CADDNAR

[CITE: Hoosier Energy Rural Electric v. DNR and L. C. Neely Drilling, 13 CADDNAR 1 (2012)]

 

[VOLUME 13, PAGE 1]

 

Cause #: 11-061G

Caption: Hoosier Energy Rural Electric v. DNR and L.C. Neely Drilling

Administrative Law Judge: Jensen

Attorneys: Czajka & Johnson (Hoosier); Boyko (DNR); Buthod (Neely)

Date: January 23, 2012

 

 

FINAL ORDER

 

[NOTE: ON FEBRUARY 23, 2012, HOOSIER ENERGY TOOK JUDICIAL REVIEW IN THE MARION SUPERIOR COURT (49D03-1202-MI-007392).]

 

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

 

69. Hoosier, as an assignee to the Maverick Lease, consented to Maverick’s, and its agent Neely’s, extraction of the coal bed methane and to the issuance of the Permits to Neely as specified in I.C. 14-37-4-1(c).

 

70. The Department’s issuance of the Permits to Neely is hereby affirmed.

 

 

FINDINGS OF FACT AND CONCLUSIONS OF LAW WITH

 

1.      On April 1, 2011, Hoosier Energy Rural Electrical Cooperative, Inc. (Hoosier) filed its “Petition for Adjudicatory Hearing and Administrative Review and Request for Stay of Effectiveness” relating to Drilling and Testing Permits numbered 54309 and 54310 issued by the Department of Natural Resources (Department) to L.C. Neely Drilling, Inc. (Neely) on March 17, 2011.  This filing initiated the Natural Resources Commission’s (Commission) administrative proceeding captioned Hoosier Energy Rural Electrical Cooperative, Inc. v. Department of Natural Resources and L.C. Neely Drilling, Inc, Administrative Cause Number 11-061G.

 

2.      Thereafter, on June 1, 2011, Hoosier filed a second “Petition for Adjudicatory Hearing and Administrative Review” on June 1, 2011 relating to Drilling and Testing Permits numbered 54308, 54309 and 54311 issued by the Department to Neely on May 16, 2011.  This filing initiated the Commission’s administrative proceeding captioned Hoosier Energy Rural Electrical Cooperative, Inc. v. Department of Natural Resources and L.C. Neely Drilling, Inc, Administrative Cause Number 11-088G.

 

3.      On June 16, 2011, Hoosier filed an unopposed motion to consolidate the two administrative proceedings.  The two administrative proceedings were consolidated on June 23, 2011 and Hoosier’s petition that initiated Administrative Cause Number 11-088G was transferred and made a part of the instant proceeding. 

 

4.      At issue in this proceeding are four Drilling and Testing Permits issued by the Department under Indiana Code §§ 14-37 and 312 IAC 16.

 

5.      The Commission is the “ultimate authority”, as that term is defined at Indiana Code § 4-21.5-1-15, for this administrative proceeding.  312 IAC 3-1-2.

 

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

 

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

 

8.      A prehearing conference and hearing on Hoosier’s request for stay were scheduled for April 15, 2011 and the prehearing conference occurred as scheduled.  On April 15, 2011, Hoosier sought an indefinite continuance of the stay hearing based upon agreements entered between the parties.  No hearing on Hoosier’s requested stay has become necessary.

 

9.      During the prehearing conference the parties agreed that the facts associated with the instant administrative proceeding are straightforward and not in dispute.  They maintain that the only matter in controversy is a matter of law that is appropriate for summary judgment.

 

10.  A schedule was established for the filing of summary judgment motions and associated briefs.

 

11.  The parties having fully briefed the issues and this proceeding is now ripe for determination based upon the motions and briefs of the parties.

