Court Opinion

ID: 9544931
Source: CourtListenerOpinion
Date Created: 2023-08-07 17:03:36.165542+00
Date Added: 2024-06-11T15:13:47.737614
License: Public Domain

BARNES, Vice Chief Justice,
dissenting.
Upon rehearing in this cause and upon reconsideration of the opinion promulgated herein on July 21, 1981 (52 OBJ (Vol. 52-No. 30) 1857), I hereby change my vote from “concur” and must respectfully “dissent”.
My first departure from the Majority’s conclusion pertains to the standard of review to be used in this case.
Article IX, Section 20, Oklahoma Constitution, makes two provisions relative to the duty and power of this Court in considering appeals from orders of the Corporation Commission. In appeals from orders of the Corporation Commission, “the review by the Supreme Court shall not extend further than to determine whether the Commission has regularly pursued its authority, and whether the findings and conclusions of the Commission are sustained by the law and substantial evidence.” However, in those appeals involving an “asserted violation of any right of the parties” under either the State or Federal Constitution, “the Court shall exercise its own independent judgment as to both the law and the facts.” Such independent review of the evidence is only invoked if Appellant points out “in what specific respect his constitutional rights have been violated” and if the constitutional violations are “clear-cut”.1 Appellants contend “that each of the 540-acre drilling and spacing units had been developed in the Mississippi Formation by the drilling of one or more wells, and the order of the Commission destroys existing equi*665ties of both the royalty owners and the owners of the oil and gas leasehold estate and takes their property for private use in violation of Section 23 of Article II of the Constitution of the State of Oklahoma and deprives them of their property without due process of law in violation of Article II, Section 7, of the Constitution of the State of Oklahoma, and in violation of the Fourteenth Amendment to the Constitution of the United States of America.” Such asserted constitutional violations could not be more “specific” or “clear-cut”, and therefore this Court must exercise its own independent judgment in this' case as to the law and facts. Whether the order appealed from falls within the first or second category, to be valid it must be lawful and supported by competent substantial evidence.2 It is my opinion that using either the standard of independent review of the evidence or the standard of substantial evidence, it is clear, as will be discussed later, that the order in question is invalid and should not stand.
Secondly, I disagree with the Majority’s holding that there was substantial evidence to support the conclusion that the wells on each of the eighty-eight 640-acre units covered by the application were not draining the units. This is the claimed “new knowledge” and change of condition upon which the application and the order of the Commission depend. The case cited by the Majority, Phillips Petroleum Co. v. Corporation Commission, 461 P.2d 597 (Okl.1969), states:
“... Because substituted substantive rights actually vest in the property owners by the force of such orders, the Oklahoma Supreme Court has laid down the rule that a modifying order will be condemned as a prohibitive collateral attack unless ‘a substantial change of condition’ has intervened between the dates of the existing and superseding orders.”
The evidence reflects that the Mississippi Lime Formation underlying the area covered by the application is a heterogeneous reservoir. The southeasterly portion of the area covered by the application contains oil pods or oil pockets. It is known that there is a transition zone. A transition zone is an area where the wells produce both free oil and free gas. Everything north of the transition zone will be predominantly productive of gas, and everything south thereof will be predominantly productive of oil and gas. Appellants and Appellees agree that one well will not effectively drain the 640 acres in the oil area. Operators of the wells in the oil area had applied for and been granted permission to drill a number of additional wells in the drilling and spacing units lying within the oil “leg”. The basis of the application for additional wells was that the oil reservoir underlying some of the drilling and spacing units could not be properly developed without the drilling of additional wells. A number of applications for increased density within some of the drilling and spacing units in the southern portion of the formation were on file at the time the application in this cause was filed, but hearings were postponed and will not be heard until this case is decided.
The Commission’s Order No. 148243 de-spacing the eighty-eight 640-acre units and the Majority’s conclusion that such order was supported by substantial evidence are based on the proposition that new knowledge has been obtained which demonstrates that none of the Mississippi wells on any of the eighty-eight governmental sections covered by the order will effectively drain the units. This conclusion is based upon the testimony and calculations of Appellees’ expert witnesses. Appellees’ experts calculated volumetric estimates of gas in place and compared these estimates with pressure decline curve estimates of gas in place. From this comparison, the experts arrived at their estimate of the percentage of the 640-acre units that were being drained by the unit well.
