Talisman Energy United States, Inc. v. N.Y. State Dep't of Envtl. Conservation

• Decision Date: 09 January 2014
• Parties: In the Matter of TALISMAN ENERGY USA, INC., Appellant, v. NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL CONSERVATION et al., Respondents.
• Court: New York Supreme Court — Appellate Division

113 A.D.3d 902
979 N.Y.S.2d 167
2014 N.Y. Slip Op. 00150

In the Matter of TALISMAN ENERGY USA, INC., Appellant,
v.
NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL CONSERVATION et al., Respondents.

Supreme Court, Appellate Division, Third Department, New York.

Jan. 9, 2014.

[979 N.Y.S.2d 168]

The West Firm, PLLC, Albany (Thomas S. West of counsel), for appellant.

Eric T. Schneiderman, Attorney General, Albany (Andrew B. Ayers of counsel), for New York State Department of Environmental Conservation and another, respondents.

Reed Smith, LLP, Pittsburgh, Pennsylvania (Stefanie A. Lepore of counsel), for Western Land Services, Inc. and others, respondents.

Biltekoff & Pullen, LLP, Amherst (Seth D. Pullen of counsel), for Epsilon Energy USA, Inc., respondent.

Before: ROSE, J.P., LAHTINEN, McCARTHY and GARRY, JJ.

ROSE, J.P.

Appeal from a judgment of the Supreme Court (Zwack, J.), entered January 16, 2013 in Albany County, which dismissed petitioner's application, in a combined proceeding pursuant to CPLR article 78 and action for declaratory judgment, to review, among other things, several determinations of respondent Department of Environmental Conservation regarding the integration of the various ownership interests in the rights of natural gas extracted by petitioner's wells.

Petitioner is a driller and developer of natural gas wells in New York, including four wells that are the subject of this proceeding/action. Respondents Western Land Services, Inc., Buck Mountain Associates, Inc., Austin Exploration Corporation, LLC, Bryon J. Cook, William F. Cook and Epsilon Energy USA, Inc. (hereinafter collectively referred to as respondents) are the partial owners or manage the partial owners of the natural gas extracted by petitioner. At issue here is whether the Legislature's substantial amendments made in 2005 to ECL article 23, which governs oil and natural gas exploration, development and production in New York, apply to the wells in question.

A more comprehensive history of the development of the law regarding the production of oil and gas in New York may be found in our prior holding in Matter of Western Land Servs., Inc. v. Department of Envtl. Conservation of State of N.Y., 26 A.D.3d 15, 804 N.Y.S.2d 465 [2005], lv. denied6 N.Y.3d 713, 816 N.Y.S.2d 749, 849 N.E.2d 972 [2006]. To briefly summarize, prior to 2005, respondent Department of Environmental Conservation (hereinafter DEC) issued spacing orders determining which owners had the right to be compensated by the well operator for the extraction of natural gas from an underground pool ( see ECL former 23–0501). DEC would then join the interests of the various owners of the pool and issue integration orders that defined the rights and obligations of the parties in terms that it deemed “just and reasonable” (ECL 23–0901 former [3] ). This resulted in conflicts between well operators and the various owners regarding the question of reasonable compensation and the degree of involvement of the owners in the risks and rewards involved in drilling a well ( see Senate Introducer Mem in Support, Bill Jacket, L. 2005, ch. 386 at 5).

To address these conflicts, the Legislature amended ECL article 23 in 2005, enacting changes to well permitting, spacing

[979 N.Y.S.2d 169]

and the integration process ( see L. 2005, ch. 386). As relevant here, DEC no longer determines the rights and obligations of the owners ( seeECL 23–0901[3] ). Rather, the owners may choose between three levels of ownership with varying rights and obligations consistent with their desired level of participation in the exploration and drilling of the well ( seeECL 23–0901[3] ).

The amendments took effect on August 2, 2005 and apply “to any oil or gas well permit or spacing order issued on or after such effective date” (L. 2005, ch. 386, § 10 [emphasis added] ). Here, the four wells in question were transition wells, in that petitioner obtained the permits for these wells prior to the effective date of the 2005 amendments, but the spacing orders had not been issued as of that date. Petitioner challenged the applicability of the 2005 amendments to such wells. Respondent Commissioner of Environmental Conservation then issued an interim decision finding, among other things, that the 2005 amendments applied to the integration proceedings involving the four transition wells at issue here. Petitioner disagreed and, after DEC issued its final integration orders allowing respondents to choose their level of ownership pursuant to ECL 23–0901(3), petitioner commenced this combined CPLR article 78 proceeding and declaratory judgment action....