Marathon Oil Co. v. Corporation Com'n of State of Okl.

• Decision Date: 01 March 1994
• Docket Number: 76955,Nos. 77190,s. 77190
• Citation: 910 P.2d 966,1994 OK 28
• Parties: MARATHON OIL COMPANY, Appellant, v. CORPORATION COMMISSION OF the STATE OF OKLAHOMA and Arco Oil and Gas Company, Appellees. ANADARKO PETROLEUM CORPORATION, and Marathon Oil Company, Appellants, v. CORPORATION COMMISSION OF the STATE OF OKLAHOMA and Arco Oil and Gas Company, Appellees.
• Court: Oklahoma Supreme Court

Page 966

910 P.2d 966

1994 OK 28

MARATHON OIL COMPANY, Appellant, v. CORPORATION COMMISSION OF the STATE OF OKLAHOMA and Arco Oil and Gas Company, Appellees.

ANADARKO PETROLEUM CORPORATION, and Marathon Oil Company, Appellants, v. CORPORATION COMMISSION OF the STATE OF OKLAHOMA and Arco Oil and Gas Company, Appellees.

Nos. 77190, 76955.

Supreme Court of Oklahoma.

March 1, 1994.

Rehearing Denied Feb. 15, 1996.

Appeal from Oklahoma Corporation Commission.

Andrews Davis Legg Bixler Milsten & Price by S. Paul Hammons, Oklahoma City, for appellant Marathon Oil Co. Watson & McKenzie by H.B. Watson, Jr., Sharon Taylor Thomas, Janis W. Preslar, Oklahoma City, for appellee Arco Oil and Gas Co.

Lindil C. Fowler, Jr. and Leslie W. Pepper, and Ben Jackson, Gen. Counsel Oklahoma Corp. Com'n, Oklahoma City, for appellee Oklahoma Corp. Com'n.

Mahaffey & Gore by Richard J. Gore, Oklahoma City, for appellees J. Howard Lennon and C. Everett Lennon.

Stack & Barnes by Robert N. Barnes, Deborah B. Barnes, Oklahoma City, for appellee Nicor Exploration Co.

HODGES, Chief Justice.

Anadarko Petroleum Corporation (Anadarko) and Marathon Oil Company (Marathon), appellants, appeal from two orders issued by the Oklahoma Corporation Commission (OCC) establishing field rules for the Wilburton-Arbuckle gas field located in Latimer County, Oklahoma. Arco Oil and Gas Company (ARCO), NICOR Exploration Company (NICOR), J. Howard and C. Everett Lennon, and the OCC are the appellees. Order number 352615 found that the OCC had jurisdiction over the matter. Order number 353858 established the field rules. The issues in this appeal are (1) whether the OCC had jurisdiction to establish field rules, (2) whether the orders are void for failure to give notice to owners of mineral interests whose interests are not included in the common source of supply as defined by the spacing order, and (3) whether the OCC's orders were supported by substantial evidence.

ARCO filed an application with the OCC to classify the Wilburton-Arbuckle common source of supply, which is the subject of this dispute, as a special allocated gas pool and to establish field rules setting production rates for the spacing units. There are fifteen producing wells in the field as established by the OCC's spacing order. Fourteen of those are operated by ARCO. Marathon has a working interest in five of the eighteen spacing units.

Marathon filed a motion to dismiss. The motion was presented to an administrative law judge and an appellate administrative law judge. Both administrative law judges found that the OCC lacked jurisdiction to issue field rules. On December 14, 1990, Marathon filed an Application to Assume Original Jurisdiction and Petition for Writ of Prohibition which this Court declined. On January 31, 1991, the OCC entered its order enacting field rules.

It is uncontested that the field is defined by bounding faults and is highly fractured. Because of the fractures the field is both horizontally and vertically permeable causing the wells to be in communication with each other. It is further uncontested that it is impossible to construct an accurate net isopach map ¹ because the porosity across the field is highly variable. The parties agree that the gas-water transition zone is at 13,300 feet below sea level. The relationship of porosity to the quantity of gas in place is of utmost importance to the understanding of the issues in this matter. Porosity of rock is "[t]he relative volume of the pore spaces between mineral grains as compared to the total rock volume. This porosity measures the capacity of the rock to hold oil, gas, and water." ² Therefore, the higher the porosity, the more gas is in place.

ARCO's experts testified that, because porosity cannot be accurately calculated, it should be assumed that the porosity can be expected to be uniform across the field, both horizontally and vertically. Based on this assumption, ARCO further assumed that the gas underlying each unit was equal to the "gross rock" volume underlying each unit. The parties have used the term gross rock to denote the space underlying each unit. There was no evidence presented on which to base this assumption, and no one testified that gross rock was a measure of gas in place.

