BEFORE THE CORPORATION COMMISSION OF OKLAHOMA APPLICANT: ENCINO OPERATING, LLC. RELIEF SOUGHT: POOLING LEGAL DESCRIPTION: SECTION 20, TOWNSHIP 16 NORTH, RANGE 17 WEST, DEWEY COUNTY, OKLAHOMA APPLICANT: MEWBOURNE OIL COMPANY CAUSE CD NO. 201501498 FILED AUG 14 2015 COURT CLERKS OFFICE - OKC CORPORATION COMMISSION OF OKLAHOMA CAUSE CD NO. 201501641 RELIEF SOUGHT: POOLING LEGAL DESCRIPTION: SECTION 20, TOWNSHIP 16 NORTH, RANGE 17 WEST, DEWEY COUNTY, OKLAHOMA REPORT OF THE ADMINISTRATIVE LAW JUDGE HEARING DATE: This Cause came for hearing before Andrew T. Dunn, Administrative Law Judge for the Corporation Commission for the State of Oklahoma on June 17 and 18, 2015 in the Commission's Courtroom, Jim Thorpe Building, Oklahoma City, Oklahoma, pursuant to notice given as required by law and the rules of the Commission, for the purpose of taking testimony and reporting to the Commission. CASE SUMMARY: Applicants Encino Operating, LLC and Mewbourne Oil Company filed applications requesting the pooling of interests of oil and gas owners in the Cottage Grove common source of supply in Section 20, Township 16 North, Range 17 West, Dewey County, Oklahoma. Applicants each argue for awarding operations to their respective companies. RECOMMENDATION: 201501641. The ALJ denies cause 201501498. The ALJ recommends cause
Page 2 of 13 APPEARANCES: Eric R. King, Attorney-at-Law, for Encino Operating, LLC. (hereinafter "Encino"). Richard A. Grimes, Attorney-at-Law, for Mewbourne Oil Company (hereinafter "Mewbourne"). Freda Williams, Attorney-at-Law, for Chesapeake Exploration, LLC. ("Chesapeake"). SUMMARY OF EVIDENCE 1. The following numbered exhibits were accepted into evidence. Exhibits Admitted. Exhibit 1: Updated Encino respondent list. Exhibit 2: Updated Encino AFE. Exhibit 3: Company fact comparison sheet prepared by Encino. Exhibit 4: Topographic land survey for Sections 20 and 29 16N-17W. Exhibit 5: 20 section plat showing Mewbourne's Cottage Grove plan of development. Exhibit 6: Updated Mewbourne AFE. Exhibit 7: Company AFE fact comparison graph prepared by Mewbourne. Exhibit 8: Private company update summary taken from the Oil and Gas Financial Journal. Exhibit 9: Company fact comparison for peak month oil production prepared by Mewbourne. Exhibit 10: Company fact comparison for peak 3 month oil production prepared by Mewboume. Exhibit 11: Company production data prepared by Mewbourne. Exhibit 12: Commercial disposal well permit for Mewboume's Prostar 28 SWD #1. Exhibit 13: Bottom Hole Survey for Mewbourne's Prostar 20 PA #1HCG well. Exhibit 14: Amended permit to drill for Encino's Centennial 1-29H well. Exhibit 15: Daily operations report including job costs for the Centennial 1-29H well. Exhibit 16: Amended permit to drill for Encino's Black Bear l-13h well. MR. DOUG SMITH, LANDMAN FOR ENcIN0.
