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Case Study of the Pigeon River Hydrocarbon

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•At one point, in 1974, the Commission rejected the findings of a DNR hearing officer after a 21-day trial. The officer had recommended that the state grant a drilling permit in the Pigeon River Country for a well site that was outside the designated area for energy development. (See discussion below).

• In 1976, the Commission defied the Governor's personal plea to prevent drilling in the forest, and adopted a plan which allowed limited drilling.

The Commission's independence led directly to the state-sanctioned compromise that is the standard against which every resource-based decision in Michigan has since been measured.

Michigan Oil Vs. Natural Resources Commission

The first lawsuit prompted by the controversy was filed in June 1974 by the Michigan Oil Company, a small operator owned by Harold McClure, a prominent state and national fund raiser for the Republican Party. The lawsuit claimed that the Natural Resources Commission violated its own regulations and the company's property rights when it denied a permit to drill an oil well in the Pigeon River Country State Forest.

The well was to be sited in Corwith Township in Otsego County, about 2.5 miles north of the Charlton 1-4 well, the first drilled by Shell. The DNR had initially denied a drilling permit for the site in October 1971 because it was located in an environmentally sensitive area north of the Black River that was outside the zone the state was considering designating for oil and gas development.

At the time of the permit denial, the lease for the well was held by Pan American Petroleum and Nomeco. Michigan Oil later purchased the lease from the two larger companies, and in May 1972 filed a second drilling permit application for the site. Less than two months later, the DNR again issued a denial.

Michigan Oil quickly appealed to the Natural Resources Commission, asserting that its property rights had been violated and that it had been denied due process under the state Oil and Gas Act. The case was referred to a DNR hearing officer, Frederick Abood, who held a 21-day trial in January and February of 1973.

The following October, Judge Abood issued a 34-page finding of fact and law that essentially agreed with every assertion made by the company. Judge Abood said that Michigan Oil should be allowed to exercise the rights granted to it by the lease contracts it had purchased from Pan American Petroleum. The Judge recommended that the NRC order the DNR to issue a drilling permit.

- NRC Ruling -

But in April 1974, after months of considering the case, the Natural Resources Commission rejected Judge Abood's findings and refused to order a drilling permit. The commissioners said that allowing the well would cause excessive environmental damage, or "waste," under the Oil and Gas Act. Two months later, Michigan Oil filed suit in Ingham County Circuit Court.

The Circuit Court upheld the NRC decision. In June 1975, Judge Thomas L. Brown ruled that the "denial of the permit to drill could validly be based partially or entirely upon ecological considerations." Judge Brown also held that Michigan Oil's property rights had not been violated. "There was a legitimate regulatory purpose in denying Michigan Oil the permit to drill," wrote Judge Brown.

The decision, upheld by the Michigan Appellate Court and the Michigan Supreme Court, clarified the authority of the DNR to set standards for locating and operating oil and gas wells. It also set the definitive legal standards in disputes involving environmental regulation and property rights.*

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*FOOTNOTE: A Firm Precedent, Recently Undermined

The precedent set in the Michigan Oil case stood for 20 years, until Gov. Engler intervened in another oil and gas case regarding drilling in the Nordhouse Dunes Wilderness near Ludington.

In that case, the DNR had refused a drilling proposal submitted by Miller Brothers, a Traverse City-based energy company, which wanted to drill in the Nordhouse Dunes. Alower court had ruled in the company's favor and awarded more than $100 million in compensation to Miller Brothers and a group of private mineral owners.

However, the case never was argued before the Michigan Supreme Court. Instead, in 1995 Gov. Engler settled the lawsuit and directed the state to pay Miller Brothers and the mineral owners $94 million for "taking" their property.At the time, it was the largest takings claim paid in the United States.
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