Generally, the answer to the question above will depend if the dispute involves interpretation of a private agreement involving private rights and duties between the non-operating working interest owner[1] and the operator, or involves the public’s interest in the conservation of oil and gas. Reviewing credible Oklahoma authorities can provide better clarity. However, it may be beneficial to summarize how both parties may come to find themselves confronted with the question.
After an oil and gas exploration company has acquired oil and gas rights,[2] the exploration company has several ways to proceed.[3] If a drilling and spacing unit has been created by an order of the Oklahoma Corporation Commission oil and gas division, the exploration company may propose a private agreement to develop the oil and gas rights, commonly referred to as a joint operating agreement, to other interest owners owning oil and gas rights in the drilling and spacing unit.
Alternatively, the exploration company may file a force pooling proceeding in the Oklahoma Corporation Commission oil and gas division to force other interest owners to agree to develop the oil and gas rights. The result of the proceeding may be a pooling order.[4] The pooling order will generally designate the exploration company filing the proceeding as the operator[5] of the proposed well. With regard to interest owners who have not entered into oil and gas leases with the operator or other exploration companies, the pooling order will generally require those unleased interest owners to elect to participate in the drilling and completion of the proposed well or to lease their interests on terms set out in the order. With regard to working interest owners who have not entered into a private joint operating agreement or a farmout agreement with the operator, the pooling order will generally require those working interest owners to elect to participate in the drilling and completion of the proposed well or farmout their interests to the operator, with the terms of the farmout set out in the force pooling order.
With this background, several possible scenarios may arise.
Scenario 1: If there is no private joint operating agreement between the operator and non-operating working interest owner, disputes regarding elections under the pooling order are governed by that order, which is subject to interpretation by the Oklahoma Corporation Commission.
Samson Resources Co. v. Oklahoma Corporation Commission, 1987 OK 73, 742 P.2d 1114, is an example of the above statement. In that case, TXO Production Corp. pooled a unit and Samson elected to participate with its interest. Later after the well was completed, TXO filed a second pooling application in which it sought to pool an uncommitted 40-acre interest of W. O. Pettit. The pooling order entered October 13, 1982, gave Pettit 15 days to elect. On the last day to elect, Petit sent TXO a letter in which he advised TXO,
In response to your force pooling [sic] order covering above captioned section, this is to advise I have farmed out my interest to Samson Resources Company, 2700 First National Tower, Tulsa, Oklahoma 74103, who has informed you they will participate with my interest.
1987 OK 73 at ¶ 3, 742 P.2d at 1115. After the day to elect passed, Samson sent TXO a letter in which the writer “confirm[ed] my earlier phone conversation wherein I informed you of our acquisition of W. O. Pettit’s interest in the captioned unit. Please forward a revised Exhibit “A” to the Operating Agreement covering the captioned unit.” 1987 OK 73 at ¶ 4, 742 P.2d at 1115. TXO took the position the letters were not valid elections by Samson to participate. Samson sought an order from the Commission determining Samson had made a valid election to participate. The Commission held Samson did not.
In affirming the Commission’s order that Samson failed to make a proper election to participate, the Oklahoma Supreme Court distinguished the jurisdictional issue of which tribunal, the Commission or district court, had the authority to determine pooling election disputes when there was no private joint operating agreement involved.
After the Corporation Commission issued its order in the case at bar, this Court handed down Tenneco. Samson cites Tenneco for the proposition that the Corporation Commission has no jurisdiction to entertain disputes over the status of elections under pooling orders. Such a construction is too broad. In Tenneco, as in the case at bar, the issue before the Court was the proper forum for deciding whether one of the parties had properly elected to participate in the drilling of a well. But unlike the case before us, the parties in Tenneco had entered into a private operating agreement which had to be construed to determine whether the election was valid. This Court found that the dispute involved the private rights of the parties, and that “no attempt [was] made by any party in the instant case to change or challenge the public issue of conservation of oil and gas,” and therefore the proper forum was the district court. Tenneco, 687 P.2d at 1054-1055.
1987 OK 73 at ¶ 7, 742 P.2d at 1115-1116.
Scenario 2: After a pooling order is issued by the Oklahoma Corporation Commission, if the party named as operator and a non-operating working interest owner whose interest was force pooled execute a private joint operating agreement further defining their rights and duties, disputes regarding those rights and duties are to be resolved by the district courts, not the Oklahoma Corporation Commission.
In Tenneco Oil Co. v. El Paso Natural Gas Co., 1984 OK 52, 687 P.2d 1049, the Oklahoma Supreme Court addressed the issue “may the interested parties to a forced-pooling order contract as to interests created, duties defined, terms of participation, operations, etc.?” 1984 OK 52 at ¶ 1, 687 P.2d at 1050. The court held they may.
Tenneco and El Paso were both subject to a pooling order issued by the Oklahoma Corporation Commission. After the pooling order was issued, Tenneco and El Paso executed an operating agreement. A dispute arose between Tenneco and El Paso over whether Tenneco properly elected to participate with its interest in certain oil and gas leases in the proposed well. Seeking to resolve that dispute, Tenneco filed a quiet title case in district court asking the trial court to find Tenneco owned the oil and gas leases (i.e., those interests had not been transferred to El Paso under the pooling order) and that it elected to participate in the proposed well. Trial court found the operating agreement modified the pooling order and ruled in favor of Tenneco. 1984 OK 52 at ¶ 14, 687 P.2d at 1052. The Oklahoma Supreme Court ultimately affirmed the trial court decision, but for reasons which differed from those of the trial court.
