CHAPTER 13 PRACTICE BEFORE STATE OIL AND GAS AGENCIES
| Jurisdiction | United States |
(Nov 1981)
PRACTICE BEFORE STATE OIL AND GAS AGENCIES
Brown, Drew, Apostolos, Massey & Sullivan
Casper, Wyoming
Practice before a state oil and gas conservation agency, like practice before any administrative agency involving a subject matter rife with technical terms and specialized personnel, can presume to be an esoteric topic filled with foreboding for all but a few initiated practitioners. However, in the context of an institute concerning administrative law and with a general understanding of the functions of state oil and gas conservation agencies, the subject becomes less mystical and provides practical applications of administrative law concepts. Moreover, in a time of burgeoning domestic exploration activity, the topic is unquestionably timely.1
Given the subject matter of this institute, I have not taken as my charge the presentation of a how-to text on practice before state oil and gas conservation agencies. Several other writers have provided excellent guidance in the nuts and bolts vein.2 Rather, the focus of this paper will be a general description of the oil and gas conservation agency function and illustration and amplification of some of the administrative law concepts and
[Page 13-2]
problems involving state oil and gas agencies. However, prior to discussing the application of any particular administrative law concepts to the regulatory functions of state oil and gas agencies, some basic understanding of the nature of state oil and gas conservation laws and their effects on the activities of the various parties involved in oil and gas exploration and development is necessary.
GENERAL OVERVIEW OF THE PRINCIPAL FUNCTIONS OF STATE OIL AND GAS CONSERVATION AGENCIES AND THE EFFECT OF CONSERVATION LAWS
Although some variations obviously exist, the oil and gas conservation laws of the several Rocky Mountain states are remarkably similar in their general purpose and effect. All of the conservation laws under discussion have as their general goal and purpose the prevention of "waste," as that term is defined by these acts3 , and the protection of the "correlative rights," also a term of art in most conservation laws, of the various parties involved.4 This similarity is probably due, in large measure, to a model conservation act proposed and revised several times by the Interstate Oil Compact Commission (an interstate commission to which most of the producing states belong) and to participation in the drafting and revision of conservation laws by oil and gas industry representatives and lawyers. Although there are differences in the Rocky Mountain states'
[Page 13-3]
conservation laws5 , the emphasis in this paper will be upon the similar and generally applicable provisions and concepts.
Generally each of the agencies administering the conservation law in the states considered is given broad authority and jurisdiction over all persons and property necessary to enforce the provisions of the conservation acts, together with specific authority to require the making and filing of certain reports and information with the agency, to require the obtaining of drilling permits prior to drilling any wells in the state, to regulate the drilling producing and plugging of wells and the spacing of wells, and the authority to limit production in the interest of preventing waste and protecting correlative rights under certain circumstances.6 Finally, all of these agencies are granted the authority to promulgate rules and regulations under the conservation law and to hold and conduct hearings with respect to certain matters.7
All of the conservation laws had as their primary impetus a remedial goal — protection against the excesses caused by the so-called "rule of capture."8 The rule of capture was developed by early case law concerning oil and gas, and represented the courts' attempts to resolve
[Page 13-4]
conflicting property interests and rights with respect to the exploration and production of oil and gas by reference to what were considered analogous substances or rules of law. In attempting to resolve the early disputes concerning the rights of various parties concerning the oil and gas underlying their lands, courts analogized oil and gas to subterranean waters and wild animals.
"Unfortunately, the case law of oil and gas originated in an era of abysmal ignorance regarding their physical characteristics, and was posited upon factual and economic assumptions which either were incorrect or no longer obtained. Of these primordial misconceptions the most tragic was that oil and gas were inexhaustible resources migrating freely and voluntarily like subterranean waters or animals ferae naturae. (Footnotes omitted)9 ...We know now that oil and gas do not migrate unless the reservoir is penetrated and its pressures disturbed. We know that instead of being infinite they are limited and irreplaceable....Finally, we have learned from bitter experience the physical and economic waste occasioned by unrestricted drilling practices under competitive conditions."10
Under the rule of capture many unnecessary and economically wasteful wells were drilled, with the consequence that reservoir energy was dissipated and recoverable hydrocarbons left in the ground. However, with the advent of conservation legislation, the deleterious consequences of
[Page 13-5]
the rule of capture were overcome and the rule of capture abrogated.
