are its responsibility and do not create a responsibility for the DEC or the applicant. Further, Buck Mountain does not identify what specific documents it is looking to review. Moreover, nor does it state that the documents that have been made available to date are insufficient. This issue is not a substantive or significant issue to be adjudicated.

The fourth issue proposed by Buck Mountain relates to the size of the units within the Field. It questions the unit sizes without any scientific support. Again, it appears that Buck Mountain is concerned that it can not comply with the terms of the private lease it has entered into. As addressed above, that concern does not create a substantive and significant issue for adjudication. In fact, Buck Mountain does not object to the proposed unit sizes as wasting resources, harming the parcel owners nor that the unit sizes fail to meet the DEC's policy as stated at ECL 23-0301.(10) Buck Mountain simply questions how it may be affected in performing its lease obligations. No issue has been raised that requires adjudication regarding unit size.

The fifth issue addresses well spacing. Buck Mountain claims "Proposed well spacing of extension wells within 5 miles will have a negative impact on development of other formations in the area". The claim is that the spacing is arbitrary and beyond practice defined by the American Association of Petroleum Geologists and the American Petroleum Institute. First, the challenge is devoid of any support, scientific or otherwise, and more importantly, it is wrong. As DEC Staff noted in its objection to the petition of Buck Mountain, the Stipulation directs that wells shall be drilled one mile, not five miles from existing wells and it provides for closer spacing if supported by "reasonable, geologic, engineering or surface considerations." Accordingly, no issue is raised.

The sixth and final issue proposed by Buck Mountain relates to depth of drilling. It is claimed that the Stipulation provides for general depths but that those depths may interfere with other field developments. However, the Stipulation does direct that all wells will have to be permitted by DEC and all permit applications will have to be supported by scientific data. Moreover, Buck Mountain again provided no scientific support for that argument. No issue is raised that requires adjudication.

Buck Mountain fails to provide any scientific support for any of the issues raised, including this final issue. Part 624 places the burden of persuasion that an issue is substantive and significant on the party raising the issue.(11) Buck Mountain has not met that burden with respect to the issues contained in its petition for party status.

Accordingly, for the reasons stated above, no issues are found to be adjudicable. The petition for party status is denied.

Amicus petition

Christopher Denton, Esq. filed a petition seeking amicus status on April 11, 2001. The petition was not timely filed. As stated earlier herein with regards to the Youngs petition, a late filed petition must meet certain criteria, as well as the criteria for a timely filed amicus petition.(12) 624.5(c) directs that late filed petitions will not be granted except under limited circumstances. Mr. Denton has not met that standard as detailed in the regulations. Mr. Denton's relationship with the Field is that he routinely represents clients in matters of the oil and gas leasing who will be affected by the precedents established here. Mr. Denton incorrectly states in his petition that the DEC has not established any criteria for the determination of the royalty payment for unleased parcels or for parcels leased to persons other than the operator. It also incorrectly states that it has not established criteria for the determination of the investment costs to be recovered before the "true owner" of the gas receives payment. The applicable statutes and regulations address these issues in detail, as noted herein.

Mr. Denton also claims that unleased landowners and the lessees who are not operators "have been excluded from the very proceeding which will determine the payments they receive for the gas ..." That is not correct. Part 624 clearly states that the applicant and DEC staff are mandatory parties and it details who else may be a party. If those seeking party status raise a substantive and significant issue or can contribute meaningfully to such an issue that has been raised, and if they have an adequate environmental interest, they may be granted party status and participate in the proceeding.(13) The Denton petition also incorrectly states that lessees who are not owners and unleased parcel owners do not have a vehicle available to challenge payments to be made under 23-0901. However, the statute provides that in the event that there is a dispute as the costs associated with the drilling operation in determining payments due, "... the department shall determine the proper costs."(14) A mechanism to handle such disputes is in place. Obviously, no such disputes have occurred yet, but in the event that they do, the department shall determine proper costs.

Mr. Denton has not met the requirement of 6 NYCRR 624.5(c) nor 624.5(d)(2) and his petition for Amicus Curia status is denied.

APPEALS

Pursuant to 6 NYCRR subdivisions 624.6(e)and (g),and 624.8(d), these rulings on party status and issues may be appealed in writing to the Commissioner. Appeals are due by May 11, 2001. Replies are not allowed.

Any appeal must be received at the office of the Commissioner no later than 4:00 P.M. on the date specified, at the following address: Commissioner Erin M. Crotty, NYS Department of Environmental Conservation, 50 Wolf Road, Albany, New York 12233-1010.

The parties are to transmit copies of any appeals to all persons on the service list at the same time and in the same manner as they are sent to the Commissioner. Two copies should be served on the Administrative Law Judge. Service by fax is not authorized.

Appeals should address these rulings directly, rather than merely restating a party's contentions.

In the event that no appeals are filed, I hereby remand the application to Staff for preparation and completion of the Commissioner's Order.

____________/s/____________
Molly T. McBride
Administrative Law Judge

Albany, New York
May 3, 2001

To: Service List

1 ECL 23-0301

2 ECL 23-0501

3 DEC has held that the Rice and Jimerson wells are in communication and thus competing for the same reserves.

4 Field April 10, 2001 letter in opposition to the Youngs petitions.

5 Late filed petitions "... will not be granted except under limited circumstances..." The limited circumstances are detailed at 624.5(b)(5)(c)(2). The petition must include the following to even be considered: a demonstration that there is good cause for the late filing, a demonstration that participation will not significantly delay the proceeding or unreasonably prejudice the other parties and that participation will materially assist in the determination of issues raised in the proceeding. (624.5(b)(5)(c)(2)(i-iii). The Youngs offered no explanation for late filing.

6 6 NYCRR 624.5(d)(1)

7 PGE also questioned whether Mr. Griswold has the legal right to enter into a binding lease with his ownership interest. Buck Mountain and the parties did not know the title interest that Mr. Griswold has and, in any event, this is not the proper forum to resolve such a question.

8 It is important to note that Buck Mountain owner, Vincent Stalis was aware of the Stipulation between PGE and the DEC prior to his entering into the lease with Mr. Griswold.

9 Transcript of Issues Conference, page 74

10 ECL 23-0301, Declaration of Policy, states the following: "It is declared to be in the public interest to regulate the development, production and utilization of natural resources of oil and gas in this state in such a manner as will prevent waste...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 protected..."

11 6 NYCRR 624.4(c)(4)

12 6 NYCRR 624.5(b)(5)(c)(2)

13 6 NYCRR 624.5(d)

14 23-0901(3)6 NYCRR 624.5(d)

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