BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

 

IN THE MATTER OF THE PAYMENT OF PROCEEDS FROM THE PRODUCTION OF OIL AND GAS AS ESTABLISHED BY SECTION 34-60-118.5, C.R.S., IGNACIO BLANCO FIELD, FRUITLAND COAL FORMATION, ARCHULETA COUNTY, COLORADO

 

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CAUSE NO.  1

 

DOCKET NO. 170700421, 170700422,                         170700423, 170700424,                         170700425

 

TYPE:  GENERAL ADMINISTRATIVE

 

ORDER NO. 1-202

REPORT OF THE COMMISSION

 

The Commission heard this matter on September 11, 2017, at the Durango Public Library, Program Room #2, 1900 East Third Avenue, Durango, Colorado, upon applications for an order to award payment of proceeds, interest, costs, and attorneys' fees due for production attributable to the Lamke 33-5-29 # 1 Well, from the Fruitland Coal Formation in the Ignacio Blanco Field, Archuleta County. 

 

JURISDICTIONAL FINDINGS

 

The Commission finds as follows:

 

1.            S.D. Bryant, (Docket No. 170700421), Michael J. Clark, (Docket No. 170700422), Anne C.S. Finney, Trustee, (Docket No. 170700423), Fosset Gulch Pipeline Company, LLC (Docket No. 170700424), and James W. Wallis, Trustee, (Docket No. 170700425), collectively, as the “Applicants” herein, are all interested parties in the subject matter of the above-referenced hearing.

 

2.            Catamount Energy Partners, LLC (Operator No. 10464) ("Catamount" or “Protestant”) is the operator of the Lamke 33-5-29 #1 Well (API No. 05-007-06322) (“Well”).

 

3.            Due notice of the time, place and purpose of the hearing has been given in all respects as required by law.

 

4.            The Commission has jurisdiction over the subject matter embraced in said Notice, and of the parties interested therein, and jurisdiction to promulgate the hereinafter prescribed order pursuant to the Oil and Gas Conservation Act.

 

PROCEDURAL HISTORY

 

5.            On October 26, 2015, the Commission entered Order No. 112-256 which, among other things, established a 320-acre drilling and spacing unit pursuant to Order No. 112-85 covering the E½ of Section 32, Township 33 North, Range 5 West, N.M.P.M., for the production of gas and associated hydrocarbons from the Fruitland Coal Seams.

 

6.            On December 5, 2015, the Commission entered Order No. 112-260 which pooled all interests within the approximate 320-acre drilling and spacing unit established for the E ½ of Section 32, Township 33 North, Range 5 West, N.M.P.M.

 

7.            On May 22, 2017, S.D. Bryant (“Bryant”), by his attorneys, filed an Application (Docket No. 170700421) pursuant to Rule 503.b.(10) and §34-60-118.5, C.R.S., for an order awarding payment of proceeds, interest, costs, and attorneys' fees due to Bryant for production attributable to the Well.

 

8.            On May 22, 2017, Michael J. Clark (“Clark”), by his attorneys, filed an Application (Docket No. 170700422) pursuant to Rule 503.b.(10) and §34-60-118.5, C.R.S., for an order awarding payment of proceeds, interest, costs, and attorneys' fees due to Clark for production attributable to the Well.

 

9.            On May 22, 2017, Anne C.S. Finney, trustee of the Anne C.S. Finney Revocable Trust (“Finney Trust”), by her attorneys, filed an Application (Docket No. 170700423) pursuant to Rule 503.b.(10) and §34-60-118.5, C.R.S., for an order awarding payment of proceeds, interest, costs, and attorneys' fees due to Finney Trust for production attributable to the Well.

 

10.          On May 22, 2017, Fosset Gulch Pipeline Company, LLC (“Fosset”), by its attorneys, by its attorneys, filed an Application (Docket No. 170700424) pursuant to Rule 503.b.(10) and §34-60-118.5, C.R.S., for an order awarding payment of proceeds, interest, costs, and attorneys' fees due to Fosset for production attributable to the Well.

 

11.          On May 22, 2017, James W. Wallis, trustee of the James W. Wallis Living Trust (“Wallis Trust”), by his attorneys, filed an Application (Docket No. 170700425) pursuant to Rule 503.b.(10) and §34-60-118.5, C.R.S., for an order awarding payment of proceeds, interest, costs, and attorneys' fees due to Wallis Trust for production attributable to the Well.