The salutary effect of conservation laws has not been obtained, however, without profound impact upon the property rights of the various parties having rights to drill for and produce oil and gas.
"The right of possession, the law of capture, and the unrestricted right of alienation are but a few of these historical [property] rights now generally conceded to be servient to valid conservation regulation.11
"Courts, in effect have said that conservation laws are a part of, and must be read into every oil and gas lease. Valid rules and regulations are superior to and supersede, expressed provisions of a lease that are inconsistent with these rules and regulations." (Footnotes Omitted)12
Well Spacing
While state oil and gas agencies have been given a broad array of powers and duties covering virtually all phases of petroleum exploration and development, perhaps the principal and most often invoked power of a state oil and gas agency is the ability to regulate the spacing of wells drilled for the production of oil or gas. Absent conservation legislation, and pursuant to the rule of capture, the owner of oil and gas exploration and development rights could drill, and in fact was encouraged
[Page 13-6]
to drill, as many wells upon his lands as he pleased. As noted above, this ability and incentive to drill as many wells as possible resulted in unnecessary wells, the dissipation of reservoir energy and a waste of the resource.
Prior to developing an understanding the conservation function of well spacing, a brief and vastly oversimplified explanation of the nature and occurrence of oil and gas is necessary.13
At the outset, one broadly held misconception concerning the occurrence of oil and gas should be dispelled — an oil and gas reservoir is not an underground lake or pool of oil or gas. If one were to examine a core sample taken from even the most prolific oil or gas reservoir, that sample would be a hard, cylindrical piece of rock with no easily seen holes or voids.
Oil and gas are the chemically altered remains of organic matter that was originally part of sediment as it was deposited.
"Sediments of marine origin that have not been subjected to excessive heat (plus 200° F.) normally yield oil or petroleum. Sediments of non-marine origin, wherein the hydrocarbons are normally of decayed plant material, ordinarily yield natural gas."14
Tiny globules of petroleum or natural gas are held in the tiny spaces between the grains in sedimentary rock and are
[Page 13-7]
capable of migrating, and therefore being produced, only in sedimentary rocks that have porosity, permeability and/or fractures or joints.15 The term "porosity" is a measure of the void spaces between the tiny grains in sedimentary rock, while the term "permeability" is a measure of the capacity of that rock to transmit the fluid or gas.
A given oil or gas reservoir is able to produce oil or gas by "primary" (as opposed to "secondary" or "tertiary" means) through the pressure differential created by the opening of a wellbore to the reservoir rock and the difference in the pressure at the wellbore from the pressure under which reservoir rock is found. Depending upon the nature of the reservoir rock, whether the reservoir is an oil or gas reservoir, the pressures and tempuratures encountered, the driving mechanism of the reservoir, and related factors, one well may be able to drain a substantial amount of acreage, or, very little acreage, with all manner of variations in between.
Suffice it to say for purposes of our discussion, to the extent too many wells are drilled into any one reservoir, the pressure of that reservoir will be depleted too quickly and hydrocarbons which would have been capable of moving toward a wellbore will no longer do so due to the absence of sufficient pressure. The only way to remedy such
[Page 13-8]
a situation is through time-consuming and expensive secondary or tertiary recovery techniques involving the introduction of extraneous fluids, gases and/or chemicals to sweep hydrocarbons towards another wellbore or to repressure the reservoir.
In sum, the number of wells permitted to be drilled to any given reservoir is the principal determinant of the length of time that reservoir will be able to produce under primary means and the amount of hydrocarbons which will be produced.
In similar fashion, the number of wells permitted to be drilled to any given oil or gas reservoir will have certain and very...
To continue reading
Request your trial