Bennion v. ANR Production Co.

Decision Date21 October 1991
Docket NumberNo. 900473,900473
CourtUtah Supreme Court
PartiesSam H. BENNION, Petitioner, v. ANR PRODUCTION COMPANY, a Delaware corporation, and the Utah State Board of Oil, Gas & Mining, an agency of the State of Utah, Respondents.

Peter Stirba, Barbara Zimmerman, Salt Lake City, for Bennion.

Alan A. Enke, John P. Harrington, Salt Lake City, for ANR Production Co.

R. Paul Van Dam, Thomas A. Mitchell, Salt Lake City, for Bd. of Oil, Gas & Min.

Phillip William Lear, R. Stephen Marshall, John W. Andrews, Salt Lake City, for amicus Rocky Mountain Oil and amicus Utah Petroleum Ass'n.

DURHAM, Justice:

This is a case of first impression on the rights of a nonconsenting mineral owner under the forced pooling provisions of the Utah Oil and Gas Conservation Act. The case raises questions regarding the drilling of increased density wells in a drilling unit already subject to a forced pooling order. The operative facts span nearly two decades, from 1971 to 1990. During that period, the Oil and Gas Conservation Act underwent several amendments and a complete repeal and reenactment. We discuss the effect of those changes on the parties' rights and liabilities, and we examine constitutional and statutory challenges to certain changes in the act.

In 1971 and 1972, in the exercise of its statutory powers, the Utah State Board of Oil, Gas and Mining (the Board) established oil and gas drilling units for large areas of the state. See Bennion v. Utah State Bd. of Oil, Gas & Mining, 675 P.2d 1135, 1137 (Utah 1983). The Board made each 640-acre geographical section a drilling unit and authorized the drilling of only one well on each unit. Id. Sam H. Bennion is the owner of an unleased mineral interest in certain property located in Section 1, Township 2 South, Range 5 West in Duchesne County. The property was included in one of the drilling units established in 1971. By issuing the 1971 order, the Board fixed the location of the unit well and precluded Bennion from drilling his own wells.

Under a communitization agreement dated June 12, 1973, all of the owners of working interests in the drilling unit except Bennion voluntarily pooled their interests pursuant to Utah Code Ann. § 40-6-6(5) (then codified at § 40-6-6(f)). The Tew 1-1B5 well (the first well) was designated as the unit well. It was completed as a producing well on July 7, 1974. In 1975, Bennion filed a petition requesting that the Board order the interests in the unit pooled pursuant to its statutory power under section 40-6-6(5) (then codified at § 40-6-6(f)). 1 A statutory pooling order was entered by the Board on April 30, 1981, retroactively effective July 26, 1979. 2 The terms of the 1981 order were the result of negotiations between the Board, Bennion, and the unit operator. The order accounted for and applied only to the first well, providing that once the well reached payout, 3 Bennion was to receive a share of production upon payment of a share of the monthly operating costs. The order made no finding concerning the sharing of costs between consenting and nonconsenting owners.

In April 1985, the Board issued an increased density well order permitting an additional well on the subject drilling unit. 4 In 1986, ANR Production Company (ANR) became the operator of the first well. On February 6, 1990, ANR commenced drilling the Miles 2-1B5 well (the second well) within the boundaries of the drilling unit. Bennion was given the opportunity to participate in the drilling of the second well, but he refused.

In a petition dated April 10, 1990, ANR requested that the Board either enter a new order or modify the 1981 order to lay out the costs Bennion would be required to pay and the revenues he would be entitled to receive as a result of the second well. On September 20, 1990, the Board entered an order modifying the 1981 order. The modified order incorporates the second well, allowing Bennion to receive a royalty from the time of first production. Before he can receive a working interest share of production, however, the new order requires Bennion to pay his share of 100 percent of the costs of surface equipment beyond the wellhead, 100 percent of the operating costs, and 175 percent of the costs of drilling, completing, and equipping the well.

In this appeal, Bennion requests that this court review the Board's 1990 action modifying the 1981 order. He raises four issues: (1) whether the imposition of a statutory nonconsent penalty is inconsistent with the declaration of public interest contained in the Utah Oil and Gas Conservation Act; (2) whether the penalty is unconstitutional, either on its face or as applied, as a taking or a violation of due process; (3) whether the Board lacks statutory authority to modify a forced pooling order; and (4) whether the 1985 order requires the operator to make a showing of economic feasibility to the Board prior to the drilling of a second well. We treat these issues in order.