 

12.          Applicants are all overriding royalty interest owners within the drilling and spacing unit where the Well is drilled and producing.

 

13.          On July 11, 2017, Catamount filed a Protest to each respective Application, alleging that there is no requirement to pay the overriding royalty owners where the underlying working interest from which the overriding royalty was created is nonconsenting in a pooled unit.

 

14.          On August 1, 2017, a prehearing conference was held with the parties to set deadlines for the Applications to be heard on September 11, 2017. After hearing the parties’ arguments, the Hearing Officer bifurcated the issues.  The first issue to be presented to the Commission was whether overriding royalties are required to be paid where the underlying working interest from which the overriding royalty was created was deemed nonconsenting by Commission order pursuant to Section 34-60-116(7), C.R.S.

 

15.          A Case Management Order was issued on August 15, 2017, effective August 1, 2017, which incorporated the parties’ positions and issues.

 

16.          On August 3, 2017, the Hearing Officer ordered the parties to provide a legal brief on the issue:  should an overriding royalty be paid when the underlying working interest is nonconsenting in a pooled unit?

 

17.          On August 10, 2017, Applicants filed a Response to the Protest arguing, among other things, that overriding royalties were royalty interests contemplated in Section 34-60-116(7), C.R.S.

 

18.          On August 14, 2017, Catamount filed its brief on the legal issue.

 

19.          On August 15, 2017 (Revised on August 16, 2017), Applicants filed their legal brief.

 

20.          On August 21, 2017, the parties filed prehearing statements. In their prehearing statement, Applicants requested that the Commission hear testimony from an expert witness.

 

21.          On August 25, 2017, Applicants filed a Motion for Leave to File Additions to Evidentiary Exhibits and Facts, which included information related to Catamount and Clark and requesting to revise Applicant’s prehearing statements to include additional facts. Applicants also filed a Motion for Administrative Notice requesting the Commission take administrative notice of various facts.

 

22.          On August 28, 2017, Catamount filed its Response to Applicants’ prehearing statements and objected to Applicant’s Motion for Administrative Notice and Motion for Leave to File Additional Exhibits.  Catamount also objected to the proffered expert testimony.

 

23.          On August 28, 2017 (Revised August 30, 2017), Applicants filed a response to Catamount’s prehearing statements.

 

24.          On August 29, 2017, Applicants responded to Catamount’s objection to the request for Additional Exhibits and Expert Testimony.

 

25.          On August 30, 2017, a final prehearing conference was held at which time the Hearing Officer heard the arguments of the parties and took the issues under advisement.

 

26.          On September 1, 2017, Applicants filed their final exhibits.

 

27.          On September 7, 2017, the Hearing Officer denied Applicants’ request for leave to file Additional Exhibits, Expert Testimony, and denied in part and granted in part, Applicant’s Motion for Administrative Notice.

 

28.          Applicants and Catamount, through their counsel, presented oral argument to the Commission concerning their legal arguments on September 11, 2017.

 

 

ISSUES AT HEARING

 

 The issue presented is: Whether the compulsory pooling provisions of the Oil and Gas Act (“Act”), § 34-60-116, C.R.S., require parties who have consented to participate in drilling a well (“consenting owners”) to pay overriding royalty interests which encumber the working interest of lessees who did not elect to pay costs (“nonconsenting owners”) during the statutory penalty period.

 

APPLICABLE LAW

 

1.            Section 34-60-116, C.R.S.:

 

            (6) When two or more separately owned tracts are embraced within a drilling unit, or when there are separately owned interests in all or a part of the drilling unit, then persons owning such interests may pool their interests for the development and operation of the drilling unit.  In the absence of voluntary pooling, the commission, upon the application of any interested person, may enter an order pooling all interests in the drilling unit for the development and operation thereof.  Each such pooling order shall be made after notice and hearing and shall be upon terms and conditions that are just and reasonable, and that afford to the owner of each tract or interest in the drilling unit the opportunity to recover or receive, without unnecessary expense, his just and equitable share.  Operations incident to the drilling of a well upon any portion of a unit covered by a pooling order shall be deemed for all purposes to be the conduct of such operations upon each separately owned tract in the unit by the several owners thereof.  That portion of the production allocated or applicable to each tract included in a unit covered by a pooling order shall, when produced, be deemed for all purposes to have been produced from such tract by a well drilled thereon.

