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Quackenbush Hill Field - Ruling 2, February 13, 2002

Ruling 2, February 13, 2002

STATE OF NEW YORK : DEPARTMENT OF ENVIRONMENTAL CONSERVATION

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

- by -

RULING ON ISSUES AND PARTY STATUS

February 13, 2002

DMN Project No. DMN-01-2

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 Quackenbush Hill natural gas field, located in Steuben and Chemung Counties. My ruling dated January 8, 2002 found that there were no issues in dispute regarding four of the five units within the proposed field, and that the DEC Staff could prepare an order regarding these four units.

The present ruling finds that there are no issues for adjudication regarding the remaining unit (the Gregory unit). Petitions for party status were submitted by: Columbia Natural Resources, Inc.; Richard M. Roper, a landowner in the Gregory unit; and James E. Caflisch, the lessee of the oil and gas under Mr. Roper's land. The requests for party status are denied.

Background

By notice dated November 29, 2001, the Department of Environmental Conservation scheduled a hearing on the proposed establishment of field-wide spacing and integration rules for a natural gas field known as the Quackenbush Hill Field. The acreage designated as the Quackenbush Hill Field is located in the Town of Corning, Steuben County and in the Towns of Big Flats and Catlin, Chemung County. 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 is proposing that the Commissioner of the DEC 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 Section 23-0301. This latter section states that, "It is hereby 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; 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...."

Pennsylvania General Energy Corp. ("PGE"), 208 Liberty Street, Warren, Pennsylvania 16365, is conducting an exploration and development program on portions of leasehold acreage in the Quackenbush Hill Field. To date, significant discoveries of natural gas have been realized from four wells drilled 9,700 to 10,300 feet to the Ordovician Trenton-Black River Formations. In terms of overall size of the project, PGE is focusing its drilling efforts in an area that extends from Corning northeastward to Pine Valley. Further drilling and testing will be necessary to further define reservoir extent. Permits to drill are required prior to commencement of drilling operations pursuant 6 NYCRR 552.1.

PGE has proposed 5 production units in the Quackenbush Hill Field which its geologists and engineers believe represent the reservoir volume likely to be drained by each well. 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 PGE. DEC Staff have reviewed PGE's proposal and the scientific support for it and concur with PGE's conclusion.

An order establishing field-wide spacing units will serve to configure production units for each of the existing wells and will include procedures for establishing spacing units for future wells. All ownership interests identified for existing production units and proposed spacing units will be integrated so that the proceeds attributable to development within each unit can be disseminated.

The DEC Staff entered into a Stipulation with PGE dated November 1, 2001. The DEC Staff's position is that this Stipulation resolves the following issues: the distribution of escrowed production royalties; integration of unleased parcels contained in some of the production units; and field-wide spacing and integration rules for the field. The DEC Staff has requested a public hearing to allow all interested parties the opportunity to discuss the issues and facilitate a decision addressing the establishment of field-wide spacing and integration rules for the Quackenbush Hill Field.

The DEC is lead agency for review of this action under the State Environmental Quality Review Act ("SEQRA," ECL Article 8 and 6 NYCRR Part 617). The DEC Staff reviewed the establishment of field-wide spacing rules and the integration of interests within units for the Quackenbush Hill Field in accordance with the criteria set forth in 6 NYCRR 617.7 and determined that the establishment of the field-wide spacing and integration rules within the units will have no significant adverse impact on the environment. The DEC Staff issued a negative declaration to this effect on November 5, 2001.

Notice of the hearing was published in the December 5, 2001 issue of the DEC's Environmental Notice Bulletin and in the December 5, 2001 editions of the Corning Leader and the Elmira Star-Gazette. The notice was also mailed, in late November 2001, to local governmental officials and to those persons who had contacted the DEC regarding the proposal. As described in an affidavit of notice from PGE's land manager, an earlier notice had been distributed to unleased landowners within the proposed units, stating that their interest is encompassed by a proposed spacing unit or units, that they have the option to enter into a lease and, if they decline, compulsory integration may occur. According to the same affidavit, landowners within the proposed units who had leased or allegedly leased their property for oil and gas to a non-operator had been sent notice that their interest is encompassed by a proposed spacing unit or units and that compulsory integration might occur; a copy of the letter was also sent to the non-operator.

