BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA APPLICANT: ROYAL RESOURCES COMPANY, LLC RELIEF SOUGHT: DRILLING AND SPACING UNIT CAUSE CD 201300659-T LEGAL DESCRIPTION: E/2 NW/4 OF SECTION 9, TOWNSHIP 14 NORTH, RANGE 11 EAST, OKMULGEE COUNTY, OKLAHOMA F I LE JLH 2 21 14 COURT CLERK'S OFHCE - TULSA CORPORATION COMMISSION REPORT OF THE ADMINISTRATIVE LAW JUDGE O}(LAHO1A This Cause came on for hearing before Curtis M. Johnson, Deputy Administrative Law Judge (hereinafter referred to as AU for the Corporation Commission of the State of Oklahoma (hereinafter referred to as Commission in the Commission's Courtroom, Robert S. Kerr Office Building, 440 S. Houston, Suite 114, Tulsa, Oklahoma, pursuant to notice given as required by law and rules of the Commission, for the purpose of taking testimony and reporting to the Commission. HEARING DATE : May 7, 2014. APPEARANCES : At the time of the hearing, Ron M. Barnes, attorney, appeared on behalf of the Applicant, Royal Resources Company, LLC (hereinafter referred to as Royal; and Edward J. Clarke, attorney, appeared on behalf of Respondents, The Estate of William Gladstone Green, Lauren Green, Rose Rock Resources, Inc., Sean Thomas Langston, Kyle Shea Langston, and Maurine Margaret Gentis (hereinafter referred to collectively as Green. CASE SUMMARY Royal filed the subject Cause CD NO. 201300659-T seeking to Space the Prue, Bartlesville, Booch, Dutcher, Union Valley, Cromwell and Wilcox common sources of supply for oil on a 40 acre basis in the E12 NW/4 of Section 9, Township 14 North, Range 11 East, Okrnulgee County, Oklahoma. Green, in the alternative, reiuested 10 acre spacing be established. Green was the prior
operator of the lease. Prosperous Oil and Gas, Inc. ( hereinafter referred to as Prosperous, Royal's operating arm, obtained operations of the lease by filing a 1073 which left the current operator of the lease on the form blank (See Exhibit #2. Royal alleged Green failed to produce the lease for one or two months, and as a result, Greens leases terminated. Royal therefore contends their top leases took effect giving them an interest in minerals in the subject lands or a right to drill. Green contends their leases are still valid, and therefore Royal owns no interest in the subject lands. RECOMMENDATION OF THE AU The ALJ contends Green's Leases are still in full force and effect. Therefore, Royal's top Leases have not taken effect. Thus Royal owns no interest in minerals, or a right to drill in the subject lands. This recommendation is based upon the fact that a Quiet Title Action was filed in District Court in this Cause and restraining orders were issued which prohibited operation of the lease. Also during the pendency of this legal action, William Green, the Operator, passed away. Furthermore, no one presented any evidence showing this one or two month delay in production was unreasonable. Thus, the ALJ cannot conclude the cessation in production "... extend[ed] for an unreasonable period which is not justifiable in light of all the circumstances." (See Bavtide Petroleum, Inc. v. Continental Resources, Inc. 231 P. 3d 114 (Okla. 2010 and Stewart v. Amerada Hess Corp., (Okla. 1979. Based upon these facts, as well as the brevity of one month, or at most two months cessation in production, the ALJ recommends Green's lease did not terminate. Therefore, Royal's top Leases did not take effect and Royal does not have an interest in minerals or a right to drill. EXHIBITS Exhibit #1 Royal's Production Map Exhibit #2 Commission Form 1073 and Oklahoma Tax Commission Gross Production Request for Change Form for the McNeely I B, McNeIly I E, McNeely 2E, McNelly 1 D, and McNelly 2D. The ALJ proceeded to hear the Cause and found as follows: 2
FINDINGS AND SUMMARY OF EVIDENCE Cause CD NO. 201300659-T is the Application of Royal seeking to Space the Frye, Bartlesville, Booch, Dutcher, Union Valley, Cromwell and Wilcox common sources of supply for oil on a 40 acre basis in the E/2 NW14 of Section 9, Township 14 North, Range 11 East, Okmulgee County, Oklahoma. 2. The Commission has jurisdiction over the subject matter and notice has been given in all respects as required by law and the rules of the Commission. 3. Mr. Barnes called his first Witness, Ms. Karen Ashford, the owner of Royal. She supervised the brokerage work conducted on the subject property. She testified that Prosperous Oil and Gas Inc. (hereinafter referred to as Prosperous is the operating arm of Royal. She further stated Royal owns 37%, and Prosperous owns 1%, of the subject property. 4. Mr. Clarke conducted cross examination of the Witness. Mr. Clarke asked the Witness how Royal and Prosperous obtained their interest in the subject property? The Witness responded, 'they have obtained leases from Sally M. Schott, Phillip Jack Joiner, Kay Hand Mount, Maurine Margaret Gentis, Kyle Shea Langston, Sean Thomas Langston, Tamoura Lyn Levene, Monika G. Sitler, II, and Sarah E. McNeely.' 5. Mi. Barnes called Michael Pruitt, a geologist, to testify for Royal. The Witness introduced Exhibit #1 of Production Map covering Sections 4, 5, 8, and 9. The Witness testified this exhibit illustrates there are 6 unplugged wells and 2 plugged wells in the 80 acres which are the subject of this Application. The Witness identified the 80 acre standup by outlining it in yellow. The Witness further stated the wells in the 80 acre tract were productive from the Dutcher, Union Valley and Cromwell. However, IHS Reports show that none of these wells have produced since December 12, 2012. The Witness was asked if he knew who was the operator of the inactive wells in the 80 acres that are the subject of this Application? The Witness sponsored Exhibit #2, Commission Form 1073 and Oklahoma Tax Commission Gross Production Request for Change Form for the McNeely IB, McNelly 1E, McNeely 2E, McNelly 1D, and McNeely 2D. The Witness explained that from his review of Commission Forms 1073, Prosperous is named as the operator of the five aforementioned wells. Furthermore the Oklahoma Tax Commission Gross Production Request For Change Forms also show Prosperous as the Operator, and no operator of record listed with the Commission two years prior to Prosperous taking over operations. The Witness was questioned regarding his recommendation to establish 40 acre spacing units for the named common sources of supply. There is currently no spacing in the 80 acre tract. The Witness testified that many of these wells are old and only 3 out of the 8 wells were never fraced. The Witness asserts that new 3
