BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA AUG & CIMAREX ENERGY CO. UNIT PETROLEUM COMPANY

Transcription

1 APPLICANT: BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA AUG & CIMAREX ENERGY CO. D L E 3 "012 COURT CLLRIfl OFFICE cerkaflon COMMI CM OF OKLAHOMA RELIEF SOUGHT: CLARIFICATION, CAUSE CD NO. CONSTRUCTION, AND/OR INTERPRETATION OF SPACING ORDER NO LEGAL DESCRIPTION: SECTION 16, TOWNSHIP 14 NORTH, RANGE 15 WEST, CUSTER COUNTY, OKLAHOMA APPLICANT: UNIT PETROLEUM COMPANY RELIEF SOUGHT: CLARIFICATION, CAUSE CD NO. CONSTRUCTION, AND/OR INTERPRETATION OF SPACING ORDER NO LEGAL DESCRIPTION: SECTION 9, TOWNSHIP 5 NORTH, RANGE 20 EAST, LATIMER COUNTY, OKLAHOMA APPLICANT: NEW DOMINION, LLC RELIEF SOUGHT: CONSTRUCTION AND/OR CAUSE CD NO. CLARIFICATION OF SPACING T ORDER NO LEGAL DESCRIPTION: N/2 SW/4 OF SECTION 28, TOWNSHIP 25 NORTH, RANGE 1 WEST, KAY COUNTY, OKLAHOMA

2 APPLICANT: RANGE PRODUCTION COMPANY RELIEF SOUGHT: LEGAL DESCRIPTION APPLICANT: CLARIFY, CONSTRUE, AND/OR INTERPRET SPACING ORDER NO SECTION 29, TOWNSHIP 5 SOUTH, RANGE 6 EAST, MARSHALL COUNTY, OKLAHOMA RANGE PRODUCTION COMPANY CAUSE CD NO RELIEF SOUGHT: CLARIFY, CONSTRUE, AND/OR INTERPRET SPACING ORDER NO CAUSE CD NO LEGAL DESCRIPTION: S/2 NE/4 OF SECTION 29, TOWNSHIP 25 NORTH, RANGE 1 WEST, KAY COUNTY, OKLAHOMA APPLICANT: RANGE PRODUCTION COMPANY RELIEF SOUGHT: CLARIFY, CONSTRUE, AND/OR CAUSE CD NO. INTERPRET SPACING ORDER NO LEGAL DESCRIPTION: N/2 SW/4 OF SECTION 28, TOWNSHIP 25 NORTH, RANGE 1 WEST, KAY COUNTY, OKLAHOMA Page 2

3 REPORT OF THE ADMINISTRATIVE LAW JUDGE IN RESPONSE TO THE MOTIONS TO DISMISS These captioned causes came on for hearing before David Leavitt, Administrative Law Judge ("AU") for the Corporation Commission, on the 24th day of April, 2012, for the purpose of hearing the Motions to Dismiss. SUMMARY OF THE CAUSE This cause springs forth from a dispute between four operators, Cimarex Energy Co. ("Cimarex"), Unit Petroleum Company ("Unit"), New Dominion, LLC ("New Dominion") and Range Production Company ("Range"), and their respective royalty owners and lessors, over the distribution of royalties derived from production in wells that were drilled by the operators. The issues before the Commission are the intent and meaning of the spacing orders that established the drilling and spacing units under which the operators drilled the wells and whether the Commission has jurisdiction to clarify and interpret the spacing orders with respect to fiduciary duties and royalty obligations. Cimarex currently operates a well in Custer County, Oklahoma that it drilled under a spacing order issued by the Commission in The dispute arose between Cimarex and certain royalty owners over the distribution of proceeds from the well and the clarification, construction and interpretation of the spacing order. The dispute evolved into lawsuits filed in state and federal court where the intent and meaning of the spacing order became an issue. Cimarex subsequently filed an Application asking the Commission to clarify, construe and interpret the spacing order to determine whether the intent and meaning of the order were to impose royalty obligations upon operators, working interest owners and any other designated payors of royalties. Unit operates wells in Latimer County, Oklahoma that it drilled under a spacing order issued by the Commission in The dispute arose between Unit and certain royalty owners over the distribution of proceeds from the wells and the clarification, construction and interpretation of the spacing order. This dispute led to a lawsuit filed in state court where the intent of the spacing order became an issue. Unit subsequently filed an Application asking the Commission to clarify, construe and interpret the spacing order to determine whether the intent and meaning of the order were to impose royalty obligations upon operators, working interest owners and any other designated payors of royalties. New Dominion operates a well in Seminole County, Oklahoma that it drilled under a spacing order issued by the Commission. The dispute arose between New Dominion and certain mineral interest owners or lessors over the distribution of proceeds from the well and the clarification, construction and interpretation of the order. The dispute led to a class action lawsuit filed in state court where the intent and meaning of the spacing order became an issue. New Dominion Page 3