Page 3 of 13 2. Mr. Smith was sworn and retained without objection by the Court and testified as a landman for Encino. 3. Mr. Smith testified that he was familiar with the application and the area of interest it covers. 4. Mr. Smith testified that Encino owns a present right to drill in Section 20 to develop the Cottage Grove common source of supply. 5. Mr. Smith testified that Encino owns 542.7 acres or approximately 80% working interest in Section 20. 6. Mr. Smith testified that Mewbourne owns 100 acres in Section 20 or approximately 15.65% working interest. 7. Mr. Smith testified that he conducted a check of leasing activity in Section 20 and the surrounding 8 sections. The most recent transactions he found were; a. In April 2015, two leases were taken by Encino from the Bank of Oklahoma at $500 and 3/16. Each of these leases covered 10-acres in the subject Section 20 (hereinafter "BOK Leases"). These leases were taken in April 2015. b. In June 2014, a 5 acre lease was taken in Section 21 at $800 and 3/16. c. In August 2014, a 2-acre lease was taken in Section 29 at $850 and 3/16. d. He testified that Mewboume had taken leases from Tom Fortner at $0 and 115 for 20 acres in the Section 20 and from the Commissioner of Land Office land auction, where, for both, Encino deferred to Mewbourne regarding the details and terms of those transactions (hereinafter "CLO Leases"). e. He testified that Mewbourne may have $0 and ¼ royalty that is not of record. 8. Mr. Smith testified that he is not aware of the terms of Encino's farmout deal. 9. On cross examination, Mr. Smith testified that he based his ownership testimony on a title opinion dated September 15, 2014, and updated March 3, 2015. At this time, Mr. Grimes represented to the witness and to the Court that Mewboume believed the acreage controlled by Encino was 512.7 acres. 10. On cross examination, Mr. Smith testified that the leases Encino acquired were 1) a lease with the Bank of Oklahoma as agent for the Oklahoma Medical Research Foundation, and 2) the Bank of Oklahoma as agent for Oklahoma City University. Each lease was for 10 acres and they were taken in April 2015 and on April 29, 2015.
Page 4 of 13 11. On cross examination, Mr. Smith affirmed that Encino has the right to drill. 12. On cross examination, Mr. Smith claimed he had not examined Encino's farmout agreement and that he did not know the terms of the agreement. 13. On cross examination, Mr. Smith testified that he did not know if Encino had been assigned any acreage from Chesapeake under the farmout. 14. On cross examination, Mr. Smith testified in response to the following question by Mr. Grimes; "So, when you answered the question that Encino possessed the right to drill it would have been based on what? Why did you answer in the affirmative? What had you looked at to confirm that they are currently in possession of the right to drill that amount of acres in this section? Did somebody tell you that or did you look at something?" Mr. Smith responded he was told by a representative of Encino (Cullen Amend) that the Company was in possession of the right to drill and that Mr. Amend would testify regarding the specifics of the Chesapeake farmout. 15. On cross examination, it was apparent that Mr. Smith was not aware of several transactions taken in Section 20 and the surrounding 8 sections. Furthermore, Mr. Smith testified that he did not have his notes on leasing activity for the hearing. MR. CULLEN AMEND S LAND MANAGER FOR ENcIN0. 16. Mr. Amend was sworn and retained without objection by the Court and testified as a landman for Encino. 17. Mr. Amend testified that he was familiar with the application and the area of interest it covers. 18. Mr. Amend testified that Encino owns a present right to drill in Section 20 to develop the Cottage Grove common source of supply. 19. Mr. Amend testified that Encino owns approximately 512 acres or, approximately 80% of the working interest in Section 20. 20. Mr. Amend testified that Encino acquired this working interest February 2015 when the company closed a 'deal' with Felix Energy Company (hereinafter "Felix").