The hearing began with a legislative (public comment) hearing on the evening of January 3, 2002, at the Holiday Inn in Painted Post, New York, before Administrative Law Judge ("ALJ") Susan J. DuBois. The hearing continued on the following day, at the same location, with an issues conference for discussion of what issues, if any, may require adjudication and what 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).

Petitions for party status in an adjudicatory hearing were received at the address specified in the notice of hearing and by the due date for such petitions from two entities: Columbia Natural Resources, Inc. ("CNR"), which stated that it was a 50% joint venture working interest partner of PGE in the Quackenbush Hill Field; and from Richard M. Roper, a landowner in the Gregory unit. An additional petition was sent to the DEC Bureau of Oil and Gas Regulation, but not to the ALJ as specified in the notice, on behalf of James E. Caflisch, Clymer, New York. I received a copy of this letter from the DEC Staff, who opposed this request for party status on both procedural and substantive grounds.

At the issues conference, PGE was represented by John H. Heyer, Esq., Olean, New York. The DEC Staff was represented by Arlene J. Lotters, Esq., DEC Division of Legal Affairs, Albany, New York. CNR was represented by Christopher B. Wallace, Esq., Utica, New York. Mr. Roper did not appear, nor was he represented, at the issues conference and he did not make a statement at the legislative hearing. Mr. Caflisch was represented by Charles Edward Fagan, Esq., Jamestown, New York.

On January 2, 2002, the DEC Staff transmitted to me a letter which stated that no issues had been proposed regarding four of the five units, nor regarding the future spacing and integration rules, and that the issues which had been proposed pertained only to distribution of royalties within the Gregory unit. The letter requested a ruling which would allow the DEC Staff to prepare and complete a Commissioner's Decision and Order establishing units and releasing royalties for the four units not affected by the proposed issues, and establishing future spacing and integration rules for the Quackenbush Hill Field. The DEC Staff requested that this ruling be made, provided that there were not any adequate late-filed petitions for party status.

At the issues conference on January 4, no additional persons requested party status and no persons proposed any issues for adjudication regarding either the future spacing and integration rules or the four units which are the subject of the DEC Staff's request. These are the Lovell, Henkel, Rhodes, and Hartman units. The issues which were proposed have to do with whether two lots in the Town of Catlin should be integrated in the Gregory unit and with the interests claimed by the person who has the oil and gas rights lease for these lots. These proposed issues relate to matters within the Gregory unit. At the issues conference, there was also a brief discussion regarding the DEC Staff's request, and no persons objected to it.

On January 8, 2002, I made a ruling which stated that the DEC Staff may prepare and complete a Commissioner's Decision and Order establishing units and releasing royalties for the four units not affected by the proposed issues (the Lovell, Henkel, Rhodes, and Hartman units), and establishing future spacing and integration rules for the Quackenbush Hill Field. The DEC Staff submitted this proposed Decision and Order to the Commissioner for her review. This Decision and Order were issued by Commissioner Erin M. Crotty on January 23, 2002.

The January 8, 2002 ruling stated that I would make a separate ruling regarding party status and issues for adjudication. The transcript of the issues conference was received by the DEC Office of Hearings and Mediation Services on February 1, 2002, and the last of the correspondence regarding the proposed issues was received on February 5, 2002.

Comments at Legislative Hearing

Approximately 70 persons attended the legislative hearing, six of whom made statements for the record. On behalf of the DEC Staff, Ms. Lotters stated that the standard gas well spacing is inadequate for this field in order to meet the goals of ECL Article 23. She stated that it is the position of the DEC Staff that the November 1, 2001 stipulation satisfies the requirements of the ECL relative to preventing waste of the resource, providing for greater ultimate recovery and protecting the correlative rights of all owners of the resource. Thomas E. Noll, Mineral Resources Specialist, DEC Division of Mineral Resources, described the field and its discovery, and discussed the provisions of the stipulation.

