CADDNAR


[CITE: Williams v. DNR and Countrymark Energy, 13 CADDNAR 6 (2012)]

 

[VOLUME 12, PAGE 6]

 

Cause #: 10-198G

Caption: Williams v. DNR and Countrymark Energy

Administrative Law Judge: Jensen

Attorneys: pro se (Williams); Boyko (DNR); Partenheimer (Country Mark)

Date: January 23, 2012

 

 

FINAL ORDER

 

[See Editor’s note at end of this document regarding change in the decision’s original format.]

 

87. The Order of Integration issued by the Department on October 28, 2010 in Response to the Countrymark’s Application filed on June 11, 2010, whereby the 80 acre Muehlenbein – Midway Unit was established to include Williams’ real property is affirmed. 

 

 

FINDINGS OF FACT AND CONCLUSIONS OF LAW

 

PROCEDURAL SUMMARY AND JURISDICTIONAL BACKGROUND

 

1.On November 23, 2010, Gary M. Williams (Williams) filed correspondence with the Natural Resources Commission (Commission) stating as follows:

Upon the conditions of 18 working days upon mailed receipt of DOG-3-2010 notice of integration order, please find enclosed my appeal for review under Indiana Code 4-21.5-3-7.

 

In accordance with the appeal under 2-21.5-3-7[1], my property is directly affected by this order.  Furthermore, I am petitioning for this appeal as entitled by law as this order was made in a partial and biased way, and ultimately disregards my property rights as a resident of the state of Indiana, promoting trespassing upon my dwelling.

 

2.      Williams’ correspondence initiated a proceeding involving an Integration Order, DOG-3-2010 (hereinafter referred to as “the Integration Order”), that was issued by the Department of Natural Resources (Department).  However, Williams’ correspondence failed to identify the entity to which the Integration Order had been issued

3.      On January 18, 2011, Countrymark Energy Resources, LLC (Countrymark), filed “Petition of Countrymark Energy Resources, LLC to Intervene” stating, in relevant part, as follows: 

 

1.  Countrymark Energy Resources, LLC filed an Application with the Division of Oil and Gas Indiana Department of Natural Resources for an oil well drilling permit and Order for mandatory integration of interests on or about June 11, 2010, effecting, among other land, land owned by Claimant Gary M. Williams and wife Elizabeth Williams located in Posey County, Indiana.

 

2.  On October 28, 2010, the Indiana Division of Oil and Gas issued an order directed to Countrymark Energy Resources, LLC which Order designated a drilling or spacing unit for the proposed well which includes land owned by Gary M. Williams and Elizabeth Williams and directed Countrymark Energy Resources to account to Gary and Elizabeth Williams for a 1/8 royalty share of all oil, natural gas and other hydrocarbons produced calculated at the rate of 0.00131 of total production from the unit.

 

3.  As permittee and owner of the proposed oil or gas well, Countrymark Energy Resources, LLC has a direct interest in the outcome of the “Appeal for Review” of Gary M. Williams filed November 23, 2010 and should be allowed to intervene as a person or entity to whom the action is specifically directed and a party to the proceeding under IC 4-21.5-1-10.

 

4.      On January 25, 2011, the administrative law judge entered an order allowing Countrymark to intervene and identifying Countrymark as a Respondent in this instant proceeding.

 

5.      A prehearing conference was conducted on January 10, 2011 at the conclusion of which the parties sought a continuance to allow for settlement negotiations.  Thereafter, on March 30, 2011, Countrymark reported that settlement efforts had failed and sought the expedited scheduling of an administrative hearing. 

6.      During the scheduled telephone status conference the parties were ordered to file and exchange witness and exhibit lists and a final status conference along with an administrative hearing was scheduled.

 

7.      The administrative hearing was conducted as scheduled with Williams proceeding pro se and the Department and Countrymark represented by counsel, Ihor Boyko and Verner Partenheimer, respectively.  At the conclusion of the administrative hearing the parties sought an opportunity to file post hearing briefs, which time was later extended.

 

8.      All parties filed timely post hearing briefs on July 29, 2011.

9.      Integration Orders are governed by Indiana Code §§ 14-37.

 

[VOLUME 12, PAGE 7]

 

10.  The Department is the administrative agency designated by the Indiana General Assembly to administer Indiana’s oil and gas program.  Indiana Code § 14-37-2-1.

 

11.  The Commission is the “ultimate authority”, as that term is defined at Indiana Code § 4-21.5-1-15, for matters involving Indiana Code § 14-37 and 312 IAC 16.  312 IAC 3-1-2.

 

12.  This proceeding is governed procedurally by Indiana Code §§ 4-21.5-3 and 312 IAC 3-1.

 

13.  The Commission possesses jurisdiction over the persons of the parties and the subject matter of this administrative proceeding.

 

OVERVIEW OF SUBSTANTIVE ISSUES PRESENTED

 

14.  Williams argues in his initial correspondence that the Department’s consideration of Countrymark’s application for the Integration Order was partial and biased, authorized criminal trespass upon his real property and disregarded Williams’ property rights.

