The Michigan geological basin contains significant amounts
of naturally occurring or native oil and gas. These resources have been the
source of produced hydrocarbons since the late 1800s. The state is also the
home to numerous natural gas storage fields into which natural gas is injected
during periods of low demand and then is withdrawn when demand for natural gas
rises during the heating season.
The Michigan geological basin contains the same subsurface
formation that lies under Ohio Springs, Ontario, where in 1858 a hand-dug hole
filled with free flowing oil. Colonel Drake drilled his famous well at Titusville,
Pennsylvania in 1859. Explorers discovered the first recorded Michigan oil
field in 1886. The discovery of the Saginaw field in 1925 is viewed as the
birth date of Michigan as a commercially producing oil state. Michigan’s
recorded natural gas production history began in the 1930s when the Michigan
Public Service Commission issued its first standard well connection permit for
a well in Mecosta County.
Oil and gas exploration efforts have drilled over 50,000
holes in Michigan. These explorations have produced more than 15,000 oil wells,
14,000 gas wells and 21,000 dry holes. Cumulative production in Michigan
exceeds 1.2 billion barrels of crude oil and 7 trillion cubic feet of natural
gas. Oil or gas has been produced in 64 of the 68 Lower Peninsula counties.
See Michigan Oil and Gas Story: County by County,
Michigan Oil and Gas News, Incorporated (1991); Michigan Oil and Gas
Association, Michigan’s
Oil & Gas Exploration – Production Inventory At A Glance; Michigan
Public Service Commission, About Michigan’s
Natural Gas Industry: Exploration and Production.
Demand for natural gas in Michigan is seasonal with higher
demand during extreme cold periods and lower demand during warmer months.
Natural gas supply, whether from gas wells located in Michigan or pipelines
transporting natural gas into the state, is available on a more uniform basis
than the seasonal demand. Suppliers and producers utilize Michigan’s
underground geological features for the storage of natural gas during periods
of lower demand. Michigan has approximately 623 billion cubic feet of working
gas storage capacity. This storage capacity exceeds that of any other state.
Michigan has approximately 55 natural gas storage fields. All but two were once
producing fields. Two of the storage fields are salt caverns, while the rest
are located in various geologic formations where the production of oil or
natural gas has taken place. See Michigan Public Service Commission, About Michigan’s
Natural Gas Industry: Storage.
In 1927, Michigan’s legislature enacted 1927 PA 65, which
designated the Director of the Department of Conservation as the Supervisor of
Wells. The statute imposed on the Supervisor of Wells the duty to prevent waste
in the sinking, drilling, and abandoning of oil, gas, or test wells. This act
required operators to secure drilling permits and to secure approval for
plugging and abandoning wells. In 1929, the legislature enacted 1929 PA 15,
which continued the regulation of oil and gas operations by the Supervisor of
Wells and provided for more comprehensive and effective regulation of oil and
gas operations. In 1937, the legislature enacted 1937 PA 326 to regulate dry
natural gas wells. Act 326 continued the authority of the Supervisor of Wells
over natural gas wells and provided for either permissive or compulsory pooling
of properties.
In 1939, the Legislature enacted 1939 PA 61, a more
comprehensive regulatory program, which repealed 1929 PA 15. In 1994, the
Legislature recodified Act 61 into Part 615 of NREPA, MCL 324.61501 et seq.
1959 PA 197, codified at MCL 324.61701 et seq, authorized the Supervisor of Wells to unitize oil and gas interests. Unitization is the joint operation of a reservoir or reservoirs to enhance the ultimate recovery of hydrocarbons.
1994 PA 308 granted the Supervisor of Wells authority to
address so-called orphan wells and established the Orphan Well Fund. MCL 324.61601 et seq. The act authorizes the Supervisor of Wells to expend money from the Orphan Well Fund to plug abandoned or improperly closed oil, gas, or brine disposal wells, to conduct remedial response activities, and to perform site restoration.
The Michigan Public Service Commission (MPSC) has
regulatory authority over certain aspects of the oil and gas industry. 1929 PA
9, MCL 483.101 et
seq., governs the buying, selling, and transportation of natural gas. 1923 PA 238, MCL 486.251 et seq., authorizes the regulation of natural gas storage. 1929 PA 16, MCL 483.1 et seq., governs the transportation of liquid hydrocarbons by pipeline within the state of Michigan.
Const 1963, art 9,
§35 establishes a trust fund to purchase public land and finance recreational projects throughout the state. Revenues for the fund are generated by royalties from oil and gas wells and production facilities on state-owned land. See MCL 324.1901 et seq.
1.
