NBI SERVICES, INC. v. CORPORATION COMMISSION OF STATE OF OKLA.

NBI SERVICES, INC. v. CORPORATION COMMISSION OF STATE OF OKLA.
2010 OK CIV APP 86
Case Number: 107452
Decided: 08/06/2010
Mandate Issued: 09/02/2010
DIVISION II
THE COURT OF CIVIL APPEALS OF THE STATE OF OKLAHOMA, DIVISION II

NBI SERVICES, INC., Appellant,
v.
THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA, composed of The Honorable Bob Anthony, Chairman, The Honorable Jeff Cloud, Vice Chairman, and The Honorable Dana L. Murphy, Commissioner; and DAVIS OPERATING CO., Appellees.

APPEAL FROM
THE OKLAHOMA CORPORATION COMMISSION

REVERSED AND REMANDED WITH INSTRUCTIONS

Gregory L. Mahaffey, Raven V. McNeal-Noumane, MAHAFFEY & GORE, P.C., Oklahoma City, Oklahoma, for Appellant
Michele Craig, Deputy General Counsel, OKLAHOMA CORPORATION COMMISSION, Office of General Counsel, Oklahoma City, Oklahoma, for Appellee The Corporation Commission of the State of Oklahoma
William H. Huffman, Jessie V. Pilgrim, LEVINSON, SMITH, & HUFFMAN, P.C., Tulsa, Oklahoma, for Appellee Davis Operating Co.

DEBORAH B. BARNES, JUDGE:

¶1 NBI Services, Inc. (NBI) appeals from the Oklahoma Corporation Commission's (the OCC) July 22, 2009, Pooling Order No. 569203 (Pooling Order),1 and the OCC's August 21, 2009, order denying NBI's "Motion to Re-Open, Motion to Stay and to Vacate [the Pooling Order]."2 The Pooling Order pooled common sources of supply in a drilling and spacing unit located in Pittsburg County, Oklahoma, of which appellee NBI and Davis Operating Co. (Davis) owned partial interests. In addition, the Pooling Order named Davis as the operator, and it ordered that any burden on the NBI interest exceeding a 1/4 total royalty be borne by NBI because NBI conveyed overrides in a "non-arm's-length" transaction in contemplation of the Pooling Order.

¶2 In the order denying NBI's "Motion to Re-Open, Motion to Stay and to Vacate [the Pooling Order]," the OCC "adopt[ed] the recommendation of the [r]eferee." The referee determined that, although a 1981 Joint Operating Agreement (the 1981 JOA) potentially rendered the Pooling Order invalid, only the district courts have the authority to determine whether all the interested parties are "covered by [the 1981 JOA] . . . ."3 Hence, the referee recommended that only a separate action brought in the district court could resolve the validity and scope of the 1981 JOA, and that NBI's motion be denied because the OCC does not have jurisdiction to make factual findings regarding the 1981 JOA in order to determine whether it affects the OCC's authority to have entered the Pooling Order.

¶3 Based on our review of the facts and law, we reverse the OCC's Order denying NBI's "Motion to Re-Open, Motion to Stay and to Vacate [the Pooling Order]," and remand this case to the OCC with instructions to reconsider NBI's motion and the Pooling Order in light of the 1981 JOA, and determine whether, and to what extent, the 1981 JOA affects the Pooling Order.

FACTS AND PROCEDURAL BACKGROUND

¶4 Pursuant to a prior order, Order No. 108707, the OCC spaced the subject property - a 640-acre drilling and spacing unit located in Pittsburg County, Oklahoma (the Spacing Unit).4 NBI is the operator of the Wilson Well in the Spacing Unit. The Wilson Well produces from the Cromwell formation. Davis acquired oil and gas rights in the Spacing Unit in 2007. Davis had drilled some wells in the Hartshorne formation in the Spacing Unit, and, in mid-2007, approached NBI concerning development of the Hartshorne formation in the Spacing Unit. According to Tony Benavides, a landman employed by Davis, NBI and Davis "had personal meetings in their office to discuss this and I thought we had something done and then all of a sudden it met with no avail, so I just indicated that we were going to pool it, which we did . . . ."5

