Court Opinion

ID: 9538313
Source: CourtListenerOpinion
Date Created: 2023-08-07 07:34:42.203172+00
Date Added: 2024-06-11T14:57:44.071288
License: Public Domain

IRWIN, Vice Chief Justice,
dissenting:
If my calculations are correct, the O’Neill lease was subject to a greater overriding royalty interest than the override of Vwth of Vsths on natural gas allowed under alternative (4) in the Commission’s pooling order. Stated another way, the overriding royalty interest burdens against the O’Neill lease exceeded what the Corporation Commission determined to be the fair and reasonable value of the Vsths working interest free and clear of burdens. Therefore, one of the issues presented and one of first impression is: If the burden against a pooled lease (e. g., a 'Vwths override) is greater than a fair and reasonable bonus for the Vsths working interest (e. g., a bonus of ⅛⅛ override) and if the lessee elects not to participate in the development, does the Corporation Commission have the authority to amend or modify (reduce) the Vwths override, or must the poolor take the lease subject to the 3/i6ths override.
In my opinion, the holder of the Vwths overriding royalty interest may be a proper party in a forced pooling proceeding, and the Commission has the authority to require such holder to make an election concerning how he will participate in the bonus (a ⅛⅛ override) although such bonus would be less than the holder’s Vieths overriding royalty interest. My views are premised upon the following reasons.
I am of the opinion that contractual rights relating to overriding royalty interests, production payments, etc., may be amended and modified to the extent necessary to conform to the requirements of forced pooling under 52 O.S.1971, § 87.1(d).
The right of the Legislature to act under the police power of the State is a part of the existing law at the time of the execution of every contract, and as such becomes in contemplation of law a part of that contract. Layton v. Pan American Petroleum Corporation, Okl., 383 P.2d 624 (1963). Since the State has the authority to regulate the production of oil and gas, a private contract in derogation of this authority, must yield to the State’s authority. Patterson v. Stanolind Oil & Gas Co., 182 Okl. 155, 77 P.2d 83 (1938). “[A] state has constitutional power to regulate production of oil and gas so as to prevent waste and to secure equitable apportionment among landowners of the migratory gas and oil underlying their land, fairly distributing among them the cost of production and apportionment.” Hunter Co. v. McHugh, 320 U.S. 220, 64 S.Ct. 19, 88 L.Ed. 5. If a poolor is required to pay a bonus or satisfy a burden in excess of a fair and reasonable bonus for Vsths working interest when a *187pooled lessee elects not to participate in the development but to accept a bonus, there would be no equitable distribution of the production or fair apportionment of the cost. In my opinion, when a pooled lessee elects not to participate but elects to accept a bonus, the poolor may not be required to pay a bonus or satisfy a burden in excess of the fair and reasonable value of the Vsths working interest. If a poolor were required to do so, the authority of the Commission in forced pooling proceedings would be thwarted.
Our decision in Holmes v. Corporation Commission, Okl., 466 P.2d 630 (1970) tacitly recognized the above views although the specific issue presented there was the amount of the penalty. In Holmes, an oil and gas lessee of the east half of a 640 acre drilling and spacing unit assigned the lease to Holmes (his sister) reserving a $2,000.00 per acre production payment payable out of ½ of Vsths of the production. The lessee of the west 320 acres filed an application for pooling. The evidence disclosed that the value of the leasehold estate, from which a $2,000.00 per acre production payment had been reserved, was from $50.00 to $100.00 per acre,1 and the cost of drilling and completing the well would be approximately $100,000.00.
The Commission entered its pooling order and provided that the protestants (Holmes and her brother) were to elect whether they would participate in the working interest and pay their proportionate share of the cost of development, or not participate in the cost and not receive their share of the ⅞ ths working interest until the applicant for the pooling order had recovered 250% of the share of the cost allowable to that interest. It was argued on appeal that the penalty should have been 150% instead of the 250%.
Although the authority of the Commission was not placed in issue, it is evident that the pooling order in Holmes modified the lease contract between Holmes and her brother, and in effect, treated Holmes and her brother as joint owners of the Vsths working interest, i. e., the $2,000.00 per acre production payment was not material in determining the value of the lease or the amount of the penalty. Stated in another way, although the $2,000.00 per acre production payment was a burden against the pooled lessee’s interest, it was not a burden against the interest of the poolor, the applicant for the pooling order.
In Youngblood v. Seewald, 299 F.2d 680 (10th Cir. 1961), a declaratory judgment action was brought to determine the effect of a pooling order of the Oklahoma Corporation Commission. An oil and gas lease owned by McClain was involved. This lease was subject to a Vi6ths royalty interest in favor of the lessors and also an override of Vsths of Vsths which had been reserved by McClain’s assignor. Of the several options offered in the pooling order, McClain elected to take an overriding royalty of Vsth of Vsths in lieu of his right to participate in the working interest. The Commission pooling order did not state who was liable for the additional Vieth royalty interest in favor of the lessor and the override of Vsth of Vsths in favor of McClain’s assignor. The issue presented was whether Seewald, (the poolor) or McClain, (the poolee) was liable for the burden on the lease. The trial court held that when McClain accepted a Vsth of Vsths overriding royalty in lieu of participating in the well, he was required to pay from his royalty income all burdens on the lease over and above the statutory Vsth royalty.