In General §20.6
Under Michigan common law, the surface owner of the land
owns oil, gas, and minerals in place beneath his or her land, and the minerals
are part of the realty until they are severed. Jaenicke v Davidson, 290
Mich 298; 287
NW 472 (1939); Manufacturers Nat’l Bank v Director of Dep’t of Natural Resources, 420
Mich 128; 362 NW2d 572 (1984); Mark v Bradford, 315
Mich 50; 23 NW2d 201 (1946). The subsurface minerals, which include oil and gas, are a real property interest that can be owned, severed, and transferred
separate from the ownership of the surface estate. Van Slooten v Larsen,
410
Mich 21; 299 NW2d 704 (1980); Southwestern Oil Co v Wolverine Gas and Oil Co, Inc, 181
Mich App 589; 450 NW2d 1 (1989); Eadus v Hunter, 268
Mich 233; 256 NW 323 (1934). A conveyance of the surface with a reservation or an exception in the deed may sever a
landowner's mineral rights from the remainder of the
land, or a conveyance may transfer just the mineral rights. Mable
Cleary Trust v Edward-Marlah Muzyl Trust, 262
Mich App 485; 686 NW2d 770 (2004); Rathburn v State, 284
Mich 521; 280 NW 35 (1938).
Upon the severance of title to the mineral interests from
the remaining land, the mineral estate and the surface estate each become
freehold estates in fee simple. Both estates are subject to laws of descent,
devise, and conveyance. Rathburn; Stevens Mineral Co v State, 164
Mich App 692; 418 NW2d 130 (1987). Multiple owners of the same mineral rights hold the interests as tenants in common. Mable Cleary Trust, 262
Mich App at 493.
A subsequent purchaser of a portion of a surface estate
that is subject to a prior oil and gas lease takes such land knowing that his
surface ownership may be burdened by the exercise of rights of the owners or
lessee of the mineral estate. Rorke v Savoy Energy LP, 260
Mich App 251, 256; 677 NW2d 45 (2003). “[E]ach subsequent purchaser of a subdivision thereof, taking with notice of the prior sale and reservation of rights, takes knowing that his surface ownership may be burdened in part, and, in
very rare cases perhaps, in its totality, by the reasonable exercise of the
rights of the owner of the oil and mineral estate; and this without regard to whether
or not the oil or mineral underlies the particular subdivision, or whether the
facilities located thereon serve facilities located without the subdivision, so
long as they do not lie beyond the original tract.” Id., quoting Schlueter
v Shawnee Operating Co, 141
Misc 2d 1000; 535 NYS2d 867 (1988).
Michigan oil and gas law distinguishes between the mineral
owner and the surface owner in the rights to use subsurface caverns for gas
storage. The surface owner has the right to use a subsurface cavern for storage
of foreign minerals or gas only after all the minerals have been extracted by
the mineral owner. Dep’t of Transportation v Goike, 220
Mich App 614; 560 NW2d 365 (1996). The general rule is that a mineral lessee who holds the rights to use a subsurface formation that contains no producible mineral deposits must still consent to the use of the formation for gas
storage. Williams & Meyers, Oil & Gas Law, § 222 (2002).
Riparian owners own the submerged land to
the middle of the stream or inland lake whether it is navigable or not,
including the underlying minerals. Aalsburg v
Cashion, 384
Mich 236; 180 NW2d 792 (1970). Michigan statutes, however, prohibit drilling for oil or gas under
the Great Lakes, their connected bays or harbors, or their connecting waterways
except under leases existing prior to April 5, 2002. MCL 324.502(4). MCL 324.502(4) prohibits the DNRE from entering into a contract on
or after April 5, 2002 allowing drilling operations beneath these waters.
Several Michigan statutes govern the
ownership of oil and gas under streets and roadways. See generally MCL 213.51 et seq.; MCL
213.171; MCL
213.172; MCL
213.361 et seq.; MCL
252.51 et seq. It is necessary to review the conveyance by the original owner to
the governmental unit for the road or street to determine the scope of the
government’s interest. Village of Kalkaska v Shell Oil
Co, 433
Mich 348; 446 NW2d 91 (1989). The recording of plats designating streets and roadways for public
use does not transfer a proprietary interest in the subsurface oil and gas to a
municipality without express language transferring those interests. Id.
B.
Rule of Capture and Fair-Share Principle §20.9
Oil and gas, unlike solid or hard rock minerals, do not
remain stationary. The movement of oil and gas underground across property
lines is a lawful dynamic of the fugitive nature of native gas. “Oil and gas,
unlike other minerals, do not remain constantly in place in the ground, but may
migrate across property lines.” Wronski v Sun Oil Co, 89
Mich App 11, 21; 279 NW2d 564 (1979).
Michigan adheres to the ownership-in-place theory with
regard to oil and gas. Under this theory, “‘The nature of the interest of the
landowner in oil and gas contained in his land is the same as his interest in
solid minerals’ . . . and as a consequence the owner of land is also the owner
of the oil and gas in or beneath it.” Id. (citation omitted).
The “rule of capture” allows a mineral owner or its lessee
to produce oil and gas under lease even if some of the produced oil or gas
migrates from under adjoining lands. A mineral lessee produces the fluid
minerals that he “captures” under his own land. If strictly applied, the rule
of capture could be inequitable when one landowner drains the oil and gas out
from under adjoining lands. To prevent this inequity, Michigan recognizes the
“fair-share principle,” which modifies the “rule of capture” to provide each
owner with the reasonable opportunity to recover oil and gas in the common
pool. The fair-share principle modifies the rule of capture to exclude
operations that are in violation of valid conservation orders issued by the
Supervisor of Wells. Id. at 22-23. The Supervisor of Wells regulates the
location and spacing of wells, allowable production rates, and pooling of large
resource fields to implement the fair-share principles. See §20.18 and following.
