Declaratory Ruling 23-14: Western Land Services, Inc. (includes Summary of Public Comments)
State of New York
Department of Environmental Conservation
In the Matter of the Petition of
WESTERN LAND SERVICES, INC.
for a Declaratory Ruling Pursuant to Section 204 of the
State Administrative Procedure Act and 6 NYCRR Part 619
Declaratory Ruling DEC #23-14
I. Introduction and Petitioner's Questions
Petitioner, Western Land Services, Inc. ("WLS" or "Petitioner"), by its attorney, Allan R. Lipman, Lipman & Biltekoff, has petitioned for a declaratory ruling pursuant to State Administrative Procedure Act §204 and Part 619 of the Official Compilation of Codes, Rules and Regulations of the State of New York ("NYCRR"), seeking a determination on two interrelated questions. WLS presents two questions: (1) whether non-participating interests in a spacing unit are entitled to receive eight-eighths of the proportionate share of unit production attributable to their acreage after the well operator has recovered 200% of the expenses listed in ECL §23-0901(3); and (2) whether the "100% of cost" penalty upon non-participating interests where the non-participating interest has not been offered the opportunity to participate in the cost of a well can be eliminated.1
The July 9, 2002 Petition (hereinafter "Petition") was initially submitted by cover letter dated July 11, 2002. By letter dated July 26, 2002, the Department informed WLS that the Petition is granted in part and denied in part. Additionally, the Department decided it would be in the public interest to solicit public comments on the Petition pursuant to 6 NYCRR §619.1(e).
On December 4, 2002, the public notice soliciting public comments was published in the Environmental Notice Bulletin and the notice was also individually mailed to the last known address of certain members of the regulated community and other interested persons. In addition to soliciting public comments on the Petition, in order to fully address Petitioner's inquiry, the public notice provided for public comments on three issues that relate to the provisions under ECL §23-0901(3). The public notice provided for public comment on the following questions: (1) when should the opportunity and decision to participate in well costs take place relative to commencement of actual drilling operations; (2) by what means should the non-operating interests receive any production to which they are entitled after the operator has recovered a designated percentage of costs attributable to their parcels; and (3) should the ruling consider the applicability of the Petition to an owner who has not entered into an oil and gas lease? If so, what other factors or issues should be considered?
The comment period ended on December 26, 2002. The Department collected the comments and mailed them to WLS on January 17, 2003 and, pursuant to 6 NYCRR §619.1(e)(2), provided WLS with a ten day period from its receipt of the copies to respond to the comments.
WLS's Supplemental Petition in response to the public comments was received on January 31, 2003. WLS's Supplemental Petition raises a third issue concerning the well operator's responsibility to transport and market gas for the benefit of non-participating interests. See Supplemental Petition, ¶63 and ¶64. The Department received 17 comments during the comment period. The public comments are summarized in Appendix A.
II. Statement of Facts
The provisions under SAPA §204 authorize agencies to issue declaratory rulings. The decision to do so is at the discretion of the agency:
On petition of any person, an agency may issue a declaratory ruling with respect to (i) the applicability to any person, property, or state of facts of any rule or statute enforceable by it, or (ii) whether any action by it should be taken pursuant to a rule. (SAPA §204). (Emphasis added).
The Department's regulations also provide that the Department may decline to issue a declaratory ruling if the petition "raises issues which are ... the subject of department review pursuant to an application for a permit ... or other approval; or the declaratory ruling is an inappropriate means of resolving the issues raised in the petition; ... or the petition does not contain sufficient information to decide the issues presented." See 6 NYCRR §619.3(b), (d), and (f). In particular, WLS's inquiry regarding a ruling specific to Langdon Hill Field is a determination which is more appropriately resolved in an administrative hearing.2
For purposes of this declaratory ruling only, the Department will assume that the facts alleged in the petitions are true. The Department may take official notice of any fact not subject to reasonable dispute if it is either generally known or can be accurately and readily verified. 6 NYCRR §619.2(b). Hence, this declaratory ruling is based on the assumed facts provided by the Petitioner and any other readily verifiable facts which are pertinent to this matter. The Department will engage in no fact finding for purposes of this declaratory ruling and the binding effect of the ruling is limited by the assumed fact predicate. See Power Authority v. New York State Department of Environmental Conservation, 58 NY2d 427, 434; 461 NYS2d 769, 772 (1983) (6 NYCRR Part 619 "clearly indicate(s) the expectation that a declaratory ruling will be based on the facts developed in the petition and comments and set forth in the ruling as its assumed basis"). The Department will not assume the truth of statements which are legal conclusions. The effect of this declaratory ruling is prospective. See National Elevator Industry, Inc. v. New York State Tax Commission, 49 NY2d 538 (1980).
WLS is a corporation located at 1100 Conrad Industrial Drive, Ludington, Michigan. John Wilson is President of WLS. WLS and its affiliated organizations are involved in the oil and gas business in Michigan and other states. Petition at 1. WLS obtained oil and gas lease rights in Otsego, Tioga, Chemung, Steuben, and Schuyler Counties in New York covering 10,618 acres. Petition at 1.
III. Applicable Law
The authority of the Department to issue compulsory integration orders in a spacing unit in the absence of voluntary integration is set forth under ECL §23-0901(1), (2), and (3).3 These provisions were only infrequently invoked in New York prior to 1999. However, as described herein, ECL §23-0901(3) has recently been subject to frequent application and increased public hearings.
ECL Article 23, Titles 1, 3, 5, 7 and 9 require the Department to regulate the development, production and operation of natural gas and oil wells within the State in a manner that, as set forth in ECL 23-0301, will maximize the recovery of gas and oil, prevent the premature depletion or waste of these natural resources, and which will protect the correlative rights of all persons, including landowners and the general public.
ECL §23-0901(3) provides as follows:
In the absence of voluntary integration as permitted by section 23-0701 and after finding as required by subdivision 2 of this section, the department shall make an order integrating all tracts or interests in the spacing unit for development and operation. Each such integration order shall be upon terms and conditions that are just and reasonable. All operations including, but not limited to, the commencement, drilling or operation of a well upon any portion of a spacing unit covered by an integration order shall be deemed for all purposes the conduct of such operations upon each separately owned tract in the spacing unit by the owner or several owners thereof. That portion of the production allocated to each tract included in a spacing unit covered by an order of integration shall, when produced, be deemed for all purposes to have been produced from such tract by a well drilled thereon. Each such integration order shall authorize the drilling, equipping and operation or operations of a well on the spacing unit, and make provision for the payment of the reasonable actual cost thereof, plus a reasonable charge for supervision and interest. If there is any dispute as to such costs, the department shall determine the proper costs. 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.
6 NYCRR Part 553 sets forth the Department's well spacing regulations. Part 553.1 establishes "statewide spacing" requirements for wells - that the well be located no closer than 660 feet from the nearest boundary line of the lease, integrated leases or unit, and no closer to another well in the same pool than 1,320 feet. It is these requirements that Petitioners argue prevent them from developing a well of their own. The Department is directed to establish well spacing units whenever the Department finds, after notice and hearing, that the well spacing regulations are inadequate and spacing of wells is necessary to carry out the policy provisions of Section 23-0301 of the ECL. See, ECL §23-0501(2). Field-wide well spacing, involving the location of wells and the number of wells drilled into an underground reservoir containing an accumulation of oil or gas or both, is a resource conservation measure by which the legislative objectives can be achieved.
