Case Title: Trout v. Wyoming Oil and Gas Conservation Com'n

Citation: 

Docket Number: 

State: wyoming

Court: Wyoming Supreme Court

Date: 1986-06-18T00:00:00Z

Document:
Trout v. Wyoming Oil and Gas Conservation Com'n1986 WY 133721 P.2d 1047Case Number: 85-280Decided: 06/18/1986Supreme Court of Wyoming
Kye TROUT, Jr., Appellant 
(Petitioner),

v.

WYOMING OIL AND GAS CONSERVATION 
COMMISSION, Appellee, (Respondent), Mitchell Energy Corporation, Appellee 
(Intervenor).

Appeal from District 
Court, NatronaCounty, Dan Spangler, 
J.

Harold E. Meier 
of Schwartz, Bon, McCrary & Walker, Casper, for appellant.

Karen A. Byrne, 
Asst. Atty. Gen., Casper, for appellee Wyoming Oil and Gas 
Conservation Com'n.

Houston G. 
Williams of Williams, Porter, Day & Neville, P.C., Casper, for appellee Mitchell Energy 
Corp.

Before THOMAS, C.J., and BROWN, CARDINE, URBIGKIT 
and MACY, JJ.

BROWN, 
Justice.

[¶1.]     By an order dated 
August 16, 1985, and a nunc pro tunc order dated September 1, 1985, the Wyoming 
Oil and Gas Conservation Commission (hereinafter Commission) approved a plan of 
unitized secondary recovery operations (unitization) of the Teapot Formation 
underlying the Mikes Draw unit area. Appellant appeals the unitization plan 
approved by the Commission. This case was certified by the district court to the 
Wyoming Supreme Court according to Rule 12.09, Wyoming Rules of Appellate 
Procedure.

[¶2.]     The issues on appeal 
urged by appellant are:

"1. Are the material 
findings of the Commission as set forth in the order supported by substantial 
evidence?

"2. May the Wyoming Oil 
and Gas Conservation Commission approve a unit formula without evidence before 
it that the proposed formula protects correlative rights or allocates oil and 
gas in an equitable manner?

"3. Is the decision of 
the Wyoming Oil and Gas Conservation Commission arbitrary, capricious and abuse 
of discretion, or otherwise not in accordance with the 
law?"

[¶3.]     We will 
affirm.

[¶4.]     The Teapot Formation is 
located in ConverseCounty north of Douglas. After meetings and discussions among the working 
interest owners concerning unitization, Intervenor, Mitchell Energy Corporation, 
proposed a Teapot Unit approximately 8.5 miles long by 2.8 miles wide covering 
approximately 7,385 acres. The appellant, Kye Trout, Jr., is the owner of 
working interests in leases in three wells located in the proposed unit. 
Mitchell Energy Corporation owns thirty-five percent of the interest in the unit 
area.

[¶5.]     Counsel for appellant 
stated that they were not opposed to the unitization and were only opposed to 
the allocation formula. Appellant's witness, Guy Ausmus, a petroleum engineer, 
testified that they strongly supported the unit because they did not believe in 
waste, and if they were to stay out of the unit, that action would constitute 
waste. This representation by appellant's counsel was apparently considered by 
the Commission to be a stipulation that unitization would prevent waste. In any 
event, waste was not an issue before the Commission.

[¶6.]     Before the Commission 
hearing on August 13, 1985, the working interest owners (operators) manifested 
an interest in unitization, and a technical committee was formed in January 1982 
to study its feasibility. After its organization, additional meetings were held 
throughout the year, resulting in the technical committee report of July 1983. 
The operators had discussed possible formulas, including a formula proposed by 
appellant. The operators with interests in wells down the middle of the field 
would not accept the original oil-in-place and pore volume parameters favored by 
appellant, because they did not believe this oil to be 
recoverable.

[¶7.]     In December of 1983, 
there was a meeting to vote on the formula for allocating unit production to the 
various tracts. Five different votes were taken. At this meeting a formula 
proposed by appellant, relying on oil-in-place as a significant factor was 
rejected. With respect to the Trout formula, Rob Pawlik, a petroleum-reservoir 
engineer, testified at the Commission hearing that this formula had no chance of 
receiving the requisite approval of the unit members. Appellant's proposed 
formula would yield more oil to him, and such oil would have to be taken from 
the other interest owners. Mr. Pawlik also stated that the formulas were 
thoroughly discussed before the meeting in December 1983, at which time the 
votes were taken, and he stated further that by the time of that meeting, the 
acceptable formula had been narrowed down by the parties and that this was the 
reason for only five votes. At the close of the meeting a large majority of the 
operators had substantially agreed on a formula.

