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Home My WebLink About20061051.tiff • DISTRICT COURT, CITY AND COUNTY OF DENVER, COLORADO 1437 Bannock St. Denver, CO 80202 Plaintiff(s): Finley & Co., Best Buy Homes LLC, Stonehocker Farms, LLC, Rohlfs C/M Inc., LC Fulenwider, Inc., Keller Farms, Magness Investment Group LLC, Brooks Farm LLC, 177 Jasper A COURT USE ONLY A Investments, LLC, Sharon R. Scheller, Scott E. Stevinson, Margaret Hill, Anna Mary Weber, Elmer Case Number: 06 CV 3277 Lundvall, Larry E. Gayeski, Ben Ballinger, Clyde Webb, Ritchie Pyeatt, Linda Pyeatt, Mayer Family Farms, David Bernhardt, Bernhardt Dairy Farm Inc., and Keith Rehfeld Div: 18 Ctrm: Defendant(s): Department of Natural Resources, Oil and Gas Conservation Commission of the State of Colorado, Kerr McGee Rocky Mountain Corporation, Noble Energy Production, Inc., and EnCana Oil & Gas (USA), Inc. Lance Astrella T. R. Rice ASTRELLA & RICE P.C. 1801 Broadway, Suite 1600 Denver, Colorado 80202 Tel: (303) 292-9021 Fax: (303) 296-6347 Email: tr@astrellalaw.com Atty. Reg. # 5136 and #13436 NOTICE OF FILING OF COMPLAINT FOR REVIEW PURSUANT TO C.R.S. § 24-4- 106 C'oYnrru,Al(c/+--r-1 on!S Ct G#� Oq—I o 2006-1051 e COME NOW the Plaintiffs, by and through counsel, and hereby give notice as follows: 1. As allowed by C.R.S. § 24-4-106, the Plaintiffs above named have filed a complaint in Denver County District Court seeking review of the most recent amendment to Rule 318A of the rules of the Colorado Oil and Gas Commission. 2. Pursuant to C.R.S. § 24-2-106(4), the party or parties commencing such litigation "shall notify each person on the agency's docket of the fact that a suit has been commenced. The notice shall be sent by first-class certified mail within ten days after filing of the action and shall be accompanied by a copy of the complaint for judicial review bearing the action number of the case." 3. It would appear by virtue of certain records maintained by the Colorado Oil and Gas Conservation Commission that you may be considered"a person on the agency's docket"and as such,this notice is provided in conformance with the foregoing requirement. The source for your inclusion is, for the most part, sign-up sheets provided by the Colorado Oil and Gas Conservation Commission in which you indicated a comment on the proposed amendment and/or your desire to speak in favor or in opposition of the same. -2- 4. No further notices will be sent to you absent an entry of appearance in the foregoing litigation. DATED this 30th day of March, 2006. Respectfully submitted, Original signature on file T. R. Rice, #13436 ASTRELLA & RICE P.C. 1801 Broadway, Suite 1600 Denver, Colorado 80202 (303) 292-9021 ATTORNEYS FOR PLAINTIFFS -3- DISTRICT COURT, CITY AND COUNTY OF DENVER, COLORADO 1437 Bannock St. Denver, CO 80202 Plaintiff(s): Finley & Co., Best Buy Homes LLC, Stonehocker Farms, LLC, Rohlfs C/M Inc., LC Fulenwider, Inc., Keller Farms, Magness Investment Group LLC, Brooks Farm LLC, 177 Jasper A COURT USE ONLY A Investments, LLC, Sharon R. Scheller, Scott E. Stevinson, Margaret Hill, Anna Mary Weber, Elmer Case Number: 06 CV 3277 Lundvall, Larry E. Gayeski, Ben Ballinger, Clyde Webb, Ritchie Pyeatt, Linda Pyeatt, Mayer Family Farms, David Bernhardt, Bernhardt Dairy Farm Inc., and Keith Rehfeld Div: 18 Ctrm: Defendant(s): Department of Natural Resources,Oil and Gas Conservation Commission of the State of Colorado, Kerr McGee Rocky Mountain Corporation, Noble Energy Production, Inc., and EnCana Oil & Gas (USA), Inc. Lance Astrella T. R. Rice ASTRELLA & RICE P.C. 1801 Broadway, Suite 1600 Denver, Colorado 80202 Tel: (303) 292-9021 Fax: (303) 296-6347 Email: tr@astrellalaw.com Atty. Reg. # 5136 and #13436 COMPLAINT FOR REVIEW PURSUANT TO C.R.S. § 24-4-106 COME NOW the Plaintiffs, by and through counsel, and hereby allege, aver and complain as follows: A. Overview. Summary of the Relief Sought and Jurisdiction 1. At the request of Kerr McGee Rocky Mountain Corporation, Noble Energy Production, Inc., and EnCana Oil & Gas (USA), Inc. (collectively, the "Applicants"), the Colorado Oil and Gas Conservation Commission (the "Commission") engaged in rule making with respect to a proposed amendment to what is commonly referred to as Rule 318A of the rules and regulations of the Commission. An amendment to Rule 318A was adopted by the Commission and it became effective on March 2, 2006. It is from this amendment that the Plaintiffs seek judicial review. 2. Rule 318A, both historically and as amended, generally addresses the number and location of oil and gas wells that can be drilled into various subsurface formations in the Greater Wattenburg Area (the "GWA"). Broadly described, the GWA extends on a north and south basis from Thornton to Greeley and on an east and west basis from points lying several miles to the west of 1-25 in an easterly direction to approximately Byers, an area of approximately 1.6 million acres. 