Chase v. Colorado Oil & Gas Conservation Commission

Citations: 284 P.3d 161; 2012 COA 94; 2012 Colo. App. LEXIS 919; 2012 WL 2045852Docket: No. 11CA1249

Court: Colorado Court of Appeals; June 7, 2012; Colorado; State Appellate Court

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Plaintiffs Laura W. Wendy Chase and Michael Sutak (Landowners) appeal a district court ruling that upheld three decisions by the Colorado Oil and Gas Conservation Commission (COGCC): 1) refusal to interpret the lease between Magpie Operating, Inc. and the Colorado State Board of Land Commissioners; 2) denial of Landowners' request to designate their property as a Designated Outdoor Activity Area (DOAA); and 3) granting a drilling permit to Magpie. The court affirms in part, reverses in part, and remands the case for further findings by the COGCC.

In 1997, the Landowners acquired a 77-acre surface estate in Larimer County, which was subject to a mineral rights reservation established in a 1916 patent. The Board owns the mineral estate and manages it for the School Trust. The property is divided by an irrigation ditch, with the southern parcel used for agriculture, featuring a residence and facilities for equestrian training.

The Board has been involved in an oil and gas lease since 1977, covering the land that includes the Landowners' property, with the lease assigned to Magpie in 1998. In June 2008, Magpie sought permits to drill on the property, having previously solicited input from the Landowners regarding well locations. Following this, the Landowners requested an onsite inspection from the COGCC, which took place on August 27, 2008, to evaluate the potential impact of drilling on their equestrian activities. Before the COGCC's survey was completed, the Landowners applied for their property to be designated as a DOAA, which would require specific occupancy thresholds. Both Magpie and the Board protested the DOAA request.

The COGCC survey, completed on November 30, 2009, found that the alternative location for State-Chase 38-86 was outside the designated drilling window per COGCC Rule 318A. Despite this, a staff analysis recommended addressing the Landowners' request for a Designated Outside Activity Area (DOAA) and, if denied, permitting drilling at the alternative site. The analysis noted that exceptions to the drilling window could be made for environmental or topographic reasons, requiring only the mineral estate owner's consent. The Board, as the mineral estate owner, approved the alternative location on December 12, 2009. 

Conditions for approving the Applications for Permit to Drill (APDs) for State-Chase 38-86 and State-Chase 34-86 included conducting drilling activities between October 31 and March 1 to avoid irrigation season, immediate interim reclamation after drilling, and minimizing disruption to surface owners' irrigation practices. The operator was also required to give 30 days' notice for non-emergency workover or treatment, with provisions for managing conflicts with the surface owners' scheduled events.

The COGCC held a hearing on the Landowners' DOAA request on February 22, 2010, where concerns were raised about the definition and applicability of a DOAA, leading to the COGCC's March 24, 2010, decision to deny the request. The decision was based on questions regarding the definition of a "designated outside activity area," the nature of the property in question, and potential waste if the APDs were denied. The denial was effective immediately and deemed final for judicial review under the Colorado Administrative Procedure Act (APA), with no need for reconsideration applications.

Following the DOAA hearing, Magpie proposed to withdraw the APD for State-Chase 34-86 and seek an exception for State-Chase 38-86, asserting that Rule 318A allowed for such exceptions to mitigate operational impacts while facilitating cost-effective vertical drilling. This proposal included accessing the well via a road along the property's eastern edge and locating a tank battery at the end of the access road.

Sixteen landowners proposed an alternative well location to Magpie and requested specific accommodations. These included the installation of a horse-safe access gate, running gas flow lines under the access road without easements, conducting drilling work between November 15 and March 1, initiating reclamation and reseeding after drilling, minimizing disruption to irrigation practices, limiting access to well sites before 8 am, and providing thirty days' notice before site preparation and drilling. The Colorado Oil and Gas Conservation Commission (COGCC) approved Magpie's Application for Permit to Drill (APD) at the landowners' suggested location and incorporated many of their conditions, particularly the drilling timeframe to avoid conflicts with equestrian activities.

After the COGCC's decision, the landowners appealed to the district court concerning the denial of their request for a Designated Outdoor Activity Area (DOAA) and the granting of the APD. They argued the COGCC failed to protect public health and safety, abused its discretion, exceeded its jurisdiction, and acted arbitrarily by denying their DOAA request, claiming the property qualified for such status. The district court ruled that the COGCC lacked jurisdiction to interpret the lease and affirmed both the denial of the DOAA and the grant of the APD. The landowners are now appealing the district court's ruling.

