Exaro Energy III, LLC v. Wyo. Oil & Gas Conservation Comm'n

Decision Date17 January 2020
Docket NumberS-19-0116
Citation455 P.3d 1243
Parties EXARO ENERGY III, LLC, Appellant (Petitioner), v. WYOMING OIL AND GAS CONSERVATION COMMISSION and Jonah Energy, LLC, Appellees (Respondents).
CourtWyoming Supreme Court

Representing Appellant: Jamie L. Jost, Jost Energy Law, P.C., Denver, Colorado.

Representing Appellee Jonah Energy LLC: S. Thomas Throne, Jacob T. Haseman and Alexis A. Klatt, Throne Law Office, P.C., Sheridan, Wyoming. Argument by Mr. Throne.

Representing Appellee Wyoming Oil and Gas Commission: No appearance.

Before DAVIS, C.J., and FOX, KAUTZ, BOOMGAARDEN, and GRAY, JJ.

KAUTZ, Justice.

[¶1] Exaro Energy III, LLC (Exaro) filed two applications with the Wyoming Oil and Gas Conservation Commission (Commission) seeking the approval of adjacent drilling and spacing units (DSUs or units) in the Jonah Field. Jonah Energy, LLC (Jonah) opposed the applications. The Commission consolidated the applications and held a contested case hearing. Exaro and Jonah agreed that the evidence presented at the hearing would apply to both applications. At the conclusion of the hearing, the Commission found and concluded as to both applications that Exaro had met its burden of proof and had provided actual, empirical data satisfying the statutory requirements for the establishment of a DSU. Nevertheless, the Commission approved one application (Docket No. 1902-2018) but not the other (Docket No. 1903-2018). The Commission’s stated reason for denying the application in Docket No. 1903-2018 was that it believed "additional data from horizontal development in the Jonah Field should be analyzed prior to approving the Application to establish a drilling and spacing unit on the Subject Lands."

[¶2] Exaro filed a petition for review of administrative action with the district court challenging the Commission’s denial of its application in Docket No. 1903-2018. It also requested that the district court certify this matter to this Court pursuant to Rule 12.09 of the Wyoming Rules of Appellate Procedure. The district court granted Exaro’s request for certification and we accepted the certified case. We conclude the Commission’s denial of Exaro’s application in Docket No. 1903-2018 was arbitrary and capricious. We reverse.

ISSUE

[¶3] Exaro raises three issues which we restate as one:

Was the Commission’s denial of Exaro’s application to establish a DSU in Docket No. 1903-2018 arbitrary and capricious given it found and concluded that Exaro had met its burden of proof and the applicable legal standard, provided actual, empirical data supporting the statutory requirements for the establishment of a DSU, and granted Exaro’s application in Docket No. 1902-2018 based on the same evidence?
FACTS

[¶4] Exaro and Jonah both own working interests in the Jonah Field.1 On April 18, 2018, Exaro filed applications with the Commission seeking to establish two adjacent "stand-up" DSUs2 for the production of hydrocarbons from the Lance Pool in the Jonah Field. The application in Docket No. 1902-2018 (hereinafter 1902) sought a 1,285.19-acre unit for Sections 26 and 35, Township 29 North, Range 108 West, 6th P.M., Sublette County. The application in Docket No. 1903-2018 (hereinafter 1903) sought a 1,038.65-acre unit for Section 25 and the N½, N½ SW¼ of Section 36, Township 29 North, Range 108 West, 6th P.M., Sublette County. The applications requested that one horizontal well be drilled within each unit to the Lance Pool. In separate proceedings before the Commission, Exaro filed an application for a permit to drill (APD) an initial horizontal well in each unit. The initial well would be drilled in the northwest corner of each unit and proceed south for approximately two miles along the unit’s western border. Visuals of Exaro’s requested DSUs and the proposed locations of its initial wells are helpful and are attached as Appendix A (1902) and Appendix B (1903).

[¶5] Jonah protested Exaro’s applications because a north-south oriented horizontal well had yet to be drilled in the Jonah Field. The only horizontal wells present in the Jonah Field were oriented east-west. According to Jonah, if the initial wells proposed to be drilled by Exaro proved infeasible, the remainder of the units would have to be developed with extremely short east-west laterals, which would cause waste of hydrocarbons, harm correlative rights, and increase costs and surface disturbances. Jonah filed its own application with the Commission for the approval of a single DSU covering the lands underlying both 1902 and 1903. It withdrew that application prior to the Commission’s decisions on Exaro’s applications.

