Eason Oil Co. v. Howard Engineering, Inc.

Eason Oil Co. v. Howard Engineering, Inc.
1990 OK 101
801 P.2d 710
61 OBJ 2540
Case Number: 72237
Decided: 10/02/1990
Supreme Court of Oklahoma

EASON OIL COMPANY, A CORPORATION, ATLANTIC RICHFIELD COMPANY, A CORPORATION, CRAWLEY PETROLEUM CORPORATION, A CORPORATION, DEVON CORPORATION, A CORPORATION, STATES MARINE CORPORATION, A CORPORATION, TEXAS AMERICAN OIL CORP., A CORPORATION, UNION TEXAS PETROLEUM CORP., A CORPORATION, P & O OIL CORPORATION, A CORPORATION, JAMES S. SMITH, EXECUTOR OF THE ESTATE OF ARNOLD D. FREESE, PLAINTIFFS-APPELLEES,
v.
HOWARD ENGINEERING, INC., A CORPORATION, H. BOYD HOWARD, LINDA KAY HOWARD, NATHAN BAILEY, A MINOR BY AND THROUGH HIS LEGALLY APPOINTED GUARDIAN, DIANE BAILEY, LYNORA BAILEY, AND PAMELA L.
BAILEY, DEFENDANTS-APPELLANTS.

On Appeal from the District Court, Garfield County, John W. Michael, Judge.

¶0 After the Corporation Commission reduced from 640 to 160 acres the size of drilling and spacing units in a common source of supply, the operator of a producing well and the parties to a joint operating agreement in a previously spaced and pooled unit brought suit to quiet title to their leases in the three non-producing quarter sections and for a declaratory judgment to determine the distribution of royalty interest payments. The working interest owners who participated under the pooling order (not parties to the operating agreement) counterclaimed for increased production revenue, asserting a greater proportionate share of the leasehold interest within the quarter section containing the producing well. The trial court quieted title in the plaintiffs' leasehold interest and determined that the despacing order effected no change in the working interest ownership of the producing well.

THE TRIAL COURT'S DECREE IS AFFIRMED.

James C. Lang, Brian S. Gaskill, Melinda J. Martin, Sneed, Lang, Adams, Hamilton & Barnett, Tulsa, and Lloyd Rowland, Rowland & Rowland, Bartlesville, for appellants.

Clyde A. Muchmore, Richard C. Ford, Judy Hamilton Morse, Crowe & Dunlevy, Oklahoma City, for appellees.

OPALA, Vice Chief Justice.

[801 P.2d 711]

¶1 [1] The dispositive first-impression issue this case presents for our review is whether the working interest ownership regime in a producing well completed under Corporation Commission spacing and compulsory pooling orders is altered when a subsequent order reduces the size of drilling and spacing units for the same common source of supply. We answer in the negative, holding that once production was established from the designated common source of supply, the working interest in the producing well vested in proportion to participation under valid compulsory pooling orders. Our pronouncement declaring that vested working interests were not disturbed by the despacing order makes it unnecessary to consider the appellants' arguments concerning damages and the effective date of the despacing order.

THE ANATOMY OF LITIGATION

¶2 The Corporation Commission designated 640-acre units for gas and gas condensate from the Mississippian common source of supply in an area known as the Sooner Trend.

[801 P.2d 712]

¶3 The contractual participants brought the suit under review against the pooled participants, the royalty owners and the owners of top leases on acreage outside the quarter-section containing the producing well (a) to quiet title in their leasehold interest and (b) for a declaration of ownership of a right to receive royalty from the producing well.

¶4 Initially the district court summarily resolved some of the quiet title issues in favor of the contractual participants.

Governing Principles

¶5 As a general rule, in order to prevent waste

¶6 Under the spacing statute,

¶7 The task before us is to determine whether the despacing order divests original participants of future production revenue from the Dierksen No. 1 well or whether interest in production became vested upon election to participate under the pooling order and remains unchanged for the life of the well.

The Vesting Of Rights Under The Initial Spacing And Pooling Orders

¶8 We have on several occasions addressed the effect of post-order events on property rights that stand vested under pooling and spacing orders. In Crest Resources v. Corporation Commission

¶9 Under a valid Commission pooling order, all participants, both voluntary and those forced to pool their lands, relinquished for one well - the Dierksen No. 1 - their individual right to drill. The proportionate share of the cost of drilling and completing the now-producing well was determined and, as in Crest, property interests vested. As we noted in Amoco and Ranola, any subsequent reapportionment of the vested interest in production would deprive some original-risk-capital investors of their property rights. In contrast to Crest, Amoco or Ranola, the critical factor here is the subsequent despacing order. But the question remains the same - whether the Commission's despacing order may operate to extinguish rights previously acquired under a valid pooling order.

