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

Citation: 

Docket Number: 

State: wyoming

Court: Wyoming Supreme Court

Date: 1999-05-28T00:00:00Z

Document:
Moncrief v. Wyoming Oil and Gas Conservation Com'n1999 WY 76981 P.2d 913Case Number: 98-245Decided: 05/28/1999Supreme Court of Wyoming
 
W. 
A. MONCRIEF, JR., Appellant (Petitioner),

v.

WYOMING OIL AND GAS 
CONSERVATION COMMISSION; and BARRETT RESOURCES CORPORATION, Appellees 
(Respondents).

W.R.A.P. 12.09(b) 
Certification from the District Court of Natrona County Dan Spangler, 
Judge.

Craig Newman of 
The Law Office of Craig Newman, Casper, Wyoming, Representing 
Appellant.

Gay Woodhouse, 
Acting Attorney General; and Roberta L. Rinegar, Senior Assistant Attorney 
General, Representing Appellee Wyoming Oil and Gas Conservation 
Commission.

William A. Keefe 
and Malcolm M. Murray of Gorsuch Kirgis LLP, Denver, Colorado, Representing 
Appellee Barrett Resources Corporation. 

Before 
LEHMAN, C.J., and THOMAS, MACY, GOLDEN & HILL, JJ.

MACY, 
Justice.

[¶1]      Appellant W. A. 
Moncrief, Jr. (Moncrief) petitioned for a review of the order in which Appellee 
Wyoming Oil and Gas Conservation Commission (the commission) approved the 
application filed by Appellee Barrett Resources Corporation (Barrett) for an 
order from the commission establishing a single 320-acre drilling and spacing 
unit. The district court certified the case to the Wyoming Supreme 
Court.

[¶2]      We affirm the 
commission's order.

ISSUES

[¶3]      In his petition 
for review, Moncrief stated the following issues:

1. Whether under 
the provisions of the Wyoming Oil and Gas Conservation Commission Act, 
WYO.STAT.ANN. § 30-5-101 et seq., the Decision is in excess of statutory and 
regulatory jurisdiction, contrary to law, lacking in statutory right, arbitrary, 
capricious, an abuse of discretion or otherwise not in accordance with law, and 
unsupported by substantial evidence in granting Barrett Resources Corporation's 
application for the establishment of a 320-acre drilling and spacing unit for 
the Frontier, Muddy, Lakota, Sundance and Morrison Formations given the evidence 
submitted by Barrett Resources Corporation and the record of the proceeding 
before the [Wyoming Oil and Gas Conservation Commission].

2. Whether the 
Decision is in excess of statutory and regulatory jurisdiction, contrary to law, 
lacking in statutory right, arbitrary, capricious, an abuse of discretion or 
otherwise not in accordance with law, and unsupported by substantial evidence in 
finding, as required by WYO.STAT.ANN. § 30-5-109(b), that 320 acres is "not 
smaller than the maximum area that can be efficiently drained by one well" 
drilled to each of the Frontier, Muddy, Lakota, Sundance and Morrison Formations 
given the evidence submitted by Barrett Resources Corporation and the record of 
the proceeding before the [Wyoming Oil and Gas Conservation 
Commission].

Moncrief defined 
the issues more specifically in his brief on appeal to state the 
following:

1. Did the 
Commission err in creating a 320-acre drilling unit for five separate 
hydrocarbon pools when the sole evidence by the applicant justifying the 
320-acre size . . . drilling unit requested consisted of a computer simulation 
which omitted entirely three of the five formations in question, erroneously 
included one formation not actually productive in the single well used to 
construct the computer simulation, did not include actual properties of one of 
the formations available to the modeler, and was otherwise not representative of 
the geology of the area under consideration and when other evidence before the 
Commission as to two of the five formations in question declared that 320 acres 
is smaller than the maximum area which can be efficiently drained by one 
well?

2. Is the 
Commission's Decision in error in creating a 320-acre drilling unit when 
previously created drilling units for the same pools immediately adjacent to the 
requested 320-acre drilling unit are twice as large, thereby rendering the 
320-acre drilling unit in question not of "approximately uniform size" as 
required by Wyo.Stat.Ann. 30-5-109(a)?

