Tenneco Oil Co. v. El Paso Natural Gas Co.

687 P.2d 1049

• Court: Supreme Court of Oklahoma
• Decided: October 10, 1984
• Docket: 53201
• Status: Published

Opinions

DOOLIN, Justice:

The cleavage within this Court, as demonstrated by this case, arises from deciding whether, after a forced-pooling order is issued by the Oklahoma Corporation Commission, the parties named as operator, and as electee or poolee, may contract between themselves to enlarge or otherwise define the terms set forth in the pooling order. Restated the question posed is this: may the interested parties to a forced-pooling order contract as to interests created, duties defined, terms of participation, operations, etc.?

. We hold they may.

A majority of this Court believes that such a contract is permissible, while the minority takes the view that such a voluntary contract is impermissible, an usurpation, and an attack on the public policy (police power) exercised by the Commission. Those who espouse the permissibility of the operating agreement believe that the forum to decide the rights and duties of the pooling order and its offspring, the operating agreement, is the traditional law or District Courts of Oklahoma. The opposing view would fix the forum for deciding such controversy within the framework of the Corporation Commission. Both opinions agree that the statutory power to administer the “conservation act” is fixed in the Corporation Commission of Oklahoma, 52 O.S.1981, § 81 et seq. and 17 O.S.1981, § 52.

The Constitution of Oklahoma provides in Art. IX, § 19 that the Corporation Commission shall have the power and authority of a Court of Record;¹ it may likewise punish for contempt, enforce its lawful orders, etc. Its power over oil and gas matters stems from statutory enactments (not mentioned in the Constitution) which of course must not be inconsistent with the constitutional provisions.

Without specifying, or further tracing the conservation act, suffice to say that the Corporation Commission is charged with enforcement of the conservation as to both oil and gas.²

This case began as one sounding in equity, a quiet-title action, filed by Tenneco Oil Company, a corporation (Tenneco), against El Paso Natural Gas Company, a corporation (El Paso), praying that the District Court of Roger Mills County, Oklahoma quiet Tenneco’s interest in certain oil and gas leases covering the party’s interest in Section 6, TWN 13 N, RN 24 West I.M., Roger Mills County, Oklahoma. Tenneco further asked for a decree judicially determining Tenneco’s right to participate in the operation of a producing well, together with other injunctive relief.³

Prior to filing suit in December of 1976, the Corporation Commission, pursuant to 52 O.S.1971, § 87.1, had established a drilling and spacing unit of 640 acres for gas and gas condensate from certain common sources of supply underlying Section 6, TWN 13 N, RN 24 West I.M., Roger Mills County. Thereafter the Corporation Commission force-pooled the interest of Tenne-co and El Paso by order dated May 9,1977. Title 52 O.S.1971, § 87.1(d) [presently 52 O.S.1981, § 87.1(e) ] provides in part:

“... 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 Commission, 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 ...” (Emphasis supplied).

Both Tenneco and El Paso sought to be named the unit operator.

By the order described aforesaid, Tenne-co was designated as operator of the unit; however, if Tenneco did not commence operations for drilling within 90 days from May 9, 1977, then El Paso should become the operator. Paragraph 9, infra.

The forced-pooling order further provided for payment of a cash bonus of $175.00 per acre plus an overriding royalty of Vie of Vs on oil and Vs of 7s on gas if a party did not participate.⁴

Paragraph 9 of the pooling order provided:

“That in the event a party has elected to participate in the drilling of the unit well and has paid to Tenneco Oil Company in cash (or has furnished Tenneco Oil Company evidence of such party’s ability to pay) its pro rata share of the cost of drilling the unit well, and if Tenneco Oil Company fails to commence operations for drilling the unit well within 90 days from the date of this order, then Tenneco Oil Company shall immediately pay over to El Paso Natural Gas Company such cash payments, or deliver to El Paso Natural Gas Company the evidence of such party’s ability to pay. In the event El Paso Natural Gas Company becomes unit operator, Tenneco Oil Company shall have 15 days (beginning with the first day when El Paso Natural Gas Company becomes the operator) to elect whether to participate in the working interest of the proposed well and shall have five days thereafter within which to pay to El Paso Natural Gas Company (or furnish to El Paso Natural Gas Company satisfactory evidence of its ability to pay) its proportionate part of the cost thereof.”