¶5 On November 20, 2008, Davis filed a pooling application to drill a well to develop the common sources of supply underlying the Spacing Unit. Davis requested in its application that the OCC:

issue an Order pooling the interests as a unit and adjudicating the rights and equities of oil and gas owners in the [Lower Boggy (Bartlesville), Upper Savanna, Lower Savanna, Upper Booch, Middle Booch and Hartshorne] common source[s] of supply underlying [the Spacing Unit] all in accordance with

On December 9, 2008, counsel for NBI filed an "Entry of Appearance and Notice of Protest" in opposition to Davis's application.

¶6 Davis's pooling application was heard by an administrative law judge (the ALJ) on March 5, 2009, at the OCC. In Davis's brief in support of its application, and at the March 5 hearing, it argued that certain royalty overrides made by NBI to its affiliates do not qualify as arms-length transactions and have destroyed any value to the interest and have made development of the unit impossible for those owners outside of the NBI interest.

¶7 NBI appealed the ALJ's recommendations,

¶8 On July 22, 2009, the OCC issued the Pooling Order granting Davis's application and noting that the interest of NBI was subject to a "non-arm's-length overriding royalty that was made in contemplation of the pooling proceeding . . . ." In the Pooling Order, the OCC adopted the ALJ's recommendation that any burden on the NBI interest exceeding a total of 25% should be borne by NBI and not Davis.

¶9 NBI filed a "Motion to Re-Open, Motion to Stay and to Vacate [the Pooling Order]." In this motion, NBI states that it "has new evidence . . . that [a]ffects the standing of [Davis] to file this case and that [a]ffects the jurisdiction of [the OCC] to hear this case."

¶10 The OCC "adopt[ed] the recommendation of the [r]eferee" in its order denying NBI's "Motion to Re-Open, Motion to Stay and to Vacate [the Pooling Order]." The referee recommended that NBI's motion be denied because, according to the referee, the OCC does not have jurisdiction to make factual findings regarding the 1981 JOA in order to determine whether it invalidates the OCC's authority to have entered the Pooling Order.

¶11 From the Pooling Order, and from the OCC's Order denying its "Motion to Re-Open, Motion to Stay and to Vacate [the Pooling Order]," NBI appeals.

STANDARD OF REVIEW

¶12 "The [S]upreme [C]ourt has previously held that issues of the Corporation Commission's jurisdiction are questions of law, upon which appellate courts must make independent findings." Union Pacific Railroad Co. v. Oklahoma Corporation Commission,

ANALYSIS

¶13 NBI argues that the OCC erred in denying its "Motion to Re-Open, Motion to Stay and to Vacate [the Pooling Order]." It argues that "100% of the interest in the [Spacing] Unit was subject to the [1981] JOA," and, therefore, the OCC lacked jurisdiction to enter the Pooling Order.

¶14 Pursuant to

¶15 On the other hand, the OCC lacks jurisdiction over private rights. That is, the OCC "is without authority to hear and determine disputes between two or more private persons or entities in which the public interest is not involved." Rogers v. QuikTrip Corp.,

¶16 In Tenneco Oil Co. v. El Paso Natural Gas Co.,

¶17 This finding is in line with

When two or more separately owned tracts of land are embraced within an established spacing unit, or where there are undivided interests separately owned, or both such separately owned tracts and undivided interests embraced within such established spacing unit, the owners thereof may validly pool their interests and develop their lands as a unit. Where, however, such owners have not agreed to pool their interests and where one such separate owner has drilled or proposes to drill a well on said unit to the common source of supply, the [OCC], to avoid the drilling of unnecessary wells, or to protect correlative rights, shall, upon a proper application therefor and a hearing thereon, require such owners to pool and develop their lands in the spacing unit as a unit.

Therefore, a pooling applicant must establish that there is no agreement among the owners of the oil and gas rights for the development of the property. Only, among other things, "[w]here . . . [the] owners have not agreed to pool their interests" does the OCC have the authority to enter a forced pooling order. Id.

