Court Opinion

ID: 4537939
Source: CourtListenerOpinion
Date Created: 2020-06-01 07:06:41.737879+00
Date Added: 2024-06-11T12:43:37.735963
License: Public Domain

Cite as 2020 Ark. 210
                 SUPREME COURT OF ARKANSAS
                                     No.   CV-19-808

                                               Opinion Delivered:   May 28, 2020

J.R. HURD; SARA SMITH HURD;
PATRICIA HURD MCGREGOR;
VICTORIA HURD GOEBEL; DAVID W.                 APPEAL FROM THE PULASKI
KILLAM; ADRIAN KATHLEEN KILLAM;                COUNTY CIRCUIT COURT, SIXTH
TRACY LEIGH KILLAM-DILEO; HURD                 DIVISION
ENTERPRISES, LTD.; AND KILLAM OIL              [NO. 60CV-17-3961]
CO., LTD.
                       APPELLANTS              HONORABLE TIMOTHY DAVIS FOX,
                                               JUDGE
V.

ARKANSAS OIL & GAS COMMISSION; AFFIRMED.
LAWRENCE BENGAL, IN HIS OFFICIAL
CAPACITY AS DIRECTOR OF THE
ARKANSAS OIL & GAS COMMISSION;
W. FRANK MORLEDGE, MIKE DAVIS,
LEE DAWKINS, JERRY LANGLEY, JIM
PHILLIPS, CHRIS WEISER, TIMOTHY
SMITH, CHARLES WOHLFORD, AND
THOMAS MCWILLIAMS, IN THEIR
OFFICIAL CAPACITIES AS
COMMISSIONERS OF THE ARKANSAS
OIL & GAS COMMISSION; AND SWN
PRODUCTION (ARKANSAS), LLC
                         APPELLEES

                       COURTNEY RAE HUDSON, Associate Justice

      Appellants J.R. Hurd, Sara Smith Hurd, Patricia Hurd McGregor, Victoria Hurd

Goebel, David W. Killam, Adrian Kathleen Killam, Tracy Leigh Killam-Dileo (collectively,
“the Hurds and the Killams”); Hurd Enterprises, Ltd.; and Killam Oil Co., Ltd. appeal

from the Pulaski County Circuit Court’s order affirming the amended integration orders

entered by appellee Arkansas Oil & Gas Commission (the “AOGC”).                For reversal,

appellants argue that the AOGC exceeded its statutory authority in granting the request by

appellee SWN Production (Arkansas), LLC (“SWN”), to reduce the royalty payable under

appellants’ oil-and-gas leases when the lessees elected to go “non-consent.” We affirm.

       This case arose from a dispute between SWN, which operates the two gas units at

issue, and the Hurds and the Killams, who are the mineral lessors, over the royalty payable

under appellants’ oil-and-gas leases. The Hurds and the Killams own mineral interests in

Sections 25 and 36, Township 9 North, Range 11 West in Cleburne County. In October

2004 and May 2010, they leased these interests to SEECO, Inc. for a 20 percent and a 25

percent royalty, respectively. They also had “Pugh Clauses” requiring SEECO to release

the leases for nonproducing depths after the primary term. In June and August 2010, at

SEECO’s request, the AOGC integrated drilling units in Sections 25 and 36 to produce

gas from the Fayetteville Shale formation. Through their SEECO leases, the Hurds’ and

the Killams’ interests in Sections 25 and 36 became part of these two units. In November

2010 and May 2014, as required by the Pugh Clauses, SEECO released the Hurds’ and the

Killams’ leases for all formations below the Fayetteville Shale. Their leases continued in

effect for their interests in and above the Fayetteville Shale because SEECO was still

producing from that formation.

                                             2
       On February 2, 2017, SEECO’s successor, SWN, asked the AOGC to integrate two

units, one in Section 25 and one in Section 36, for the purpose of drilling a cross-unit

natural-gas well in a geologic formation called the Moorefield Shale, which lies below the

Fayetteville Shale.1 These applications by SWN became AOGC docket numbers 007-2017-

02 (for Section 36) and 008-2017-02 (for Section 25). SWN offered the royalty owners and

other unleased mineral owners either (1) a $100/acre bonus and a one-eighth royalty or (2)

a $0/acre bonus and a one-seventh royalty.

