Panhandle Eastern Pipeline Co. v. Corporation Commission of Oklahoma

715 F. Supp. 1055, 106 Oil & Gas Rep. 125, 1989 U.S. Dist. LEXIS 7559, 1989 WL 73483
CourtDistrict Court, W.D. Oklahoma
DecidedJune 13, 1989
DocketNo. CIV-88-1733-W
StatusPublished

This text of 715 F. Supp. 1055 (Panhandle Eastern Pipeline Co. v. Corporation Commission of Oklahoma) is published on Counsel Stack Legal Research, covering District Court, W.D. Oklahoma primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Panhandle Eastern Pipeline Co. v. Corporation Commission of Oklahoma, 715 F. Supp. 1055, 106 Oil & Gas Rep. 125, 1989 U.S. Dist. LEXIS 7559, 1989 WL 73483 (W.D. Okla. 1989).

Opinion

ORDER

LEE R. WEST, District Judge.

In the action before this Court, the Plaintiffs seek declaratory and permanent in-junctive relief to enjoin the Defendants, Oklahoma Corporation Commission and its Commissioners, from invoking the notice and protest provisions of 52 O.S. § 87.2 for the purpose of conducting increased density proceedings. Plaintiffs are operators of natural gas pipelines and are purchasers under numerous gas contracts entered into with various producer-sellers in Oklahoma. Under the terms of such contracts, plaintiffs purchased natural gas produced from certain wells, most of which are located on drilling and spacing units created by the orders of the Oklahoma Corporation Commission under the authority of 52 O.S. §§ 87.1-87.2.

Title 52 O.S. § 87.2, the Oklahoma statute regarding notice and protest of spacing units, including increased density proceedings, sets out who is entitled to notice and opportunity to be heard at increased density proceedings. Title 52 O.S. § 87.2 provides that owners of the mineral estate, or owners of the right to drill a well for oil and gas on the lands, or owners of correlative rights within the common source of supply are the proper parties to receive notice and to protest the applications to establish additional wells in increased density proceedings. Under said statute, operators of natural gas pipelines do not receive notice and opportunity to be heard at such proceedings. The statute does provide that other persons may be granted leave to intervene in such a proceeding based upon clear and convincing evidence that such persons have substantial rights which may be adversely affected by the outcome of the proceedings.

The issue to be answered by this Court is whether the contracts held by the operators of the natural gas pipelines create a constitutionally protected property interest such that the Fourteenth Amendment attaches, requiring notice and opportunity to be heard at increased density proceedings. The Court answers in the negative.

Increased density proceedings are concerned with the determination of whether to permit the drilling of an additional producer well in a specific zone. The operators of the natural gas pipelines may be adversely affected by increased density proceedings if increased production results which obligates the purchaser to either “take-or-pay.” Thus, the operators may suffer as a consequence a business loss, i.e., economic harm. Even in Fifth Amendment “taking” cases, consequential damages in the form of business losses and frustration or destruction of contracts resulting from lawful government action are not compensable. Omnia Commercial Company, Inc. v. United States, 261 U.S. 502, 43 S.Ct. 437, 67 L.Ed. 773 (1923); United States v. 677.50 Acres of Land in Marion County, Kansas, 420 F.2d 1136 (10th Cir.1970); J.A. Tobin Construction Co. v. United States, 343 F.2d 422 (10th Cir.1965), Stipe v. United States, 337 F.2d 818 (10th Cir.1964).

For purposes of this action, the Court received two representative contracts. The plaintiffs point out that these contracts create rights-of-way for building and use of pipelines, right of ingress and egress necessary to carry out the terms of the contract, and the right to all gas produced except for minimal amounts reserved by the seller. Plaintiffs assert that these incidents to the contracts create a property right in the mineral estate itself. The Court does not agree.

Increased density proceedings involve the application for an additional well to a specific zone to increase production. Such a proceeding does not affect rights-of-way or ingress and egress rights of the operators of the pipelines. Further, the fact that the operators executed contracts [1058]*1058to purchase virtually all gas produced through take-or-pay provisions does not elevate the contracts to the stature of an interest in the mineral estate itself. In United States v. 677.50 Acres in Marion County, Kansas, supra, the Court for the Tenth Circuit refused to elevate a pipeline’s division order contracts to an interest in the estate itself, notwithstanding the unique circumstances that the division order contracts were irrevocable for a period during which the mineral estate was condemned. Id. at 1136. Although the 677.50 Acres case is a “taking” case, the analysis by the Court for the Tenth Circuit to determine if a contract creates an interest in a mineral estate is applicable. The Court for the Tenth Circuit further notes that the division order contracts were concerned with the oil after it was severed from the mineral estate, thus incapable of creating an interest in the mineral estate itself. Id. In the case at bar, the gas is acquired by the operators of the pipelines at the point of delivery after the gas is produced. Therefore, by similar analysis, the subject contracts do not create an interest in the mineral estate itself. Finally, the Court for the Tenth Circuit observed that the division order contracts did not permit the pipelines to compel production or sue for waste. Id. These indices of ownership are similarly missing in the case at bar.

The operators of the pipelines assert that valid contracts are property interests, citing Lynch v. U.S., 292 U.S. 571, 54 S.Ct. 840, 78 L.Ed. 1434 (1934). The court in that case was concerned with the unilateral cancellation of insurance policies issued pursuant to the War Risk Insurance Act to World War I veterans. The court found that the “taking” of those contracts deprived the veterans of property without due process of law in violation of the Fifth Amendment. Said case is clearly distinguishable from the instant action at bar: the contracts in question have not been “taken,” nor has the issue been raised before this Court. Even if the issue had been raised, the “taking” argument would fail because no actual taking has occurred; merely frustration of the subject contracts has occurred. See United States v. 677.50 Acres of Land in Marion County, Kansas, supra.

The operators of the pipelines also assert that the Oklahoma statutory definition of “waste” creates a constitutionally protected property interest by obligating the operators of the pipelines to prevent said “waste.” While it is true that property interests may be created by independent sources such as state statutory law, Board of Regents of State Colleges v. Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 2709, 33 L.Ed.2d 548 (1972), this Court disagrees with the plaintiffs’ analysis that increased production under the subject contracts creates waste. This specific issue was examined by the Oklahoma Supreme Court in Golsen v. ONG Western, Inc., 756 P.2d 1209 (Okl.1988), where that court concluded that the take-or-pay purchase contracts were proof that a market existed for the producer, and therefore no waste occurred. This Court agrees.

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Related

Omnia Commercial Co. v. United States
261 U.S. 502 (Supreme Court, 1923)
Lynch v. United States
292 U.S. 571 (Supreme Court, 1934)
D. H. Overmyer Co., Inc. of Ohio v. Frick Co.
405 U.S. 174 (Supreme Court, 1972)
Board of Regents of State Colleges v. Roth
408 U.S. 564 (Supreme Court, 1972)
Gene Stipe v. United States
337 F.2d 818 (Tenth Circuit, 1964)
Golsen v. ONG Western, Inc.
756 P.2d 1209 (Supreme Court of Oklahoma, 1988)
J. A. Tobin Construction Co. v. United States
343 F.2d 422 (Tenth Circuit, 1965)

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Bluebook (online)
715 F. Supp. 1055, 106 Oil & Gas Rep. 125, 1989 U.S. Dist. LEXIS 7559, 1989 WL 73483, Counsel Stack Legal Research, https://law.counselstack.com/opinion/panhandle-eastern-pipeline-co-v-corporation-commission-of-oklahoma-okwd-1989.