Bennion v. Utah State Bd. of Oil, Gas & Min.

• Decision Date: 04 November 1983
• Docket Number: No. 18345,18345
• Citation: 675 P.2d 1135
• Court: Utah Supreme Court
• Parties: S.H. BENNION, Plaintiff and Appellant, v. UTAH STATE BOARD OF OIL, GAS & MINING and Shell Oil Company, a Delaware corporation, Defendants and Respondents.

Page 1135

675 P.2d 1135

S.H. BENNION, Plaintiff and Appellant, v. UTAH STATE BOARD OF OIL, GAS & MINING and Shell Oil Company a Delaware corporation, Defendants and Respondents.

No. 18345.

Supreme Court of Utah.

Nov. 4, 1983.

Peter Stirba, Salt Lake City, for plaintiff and appellant.

Alan L. Sullivan, Salt Lake City, for Shell Oil.

David L. Wilkinson, Atty. Gen., Richard L. Dewsnup, Asst. Atty. Gen., Salt Lake City, for defendants and respondents.

OAKS, Justice:

This is a case of first impression on the rights of a nonconsenting mineral owner under the pooling provisions of the Oil & Gas Conservation Act, U.C.A., 1953, § 40-6-1, et seq. After extensive hearings, the Board of Oil, Gas and Mining ("the Board") ruled for the operator, Shell Oil Co. The mineral owner, Bennion, challenged that order in an action or appeal (the authorizing statute uses both terms, § 40-6-10) in the district court. On cross-motions for summary judgment, the district court affirmed the Board's order, and the mineral owner pursued this appeal. The issues all concern the rights of the owner of a mineral interest who refuses to enter into a voluntary pooling arrangement with the operator of a drilling unit as to the period prior to the effective date of an order forcing the pooling of all interests in the drilling unit.

We note at the outset that while this appeal was pending the Legislature repealed Title 40, chapter 6, and reenacted it with different content and section numbers. Utah Laws, 1983, ch. 205. Neither of the parties has suggested that any of these changes affect the resolution of this controversy. Statutory references herein are to the legislation in force at various times pertinent to this controversy and prior to the reenactment in 1983.

Under the common law "rule of capture," a property owner could drill a well on his own land and recover oil or gas by drainage from his neighbor. Brown v. Spilman, 155 U.S. 665, 670, 15 S.Ct. 245, 247, 39 L.Ed. 304 (1895); 1 Williams & Meyers, Oil & Gas Law § 204.4 (1981). This rule of law produced results that were unfair to many landowners and development practices that were uneconomical or wasteful for all. Thus, it encouraged the drilling of more wells than necessary to drain a field, and it permitted techniques and rates of production that augmented the profits of the property owner whose land was producing, but wasted the resources of the field as a whole. Allen, "An Argument for Enforced Unit Development of Oil and Gas Reservoirs in Utah," 7 Utah L.Rev. 197 (1960). Legislative remedies were required.

The Utah Oil and Gas Conservation Act, enacted in 1955, implements the declared public interest in developing natural resources in a manner that will prevent waste, foster greater ultimate recovery, and protect the correlative rights of all property owners. § 40-6-1. The Act establishes the Board of Oil, Gas and Mining (as it is now known) and gives that body broad powers of policy making and adjudication to enforce the provisions of the Act. Those powers include identifying ownership of oil or gas wells and producing leases and specifying and supervising techniques of exploration and production. § 40-6-5. Other powers are mentioned below. The constitutionality of this legislation is not at issue on this appeal. (Similar legislation in other states has been upheld. Authorities cited Annot. 37 A.L.R.2d 434 (1954)).

I. FACTS

In 1971 and 1972, in the exercise of its statutory powers, § 40-6-6, the Board established oil and gas drilling units for large areas in the state. The Board made each "section" a drilling unit and authorized the drilling of only one well on each unit. Among the units so established was Section 1, Township 2 South, Range 5 West, Uintah Special Meridian, in Duchesne County. At about this time, the working interests in the minerals in this section were owned by or leased to eight persons. Shell Oil Co. had a little over 75 percent of the total mineral interests in the section, and Bennion owned about 3 percent (an unleased one-fourth mineral interest in 80 acres). (The royalty interests under leases, held by approximately fifty other persons, are not at issue here.)

