Case Name: 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
Jurisdiction: Oklahoma
Decision Date: 1980-01-08
Citations: 617 P.2d 181
Docket Number: No. 50741
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.
Judges: LAVENDER, C. J., and HODGES, SIMMS and DOOLIN, JJ., concur.
Reporter: Pacific Reporter 2d
Volume: 617
Pages: 181–191

Head Matter:
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.
Guy E. Taylor, Oklahoma City, for appellants.
Watson, McKenzie & Moricoli by H. B. Watson, Jr., Richard K. Books, Oklahoma City, for appellee.

Opinion:
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 Vsths 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. + % overriding royalty and a contingent interest equal to ⅛⅛ 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 ⅛⅛ royalty interest; (3) To receive $75 per acre bonus and a ¼6⅛ of ⅜⅛ in addition to the normal royalty of ⅛⅛; or (4) To receive in addition to the normal ⅛⅛ royalty an override of ½6⅛ of Vsths on oil and ⅛⅛ of Vsths 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 Visth of Vsths oil and ⅛ th of Vsths gas in addition to the Vsth 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 poo1 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 (⅞) interest and a lessor to the remaining one-eighth (Vs) 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 where the Commission deals with unleased tracts.
The Commission's authority under § 87.1(d) to require owners to pool their interests and contribute to the costs of development and operation, does not authorize the Commission to require owners of an override to contribute as they are, by statute, not owners. This conclusion is confirmed by the fact that no order pooling the royalty interests in a unit is necessary or contemplated by the statute because the creation of a unit, by operation of law, pools royalty interests. The last paragraph of 52 O.S.1971, § 87.1(d) provides:
In the event a producing well, or wells, are completed upon a unit . . . any royalty owner or group of royalty owners holding the royalty interest under a separately owned tract included in such spác-ing unit shall share in the one-eighth (Vs) of all production from the well or wells drilled within the unit, . in the proportion that the acreage of their separately owned tract or interest bears to the entire acreage of the unit; . (Emphasis added.)
In contrast to the fact that § 87.1(d) contemplates the pooling of royalty interests by operation of law upon the formation of a unit, the first paragraph of that section of the statute expressly provides that the owners of a right to drill may voluntarily pool their interests or upon proper application the Commission shall require the owners to pool and develop when the owners have not agreed to do so. Thus the creation of a drilling and spacing unit pools royalty interests by operation of law, but working interests are pooled only by voluntary agreement or a separate Commission order. Whitaker v. Texaco, Inc., 283 F.2d 169 (Okl. 10 Cir. 1960). From the preceding discussion we conclude the Corporation Commission is not clothed with authority by virtue of 52 O.S.1971, § 87.1(d) to enter an order such as that before us requiring the owner of an overriding royalty interest within a unit to elect between participation or acceptance of an alternative which disturbs the terms of the grant of the override. Insofar as the order attempts to disturb the rights of the overriding royalty owners under § 87.1(d) the order is erroneous and is reversed.
The Commission's order allowed the lessee, O'Neill, to participate in the development of the well or accept a ⅛⅛ of Vs ths interest on natural gas and Vieth of Vs ths on oil in addition to accepting the normal ⅛⅛ royalty interest in lieu of participation. The paragraph of the order allowing O'Neill that interest also requires the overriding royalty owners (except one omitted royalty owner) to receive their share out of O'Neill's above-mentioned interest, without regard to whether O'Neill chooses to participate or take an interest in lieu thereof. The order clearly provides that the original lessee is to bear all override burdens of the leasehold out of what he receives for his working interest. It appears that in setting O'Neill's royalty the Commission contemplated that the overrides were to come out of O'Neill's interest. However, the overrides do not come from the original lessee's interest when he chooses not to participate but are attributable to the unit operator. The statute specifies that overriding royalties, production payments, royalties in excess of ⅛⅛, or other obligations shall be paid by the lessee out of his share of the working interest. The last paragraph of 52 O.S.1971, § 87.1(d) states in part:
. . . [P]rovided, where a lease covering any such separately owned tract or interest included within a spacing unit stipulates a royalty in excess of one-eighth (⅛) of the production, or said lease shall be subject to an overriding royalty, to production payment or other obligation, then the lessee of said lease out of his share of the working interests from the well drilled oh said unit, shall sustain and pay said excess royalty, overriding royalty, or production payment, and therefrom meet any other obligation due in respect to the separately owned tract or interest held by him. (Emphasis added.)
These provisions of 52 O.S.1971, § 87.1(d) conflict with the order as written because where O'Neill elects, as he did here, not to participate, he is no longer possessed of a working interest in the unit well. The statute provides the excess royalty is to be paid by the lessee out of his working interest. Under the last quoted statutory provision (52 O.S.1971 § 87.1(d)) when an owner of a working interest elects not to participate in a unit well, electing rather to accept a bonus or royalty in lieu thereof, that working interest becomes the property of a person authorized to drill the well, and that unit operator is required to pay the bonus. Youngblood v. Seewald, 299 F.2d 680 (Okl. 10 Cir. 1961). Inasmuch as the order sets the amount of O'Neill's option on the basis that (although not participating) he will stand the override obligations owed the appellants, that portion of the order must be vacated and remanded for a determination of what fair compensation for that working interest is in view of the fact that the unit operator must stand these override obligations in the event O'Neill does not partici pate. The order of the Corporation Commission is reversed and remanded for proceedings consistent with the views expressed herein.
If the Commission may not require an override owner to participate in the drilling operation and share the costs thereof, and if, as noted above, the owner of a lease may pass unbearable override burdens to third parties in contemplation of a pooling order which will transfer the burden of satisfying those overrides to the owners of the working interest when the lessee chooses not to participate, it is conceivable that a lessee acting in bad faith might burden a lease to the point it becomes useless. The existence of such a potential problem does not militate, in and of itself, that the Legislature has afforded the Corporation Commission the power to change an overriding royalty into a working interest to alleviate that situation. In our opinion, such power is not clearly indicated by the Legislature, and the effect of such a grant of power on the State, its people and the oil and gas industry in general is a matter to be weighed against the potential abuse in the legislative arena and not in this forum.
The order of the Corporation Commission is reversed.
REVERSED AND REMANDED.
LAVENDER, C. J., and HODGES, SIMMS and DOOLIN, JJ., concur.
IRWIN, V. C. J., and BARNES and OPA-LA, JJ., concur in part and dissent in part.
WILLIAMS, J., dissents.