Six C Properties, L.L.C. VS James H. Welsh, Commissioner of Conservation of the State of Louisiana, Office of Conservation and Radius Operating, L.L.C.
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STATE OF LOUISIANA COURT OF APPEAL FIRST CIRCUIT NUMBER 2010 CA 1913 SIX C PROPERTIES LLC VERSUS JAMES H WELSH C GONSERVATION MNIISSIONER OF OF THE STATE OF LOUISIANA OFFICE OF CONSERVATION AND RADIUS OPERATING LLC Judgment Rendered AY 2 6 2011 Appealed fram the Nineteenth Judicial District Court J In and for the Parish of East Baton Rouge State of Louisiana Suit Number S 223 7 Honorable Kay Bates Judge William Timothy Allen III Counsel for Michael E Riddick Appellant Plaintiff Paul M Adkins Six C Properties LLC Stacey D Williams Shreveport LA J Blake Can ield Counsel for Baton Appellee Defendant Roug LA James H Welsh as Commissioner of Conservation ftandall C Songy Karen D Ancelet Lafayette LA Counsel for Appellee Defendant Radius Operating LLC BEFORE PARRO GUIDRY AND HUGHES JJ r j DRY GU J Six C Properties LLC Six C the surface owner of a substantial portion of land subj to a coal seam natural gas CSNG unit established by order of the ct Commissioner of Conservation appeals a district court judgment upholding the order I FACTS AND PROCEDURAL HISTORY In October 2009 Radius Operating LLC Radius filed an application with James H Welsh Commissioner of Conservation Commissioner ta hold a public hearing regarding the issuance of an order to create a CSNG unit in the Middle and Lower Wilcox Coal Seam Zone of the East Bayou Castor Field in LaSalle Parish for the exploration and production of CSNG Radius defrz the area of ed the unit to be created as that coal seam natural gas bearing zone encountered between the depths of 2 teet and 3 feet electrical log measurements in the 650 25 Radius Operating LLC LP Mineral Owners et al No 1 Well located in Section 28 Township l I North Rang 2 East LaSalle Parish Louisiana less and except all non intervals encount within such zone coal red Un November 17 2009 the Commissianer conducted a public hearing in accordance with Radius application and received evidence relative to the s establishment of the proposed unit Six C appeared at the hearing and offered nce evid in opposition to the unit proposed by Radius On December 7 2009 the Commissioner issued Office af Cons rvation Order No 1528 establishing the rules and regulatians for the creation of a CSNG unit for th Middle and Lower Wilcox Coal Seam Zone in the East Bayou Castor Field hereinafter referred to as the East Bayou Castor unit with Radius as the unit operator In issuing the order the Commissioner specifically found the According ta La R 3U a drilling unit is the maximum area which may be etficienily S9 B and economically drained by one well This unit shall constitute a developed area as long as a well is locaied thcreon which is capable of producing oil or gas in paying quantities 2 creation of the East Bayou Castor unit was necessary to promote the development of a CSNG producing area to prevent waste and to avoid drilling unnecessary wells The Commissioner further faund the available evidenc was sufficient to reasonably establish th limits of the CSNG producing area and to establish that operation of the East Bayou Castor unit was economically feasible so that each separate tract within the unit would be reasonably assured an opportunity to recover its just and equitable share of CSNG Ofiice of Conservation Order No 1 S28 authorized Radius to drill as many wells to serve the unit as may be efficiently and economically drain the CSNG praducing necessary to area The order exempted any future wells drilled and completed within the East Bayou Castor unit from any spacing requirement but mandated that no lls w between well be located any closer than 330 feet to any unit I boundary Following the Commissioner sissuance of Office of Conservation Order No 1528 Six C filed a petition or judicial review in the Nineteenth Judicial District Court naming the Commissioner and Radius as defendants in that action In the petition for judicial review Six C alleged that the Commissianer sissuance of 4ffic of Conservation Order No 1528 was manifestly erroneous and an abuse of discretion In lieu of arguments the case was submitted based solely on the agency record and memoranda filed by the parties The district court rendered judginent confirming and upholding Ottice af Conservation Order No l 528 in a judgment signed July 12 2010 Six C devolutively appeals ASSIGNMENTS OF ERROR On appeal Six C contends that the district court erred in confirming and upholding the Commissioner sorder based on the following specified errors The District Court erred by confirming and upholding Office of Conservation Order No 1528 when the evidence in the recard showed that the creation of the coal seam natuxal gas economically feasible as required by La R 30 S 5 2 3 unit was not The District Court erred by confirmin and upholding