3. Is the 
Commission's Decision impermissibly based upon the vast sums of money being 
expended and proposed to be expended by Respondent Barrett in the area under 
consideration when compared to the slower and less densely drilled exploration 
pace suggested by Appellant and the other party to the proceeding below which 
would involve nominally one-half the drilling dollars proposed by the Respondent 
Barrett?

FACTS

[¶4]      In February of 
1998, Barrett filed an application for an order establishing a 320-acre drilling 
and spacing unit on the east half of Section 19, Township 37 North, Range 86 
West, 6th P. M., Natrona County, for the Frontier, Muddy, Lakota, Sundance, and 
Morrison Formations (subject formations). Moncrief and Chevron U.S. A., Inc. 
(Chevron) objected to Barrett's application.

[¶5]      The requested 
drilling and spacing unit was the fourth unit to be established for the subject 
formations in the Waltman Field (Cave Gulch Area). The first spacing unit, which 
was established on the south half of Section 29 and the north half of Section 
32, covered 640 acres. The second spacing unit, which was established on the 
south half of Section 20 and the north half of Section 29, also covered 640 
acres. The third spacing unit, which was a vertical 320-acre unit located west 
of and adjacent to the adjoining halves of the two 640-acre units, was 
established on the east half of Section 30. The drilling and spacing unit at 
issue in this appeal is a 320-acre vertical unit located directly north of the 
previously established 320-acre vertical unit. The following map depicts the 
spacing units which have been established in the Waltman 
Field:

[¶6]      The commission 
heard this matter on March 10, 1998, and approved Barrett's application, 
reserving jurisdiction to take additional action as it deemed necessary and 
proper. Moncrief filed a petition in the district court for a review of the 
commission's order, and the district court certified the case to the Wyoming 
Supreme Court pursuant to W.R.A.P. 12.09(b).

STANDARD OF 
REVIEW

[¶7]      When we are 
reviewing cases that have been certified to us pursuant to W.R.A.P. 12.09(b), we 
apply the appellate standards which are applicable to a reviewing court of the 
first instance. Weaver v. Cost Cutters, 953 P.2d 851, 854 (Wyo. 1998). W.R.A.P. 
12.09(a) limits judicial review of administrative decisions to a determination 
of the matters specified in Wyo. Stat. Ann. § 16-3-114(c) (Michie 
1997).

[¶8]      When this Court 
reviews an administrative agency decision, our job is to determine whether the 
decision meets the applicable legal standards and is supported by substantial 
evidence in the record. Anschutz Corporation v. Wyoming Oil and Gas Conservation 
Commission, 923 P.2d 751, 754 (Wyo. 1996). Our function is to examine the 
conflicting evidence to determine whether the commission reasonably based its 
findings and decision upon all the evidence which was before it. Id. Technical 
decisions relative to the waste of oil and gas resources, however, are for the 
commission, as the trier of fact made up of experts in the field, to make and 
not for this Court to decide. 923 P.2d  at 757; Larsen v. Oil and Gas 
Conservation Commission, 569 P.2d 87, 93 (Wyo. 1977); Pan American Petroleum 
Corporation v. Wyoming Oil and Gas Conservation Commission, 446 P.2d 550, 554 
(Wyo. 1968). "Our function is only to determine whether the administrative 
decision meets the applicable legal standards and whether the facts of record 
are supportive of this decision." Larsen, 569 P.2d  at 93.

DISCUSSION

[¶9]      "In 1951, the 
legislature enacted the Oil and Gas Conservation Act, Wyo. Stat. §§ 30-5-101 to 
30-5-104 and §§ 30-5-108 to 30-5-119 (1983 & Cum.Supp. 1994) . . . to 
regulate the oil and gas industry in the state." Union Pacific Resources Company 
v. Texaco, Inc., 882 P.2d 212, 222 (Wyo. 1994). The act created the commission 
and gave it the necessary jurisdiction and authority to effectuate the purpose 
of the act, which is to provide a comprehensive regulatory program to prevent 
the waste of Wyoming's oil and gas resources and to protect the correlative 
rights of property owners. 882 P.2d at 222-23; Wyo.Stat.Ann. §§ 30-5-102, 
104(a), -109 (Michie 1997).

