Gawenis v. Ark. Oil & Gas Comm'n , 2015 Ark. 238 ( 2015 )


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                    SUPREME COURT OF ARKANSAS
                                           No.   CV-14-648
    
    RICHARD G. GAWENIS                                Opinion Delivered   May 28, 2015
                                   APPELLANT
                                                      APPEAL FROM THE VAN BUREN
    V.                                                COUNTY CIRCUIT COURT
                                                      [NO. CV-2012-150]
    
    ARKANSAS OIL & GAS                                HONORABLE H.G. FOSTER, JUDGE
    COMMISSION, AND SEECO, INC.
                        APPELLEES                     AFFIRMED.
    
    
                                    JIM HANNAH, Chief Justice
    
    
           Appellant Richard G. Gawenis appeals from an order of the Van Buren County
    
    Circuit Court affirming an order of appellee Arkansas Oil and Gas Commission to integrate
    
    Gawenis’s unleased mineral interests into a drilling unit. For reversal, Gawenis contends that
    
    the Commission’s forced integration of his mineral interests is an unconstitutional taking of
    
    his property and that the Commission’s order deprived him of his constitutional right to a jury
    
    trial to determine just compensation for his property. This appeal requires interpretation of
    
    the Arkansas Constitution; therefore, our jurisdiction is pursuant to Arkansas Supreme Court
    
    Rule 1-2(a)(1) (2014). We affirm the circuit court’s order.
    
           Gawenis is the owner of the oil, gas, and other minerals beneath a .69 acre tract in Van
    
    Buren County, Arkansas, that is situated within the Ozark Highlands Unit (“OHU”). Formed
    
    by the United States of America Bureau of Land Management, the OHU is believed to be
    
    prospective for natural-gas exploration and development from the Fayetteville Shale
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    formation. The OHU is composed mostly of mineral interests owned by the United States
    
    of America, but it also contains some privately owned mineral interests, such as the .69 acre
    
    mineral tract owned by Gawenis.
    
           On May 22, 2012, the Commission held a public hearing to receive evidence related
    
    to SEECO’s application seeking to create a 5,154-acre oil-and-gas drilling unit in the OHU
    
    and to integrate all unleased and uncommitted mineral interests within the unit. On June 4,
    
    2012, the Commission established the unit and integrated all of the unleased and
    
    uncommitted mineral interests within the unit, except for the unleased mineral interests of
    
    Gawenis.
    
           On June 26, 2012, the Commission held a hearing to receive evidence related to
    
    SEECO’s request to integrate Gawenis’s unleased mineral interests into the drilling unit.
    
    Gawenis testified at the hearing, stating that he believed that the forced-integration procedures
    
    of the Commission amounted to a taking of his property, that the risk-factor percentage was
    
    inappropriate, that his rights and his land belonged to him, and that he had not been afforded
    
    a jury trial to determine just compensation for his mineral interests. In a July 12, 2012 order,
    
    the Commission approved SEECO’s application and integrated Gawenis’s unleased mineral
    
    interests into the drilling unit.
    
           Gawenis sought review of the Commission’s decision in the circuit court pursuant
    
    to the Arkansas Administrative Procedure Act, Arkansas Code Annotated sections 25-15-
    
    201 to -219. At a hearing before the circuit court, Gawenis argued that the Commission’s
    
    forced-integration procedures amounted to a taking of his property and that he was
    
    
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    entitled to have a jury determine compensation. On March 31, 2014, the circuit court
    
    entered an order affirming the Commission’s decision and finding, inter alia, that the
    
    forced-integration procedures are constitutional and that the terms provided under the
    
    Commission’s order were fair and reasonable consideration for an oil-and-gas lease.
    
    Gawenis appeals.
    
           A brief review of the history of relevant oil-and-gas law is helpful to an
    
    understanding of Gawenis’s arguments. In early twentieth-century Arkansas, the “rule of
    
    capture” governed the production and use of oil and gas. This court defined the rule of
    
    capture in a 1912 case as follows:
    
           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.
    
    Osborne v. Ark. Terr. Oil & Gas Co., 
    103 Ark. 175
    , 180, 
    146 S.W. 122
    , 124 (1912)
    
    (quoting Brown v. Spilman, 
    155 U.S. 665
    , 669–70 (1895)). Under the rule of capture, a
    
    landowner had an unrestricted right to drill for oil and gas on his or her land, and if oil and
    
    gas were found, the landowner would not be liable to adjacent landowners whose lands
    
    were also drained. Each landowner was encouraged to produce as much oil and gas from
    
    the reservoir as possible, even though “[t]he resultant ‘race’ to the depletion of the
    
    reservoir wasted oil and gas reserves, as well as economic resources, and jeopardized
    
    property rights.” Phillip E. Norvell, Prelude to the Future of Shale Gas Development: Well
    
    Spacing and Integrating for the Fayetteville Shale in Arkansas, 49 Washburn L.J. 457, 459
    
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    (Winter 2010).
    