Oftice of Conservation Order No 152 when the Commissioner abused his discretion by failing to restrict the numb wells or impose spacing rof between wells The District Court erred by confirming and upholding Office of Conservation Order No 1528 when the evidence in the record failed to establish the limits of the coal seam natural gas producing area SCUSSION D The standard for the district court review of the Commissioner s sorder is found in La R 30 which provides that such review shall be conducted by the S 12 court without a jury and confined to the administrative record La S R 4 B 12 30 The statute further provides The court may affirtn the decision of th assistant secretary or remand the case for further proceedings The court may reverse or modify th decision if substantial rights af the appellant have been the administrative prejudiced because s inferences findin conclusions or decisions are a In violation of constitutional or statutory pravisions b In excess af the statutory authority ofthe ag ncy c Made upon unlawful procedure d Affected by ather rror of law e Arbitrary capricious or or characterized by abuse of discretion or clearly unwarranted exercise of discr ar tion f Manifestly erroneous in view of the reliable probativ and ial substan evidence on the whole record In the application of the rule wher the assistant secretary has the opportunity to judge the credibility of witnesses by first observation of demeanor on the hand witness stand and the reviewing court does not due regard shall be given to the assistant secretary sdetermination on credibility issues La R 30 Thereafter if a party is dissatistied with the judgment of the S 12 5 B district court following judicial review the party is fre to appeal the judgment to th appropriate appellate court See La R 30 and 30 On appeal the S 12 D 15 s Coinmissioner findings of act are entitled to great weight and unless manifestly erroneous or clearly wrong should not be reversed Hunt Oil Company v Batchelor 93 p 11 La 10 644 So 2d 191 200 3144 94 17 4 In reviewing the conclusions and exercises of agency discretion by the Commissioner the reviewing court must apply the arbitrariness test and the party challen the ing sdecision must make a clear showing that the administrative action Commissioner was arbitrary and capricious Yuma Petroleum Com an v Thom son 98 1399 pp 4 La 3 731 So 2d 190 193 S 99 2 In 2004 the Louisiana Legislature enacted La R 30 to provide S 5 2 authority for the Commissioner to establish CSNG units when such unit operation will promote the development of such coal seam natural gas producing area prevent waste and avoid the drilling of unnecessary wells La R 30 S5 B 2 According to the statute an arder to create a CSNG unit may only be issued after notice and a public hearing and must be based on findings that 1 the order is reasonably necessary to promote development of a CSNG producing area and to prevent waste and the drilling of unnecessary wells 2 the unit operation is economically feasible and 3 the limits of the CSNG producing area can be reasonably established based on sufficient existing evidence La R 30 S5 C 2 In its first specif cation of error Six C contends the recard does not establish that the East Bayou Castor unit is economically feasible president of Radius feasibility of the testified proposed Salar Nabavian the at the public hearing regarding the economic unitization ln conjunction with his testimony Radius 2 Accordin to La RS 3 0 1 waste means 3 n I additian to its ordinary meaning means physical waste as that term is generally understood in the oil and as industry It includes a the inefficient excessive or improper usc or dissipation oI reservoir encrgy and the location spacing drilli equipping operating or producing of an oil or g gas well in a maimer which results or tends to result in reducing the quantity of oil or gas ultimately recc trom a pool and verable b the inefficient storing ofi oil the producing of oil c gas from a pool in excess r of transportation or marketing facilities or of reasonable rnarket demand and the locatin spacing drilling equipping operating or producing of an ail or gas well in a manner causin or tending to cause unnecessary or excessive surface loss or destructian of oil or gas c Thc disposal storage ar injection af any waste product in the subsurfacc by means at a disposal wel l 5 offered two exhibits prepared by Mr Nabavian that documented the income he projected would be generated by the East Bayou Castor unit Mr Nabavian testified that he is a p engineer with a history of working in various fields troleum of oil and gas exploration In considering the economic feasibility of the unit Mr Nabavian testified that he had a company perform a reservoir study of the project to asses the permeability porosity drainage acreage and similar features of the project In light ofi the study Mr Nabavian believed that he could dewater the area in a timely fashion to