A pressure decline curve will indicate how much gas will be produced from a particular well, but will not show the thickness or shape of the reservoir from which the gas will be produced. In a fractured reservoir, such as the Mississippi Formation, *666gas may travel considerable distance to reach the well and therefore the reservoir may or may not underlie the drilling and spacing units upon which the well is located, and may or may not be uniform in thickness. On the other hand, a volumetric estimate of gas in place makes the assumption that the entire drilling and spacing unit upon which the well is located is underlain with productive formation of equal thickness and ability to produce as that exposed in the wellbore. Put another way, an assumption is made that the same number of feet of pay found in a particular well will be found throughout the 640-acre unit. Every engineer who testified specifically on the point testified that such an assumption in the Mississippi Formation has no validity and that it is impossible to make a valid volumetric estimate of gas in place in the Mississippi Formation. The conclusions of Appellees’ experts that existing wells were not draining the 640-acre units were based on the fact that their volumetric estimates of gas in place beneath the drilling and spacing units showed that there was more gas under the units than indicated by the pressure decline curve of the unit wells. The statements made by Appellees’ experts that none of the unit wells, in the gas area, is draining the unit depends upon the correctness of the volumetric estimates, and the evidence establishes that it is impossible to make a valid volumetric calculation of the Mississippi Formation in this area.3
Therefore, the Appellees’ position that the unit wells would not drain the 640-acre units, which depends upon the comparison of an imperfect volumetric calculation with the reliable pressure decline curve predictions, is not supported by substantial evidence and should fail.
In addition, the testimony reflects that there are only five units in the predominantly gas area which have been penetrated in the Mississippi Formation by more than one wellbore. The evidence reflects that the data obtained from the second well on these five units (less recovery of gas from the second well; no second well has found virgin pressure which is indicative that drainage has occurred) shows that the existing gas wells are draining the units.
The remaining units which have more than one well on them are in the oil area. Appellants make no contention that one well would effectively drain 640 acres in the oil area. In the oil area, where the operators had been given permission to drill for additional wells, the unit wells were not draining the oil and this was the reason for the applications to drill additional wells. The fact that a 640-acre unit within the predominantly oil area cannot be effectively drained by one well does not prove that a well on the gas portion of the reservoir will not drain the 640-acre unit.
Moreover, Appellants’ expert, Mr. H., prepared an exhibit showing the gas/oil *667ratios of the cumulative production from the units within the area of interest as of January 1, 1978. These numbers were calculated by taking the cumulative gas production and dividing by the cumulative oil production. In the northern area all of the wells had a gas/oil ratio in excess of 75,000 to 1. Mr. H. testified that “any well which has produced with a cumulative gas/oil ratio to date as high as 75,000 to 1 has to be called a gas well by anybody’s definition.” He further testified that in four of the units where there was an additional well that three of the four wells had shown no additional gas reserves would be recovered as a result of drilling the additional well, and these three wells appeared to be marginally economic or possibly uneconomic. He concluded that in the northern predominantly gas area one well would drain 640 acres.
I submit that either an independent review of the evidence or a review of the supportive facts compels the conclusion that there is no substantial evidence that one well in the gas portion of the reservoir will not drain a 640-acre unit, and therefore there is no change in knowledge of conditions. Without a change in knowledge of conditions supported by substantial evidence, the Commission’s order is defective and cannot stand.
Thirdly, having decided that there is no substantial evidence of a change of conditions in the predominantly gas area, I cannot agree with the Majority’s conclusion that the change of conditions in the oil area warrants de-spacing as opposed to increased density drilling. All parties agree that one well will not drain a 640-acre unit in the predominantly oil area. Therefore, there is substantial evidence of a change of condition in such area and the question then becomes one of deciding which statutory remedy dealing with this change of condition is supported by substantial evidence. Appellants argue that the Commission’s choice of de-spacing is not supported by substantial evidence as such choice permits waste and fails to protect correlative rights. They further argue that such choice is unconstitutional as it is an unreasonable exercise of the police power which destroys the vested rights of the owners of the oil and gas leases held by unit production and the vested rights of the royalty owners under the tracts upon which the unit well is located, who have shared the production from the unit well with other owners in the 640-acre units for about fifteen years. I agree with Appellant’s contentions based on case law, statutory authority, and the record evidence.