           In 1939, the General Assembly enacted the Arkansas Conservation Act. See Act of
    
    Feb. 20, 1939, No. 105, 1939 Ark. Acts 219.1 The Act modified the rule of capture and
    
    established the Arkansas Oil and Gas Commission to regulate the development and
    
    production of oil and gas in the state.2
    
           To prevent waste and to avoid the risks arising from the drilling of an excessive
    
    number of wells, the Commission has statutory authority to establish drilling units, designate
    
    the number of wells that may be drilled and produced, and regulate the spacing among wells
    
    within a unit. See Ark. Code Ann. § 15-72-302(b). The Commission also has the authority
    
    
           1
          The Act has been amended from time to time and is now codified at Arkansas Code
    Annotated sections 15-72-101 to -407 (Repl. 2009).
           2
            In a section titled “Declaration of Policy,” the Act stated,
    
           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.
    
    See Act of Feb. 20, 1939, No. 105, § 1, 1939 Ark. Acts 219, 219; currently codified at Ark.
    
    Code Ann. § 15-72-101; see also Susan Webber Wright, The Arkansas Law of Oil and Gas, 9
    
    U. Ark. Little Rock L.J. 223, 231 (1986–87) (noting that “[i]f the rule [of capture] were
    
    allowed to operate without governmental regulations, each landowner could drill as many
    
    oil or gas wells as he could afford and could produce as rapidly as possible in order to drain
    
    the common pool before the others did so”).
    
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    to integrate production in drilling units. See id. § 15-72-303. Owners3 of tracts or interests
    
    within an established drilling unit may voluntarily pool, combine, and integrate their tracts
    
    or interests for the development or operation of that drilling unit. See id. § 15-72-303(a). But
    
    if the owners fail or refuse voluntarily to integrate their interests, the Commission shall, upon
    
    the application of any owner or operator,4 integrate all tracts and interests in the drilling unit
    
    for the development or operation of the drilling unit and the sharing of production from the
    
    drilling unit. Id. § 15-72-303(b). “Forced integration” or “compulsory pooling,” as it is
    
    known in other jurisdictions, “is the remedy that permits development of the drilling unit in
    
    the event that the mineral-interest owners cannot agree to pool voluntarily.” Norvell, supra,
    
    at 463.
    
              Integration orders are made after notice and a hearing and “upon terms and conditions
    
    which are just and reasonable and which 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.” Ark. Code Ann. § 15-72-304(a).
    
    When, as in this case, there is no well drilled in the unit, the integration order (1) authorizes
    
    the drilling, equipping, and operation of a well on the drilling unit, (2) provides who shall
    
    
    
              3
           “Owner,” as used in the Act, “means the person who has the right to drill into and
    to produce from any pool and to appropriate the production either for himself or herself, or
    for himself or herself and another, or others.” Ark. Code Ann. § 15-72-102(9).
              4
           An “operator” is a “person who has the right as an owner or by agreement with an
    owner to enter upon the lands of another for the purposes of exploring, drilling, and
    developing for the production of brine, oil, gas, and all other petroleum hydrocarbons.” Ark.
    Code Ann. § 15-72-102(8).
    
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    drill, complete, and operate the well, (3) prescribes the time and manner in which all owners
    
    in the drilling unit who may desire to pay their share of the costs of such operations and
    
    participate therein may elect to do so, and (4) provides that an owner who does not
    
    affirmatively elect to participate in the risk and cost of the operations shall transfer his or her
    
    rights in the drilling unit and the production from the unit well to the participants for
    
    reasonable consideration and on reasonable terms. See id. § 15-72-304(b)(1)–(4).
    
           The integration order at issue in this case gave Gawenis four options: (1) lease his
    
    mineral interests to any party on mutually agreed terms, (2) lease his interest to the
    
    participating owners for a cash bonus of $938.36 per net mineral acre and a 1/5 royalty, (3)
    
    participate as a working interest owner in the drilling of the proposed well by paying his
    
    proportionate share of the costs and receiving his proportionate share of the proceeds, or (4)
    
    become a “Non-Drilling (Non-Consenting) Party” who receives compensation for produced
    
    minerals after the participants have been paid a certain amount as a risk-factor percentage. If
    
    Gawenis failed to elect one of the options, then his mineral interests would be deemed
    
    integrated into the unit for a cash bonus of $938.36 per net mineral acre and a 1/5 royalty.
    
