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Terry Hill South Field - Ruling, June 5, 2003

Ruling, June 5, 2003

STATE OF NEW YORK: DEPARTMENT OF ENVIRONMENTAL CONSERVATION

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

RULING ON MOTION
FOR STAY

DMN Project No. DMN-02-03

June 5, 2003

Background

The Department of Environmental Conservation ("DEC" or "Department") Staff has proposed issuance of an Order which would establish field-wide spacing and integration rules for the Terry Hill South natural gas field (the "Field"). The Field is situated on portions of acreage located in the Towns of Catlin and Veteran, in Chemung County, and the Towns of Dix and Montour, in Schuyler County. At issue in this motion is Department Staff's request that the issues ruling be held in abeyance pending a determination on a declaratory ruling which is before the Department's General Counsel. For the reasons set forth below, the motion is granted.

The Department 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...."

An order establishing field-wide spacing units in the Terry Hill Field 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.

Fairman Drilling Company ("Fairman"), R.D. #1, Helvetia Road, P.O. Box 288, DuBois, Pennsylvania 15801-0288, conducted an exploration and drilling program and successfully drilled six wells in the Field. Permits to drill are required prior to commencement of drilling operations pursuant Section 552.1 of Title 6 of the Official Compilation of Codes, Rules and Regulations of the State of New York ("6 NYCRR").

Fairman began development of the Ordovician Trenton-Black River formations in the Field in March of 2000. Fairman continued to drill, complete and produce wells to develop the existing Field and to identify similar producing reservoirs in adjacent areas, and, as of October 30, 2002, conveyed its interests to Fortuna Energy Inc. ("Fortuna"), 1519 Olean-Portville Road, Olean, New York 14760.

The Department entered into a Stipulation, dated October 9, 2002, with Fairman Drilling Company, which is binding upon Fortuna as successor to Fairman. It is Department Staff's position that this Stipulation resolves issues pertaining to field wide spacing rules and establishes procedures for future wells. According to Department Staff, the Stipulation's provisions are based upon an analysis of available geologic, engineering and seismic data from wells within the Terry Hill South Field and from similar reservoirs in the vicinity.

The Department is lead agency for review of this action under the State Environmental Quality Review Act ("SEQRA," ECL Article 8 and 6 NYCRR Part 617). Department Staff reviewed the establishment of field-wide spacing rules and the integration of interests within units for the Terry Hill South Field in accordance with the criteria set forth in 6 NYCRR Section 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. A Notice of Determination of Non-Significance Negative Declaration was prepared on July 23, 2002, after determining that the establishment of field wide spacing and integration rules within the units will have no significant adverse impact on the environment.

Proceedings

By notice dated November 19, 2002, the Department scheduled a hearing on the proposed establishment of field-wide spacing and integration rules for the Terry Hill South Field. Pursuant to Part 553 of 6 NYCRR, Department Staff is proposing that the Commissioner issue an order establishing the spacing and integration rules.

Notice of the hearing was published in the November 2, 2002 issue of the DEC's Environmental Notice Bulletin and in the November 5, 2002 edition of the Elmira Star-Gazette. The hearing began with a legislative (public comment) hearing on the evening of December 3, 2002, at the Holiday Inn in Painted Post, New York, before Administrative Law Judge ("ALJ") Maria E. Villa. 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 was held pursuant to the procedures set forth 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 three entities: Columbia Natural Resources, Inc. ("CNR"); Pennsylvania General Energy Corp. ("PGE"); and a joint petition on behalf of Buck Mountain Associates, Rural Energy Development Corporation, Western Land Services, Inc., Florence Teed, Rae Lynn Ames, and Terry and Linda Zahurahnec (hereinafter referred to as the "Buck Mountain Intervenors").

At the issues conference, Fortuna was represented by John H. Heyer, Esq., Olean, New York. The DEC Staff was represented by Arlene J. Lotters, Esq., and Franz T. Litz, Esq., DEC Division of Legal Affairs, Albany, New York. CNR and PGE were represented by Christopher B. Wallace, Esq., Utica, New York. The Buck Mountain Intervenors were represented by Allan Lipman, Esq., Buffalo, New York, and by Christopher Denton, Esq.

CNR and PGE's petitions were essentially identical, and stated that the petitioners had an environmental interest in the oil and gas leasehold interests and attendant correlative rights in the Terry Hill South Field and in areas immediately proximate to the Field. CNR and PGE opposed the proposed field-wide spacing and integration rules, arguing that they had not been afforded the opportunity to voluntarily participate in the Field drilling operations by the Operator, although they owned acreage within the field. In addition, CNR and PGE contended that the size and shape of certain well units in the Field might not be supportable, based upon the seismic information contained in Exhibit E to the Stipulation. At the commencement of the issues conference, counsel for CNR and PGE submitted motions to withdraw those petitions for party status. Over the Buck Mountain Intervenors' objection, the ALJ granted the motions.

