Schmude Oil, Inc. v. Dep't of Envtl. Quality, Docket No. 313475.

306 Mich.App. 35

856 N.W.2d 84

SCHMUDE OIL, INC.

v.DEPARTMENT OF ENVIRONMENTAL QUALITY.

Docket No. 313475.

Court of Appeals of Michigan.

Submitted June 11, 2014, at Lansing.

Decided July 1, 2014, at 9:00 a.m.

Mika Meyers Beckett & Jones PLC, Grand Rapids (by John M. DeVries and Nikole L. Canute ) for petitioners.

Attorney General, Aaron D. Lindstrom, Solicitor General, Matthew Schneider, Chief Legal Counsel, and Daniel P. Bock, Assistant Attorney General, for respondent.

Before: BORRELLO, P.J., and SERVITTO and BECKERING, JJ.

Opinion

PER CURIAM.

On April 27, 2012, respondent, the Department of Environmental Quality (DEQ), denied applications for permits submitted by petitioners, Schmude Oil, Inc., Wellmaster Exploration & Production Co., LLC, and Dennis Schmude to drill Antrim Shale¹ wells. Petitioners appealed respondent's denial of the permits in the Ingham Circuit Court, which affirmed respondent's decision. Petitioners now appeal the circuit court's decision by leave granted. We affirm.

I. PERTINENT FACTS AND PROCEDURAL HISTORY

In December 2006, petitioners filed ten applications with respondent for permits to drill and operate Antrim Shale wells. On April 9, 2010, petitioners filed an additional application for a permit to drill a brine-disposal well. All 11 proposed well sites were located on the Song of the Morning Ranch (SOMR) property, an 806–acre parcel privately owned by Golden Lotus, Inc. The SOMR is located within the Pigeon River Country State Forest (PRCSF).

Oil and gas drilling in the PRCSF has previously been the subject of litigation in Michigan courts. This Court's opinion in Hobson Petroleum Corp. v. Dep't of Quality Control, unpublished opinion per curiam of the Court of Appeals, issued December 21, 2001 (Docket No. 222992), p. 2, 2001 WL 1654785, provides the following concise history of the PRCSF:

Pigeon River was dedicated on December 7, 1973, and the Natural Resources Commission adopted “A Concept of Management for the Pigeon River Country.” The primary purpose for the dedication was to create a unified management plan to address the potential for disruption wrought by oil and gas development. After the dedication, the then Michigan Department of Natural Resources [DNR], (now Department of Environmental Quality), developed a formal plan to manage the hydrocarbon resources in the Pigeon River area in addition to creating a comprehensive environmental impact statement....

In 1976, [this plan was] incorporated into a consent order and unit agreement with the major oil companies which held the bulk of mineral rights leases within Pigeon River. One year after the consent agreement, litigation arose over drilling exploratory wells within Pigeon River, which culminated in the Michigan Supreme Court issuing a permanent injunction prohibiting drilling of the wells in that area. See West Michigan Environmental Action Council v. Natural Resources Comm., 405 Mich. 741, 760, 275 N.W.2d 538 (1979).

In 1980, negotiations between environmental groups, oil companies, and the State, resulted in a second consent order [the Amended Stipulation and Consent Order (the ASCO) ]. The second consent order was similar to the 1976 order....

Additionally, during this time, the Legislature passed an act incorporating the plan outlined by the consent orders which delineated the framework for all hydrocarbon development within the Pigeon River area. The act incorporated the provisions of the 1980 consent order which included a “nondevelopment region” where no drilling could occur.

The ASCO also created a “limited development region” where drilling could occur, subject to certain limitations. These regions were determined geographically as discrete units on a map of the PRCSF in appendices to the ASCO, with Unit I signifying the limited development region and Units II, III, and IV signifying the nondevelopment regions. The boundary between Units I and II bisects the SOMR property; 180 acres are in Unit I and 640 acres are in Unit II. In this case, eight of petitioners' proposed well sites were within Unit II, while the other three were in Unit I.

The DEQ Office of Geological Survey (OGS) responded to petitioners' permit applications and concluded that whether it would be unlawful for respondent to issue some or all of the SOMR well permit applications depended on whether the Pigeon River Country State Forest hydrocarbon development act of 1980 (PRHDA), also referred to as Part 619 of the Natural Resources and Environmental Protection Act (NREPA),² applies to privately owned land within the boundaries of the PRCSF. The OGS concluded that the Part 619 applies to private lands, but suggested that horizontal wells could be a viable alternative to traditional vertical wells and would potentially be in compliance with the PRHDA. On July 10, 2007, respondent required petitioners to produce evidence of feasible and prudent alternatives, which petitioners did, under protest. Petitioners presented evidence that horizontal drilling would be high risk and economically unsound.

