Martinez v. COGCC: Colorado Supreme Court Rejects Adverse Impacts Pre-Condition

On January 14, 2019, the Colorado Supreme Court reached a decision in COGCC v. Martinez, ending more than five years of litigation between seven youth activists from Boulder-based Earth Guardians and the Colorado Oil and Gas Conservation Commission (“COGCC”). The Court held that the COGCC appropriately exercised its agency discretion when it declined to undertake a rulemaking that would have conditioned approval of applications for oil and gas drilling permits on a conditional finding of no adverse impacts to health, safety, or the environment.

The facts of the highly publicized case are well known. In 2013, Earth Guardians petitioned the COGCC to promulgate a rule requiring that COGCC withhold issuance of any new drilling permits “unless the best available science demonstrates, and an independent, third party organization confirms, that drilling can occur in a manner that does not cumulatively, with other actions, impair Colorado’s atmosphere, water, wildlife, and land resources, does not adversely impact human health, and does not contribute to climate change.” COGCC declined to undertake the proposed rule-making, finding, inter alia, that the proposed rule was beyond COGCC’s limited statutory scope. The petitioners appealed to district court, which affirmed COGCC’s denial of the petition.

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Earthquakes: State Regulation of O&G Injection Wells Is OK Oklahoma Judge Dismisses Federal Lawsuit on Jurisdictional Grounds

On Tuesday, April 4, 2017, Judge Stephen P. Friot, United States District Court for the Western District of Oklahoma, dismissed a nationally significant lawsuit brought over earthquakes linked to oil and gas wastewater injection wells on jurisdictional grounds.  See Sierra Club v. Chesapeake Operating, LLC, et al., No. CIV-16-134-F (W.D. Okla., Order dated 4/4/2017) (unpublished), The court deferred to the expertise of the Oklahoma Corporation Commission (“OCC”), the state body governing wastewater injection wells in Oklahoma. Citing the actions and capability of the OCC, Friot concluded:

Every night, more than a million Oklahomans go to bed with reason to wonder whether they will be awakened by the muffled boom which precedes, by an instant, the shaking of the ground under their homes. Responding to earthquake activity is serious business, requiring serious regulatory action. The record in this case plainly demonstrates that the Oklahoma Corporation Commission has responded energetically to that challenge. Of equal importance, it is plain that the Oklahoma Corporate Commission has brought to bear a level of technical expertise that this court could not hope to match.  The challenge of determining what it will take to meaningfully reduce seismic activity in and near the producing areas of Oklahoma is not an exact science, but it is no longer one of the black arts.  This court is ill-equipped to outperform the Oklahoma Corporation Commission in advancing that science and putting the growing body of technical knowledge to work in the service of rational regulation.

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Update to February 11, 2016 Blog Post/Weed and Water - Can Water Be Used for Marijuana Cultivation in Colorado

Last Year, WSMT blogged about whether water could be lawfully appropriated for Marijuana cultivation.  2/11/16 blog post.  We provided three arguments why that would be allowed.

Almost exactly a year later, the Division  water referee agreed In Re High Valley Farms, LLC, 14CW3095 with two of the reasons we set forth in our blog from last year - namely that appropriation of water is controlled by state law, and that the word "lawfully" in the state law definition of beneficial use of water means that the appropriation, not the use of the water, must be lawful.  A copy of the February 17, 2017 order is available here.

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Weed and Water - Can water be used for marijuana cultivation in Colorado?

The question has become important to marijuana growers after the Colorado Supreme Court’s decision in Coats v. Dish Network, LLC, 303 P.3d 147 (Colo. 2015), where the Court held that an activity is only “lawful” if it violates neither state nor federal law.

The issue has now arisen in the water context before Water Division 5. In Re High Valley Farms, LLC, 14CW3095. In that case, the Division Engineer has demanded that “[t]he applicant must explain how the claim for these conditional water rights [the water is to be used for an indoor marijuana grow facility] can be granted in light of the definition of beneficial use as defined in C.R.S. § 37-92-103(4). Specifically, beneficial use means ‘the use of that amount of water that is reasonable and appropriate under reasonably efficient practices to accomplish without waste the purpose for which the appropriation is lawfully made.’”