¶10 The pooled participants argue that once the spacing order was vacated as to the 640-acre unit, the essential prerequisite for pooling was removed and thus the rights that had vested thereunder were modified by the subsequent despacing order. In other words, vacation of the original spacing order is asserted to be a "vitiating infirmity"

¶11 Helmerich & Payne, Inc. v. Corporation Commission

¶12 The pooled participants rely on Union Oil Co. of California v. Brown,

¶13 Unlike in Wood, a valid Commission order preceded here the pooling of interests. All parties were allowed to choose whether to participate in the Dierksen No. 1 well. The pooling order remains valid and binding on the participating interests that vested thereunder.

¶14 We hold that the Commission's action to despace the area and establish 160-acre units for future wells did not divest the working interest owners of their vested right to production from the existing well according to the initial investment percentage under a prior valid pooling order. Each participant in the Dierksen No. 1 well risked his investment in production in proportion to the leasehold estate in the 640-acre unit. The contractual participants availed themselves of every possible opportunity to protect their initial investment.

¶15 The trial court's decree confirming the rights of the participants in the production from the Dierksen No. 1 well is affirmed.

¶16 All Justices concur.

Footnotes:

1 See Commission orders, beginning with Order No. 49133 (the first drilling and spacing unit order), as last amended by Order No. 50337, which spaced 40 governmental sections, including Section 21, Township 22 North, Range 8 West, Garfield County, Oklahoma, the section affected by this appeal.

2 See Commission Order No. 133103. While the record does not contain the original spacing or pooling orders, any fact either stipulated or admitted in the briefs may be considered as supplementing and curing a deficient appellate record. Depuy v. Hoeme, Okl., 775 P.2d 1339, 1341, n. 13 [1989]; Reeves v. Agee, Okl., 769 P.2d 745, 753, 756 [1989]; Womack v. City of Oklahoma City, Okl., 726 P.2d 1178, 1181, n. 8 [1986]. In their briefs to us both parties refer to the pooling order and to the original spacing orders. The terms of these orders are undisputed.

3 See supra note 1 for the legal description of Section 21.

4 Commission Order 148243. The despacing order (a) vacated the prior spacing order as to Section 21 and reduced the 640-acre spacing to 160-acre units for oil, gas and gas condensate from the Mississippian common source of supply; (b) pooled and unitized all royalty interests within each drilling and spacing unit, (c) determined that each royalty owner shall share in one-eighth of all production from any well thereon in the proportion that the acreage owned by each royalty owner bears to the entire acreage in the 160-acre drilling and spacing unit and (d) determined the despacing order's effective date to be January 1, 1979.

5 Order No. 148242.

6 The despacing order was affirmed in Union Texas, Etc. v. Corporation Comm'n, Etc., Okl., 651 P.2d 652 [1982], cert. denied 1982 (103 S. Ct. 82, 459 U.S. 837, 74 L.Ed.2d 78).

7 Defendants other than the pooled participants were dismissed from this suit without prejudice.

8 The pooled participants claimed that their leasehold interest in the Dierkson No. 1 Well increased from 43.6% (with production based on 640-acre spacing) to 74.4% (with production based on 160-acre spacing). They asserted that the contractual participants have damaged them by the difference between the amount they have been paid and the amount they should have received as a result of the Commission despacing order. See Eason Oil Co. v. Howard Engineering, infra note 10.

9 The district court rendered a partial summary adjudication for the plaintiffs (contractual participants), ruling that: (1) it has subject matter jurisdiction to determine who has the right to drill on the lands in question; (2) the Commission has exclusive jurisdiction to determine the date its despacing order became final; (3) the despacing order became effective October 4, 1982 - the date the U.S. Supreme Court denied certiorari to review the despacing order (see footnote 6 supra); (4) the despacing order resulted in the temporary cessation of production of the leases within the newly created 160-acre drilling and spacing units that did not have producing wells located thereon; (5) the leases that are the subject of litigation and cover lands in the newly established 160-acre drilling and spacing units, which have no wells located thereon, allow lessees additional time to resume drilling operations after the effective date of the despacing order; and (6) the effect of the plaintiffs' failure to drill and develop oil and gas interests on the 160-acre units is relevant only to the extent that such failure occurred after the effective date of the Commission's despacing order.