       After learning of the integration applications by SWN, the Hurds leased their

interests in Sections 25 and 36 to Hurd Enterprises, and the Killams leased their interests

to Killam Oil. Each of these leases provided for a 25 percent (or one-fourth) royalty to the

lessor. On February 22, 2017, the AOGC heard SWN’s applications. SWN indicated at

the hearing that it had recently learned of the Hurds’ and the Killams’ leases, although it

was not yet aware of the precise terms. SWN requested permission to return and have the

AOGC make a determination as to the reasonableness of the royalty rate that SWN, as the

operator, could potentially be responsible for paying if the lessees were to elect not to

participate in the costs of the well.

       The AOGC granted SWN’s applications and issued two integration orders on

March 6, 2017. These orders contained a “Joint Operating Agreement” that approved

       1
        As we explained in Gawenis v. Arkansas Oil & Gas Commission, 2015 Ark. 238, 464
S.W.3d 453, an integration order forces all interest owners in a specific geographic area to
pool their interests and allows one operator (the applicant) to drill the area for the sharing
of production from the unit.

                                              3
SWN as the operator of the units. In addition, there were provisions that allowed a period

of time for the unleased mineral-interest owners and any uncommitted leasehold working-

interest owners to either participate in the costs of completing and operating the proposed

well or to go “non-consent.”2 Owners that choose to go non-consent would not have to

pay any upfront costs for the well, but their share of production from the well would be

transferred to the “consenting parties” who had agreed to participate in the well. This

transferred working-interest share of production would then be applied to pay the non-

consenting parties’ proportionate share of the completion and operational costs for the

well, plus an additional risk penalty.    After these sums were paid (the “recoupment

period”), the non-consenting owners would begin receiving revenue from the well’s

production. The integration orders further provided that the leasehold royalty would be

paid during the recoupment period according to the provisions of the leases existing for

each separately owned tract, except where the AOGC found “that such lease(s) provide for

an excessive, unreasonably high, rate of royalty as compared with the royalty determined by

the Commission to be reasonable and consistent with the royalty negotiated for lease(s)

made at arm’s length in the general area where the Unit is located[.]”

       On March 8, 2017, SWN filed supplemental applications with the AOGC for

Sections 25 and 36. SWN stated that it expected the Hurds and the Killams to elect to go

       2
        Because SWN was not yet aware of the Hurds’ and the Killams’ leases to Hurd
Enterprises and Killam Oil at the time of its application to the AOGC, the March 6, 2017
integration orders identify the Hurds and the Killams as “unleased mineral interests” to be
integrated, and there are no parties identified as “uncommitted leasehold working
interests” in those orders.

                                             4
non-consent. It further alleged that the 25 percent royalty rate set forth in appellants’

February 2017 leases was unreasonable and was artificially inflated due to the Hurds’ and

the Killams’ self-dealing with their own oil-and-gas companies. SWN asked the AOGC to

determine a reasonable royalty rate. Hurd Enterprises and Killam Oil then notified SWN

of their election to go non-consent and objected to the supplemental applications. They

argued that SWN’s request was contrary to statutory law, outside the AOGC’s jurisdiction,

and contrary to the March 6 integration orders.

       The AOGC heard evidence on the supplemental applications on May 23, 2017, and

held an adjudication hearing on June 27. At the hearings, SWN presented evidence that

gas prices had declined since 2010, that SWN was the only company taking Moorefield-

only leases, and that the highest bonus and royalty paid for Moorefield-only interests in

Sections 25 and 36 was what SWN had offered the Hurds and the Killams and other

unleased mineral owners—a $100/acre bonus and a one-eighth royalty, or a $0/acre bonus

and a one-seventh royalty. The Hurds and the Killams, however, argued that a 20–25

percent royalty was reasonable given the proposed well’s estimated production and the

recoverable reserve.

       On July 18 and 20, 2017, the AOGC issued amended and supplemental orders

finding that it had the authority and jurisdiction to consider SWN’s supplemental

applications and that the 25 percent royalty rate set in the February 2017 leases was

excessive and unreasonably high compared to royalties negotiated for leases made at arm’s

length in the general area where the unit is located.     The AOGC ordered that the

                                            5
leasehold royalty rate payable to the Hurds and the Killams during the recoupment period

was not to exceed one-seventh and amended the “Joint Operating Agreement” accordingly.

