STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

ELVIA LOUISE JORDAN WILLIAM J. ) JORDAN, WILLIAM C. POLK, DOLLIE POLK, ) ALAM FRANCES SETTLE, VERA WILDO RODRICE, ) PHILLIP A. POLK, LENNIE CHERYL HAMEL, ) LOUISE JOSEPHINE GILLMAN, ERIC D. HALL, ) WILLIAM HENRY POLK, TENNIE J. POLK and ) CHARLOTTE B. HUGHES, )

)

Petitioners, )

)

vs. ) CASE NO. 83-3229

) SMACKCO, LTD., and DEPARTMENT OF NATURAL ) RESOURCES, )

)

Respondents. )

)

RECOMMENDED ORDER

This matter came on for hearing in Milton, Florida, before the Division of Administrative Hearings by its duly designated Hearing Officer, Robert T. Benton, II, on January 26, 1984. The parties were represented by counsel:

For Petitioners: James Reddick, Esquire and

Dan Stewart, Esquire

808 Caroline Street Southeast, Suite 5

Milton, Florida 32570

For Respondent: J. Nixon Daniel, III, Esquire and Smackco, Ltd. Spencer Mitchem, Esquire

Beggs & Lane

Post Office Box 12950 Pensacola, Florida 32576-2950

For Respondent: Charles J. Hardee, Esquire Department of 3900 Commonwealth Boulevard Natural Resources Tallahassee, Florida 32303

Counsel are to be commended for their presentations in what is apparently the first case of its kind in Florida.

By petition filed with the Bureau of Geology in the Department of Natural Resources (DNR), Smackco, Ltd. (Smackco) seeks "an exception to permit the reconstruction of four (4) oil-test drilling units for wells deeper than 7,000 feet" in Santa Rosa County. Petitioners oppose any change in the configuration of existing drilling units. When they requested formal administrative proceedings, DNR referred the matter to the Division of Administrative Hearings, pursuant to Section 120.57(1), Florida Statutes (1983).

The hearing officer has had the benefit of the parties' proposed findings of fact, which have been adopted, in substance, except to the extent they are not supported by the weight of the evidence, or are immaterial, cumulative or subordinate.

ISSUE

Whether DNR should establish an exceptional drilling unit or units in order to prevent waste and to avoid the . . . risks . . . from . . . an excessive number of wells, Section 377.25(2), Florida Statutes (1983)? The respondents expressly declined to raise any question as to the petitioners' standing or party status.

FINDINGS OF FACT

1. Petitioner W. J. Jordan and apparently all the other petitioners are owners of mineral rights under the northwest quarter of the southeast quarter of Section 13, Township 5 North, Range 29 West, Santa Rosa County, Florida. T. R. Miller owns the mineral rights under the northeast quarter of the southeast quarter of Section 13 and has leased them to Smackco. Near the center of the southeast quarter of Section 13 (the existing unit) respondent Smackco drilled the L. W. Roberts 13-4 well.

   
   

   NOT COMMERCIALLY PRODUCTIVE

   
   

2. Smackco drilled the L. W. Roberts 13-4 well down to the Norphlet formation and went 49 feet further, into the Norphlet sands, before giving up its efforts to extract oil from the well. Although Smackco did find a mixture containing 28 to 30 percent hydrocarbons, the hydrostatic head precluded commercial production.

   
   

3. If the well had come in, royalties would have inured to the benefit of petitioners, T. R. Miller, and the owners of the mineral rights under the southern half of the existing unit.

   
   

4. Although the evidence showed that extracting oil from the L. W. Roberts 13-4 well was not commercially feasible now, it did not establish that the price of oil will never rise to the point that production would make economic sense.

   
   

   ADDITIONAL DATA

   
   

5. At least three other oil wells have been drilled at the Mount Carmel Prospect in Township 5 North, Range 29 West, Santa Rosa County, Florida. In keeping with applicable statutes and rules, these wells are also located at or near the center of their respective quarter sections. Except where no governmental sections are laid out (offshore or in Spanish land grants), or where all rights affected by a change are in one ownership, DNR has adhered to the concededly arbitrary use of quarter sections as drilling units.