[¶8.]     It was determined at 
the Commission hearing that 82.39 percent of the operators and 93.06 percent of 
the royalty interest owners indicated voluntary joinder of the unit proposed by 
Mitchell Energy Corporation. After the hearing, the unit formula earlier favored 
by the operators was confirmed by the Commission, allocating unitization 
production based on three parameters or factors of varying weight:1

Parameter 
                                                     
            
Weight 

Last six months 
production                                      
47.5%

Remaining proved 
developed producing reserves           
47.5%

Original 
oil-in-place                                                   
5.0%

[¶9.]     Although appellant 
lists three issues, his appeal is essentially a sufficiency-of-the-evidence 
argument. Appellant summarized his argument by stating 
that:

"There was no substantial 
evidence to support the Commission's findings. The statements of the 
commissioners at the close of the hearing contradict the findings placed in the 
order.

"The Commission erred in 
that there was no evidence whatsoever as to the effect of the formula on 
correlative rights or that the formula allocated oil and gas in an equitable 
manner. The Commission did not take into account the effect on correlative 
rights or the equitable distribution of oil in making its 
decision.

"The Commission's 
decision was arbitrary and capricious in that it was based upon a threat from 
the intervenor, Mitchell Energy Corporation, that it would not produce oil 
unless its formula were approved.

"The Commission erred in 
approving a 7,000 acre unit when the evidence was that the operator would only 
operate a small pilot project."

[¶10.]  The rules for reviewing a decision of an 
administrative agency are well known. Section 16-3-114(c), W.S. 1977 (October 
1982 Replacement), as amended, provides:

"(c) To the extent 
necessary to make a decision and when presented, the reviewing court shall 
decide all relevant questions of law, interpret constitutional and statutory 
provisions, and determine the meaning or applicability of the terms of an agency 
action. In making the following determinations, the court shall review the whole 
record or those parts of it cited by a party and due account shall be taken of 
the rule of prejudicial error. The reviewing court shall:

"(i) Compel agency action 
unlawfully withheld or unreasonably delayed; and

"(ii) Hold unlawful and 
set aside agency action, findings and conclusions found to 
be:

"(A) Arbitrary, 
capricious, an abuse of discretion or otherwise not in accordance with law; 

"(B) Contrary to 
constitutional right, power, privilege or immunity;

"(C) In excess of 
statutory jurisdiction, authority or limitations or lacking statutory 
right;

"(D) Without observance 
of procedure required by law; or

"(E) Unsupported by 
substantial evidence in a case reviewed on the record of an agency hearing 
provided by statute."

[¶11.]  In Board of Trustees of School District 
No. 4, BigHornCounty 
v. Colwell, Wyo., 611 P.2d 427, 428-429 (1980), we 
said:

"For the purpose of 
reviewing the propriety of the district court's action, we will review the 
agency action as though the appeal were directly to this court from the agency. 
We are governed by the same rules of review as was the district court. 
[Citations.]

"Therefore, we will not 
substitute our judgment for that of the agency. * * *

"* * * * 
*

"`* * * Under this 
standard [§ 16-3-114(c), W.S. 1977 (October 1982 Replacement)], we do not 
examine the record only to determine if there is substantial evidence to support 
the Board's decision, but we must also examine the conflicting evidence to 
determine if the Board could reasonably have made its findings and order upon 
all of the evidence before it. * * *"

[¶12.]  We examine the entire record to determine 
if there is substantial evidence to support an agency's findings. If the 
agency's decision is supported by substantial evidence, we cannot properly 
substitute our judgment for that of the agency, and must uphold the findings on 
appeal. Mountain Fuel Supply v. Wyoming Public 
Service Commission, Wyo., 662 P.2d 878 (1983). Substantial 
evidence is relevant evidence which a reasonable mind might accept in support of 
the conclusions of the agency. It is more than a scintilla of evidence. 
Kloefkorn-Ballard Construction and Development, Inc. v. North Big Horn Hospital, 
Wyo., 683 P.2d 656 (1984); Brasel & Simms Construction Co., Inc. v. State 
Highway Commission of Wyoming, Wyo., 655 P.2d 265 (1982); and Wyoming State 
Department of Education v. Barber, Wyo., 649 P.2d 681 
(1982).