David A. Lind, President of PGE, stated that PGE has drilled over 600 wells, including wells in the nearby Wilson Hollow Field. He stated that information from the spacing hearings for several fields in the area, and related information, indicated that a determination of appropriate well spacing and unit sizes was necessary for the Quackenbush Hill Field. Mr. Lind stated that PGE had used the most current property tax assessment maps in identifying properties within the proposed units.

Kenneth Hager, Horseheads, New York, stated that the wellhead of the Rhodes well was initially going to be on his property but had been moved to a site adjacent to his property. He stated that his property was impacted and that although PGE told him that his royalties would make up for it, only a small area of his land was actually in the Quackenbush Hill Field. He noted that he did not dispute the accuracy of the maps of the field, but that he wanted compensation for his loss of road frontage.

Richard J. Long, Big Flats, New York, stated that his property is located near the Lovell No. 1 well and that construction of the well had produced noise, traffic, and damage to the road. He also stated that much less of his land is in the Quackenbush Hill Field than he had expected.

Vincent C. Stalis, Millport, Owner of Buck Mountain Associates, stated that he is in the business of "oil and gas and lease/ royalty services." He stated that there is a very large amount of gas in the faults which are being explored in the Corning area and that a decision on spacing should not be rushed. He stated a number of questions regarding when compulsory integration would occur and whether the notice from PGE had been proper. He stated that if Mr. Roper's acreage was incorrect on the ownership tabulation, others may be also.

Party Status

6 NYCRR Section 624.5(d) provides that full party status will be granted based on: "(i) a finding that the petitioner has filed an acceptable petition pursuant to paragraphs (b)(i) and (2) of this section [the filing and contents of petitions]; (ii) a finding that the petitioner has raised a substantive and significant issue or that the petitioner can make a meaningful contribution to the record regarding a substantive and significant issue raised by another party; and (iii) a demonstration of adequate environmental interest." In addition, the DEC Staff and the applicant (in this case, PGE) are mandatory full parties pursuant to 6 NYCRR Section 624.5(a).

As discussed below, none of the proposed issues have been determined to be substantive and significant, so party status is not being granted to any of the entities that requested it.

In its petition, CNR supported the stipulation and did not propose any issues, but stated that it would be prepared to offer expert evidence by a geophysicist and/or by an engineer in support of the proposal. CNR stated that it had an ownership interest equal to PGE in the four existing Quackenbush Hill Field wells as well as in the correlative rights within the field. CNR has demonstrated an adequate environmental interest. Depending on the nature of the issues that might have been identified, CNR might have been able to make a meaningful contribution to record, but since no issues have been identified for adjudication CNR's petition for party status is denied.

CNR's petition also argued briefly that CNR qualified as a mandatory full party due to its role as a joint venture working interest partner with PGE. CNR is not, however, a party to the November 1, 2001 stipulation. Under the stipulation, PGE (not CNR) is identified as having responsibility for the escrowed royalty payments. CNR's role here appears to be similar to its role with respect to the Wilson Hollow Field (In the Matter of Pennsylvania General Energy, Inc., DEC Application No. DMN-01-1, Ruling on Issues and Party Status dated May 3, 2001). That ruling found that CNR was not a mandatory party with regard to the Wilson Hollow Field.(1) CNR is also not a mandatory party to the present hearing regarding the Quackenbush Hill Field.

Mr. Roper did not appear at the issues conference. His petition for party status stated that he had a valid mineral rights lease which was recorded with the Chemung County Clerk prior to the notice of compulsory integration. Based on correspondence attached with Mr. Caflisch's petition, this lease was to Buck Mountain Associates, Millport, New York ("Buck Mountain") but was assigned from Buck Mountain to Mr. Caflisch on December 14, 2001. Mr. Roper's petition objected to the manner in which notice had been provided regarding the hearing, stated that the amount of land listed for him in the ownership tabulation was incorrect, that he was not within the scope of compulsory integration, and that all terms and conditions of his lease should not be overruled by compulsory integration.