[¶6] The Commission consolidated Exaro’s applications for purposes of the contested case hearing. It also ordered that the evidence presented at the hearing would apply to both applications. The parties agreed the only issue before the Commission was whether the lands underlying Exaro’s applications should be developed with north-south or east-west oriented horizontal wells.3

[¶7] With respect to that issue, Exaro presented geological and engineering testimony explaining that due to the presence of major faults running north-south within the proposed units, the only appropriate way to access the gas stranded under the subject lands and avoid crossing the faults is to run the wells parallel to those faults, i.e., in a north-south direction. Jonah’s witnesses did not object to the drilling of a north-south horizontal well along the western border in 1902. They agreed data from a north-south oriented horizontal well would be helpful. They did object, however, to the drilling of a north-south oriented well along the western boundary in 1903. According to them, if the initial well in both units proved unworkable, the remainder of the subject lands would have to be developed with short east-west laterals (under a mile long) because the well in 1903 would block the drilling of longer east-west laterals. Jonah’s engineering witness testified short laterals cause waste of hydrocarbons because they recover less gas per dollar spent, have to be shut-in sooner than longer laterals, and ultimately leave more gas stranded due to required setbacks; they also create "substantially more surface disturbance" due to the need for additional wells, drilling pads, and production-related facilities.

[¶8] At the conclusion of the hearing, the Commission decided as to both 1902 and 1903 that Exaro had (1) "met its burden of proof," (2) "satisfied the applicable legal standard[,]" and (3) "provided ... actual, empirical data that [each DSU] ... is not smaller than the maximum area that can be effectively drained by one (1) horizontal well drilled to the Lance Pool on the Subject Lands and that [each] unit will permit the recovery of hydrocarbons in the Lance Pool underlying the Subject Lands, will prevent waste and will protect correlative rights."4

Nevertheless, the Commission approved only 1902. A majority of the Commission denied 1903 stating "additional data from horizontal development in the Jonah Field should be analyzed prior to approving the Application to establish a drilling and spacing unit on the Subject Lands." Exaro appeals from the Commission’s denial of its application in 1903.

STANDARD OF REVIEW

[¶9] When an agency’s decision is certified to this Court under W.R.A.P. 12.09, "we apply the standards for judicial review set forth in Wyo. Stat. Ann. § 16-3-114(c) [of the Wyoming Administrative Procedures Act]."5 Wyodak Res. Dev. Corp. v. Wyo. Dep’t of Revenue , 2017 WY 6, ¶ 14, 387 P.3d 725, 729 (Wyo. 2017). Wyo. Stat. Ann. § 16-3-114(c) (LexisNexis 2019) provides in relevant part:

(c) To the extent necessary to make a decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action. In making the following determinations, the court shall review the whole record or those parts of it cited by a party and due account shall be taken of the rule of prejudicial error. The reviewing court shall:
...
(ii) Hold unlawful and set aside agency action, findings and conclusions found to be:
(A) Arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law [or]
...
(E) Unsupported by substantial evidence in a case reviewed on the record of an agency hearing provided by statute.

[¶10] When, as here, both parties submitted evidence at the contested case hearing and an agency’s factual findings are involved, we apply the substantial evidence standard of review. Dale v. S & S Builders, LLC , 2008 WY 84, ¶ 10, 188 P.3d 554, 558 (Wyo. 2008) (quoting Newman v. State ex rel. Wyo. Workers’ Safety & Comp. Div ., 2002 WY 91, ¶¶ 22-23, 49 P.3d 163, 171-72 (Wyo. 2002) ). See also, Camacho v. State ex rel. Dep’t of Workforce Servs., Workers’ Comp. Div. , 2019 WY 92, ¶ 23, 448 P.3d 834, 843 (Wyo. 2019). Under this standard of review,

"we examine the entire record to determine whether there is substantial evidence to support an agency’s [factual] findings. If the agency’s decision is supported by substantial evidence, we cannot properly substitute our judgment for that of the agency and must uphold the findings on appeal. Substantial evidence is relevant evidence which a reasonable mind might accept in support of the agency’s conclusions. It is more than a scintilla of evidence."

Dale , ¶ 11, 188 P.3d at 558 (quoting Newman , ¶ 12, 49 P.3d at 168 ). Because the agency " ‘is the trier of fact and has the duty to weigh the evidence and determine the credibility of witnesses,’ " we give deference to its factual findings unless they are " ‘clearly contrary to the overwhelming weight of the evidence on record.’ " Id . (quoting Newman , ¶ 26, 49 P.3d at 173 ). This is especially true for "[t]echnical decisions relative to the waste of oil and gas resources." Moncrief v. Wyo. Oil & Gas Conservation Comm’n , 981 P.2d 913, 916 (Wyo. 1999) (citations omitted). Such...

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