## Facts

- Mineral owners in Cleburne County, Arkansas held interests under the Fayetteville Shale; an operator sought to drill a cross-unit gas well targeting the deeper Moorefield Shale.
- The operator applied to the Arkansas Oil & Gas Commission (AOGC) for compulsory integration of drilling units and offered owners a choice of (1) a 1/8 royalty plus a bonus or (2) a 1/7 royalty with no bonus.
- After learning of the applications, the mineral owners leased their interests to affiliated entities as lessee-operators; the leases provided for a 1/4 royalty.
- The AOGC issued integration orders allowing working-interest owners to either participate in costs or elect “non-consent,” under which consenting parties fund drilling/completion and recover costs plus a risk penalty from production allocated to the non-consenting interest during a recoupment period.
- The integration orders provided that royalties would be paid during recoupment at lease rates unless the AOGC found the royalty “excessive and unreasonably high.”
- The affiliated lessees elected non-consent; the operator challenged the 1/4 royalty as excessive for recoupment-period purposes.
- After a hearing, the AOGC issued amended integration orders finding the 1/4 royalty excessive and reducing the recoupment-period royalty to 1/7.
- The mineral owners and affiliated lessees sought judicial review, asserting the AOGC lacked statutory authority to reduce royalties set by private lease.

## Issues

1. Whether the AOGC acted beyond its statutory authority by reducing, during the recoupment period, the royalty payable under private leases for non-consenting working-interest owners in an integration order.
2. Whether the amended integration orders were arbitrary, capricious, or unsupported by substantial evidence.

## Decision

- The Arkansas Supreme Court affirmed the circuit court and upheld the AOGC’s amended integration orders.
- The court held the AOGC acted within its statutory authority to impose “just and reasonable” integration terms, including limiting a non-consent lease royalty during the recoupment period when found excessive.
- The court held the orders were supported by substantial evidence and were not arbitrary or capricious.

## Legal Principles

- An integration order must be issued on “just and reasonable” terms that allow each owner to recover a just and equitable share without unnecessary expense.
- The AOGC’s broad statutory authority over drilling and production operations and waste prevention permits it to structure the economic consequences of non-consent elections within integration orders.
- In the non-consent context, the AOGC may evaluate whether a contractual royalty is “excessive and unreasonably high” for the recoupment period and limit the effective royalty obligation during that period as part of the integration terms.
- Courts reviewing agency action do not reweigh evidence and will uphold an agency decision supported by substantial evidence and grounded in a rational basis.

## Conclusion

The court held that Arkansas’s conservation and compulsory-integration statutes authorize the AOGC to set recoupment-period terms that are “just and reasonable,” including temporarily limiting a non-consent lease royalty found excessive, and it deferred to the Commission’s evidentiary findings and economic rationale.


Hurd v. Ark. Oil & Gas Comm'n, 2020 Ark. 210, 601 S.W.3d 100 (2020)