In Coats v. Dish Network, LLC, 303 P.3d 147 (Colo. 2015), the Colorado Supreme Court held that “lawful,” as used in an employment statute where it was not further defined, should be interpreted based on its ordinary meaning. Id. at 150. The “ordinary meaning of ‘lawful’ is that which is ‘permitted by law.’” Id. So, “for an activity to be ‘lawful in Colorado, it must be permitted by, and not contrary to, both state and federal law.” Id. at 151.

Like the statute in Coats, the statutes governing water rights in Colorado do not define “lawful.” Thus, Coats seemingly dictates that the ordinary meaning of “lawful,” as meaning lawful under both federal and state law, applies. That would mean that growing marijuana is not a beneficial use and therefore not an allowed use of water pursuant to Colorado water law. There are, however, at least three reasons to believe that growing marijuana can be considered a beneficial use despite the broad language in Coats: 1) there is a constitutional right to divert water that cannot be curtailed by statute, 2) the statutory definition of beneficial use does not necessarily prohibit using water for illegal purposes, and 3) policy considerations in the water context, unlike the employment context, weighs in favor of interpreting lawful to mean lawful under state law only.

First, although beneficial use is statutorily defined, the right to divert for beneficial use derives from the Colorado Constitution. Colo. Const., Art. XVI, §§ 5-6. The Colorado Supreme Court has interpreted this to mean that the legislature “cannot prohibit the appropriation or diversion of unappropriated water for useful purposes.” Fox v. Div. Engineer for Water Div. 5, 810 P.2d 644, 646 (Colo. 1991). The Colorado Constitution establishes that marijuana grow is a useful purpose. Colo. Const., Art. XVIII, § 16. It should therefore be possible to appropriate water to grow marijuana, regardless of the statutory definition of beneficial use, because the legislature cannot abrogate the constitutional right to divert water for a purpose that is protected by the constitution.

Second, it is not readily apparent that “lawfully” modifies “the purpose” in the statutory definition of “beneficial use.” Pursuant to the last-antecedent canon of construction, “lawfully” modifies “appropriation” – not “purpose.” Thus, the appropriation must be accomplished lawfully in accordance with Colorado water law, but the water does not necessarily have to be used for a lawful purpose to effect an actual appropriation. In fact, the prior appropriations doctrine arose in the west to administer water rights when miners were using water to illegally mine federal lands prior to the General Mining Act of 1872. Thus, the statutory definition of “beneficial use” does not preclude appropriation of water for an illegal purpose as long as it is diverted in accordance with the law.

Third, Coats involved employment discrimination, an area of extensive federal regulation where policy concerns weighed in favor of allowing employers to discharge employees for violations of federal law. Id. Unlike employment law, water law is uniquely controlled by state law. 43 U.S.C. § 666 (subjecting the U.S. to state law in water rights cases); See also Bureau of Reclamation, Reclamation Manual (Temporary Release): Use of Reclamation Water or Facilities for Activities Prohibited by the Controlled Substances Act of 1970, PEC TRMR-63 (May 16, 2014) (prohibiting the use of BOR water for marijuana grow facilities, while not prohibiting the use of other water passing through BOR facilities for marijuana grow facilities). Further, policy arguments favor interpreting beneficial use as encompassing marijuana grow because the objective of Colorado water law is “the optimum use of water consistent with preservation of the priority system of water rights” C.R.S. § 37-92-501(2)(e). There is no doubt that marijuana grow is optimal in the sense that it can lead to greater revenues both per acre planted and per acre-foot of water used than most other crops grown in this state. Lawful should therefore, for the purpose of water law, be interpreted to relate only to state law.

While marijuana growers in Colorado should prevail against a challenge that their use is not beneficial, the safer course of action may still be to apply for indoor irrigation, commercial, and industrial use, without specifying the type of crop to be grown. That may also allow greater flexibility for future changes in the type of crop grown.

