Sundown Energy, L.P. v. Harding & Shelton, Inc.

• Decision Date: 14 December 2010
• Docket Number: No. 102,248.,102,248.
• Citation: 245 P.3d 1226,2010 OK 88
• Parties: SUNDOWN ENERGY, L.P., Respondent/Appellant, v. HARDING & SHELTON, INC.; Dominion Exploration Mid-Continent, Inc.; Tex-Star, Inc.; and JMA Resources, Inc., Applicants/Respondents/Appellees, and The Corporation Commission of the State of Oklahoma, Appellee.
• Court: Oklahoma Supreme Court

245 P.3d 1226

2010 OK 88

SUNDOWN ENERGY, L.P., Respondent/Appellant,

v. HARDING & SHELTON, INC.; Dominion Exploration Mid-Continent, Inc.; Tex-Star, Inc.; and JMA Resources, Inc., Applicants/Respondents/Appellees,andThe Corporation Commission of the State of Oklahoma, Appellee.

No. 102,248.

Supreme Court of Oklahoma.

Dec. 14, 2010.

ON CERTIORARI TO THE COURT OF CIVIL APPEALS DIVISION 4

¶ 0 Appeal from Corporation Commission's Order allowing Appellee to drill into upper and deeper units resulted in amending a previous pooling order by requiring Appellant to relinquish subsequent well rights if they fail to participate under a cost allocation approach to drilling costs.

CERTIORARI PREVIOUSLY GRANTED; COURT OF CIVIL APPEALS OPINION VACATED; ORDER OF THE CORPORATION COMMISSION AFFIRMED.

Tim W. Green, Guthrie, OK, for Appellant, Sundown Energy, L.P.

Gregory L. Mahaffey, Deena R. Tyler, Ryan W. Sears, Lee D. Groeneveld, Mahaffey & Gore, P.C., Oklahoma City, OK, for Appellee, Harding & Shelton, Inc.

Eric R. King, John M. Benson, Daniel A. Nickel, Gable & Gotwals, Oklahoma City, OK, for Appellee, Dominion Exploration Mid-Continent, Inc.

Roger A. Grove, Grove & Hulett, P.C., Oklahoma City, OK, for Appellee, Tex-Star, Inc.

Charles L. Helm, Helm & Boone, Oklahoma City, OK, for Appellee, JMA Resources, Inc.

Michele O'Neill Craig, Michael Decker, Oklahoma Corporation Commission, Oklahoma City, OK, for Appellee, Oklahoma Corporation Commission.

Mark D. Christiansen, Crowe & Dunlevy, Oklahoma City, OK, for Amicus Curiae,Oklahoma Independent Petroleum Association.

HARGRAVE, J.

SUMMARY OF FACTS AND PROCEDURAL HISTORY

¶ 1 The Corporation Commission, on November 6, 1985, entered Pooling Order (P.O.) No. 289640 which force pooled nine common sources of supply and established a 640-acre drilling and spacing unit underlying Section 20, Township 16 North, Range 18 West in Dewey County, Oklahoma hereinafter referred to as Unit 1. These common sources of supply were the Douglas Sand, Tonkawa, Cottage Grove, Oswego Lime, Cleveland Sand, Cherokee Sand, Morrow, Springer, and Chester Lime. These are "upper" formations. Dominion obtained some of these interests and is the current operator of the Rounds No. 1-20 well located in Unit 1. Dominion owns about 14.9% interest of record in Unit 1. Sundown owns a working interest of approximately 10.33% in Unit 1.

¶ 2 Harding & Shelton, Inc.(H & S) subsequently acquired a leasehold interest of 480 acres in Unit 1. H & S acquisition included leasehold interests in the unpooled formations below the Unit 1 formations which are not included in P.O. No. 289640. These formations, hereinafter referred to as Unit 2, consist of the unpooled formations below the Unit 1 formations.

¶ 3 In 2004, H & S filed an amended application seeking to clarify the rights and interests of the mineral owners of Unit 1 in the nine formations covered by P.O. No. 289640, as well as pooling those of Unit 2 in the lower unpooled formation of Atoka, Mississippi Lime, Hunton, and Viola, which underlie the formations covered by P.O. No. 289640. H & S proposed to drill a well in Section 20, the primary target being the Hunton formation in Unit 2. This proposal, would require H & S to drill a well through both the previously pooled upper formations of Unit 1 and into the other lower pooled formations of Unit 2 to reach the Hunton. H & S's expert testified that the Hunton was the target formation but that the Hunton and Atoka were primary zones of interest, with the Mississippi and Chester as secondary objectives.

