Trees Oil Company v. State Corporation Commission, No. 91,733 (KS 2/18/2005)

Decision Date18 February 2005
Docket NumberNo. 91,733,91,733
CourtKansas Supreme Court


1. In this oil and gas appeal taken under K.S.A. 77-601 et seq., the district court decision affirming the Kansas Corporation Commission's order, pursuant to the Kansas Unitization Act, K.S.A. 55-1301 et seq., granting unitization and unit operation of the South Eubank Waterflood Unit is affirmed.

2. Under the facts of this case, the court makes the following findings and rulings: (1) Numerous standards of review and legal maxims of statutory construction are stated and applied; (2) the K.S.A. 55-1302 definition of "pool" is construed to include commingled Chester and Morrow formations which constitute a single and separate natural reservoir characterized by a single pressure system so that production of petroleum from one part of the pool affects the reservoir pressure throughout its extent; (3) there was substantial competent evidence to sustain all the Commission's findings and orders which were made in compliance with K.S.A. 2003 Supp. 55-1304 and K.S.A. 2003 Supp. 55-1305; (4) inclusion of the tracts of an unwilling minority participant in the unit was necessary to protect correlative rights and was supported by substantial competent evidence; (5) denying the unwilling minority participant's request to present supplemental technical geological evidence at an interim hearing held to consider only the fairness of the Unit Operation Agreement was not unreasonable, arbitrary, or capricious.

Appeal from Haskell District Court, TOM R. SMITH, judge. Opinion filed February 18, 2005. Affirmed.

C. Michael Lennen, of Morris, Laing, Evans, Brock & Kennedy, Chtd., of Wichita, argued the cause and was on the brief for appellant.

John G. McCannon, Jr., assistant general counsel, argued the cause, and Susan B. Cunningham, general counsel, was with him on the brief for appellee Kansas Corporation Commission.

Jeff Kennedy, of Martin, Pringle, Oliver, Wallace & Bauer, L.L.P., of Wichita, argued the cause, and Stanford J. Smith, of the same firm, was with him on the brief for appellee OXY-USA, Inc.

Spencer L. Depew, of Depew Gillen Rathbun & McInteer, LC, of Wichita, argued the cause and was on the brief for appellee Anadarko Petroleum Corporation.

The opinion of the court was delivered

Per Curiam:

This is an administrative appeal pursuant to K.S.A. 77-601 et seq. from the decision of the district court of Haskell County, Kansas, affirming the order of the State Corporation Commission of Kansas (KCC or Commission) granting the application of Chesapeake Operating Inc. (Chesapeake) to allow the compulsory unitization and unit operation of the South Eubank Waterflood Unit (Unit) pursuant to the Kansas Unitization Act, K.S.A. 55-1301 et seq., over the continuing objection of The Trees Oil Company (Trees).

The first issue was one of first impression involving the statutory definition of an oil and gas "pool" as defined in K.S.A. 55-1302, when considered by the KCC and district court. This issue becomes one of last impression as the result of 2004 amendments to K.S.A. 55-1302 which now clearly grant the rights Trees contests, as will be fully discussed in our opinion. See L. 2004, ch. 115, sec. 1.

Trees' second, third, and fourth issues involve the application of administrative law to the KCC orders and relate to the involuntary inclusion of Trees' property within the Unit, whether there was substantial competent evidence to uphold the KCC findings and rulings, and if the KCC acted arbitrarily and capriciously in refusing to allow Trees to present additional geological evidence at a second hearing the Commission ordered to consider only the fairness of the terms of the Unit Operating Agreement.

In order to fully understand the issues on appeal, it is necessary that we set forth in considerable detail the procedural history of this appeal, the evidence presented, the findings and orders of the KCC, and the rulings of the district court.

Procedural History and Factual Background

Several oil and gas operators, Chesapeake, OXY-USA, Inc. (OXY), and Anadarko Petroleum Corporation (Anadarko), own 16 oil and gas wells that produce oil out of a 3.7 miles long and 500- to 1,500-foot wide incised Chester and Morrow formation channel and desired to inject water into the Chester formation to produce substantial additional oil production beyond that possible with conventional pumping methods.