Both the DEC Staff and PGE opposed Mr. Roper's request for party status. With respect to party status, the DEC Staff argued that Mr. Roper had leased his mineral rights to another party and therefore did not control any interests that would be affected by this proceeding. The DEC Staff stated that the private agreement between Mr. Roper and the lessee is not affected by the stipulation and that the lessee's obligation to comply with that agreement is not within the Department's jurisdiction. The DEC Staff also argued that Mr. Roper's petition did not raise issues for adjudication.

Mr. Roper's interests would not be affected by the proposal and (as discussed below) his petition did not raise any issues for adjudication. Mr. Roper's petition for party status is denied.

The third petition, submitted on behalf of Mr. Caflisch, was procedurally defective in that neither Mr. Caflisch nor his attorney sent it to the address specified in the notice of hearing. At the issues conference, Mr. Fagan cited 6 NYCRR Sections 624.5(b)(4) and (5) which provide that an ALJ may deny an inadequate petition or require additional information from the filer, and that the ALJ shall provide an opportunity for supplementation of the petition where the ALJ finds that a prospective party did not have adequate time to prepare its petition. Mr. Fagan argued that Mr. Caflisch received assignment of the lease on December 14, 2001 and did not have a copy of the notice at that time, but was advised by Buck Mountain that a hearing was scheduled. Mr. Fagan argued that Mr. Caflisch did not have time to meet the technical requirements but that the DEC and PGE were put on notice.

I only received notice of Mr. Caflisch's petition because DEC Staff and PGE responded to it. The time involved in obtaining a copy of the notice of hearing would not be lengthy. Mr. Fagan had represented a party (Buck Mountain) in a similar hearing on the Wilson Hollow Field in 2001 and could be expected to have some familiarity with the process. Notwithstanding the procedural objection, however, the substance of the petition was addressed by the participants at the issues conference and Mr. Fagan presented additional information about the proposed issues and Mr. Caflisch's interest in the proceeding. The proposed issues are discussed further below. Mr. Caflisch's petition is being evaluated on its substance, apart from the procedural question, which can be done at the discretion of the ALJ under 6 NYCRR 624.5(b)(4).

With regard to party status, Mr. Caflisch has an adequate interest in the proposed action as an owner of oil and gas rights within the proposed field (although the participants in the issues conference disagreed regarding the nature of his rights and regarding whether he is an operator of gas wells). As discussed further below, however, Mr. Caflisch has not raised a substantive and significant issue, and his petition for party status is denied.

Standards for identifying issues for adjudication

6 NYCRR Section 624.4(c) specifies the standards for adjudicable issues in a DEC permit hearing. An issue is adjudicable if it relates to a dispute between the DEC Staff and an applicant over a substantive term or condition of the draft permit (624.4(c)(1)(i)). When the Department Staff has determined that a permit application, conditioned by a draft permit, will meet all statutory and regulatory requirements, the potential party proposing an issue has the burden of persuasion to demonstrate that the proposed issue is substantive and significant (624.4(c)).

An issue is substantive if there is sufficient doubt about the applicant's ability to meet statutory or regulatory criteria such that a reasonable person would inquire further (624.4(c)(2)). 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 (624.4(c)(3)).

In order to establish that adjudicable issues exist, "an intervenor 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 intervenor proposes to demonstrate a defect in the application through cross-examination of the Applicant's witnesses, an intervenor 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 interpretation of this standard.

Proposed Issues

Mr. Roper's petition for party status contained three numbered paragraphs, the second of which contains several assertions. These three paragraphs concern the amount of land owned by Mr. Roper, whether his land should be affected by compulsory integration, and the adequacy of the notice that was provided regarding the deadline for petitions.

1) Mr. Roper asserted that the amount of land that had been listed for him was not correct and that he has title to 1.938 acres rather than 1 acre as listed in the ownership tabulation. Mr. Roper also stated that the ownership tabulation was not included in any documents on file locally. The DEC Staff responded that any disagreement between Mr. Roper and PGE regarding the number of acres owned by Mr. Roper should be resolved in another venue and does not affect unit configuration, field-wide spacing rules or terms for compulsory integration. The DEC Staff also stated that the ownership tabulations were available through a Freedom of Information Law request and that the maps were sufficiently informative. PGE stated that one of the two parcels to which Mr. Roper claims title is described in the deed as being granted by "quit claim only" and that the parcel is assessed by Chemung County to someone other than Mr. Roper. PGE stated that there may be a title dispute regarding this parcel, which should be resolved by the two owners.