Tenneco was unable to meet the drilling commencement deadline of 90 days and notified El Paso on July 21, 1977, or July 22, 1977,⁵ by telephone, later confirmed by letter dated July 27, 1977.

Chronologically the next step was that El Paso sent Tenneco an executed operator’s agreement on August 11, 1977. Tenneco did not immediately sign the operator’s agreement but did so on September 6,1977, and mailed same to El Paso who received it on September 7, 1977.

Meanwhile El Paso, by letter dated August 31, 1977, tendered the cash bonus to Tenneco under the Corporation Commission forced-pooling order, which Tenneco returned. Thereafter Tenneco brought its action against El Paso on November 8, 1977⁶ in the District Court of Roger Mills County.

The trial court on November 12, 1978 granted judgment in favor of Tenneco, finding the operating agreement modified the forced-pooling order of the Corporation Commission and holding that. Tenneco was entitled to its proportional production based on its ownership of leases within the 640 acre spacing. In due course a timely appeal was effected by El Paso and by an opinion rendered October 19, 1982,⁷ we reversed the Court of Appeals with directions to dismiss Tenneco’s cause of action for want of subject-matter jurisdiction.

By this opinion granting rehearing, we vacate the previous opinion of this Court and affirm the action of the trial court.

There can be little doubt that questions as to jurisdiction may be raised at any time by the parties and by the Court on its own motion.⁸ The same rule applies to orders and decrees of the Oklahoma Corporation Commission.⁹ In Dickson v. Dickson, 637 P.2d 110 (Okla.1981) we cited Hawkins v. Hurst, 467 P.2d 159 (Okla. 1970) holding the Supreme Court of Oklahoma must inquire into its own jurisdiction as well as the jurisdiction of the trial court, whether or not raised by á party.

We are critical and condemn the use of the word “modify,” a derivative, or synonym thereof, as used in the trial court’s journal entry of 'judgment when describing the effect of the operator’s agreement on the order of the Commission within the purpose of the conservation act. The purpose of 87 O.S.1981, § 81 et seq. is contained in the title given to the chapter in its codification. It is codified as an act whose purpose is the conservation of oil and gas and the duty fixed thereby is entrusted to the Corporation Commission. We have held many times that the Commission is a constitutional body possessed of executive, legislative and judicial powers. The statutes provide that the Commission shall prohibit and control waste and shall protect correlative rights. The rationale behind such duty is that the Corporation Commission shall look after the rights of the body politic.

At the risk of oversimplification, we hold the enactments for the conservation of oil and gas are public in nature and that the spacing order, the pooling order, and the order fixing allowables, to name but a few of its functions, are within the realm of the public rights to be protected. Thus, the spacing order sets the stage for development and guards the public interest in developing an orderly and judicious drilling program. It is aimed at protecting the interest of all, by the prohibitions against waste. The forced-pooling order, among other things, represents the interest of consumers and mineral interests and disallows the “dog in the manger” attitude, which would deny economic development.

In an economy of scarcity, a body such as Oklahoma Corporation Commission serves well.

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,¹⁰ or diminish correlative rights,¹¹ control of which is exclusively within power of Corporation Commission.¹² The Corporation Commission is a tribunal of limited jurisdiction, Burmah Oil & Gas Company v. Corporation Commission, supra, and Kingwood Oil Company v. Hall-Jones, 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).