Where a spacing unit contains two or more separately owned tracts, or where there are separately owned interests in all or part of a spacing unit, ECL Article 23 requires integration of these multiple interests in order to further ECL §23-0301's policies. Titles 7 and 9 of ECL Article 23 deal, respectively, with voluntary and compulsory integration of interests in oil and natural gas pools and fields. ECL §23-0701 provides the opportunity for persons with separately owned tracts or interests in a spacing unit to voluntarily integrate them for development and operation of the spacing unit. When such voluntary integration does not occur, so that a spacing unit contains interests not controlled by the well operator through voluntary arrangements, the Department after notice and hearing shall issue an order integrating all tracts or interests in a well spacing unit for its development and operation. A compulsory integration hearing may be held in conjunction with the well spacing hearing required under ECL §23-0501(2). See ECL §23-0901(2) and (3); see also ECL §23-0501(9).
The form and manner of public notice and hearing under ECL Article 23 are governed by Sections 23-0305(4) and (6)4. Part 624 of 6 NYCRR establishes a public hearing process applicable to a wide variety of Department approvals issued in connection with Department regulatory programs.5 Part 624's provisions are applicable to the "notice and hearing" required prior to issuance of a well spacing and compulsory integration order under ECL §§23-0501(2) and 23-0901(2). The public hearing process provides a mechanism for development of a factual record for a decision on the proposed order. In this manner, the Commissioner's Decisions and Orders constitute fact-based decisions, taking into account the conditions then existing in the field, while protecting the rights of all affected persons in a just and reasonable manner, and providing for the efficient, maximized development of the natural gas resource. The crux of the two questions presented by Petitioner in its initial Petition and the third question presented by Petitioner in its Supplemental Petition have not been addressed substantively in prior Commissioner's Decisions and Orders.
Natural gas development in the Finger Lakes region of New York State has recently focused primarily on a rock formation, commonly referred to as the "Trenton-Black River" ("TBR") formation, that exists 3,000 to 12,000 feet and more below the ground surface. Industry's discovery of commercial natural gas deposits in the TBR has led to public hearings to address both well spacing and compulsory integration for eight different natural gas fields6 located in the southern Finger Lakes region since 1999.7 The Commissioner has issued final Decisions and Orders for six fields8 and two additional proceedings are pending before Administrative Law Judges.9 Administrative hearings for a number of additional natural gas field discoveries have yet to be convened.
A deep TBR well may drain natural gas from an area as large as 640 acres. Spacing units this large typically contain many separately owned tracts. Well operators seek to pool separately owned tracts by leasing oil and gas rights from mineral rights owners associated with the property, as well as through joint operating agreements or other voluntary arrangements among oil and gas interests. Such interests are not affected by compulsory integration. However, tracts in spacing units that are not controlled by the well operator must be compulsorily integrated pursuant to ECL §23-0901(3).
For each field, prior to hearing, Department staff initiated negotiations toward an executed stipulation which would allow the Department staff to attain the well operator's agreement in advance of the hearing regarding its development of the field. Each stipulation, by its terms, requests that the ALJ incorporate its terms into a final Commissioner's Decision and Order. The six Commissioner's Decisions and Orders that have been issued adopted the terms proposed in the Stipulations including their terms regarding compulsory integration.
Given the significance of the issues raised in the Petition, the Department solicited public comments which specifically relate to the provisions under ECL §23-0901(3), including the following:
- When should the opportunity and decision to participate in well costs take place relative to commencement of actual drilling operations;
- By what means should the non-operating interests receive any production to which they are entitled after the operator has recovered a designated percentage of costs attributable to their parcels; and
- Should the ruling consider the applicability of the Petition to an owner who has not entered into an oil and gas lease? If so, what other factors or issues should be considered?
A summary of the public comments is attached as Appendix A. Answering WLS's Petition necessarily incorporates public comments and WLS's Supplemental Petition.
V. Summary of Ruling
This summary addresses the two questions presented in the initial Petition and the third question presented in the Supplemental Petition.
First, unit interests which have not entered into leases, joint operating agreements or other voluntary arrangements with the well operator by 90 days after receiving notice that their interests may be affected by compulsory integration may be eligible to receive up to eight-eighths of the proportionate share of unit production attributable to their acreage after the well operator has recouped 200% of the expenses listed in ECL §23-0901(3). Such eligibility, however, is not an automatic entitlement as compulsory integration orders must be "just and reasonable" based upon field-specific factors. ECL Article 23 does not require the well operator to initiate specific offers. The Department does not involve itself in offers to enter into leases, joint operating agreements or other voluntary arrangements.
Second, the Petition seeks elimination of the "100% of cost" penalty upon non-participating interests where the non-participating interest has not been offered the opportunity to participate in the cost of the well. Such elimination is not possible because the 100% risk penalty charge is mandatory pursuant to statute.
Third, ECL §23-0901(3) does not include language regarding marketing and transporting gas. In the absence of a voluntary transportation and marketing arrangement between the well operator and the non-consenting interest owner, a just and reasonable compulsory integration order issued by the Department would require, inter alia, that the non-consenting interest owner make arrangements to receive gas in kind or be subject to gas balancing provisions.11
ECL §23-0901(3) states, in pertinent part, that the portion of the production attributable to each tract in a unit shall be deemed to have been produced from such tract by a well drilled thereon. Furthermore, if one of the owners pays the expenses for the benefit of another person, then such owner shall be entitled to the share of production accruing to such other person, less a royalty not to exceed one-eighth, until the market value of such other person's share of production equals twice such other person's share of the cost.12
When interpreting statutes, one must consider their purpose and the objectives to be accomplished. People v. Cypress Hills Cemetery, 208 AD2d 247, 251(2d Dept. 1995). The legislative intent is the controlling principle, and the primary consideration in interpreting the statute is to ascertain and give effect to that intent. Id. Where words of a statute are free from ambiguity and express plainly, clearly and distinctly the legislative intent, resort may not be had to other means of interpretation (McKinney's Statutes §76). Where the legislative intent of a statute cannot be determined from a literal reading, one may go outside the statute to try to find its true meaning. Id. Where there is ambiguity about the meaning and intent of a statute, it is proper to resort to its legislative history for clarification. Id. at 252. Where there is doubt as to the meaning of the language of a statute, various extrinsic matters throwing light on the legislative intent may be considered (McKinney's Statutes §120). Memoranda and letters submitted to the Governor recommending his signature or disapproval of a bill are extrinsic matters which may be considered.
In statutory construction, commonly used words must be given their usual and ordinary meaning, unless it is plain from the statute that a different meaning is intended. Regan v. Heimbach, 91 AD2d 71, 72 (3d Dept. 1983). While general words in a statute ordinarily should be given their full significance, their meaning may, in a proper case, be restricted. Statewide Roofing v. Eastern Suffolk Bd., 173 Misc.2d 514, 517, 661 N.Y.S.2d 922, 925 (Sup. Ct. Suffolk Cty. 1997). Words, however general, must yield to their necessary particular application. Id. at 518. A construction of a statute which tends to sacrifice or prejudice the public interests or welfare is not favored and should be avoided if possible. Id. The statute's provisions must be given a sensible and practical construction that furthers rather than frustrates that statutory purpose. Long v. Adirondack Park Agency, 76 NY2d 416, 420 (1990).
The Department has been specifically granted a number of powers by the Legislature under ECL Article 23. One of these powers that has been assigned to the Department is the authority to issue compulsory integration orders. See ECL §23-0901. The Department is not authorized to go beyond the language of ECL §23-0901.
