Matter of Western Land Servs., Inc. v Department of Envtl. Conservation of State of New York
Annotate this CaseDecided on November 1, 2004
Supreme Court, Albany County
In the Matter of the Application of WESTERN LAND SERVICES, INC., et al., Petitioners,,
against
DEPARTMENT OF ENVIRONMENTAL CONSERVATION OF THE STATE OF NEW YORK, ERIN M. CROTTY, COMMISSIONER, of the Environmental Conservation of the State of New York, JAMES H. FERREIRA, in his capacity as General Counsel of the Department of Environmental Conservation of NYS, Respondents.
3091-04
Lipman & Biltekoff, LLP
Attorneys for Petitioner
(Michael P. Joy, Esq., of Counsel)
333 International Drive, Suite B-4
Williamsville, New York 14221
Hon. Eliot Spitzer
Attorney General of the State of New York
(Timothy Hoffman, Esq., of Counsel)
107 Delaware Avenue
Buffalo, New York 14202
Christopher Denton, Esq.
Attorney for Amicus Curiae Brief of the New
York Natural Resource Owners Association 311 Lake Street
Elmira, New York 14901
Bernard J. Malone, J.
The petition is granted to the extent of annulling those portions of Declaratory Ruling No. 23-14 of the New York State Department of Environmental Conservation (hereinafter, the respondents will be referred to collectively as "DEC") which declared that DEC has the authority to limit an unleased mineral rights owner or non-operating mineral rights lessee to less than 8/8ths of unit production attributable to acreage compulsorily integrated into a spacing unit after the unit operator has recouped drilling costs and a risk penalty and in all other respects the petition is dismissed.
The perimeters of underground pools of oil and natural gas do not conform to the boundary lines of persons owning the land above the pools. At common law, a land owner did not have title to oil or natural gas beneath his property until such time as that oil or gas was reduced to possession. That concept is called "the law of capture" and the result was that one property owner could drill a well into a pool of oil or natural gas and drain that product from underneath his neighbor's land (Wagner v Mallory, 169 NY 501). The common law rule of capture did give to a real property owner the right to drill, explore, develop and produce the minerals beneath his soil. The result was that when a pool of oil or natural gas was discovered each individual property owner would drill a well upon his property into the pool to withdraw product. In the early years of the last century, the rule of capture led to the waste of oil and gas due to a multiplicity of wells in close proximity to each other. A consequence of too many wells over the pool was that the pressure in the pool would drop rapidly with much product being left in the ground with no way to put pressure on it to get it out. It eventually occurred to those in the oil industries and state governments that this was a process wasteful of natural resources and overly expensive due to the proliferation of wells and delivery systems.
The Interstate Oil and Gas Compact Commission drafted a model statute to address the issue. By Chapter 959 of the Laws of 1963, New York State adopted a version of the model statute entitled "Oil and Gas". The current version of that statute is article 23 of the Environmental Conservation Law. For wells developed after January 1, 1981, DEC established "spacing units" for each pool in the field of approximately uniform size and shape so as to provide for the appropriate spacing of wells and the efficient and economical development of the pool as a whole (Environmental Conservation Law §23-0501). 6 NYCRR 553.1 establishes that a well can be located no closer than 660 feet from the nearest boundary line of the lease, integrated lease or unit, and no closer to another well in the same pool than 1,320 feet. Any person or entity seeking to drill a well within the spacing unit must obtain a permit from DEC. Many property owners elect to develop their mineral rights through the process of a mineral rights lease whereby the lessor receives a cash signing bonus and a royalty share of any spacing unit production for a term of years. That royalty share is ordinarily a percentage of the product production attributable to the lessor's acreage in comparison to the acreage of the entire spacing unit. Oil and gas companies compete to obtain such oil and gas leases. Consequently, if the entity seeking to drill a well has enough pooling leases to meet the [*2]well spacing requirements it can apply to DEC for a drilling permit. However, if the spacing unit contains two or more separately owned tracts of land and the driller does not control the mineral rights of all of the parcels within the spacing unit article 23 of the Environmental Conversation Law requires integration of those multiple interests in order to meet the public policy interests set forth by the Legislature in section 23-0301 as follows: "It is hereby declared to be in the pubic interest to regulate the development, production and utilization of natural resources of oil and gas in this state in such a manner as will prevent waste; to authorize and to provide for the operation and development of oil and gas properties in such a manner that a greater ultimate recovery of oil and gas may be had, and that the correlative rights of all owners and the rights of all persons including landowners and the general public may be fully protected, and to provide in similar fashion for the underground storage of gas, the solution mining of salt and geothermal, stratigraphic and brine disposal wells."