¶18 NBI claims that the 1981 JOA shows that all of the interest owners are subject to a private, voluntary agreement regarding the development of the Spacing Unit. Pursuant to the law set forth above, it is clear that NBI's claim regarding the 1981 JOA, if true, threatens the jurisdiction of the OCC to have entered the Pooling Order. Nevertheless, the OCC denied NBI's "Motion to Re-Open, Motion to Stay and to Vacate [the Pooling Order]" on the basis that only the district courts have the power to resolve the issue as to whether the 1981 JOA affects the jurisdiction of the OCC to have entered the Pooling Order. For the following reasons, we disagree.

¶19 "[The OCC], when exercising its adjudicative authority, is the functional analogue of a court of record with dispute resolution authority conferred by Constitutional grant." Van Horn Oil Co. v. Oklahoma Corporation Commission,

There can be absolutely no doubt of the [OCC's] legitimate claim to possession of adjudicative authority. When in individual proceedings it sits to hear and decide the issues before it, it acts, pursuant to Art. 9 § 19, Okl. Const., in the exercise of "powers and authority of a court of record". The role so constitutionally assigned to the [OCC] is entirely consistent both with Art. 4 § 1, Okl. Const., that provides for the separation of powers, as well as with Art. 7 § 1, Okl. Const., that vests judicial power in certain constitutionally-created or statutorily-established courts and tribunals.

Monson v. State of Oklahoma ex rel. Oklahoma Corporation Commission

¶20 If the OCC lacked the authority to determine whether the separate owners of a spacing unit are subject to a private agreement to pool their interests and develop that spacing unit, this would infringe upon the OCC's powers constitutionally and statutorily conferred upon it. It would hinder the OCC's ability to enter valid pooling orders because the OCC has the statutory authority to do so only "[w]here . . . [the] owners have not agreed to pool their interests . . . ."

¶21 Because the OCC did not determine whether, or to what extent, the 1981 JOA affects its jurisdiction, we decline to make this determination. It is not the duty of the appellate court on review to make first-instance determinations of disputed law or fact issues. Evers v. FSF Overlake Associates,

¶22 Because we remand this case to the OCC and decline to make first-instance findings on appeal, we deny NBI's motion to admit new evidence into the appellate record that purportedly helps prove the validity of the 1981 JOA. Furthermore, and in light of this Opinion, we need not address the remaining issues raised on appeal regarding whether the Pooling Order is sustained by the law and by substantial evidence.

CONCLUSION

¶23 For the reasons set forth above, we reverse and remand this case to the OCC to reconsider NBI's motion and the Pooling Order in light of the 1981 JOA, and determine whether, and to what extent, the 1981 JOA affects the Pooling Order.

¶24 REVERSED AND REMANDED WITH INSTRUCTIONS.

WISEMAN, C.J., and FISCHER, P.J., concur.

FOOTNOTES

1 Record (R.), p. 341.

2 R., p. 368.

3 R., p. 255.

4 The legal description of this property is Section 4, Township 6 North, Range 14 East, Pittsburg County, Oklahoma. In Davis's answer brief, p. 2, it asserts that this spacing order was entered by the OCC in 1974.

5 R., p. 37.

6 R., p. 272.

7 R., p. 297.

8 The ALJ recommended that the fair-market value options in lieu of participation should be: (a) a cash bonus of $150 per acre with a 23% royalty; or (b) no cash bonus with a 1/4th royalty; (2) that any party burdened in excess of 23% will be precluded from electing the highest cash bonus and royalty and must choose to either participate or take no cash bonus with a 1/4th royalty.

9 R., p. 299.

10 Id.

11 R., p. 306.

12 Specifically, NBI argued (1) that the ALJ's report "fails to protect the correlative rights or prevent waste of hydrocarbons," (2) that "[t]he ALJ erred in not sustaining [NBI's] objection to the economic testimony of [Davis's landman, Tony Benavides], that did not meet the Daubert test," (3) that the "evidence shows that a well will be economic at the reduced net revenue interest," and (4) that "[t]he ALJ erred in abrogating the private property rights of non-parties . . . by obliterating their overriding royalty interests." R., pp. 306-307.