Pursuant to its police powers, New York, like most oil and gas producing states, enacted spacing and integration legislation to protect against overproduction and waste of the oil and gas resource. The statutory language of ECL §23-0901 is similar in many respects to language found in other state statutes. Compulsory integration and unitization is an important regulatory authority created to conserve oil and gas, prevent waste, and protect correlative rights. Prior to state regulation of the development, production and operation of oil and gas, owners of mineral interests were able to exploit oil and gas with little constraint. Compulsory pooling is "now available in nearly all producing states ... . Pooling is important in preventing the drilling of unnecessary and uneconomic wells, which will result in physical and economic waste." See, Williams and Meyers, "Oil and Gas Law," Chapter C, p. 317.
A. Legislative History
The Legislature passed, and the Governor signed into law, Chapter 959 of the Laws of 1963 which, among other changes, amended the Conservation Law of 1911, adding a new article 3-a entitled "Oil and Gas." Chapter 959 of the Laws of 1963 was recodified as ECL Article 23. In conjunction with the addition of the new Chapter 959, the Laws of 1963 added a section 79 explicitly providing authority to the Department "to make an order integrating all tracts or interests in the spacing unit for the development and operation thereof. Each such integration order shall be upon terms and conditions that are just and reasonable."
Section 79 of the Laws of 1963, subdivision 1, was amended by Chapter 707 of the Laws of 1970 by clarifying that former subdivision 2 pertains to integration of interests within individual spacing units whereas former subdivisions 3 through 11 pertain to the operation as a unit of a whole oil and gas pool. Both this provision and former Conservation Law §79 are now included in ECL §§23-0901(1)-(3) and 23-0901(4)-(12).
Chapters 959 and 707 of the Laws of 1963 and 1970, respectively, added the statutory language which is the subject of this declaratory ruling. In its Memorandum supporting the comprehensive oil and gas legislation of 1963, the Joint Legislative Committee on Interstate Cooperation found that:
It also provides a comprehensive conservation law ... and patterned closely after the recommendations of the Interstate Oil Compact Commission and the laws already in existence in other states.
The bill provides for regulation of oil and gas production in the interests of good conservation practice, safety, and the protection of the rights of persons having interests in oil and gas properties.
In the excerpt from the Department's Memorandum in Support of ECL Article 23, the Department notes that:
It is recognized that legislation alone does not find oil and gas reserves. However, good conservation legislation will encourage oil and gas operators to search for these resources in the state. The bills recognize and protect the public interest in conservation and in the prevention of waste and at the same time provide appropriate safeguards for both landowners and operators.
Bill Jacket excerpt from Department's Memorandum in Support of ECL Article 23 (April 15, 1963).
Comments of other governmental agencies and oil and gas industry representatives on the bill lend further support to the conclusion that Chapters 959 and 707 were intended to clarify and broaden the State's jurisdiction to regulate oil and gas development and production in the interests of good conservation practice, safety, and protection of the rights of persons having interests in oil and gas properties.
B. Definition of "Owner"
New York's oil and gas law is founded on three premises: (1) that mineral interest owners have the right to produce the oil and gas under their land and are said to have a profit-a-prendre, see Banach v. Home Gas Company, 199 N.Y.S.2d 858, 861 (Sup.Ct., Schuyler Cty. 1960), aff'd 12 AD2d 373 (3d Dept. 1961); (2) that the rule of capture applies, see Reeland v. Moore Oil Co., Inc., 242 AD 462, 465-66 (4th Dept. 1934); Envirogas, Inc., v. Chu, 114 AD2d 38, 42 (3d Dept. 1986); and (3) that the rule of capture is modified by the statutory duties upon the Department to prevent waste, provide for the greater ultimate recovery of oil and gas, and to protect the correlative rights of all owners [ECL §23-0301].
ECL §23-0101(11) defines "owner" as follows:
"...[o]wner means the person who has the right to drill into and produce from a pool or a salt deposit and to appropriate the oil, gas or salt he produces either for himself or others, or for himself and others."
The language in this statutory provision does not include any qualifying language regarding size or location of tracts as a prerequisite to a "right to drill." This definition of "owner" is broad enough to permit a statutory pooling and integration order "integrating all tracts or interests in the spacing unit for development and operation." ECL §23-0901(3) (Emphasis added).
An analysis of the legal foundation for pooling and integration requires a brief review of the common law rule of capture. The right to produce oil or gas has historically been analogized to the law of ferae naturae that a property owner had no property interest in oil and gas until reduced to possession. The concept was explained and developed in Wagner v. Mallory, 169 NY 501 (1902) where the Court of Appeals held that a person could drill a well upon his real property and drain oil, including oil underneath his neighbor's land, and that consequently no title to oil vested in a lessee until it was taken from the ground and reduced to possession. Wagner, 169 NY at 505. The theory of ownership of oil and gas in New York State was stated in Envirogas, Inc., v. Chu supra, citing to Wagner v. Mallory, supra, wherein the court stated: "Ownership of the land does not entail ownership of the gas. Nor does the common lease provision transferring the exclusions and unconditional right to extract gas suggest a reservation in the lessors of ownership of the gas." Envirogas, 114 AD2d at 42.
Under the rule of capture, a property owner does not have ownership of the subsurface oil and gas until captured, but the owner does have the right to search for, develop, and produce the oil or gas. Thereby, an owner of property where the mineral interests have not been severed through a mineral deed or otherwise conveyed to others has the right to drill, explore, develop, and produce the minerals.13 This qualified ownership theory, frequently termed the "correlative rights" theory, is reflected in the statutory definition of "owner" as set forth under ECL §23-0101(11). In other words, a person does not own the subsurface oil and gas, but possesses the right to explore for the resources. That right may be exercised by the mineral interest owner by drilling a well with a permit issued by the Department. In the event the owner's acreage is too small to develop a well under the Department's well spacing requirements, the owner could seek to pool acreage through agreements with neighbors to hold sufficient acreage to meet spacing requirements14 or could apply for a variance from well spacing requirements in order to obtain a drilling permit15 or could seek to negotiate an agreement with a drilling operator to share costs up front. Most owners exercise the right to drill, explore, develop and produce the minerals by leasing the mineral interest to a lessee who then accepts an implied covenant to develop the minerals. Thus, an "owner" has the right to explore for the oil or gas and may exercise this right in accordance with the regulatory scheme.16
Absent state regulation, under the rule of capture, a landowner, however small the tract, could drill many wells on the land in order to "capture" the resource. The comprehensive statutory and regulatory program set forth under ECL Article 23, Titles 1, 3, 5, 7 and 9, represents a legislative modification of the rule of capture to ensure that the development and operation of the oil and gas resource protects the public interest by preventing waste and protecting correlative rights.
C. Definition of Correlative Rights
ECL §23-0301 requires the Department to regulate oil and gas development in such a manner that will prevent waste, will maximize the amount of oil and gas recovered, and will protect correlative rights and the rights of all persons. To protect correlative rights is defined in regulation as to:
"... afford a reasonable opportunity to each person entitled thereto to recover or receive the oil or gas beneath his tract or tracts or the equivalent without being required to drill unnecessary wells or to incur other unnecessary expense to recover or receive such oil or gas or its equivalent." (6 NYCRR 550.3(ao), [emphasis added]).