[¶13.]  In his statement of the issue, appellant 
claims the Commission's decision is contrary to law and not supported by 
substantial evidence. He does not allege the Commission acted in excess of its 
jurisdiction, or that it failed to follow the required 
procedures.

[¶14.]  The Commission made findings of fact and 
conclusions of law in support of its order. Appellant's principal contention is 
that the evidence was insufficient to support finding Nos. 15, 16, and 17, which 
state:

"15. Kye Trout (Trout) 
appeared to protest the application considered herein. Trout's concern is that 
his leases, which were acquired in 1983, did not receive equity in the 
participation formula which is based 47.5 percent on the last six months' rate, 
47.5 percent on remaining proved developed producing reserves, and five percent 
(5%) on the volume of original oil-in-place. The Commission finds that the 
proposed formula does allocate oil and gas in a just and equitable manner to 
each separately owned tract so far as can be practically determined; that the 
unitized operation will prevent waste, will protect correlative rights and will 
substantially increase the amount of produced oil and gas; and that the value of 
the additional reserves is much greater than the investments required to produce 
the additional reserves. The operator, Mitchell Energy, had discussed formulas 
similar to that favored by Trout, but found that an overwhelming majority of the 
working interest owners would never support such a 
formula.

"16. Many technical 
committee meetings and working interest owners meetings have been held since 
1982 in arriving at the unitization formula and the parameters therein. The 
technical exhibits and data of the applicant are found to be true and accurate. 

"17. Mitchell Energy's 
application for a waterflood operation of the Mikes Draw Unit's Teapot Formation 
should be approved to provide for the increased recovery of hydrocarbons and for 
the protection of correlative rights."

[¶15.]  A unit agreement has the effect of 
forming a single leasehold ownership in the unitized tract. Such agreements are 
economical because they allow the reservoirs of oil and gas to be produced more 
exhaustively as a natural unit without the constraints of artificial property 
lines. Ego Oil Company, Inc. v. Garner, 115 Ill. App.3d 82, 70 Ill.Dec. 902, 450 N.E.2d 375 (1983).

[¶16.]  Unitization means that everyone who has a 
legal interest in the oil and gas join together in a common plan to gain 
effective production from a field. Amoco Production Company v. Ware, 269 
Ark. 313, 602 S.W.2d 620 (1980).

"Unit operation is said 
to represent development and operation of an oil pool as a unit. It involves the 
consolidation or merger of all of the interests in the pool and the designation 
of one or more of the parties as operator. This method of development will 
permit the location of wells so as to secure the most scientific use of the 
natural reservoir energy in the production of oil and gas by primary recovery 
methods. [Citation.] It would also include the location of both induction and 
production wells so as to secure the most scientific use of artificial energy in 
the production of oil and gas by secondary or tertiary recovery. * * *". Parken 
v. State Corporation Commission of Kansas, 234 
Kan. 994, 677 P.2d 991, 1002 (1984).

[¶17.]  The Commission's authority to compel 
unitization in Wyoming is authorized by § 30-5-110, W.S. 1977 
(June 1983 Replacement). Under subsection (e)(ii), the Commission must find: 
"Such unit operation is feasible, will prevent waste, will protect correlative 
rights, and can reasonably be expected to increase substantially the ultimate 
recovery of oil or gas."

[¶18.]  Correlative rights are defined by § 
30-5-101(a)(ix), W.S. 1977 (June 1983 Replacement), as

"* * * the opportunity 
afforded the owner of each property in a pool to produce, so far as it is 
reasonably practicable to do so without waste, his just and equitable share of 
the oil or gas, or both, in the pool."

See also, United 
Petroleum Exploration v. Premier Resources, 511 F. Supp. 127 (W.D.Okla. 1980); 
and Kingwood Oil Company v. Corporation Commission, Okla., 396 P.2d 1008 
(1964).

[¶19.]  Wyoming is in accord with other states which 
recognize that correlative rights and the right to produce oil from a pool are 
limited both by a duty not to injure the pool and a duty not to cause waste. 
Gilmore v. Oil and Gas Conservation Commission, Wyo., 642 P.2d 773 
(1982).