[¶10]   The commission possesses the 
authority, in establishing drilling units, to prevent waste and to protect 
correlative rights. Union Pacific Resources Company, 882 P.2d  at 224; § 
30-5-109(a). Once a drilling unit has been established, the commission has 
continuing authority to modify its orders to ensure that the drilling unit is 
not smaller than the maximum area that can be efficiently drained by one well. 
Union Pacific Resources Company, 882 P.2d at 224-25; § 30-5-109(b), (d). When 
data is developed which establishes the extent of the common source of supply, 
the commission has authority to protect the public interest by increasing or 
decreasing the size of a drilling unit. Union Pacific Resources Company, 882 P.2d  at 225.

A. Substantial 
Evidence

[¶11]   The issue before the commission was 
whether a 320-acre drilling and spacing unit was an appropriately sized unit for 
the subject formations. Section 30-5-109(b) provides:

In establishing 
a drilling unit, the acreage to be embraced within each unit and the shape 
thereof shall be determined by the commission from the evidence introduced at 
the hearing but shall not be smaller than the maximum area that can be 
efficiently drained by one (1) well.

Moncrief 
contends that the commission's order in this case is legally and factually 
erroneous because the only basis for the finding that 320 acres is not smaller 
than the maximum area which can be efficiently drained by one well is a flawed 
computer reservoir simulation. Moncrief maintains that the computer simulation 
did not include three of the five formations involved, erroneously modeled a 
formation which was not productive in the single well utilized for the model, 
did not include actual porosity values significantly higher than those input by 
the modeler, and was otherwise flawed. Moncrief contends that this Court's 
decision in Larsen, 569 P.2d 87, requires that considerable effort be made to 
quantify the oil and gas that will be produced from the whole pool and from each 
separate tract "insofar as it is reasonably practicable to do so." Moncrief 
maintains that, because Barrett did not perform or present any calculation or 
attempt to quantify the drainage area of any well other than by using a flawed 
computer simulation, it failed to prove that 320 acres is not smaller than the 
maximum area which can be efficiently drained by one well.

[¶12]   The appellees counter that § 
30-5-109(b) does not require that the evidence for establishing a drilling unit 
be of any particular type. They claim that the only requirement is that the 
evidence be relevant evidence which reasonable minds can accept as being 
adequate to support the commission's order. They assert that the commission did 
not rely upon the computer model and that substantial evidence was presented in 
addition to the computer model which supported the commission's order. 

[¶13]   In Larsen, we reversed the order 
establishing drilling units on the basis that the commission failed to make 
specific findings of fact concerning the correlative rights of the parties even 
though information and production data about the field was available because the 
field had been extensively drilled. 569 P.2d  at 92. Under Larsen, Barrett was 
required only to predict the quantity of oil and gas that would be produced from 
the whole pool and from each separate tract insofar as it was reasonably 
practicable to do so. Id. The case at bar presents a different situation because 
the field at issue here was in the early stages of development. The fact that 
this field had not been fully developed, coupled with the complex geography of 
the field, made predicting the amount of oil and gas which would be produced 
extremely difficult.

[¶14]   At the hearing, Barrett presented 
four witnesses: a geologist, a scientist who was an expert in petroleum 
engineering, a senior engineer who was also an expert in petroleum engineering, 
and a landman. The geologist presented a structure map of the area which had 
been created from drilling information on area wells and a 
twenty-two-square-mile three dimensional (3-D) seismic survey. He explained that 
the map was developed as a result of an unusually thorough integration of the 
3-D seismic data with the production and well log data accumulated from eight 
wells in the vicinity. He informed the commission that the structure map was 
slightly different from the one that was presented in a previous application 
hearing because he now had significant information from two additional wells 
which showed that the crest of the structure was located slightly more west. The 
revised map also showed a northsouth running trending fault splitting Sections 
29 and 30. As a result, the geologist concluded that the west half of Section 19 
would not be productive.