4 subsequently filed an Application asking the Commission to clarify, construe and interpret the spacing order to determine whether the intent and meaning of the order were to create, modify, or amend the legal rights of the royalty owners with respect to marketing or royalty obligations on the part of the operator. Range operates wells in Marshall and Kay Counties, Oklahoma that it drilled under three separate spacing orders issued by the Commission. The dispute arose between Range and certain mineral interest owners over the distribution of proceeds from the well and the clarification, construction and interpretation of the spacing orders. The dispute led to a class action lawsuit filed in state court where the intent and meaning of the spacing orders became an issue. New Dominion subsequently filed an Application asking the Commission to clarify, construe and interpret the spacing orders to determine whether the intent and meaning of the order were to impose duties with respect to royalty obligations, or a covenant or duty to market or to place gas in a marketable condition without costs to royalty owners, upon the operators or working interest owners. The royalty owners and lessors ("Movants") protested the Applications, contending that the Commission lacks jurisdiction to determine the legal effect of the spacing orders, arguing that such issues involving royalty obligations comprise private rights between private parties that are under the exclusive jurisdiction of the district courts. The six Applications were consolidated by the Commission and the Movants filed Motions to Dismiss. Subsequently, responses were filed by the Applicants and reply briefs were filed by some of the Movants and a hearing on the Motions to Dismiss was heard. The ALJ took the cause under advisement after receiving the transcript on May 18, 2012 and issued his report. RECOMMENDATIONS After hearing the arguments of counsel and considering all the facts, evidence and testimony presented in the captioned causes, the ALJ recommends that the Motions to Dismiss be granted. APPEARANCES At the time of the hearing Richard K. Books, attorney, appeared on behalf of Applicants Range and the Oklahoma Independent Petroleum Association ("OIPA"); Dale E. Cottingham and Russell James Walker, attorneys, appeared on behalf of Applicant Cimarex; Dale E. Cottingham, Paula Williams and Mark E. Schell, attorneys, appeared on behalf of Applicant Unit; Ron M. Barnes and Kevin Hayes, attorneys, appeared on behalf of Applicant New Dominion; John A. Mackecimie, Robert G. Gum, Bradley D. Brickell and Timothy J, Prentice, attorneys, appeared on behalf of Movants Roy J. Reynolds et al, a state-wide putative class of royalty owners or lessors, Jane Kallis, as Trustee of William Ross Cabeen and Wendy Cabeen Trust, Danny Vandergriff, James W. Jones, First United Methodist Church of Alabama and Cheryl Jean Booth Page 4

5 Palmer ("Reynolds"); Gregory L. Mahaffey, Terry J. Barker and Douglas G. Dry, attorneys, appeared on behalf of Movants Juanita Golightly, Panola Independent School District No. 4, Michael Kilpatrick, Gwen Grego, Carla Lessel, Thelma Christine Pate, Melody Culberson and Charlotte Abernathy ("Golightly"); Rex Sharp, Joseph Woltz and Gregory L. Mahaffey, attorneys, appeared on behalf of Movants David D. Duncan, The Duncan Group, LLC, Nancy Beth Archer and Vicki Lynn Stone ("Duncan"); Robert N. Barnes, Patranell Britten Lewis, Kerry W. Caywood and Bradley E. Beckworth, attorneys, appeared on behalf of Movants Little Land Company, LP, James A Drummond, Chris Parrish and a state-wide putative class of royalty owners ("Little Land"); and Terry L. Stowers and Douglas E. Burns, attorneys, appeared on behalf of the Coalition of Oklahoma Surface and Mineral Owners ("COSMO"). JURISDICTION The Commission has jurisdiction over a determination of the Motion and notice has been given in all respects as required by law and the rules of the Commission.' SUMMARY OF THE EVIDENCE AND THE ARGUMENTS 1. On December 27, 1972, the Commission issued Order No creating a 640-acre drilling and spacing unit covering the Morrow common source of supply underlying Section 16, Township 14 North, Range 15 West, Custer County, Oklahoma. 2. On February 5, 2008, Cimarex completed the Clarence Duncan No Well in the Morrow on the unit in Section 16 and the Morrow was productive of gas. Cimarex currently operates the well. 3. Since that time, a dispute arose between Cimarex and certain royalty owners over the distribution of proceeds from the well and the clarification, construction and interpretation of the spacing order. The dispute led to lawsuits filed in state and federal court One royalty owner group, Duncan, alleged in their suit that the order imposed a duty on Cimarex to place gas in a marketable condition, without cost to royalty owners, and that the imposed duty is similar to the implied covenant to market found in a typical oil and gas lease. 5. Cimarex responded that the meaning of the order on this point is not clear and that the Commission has jurisdiction to decide this issue. 'See 17 O.S See, for example, Hitch Enterprises, Inc. v. Cimarex Energy Co., No. 11-CV-13-W filed in the United States District Court for the Western District of Oklahoma. Page 5

6 6. On July 29, 2011, Cimarex filed its Application asking the Commission to clarify, construe and interpret the order: 1) to determine if, apart from any proportionate reductions of royalty, the Commission intended the entry of the order to modify, amend, or otherwise have any controlling implications with respect to royalty obligations - on the part of the operator, other working interest owners, or any designated payors of royalties - upon production from any well subject to the order; and 2) if the Commission intended the entry of the order to modify, amend or otherwise have any controlling implications with respect to royalty obligations, to determine the language within the order that addresses any resulting royalty obligations. 7. On July 16, 1982, the Commission issued Order No creating a 640-acre drilling and spacing unit covering the Upper Atoka and Lower Atoka common sources of supply underlying Section 9, Township 5 North, Range 20 East, Latimer County, Oklahoma. 8. Unit subsequently completed the Golightly No. 1 Well, the Golightly No. 2 Well, the Golightly No. 3 Well and the Golightly No. 4 Well in the Lower Atoka on the unit in Section 9 and the Lower Atoka was productive of gas. Unit currently operates the wells. 9. Since that time, a dispute arose between Unit and certain royalty owners over the distribution of proceeds from the wells and the clarification, construction and interpretation of the spacing order. The dispute led to a lawsuit filed in state court One royalty owner group, Golightly, alleged in their suit that the order imposed a duty on Unit to place gas in a marketable condition, without cost to royalty owners, and that the imposed duty is similar to the implied covenant to market found in a typical oil and gas lease. 11. Unit responded that the meaning of the order on this point is not clear and that the Commission has jurisdiction to decide this issue. 12. On August 3, 2011, Unit filed its Application asking the Commission to clarify, construe and interpret the order: 1) to determine if, apart from any proportionate reductions of royalty, the Commission intended the entry of the order to modify, amend, or otherwise have any controlling implications with respect to royalty obligations - on the part of the operator, other working interest owners, or any designated payors of royalties - upon production from any well subject to the order; and 2) if the Commission intended the entry of the order to modify, amend or otherwise have any controlling implications with respect to royalty obligations, to determine the language within the order that addresses any resulting royalty obligations. See Panola v. Unit, Case No. CJ filed in the District Court of Latimer County, Oklahoma. Page 6

