Opinion ID: 2612450
Heading Depth: 1
Heading Rank: 1

Heading: breach of contract for causing drainage

Text: Article 7, § 7 of Oklahoma's Constitution provides that the District Court shall have unlimited original jurisdiction of all justiciable matters, except as otherwise provided in this Article, and such powers of review of administrative action as may be provided by statute. Title 52, O.S.Supp. 1988, § 87.1, defines the Commission's authority relative to a common source of supply and well spacing and drilling units. However, we have construed this statute to vest jurisdiction of public right disputes in the commission, whereas, disputes over private rights are properly brought in the district court. [1] In other words, the commission's jurisdiction is limited to protection of public rights in development and production of oil and gas. [2] Clearly, the correlative rights of all mineral rights owners in the common source of supply for the subject unit fall within the parameters of public rights when a unitization order, pooling order, or order setting the allowables on the unit's well were concerned. Thus, when the appellants applied for an order to restrict the allowable on the Wosika # 1 well in order to protect the correlative rights of all parties to the common source of supply, they properly brought the application before the commission. However, when a dispute arises between a lessor and a lessee regarding the lessee's breach of an implied covenant, the rights involved enter the realm of the private world and are proper disputes for the district court to resolve because they involve issues concerning the construction of a private contract between the parties. [3] Therefore, the appellants' action for damages for the lessee's alleged breach of an implied covenant to protect from drainage is a private action arising from their contract and does not involve the correlative rights of the public. Each of the authorities cited in footnote 1 for the proposition that the commission has jurisdiction to hear only public rights disputes involved actions on joint operating agreements or disputes concerning a pooling order's effect. This case concerns an action brought on the lease agreement entered into by the parties pertaining to the oil and gas under the appellants' land. We have held that when an oil and gas company enters into a lease with mineral rights owners to extract oil or gas from the owners' lands, the company (lessee) impliedly covenants to protect the lessors' land from drainage of the minerals from under their land caused by wells on adjoining lands. [4] In order to protect the lessor's land from this drainage, we have required the lessee to drill a well and produce the minerals on the lessor's land to offset the draining well. [5] Moreover, we also have allowed lessors to bring an action for damages they have received due to their hydrocarbons being drained by adjacent wells where the lessee failed to drill an offset well to protect the lessor from drainage. [6] Despite the many actions brought against lessees for their failure to protect the lessor from drainage, we have only determined two cases which involved a situation similar to the one at bar. In Morriss v. Barton, 200 Okl. 4, 190 P.2d 451 (1947), we stated in the second syllabus by the Court that: [the] [l]essee of an oil and gas lease, who owns adjoining land, may not operate wells on his own land, contrary to [the] duty devolved upon him as lessee, so as to materially reduce or effectively destroy production from wells on the leased land. On 190 P.2d at page 457 of the text, we recognized that the lessee had a duty to proceed with due care and that failure to do so may be more than just a breach of the contract (lease), but could amount to a tortious act. The fact that the lessee owned one of the tracts which were draining the plaintiff's land was not determinative to our holding. What mattered was that the defendant, as lessee, owed his lessor a duty not to materially reduce the production of the plaintiff's well by increasing production on an adjacent well and by failing to exercise due care in operating the well on plaintiff's land. Granted, in the case at bar, the appellants do not allege that the lessee acted without due care in operating the well on their land. However, this distinction is not fatal in light of other cases which support their damage claims. In Hall Jones Oil Co. v. Claro, Okl., 459 P.2d 858 (1969), we alluded to the potential problem that might arise where a lessee has adjoining leases and operates wells on both leases with one lessor claiming that his land is being drained by the increased production on the adjacent land. In this case, several mineral interest owners brought a class action suit to recover damages for the hydrocarbons drained from their land by wells on adjacent lands also operated by their lessee. The lessors maintained that the lessee tortiously and willingly breached its implied covenant to protect them from drainage by producing oil from a well on an adjacent tract of land upon which lessees also had a leasehold interest. In discussing the lessee's improper drainage of the lessors' lands, we stated at page 863: Professor Merrill in Covenants Implied in Oil and Gas Leases, 2d Edition (1940) Section 111, pp. 259 and 260, in referring to fraudulent drainage said: `   no doubt if the lessee owns the fee, or royalty interest, in the adjoining land and operates thereon to draw oil or gas from beneath the leased premises because he will get a larger share, at the same time blocking development on part of others by keeping the lease alive, there is both harsh dealings and sharp practice deserving to be called by the hard name of fraud. Similar comment may be made if his purpose is to favor one lessor at the expense of another. ' We feel defendants' conduct amounts to harsh dealings and sharp practice properly deserving to be labeled fraudulent drainage. (emphasis added) We are certainly not judging the appellees in the case at bar and labeling their conduct as fraudulent. Such determination could only be made after evidence has been presented. However, we consider the language of Claro and Professor Merrill's treatise to indicate that an action such as the appellants' is proper. This indication comes from the language regarding a lessee's favoring of one lessor over another, which is the crux of the appellants' action. Although the case mentions instances where the lessee owns the fee, or royalty interest, in the adjoining land, we again do not find the distinction fatal to the appellants' argument. By owning the fee or royalty interest, the lessee will realize greater profits if he produces more oil and gas from the well in which he has a royalty interest than the one in which he does not (i.e., the lessor's land). Likewise, if the adjoining well produces minerals which are selling at a greater unit price, as the appellants in the case at bar claim the situation to be, then clearly the lessee's profit margin will increase by producing greater quantities from the adjoining well at the expense of the lessors whose well is receiving a lower price per unit for the minerals produced from it. We find that this analogy supports a reading of Claro to include situations where the lessee is not a fee or royalty interest owner. Moreover, in Samson Resources Co. v. Corporation Commission, Okl., 702 P.2d 19, 23 (1985), this Court noted that a mineral lessor has a right to enforce a lessee's implied covenant to develop a lease as a prudent operator, which includes a duty to protect against drainage by the lessee's other operations.  (emphasis added) We hold that these other operations include the situation that appellants allege, that of a lessee producing more hydrocarbons from a well location exception adjacent to the lessor's land, thereby draining minerals from the lessor's land. This holding does not declare that appellants are entitled to damages; they must prove their allegations in order to recover from appellee. Furthermore, we do not address the questions raised by the appellee concerning the application of the doctrines of res judicata or collateral estoppel because these questions are not ripe for review. Our holding merely answers the question posed. The district court does have subject matter jurisdiction to hear a damage action for breach of a contract and its implied covenant to protect against drainage by the lessee's other operations.