   
   

6. Information gained from the wells drilled at the Mt. Carmel Prospect, and from seismic tests performed there formed the basis for uncontroverted expert opinion that a sandy mass, known to geologists as the Norphlet structure, lies almost three miles below the earth's surface; and that a pool of oil floats on salt water within the Norphlet structure, as shown in the Appendix to this order. The L. W. Roberts 13-4 is on the northern edge of the pool that the geologists hypothesize.

7. The geophysicist's testimony that the Jay fault running northwest southeast and the smaller almost perpendicular fault running off to the northeast lie approximately as depicted in the Appendix was also uncontroverted. These faults may act as walls keeping oil on one side. The faults themselves do not hold oil.

   
   

   THE NEXT WELL

   
   

8. If a new well were drilled in the center of the northwest quarter of Section 16, at a point one half mile due south of the L. W. Roberts 13-4, see Appendix, it would be near the western edge of the pool of oil, if the geologists are right. (If the geologists are wrong, drilling there might mean hitting the fault zone, as happened with the Franks Pittman well.) Drilling a quarter mile north, at the center of the first proposed drilling unit, would reduce the risk of hitting the fault, and might make commercial production of a substantial amount of oil possible.

   
   

   DRAINAGE LIKELY

   
   

9. Smackco's geophysicist conceded that hydrocarbons at the L. W. Roberts 13-4 and hydrocarbons under the northwest quarter of the existing unit "very possibly" will migrate to a well in the center of the proposed drilling unit, if hydrocarbons are extracted in large quantities there. A well of the kind and to the depth contemplated can be expected to drain 160 acres more or less.

   
   

10. The geologists cannot know precisely what the situation is three miles down on the basis of the information they have at hand. They may be mistaken now about the location of oil just as they were when they recommended earlier well sites in the Mt. Carmel Prospect.

    
    

    CONCLUSIONS OF LAW

    
    

11. Subject to certain conditions, DNR is authorized to establish drilling units to facilitate the efficient extraction of oil:

    
    

    For the prevention of waste and to avoid the augmenting and accumulation of risks arising from the drilling of an excessive number of wells, the board shall establish a drilling unit or units for each pool. A drilling unit, as contemplated herein, means the maximum area in a pool which may be efficiently and economically drained by one well, and such unit shall constitute a developed area as

    long as a well is located thereon which is capable of producing oil or gas in paying quantities.

    
    

    Section 377.25(2), Florida Statutes (1983).

    
    

    "Waste" is broadly defined for purposes of the statute to include:

    
    

    1. The inefficient, excessive, or improper use or dissipation of reservoir energy; and the locating, spacing, drilling, equipping, operating, or producing of any

       oil or gas well or wells in a manner which results, or tends to result, in reducing the quantity of oil or gas ultimately to be recovered from any pool in this state.

    2. The inefficient storing of oil; and the locating, spacing, drilling, equipping, operating, or producing of any oil or gas well or wells in a manner causing, or tending to cause, unnecessary or excessive surface loss or destruction of oil or gas.

    3. Producing oil or gas in such a manner as to cause unnecessary water channeling or coning.

       * * *

       1. The drowning with water of any stratum or part thereof capable of producing oil or gas.

       2. Underground waste however caused and whether or not defined.

       (k) Abuse of the correlative rights and opportunities of each owner of oil and gas in a common reservoir due to nonuniform, disproportionate, and unratable withdrawals,

       causing undue drainage between tracts of land. Section 377.19(10), Florida Statutes (1983).

       
       

       A pool is defined as "an underground reservoir containing or appearing to contain a common accumulation of [hydrocarbons]." Section 377.19(6), Florida Statutes (1983). The following restrictions apply, in establishing drilling units:

       
       

       1. No rule, regulation or order of the division shall be such in terms or effect:

          1. That it shall be necessary at any time for the producer from, or the owner of, a tract of land in the pool, in order that

             he may obtain such tract's just and equitable share of the production of such pool, as such share is set forth in this section, to drill and operate any well or wells on such tract in addition to such well or wells as can without waste produce such share, or

          2. As to occasion net drainage from a tract, unless there be drilled and operated upon such tract a well or wells in addition to such well or wells thereon as can without waste produce such tract's just and equitable share, as set forth in this section, of the production of such pool.