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COLORADO OIL & GAS CONSERVATION LAW: THE BASICS -- A POP QUIZ

The Conservation Basics
A primary objective of the Colorado Oil & Gas Conservation Act (the “Act”) has always been conservation through prevention of waste and enforcement of efficient drilling and production practices. In other words, traditionally the Act served one important god – the resource conservation god.

Since 1994, however, the Act and those who work with it have had to serve an additional important god -- the god of public health, safety and welfare, and this one has become increasingly demanding.

Colorado mineral owners, explorers and producers, and those of us who represent them, all have a duty to make certain that the one god does not eclipse the other – to make certain that the conservation god does not become a second-class citizen in the world of oil & gas exploration, development and production in Colorado.

The Quiz – Test your knowledge of the basics
Which of the following statements are true, false, or close enough?
Question 1: The Rule of Capture…..
1. Allowed old Englishmen to pursue foxes off their land as long as the chase started on their land.
2. Came to this country on the Mayflower and helped Buffalo Bill make his name, but died with the buffalo long before oil or gas were discovered in Colorado.
3. Played a significant role in early oil & gas exploration and production in Colorado.
4. Was eliminated by passage of the Colorado Oil & Gas Conservation Act in 1951.
5. Survived passage of the original Colorado Oil & Gas Conservation Act, but was eroded by subsequent amendments to that Act.
6. Was effectively eliminated from Colorado common law by the 1994 amendments to the Colorado Oil & Gas Conservation Act
7. Has always been and remains a viable part of the Colorado common law applicable to oil & gas exploration and production.
8. With slight modification due to well location rules, applies to any well drilled in Colorado absent an applicable COGCC spacing order.
9. Says I’m entitled to produce and own whatever oil or gas I can find so long as I produce product to which I have a legal right from operations anywhere on lands that I own or have the right to be on.
Answer to Question 1: These statements are true except
• A-2 and A-4 are definitely false
• A-5 and A-6 are the difficult ones. These two are, in principle, also false, but the question is whether under COGCC practice, post 1994, the Rule of Capture has the same stature it used to have. More to the point, does it have the stature it should have if we are to serve the resource conservation god with the same fervor that the god of public health, safety and welfare is served.

Question 2: Waste
Under Colorado law, Waste of oil and gas in development and production operations is NOT which of the following?
1. Prohibited.
2. OK if necessary to protect public health, safety and welfare.
3. Any practice that leaves producible oil or gas in the ground.
4. The improper use or dissipation of reservoir energy.
5. Well spacing that is not sufficiently dense to drain the area drilled.
6. Drilling more than one well where one well can efficiently and economically do the job.
7. Tempered by market demand for produced product, i.e., it’s not waste if there’s no economic market.
Answer to Question 2: With the exceptions of #s 2 and 7, everything listed above is an accurate statement about Waste under the Act.
• 7 is easy to peg as a misstatement; the Act (unlike conservation laws in other states) specifically provides that market demand is not a factor in determining Waste.
• 2 is not so easy. It may be that in a post-1994 direct conflict the god of conservation loses the battle. It is at least food for thought by today’s COGCC practitioners, although maybe it’s not a practical issue because of modern technological advancements in production practices.

Question 3: What’s missing from the above list, i.e., what else does Colorado law categorize as waste?

Answer to Question 3: The abuse of correlative rights. The Act clearly defines abuse of correlative rights to be Waste, and that gets us to 4.

Question 4: True or False?
Protection of correlative rights means if you don’t own 100%...
1. You can still keep what you produce unless your cousin-in-law is the mineral cotenant.
2. You have to account retroactively to the other owners for their share, regardless of whether they participated in the cost of production.
3. You can still keep it all if you get there first because you’re protected by the Rule of Capture.
4. Each owner and producer in a common pool or source of supply of oil and gas is to have an equal opportunity to obtain and produce its just and equitable share of the oil and gas underlying such pool or source of supply.
Answer to Question 4: Statement 1 is definitely false, and Statement 4 is definitely true. However, the answers to Statements 2 and 3 are more challenging. Statement 2 is incorrect because the Act does not require backwards accounting at least for would-be participants who had (reasonable) notice of the drilling and production activity and who elected not to, or failed to, participate. For that reason Statement 3 is arguably correct, at least under the right circumstances. The Rule of Capture is still alive in Colorado, as long as each mineral owner had the same opportunity to produce/participate in production. This is really about the conservation god rewarding the risk-taker and is what is behind the force pooling provisions of the Act which have the effect of penalizing the non-risk taker.