 

(7)(a) Each such pooling order shall make provision for the drilling of a well on the drilling unit, if not already drilled, for the operation thereof, and for the payment of the reasonable actual cost thereof, including a reasonable charge for supervision and storage.  Except as provided in paragraph (c) of this subsection (7), as to each nonconsenting owner who refuses to agree to bear his proportionate share of the costs and risks of drilling and operating the well, the order shall provide for reimbursement to the consenting owners who pay for the drilling and operation of the well of the nonconsenting owner's share of the costs and risks of such drilling and operating out of, and only out of, production from the unit representing his interest, excluding royalty or other interest not obligated to pay any part of the cost thereof.  In the event of any dispute as to such costs, the commission shall determine the proper costs as specified in paragraph (b) of this subsection (7).  The order shall determine the interest of each owner in the unit and shall provide that each consenting owner is entitled to receive, subject to royalty or similar obligations, the share of the production of the well applicable to his interest in the drilling unit and, unless he has agreed otherwise, his proportionate part of the nonconsenting owner's share of such production until costs are recovered and that each nonconsenting owner is entitled to own and to receive the share of the production applicable to his interest in the unit after the consenting owners have recovered the nonconsenting owner's share out of production.

 

2.            Section 34-60-118.5, C.R.S., which provides the Colorado Oil and Gas Conservation Commission with exclusive jurisdiction concerning the payment of proceeds derived from the sale of oil, gas or associated products from a well in Colorado including the following:

        

(a)  The date on which payment of proceeds is due a payee under section (2) of the section;

(b)  The existence or nonexistence of an occurrence pursuant to subsection (3) of this section which would justifiably cause a delay in payment; and

(c)  The amount of the proceeds plus interest, if any due a payee or payer.

 

3.            Section 34-60-118.5(2)(a), C.R.S., provides that payment of proceeds derived from the sale of oil, gas, or associated products shall be paid by a payer to the payee commencing not later than six months after the end of the month in which production is first sold, and, thereafter, on a monthly basis not later than sixty days for oil and ninety days for gas and associated products following the end of the calendar month in which subsequent production is sold.

 

4.            Under the COGCC Rule 507.b.(2), notice of pooling applications must be provided to all persons who own any interest in the mineral estate of the tracts to be pooled “except for owners of an overriding royalty interest.”

 

5.            An overriding royalty is a royalty interest that is carved out of the lessee’s working interest created by an oil and gas lease, and is limited in duration to the life of the leasehold interest.  Grynberg v. Waltman, 946 P.2d 473 (Colo. App. 1996). Like the royalties reserved by mineral owners when they lease minerals (“landowner royalties”), overriding royalties do not bear any costs of drilling or production. See Garman v. Conoco, Inc., 886 P.2d 652, 657 (Colo. 1984) (citing 2 Howard R. Williams & Charles J. Meyers, Oil and Gas Law § 418.1 (1993)).

 

6.            In interpreting a statute, the Commission is to read the language of the statute, and give all words their plain and ordinary meaning. Golden Animal Hosp. v. Horton, 897 P.2d 833, 836 (Colo. 1995).  The statute should be read in its entirety, so that all parts have meaning and effect. Zab, Inc. v. Berenergy Corp., 136 P.3d 252, 255 (Colo. 2006). If the language is clear and unambiguous, the analysis stops there. W. Fire Truck, Inc. v. Emergency One, Inc., 134 P.3d 570, 573 (Colo. App. 2006).

 

7.            If the language is ambiguous, the Commission should examine legislative history, the consequences of an interpretation, and the goal of the statute. Bd. of County Com'rs v. Costilla County Conservancy Dist., 88 P.3d 1188, 1193 (Colo. 2004). The Commission should presume the legislature intended a just and reasonable result and not interpret the Act in a manner that leads to an absurd or unreasonable result. Board of County Com'rs of County of Rio Blanco v. ExxonMobil Oil Corp., 192 P.3d 582, 585–86 (Colo. App. 2008).

 

8.            No evidence was presented at hearing regarding the legislative history of the relevant provisions of the Act.

 

9.            While counsel for both parties argued that industry practice supported their positions, no evidence was presented at hearing regarding industry practice.