[¶15]   The geologist used well log data 
and production information, along with core information, to characterize the 
geological nature of the reservoirs in the subject formations. He stated that 
the Muddy Formation has good porosities and permeabilities but that it is a 
discontinuous channel sand which is not consistently productive. The geologist 
characterized the other four subject formations as tight gas sands which means 
that they possess extremely low porosities and permeabilities.1 In addition, he testified that core 
information indicated that there was significant quartz cementation, as well as 
pore-plugging clays in the pore spaces of the rocks, which further reduces 
indicated porosities and permeabilities and that, because these formations are 
at extreme depths of 18,000 to 22,000 feet, the enormous overburden further 
reduces porosity and permeability. He also identified a number of vertical 
fractures in the cores from well log interpretations which could allow 
formations to produce even though they lack adequate porosity and 
permeability.

[¶16]   The geologist concluded that, 
although the Muddy Formation has greater porosities and permeabilities, it is a 
discontinuous channel sand. He also determined that the only way the other 
subject formations could produce would be by way of the fracture systems in the 
rocks because observed porosities and permeabilities in the matrices would not 
allow these formations to produce. As a result, he testified that there is an 
overall extreme amount of heterogeneity and discontinuity2 in these tight gas 
formations.

[¶17]   The scientist's testimony supported 
the geologist's testimony. He presented the computer simulation with which 
Moncrief takes issue. He also testified about his involvement with the MWX 
project in the late 1970's and 1980's which was a multi-well, multi-discipline 
study funded by the Department of Energy on the behavior of gas in the western 
tight gas sands to determine what mechanisms would permit the production of gas 
from these types of formations. He testified that it is fracture systems in 
these tight gas formations which allow the production of gas. He stated that 
these fracture systems are irregular and show a high degree of heterogeneity 
which causes tight gas sands to not behave in the same manner as more 
conventional reservoirs that rely on much higher porosity and permeability to 
allow the movement of fluids to the well bore. The scientist concluded from the 
early production declines in the wells already drilled in the Cave Gulch Area, 
the existence of natural fractures in the cores, and the heterogeneities in the 
reservoirs that it is unlikely that wells will drain a large area. Barrett's 
other petroleum engineering expert agreed that, on the basis of his analysis of 
the information available, the proposed well would not drain more than 320 
acres.

[¶18]   Moncrief did not present any 
geological testimony, and Chevron's geologist, whose testimony focused almost 
exclusively on the location of the fault, advocated a 640-acre drilling unit 
even though he did not have persuasive data to support his opinion. Moncrief's 
petroleum engineering expert testified that, on the basis of his analysis of two 
wells in the vicinity of the proposed well, the Frontier and Lakota Formations 
could be produced on 640-acre spacing. He conceded that Moncrief did not take 
issue with the 320-acre spacing for the Muddy Formation. None of Moncrief's or 
Chevron's witnesses contested the conclusion that the formations, other than the 
Muddy Formation, were tight gas sands, nor did they challenge the conclusion 
that tight gas sands exhibit an extreme degree of heterogeneity and 
discontinuity.

[¶19]   We have stated before that the 
complex and technical nature of these types of cases requires this Court to 
defer to the administrative agency's factual determinations. Anschutz 
Corporation, 923 P.2d  at 757; Larsen, 569 P.2d  at 93; Pan American Petroleum 
Corporation, 446 P.2d  at 554. The ultimate weight of the evidence and the 
credibility of the witnesses are to be determined by the commission "in the 
light of the expertise and experience of its members in such matters." Pan 
American Petroleum Corporation, 446 P.2d  at 554.

[¶20]   The commission found that the 
subject formations are complex, tight gas reservoirs with very low 
permeabilities and porosities, particularly in the Frontier and Lakota 
Formations. It also found that the Muddy Formation has relatively higher 
permeabilities but that it is extremely discontinuous. It ultimately concluded 
that a 640-acre drilling unit would not be prudent. The record supports this 
decision. It contains extensive geologic evidence, including structure maps; 
cross sections; seismic interpretation; permeability, porosity, and fracture 
analyses; well logs; and completion, testing, and production information from 
numerous wells. The commission seemed satisfied that Barrett presented the best 
available evidence to enable it to make an informed decision. One commissioner 
commented:

We, I think, 
have seen with analogs and core photographs and a lot of detailed information, I 
think some very, very excellent geologic data. I think it's 
exceptional.

