Samson Resources Co. v. Corporation Commission

1985 OK 31, 702 P.2d 19, 1985 Okla. LEXIS 208

• Court: Supreme Court of Oklahoma
• Decided: April 23, 1985
• Docket: 60855
• Status: Published

Opinions

LAVENDER, Justice:

This Court is once again called upon to enquire into the question of the scope of respondent Oklahoma Corporation Commission’s jurisdiction over matters related to the development of oil and gas drilling operations. Petitioner, Samson Resources Company, contends that the Commission is attempting to exercise jurisdiction over an area of private contractual relationships. Respondents Commission and Tenneco Oil Company argue that the matter is within the Commission’s jurisdiction as it involves the shibboleth “correlative rights.”

This dispute came before the Commission on the application of respondent Tenneco seeking an order changing operator in the 640 acre drilling and spacing unit encompassing all of Section 15, Township 14 North, Range 26 West, Roger Mills County, Oklahoma. The spacing unit had been created by a prior Commission order. Ten-neco’s application alleged that a well had been drilled on the unit pursuant to a voluntary agreement for development entered into by all of those owning the right to drill in the unit.¹ Tenneco also alleged that petitioner, the unit well operator under the voluntary agreement, had operated the well to the detriment of the other interest holders. The application requested that the Commission designate Tenneco as unit operator, displacing petitioner.

A hearing was set on Tenneco’s application. Both Tenneco and petitioner presented arguments at that hearing concerning the Commission’s jurisdiction over the matter. The trial examiner referred the question to the Commissioners, who heard the arguments on the same day. Following this hearing the Commission issued an order finding that it had jurisdiction of the matter and remanding the cause to the trial examiner for hearing. On the day prior to this hearing, petitioner filed the present application and petition for writ in this Court. One day of hearing was held in the Commission prior to this Court’s issuance of an order staying proceedings below pending the decision on the application and petition for writ.

The transcripts of the hearings in this matter before the Commission and the exhibits introduced have been provided to this Court as part of petitioner’s original application and supplemental statement of facts. These exhibits include the documents establishing a contractual relationship between respondent Tenneco and petitioner regarding the development of the unit. Petitioner contends that this relationship is the basis of the dispute between the parties. Tenneco contends that, regardless of the relationship, petitioner’s actions affect “correlative rights” and thus bring the matter within Commission jurisdiction.

Tenneco alleges that petitioner has a greater interest in production from a well located in a unitized section also operated by petitioner which offsets Section 15. And that, as a result of this greater interest, petitioner has not operated the Section 15 unit well so as to obtain maximum production. Tenneco states that, as a result, the well in the offsetting section, which produces from the same formation as the Section 15 unit well, has drained possible production from Section 15, and that this necessitates the requested change of operators.

I.

In the recent case of Tenneco Oil Co. v. El Paso Natural Gas Co.,2 recognizing the limited nature of the Commission’s jurisdiction,³ we stated that the function to be served by the Commission under the statutes concerning oil and gas conservation,⁴ under which respondents now claim jurisdiction for the Commission, was to protect public rights in the development and production of oil and gas.⁵ This Court went on to state:⁶

This is not to say that the rights to produce the designated quantity of hydrocarbons from the well and the division thereof, the public interest, and the owner-operator interests are not the proper subject of a private contract. The limitation being always omnipresent is that no private contract or operating agreement may cause or grant a license to commit waste, or diminish correlative rights, control of which is exclusively within power of Corporation Commission. The Corporation Commission is a tribunal of limited jurisdiction, Burmah Oil & Gas Company v. Corporation Commission [541 P.2d 834 (Okla.1975)], supra, and Kingwood Oil Company v. Hall-Jones [396 P.2d 510 (Okla.1964) ], supra. Respective rights and obligations of parties are to be determined by the district court, Southern Union Production Company v. Corporation Commission, 465 P.2d 454 (Okla.1970). (Emphasis added) (Footnotes omitted)

In Tenneco we stated that the parties to a Commission forced pooling order could flesh out that arrangement through contract. And that the parties’ rights and obligations under the contract would be a matter for determination in the district courts, the proper forum for questions dealing with the respective rights of private parties.