3. Prior to the amendment of Rule 318A which forms the basis of this appeal, oil and gas producers were allowed to drill one well for each 40 acres, which well was assumed to drain hydrocarbons from the oil and gas formation under the 40 acres. Rule 318A, both before and after amendment, also purports to designate where the wells may -2- be located on the surface. Specifically, for each governmental quarter section consisting of a square, one half mile on each side (an area of 160 acres), five "drilling windows" are identified, one in each center of each 40 acre governmental quarter-quarter and one in the center of the quarter section. These windows are commonly referred to as "5-spot" locations and can be visualized as the side of a die with five dots on it, i.e., one dot in the middle of the square and one in the middle of each of the quadrants of the square. 4. The amendment of the rule as adopted by the Commission increases the number of wells which can be drilled by adding not less an additional three wells per 160 acre quarter section. In order to reduce the amount of land used by the oil companies to drill the additional three wells, and at the suggestion of the Applicants themselves, the Commission is requiring the oil companies to directionally drill the additional wells. That is, the surface location of the additional wells would be close to (within 50 feet) one of the wells allowed by Rule 318A prior to amendment, but the new well(s)would be drilled at an angle so that the bottom of the well would be a considerable horizontal distance from the top of the well. 5. The Applicants, which were comprised of a cross-section of oil and gas producers, all agreed that although drilling the new wells directionally could be more expensive than drilling a conventional vertical well, producers in the oil and gas industry can afford to pay this extra cost and still make an acceptable rate of return on investment. -3- 6. The problem faced by landowners is that for every actual or even potential well that the Commission allows under its rules, the more of the surface of the land which the landowner must give up to the oil companies. The landowners generally do not receive compensation for this land used by the oil companies. The 5-spot drilling windows and the allowable number of wells therein are accompanied by restricted zones known as "setbacks" which have a radius of 150' in rural areas and 350' in urban areas. The setbacks create a no-build and no-development zone which essentially condemns considerable land for which the oil companies generally do not pay.While this was also the case prior to the amendment of Rule 318A, the allowance of the additional wells has exacerbated the loss suffered by landowners. Further, and as will be demonstrated during the course of this case, the evidence presented to the Commission made clear that the very existence of the 5-spot drilling pattern has been rendered obsolete, and that reasonable alternatives exist that would minimize the loss of the surface while at the same time, maximize the number of wells that can be drilled. 7. The issue in this case is whether the Commission can legally adopt a rule or regulation which allows the oil companies to use more land for free than is reasonable and necessary for the recovery of oil and gas reserves which exist below the surface. -4- 8. Since the oil and gas companies can pay the extra cost to drill wells directionally and still make a rate of return that is acceptable to them, the Commission is compelled by statute to reduce the number of drilling windows per quarter section and require the wells to be clustered and directionally drilled in order to reduce, rather than increase, the land used for free by the oil companies. 9. Plaintiffs do not challenge the Commission's authority to increase the number of wells which can be drilled in a quarter section of land, and specifically do not challenge the Commission's decision to allow the additional wells provided for by the amendment to Rule 318A. The Plaintiffs do, however, assert that the Commission has ignored its statutory duty to minimize the amount of land which can be used by the oil companies attendant to their drilling activities. Since the oil companies have admitted that they can drill wells directionally in a profitable manner, the Commission should have not increased the amount of land allowable for use in drilling when it amended Rule 318A. To the contrary, the Commission had a statutory obligation to re-visit the prudence of the continued existence of the 5-spot drilling windows and to have implemented a reasonable alternative such as reducing the number of drilling windows in a quarter section and