The owner of the mineral interest may lease the interest
for exploration and development. Under an oil and gas lease, the lessee
acquires the right to use and occupy that portion of the surface of the land
that is needed for the exploration of oil and gas. VanAlstine v Swanson,
164
Mich App 396; 417 NW2d 516 (1987). If the mineral interest has been severed from the surface estate, the mineral estate is dominant to the servient surface estate. Miller Brothers v Dep’t of Natural Resources, 203
Mich App 674; 513 NW2d 217 (1994). The owner of the surface estate has an implied duty to allow the owners of the mineral estate to exercise their rights to extract oil and gas. Id.
Even though dominant, the severed mineral owner’s or lessee’s
use of the surface must be “reasonable”. The amount of damages that a mineral
owner must pay to the surface owner for use of the surface land has been
vigorously debated. Unless there are specific provisions in the documents of
conveyance or severance of the mineral rights, the surface owner is usually
compensated only for damage to growing crops or trees that results from the
drilling process. The exception to this rule is when the lessee negligently
overburdens the servient estate. See Topp, Severed Minerals: Are Surface
Owners Entitled to Damages for Diminution of Their Property Value? 78 Mich
BJ 148 (Feb. 1999); Topp, Severed Minerals: Restrictive Covenants as Restrictions on Surface Use by the Mineral Owner, 32 Michigan Real Property Review No. 4
(Winter 2004).
Even though an oil and gas lessee is entitled to enjoy
“reasonable surface use” necessary or convenient for the exploration and
development operations, this right does not entitle the lessee to have
unfettered use of the surface. Although there are no published Michigan
appellate decisions on point, cases from other states hold that the relative
rights of the surface owner and the oil and gas lessee or mineral owner are
balanced. Gerrity Oil & Gas Corp v Magness, 946
P2d 913 (Colo 1997) (dominant mineral owner or lessee must enjoy his implied easements with due regard to the interest of the owner of the servient surface
estate); Grynberg v City of Northglenn, 739
P2d 230 (Colo. 1987) (each owner must have due regard for the rights of the other in making use of the estate in question); Gulf Production Co v
Continental Oil Co, 139
Tex 183, 132 SW2d 553 (1939), superseded without change to cited material by Gulf Production Co v Continental Oil Co, 139 Tex 183, 164
SW2d 488 (1942) (surface estate servient to mineral estate but requiring that
mineral owners right be exercised with due regard to rights of surface owner); Columbia
Gas Transmission Corp v Limited Corp, 759
F Supp 343 (ED Ky 1990)(dominant estate owner liable in damages for conducting mining operations causing physical damage to the servient estate when damage could have been avoided with the use of reasonable care by the
dominant estate owner), aff’d 951
F2d 110 (6th Cir 1991).
Unpublished decision: Rorke v Savoy
Energy LP, unpublished opinion per curiam of the Court of Appeals, issued
May 18, 2004 (Docket
No. 245317) (right to engage in a specified activity that was expressly authorized in oil and gas lease resulted in the mineral rights owner having no obligation to accommodate the surface owner’s use of the property).
If the mineral owners or mineral lessee’s use of the
surface is not “reasonable and necessary,” the use is considered excessive and
the surface owner may protect himself through an action in trespass or an
appeal to equity for an injunction. Williams & Meyers, Oil & Gas Law,
§ 218.8. Excessive use resulting in violation of conservation agency rules or regulations governing development and exploration of oil and gas may provide the
basis for a “negligence per se” claim by the surface owner. Id.
Courts in other states have found incidents of surface use
exceeding the scope of “reasonable and necessary” to include the following: Oryx
Energy Company v Shelton, 942
SW2d 637 (Tex App 1996) (finding sufficient evidence relating to oil spills and leaks and abandoned pipes and other equipment to show that even though the
lessee was found not to have acted negligently, the lessee still made an
excessive use of the surface so as to justify an award of compensatory
damages); Magnolia Petroleum Co v Norvell, 205
Okla 645; 240 P2d 80 (1952) (finding that the lessee failed to take reasonable precautions against erosion while constructing its roads causing unnecessary
permanent injury to the surface injury entitling the lessor to damages); Speedman
Oil Co v Duval Coty Ranch Co, 504
SW2d 923 (Tex Civ App 1973) (sustained a temporary injunction restraining the pumping, flowing, or producing of oil and gas due to history of spills of oil and salt water); Winslow v Duval Coty Ranch Co, 519
SW2d 217 (Tex Civ App 1975 ref’d n.r.e.) (finding that the plaintiff may be entitled to an injunction against pollution of the surface estate). An oil and gas lessee was found liable for surface damage when it constructed a road to a
well site from the east rather than from the north, which would have minimized
surface damage and not interfered with the irrigation of the land. Flying
Diamond Corp v Rust, 551
P2d 509 (Utah 1976).