The Tenth Circuit Court of Appeals said that:
“The value of McClain’s working interest could not be determined without considering the burdens on the lease. It *188could well be that without any overriding burdens the value would have been far in excess of * * * ⅛⅛ of 8/sths royalty * * *. The result of the trial court’s interpretation is that McClain would receive nothing, and he would be unable, out of the Vbth he accepted, to pay the lessor’s excess royalty and Youngblood’s (McClain’s assignor) override in full.”
The Court held that since McClain did not elect to participate in the well, his working interest became the property of Seewald, the poolor entity authorized to drill, and that the owner of the working interest (poolor-Seewald) must satisfy the burdens on the lease.
Although it might appear that Young-blood stands for the rule that when an owner of a working interest elects to accept a bonus or override instead of participating in the unit well, the unit operator is obligated to satisfy the burdens against the pooled lease from his interest in the production, Youngblood will not support such rule. In the first place, Youngblood specifically did “not consider whether the Commission has the power to restrict overriding burdens when all the parties are before the Commission”. Secondly, the Commission did not attempt to disturb the excess royalty or the overriding royalty. Thirdly, the poolor made no attempt to show that the excess royalty and override and the bonus paid to the pooled lessee was in excess of the fair and reasonable value of the lease.
In my opinion, our pooling statute clearly provides for an equitable distribution of the production and a fair apportionment of the costs, and a lessee whose lease may be pooled, may not burden his lease so that a poolor would be required to pay more than a fair and reasonable bonus for the %ths working interest.
52 O.S.1971, § 87.1(d) speaks directly to the manner in which production is distributed and cost apportioned when owners agree to pooling, or a pooled lessee elects to participate in the development. However, the statute establishes only guidelines when a pooled lessee does not want to participate in the development. The Commission has (by rule) granted the pooled lessee a right of election. In Anderson v. Corporation Commission, Okl, 327 P.2d 699 (1957), we upheld a Commission order which allowed the pooled-lessee the right to participate in the development or accept a bonus for its Vsths working interest. Section 87.1(d), inter alia, provides:
“ * * * provided, 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 interest from the well drilled on 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.”
The above proviso appears clear and unambiguous and to me it simply states: “Where a lease stipulates a royalty in excess of ⅛⅛ of the production, or is subject to an overriding royalty, production payments, etc., such excess burdens should be satisfied out of the pooled lessee’s working interest.” If the bonus for the lessee’s working interest (free and clear of the burdens in excess of the ⅛⅛ royalty) is not sufficient to satisfy the excess burdens, I find no language whatsoever that would impose the burdens against the poolor. If the above is a correct interpretation, a pool- or is required to pay no more than a fair and reasonable bonus if the pooled-lessee elects not to participate in the development.
I am unable to find a material legal distinction between the above statutory language and comparable language first adopted in 1935 (1935 Session Laws, Ch. 59, at pg. 235),2 codified as 52 O.S.1961, § 87, *189and repealed in 1947. The 1935 enactment did not provide for forced pooling, and it is evident that any overriding royalty interest, production payment or other obligation in excess of the normal ⅛⅛ royalty, would be satisfied from the %ths working interest from which it originated and from no other interest. Although the language has been modified to some extent so as to be consistent with other changes in our pooling laws, the basic context has remained unchanged.
I respectfully dissent. I am authorized to state that WILLIAMS, BARNES and OPA-LA, JJ., concur in the views expressed herein.

. If the pooled lessee had elected not to participate in the production, and if the $2,000.00 per acre production payment had become the obligation of the poolor, Holmes would have been entitled to receive a $640,000.00 production payment from the production allowable to 'h of Vsths of the production in the east 320 acres before poolor would have been entitled to any production or costs allowable to that interest. This $640,000.00 production payment would have been an obligation of poolor, if produced, although the fair and reasonable value of an oil and gas lease on the minerals was from $50.00 to $100.00 per acre.

. “* * * Provided, where the lease of a person who has sustained his share of the cost of drilling the well on the majority * * * stipulates a royalty in excess of one-eighth (Vs) of the production, or said lease shall be subject to an overriding royalty, to an oil payment, or *189other obligation, than the lessee of said lease, out of his share of the seven-eighths (7/⅛) of the production * * * shall sustain and pay said excess royalty, overriding royalty, or oil payment * *

. Tecumseh Gas System, Inc. v. State, Okl., 537 P.2d 421 [1975]. See also State v. Guardian Funeral Home, Okl., 429 P.2d 732, 736 [1967].