7 13. On November 1, 2006, the Commission issued Order No creating a 320-acre laydown drilling and spacing unit covering the Misener-Hunton common source of supply underlying the N/2 of Section 8, Township 10 North, Range 6 East, Seminole County, Oklahoma. 14. On or about February 5, 2008, New Dominion completed the Blocker 1-8H Well in the Misener-Hunton on the unit in Section 8 and the Misener-Hunton was productive of gas. New Dominion currently operates the well. 15. Since that time, a dispute arose between New Dominion and certain mineral interest owners or lessors over the distribution of proceeds from the well and the clarification, construction and interpretation of the spacing order. The dispute led to a class action lawsuit filed in state court One lessor and mineral owners group, Reynolds, contended in their suit that the spacing order imposed a fiduciary duty on New Dominion in favor of all royalty owners in the unit to place gas in a marketable condition, without cost to royalty owners, and to market gas on behalf of and pay royalties to all royalty owners in the unit. Reynolds further contended that a fiduciary duty to place all unit gas in a marketable condition and to market unit gas and pay royalties was imposed as a matter of law on New Dominion as a result of the issuance of the order because the spacing order is a resort to the police power of the state which alters and amends existing legal rights. 17. New Dominion responded that the meaning of the order with respect to the fiduciary duties of operators is not clear and that the Commission has jurisdiction to decide this issue. 18. On August 3, 2011, New Dominion filed its Application asking the Commission to clarify, construe and interpret the order: 1) to determine if, apart from any communitization of royalty such that all royalty owners in the unit are entitled to royalty on a proportionate share of all gas marketed and all oil produced by all working interest owners, and payment obligations "See Jack Mattingly, et al. v. Equal Energy, et al. (including New Dominion, LLC), D. C. of Creek County, B-CJ filed in the District Court for Creek County, Oklahoma. New Dominion pointed out that Order No affected the rights and obligations of the royalty owners, the operator and other working interest owners in the unit created by the spacing order in the following manner: (1) pursuant to 52 U.S. Section 87.1(e), each royalty interest owner owning a royalty interest in the unit became entitled to share in all production from the unit from the well or wells drilled within the unit to the extent of such royalty interest owner's interest in the unit, and (2) pursuant to the provisions of the Oklahoma Production Revenue Standards Act, 52 U.S. Sections through ("PRSA"), the operator and all other working interest owners in the unit became obligated to pay royalties to all royalty interest owners in the unit in accordance with the provisions of the PRSA. Page 7

8 imposed upon the working interest owners in the unit pursuant to the terms of individual oil and gas leases and the provisions of the Oklahoma Production Revenue Standards Act ("PRSA"), the Commission intended the entry of the order to create, modify, or amend the legal rights of the royalty owners with respect to marketing or royalty obligations on the part of the operator; and 2) if the Commission intended the entry of the order to create, modify, or amend legal rights of royalty owners with respect to marketing or royalty obligations imposed upon the Applicant operator, to determine the language within the order that addresses any resulting marketing or royalty obligations. 19. On May 20, 2010, the Commission issued Order No creating a 640-acre drilling and spacing unit covering the Caney, Sycamore, Woodford and Hunton common sources of supply underlying Section 29, Township 5 South, Range 6 East, Marshall County, Oklahoma. Range currently operates a well in the unit. 20. Since that time, a dispute arose between Range and certain royalty interest owners over the distribution of proceeds from the well and the clarification, construction and interpretation of the spacing order. The dispute led to a class action lawsuit filed in state court Range acknowledged that some of the parties to the lawsuit take the position that the order imposed a duty upon the operator to place gas in a marketable condition, without cost to royalty owners and/or that the order imposed a duty similar to an implied covenant to market. 22. Range contended that the Commission had no intention of imposing any such duties, and that the order imposed no such duties. 23. On September 30, 2011, Range filed its Application asking the Commission to clarify, construe and interpret the order to determine: 1) that the order did not impose a covenant or duty to market, and did not impose a duty to place gas in a marketable condition, without costs to royalty owners; and 2) that the order did not impose upon the operator or other working interest owners any duties with respect to royalty obligations apart from any proportionate reduction of royalty. 24. On May 20, 2010, the Commission issued Order No creating an 80-acre laydown drilling and spacing unit covering the Mississippian common sources of supply underlying the S/2 of the NE/4 of Section 29, Township 25 North, Range 1 West, Kay County, Oklahoma. Range currently operates a well in the unit. 6 See Drummond v. Range Resources Corporation, et al. Case No. CJ filed in the District Court of Grady County, State of Oklahoma. Page 8