 

15.  Through the administrative hearing Williams expounded upon his initial correspondence asserting that his 14th Amendment rights to due process and 5th Amendment rights against the taking of property without just compensation were violated by the Department’s action and further that hydraulic fracturing associated with the well to be drilled by Countrymark would potentially harm his water supply, the source of which is a privately owned drilled well.

 

16.  The true legal characteristics of Williams’ contentions are somewhat difficult to discern and are restated, as assimilated from the pleadings and the evidence of record, as follows:

 

A.    Williams offers multiple grounds in support of his argument that the Integration Order violates the Constitution of the State of Indiana as well as the Fifth and Fourteenth Amendments to the Constitution of the United States, which guarantee that private property will not be taken for public use without just compensation and that property will not be taken without “due process of law”.

1.      First Williams alleges that the Department lacks authority under the Indiana State Constitution and the Constitution of the United States to issue the Integration Order. 

2.      Williams further contends that the oil to be recovered is for the private corporate interests of Countrymark and not for public benefit thereby negating Countrymark's or the Department’s authority to engage in this action.

3.      Williams next avers that the Integration Order is not based on “reasonable terms that give the owner of each tract an equitable share of oil and natural gas in the unit or pool” as required by Indiana Code § 14-37-9-2 and thereby fails to provide just compensation for the following reasons:

 

a.       The majority of the pool to be recovered by Countrymark is located directly beneath Williams’ property although the Integration Order provides the same compensation, one-eighth share proportioned by surface acreage, as is provided to every other real property owner within the Unit; and

b.      The Unit approved by the Integration Order consists of 80 acres, including two 40 acre tracts identified as the Midway parcel, where Williams’ property is situated, and the Muehlenbein parcel.  Williams contends that the Muehlenbein parcel is effectively depleted of oil resources as a result of oil extraction that has occurred on that parcel for over 50 years and for this reason the inclusion of Muehlenbein parcel into the drilling unit is improper in that it artificially decreases that equitable shares to be received by the property owners of the Midway parcel.

 

B.     Williams complains that Countrymark’s original intent to traverse through the subsurface of Williams’ property would constitute criminal trespass by Countrymark, in violation of Indiana Code § 35-43-2-2, and by issuing the Integration Order with knowledge of Countrymark’s intentions the Department is aiding in the commission of this violation. With respect to this contention, Williams notes that the additional permit Countrymark will be obligated to obtain from the Department in order to drill the well associated with this Integration Order will be issued in accordance with Indiana Code § 14-37-4-3, which does not grant to Countrymark “a property right or an exclusive privilege.”

 

C.     Williams interprets 312 IAC 16-5-2 as prohibiting the Department from establishing a drilling unit consisting of 80 acres.

 

D.    Williams contests the issuance of the Integration Order on the basis of his belief that Countrymark intends to engage in hydraulic fracturing, which he further believes would be detrimental to his submersible water well, which provides his only source of water.

 

 

[VOLUME 12, PAGE 8]

 

 

FINDINGS OF FACT

 

17.  Williams is the owner of real property consisting of approximately 0.83 acres in the Midway Acres Subdivision located within the southwest quarter of the northwest quarter of Section 27, Township 6 South, Range 12 West.  Exhibit 1, Document 2, Application for Integration Order.

 

18.  Countrymark, a limited liability company, is, as relevant to this proceeding, the owner and operator of 32 total oil and gas leases comprising approximately 77.81 surface acres located in the West Half of the Northwest Quarter of Section 27, Township 6 South, Range 12 West.  Included is a lease between Edward Muehlenbein and W.C. McBride, Inc. entered into on April 15, 1947 covering the entirety of the northwest quarter of the northwest quarter of Section 27, Township 6 South, Range 12 West (Hereinafter this parcel will be referred to individually as “the Muehlenbein Tract”).  The remaining 31 leased tracts comprise the real property contained within the southwest quarter of the northwest quarter of Section 27, Township 6 South, Range 12 West, with the exception of Williams’ real property and approximately 0.71 acres of real property owned by Ralph J. and Joann T. Wheeler (Hereinafter this parcel will be referred to individually as “the Midway Tract”)Exhibit 1, Document 2, Application for Integration Order

 

19.  Mike Gibbons (Gibbons), Vice President of Production for Countrymark, testified that Countrymark and Countrymark Cooperative LLP are subsidiaries of Countrymark Holdings Company. 

 

20.  Countrymark is responsible for “exploration, development and extraction of oil and gas reserves” with produced oil being sold to Countrymark Cooperative LLP, which is an oil refinery.  Testimony of Gibbons

 

21.  Countrymark filed its Application for Integration Order (hereinafter referred to as “Countrymark’s Application”) with the Department on or near June 11, 2010 seeking to have the real property owned by Williams and by Ralph J. and Joann T. Wheeler[2] forcibly integrated  into the “Muehlenbein-Midway Unit” (Hereinafter, the Muehlenbein-Midway Unit will be referred to simply as “the Unit”), stating, in part, as follows:

 

7. By virtue of lease authority and written consent, Applicant has pooled Lease Tracts 1 – 31 for oil and gas development purposes by a Pooling Declaration.  By this authority and the exercise thereof, the royalty and overriding royalty owners of Lease Tracts 1 – 31 are not persons or entities affected by the matters addressed in this application.