       Appellants filed a petition for review in the Pulaski County Circuit Court pursuant

to the Arkansas Administrative Procedure Act (“APA).3 They claimed that the AOGC’s

supplemental integration orders were (1) in violation of statutory provisions; (2) in excess

of the AOGC’s statutory authority; (3) made upon unlawful procedure; and (4) arbitrary,

capricious, and characterized by an abuse of discretion.

       SWN and the AOGC responded that the governing statutes provide clear authority

for the AOGC to set reasonable royalty rates. The AOGC also filed a motion to dismiss

the petition for review, claiming that it had sovereign immunity from suit pursuant to this

court’s decision in Board of Trustees of the University of Arkansas v. Andrews, 2018 Ark. 12,

535 S.W.3d 616. The circuit court agreed that sovereign immunity applied and dismissed

the petition in an order entered on February 12, 2018. On appeal, we held that sovereign

immunity did not bar the petition for review, and we reversed and remanded for the circuit

court to consider the merits of the petition. Ark. Oil & Gas Comm’n v. Hurd, 2018 Ark.
397, 564 S.W.3d 248.

       Following a hearing on remand, the circuit court entered an order on July 16, 2019,

affirming the AOGC’s orders. Appellants filed a timely notice of appeal, and the case is

       3
       The petition for review also named the Director of AOGC, Lawrence Bengal; and
the Commissioners of AOGC, W. Frank Morledge, Mike Davis, Lee Dawkins, Jerry
Langley, Jim Phillips, Chris Weiser, Timothy Smith, Charles Wohlford, and Thomas
McWilliams, in their official capacities.

                                             6
once again before us. In their sole point on appeal, appellants argue that the AOGC

exceeded its statutory authority in granting SWN’s request to reduce the royalty payable

under appellants’ oil-and-gas leases when the lessees elected to go “non-consent.” They

contend that the AOGC’s actions were both ultra vires and arbitrary and capricious and

that we should reverse its decisions to grant the supplemental applications.

       Our review on appeal is directed toward the decision of the administrative agency,

rather than the decision of the circuit court. Great Lakes Chem. Corp. v. Bruner, 368 Ark.
74, 243 S.W.3d 285 (2006). As with all appeals from administrative decisions under the

APA, either the circuit court or the appellate court may reverse the agency decision if it

concludes that the substantial rights of the petitioner have been prejudiced because the

administrative findings, inferences, conclusions, or decisions are: (1) in violation of

constitutional or statutory provisions; (2) in excess of the agency’s statutory authority; (3)

made upon unlawful procedure; (4) affected by other error or law; (5) not supported by

substantial evidence of record; or (6) arbitrary, capricious, or characterized by abuse of

discretion. Gildehaus v. Ark. Alcoholic Beverage Control Bd., 2016 Ark. 414, 503 S.W.3d 789;

Ark. Code Ann. § 25-15-212(h) (Supp. 2019).

       Appellants do not dispute that the March 2017 integration orders contain a clause

specifically allowing the AOGC to reduce the leasehold royalty rate when the lease

provides for “an excessive, unreasonably high, rate of royalty, as compared with the royalty

determined by the Commission to be reasonable and consistent with the royalty negotiated

for lease(s) made at arm’s length in the general area where the Unit is located.” Rather,

                                              7
appellants argue that the AOGC lacks the statutory authority to include or enforce such a

clause. Accordingly, the issue raised on appeal is strictly one of statutory interpretation.

       As an initial matter, appellants challenge this court’s practice of giving deference to

an administrative agency’s interpretation of a statute, claiming that this conflicts with the

constitutional doctrine of separation of powers. However, we recently addressed this issue

in Myers v. Yamato Kogyo Co., Ltd., 2020 Ark. 135, at 3, ___ S.W.3d ___, ___, and set forth

the applicable standard of review:

       [W]e clarify today that agency interpretations of statutes will be reviewed de novo.
       After all, it is the province and duty of this Court to determine what a statute
       means. See Farris v. Express Servs., Inc., 2019 Ark. 141, at 3, 572 S.W.3d 863, 866. In
       considering the meaning and effect of a statute, we construe it just as it reads, giving
       the words their ordinary and usually accepted meaning in common language. Id.
       An unambiguous statute will be interpreted based solely on the clear meaning of the
       text. But where ambiguity exists, the agency’s interpretation will be one of our
       many tools used to provide guidance.

Because we apply this standard to the statutes involved here, there is no need to further

discuss appellants’ argument in this regard.