9 25. Since that time, a dispute arose between Range and certain royalty interest owners over the distribution of proceeds from the well and the clarification, construction and interpretation of the order. The dispute led to a class action lawsuit filed in state court Range acknowledged that some of the parties to the lawsuit take the position that the spacing order imposed a duty upon the operator to place gas in a marketable condition, without cost to royalty owners and/or that the order imposed a duty similar to an implied covenant to market. 27. Range contended that the Commission had no intention of imposing any such duties, and that the order imposed no such duties. 28. On October 4, 2011, Range filed its Application asking the Commission to clarify, construe and interpret the order to determine: 1) that the order did not impose a covenant or duty to market, and did not impose a duty to place gas in a marketable condition, without costs to royalty owners; and 2) that the order did not impose upon the operator or other working interest owners any duties with respect to royalty obligations apart from any proportionate reduction of royalty. 29. On October 1, 2010, the Commission issued Order No creating an 80-acre laydown drilling and spacing unit covering the Mississippian common source of supply underlying the N/2 of the NE/4 of Section 29, Township 25 North, Range 1 West, Kay County, Oklahoma. Range currently operates a well in the unit. 30. Since that time, a dispute arose between Range and certain royalty interest owners over the distribution of proceeds from the well and the clarification, construction and interpretation of the spacing order. The dispute led to a class action lawsuit filed in state court Range acknowledged that some of the parties to the lawsuit take the position that the order imposed a duty upon the operator to place gas in a marketable condition, without cost to royalty owners and/or that the order imposed a duty similar to an implied covenant to market. 32. Range contended that the Commission had no intention of imposing any such duties, and that the order imposed no such duties. See Drummond v. Range Resources Corporation, et al. Case No. CJ filed in the District Court of Grady County, State of Oklahoma. 8 See Drummond v. Range Resources Corporation, et al. Case No. CJ filed in the District Court of Grady County, State of Oklahoma. Page 9

10 33. On October 4, 2011, Range filed its Application asking the Commission to clarify, construe and interpret the order to determine: 1) that the order did not impose a covenant or duty to market, and did not impose a duty to place gas in a marketable condition, without costs to royalty owners; and 2) that the order did not impose upon the operator or other working interest owners any duties with respect to royalty obligations apart from any proportionate reduction of royalty. 34. In response to the Applications filed in the above causes, the Movants entered their appearances and objected to the Commission's jurisdiction. 35. Because the nature and scope of the subject matter and the relief requested of the Commission was very similar in all of the above causes, the Commission issued Order No on December 23, 2011 consolidating all of the above causes for trial under CD On January 12, 2012 the Commission issued Order No allowing the Oklahoma Independent Petroleum Association ("OIPA") to intervene and fully participate in the cause. On the same day, the Commission also issued Order No allowing the Coalition of Oklahoma Surface and Mineral Owners ("COSMO") to intervene and fully participate in the cause. 37. On February 23, 2012, Little Land and Reynolds filed their Motions to Dismiss, followed by Golightly's Motion to Dismiss on February 24, 2012 and Duncan's Motion to Dismiss on February 27, On March 23, 2012, Cimarex and Unit filed their Responses to the Movants' Motions to Dismiss. Range adopted the Responses of Cimarex and Unit on March 26, On the same day, New Dominion filed its Responses to the Movants' Motions to Dismiss. Subsequently, reply briefs were filed by some of the Movants and the hearing on the Motions to Dismiss was heard on April 24, Arguments of the Movants 38. The crux of the Movants' arguments is that the Commission doesn't have subject matter jurisdiction to clarify, construe and interpret spacing orders as to whether they impose fiduciary duties with respect to royalty obligations upon unit operators. Royalty obligations are alleged to be private matters between private parties that may be an indirect consequence or effect of a spacing order but are not related to the public rights regulated by the police power of the Commission. 39. During the hearing and in their pleadings, the Movants pointed out that the Commission is a court of limited jurisdiction having police power to regulate public rights related to the prevention of waste and the protection of correlative rights, and that the power of the Page 10