The present case appears, even more clearly than Tenneco, to involve a question of private rights. The unit in this case had been developed under the auspices of a voluntary pooling agreement, clearly sanctioned by the terms of 52 O.S. 1981 § 87.1(e). Certain rights and obligations arose between the parties to this agreement.

A contractual relationship also arose between petitioner and respondent Tenneco under which Tenneco “farmed out” its interest in the unit to petitioner on condition that petitioner drill and operate the unit well. Part of the terms of this “farm out” were that, on pay out of the well, Tenneco would convert its overriding royalty interest reserved under the “farm out” to a working interest in one-half of the leases assigned to petitioner under the contract. Tenneco also agreed that at payout and conversion it would enter into an operating agreement recognizing petitioner as the unit operator.

Now, respondent Tenneco takes the position, shared by respondent Commission, that it is within the Corporation Commission’s jurisdiction to override these private contractual relationships on the assertion that the action of one of the parties has affected “correlative rights.” The recognized power and responsibility of the Commission to act to protect correlative rights must be interpreted, in light of our holding in Tenneco, to be confined to situations in which a conflict exists which actually affects such rights within a common source of supply and thus affects the public interest in the protection of production from that source as a whole. This Court adopted a definition of correlative rights in Kingwood Oil Co. v. Corporation Commission: ⁷

The term “correlative rights” has been defined as a convenient method of “indicating that each owner of land in a common source of supply of oil and gas has legal privileges as against other owners of land therein to take oil and gas therefrom by lawful operations conducted on his own land, limited, however, by duties to other owners not to injure the source of supply and by duties not to take an undue proportion of the oil and gas”. Summers, Oil and Gas, Vol. 1, Sec. 63.

In United Petroleum Exploration, Inc. v. Premier Resources, Ltd.,8 the United States District Court added a refinement in interpreting our definition which we have accepted in Tenneco,⁹

From this it can be seen that correlative rights are those rights which one owner possesses in a common source of supply in relation to those rights possessed by other owners in the same common source of supply. At this point, it must be emphasized that a common source of supply in which the owners of mineral interests possess correlative rights is the underlying geological strata from which the oil and gas is produced, rather than the well through which the oil and gas is reduced to possession. See, 52 Okla. Stat.1971 § 86.1(c).

It can thus be seen that the power to protect “correlative rights” is limited by definition and by the terms of the statute under which the Commission claims jurisdiction; 52 O.S. 1981 § 87.1. Under this statute the Commission properly exercises its power to protect correlative rights by the establishment of spacing units and the setting of allowable production. This allows protection of the public interest in orderly development and production of resources and the prevention of the drilling of unnecessary wells. The setting of al-lowables on production insures that no one party or parties take an undue proportion of the oil and gas.¹⁰

Section 87.1 provides two other avenues for the exercise of Commission jurisdiction over the public interest in correlative rights. To prevent drainage from offsetting production the Commission may allow additional well locations in a spacing unit. To prevent drainage and the concomitant waste occurring in a unit in which interest owners are not able to come to terms regarding voluntary development, the Commission is empowered, upon proper application, to order those interests pooled. This allows an orderly development of the common source of supply. Aside from the recognized power to monitor certain terms and conditions of the contract imposed on the parties through a forced pooling order,¹¹ no other powers to protect correlative rights are granted or implied by this statute.¹²

The relief requested by Tenneco in this case, the replacement of an operator designated under a voluntary pooling agreement in order to protect “correlative rights,” is clearly beyond the Commission’s conferred jurisdiction, as it concerns a dispute between private parties in which the public interest in correlative rights is not involved.¹³ The basis for Tenneco’s argument does not truly concern the disproportionate taking of gas from a common source of supply, as it has attempted to so characterize its argument. It appears from the materials before this Court that both wells in question being operated by petitioner are being produced within the allowables previously set by the Commission. As previously discussed, the setting of allowables in this instance is the proper Commission avenue to insure that no single party takes an undue share of production from a common source of supply.

