O'Neill v. American Quasar Petroleum Co.

• Decision Date: 08 January 1980
• Docket Number: No. 50741,50741
• Citation: 617 P.2d 181
• Parties: APPLICANT: American Quasar Petroleum Co. In the Matter of Pooling Interests and Adjudicating the Rights and Equities of Oil and Gas Owners in the Pennsylvanian, Tonkawa, Cottage Grove, Oswego, Cleveland, Big Lime, Red Fork (Cherokee), Atoka, Morrow, Chester, Mississippian, Hunton, Viola, Simpson, and Arbuckle Common Sources of Supply Underlying all of Section 12, Township 18 North, Range 20 West, Dewey County, Oklahoma. Joseph I. O'NEILL, Jr.; Howard L. Kennedy and Jacqueline Kennedy, husband and wife; John F. Mitchell and Evelyn Mitchell, husband and wife; and William E. Hulsizer and Phyllis N. Hulsizer, husband and wife, Appellants, v. AMERICAN QUASAR PETROLEUM CO., Appellee.
• Court: Oklahoma Supreme Court

Page 181

617 P.2d 181

1980 OK 2

APPLICANT: American Quasar Petroleum Co In the Matter of Pooling Interests and Adjudicating the Rights and Equities of Oil and Gas Owners in the Pennsylvanian, Tonkawa, Cottage Grove, Oswego, Cleveland Big Lime, Red Fork (Cherokee), Atoka, Morrow, Chester Mississippian, Hunton, Viola, Simpson, and Arbuckle Common Sources of Supply Underlying all of Section 12, Township 18 North, Range 20 West, Dewey County, Oklahoma Joseph I. O'NEILL, Jr.; Howard L. Kennedy and Jacqueline Kennedy, husband and wife; John F. Mitchell and Evelyn Mitchell, husband and wife; and William E. Hulsizer and Phyllis N. Hulsizer, husband and wife, Appellants, v. AMERICAN QUASAR PETROLEUM CO., Appellee.

No. 50741.

Supreme Court of Oklahoma.

Jan. 8, 1980.

As Modified Jan. 11, 1980.

Rehearing Denied Oct. 10, 1980.

Appeal from an order of the Oklahoma Corporation Commission.

Owners of royalty interests in drilling and spacing unit appeal from Corporation Commission order pooling interests in the unit, correctly alleging the Commission has no statutory authority to issue a pooling order requiring nonparticipating royalty owners to either participate in drilling unit well or in the alternative to accept a lesser royalty, notwithstanding the fact the nonparticipating royalty owners' interest is convertible to a working interest upon payout.

REVERSED AND REMANDED.

Guy E. Taylor, Oklahoma City, for appellants.

Watson, McKenzie & Moricoli by H. B. Watson, Jr., Richard K. Books, Oklahoma City, for appellee.

HARGRAVE, Justice:

The appellants, William E. Hulsizer and his wife Phyllis, own an overriding royalty interest in the leasehold of Joseph I. O'Neill, Jr. totaling 1% of 8/8ths in and to 77.31 acres of a 640-acre drilling and spacing unit located in Section 12-18N-20W of Dewey County, Oklahoma. Mr. O'Neill also assigned an override of 1.5625% of all oil and gas produced to appellants Howard L. and Jacqueline Kennedy, which was convertible at the election of the assignees to a 6.25% working interest upon payout of the unit well. An identical override of 1.5625% convertible to a 6.25% working interest at payout was granted to John F. Mitchell and Evelyn Mitchell. Additionally a 5.46875% override was granted by O'Neill to John R. Withrow. Therefore the 77.31 acre leasehold interest owned by O'Neill was burdened by a 9.k % overriding royalty and a contingent interest equal to 1/8th of the leasehold vesting upon payout of a well.

A year and eight months later lessee O'Neill was notified that American Quasar Petroleum Company intended to drill a well on the previously established unit. Thereafter appellee filed its application with the Corporation Commission requesting Section 12 be pooled. The cause was set for hearing and at the day and time appointed for that hearing, appellants' counsel requested a continuance for the purpose of requesting additional evidence. Appellee resisted the continuance on the ground that it was presently awaiting the Commission's order so that they could begin drilling. The hearing was held the afternoon of the originally scheduled day, February 8, 1977, before the Commission en banc. The Commission's order gave any owner of a right to drill on the unit four alternatives. They were: (1) to participate in development by paying a proportionate cost of the well; (2) To receive a cash bonus of $100 per acre and the normal 1/8th royalty interest; (3) To receive $75 per acre bonus and a 1/16th of 8/8th in addition to the normal royalty of 1/8th; or (4) To receive in addition to the normal 1/8th royalty an override of 1/16th of 7/8ths on oil and 1/8th of 7/8ths on natural gas. These alternatives were not given to O'Neill, the Kennedys, the Michells or the Hulsizers and the alternatives allowed these parties were either to participate in the development or to accept the fair share of the production listed in Item (4) above. Upon failure to elect within 20 days the order provided the appellants were deemed to have elected to take the override of 1/16th of 7/8ths oil and 1/8th of 7/8ths gas in addition to the 1/8th royalty. The last mentioned provision (fair share of production) was accepted reserving the right to appeal.

