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J.P. Furlong Co. v. Board of Oil, Gas and Mining and the Department of Natural Resources

Supreme Court of Utah

June 5, 2018

J.P. Furlong Company, Petitioner,
v.
Board of Oil, Gas and Mining and the Department of Natural Resources, Respondents.

          On Petition for Review of Administrative Agency Action

         Utah Board of Oil, Gas and Mining Docket No. 2015-013 Cause No. 139-130

          Anthony T. Hunter, Wichita, KS, for petitioner.

          Sean D. Reyes, Att'y Gen., Michael S. Johnson, Meg Osswald, Asst. Att'ys Gen., Salt Lake City, for respondents.

          Justice Pearce authored the opinion of the Court in which Chief Justice Durrant, Associate Chief Justice Lee, Justice Himonas, and Justice Petersen joined.

          OPINION

          Pearce, Justice.

         INTRODUCTION

         ¶ 1 J.P. Furlong Company (Furlong) owns a mineral lease. Furlong challenges the Board of Oil, Gas, and Mining's (Board) decision to impose a joint operating agreement (JOA)[1] on its relationship with the party operating a drilling unit that includes Furlong's lease. Furlong primarily complains that the Board accepted, without change, the JOA the operator proposed. Furlong also assails the Board's refusal to make any of the changes to the JOA that Furlong wanted.

         ¶ 2 The JOA is materially the same agreement that governs other interests in the project and is based on a widely accepted form agreement. Furlong nevertheless challenges the Board's decision, arguing that there was not substantial evidence to support it, and that the Board erroneously applied the law to arrive at its conclusion that the JOA was just and reasonable. We see no merit in either of these contentions and affirm.

         BACKGROUND

         ¶ 3 Utah law allows the Board to "establish[] . . . drilling units for a pool." Utah Code § 40-6-6(1). A "pool" is "an underground reservoir containing a common accumulation of oil or gas or both." Id. § 40-6-2(19). And drilling units are "defined as an area from which the oil or gas may be efficiently and economically produced through one well located in the center of the unit." 1 Summers Oil and Gas § 5:1 (3d ed. 2017).

         ¶ 4 Utah also allows for voluntary and compulsory pooling. Pooling "bring[s] together . . . separately owned interests for the common development and operation of a drilling unit." Utah Code § 40-6-2(20). Voluntary pooling occurs when "[t]wo or more owners within a drilling unit . . . bring together their interests for the development and operation of the drilling unit." Id. § 40-6-6.5(1). In the absence of such a voluntary agreement, "the board may enter an order pooling all interests in the drilling unit for the development and operation of the drilling unit." Id. § 40-6-6.5(2)(a). This is, as the name suggests, compulsory pooling. See 1A Summers Oil and Gas § 6:4 (distinguishing between voluntary and compulsory pooling).

         ¶ 5 In the course of pooling their interests, parties often enter into a joint operating agreement. 4 Summers Oil and Gas § 48:1.

A joint operating agreement . . . is a contract typical to the oil and gas industry whose function is to designate an operator, describe the scope of the operator's authority, provide for the allocation of costs and production among the parties to the agreement, and provide for recourse among the parties if one or more default in their obligations.

Id.

         ¶ 6 The drilling unit here is split into several tracts of land. EP Energy E&P Company, L.P. (EPE) and Furlong, among other parties, have an interest in Tract 6 of the drilling unit. Tract 6 represents 11.59 percent[2] of the drilling unit. 89.48 percent of Tract 6 is under lease to EPE. 2.08 percent of Tract 6 is under lease to Furlong and another company, KKREP, in equal proportion. Therefore, Furlong has an interest in only 1.04 percent of Tract 6, and just 0.12 percent of the drilling unit.

         ¶ 7 All but three working interest owners[3] voluntarily pooled their interests and signed a joint operating agreement with EPE. Furlong is one of the three holdouts.[4]

         ¶ 8 Furlong and EPE negotiated in hopes of agreeing to voluntarily pool their interests. EPE sent Furlong a proposed joint operating agreement which Furlong returned with suggested changes. EPE accepted one change, rejected others, and asked for explanation on the rest. Furlong explained the rationale behind its edits.

         ¶ 9 At that point, EPE ceased negotiations, stating that the parties had "reached an impasse as to mutually agreeable [joint operating agreement] terms." EPE also informed Furlong that it had filed a Request for Agency Action before the Board and that it would seek to force pool all of the interests in the drilling unit. EPE left open the option of further negotiation "[s]hould Furlong be willing to reconsider its position" on changes to the JOA.

         ¶ 10 The Board conducted a hearing.[5] EPE asked the Board to force pool the remaining three interests-including Furlong's[6]-and to impose the JOA on the interest holders.

         ¶ 11 The JOA the Board adopted was "materially the same form as the [joint operating agreement] signed by the other participating working interest owners in Section 2, including Furlong's co-lessee . . . ." It is also "materially identical" to joint operating agreements EPE has used since 2011. EPE has agreed to these same terms when it is an interest holder and not an operator. In other words, the Board accepted evidence that EPE had agreed to terms like those in the JOA when it stood in Furlong's shoes.

         ¶ 12 An EPE employee testified that the adopted JOA was "a standard industry form supplied by the American Association of Professional Landmen [AAPL], Form 610." Furlong did not dispute that EPE used the model form to craft the JOA. Indeed, it conceded that the Board "could [look] at the AAPL" to identify terms to include in a joint operating agreement.

         ¶ 13 Nevertheless, Furlong argued that any joint operating agreement the Board imposed should differ from the standard form in several ways. First, Furlong did not want the JOA to be recorded and publicly available. Furlong explained that it ...


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