Judicial review of COGCC decisions is governed by the Administrative Procedure Act (APA), which permits overturning an agency decision only if found arbitrary, unsupported by the record, erroneous in law interpretation, or exceeding authority. The reviewing court looks at the record favorably towards the agency's decision, and the sufficiency of evidence is assessed as a legal question. The court's review is confined to the agency's record.

In interpreting administrative regulations, the same principles apply as with statutes, emphasizing plain and ordinary meanings of terms used. COGCC Rule 100 mandates that undefined words should be interpreted according to their customary meanings, while technical terms should adhere to accepted definitions in the oil and gas industry. Agencies receive significant deference in their interpretations of their own rules, provided these interpretations are legally sound and supported by the record, unless the rule distinctly dictates otherwise.

The Colorado Oil and Gas Conservation Act, established in 1951, created the COGCC to ensure responsible development of oil and gas resources. The COGCC's authority is derived from this statute, which delineates its powers and responsibilities, including the regulation of drilling and production activities. Originally focused on enhancing oil and gas productivity, the COGCC's scope expanded with 1994 amendments to also prioritize environmental impacts and public health and safety. This broader mandate led to the implementation of various safety regulations and operational standards, including setbacks from residential areas, blowout prevention measures, and safety protocols for equipment and operations.

COGCC's regulations aim to safeguard public health, safety, and welfare during oil and gas operations. Rule 6038 specifically addresses drilling setbacks near Designated Occupied Areas (DOAA) and High Density Areas (HDA), working in conjunction with Rules 100, 318, and 318A. Rule 608 grants COGCC authority to define boundaries and setbacks for properties classified as DOAA or HDA, while Rule 603 mandates minimum distances from occupied structures, public roads, utility lines, railroads, and property lines, with larger setbacks required for wellheads and production equipment in DOAA or HDA zones.

Rule 318 outlines setbacks from lease lines for gas well locations, which can vary based on well depth unless exceptions or variances are requested by the operator or surface owner. The COGCC retains discretion to approve or deny such requests based on various conditions, including geological and environmental factors. Generally, wellheads must be located at least 150 feet from buildings and major infrastructure unless exceptions are granted. The rules are designed to enhance safety while providing COGCC with significant discretion for exceptions.

Landowners argue that COGCC improperly issued a drilling permit to Magpie, citing a lease restriction against drilling within 200 feet of any property improvement without consent. They contend that COGCC should have jurisdiction to interpret the lease based on its enabling statute, section 34-60-105. However, agency jurisdiction determinations are subject to de novo court review, and while agencies may receive deference for reasonable interpretations that facilitate decision-making, the COGCC lacks jurisdiction to interpret leases, as established in previous case law.

The COGCC's Statement of Basis clarifies its jurisdictional limits, stating it can only address issues within its authority, excluding the interpretation or enforcement of contracts between surface owners and operators. Although the Landowners claim that section 34-60-105 grants the COGCC the power to interpret leases, they fail to specify any provision that supports this. The ambiguity of the section leads to the conclusion that the COGCC’s determination of lacking jurisdiction to interpret the contract is reasonable, as supported by precedent (Grynberg, 7 P.3d at 1062-63). Furthermore, while district courts can issue declaratory relief, the Landowners did not request such a declaration in their complaint, rendering the lease interpretation issue outside consideration.

Regarding the Landowners' DOAA request, they argue that the COGCC improperly denied it by not applying the requirements of the DOAA rule, which states that the area must be occupied by at least twenty people for forty days or more, without necessitating their simultaneous presence. The summary agrees with the Landowners on this point but also finds that the COGCC did not make sufficient factual findings related to the DOAA request, warranting a remand for detailed findings regarding compliance with the DOAA criteria.

The COGCC has discretion in determining DOAA status and is not required to grant it for the entire area requested by the Landowners, as per COGCC rules. The record shows that only one other area was previously declared a DOAA, where the COGCC limited the designation despite high anticipated visitor numbers due to the area's undeveloped status. If any portion of the property receives DOAA status, the COGCC retains discretion to define the appropriate boundaries and setbacks. Additionally, the interpretation of occupancy for DOAA purposes was debated, with clarity that twenty persons do not need to be present simultaneously, as the definition lacks provisions for density and does not specify concurrent presence.