Page 5 of 13 21. Mr. Amend testified that Mewbourne owns approximately 15% working interest in Section 20. 22. Mr. Amend testified that, at the time of pooling, Mewbourne owned approximately 3% working interest in Section 20. 23. Mr. Amend testified that Mewboume leased from the CLO 80 acres in total. 24. Mr. Amend testified that Encino proposed its well on March 4, 2015, and filed its application on March 19, 2015, whereas Mewboume filed its application March 30, 2015. 25. On cross examination, Mr. Amend testified that to the following regarding Encino's farmout agreement. a. The farmout was originally negotiated between Felix and Chesapeake. This agreement was entered into February 2014. b. Encino acquired Felix's interest in the farmout agreement with Chesapeake in February 2015. Mr. Amend testified that Encino "stepped into Felix's shoes" in regards to the farmout, taking its interest in a large amount of acreage in the greater area surrounding the lands subject to this application. c. Mr. Amend testified in response to the following question; "Under that farmout what does Encino, having stepped into the shoes of Felix, what does Encino have to do to earn an assignment of Chesapeake's working interest in a given section, such as Section 20?" He answered that Encino had to "drill and produce it," meaning that his Company had to drill and produce Section 20 in order to earn Chesapeake's working interest under the terms of the produce-to-earn farmout agreement. He further testified that this means that production must be obtained in addition to the commencing of operations in order to earn the right of assignment from Chesapeake. d. Mr. Amend testified that Encino will earn 100% of the assignment under the farmout once production is obtained on the initial well. 26. On cross examination, Mr. Amend testified that Encino owns 512.7 acres in Section 20. Of that 512.7 acres, 492.7 acres are associated with the farmout agreement and 20 acres with the BOK Leases. 27. At the Court's direction, Mr. Amend was recalled and testified to the following in response to the Court's questions.
Page 6 of 13 a. The BOK Leases were paid April 29, 2015, and Encino took the leases at least two weeks prior to paying. The leases were for a total of 20 acres. b. The Encino pooling was filed March 19, 2105. c. The farmout agreement was a conditioned on production being obtained. 28. On further questioning by Mr. Grimes, Mr. Amend testified that the original farmout agreement between Chesapeake and Felix was completed in 2014 and that Encino acquired Felix's position in February 2015, covering 492 acres in Section 20. MR. TRACE DILLINER, LANDMAN FOR MEWBOURNE. 29. Mr. Dilliner was sworn and retained without objection by the Court and testified as a landman for Mewbourne. 30. Mr. Dilliner testified that he was familiar with the application and the area of interest it covers. 31. Mr. Dilliner testified that Mewbourne owns a present right to drill in Section 20 to develop the Cottage Grove common source of supply. 32. Mr. Dilliner testified that Mewbourne owns 100 acres within Section 20 and 80 acres of this amount were leased from the CLO. He testified that Mr. David Brannon knew the conditions surrounding this lease. 33. Mr. Dilliner testified that Encino owns 512.7 acres, which includes the 20 acres involving the BOK Leases. 34. Mr. Dilliner testified that Mewbourne was dismissing the Tonkawa from the application. 35. Mr. Diliner testified that Mewbourne took a lease from Robert Gerald Fortner for 10 acres on February 3, 2015, and from him as trustee of his trust for 10 acres on April 10, 2015. Both were for 10 acres. Mr. Dilliner testified that the trust name was the Robert Fortner Revocable Living Trust and that Mewbourne signed leases with him in his capacity as trustee and personally. 36. On direct, cross, redirect, and at the Court's questioning, Mr. Dilliner testified to the following lease transaction details reflecting fair market value. a. He has conducted a search and determined, in his opinion, the highest and best transactions that are arms-length in the area.
Page 7 of 13 b. $l500 and l/5. i. July 14, 2015, N/G Discovery, LLC.,.125 acres, Section 29 16N-17W. ii. July 18, 2014, Jim D. Francis,.6 acres, Section 29 16N-17W. iii. August 11, 2014, 26.66667 acres, Section 21 16N-17W. c. $800 and l/5. i. There were two leases taken in Section 20 at 10 acres apiece. These were taken February 3 and April 10, 2015. d. $l000 and 3/16. i. August 5, 2014, Mewbourne, 10 acres. e. $O and l/4 i. April 23, 2015; Mewbourne, 80.333 acres, Section 16. ii. August 8, 2014, Mewbourne,.09259 acres, Section 29. iii. September 26, 2014, JMA, 2 acres, Section 29. f. The CLO leases for 80 acres had a total cash consideration of $82,080 for $1026 and 3/16 royalty. The transaction was completed May 13, 2015. g. The proposal letter offered bonus and royalty amounts of $500 and 3/16 and $0 and 1/4. Since February 2014, Mewbourne has taken leases for less than $1500 and 1/5. These include two leases in Section 20 for $800 and 1/5. In the past year, Mr. Dilliner testified, these were the highest bonus amounts paid delivering an 80% NRI. MR. DAVID BRANNEN, LANDMAN FOR MEWBOURNE. 37. The Court called Mr. David Brannen. Mr. Brannen was not previously sworn and, because of his prompting of the witness during testimony (Mewbourne Landman Mr. Dilliner), the Court called him to testify in order to correct any improper testimony he provided as an unsworn witness testifying out of turn. His testimony related to his knowledge of the CLO leases. 38. Mr. Brannen was sworn and retained without objection by the Court and testified as a landman for Mewbourne. 39. Mr. Brannen testified that he was familiar with the application, specifically the CLO leases. 40. Mr. Brannen testified that the CLO leases were sealed bid scenario leases taken at $1026 and 3/16 for an 80 acre tract.