I think that 
data goes on to say that they are trying to explain about tight sands and that 
tight sands do respond critically to water saturations and the overburden. I 
think at these kinds of depth, I certainly believe that that comes into play 
here. I don't think anybody has argued today the evidence of 
heterogeneity.

This 
commissioner also stated that there had been some strong petroleum engineering 
evidence but that there "probably are errors on both sides of the equation. I 
think when you make assumptions even to the best of your ability, we all know 
what our limitations are, and I think there are limitations to both 
sides."

[¶21]   It appears to us that Moncrief 
places undue importance on the role of the computer simulation. The commission's 
order reveals that the commissioners did not rely upon the computer simulation 
in making their decision. Giving due regard to the commissioners' collective 
expertise, we hold that substantial evidence existed in the record from which 
they could have reasonably found that:

There are well 
bore to well bore and zone to zone discontinuities, whether due to a 
discontinuous nature of natural fractures or the permeabilities or porosities, 
that do not allow production to continue from one well to another over large 
areas. It would not be appropriate or prudent in this situation to establish a 
640-acre drilling and spacing unit for subject formations underlying subject 
lands.

[¶22]   We point out that, under § 
30-5-109(d), the commission has continuing authority to increase or decrease the 
size of the drilling unit. Accordingly, if information is later obtained which 
indicates that a change in the size of the drilling unit is necessary to prevent 
waste and to protect correlative rights, the commission can order such a change 
at that point in time.

B. Uniform 
Size

[¶23]   Moncrief contends that the 320-acre 
drilling unit is not of "approximately uniform size" as required by § 
30-5-109(a). We reject this argument for two reasons.

[¶24]   First, the most recently approved 
spacing unit is 320 acres, and that unit is positioned directly south of the 
drilling and spacing unit at issue in this appeal. The second reason we reject 
Moncrief's argument is because, although § 30-5-109(a) gives the commission the 
authority to "establish drilling units of specified and approximately uniform 
size covering any pool," this provision must be read in conjunction with other 
relevant provisions of the act. Parodi v. Wyoming Department of Transportation, 
947 P.2d 1294, 1295 (Wyo. 1997). Section 30-5-109(b) provides that "the acreage 
to be embraced within each unit and the shape thereof shall be determined by the 
commission from the evidence introduced at the hearing but shall not be smaller 
than the maximum area that can be efficiently drained by one (1) well." In 
addition, Wyo.Stat.Ann. § 30-5-104(d)(iv) (Michie 1997) provides that the 
commission has authority:

[¶25]   (iv) When required, in order to 
protect correlative rights, to establish drilling units affording each owner an 
opportunity to drill for and produce as a prudent operator, and 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 and to restrict or limit the production of 
oil or gas from any well which is allowed, after the effective date of this act, 
as an exception to the location requirements of or as an additional well 
permitted under any order of the commission establishing drilling units for a 
pool or part thereof or of any general well spacing rule or order adopted by the 
commission for conservation purposes, upon such terms and conditions as the 
commission may determine, upon the commission's own motion or upon application 
of any interested person and after notice and hearing . . 
.

This provision, 
coupled with § 30-5-109(a) and (b), clearly expresses the legislative intent to 
bestow the commission with the power to effectuate the main purpose of the act; 
the prevention of waste of Wyoming's oil and gas resources. Anschutz 
Corporation, 923 P.2d  at 755; see also Big Piney Oil & Gas Company v. 
Wyoming Oil and Gas Conservation Commission, 715 P.2d 557, 563 (Wyo. 1986) 
(holding that correlative rights are always subject to the need to prevent 
waste). Indeed, the plain language of § 30-5-109(a) specifically predicates the 
requirement to establish drilling units of specified and approximately uniform 
size on the need to prevent waste. The commission recognized this need and, in 
light of the evidence on geologic characteristics of the subject formations, 
determined that a 320-acre drilling and spacing unit was necessary to conform 
with the purpose of the statute. The commission's decision was, therefore, in 
conformity with the governing statutes.

