Hurd v. Ark. Oil & Gas Comm'n
| Decision Date | 28 May 2020 |
| Docket Number | No. CV-19-808,CV-19-808 |
| Citation | 2020 Ark. 210,601 S.W.3d 100 |
| Parties | J.R. HURD; Sara Smith Hurd; Patricia Hurd McGregor; Victoria Hurd Goebel; David W. Killam; Adrian Kathleen Killam; Tracy Leigh Killam-Dileo; Hurd Enterprises, Ltd.; and Killam Oil Co., Ltd., Appellants v. ARKANSAS OIL & GAS COMMISSION ; Lawrence Bengal, in His Official Capacity as Director of the Arkansas Oil & Gas Commission ; W. Frank Morledge, Mike Davis, Lee Dawkins, Jerry Langley, Jim Phillips, Chris Weiser, Timothy Smith, Charles Wohlford, and Thomas McWilliams, in Their Official Capacities as Commissioners of the Arkansas Oil & Gas Commission; and SWN Production (Arkansas), LLC, Appellees |
| Court | Arkansas Supreme Court |
Friday, Eldredge & Clark, LLP, Little Rock, by: William A. Waddell, Jr., Robert S. Shafer, and Joshua C. Ashley ; and Morgan Law Firm, P.A., by: M. Edward Morgan, Clinton, for appellants.
Shane E. Khoury, Chief Counsel, Alan J. York, Associate Chief Counsel, and Madison Pitts, Att'y, for appellee Arkansas Oil & Gas Commission.
PPGMR LAW, PLLC, Little Rock, by: G. Alan Perkins and Kimberly D. Logue, for appellee SWN Production (Arkansas.)
Appellants J.R. Hurd, Sara Smith Hurd, Patricia Hurd McGregor, Victoria Hurd Goebel, David W. Killam, Adrian Kathleen Killam, Tracy Leigh Killam-Dileo (collectively, "the Hurds and the Killams"); Hurd Enterprises, Ltd.; and Killam Oil Co., Ltd. appeal from the Pulaski County Circuit Court's order affirming the amended integration orders entered by appellee Arkansas Oil & Gas Commission (the "AOGC"). For reversal, appellants argue that the AOGC exceeded its statutory authority in granting the request by appellee SWN Production (Arkansas), LLC ("SWN"), to reduce the royalty payable under appellants’ oil-and-gas leases when the lessees elected to go "non-consent." We affirm.
This case arose from a dispute between SWN, which operates the two gas units at issue, and the Hurds and the Killams, who are the mineral lessors, over the royalty payable under appellants’ oil-and-gas leases. The Hurds and the Killams own mineral interests in Sections 25 and 36, Township 9 North, Range 11 West in Cleburne County. In October 2004 and May 2010, they leased these interests to SEECO, Inc. for a 20 percent and a 25 percent royalty, respectively. They also had "Pugh Clauses" requiring SEECO to release the leases for nonproducing depths after the primary term. In June and August 2010, at SEECO's request, the AOGC integrated drilling units in Sections 25 and 36 to produce gas from the Fayetteville Shale formation. Through their SEECO leases, the Hurds’ and the Killams’ interests in Sections 25 and 36 became part of these two units. In November 2010 and May 2014, as required by the Pugh Clauses, SEECO released the Hurds’ and the Killams’ leases for all formations below the Fayetteville Shale. Their leases continued in effect for their interests in and above the Fayetteville Shale because SEECO was still producing from that formation.
On February 2, 2017, SEECO's successor, SWN, asked the AOGC to integrate two units, one in Section 25 and one in Section 36, for the purpose of drilling a cross-unit natural-gas well in a geologic formation called the Moorefield Shale, which lies below the Fayetteville Shale.1 These applications by SWN became AOGC docket numbers 007-2017-02 (for Section 36) and 008-2017-02 (for Section 25). SWN offered the royalty owners and other unleased mineral owners either (1) a $100/acre bonus and a one-eighth royalty or (2) a $0/acre bonus and a one-seventh royalty.
After learning of the integration applications by SWN, the Hurds leased their interests in Sections 25 and 36 to Hurd Enterprises, and the Killams leased their interests to Killam Oil. Each of these leases provided for a 25 percent (or one-fourth) royalty to the lessor. On February 22, 2017, the AOGC heard SWN's applications. SWN indicated at the hearing that it had recently learned of the Hurds’ and the Killams’ leases, although it was not yet aware of the precise terms. SWN requested permission to return and have the AOGC make a determination as to the reasonableness of the royalty rate that SWN, as the operator, could potentially be responsible for paying if the lessees were to elect not to participate in the costs of the well.