 

 

FINDINGS OF FACT:

 

12.  On March 17, 2011, the Department issued to Neely two Drilling and Testing Permits 54309 and 54310.  Neely determined that as a result of an erroneous property description, Permit 54309 was issued for property where he does not possess a leasehold interest.  On May 16, 2011, the Department issued to Neely two additional Drilling and Testing Permits, 54308 and 54311 and on that same date amended the property description associated with Permit 54309.

 

13.  At issue in this proceeding are Permits 54308, 54309, 54310 and 54311 issued by the Department to Neely (hereinafter Permits 54308, 54309, 54310 and 54311 will collectively be referred to as “the Permits”.)

 

14.  Neely is the contract operator and agent for Maverick Energy Inc. (Maverick).  Maverick is the owner of a leasehold estate by which Maverick possesses the exclusive right to explore for and produce all producible gases, including coal bed methane, from all depths on certain described property.  Affidavit of Larry C. Neely; Hoosier Energy’s Response in Opposition to Neely’s Motion for Summary Judgment, Exhibit B, Coalbed Gas Option and Lease (hereinafter referred to as “the Maverick Lease”).

 

15.  The Maverick Lease states:

This lease and all of the conditions, covenants and terms thereof shall extend to and bind the heirs, executors, personal representatives, successors and assigns of Lessor and Lessee.  The estate of either party hereby may be assigned in whole or in part.

 

[VOLUME 13, PAGE 2]

 

16.  Subsequent to the execution of the Maverick Lease, Hoosier became the successor in title to the property, including the surface and coal estates, that are subject to the Maverick Lease and upon which wells associated with the Permits are proposed to be located.[1]  

 

17.  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.

 

18.  Maverick, by virtue of an Assignment of Oil and Gas Leases and Easements (Assignment) executed on October 13, 2008, conveyed its rights to explore for and produce non-coal bed methane gases to Atlas Energy Indiana, LLC, although Maverick retained certain non-coal bed methane interests.

 

19.  Neely’s applications reflect that the wells authorized by the Permits are new “Geologic/Structure test” wells.[2]

 

20.  Neely’s applications for the Permits reflect that the wells are to be drilled to a “proposed total vertical depth 1400 feet” with the Ste Genevieve to be the deepest formation drilled.

 

21.  Mona L. Nemechek (Nemechek) is a licensed geologist in both Indiana and Kentucky who presently serves as the Manager of Technical Services for the Department’s Division of Oil and Gas.  Neither Neely, nor Hoosier, dispute Nemechek’s professional opinion that “the coal seams that are most likely to contain producible quantities of coal bed methane would be found above a depth of approximately 500 feet.” Affidavit of Mona L. Nemechek, dated June 15, 2011.

 

22.  A handwritten notation made by Nemechek appears on the face of Permits numbered 54309 and 54310 stating:

 

No Stimulation of Coal Seams is Authorized Under This Permit

 

23.  Hoosier contends that the Department’s issuance of the Permits to Neely contravenes the prohibition on the Department’s issuance of a permit for the extraction of coal bed methane from a well for oil and gas purposes before July 1, 2012 that is found at Indiana Code § 14-37-4-1(b)(2).

 

24.  Both Neely and the Department agree with Hoosier that the extraction of coal bed methane and the issuance of a permit for that purpose is prohibited until July 1, 2012 by I.C. 14-37-4-1(a – b).  However, they concur in the position that the Permits, which are Geologic/Structure test wells, do not authorize the extraction of coal bed methane and consequently the Permits are not prohibited by operation of I.C. 14-37-4-1(b)(2).

 

25.  Hoosier, as a successor in title to the property subject to the Maverick Lease accepted ownership of that property subject to the terms of the Maverick Lease and thereby consented to the issuance of the permits and Neely’s extraction of coal bed methane from the property as specified at I.C. 14-37-4-1(c) such that Hoosier’s consent renders the prohibitions established at I.C. 14-37-4-1(b)(1 – 2) inapplicable to the issuance the Permits.

