The Supreme Court of Wyoming is reviewing an appeal by Exxon Mobil Corporation against the Wyoming Oil and Gas Conservation Commission and Denbury Onshore, LLC. The case stems from the Commission's approval of Cimarex Energy Company's plan to reinject waste carbon dioxide and hydrogen sulfide into a natural gas formation, which Exxon opposed. After losing in the District Court, Exxon appeals the ruling.
The Court identifies two main issues for consideration:
1. Whether the Commission provided sufficient findings regarding the potential waste of natural gas and the impact on Exxon's correlative rights due to Cimarex’s plan.
2. Whether the Commission should have granted a rehearing following Denbury Onshore’s acquisition of Cimarex’s interests and its plans to sell carbon dioxide from the production unit.
The facts indicate that both Cimarex and Exxon hold mineral interests in the Moxa Arch region, with Exxon having produced natural gas from its units since 1986. The gas composition from Exxon's units has higher methane content compared to Cimarex's, due to their geological positioning on the Moxa Arch. Denbury Onshore later acquired Cimarex's interests and was substituted as the respondent in the district court proceedings.
The Court affirms the second issue but reverses the first, remanding the case to the district court with instructions for the Commission to make appropriate findings.
Riley Ridge methane has been drawn to Exxon’s wells due to a pressure gradient resulting from Exxon's twenty-five years of production, while the leaseholders of Riley Ridge have not produced any gas. This production has reduced the bottom-of-the-well pressure in the Madison strata by three to fifteen percent, with the most significant reductions occurring at the Moxa Arch crest. Meanwhile, Cimarex and its partners, including Wold Oil Properties, consolidated various Riley Ridge working and overriding royalty interests to enable economically viable production. However, negotiations with Exxon to process and transport Riley Ridge gas through its system were unsuccessful, as Exxon declined, citing sufficient gas supply and no perceived benefit to cooperating with Riley Ridge owners.
Cimarex eventually proposed a solution to facilitate production by constructing a gas processing plant on the Riley Ridge unit and reinjecting separated carbon dioxide and hydrogen sulfide into the Madison formation until a market for stored carbon dioxide for enhanced oil recovery emerged. In 2010, Cimarex sought a permit to use the Riley Ridge No. 20-14 well for this reinjection.
Exxon opposed this plan, arguing it would lead to waste and infringe upon its correlative rights, which refer to each property owner's opportunity to produce their fair share of oil or gas from a common pool without waste. The definition of "waste" includes various forms of inefficient use and loss of reservoir energy, improper well operation, and excess production beyond necessary amounts. Statutory provisions prohibit waste, and the Commission is tasked with preventing it and safeguarding correlative rights.
Exxon did not oppose Cimarex's general plan to reinject carbon dioxide and hydrogen sulfide into the Madison strata but objected specifically to the injection at the No. 20-14 well, citing concerns that the carbon dioxide plume would dilute valuable methane production from its Lake Ridge and Fogarty Creek wells. Exxon argued that this dilution would necessitate processing larger volumes of gas to maintain current methane output.
During a contested hearing, Cimarex presented evidence indicating that its injection plan would reduce, but not eliminate, the gas drainage caused by Exxon and mitigate reservoir pressure decline associated with Exxon's methane extraction. Cimarex claimed that reinjecting carbon dioxide would decrease pressure depletion significantly, extending the operational life of the wells and delaying the need for additional gas compression.
Experts for Cimarex argued that without reinjection, the existing rate of pressure reduction would lead all operators to abandon their wells while still containing hydrocarbon gas. They asserted that CO2 reinjection would redirect hydrocarbon gas towards producing wells, leaving only carbon dioxide when reservoir pressure reached abandonment levels.
Exxon’s experts concurred that maintaining reservoir pressure would generally enhance methane production and acknowledged that Cimarex’s CO2 reinjection would assist in preserving pressure in the Madison formation. They noted that the injected gas would displace methane-bearing gas towards Exxon’s holdings, albeit with gradual dilution at the plume’s leading edge.