Tenneco’s assertions, when reduced to essence, allege that petitioner is violating a perceived duty to operate the Section 15 unit in a good faith manner so as to achieve maximum benefits for all interest holders in the unit. As such, the purely private interest nature of the conflict is apparent. The resolution of such a conflict is clearly beyond the jurisdiction of the Commission. Therefore, the attempted exercise of jurisdiction by the Commission in this case must be prohibited.

II.

The lack of jurisdiction of this matter on the part of the Commission, however, does not preclude Tenneco from seeking relief in the proper forum. We have previously held that the status of unit operator confers a duty to operate the leaseholds as a unit and to safeguard the correlative rights of the various interest holders.¹⁴ Therefore, just as a mineral lessor has a right to enforce a lessee’s implied covenant to develop a lease as a prudent operator, which includes a duty to protect against drainage by the lessee’s other operations,¹⁵ an interest holder in a unitized section has a right to enforce the unit operator’s duty to conduct operations as a prudent operator.

However, the type of questions presented in an action of this nature; the relationship of the parties; their duties; their rights and obligations; and the existence of liability for the breach of such duties, are matters particularly within the province of the district courts. As the Commission lacks the power to entertain a suit for damages,¹⁶ the seeking of relief in that forum would be not efficacious.

III.

Original jurisdiction assumed. Writ of prohibition issued to prevent any further attempt by the Commission to exercise jurisdiction over cause C.D. No. 105048 regarding Tenneco’s application to be named unit operator of the Guenzel No. 1-15 Well in Section 15, Township 14 North, Range 26 West, Roger Mills County, Oklahoma.

SIMMS, C.J., DOOLIN, V.C.J., and HAR-GRAVE, WILSON and KAUGER, JJ., concur. SUMMERS, J., concurs in result. HODGES and OPALA, JJ., dissent.

1 . As will be discussed infra. Tenneco, at the time of the agreement, had contracted out its right to drill to petitioner and was thus not a party to the development agreement.

2 . 687 P.2d 1049 (Okla.1984).

3 . See also Merritt v. Corporation Commission, 438 P.2d 495 (Okla.1968), in which we stated in the Court’s first syllabus:

The Corporation Commission is a tribunal of limited jurisdiction and has only such jurisdiction and authority as is expressly or by necessary implication conferred upon it by the Constitution and statutes of this state.

4 . 52 O.S. 1981 §§ 81, et seq.

5 . 687 P.2d at 1052.

6 . 687 P.2d at 1053.

7 . 396 P.2d 1008, 1010 (Okla.1964).

8 . 511 F.Supp. 127 (W.D.Okla.1980).

9 . 687 P.2d at 1053 (footnote 11).

10 .See Corporation Commission v. Phillips Petroleum Co., 536 P.2d 1284, 1290, 1291 (Okla.1975).

11 . See Amarex, Inc. v. Baker, 655 P.2d 1040, 1045 (Okla.1982).

12 . See Merritt v. Corporation Commission, supra, at note 3.

13 . See Southern Union Production Co. v. Corporation Commission, 465 P.2d 454, 458 (Okla.1970), where we stated:

We have held that the Corporation Commission is without authority to hear and determine disputes between two or more private persons or entities in which' the public interest is not involved. Gibson v. Elmore City Telephone Co. (1966), Okl., 411 P.2d 551.

14 . Crest Resources and Exploration Corporation v. Corporation Commission, 617 P.2d 215, 218 (Okla.1980).

15 . See Dixon v. Anadarko Production Co., 505 P.2d 1394 (Okla.1972).

16 . Texas Oil and Gas Corporation v. Rein, 534 P.2d 1277, 1279 (Okla.1974); Kingwood Oil Co. v. Hall-Jones Oil Corp., 396 P.2d 510, 513 (Okla.1964).