Harken Southwest Corp. v. Board of Oil, Gas and Min.

• Decision Date: 16 July 1996
• Docket Number: No. 950121,950121
• Parties: HARKEN SOUTHWEST CORPORATION, Petitioner, v. BOARD OF OIL, GAS AND MINING and Division of Oil, Gas and Mining, Department of Natural Resources, State of Utah, Respondents.
• Court: Utah Supreme Court

Page 1176

920 P.2d 1176

HARKEN SOUTHWEST CORPORATION, Petitioner, v. BOARD OF OIL, GAS AND MINING and Division of Oil, Gas and Mining, Department of Natural Resources, State of

Utah, Respondents.

No. 950121.

Supreme Court of Utah.

July 16, 1996.

Alan L. Sullivan, Thomas W. Clawson, Salt Lake City, for petitioner.

Jan Graham, Att'y Gen., Thomas A. Mitchell, Asst. Att'y Gen., Salt Lake City, for respondents.

ZIMMERMAN, Chief Justice:

Harken Southwest Corporation ("Harken") operates several oil and gas wells in San Juan County. In March of 1994, Harken applied to the Utah Division of Oil, Gas and Mining ("Division") for designation of thirteen wells drilled between 1990 and 1992 as "wildcat" wells. Wildcat wells drilled after January 1, 1990, are exempt from severance taxes during the first twelve months of production. Utah Code Ann. § 59-5-102(2)(d). The Division refused to confer wildcat status on six of the wells, and Harken appealed to the Utah Board of Oil, Gas and Mining ("Board"). The Board affirmed the Division's decision, and Harken seeks review by this court. We affirm as to two of the wells, reverse as to one of the wells, and vacate and remand as to the other three wells.

A wildcat well is "an oil and gas producing well which is drilled and completed in a pool, as defined under Section 40-6-2, in which a well has not been previously completed as a well capable of producing in commercial quantities." Id. § 59-5-101(21). Section 40-6-2(18) of the Utah Code defines a pool as "an underground reservoir containing a common accumulation of oil or gas or both." That section also provides: "Each zone of a general structure that is completely separated from any other zone in the structure is a separate pool. 'Common source of supply' and 'reservoir' are synonymous with 'pool.' " Id. § 40-6-2(18). In other words, to qualify a well for wildcat status, the well operator must establish that the well was the first well capable of commercial production drilled into a pool, reservoir, or common source of supply.

All of the wells which are the subject of this appeal ("subject wells") penetrate similar subsurface structures known as algal mounds. Algal mounds are sponge-like piles of carbonate debris which were formed about 275 million years ago from the remains of algae that had settled to the sea floor. As these mounds of algal material stacked up, shale barriers formed around the mounds, effectively sealing many of them and preventing hydrocarbons which had accumulated in the mounds from escaping or migrating to other mounds. Algal mounds are typically between one-quarter mile and one mile in diameter.

In determining that none of the subject wells qualified for wildcat status, the Board heard testimony from two main witnesses, both of whom interpreted the same data. Harken's witness, Dr. Mark W. Longman, is a consulting geologist recognized as an expert on algal mound formations in southeastern Utah. The Division's witness, Bradley G. Hill, also has experience in petroleum geology. The data they interpreted consisted of rock data, seismic data, and pressure and production data. Rock data, obtained by drilling wells, measure the density of the rocks into which a well is drilled. Rock data are used to identify algal mounds, which are highly porous and can therefore be drilled relatively quickly. Seismic data measure the thickness of layers of rocks such as the shale barriers surrounding algal mounds and allow geologists to map the features and geometry of algal mounds. Finally, pressure and production data are used to determine whether an algal mound from which a well is producing is continuous with any other algal mounds.

The Board also relied on an order of the Oil and Gas Conservation Commission ("Commission") issued in 1960 which established 80-acre drilling and spacing units for the Greater Aneth Area of San Juan County ("1960 spacing order"). Three of the subject wells are located within the Greater Aneth Area: the Blue Hogan 1-J-1 well ("Blue Hogan"), the Mule 31-M well ("Mule"), and the Brown Hogan 1-A-2 well ("Brown Hogan"). In the 1960 spacing order, the Commission found that the Greater Aneth pool, which underlies the Greater Aneth Area, "is continuous ... and constitutes a common source of supply." The Commission then concluded, "One well [drilled on] each 80 acres will efficiently and economically drain the said pool or common source of supply as found in and underlying the Greater Aneth Area." On the basis of these findings, the Board employed a presumption that Blue Hogan, Mule, and Brown Hogan were drilled into an extension of the Greater Aneth pool in which a well capable of commercial production had previously been drilled and, therefore, concluded that the three wells were not wildcat wells.