C. Economic 
Considerations

[¶26]   Moncrief contends that the high 
cost of the proposed well and Barrett's corporate philosophy influenced the 
commission. At the hearing, Chevron's attorney inquired about the specific cost 
of the wells during his cross-examination of the geologist: 

Q. I thought you 
were getting pretty prolific production from these wells. I mean, what are they 
costing you? What do these wells cost you to drill?

A. I believe the 
AFEs have ranged from 5.2 up close to 7 million dollars apiece. That includes 
completions, I think two completions.

Moncrief's 
counsel brought up the subject again while he was cross-examining the geologist, 
who had just testified that, due to the heterogeneous nature of a particular 
sliver of reserves, he did not believe it would ever be drilled "because it's 
uneconomic":

Q. And as long 
as we're on that subject, approximately what is the cost, trouble free, of a 
well? Let's say the 5-30. What is that projected to cost?

A. As I 
indicated earlier, I believe the AFE is approximately 6.8 million. I would 
invite [Barrett's engineer] to correct me if I'm wrong.

Q. And would the 
same be true of the well that's proposed for the drilling unit that you're 
trying to create here today?

A. 
Yes.

Barrett's 
engineer later gave an estimate of $7.5 million.

[¶27]   The commissioners were aware of the 
specific cost of the wells because Chevron and Moncrief inquired about it and 
not because Barrett volunteered the information to support its request for the 
320-acre drilling and spacing unit. Additionally, no reason exists for us to 
believe that the commission based its decision on economic rather than technical 
considerations. In its order, the commission did not refer to the expense 
associated with the drilling of this well. In fact, in response to Moncrief's 
counsel's reminder to the commission that its "charge is not to be a cheering 
section for parties wanting and willing and able to spend lots of money but, 
rather, to be the guardians of the conservation law," one commissioner 
stated:

And I certainly 
don't feel that this commission is cheering anyone on, but, in that same 
respect, the commission certainly is trying to prevent waste and wants to 
recover as much reserves as we possibly can in the state of 
Wyoming.

Another 
commissioner commented:

[T]here is 
definitely an argument here on what spacing is or what it should be. But I keep 
thinking of other areas where we deal with these same formations and have the 
same problems, how much does it really drain. . . . [T]here is conflicting 
testimony of whether 320-acre spacing is smaller than what can be efficiently 
drained. We have one side that says it isn't; we have other testimony that says 
it is.

. . . . We have 
to decide which side is most convincing, but we have testimony on that very 
issue, which I think is the issue from a waste standpoint.

. . . . We have 
to convince ourselves, is it or is it not smaller than what can be efficiently 
drained. And it's not that simple. I hear engineers arguing both ways. I see a 
lot of geology up there that shows a lot of heterogeneity. . . . And I have 
heard that argument on the Frontier time and time again and tight sands time and 
time again.

From these 
comments, it appears to us that the commissioners were primarily concerned with 
preventing the waste of Wyoming's oil and gas reserves. Nothing in the 
commission's report convinces us differently. This Court will not infer that an 
inappropriate basis supports the commission's findings when nothing in the 
findings of fact justifies us doing so. Our function is limited to determining 
whether the stated findings and conclusions are supported by substantial 
evidence. Larsen, 569 P.2d  at 93. As our above discussion reveals, we conclude 
that the commission's order is supported by substantial evidence and is 
otherwise in accordance with law.

[¶28]   Affirmed.

Footnotes

1 Porosity is 
the total volume of open spaces, pores, or voids in a rock or sediment. 
Permeability refers to the relative ease with which a fluid moves through porous 
media. See Webster's New World Dictionary (2d college ed. 
1972).

2 During the 
oral argument in this matter, Moncrief's counsel stated that the term 
heterogeneity meant

that, while [a] formation may be encountered [under two] well bores some 
distance apart from one another, somehow in between well bore A, which produces 
from this formation, and well bore B, something has happened in the productive 
character qualities of the sand and so that it produces in well bore A and, 
while present in well bore B, it somehow has lost its productive qualities or is 
marginally productive.

He 
also stated that the term discontinuity means a formation "somehow is present in 
well bore A but isn't found at all in well bore B at some lateral distance 
removed."