       SWN and the AOGC cite two statutes that they contend authorize the agency’s

decision to reduce the royalty rates payable under the oil-and-gas leases in this case. First,

Arkansas Code Annotated section 15-71-110(a)(1) (Supp. 2019) provides that “[t]he Oil

and Gas Commission shall have jurisdiction of and authority over all persons and property

necessary to administer and enforce effectively the provisions of this act and all other

statutory authority of the commission relating to the exploration, production, and

                                               8
conservation of oil and gas.” Second, Arkansas Code Annotated section 15-72-304(a)

(Supp. 2019), which governs integration orders, states that

       [a]ll orders requiring integration shall be made after notice and an opportunity for a
       hearing and shall be upon terms and conditions that are just and reasonable and
       that will afford the owner of each tract or interest in the drilling unit the
       opportunity to recover or receive his or her just and equitable share of the oil and
       gas in the pool without unnecessary expense and will prevent or minimize
       reasonably avoidable drainage from each developed unit which is not equalized by
       counter drainage.

SWN and the AOGC assert that the language in this statute providing that integration

orders “shall be upon terms and conditions that are just and reasonable” gives the AOGC

the authority to determine reasonable royalty rates and to reduce the rates in accordance

with the provisions in its integration orders where the leasehold rates are excessive.

       We find that, in addition to the plenary authority granted to the AOGC under

section 15-71-110(a)(1), the clear and unambiguous language in section 15-72-304(a)

explicitly authorizes the AOGC to ensure that all integration orders are upon terms that

are “just and reasonable” and that will afford each owner the opportunity to receive “his or

her just and equitable share. . . . without unnecessary expense.” While there is no statutory

provision specifically stating that the AOGC may reduce the royalty rate contained in a

lease, there is also no statutory language expressly stating that the consenting parties, such

as SWN, are responsible for payment of royalties when an uncommitted leasehold working-

interest owner, such as Hurd Enterprises or Killam Oil, elects to go non-consent. Section

15-72-304(c)(3) discusses the transfer of “rights” in the drilling unit to the consenting

parties in such a scenario but not the transfer of obligations. Instead, these types of

                                              9
detailed provisions are generally found in the terms of the integration order itself or in the

joint operating agreement that is incorporated into each order. As SWN argued below, it

would be impracticable for statutes to cover every possible situation that an agency may

encounter when carrying out its statutory duties. We have held that “[s]tate agencies

possess such powers as are conferred by statute or are necessarily implied from a statute.”

Walker v. Ark. State Bd. of Educ., 2010 Ark. 277, at 20–21, 365 S.W.3d 899, 911 (emphasis

added).

       Appellants cite to our decision in Dobson v. Arkansas Oil & Gas Commission, 218 Ark.
160, 235 S.W.2d 33 (1950), in support of their argument that the AOGC may only act

under direct statutory authority. However, in Dobson, we held that the agency could not

compel the unitization of an entire oil and gas field when there was no statute in existence

at that time empowering it to do so. Id. Here, Arkansas Code Annotated section 15-72-

304 expressly authorizes the AOGC not only to enter integration orders but also to ensure

that they are on just and reasonable terms. Thus, the present case is clearly distinguishable

from Dobson.

       SWN and the AOGC further demonstrate the fallacy of appellants’ position by

providing an example of a lease between affiliated parties that contains an even higher

royalty rate, such as a royalty of seven-eighths. Appellants argued in their brief below that

they would not oppose the AOGC’s “disregarding such an obvious fiction,” and they claim

that this extreme example does not justify the agency’s “legal overreach.” However, as the

AOGC asserts, it either has the statutory power to determine what is just and reasonable,

                                             10
or it does not. If appellants’ argument was correct, the AOGC would be powerless to act

even in extreme cases like the one cited above.

       Appellants also contend that the AOGC’s supplemental orders were arbitrary and

unreasonable because they set the maximum royalty rate of one-seventh for “non-arm[’]s-

length” leases only and because there were other arm’s-length leases in the general area

with higher royalty rates.    However, these arguments relate to the AOGC’s factual

determinations, which appellants concede they are not challenging. As discussed above,

the AOGC’s actions were authorized by statute.         Accordingly, we conclude that the

supplemental orders were neither ultra vires nor arbitrary or capricious, and we affirm.

       Affirmed.

       KEMP, C.J., and BAKER and HART, JJ., dissent.