The conflict or dichotomy as to subject-matter jurisdiction between Courts and Administrative Agencies has not been perfectly defined, by any Court; however, recently the Supreme Court in Northern Pipeline Company v. Marathon Pipeline, 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), dealt with the matter as public versus private rights. It held:

“This doctrine may be explained in part by reference to the traditional principle of sovereign immunity, which recognizes that the Government may'attach conditions to its consent to be sued. But the public-rights doctrine also draws upon the principle of separation of powers, and an historical understanding that certain prerogatives were reserved to the political branches of government. The doctrine extends only to matters arising ‘between the Government and persons subject to its authority in connection with the performance of the constitutional functions of the executive or legislative departments,’ and only to matters that historically could have been determined exclusively by those departments. The understanding of these cases is that the Framers expected that Congress would be free to commit such matters completely to nonjudicial executive determination, and that as a result there can be no constitutional objection to Congress’ employing the less drastic expedient of committing their determination to a legislative court or an administrative agency.

The public-rights doctrine is grounded in a historically recognized distinction between matters that could be conclusively determined by the Executive and Legislative Branches and matters that are ‘inherently ... judicial.’

The distinction between public rights and private rights has not been definitively explained in our precedents. Nor is it necessary to do so in the present case, for it suffices to observe that a matter of public rights must at a minimum arise ‘between the government and others.’ In contrast, ‘the liability of one individual to another under the law as defined,’ is a matter of private rights. Our precedents clearly establish that only controversies in the former category may be removed from Art. Ill courts and delegated legislative courts or administrative agencies for their determination. Private-rights disputes, on the other hand, lie at the core of the historically recognized judicial power. ” (Emphasis supplied).

Northern v. Marathon, supra, arose after Northern had applied for reorganization under the bankruptcy court. Northern filed proceedings in that court against Marathon for damages arising from breach of contract, warranty, misrepresentation and coercion. Marathon sought dismissal on grounds that only Art. Ill Judges (those judges possessing life tenure and protection against diminution of salary) could hear such matter and the attempted delegation of power to the bankruptcy court was unconstitutional. The Supreme Court observed in part:

“... the restructuring of debtor-creditor relations, which is the core of the federal bankruptcy power, must be distinguished from the adjudication of ... private rights such as the right to recover contract damages that is the issue in this case ...”

Although admittedly Tenneco did not seek damages, the relief sought was equitable and private in nature and was not an attack upon the public rights function of the Corporation Commission, i.e., to regulate and administer the conservational laws and policies of the sovereign state.

Custom and usage, as those terms are legally understood, is not the basis for our holding. We are extremely doubtful that custom and usage may decide a forum, confer jurisdiction, or define private versus public-rights issues. “Custom or usage repugnant to expressed provisions of statute is void.”¹³

No amount of custom or usage can change the constitutional¹⁴ status and powers of the district courts or the constitutional and statutory powers of the Corporation Commission.¹⁵

What has approached custom is the practice within the industry (oil and gas) to refine, broaden, and specify duties between pooled interests in a spacing unit to provide specific rights and obligations between the parties. Without attempting to limit or list all such areas covered by operating agreement, and by way of examples, we mention: procedures for payment, methods of accounting, liabilities of parties, regulations of expenditures, procedures for default, etc. Particularly within the realm of costs and payment, the operating agreement may substitute and approve a farm-out agreement as a method of division and may define the interests of such parties, giving one the working interest and the other royalty.

It is likewise common within the industry for the pooling agreement to be in existence and executed between some of the parties interested in the common source of supply and not executed by a “forced party.” The forced-party’s interest, of course, comes into existence after the forced pooling order is issued, and invariably at a later date than the voluntary agreement between parties.¹⁶ The forced-pooling order does not usually address such items as percentage of the interests owned by the parties, costs as to title examination or insurance, failure of title, successive operators by resignation, not to mention taxes, waiver or non-waiver of partition rights, etc.

In short, the forced-pooling order generally, and specifically in this case, is “bare bones”; many, many problems commonly encountered in the industry must be and were covered by an operating agreement.