11 Commission to protect correlative rights is limited to situations or conflicts affecting the public's interest in the protection of production from common sources of supply, citing Samson Resources Co. v. Corporation Com'n, 702 P.2d 19, 1985 OK 31 (Okla., 1985) and Kingwood Oil Co. v. Hall-Jones Oil Corp. 396 P.2d 510 (Okla. 1964).' 40. They noted that the Oklahoma Court of Civil Appeals also held that the Commission's jurisdiction is limited to the resolution of public rights, citing Grayhorse Energy, LLC v. Crawley Petroleum Corp., 245 P.3d 1249 (Okla. Civ. App. 2010) and Arrowhead Energy, Inc. v. Baron Exploration Co., 930 P.2d 181 (Okla. 1996), and emphasized that the Oklahoma Supreme Court held that disputes unrelated to the protection of correlative rights or the prevention of waste or drainage are not to be tried by the Commission, citing Southern Union Prod. Co. v. Corp. Comm 'n, 465 P.2d 454 (Okla. 1970) and Hadson Petroleum Corp. v. Grynberg & Assocs., 763 P.2d 87 (Okla. 1988). 41. The Movants also stated that the Commission only possesses such authority as is expressly or by necessary implication conferred upon it by the constitution and statutes of Oklahoma and matters involving the private rights of parties are reserved to the district court. Questions in an action concerning the relationship of private parties, their duties, rights and obligations, and the existence of liability for the breach of such duties are matters particularly within the province of the district court, citing Tenneco Oil Co. v. El Paso Natural Gas Co., 1984 OK 52, 687 P.2d 1049, Rogers v. QuickTrip Corp., 230 P.3d 853 (Okla. 2010) and Burmah Oil & Gas Co. v. Corp. Comm'n, 541 P.2d 834 (Okla. 1975).b0 The Movants stated that in Samson Res. Co., the Oklahoma Supreme Court clarified that correlative rights are those in 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." 1985 Okla. LEXIS 208.The Court further held that correlative rights giving rise to the Commission's jurisdiction are "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" and that the Commission's power to protect correlative rights is limited "by the terms of the statute under which the Commission claims jurisdiction." The Movants stated that in Kingwood Oil Co., the Oklahoma Supreme Court defined correlative rights as: "[T]he relative rights of owners in a common source of supply to take oil or gas by legal operations limited by duties to the other owners (1) not to injure the common source of supply and (2) not to take an undue proportion of the oil and gas." The Movants recited the Oklahoma Supreme Court's review of the Commission's subject matter jurisdiction in oil and gas matters in the Tenneco Oil Co. v. El Paso Natural Gas Corp. case. The Movents noted that the Court said that due to the Oklahoma Constitution Art. IX 19, the Commission has the power and authority of a court of record; it is a tribunal of limited jurisdiction; its power over oil and gas matters stems from statutory enactments not mentioned in the Constitution but which must not be inconsistent with constitutional provisions; it is charged with enforcement of the conservation of oil and gas; that the purpose of 52 O.S.A. Chapter 3 Oil and Gas, 81 et seq. is the conservation of oil and gas and the duty fixed thereby is entrusted to the Commission; that the Commission is a constitutional body possessed of executive, legislative and judicial powers; that the Commission shall prohibit and control waste and shall protect correlative rights; the rationale behind such duty is that the Commission shall look after the rights of the body politic; the enactments for the conservation of oil and gas are public in nature and the spacing order, pooling order, and the order fixing allowable, to name but a few of the Commission's functions, are Page 11

12 42. They emphasized that the Oklahoma Supreme Court has specifically held that the district courts have jurisdiction to resolve disputes over private rights involving mineral interests and oil and gas leaseholds, and that the district court was the proper forum to determine whether fiduciary duties inherent in the operation of a unit were breached, citing Leck v. Cont '1 Oil Co., 800 P.2d 224, 1989 OK 173 (Okla. 1989). 43. In light of the above, the Movants alleged that the Commission lacks subject matter jurisdiction to hear the Applicants' causes because their dispute involves private rights between private parties and doesn't involve the government, noting that the liability of one individual to another under the law is private rights issue. Because the Movants' claims against the Applicants were for breach of contract, breach of the duty of good faith and fair dealing, breach of fiduciary duty, constructive fraud, breach of implied covenants, and unjust enrichment, the claims comprised private rights that are unrelated to the public's interest in the prevention of waste and the protection of correlative rights. They also alleged that the inquiry presented by the Applicants whereby the Commission was asked to clarify, construe and interpret spacing orders with respect to royalty obligations and fiduciary duties has nothing to do with preventing waste or drainage or protecting correlative rights, and is thus outside of the jurisdiction of the Commission The Movants argued that the meaning and intent of the spacing orders are obvious to the reader, because the language found in the spacing orders is clear and unambiguous, containing within the realm of the public rights to be protected; that the spacing order sets the stage for development and guards the public interest in developing an orderly and judicious drilling program, and is aimed at protecting the interest of all by the prohibitions against waste; that no private contract or agreement may cause or grant a license to commit waste or diminish correlative rights, the control of which is exclusively within the Commission; that the respective rights and obligations of parties are to be determined by the district court; that there is a conflict or dichotomy as to subject-matter jurisdiction between courts and administrative agencies; that the distinction between public rights and private rights has not been definitively explained in the precedents; 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 is a matter of private rights; only controversies in the former category may be removed from the courts; and private rights disputes on the other hand lie at the core of historically recognized judicial power. ii The inquiries made of the Commission by all of the Applicants were essentially the same, namely: 1) Apart from any proportionate reductions of royalty, did the Commission intend the entry of the spacing orders to modify, amend, or otherwise have any controlling implications or create any fiduciary duties with respect to royalty obligations or marketing duties on the part of the operator, other working interest owners, or any designated payors of royalties with respect to production from any well subject to the orders apart from proportionate reduction and the Production Revenue Standards Act? 2) If the Commission intended the entry of the spacing orders to modify, amend or otherwise have any controlling implications with respect to royalty obligations, what language within the orders addresses any resulting royalty obligations? Page 12