 

8. The proposed unit is within a pool or portion of a pool suitable for secondary recovery methods, and for the prevention of waste and to avoid the drilling of unnecessary wells, the interests of the owners named in Paragraph 6 above [the Williams and the Wheelers], should be integrated upon terms reasonable to give the owners of each tract an equitable share of the oil and gas in and that may be recovered from the unit and as to Integration Tracts A and B [the Williams and the Wheelers tracts, respectively] a fair and reasonable allocation of development expense.

 

9. Each of the oil and gas leases covering Lease Tracts 1 – 31 provides for a 1/8 royalty, with no Lessor contribution, and is reasonable under the circumstances in that the proposed re-entry well (1) is speculative as to result; (2) will require an investment of between $750,000 and $1,000,000 and (3) as to Leases 2 through 31 and Integration Tracts A and B will consist of a horizontal bore hold at least 2,000 feet subsurface, without any lease hold right or authority for ingress and egress or any other rights to the surface of the land or disturbing the surface in any way whatsoever and (4) the point of entry and withdrawal of production is more than 250 feet from the northern boundary of the tracts comprising the Midway subdivision as located in the Southwest Quarter of the Northwest Quarter of Section 27, Township 6 South, Range 12 West.  Accordingly applicant [Countrymark] proposes that the Integration Tracts be allocated revenue from production as follows:

 

                                               

Surface Acres

Production Allocation

 

Integration Tract A [Williams]

0.83

0.83/79.35 x .125=.00131

 

Integration Tract B [Wheeler]

0.71

0.71/79.35 x .125 = .00119

 

With no obligation to contribute to development or operating expenses and with applicant having no right of entry on the surface or above 600 feet subsurface or upon such other terms as may be deemed reasonable under the provisions of I.C. 14-37-9-2.3 and 4.  Id and Document 3, “Exhibit C to the Application for Integration”.

 

22.  Attempts were made for Countrymark and Williams to reach an agreement as to the integration of interests in the oil resources to be recovered by Countrymark.  Stipulated Exhibit 1.

 

[VOLUME 12, PAGE 9]

 

23.  No party alleges any failings with respect to the Department’s fulfillment of procedural requirements associated with Countrymark’s Application.  In any event, the evidence reveals that an informal hearing was scheduled and conducted by the Department on August 10, 2010 and the opportunity was provided for the public to submit written comments in advance of that hearing.  A “Notice of Informal Hearing on Application for Forced Pooling filed by Countrymark Energy Resources, LLC” dated July 5, 2010 was personally issued to Williams, who participated in the informal hearing and was provided an additional 30-day opportunity to submit further information following conclusion of the informal hearing.   Exhibit 1, Document 5, “Notice to Unleased Landowners”, and Document 7, “September 9, 2010, comments submitted by Gary Williams via email”.

 

24.  The Department issued its “Order of Integration” on October 28, 2010, rendering its findings of fact and conclusions of law and order, which states in part:

Conclusions of Law and Order of Integration

 

 

5. All leaseholds and parcels comprising the Gary and Elizabeth Williams property (Integration Tract A)…are hereby ordered to be integrated into the UNIT as a single drilling unit.  It is reasonable, fair, and equitable, as required by IC 14-37-9-2, that such integration of interests be accomplished so that the unit operations may be conducted as if the UNIT area had been included in single leases executed by all owners of oil and gas interests within said UNIT.

 

6. Gary and Elizabeth Williams shall be entitled to receive a 1/8th royalty share of all oil, natural gas, and other hydrocarbons produced, and calculated at the decimal rate of 0.00131 of the total production from the UNIT.

 

8. As provided in IC 14-37-9-2, the portion of the production allocated to the owner of any tract within the UNIT shall be considered as if produced from a well drilled on that tract.

 

9. Notwithstanding any contrary provisions contained in the Application, nothing in this Order of Integration shall be construed as granting applicant any legal right of entry onto, over, or across the surface of any portion of the Williams…properties.  However, Applicant shall be considered as being granted all other rights and privileges afforded to owners of oil and gas interests under Indiana law at IC 32-23-7-6.

 

25.  It is confirmed that the issue of the Integration Order is the only matter at issue in this proceeding and further acknowledged that the Department’s consideration of the Integration Order is separate and apart from the Department’s consideration of Countrymark’s Application for Well Permit for the drilling and operation of the well for oil and gas purposes associated with the Unit.  However, certain aspects of this proceeding require a consideration of Countrymark’s intentions with respect to the drilling of that well.

  

26.  Countrymark’s intention, as stated on its Application for Well Permit, is to drill a new “horizontal well sidetracking” for the secondary recovery of oil.  Exhibit 1, Document 4.  As included with Countrymark’s Application, the well’s surface location would have been within the Muehlenbein Tract with a southeasterly horizontal bore that traversed through nearly the center of Williams’ property.  Exhibit 1, Document 2, Exhibit B to the Application for Integration Order, Testimony of Williams, Testimony of Jason Smith (Smith).  However, before the informal conference was conducted, Countrymark had revised the well path in such a way that the surface location was outside the western boundary of the Unit with an east to north horizontal trajectory that would traverse only the eastern edge of Williams’ property.  Claimant’s Exhibit a, Testimony of Williams, Testimony of Smith.  At the administrative hearing, however, Smith testified that Countrymark presently anticipates using a third drilling plan that will have a surface location on the Muehlenbein Tract.  Respondents Exhibit I-3A.  Under this third drilling plan, from the surface location, the well is proposed to be drilled to a vertical depth of approximately 800 feet before beginning its horizontal conversion at which the horizontal bore will continue in a southerly direction into the Midway Tract with a fully horizontal bore located more than 2,000 feet subsurface that will be located approximately 50 feet outside the property boundary of Williams’ property.  Testimony of Smith, Testimony of Gibbons, Respondents Exhibit I-3A, I-3B1 and I-3B2.