fracing technology will allow one well to drain the 40 acre unit. The Witness stated the legal location for a well in the 40 acre unit would be 330 feet from the unit boundary. The Witness also contends each 40 acre unit is substantially underlain by each named common source of supply. The Witness asserts the wells in these units will be substantially productive of oil. 6. Mr. Clark conducted cross examination of the Witness. The Witness testified the depths of the formations are: Prue Bartlesville Booch Dutcher Union Valley Cromwell Wilcox 1340 feet 1870 feet 2200 feet 2400 feet 2500 feet 2570 feet 3050 feet The Witness stated he reviewed well control and logs in his study of this area. He did not conduct any drainage studies. He also did not have any porosity or permeability estimates for the named common sources of supply. The Witness explained the reason for the absence of this data was there were very few porosity logs run on wells in this area. The Witness contends 40 acre units are the proper size units for the named common sources of supply. The Witness based this contention upon the fact that the units are substantially underlain by the common sources of supply and the new fracturing technology will allow more reservoir to be reached by a well. The Witness did agree the Bartlesville, Booch, Dutcher, Red Fork, Union Valley Lime, Viola Lime, and Wilcox formations had been spaced on a 10 acre basis in the NE/4 of the NE/4 of Section 4, Township 14 North, Range 11 East in Okmulgee County, Oklahoma. The Witness did admit he had not been to the 80 acres tract, but he did know the wells on that tract were inactive. The Witness was uncertain if electricity was still available to the subject wells. 7. Mr. Barnes conducted redirect examination of the Witness. The Witness testified the older the wells, the less likely they have porosity logs run on them. The Witness did assert these formations have good porosity because they were productive in this area. At this point in the proceeding, the Applicant rested their Cause. S. Mr. Clark called Jeff Andrews to testify for the Respondent. The Witness testified he had been a geologist for 30 years. He has developed oil and gas prospects and operated wells in Oklahoma. The Witness stated he owned mineral rights in, and is familiar with, the lands subject to this Application. The Witness contends one well per 40 acres would not drain these formations. He testified only one well had penetrated all of these formations in the 80 acre tract. The Witness stated he 4
had not done a drainage study on the subject formations in this area and does not know of any drainage studies that have been conducted in the subject area. The Witness did know of one porosity log run in this area, but he could not recall what the porosity was without referring to the log. The Witness explained one well per 40 acres could not drain the unit, because the Dutch has 4 productive lenses and one vertical wellbore will not encounter all of these lenses. Therefore, the lenses that are not encountered will not be drained. The Witness is requesting 10 acre spacing for the subject area as in Section 4. The Witness contends 10 acre spacing would allow a sufficient number of wells to be drilled so all lenses are encountered. The Witness asserts even with new technology and fracture techniques, one well would not be able to drain 40 acres. The Witness was questioned regarding the validity of the Green Leases. The Witness stated the well in the 80 acre tract had produced in paying quantities up to December 12, 2012. In his opinion the Leases had remained in full force and effect. The Witness testified he received several checks for the production on the Lease. The Witness also stated from his visits to the Lease, all the equipment appeared to be in place to produce the Lease. The only thing missing is electric power to operate the equipment. The Witness explained the electricity was turned off because an injunction was imposed by District Court as the result of quiet title action. The Lease has not produced since December of 2012, because of this injunction. The Witness was questioned regarding the Form 1073s filed by Prosperous. The Witness contends it is not appropriate to omit the prior operator information on this Form, if the location of the Operator is known. The Witness contends this procedure should only be employed when the operator is unknown or not locatable. The Witness asserts the Applicant knew who the operator was, and where he could be located. 9. Mr. Barnes conducted cross examination of the Witness. The Witness agreed he was requesting 10 acre units be established. The Witness did admit a dry hole was drilled in one of the 10 acre units in Section 4, and to this date those 10 acre units have remained undeveloped. Mr. Barnes asked the Witness, you testified that you got caught up on royalty.' The Witness said he had been paid for the production on the Lease. The Witness stated he acquired his interest in this Lease in 2005 and the most recent check he received from the production on the Lease was 2012. Again the Witness testified the Lease has not been allowed to produce since December 12, 2012. Mr. Barnes asked the Witness who was the Operator of the Lease, Henderson or Green? The Witness testified they were father and son so he was not certain. The Witness was asked if their bond was revoked in 2011, how they could operate the Lease. The Witness did not know. 10. At this point in the proceeding, the ALJ took the cause under advisement.