Page 8 of 13 41. On cross examination, Mr. Brannen testified to Mr. Dilliner's opinion regarding fair market value, stating that the values presented were fair market value for leases and that Mewbourne was not asking for higher values as a means to recoup expenses in the event the Company was not awarded operations. FINDINGS OF FACT 42. Causes CD Nos. 201501498 and 201501641 are pooling applications for Section 20, Township 16 North, Range 17 West, Dewey County, Oklahoma. 43. Notice of this proceeding is governed by OAC 165:5-7-9(a). The Corporation Commission has jurisdiction over the subject matter and notice has been given in all respects as required by law and the rules of the Corporation Commission. 44. Encino filed an application seeking to force pool Section 20, Township 16 North, Range 17 West, Dewey County, Oklahoma on March 19, 2015. 45. At the time the pooling application was filed, Encino's ownership in Section 20 was based on a produce-to-earn farmout agreement with Chesapeake. The farmout agreement was originally between Felix and Chesapeake and consummated in February 2014. In February 2015, Encino assumed Felix's position under the original agreement. 46. Mewbourne filed an application seeking to force pool Section 20, Township 16 North, Range 17 West, Dewey County, Oklahoma on March 30, 2015. 47. At the time Mewbourne filed its pooling application, Mewbourne owned 10 acres in Section 20 under a lease taken February 3, 2015, from Robert Gerald Fortner. CONCLUSIONS AND RECOMMENDATIONS 48. The Corporation Commission must act either under the rules of procedure and evidence provided by itself or the Legislature when it conducts hearings for prevention of waste and/or the protection of correlative rights by regulation of production. Wilcox Oil & Gas Co. v. State, 162 Old. 89, 19 P.2d 347, 348. This is because the Corporation Commission is a body of limited jurisdiction and its jurisdiction is derived expressly from or impliedly from the Constitution and statutes. May Petroleum, Inc. v. Corporation Commission of the State of Oklahoma, 663 P.2d 716 (Okla. 1982); Kingwood Oil Co. v. Hall-Jones Oil Corp., 396 P.2d 510 (Okl.1965). Such is the case for the commencement of a cause: An applicant must abide by the statutory requirements in order to invoke the jurisdiction of the Corporation Commission to hear its application for relief.