Under a strict interpretation of this provision, correlative rights are protected if the owner has the opportunity to receive oil or gas, or the equivalent thereof, attributable to the owner's acreage when it is produced regardless of how, when or by whom it is produced. Having correlative rights in a common source of supply does not mean that each owner is guaranteed to recover or receive a proportionate share of the oil or gas in the reservoir, but only that each owner shall be afforded the opportunity to receive or be compensated for production on a reasonable and fair basis. Once the state has ensured the opportunity to receive the gas or the equivalent, it has protected the correlative rights of a party; it need not ensure a share of production to a party. See Kramer and Martin, The Law of Pooling and Unitization, 3rd Ed., Vol. 1, §5.01(4). Owners desiring control of how, when and by whom gas is produced may take affirmative steps, such as pooling leases to gain control of sufficient acreage to meet well spacing requirements, applying for a well variance or seeking voluntary integration agreements. If no well is drilled and no oil or gas is produced, then no correlative rights exist.
It bears note that the regulatory definition of the term "protect correlative rights" at 6 NYCRR §550.3(ao) refers to persons and is not limited to owners, operators, lessees, lessors or any other category of person. The non-participating or non-consenting interests affected by the statutory language of ECL §23-0901(3) are also referred to as persons in the statute. Neither 6 NYCRR 550.3(ao) nor ECL §23-0901(3) include any qualifying language regarding size or location of tracts.
The form and manner of notice to unleased mineral owners regarding an opportunity to participate in the formation of a well spacing unit and the compulsory integration process is governed both by the procedural regulations of the Department and by state and federal constitutional requirements. ECL §§23-0305(4) and (6) and 6 NYCRR Part 624 establish the type and manner of notice to be provided. An integration order cannot be issued without first holding a hearing on whether the integration of interests in a spacing unit, under conditions then existing in the State or in the field to be affected, is necessary to carry out the policies set forth in ECL §23-0301. ECL §23-0901(2). This hearing may be held in conjunction with the hearing required by ECL §23-0501(2). ECL §23-0901(2).
Neither ECL §§23-0501 nor 23-0701 nor 23-0901 specify the type of notice nor the content of the notice that must be provided for proposed orders for well spacing and integration. None of these statutory provisions explicitly require that the well operator initiate negotiations by offering specific opportunities to unleased owners as a prerequisite for compulsory integration. ECL Article 23, Title 7, provides the opportunity for voluntary agreement among "interested persons" to "integrate their tracts or interests for the development and operation of the spacing unit." See ECL §23-0701. Pursuant to ECL §23-0501(9) an order establishing spacing units must provide a time period of not less than ninety days for voluntary negotiations among uncontrolled interests prior to the compulsory integration procedure mandated by ECL §23-0901(3). Voluntary agreements negotiated before or during the 90 day period and reached outside of the governmental context obviate the necessity for compulsory integration. See ECL §23-0901(2).
While ECL §§23-0501, 23-0701, and 23-0901 do not explicitly require the Department to inform mineral interest owners of the specific provisions applicable to well spacing, voluntary integration, and compulsory integration including specific terms for integrating interests, the Department is mandated by statute to protect "the correlative rights of all owners ..." (ECL §23-0301). Consideration of whether due process notice requires the Department to notify all owners of every option available for exercising their right to drill, explore or otherwise receive or be compensated for production "... must begin with a determination of the precise nature of the government function involved as well as of the private interest that has been affected by government action." Cafeteria and Restaurant Workers v. McElroy, 367 U.S. 886, 895 (1961). The private interest affected by the State's regulation of oil and gas interests is defined as the "reasonable opportunity... to recover or receive the oil or gas beneath his tract or tracts or the equivalent thereof ... ." See 6 NYCRR §550.3(ao). For notice to meet due process requirements, it "must be made in a meaningful manner, and therefore the content of the notice needs to state the required information and must afford a reasonable time for those interested to make their appearance."17 The State's governmental interest is to regulate the oil and gas natural resources in a manner that protects the rights of all owners.
Reasonable notice requires that owners possess sufficient information to act to protect their own interests. Where notice that compulsory integration may occur is given, together with a description of the proposed terms, citation to the appropriate laws and regulations and notice of the hearing date and location, sufficient information is provided for owners to act to protect their interests. The statute does not specify or favor voluntary agreements or leasing over compulsory integration as the mechanism for the protection of correlative rights. Department approval of field-wide spacing rules and compulsory integration orders under the statute requires protection of correlative rights. The administrative hearing process pursuant to 6 NYCRR Part 624 ensures the maximum amount of public notice and participation available under Department regulations.
E. Risk and Penalty
ECL §23-0901(3) provides the Department with the authority to issue compulsory integration orders in the absence of voluntary integration of tracts or interests within the spacing unit "upon terms that are just and reasonable." This vested authority mandates that the Department's orders of integration be issued on a case-by-case basis depending on existing conditions achieving the objectives set forth in ECL §23-0301.
New York's well spacing and compulsory integration statute is classified as a "risk penalty" statute in terms of how non-consenting owners are addressed.18 This statutory "risk penalty" is invoked in situations where one or more of the owners drills a well or pays to drill a well "for the benefit of another person." In this statutory language regarding cost recoupment, the non-participating interest is "another person" or "such other person" and the definition of "protect correlative rights" at 6 NYCRR §550.3(ao) refers to "each person."
"All risk penalty statutes seek to achieve the objective of compensating the risk-taker and preventing the free ride by the non-consenting owner. As such, the penalty provisions provide an incentive for voluntary participation with the proposed operator on terms worked out in the marketplace rather than in a governmental context."19 The "risk penalty" pooling statutes allow the unleased owner the opportunity to lease or reach a voluntary agreement to share in the costs and production from the spacing unit. If the costs are not shared, the non-consenting owner receives production in kind or its equivalent only after the risk penalty charge.
Accordingly, ECL §23-0901(3) provides that under a compulsory integration order, non-consenting interest owners pay their proportionate part of the spacing unit drilling, equipping, and operating expenses, plus a reasonable charge for supervision and interest and a 100% penalty, which is withheld by the well operator from the proceeds of production. In other words, the well operator is entitled to the non-consenting interest owners' share of production, except for a maximum one-eighth royalty, until the market value of production equals 200% of the non-consenting interest owners' proportionate share of the costs of drilling, equipping and operating the well. The 100% risk charge is mandatory pursuant to statute [ECL §23-0901(3)], and compensates the well operator for its risk. In the event of cost disputes, ECL §23-0901(3) provides Department authority for resolution.
Thus, as set forth above, natural gas in New York is not owned prior to production. The risk-penalty concept embodied in the statute ensures that entitlement to production beyond the royalty share requires assumption of some risk, either through direct participation in exploration and development costs when incurred, or by assessment of 200% of such costs, plus a charge for supervision and interest, prior to receipt of any production.
F. Receipt of Allocated Working Interest Share of Production by Non-Participating Interests: Petitioner's Supplemental Petition
Petitioner's Supplemental Petition concludes that "the designated operator of the unit has a responsibility to transport ... and to market gas for the benefit of all the owners thereof" and "the designated operator has the duty to transport the gas to a gas transmission line where the gas can be marketed for the benefit of all owners within the spacing unit." Supplemental Petition, Para. No. 63 and 64. This assertion is without merit.
ECL §23-0901 does not include explicit statutory language allowing the Department to compel a well operator to market and transport gas attributable to the tracts which are compulsorily integrated subsequent to the 200% cost recoupment. It is preferable for unit interests to agree on marketing and transportation or gas balancing terms so that all produced gas can be allocated among all owners from the time production commences. The Department's position is that it is more practicable for unit interests to agree on transportation or gas balancing terms so that all produced gas can be allocated among all owners from the time production commences. However, ECL §23-0901(3) does not provide the basis for Department action to order a well operator to market and use its gas gathering pipeline to transport gas owned by others in the absence of a voluntary agreement to do so. Thus, the compulsory integration order must include terms that are just and reasonable for allocation of gas-in-kind and gas balancing where necessary as the result of lack of gas transportation and marketing agreements.