make the project very economic He explained that he had expended a lat of the upfront costs to establish two drilling wells and a saltwater well in the unit due in part to some equipm he patented to help nt dewater the a ar Still Mr Nabavian testitied that e at this point I already ven had all indication that 1 needed that there coal seams in this particular area that s had plenty of natural gas and really it was a function af dewatering Mr Nabavian testified that he used information from another CSNG unit in the area the Riverton Unit CSNG No l to forecast the production and income figures for the East Bayou Castor unit that he listed in exhibits 6 and 1 Mr Nabavian said that he chose the Riverton unit because it had the longest production history Based on the raw data from the Riverton unit and his background in oil and gas drilling operations Mr Nabavian opined that the project was economically feasible Six C points out that the actual numbers reported by Radius for the initial operation of the two drilling wells and the saltwater well reveal that operating costs are much higher and the production amounts are much lower than those projected by Mr Nabavian in exhibits 6 and 7 While he acknowledged that as of the date of the public hearing the project had not attained ecanomic feasibility Mr Nabavian ied testi that he was contident the project would be economically feasibl based on his expertise and the existence of other CSNG 6 operations in the area He stated I that the initial op costs were higher and the production numbers w lower rating re due to the initial phase af the learned lessons period project bein a But as he explained about the operating expenses there a reduction as we learned more s ve and more He also stated that part of the reason that the project initially lost rather than made a profit was because he oversized his facilities For example he stated that the project compressor was too big so in essence it using quite s s a bit of that natural gas therefore he said he would downgrade his equipment to be more economical While the initial numbers presented by the two wells Radius had begun operating demonstrated that the project was not economically viable at the time of the public hearing Mr Nabavian nevertheless testifiied that many of the costs would decrease and the production would increase as the project was further developed and additional wells were added Moreover Mr Nabavian testimony s established that there were other economically feasible CSNG units operating in the area By virtue of his regulatory authority the Cominissioner is surely knowledgeable of the success of the other CSNG units referred to by Mr Nabavian He also is better suited by his expertise in the field of minerals management to assess the credibility of Mr Nabavian to testify about the economic feasibility of the See project Amoco Production Com an v Thompson 516 So 2d 376 395 La App 1 st Cir 1987 writs denied 520 So 2d 118 La 1988 As such we cannot say that the Commissioner erred in finding the project to be economically feasible 3 Furthermore as has b recognized en he inherent natuare and character of the right to extract oil and gas fram the soil l is such as not to be susccptible of having an intrinsic determinable and fixable value I element whicl enters into the valuation is too uncertain conditional he and contingent At rnc any value which may be fixed on the right is st ntemplative cc speculativc and conjectural not to say fanciful and theoretical Cascio v Twin Cities Develc ment LLC 45 p 5 pp 2d Cir 9 4 Sc 3d 634 La 10 22 341 344 quc Wilkins v NelSOn 155 La 807 813 99 So 607 609 1924 ting 7 In its second assignment of error Six C contends that the Commissioner abused his discretion in not imposing restrictions on the spacing hetween wells We disagree Craig Barclay a geologist from Shreveport Louisiana was hired by Radius to study the area proposed for the East Bayou Castor unit Mr Barclay testified on behalf of Radius at the public hearing before the Commissioner In his testimony he specifically recommended that project wells not be drilled within 33Q feet of a unit boundary but as far spacing between wells he recominended that there be no spacing restrictions consistent with what had been wells between approved for other CSNG producing units He recommended that there b no wells between spacing restrictions ta maximize the recovery of CSNG again consistent with other CSNG producing units According to La S R C 9 30 the Commissioner must consider all available geological and engineering evidence and shall provide for the unit well to be located at the optimum position in the drillin unit for the most efticient and economic e draina of such unit In this instance the only scientitic evidence presented regarding the optimum position for well spacing was the testimony of Mr Barclay and exhibits submitted in conjunction with his testimony Thus the Commissioner did not abuse his discretion