13 no express terms about marketing duties, fiduciary duties or royalty obligations. They point out that a plain reading of the spacing orders shows that they are normal, usual and customary in all respects, and that the orders have no terms or provisions related to royalty other than a recitation found in Order Nos and that the creation of each drilling and spacing unit communities the royalty interest. They contended that there is nothing in the orders for the Commission to clarify, construe or interpret regarding royalty interests or the royalty-related duties of the working interest owners. 45. The Movants also argued that the Applicants' inquiry before the Commission has already been answered by the courts in Oklahoma. They noted that the courts have held that unit orders entered by the Commission have the legal effect of creating a fiduciary relationship between the operator and the other owners in a unit, citing Young v. West Edmund Hunton Lime Unit, 275 P.2d 304 (Okla. 1954), Hebble v. Shell Western. E & P, Inc., 238 P.3d 939 (Okla. Civ. App. 2010) and the Leck v. Cont'] Oil Co. case, and that an operator's fiduciary duties are not limited by the terms of a spacing order because such duties arise from the status of the operator and not from power of the Commission to issue the order, citing Naylor Farms, Inc. v. Anadarko OGC Co., No. CIV R (W.D. Okla. July 14,201 1) The Movants claimed that Oklahoma courts have held that the scope of an operator's fiduciary duty includes: (1) distributing the allocated percentage of production to the various owners of the unit at the highest market price available (Young, 275 P.2d at 310); (2) protecting against drainage (Leck, 800 P.2d at ); (3) properly accounting for and distributing oil and gas proceeds from the units (Hebble, 238 P.3d at 943); (4) not acting for the operator's self-interest at the expense of its principal (Naylor Farms, Inc); (5) calculating and paying royalty to each royalty owner based upon all production from each well drilled within each unit, according to each royalty owner's proportionate acreage in relation to the total acreage within the drilling and spacing unit (Nay/or Farms, Inc. citing 52 O.S. 87.1(e)); (6) calculating and paying royalties to each royalty owner based upon the gross proceeds or income derived from the sale of all unit production (Nay/or Farms, Inc.); and (7) calculating and paying royalties to the royalty owner free of or unreduced by any costs of drilling, development, operations and marketing costs (Nay/or Farms, Inc). 13 See Hebble v. Shell Western. E & P, Inc., where the Oklahoma Court of Civil Appeals held that: [T]he Oklahoma Supreme Court has "recognized the existence of a fiduciary duty owed by a unit to the royalty owners and lessees who are parties to the unitization agreement or subject to the order creating the unit. This is not a duty created by the lease agreement but rather by the unitization order and agreement." Leck v. Continental Oil Co. (Leck), 1989 OK 173, 800 P.2d 224, 229. After unitization, the leases no longer control. Howe/I, 112 P.3d at Instead, the parties' relationships are defined by statute and by Commission order. "The unit organization with its operator stands in a position similar to that of a trustee for all who are interested in the oil production either as lessees or royalty owners." Young v. West Edmond Hunton Lime Unit, 124 OK 195, 275 P.2d 304, 309. The fiduciary duty of the unit operator arises not only from the creation of field-wide units for secondary recovery under 52 O.S.2001 H , but also from the creation of drilling and spacing units under 52 O.S.Supp E.g., Leck, 800 P.2d at 229. The critical factor is the resort to the police powers of the state on the part of a lessee in unitization proceedings which modify and amend existing legal rights. Olansen v. Texaco Inc., 1978 OK 139, 587 P.2d 976,985 Page 13

14 46. According to the Movants, the courts held that an operator's fiduciary duty extends to its royalty payment obligations under contractual agreements between the operator and the royalty owners in the spacing unit and that all oil and gas leases contain an implied covenant to market that is effective unless the lease contains language that expressly negates the covenant, citing Wood v. TXO Prod. Corp., 854 P.2d 880 (Okla. 1992) and Mittelstaedt v. Santa Fe Minerals, Inc., 954 P.2d 1203 (Okla. 1998). 47. The Movants acknowledged that the Commission may clarify, construe and/or interpret its orders under S They noted that the Commission exercises this power to clarify, construe and interpret its orders in the context of its public rights jurisdiction over conservation, citing McDaniel v Moyer, 662 P.2d 309 (Okla. 1983), Cabot Carbon Co. v. PhillipsPetroleum Co., 287 P.2d 765 (Okla. 1955) and Shell Oil Co. v. Keen, 355 P.2d 997 (Okla. 1960) among other court decisions, but pointed out that the Commission does not have jurisdiction to determine the legal effect of the orders, citing Arrowhead Energy, Inc., 930 P.2d 181, Leck v. Continental Oil Co., 800 P.2d 224 (Okla. 1989), Nilsen v Ports of Call Oil Co., 711 P.2d 98 (Okla. 1985), Slawson v. Mack Oil Company, 983 F.2d 978 (10th Cir. 1992) and Grayhorse Energy, LLC, 245 P.3d The Movants claimed that when the Applicants asked the Commission to clarify, construe, and interpret the spacing orders in order to make it clear that the orders did not impose a covenant or duty to market, or to place gas in a marketable condition without costs to royalty 14 The Movants also pointed out that the courts have held that lessees as well as operators owe a fiduciary duty to royalty owners, citing Shearn v. Ward Petroleum Corp., 808 F. Supp. 1530, 1532 (W.D. Okla. 1992) and Roberts Ranch Co. v. Exxon Corp., 43 F. Supp. 2d 1252, 1265 (W.D. Okla. 1997). The 10th Circuit court has also held that lessees stand in a fiduciary relationship to royalty owners. Fransen v. Conoco, Inc., 64 F.3d 1481(10th Cir. 1995). 15 See S. 112 which states "Any person affected by any legislative or administrative order of the Commission shall have the right at any time to apply to the Commission to repeal, amend, modify, or supplement the same. Such application shall be in writing and shall be heard as expeditiously as possible after notice of the hearing thereon shall have been given in the manner provided by Section 14 of this act. An appeal shall lie to the Supreme Court from any order made by the Commission in any such proceedings or from the refusal of the Commission to make any order petitioned for therein, in the same manner and within the same time in which other appeals are authorized to be taken by the provisions of this act, and, on any such appeal, the Supreme Court may affirm the order of the Commission, or the Commission's action in refusing to make the order petitioned for, or may itself make the order which the Commission should have made, or remand the cause to the Commission with directions to make such order as the Supreme Court may determine should have been made." 16 The Movants referred to Grayhorse Energy,LLC and noted that while district courts cannot reverse, modify, or correct Commission orders, they do have the power to adjudicate the legal effect of a Commission order to resolve disputes over private rights that involve mineral interests and oil and gas leaseholds. Page 14