           Gawenis contends that the forced-integration provisions of sections 15-72-303 through
    
    -304 authorize an unconstitutional taking of his property in violation of article 2, section 22,
    
    of the Arkansas Constitution. Arkansas statutes are presumed constitutional, and the party
    
    attacking a statute has the burden of showing that the challenged statute clearly violates the
    
    Arkansas Constitution. E.g., Hall v. Tucker, 
    336 Ark. 112
    , 117–18, 
    983 S.W.2d 432
    , 435
    
    (1999). Article 2, section 22 states that “[t]he right of property is before and higher than any
    
    
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    constitutional sanction; and private property shall not be taken, appropriated or damaged for
    
    public use, without just compensation therefor.” Gawenis contends that, because forced
    
    integration under sections 15-72-303 and 15-72-304 is, for all intents and purposes, a taking
    
    of the mineral owner’s property, it is not enough that the Commission determines
    
    “reasonable” compensation for the owner’s mineral rights, see Ark. Code Ann. § 15-72-
    
    304(b)(4). According to Gawenis, he and other owners subject to forced integration are
    
    constitutionally guaranteed “just” compensation.
    
           Although the issue whether the forced-integration procedures amount to an
    
    unconstitutional taking is one of first impression in Arkansas, we note that the Oklahoma
    
    Supreme Court confronted a similar issue in Anderson v. Corporation Commission, 
    327 P.2d 699
    
    (Okla. 1957). In that case, the appellant asserted that Oklahoma’s conservation statute made
    
    him a tenant-in-common owner of the unit well, which was not located on his land. He also
    
    asserted that the Oklahoma commission’s order, which required him to either participate in
    
    the cost of the unit well or accept a bonus and a royalty, constituted an unconstitutional
    
    taking of his property. The court rejected the appellant’s arguments:
    
           In the case of Amis v. Bryan Pet. Corp., 185 Okl. 206, 
    90 P.2d 936
    , 939, an almost
           identical relationship existed by reason of municipal zoning ordinances controlling
           drilling. It was there said that,
    
                  ‘Here the city created the relationship as it now exists between the parties. Had
                  it not been for the zoning ordinance none of the lot owners would have held
                  an interest in the oil and gas rights beneath the lots of the others. The
                  relationship in the nature of a tenancy in common resulted merely as an
                  incident to the application of the city’s police powers. The tenancy . . . is
                  entirely subject thereto. The parties cannot successfully assert their common
                  law rights as tenants in common, for such a tenancy actually does not exist.’
    
    
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           The order complained of did not constitute a taking of property of Anderson in any
           manner. It granted him the right to participate in the production from a well on
           Ellison’s property, but on condition that certain requirements were met. The
           limitation of one well to eighty acres was a proper exercise of the police power in
           furtherance of conservation of natural resources. That he was allowed to share in the
           production or to receive a bonus instead of that participation was a grant to him at the
           expense of Ellison merely because of the recognition of correlative rights. On the other
           hand, Ellison was not deprived of anything because he was granted the right to drill
           the only well which would be permitted on the eighty acre drilling unit upon
           condition that Anderson (and other owners of leasehold interests) could participate in
           the production upon payment of his part of the cost. Both were forced to co-operate
           for the benefit of both and for the protection of the public generally.
    
    Anderson, 327 P.2d at 702–03.
    
           We find persuasive the reasoning in Anderson. Similar to the conservation statute
    
    discussed in Anderson, the forced-integration provisions of the Arkansas Conservation Act do
    
    not “take” anything away from Gawenis. Rather, the integration order allowed Gawenis to
    
    lease his interest in the drilling unit in exchange for compensation or to participate in the
    
    drilling of the well and receive monetary benefits.
    
           We are not persuaded by Gawenis’s argument that Anderson is inapposite because the
    
    Oklahoma Constitution differs from the Arkansas Constitution in its treatment of property
    
    rights. Even assuming, as Gawenis contends, that the Oklahoma Constitution is “more lax
    
    [than the Arkansas Constitution] in the limitations placed upon takings,” this court has
    
    recognized that, although article 2, section 22 protects individual property rights, the
    
    individual’s use and enjoyment of property is always subject to reasonable regulations in order
    
    to preserve the welfare of the public at large. Yarbrough v. Ark. State Highway Comm’n, 
    260 Ark. 161
    , 165, 
    539 S.W.2d 419
    , 421 (1976). We have also recognized that the valid exercise
    
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    of the police power through land-use regulations does not constitute a compensable “taking”
    
    because “the owner of such property is sufficiently compensated by sharing in the general
    
    benefits resulting” from the regulations. See City of Little Rock v. Sun Bldg. & Developing Co.,
    
    
    199 Ark. 333
    , 338, 
    134 S.W.2d 582
    , 585 (1939). We hold that the Commission’s integration
    
    of Gawenis’s .69 acre mineral interest is not a compensable taking but a constitutional exercise
    
    of the State’s police power.
    
           Finally, we disagree with Gawenis’s contention that the Commission’s order deprived
    
    him of his constitutional right to a jury trial to determine just compensation for his property.
    
