Opinion ID: 154917
Heading Depth: 3
Heading Rank: 1

Heading: t he d rainage i ssue

Text: In the mid-1980s, ARCO discovered the Arbuckle formation, a large source of natural gas underlying other formations in the Wilburton Field. ARCO is the operator of fourteen of sixteen wells producing gas from the Arbuckle formation pursuant to private joint operating agreements with other working interest owners. 2 On January 31, 1991, the Oklahoma Corporation Commission (“OCC”) issued Field Rules, retroactive to May 1, 1990, recognizing the Arbuckle Formation as a common source of supply, meaning that any one well could ultimately drain all the gas in the formation. The Field Rules established certain limits on the monthly production of each unit, called “allowables.” The OCC determined that because seven of the Arbuckle wells were limited in their ability 2 Each well is composed of a separate 640-acre drilling and spacing unit. See Okla. Stat., tit. 52, § 87.1 91993) (authorizing the Oklahoma Corporation Commission to establish well spacing units to prevent waste and to protect the correlative rights of interested parties in a common source of supply). Unless the OCC grants an exception, only one well is permitted to be drilled in each drilling and spacing unit. -7- to produce gas, the Field Rules were necessary to ensure that each well would produce approximately its fair share of the gas. The Field Rules contained several provisions concerning the treatment of a well that is underproducing its allowable, known as an “underage.” The Field Rules specified that underages accumulated by a well could be carried forward and added onto that well’s monthly allowable, effectively increasing the limit on future production. If a well’s underages exceeded a specified amount, however, those underages would be canceled. The Field Rules contained an “Effective Date” provision as follows: These rules shall be effective May 1, 1990, and the Unit Operator of each Unit shall have the period from the effective date of the rules to December 31, 1991 to adjust any over and under production before it is adjusted in accordance with [the cancellation provision]. App’t. App., Vol. I at 227 (emphasis added). After the Field Rules were issued, three of ARCO’s wells (the Yourman No. 2, the Costilow No. 3, and the Kilpatrick No. 2) began to accrue underages each month and were approaching the point at which their underages would be canceled pursuant to the Field Rules. In early 1991 ARCO performed “workover” operations on the three underproducing wells to increase their deliverability. The successful workovers resulted in increased production in all three wells and permitted two of the wells to make up their underages and meet the allowables established by the Field Rules. -8- Several of the Lessors owning interests in adjacent units contend that the workovers caused the three wells to drain gas from their units, resulting in decreased production relative to the “draining” wells. Before the district court, Lessors sought damages against ARCO for uncompensated drainage, asserting a number of theories including: (1) breach of the implied covenant to protect against drainage, (2) tortious drainage, (3) breach of fiduciary duty, (4) breach of good faith, (5) conversion, and (6) unjust enrichment. In addition, Lessors contended that by selectively performing the workovers on units in which ARCO has a greater working interest, ARCO acted tortiously, wantonly and maliciously, subjecting ARCO to liability for punitive damages. The district court granted summary judgment to ARCO on the basis that the Field Rules bar all of Lessors’ claims.