Exxon also submitted evidence suggesting that Cimarex's plan would negatively impact long-term production from its wells. This evidence included a computerized simulation that analyzed the spread of the CO2 plume in Layer 25, the most productive stratum. Exxon’s projections indicated that the plume would eventually affect its wells, leading to reduced methane content and increased production costs, potentially necessitating well shutdowns.
Despite the plume moving rapidly through Layer 25, Exxon’s model projected that only three wells would be impacted within ten years of injection—two owned by Cimarex and one by Exxon. Over a fifty-year horizon, eight additional wells would be affected, with varying degrees of dilution, where four of Exxon's wells would only experience minor effects.
Exxon indicated plans to progressively shut in four wells affected by the Layer 25 plume's diluting effects, ceasing production from the first well as methane levels dropped. It anticipated closing the Lake Ridge No. 5-32 well within seven to twelve years after Cimarex started carbon dioxide injection and expected the Fogarty Creek No. 22-01 well to follow eight years later due to a similar decline. The timeframe for the Fogarty Creek No. 23-12 and Lake Ridge No. 8-11 wells was less certain, suggesting they might remain operational for about forty-five years following the injection start. Exxon’s model suggested that the wells would shut in once the methane concentration fell to between eighteen and twenty percent, noting current methane levels in the area were sixteen to twenty percent.
Cimarex challenged the validity of Exxon’s model, highlighting its failure to incorporate geological factors like fractures that could alter the carbon dioxide plume's trajectory. Cimarex criticized Exxon’s assumption that methane concentrations had remained unchanged for twenty-four years and argued Exxon’s model incorrectly projected a higher carbon dioxide reinjection rate than planned. Additionally, it did not consider the potential for Cimarex to sell some reinjected carbon dioxide, which could diminish the plume size and methane dilution.
Despite these criticisms, Cimarex informed the Commission it would likely avoid injecting waste gas into Layer 25. The Commission sided with Cimarex, permitting it to convert the Riley Ridge No. 20-14 well into a waste injection well, barring carbon dioxide injection into Layer 25, thus allowing injection into higher strata. Exxon contended this decision was unfairly advantageous to Cimarex, given its historical gas production from the area. Following Cimarex's acquisition by Denbury Onshore, which intended to sell some reinjected carbon dioxide, Exxon petitioned for a rehearing, which the Commission denied. Exxon subsequently sought judicial review of the Commission's rulings, but the district court upheld the decisions.
When reviewing agency decisions from contested case hearings, the Court primarily assesses whether the agency’s findings of fact are backed by substantial evidence. It can also evaluate if the agency's actions were arbitrary and capricious, particularly when the challenged action does not fit other review standards established by Wyoming’s Administrative Procedures Act. This broader inquiry may be necessary when an agency fails to provide adequate findings of fact.
If procedural rules allow for rehearing contested cases, the Court applies an abuse of discretion standard to assess the agency's handling of rehearing motions. The Wyoming Legislature established a comprehensive regulatory framework through the Oil and Gas Conservation Act to prevent resource waste and protect property owners' rights, assigning the Commission the responsibility to fulfill these objectives.
The Commission is mandated to produce findings of basic facts on all material issues, which are essential for judicial review. A final decision in a contested case must include findings of fact that are explicitly supported by underlying facts. This requirement is crucial because courts require clear findings to determine whether agency decisions are reasonable and supported by substantial evidence. Without such findings, there is no rational basis for judicial review, as emphasized by historical legal precedents. The agency's duty to articulate separate findings of fact and conclusions of law is vital for transparent and effective judicial oversight.
Courts reviewing agency actions must determine if the agency's findings of fact are supported by substantial evidence. This requires a clear understanding of the underlying evidentiary facts relied upon by the agency, as ultimate findings cannot be implied. This principle is emphasized by legal precedents indicating that a robust "reasoned analysis" is necessary to ensure that agency determinations are legally valid. The reviewing court must confirm that the agency's conclusions are drawn from a comprehensive consideration of the entire record or pertinent portions cited by any party, following legal standards.
In the context of complex technical evaluations, such as those related to petroleum geology, courts cannot proceed without clarity. Exxon contended that Cimarex's proposed carbon dioxide injection well would waste methane from the Madison formation, infringing on its correlative rights. In response, Cimarex and Wold provided rebuttal testimony asserting that the operation would not waste resources and would actually facilitate the recovery of methane and helium, manage reservoir pressure, and prevent unnecessary reservoir energy loss. They also presented evidence showing that ExxonMobil was already draining their reserves, arguing that the well's approval would mitigate this issue.