 

27.  While Countrymark’s witnesses testified that Countrymark “anticipates” utilizing a drilling trajectory that avoids subsurface drilling within the boundary of Williams’ property and expressed a high degree of confidence in Countrymark’s ability to accurately drill the well so as to avoid Williams’ subsurface property, there is no identified enforceable restriction that requires this action or that would prevent drilling the well through Williams’ subsurface property.

 

[VOLUME 12, PAGE 10]

 

28.  While Williams offers the assertion that the majority of the oil to be recovered under the Integration Order is located directly beneath his property, Williams offered no evidence to support this position. 

 

29.  The only evidence relating to the location of oil within the Unit was presented through the testimony of Smith, who is a licensed professional geologist serving as Countrymark’s Manager of Production and Development and who before being employed by Countrymark, served as the Senior Geologist for Core Minerals; Smith also provided field geologist services through other previous employment.  Testimony of Smith.  Smith holds degrees in Biophysics and Geology from the University of Southern Indiana.  Id.

 

30.  Smith’s primary role with Countrymark involves evaluation of well histories to determine if oil resources remain following previous production, which involves a review of how previously drilled wells were completed and which formations they were drilled into along with consideration of other factors to determine where oil from a previously drilled pool may continue to exist. Testimony of Smith.

 

31.  The subsurface strata associated with Williams’ property as well as the area within the Unit was determined through a review of existing geophysical logs available through the Department and the Indiana Geological Survey as well as samples recovered while drilling a different well in the area.  The Indiana Department of Transportation also provided samples of limestone being quarried for construction from a limestone formation that Countrymark plans to drill through to reach its target formation.  Testimony of Smith.

 

32.  Furthermore, “Electric Logs”, which measure resistivity and conductivity of subsurface materials by which various strata and material can be identified in terms of porosities and permeabilities and the thicknesses of various strata can also be determined.  Testimony of Smith.  Three Electric Logs using three existing well holes indicates that the six and one-eighth inch horizontal bore hole will be located beneath 6 limestone layers.  Testimony of Smith, Respondent’s Exhibit I-6.

 

33.  Williams expressed concern that his drilled water well, the sole source of his family’s water, could be damaged as a result of the horizontal drilling proposed by Countrymark and hydrofracturing that he believes Countrymark intends to engage in; however, Williams offered no witnesses or other evidence in support of his concerns.

  

34.  The vertical portion of the bore that will be located at a great distance from Williams’ real property will be at a greater diameter but the horizontal bore hole that will traverse beneath the surface of or near Williams’ real property will be only six and one eighth inches in diameter. Testimony of Gibbons, Respondent’s Exhibit I-4 (photo is to scale).

 

35.  Water resources are protected by the cementing of casing within the bore hole.  Countrymark will identify the “lowest USDW, which is the groundwater” through which the casing is cemented to the surface.  Testimony of Gibbons.  Gibbons explained that the “casing” is a string of steel pipe sections that have been connected together and placed within the bore hole and that the cement is circulated in the void between the earthen bore hole and the exterior of the casing.  In addition, for the “long-string or primary production string… it is required by the state of Indiana to circulate cement back to surface…in that particular case you would have two layers of protection at that point…”  Testimony of Gibbons.

 

36.  The only evidence presented that has bearing upon Williams' concerns for his water well come from Smith and Gibbons.  Smith testified that there was little likelihood that any slump would occur at the surface even if the bore hole collapsed because the depth of the bore hole would be greater than 2,000 feet subsurface.  Furthermore, Gibbons testified that in his years in the oil production business he could not recall one instance of water well contamination or damage that has occurred under the existing regulations.

 

37.  With respect to the issue of hydrofracturing the Findings of Fact stated in the Department’s “Order of Integration” state clearly that at the time of the Department’s Informal Hearing Countrymark expressed no intent to hydrofracture the well.  Stipulated Exhibit 1.  In further support, the well that is to be drilled within the Unit will be drilled into sandstone where hydrofracturing would be counterproductive.  Testimony of Gibbons.

 

38.  The only evidence contained within the record necessitates the determination that any likelihood of damage to Williams’ drilled water well is highly remote.

 

[VOLUME 12, PAGE 11]

 

39.  The Electric Logs and other available subsurface data was used to “generate an image” of the subsurface structure to assess the original location of the oil and to estimate the original amount of oil in place.  Testimony of Smith.  By this methodology the oil reserve associated with the Midway lease was originally located directly beneath Williams’ property and the property to the north of Williams.  Testimony of Smith.  That the original location of greatest oil concentration was determined cannot be equated to a definitive present location of the oil reserve because oil production has previously occurred.  Testimony of Smith.  Following past production in the Unit, the field was “water flooded” by the injection of water into the existing wells thereby causing additional migration of the oil reserve.  Testimony of David Sawyer (Sawyer).  In fact, despite the best evaluation of all available data, which reveals that a remaining oil reserve should exist, the possibility remains that there may be no oil reserve to recover at all. Testimony of Smith, Testimony of Gibbons.