At the fear of being repetitious, we repeat: no attempt is made by any party in the instant case to change or challenge the public issue of conservation of oil and gas; all items in the operating agreement are private and thus properly presented to the district court.

El Paso asks us to declare and hold that the evidence necessary to establish an election under the forced-pooling order issued by the Corporation Commission should be “clear and convincing,” rather than the lesser requirement applied herein by the district court of a “mere preponderance.” It points out that the precise point as to the nature of the burden of proof necessarily assumed by Tenneeo in this case has not been defined by this Court. We are disinclined to assign a “clear and convincing” standard of proof under forced-pooling orders, under the circumstances of this case.

Heretofore we have required that in adverse possession matters, the elements necessary to establish adverse possession must be established by clear and positive proof.¹⁷ Likewise such a standard is required for reformation of a written instrument (oil and gas lease).¹⁸

The Supreme Court of Idaho in Lynch v. Cheney, 561 P.2d 380 (Idaho 1977), has correctly observed at pg. 385:

“The rationale for a ‘clear and convincing’ evidentary standard rests in the value the law places on the integrity of a formal writing.”

Lynch v. Cheney, supra, concerned itself with an allegation that a wife had agreed orally to cancel arrearages on a written judgment.

When we analyze the evidence and issues in the instant case, we are immediately struck and observe that Tenneeo, the party which must bear the burden of quieting its title, does not challenge the sanctity or integrity of a written judgment, order or instrument. At issue is the meaning of provisions in the forced-pooling order dealing with election, such as, “the owners should be required to elect,” “and in the event that such ... owners do not make such election ...” and ... “in the event a party has elected,” to cite examples.

It cannot be argued successfully or established by .the evidence that the forced-pooling order issued herein requires a written notice of election, or any given method for that matter. An election can be written, oral, by estoppel, or according to statute, rule, or regulation, to name but a few methods. Such a fact (election), an element of Tenneco’s proof in the quiet title action, must be proved by a preponderance of the evidence. Tenneeo simply states it made an election under the Commission order; it does not challenge, attack, or seek to interpret such order. Neither can the Corporation Commission be faulted. It knows that hundreds of the owners of mineral estates or interests who are subject to pooling or spacing orders are relatively unsophisticated and may not possess knowledge, experience, or expertise enough to make a formal election.

Lastly, we concern ourselves with the standard of review to be applied by the appellate courts to matters of equity. There is no doubt this Court must examine the evidence and determine if the trial court’s judgment is clearly against the weight of same. If the judgment is not clearly against the weight of the evidence, then we should affirm.¹⁹

We have carefully weighed the evidence herein and, although conflicting, find the judgment rendered not clearly against the weight of the evidence.²⁰

Neither is the evidence contrary to law or established principles of equity;²¹ nor do grounds for reversal exist when it is possible to draw another conclusion.²²

Opinion of this Court dated October 19, 1982, vacated; rehearing granted; trial court affirmed.²³

SIMMS, V.C.J., and LAVENDER, HAR-GRAVE, ALMA WILSON and KAUGER, JJ., concur. BARNES, C.J., and OPALA and HODGES, JJ., dissent.

1 . It is a tribunal of limited jurisdiction, Burmah Oil & Gas Company v. Corporation Commission, 541 P.2d 834 (Okla.1975); Kingwood Oil Company v. Hall-Jones Oil Corporation, 396 P.2d 510 (Okla.1964).

2 . Oil, 52 O.S. 1981, § 276; gas, 52 O.S. 1981, 241.

3 . Injunctive relief as prayed for is not an issue dealt with in this opinion.

4 . Cost of drilling completion and equiping was estimated by the order at $2,389,200.00.

Paragraph 8 of forced-pooling order required an election within 15 days of its date, May 9, 1977, by all parties who owned an interest in the premises. It was assumed that if an owner made no election, then he had effected an election to accept the cash bonus and overriding royalty interests in lieu of participation.