Page 9 of 13 49. Here, the issue is whether Encino properly invoked the jurisdiction of the Corporation Commission to hear its application at the time of filing the cause for forced pooling relief where Encino based its ownership on a produce-to-earn farmout agreement. 50. Subsection (e) of 52 O.S. 87.1 authorizes the Corporation Commission, upon a proper application and hearing, to allow owners to pool and develop their lands. A portion of that subsection provides: 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 the 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 hearin2 thereon, require such owners to pool and develop their lands in the spacing unit as a unit. 51. Thus, this statute requires that one must be an owner in order to, first, file a proper pooling application and, second, have a hearing on that application. 52. Subsection 4 of 52 O.S. 86.1 defines "Owner" as a person who has the right to drill into and to produce from any common source of supply and to appropriate the production, either for that person or for that person and others. In O'Neill v. American Quasar Petroleum Co., the Court inserted this definition of the word "owner" into 52 O.S. 87.1 (e), reading the statute to "authorize the Commission to pool a party's interest where that party owns a right to drill into and produce from a common source of supply." 617 P.2d 182, 183 (Okla. 1980). 53. Subsection (e) of 52 O.S. 87.1 requires a "proper application" be filed with the Corporation Commission. A "proper application" and its requirements are provided in O.A.C. 165: 5-7-1. Subsection (d)( 1) of this rule of practice requires that; The applicant be identified, including name, address, and telephone number of his attorney or designated representative and the nature of the applicant's interest in the subject matter of the cause; and the name and address of each person (if any) named as respondent.1 2 Note: "Applicant" is defined under O.A.C. 165: 5-1-3 as "any person commencing a proceeding" and "application" is defined as "any written request by an applicant commencing a proceeding for Commission action or relief. 2 Note: O.A.C. 165: 5-7-7 (a-g) provides the rules of practice for an applicant to follow when filing a pooling application. This rule generally refers to an "applicant" as the party filing the application.
Page 10 of 13 54. 52 O.S. 87.1(e) requires an applicant to be an owner to file a proper application and O.A.C. 165: 5-7-7 provides the application and notice requirements for a forced pooling cause. Generally, O.A.C. 165: 5-7-7 references the party to file a pooling as "the applicant." Subsection (e) of this section, though, elaborates on applicant, stating; "If the applicant anticipates some other owner of the right to drill may be designated as the operator of the unit well, the body of the application and notice shall so state." 55. While "Applicant" is defined under O.A.C. 165: 5-1-3 as "any person commencing a proceeding," this rule specifically references the language "some other owner of the right to drill" in Subsection (e) of O.A.C. 165: 5-7-7, leading to the conclusion that the initial applicant is also an owner, which compliments the 52 O.S. 87.1(e) requirement that one seeking a forced pooling must be an owner to file a "proper application." 56. The statutes require that an applicant file a proper application in order to invoke the jurisdiction of the Corporation Commission and that, as part of the requirements to file such a proper application as provided under O.A.C. 165: 5-7-1, the applicant must state the nature of its interest the right to drill and produce from the common source of supply in the subject matter of the cause. The statutes require that the applicant seeking forced pooling relief must be an owner with the right to drill and produce the minerals in order to file a proper application. Parties not owning an interest in the minerals who file an application for a forced pooling cause will not invoke the jurisdiction of the Corporation Commission to hear the cause. Leede Oil & Gas, Inc. v. Corporation Commission of the State of Oklahoma, 747 P.2d 294, 299 (Okla. 1987); May Petroleum, Inc., 663 P.2d at 717. Therefore, an applicant must be an owner with a right to drill into and produce from the common source of supply as part of the requirement for filing a proper application, which is necessary to invoke the jurisdiction of the Corporation Commission. 57. In its application, Encino explained its interest by stating that it "is the owner of the right to drill a well to the Cottage Grove common source of supply underlying the a 640-acre drilling and spacing unit comprised of Section 20, Township 16 North, Range 17 West, Dewey County, Oklahoma, by virtue of valid and subsisting oil and gas leases owned by Applicant covering portions of said land." 58. After reviewing the evidence presented, it is my determination that Encino did not show by a preponderance of the evidence a compelling case that it is actually an owner in the lands subject to this application. Rather, the evidence presented questioned ownership and was insufficient to establish jurisdiction as required by 52 O.S. 87.1.