The AOGC granted SWN's applications and issued two integration orders on March 6, 2017. These orders contained a "Joint Operating Agreement" that approved SWN as the operator of the units. In addition, there were provisions that allowed a period of time for the unleased mineral-interest owners and any uncommitted leasehold working-interest owners to either participate in the costs of completing and operating the proposed well or to go "non-consent."2 Owners that choose to go non-consent would not have to pay any upfront costs for the well, but their share of production from the well would be transferred to the "consenting parties" who had agreed to participate in the well. This transferred working-interest share of production would then be applied to pay the non-consenting parties’ proportionate share of the completion and operational costs for the well, plus an additional risk penalty. After these sums were paid (the "recoupment period"), the non-consenting owners would begin receiving revenue from the well's production. The integration orders further provided that the leasehold royalty would be paid during the recoupment period according to the provisions of the leases existing for each separately owned tract, except where the AOGC found "that such lease(s) provide for an excessive, unreasonably high, rate of royalty as compared with the royalty determined by the Commission to be reasonable and consistent with the royalty negotiated for lease(s) made at arm's length in the general area where the Unit is located[.]"
On March 8, 2017, SWN filed supplemental applications with the AOGC for Sections 25 and 36. SWN stated that it expected the Hurds and the Killams to elect to go non-consent. It further alleged that the 25 percent royalty rate set forth in appellants’ February 2017 leases was unreasonable and was artificially inflated due to the Hurds’ and the Killams’ self-dealing with their own oil-and-gas companies. SWN asked the AOGC to determine a reasonable royalty rate. Hurd Enterprises and Killam Oil then notified SWN of their election to go non-consent and objected to the supplemental applications. They argued that SWN's request was contrary to statutory law, outside the AOGC's jurisdiction, and contrary to the March 6 integration orders.
The AOGC heard evidence on the supplemental applications on May 23, 2017, and held an adjudication hearing on June 27. At the hearings, SWN presented evidence that gas prices had declined since 2010, that SWN was the only company taking Moorefield-only leases, and that the highest bonus and royalty paid for Moorefield-only interests in Sections 25 and 36 was what SWN had offered the Hurds and the Killams and other unleased mineral owners—a $100/acre bonus and a one-eighth royalty, or a $0/acre bonus and a one-seventh royalty. The Hurds and the Killams, however, argued that a 20–25 percent royalty was reasonable given the proposed well's estimated production and the recoverable reserve.
On July 18 and 20, 2017, the AOGC issued amended and supplemental orders finding that it had the authority and jurisdiction to consider SWN's supplemental applications and that the 25 percent royalty rate set in the February 2017 leases was excessive and unreasonably high compared to royalties negotiated for leases made at arm's length in the general area where the unit is located. The AOGC ordered that the leasehold royalty rate payable to the Hurds and the Killams during the recoupment period was not to exceed one-seventh and amended the "Joint Operating Agreement" accordingly.
Appellants filed a petition for review in the Pulaski County Circuit Court pursuant to the Arkansas Administrative Procedure Act ("APA").3 They claimed that the AOGC's supplemental integration orders were (1) in violation of statutory provisions; (2) in excess of the AOGC's statutory authority; (3) made upon unlawful procedure; and (4) arbitrary, capricious, and characterized by an abuse of discretion.
SWN and the AOGC responded that the governing statutes provide clear authority for the AOGC to set reasonable royalty rates. The AOGC also filed a motion to dismiss the petition for review, claiming that it had sovereign immunity from suit pursuant to this court's decision in Board of Trustees of the University of Arkansas v. Andrews , 2018 Ark. 12, 535 S.W.3d 616. The circuit court agreed that sovereign immunity applied and dismissed the petition in an order entered on February 12, 2018. On appeal, we held that sovereign immunity did not bar the petition for review, and we reversed and remanded for the circuit court to consider the merits of the petition. Ark. Oil & Gas Comm'n v. Hurd , 2018 Ark. 397, 564 S.W.3d 248.
Following a hearing on remand, the circuit court entered an order on July 16, 2019, affirming the AOGC's orders. Appellants filed a timely notice of appeal, and the case is once again before us. In their sole point on appeal, appellants argue that the AOGC exceeded its statutory authority in granting SWN's request to reduce the royalty payable under appellants’ oil-and-gas leases when the lessees elected to go "non-consent." They contend that the AOGC's actions were both ultra vires and arbitrary and capricious and that we should reverse its decisions to grant the supplemental applications.
Our review on appeal is directed toward the decision of the administrative agency, rather than the decision of the circuit court. Great Lakes Chem. Corp. v. Bruner , 368 Ark. 74, 243 S.W.3d 285 (2006). As with all appeals from administrative decisions under the APA, either the circuit court or the appellate court may reverse the agency decision if it concludes that the...
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