The ownership tabulation, which was transmitted to me with the DEC Staff's January 2, 2002 response to Mr. Roper's petition, is nine pages long. While it would be preferable to have this document available at the local document repositories with the maps and the stipulation, the ownership tabulation was available by request to the DEC Staff and Mr. Roper apparently did review the tabulation. The availability of this document is not an issue requiring adjudication.

Mr. Roper attached with his petition a copy of the deed for the property in question, which identifies two parcels which are 1.142 and 0.796 acres in size, the smaller of the two being conveyed "without warranty of title, by quit claim only." Both parcels are entirely within the Gregory unit.

The stipulation provides that, "Production shall be allocated to each parcel within each Spacing Unit based on the acreage of the parcel as a percentage of the total acreage of each Spacing Unit." (Stipulation paragraphs II.B and III.G; Exhibit 2 of the hearing record, pages 3 and 6). The proposed issue, of whether the acreage listed for Mr. Roper in the ownership tabulation is correct, would not have the potential to result in a modification of the proposed unit configuration, field-wide spacing rules or terms for compulsory integration. The outcome of any dispute about ownership of the parcel would be applied in making royalty payments pursuant to the terms of the Order. Any dispute about the amount of land actually owned by Mr. Roper would need to be resolved in another forum, not in a DEC administrative hearing.

The stipulation also agrees that the Commissioner's Order will provide 90 days after its effective date for updated maps reflecting changes in property ownerships and descriptions to be prepared and made a part thereof, if necessary. I would encourage the parties to attempt to resolve the question of ownership of the 0.796 acre parcel, if possible. It is not, however, an issue for adjudication in this hearing.

2) Mr. Roper stated that he had a valid mineral rights lease, recorded prior to notice of compulsory integration. He contended that he was not within the scope of compulsory integration and that the terms and conditions of his lease should not be overruled by compulsory integration. Mr. Roper did not state why he believed he was not within the scope of compulsory integration, other than to state that he has a valid mineral rights lease. He leased the oil and gas rights to his land to Buck Mountain on January 20, 2001. This lease was then assigned by Buck Mountain to Mr. Caflisch on December 14, 2001.

The DEC Staff argued that Mr. Roper's interests are controlled by the terms of his lease and that the private agreement between Mr. Roper and the lessee is not affected by the Stipulation. The DEC Staff also stated that the lessee's obligation to comply with that agreement is not within the DEC's jurisdiction.

ECL 23-0901.2 provides, in part, that, "The department shall not make any order requiring the integration of interests in any spacing unit or requiring the development or operation of any field, pool or part thereof as a unit unless it finds, after detailed study and analysis, notice and hearing, that the integration of interests in spacing units, under conditions then existing in this state, or in the field or pool to be affected, is necessary to carry out the policy provisions of section 23-0301."

ECL 23-0301 provides that, "It is hereby 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; to authorize and to provide for the operation and development of oil and gas properties in such a manner that 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, and to provide in similar fashion for the underground storage of gas, the solution mining of salt and geothermal, stratigraphic and brine disposal wells."

Mr. Roper has not offered any reasons why the proposed integration of interests is not necessary to carry out the policies stated in ECL 23-0301. With regard to his lease, the lease is a private agreement and is not under the jurisdiction of the Department. Contrary to the assumption in Mr. Roper's petition, his lease would not be over-ruled by compulsory integration. No issue has been raised with regard to Mr. Roper's land and compulsory integration.

3) Mr. Roper's third issue is an objection to how notice of the hearing was provided, specifically notice of the December 26, 2001 deadline for petitions. He stated that if a law exists that allows notification only through the classifieds, the law needs to be changed. The notice was published and distributed as provided for in 6 NYCRR 624.3(a). The adequacy of the legal and regulatory requirements for notices is not a subject for adjudication in a hearing.