 

40.  There exists no evidence to support a finding that a greater amount of oil with the Unit presently lies beneath Williams’ property as compared to what oil exists beneath the real property of any other owner within the Unit.

 

41.  Sawyer, Production Engineer for Countrymark, who was previously employed by Countrymark’s predecessor, Core Minerals, has the responsibility of identifying projects, estimating reserves, increasing production, unitizing and economic modeling associated with well projects. Testimony of Sawyer.  According to Sawyer, the existing vertical well located on the Muehlenbein Lease is presently producing two to three barrels of oil per day, which is similar to the production from other previously existing vertical wells, the Ford wells.  The Ford Wells were recently replaced with a horizontal well that now produces approximately 110 barrels of oil per day and this is the same type of production Countrymark expects to experience with the horizontal well to be drilled on the Unit. Id. The oil to be produced will be recovered from both the Muehlenbein and the Midway Parcels and for economic efficiency for both Countrymark and the landowners the 80 acre Unit was most appropriate.  Id.

 

42.  According to Smith oil produced by the anticipated horizontal well will be captured from both the Muehlenbein Parcel and the Midway Parcel and the “bottom of the well bore will be on” the Muehlenbein Parcel so both parcels are entitled to share in the proceeds. Testimony of Smith, Testimony of Sawyer.  

 

43.  Williams offered no witnesses or evidence in contest to the testimony of Countrymark’s experts regarding the oil reserves remaining beneath the Muehlenbein Parcel or the location of the greatest quantities of oil beneath the Midway Parcel.

 

 

CONCLUSIONS OF LAW

 

44.  In this proceeding, the burden of going forward with evidence and the burden of persuasion, commonly referred to as the burden of proof, must be borne by the Claimant, Williams.  Shoaff, et al. v. Fort Wayne Zoological Society and DNR, 8 CADDNAR 157, (2000).  As such Williams must prove by a preponderance of the evidence that the Integration Order should be set aside.

 

Constitutional Issues and Department Legal Authority

 

45.  A brief historical review of oil and gas law is beneficial to a determination of the constitutional issues raised by Williams.

 

46.  Oil and gas have been described by the United States Supreme Court since 1895 as “substances of a peculiar character” because these substances are subject to escape from one location and migration to another.  Brown v. Spilman, 155 U.S. 665, 669-670, (1895).  Oil and gas are a part of the property under which they lie and for that reason are the property of the surface owner of the land but they remain the property of the surface owner only for the time that they remain beneath that surface.  Id.  For this reason the law associated with mining for coal and other minerals, which have a fixed and unchanging location, are not applicable.   Id.

 

47.  “When they [oil and gas] escape and go into other land, or come under another’s control, the title of the former owner is gone.  If an adjoining owner drills his own land, and taps a deposit of oil or gas, extending under his neighbor’s field, so that it comes into his well, it becomes his property.”  Id.  This is known as the “rule of capture.”  Hale, et al. v. CNX Gas Company, LLC, et al, 2011 U.S. Dist. LEXIS 52935.

 

48.  Consequently, “possession of the land, therefore, is not necessarily possession of the gas”.  Westmoreland & Cambria Natural Gas Company v. DeWitt, 18 A. 724 (Pa. 1889).

 

49.  The court in Ohio Oil Company v. State of Indiana, 177 U.S. 190, (1900) reviewed causes involving claims by one land owner against a neighboring land owner, each of whom possessed oil and gas wells.  For example, in Hague v. Wheeler, 157 Pa. 324, one neighbor complained of waste by the other, while in Jones v. Forest Oil Co., 194 Pa. 379, (1900), a neighbor complained about the adjoining land owner’s use of a pump of such strength to draw oil and gas away from the well of the complainant.  In each of these cases the courts refused relief based upon the premise that “the property of the owner of lands in oil and gas is not absolute until it is actually in his grasp and brought to the surface” and the Jones court found no reason “why an oil and gas operator should not be permitted to adopt any and all appliances known to the trade to make the production of his wells as large as possible”.  Ohio Oil at 205, citing Jones.

 

[VOLUME 12, PAGE 12]

 

50.  No owner of the surface of the earth, within the area beneath which the gas and oil move, can exercise his right to extract from the common reservoir, in which the supply is held, without, to an extent, diminishing the source of supply as to which all other owners of the surface must exercise their rights.”  Ohio Oil at 203.

 

51.  The Ohio Oil court succinctly summarized the state of Indiana law at that time as follows:

 

Without pausing to weigh the reasoning of the opinion of the Indiana court in order to ascertain whether they in every respect harmonize, it is apparent that the cases in questions, in accord with the rule of general law, settle the rule of property in the state of Indiana to be as follows: 

 

Although in virtue of his proprietorship the owner of the surface may bore wells for the purpose of extracting natural gas and oil until these substances are actually reduced by him to possession, he has no title whatever to them as owner.  That is, he has the exclusive right on his own land to seek to acquire them, but they do not become his property until the effort has resulted in dominion and control by actual possession. 