Conclusion
The issues explored above are not pedantic. Nor should they be seen to be the atavistic ramblings of an ancient who worked closely with the COGCC in the old days (before 1994). These three basic concepts -- The Rule of Capture, Waste and Protection of Correlative Rights – remain essential to proper conservation of a waning resource. They are grounded in a good scientific and economic understanding of how to maximize oil and gas production while maintaining efficiency.
The irony is that serving this conservation god does not necessarily mean conflict with the duty to serve the god of public health, safety and welfare. Good resource conservation and production efficiency serve both gods. These practices not only incentivize the production of more product at less cost, they also serve to minimize surface and environmental impact in the process.

So, the message continues to be the same – oil and gas conservation basics are important for all of us involved in the Colorado oil and gas industry to understand and apply.

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Changes in Colorado’s Rules of Civil Procedure Aimed at Frontloading Litigation to Decrease Costs

After testing new rules in a select number of Colorado districts over the past few years, on July 1, 2015, the Colorado Supreme Court adopted new rules intended to significantly change civil litigation, especially the discovery process. This initial stage of a lawsuit – depositions, document requests and production, and interrogatories – is costly in client time and legal fees. Responding to complaints about those escalating costs, the new rules focus on setting discovery parameters early in a case to proportionally reflect the monetary claim and controversy at issue. Above all, the rules seek to restrict discovery of documents or issues merely tangential to the real source of the dispute or, more cynically, to move past “scorched earth” litigation tactics. The Court hopes to do so by rewriting the case management process, abandoning default or presumptive orders in favor of open communication between counsel and the court to reach an order tailored to the specific needs of each individual case. Judges will also play a stronger role in managing the discovery process.

The new discovery rule (CRCP 16(b)) now requires parties to meet in person or by telephone to reach a proposed case management order that details the claims, defenses, description of the case, settlement efforts, amount in controversy, proportional discovery limits, discovery timing, expert witness considerations, treatment of electronic information, and all deadlines in advance of a firm trial date. Where agreement cannot be achieved, both parties must present their respective positions in advance of the mandatory court conference, which must occur 49 days after the case is at issue. The rule—like other similar rule new changes beyond the scope of this post—requires the court to “actively oversee” the process.

Of course, adverse parties will continue to have different views of what their case requires, and it is facile to expect agreement on case parameters before an in-depth investigation into the dispute has commenced. To this end, the success of the new rules will hinge on whether or not judges actively oversee and are willing to involve themselves in the discovery phase of cases on their dockets. Often, this is not a question of the bench’s desire to administer justice, but rather the practical requirements of managing caseloads that may leave little time for a judge to decide discovery disputes. Only time will tell if the rule’s new demands on the bench to routinely oversee discovery can and will be implemented.

To this end, the new rules afford counsel the opportunity to further clients’ goals by always endeavoring to keep good, open lines of communication with opposing counsel. Indeed, under the prior rules where the bench rarely involved itself in discovery unless absolutely necessary, conceding a small point rarely returned any benefit to the conciliatory party, removing any incentive to self-regulate the process and resulting in relatively unrestrained discovery where both sides “wanted it all.” Now, because the rules require the court to “actively oversee” the discovery process, if the opposition is unwilling to reciprocate and concede anything, the court will likely recognize which party is causing the friction and respond accordingly. Thus, under the new regime, it should be easier to establish trust and candor with the court, which could yield substantive benefits for a party in addition to saving money. Though discovery will always be contentious as each side will have a different view of the case and its requirements, Colorado’s new rules present a real opportunity to reach the merits more quickly and inexpensively.

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