 

26.  Neely has not commenced drilling the wells authorized by the Permits.

 

Summary Judgment Standard:

 

27.  Summary Judgment is authorized in administrative proceedings by Indiana Code § 4-21.5-3-23.

 

28.  Summary Judgment is appropriate to terminate litigation where there exists no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.  Steven T. Gerber v. Department of Natural Resources, 9 CADDNAR 31 (2001).

 

29.  It is the party moving for summary judgment who bears the burden of proving that summary judgment should be granted in its favor.  Id.

 

30.  “A genuine issue of material fact exists when facts necessary for the disposition of a proceeding are either (1) in dispute or (2) not in dispute but capable of supporting differing inferences on the same issue.”  F.D. McCrary Operator, Inc v. DNR, 10 CADDNAR 73 (2005) citing Indiana Department of Environmental Management v. Schnippel Construction, Inc., 778 N.E.2d 407 (Ind.App. 2002).

 

31.  However summary judgment may remain appropriate despite the existence of conflicting facts Stuteville v. Downing, 391 N.E.2d 629, (1979), and is appropriate where the court is required to make an interpretation.   Ancich v. Mobile Oil Corporation, 422 N.E.2d 1320 (1981).

 

 

CONCLUSIONS OF LAW:

 

32.  Rules of statutory construction prohibit the construction of clear and unambiguous statutes, but "mandate the court to interpret ambiguous statutes in order to ascertain and effectuate the general intent of the legislature." McCrary, supra citing Indiana Alcoholic Beverage Commission v. Osco Drug, Inc., 431 N.E.2d 823 (Ind. App. 1982)

 

33.  When a statute is open to multiple interpretations, the court may consider the implications of a particular construction. Id.

 

 

34.  Words and phrases are to be given their plain and customary meaning unless the intent of the legislature will be defeated by such meanings and further requires that every word be given effect, and no part be held meaningless. McCrary, supra (and cases cited).

 

[VOLUME 13, PAGE 3]

 

35.  In construing administrative rules the same rules of statutory construction are applicable. McCrary, supra, citing State v. Molnar, 803 N.E.2d 261 (2004 Ind.App.)

 

36.  I.C. § 14-37-4-1 provides as follows:

Sec. 1. (a) Subject to subsection (b), a person may not drill, deepen, operate, or convert a well for oil and gas purposes without a permit issued by the department.

    (b) Except as provided in subsections (c) and (d):
       

 (1) the extraction of coal bed methane from a well for oil and gas purposes on or after the effective date of this subsection and before July 1, 2012, is prohibited; and

 

 (2) the department may not issue a permit under this chapter for the extraction of coal bed methane from a well for oil and gas purposes before July 1, 2012, regardless of whether the application for the permit was made to the department before the effective date of this subsection.
   

 (c) Subsection (b) does not apply if the owner of the right to the coal from which the coal bed methane for which a permit is sought under this chapter is derived consents in an instrument binding on that owner to the extraction of the coal bed methane and to the issuance of the permit.

(d) Subsection (b)(1) does not apply to a coal bed methane well that is operated under a permit issued by the department.

As added by P.L.1-1995, SEC.30. Amended by P.L.80-2005, SEC.2; P.L.78-2010, SEC.4; P.L.42-2011, SEC.32.

 

37.  I.C. 14-37-4-1 became effective on March 17, 2010, exactly one year before the issuance of the Permits to Neely.

 

38.  On its face, I.C. 14-37-4-1 is not ambiguous and is therefore not subject to interpretation.

 

39.  I.C. 14-37-4-1(a) clearly requires a person to obtain a permit from the Department before drilling, deepening, operating or converting any well for oil and gas purposes subject to two restrictions set forth at I.C. 14-37-4-1(b). The restrictions specify that the actual use of a well for oil and gas purposes permitted under I.C. 14-37-4-1(a) shall not be for the extraction of coal bed methane and that the Department is prohibited from issuing a permit under I.C. 14-37-4-1(a) “for the extraction of coal bed methane from a well for oil and gas purposes before July 1, 2012.”