 

It is also clear from the Indiana cases cited that, in the absence of regulation by law, every owner of the surface within a gas field may prosecute his efforts and may reduce to possession all or every part, if possible, of the deposits, without violating the rights of the other surface owners. (Emphasis added)  Ohio Oil at 208.

 

52.  The United States Supreme Court concluded in Ohio Oil:

…As to gas and oil the surface proprietors within the gas field all have the right to reduce to possession the gas and oil beneath.  They could not be absolutely deprived of this right which belongs to them without a taking of private property.

 

It follows from the essence of their right and from the situation of the things as to which it can be exerted, that the use by one of his power to seek to convert a part of the common fund to actual possession may result in an undue proportion being attributed to one of the possessors of the right to the detriment of the others or by waste by one or more to the annihilation of the rights of the remainder

 

Hence it is that the legislative power from the peculiar nature of the right and the objects upon which it is to be exerted, can be manifested for the propose of protecting all the collective owners, by securing a just distribution, to arise from the enjoyment, by them, of their privilege to reduce to possession, and to reach the like end by preventing waste

 

Viewed, then, as a statute to protect or to prevent the waste of the common property of the surface owners, the law of the state of Indiana which is here attacked because it is asserted that it divested private property without due compensation, in substance, is a statute protecting private property and preventing it from being taken by one of the common owners without regard to the enjoyment of the others.  (Emphasis added) Ohio Oil at 209-210.

 

53.  In the same manner as the Ohio Oil  court examined and upheld the Indiana statute then in controversy, which was enacted to prohibit the waste of oil and gas, thereby determining that it was not a statute that divested a person of property without due process but was instead a statute that prevented one private party from depleting the oil and gas resources to the detriment of other common owners, it is hereby similarly determined that the Indiana statute here in issue does not deprive Williams of his property right in the oil at issue, but instead protects Williams’ property right from being depleted by Countrymark or any other owner without any compensation whatsoever.

 

54.  As a consequence of the determination that the statutes and administrative rules do not dispossess Williams of his property right to the oil beneath the surface of his owned land, but instead confer upon Williams a right to share in the proceeds of the sale of that oil recovered by Countrymark, a right Williams did not have at common law, no taking as referred to in the Constitution of the State of Indiana or under the Fifth and Fourteenth Amendments to the Constitution of the United States, has occurred.  Ohio Oil at 208.

 

55.  Because no taking has occurred, it is irrelevant whether the oil to be recovered by Countrymark is being recovered for public or private use.  Notwithstanding this conclusion, it is interesting to note that the oil to be recovered by Countrymark will be sold, refined and placed in the market for public purchase.  This cannot be truly distinguished from the expanded view of “public use” that has embraced the taking of private real property for transfer to a second private entity for the purpose of economic development that has been, on occasion, upheld by the U. S. Supreme Court.  Kelo v. City of New London, 545 U.S. 469, (2005).

 

56.  The Department is possessed of only that authority granted to it by the Indiana General Assembly.  Dyer Baptist Church v. Town of Dyer and DNR, 8 CADDNAR 79 (1998). 

 

57.  Through the enactment of Indiana Code § 14-37-9-1, the Department is authorized to require owners to integrate their oil and gas interests under the proper circumstances.  Indiana Code § 14-37-9-1 states:

 

Sec. 1. (a) If at least two (2) separately owned tracts of land are located:
        (1) within an established drilling unit; or
        (2) within a pool or part of a pool suitable for secondary recovery methods;
the owners of the separate tracts may agree to integrate their interests and to develop their land as a drilling unit.
    (b) If the owners of separate tracts of land do not agree to integrate their interests, the commission shall, for the prevention of waste or to avoid the drilling of unnecessary wells, require the owners to integrate their interests and to develop the land as a drilling unit.

 

[VOLUME 12, PAGE 13]

 

58.   An order for integration issued by the Department is further controlled by Indiana Code § 14-37-9-2, which states:

 

Sec. 2. An order for integration issued under this chapter must be based upon reasonable terms that give the owner of each tract an equitable share of oil and natural gas in the unit or pool. The part of the production allocated to the owner of each tract shall be considered as if produced from a well drilled on that tract. The commission may not limit well production under this chapter.

 

Integration Order Fails to Appropriately Proportion Compensation

 

59.  Williams asserts that as the surface owner of the real property under which lies the largest original pool within the Midway Parcel he is the owner of what is probably the largest remaining oil resource and should consequently receive a larger proportion of the proceeds as opposed to the remaining common owners within the unit.

 

60.  The payment of a royalty of one-eighth the net proceeds multiplied by the property owner’s proportional surface ownership is presently, and has been throughout longstanding history, customary within the industry.  Hale et al. v. CNX Gas Company, LLC, et al., 2001 U.S. Dist. LEXIS 52935, Patterson v. Stanolind Oil & Gas Co. et al., 305 U.S. 376, (1939), Marrs v. Oxford, 32 F.2d 134, Tyson Oil Co. v. Railroad Commission, 12 F. Supp. 202 and Adkins v. West Frankford, 51 F. Supp. 2d 532.  In fact, certain states require the royalty share for owners of real property within an established drilling unit to be set at one-eighth share.  Okl. Stat. Tit. 52 §87.1 and Ark. Code § 15-72-305.