Petitioner further claims that if the well operator, in the absence of a separate marketing and transportation agreement, takes its gas in kind but the non-consenting interests do not, then this action "would constitute conversion of property owned" by the non-consenting interests and "the operator would have had no authorization to transfer title to such portion of the gas." Supplemental Petition, ¶66. This claim similarly is unsupported by the plain statutory language.
It is well settled that the well operator bears, at most, the right, but not the obligation, to transport and market production on behalf of the other interests. The gas attributable to other interests is not converted nor is title transferred if the well operator does not assert its right to transport and market. The other interests have the opportunity to take in kind or separately dispose of their allocated production. The policy provision of ECL §23-0301 requiring protection of correlative rights is satisfied if all owners reach a voluntary agreement regarding transporting and marketing the gas. In the absence of an agreement with the operator, a non-consenting owner may arrange for its own transporting and marketing of gas.
The Department's construction of this provision is reasonable. The weight of authority in cases involving language regarding marketing and transporting gas arising from compulsory integration conclude that "no fiduciary duty (of the operator) with respect to marketing arose from the forced integration."20 Standard industry practice involves use of a "Model Operating Agreement" (American Association of Petroleum Landmen Form 610) which provides mechanisms for the non-operating interests to either take gas in kind, enter into gas balancing agreements or grant the operator the revocable right to market and transport gas on their behalf.
ECL §23-0901(3) provides for compulsory integration orders authorizing "the drilling, equipping and operation or operations of a well on the spacing unit... ." The statute does not explicitly include language regarding marketing and transporting gas in the absence of a joint agreement between the operator and the non-consenting interest owner. The lack of specific statutory language; cases involving marketing and transporting; and industry practice support the Department's conclusion that it is the responsibility of the non-consenting interests after compulsory integration to make their own arrangements for transporting and marketing any production they receive.
VII. Just and Reasonable Integration Orders
Finally, it bears mention that the Petition raises the issue of the "just and reasonable" standard under ECL §23-0901(3). See Petition ¶37. Integration orders under ECL §23-0901 must be "just and reasonable" and take into account "conditions then existing in this state, or in the field or pool to be affected ... to carry out the policy provisions of section 23-0301."
Allocation of production revenue occurs only by virtue of an order of integration, which must take into account "conditions then existing ... in the field or pool to be affected," and be "just and reasonable." ECL §§23-0901(2), (3). This statutory language qualifies the non-consenting mineral interest owners' eligibility to receive an allocation of production revenue in a well spacing unit subject to the compulsory integration process. The legislature recognized that integration orders under ECL §23-0901 must be based upon terms and conditions that are just and reasonable and take into account the specific facts developed during the administrative hearing process. In Envirogas v. Con. Gas Supply, 98 AD2d 119, 122 (4th Dept. 1983), the court described the statutory purpose of ECL Article 23 as "to permit the greatest extraction of oil or gas with the least waste, to eliminate unnecessary drilling and to permit the most equitable distribution of royalties among the landowners (see ECL §23-0301)." (emphasis added). The balancing of equities that the Legislature recognizes in the statute requires development of a factual record upon which a Commissioner's record-based Decision and Order is based.21 A declaratory ruling cannot be substituted for the unique factual record developed under 6 NYCRR Part 624.
Compulsory integration proceedings are not coercive proceedings by or against any owner. On the contrary, the Commissioner's Decisions and Orders must afford each owner of a tract or interest its just and equitable share of the oil or gas, or just and equitable compensation. Past Commissioner's Decisions and Orders have successfully balanced the rights of all owners whose property overlies a common pool or field, allocated natural gas production in compulsorily integrated units, met the policy mandates of ECL §23-0301, and fulfilled the "just and reasonable" standard of ECL §23-0901(3).
ECL Article 23 affords all owners the opportunities to enter into leases, joint operating agreements or other voluntary arrangements to participate in the working interest in a well. To date, the majority of owners have not demonstrated an interest in drilling or participating in wells.22 Integrating unleased owners who have not taken affirmative steps to drill or participate in the well as one-eighth royalty interests provides that the gas attributable to unleased acreage will be produced, marketed and transported without the unleased owners assuming any risk or liability associated with drilling wells and constructing pipelines.
Leases and voluntary agreements with the well operator are fair and acceptable practices and assist to meet the mandate in ECL §23-0301 to provide for a greater ultimate recovery. Incentives to owners to lease despite eligibility to receive eight-eighths if they remain unleased include the signing bonus, the fact that many tracts will never be drilled or included in a spacing unit and absence of expenses or liabilities associated with working interest ownership. Holding out for eight-eighths is only beneficial if a well is drilled and establishes commercial production of sufficient value for the well operator to recoup 200% of costs and the landowner is assured that the gas attributable to his or her acreage will be marketed and transported. Whether or not all parties are in agreement that the 100% penalty to compensate for risk that is included in the statutory 200% cost recoupment is truly commensurate with actual risk involved in drilling TBR wells is a matter of legislative judgment that is set forth by statute.
As discussed above, this declaratory ruling addresses Petitioners' three questions as presented in WLS's Petition and Supplemental Petition. Insofar as the query regarding a ruling specific to Langdon Hill Field is concerned, that portion of the request is denied. The first question presented by WLS's initial Petition is whether non-participating interests in a spacing unit are entitled to receive eight-eighths of the proportionate share of unit production attributable to their acreage after the well operator has recovered 200% of the expenses listed in ECL §23-0901(3). The second question qualifies this first question by seeking elimination of the "100% of cost" penalty upon non-participating interests where the non-participating interest has not been offered the opportunity to participate in the cost of a well. WLS's Supplemental Petition presented a third question concerning the transport and marketing of gas.
To date, Commissioner's Orders incorporating stipulations have fairly allocated natural gas production in compulsorily integrated units, met the policy mandates of ECL §23-0301, and satisfied the "just and reasonable" standard of ECL §23-0901(3). Petitioner's declaratory ruling request presents specific circumstances that were not necessary to address in previous Commissioner's Orders. That is, Petitioner seeks a ruling construing the "risk penalty approach with regard to charging costs to an owner... to the limited extent necessary to permit the drilling party to recover his costs plus a 100% penalty." Petition at p. 14. A compulsory integration order can be issued by the Department only after all owners who have not voluntarily agreed have been given notice of and offered the opportunity for a public hearing. Unit interests which have not entered into leases, joint operating agreements or other voluntary arrangements with the well operator by 90 days after receiving notice that their interests may be affected by compulsory integration may be eligible to receive up to eight-eighths of the proportionate share of unit production attributable to their acreage after the well operator has recouped 200% of the expenses listed in ECL §23-0901(3). No more than one-eighth of this share is considered a royalty interest and is determined on the same basis as the royalties attributable to most of the leased acreage in the unit. Recoupment of 200% of the appropriate expenses is out of the remaining seven-eighths. However, integration as a royalty interest should continue as an available option in situations where owners do not choose to lease, participate, drill their own wells or build their own pipelines. Such compulsory integration as a royalty may be just and reasonable depending upon the factual circumstances. Moreover, an unleased owner should not be forced to take on the responsibilities or liabilities of a working interest owner.