An earlier notice regarding the proposal had also been sent to landowners within the proposed units who were unleased or who had leased their property for oil and gas to a non-operator, as described on page 2 of this report. This notice was sent both to Mr. Roper and to Buck Mountain.

Mr. Caflisch's petition proposed three issues, concerning whether Mr. Caflisch received proper notice, whether the "operator lease" is subject to compulsory integration, and whether Mr. Caflisch's interest (which the petition identifies as a 7/8 interest) should be escrowed along with landowner royalties.

4) Mr. Caflisch's first proposed issue is stated as follows in the petition: "Did Operator get proper Pennsylvania General Energy (PGE) notice? How should the Notice be phrased? A copy of the notice was sent to Buck Mountain Associates by mail. There was no inquiry if the lease was assigned to another party." DEC Staff responded that Mr. Caflisch was not an owner or operator of record in the proposed field when PGE provided notice as required by Paragraphs II.C.3 and III.C.3 of the stipulation.

PGE's affidavit of notice is dated September 26, 2001 (Exhibit 1)(2). The stipulation is dated November 1, 2001 (Exhibit 2). The notice of hearing was published on December 5, 2001 in two newspapers in the area of the Quackenbush Hill Field and on the same date in the DEC's Environmental Notice Bulletin. Mr. Caflisch only received assignment of the lease on December 14, 2001. There was no reason for PGE to notify Mr. Caflisch when it sent out notice, since he had no interest in the lease at that time. Even if the letter from PGE to Buck Mountain had inquired about whether the lease had been assigned to another party, this would not have notified Mr. Caflisch nor provided anyone with additional information since the assignment of the lease did not occur until several months later. There is no issue requiring adjudication with regard to the notice.

5) Mr. Caflisch's petition proposed an issue regarding compulsory integration, as follows: "Is operator lease subject to compulsory integration? As defined by NYS DEC and as stated in the Stipulation, the operator lease is subject to compulsory integration." In the context of the petition, the "operator lease"appears to be a reference to Mr. Caflisch's interests. In the context of the correspondence and the discussion at the issues conference, this proposed issue relates to the following one (stated in the paragraph below) and the two will be discussed together in this ruling.

6) Mr. Caflisch's final issue is stated in the petition as follows: "Should the operator (James E. Caflisch) interest be escrowed along with landowner royalties? If the 7/8ths interest is not escrowed, then in the event the company is dissolved, the 7/8ths interest would be lost with the company. If the 7/8ths interest is not escrowed, then how does the company protect or guarantee that royalty interest?" At the issues conference, Mr. Fagan clarified that the company referred to is PGE. He also argued that the DEC's own Internet web site lists Mr. Caflisch as an "operator."(3)

The DEC Staff argued that PGE is the operator of the Gregory well and unit and is the only operator of record in that unit, and no other operator has applied for a drilling permit or demonstrated an adequate acreage position to be granted a drilling permit. With regard to the web site, they stated that the downloadable file accessed from the web page is generated from a "mail" file which is based on organizational reports required under 6 NYCRR 551.1(a) to be filed with the Division of Mineral Resources, and that there is no distinction in the file among landowners or others who produce for self-use and operators who produce gas for sale. DEC Staff compared the present case with the decision in the Wilson Hollow Field hearing and argued that consistent with that decision, the acreage which Mr. Caflisch states he controls should be compulsorily integrated as a royalty interest. DEC Staff also stated that it is incorrect to refer to 7/8 of production revenue as a royalty interest.