Payment of the estimated cost by such an electee was due 20 days from the date of May 9, 1977.

5 .Tenneco alleged and presented evidence that on this date it notified El Paso of its election to participate which was hotly contested by El Paso. On August 4 or 5, 1977, El Paso moved onto Section 6 and commenced operations toward drilling.

6 . El Paso brought in a producer after the suit was filed.

7 . Tenneco Co. v. El Paso Natural Gas Company, 53 OBJ 2476, 2481 (1982).

8 . Durham v. Sharum, 203 Okl. 426, 222 P.2d 1029 (1950); Wright v. Kemper, 137 Okl. 259, 279 P. 346 (1929).

9 .Woods Petroleum Corporation v. Sledge, 632 P.2d 393 (Okla.1981) citing Wright v. Kemper, supra; Application of Central Oklahoma Milk Producers Association, 312 P.2d 500 (Okla.1957), a Corporation Commission case.

10 . For definition of waste: oil, 52 O.S. 1981, § 86.2; gas, 52 O.S. 1981, 86.3.

11 . United Petroleum Exploration, Inc. v. Premier Resources, Ltd., 511 F.Supp. 127 (W.D.Okla. 1980):

"... 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 [which 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 also

Kingwood Oil Company v. Hall-Jones, supra. "Basis for enactment for state’s oil and gas conservation laws is to protect correlative rights. Inexco Oil Company v. Corporation Commission, Oklahoma, 628 P.2d 362 (1981).”

12 . Cabot Carbon Company v. Phillips Petroleum Company, 287 P.2d 675 (Okla.1955); Southern Union Production Company v. Corporation Commission, 465 P.2d 454, 457 (Okla.1970).

13 . Okla. N.M. & P. Ry. Company v. Downey, 116 Okl. 253, 244 P. 173 (1926).

14 . Art. VII, § 1.

15 . Art. IX, § 18 et seq., 17 O.S. 1981, § 51, et seq.; 52 O.S. 1981, § 81, et seq.

16 .If a strict enforcement of a public-rights approach is made, this may lead those parties forced to pool with a forum in the Corporation Commission and those parties voluntarily pooling with a private contract enforced by the district court. What would be the forum of a dispute between a forced party and a voluntary party?

17 . Pavlovitch v. Wommack, 206 Okl. 158, 241 P.2d 1119 (1952); Rodgers v. International Land Co., 111 Okl. 98, 238 P. 407 (1924).

18 . Davis v. Keeche Oil & Gas Company, 89 Okl. 226, 214 P. 711 (1923). Same standard as to establish a constructive trust, Hayden v. Dannenberg, 42 Okl. 776, 143 P. 859 (1914).

19 . Caywood v. January, 455 P.2d 49 (Okla.1969), it is "well settled that a quiet title action is an action of equitable cognizance. The judgment of the trial court in an action of equitable cognizance will not be disturbed on appeal unless it is clearly against the weight of evidence citing Priddy v. Shires, 204 Okl. 664, 233 P.2d 298 (1951); Tenneco Oil Company v. Humble Oil & Refining Company, 449 P.2d 264 (Okla.1969) and Moree v. Moree, 371 P.2d 719 (Okla.1962).

20 . Fry v. Hurst, 293 P.2d 552 (Okla.1956), "where evidence in a quiet title action was conflicting a judgment of the trial court was not against its clear weight, court on appeal would not reverse judgment quieting title ... (case concerning a mineral reservation).

21 . Story v. Hefner, 540 P.2d 562 (Okla.1975); Mayfair Building Company v. S & L Enterprises, Inc., 483 P.2d 1137 (Okla.1971).

22 . Rivers v. Parker, 382 P.2d 16 (Okla.1963) and Brown v. Greever, 379 P.2d 689 (Okla.1963).

23 . Insofar as Chancellor v. Tenneco Oil Company, 653 P.2d 204 (Okla.1982) is in conflict herewith same is expressly overruled.