ARCO proposed field rules based on these two assumptions. ARCO calculated what it determined to be the area of the reservoir. Gross rock was determined by multiplying the area underlying each unit times the height of the Arbuckle formation underlying each unit. ARCO used 13,300 feet below sea level as the base of the Arbuckle in determining the height of the formation under each unit. ARCO totaled the gross rock from each unit to arrived at the total gross rock for the field. It then determined what portion of gross rock underlaid each unit. ARCO proposed that each unit be assigned an allowable based solely on the portion of gross rock under each unit.

Based on its calculations of the gross rock under each unit, ARCO determined that some of the wells were not recovering their fair share of the gas and that correlative rights were being violated. ARCO reasoned that, in order to protect correlative rights, either field rules would have to be adopted or additional wells would have to be drilled. It argued that the drilling of additional wells would constitute waste.

Marathon presented evidence that most of the porosity was above 716 feet below the ceiling of the reservoir and that only a small measure lay between the 716 feet mark and the 13,300 feet below sea level. Based on what Marathon determined to be the gross rock, it proposed a formula ninety per cent of which was based on deliverability and ten per cent on gross rock.

The OCC issued an order for field rules. The OCC found that it had jurisdiction to issue field rules and that proper notice had been given. The OCC also found: "It [was] not possible to correlate the porosity and permeability across the field" and "[t]he best porosity [was] in the upper portion of the reservoir."

Even though the OCC found that the best porosity was in the upper portion of the reservoir, it adopted ARCO's calculation of the gross rock which assumed that porosity was uniform across the field. But the OCC did not adopt ARCO's proposed formula. Rather, the OCC adopted a formula based on fifty per cent deliverability and fifty per cent gross rock. ³

The field rules provide that the operators will recommend the anticipated deliverability of each well and the anticipated market demand. The pool allowable is equal to the estimated market demand. Each unit's allowable is determined by multiplying the pool allowable times the portion of the unit's gross rock and its wells' deliverability. The deliverability is determined by conducting a five-day test on each well four times a year. The unit allowable shall not be less than twenty per cent of that unit's allowable for the preceding January or 1,000 million cubic feet of gas per day, whichever is greater.

I. Jurisdiction

Under its police power, the state has authority to regulate the production of oil and gas. Helmerich & Payne, Inc. v. Corporation Comm'n, 532 P.2d 419, 422 (Okla.1975). The OCC's power, although derived from the police power of the state, is only such as expressly or by necessary implication granted by statute. Kingwood Oil Co. v. Hall-Jones Oil Corp., 396 P.2d 510, 513 (Okla.1964); Helmerich & Payne, 532 P.2d at 423. Thus, the police power will not suffice to bestow jurisdiction on the OCC. Neither do we agree that the OCC's jurisdiction is based on an amorphous intent of the legislature which is not specifically addressed by a statute. Rather, there must be statutory authority, either express or necessarily implied for the OCC's action. See Kingwood Oil Co., 396 P.2d at 513.

The appellees suggest section 86.4 of title 52 expressly grants the OCC's jurisdiction over this matter. Section 86.4 provides:

The [Oklahoma Corporation] Commission is hereby empowered after notice of hearing to make such orders, rules and regulations applicable to each common source of supply as it may find to be necessary or proper....

The jurisdiction granted under section 86.4 is limited to the protection of public rights. Nilsen v. Ports of Call Oil Co., 711 P.2d 98 (Okla.1985). This protection of public rights includes the prevention of waste and the protection of correlative rights of owners of mineral interests in the land overlying a common source of supply. Wood Oil Co. v. Corporation Comm'n, 268 P.2d 878 (Okla.1954). Therefore section 86.4 grants authority to make orders which are necessary to prevent waste as defined in and limited by sections 86.3 and 243 and to protect the correlative rights of the mineral interest owners. ⁴

Because we find that section 86.4 empowers the OCC to establish field rules for the protection of correlative rights, we need not address whether the other statutes proposed by the appellees would serve as a basis for jurisdiction.

II. Notice

Marathon objects to the OCC orders based on lack of notice to parties whose interests were not included in the spacing orders. The appellees respond that Marathon does not have standing to object to other mineral owners' lack of notice when Marathon admittedly received proper notice. The appellees also argue that Marathon has launched an improper collateral attack on the OCC spacing order.

In Order No. 352619, the OCC found that the Arbuckle formation underlying the eighteen sections covered by the application in this case to be a common source of supply. That determination can be changed only upon "a changed factual situation from that existing at the time the order was entered, in order that the modification not constitute a prohibited collateral attack." Corporation Comm'n, v. Union Oil Co., 591 P.2d 711, 716 (Okla.1979). Thus, for purposes of notice, the OCC was authorized to rely on its previous finding and treat the area underlying the eighteen sections...