The Supervisor of Wells Act, MCL 324.61501 et seq., Michigan’s oil and gas regulatory statute, may limit a lessee’s right to
use the surface. The Act, codified as Part 615 of NREPA, specifically prohibits
waste in the exploration and development of minerals. Part 615 defines “waste”
as follows:
(q) “Waste” in addition to its ordinary meaning includes
all of the following:
(i) “Underground waste”, as those words are
generally understood in the oil business, and including all of the following: .
. .
(B) Unreasonable damage to underground fresh or mineral
waters, natural brines or other mineral deposits from operations for the
discovery, development, and production and handling of oil or gas.
(ii) “Surface waste”, as those words are generally
understood in the oil business, and including all the following:
(A) The unnecessary or excessive or surface loss or
destruction without beneficial use, however caused, of gas, oil or other
product, but including the loss or destruction, without beneficial use,
resulting from evaporation, seepage, leakage, or fire, especially a loss or
destruction incident to or resulting from the manner of spacing, equipping,
operating, or producing a well or wells, or incident to or resulting from
inefficient storage or handling of oil.
(B) The unnecessary damage to or destruction of the
surface; soils; animal, fish, or aquatic life; property or other environmental
values from or by oil and gas operations.
(C) The unnecessary endangerment of public health,
safety, or welfare from or by oil and gas operations. . . .
MCL
324.61501(q) (emphasis added).
The Michigan Supreme Court has held that a lessee may be
denied a permit for the development of minerals that would result in serious or
unnecessary damage to or destruction of natural resources (flora and fauna) of
the state. Michigan Oil Co v Natural Resources Comm’n, 406
Mich 1; 276 NW2d 141 (1979). The Court interpreted the statutory definition of the term "waste" to refer not only to waste of oil and gas,
but also to any unnecessary spoliation or destruction of the land, including
flora and fauna, by one lawfully in possession to the prejudice of the estate
or interest of another. Id. at 26, citing MCL 319.2, the
predecessor of MCL
324.61501(q). The Court also rejected a construction of
the statute that would permit oil and gas drilling unnecessarily detrimental to
the other natural resources of the state. Id. at 23.
The Michigan Dormant Minerals Act allows severed minerals
to be reunited with the surface estate under certain circumstances. MCL 554.291 et seq.
The Dormant Mineral Act provides that any interest in oil or gas in any land
owned by any person other than the surface owner that has not been sold,
leased, mortgaged, or transferred by an instrument recorded in the office of
the register of deeds for 20 years is deemed abandoned if (1) a drilling permit
is not obtained, (2) actual production is not obtained from the property or
pooled unit, or (3) the interest not used for underground gas storage. MCL 554.291. Under the Dormant Mineral Act, the severed mineral owner may record a claim of
interest or “Notice of Intent” to retain mineral rights every 20 years if one
of the events set forth in MCL 554.291 does not occur during the 20 year period. The occurrence of one of the specified
events or filing of a claim of interest will also protect the severed interest
from foreclosure due to nonpayment of property taxes by the surface owner. MCL 554.291(3). Storage field operators may file an affidavit defining the boundaries of the underground storage field so as to establish a prima facie case of the use of such interests in underground gas storage operations. MCL 554.293.
The success of a claim for possession of property through
adverse possession depends generally on whether or not the minerals are severed
from the surface. If the minerals are not severed from the surface, the mineral
rights are part of the realty (see §20.6). A person
proving non-severance under adverse possession is entitled to both the surface
and mineral estate. Deer Lake Co v Michigan Land & Iron Co, 83
Mich 11; 46 NW 1024 (1890).
If the mineral estate is severed from the surface estate,
adverse possession of the surface estate will not by itself result in
possession of the mineral estate. Van Slooten v Larsen, 86
Mich App 437, 272 NW2d 675 (1978). To claim the underground mineral rights, a potential adverse possessor must demonstrate acts of dominion over the
mineral rights for the prescriptive 15 year period, such as by developing the
minerals or other mineral exploration activities on the surface estate. Id.
Under the law of “capture”, courts have found that the
title to native oil and gas that moves across property lines to neighboring
property is lost. ANR Pipeline Co v 60 Acres of Land, 418
F Supp 2d 933
(WD Mich 2006).
“Oil and gas, unlike other minerals, do not remain constantly in place in the
ground, but may migrate across property lines.” Wronski v Sun Oil Co, 89
Mich App 11, 21; 279 NW2d 564 (1979). See §20.9.
Title to foreign, extraneous or injected gas, however, remains with the
injector even if it migrates under adjoining property:
Injected gas which has previously been produced, reduced
to possession, and then re-injected into the ground is not subject to the rule
of capture. Once severed from the realty, gas becomes personal property, and
title to that property is not lost when it is injected into underground storage reservoirs. See, e.g.,
Ellis v Arkansas Louisiana Gas Co, 450
F Supp 412, 419 (ED Okla 1978); White v New York State Natural Gas Corp, 190 F Supp 342, 349 (WD Pa 1960). Accordingly, if injected gas moves across boundaries there may be a trespass.