In refusing to confer wildcat status on the subject wells, the Board concluded that Harken failed to satisfy its burden of establishing that the wells were wildcat wells. On review, Harken asserts that (i) the Board erred in employing a presumption that Blue Hogan, Mule, and Brown Hogan were not wildcat wells; (ii) the Board's conclusion that none of the subject wells qualified for wildcat status is not supported by substantial evidence; and (iii) the Board incorrectly required Harken to prove "beyond a reasonable doubt" that the subject wells were wildcat wells. We consider Harken's arguments in order.

Harken first contends that the Board erred in presuming from the 1960 spacing order that Blue Hogan, Mule, and Brown Hogan were not wildcat wells. We agree with Harken. The presumption applied in this case was not legislatively or judicially created but was apparently adopted by the Board itself. As an administrative presumption, it must satisfy a test of logical probability. See Utah Code Ann. § 63-46b-16(4)(h)(iv) (requiring appellate court to grant relief from arbitrary or capricious agency action). In other words, "a presumption adopted and applied by the Board must rest on a sound factual connection between the proved and inferred facts." NLRB v. Baptist Hosp., Inc., 442 U.S. 773, 787, 99 S.Ct. 2598, 2606, 61 L.Ed.2d 251 (1979). See generally 1 Clifford S. Fishman, Jones on Evidence § 4:56, at 391 (7th ed. 1992) (discussing validity of administrative presumptions). We conclude that no such logical connection supports the presumption adopted in this case.

In evaluating the relevance of the 1960 spacing order to the inference that Blue Hogan, Mule, and Brown Hogan were not wildcat wells, we must consider the spacing order in light of its function and the policies it was intended to serve. Spacing orders specify the density and location of wells in an area which overlies an underground oil or gas reservoir. Utah Code Ann. § 40-6-6. To facilitate the efficient and economical drainage of the underlying pool, spacing orders establish drilling units on which only one well may be drilled. Id. § 40-6-6(2). Spacing orders must (i) include all lands determined to overlay the pool, (ii) define the size and shape of each drilling unit, and (iii) fix the location of the well within each drilling unit. Id. § 40-6-6(5)(b), (c), (d). In addition, spacing orders must "be made upon terms and conditions that are just and reasonable." Id. § 40-6-6(5)(a). Thus, spacing orders are dependent not only on a variety of factual determinations, but also on the need to balance the competing interests of affected parties and on the general requirement that they be reasonable.

In establishing 80-acre drilling units for the Greater Aneth Area, the Commission was concerned with both the specific goal of draining the Greater Aneth pool and the more general policies of "prevent[ing] waste, ... avoid[ing] the drilling of unnecessary wells[,] and ... protect[ing] the correlative rights of interested parties." Because the Commission was guided to a large degree by these general policies, it was not necessarily concerned with small-scale interruptions in the continuity of the Greater Aneth pool. In fact, the Commission recognized that such interruptions might exist when it found that "wells drilled with a density of one well to each 80 acres will, with insignificant exceptions, ... provide efficient and adequate intercommunication for all parts of the reservoir." (Emphasis added.)

In contrast to the 1960 spacing order, the determination of whether the subject wells qualify as wildcat wells is a purely factual determination that does not depend at all upon any underlying policies. See Utah Code Ann. § 59-5-101(21) (defining wildcat well). Because the Commission's finding that the Greater Aneth pool was continuous was influenced by the general policies it was attempting to serve and because these policies are irrelevant in determining whether a well qualifies for wildcat status, we conclude that the Board acted arbitrarily and capriciously in presuming from this finding that Blue Hogan, Mule, and Brown Hogan were not wildcat wells. See id. § 63-46b-16(4)(h)(iv). Therefore, we vacate the Board's decision as to these three wells. Because of the highly technical nature of the evidence presented, we remand for the Board to reconsider that evidence and to decide, without relying on the 1960 spacing order, whether Harken has met its burden of establishing that the three wells are wildcat wells.

Harken next contends that the Board's conclusion that none of the subject wells qualified for wildcat status is not supported by substantial evidence. We will reverse the Board's decision only if we determine that it was "based upon a determination of fact, made or implied by the agency, that is not supported by substantial evidence when viewed in light of the whole record before the court." Utah Code Ann. § 63-46b-16(4)(g). Substantial evidence is " 'that quantum and quality of relevant evidence that is adequate to convince a reasonable mind to support a conclusion.' " U.S. West Communications, Inc. v. Public Serv. Comm'n, 882 P.2d 141, 146 ...