 

40.  However, an exception to the restrictions set forth in I.C. 14-37-4-1(b) exists where the owner of the coal estate from which the coal bed methane is to be derived “consents in an instrument binding on that owner to the extraction of the coal bed methane and to the issuance of the permit.” I.C. 14-37-4-1(c).

 

41.  Neely has not drilled the wells authorized by the Permits so actual use of the wells for the extraction of coal bed methane is an impossibility at the present time.  Thus, I.C. 14-37-4-1(b)(1) is not implicated in this proceeding currently.

 

42.  As Neely aptly points out, a violation of the prohibition on the actual extraction of coal bed methane, as set forth at I.C. 14-37-4-1(b)(1), would subject a permit holder to “appropriate sanctions and penalties as would be the case for any violation of applicable laws and regulations relating to the operation of oil and gas wells.  However, the mere fact that an operator may potentially act in contravention of the terms of a permit is not, in and of itself, a legitimate basis for denying the permit in the first place.”  L.C. Neely Drilling, Inc.’s Memorandum in Support of Motion for Summary Judgment, pg. 5.  For this reason, I.C. 14-37-4-1(b)(1) will be given no further consideration.  

 

43.  A "well for oil and gas purposes" is defined as

a hole drilled, deepened, or converted for any purposes for which a permit is required under IC 14-37 and the rules adopted under that article, including the following:

(1) An oil or natural gas well.

(2) A Class II well under the underground injection control program promulgated under Part C of the Safe Drinking Water

Act (Public Law 95-523, as amended by Public Law 96-502, 42 U.S.C. 300f et seq.) and under 40 CFR 124, 40 CFR 144, 40 CFR 145, and 40 CFR 146.

(3) A structure test well.

(4) A well used for the sole purpose of supplying water for the secondary recovery of petroleum resources.

(5) An underground gas storage well or underground gas storage observation well.

 

44.  Neely’s applications at issue in this proceeding are for “Geologic/Structure Test Wells”. 

 

45.  A geologic or structure test well is a well for oil and gas purposes but more specifically is a "nonproduction well drilled to investigate geologic, structural, or hydrogeologic stratigraphic intervals.”  312 IAC 16-1-27 and 312 IAC 16-1-51(3).

 

46.  Hoosier’s interpretation of I.C. 14-37-4-1, set forth on page 4 of Hoosier Energy’s Brief in Support of Motion for Summary Judgment,  is to the effect that the Department’s issuance of a permit to Neely for any “well for oil and gas purposes” contravenes the prohibition set forth at I.C. 14-37-4-1(b)(2).

 

[VOLUME 13, PAGE 4]

 

47.  Hoosier’s interpretation fails to give effect to the words “for the extraction of coal bed methane” which is descriptive of the type of well for oil and gas purposes referenced in I.C. 14-37-4-1(b)(2).  This failure to consider all the words of a statute is violative of the most elementary statutory construction principles.

 

48.  Furthermore, the result of Hoosier’s interpretation would be the determination that by enacting I.C. 14-37-4-1(b)(2), the Indiana General Assembly intended to prohibit the Department’s issuance of permits for any “well for oil and gas purposes”, including all oil wells, natural gas well, Class II injection wells, underground gas storage wells, underground gas storage observation wells or water supply wells for secondary recovery of petroleum.  Rules of statutory construction disallow this absurd result.

 

49.  That a geologic or structure test well is a well for oil and gas purposes is insufficient to trigger the prohibition set forth at I.C. 14-37-4-1(b)(2).  As Neely and the Department correctly state, only the issuance of a permit for a well for oil and gas purposes to be used “for the extraction of coal bed methane” is prohibited.

 

50.  The Permits authorized the drilling of wells for oil and gas purposes but whether the Permits were issued “for the extraction of coal bed methane” is not so abundantly clear.