PGE stated it did not believe that Mr. Caflisch has the capability of drilling or operating as an ordinary oil and gas operator, and stated that his proposed issue is substantially the same as the issue raised by Mr. Fagan on behalf of Buck Mountain in the Wilson Hollow Field hearing. PGE also argued that Mr. Caflisch came into the proceeding "essentially at the eleventh hour" and is "attempting to create an interest which didn't exist before and to make that binding upon the parties to this hearing" (Transcript, p. 35).(4)

The parties made rather extensive arguments about whether Mr. Caflisch is an "operator" as defined in the oil and gas regulations or in the Stipulation, but as discussed below, this question is not dispositive of whether he has either raised an issue requiring adjudication or made a legal argument that would lead to a change in the proposed Order. The term "operator," for purposes of the DEC's oil and gas regulatory program, is defined in 6 NYCRR 550.3(ab) as, "any person who is in charge of the development of a lease or the operation of a producing well." The definition of the term "operator" which is adopted for purposes of the Stipulation is, "a person, natural or artificial, engaged in the business of drilling, producing, and/or operating wells for oil and/or natural gas" (Stipulation, I.B; Exhibit 2).

Mr. Caflisch's offer of proof regarding his status as an "operator" consists of his statement that he is an "owner/operator" of four natural gas wells in Chatauqua County, that he is on the DEC's list of operators, and that the "operator interest" in the 1.9 acre parcel has been fully assigned to Mr. Caflisch. His actual role with regard to the wells in Chatauqua County is unclear. He may indeed be an "operator" under the definitions cited above if he operates the four wells; this may even be a business activity for him. Alternatively, he may simply have wells on his property which are operated by someone else. If the scope of the list on the DEC web site is as described by the DEC Staff (i.e., all persons who have filed organizational reports), the title and description of the list are confusing and should be revised to identify accurately the scope of the list.

As to the "operator interest" in the 1.9 acre parcel, the lease which was assigned to Mr. Caflisch is a "Non-Drilling Oil and Gas Lease" which states, in paragraph 2 of the lease, "Under this lease, Lessee [currently Mr. Caflisch] obtains no rights to enter onto, or conduct operations on, the surface of the said premises. No well shall be drilled within 200 feet of any house or barn now on said premises." (Exhibit 9). Further, the acreage is insufficient for drilling of a gas well under either the spacing requirements of 6 NYCRR Part 553 or the spacing identified in the Stipulation. Mr. Fagan also stated at the issues conference that Mr. Caflisch does not intend to drill a well on this lease (Transcript, p. 40).

Even if Mr. Caflisch were an operator, however, his arguments have not raised an issue for adjudication. Contrary to Mr. Fagan's suggestion at the issues conference,(5) Buck Mountain's status as a non-operator was not the sole reason for the Commissioner's statements in the August 8, 2001 Wilson Hollow Field Second Interim Decision that the terms of a private agreement do not prevent the DEC from carrying out its statutory obligations, and that the DEC does not participate in the negotiations of lease agreements (Second Interim Decision, page 6; see also discussion in the remainder of this Interim Decision and the May 3, 2001 Ruling on issues and party status in the same hearing). Other aspects of that decision, and other factors in the present record, lead to the conclusion that no issue has been raised in the present hearing.

As stated in the Wilson Hollow Field Second Interim Decision and the earlier Glodes Corners Road Field Interim Decision (February 25, 2000), the Department does not participate in the negotiation of lease agreements. If Mr. Caflisch received assignment of a lease that is disadvantageous to him in view of the terms of the stipulation, those concerns are between the private parties involved in the lease. This is particularly so in the present situation, where Mr. Caflisch received assignment of the lease after PGE sent notification to Mr. Roper and to Buck Mountain regarding the proposal to establish spacing units, after the Stipulation was signed, and after the notice of hearing was published.

Mr. Fagan argued at the issues conference that in a related situation involving Buck Mountain and the Wilson Hollow Field, PGE has taken the position that Buck Mountain is "entitled to nothing in that royalty situation" (Transcript, p. 35). Mr. Heyer later clarified, however, that PGE paid a 1/8 royalty to Buck Mountain; Mr. Fagan responded that the 1/8 goes to the landowner under the agreement Buck Mountain has with the landowner, and Buck Mountain gets nothing (Transcript, pp. 47 - 52). This again is a result of private agreements, which Buck Mountain made after the date of the stipulation regarding the Wilson Hollow Field (Wilson Hollow Field Second Interim Decision, p. 6).