ANR
Pipeline
at 940 (emphasis added). An action for subsurface trespass is recognized at common law. 1 Restatement
Torts 2d, §159, p 281.
Unpublished
decision:
Hope Land Mineral Corp v Panhandle Eastern Pipe Line Co,
unpublished opinion per curiam of the Court of Appeals, issued May 9, 2001 (Docket
No. 234202) (claim of trespass recognized where natural gas has been stored in, or migrated to, subsurface areas of another’s land).
The Michigan Court of Appeals held that the denial of a
permit to drill an oil and gas well was a regulatory taking. Miller Bros v
Dep’t of Natural Resources, 203
Mich App 674; 513 NW2d 217 (1994). In Miller Bros, the DNR denied
the mineral lessee a permit to conduct any gas and oil development activities
in the Nordhouse Dunes area. The lessee brought suit stating that the denial of
the drilling permit was a taking of its mineral rights. In defense of the drilling
permit denial, the state argued that even if a taking occurred, the lessee was
not entitled to compensation since mineral development within the Nordhouse
Dunes area could have been enjoined under nuisance law. Id. at 62. The
court rejected the nuisance defense and found a regulatory taking had occurred,
holding that the limited detrimental effect on the surface property was not
sufficient damage to deny the permit.
A.
Regulation by the Supervisor of Wells under Part 615 §20.18
With the enactment of 1939 PA 61, the Michigan Legislature
created the office of Supervisor of Wells and specified the powers and duties
of this office. The Director of DNRE is currently designated as the Supervisor
of Wells. Generally, the Supervisor of Wells has appointed an Assistant
Supervisor of Wells to carry out the functions of the office.
Part 615 of NREPA, MCL 324.61501 et
seq., contains the primary statutory provisions regulating oil and gas
exploration and production. Administrative regulations implementing these
provisions are found at 1996 AACS, R
324.101 et seq. The Supervisor of Wells also issues orders and instructions governing oil and gas operations. Through these orders and instructions, the Supervisor of Wells has set general spacing and maximum production rates for
wells drilled into various geologic formations, pooled unleased interests
within drilling units, authorized variances and exceptions, and specified
required operational practices. DNRE’s website lists instructions,
special
orders, and general
spacing orders. The primary regulatory provisions contained in Part 615 and
its administrative rules are discussed in §20.19
and following.
1.
Permitting §20.19
Part 615 requires a person to obtain a permit to drill any
well for oil or gas, to conduct secondary recovery operations, and to dispose
of salt water, brine, or other oilfield waste produced in association with oil
and gas operations. Part 615 requires a permit for wells drilled for the
development of reservoirs for the storage of liquid or gaseous hydrocarbons. A
potential permittee must file and maintain an adequate surety or cash bond as a
condition of the permit. The statute prohibits DNRE from issuing a permit to a
person who has not complied with or is in violation of Part 615 or any of the
rules, requirements or orders issued or promulgated by the Supervisor of Wells
or DNRE. MCL
324.61525(1).
Part 615 prohibits the Supervisor of Wells from issuing a
permit to authorize the drilling of a well beneath the bottomlands of the Great
Lakes, the connected bays or harbors of the Great Lakes, or connecting
waterways. This prohibition does not apply to leases in effect before April 5,
2002. MCL
324.61505a. The DNRE may not enter into contracts on or after April 5, 2002 allowing drilling operations beneath these waters.
Administrative rules provisions pertaining to the
application for and issuance of permits, as well as to performance bonds, are
found in 1996 AACS, R
324.201-.216.
MCL
324.61506(j) authorizes the Supervisor of Wells to fix the spacing or location of wells to prevent the drilling of unnecessary wells. MCL 324.61513(2) authorizes the Supervisor to establish a drilling unit for each pool. A drilling unit is the
maximum area that may be efficiently and economically drained by one well.
Administrative rule 301, 1996 AACS, R
324.301, specifies the generally applicable requirements for the location and spacing of wells to be drilled for oil or gas. Rule 301 requires the standard drilling unit for wells to be drilled for oil or gas to be a legal subdivision
of 40 acres, more or less, defined as a quarter-quarter section of land that
conforms to one of the quarter-quarters of the governmental-surveyed section of
land. This rule specifies the distance the bottom hole location of a well must
be set back from a drilling unit boundary. Rule 301 also provides for setbacks
of well surface locations and associated surface facilities from fresh water
wells, existing structures and public water supply wells.
The Supervisor of Wells may grant exceptions to the
location and spacing requirements for a particular well or drilling unit. 1996
AACS, R
324.301(2).
The Supervisor of Wells may adopt special spacing orders,
rules or determinations that set drilling unit and spacing requirements
differing from those specified in Rule 301. These orders include certain geologic
formations, such as the Antrim formation, Niagaran formation, Trenton-Black
River formation, and the Glenwood and deeper formations. See general
spacing orders on the DNRE’s website. Numerous exceptions have been granted
for individual drilling units or wells. See special
orders on the DNRE’s website.