We reach only the appellants' first proposition of error asserting that the Corporation Commission does not have statutory authority to adjudicate the rights and equities of owners of an overriding royalty interest. 52 O.S.1971, § 87.1(d) (since amended) provides statutory authority for the Commission to force a pooling of separately owned interests in a unit. In pertinent part that statute provides:

... 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 said 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 hearing thereon, require such owners to pool and develop their lands in the spacing unit as a unit. ... (Emphasis supplied.)

The statute gives the Commission the authority to require the owners to pool and develop as a unit. The Corporation Commission is a tribunal of limited jurisdiction and its power is derived from and defined exclusively by the provisions set forth in and necessarily implied by the Statutes of the State of Oklahoma. Kingwood Oil Co. v. Hall-Jones Oil Co., Okl., 396 P.2d 510 (1964). The definition of the term "Owner" is set forth in 52 O.S.1971, § 86.1(d) as follows: "The term 'Owner' shall mean 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 himself or for himself and others." Inserting the definition for the word defined, we read the statute to state: Where such persons having the right to drill and produce have not agreed to pool their interests and where one such person having a right to drill into and produce from any common source of supply, has drilled or proposes to drill a well on said unit to the common source of supply, the Commission, to avoid the drilling of unnecessary wells, or to protect correlative rights, shall upon proper application, require such persons having the right to drill or produce, to pool and develop their land in the unit as a unit. The statute therefore authorizes 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. Does an owner of an overriding royalty interest possess a right to drill or produce? If so, then the above mentioned statute, 52 O.S.1971, § 87.1(d), empowers the Commission to require the owner of the override to pool and develop their land.

The term overriding royalty refers to a percentage carved from the lessee's working interest, free and clear of any expense incident to production and sale of oil and gas produced from the leasehold. De Mik v. Cargill, Okl., 485 P.2d 229 (1971), reviewed certain attributes of an overriding royalty interest. The nature of an overriding royalty interest is such that only when oil and gas are reduced to possession does the interest attach. Prior to this event the owner of an override has no assertable right in the leasehold, and the vesting of an overriding royalty owner's rights are dependent upon the happening of a future event or condition. In Cities Service Oil Co. v. Geolograph Co., 208 Okl. 179, 254 P.2d 775 (1953) quoting from Thornburgh v. Cole, 201 Okl. 609, 207 P.2d 1096, this Court stated that an overriding royalty is a certain percentage of the working interest which as between the lessee and assignee of the mineral lease is not charged with the cost of development or production. The Court discussed the fact that the term "Overriding royalty" was a term of peculiar significance and common usage in the industry, and when the term was used by those familiar with the industry it "must have been" the purpose of the parties that payments made should be free and clear of all cost and expenses.

The owner of an overriding royalty interest has no assertable right in the oil and gas leasehold prior to the time when the hydrocarbons are reduced to possession. De Mik v. Cargill, supra. This being true, it necessarily follows that the owner of an override has no right to drill and produce from a common source of supply on the unit. Therefore the owner of an override is not an "Owner" as defined by 52 O.S.1971, § 86.1(d). The appellee and the Corporation Commission suggested in the oral presentation of this cause that the Commission's power to require "owners to pool and develop" as specified in 52 O.S.1971 § 87.1(d) is not limited to those classes of owners defined in 52 O.S.1971 § 86.1(d) as those having a right to drill into and produce from a common source by virtue of the second paragraph of 52 O.S.1971 § 87.1(d), wherein it is provided:

For the purpose of this section the owner, or owners, of oil and gas rights in and under an unleased tract of land shall be regarded as a lessee to the extent of seven-eighths (7/8) interest and a lessor to the remaining one-eighth (1/8) interest therein. (E.A.)

We cannot conclude that this section implies the power to completely rearrange contractual rights and duties of the owners of all overriding royalty interests in the state by converting their non-participating investment into a working interest where the royalty is in excess of one-eighth. To do so would be a major disruption of the investments made therein and of the industry that created them. Such a profound upheaval is not contemplated by the last-quoted provision. The language quoted simply solved the dilemma in regard to the Commission's power to, in effect, give a forced lease on unleased tracts and indicates the treatment to be given to the interests after that is done. There is no indication in the language quoted which justifies a broader application than in instances...