April 19, 2018

Colorado Court of Appeals: Oil and Gas Commission’s Warrantless Inspections of Locations Does Not Violate Constitution

The Colorado Court of Appeals issued its opinion in Maralex Resources, Inc. v. Colorado Oil and Gas Conservation Commission on Thursday, March 22, 2018.

Administrative Law—Constitutional Law—Fourth Amendment—Search and Seizure—Warrantless Search—Administrative Search.

O’Hare was the president of Maralex, a Colorado corporation licensed to conduct oil and gas operations in the state. Maralex operated over 200 oil wells in Colorado. Maralex operated wells located on the O’Hares’ ranch. The O’Hares owned both the surface and mineral rights, but leased the mineral rights to Maralex. The Colorado Oil and Gas Conservation Commission (COGCC) obtained an administrative search warrant authorizing entry and inspection of certain Maralex locations, and after conducting inspections, COGCC issued multiple notices of alleged violations to Maralex and O’Hare. After an administrative hearing, the COGCC issued an order finding violation (OFV), concluding that Maralex had violated several rules, and Maralex was assessed a penalty of $94,000. Maralex and the O’Hares sought judicial review of COGCC’s order. The district court denied their request for injunctive and declaratory relief and affirmed the OFV in full.

On appeal, Maralex and the O’Hares contended that COGCC Rule 204 permitting unannounced, warrantless searches of oil and gas locations violated the U.S. and Colorado Constitutions. There are exceptions to the requirement that searches be conducted pursuant to a warrant issued upon probable cause. One exception is in the context of administrative searches made pursuant to a regulatory scheme of a closely regulated industry. A warrantless inspection conducted pursuant to a regulatory scheme of a closely regulated industry is reasonable if (1) the scheme is informed by a substantial government interest, (2) it is necessary to further that government interest, and (3) the scheme provides a “constitutionally adequate substitute” for a warrant. The Court of Appeals concluded that the oil and gas industry is closely regulated; the state has a substantial interest in regulating oil and gas operations; warrantless searches are necessary to further the state’s substantial interest in the safe and efficient operation of oil and gas facilities; and COGCC’s inspection regime provides a constitutionally adequate substitute for a warrant. Therefore, warrantless inspections made pursuant to Rule 204 do not violate either the Colorado or U.S. Constitution.

The O’Hares also raised constitutional challenges to Rule 204 in their capacity as surface owners of land including oil and gas locations subject to COGCC oversight. They first contended that Rule 204 is unconstitutional as applied to surface owners because, unlike operators of oil and gas locations, they have an expectation of privacy in the property searched. In this case, the O’Hares granted Maralex a very broad set of rights under the surface agreement. By granting the corporation an unlimited easement on the surface estate, the O’Hares substantially lessened any objective expectation of privacy in the property over which they willingly transferred access and control rights to Maralex. The Court also rejected the O’Hares’ broader challenge to the facial constitutionality of Rule 204 as to all surface owners, concluding that where a surface owner grants a mineral lessee a broad surface easement, warrantless entry of the surface estate would not necessarily violate the surface owner’s rights.

Maralex also challenged the COGCC’s order concluding that it violated multiple rules in relation to certain wells. The COGCC’s finding that Maralex violated Rule 204 on March 20, 2014 was arbitrary and capricious because the inspection supervisor agreed to delay the inspection until the next day. Thus, there was not substantial evidence to support COGCC’s determination that Maralex failed to provide access to its wells at all reasonable times. As to the remaining dates at issue, the evidence supports COGCC’s determination that Maralex violated Rule 204 for the duration of that six-day period.

The Court also found record support for COGCC’s determination that Maralex violated Rules 603.f, 905(a), and 907(a)(1).

The district court’s order affirming that part of the OFV concluding Maralex violated Rule 204 on March 20, 2014 and the corresponding penalty were reversed. In all other respects, the order was affirmed. The case was remanded for further proceedings.

Summary provided courtesy of Colorado Lawyer.

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