requiring that wells which do not drain the reservoir from directly under those reduced number of drilling windows be drilled directionally. -5- 10. The Commission's statutory duty to minimize land use for oil and gas operations arises from CRS §§ 34-60-102 and 103; the Commission's corresponding obligation to maximize recovery of oil and gas arises from the very same legislative mandate. If wells could not be profitably drilled on a directional basis by the oil companies, these two duties could be found to be in conflict. However, since the oil and gas industry has conceded that directional wells can be drilled at a profit, the aforementioned duties of the Commission are clearly not in conflict with one another and both must be honored. Therefore, and in the context of the amendment to Rule 318A, the Commission abused its discretion and acted arbitrarily and capriciously by ignoring its duty to minimize the amount of the surface to be used for drilling activities. Reducing the surface used for drilling could have been easily achieved by simply reducing the number of drilling windows in the 160 acre quarter section and requiring that wells be drilled directionally from the reduced number of drilling windows. 11. Particularly as amended, Rule 318A takes real property from the landowner and gives it to the oil company. This is not only a taking without compensation as proscribed by the Colorado Constitution, but it an unnecessary taking without compensation. Therefore, the Commission not only ignored its statutory mandate to minimize waste, it also violated the constitutional protections provided to the landowners of this State. -6- 12. The effective date of the amendment is March 2, 2006. Jurisdiction of this matter is conferred upon the Court by virtue of C.R.S. § 24-4-106. B. Parties and Venue 13. Plaintiffs are individuals and entities who own surface and/or mineral rights in the GWA. Plaintiffs participated in the rule making process described above. 14. The Commission is a division of Department of Natural Resources, which is an agency of the State of Colorado. 15. Kerr McGee Rocky Mountain Corporation is a Delaware corporation which may be found at 1675 Broadway, Denver, CO 80202. 16. Noble Energy Production, Inc. is a Delaware corporation which may be found at 1675 Broadway, Denver, CO 80202. 17. EnCana Oil &Gas(USA), Inc. is a Delaware corporation which may be found at 370 17th St., Suite 1700, Denver, CO 80202.. 18. Venue is proper pursuant to C.R.S. § 24-4-10. -7- C. Applicable Law 19. Pursuant to CRS § 34-60-102(1), the Commission is required to "permit each oil and gas pool in Colorado to produce up to its maximum efficient rate of production, subject to the prohibition of waste . . ." (Emphasis addede). 20. Under CRS § 34-60-103(13), prohibited waste is defined to include "the locating, spacing, drilling, equipping, operating, or producing of any oil or gas well or wells . . which causes or tends to cause unnecessary or excessive surface loss . . ." (Emphasis added) 21. In furtherance of the requirement that the Commission promote health, safety and welfare, it has established setbacks under Rule 603 of the Commission's rules and regulations. Setbacks create an area surrounding drill sites that cannot be used for surface development. Setbacks mandated by the Commission include those of 150'from a wellhead on a statewide basis and 350' from a wellhead in high density areas. Many municipalities and other local governments require 350'setbacks without regard to density. To put the impact upon the surface in perspective, the area encumbered by a single well with a setback of 350' is over eight acres. In addition, surface use is also setback from production facilities necessary for oil and gas production, and these setbacks mirror those associated with the location of the wellhead. -8- 22. Under the Administrative Procedures Act (the "APA"), no rule shall be adopted unless the record on a whole demonstrates the need for the rule, that proper statutory authority exists for the regulation and the rule does not conflict with other provisions of the law. CRS 24-4-103(4)(b). 23. An administrative agency must comply strictly with its enabling statutes,and has no authority to set aside or circumvent legislative mandates. Martinez v. Colorado Dept. of Human Services, 97 P.3d 152 (Colo. App. 2003). 24. The current law of this jurisdiction is that"mineral rights holders are required to accommodate surface owners to the fullest extent possible consistent with their right to develop the minerals." Gerrity Oil and Gas Corp. v. Magness, 946 P.2d 913, 929 (Cob. 1997). 