Section 87.1(d) provides in part:
“The Commission shall have jurisdiction upon the filing of a proper application therefor, and upon notice given as provided in Subsection (a) above, to decrease the size of the well spacing units or to permit additional wells to be drilled within the established units, upon proper proof at such hearing that such modification or extension of the order establishing drilling or spacing units will prevent or assist in preventing the various types of waste prohibited by statute or any of said wastes, or will protect or assist in protecting the correlative rights of persons interested in said common source of supply .... ” (Emphasis added)
The Commission is thus empowered where there is substantial evidence of a change of conditions or knowledge of conditions to either change the size of the existing drilling and spacing units or to permit the drilling of additional wells in existing drilling and spacing units where such action is necessary to prevent waste or protect correlative rights. The fact that the statute gives the Commission a choice of remedies shows recognition by the Legislature that in some instances the proper remedy is a change in spacing, and in other instances intensification of drilling in the existing units is the proper remedy. Having been given a choice of remedies, it is incumbent upon the Commission to use the remedy which will best prevent waste and protect correlative rights. In Denver Producing & Refining Co. v. State, 199 Okl. 177,184 P.2d 961 at 964 (1947), we stated that: “In striking a balance between conservation of natu*668ral resources and protection of correlative rights, the latter is secondary and must yield to a reasonable exercise of the former.”
Is the Commission’s order necessary to prevent waste? The record evidence reflects that a change in spacing from 640-acre units to 160-acre units results in the drilling of many unnecessary wells in the predominantly gas area covered by the application, thus causing economic waste.4 It is common knowledge that the price of gas from the 1960s to present has gone from twenty cents to about two dollars per MCF, and a billion cubic feet at two dollars per MCF will pay for a well costing $350,000.00, but it is still economic waste if the well is unnecessary. Appellees’ experts testified that there would be more rapid development under de-spacing; however, the fact that there may be faster drilling if the leases are thrown up for grabs does not prove waste. Appellees’ experts, in fact, testified that there would be no difference in the recovery of hydrocarbons whether the wells are drilled now or ten years from now. Admittedly, in the predominantly oil area, additional wells are necessary in order to produce the oil; however, the record indicates that such wells are being applied for and drilled pursuant to orders of the Corporation Commission permitting increased density in the units. The Commission cannot assume that the operators are going to leave oil and gas in the ground that is economical to produce. However, if an operator fails to apply for increased density, the royalty owner is not without remedy. A royalty owner has the right to request intensification of drilling.5 If the operator, after the Commission grants permission to drill an additional well does not drill one, the royalty owner may proceed in the District Court in an action for lease cancellation for failure to develop in the manner of a prudent operator. In addition, there is no guarantee that more rapid development would occur through de-spacing. Most de-spacing and increased density orders only permit additional wells to be drilled; but economic, reservoir engineering and geological factors are the actual determinants as to whether an operator chooses to drill. In response to arguments from oil and gas operators who coveted some of the acreage included in the 640-acre units, and in response to the plea of some mineral owners that development was proceeding at too slow a pace, the Corporation Commission elected to break up the 640-acre units without any substantial evidence that waste would occur if the 640-acre units were left intact.
Is the order necessary to protect correlative rights? It is my opinion that the order not only is not necessary to protect correlative rights, but destroys and violates the same. Mr. Howard H. Harris, the author of an article entitled “Modification of Corporation Commission Orders Pertaining to a Common Source of Supply”, dated May, 1958, Vol. 11, Oklahoma Law Review 125, states at page 130:
“3. Each individual owner has the right:
“A. To have the basic nature of its interests maintained and to have its contractual rights with other persons remain undisturbed, except insofar as abrogation is absolutely necessary to effect accomplishment of the conservation objective; ...” [Emphasis added]
In concluding that smaller units are required to protect correlative rights, the Commission ignored the fact that the establishment of 160-acre units deprived the owners of existing leases, which were held by production of their property, and awarded them to the parties who had taken top leases in expectation that the Commission might be persuaded to enter such an order. The 640-acre unit wells have been in existence since the early 1960s and, but for the spacing orders, the owner or owners of the minerals under the land upon which the unit well is located would have received 100% of the royalty from the well. Because *669of the spacing orders, such owner has shared the royalty proceeds with the other mineral owners in the 640-acre unit. If the order of the Commission stands, such owner or owners will find that they now own 100% of the royalty attributable to the partially depleted unit well, and have been stripped of any participation in the production of any additional well or wells that may be drilled in the governmental section that formerly comprised the 640-acre unit. That parties who have shared their royalty under the compulsion of the statutory unit should be deprived of any right to share in the production from any additional wells that might be drilled in the unit acreage is a gross inequity and a violation of their vested rights. Thus, there is no substantial evidence that the order is necessary to protect correlative rights, but, in fact, the order violates those rights.
Indeed, the order entered unnecessarily takes the Appellants’ property for the benefit of others and is an unreasonable extension of the police power in the prevention of waste and thereby violates the constitutional rights of Appellants. In Oklahoma Natural Gas Co. v. Choctaw Gas Co., 205 Okl. 255, 236 P.2d 970 (1951), we stated that:
“Although private rights yield to the exercise of police power, they are not to be totally annihilated thereby, or interfered with to a greater extent than reasonably necessary, taking into consideration the real object to be accomplished.”