I. CONFLICT WITH THE DECLARATION OF PUBLIC INTEREST

Bennion argues that the imposition of a nonconsent penalty in this case is inconsistent with the statutory declaration of public interest contained in the Oil and Gas Conservation Act. 5 This is a question of law to be reviewed under a correction-of-error standard. See Utah Code Ann. § 63-46b-16(4)(d); Morton Int'l v. Utah State Tax Comm'n, 814 P.2d 581, 587 (Utah 1991); Savage Indus. v. Utah State Tax Comm'n, 811 P.2d 664, 669-70 (Utah 1991). In pertinent part, the declaration of public interest contained in the Oil and Gas Conservation Act provides:

It is declared to be in the public interest to foster, encourage, and promote the development, production, and utilization of natural resources of oil and gas in the state of Utah in such a manner as will prevent waste; to authorize and to provide for the operation and development of oil and gas properties in such a manner that a greater ultimate recovery of oil and gas may be obtained and that the correlative rights of all owners may be fully protected....

Utah Code Ann. § 40-6-1 (1988). Bennion argues that the modification of the 1981 order requiring him to pay nonconsent penalties for the second well does not protect his correlative rights pursuant to the statutory directive.

"Correlative rights" are defined under section 40-6-2 of the Utah Code as "the opportunity of each owner in a pool to produce his just and equitable share of the oil and gas in the pool without waste." The statute requires the protection of all owners' correlative rights, of course, not just Bennion's. A nonconsent penalty clearly protects the participating parties by compensating them for the risk they assume in drilling the well. 6 In addition such an allocation of risk and benefits protects nonconsenting parties' rights by allowing them to receive revenues (in addition to a royalty) from a well for whose drilling costs they are not liable. The imposition of a penalty on nonconsenting working interest owners is a reasonable way to allocate risks and balance the diverse interests involved in the pooling of oil and gas interests. See Application of Kohlman, 263 N.W.2d 674, 678-79 (S.D.1978). Taken as a whole, forced pooling in general "prevents waste," provides for "a greater ultimate recovery of oil and gas," and protects "the correlative rights of all owners" pursuant to the purposes of the Oil and Gas Conservation Act. Accord Palmer Oil Corp. v. Phillips Petroleum Co., 204 Okl. 543, 231 P.2d 997, 1005 (1951), appeal dismissed for lack of substantial federal question, 343 U.S. 390, 72 S.Ct. 842, 96 L.Ed. 1022 (1952). As part of the statutory scheme, the nonconsent penalty is entirely consistent with those objectives.

II. THE CONSTITUTIONALITY QUESTION

Bennion challenges the statutory nonconsent penalty as an unconstitutional taking and a violation of due process. Under the Utah Administrative Procedures Act, we may grant relief if we find that an agency's order was based on a statute which is unconstitutional on its face or as applied. Utah Code Ann. § 63-46b-16(4)(a). When legislative enactments are attacked on constitutional grounds, we apply a presumption of validity "so long as there is a reasonable basis upon which both provisions of the statute and the mandate of the constitution may be reconciled." Timpanogos Planning & Water Management Agency v. Central Utah Water Conservancy Dist., 690 P.2d 562, 564 (Utah 1984); see Mountain States Tel. v. Garfield County, 811 P.2d 184, 187 (Utah 1991); State v. Rio Vista Oil, Ltd., 786 P.2d 1343, 1349 (Utah 1990). The burden is on the petitioner to affirmatively demonstrate the unconstitutionality of the statute. See Mountain States Tel., 811 P.2d at 187; Rio Algom Corp. v. San Juan County, 681 P.2d 184, 191 (Utah 1984).

In 1955, the Utah legislature first enacted the legislation now known as the Utah Oil and Gas Conservation Act. 1955 Utah Laws ch. 65. The statute created the Oil and Gas Conservation Commission (now known as the Board of Oil, Gas and Mining), id. at § 3, and gave that agency the power to establish drilling units, id. at § 6(a), and to enter orders pooling "all interests in [a] drilling unit for the development and operation thereof," id. at § 6(f). The original statute provided that pooling orders should allow for the reimbursement of nonconsenting working interest owners' shares of costs out of production from the unit, id. at § 6(g) (codified at § 40-6-6 (Supp.1959)); it contained no nonconsent penalty for failure to participate in a well. In 1977, the Oil and Gas Conservation Act was amended to add such a penalty; the amount of the penalty was 120 percent for a well in a proven field and 150 percent for a well drilled "to a different common source of supply or in an area not proven for production." 1977 Utah Laws ch. 161, § 1. In 1983, the Utah Code was amended to its current form, which provides for a statutory nonconsent penalty ranging between 150 percent and 200 percent. 7 1983...

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