MICHIGAN COURT AWARDS $90 MILLION TO OIL FIRM

Michigan has appealed a state court ruling seen as a landmark decision on compensation to companies blocked from developing resources because of environmental opposition. Last Sept. 20 Michigan's Ingram County Circuit Court Judge Peter Houk ordered the state to pay about $90 million to Miller Bros. Oil & Gas Producers, Grand Rapids, Mich., its partners, and a group of private mineral owners in a case stemming from the state's ban on oil and gas development in Mason County's

Nov. 18, 1991

3 min read

Michigan has appealed a state court ruling seen as a landmark decision on compensation to companies blocked from developing resources because of environmental opposition.

Last Sept. 20 Michigan's Ingram County Circuit Court Judge Peter Houk ordered the state to pay about $90 million to Miller Bros. Oil & Gas Producers, Grand Rapids, Mich., its partners, and a group of private mineral owners in a case stemming from the state's ban on oil and gas development in Mason County's Nordhouse Dunes area.

The state last month appealed the award, which gives $46 million to Miller Bros. and $25.5 million to the mineral owners plus interest.

One aspect of the ruling is that it awards compensation based on the projected value of unproven resource potential. No drilling has occurred on the leases involved.

HOW IT CAME ABOUT

The dispute dates to a 1987 order banning oil and gas development or production from the 4,500 acre Nordhouse Dunes area in western Michigan.

Miller Bros. began leasing mineral rights in the area in the mid-1970s. Two seismic surveys showed potential for significant reserves on the prospect, which lies in the heart of the northern Silurian Niagaran reef trend.

The primary surface rights owner, the U.S. Forest Service, gave Miller Bros. approval to conduct a five well drilling program. However, state statute requires approval from the supervisor of wells, who at the time was Gordon Guyer, director of the Department of Natural Resources (DNR).

Miller Bros. said despite preparation of a hydrocarbon development plan with five flexible drillsites, an environmental review, and informal advice from DNR staff that drilling would be allowed, Guyer issued the drilling ban Apr. 23, 1987.

Miller Bros. noted the state otherwise has never permanently banned drilling in any other area in Michigan. A temporary prohibition was enacted in the Pigeon River State Forest, but drilling ultimately was allowed with special precautions.

EMINENT DOMAIN

Upon receiving the prohibition order, Miller Bros. filed a notice with the court notifying DNR it considered the order to be a seizure of its leasehold mineral rights, which it valued at $93 million.

The state elected not to rescind or change the order. Although Miller Bros. said it never intended to conduct surface operations on the dunes, modification of the order could have allowed directional drilling into potential resources.

Instead, the state exercised its right of eminent domain, saying it wished to determine just compensation.

That determination yielded data indicating there likely are six reefs on the acreage with average oil reserves of 1.8 million bbl/reef.

WHAT LIES AHEAD

On Oct. 8 the state appealed the award, saying the state's action was not taking of property and calling the potential oil and gas reserves figures used to determine the award "speculative."

Miller Bros. General Manager H. Jack Miller told Michigan Oil & Gas News the company would be amenable to settlement discussions with Michigan officials.

Meantime, he noted the state could be losing another $30,000/day in added interest if it drags out an appeal.

In a talk before a meeting of the Michigan Oil and Gas Association, Miller said the award "sends a clear message to government agencies that if you are going to take away someone's rights, you had better be prepared to compensate them for it."