Under voluntary integration, where the integrated owner agrees to participate in its proportionate share of the cost of drilling, equipping, and operating the well, this participation can be deemed a purchase or a buy-in of the proportionate seven-eighths working interest. Conversely, the owner affected by application of a risk penalty through a compulsory integration order, buys-in or purchases the proportionate seven-eighths working interest through the operator's withholding of costs from production plus assessment of the penalty. Under the applicable New York ownership theory of rule of capture, the gas is only owned upon production. Nevertheless, there is an inherent right in the ownership of land of the right to explore for oil and gas and reduce it to possession. The action of one well operator with respect to a common source of supply inevitably affects the rights of all other interest owners in the same common source of supply. The voluntary integration statute allows all owners to participate as working-interest owners in the integrated unit. In the absence of voluntary integration, the statutory alternative designates the payment of 200% of costs pursuant to a field-specific just and reasonable compulsory integration order. It is through these two provisions that the working interest can be obtained by an owner who is not the operator. Regarding the third question, ECL §23-0901(3) does not include language regarding marketing and transporting gas. In the absence of a voluntary transportation arrangement between the well operator and the non-consenting interest owner, a just and reasonable compulsory integration order issued by the Department would require, inter alia, that the non-consenting interest owner make arrangements to receive gas in kind or be subject to gas balancing provisions.
The effect of this ruling should not be interpreted as interfering with or constraining existing or future lease agreements, joint operating agreements or other voluntary arrangements among oil and gas interests. Details on the specific procedures followed with respect to non-operating lessees and unleased owners should be within the framework set forth herein, but factually developed through the public hearing process. A declaratory ruling cannot be substituted for an administrative hearing under 6 NYCRR Part 624, which would develop a factual record upon which a Commissioner's Decision and Order is based. All affected parties who receive notice of a compulsory integration proceeding are offered the procedural and substantive due process protections set forth in the applicable statutory and regulatory provisions. Persons who seek to capture the oil and gas beneath their property are entitled to do so, but their efforts are subject to New York's statutorily declared policy and applicable statutory and regulatory requirements.
Dated: January 29, 2004
Albany, New York
Deputy Commissioner and General Counsel
1. The petition for a declaratory ruling was filed pursuant to Section 204 of the State Administrative Procedures Act and Part 619 of Title 6 of the New York Codes, Rules and Regulations.
2. An administrative hearing under 6 NYCRR Part 624 on well spacing and compulsory integration in Langdon Hill Field has not yet been scheduled.
3. ECL §23-0901(1) and (2) pertain to both compulsory integration within individual spacing units and unitization of an entire pool or part thereof. ECL §23-0901(1) establishes that §23-0901(3) is specifically applicable to integration within individual spacing units. Subdivisions (4) through (12) are specifically applicable to unit operation and not to compulsory integration within individual spacing units.
4. ECL §23-0305(4) provides that "[a]ny notice required by this article shall be given by the Department by any one or more of the following methods (a) personal service, (b) publication in one or more issues of a newspaper of general circulation in the county where the land affected or some part thereof is situated, or (c) by registered or certified mail addressed, postage prepaid, to the last known mailing address of the person or persons affected. The date of service shall be the date on which service was made in the case of personal service, the date of first publication in the case of notice by publication, and the date of mailing in the case of notice by mail. The notice shall specify the style and number of the proceeding, the time and place of the hearing, and shall briefly state the purpose of the proceeding. Should the Department elect to give notice by personal service, such service may be made by any officer authorized to serve process, or by any agent of the Department in the same manner as is provided by law for the service of process in civil actions in the courts of the state."
5. "Permit" under 6 NYCRR §624.2(x) "means any permit, certificate, license or other form of department approval, other than an enforcement order, issued in connection with any regulatory program administered by the department." See also 6 NYCRR §624.1(a)(6), describing the applicability of Part 624 to a wide variety of regulatory circumstances.
6. A "field" is defined at ECL §23-0101(6) and 6 NYCRR 550.3(p) as the area underlaid by one or more pools. A "pool" is defined at ECL §23-0101(14) and 6 NYCRR 550.3(ah) as an underground reservoir containing a common accumulation of oil or gas or both. Pursuant to 6 NYCRR §556.7(b), the Department assigns a specific name to each pool or field.
7. A large number of public comments and Petitioners' Supplemental Petition discuss whether the current 200% risk penalty is inadequate to compensate a party drilling wells to the depth of the TBR formations. See Supplemental Petition, ¶53. Whether New York's current statutory provisions regarding spacing, pooling and unitization are inadequate in light of the TBR formation is a determination for the Legislature and beyond the scope of this Declaratory Ruling.
8. Glodes Corners Road, Muck Farm, Wilson Hollow, Quackenbush Hill, Cutler Creek, and Pine Hill Fields. DEC Project Nos. DMN-99-1, DMN-01-1, DMN 02-2, and DMN 01-4.
9. Terry Hill South and County Line Fields. DEC Project Nos. DMN-02-3 and DMN 02-5.
10. WLS, by Petition dated September 17, 2002, seeks a separate declaratory ruling relative to the effect of Stipulations in the decision-making process. A separate declaratory ruling, DR #23-13, addresses this Petition.
11. To receive gas in kind means receipt of gas itself at the wellhead instead of monetary compensation. To receive gas in kind, a non-consenting interest owner must make arrangements to transport and market the gas. When a non-consenting interest owner fails to either enter into a voluntary transportation and marketing arrangement or take gas in kind, gas balancing is the method by which the non-consenting interest owner receives its gas or compensation therefor. A just and reasonable compulsory integration order would require that gas balancing occur when the non-consenting interest owner makes arrangements to receive gas, or when the well operator has produced all the gas to which it is entitled, or when the well is depleted. The result is that the non-consenting interest owner receives its share of gas at a later date or as a cash settlement when the well is depleted.
12. The owner paying the expenses pursuant to this provision shall herein be referred to as the "well operator." The well operator may have voluntary participation arrangements with other unit interests. The party referred to as "another person" or "such other person" is herein called a "non-participating interest" or "non-consenting interest."
13. Burk, Joan, Petroleum Lands and Leasing, Ch. 2, p.13, Penn Well Publishing Co. (1983).
14. Section 552.1 makes it illegal for a party to drill a well without a drilling permit from the Department. Section 553.1 establishes "statewide spacing" requirements for wells, namely that the well be located no closer than 660 feet from the nearest boundary line of the lease, integrated leases or unit, and no closer to another well than 1,320 feet in the same pool. It is these requirements that the Petitioners argue prevent them from developing a well of their own.
15. Section 553.4 provides for variances from the well spacing requirements.
16. In the recent Decision and Judgment in Caflisch, et al. v. Crotty, et al., the Supreme Court, Chemung County found that petitioners were not "owners" under the specific facts that were developed during that administrative hearing process, citing to their lack of a drilling permit, their insufficient acreage to obtain one, and their lack of a drilling lease. Caflisch, et al. v. Crotty, et al., Supreme Court, Chemung County, Index No. 2003-1579 (December 31, 2003). While the Court and the Department have viewed these as among the appropriate field-specific facts to consider in fashioning a just and reasonable compulsory integration order (see Section VII., infra), as explained above, an owner's "right to drill" can be exercised through agreements with others even in the absence of a drilling permit or sufficient acreage.
17. Wegman's Food Markets, Inc., v. State of New York, 76 AD2d 95, 98 (3d Dept. 1980).
18. Journal of Energy Law and Policy, "Compulsory Pooling and Unitization: State Options in Dealing with Uncooperative Owners," 7 Journal of Energy Law and Policy 255, 258, Bruce M. Kramer (1986).
20. Gerald J.W. Bos & Co., Inc. v. Harkins & Co. and Transcontinental Gas Pipe Line Corp. (Kramer and Martin, Vol. 1, p. 19-116); Arkansas Louisiana Gas Co. v. Southwest Natural Production Co. (Kramer and Martin, Vol. 1, p. 19-114.).