15 owners, or any duties with respect to royalty obligations, they really asked the Commission to determine the legal affect of the orders. The Movants claimed that the Commission does not have jurisdiction to interpret its previous orders where doing so is not within its power to hear and determine disputes between parties in which the public interest in the prevention of waste and the protection of correlative rights of interested parties in a common source of supply is involved, and the Commission exceeds its jurisdiction in announcing an opinion about the legal effect of its previous orders on the private rights of the parties, citing Southern Union Production Co. v. Corporation Commission, 465 P.2d 454 (Okla. l970).' 49. Even if the Commission believes it has jurisdiction over the issues set forth in the Applications, the Movants argued that the Commission should dismiss the Applications because the issues presented have been proceeding in Oklahoma district courts for over a year. The Commission should decline to hear and try the same issues being heard by the district courts because any rulings it may issue will not impact the district courts' resolution as to whether the oil and gas leases at issue contain an implied covenant to market prohibiting the Applicants from deducting costs from royalty payments for the purpose of creating a marketable product. The Movents noted that the district courts have plenary power to determine the legal effects of a Commission order, citing Arrowhead Energy, Inc., 930 P.2d 181 and Grayhorse Energy,LLC, 245 P.3d 1249, and should be allowed to do so without interference from the Commission. Arguments of the Applicants 50. The crux of the Applicants' arguments is that the Commission has the exclusive right by statute to clarify the terms and meaning of its spacing orders, and there exists a genuine controversy with respect to the meaning and intent of the spacing orders referred to by the Applicants in their respective Applications that affects the rights and obligations of the regulated community. Clarification of whether the Commission's spacing orders impose duties and obligations upon unit operators lies exclusively within the province of the Commission and this clarification is properly made before the district courts determine the legal effects of such orders. 51. The Applicants agreed with the Movants that the Commission is a court of limited jurisdiction charged with overseeing the conservation of oil and gas and that the Commission is directed by 52 O.S to establish drilling and spacing units for the prevention of waste and the protection of correlative rights. Once a spacing order has issued, the Commission has the exclusive jurisdiction under 52 O.S. 112 to construe, interpret and clarify the order if properly requested to do so by the regulated community. The Applicants pointed out that the 17 They Movants claimed that the Oklahoma Supreme Court has held that the legal effect of unitization and spacing orders is to create marketing and other duties owed to the oil and gas lessor and royalty interest owners, citing Leck v. Continental Oil Co., 800 P.2d 224 (Okla. 1989), Young v. West Edmond Hunton Lime Unit, 275 P.2d 304 (Okla. 1954) and West Edmond Hunton Lime Unit v. Young, 325 P.2d 1047 (Okla. 1958). Page 15

16 Commission's power to clarify its orders has long been recognized by Oklahoma courts, citing Nilsen v. Ports of Call Oil Co., 1985 OK 104, 711 P.2d 98 and Cabot Carbon Co. v. Phillips Petroleum Co., 289 P.2d 675, 1955 OK 194 (Okla. 1955). 52. The Applicants also agreed with the Movants that the Commission doesn't have jurisdiction to determine the legal effects of its orders, but argued that they are not asking the Commission to determine the legal effect of the spacing orders, as alleged by the Movants, but to clarify their intent and meaning. The Applicants argued that the Commission's authority to clarify its orders is exclusive and entirely distinct from the district court's jurisdiction to determine the legal effect of such orders. 53. The Applicants argued that clarifying a spacing order serves to supplement the order without changing the order itself or the rights accrued under the order, and that the issuance of an order which clarifies and does not modify or change a prior order is not a collateral attack on the original order, citing Nilsen v. Ports of Call Oil Co., 1985 OK 104, 711 P.2d 98 and Forest Oil v. Okla. Corp. Com'n, 1990 OK 58, 807 P.2d 774. They contended that clarifying a spacing order supplements the prior order by refining its language to eliminate obscurity or ambiguity while a determination of the legal effect of an order involves issues such as damages and quieting title, which are properly before the district court, citing Nilsen, 1985 OK 104, 711 P.2d 98 and Pelican Production Corp. v. Wishbone Oil & Gas, Inc., 1987 OK CIV APP 74,746 P.2d The Applicants alleged that their Applications were necessary because the Movants claimed before the district courts or before the federal court that the spacing orders imposed fiduciary duties with respect to royalty obligations upon unit operators even though they admitted that the orders contained no express terms about marketing duties, fiduciary duties or royalty obligations. The Applicants contended that an order of the Commission may not impose a duty without containing explicit language for that purpose, and that the extent of the duty owed must be contained in the order, citing decordova v. Corporation Commission, No. 93,373 (Okla. Ct. App. Mar. 24, 2000), an unpublished opinion of the Oklahoma Court of Civil Appeals. The Applicants noted that the Commission had the power and jurisdiction to construe the meaning of the language used by it in its orders, citing Amarex, Inc. v. Baker, 1982 OK 155, 655 P.2d The Applicants further alleged that Oklahoma case law hasn't resolved the nature of the fiduciary duties related to royalty obligations, if any, that are imposed upon an operator by the issuance of a spacing order. In an analysis of the cases cited by the Movants in support of their position, the Applicants contended that a genuine controversy exists with respect to the meaning and intent of the Commission's spacing orders, and that this controversy must be resolved before the district courts can properly determine if the Movants are entitled to payment of royalties or whether the Applicants have satisfied whatever obligations that were imposed upon them by the Commission. Page 16

