June 27, 2019

Colorado Court of Appeals: Oil and Gas Conservation Commission Correctly Declined to Interpret Lease Provision Due to Lack of Jurisdiction

The Colorado Court of Appeals issued its opinion in Chase v. Colorado Oil & Gas Conservation Commission on June 7, 2012.

Mineral Estate—Designated Outdoor Activity Area—Drilling Permits—Jurisdiction—Colorado Oil and Gas Conservation Commission.

Plaintiffs Laura Chase and Michael Sutak (collectively, landowners) appealed the district court’s judgment affirming orders of defendant Colorado Oil and Gas Conservation Commission (COGCC): (1) declining to interpret the lease between defendants Magpie Operating, Inc. (Magpie) and the Colorado State Board of Land Commissioners (Board); (2) denying landowners’ request to have their property deemed a Designated Outdoor Activity Area (DOAA); and (3) granting a permit to drill for natural gas to Magpie. The judgment was affirmed in part and reversed in part, and the case was remanded for further findings by the COGCC.

In 1997, landowners purchased a 77-acre surface estate in Larimer County, knowing it was subject to a mineral rights reservation. The 1916 patent reserved to the state all mineral rights and “the right of ingress and egress for the purpose of mining together with enough of the surface of [the property] as may be necessary for the proper and convenient working of such minerals and substances.” The Board owns the mineral estate and manages it for the benefit of the School Trust pursuant to the Colorado Constitution.

An irrigation ditch divides the property into two parcels. The south parcel is used for agricultural purposes and also contains a residence, agricultural outbuildings, and an indoor riding arena.

Since 1977, the Board had been a party to an Oil and Gas Lease (lease) over a 640-acre section of land that includes the property. The lease was assigned many times, most recently to Magpie. The first attempt to access the mineral estate occurred in June 2008, when Magpie submitted applications for permits to drill (APD) wells on the property.

Magpie consulted with landowners before submitting its APDs. Landowners contacted the COGCC in December 2007 to request onsite inspection of the property to assist in identifying a drilling site. Consultation and an inspection occurred in 2008, principally to address landowners’ concerns about the potential impact of drilling on their equestrian activities.

After submitting the APDs but before COGCC’s evaluation was completed, landowners applied to have their surface estate declared a DOAA. Magpie and the Board protested. The COGCC evaluation was completed in November 2009 and revealed that the proposed alternative drilling site was outside the drilling window. COGCC staff recommended that the COGCC address the request for a DOAA and, if it was denied, allow drilling on the alternative site. The Board approved the alternative well site on December 12, 2009. The staff also recommended a number of conditions of approval of the APDs.

On February 22, 2010, the COGCC held a hearing on the DOAA request and expressed a number of concerns. It ultimately denied the request by a vote of six to three.

Magpie tried to resolve the conflict with landowners by offering to withdraw the request for one well and to move the other. Landowners responded with multiple additional conditions for the well site. The COGCC granted Magpie’s APD for one well at the location suggested by landowners and approved many of their proposed conditions.

Landowners appealed the denial of the DOAA request, as well as the grant of the permit to drill. The district court affirmed the denial of the DOAA and the grant of the APD. Landowners appealed.

Landowners argued that the COGCC erred in granting Magpie a permit to drill because the lease between Magpie and the Board prohibits Magpie from conducting exploration or drilling operations within 200 feet of any improvement on the property without landowners’ consent. The COGCC determined it lacked jurisdiction to interpret the lease. The Court of Appeal agreed, finding that the COGCC’s interpretation of its Statement of Basis was reasonable and that it limited its jurisdiction, which did not extend to “contracts between surface owners and operators governing surface use. . . . ”

Landowners argued that the COGCC erred in denying their DOAA request because the COGCC failed to apply the clear and unambiguous requirements of the DOAA rule. Landowners stated that the rule provides that the subject area be occupied by at least twenty people for forty days or more, but does not require that all the occupants be present at any one time. The Court agreed but found that the COGCC failed to make the necessary factual findings concerning the DOAA request. Accordingly, the case was remanded for detailed findings on whether the property meets the criteria of a DOAA under the COGCC rules.

Summary and full case available here.

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