 

51.  Neely interprets the word “extraction” as found in I.C. 14-37-4-1 as being synonymous with the word “production” found in other statutes relating to oil and gas well permitting.

 

52.  The parties agree that the word “extraction” is not defined in the context of I.C. 14-37-4-1.  Therefore, the word must be given its plain and ordinary meaning unless to do so would create an illogical or absurd result. McCrary supra.

 

53.  The word “extraction” means:

 

1. The act of extracting or state of being extracted. 2.  Something obtained by extraction. Webster’s II new Riverside university dictionary, 1984, 1988 by Houghton Mifflin Company;

 

1. The act of extracting or the condition of being extracted.  2.  Something obtained by extracting; extract.  The American Heritage Dictionary, Second College Edition, 1982, 1985 by Houghton Mifflin Company;

 

(as applicable) 1.  The act or instance of extracting something, Random House Webster’s College Dictionary, 2000 Second Revised and Updated Random House Edition, April 2000.

 

54.  The word “extract” means:

 

1.  To draw out forcibly. 2. a. To obtain despite resistance  b.  To draw forth by great effort. 3.  To obtain from a substance by chemical, or mechanical action, as by pressure or distillation.  Webster’s II new Riverside university dictionary, 1984, 1988 by Houghton Mifflin Company

 

1. To draw or pull out forcibly. 2.a. To obtain despite resistance. b. To draw forth by great effort.  3.  To obtain from a substance by chemical or mechanical action, as by pressure, distillation, or evaporation.  The American Heritage Dictionary, Second College Edition, 1982, 1985 by Houghton Mifflin Company

 

1.  To pull or draw out, usu. with special effort. 2. to draw forth; educe.  3.  to derive; obtain…. 5. To gain with determined effort. 6. To separated or obtain from a mixture, as by pressure, distillation, or treatment with solvents.  Random House Webster’s College Dictionary, 2000 Second Revised and Updated Random House Edition, April 2000.

 

55.  The word “production” means:

 

(as applicable) 1.  An act or process of producing. 2. Creation of value or wealth by producing goods and services. Webster’s II new Riverside university dictionary, 1984, 1988 by Houghton Mifflin Company; The American Heritage Dictionary, Second College Edition, 1982, 1985 by Houghton Mifflin Company

 

(as applicable) The act of producing; creation or manufacture.  Random House Webster’s College Dictionary, 2000 Second Revised and Updated Random House Edition, April 2000

 

56.  The word “produce” means:

 

To furnish or supply; yield.  Random House Webster’s College Dictionary, 2000 Second Revised and Updated Random House Edition, April 2000

 

To bring forth; yield.  Webster’s II new Riverside university dictionary, 1984, 1988 by Houghton Mifflin Company; The American Heritage Dictionary, Second College Edition, 1982, 1985 by Houghton Mifflin Company

 

57.  A review of the definitions reveals that the words “extraction” and “production” are not synonymous as Neely urges. 

 

58.  Extraction refers more appropriately to the act of extracting material and focuses on the singular or initial event of drawing a substance forth.  Whereas, production refers to a continuing process implemented for bringing forth a supply or yield of the substance.

  

59.  A perfect example in the context of this proceeding would be the act of drilling a nonproduction well, such as a geologic or structure test well, for the expressed purpose of drawing forth coal bed methane but deferring installation of equipment and implementation of processes for actually supplying quantities of coal bed methane until a later time.

 

[VOLUME 13, PAGE 5]   

 

60.  The ultimate issue remains unresolved by the examination of the definition of “extraction” and “extract” because what must be determined in assessing the applicability of I.C. 14-37-4-1(b)(2) upon the Permits is the actual reason Neely sought the permit.

  

61.  In light of the fact that Maverick entered into the Assignment of its right to the Lease to Atlas reserving only an interest in the gaseous hydrocarbons, including coal bed and coal mine methane,  Neely has little or no interest in any other type of oil or gas.  By Neely’s own acknowledgement the overriding purpose of obtaining the Permits is the extraction of coal bed methane.  