MCL
324.61513(4) permits pooling, which is the combining of oil and gas
interests in a drilling unit or larger area. As there may be numerous separate
owners of oil and gas within the boundaries of a proposed drilling unit, it may
be necessary to have the owners of those interests pool their interests to
allow an operator to form a complete drilling unit that conforms to the
applicable drilling unit requirement.
Voluntary pooling can be accomplished either through
execution of a pooling agreement or pursuant to the terms of oil and gas leases
that are acquired from the several owners of the oil and gas. 1996 AACS, R
324.303 governs the voluntary pooling of separate tracts or mineral interests to form a full drilling unit or multiples of full drilling units, and to develop the units.
MCL
324.61513(4) authorizes compulsory pooling of oil and gas interests within
a drilling unit. Compulsory pooling must insure that each owner of an interest
within a drilling unit can receive the owner’s just and equitable share of the
production from the unit. 1996 AACS, R
324.304. The compulsory pooling process prevents a proliferation of wells that could occur if each owner of a separate small tract drilled a well on that tract. The pooling process also protects an owner from having the owner’s oil or
gas drained without compensation.
Each compulsory pooling plan is implemented after a
hearing before the Supervisor of Wells. The compulsory pooling order issued by
the Supervisor allows the pooled owner to choose to pay in advance the owner’s
share of costs of the well or to have those costs deducted from the owner’s
revenues. The pooled mineral owner will receive 1/8 of the owner’s revenue
share as a cost-free royalty. The cost of drilling and production of a well
will be deducted from the remaining 7/8 interest if the well is successful.
1996 AACS, R
324.304 and R
324.1206(4) and (5).
The Supervisor of Wells may not require the pooling of
state-owned properties or parts of properties if the state provides for the
orderly development of state-owned hydrocarbon resources through an oil and gas
leasing program and the Supervisor determines the owner of each tract within
the drilling unit is afforded the opportunity to recover and receive the
owner’s just and equitable share of the hydrocarbon resources in the pool. MCL 324.61513a.
MCL
319.101 et seq. provides an alternative way to combine separately owned mineral interests. This statute authorizes the holder of a majority of the title holders to the land or to the oil and gas rights in such lands to file a
circuit court action to combine unleased interests in order to explore and
develop oil and gas resources.
The provisions of Parts 4, 5, 7, 9, 10, and 11 of the Part
615 administrative rules set forth the requirements applicable to the drilling,
completion, and operation of oil and gas wells and related facilities. 1996
AACS, R
324.401 et seq. These rules address all aspects of oil and gas operations. The rules regulate the entire life cycle of a well from its initial drilling, through production, to plugging and abandonment. The rules contain
requirements for oil and gas flowlines and production facilities, waste
disposal and release reporting requirements, and performance standards
pertaining to noise and odor.
Under Part 615, the Supervisor of Wells is authorized to
regulate or limit the amount of oil or gas produced from any well, pool, or
field of one or more pools. MCL 324.61513(1). After a hearing, the Supervisor of Wells may set allowable production rates.
The production limits may apply to a specific well, field, or pool, or be set
as a part of a general spacing order that the Supervisor issues with regard to
wells drilled into specific geologic formations. See generally 1996 AACS, R
324.601-.613.
With regard to wells producing natural gas, the Michigan
Public Service Commission (MPSC), under 1929 PA 9, MCL 483.101 et seq., has issued regulations empowering the MPSC to, among other things,
determine how much of the open flow of gas from a well may be utilized. While
there is some overlap between the jurisdiction of the MPSC under Act 9 and the
Supervisor of Wells under Part 615 with regard to these natural gas wells, if
the reservoir into which a well is drilled contains primarily dry natural gas,
the MPSC rather than the Supervisor of Wells exercises jurisdiction over
production rates. The MPSC will set an allowable withdrawal order providing for
the maximum rate of gas production as part of issuance of a natural gas well
connection permit. MCL
483.107; 1979 AC, R
460.865.
Part 615 authorizes the Supervisor of Wells to hold
hearings with regard to the regulation of oil and gas exploration, drilling,
and production. Part 12 of the administrative rules sets forth the applicable
special hearing requirements. 1996 AACS, R
324.1201.
Unitization is a legal process under which separately
owned wells, tracts and rights in a producing field are combined for operation
as a single unit to increase the ultimate recovery of hydrocarbons. A
unitization plan often provides for the use of secondary or tertiary production
methods on a field-wide basis. Part 617 of NREPA, MCL 324.61701 et seq., grants the Supervisor of Wells the authority to order unit
operations.
A potential unitization plan operator initiates the
unitization process by filing a unitization plan along with a petition
requesting approval by the Supervisor of Wells. The plan operator must give
notice to interested persons. In addition to specifying the nature of
field-wide operations, the unitization plan sets forth the allocation of costs
among the producers; the allocation of revenues among the interest owners; the
taking over of existing wells and facilities from the owners of those wells and
facilities and the terms on which they are to be taken over; and the financial
and other terms upon which unitized operations are to be conducted. See MCL 324.31705.