 

CONCLUSIONS

 

10.          Counsel for Applicant argued that section 34-60-116(7)(a), C.R.S., requires an operator to pay the overriding royalty owners because the statute specifically excludes “royalty or other interest not obligated to pay any part of the cost thereof.” Applicants further argued that this interpretation is consistent with the language in the statute which indicates that pooling order “shall provide that each consenting owner is entitled to receive, subject to royalty or similar obligations, the share of the production of the well applicable to his interest in the drilling unit …”

 

11.          Catamount’s counsel argued when a working interest owner is nonconsenting pursuant to a pooling order, the statute requires that the nonconsenting working interest owners receive nothing and the consenting owner is entitled to the proportionate part of the nonconsenting owner's share of such production are until costs are recovered. The basis for Catamount’s argument is the overriding royalty interest in carved out of a working interest who is not entitled to its share of production, thus, the interests flowing from that nonconsenting owner only received payment when the costs are recovered.  Catamount further argued that any interpretation could result in an uneconomic well if working interest owners were able to create high overriding royalties and circumvent the statutory risk penalty. Finally, Catamount argued that the fact the legislature named overriding royalties in Section 118 of the Act, and not in Section 116, showed an intent to include overriding royalties only when specifically named.

 

12.          The Commission finds that the relevant language in § 34-60-116(7)(a), C.R.S., is unambiguous. The language “royalty or other interest not obligated to pay any part of the cost thereof” does not include overriding royalty interests as interests to be paid by consenting owners during the statutory penalty period.

 

13.          § 34-60-116(7)(a), C.R.S. provides that nonconsenting owners shall reimburse consenting owners out of production representing the nonconsenting owner’s interest, “excluding royalty or other interest not obligated to pay any part of the cost thereof.” An overriding royalty is carved from the working interest of a mineral lessee. On the other hand, royalties such as landowner royalties are reserved directly out of a mineral interest. The Commission finds that while the statutory language excludes royalties or other similar interests from the obligation to reimburse consenting owners, it does not include overriding royalties because overriding royalties are carved from the interests of nonconsenting owners who have an obligation to reimburse consenting owners under the Act.

 

14.          Further, where the legislature intended to include overriding royalties in a list of interests, it specifically named overriding royalties. Section 34-60-118 discusses “interests which are free of cost, such as royalties, overriding royalties, and production payments.”  §§ 34–60–118(5) and (6), C.R.S. The legislature could have included the term “overriding royalties” in § 34-60-116(7)(a), as it did in other sections of the Act. The absence of “overriding royalties” in § 34–60–116(7)(a) shows the legislature did not intend for overriding royalties to be included in the category of interests that are to be paid during the statutory penalty period.

 

15.          Even if the language of § 34-60-116(7)(a), C.R.S., were ambiguous, the Commission’s conclusion is supported by the goals and purpose of the Act. The Act declares that it is in the public interest to “foster” development of oil and resources. § 34-60-102(1)(a)(I), C.R.S. The pooling provisions of the Act provide a path to development where some mineral owners do not consent to participate in a well and further aids in making development economical by requiring reimbursement of consenting owners by nonconsenting owners.  § 34-60-116(7)(b)(I), C.R.S. If overriding royalty owners were entitled to payment during the statutory penalty period, nonconsenting working interest owners could circumvent reimbursement and the statutory risk penalty by assigning out overriding royalty interests. Such a result could chill development and would be contrary to the goals of the Act.  

 

16.          The Applications rely on the argument that the Act requires payment of overriding royalties during the statutory penalty period. As the Commission rejected this argument, the Applications are without basis and the Applicants are not entitled to the relief requested.

 

ORDER

 

IT IS HEREBY ORDERED:

 

1.         The Commission hereby DENIES the relief sought in the Applications in Docket Nos. 170700421, 170700422, 170700423, 170700424, 170700425.

 

 

IT IS FURTHER ORDERED:

 

1.         The provisions contained in the above Order shall become effective immediately.

 

2.         The Commission expressly reserves its right, after notice and hearing, to alter, amend or repeal any and/or all of the above Orders.

 

3.         Under the State Administrative Procedure Act, the Commission considers this Order to be final agency action for purposes of judicial review within 35 days after the date this Order is mailed by the Commission.

 

4.         An application for reconsideration by the Commission of this Order is not required prior to the filing for judicial review.

 

ENTERED this 5th day of October, 2017, as of September 11, 2017.

           

OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

 

 

By____________________________________

James P. Rouse, Acting Secretary