RECOMMENDATIONS, CONCLUSIONS AND FINDINGS After taking into consideration all the facts, evidence, Exhibits, and arguments of Counsel, it is the recommendation of the ALJ in Cause CD NO. 201300659T seeking to Space the Prue, Bartlesville, Booch, Dutcher, Union Valley, Cromwell and Wilcox common sources of supply for oil on a 40 acre basis in the E12 NW/4 of Section 9, Township 14 North, Range 11 East, Okmulgee County, Oklahoma, should be recommended. 2. There are only two issues for resolution in the Cause: whether the Applicant owns an interest in the proposed Unit, and what is the proper size unit to establish for the named common sources of supply. in order to invoke the jurisdiction of the Corporation Commission under oil and gas conservation statutes, an applicant must have interest in minerals or hold a right to drill in common source of supply affected by a proposed order. Samson Resources Co. v. Oklahoma Corp. Com'n, 859 P.2d 1118 (Okla. 1993; Leede Oil & Gas, Inc. V. Corporation Commission of State of Oklahoma, 747 P.2d 294, 299 (Okla. 1987; and May Petroleum, Inc., 663 P.2d 716, 717 (Okla. 1982. 52 O.S. Section 87.1 Subsection (a provides that an order "...may be entered after hearing upon petition of any person owning an interest in the minerals in lands embraced within such common source of supply, or the right to drill a well for oil or gas on lands embraced within such common source of supply... Therefore, the issue becomes whether Royal owns an interest in minerals or possesses a right to drill in the lands and the common sources of supply which they seek to space. While the ALJ is well aware the District Court has jurisdiction to resolve issues concerning title, ALJ is also cognizant of the fact the Commission does have authority to determine whether a party has an interest in minerals or a right to drill sufficient to confer jurisdiction on the Commission. (See Samson Resources Co. v. Oklahoma Corp. Com'n., 859 P.2d 1118 (Okla. App. 1993 and 52 O.S. Section 87.1 Subsection (a 3. The ALJ contends Royal does not possess an interest in minerals or the right to drill in the subject Lease. This recommendation is based upon the conclusion Royal's top Leases have never taken effect, because these Leases do not become effective until the "...existing lease expires or is terminated." (See Harding v. Shelton, Inc. v. Prospective Inv. and Trading Co., Ltd. 123 P.3d 56 (Okla. Civ. App Div. 4 2005; 8 Williams & Meyers, Oil and Gas Law, 1115 (2004 Royal argued IllS as well as Gross Production Request For Change records (See Exhibit #2 established the lease failed to produce for one or two months, December 2012 to January 2013, before Prosperous, Royal's operating arm, took possession of the lease. However "...cessation of production during the secondary term of a lease is not in and of itself sufficient to automatically terminate a lease. Rather, a lease remains viable so long as the interruption of production in paying quantities does not extend for an unreasonable period which is not justifiable in light of all the circumstances" (See Baytide Petroleum, Inc. v.
Continental Resources, Inc. 231 P. 3d 114 (Okla. 2010 and Stewart v. Amerada Hess Corp., (Okla. 1979 This Lease was subject to Quiet Title Action filed in District Court and restraining orders were issued which prohibited operation of the Lease. Also during the pendency of this legal action William Green, the Operator, passed away. Furthermore, no one presented any evidence this one or two month delay in production was unreasonable. Thus, the ALJ cannot conclude the cessation in production '... extend[ed] for an unreasonable period which is not justifiable in light of all the circumstance." (See Baytide and Stewart Id. Based upon these facts, as well as the brevity of one month or at most two months cessation in production, the ALJ recommends Green's lease did not terminate. Accordingly, Royal's top Leases did not take effect and Royal does not have an interest in mineral or a right to drill. Therefore, the Commission does not have jurisduction to hear the Spacing Application of Royal. 6. Thus, the ALJ denies the Application of Royal in Cause CD NO. 201300659-T seeking to Space the Prue, Bartlesville, Booch, Dutcher, Union Valley, Cromwell and Wilcox common sources of supply for oil on a 40 acre basis in the E12 NW/4 of Section 9, Township 14 North, Range 11 East, Okmulgee County, Oklahoma, should be denied. Respectfully submitted this 24th of June, 2014. CURTIS MA'OHNSON Deputy Administrative Law Judge 7