       KAREN R. BAKER, Justice, dissenting. I dissent from the majority opinion and

would dismiss this appeal for the reasons stated in my dissent in Arkansas Oil & Gas

Comm’n v. Hurd, 2018 Ark. 397, 1, 564 S.W.3d 248, 249.

       JOSEPHINE LINKER HART, Justice, dissenting. I dissent.               The majority’s

interpretation of Ark. Code Ann. § 15-72-304 grants the Arkansas Oil and Gas

Commission (AOGC) authority it simply does not have. AOGC exists to facilitate safe

and sustainable production of natural resources, not to settle purely private business

negotiations or to serve as a tribunal therefor. Moreover, the evidence in the record does

not support AOGC’s determination that the Hurds’ and the Killams’ lease agreements,

which contain a 25 percent royalty provision, are unreasonable or otherwise justify

                                             11
government intervention. Instead, the record reflects that SWN presented the Hurds and

the Killams with what they considered a low-ball offer, so the Hurds and the Killams took

steps to protect their financial interests within their existing course of business with SWN.

AOGC’s order should be reversed.

       First, understand that the Arkansas Oil and Gas Commission’s role is one of

equitable necessity. Such regulatory bodies were conceived in response to increasingly

apparent shortcomings of the common law’s “rule of capture.” The following excerpt aptly

sets out the development of these concerns:

              Oil and gas are fugacious minerals. Thus, their ownership is governed
       by the ancient common law rule of capture. The rule of capture has long
       been a part of Arkansas law. In the 1912 case of Osborn v. Arkansas Territorial
       Oil & Gas Co., the Arkansas Supreme Court, quoting an earlier United
       States Supreme Court decision, stated:

              Petroleum, gas, and oil are substances of a peculiar character. .
              . . They belong to the owner of land, and are part of it so long
              as they are part of it or in it or subject to his control; but, when
              they escape and go into other land or come under another’s
              control, the title of the former owner is gone. If an adjoining
              owner drills his own land and taps a deposit of oil or gas
              extending under his neighbor’s field, so that it comes into his
              well, it becomes his property.

               More simply stated, every well owner has a legal right to keep
       everything his well can produce as long as it does not physically cross over
       onto a neighboring tract. But as a corollary, the neighbor also has a legal
       right to drill his own wells and capture oil and gas.

              The trouble is that the rule of capture, left to run amuck in this
       fashion, leads to a pretty dreadful end. Competition among drillers for
       limited oil and gas reserves inevitably led to an intolerable situation […] Not
       only were far more wells drilled than were needed to produce the recoverable
       oil, excessively rapid production actually damaged the underground

                                              12
       reservoir, reducing the ultimate recovery and causing large amounts of oil to
       be lost forever. Of even greater concern to the industry was the resultant glut
       of oil, which led to a freefall in its price.

Thomas A. Daily, Rules Done Right: How Arkansas Brought Its Oil and Gas Law into a

Horizontal World, 68 Ark. L. Rev. 259, 261-62 (2015).

       Indeed, the nature of market competition in such an explorative industry made

government involvement all but inevitable. Daily’s law review article also quoted Daniel

Yergin’s historical account, The Prize: The Epic Quest for Oil, Money, and Power, which

observed as follows:

       But who would control production? Was it to be done voluntarily or under
       the government’s aegis? By the Federal government or by the states? Even
       within individual companies there were sharp debates. A major split
       developed within Jersey Standard, with Teagle in favor of voluntary control,
       while Farish, the head of the Humble subsidiary, concluded that the
       government had to be involved. “The industry is powerless to help itself,”
       Farish wrote to Teagle in 1927. “We must have government help, permission
       to do things we cannot do today, and perhaps government prohibition of
       those things (such as waste of gas) that we are doing today.” When Teagle
       suggested that “practical men” from the industry should develop a program
       of voluntary self-regulation, Farish replied sharply, “There is no one in the
       industry today who has sense enough or knows enough about it to work out
       this plan.” He added, “I have come to the conclusion that there are more
       individual fools in the petroleum industry than in any other business.”

Yergin, supra, at 206 (quoting various authorities).

       Hence, government regulation. In 1939, Arkansas passed its own “Conservation

Act,” which created the Arkansas Oil and Gas Commission. Acts of 1939, Act 105, § 2.