Mr. Fagan argued that Mr. Caflisch's royalty should be larger than 1/8, based in part on the provisions of ECL 23-0901.3. A portion of this section reads as follows: " If one or more of the owners shall drill, equip and operate, or operate, or pay the expenses of drilling, equipping and operating, or operating, a well for the benefit of another person as provided for in an order of integration, then such owner or owners shall be entitled to the share of production from the spacing unit accruing to the interest of such other person, exclusive of a royalty not to exceed one-eighth of the production , until the market value of such other person's share of the production, exclusive of such royalty, equals twice such other person's share of the reasonable actual cost of drilling, equipping and operating, or operating the well, including a reasonable charge for supervision and interest." Mr. Fagan argued that this provision applies to Mr. Caflisch, and proposed that a requirement granting him an interest of this kind be included in the Commissioner's Order (Transcript, p. 56 - 59).

This provision is not applicable to Mr. Caflisch, and no such requirement should be included in the Order. PGE stated (and no person contested the fact) that PGE, with some participation by CNR, paid for all of the costs of drilling, equipping and operating the wells in the field and wells to be drilled in the Quackenbush Hill Field (Transcript, p. 44). Mr. Caflisch did not even have a lease in the field until December 14, 2001. Neither PGE nor CNR drilled, equipped and operated, or operated, any of the wells "for the benefit of" Mr. Caflisch. Further, the provision quoted above applies when these activities are carried out "for the benefit of another person as provided for in an order of integration" (emphasis supplied). There is no order of integration yet for this field.

Mr. Fagan also suggested that the reference to "a share of the royalty"in the Wilson Hollow Field Decision and Order(6) indicated that Buck Mountain's interest was an "operator's interest, what would normally be referred to as the seven-eights interest" (Transcript, p. 45 - 46) and that Mr. Caflisch has the same kind of interest in the Quackenbush Hill Field (Transcript, p. 58). This is not, however, what the Wilson Hollow Field Decision and Order says (see page 2 of the September 13, 2001 Decision and Order).

Returning to the third proposed issue as stated in Mr. Caflisch's petition, Mr. Caflisch does not have the 7/8 interest which this proposed issue assumes, and thus there is no basis for the escrow provision which Mr. Caflisch is apparently proposing. As to his second proposed issue, concerning whether the "operator lease" is subject to compulsory integration, Mr. Caflisch has not demonstrated the existence of any "operator lease" nor any possibility that he would operate a well within the Quackenbush Hill Field, and has not raised any substantive or significant issue regarding whether the acreage identified in his lease should be compulsorily integrated in the Quackenbush Hill Field.

No issues have been raised for adjudication in this hearing. I recommend that a Decision and Order be issued as described in the Stipulation, regarding the remaining unit in the Quackenbush Hill Field (the Gregory unit).

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.

Any appeals must be received at the office of the Commissioner no later than 4:00 P.M. on March 1, 2002, at the following address: Commissioner Erin M. Crotty, NYS Department of Environmental Conservation, 625 Broadway, Albany, New York 12233-1010. Any replies must be received no later than 4:00 P.M. on March 15, 2002 at the same address.

The parties are to transmit copies of any appeals and replies to all persons on the service list at the same time and in the same manner as they are sent to the Commissioner, with two copies being sent to my address. Service by fax is not authorized.

_____________/s/_____________
Susan J. DuBois
Administrative Law Judge
Albany, New York

Dated: February 13, 2002

TO: Arlene J. Lotters, Esq.
John H. Heyer, Esq.
Christopher B. Wallace, Esq.
Richard M. Roper
Charles Edward Fagan, Esq.

1 CNR did not appeal the ruling in the matter of the Wilson Hollow Field.

2 References to exhibit numbers in this report are to exhibits of the hearing record. The exhibits attached with the Stipulation are Exhibits A through E.

3 http://co-nt-cms1/website/dmn/ActiveOp.htm as updated on 3/20/2001.

4 This and subsequent transcript references are to the January 4, 2002 issues conference transcript.

5 Transcript pp. 35 - 37.

6 The transcript states the date of this Decision and Order as December 13, 2001, but the date is actually September 13, 2001, the second Decision and Order in the matter of the Wilson Hollow Field.

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