6 NYCRR 550.3 (ao) defines the protection of correlative rights 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". In order to obtain an order of integration the well operator applies to DEC and DEC gives notice to all property owners within the spacing unit of the application. Section 23-0701 of the Environmental Conservation Law sets forth a statutory scheme for voluntary agreements among all interested persons to integrate their tracts or interests for the development and operation of the spacing unit. An order establishing a spacing unity must provide a time period of not less than 90 days for voluntary negotiations between all of the interested parties (Environmental Conservation Law §23-0501[9]). If a voluntary agreement is not reached the next step is a compulsory integration order pursuant to Environmental Conservation Law section 23-0901. That statute is designed to address the situation where the spacing unit contains "non-consenting owners". Non-consenting owners are people with rights to drill who have not entered into gas leases or paid their share of the costs and expenses of building and operating the well or wells serving the spacing unit. These petitioners are or represent non-consenting owners.
In recent years, large pools of natural gas have been discovered in the Finger Lakes Region of the State, especially in a rock formation commonly referred to as the "Trenton-Black River" (TBR) formation that exists 3,000 to 12,000 feet and in some places more below the ground surface. The discovery of these pools has resulted in numerous applications to DEC for integration orders. Petitioner Western Land Services (WLS) is the lessee of mineral rights in South Central New York but is unable to drill upon the lands subject to the leases due to well spacing and setback requirements. By petition dated July 9, 2002, WLS petitioned the DEC for a declaratory ruling regarding the Department's interpretation of implementation of ECL section 23-0901, and in particular subdivision (3) of that statute which provides: "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 [*3]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 provisions 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."
At pages 13 and 14 of the challenged Declaratory Ruling the operation of subdivision (3) is explained as follows: "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. 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. 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 received 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 [*4]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 risks. 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 of supervision and interest, prior to receipt of any production."
WLS submitted a petition and supplemental petition to DEC for a declaratory ruling upon the following issues: whether a non-consenting owner in a spacing unit is entitled to receive 8/8ths of the proportionate share of the spacing unit production attributable to his acreage after the well operator has recovered 200% of the expenses listed in subdivision (3); whether DEC could eliminate the 100% of cost penalty upon the non-consenting owner where that non-consenting owner was never offered the opportunity to participate in the cost of the well by the well operator; and whether DEC can compel the well operator to transport and market the gas of the non-consenting owners. On January 29, 2004, DEC issued Declaratory Ruling No. 23-14 and this article 78 proceeding was thereafter timely commenced.
The petitioners contend that DEC made four erroneous legal determinations in the Declaratory Ruling. The first concerns unit production, which is the income derived from the product taken from each parcel within the spacing unit. The petitioners contention is that the last sentence of subdivision (3) provides that a non-consenting owner is entitled to 8/8ths of unit production from his parcel once the 100% statutory penalty and the drilling, operating and supervision expenses of the well have been paid. The Declaratory Ruling concedes that the non-consenting owner is entitled to the one-eighth of production royalty set forth in the statute but goes on to state that DEC has the discretion "upon terms and conditions that are just and reasonable" based upon the field specific factors developed during the administrative hearing process to determine how much of the 7/8ths unit production a non-consenting owner should receive. In other words, the petitioners contend that in every case subdivision (3) requires that after payment of the statutory penalty and costs a non-consenting owner must receive 8/8ths of the unit production attributable to his parcel. DEC takes the position in the declaratory ruling that non-participating owners are eligible for but not automatically entitled to receive 8/8ths of unit production and that each case must be determined on its individual facts.
This case presents issues of statutory construction and the applicable law is set forth by the Court of Appeals in the case of Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451, 459, as [*5]follows: "Where the interpretation of a statute or its application involves knowledge and understanding of underlying operational practices or entails an evaluation of factual data and inferences to be drawn therefrom, the courts regularly defer to the governmental agency charged with the responsibility for administration of the statute. If its interpretation is not irrational or unreasonable, it will be upheld. (Matter of Howard v Wyman, 28 NY2d 434; cf. Ostrer v Schenck, 41 NY2d 782, 786.) Where, however, the question is one of pure statutory reading and analysis, dependent only on accurate apprehension of legislative intent, there is little basis to rely on any special competence or expertise of the administrative agency and its interpretive regulations are therefore to be accorded much less weight."
The critical statutory language is the last sentence of subdivision (3) of section 23-0901 of the Environmental Conversation Law which provides: "If one or more of the owners shall drill, equip and operate, or operate and 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 persons's share of the reasonable actual cost of drilling, equipping and operating, or operating the well, including a reasonable charge for supervision and interest".