25. A mineral owner must have due regard for the rights of a surface owner, and in instances of competing uses of the separate estates, the surface owner must demonstrate that the mineral rights holder's conduct constitutes a material interference with surface use. Similarly,the mineral rights holder must demonstrate that its occupancy of the surface will be, or is, reasonable and necessary, and present evidence that its operations are conforming with standard customs and practices in the industry. Id. -9- 26. Alternative measures must be considered by the mineral rights holder to minimize his surface occupancy, although the mineral rights holder is not required to utilize any alternative requested by the surface owner. Instead, the alternative to reduce surface occupancy must be both "reasonable and practical under the circumstances." Id. 27. " Private property shall not be taken or damaged, for public or private use, without just compensation. " § 15 of the Constitution of the State of Colorado. "Damage" is the equivalent of a party's rights being infringed upon. Riggs v. McMurtry, 157 Colo. 33, 400 P.2d 916 (1965). D. Specific Allegations 28. The GWA encompasses an area comprised of roughly 2,500 square miles of land, or somewhere in the range of 1.6 million acres. As originally proposed, the amendment to Rule 318A would have affected the entire GWA. 29. On November 10, 2005, the Applicants amended their proposal to exclude certain remote parcels of acreage which acted to reduce the size of the area impacted by the proposed rule to approximately 1,250 square miles, or.8 million acres. This November 2005 version of the request for amendment to Rule 318A also contemplated a distance of -10- 50' between wells. The formations affected by the proposed increased well density, or "down-spacing", were the J Sand and Codell/Niobrara. These two formations considered the most productive in the GWA. 30. As noted above, spacing regulations and well locations allowed by the Commission existing as of November of 2005 provided for what is commonly referred to as 5 -spot drilling. Using the 350' setback requirement (because most of the acreage impacted is or soon will be high density), the 5-spot drilling windows under Rule 318A as it existed prior to amendment rendered 27% of the land in the GWA virtually unusable for surface development or other uses such as parks and recreation areas. This does not include the setbacks surrounding petroleum storage tanks or other equipment, nor does it consider the land used for roads and pipelines to service the wells. In most cases, the landowner receives little or no compensation for the loss of this land. 31. Significantly, the use of that land described above is lost whether or not a wells are ever drilled in the windows provided for by the Commission. This is because the oil companies insist that municipalities set aside space for future wells in the planning and platting process. However, the lost use of land associated with actual or prospective oil and gas development could have been minimized if the Commission reduced the number of drilling windows in Rule 318A. As proof thereof, the Plaintiffs and others offered, by way of example, the following to the Commission: -11- a. When a surface owner plans for the development of the surface, he must take into account both existing and prospective locations for oil and gas development and include in that equation the set back requirements of the Commission and the various jurisdictions in the GWA. That being said, if the number of drilling windows were reduced, more land would be available for private use or open space parks and public purposes. b. The 5-spot drilling windows were originally created by the Commission because at one time,wells could not be directionally drilled at a profit. By historically locating wells in the center locations contemplated by the 5-spot drilling windows, production from the reservoirs was maximized. By and large, and under that set of circumstances, the creation of the drilling windows addressed above was rationally based. c However, the evidence presented by the Applicants themselves made clear that the oil and gas industry has concluded that drilling wells directionally was economically viable. -12- 32. For unstated reasons, and without any basis whatsoever, the Commission declined to take into account the obsolescence of the 5-spot drilling locations notwithstanding its statutory obligation to do so. The negative impact of the failure on the part of the Commission to re-visit the prudence of its continued adherence to the 5-spot pattern adopted under previously existing circumstances was compounded by its adoption of the Applicant's amendment to Rule 318A whereby it increased the number of allowable wells, thereby unnecessarily expanding the amount of the land taken by oil companies without compensation. 