 

The ‘only possible purpose’ of a GST (geologic or structure test) well is not, as Hoosier claims, ‘the extraction of coal bed methane,’ but rather, Neely’s purpose for drilling a GST well is to evaluate the potential for the future ‘extraction’ or ‘production’ (pick your term) of coal bed methane.  Any future production/extraction would then require a new permit to convert the GST well to a producing well. 

L.C. Neely Drilling, Inc.’s Reply Brief to Hoosier Energy’s Response in Opposition to Neely’s Motion for Summary Judgment, pg 2. 

 

62.  Neely argues that because a “de minimus amount of coal bed methane may be released incidental to the drilling of a GST well” or any other type of well that penetrates a coal seam that under Hoosier’s theory  the drilling of all wells that would penetrate a coal seam would be prohibited by I.C. 14-37-4-1(b)(2).  This is an incorrect generalization.  Only those permits that authorize the drilling of wells through coal seams that were drilled “for the extraction of coal bed methane” are prohibited.  If Neely’s actual purpose for seeking the Permits was the evaluation and assessment of crude oil or natural gas reserves, the prohibitions established by I.C. 14-37-4-1(b)(2) would be of no import or application even if the drilling of the well would result in the incidental extraction of coal bed methane.

 

63.  The important consideration is the intention of the permit applicant and the purpose of the well to be drilled.  In this instance Neely acknowledges that the intent of the permit and the purpose of the well is the extraction of coal bed methane for the future production of coal bed methane.  Consequently, the permits were issued in contravention of I.C. 14-37-4-1(b)(2), unless Hoosier, as an assignee of the Maverick Lease, has consented “to the extraction of the coal bed methane and to the issuance of the Permits” under I.C. 14-37-4-1(c).

    

64.  The Maverick Lease clearly states that the lessor, at this time Hoosier,

has granted, demised, leased and let and by these presents does grant, demise, lease and let exclusively unto lessee [at this time Maverick] all coal bed gas, and its constituent products, from coal formations or seams and all zones in communication therewith, (hereinafter referred to as “gas”) from immediately below the surface down to 3000 feet below the surface, together with all the rights of ingress or egress, and all other appurtenant easement and right-of-way lessor may hold to the surface….

and further;

For the purpose of this lease, “coal bed methane gas activity” shall mean those activities required to extract coal bed methane gas, including but not limited to, preparing the leased property for production pursuant to the terms of the Indiana Department of Natural Resources, Division of Oil and Gas, Indiana Department of Environmental Management, and all activities required pursuant to the issuance and maintenance of any other permits required to produce coal bed methane gas.

 

65.  Hoosier does not contend that the terms of the Maverick Lease did not constitute consent to Neely, as the agent of Maverick, to produce coal bed methane and to obtain all necessary permits for the production of coal bed methane in 2003 and at all times prior to the enactment of I.C. 14-37-4-1(b) in 2010.

 

66.  In fact such consent from Hoosier to Maverick is necessary to the continued effectiveness of the Maverick Lease which “shall remain in full force and effect for a period of 5 years, after option is exercised, and as long thereafter as coal bed gas is being produced and sold from the project area.” A withdrawal of consent by Hoosier to Maverick, and its agent Neely, to obtain permits for continued coal bed methane production could ultimately result in the termination of the Maverick Lease.  

 

67.  Hoosier however, now argues, without providing legal support, that the intervening enactment of I.C. 14-37-4-1(b) in 2010 has in some manner voided the consent previously bargained for in the Maverick Lease executed in 2003.

 

68.  There is no logical reason or identifiable legal support for the proposition that Hoosier’s consent, granted by it as an assignee of the Maverick Lease, which was effective before the enactment of I.C. 14-37-4-1, is any less effective after the enactment of I.C. 14-37-4-1.