21. In the recent Decision and Judgment in Caflisch, et al. v. Crotty, et al., the Court dismissed the petition/complaint challenging a Department integration order under ECL Section 23-0901. The Court recognized that integration orders must take into account field-specific facts, and held that under the circumstances presented the Commissioner's order properly implemented the statutory and regulatory provisions under ECL Article 23. Caflisch, et al. v. Crotty, et al., Supreme Court, Chemung County, Index No. 2003-1579 (December 31, 2003).
22. Specifically, none of the 89 unleased landowners in the first 35 compulsorily integrated TBR spacing units established by order of the Commissioner or Division Director sought to be offered an opportunity to participate in the wells or receive more than a one-eighth royalty after compulsory integration. These 89 unleased owners controlled 2.87% of acreage in the 35 units. Owners of nearly all of the remaining 97.13% of acreage chose to lease to the well operator even though they were not prohibited from seeking to enter into other voluntary arrangements. They were also not prohibited from seeking to drill their own wells pursuant to ECL §23-0501(3) and (5), but none chose to do so. In 16 pending units (three in Wilson Hollow Field, eight in Terry Hill South Field and five in County Line Field), only four of 54 unleased owners, controlling 0.26% of acreage in the 16 units, are seeking to receive eight-eighths of production after cost recoupment.
Buck Mountain Associates ("BMA"), a company currently holding leases in the TBR formation, expresses support for the generalized conclusions implied throughout the Petition. BMA did not provide specific responses to the questions set forth in the public notice, but did indicate support for the applicability of the generalized conclusions in the Petition to unleased interests. BMA did not provide any historical or industry practice information in support of its position. BMA requests a public hearing be held regarding the proposed declaratory ruling.
Columbia Natural Resources, Inc. ("CNR"), initial explorer and producer of the TBR formation in New York, requested an extension to the deadline for responses. CNR did not indicate its position on the requested declaratory ruling, did not provide responses to any of the questions in the public notice, and did not provide any historical or industry practice information regarding the Petition.
Byron J. Cook of Cook Investments ("BJCook"), a geologist, lawyer and producer with experience and professional affiliations in Michigan, supports the generalized conclusions implied throughout the Petition. In response to public notice, BJCook indicates that the opportunity and decision to participate in well costs should be at the time the spacing unit is established - before or after drilling. BJCook further suggests that "standard terms" of a Joint Operating Agreement (JOA) be the method by which uncontrolled interests receive their share of production and that operator should be required to market all gas produced from the well. BJCook expresses support for the generalized conclusions in the Petition regarding unleased interests and that there should be no distinction between unleased owners and lessees. BJCook does not provide any substantive historical or industry practice analysis in support of his positions.
Jeffrey D. Cook ("JDCook"), a Petroleum Landman with experience and professional affiliations in Michigan, supports the generalized conclusions in the Petition. JDCook did not provide responses to the first or second questions in the public notice, but did indicate support for the applicability of the Petition to unleased interests. JDCook does not provide any substantive historical or industry practice analysis in support of his positions; however he does negatively comment on John H. Heyer's position (summarized below; "Heyer").
Elexco Land Services, Inc. ("Elexco"), a Michigan corporation specializing in real estate/lease acquisition, qualified to conduct business in New York, with TBR experience in the Mid-Atlantic and Northeast United States as well as various provinces in Canada, supports the implied conclusions in the Petition, but through legislation instead of a declaratory ruling. Elexco did not indicate any position relative to the second question presented in the Petition, but indicated that a change in legislation would be required to support it. In response to the first public notice question, Elexco indicates that the opportunity and decision to participate in well costs should be before the well is drilled and within a prescribed time limit. However, for new field wildcat wells, Elexco believes that all uncontrolled interests should be considered non-consent and subject to the risk penalty. Elexco further states that the risk penalty premium should be based on the degree of risk and cost involved, and that the 200% risk penalty is inadequate for TBR wells based on their depth, expense and the geologic characteristics of the reservoir. In response to the second public notice question, Elexco suggests that the means by which non-participating interests should receive their share of production is by the well operator transporting and selling the non-participating interest owner's share(s) of gas; it also states that the well operator should be able to recover a reasonable tariff on this transaction; and that proponents advocating the use of JOA terms should not be able to choose only those conditions/attachments that benefit the non-participating interests. In response to the third public notice question, Elexco indicates support for the applicability of the implied conclusions in the Petition to uncontrolled interests, that is, that there should be no distinction between unleased owners and lessees. Elexco further states that an owner is any entity having an interest in property. Elexco provides discussion of TBR plays and typical success rates. Elexco also provides some discussion of Ohio, Michigan and Ontario hearing processes and responsibilities.
EOG Resources, Inc. ("EOG"), which has drilled deep exploratory wells in New York and characterizes itself as an operator, a non-operating lessee, and an unleased landowner, opposes the implied conclusions in the Petition. In response to the first public notice question, EOG indicates that the opportunity and decision to participate in well costs should be before drilling, and within 30 days of a Spacing Unit Order being issued. EOG also suggests that a specific time frame for drilling be established. In response to the second public notice question, EOG indicates that the means by which uncontrolled interests should receive their share of production is by way of an overriding royalty, and that EOG is not favor of applying the risk penalty to any uncontrolled interest. In response to the third public notice question, EOG states that unleased owners should be afforded the same options as non-operating lessees, but these options do not include the risk-penalty provision set forth in ECL §23-0901(3). EOG does not provide any historical or industry practice analysis in support of its positions.
Craig A. Haynes ("Haynes"), an attorney in Texas and other states with a practice relating to oil and gas issues and clients in Texas, New York and several other states, submitted comment letters dated December 23 and December 26, 2002 (through Thompson & Knight, LLP, wherein he is a partner) on behalf of Republic Royalty Company and Spinnaker Royalty Company, which owns mineral rights in New York and in several other states. Haynes indicates general support for the implied conclusions in the Petition, but provides no specific discussion of the second question presented in the Petition. In response to the first public notice question, Haynes indicates that the opportunity and decision to participate in well costs should be after the unit is formed, but before the well is drilled. Nevertheless, in the instance where a well is drilled before a unit is formed, Haynes believes that the opportunity to participate should still be available. In response to the second public notice question, Haynes lists several means by which non-operating interests may receive allocated production. These include separate marketing arrangements and gas balancing agreements. He states that "[i]n Texas those arrangements generally are not governed by statute and are the result of private contractual arrangements." Furthermore, "[s]plitting unit production between various working interest owners is done every day in most oil and gas producing states." He does not, however, answer the question with respect to non-operating interests who have not entered into a JOA and are, therefore, compulsorily integrated. In response to the third public notice question, Haynes indicates support for the applicability of the implied conclusions in the Petition to unleased interests and that there is no distinction between unleased owners and lessees. Haynes asserts that the process recently implemented in New York is unconstitutional and violates due process. He specifically cites the Interim Decision of October 28, 2002 in the matter of Quackenbush Hill Field as an example, and he also states that reliance upon Sylvania Corporation v. R. Stewart Kilbourne regarding constitutionality is erroneous. Haynes describes risk-penalty statutes and their application in several other states.