Trees owns and operates one oil and gas well on 80 acres within the southern boundary of the proposed water flood project and, after attending two planning meetings in mid-2000, informed the other operators it did not wish to voluntarily participate in the project.

Planning on the project continued and, on June 27, 2001, Chesapeake filed an application with the Commission that sought unitization and unit operations of the area above described. OXY and Anadarko were allowed to intervene.

Trees filed a protest and request for a continuance in mid-July 2001. The hearing, which had originally been set for August 2, 2001, was continued, first to September 6, 2001, and later to September 20, 2001.

The hearing took place on September 20, 2001, with the Commission taking testimony from five technical witnesses and admitting exhibits. Posthearing briefs were filed, the record was closed, and the Commission took the matter under advisement.

On March 12, 2002, the KCC issued an Interim Order Requiring Additional Evidence, in which it stated: "The Commission has before it ample record and is ready to rule on the conditions in K.S.A. 55-1302(a) and (b)," but reopened the record for the specific purpose of receiving additional testimony as to whether specific terms of the Unit Operating Agreement were fair and equitable to all parties.

On April 3, 2002, the Commission heard additional evidence concerning the fairness of the specific terms of the Unit Operating Agreement. The Commission refused to reopen the record to allow Trees to present additional geological testimony.

On April 18, 2002, the KCC issued a detailed 26-page order of findings and conclusions granting Chesapeake's application for unitization and unit operations of the South Eubank Waterflood Unit. Trees' petition for reconsideration was denied, and it then filed a petition for judicial review before the Haskell County District Court.

Briefs were filed, oral arguments were held, and, on December 12, 2003, Haskell County District Judge Tom R. Smith issued a comprehensive 18-page decision in which the rulings and orders of the Commission were affirmed. Trees appealed.

We have jurisdiction by transfer on our own motion pursuant to K.S.A. 20-3018(c).

Ten pages of the Commission order contained a summary of the evidence presented which we will condense somewhat to show the testimony of the proponents and opponents of the application.

Rodney J. Vaeth, a Chesapeake expert landman, presented copies of the Unit Agreement and the Unit Operating Agreement which he testified incorporated the statutory requirements of the Kansas Unitization Act and met the required statutory percentages of both royalty and working interest owners who had approved both agreements. He testified 93.39152 percent of the working interest owners had approved Phase I of the agreements and 94.47862 percent had approved Phase II of the agreements. He further testified 69.396548 percent of the royalty owners on a surface acre basis had approved the agreements, that 64.00343 percent of the royalty owners had approved Phase I and 67.35903 percent of the royalty owners had approved Phase II of the agreements.

Jimmy W. Gowens, a petroleum geologist, testified for Chesapeake and described the reservoir and unit areas as portions of the Morrow and Chester sand formations in an incised channel 3.7 miles long and between 500- to 1,500-foot wide and described how the boundaries were established by the technical committee by seismic data and other factors. He noted that, within the field, Chesapeake operated 12 wells, Anadarko 4 wells, and Trees operates 1 well. He described the Chester sand as continuous from the north boundary of the Unit to the south boundary.

Gowens had personally been involved in drilling all of the Chesapeake wells. He testified seven of the wells within the proposed unit area have commingled production from both the Chester and Morrow formations and, as the result of such dual completions, both of the formations are in pressure communication.

Gowens testified he had prepared the hydrocarbon pore volume (HPV) maps which were used in determining the participation formulas. On cross-examination, he said the HPV values are a very reliable measure of oil in place.

In rebuttal testimony, Gowens said he doubted the ability of Trees to use the Lou Ethel well (a well south of Trees' Josephine well which was included in the Unit) as an injection well for a mini waterflood. He questioned whether there was communication between the two wells because of the possibility of a separating fault.

Chesapeake then presented the testimony of Dan Scott, a petroleum engineer with 22 years of experience. He testified the unit area is underlaid by productive Chester sand which is in good pressure communication throughout the Unit making it an excellent waterflood candidate.

Scott testified the project was economic and would result in incremental secondary recovery of at least 690,000 barrels of oil, a figure he believed to be conservative. He said the increased recovery would not be achievable through primary operations and would therefore prevent waste. The project, based on an oil price of $20 per barrel, was expected to achieve a gross profit of $6.2 million.

Scott then testified in detail regarding the determination of the unit participation percentages and...

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