[¶20.]  Appellant disagrees with finding number 
16 and states, "In fact there had not been extensive negotiations." While 
"extensive" and "many" are imprecise terms, the record reveals that there were 
negotiations involving interested parties before the unit meeting in December 
1983. In our factual recitation we traced the history of negotiations among the 
operators beginning in January 1982 and continuing until August 1985. We cannot 
say that the Commission was wrong in its characterization of the 
negotiations.

[¶21.]  The principal thrust of this appeal is 
appellant's contention that his correlative rights were not protected by the 
Commission's unitization order. Mr. Norris, a consulting geological engineer, 
was employed by the technical committee to do the geological background work 
prior to and part of the unitization committee work. Both Mr. Norris and Mr. 
Pawlik testified that the formula selected was fair and equitable to all parties 
for our purposes. This is equivalent to saying that the formula protects 
correlative rights. The purpose of the allocation formula is to assign to the 
various tracts a fair share of all unit production, wherever the wells are 
located. What is fair and equitable is to some extent in the eye of the 
beholder; however, both Norris and Pawlik were cross-examined regarding the 
basis of their conclusion that the formula was fair and equitable. Mr. Pawlik 
explained that original oil-in-place was not heavily weighted because such oil 
was not recoverable. He also thought it significant that an overwhelming 
majority of interest parties favored the formula agreed 
upon.

[¶22.]  The Commission also heard a witness for 
appellant, Mr. Asmus, discuss appellant's proposed formula which gave more 
weight to oil-in-place. The Commission simply decided that the oil-in-place 
parameter "should be given only slight" weight.

[¶23.]  Counsel for appellant also argued that 
the Commission itself did not believe that the approved formula set forth in the 
unit agreement protected correlative rights. The commissioners in effect said 
that where the statutory eighty percent approval is received, then the 
Commission has authority to approve the unit. Substantially, the same problem 
was present in the Gilmore case. There, we said:

"The operators held 
various meetings at which they voted on formulae to be used in allocating 
production under unitization. The 81 working interest owners considered a total 
of 71 formulae. Naturally, each of the owners wanted parameters favorable to 
them and wanted more weight to be given these parameters. After voting on almost 
60 formulae, the owners were frustrated in their attempt to find one that would 
receive the statutory approval. As a result, they examined their voting records 
and used a computer to arrive at an equitable compromise formula that could 
receive the required approval. The resulting formula number 67 at issue here, 
received 75.89 percent approval. It appeared that no greater percentage would 
approve any formula proposed." Id., at 775.

[¶24.]  Arguably, the Commission was not entirely 
happy with the formula favored by the majority. However, as in Gilmore, it was 
realistic. Substantially the same situation exists in this case. It was clear 
from the evidence that no other formula proposed would get the requisite eighty 
percent approval. The statutory requisite approval could not be obtained on any 
formula using oil-in-place as a substantial parameter. This was obvious to all 
concerned and had been discussed before the vote; the vote merely confirmed what 
all parties had known from their previous discussions.

[¶25.]  We quoted § 30-5-110(f), W.S. 1977 (June 
1983 Replacement), in deciding to affirm the Commission's order approving the 
unit in the Gilmore case. About the only difference we can see in this case and 
Gilmore is that in the latter about sixty formulae were voted on, while five 
were voted on here. This difference under the circumstances is not 
significant.

"* * * [W]e do not think 
it would be fair or equitable to permit a very small minority of small 
fractional interest owners in this common source of supply of hydrocarbons to 
prevent the Board and the overwhelming majority of the operating and royalty 
owners from pursuing a unitization program designed to obtain a maximum recovery 
from the field. * *" Corley v. MississippiState Oil and Gas Board, 234 Miss. 199, 105 So. 2d 633 
(1958).

"* * * In most instances 
it is impossible to use a formula which will apply equally to all persons 
producing from a common source. In striking a balance between conservation of 
natural resources and protection of correlative rights, the latter is secondary 
and must yield to a reasonable exercise of the former. * * *" Denver Producing & Refining Company v. State, 199 Okla. 171, 184 P.2d 961, 964 (1947).

[¶26.]  In Gilmore, we quoted with approval from 
the above cases. We then said:

"There is no indication 
that a more equitable formula could be devised * * *. The operator's technical 
committee and the Commission, both having experience and expertise at 
unitization, settled the formula 67 as the fairest and most feasible * * *. It 
would appear, therefore, that there is little chance that anyone involved could 
devise a better formula, nor is it likely that a different formula could receive 
the necessary approval.