Page 11 of 13 59. At the time Encino filed its forced pooling application, the nature of its interest was based on a produce-to-earn farmout agreement. In order for Encino to earn (to have assigned by Chesapeake) an interest in Section 20, the Company would need to commence operations and produce oil and gas from the unit. Such are the facts as testified to by Encino's landman, Cullen Amend. He stated that Encino had to "drill and produce it," meaning that his Company had to drill and produce Section 20 in order to earn Chesapeake's working interest under the terms of the produce-to-earn farmout agreement. He further testified that, at which point Encino obtains production, it earns 100% of the assignment from Chesapeake. 60. Based on witness testimony, Encino does not have a vested ownership right in Section 20. The vesting of ownership through an assignment of interest, as testified to by Encino's landman, is future interest with vesting contingent on actual production being established from the leasehold. Thus, Encino, at the time it filed its application, was not an actual owner in the unit. 61. 52 O.S. 87.1 is quite clear: Only an owner may file a forced pooling application. 62. Subsection 4 of 52 O.S. 86.1 is quite clear: An "owner" is a person who has the right to drill into and to produce from any common source of supply and to appropriate the production, either for that person or for that person and others. 63. Subsection (e) of 52 O.S. 87.1 clearly requires a "proper application" be filed with the Corporation Commission. 64. O.A.C. 165: 5-7-1(d)(1) clearly provides that "proper application" is required to identify the nature of the applicant's interest (as an owner in the subject lands) in the subject matter of the cause (forced pooling relief) at the time of filing. 65. Encino was not an owner in Section 20 at the time it filed its pooling application on March 19, 2015. Therefore, Encino was not an owner with standing to file a proper application for forced pooling relief with its not being an owner with a right to drill in Section 20 on which to base its application. 66. By the time of hearing on June 17 and 18, 2015, Encino was an owner in the unit and had taken the BOK Leases, which totaled 20 acres. These leases were taken in April 2015 after Encino filed its pooling application, but before a hearing on the merits. While Encino did own an interest by the time of hearing, it does not rise to the level to cure its standing issue. This is because the statute requires that a "proper application" be filed prior to the hearing and part of making an application proper is actually owning the right to drill into and to produce from any common source of supply and to appropriate the production, either for that person or for that person and others in the subject unit. 67. The statutory requirement of 52 O.S. 87.1 requires a forced pooling applicant to own an interest in the minerals. This is because forced pooling protects the correlative rights of 3 Note: Encino took the BOK leases for a total of twenty acres in April 2015.
Page 12 of 13 owners in a unit by giving each their fair share of the production from the well while, simultaneously eliminating the need for small-tract exceptions, avoiding the drilling of unnecessary wells, and preventing the inefficient dissipation of reservoir energy. Inherent in this reasoning is protecting owners in a unit and it does not stand to reason that non-owners should be given the same benefit as owners. 68. It is worth noting that the Corporation Commission does not have jurisdiction to determine title in vested property interests. Such private ownership rights must be determined in district court. Amoco Production Company v. Corporation Commission of the State of Oklahoma, 751 P.2d 203 (Okla. App. 1986). An applicant must present supporting preponderance evidence for a finding-of-fact determination that it is an owner with an interest in the minerals. Here, the applicant testified that such a transfer of ownership through a produce-to-earn assignment would occur on production. The issue is that a produce-to-earn farmout agreement may never vest actual ownership in the lands at issue. Testimony regarding these facts did not provide supporting preponderance evidence to the Court that Encino is an owner at the time of filing its application. 69. For this reason, the Corporation Commission's jurisdiction has not been invoked by Encino to hear its cause for forced pooling relief. The Court denies Cause CD No. 201501498 in its entirety. 70. At the time Mewboume filed its pooling application, Mewbourne owned 10 acres in Section 20 under a lease taken February 3, 2015, from Robert Gerald Fortner. While this is a small interest of only 10 acres out of a total 640 acres sought to be pooled, it is still enough interest to stand as an owner and file a proper application for forced pooling relief. It is the determination of the Court to recommend Cause CD. No. 201501498 in its entirety with the Court concluding that the values of $1500 and 1/5, $1000 and 3/16, $0 and ¼, and the requirement that, if any overburdened interests exist, those owners are compensated at $5.00 per acre. RESPECTFULLY SUBMITTED THIS 14th day of August, 2015. Andrew T. Dunn Administrative Law Judge Ewc
Page 13 of 13 cc: Richard Grimes. Eric R. King. Freda Williams. Michael L. Decker, Office of Administrative Proceedings, Director. James L. Myles, Office of General Counsel, Deputy General Counsel. Court Clerk. Oil-Law Records. Commission File. Office of General Counsel.