## Facts

- Schmude Oil, Inc., Wellmaster Exploration & Production Co., L.L.C., and Dennis Schmude held oil and gas lease interests on the Song of the Morning Ranch, an approximately 806-acre privately owned parcel within the Pigeon River Country State Forest.
- In December 2006, petitioners applied for 10 permits to drill and operate Antrim Shale wells on the parcel; in April 2010, they applied for an additional permit for a brine disposal well.
- Pigeon River Country had a long-standing oil-and-gas management regime developed through agency planning, litigation, and negotiated consent orders.
- A 1980 consent order commonly referred to as the Antrim Shale Consent Order established geographic zones, including non-development areas where drilling was prohibited.
- The proposed well sites were located within a designated non-development area under that framework.
- The Michigan Department of Environmental Quality denied the permit applications, concluding the non-development restrictions applied to both public and private lands within the designated area.
- The Ingham Circuit Court affirmed the agency decision, and petitioners sought appellate review.

## Issues

1. Whether the Antrim Shale Consent Order and related Pigeon River management restrictions apply to privately owned land within the state forest such that drilling may be prohibited based on geographic zoning rather than land ownership.
2. Whether the DEQ acted within its statutory authority in relying on the consent order and management plan to deny the drilling and brine disposal permits.
3. Whether denial of the permits constituted an unconstitutional regulatory taking of petitioners’ leasehold and mineral interests.

## Decision

- The Michigan Court of Appeals affirmed the circuit court and upheld the DEQ’s denial of all permits.
- The court held the consent order and management plan restricted drilling in designated non-development areas regardless of whether the surface estate was publicly or privately owned.
- The court concluded the DEQ’s decision was authorized by law and was not arbitrary or capricious.
- The court rejected the takings challenge, finding the permit denials did not amount to a compensable taking.

## Legal Principles

- A geographically defined environmental management regime governing oil and gas development may apply to private lands within its boundaries when the text, history, and structure indicate restrictions are area-based rather than ownership-based.
- An agency charged with oil-and-gas conservation and resource protection may deny drilling permits consistent with established management plans and consent-order restrictions implemented as part of its delegated authority.
- Regulatory-takings claims generally fail where the government regulates use rather than appropriates property, and where the claimant acquired interests after the regulatory limits were already in place, weakening reasonable investment-backed expectations.
- On judicial review of agency action, a permitting denial will be upheld when authorized by law, supported by competent, material, and substantial evidence on the whole record, and not arbitrary or capricious.

## Conclusion

The court upheld the DEQ’s denial of drilling and brine-disposal permits for wells proposed on a private parcel located in a non-development zone within the Pigeon River Country State Forest, ruling that the consent-order-based zoning applied regardless of ownership and that the permit denials did not effect an unconstitutional taking.


Schmude Oil, Inc. v. Dep't of Env't Quality, 306 Mich. App. 35, 856 N.W.2d 84 (Mich. Ct. App. 2014)