The pooled participants' quest for appellate review of this disposition by petition for certiorari to review a certified interlocutory order was denied July 23, 1984. Howard Engineering, Inc. v. Eason Oil Company, No. 61,861.

10 Eason Oil Co. v. Howard Engineering, Okl., 755 P.2d 669 [1988].

11 See 52 O.S.Supp. 1977 § 87.1 (a), the statute in effect when the pooling and spacing orders were entered. These principles remain unchanged in the present statutory scheme (52 O.S.Supp. 1988 § 87.1 ). See also 52 O.S. 1981 § 273 ; Harris, Modification of Corporation Commission Orders Pertaining to a Common Source of Supply, 11 Okla.L.Rev. 125, 127 [1958]; Wood Oil Co. v. Corporation Commission, Okl., 268 P.2d 878, 884 [1954]; Wood Oil Co. v. Corporation Commission, Okl., 205 Okl. 537, 239 P.2d 1023, 1026 [1950].

12 See in this connection Harris, supra note 11 at 129, where the author defines the concept of correlative rights as ". . . the aggregate of the compromised and reconciled rights, privileges and restraints which is substituted for the separate independent and interdependent bundles of adverse and competing rights and duties which are vested in different classes of individual owners . . ."; see also Kingwood Oil Company v. Hall-Jones Oil Corporation, Okl., 396 P.2d 510, 512 [1964]; Pelican Prod. v. Wishbone Oil & Gas, Okl.App., 746 P.2d 209, 211, 212 [1987]; United Petroleum Exploration v. Premier Resources, 511 F. Supp. 127, 129 [W.D.Okl. 1980]; 83 Oil and Gas Reporter 108, 114, citing Murphy v. Amoco Production Co., 590 F. Supp. 455 [N.D. 1984].

13 52 O.S.Supp. 1977 § 87.1 (a); Ward v. Corporation Commission., Okl., 501 P.2d 503, 507 [1972].

14 52 O.S.Supp. 1977 § 87.1 (e).

15 Dancy and Dancy, Regulation of the Oil and Gas Industry by the Oklahoma Corporation Commission, 21 Tulsa L.J. 613, 626 [1986].

16 Other parties may be entitled to share in production, but the distribution of that revenue is not at issue and is not addressed here.

17 52 O.S.Supp. 1977 § 87.1 .

18 52 O.S.Supp. 1977 § 87.1 (d).

19 Okl., 617 P.2d 215, 218 [1980].

20 Okl.App., 751 P.2d 203 [1988]. In Amoco the issue presented was whether a forced-pooling order pooled the working interest in a single wellbore or on a unit-wide basis. The appellate court held that a mineral interest owner who elected to accept bonus payments instead of participating in the initial well under a forced-pooling order was not entitled to participate in subsequent wells.

21 Okl., 752 P.2d 1116 [1988].

22 The pooled participants refer us to Crest Resources v. Corporation Commission, supra note 19 at 218, in support of their argument that a "vitiating infirmity" exists in the rights created under the pooling order.

23 Supra note 11, 239 P.2d at 1023.

24 Wood Oil Company v. Corporation Commission, supra note 11, 239 P.2d at 1026.

25 Wood Oil Company v. Corporation Commission, supra note 11, 239 P.2d at 1027. In Ward v. Corporation Commission, supra note 13, the court held that non-drilling lessees and mineral owners share in production of a spaced well as of the time the unit is initially established by a spacing order. As in Wood, supra note 11, 239 P.2d at 1026, the well was completed before the drilling and spacing unit was established.

26 Crest Resources v. Corporation Commission, supra note 19 at 215.

27 Okl., 532 P.2d 419 [1975].

28 Okl., 641 P.2d 1106 [1982].

29 See 52 O.S.Supp. 1977 § 87.1 (b); Union Oil Co. of California v. Brown, supra note 28 at 1109-1110.

30 The pooled participants also cite Southern Union Production Co. v. Eason Oil Company, Okl.App., 540 P.2d 603 [1975], in support of their view that the effectiveness of the pooling order ended when the basic spacing order had been withdrawn by the establishment of a new drilling and spacing unit. The holding in Southern is limited to a situation where the unit well is non-productive. Moreover, Southern does not have precedential authority and we need not consider its effect upon existing jurisprudence.

31 These participants initiated the Commission pooling order which encouraged participation in the successful unit well.