33. Before Rule 318A was amended, 27% of the land is reserved for oil and gas wells without regard as to whether wells will or will not be drilled. Prior to the amendment to Rule 318A, roughly 80% of the then allowable well locations had not yet been drilled. By nearly doubling the number of wells that can be drilled by virtue of the amendment to Rule 318A, at least 34% of the surface has been rendered usable into the foreseeable future. If, on the other hand, the Commission had reduced the number of windows to two per quarter section, but had also allowed the increased number of wells sought by the Applicants, no more than 16% of the surface would be unnecessarily 34. The generally unrebutted evidence that was presented to the Commission made clear that the purposes of both the surface owner and the mineral rights holder could -13- be both accommodated, and the legislative mandate imposed upon the Commission satisfied, by allowing increased well density but from fewer windows. 35. In the context of the proposed rule making, the Commission had two obligations which were co-existent with one another. First, the Commission was required to "permit each oil and gas pool in Colorado to produce up to its maximum efficient rate of production", and second, it furthermore required to "[prohibit] waste [which specifically includes any unnecessary or excessive surface loss]." 36. As a consequence, the mandate of Gerrity Oil and Gas Corp. v. Magness was directly relevant and the Commission was required to honor and apply the same in its consideration of the amendment to Rule 318A. 37. The Commission did not apply the mandate of Gerrity Oil and Gas Corp. v. Magness and the adoption of the amendment to Rule 318A violated its enabling statute. Furthermore, the Commission's action constituted a taking without compensation. The mineral rights holder has, under the amendment adopted, no obligation to compensate the surface owner for any of the real property unduly encumbered as a consequence of the mineral rights holder's ability to hold acreage indefinitely without any present intent or willingness to drill. The adoption of the amendment to Rule 318A essentially condemned a vast amount of the surface estate without reasonable basis or compensation. -14- 38. There were 1,250 square miles impacted by the amendment. With setbacks of 350' and the continued permissibility of 5-spot locations, a total of 352,000 acres must be reserved for oil and gas development which may or may not occur. If the average price of land is assumed to be $10,000 per acre, surface owners would suffer a potential loss of$3.5 billion without compensation. 39. The failure on the part of the Commission to reduce the number of available drilling windows on a quarter section basis fosters waste and constitutes a taking without compensation, both of which are legally impermissible. E. Summary of Claim(s) for Relief Failure to Make Changes to the Existing Rule 318A as Was Warranted by the Evidence 40. Based upon the evidence received in the form of briefs, testimony and exhibits, it was clear that Rule 318A as it existed even before the adoption of the Applicants' proposed amendment allowed the impermissible commission of waste. By adopting such amendment, the Commission exacerbated the situation. -15- r 41. The evidence and public comment supported the proposition that the underlying purpose of Rule 318A had been rendered obsolete. As former commissioner Bruce Johnson quite properly noted in his testimony, the creation of the 5-spot drilling windows was not based upon surface considerations, but rather, the protection of correlative rights in light of the spacing that then existed. At the time the 5-spot windows were created, it was assumed that only vertical wells could be drilled, and locations in the center of each quarter-quarter section and in the center of the quarter section itself were deemed best suited to protect the correlative rights of the mineral rights holders. Accordingly, at the time of its initial adoption, Rule 318A was founded upon a rational basis. 42. The evidence, including the testimony of the Applicants' own witnesses, made clear that directional drilling is economically and technically viable and constitutes a reasonable alternative to vertical drilling. While this viability formed the lynchpin of the Applicants' proposed amendment to Rule 318A, it also made apparent that the rational basis for reserving the surface estate for drill-site locations in center locations throughout a quarter section was no longer existent. By the Applicants' own admission, directional drilling allows for the protection of correlative rights from drill-site locations other than those provided by the Commission. Such being the case, no further need existed for drilling windows in their present form. -16- 43. As a result, and in order for the Commission to conform with the mandates of its enabling legislation, it was then necessary to re-visit the provisions of the rule and modify the same in a manner consistent with the evidence presented. What the evidence demonstrated was that the continued use of the 5-spot windows creates waste upon the surface, and instead of expanding those permitted locations as was urged by the Applicants, the number of windows should have been contracted. 