To issue an order of unitization, MCL 324.61704(4) requires that the Supervisor find the following:
a.
that the unitization requested is reasonably necessary to substantially
increase the ultimate recovery of oil and gas from the unit area;
b.
that the type of operations contemplated by the plan are feasible, will
prevent waste, and will protect correlative rights; and
c.
that the estimated additional cost of conducting the operations would
not exceed the value of the additional oil and gas so recovered.
The Supervisor may issue an order of unitization without
holding a hearing if no protests are filed. If the Supervisor receives written
protests, the Supervisor may issue an order only after a Supervisor’s hearing. MCL 324.61704. The unitization order will not become effective until the unit plan is approved
by a specified percentage of those who have interests that would be the subject
of the unit operations. MCL 324.31706.
As noted in §20.18 and
following, the Supervisor of Wells has jurisdiction over the spacing, drilling,
deepening, plugging, reworking and abandonment of oil and gas wells. After a
well is drilled, and before production begins, the well is classified as either
a natural gas or an oil well. Natural gas well regulation is split between the
Supervisor of Wells and the Michigan Public Service Commission (MPSC). The MPSC
authority is found in 1929 PA 9, MCL 483.101 et seq.
Under the regulatory program in 1929 PA 9, before a
natural gas well begins production, the producer or operator must apply to the
MPSC for a wellhead connection permit. An allowable withdrawal order is issued
with the permit which, for most wells, sets the production limits for specified
timeframes. 1979 AC, R
460.864. Natural gas wells are subject to proration by the MPSC. Proration is intended to keep each gas well in a field from producing more than its fair share of the total field production.
1929 PA 9 regulates certain natural gas pipelines and the
purchase and transportation of natural gas. The authority to permit the
construction of such pipelines rests with the MPSC. MCL 483.101. Act 9 grants operators of regulated natural gas pipelines the right to use state
highway right-of-ways and easements, and grants operators the power of eminent
domain to acquire the necessary property interests for the construction of a
pipeline. MCL 483.102.
As required by the Natural Gas Pipeline Safety Act of
1968, 49 USC 60101 et seq., and pursuant to the authority granted in 1969 PA 165, MCL 483.151 et seq., the MPSC has promulgated gas safety standards pertaining to certain pipelines transporting natural gas. Rules implementing these standards are at 2000 AACS, R
460.20101 et seq.
The MPSC approves the construction of new petroleum or
liquid hydrocarbon pipelines under the provisions of 1929 PA 16, MCL 483.1 et seq. An entity receiving approval under Act 16 is entitled to use the state
highway right-of-ways and easements and is granted the power of eminent domain
to acquire the necessary property rights for the pipeline. MCL 483.2.
Liquid hydrocarbon pipelines must be built and maintained
in accordance with federal standards established by the U.S. Department of
Transportation, Pipeline and Hazardous Materials Safety Administration. See
generally 49
CFR Parts 190-199. The Hazardous Liquid Pipeline Safety Act of 1979, 49 USC 60101 et seq., authorizes federal regulation of interstate pipeline
transportation of hazardous liquids including crude oil and petroleum products.
1.
Townships and Counties §20.30
The Michigan Zoning Enabling Act prohibits township and
county regulation or control of the drilling, completion, or operation of oil
or gas wells, or other wells drilled for oil and gas exploration purposes. MCL 125.3205. Townships and counties do not have jurisdiction over issuance of permits for the location, drilling, completion, operation, or abandonment of those wells. See, e.g., Dart Energy Corp v Iosco Twp, 206
Mich App 311; 520 NW2d 652 (1994) (oil and gas well converted to brine well). Certain oil and gas facilities that do not include oil and gas wells may be subject to township or county zoning approval. See, e.g., Addison Twp v
Gout, 435
Mich 809; 460 NW2d 215 (1990). See §20.31 regarding city and village regulation
of oil and gas wells or operations.
2.
Cities and Villages §20.31
Unlike townships and counties (see §20.30), the Michigan Zoning Enabling Act
does not expressly preclude regulation by cities and villages of oil and gas
wells or operations. MCL
125.3205.
Where a zoning ordinance attempts
to prohibit or limit the extraction of valuable mineral resources, such an
ordinance is presumed to be reasonable and the burden is on the party
challenging the ordinance to overcome this presumption by demonstrating that
there is no reasonable governmental interest being advanced. Kyser v Kasson
Twp, 486 Mich 514; ___ NW2d ___ (2010) (No.
136680, issued July 15, 2010). Kyser overturned the court of appeals decision that held that the ordinance is invalid if the party challenging the prohibition can show that “no very serious consequences” would result from
extraction of those resources. Kyser v Kasson Twp, 278
Mich App 743; 755 NW2d 190 (2008). “Valuable natural resources” are those resources of a certain high-quality or rarity that when extracted are expected to raise revenues and produce a profit for the producer, such as high quality
gravel necessary for certain construction projects. Id. This more
permissive regulation of valuable natural resource removal operations occurred
because such resources are located only in discrete areas in a given community.