in failing ta rspacing between quire wells in the unit as the record clearly contains evidence that supports the s Commissioner decision See also Simmons v Pure Oil Co 124 So 161 2d 4 Also in conjunction with this specification of error Six C urges that dama to its forestry e business is another reason why the failure to irnpose a spacing requiremcnt was wclls between an abuse of discretion Through the testimony of Stephen Gleason Six C establislled that 4 640 acres of the 5 acres of fc land that it owns is ccmtaialed in the Hast Bayau Castor unit 600 restry thereiare Six C praposed a minirnum spacing betwee wells of 2 ieet to protect its interest G40 as a surface owner By law t owner of land burdened by a mi right or rights and the he aeral owner of a mineral right must exercise their respective rights with reasonable regard for those of the other La R 31 see also La R 31 providing ihat towner of a mineral S 11 A S 22 he serviiude is entitled to use only sc much of lhe land as is reasonably necessary to cc his nduct operatians F is obligated insofar as practicable to restore the surface to its original condicion e at the earliest reasonable time Thus to the extent Radius operations in the East Bayou s Castar unit violates thcse duties Six C rernedy lies in pursing an action for damages against s See Radius 1067 Uu dwards v ree v Oil Gas Jeems Ba ou Othcr Minerals 31 La App 2d Cir 5 73 So 869 99 an 507 So 2d 11 La App 2d Cir 1987 Yroduction Com 2d 165 La App 2d Cir 1960 aff 241 La 592 129 So 2d 78fi 1961 d Finally Six C argues that the record fails to establish the limits of the CSNG producing area We reject this argum nt Mr Barclay expressly testified at the public hearing that the entire area of the proposed unit is reasonably believed to be underlain by coal seams that are productive of natural as and that because the entire area is underlain by productive CSNG the boundaries of the unit reasonably establish the limits of the CSNG producing area Furthermore we observe that La S 5 R 30 provides that the Commissianer must find that s 3 C 2 ticient u evidence exists to reasonably establish the limits of the coal seam natural gas producing area So a Mr Barclay testified that the xact boundary of the though CSNG producing area would not be known until Radius continued drilling and developing the unit his testimony based on his geologic study of the area is sufficient evidence to reasonably establish the limits to which he testified CONCLUSION Therefore finding that the record sufticiently supports the Commissioner s issuance of Office of Conservation Order No 1528 we affirm All costs of this appeal are ass to Six C Properties LLC ssed AFFIRMED 5 According to finding 2 recited in Uffice of Conservation Ordcr No 1528 the Commissioner simply found that sufticient evidence exists to reasonably establish the lirnits of the coal seam natural gas producing area 9 STATE OF LOUISIANA COURT OF APPEAL FTRST CIRCUTT NUMBER 2010 CA 1913 SIX C PROPERTIES LLC VERSUS JAMES H WELSH COF CONSERVATION MMISSIONER OF THE STATE OF LOUISIANA FFICE OF CONSERVATION AND RADIUS OPERATING LLC Hughes J dissenting in part I respectfully dissent as to the failure of the Commissioner of Conservation and this court to enforce the spacing provisions of La Admin Code Title 43 part XIX Subpart 7 Chapter 19 section 1945 et seq I of the am greatly proposed concerned about the n spacing exemption giv to Radius 80 unit is commercial forest land owned by Six C Certain areas involved with well drilling cannot be reforested and other areas are at a greatly increased risk of erosion Given the serious issues that the Radius project is not and may not become economically feasible and the inability thus ar to guard against or pay for dama esinflicted on the forest lands of Six C it would seem that the spacing r quirements should be strictly enforced rather than exempted and respectfully submit that the Commissioner was arbitrary and abused his discretion in this regard The uncontradicted testimony of forestry expert Stephen Gleason establishes for the record that Six C has an investment of over 6 million with over 4 000 acz in the proposed unit Surface lands taken for well sites roads and pipelines cannot be reforested occurring and resulting in Radius has failed to a loss vegetate There is already considerable erosion as promised As put by Mr Gleason if you don thave something in that part of the world erosion is you know growing on it its going to leave there Mr Gleason also pointed out that forestry op are based on scale and rations the more chopped up the forest becomes the greater the difficulty to operate and necessarily the less profitable Mr Gleason testified that the failure to enforce normal spacing requirements would b devastatin to Six C The spacing requirements for enforcement not were adopted exemption Landowners for a purpose beware In this case they beg I
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