17 56. The Applicants noted that Oklahoma Court of Appeals held that the Commission was within its jurisdiction to clarify the language found in its pooling orders with respect to a royalty owner's rights to obtain remedies in district court for the deduction of post-production costs from royalty payments, citing New Dominion v. Parks Family Co., LLC, 2008 OK CIV APP 112, 216 P.3d 292, and that after the Commission clarified the order, the matter would return to district court for resolution of the effects of the order. The Applicants advocated that the court's holding in the New Dominion case applied to spacing orders as well as pooling orders. CONCLUSIONS OF LAW 57. The Commission is a tribunal of limited jurisdiction charged with overseeing the conservation of oil and gas and its jurisdiction is limited to the resolution of public rights. See New Dominion, LLC v. Parks Family Company, LLC, 2008 OK CIV APP 112, 216 P.3d 292. The Commission's jurisdiction and authority is limited to what is expressly or by necessary implication conferred upon it by the Constitution and statutes. See Merritt v. Corporation Commission, 438 P.2d 495 (Okla.1968). Matters involving the private rights of the parties are reserved to the district court. See Tenneco Oil Co. v. el Paso Natural Gas Co., 1984 OK 52, 687 P.2d As held by the Oklahoma Supreme Court: That the Commission is a tribunal of limited jurisdiction is well established in Oklahoma jurisprudence. It possesses only such authority as is expressly or by necessary implication conferred upon it by the Constitution and statutes of Oklahoma. If no Commission jurisdiction stands expressly conferred or necessarily implied, either by the constitution or by statue, its order would be void. The function of the Commission is to protect the rights of the body politic; private rights and obligations of private parties lie within the purview of the District court...the 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. Rogers v. Quicktrip Corp., 2010 OK 3, 230 P.3d Within the scope of its jurisdiction to regulate the conservation of oil and gas, the Commission is directed to prevent waste and protect correlative rights, and to issue spacing orders to provide for the orderly development of hydrocarbons within a governmental unit. As part of this regulatory process, 52 O.S. 112 authorizes the Commission to repeal, amend, modify or supplement its orders and thus confers upon the Commission power to construe, interpret and clarify the terms, intent and meaning of its spacing orders. See McDaniel v. Moyer, 19830K 39, 662 P.2d 309 and Nilsen v. Ports of Call Oil Co., 19850K 104,711 P.2d The power of an administrative agency such as the Commission to interpret and clarify its orders benefits the public because the agency is presumed to capably understand and have Page 17

18 expertise over the areas it is entrusted to regulate, and the Oklahoma Supreme Court supports this position, holding that an agency has the authority to interpret statutory language and act constructively concerning activities delegated to them by the Legislature. See Cox v. State ex rel. Okla. Dept of Human Servs., 2004 OK 17, 87 P.3d 607. Applying the logic of the Court, an agency that has the authority to interpret statutory language related to its delegated activities is also empowered to interpret and clarify its own orders issued to carry out the purposes of the statutes. 60. In general, the interpretation or construction of an ambiguous or uncertain statute by the agency charged with its administration is entitled to the highest respect from the courts. See Leake Estate v. Oklahoma Tax Commission, 1994 OK CIV APP 157, 891 P.2d 1299; Oral Roberts University v. Tax Commission, 1985 OK 97, 714 P.2d In such cases the administrative construction will not be disturbed except for very cogent reasons, provided that the construction so given was reasonable. Tulsa Tribune Co. v. State ex rel. Oklahoma Tax Commission, 1989 OK 13, 1989 Okla. LEXIS 18); Udall v. Tallman, 380 US 1, (1965), 85 S.Ct,792; and Hoover v. Bracken Energies, Inc. v. US. Department of the Interior, 723 F.2d 1488, (CA 10 Okla. 1983). As held by the United States Supreme Court: When faced with a problem of statutory construction, this Court shows great deference to the interpretation given the statute by the officers or agency charged with its administration. 'To sustain the Commission's application of this statutory term, we need not find that its construction is the only reasonable one or even that it is the result we would have reached had the question arisen in the first instance in judicial proceedings.' Unemployment Comm's of Territory of Alaska v. Aragon, 329 U.S. 143, 153, 67 S.Ct. 245, 250, 91 L.Ed See also e.g., Gray v. Powell, 314 U.S. 402, 62 S.Ct. 326, 86 L.Ed. 301; Universal Battery Co. v. United States, 281 U.S. 580, 583, 50 S.Ct. 422, 74 L.Ed 'Particularly is this respect due when the administrative practice at stake 'involves a contemporaneous construction of a statute by the men charged with the responsibility of setting its machinery in motion; of making the parts work efficiently and smoothly while they are yet untried and new." Power Reactor Development Co., v. International Union of Electricians, 367 U.S. 396, 408, 81 S.Ct. 1529, 1535, 6 L.Ed.2d 924. When the construction of an administrative regulation rather than a statute is in issue, deference is even more clearly in order (emphasis added). Udall v. Tallman, 380 US 1, (1965), 85 S.Ct Because an administrative order is more akin to a rule or a regulation than to a statute, the Court shows great deference to an agency's interpretation of its orders. By showing great deference to an agency's interpretation of its own rules and orders, the Court respects the opinions and reasoning of the agency with regard to matters delegated to it by the Legislature. Because the United States Supreme Court shows great deference to an agency's interpretation of Page 18