New Mexico Court of Appeals Finds that Oil Conservation Commission Acted Legally in Their Adoption of New Rules for Horizonal Wells

In Jalapeno Corp. v. N.M. Oil Conservation Comm’n, No. A-1-CA-37449, 2020 N.M. App. Unpub. LEXIS 292, the Court of Appeals of New Mexico ruled in favor of the New Mexico Oil Conservation Division (“OCD”), after a challenge from an oil and gas operator, allowing the OCD to “comprehensively revise the rules governing horizontal wells.”  The updated regulations modernized well spacing, infill horizontal wells, and transitional provisions as they relate to horizontal spacing units.

Soon after the New Mexico Oil Conservation Commission (“Commission”) adopted the OCD’s revised rules, Jalapeno appealed, alleging that the rules were arbitrary and capricious and contrary to law.  The court began its analysis by explaining the standard of review for a rule adopted under the New Mexico Oil and Gas Act (the “Act”).  A rule adopted under the Act may be set aside only if the court concludes the rule is “(1) arbitrary, capricious or an abuse of discretion; (2) not supported by substantial evidence in the record; or (3) otherwise not in accordance with law.”

Most of what Jalapeno contends generally relates to protecting the rights and interests of the other interest owners who do not have the financial wherewithal to implement large-scale multistage fractures in a shared reservoir.  Jalapeno, 2020 N.M. App. Unpub. LEXIS 292, at *17-18.  The new rules raised three concerns for Jalapeno: (1) they failed to specify acreage requirements for horizontal spacing units; (2) the new infill horizontal well definition violated the correlative rights of non-consenting owners by compulsory pooling orders; and (3) the Commission did not provide a sufficient explanation or notice for the new transitional provisions.

The court broke down each of Jalapeno’s arguments and ultimately refuted all of them.  As for the acreage requirements, the court noted that while Jalapeno may not be pleased with the guidance of the new rules, it failed to give reason as to why the criteria provided in the new horizontal well-spacing rule is insufficient.  Further, as to the infill horizontal well definition, the court focused heavily on the comments made at the hearing on the proposed rule changes.  There, the members of the Commission acknowledged the need “to adopt a horizontal rule that is designed for the 21st century.”  Accordingly, the court found that the “Commission considered the impact of the proposed infill horizontal well definition on the correlative rights of owners and reasoned that those rights were properly protected by the notice and opportunity to be heard guaranteed by the Act.”  Finally, in considering Jalapeno’s argument against the new transitional provisions, the court was deferential to the OCD and the Commission.  Notably, the Commission need not specify its reasoning for the new provisions—the rational connection between the testimony concerning the transitional provisions and the adoption of those provisions was grounds to sustain the updated provisions.

In giving deference to the OCD and Commission, the court explained that “rules, regulations, and standards that have been enacted by an agency are presumptively valid and will be upheld if reasonably consistent with the authorizing statutes. (internal quotation marks and citation omitted) Id., at *4.  Under these facts, all the amendments are reasonably related to the authority granted to the Commission because the new rules are “reasonably related to preventing waste, to protecting correlative rights” and because the “2018 rules do not misinterpret or misapply the law.”  Id., at *12.

The appellate court did not set aside any of the rules adopted by the Commission, leaving the Commission’s order intact and making it the new law with regards to the governing of horizontal wells in New Mexico.  The court’s affirmation of the Commission’s decision to adopt new rules illustrates the important role of agencies in oil and gas regulation, and the court’s hesitancy to step on the broad power of these agencies.


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