In a letter dated January 4, 2011, Harold R. Fitch, the assistant supervisor of wells for OGS, denied 9 of petitioners' 11 permit applications. Fitch stated that eight of the proposed wells were within the nondevelopment region and that the permits for those wells had to be denied. The three other wells were within the limited development region. Fitch denied the permit application for one of the wells in the limited development region because it was within ¼ mile of the Pigeon River, and, therefore, “[did] not comply with Part 619.” Fitch approved the permit applications for one Antrim Shale well and one brine-disposal well in the limited development region. Fitch also concluded that drilling horizontal wells from surface locations would comply with Part 619.

Petitioners appealed this decision to the director of the DEQ, Dan Wyant. Wyant concluded that Part 619 applied to both public and private lands within the PRCSF, and denied the appeal. Petitioners appealed that decision in the Ingham Circuit Court, which subsequently affirmed Wyant's decision. The case is now before us on leave granted.

II. WHETHER THE ASCO APPLIES TO PRIVATE LAND

This case requires us to review the circuit court's review of an agency decision. “[W]hen reviewing a lower court's review of agency action this Court must determine whether the lower court applied correct legal principles and whether it misapprehended or grossly misapplied the substantial evidence test to the agency's factual findings.” Boyd v. Civil Serv. Comm., 220 Mich.App. 226, 234, 559 N.W.2d 342 (1996). The facts are not in dispute, and the only question is whether respondent violated the law in denying petitioners' well permit applications. Determining whether respondent's decision was authorized by law requires statutory interpretation. This Court reviews de novo issues of statutory interpretation. Burleson v. Dep't of Environmental Quality, 292 Mich.App. 544, 548, 808 N.W.2d 792 (2011).

We first consider whether Part 619 adopted and incorporated the provisions of the ASCO, and conclude that it did. We begin by analyzing the sections of Part 619. MCL 324.61901 states:

(1) The legislature finds that it is in the public interest to encourage and promote safe, effective, efficient, and environmentally prudent extraction of hydrocarbon resources in the Pigeon river country state forest; and that economic benefits to the state will result from the exploration for the production of energy resources due to the taxation of production of hydrocarbon deposits and the payment of royalties to the state from production of hydrocarbon deposits, which royalties among other things enable the state to acquire and develop property for the enjoyment of the outdoor recreationists of the state.

(2) The legislature further finds that wise use of our natural resources essential for future energy needs requires that energy resource development must occur in harmony with environmental standards; and that the development of new industry and the expansion of existing industry to obtain the optimum safe production of the state's energy resources is an important concern to the economic stability of this state.

MCL 324.61902 provides:

The Pigeon river country state forest as dedicated by the commission on December 7, 1973, is a valuable public resource. It is in the public interest to produce oil and gas as quickly as possible to minimize the duration of activities associated with hydrocarbon development in the Pigeon river country state forest. To expedite the development of oil and gas resources on certain lands presently under lease but undeveloped as of March 31, 1981 and for which the amended stipulation and consent order has been adopted and approved by the commission on November 24, 1980, and in consideration of the protracted nature of the controversy, the legislature finds that this amended stipulation and consent order constitutes an appropriate hydrocarbon development plan for the purposes and within the intent expressed in section 61901. [Emphasis added.]

MCL 324.61903, like § 61902, mentions the ASCO, and provides:

The hydrocarbon activities within the Pigeon river country state forest authorized by the plan referred to in section 61902 can be carried out without violation of law under terms of the amended stipulation and consent order referred to in section 61902. [Emphasis added.]

Further, MCL 324.61904 states:

In light of the legislative findings in section 61901, the declaration of public interest in section 61902, and the determination that hydrocarbons can be developed in concert with law in section 61903, the department shall implement the approved hydrocarbon development plan for the Pigeon river country state forest not later than January 1, 1981. [Emphasis added.]

The ASCO, which is referred to in §§ 61902 through 61904, designates certain lands in the PRCSF as the “nondevelopment region” when it states, in relevant part:

The parties to this Amended

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