* * * * * 
*

"A reversal here would 
not give appellant a larger share of the allocation, but would send the case 
back to the Commission with a mandate to come up with another formula. We do not 
believe that even appellant has any real expectation of a different formula that 
would receive the required approval. If a new formula were found and agreed 
upon, it could spawn new lawsuits. The specter of veto by the United States 
Geological Survey would not disappear. It is a fact of life which we cannot 
ignore.

* * * * * 
*

"Appellant seems to 
expect perfection. Justice was accomplished here as much as could be under the 
circumstances. * * *" 642 P.2d  at 780-781.

[¶27.]  What was said in the Gilmore case is 
applicable to this case. It would be virtually impossible to devise a formula 
acceptable to all concerned.

[¶28.]  Appellant argues that the Commission's 
order was not in accordance with law because it approved the formula under 
threat of nonproduction. Appellant contends that the evidence shows the formula 
was forced upon the parties by Mitchell. Appellant also argues that the 
Commission's order was in error because it approved a seven thousand acre unit, 
and Mitchell was only planning a pilot project.

[¶29.]  The testimony relied upon by appellant 
does not indicate that the Commission was threatened or blackmailed. Rather it 
shows that the other operators had worked over a long period of time in coming 
to a common agreement as to which formula should be adopted. Mitchell informed 
the Commission that they did not believe they could get the requisite approval 
for using a different formula. Appellant characterizes this statement to be a 
threat. However, it appears merely a realistic appraisal of the negotiations and 
the work that had already been done and the fact that a majority of the 
operators would not agree to a different formula. Appellant does not 
substantiate his allegations of blackmail with competent evidence showing either 
a threat or Commission's acquiescence to any improper demands, nor does he cite 
persuasive authority. We are not required to consider questions which are not 
supported by proper citation of authority or cogent argument. Osborne v. 
Manning, Wyo., 
685 P.2d 1121 (1984).

[¶30.]  There was no reason for the Commission to 
approve a unitization agreement merely because the parties indicated that a 
different agreement would not be acceptable. The Commission had the authority to 
order shut-in production pending successful negotiations if it believed the 
allocation formula did not protect correlative rights or otherwise meet 
statutory criteria. § 30-5-117, W.S. 1977. Inexco Oil Company v. Oil and Gas 
Conservation Commission, Wyo., 490 P.2d 1065 (1971). The Commission 
exercised its authority and shut-in production in the Hartzog Draw area, which 
was the subject of the Gilmore case.

[¶31.]  Appellant's complaint about the 
Commission approving a 7,000 acre unit also lacks cogent argument and authority. 
Furthermore, appellant did not make this complaint to the Commission. Issues 
which were not raised before the administrative agency will not be considered 
for the first time on appeal. McCulloch Gas Transmission Company v. Public 
Service Commission of Wyoming, Wyo., 627 P.2d 173 (1981); and Matter of State 
Bank Charter Application of Security Bank, Buffalo, Wyo., 606 P.2d 296 
(1980).

[¶32.]  Appellant states in his argument that 
there is no evidence before the Commission concerning waste. Be it remembered 
that appellant effectively stipulated that waste would occur absent the unit 
agreement at the hearing. All parties were in agreement that unitization would 
prevent waste. We will not consider appellant's contention that there was no 
evidence of waste before the Commission. That was not an issue before the 
Commission and cannot be considered for the first time on 
appeal.

CONCLUSION

[¶33.]  Before the Commission hearing, 
negotiation among interested parties demonstrated that all parties agreed that 
unitization was appropriate. The only problem was agreeing on a 
formula.

[¶34.]  At the Commission hearing, a formula 
favored by appellant was considered, along with the formula proposed by 
Mitchell. The formula favored by appellant received only a small percentage 
vote, while the Mitchell formula received the necessary vote to legally form the 
unit. At the hearing, correlative rights was the principal matter considered. 
The Commission determined that the formula prepared by Mitchell was fair and 
equitable and that correlative rights were protected.

[¶35.]  We must accord considerable deference to 
the Commission and its expertise. We cannot say that it was clearly wrong in its 
determination.

[¶36.]  Affirmed.

FOOTNOTES

1 Appellant presented a 
somewhat different formula at the hearing than he presented at the meeting. In 
any event, the working interest owners defeated appellant's proposed formula, 
and the Commission also rejected the similar formula appellant presented to 
it.