The participants were given the opportunity to brief a number of issues raised in the petition filed by the Buck Mountain Intervenors, including

  1. The applicability of the substantive and significant standard articulated in Title 6 of the Official Compilation of Codes, Rules and Regulations of the State of New York ("6 NYCRR") Section 624.4 to this proceeding;
  2. The petitioners' entitlement to a share of the working interest where the controlling acreage is not large enough to satisfy drilling permit requirements;
  3. Whether the petitioners, who are not parties to the Stipulation entered into between Department Staff and Fortuna's predecessor in interest, are bound by the Stipulation;
  4. Whether, in order to receive a working interest, the petitioners must fall within the Stipulation's definition of an "Operator;"
  5. Whether the 100% penalty provision set forth in Environmental Conservation Law Section 23-0901(3) is applicable where a petitioner has not been given the opportunity to participate in well costs;
  6. Whether the rights of all petitioners within the unit are fully protected to assure that petitioners will receive their rightful share of production from the unit; and
  7. Whether the well costs incurred or to be incurred by Fortuna are appropriate.

The Buck Mountain Intervenors also raised an issue as to whether the proposed unit configuration and size is proper.

At the issues conference, Department Staff 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 Terry Hill South Field. The ruling requested would allow Department Staff to prepare and complete a Commissioner's Decision and Order establishing units and releasing royalties for the five units (the Clauss, Hinman, Broz-Kimball, Lant #2, and Gublo units) which, according to Department Staff, would not be affected by the issues proposed for adjudication in this proceeding.

Department Staff represented that the royalties, which total approximately $1 million, have been held in escrow for the benefit of the mineral rights owners in the Broz-Kimball and Clauss units since August 2001 and October 2001, respectively, and for payment of royalties if and when production commences in the Hinman, Lant #2, and Gublo units. The ALJ directed that the request be made in writing, and, on December 12, 2002, Department Staff and the Applicant filed submissions in support of this request. The Buck Mountain Intervenors opposed the request by submission dated December 19, 2002.

On May 15, 2003, Department Staff filed a motion, requesting that the issues ruling be stayed pending a determination by the Department's general counsel on two petitions for a declaratory ruling filed on July 9, 2002 by Allan Lipman, counsel for the Buck Mountain Intervenors, on behalf of Western Land Services, Inc. The Buck Mountain Intervenors replied to the motion on May 23, 2003. The Applicant did not respond to the motion. For the reasons set forth below, the motion is granted.

Positions of the Participants

Department Staff's motion for a stay requests that in the interests of judicial economy and administrative efficiency, the issues ruling be held in abeyance in light of the petitions for a declaratory ruling which are pending before the Department's General Counsel. In Department Staff's December 3, 2002 Response to Petitions for Party Status, Department Staff requested that the ALJ consider deferring decision on various legal issues raised by the petitioners, which are also under consideration in connection with the declaratory ruling. Department Staff's motion indicates that the declaratory ruling is expected in mid-Summer of 2003, that the delay will not prejudice the Applicant or the proposed intervenors, and that the declaratory ruling will assist in resolving a number of legal issues pending in this proceeding.

In addition, Department Staff states that counsel for the Buck Mountain Intervenors has filed a combined declaratory judgment and Article 78 petition in Supreme Court, Chemung County, entitled Caflisch, et al. v. Crotty, et. al., Index No. 03-1579. According to Department Staff, the proceeding, which commenced on April 30, 2003, seeks judgment reversing the Commissioner's Decision and Order in Matter of Quackenbush Hill Field (December 30, 2003). The proceeding in Supreme Court has been adjourned to afford the Department's General Counsel an opportunity to address the petition for a declaratory ruling. Department Staff states further that the motion has no bearing on Department Staff's December 12, 2002 Request for Ruling Allowing Distribution of Escrowed Royalties.

The Buck Mountain Intervenors' response to the motion indicates that two petitions for a declaratory ruling, both filed on behalf of Western Land Services, Inc., are pending before the General Counsel, and that the proposed intervenors object to the requested stay unless it includes a stay of the pending request for a ruling to release escrowed royalties. The proposed intervenors note that the second request for a declaratory ruling "specifically addresses the methodology used by the Department in establishing the proposed units and if the declaratory ruling is issued, as requested by Western Land Services, Inc., it will make it clear that Your Honor should not allow the proposed distribution of escrowed royalties at this time." Buck Mountain Intervenors' Response, at 2.

Because it appears that no participant will be prejudiced, and that guidance from the General Counsel will be of assistance in resolving a number of issues raised in this proceeding, the motion is granted. Given the disputes among the participants with respect to the delineation of well units in the field, and the pendency of the declaratory ruling, Department Staff's request for release of royalties will also be held in abeyance.

Ruling

The motion for a stay of the issues ruling, pending a determination by the General Counsel on the petition for a declaratory ruling, is granted. I also reserve ruling on Department Staff's request for a ruling allowing Department Staff to prepare and complete a Commissioner's Decision and Order releasing escrowed royalties, until the declaratory ruling issues, or until August 22, 2003, whichever occurs first. Any further application to extend the stay must be filed with this office no later than August 8, 2003.

_____________/s/____________
Maria E. Villa
Administrative Law Judge

Albany, New York
June 5, 2003

TO: Attached Service List

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