44. Because the proposed amendment to Rule 318A was premised upon an obsolete predicate, the Commission was required to reject the Applicants' proposal out of hand and the Commission was legally obligated to take such action and to consider the revocation of the existing Rule 318A or a substantial modification thereof. The Commission improperly failed to do so. The Existence of a Clear Taking and the Improper Use of the Rule Making Process 45. Whether the 5-spot windows were allowed to continue to exist or were effectively expanded as a consequence of down-spacing, a taking without compensation occurred. The surface owner continues to be required to reserve acreage for drilling activities which may or may not occur in the future. As the surface is developed around -17- r the acreage reserved for future, uncertain, oil and gas development, land will be wasted if oil and gas development does not take place. 46. Although Assistant Attorney General Harmon made record that it was the Commission's official position that neither the existing drilling windows or the proposed amendment were intended to create a vested property right for the benefit of the mineral rights holder, the testimony of industry lobbyist Ken Wonstolen acted to underscore what the surface owners have long recognized - That the oil and gas industry perceives the existing 5-spot spacing to create an expectancy and the absolute right to reserve into perpetuity the prospective right to drill in the windows created by this Commission. 47. It is that perceived"property right"as noted above which is articulated by the oil and gas lessee each and every time an owner of the surface gives notice pursuant to C.R.S. §§ 24-65.5-101 et seq., with objections by oil and gas lessees being raised to the effect that the surface owner has not taken into account the absolute right to drill from the existing drilling windows without regard to whether the intention to develop the minerals is imminent or merely theoretical. 48. Perception has become reality, and the Commission took no affirmative action to disabuse anyone of what the mineral rights holders routinely forward, clothed in -18- the alleged powers of the State, that being the existence of an absolute property right to the 5-spot drilling windows which exist and are devoid of purpose. Arbitrary and Capricious Rule Making and Further Inapplicability of the Rule Making Process Based Upon the Circumstances Presented 49. Much of the evidence presented at the hearing was unrebutted. The Applicants repeatedly made clear that directional drilling is economically and technically feasible. The Applicants also articulated on multiple occasions their professed desire to use as little of the surface as possible in their effort to recover the oil and gas resource. 50. By the very terms of this Commission's legislative mandate, the fact that directional drilling is now economically and technically viable did not mean that the existing 5-spot windows should have been retained and effectively expanded to provide the mineral rights holder with a convenient location from which to drill additional wells. To the contrary, what the economic and technical viability of directional drilling did mean was that the existing Rule 318A was required to be revised in its entirety to take into account changed circumstances. 51. Accordingly, the only legally supportable conclusion that the Commission could have reached was that (a) 5-spot drilling windows are no longer necessary for the efficient and economic recovery of the reserves, and (b)the continued existence of 5-spot -19- • drilling windows created a use of the surface which was inconsistent with the mandate of C.R.S. §§ 34-60-102(1) and 103(13). 52. In its rule making, the Commission managed to violate its own statutory duty established by the legislature to minimize surface use, the common law proscribing excessive surface use as set forth by the Colorado Supreme Court, and the Constitution of the State of Colorado prohibiting a taking without compensation. WHEREFORE, Plaintiffs request that judgment enter in their favor in a manner consistent with the foregoing and as may be established during the course of briefing and review of the record. DATED this 23rd day of March, 2006. -20- Respectfully submitted, Original signature on file T. R. Rice, #13436 ASTRELLA & RICE P.C. 1801 Broadway, Suite 1600 Denver, Colorado 80202 (303) 292-9021 ATTORNEYS FOR PLAINTIFFS -21- Hello