 

 

61.  Despite the parties being offered the opportunity for submission of post hearing briefs, an opportunity to which all parties availed themselves, no party, including Williams has provided any legal support for the determination of royalty shares attributed to real property based upon the amount of oil lying beneath the surface of each tract.  Independent research has likewise revealed no existing support for Williams’ proposition.

 

62.  Furthermore, Williams’ argument fails to grasp the particular nuance that until the oil resource lying beneath his real property is converted to actual physical possession “he has no title whatever to them as owner.”  Ohio Oil, supra at 208.  Therefore, even if the majority of the oil resource recovered by Countrymark is contributed by Williams’ real property, a fact that Williams has failed to prove, he is not the title owner of any oil, regardless of amount, while it remains beneath his real property.  Therefore, logically Williams is, therefore, entitled to no greater compensation that any other surface owner.

 

63.  Furthermore, as previously stated, Williams, who bears the burden of proving his assertions by a preponderance of the evidence, has failed to establish that any oil, let alone a greater amount of the oil reserve in the Unit, actually lies beneath his real property.  Therefore, even if the law supported Williams’ proposition that he is entitled to a greater proportion of the proceeds, such could not be awarded in this case. 

 

Appropriateness of the Unit’s Size

 

64.  Williams maintains that the inclusion of both the Muehlenbein Parcel and the Midway Parcel into the Unit, as was approved by the Integration Order, artificially diminishes the proceeds payable to each of the owners of real property within the Unit and is in violation of Indiana law.

 

65.  The establishment of a drilling unit is controlled by 312 IAC 16-5-2 which states:

 

Sec. 2. (a) This section establishes drilling units.

(b) For sandstone reservoirs, every quarter, quarter, quarter section containing ten (10) acres, more or less, as established by the official U.S. Public Lands Survey by the rectangular surveying system for the state.

(c) For all other reservoirs, except in established Trenton limestone reservoirs, half a quarter, quarter section containing twenty (20) acres, more or less, as established by the official U.S. Public Lands Survey by the rectangular surveying system for the state.  The use of any portion of one (1) quarter, quarter section with any portion of another quarter, quarter section is prohibited unless

approved following an informal hearing conducted under 312 IAC 16-2-3.

(d) For established Trenton limestone reservoirs, half of every quarter, quarter, quarter section containing five (5) acres, more or less, as established by the official U.S. Public Lands Survey by the rectangular surveying system for the state.

(e) An exception to drilling unit requirements may be authorized following an informal hearing under 312 IAC 16-2-3, if the exception is supported by unusual regional or geological characteristics and is conducive to the most efficient and economical recovery of oil and gas.

(f) A drilling unit may be established following an informal hearing under 312 IAC 16-2-3 for those areas not covered by the rectangular surveying system of the U.S. Public Lands Survey. The drilling unit shall conform as nearly as practicable to the drilling unit requirements for reservoirs of similar lithology in those areas covered by the rectangular surveying system.

(g) For irregular sections containing more or less than six hundred forty (640) acres, the department may establish drilling units other than those defined in subsections (b) through (c) of approximately twenty (20) acres or ten (10) acres.

 

66.  An informal hearing was scheduled and conducted by the Department, in accordance with 312 IAC 16-2-3 and with participation from both Williams and Countrymark on August 10, 2010.

 

67.  Following the informal conference, the Department concluded that “the configuration of the proposed 80 acre UNIT is consistent with the drilling unit requirements of 312 IAC 16-5-2 and the Non-Rule Policy Document #58 adopted by the Natural Resources Commission with respect to drilling unit and well spacing requirements for horizontal wells.”  Stipulated Exhibit 1, Order of Integration.

 

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68.  This proceeding involves a sandstone reservoir thereby drawing into application 312 IAC 16-5-2, which dictates a 10 acre drilling unit.  However, pursuant to 312 IAC 16-5-2(e), the Department may grant an exception to the drilling unit requirements based upon specified criteria.  

 

69.  The Department’s determination to grant an exception to the drilling unit requirement set forth at 312 IAC 16-5-2(b) is authorized by 312 IAC 16-5-2 and is consistent with “Non-Rule Policy Document # 58”.  312 IAC 16-5-2(e)

 

70.  It is important to note that “Non-Rule Policy Document # 58” is a “nonrule policy document and not a rule so the publication does not have the force of law,” Rekeweg v. Nix, 12 CADDNAR 75, (2009), but does constitute a statement that “interprets, supplements or implements” a statute or administrative rule.  Tiller v. DNR, 10 CADDNAR 5, (2005).

 

71.  As is noted within Non-Rule Policy Document #58:

 

In accordance with IC 14-37-3-3 the commission is authorized to develop rules regulating the spacing of wells for oil and gas purposes. Existing rules for this purpose are found at 312 IAC 16-5-1 through 312 IAC 16-5-3. These rules were developed before widespread use of horizontal well drilling technologies began to be employed in Indiana.  Applying the existing vertical well spacing rules to horizontal wells has become increasingly difficult for the division of oil and gas to ensure that consistent methods are used to determine the location of wells within a drilling unit and to assign acreage to a horizontal well for production sharing purposes

 

Non-Rule Policy Document #58 recognizes the need for flexibility in the establishment of drilling units associated with horizontal wells.