The Supreme Court found Tenneco’s quiet title action sought equitable relief from the trial court and “was not an attack upon the public rights function of the Corporation Commission, i.e., to regulate and administer the conservational laws and policies of the sovereign state.” 1984 OK 52 at ¶ 23, 687 P.2d at 1054. Therefore the dispute over whether Tenneco owned the oil and gas leases and elected to participate in the proposed well was for the district court to determine. The Supreme Court said in part,
When we analyze the evidence and issues in the instant case, we are immediately struck and observe that Tenneco, the party which must bear the burden of quieting its title, does not challenge the sanctity or integrity of a written judgment, order or instrument. At issue is the meaning of provisions in the forced‑pooling order dealing with election, such as, “the owners should be required to elect,” “and in the event that such . . . owners do not make such election . . .” and . . . “in the event a party has elected,” to cite examples.
It cannot be argued successfully or established by the evidence that the forced‑pooling order issued herein requires a written notice of election, or any given method for that matter. An election can be written, oral, by estoppel, or according to statute, rule, or regulation, to name but a few methods. Such a fact (election), an element of Tenneco’s proof in the quiet title action, must be proved by a preponderance of the evidence. Tenneco simply states it made an election under the Commission order; it does not challenge, attack, or seek to interpret such order.
1984 OK 52 at ¶¶ 33, 34, 687 P.2d at 1055.
Scenario 3: If there is a private joint operating agreement between the operator and non-operating working interest owner and no pooling order is involved in the development of the drilling and spacing unit, disputes between the parties regarding rights and duties under the joint operating agreement are to be resolved in the district courts.
In Samson Resources Co. v. Corporation Commission of the State of Oklahoma, 1985 OK 31, 702 P.2d 19, Samson operated a well in a drilling and spacing unit in Section 15 under a private joint operating agreement to which Tenneco was a party. Tenneco applied to the Oklahoma Corporation Commission to change the operator of the well to Tenneco. Tenneco contended Samson had a greater interest in production from a well which Samson operated and offset the well in Section 15, and “as a result of this greater interest, [Samson] has not operated the Section 15 unit well so as to obtain maximum production.” 1985 OK 31 at ¶ 5, 702 P.2d at 21. The Oklahoma Supreme Court found no correlative rights were involved, contrary to the argument of Tenneco, and thus the matter was not for the Oklahoma Corporation Commission to determine. In the process the court said in part,
The present case appears, even more clearly than Tenneco, to involve a question of private rights. The unit in this case had been developed under the auspices of a voluntary pooling agreement, clearly sanctioned by the terms of 52 O.S. 1981 § 87.1(e). Certain rights and obligations arose between the parties to this agreement.
A contractual relationship also arose between petitioner and respondent Tenneco under which Tenneco “farmed out” its interest in the unit to petitioner on condition that petitioner drill and operate the unit well. Part of the terms of this “farm out” were that, on pay out of the well, Tenneco would convert its overriding royalty interest reserved under the “farm out” to a working interest in one-half of the leases assigned to petitioner under the contract. Tenneco also agreed that at payout and conversion it would enter into an operating agreement recognizing petitioner as the unit operator.
Now, respondent Tenneco takes the position, shared by respondent Commission, that it is within the Corporation Commission’s jurisdiction to override these private contractual relationships on the assertion that the action of one of the parties has affected “correlative rights.” The recognized power and responsibility of the Commission to act to protect correlative rights must be interpreted, in light of our holding in Tenneco, to be confined to situations in which a conflict exists which actually affects such rights within a common source of supply and thus affects the public interest in the protection of production from that source as a whole.
* * *
The relief requested by Tenneco in this case, the replacement of an operator designated under a voluntary pooling agreement to protect “correlative rights,” is clearly beyond the Commission’s conferred jurisdiction, as it concerns a dispute between private parties in which the public interest in correlative rights is not involved. The basis for Tenneco’s argument does not truly concern the disproportionate taking of gas from a common source of supply, as it has attempted to so characterize its argument. It appears from the materials before this Court that both wells in question being operated by petitioner are being produced within the allowables previously set by the Commission. As previously discussed, the setting of allowables in this instance is the proper Commission avenue to ensure that no single party takes an undue share of production from a common source of supply.
1985 OK 11 at ¶¶ 8, 8, 9 and 12, 702 P.2d at 21-23 (footnotes omitted).
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[1]“‘Interest owner’ means a person owning an interest of any kind or nature in oil and gas rights before the acquisition thereof by a first purchaser. Interest owner includes a representative and a transferee interest owner; . . . .” Okla. Stat. tit. 52, § 549.2(6). Interest owners include those owning royalty interests and those owning working interests in the unit. Okla. Stat. tit. 52, § 570.2(1), (6), (7), (8), (9) and (12).
[2]“‘Oil and gas rights’ means, as to any lands within the State of Oklahoma, any right, title or interest, whether legal or equitable, in and to: (1) oil, (2) gas, (3) proceeds, (4) an oil and gas lease, (5) a pooling order, and (6) an agreement to sell.” Okla. Stat. tit. 52, § 549.2(9).
[3]The exploration company might purchase oil and gas rights outright from an interest owner. Alternatively, an exploration company might lease oil and gas rights from an interest owner or enter into a farmout agreement with another exploration company who owns oil and gas leases.
[4]“‘Pooling order’ means an order issued by the [Oklahoma] Corporation Commission that requires the owners of the right to drill for oil or gas in a drilling and spacing unit to pool their interests for the development of such drilling and spacing unit; . . . .” Okla. Stat. tit. 52, §549.2(13).
[5]“‘Operator’ means a person engaged in the severance of oil or gas for that person alone, for other persons only, or for that person and others; . . . .” Okla. Stat. tit. 52, § 549.2(10).