       Section 377.25, Florida Statutes (1983).

       
       

       The phrase "just and equitable share" is defined, as follows:

       
       

       (4) Subject to the reasonable requirements for prevention of waste, a producer's just and equitable share of

       the oil and gas in the pool, also sometimes referred to as a tract's just and equitable share, is that part of the authorized produc- tion for the pool, whether it be the total which could be produced without any restric- tion on the amount of production, or whether it be an amount less than that which the pool could produce if no restriction on amount were imposed, which is substantially in the proportion that the quantity of recoverable oil and gas in the total developed area of the pool, insofar as these amounts can be practically ascertained; and, to that end, the rules, regulations, permits and orders

       of the division shall be such as will prevent or minimize reasonably avoidable net drainage from each developed unit, that is, drainage which is not equalized by counterdrainage,

       and will give to each producer the opportunity to use his just and equitable share of the reservoir energy.

       Section 377.25, Florida Statutes (1983).

       
       

       In implementing Section 377.25, Florida Statutes (1983), DNR has adopted Rule 16C-26.04, Florida Administrative Code, which provides that, in general:

       
       

       Oil-test wells to be drilled to a depth of less than seven thousand feet shall be located within 200 feet of the center

       of a drilling unit consisting of a govern- mental quarter/quarter section (40 acres, plus or minus ten percent); an oil-test well to be drilled to a depth greater than seven thousand feet shall be located within

       400 feet of the center of a drilling unit consisting of a governmental quarter section (160 acres, plus or minus 10 percent.)

       Rule 16-26.04(1)(a), Florida Administrative Code.

       
       

       Rule 16-26.04(4), Florida Administrative Code, contemplates exceptions "to permit drilling . . . on different units than those prescribed in this rule" and sets forth the procedure for applying for such exceptions. The parties stipulated that the rule does not add any substantive requirement, pertinent to evaluating applications for exceptional drilling units, to the requirements found in the statutes.

       
       

       BURDEN ON PARTY SEEKING EXCEPTION NOT MET

       
       

12. As the proponent of exceptional drilling units, Smackco has the burden of proof. None of the exceptional drilling units proposed by Smackco was shown to be "the maximum area in a pool which maybe efficiently and economically drained by one well." Section 377.25(2), Florida Statutes (1983). One of the proposed units was not even shown to include part of a pool. Nothing in the statutes requires that a drilling unit be a perfect square.

    
    

13. Smackco's own expert conceded, the likelihood that hydrocarbons underlying part of the tract to the north of the proposed exceptional unit would

drain to the south, in the event a well at the center of the proposed exceptional unit proved productive. Drainage across arbitrary lines is contemplated by the statute and is to be expected, in the nature of things. It is not unlike drawing lines in the ocean. But the statute forbids DNR to authorize "net drainage."

No rule . . . or order of (DNR shall be such in terms or effect:

* * *

(b) As to occasion net drainage from a tract. . . .

Section 377.25, Florida Statutes (1983).

Drainage from one tract to another is to be authorized only when wells are in place and operating that will assure production of the first tract's just and equitable share of the common pool. In the present case, no production to offset the drainage is contemplated.

RECOMMENDATION

Upon consideration of the foregoing, it is RECOMMENDED:

That DNR deny Smackco's petition for exceptional drilling units.

DONE and ENTERED this 2nd day of March, 1984, in Tallahassee, Florida.

ROBERT T. BENTON, II

Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 2nd day of March, 1984.

COPIES FURNISHED:

James Reddick, Esquire and Dan Stewart, Esquire

Suite 5

808 Caroline Street, Southeast Milton, Florida 32570

J. Nixon Daniel, III, Esquire and Spencer Mitchem, Esquire

Beggs & Lane

Post Office Box 12950 Pensacola, Florida 32576-2950

Charles J. Hardee, Esquire Department of Natural Resources 3900 Commonwealth Boulevard

Tallahassee, Florida 32303

Elton Gissendanner, Director Department of Natural Resources Executive Suite

3900 Commonwealth Building

Tallahassee, Florida 32303

* NOTE: Original Recommended Order has an appendix map which is available for review in the Division's Clerk's Office.

Docket for Case No: 83-003229

Orders for Case No: 83-003229