The petitioners contend that the above quoted language presents a question of pure statutory reading and analysis to determine legislative intent. The petitioners argue that by the foregoing language the Legislature has clearly set forth that once the statutory penalty and the non-consenting owner's share of the well have been paid to the well operator the non-consenting owner is entitled to receive his full 8/8ths of the unit production attributable to his property. DEC contends that the last sentence of subdivision (3) is modified by the language of the second sentence of the subdivision which requires that every "integration order shall be upon terms and conditions that are just and reasonable." DEC states that the just and reasonable language gives it the discretion to determine if a non-consenting owner will receive 1/8 or 8/8ths or something between those fractions of the unit production attributable to his parcel. This Court disagrees with DEC's construction of the statute.
"It is an accepted rule that all parts of a statute are intended to be given effect and that a statutory construction which renders one part meaningless should be avoided" (Rocovich v Consolidated Edison Co., 78 NY2d 509, 515). DEC's interpretation of subdivision (3) could render meaningless the entire "risk penalty" approach underlying the statute. The Legislature has told non-consenting owners that by their failure to enter into a mineral lease or pay their proportionate share of the expenses of building and operating the well they will be subject to a penalty of paying to the mine operator their proportionate share of those expenses plus a penalty of 100%. The non-consenting owners shares of those expenses as well as the [*6]penalty come out of the 7/8ths of unit production that they would otherwise have received. Under DEC's construction of subdivision (3) it can determine on a case by case basis that a non-consenting owner is never entitled to 7/8ths of unit production attributable to his property. In that situation the non-consenting owner would be subject to a penalty well beyond 200% of his portion of the expenses of building and operating the well. In effect, DEC could ignore the remedy chosen by the Legislature and implement its own remedy. That result can not be countenanced. The language of subdivision (3) of section 23-0901 of the Environmental Conservation Law is clear and unequivocal as to how a non-consenting owner is to be treated with respect to unit production. Furthermore, that language does not accord DEC the discretion to alter the statutory formula.
The petitioners second and third disputes with the declaratory ruling are that DEC has determined that it does not have the statutory authority to compel a well operator to offer a non-consenting owner the opportunity to share in the expenses of building and operating the well so as to avoid the 100% statutory penalty and that it also lacks the authority to order a well operator to transport and market the natural gas attributable to a non-consenting owner. These contentions present issues much different than the first issue of statutory construction addressed above in this decision and judgment.
Petitioners construe the language of subdivision (3) broadly as giving DEC the authority to compel well operators to offer participation rights to non-consenting owners and to transport and market the natural gas of the non-consenting owners. DEC reads the statutory language much more conservatively as denying it the authority to enter into areas of the free market concerning contracts and marketing. Some portions of subdivision (3) are subject to either construction. For instance, subdivision (3) provides, in pertinent part, that: "The department shall make an order integrating all tracts or interest in the spacing unit for development and operation. Each such integration order shall be upon terms and conditions that are just and reasonable."
The term "operation" can be broadly construed as including the delivery system to transport the natural gas from the well to the market. The "just and reasonable" language can also be broadly construed to give DEC the authority to compel a well operator to transport the product attributable to a non-consenting owner to market as a condition of obtaining an integration order. On the other hand, the same words could be strictly construed so as not to give DEC such authority. "Where there are two reasonable and consistent ways of construing the statute, it is not for the Court to substitute its judgment for that of the regulatory agency charged with its enforcement". (Rosenblum v New York State Workers Compensation Bd., 190 Misc 2d 588,592). It is especially so when the interpretation of the statute involves knowledge of the agency of underlying operational practices (Matter of Valley Realty Devel. Co., Inc. v Jorling, 217 AD2d 349). Here, the statutory construction arrived at by DEC upon the second and third arguments of the petitioners is in this Court's opinion rational and will therefore be deferred to by this Court.
The petitioners final contention is that the declaratory ruling should be applicable retroactively. The Court disagrees (Matter of National Elevator Ind., Inc. v New York State Tax Comm., 49 NY2d 538). [*7]
All papers, including this decision and judgment, are being returned to the attorneys for the petitioners. The signing of this decision and judgment shall not constitute entry or filing under CPLR section 2220. Counsel is not relieved from the applicable provisions of that section relating to filing, entry and notice of entry.
This memorandum shall constitute both the decision and the judgment of the Court.
IT IS SO ORDERED AND ADJUDGED.
DATED: ALBANY, NEW YORK
NOVEMBER 1, 2004
// BERNARD J. MALONE, JR., J.S.C.
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