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A Better Partnership
July 03, 2014

COA upholds DEQ’s decision to deny oil companies’ applications for drilling permits

In Schmude Oil, Inc. v. Dep't of Environmental QualityNo. 313475, the court upheld the Department of Environmental Quality’s (“DEQ”) decision to deny a group of oil companies’ applications for permits to drill and operate Antrim Shale wells on privately owned land located within the Pigeon River Country State Forest (“PRCSF”).  The Court held that the plain language of the Pigeon River Country State Forest Hydrocarbon Development Act (“PRHDA”) restrictions on drilling applied to all land within the PRCSF boundaries.  It also rejected the companies' takings and equal protection claims because, among other things, the restrictions were in place when the companies purchased their property interests and the regulations had a rational basis. 

This case arose from the petitioner oil companies filing eleven applications with the DEQ for permits to drill in well sites located on the property of the Song of the Morning Ranch (“SOMR”).  This property was located within the PRCSF.  The DEQ denied most of the applications, reasoning that (1) most of the proposed well sites were within the “nondevelopment region” of the PRCSF established by a consent order (“the ASCO”) between oil companies, environmental groups, and the State, which was included in Part 619, and (2) the other proposed sites within the “limited development region” did not comply with limitations also established in the ASCO.  It also concluded that drilling horizontal wells from surface locations would comply with Part 619.  The petitioners appealed the DEQ’s decision to its director, who upheld the decision, stating that Part 619 “applied to both public and private lands within the PRCSF.”  The Ingham County Circuit court affirmed the director’s decision, and the Michigan Court of Appeals granted petitioners’ leave to appeal the decision.

The Michigan Court of Appeals affirmed.  It first held that based on the plain language of multiple sections of the PRHDA (also known as Part 619 of the Natural Resources and Environmental Protection Act (“NREPA”), all referencing the ASCO as its “hydrocarbon development plan” for the PRCSF, the Legislature intended to adopt and incorporate the ASCO into Part 619.  After reaching this conclusion, the Court then held that the DEQ correctly denied the applications for the permits in the nondevelopment region.  It reasoned that based on the plain language of the ASCO, which defined the nondevelopment region of the PRCSF as “all” lands within a particular unit of the property, the consent order “contain[ed] no differentiation between public and private lands, since both types of land fall under the plain meaning of ‘all’”.  Because most of the permits fell within the nondevelopment region, the DEQ correctly denied the applications for those permits.  Applying this same logic, the plain language of the ASCO defining the limited development region also required the DEQ to deny the applications for the proposed sites in that area.  The consent order provided that “all” lands within a certain unit of the PRCSF were considered the limited development region.  In that region, no well sites are allowed to be placed within a quarter-mile of surface water.  Applying the same logic as above concerning the term “all,” the court upheld the DEQ’s decision.

The petitioners also argued that the DEQ’s decision was unconstitutional, alleging that it was a taking for public use without just compensation, and that it was an equal protection violation by drawing classifications between different landowners by labeling certain parts of PRCSF property as nondevelopmental.  The Court rejected both of these arguments on multiple grounds.

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