Also, in Cabot Carbon Co. v. Phillips Petroleum Co., 287 P.2d 675 (Okl.1975), we stated at page 679 that:
“The Corporation Commission’s power to regulate the taking from the reservoir to prevent waste and protect correlative rights, even to fixing the price of production so taken, if necessary to accomplish these conservation purposes, does not extend to overturning private contracts where not necessary for such accomplishment.”
In Skinner v. State, 189 Okl. 235,115 P.2d 123 (1941), 115 P.2d at page 126, this Court said:
“ ‘Due process’ has a dual significance, as it pertains to procedure and substantive law. As to procedure it means ‘notice and an opportunity to be heard and defend in an orderly proceeding adapted to the nature of the case before a competent, impartial tribunal having jurisdiction of the cause.... In substantive law, due process may be characterized as a standard of reasonableness, and as such it is a limitation upon the exercise of the police power.’ ”
There was no substantial evidence that it was necessary or a reasonable exercise of the police power to decrease the size of the drilling and spacing units in order to prevent waste, and, by doing so, thereby terminate vested leasehold rights of lessees and the rights of certain royalty owners in their just share of production, instead of ordering increased well density. The action of the Commission was therefore arbitrary, invalid and unconstitutional in violation of Section 23 of Article II of the Constitution of the State of Oklahoma and deprives them of their property without due process of law in violation of Article II, Section 7, of the Constitution of the State of Oklahoma and in violation of the Fourteenth Amendment to the Constitution of the United States of America.
Further, I cannot agree with the Majority Opinion’s conclusion when it states there is substantial evidence to support the Commission’s choice of a remedy to de-space because “past density applications by owners in the unit have not uniformly developed the common source, and have not been carried out with dispatch.” There is no evidence in the record to support this conclusion.
With respect to the conclusion that past density applications have not resulted in the uniform development of the common source of supply, it should be noted that applications to increase density are submitted on a unit-by-unit basis, the obvious consequence of which is that there is not the same number of wells on each unit. Obviously, as stated before, in the gas area only one well is required, while on the oil portion of the area up to four wells may be required.
*670With respect to the conclusion that past density applications have not been carried out with dispatch, the record is devoid of evidence to support this conclusion, except for the case of Harper v. Hayes, 431 P.2d 387 (Okl.1964), and, in fact, evidence in that case clearly contradicts such a conclusion. In every instance, except one, where an order was entered authorizing an additional well, a well was drilled. Only in Harper had the Commission entered an order permitting the drilling of additional wells in a 640-acre unit, where the permitted number of additional wells, at the time of the hearing in this case, had not been drilled. This was in Section 26-22N-8W. The initial well drilled in said section was an oil well, and Harper obtained permission to drill three more wells in the 640-acre unit on the theory that three more oil wells would result. The additional second well was a gas well. The two additional wells authorized were not drilled because it appeared that these would also be gas wells and therefore would not be necessary to drain the unit. Further, Appellees in their application did not request that Section 26 be de-spaced, although the evidence reflects that it is part of the same common course of supply. Thus, the sole instance of failure to drill additional wells applied for occurred in a 640-acre unit not covered by the application in this cause.
Fourthly, I am in agreement with Appellants’ position that both in the hearings below and in this appeal that Appellee’s application for de-spacing was defective because it failed to de-space the entire common source of supply. Appellants’ position in this regard was based upon 52 O.S.Supp. 1978, § 87.1(a), which provides in pertinent part that the Commission:
“had the power to establish well spacing and drilling units of specified and approximately uniform size and shape covering any common source of supply, or perspective common source of supply, of oil or gas within the State of Oklahoma; ... or may establish, reestablish, or reform well spacing and drilling units of different sizes and shapes when the Commission determines that a common source of supply contains predominantly oil underlying an area or areas and contains predominantly gas underlying a different area or areas; provided further that the units in the predominantly oil area or areas shall be of approximately uniform size and shape, and the units in the predominantly gas area or areas shall be of approximately uniform size and shape, except that the units in the gas area or areas may be of nonuniform size and shape when they adjoin the units in the oil area or areas; ...”
The record discloses that Appellees requested the Commission to establish smaller drilling and spacing units in only a portion of the subject common source of supply. Dismissals of various units occurred during the course of the proceeding. Relief requested by the Appellees was clearly contrary to the provisions of Section 87.1(a) unless all the common source of supply was involved, or unless there is a combination reservoir when the gas units and oil units are separately defined. The order appealed did not establish separate gas units and separate oil units.