The second letter provided by Haynes responds to Heyer, summarized below. Haynes asserts, among other things, that Heyer's interpretation of the term "owner" is incorrect, and substantiates this with various references to Texas law. He states "[t]he operators attempt to exclude everyone but themselves from the New York forced pooling statute by reading the term 'owner' very narrowly. The operators contend an 'owner' means only a person who has a drilling permit, instead of the commonly-accepted meaning of the 'right to drill,'-i.e., someone that has the right to explore the mineral estate... ." Haynes also points out that, contrary to Heyer's comments, the rule of capture is irrelevant when a spacing unit is created.
Heyer, an attorney, on the behalf of clients described as operators of wells in New York State, opposes the implied conclusions in the Petition. Heyer equates the "right to drill" with attainment of a permit to drill and contends that the rule of capture remains in effect in New York. Heyer recommends that New York integrate all non-operator lessees as royalty interests not entitled to a share of production beyond a one-eighth royalty. Heyer does not specifically address the second question presented in the Petition nor does he respond to the first two public notice questions. In response to the third public notice question, Heyer asserts that unleased owners should receive only a one-eighth royalty. Heyer followed his comment letter with a second letter stating that his comments were submitted on behalf of Pennsylvania General Energy, Corp. ("PGE") and Fortuna Energy, Inc. ("Fortuna").
Phillips Production Company ("Phillips"), a corporation active in the TBR formation that has drilled deep exploratory wells in New York, opposes the implied conclusions in the Petition and requests it be denied, but provides no discussion to augment its position. In response to the first public notice question, Phillips asserts that the size of non-leased acreage should determine whether or not an interest "would have the right to participate in a working interest," but does not provide any recommended minimum acreage size. Phillips states that unleased owners can only be identified after a well is drilled and capable of production. In response to the second public notice question, Phillips states that unleased owners should be required to enter into operating agreements with the well operator and incur their proportionate share of well costs. However, in response to the third public notice question, Phillips asserts that non-leased owners should not have the opportunity to participate after the well is drilled and the unit is formed. Phillips does not provide any historical or industry practice analysis in support of its positions. Phillips does not discuss statutes of other states.
Dale R. Quinn ("Quinn"), an unleased mineral rights owner in Catlin, New York, supports the implied conclusions in the Petition as a whole, but does not specifically discuss the second question presented in the Petition. He expresses his opposition to an alleged DEC position. Quinn does not respond to the first public notice question. In response to the second public notice question, Quinn indicates that production should be shared based on proportional allocations of gas produced with no fees charged for marketing or transportation. In response to the third public notice question, Quinn believes that the implied conclusions in the Petition should be applicable to unleased owners. Quinn does not provide any substantive historical or industry practice analysis in support of his positions, but he does provide considerable detail about his personal experiences and opinions regarding the leasing process and other aspects of the oil and gas business. Quinn provides no discussion of other states' statutes. Quinn filed a second, late comment letter further addressing the definition of the term "owner" in ECL §23-0901.
Robert I. Reis ("Reis"), law professor at SUNY-Buffalo and attorney, supports the implied conclusions in the Petition as a whole, but does not specifically discuss the second question presented in the Petition. Reis did not provide any specific responses to the first or second public notice questions, but does address the third public notice question by stating that "the property rights of an unleased landowner includes ... the right to receive a 7/8ths working interest ... ." Reis asserts that the risk-penalty approach is a just and reasonable regulation of oil and gas interests. Reis does not provide any substantive historical or industry practice analysis in support of his positions. However, like Haynes, Reis asserts that Sylvania Corporation v. R. Stewart Kilbourne does not address constitutionality of recent application of the statute.
James W. Reynolds ("Reynolds"), a mineral rights owner and lessee, as well as driller and operator of wells in New York, supports the implied conclusions in the Petition and asserts that the law of capture remains in effect in New York. Reynolds did not indicate any position relative to the second question presented in the Petition, nor did he provide responses to any of the public notice questions. Reynolds does not provide any substantive historical or industry practice analysis or review of other states' statutes in support of his position. He does point out that only subdivisions (1), (2) and (3) of ECL §23-0901 pertain to compulsory integration in individual spacing units, and that references to subdivisions (4) through (12) are irrelevant. Reynolds asserts that a public hearing is required regarding the declaratory ruling.
Rural Development Corporation ("Rural"), a company currently holding oil and gas leases in the TBR formation, submitted affidavits dated December 23 and December 26, 2002. Rural, in its December 23 affidavit, provides extensive discussion and exhibits regarding its specific experiences with PGE. Rural requests that the ruling "fully protect correlative rights" and requests a hearing prior to the ruling being finalized. Rural states that "all the owners of acreage within a unit [own] an undivided interest in all the gas produced;" "... the owners are entitled to receive their pro rata share ... ;" and that "an owner is entitled to the owner's undivided interest." Rural further requests incorporation into the ruling of the position set forth in a letter dated August 29, 2002, from Lipman to DEC regarding units in a specific field operated by PGE. The discussion in this letter relates to the second public notice question regarding the means by which non-operating interests receive production under a compulsory integration order. Rural opposes any requirement that production be received in kind. Rural did not address the second question presented in the Petition or the first public notice question. Rural did not provide any historical or industry practice information or analysis of other states' statutes in support of its position.
Peter H. Shaffer ("Shaffer"), an attorney representing "... several oil and gas producers currently involved in leasing and drilling in New York," states that his unnamed clients "are unanimously and resolutely opposed to the implied conclusions in the Petition." Schaffer did not respond to any of the public notice questions. Shaffer's one-page response states the conclusion that the implied conclusions in the Petition would promote predatory practice and an environment friendly to unscrupulous operators, contradict New York State law, and extinguish "[n]ormal contractual relations and the laws that have evolved to regulate them together with a body of oil and gas law and practices ... ." Schaffer did not provide any historical or industry practice information in support of his position, nor did he discuss similar statutes in other states.
Christopher A. Spence ("Spence"), an attorney representing his mother (an owner of approximately five acres in the vicinity of Glodes Corners Road Field), supports the implied conclusions in the Petition and asserts in response to the third public notice question that an unleased landowner is entitled to "his entire working interest in the oil and gas production ..." and should be offered the opportunity to participate. Spence does not address the first or second public notice questions, nor does he provide historical or current industry practice or analysis of other states' statutes in support of his position.
Triana Energy, Inc. ("Triana"), an independent exploration and production company active in the TBR formation in New York, opposes the implied conclusions in the Petition. In response to the first public notice question, Triana indicates that the opportunity and decision to participate in well costs by non-operating lessees should be provided after the well is drilled and after the well spacing unit is established. Triana states that well operators cannot practically identify the parties that may be within a proposed well spacing unit prior to drilling a well and that well operators are not under any statutory obligation to initiate participation offers to non-operating lessees. In response to the second public notice question, Triana indicates that the means by which uncontrolled interests should receive their share of production is through an operating agreement provided as part of the compulsory integration order. In response to the third public notice question, Triana indicates that the requested ruling should not be applicable to unleased owners. Triana does not provide any historical or industry practice analysis in support of its positions nor does Triana discuss statutes of other states.
Claude L. VanderPloeg ("VanderPloeg"), an attorney with Mika Meyers Beckett & Jones, with 25 years of working almost exclusively for oil and gas exploration and production companies, supports the implied conclusions in the Petition on behalf of Cook Investments (who have interest in oil and gas leases and who also submitted comments by BJCook). VanderPloeg comments that the analysis presented by Haynes is accurate. VanderPloeg does not provide responses to the first or second public notice questions. VanderPloeg supports the applicability of the implied conclusions in the Petition to unleased interests. VanderPloeg did not provide any historical or industry practice information in support of its position, although he did provide commentary related to the rule of capture. He also rebuts Heyer's definition of the term "owner."