The Commission ultimately favored the application for an aquifer exemption and well use for waste disposal but imposed a precautionary requirement that Cimarex and Wold must obtain advance approval from ExxonMobil before proceeding with specific operations in "Layer 25" of the wellbore.
The Commission approved the Riley Ridge #20-14 Well for disposal with specific conditions, including requiring prior approval from the Supervisor and ExxonMobil before completing "Layer 25" for injection, and the use of a radioactive tracer to ensure no injectate escapes into that layer. The Commission's findings inadequately addressed the factual basis for resolving Exxon’s challenges to Cimarex's proposal, particularly regarding the impact of carbon dioxide injection on Exxon's correlative rights. While the Commission suggested that restricting injection into Layer 25 would protect Exxon's rights, it failed to provide concrete factual findings or evidence supporting this conclusion.
Exxon’s argument centered on the belief that Cimarex's carbon dioxide injection would significantly harm its methane production from nearby wells. However, the Commission did not find the rebuttal testimony presented by Cimarex persuasive, nor did it explain its rejection of Exxon's claims regarding potential waste from carbon dioxide reinjection. The lack of detailed findings limited the ability to evaluate the evidence supporting the Commission's decisions, emphasizing the importance of maintaining the integrity of the agency's fact-finding role.
Exxon’s argument regarding waste primarily hinges on the potential premature shutdown of its Lake Ridge and Fogarty Creek wells due to dilution from carbon dioxide injected into Layer 25. The Court considered an alternative approach where Cimarex could inject carbon dioxide into the Madison formation to maintain reservoir energy while prohibiting injection into Layer 25, but ultimately decided against pursuing this path. Instead, the matter is returned to the Commission for specific findings that allow for judicial review of the decision's evidentiary support and statutory compliance, without necessitating another contested case hearing if the existing record suffices.
Denbury Resources announced its acquisition of Wold's interests and plans to sell carbon dioxide produced from the Riley Ridge wells, intending to build a pipeline for transportation. Exxon filed for a rehearing, claiming the acquisition and pipeline plans constituted newly discovered evidence, but the Commission ruled that ownership changes did not affect its earlier decision. Denbury asserts it has complied with the Commission's regulations, emphasizing that Exxon would have the opportunity for a hearing if Denbury seeks to change its operations regarding well No. 20-14 in the future.
The Court found ambiguity in whether Denbury would need to apply for permission to sell carbon dioxide instead of reinjecting it. However, it agreed with Denbury that the Commission acted within its discretion by denying the rehearing request, noting that potential future changes in operation do not warrant immediate reconsideration. On the merits, Exxon argued that Denbury's plans to sell carbon dioxide, disclosed after the contested case hearing, constituted newly discovered evidence that could have influenced the permit decision, but this claim did not compel a rehearing.
Sales of carbon dioxide from Cimarex's operations are argued to undermine claims of pressure maintenance benefits associated with reinjecting carbon dioxide into the Madison formation, as large quantities of gas would be sold instead. Cimarex had previously indicated that part of its motivation for converting its Riley Ridge No. 20-14 well to an injection well was to store carbon dioxide for future sale, a plan that gained clarity with Denbury's involvement but was not new. This plan does not materially strengthen Exxon's position regarding potential waste or damage to its correlative rights because while reinjection could prevent waste by sustaining reservoir pressure, selling carbon dioxide could reduce the projected benefits of increased pressure. Exxon contended that waste and damage would escalate with increased carbon dioxide injection, especially into Layer 25. A commissioner pointed out that if carbon dioxide were sold instead of injected, it would significantly alleviate Exxon's concerns, a point Exxon’s counsel acknowledged. Even if the potential sale of carbon dioxide were considered new information, it would only lessen the basis for Exxon's objection. The Commission's decision to deny Exxon’s rehearing petition was deemed a reasonable exercise of discretion. The court reversed and remanded the case for the Commission to make appropriate findings but upheld the denial of Exxon's rehearing petition.