    Article 12, section 9, of the Arkansas Constitution states that
    
           [n]o property, nor right of way, shall be appropriated to the use of any corporation,
           until full compensation therefor shall be first made to the owner, in money; or first
           secured to him by a deposit of money; which compensation, irrespective of any benefit
           from any improvement proposed by such corporation, shall be ascertained by a jury
           of twelve men, in a court of competent jurisdiction, as shall be prescribed by law.
    
    Gawenis cites no authority for the proposition that the forced-integration provisions
    
    constitute a corporate “appropriation” of his property. Accordingly, he has no constitutional
    
    right to a jury trial on the issue of compensation.
    
           In this case, Gawenis has failed to satisfy his burden of showing that the challenged
    
    statutes clearly violate the Arkansas Constitution. The circuit court’s order is affirmed.
    
           Affirmed.
    
           Special Justices SARAH CAPP and DUSTIN JONES join in this opinion.
    
           HART, J., dissents.
    
           DANIELSON and BAKER , JJ., not participating.
    
    
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           JOSEPHINE LINKER HART, Justice, dissenting. Richard G. Gawenis argues that
    
    he is entitled to a jury trial under the Arkansas Constitution. The majority, however, declines
    
    to address the issue. Because Gawenis is correct, I respectfully dissent.
    
           The Arkansas Constitution provides as follows:
    
           No property, nor right of way, shall be appropriated to the use of any corporation,
           until full compensation therefor shall be first made to the owner, in money; or first
           secured to him by a deposit of money; which compensation, irrespective of any benefit
           from any improvement proposed by such corporation, shall be ascertained by a jury
           of twelve men, in a court of competent jurisdiction, as shall be prescribed by law.
    
    Ark. Const. art. XII, § 9.
    
    The Commission approved SEECO’s application to integrate all unleased and uncommitted
    
    mineral interests. There is no jury trial at the Arkansas Oil & Gas Commission. Thus, if the
    
    integration process appropriates Gawenis’s property, then the whole integration system is
    
    unconstitutional.
    
           Though the majority does not address the issue, it concludes that the forced-integration
    
    provisions of the Arkansas Conservation Act do not take anything away from Gawenis
    
    because the integration order allowed Gawenis to lease his interest in the drilling unit in
    
    exchange for compensation or to participate in the drilling of the well and receive monetary
    
    benefits.
    
           The integration order, however, does not account for secondary recovery methods that
    
    SEECO will utilize to cause the gas to migrate to SEECO’s well. Minerals are fugacious when
    
    there is escape, seepage, or drainage that occurs as a result of the tapping a common reservoir;
    
    in the Fayetteville Shale, however, the gas is primarily nonfugacious, thus owing to the need
    
    
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    for secondary recovery methods. See Young v. Ethyl Corp., 
    521 F.2d 771
    , 774 (8th Cir. 1975)
    
    (discussing fugacious and nonfugacious brine). In Jameson v. Ethyl Corporation, 
    271 Ark. 621
    ,
    
    
    609 S.W.2d 346
     (1980), this court stated that the law should not “permit those persons who
    
    are in an economically advantaged posture to be able to gain negotiating clout by being
    
    allowed to undertake, with impunity, processes that go beyond extracting transient minerals
    
    or [gases] which have drained or flowed by natural process to their drilling sites.” Id. at 626,
    
    609 S.W.2d at 350. The Jameson court cited Osborn v. Arkansas Territorial Oil & Gas Company,
    
    
    103 Ark. 175
    , 
    146 S.W. 122
     (1912), where this court adopted the rule of capture, noting that
    
    petroleum, gas, and oil belong to the owner of the 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. The Jameson court,
    
    however, noted that Osborn did not involve a secondary recovery process. The Jameson court
    
    recognized the obligation of the extracting party to compensate the owner for any special
    
    damages that may have been caused to the property. Similarly, Gawenis is entitled to
    
    compensation for any special damages that may be caused to his property by secondary
    
    recovery methods, such as fracking. See O’Brien v. Primm, 
    243 Ark. 186
    , 
    419 S.W.2d 323
    
    (1967) (concluding that defendants were negligent in conducting the sand-fract operation and
    
    that such negligence was a proximate cause of damage to a water well); Young, 521 F.2d at
    
    775 (concluding that a landowner had a vested existing property right in the brominated salt
    
    water underlying his land and that a party’s act of forcibly removing the solution by means
    
    of injection and production wells constituted an actionable trespass). Thus, SEECO has
    
    
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    appropriated Gawenis’s property, and Gawenis is entitled to a jury trial to determine his full
    
    compensation.
    
           Thus, I respectfully dissent.
    
           Matt D. Campbell, for appellant.
    
           Dustin McDaniel, Att’y Gen., by: Jennifer L. Merritt, Ass’t Att’y Gen., for appellee.
    
    
    
    
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