The commissioners' discussions reveal the ambiguity in the DOAA (Designation of Areas of Agricultural) definition. Citing precedent, when multiple interpretations exist, the language is deemed ambiguous. No specialized definition for 'occupy' in the oil and gas industry was found; thus, the term is defined using its common meaning, which suggests that it does not necessitate the presence of twenty individuals at once. Examples from the DOAA, such as 'playground' and 'recreation area,' do not imply that twenty people must be simultaneously present to fulfill occupancy requirements. Additionally, other COGCC regulations indicate that 'occupied' does not require simultaneous presence, reinforcing the interpretation that twenty individuals need not be present at the same time to meet DOAA criteria.

Regarding the COGCC's evaluation of the DOAA request, the Landowners argued that the COGCC improperly considered the purpose of the DOAA and potential waste. However, the final order did not include any definitive findings on waste or purpose, making it unclear if these factors influenced the decision or if discretion was abused in denying the request. Nonetheless, the definition of DOAA does not restrict the COGCC from considering factors beyond occupancy when designating land as DOAA.

The Conservation Act emphasizes the public interest in protecting against waste in oil and gas production and utilization, which supports the Colorado Oil and Gas Conservation Commission's (COGCC) authority to consider waste when determining if an area should be designated as a Designated Outdoor Activity Area (DOAA). The COGCC has the jurisdiction to enforce relevant regulations and make necessary rules to fulfill its obligations. The assertion by Landowners that the COGCC could not consider waste in its decision is rejected.

However, upon reviewing the COGCC's denial of the DOAA request and Magpie's Application for Permit to Drill (APD), it is noted that the order lacks sufficient factual findings to allow for meaningful judicial review. The COGCC must provide a clear rationale for its decisions, as established in relevant case law, and if it fails to do so, courts may remand the case for further examination. The order does not clarify whether the criteria for a DOAA were met or specify which aspects were lacking, and there appears to be confusion among commissioners regarding the evidence provided by Landowners about property usage. 

Additionally, while some commissioners raised concerns about the credibility of Landowners' records, the order does not indicate what credibility assessments were made. Appellate courts typically defer to the agency's fact-finding and credibility determinations, but the lack of clarity in the COGCC's findings hampers the ability to assess its decision-making process.

Landowners' application was denied by the COGCC, primarily due to ambiguities surrounding the definition of 'designated outside activity area' (DOAA). The COGCC order did not clarify whether the requirement was for twenty people to be present simultaneously or over the course of a day, leaving the basis for the denial unclear. Consequently, there was insufficient detail in the order's findings of fact and conclusions of law to support meaningful judicial review. The court emphasized that an agency must provide a clear rationale for its decisions to allow for appropriate review. As a result, the case is remanded to the district court with instructions to send it back to the COGCC for further findings. Additionally, the court did not address Landowners' argument against the permit granted to Magpie, as it depended on the unresolved DOAA designation. The district court's judgment was affirmed regarding the refusal to interpret the lease, but reversed concerning the denial of the DOAA designation and the permit issued to Magpie, pending the COGCC's findings on remand.

Magpie and Landowners are currently engaged in litigation regarding the interpretation of a lease in Larimer County District Court (No. 0O9CV 1134). Public hearings in 2008 revealed confusion over the number of individuals required to designate an area a Designated Outdoor Activity Area (DOAA) and highlighted issues with measuring setbacks for certain outdoor activities. There is no fixed standard for the number of people or the definition of boundaries related to DOAA, as concerns extend beyond traditional structures to activities that require protection.

Waste is defined under Colorado law as the release of gas from wells in excessive amounts or in a manner that reduces reservoir pressure or diminishes resource quantity, with exceptions for necessary operational gas. The setbacks for DOAA are governed by COGCC Rule 603.d., which is included in safety regulations aimed at protecting public health during drilling operations.

Mineral estate owners have an implied easement that allows reasonable surface use for mineral access, balancing the rights of both the easement holder and landowner, as established in case law. Additionally, the Board is tasked with managing state assets and producing consistent income in accordance with constitutional obligations. The COGCC must operate within these legal frameworks, and while discrepancies in attendance reporting were noted, the COGCC's orders did not include factual determinations for court review.