In June 1973, Shell notified the other seven working interest owners of its intent to drill a well in the unit and proposed that their interests be pooled by agreement, as authorized in § 40-6-6(f). All agreed except Bennion, who notified Shell by letter in December 1973 that he did not want to be involved in the venture. Shell proceeded with the well and completed it as a producer on July 7, 1974. Production (or proceeds) and costs were divided among the various working interest owners in accordance with their agreement. As a "nonconsenting owner," Bennion's rights and duties were as prescribed by the statutory law, Utah Laws, 1966, ch. 8, § 1, § 40-6-6(g) (prior to amendment in 1977), whose uncertainty provides the occasion for this appeal. At this point, Bennion apparently believed the statutes guaranteed him a royalty on his interest, free from any share of the costs of drilling, and Shell apparently believed that Bennion had no rights to any payment so long as he was not involved in any pooling arrangement.

In February 1975, Bennion petitioned the Board to exercise its statutory power, § 40-6-6(f), to order the pooling of all interests in the drilling unit (so-called "forced pooling"). Hearings scheduled for March and September 1975 were continued without date upon Bennion's request.

Correspondence exchanged between Bennion and Shell during the fall of 1975 illuminates the nature of their controversy. Bennion contended that his share of the total mineral interest in the section was 3.125 percent; Shell maintained it was 2.94898 percent. The difference concerned the size of the section. Bennion calculated his share on the basis of a drilling unit of 640 acres, relying on the fact that the Board order establishing drilling units in this area specified "640 acre drilling units ... comprising each governmental section, or governmental lots corresponding thereto...." (Cause No. 139-8, Order of Sept. 20, 1972.) Shell calculated on the basis that Section 1 in fact contained 678.2 acres rather than the usual 640.

In order to reap maximum benefits from his position as the owner of a mineral interest in a producing well, Bennion had to enter a pooling arrangement and pay his share of the producing costs along with the other owners of the working interests. In December 1975, he sent Shell a check for $26,293.87 for that purpose. He calculated this amount on the basis of Shell's report of total costs of $841,403.82 through February 1975 and his claimed share of 3.125 percent. Shell promptly returned the check with a letter explaining that "we do not agree with the facts and conditions presented therein," an obvious reference to the continuing controversy over the exact size of Bennion's interest.

In May 1976, the well achieved "payout"; i.e., the value of its production exceeded the amount necessary to pay drilling and related costs. Before and after that time, Shell and Bennion continued to negotiate sporadically. Neither sought further intervention from the Board until June 7, 1979, when Bennion renewed his petition for forced pooling. After several hearings, the Board, in an interim order entered March 26, 1980, ordered the drilling unit pooled, effective July 26, 1979. The final order, entered April 30, 1981, reaffirmed the forced pooling, recognized the 678.2 acres of Section 1 as the drilling unit, established Bennion's interest in the unit at 2.94898 percent, and directed that Bennion was entitled to his share of production in kind from and after the date of the forced pooling, upon payment of his share of expenses.

As to production prior to the forced pooling, the Board's order stated "that Shell is willing to let Bennion share in the proceeds of production of said unit from first production," thus sidestepping the contested issue of the nonconsenting landowner's vested right to a share of production prior to pooling. In defining Bennion's right to these "proceeds" of production, the Board ordered, in substance, as follows. (These orders were affirmed by the district court, and their result or reasoning is to greater or lesser extent challenged on this appeal.)

1. A nonconsenting mineral owner is entitled to his proportionate share of a one-eighth royalty from first production to payout, thus treating him during this period as if he had leased his mineral interest to the operators for the standard royalty. (In Bennion's case, this amount totalled $14,334.48.)

2. From payout to the effective date of pooling, a nonconsenting mineral owner is entitled to his proportionate share of the revenue received from production, less his proportionate share of expenses, including expenses incurred prior to payout as well as thereafter. (In Bennion's case, this amount totalled $105,091.09 less $47,203.16, which equalled $57,887.93. This amount plus the royalty of $14,334.48, a total of $72,222.41, had been paid by Shell and invested in a money market certificate immediately after the interim order of March 1980. The Board ordered this certificate and accrued interest delivered to Bennion.)

3. Shell was required to pay Bennion 6 percent interest on the amount of his "statutory royalty" for the period from first production until the purchase of the original money market certificate. (This amount was calculated at $2,504.)

In respect to these orders, Bennion contends (1) that he should receive production in kind prior to the pooling order. In the alternative, if Shell is held to be able to satisfy its obligation by cash payments for the proceeds of production, Bennion contends (2) that his royalty should be "cost free," so Shell must not deduct expenses incurred prior to payout, and (3) that he is entitled to interest on amounts due under his working interest payments (after payout), as well as...