 

72.  Again Williams presented only the premise that the inclusion of 80 acres within the Unit would diminish the royalty payment due to the property owners by one-half but offered no actual economic data to support his assertion.

 

73.  In any event, 312 IAC 16-5-2 requires the Department to base its determination to grant an exception to the drilling unit requirements upon a determination associated with “unusual regional or geological characteristics” and a determination that the exception “is conducive to the most efficient and economical recovery of oil and gas.”

 

74.  The only evidence in the record relating to these criteria supports the establishment of the Unit comprised of 80 acres.

 

75.  The planned horizontal well will recover oil from both the Muehlenbein Parcel and the Midway Parcel and therefore both must be included in the Unit.  Testimony of Smith. Countrymark’s Production Engineer, Sawyer, testified that his responsibility is to estimate reserves and prepare economic modeling regarding the most cost effective and efficient means of recovering those reserves.  Sawyer was familiar with current vertical well production on the Muehlenbein Parcel as well as significant increases in production in other fields where similar vertical wells have been replaced by horizontal wells.

 

76.  Sawyer’s integrity and qualifications were not questioned and no evidence was offered to controvert Sawyer’s conclusions that the most cost effective and efficient means of recovering the oil reserves available is through the unitization of both the Muehlenbein Parcel and the Midway Parcel. 

 

Criminal Trespass Claim

 

77.  The issuance of the Integration Order is an exercise of police power by the state of Indiana and the constitutionality of such exercise is not in doubt.  Buck Draw Field v. Wyoming Oil and Gas Conservation Commission, 721 P.2d 1070, (Wy. Sup. Ct., 1986)

 

78.  The Integration Order, at issue in this proceeding, does not authorize the drilling of a well for oil and gas purposes, it merely integrates two parcels of real property into the Unit.

 

79.  Williams’ concern that the actual well proposed to be drilled by Countrymark will amount to criminal trespass does not appear to provide a legal basis upon which the Integration Order could be set aside.  This issue would more appropriately relate to permitting and enforcement associated with the actual drilling of wells for oil and gas purposes.

 

80.  As it has been previously discussed, a longstanding line of decisions throughout history confirm the constitutionality of state legislation designed to protect and promote the public welfare and safety by preventing the waste of and promoting the efficient production of oil and gas resources as well as to provide for the appropriate compensation to all owners of oil interests.  Ohio Oil, supra, Buck Draw Field, supra, Adkins v. City of West Frankfort, 51 F. Supp. 532, (Dist. Crt., E.D. Ill., 1943).

 

[VOLUME 12, PAGE 15]

 

81.  An exercise of police power serves to allow all necessary action to serve the purposes prescribed for the benefit of the general public.  To the extent that actual subsurface contact with Williams’ real property occurs such would not in the mind of the trier of fact constitute Criminal Trespass.

 

82.  However, it is important to note that the prosecution of a person for Criminal Trespass, as established at Indiana Code § 35-43-2-2(a)(1) and (4), is to be initiated by a prosecuting attorney.  Indiana Code § 35-34-1-1(b).  This determination shall not be construed as a usurpation of any obligations or responsibilities of any prosecuting attorney and shall further not be construed in any manner to impede the exercise of prosecutorial discretion. 

 

Hydrofracturing and Protection of Groundwater

 

83.  Similar to the determination stated in findings # 78 and #79, supra, the Integration Order at issue in this proceeding does not authorize the drilling of a well for oil and gas purposes, it merely unitized Williams’ property into the Unit from which oil resources with be produced.  The issue of hydrofracturing and potential damage to water resources would be relevant to the permitting and enforcement associated with the actual drilling and operation of any well for oil and gas purposes but does not present a legal basis for overturning the Department’s issuance of the Integration Order.

 

84.  In any event, there are requirements and criteria set forth relating to the protection of underground sources of drinking water in conjunction with the drilling of wells for oil and gas purposes.  These requirements are predominantly set forth at 312 IAC 16-5-7 through 312 IAC 16-5-9.

 

85.  Williams has simply failed to prove that hydrofracturing is planned by Countrymark with respect to any future well to be drilled within the Unit.

 

86.  Furthermore, even if hydrofracturing were to occur, Williams presented no evidence to support his contention that such hydrofracturing could impact his water well or that the well drilling anticipated by Countrymark are expected to be in contravention of 312 IAC 16-5-7 through 312 IAC 16-5-9.

 

[EDITOR’S NOTE: The original format of the Administrative Law Judge’s Findings of Fact, Conclusions of Law, and Final Order has been modified to correspond with CADDNAR format.  The Final Order, Paragraph 87, has been relocated to the “Final Order” section at the beginning of this document.]

 



[1] The reference to 2-21.5-3-7 is understood to be an intended reference to 4-21.5-3-7.

[2] The real property owned by the Wheelers was also ordered integrated into the unit as applied for by Countrymark.  However, the Wheelers did not seek administrative review of the Integration Order.