AOGC was created by an act of the legislature, providing that the commission’s members

                                               13
are to be appointed by the Governor. Id. Section 1 of the Conservation Act described its

purpose as follows:

       DECLARATION OF POLICY: In recognition of past, present, and
       imminent evils occurring in the production and use of oil and gas, as a result
       of waste in the production and use thereof in the absence of co-equal or
       correlative rights of owners of crude oil or natural gas in a common source of
       supply to produce and use the same, this law is enacted for the protection of
       public and private interests against such evils by prohibiting waste and
       compelling ratable production.

These laws confer jurisdiction and authority upon AOGC to address all manner of

practical issues related to production measurement and waste prevention, including the

identification of well ownership, implementation and disposal of equipment and

production facilities, managing wells to prevent escape of resources, pollution, and

intrusion of water, etc. See Ark. Code Ann. § 15-71-110.

       Note that all these laws must be implemented and interpreted in accord with the

Arkansas Constitution, which closely guards the people’s property rights.      “The right of

property is before and higher than any constitutional sanction; and private property shall

not be taken, appropriated or damaged for public use, without just compensation

therefor.” Arkansas Constitution, art. 2, § 22. “No bill of attainder, ex post facto law, or

law impairing the obligation of contracts shall ever be passed; and no conviction shall work

corruption of blood or forfeiture of estate.” Id. art. 2, § 17 (emphasis added). “The State's

ancient right of eminent domain and of taxation, is herein fully and expressly conceded; and

the General Assembly may delegate the taxing power, with the necessary restriction, to the

State's subordinate political and municipal corporations, to the extent of providing for

                                             14
their existence, maintenance and well being, but no further.” Id. art. 2, § 23 (emphases

added).

        The Arkansas Constitution also prohibits giving particular individuals or entities

special treatment, especially when that treatment would be properly afforded by a court of

law, where judges are elected and juries decide facts. Article 2, § 18 dictates that “[t]he

General Assembly shall not grant to any citizen, or class of citizens, privileges or

immunities which, upon the same terms, shall not equally belong to all citizens.”

Furthermore, “[n]o person shall be taken, or imprisoned, or disseized of his estate, freehold,

liberties or privileges; or outlawed, or in any manner destroyed, or deprived of his life,

liberty or property; except by the judgment of his peers, or the law of the land; nor shall any

person, under any circumstances, be exiled from the State.” Art. 2, § 21 (emphasis added).

Finally, article 5, § 25 provides that “[i]n all cases where a general law can be made

applicable, no special law shall be enacted; nor shall the operation of any general law be

suspended by the legislature for the benefit of any particular individual, corporation or

association; nor where the courts have jurisdiction to grant the powers, or the privileges, or the relief

asked for.” (Emphases added).

        To sum up, the rationale behind having a regulatory body like AOGC is to prevent

waste and to ensure that all interested landowners have their seat at the table. This

involves developing production plans that will generate sustainable yields, as well as

providing a forum where differences of opinion regarding those plans may be resolved.

AOGC does not have authority to compel or entertain requests for what would amount to

                                                   15
a taking, or other such relief that would be properly issued by a court of law. Put simply,

AOGC’s role is to facilitate safe and sustainable production of shared natural resources.

       With these principles in mind, let us turn to the statute where the majority finds

authority for AOGC’s actions in this case. Arkansas Code Annotated § 15-72-304(a)

provides as follows:

       All orders requiring integration shall be made after notice and an
       opportunity for a hearing and shall be upon terms and conditions that are just and
       reasonable and that will afford the owner of each tract or interest in the
       drilling unit the opportunity to recover or receive his or her just and
       equitable share of the oil and gas in the pool without unnecessary expense
       and will prevent or minimize reasonably avoidable drainage from each
       developed unit which is not equalized by counter drainage.

(Emphasis added.)      The majority contends that the emphasized language above gives

AOGC authority to disregard the royalty provisions contained in the Hurds’ and the

Killams’ lease agreements and replace those provisions with what AOGC feels is a

reasonable royalty rate.