¶ 4 Based on the application of H & S, the Oklahoma Corporation Commission entered P.O. No. 497550, dated November 16, 2004, allowing H & S to pool the deeper formations of Unit 2, which were underlying those formations previously pooled as Unit 1 by P.O. No. 289640, exclusive of the Rounds No. 1-20 well. The Commission denied H & S's request to include those formations of Unit 1 covered by P.O. No. 289640 with the deeper formations of Unit 2. Thus, the Commission, in effect, created two units, Unit 1—the shallow, upper formations, and Unit 2—the lower, deeper formations. In its order, the Corporation Commission determined that to allow Unit 1 covered by P.O. No. 289640 to be pooled with Unit 2, the deeper formations, constituted an impermissible collateral attack upon the original pooling order. The Commission appointed H & S as operator of the deeper units and pooled the deeper common source of supply of the Atoka, Mississippi Lime, Hunton Lime, and Viola. H & S appealed the order that granted in part and denied in part their application.

¶ 5 The Oklahoma Court of Civil Appeals, Division I, affirmed the H & S application as set out by the Commission's P.O. No. 497550 in Harding & Shelton, Inc. v. Sundown Energy, Inc., 2006 OK CIV APP 12, ¶ 13130, 130 P.3d 776, 779. The Court of Civil Appeals noted that the 1985 pooling order finally determined the rights and obligations of mineral owners "in the affected common source(s) of supply, because to hold otherwise would cast the established rights and obligations of any holder of a mineral interest in the previously pooled common source(s) into chaos every time there was a change in ownership of mineral or leasehold rights in any pool formation." The 1985 order was held to be impervious to collateral attack, because there was no evidence of a cessation of production so as to nullify the order, and because there was no attempt to show a change of condition or knowledge of conditions so as to render modification proper. Applicants were thus unsuccessful in seeking to re-pool the formations covered bythe 1985 order and to pool the deeper formations that had not previously been pooled underlying the same 640 acres.

¶ 6 Subsequently, in November 2004, H & S filed an application seeking the following relief from the Oklahoma Corporation Commission:

(1) to clarify, amend, modify, and supplement P.O. 289640 to determine that the pooled common sources of supply (Unit 1) were pooled as a unit and did not pool only the borehole (Rounds No.1-20);

(2) to determine P.O. 289640 was still in force and effect;

(3) to determine that any owner who elected an alternate to participation in the initial well drilled pursuant to Order No. 289640 is deemed not only to have relinquished all of its working interest and right to drill in said unit and said common sources of supply as to the initial well drilled, but also as to any wells drilled subsequent thereto, and to make provisions for subsequent wells drilled on the unit for those parties who participated in the initial well drilled pursuant to said order, and;

(4) to amend P.O. 289640 to designate H & S as operator of all subsequent wells.

Sundown protested.

¶ 7 An administrative-law judge recommended that H & S's application be granted. The Oklahoma Corporation Commission ultimately granted the relief requested by H & S, and Sundown brought the instant appeal. The Court of Civil Appeals reversed, noting that the Commission's 2005 order required "Sundown to surrender its interests in the formations of Unit 1 and its opportunity to other future development therein if it fails to participate in drilling a well to the deeper formation of Unit 2, in which it does not own an interest ..." Although the order allows Sundown Energy to pay its proportionate share of the cost of drilling to the deepest formation, the Court of Civil Appeals concluded that if the well is completed, then "Sundown will be required to pay its proportionate share of costs, but will not share in the revenue from the deeper formation of Unit 2 because it does not own an interest in the Unit 2 formations pooled." We grant Certiorari to review this holding.

STANDARD OF REVIEW

¶ 8 The Oklahoma Constitution at Article 9, § 20 sets forth the standard of review for appeals from orders of the Oklahoma Corporation Commission and states as follows in relevant part:

The Supreme Court's review of appealable orders of the Corporation Commission shall be judicial only, and in all appeals involving an asserted violation of any right of the parties under the Constitution of the United States or the Constitution of the State of Oklahoma, the Court shall exercise its own independent judgment as to both the law and the facts. In all other appeals from orders of the Corporation Commission the review by the Supreme Court shall not extend further than to determine whether the Commission has regularly pursued its authority, and whether the findings and conclusions of the Commission are sustained by the law and substantial evidence.

"An appeal from a Corporation Commission order rest solely in the Oklahoma Supreme Court. If the appeal asserts a violation of constitutional rights, the Supreme Court shall exercise its own independent judgment on questions of both law and interpretation of facts. This Court will, however, determine constitutional questions only if necessary to adjudicate the rights of the parties." Ranola Oil Co. v. Corporation Com'n., 1988 OK 28, ¶ 7, 752 P.2d 1116, 1118.

¶ 9 The Commission has a wide discretion in the performance of its statutory duties, and this Court may not substitute its judgment upon disputed factual determinations for that of the Commission but is restricted to a determination of substantial evidentiary support for the order issued under authority of the statutes. Union Texas Petroleum v. Corporation Com'n., 1981 OK 86, ¶ 31, 651 P.2d 652; In re Application of Continental Oil Company, 1962 OK 131, 376 P.2d 330. Searching a record for substantial evidence supporting the order appealed does not entail a comparison of the parties' evidence to determine that which is most convincingbut only that the evidence supportive of the order be considered to determine whether it implies a quality of proof inducing a conviction that the evidence furnished a substantial basis of facts from which the issue could be reasonably resolved. Union Texas Petroleum v. Corporation Com'n, 1981 OK 86, ¶...