Hurd v. Arkansas Oil & Gas Commission

The Hurds and Killams (plaintiffs) owned mineral interests in land beneath the Fayetteville Shale formation in Arkansas. In February 2017, SWN Production Arkansas, LLC (SWN) asked the Arkansas Oil & Gas Commission (AOGC) (defendant) to integrate drilling units to create a cross-unit natural-gas well in the Moorefield Shale formation, which was below Fayetteville Shale. SWN offered royalty owners in the area either a one-eighth royalty and a $100-per-acre bonus, or a one-seventh royalty with no bonus. When the Hurds and Killams learned of SWN’s integration applications, they leased their mineral interests to Hurd Enterprises and Killam Oil, respectively. The leases granted a one-fourth royalty to the Hurds and Killams. The AOGC subsequently approved SWN’s integration applications. The AOGC’s integration orders specified that mineral-interest owners including the Hurds and Killams could choose to participate in the costs of completing the well or “go non-consent.” Nonconsenting parties would not pay upfront costs for the well, but their share of production would be transferred to consenting parties for a recoupment period until a proportionate share of their costs was repaid. The integration orders provided that royalties would be paid to nonconsenting parties during the recoupment period at the rate in their leases, unless AOGC found the royalty rate to be excessive and unreasonable. Hurd Enterprises and Killam Oil elected to go non-consent, and SWN challenged the one-fourth royalty rate in the leases with the Hurds and Killams. The AOGC determined that the rate was excessive and limited the royalty during the recoupment period to one-seventh. The Hurds and Killams petitioned for review, asserting that the AOGC had exceeded its statutory authority in reducing the royalty. The circuit court affirmed the AOGC’s decision, and the Hurds and Killams appealed to the Arkansas Supreme Court. On appeal, the AOGC and SWN argued that the AOGC had the statutory authority to determine reasonable royalty rates and reduce excessive rates because (1) Arkansas Code § 15-71-110(a)(1) gave the AOGC plenary authority over oil-and-gas matters, and (2) Arkansas Code § 15-72-304(a) required the AOGC’s integration orders to include just and reasonable terms and conditions that allowed each owner the opportunity to receive her just and equitable share of the oil and gas in the pool without unnecessary expense.