       The majority mistakes the role of the AOGC. The role of AOGC does not, and

should not, involve deciding the winner of purely private business negotiations between

the real parties in interest (in this instance, the Hurds, the Killams, and SWN)—i.e., the

ones who actually provide the means for whatever production plan AOGC ultimately

implements. The rate for a royalty provision contained in a mineral lease agreement is one

of an untold number of considerations factoring into the reasonableness of the overall

contract. Many of those considerations will be tied to the particular situation each party is

in at the time of the negotiations. Arkansas Code Annotated § 15-72-304’s requirement

                                              16
that integration orders be issued “upon terms and conditions that are just and reasonable”

refers to AOGC’s responsibility to prevent waste and ensure ratable production of shared

geological resources—it does not create some government authority to disregard purely

private business negotiations or to substitute its own judgement therefor. AOGC cannot,

through a misinterpretation of a statute and ignorance of our constitution, force the Hurds

and the Killams to give up their resources for less than they believe they are worth because

it amounts to government appropriation of their property, i.e., a taking.

       Moreover, SWN was aware that the Hurds’ and the Killams’ leases to their own

entities existed at the time it obtained its order for integration, which provided that

leasehold royalty interests would be paid pursuant to the terms in the leases. Then, AOGC

issued a supplemental order providing that no leasehold royalty interest higher than 1/7

would be honored on non-arms-length transactions. What makes it any different after the

fact than before the fact? The only difference is that SWN complained. AOGC cannot be

seen as a springboard for a party like SWN to attack leasehold royalty rates that are higher

than it wishes to pay.

       If AOGC can disregard the royalty rate contained in the Hurds’ and the Killams’

leases, then it can also disregard the royalty provisions in the existing leases with other

mineral-interest holders in the Fayetteville Shale area.     The Hurds’ and the Killams’

interests in the Moorefield depths were unleased because their prior lease with SWN

contained a Pugh clause. Other existing leases in the Fayetteville Shale did not contain a

Pugh clause releasing the Moorefield depths, and some of those leases contain royalty rates

                                             17
as high as 20 percent or more. SWN is honoring these leases for the Moorefield depths.

These facts illuminate the disparate treatment of the Hurds and the Killams. The findings

of fact contained in AOGC’s order do not address the royalty rates being paid pursuant to

the Fayetteville Shale leases.

       What’s more is that these decisions are placed in the hands of individuals who are

appointed to AOGC by the governor, who does not have power under either these statutes

or the constitution to act as an elected judge would in an eminent domain proceeding.

This is not what the legislature intended when it provided that integration orders shall be

“upon terms and conditions that are just and reasonable.” The majority’s interpretation

disregards AOGC’s intended role and relieves operators of any reason to negotiate with the

landowners. One nominally extended low-ball offer would not amount to legitimate

negotiation. Allowing AOGC to endorse and implement either party’s conception of a

reasonable royalty rate transforms AOGC’s role from that of a neutral business facilitator

to that of a czar with authority to dictate which players in the industry get the biggest share

of revenue. Such involvement exceeds AOGC’s role and authority, as set forth in the

statutes and constitutional provisions above. SWN needs to deal with the Hurds and the

Killams, not AOGC.

       If there was any need for illustrating the unworkability of allowing AOGC to

substitute what it considers a reasonable royalty rate in private parties’ existing leases, this

case’s own facts provide a clear example. Put simply, what makes the royalty provision

contained in the Hurds’ and Killams’ leases unreasonable?           The majority justifies its

                                              18
position by characterizing the Hurds’ and Killams’ leases as “non-arms-length” transactions,

but that characterization grossly oversimplifies this matter.

       The evidence in the record reflects that the Hurds and the Killams have been

leasing to SWN (formerly SEECO, Inc., now Flywheel Energy Production, LLC) since at

least 2004.    The various terms contained in each mineral lease agreement differ

significantly. But even narrowing the consideration to just the terms for royalty rate and

bonus-per-acre from those leases, we see terms as high as a 25 percent royalty with a $1,500

bonus-per-acre to as low as a 16.67 percent royalty with a $1,000 bonus-per-acre. In fact,

the family’s prior lease that released the Moorefield depths had provided for a 23 percent

royalty for mineral interests in the Fayetteville Shale. So, as an initial matter, note that the

relative terms contained in the lease agreements at issue here (a 25 percent royalty with a

$0 bonus-per-acre) are within the range of those prior agreements. Moreover, SWN knew

the royalty rate in the family’s leases when it obtained the integration order. It was in place

when the first order was entered. Assuming without deciding that 25 percent is excessive,

that fact was known before SWN obtained its integration order.