Throughout the hearing and on appeal, Appellants urged an alternative position. They urged that the proper remedy in this case was additional well authorization. Additional well authorization is an alternative to respacing and is provided for in Section 87.1(a) as follows:
“... Provided that the Commission may authorize the drilling of an additional well or wells on any spacing and drilling unit or units or any portion or portions thereof, or may establish, re-establish, or reform well spacing and drilling units.... ” (Emphasis added)
Thus, the statute permits additional well authorization in less than all of the units in a common source of supply, but requires all of the common source of supply to be involved in respacing.
The Majority Opinion is mistaken in its contention that Appellants urged a unit-by-unit consideration of the application for purposes of de-spacing, as well as for the *671purposes of additional well authorization (increased density). Because of this mistaken assumption, the Majority states that: “It is inappropriate to now allow reversal of the Commission’s order on grounds which directly conflict with the parties’ position below.” Although Appellants never requested de-spacing, it was their contention that if de-spacing was undertaken, it would have to encompass the entire common source of supply. What Appellants did request was increased density which of necessity would be on a unit-by-unit basis.
Since 52 O.S.Supp.1978, § 87.1(a), requires all of the common source of supply to be involved in de-spacing, the Commission’s order is defective, and the order’s failure to deal with the entire common source of supply is another reason for its reversal by this Court.
Lastly, although I do not disagree with the Majority’s holding that the Commission lacked personal jurisdiction over Union Oil of California, I disagree with the consequential results reached by the Majority when they conclude that no part of the Corporation Commission’s order “is valid insofar as it affects the rights and interests of Union Oil of California, and is reversed insofar as it attempts to adjudicate the rights of Union Oil of California.” The result of the Majority Opinion is to effectively change each 640-acre drilling and spacing unit in which Union has an interest into four 160-acre drilling and spacing units as to every one of the 640-acre units except Union. The effects and consequences are chaotic, leaving undetermined and uncertain the rights and liabilities of the parties in each such 160-acre unit as against Union, whose interest is still fixed on the basis of a 640-acre unit. Even if Union’s interest is de minimus, the consequences are the same. For example, if Union owns an overriding royalty interest covering only one non-producing 160-acre unit, does the lessee on whose leasehold the former 640-acre unit well was located still have to continue to account to Union on the basis of a 640-acre unit? If Union owns a lease covering only one non-producing 160-acre unit, how can it terminate as to the lessor-royalty owners where the primary term has expired, but not terminate as to Union’s lessee interest because the lease was within the former producing 640-acre unit? These disruptive consequences are yet another reason why the Commission’s order cannot stand and should be reversed.
I am authorized to state that Justice HODGES and Justice SIMMS join me in this dissent.

. Cameron v. Corporation Commission, 414 P.2d 266 (Okl. 1966); and Southern Union Gas Co. v. Texas County Irrigation & Water Resources Association, 564 P.2d 1004 (Okl.1977).

. Anderson-Prichard Oil Corp. v. Corporation Commission, 205 Okl. 672, 241 P.2d 363 (1951).

. The testimony of Mr. H. for the Appellants concerning the use of volumetric estimates is as follows:
“Q. Did you use the volumetric estimates on the Mississippi Lime wells?
A. I haven’t used the volumetric estimate since the mid-1960s and I only tried it once to convince myself that it was not a logical approach.
Q. Why do you find that to be the case?
A. The quality of the logs that are available and the quality of the information to identify porosity and water saturation and net feet of pay is unacceptable for reserve estimates.
Q. Is there any validity at all in your opinion in the results that you might obtain from volumetric estimates in the Mississippi Lime?
A. No.
Q. Do you have an opinion about Mr. Benton’s computer calculation of the drainage area?
A. I think the manner in which it was used is erroneous. It’s a useful device but primarily what it did was to verify the pressure cumulative analysis that it was — if you examine the results of that and the results of pressure cumulative studies, you will see that there is a very good correlation between the two. And there should be because what it’s doing is analyzing the performance of the well to date. But it requires entering an assumption as to the amount of net pay in the well in order to calculate drainage area, and if you don’t know net pay, you can’t calculate drainage area.
Q. So you are saying that the information that’s provided is invalid and the results are invalid?
A. Yes.”

. See Ward v. Corporation Commission, 470 P.2d 993 (Okl.1970).

. Spaeth v. Corporation Commission, 597 P.2d 320 (Okl.1979).