Application of the “no very serious consequences” test required inquiry into
three criteria: (1) whether the mineral proposed to be extracted is “valuable,”
(2) the degree of public interest in the minerals to be extracted; and (3) the
nature and severity of the consequences that are likely to result from the
removal operations. Id.
Injection wells drilled for the purpose of disposal of
waste fluids produced incidental to oil and gas operations, or wells used to
inject water, gas, air, brine, or other fluids for the purpose of increasing
the ultimate recovery of hydrocarbons from a reservoir or for the storage of
hydrocarbons, must be permitted under Part 615. MCL 324.61525(1); 1996 AACS, R
324.201(1). Part 8 of the administrative rules set forth requirements
regarding the use and operation of injection wells. 1996 AACS, R
324.801 et seq.
In addition to obtaining a permit and being subject to
regulation under Part 615 (see §20.18 and
following), injection wells may require permits from EPA pursuant to the
Underground Injection Control Program. This program was created pursuant to the
federal Safe Drinking Water Act, 42 USC 300f et seq. and is regulated under 40
CFR Parts 124, 144 and 146-148.
1994 PA 308 creates the Orphan Well Fund within the
Michigan Department of Treasury. MCL 324.61601 et seq. Revenues for the Orphan Well Fund come from a severance tax on the
oil and gas industry. The act authorizes the Supervisor of Wells to expend
money from the fund to plug abandoned or improperly closed oil, gas or brine
disposal wells, to conduct remedial response activities, and to perform site
restoration. Before initiating these actions, the Supervisor of Wells must
determine that the owner of the well is unknown or insolvent or that there
exists an imminent threat to public health and safety.
Watercourse crossings by pipelines not exceeding 20 inches
in diameter are identified as a minor project category under the administrative
rules issued pursuant to Part 301 of NREPA, MCL 324.30101 et seq. See 1985 AACS, R
281.816(1)(g). Administrative rules R
281.832 to R
281.838 set forth requirements pertaining to pipeline and other utility water crossings.
Part 303 of NREPA, MCL 324.30301 et seq., which regulates wetlands, specifically exempts the maintenance, repair, or operation of gas or oil pipelines, and the construction of gas or oil pipelines having a diameter of six inches or less, from the permit
requirements if the pipelines are constructed, maintained, or repaired in a
manner to assure that any adverse effect on the wetland will otherwise be
minimized. MCL 324.30305(2)(l). Wetlands are discussed generally in Chapter 10.
County enforcement agencies are generally responsible for
issuing permits under Part 91 of NREPA, Soil Erosion and Sedimentation Control,
MCL 324.9101 et seq. Most oil and gas related operations, however, can comply with Part 91 by submitting an application for a permit to drill and operate under Part 615, discussed in §20.19 and following. MCL 324.9115(3).
a.
Michigan §20.39
Part 201 of NREPA, Environmental Remediation, MCL 324.20101 et seq., addresses the potential liability of owners or operators of facilities where hazardous substances may exist in the soil or groundwater. Part 201 is discussed in Chapter 5. The definition of “hazardous substance” under
Part 201, MCL
324.20101(1)(t)(iv), includes “petroleum as defined in Part 213.” This definition is important, because CERCLA excludes petroleum products from the
definition of a hazardous substance (see §20.40).
Under Michigan law, therefore, an oil or gas operator or lessee that causes a
release of petroleum products from the drilling or operating of the well is
liable. A person who owns severed subsurface mineral rights or severed
subsurface formations, or who leases subsurface mineral rights or formations,
however, is not liable under Part 201 unless the person is responsible for an
activity causing a release of hazardous substances at the facility. MCL 324.20126(3)(d).
b.
CERCLA Petroleum Exclusion §20.40
CERCLA, 42 USC 9601 et seq., is the federal counterpart to Michigan’s liability scheme in Part 201. CERCLA is discussed in Chapter 5. The definition of “hazardous substance” under CERCLA, 42 USC 9601(14), excludes petroleum, including crude oil or any
fraction thereof, and natural gas, natural gas liquids, liquefied natural gas,
or synthetic gas usable for fuel. In contrast, Michigan’s definition of
“hazardous substance” under Part 201, MCL 324.20101(1)(t)(iv), includes “petroleum as defined in Part 213”, as described in §20.39.
Under Part 201 of NREPA, MCL 324.20126(1)(c), a person about to become an owner or operator of contaminated property may
conduct a baseline environmental assessment to obtain protection from liability
for existing contamination. A Part 615 permittee may prepare a baseline
environmental assessment to establish this liability exemption under Part 201.
2002 AACS, R
299.5903(8) specifies the time period in which the Part 615 permittee may conduct the BEA. Generally, the period to conduct a BEA ends 45 days after the date the Part 615 permit is issued unless notice is provided to DNRE not less than
five days in advance of any site preparation work. If the notice is provided,
the period to conduct a BEA ends 45 days after the date DNRE receives the
notice. 2002 AACS, R
299.51017(2) specifies how a Part 615 permittee is to provide notice to DNRE of contamination migrating beyond property boundaries. Baseline environmental assessments are discussed in Chapter 7.
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