       But of course, it’s more complicated than that. SWN had offered the Hurds and

the Killams either a one-eighth royalty with a $100 bonus-per-acre, or a one-seventh royalty

with no bonus-per-acre. This offer was apparently rejected. SWN contends that its offer

represented what a reasonable market royalty would be, since this was what the other

Moorefield-only mineral interest holders had leased for. SWN did acknowledge below that

it has other pre-existing leasehold interests that would cover the Moorefield development

                                              19
and which contained a 20 percent provision (with a “large bonus”), and that the terms

contained in those leases are being honored. Still, SWN alleged that several factors now

warranted a lower rate, such as lower fuel prices, fewer active drilling rigs in the area, and

that SWN was “the only party seeking Moorefield-only leases.”4

       However, the Hurds and the Killams saw the situation quite differently. One-

seventh with no bonus or one-eighth with a bonus was “[not] even close” to market value

for the Hurds’ and the Killams’ interests, according to J.R. Hurd, chairman for the

families’ businesses who testified at the hearing below. He recounted that the Hurds’ and

the Killams’ interests represented more than 20 percent of the overall unit, maintaining

that larger tracts generally get higher royalty rates than smaller tracts. Hurd also pointed

out that while SWN did file for this integration with AOGC, SWN did not disclose logs,

test results, or much other information to the Hurds and the Killams regarding the

expected production from this venture when SWN extended its offer.

       As stated above, however, even without the Hurds and the Killams having agreed to

terms, SWN filed for integration with AOGC. The Hurds and the Killams, at that point

in a tenuous position, responded by leasing those interests to their own entities for a 25

percent royalty with zero bonus per acre, and electing to go non-consent. It seems the

purpose of this maneuver was to “lock in” what they considered a reasonable royalty rate

       4
        The evidence entered below reflects that the sale price for these resources fluctuates
on a daily basis, and mineral leases contemplate that the sale price will fluctuate.
Moreover, SWN’s self-serving valuation of the family’s mineral interests has no more
evidentiary value than the family’s self-serving valuation.

                                             20
for the use of their property, since SWN had only offered little more than the minimum

1/8 statutory default royalty, which would have been applied to the family’s mineral

interests if they had remained unleased when the unit was created. Ark. Code Ann. § 15-

72-305(a)(1). Based upon the evidence, it appears that the Hurds and the Killams took

these steps to protect their family’s financial interests, considering the lack of information

about the prospective venture, the fact that some of the family business’s owners have

mineral interests and some do not, and that the family is in the oil and gas business for

“the long haul.” In light of these circumstances, the family maintained that a 25 percent

royalty with zero bonus per acre was a reasonable valuation of the family’s mineral

interests.

       SWN, unhappy with the family’s maneuver, requested that AOGC disregard and

replace the royalty rate contained in the family’s leases with what SWN had offered the

family previously. AOGC obliged, and the Hurds and the Killams appealed. This entire

dispute stems from the discrepancy between the term for a 25 percent royalty with $0

bonus-per-acre contained in the family’s leases and the term for 1/7 or 1/8 royalty with

$100 bonus-per-acre offered by SWN.

       SWN maintains that other mineral interest holders (whom we essentially know

nothing about from the record) in a similar position to the Hurds and the Killams agreed

to its proposed terms, but this is of no moment. Each deal is different. Those other leases

pertained to those parties, their land, and their mineral interests. Moreover, if there was

no one else taking Moorefield-only leases, then perhaps those other mineral interest

                                             21
holders are the ones who entered into unreasonable deals with SWN, and the Hurds and

the Killams simply knew better? Such considerations require flexibility, accounting for

market status and the particular circumstances of the parties involved—and are ill-suited for

the standards and consistency demanded of good government. The legislature did not give

AOGC authority to dictate purely private business negotiations, and even if it had,

AOGC’s decision to do so in this instance is arbitrary and without a clear evidentiary basis.

The majority’s misinterpretation of our oil and gas laws violates the rules of statutory

construction and is unconstitutional as applied to the Hurds and the Killams.

       I dissent.

       KEMP, C.J., joins this opinion.

       Friday, Eldredge & Clark, LLP, by: William A. Waddell, Jr., Robert S. Shafer, and Joshua

C. Ashley; and Morgan Law Firm, P.A., by: M. Edward Morgan, for appellants.

       Shane E. Khoury, Chief Counsel, Alan J. York, Associate Chief Counsel, and Madison

Pitts, Att’y, for appellee Arkansas Oil & Gas Commission.

       PPGMR LAW, PLLC, by: G. Alan Perkins and Kimberly D. Logue, for appellee SWN

Production (Arkansas.)

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