Court Opinion

ID: 9562528
Source: CourtListenerOpinion
Date Created: 2023-08-21 18:30:57.678365+00
Date Added: 2024-06-11T09:17:23.505201
License: Public Domain

Schroeder, C.J.,
dissenting: I must respectfully dissent from the majority opinion for the reasons hereafter stated and upon the philosophy expressed in my dissent to Williams v. City of Wichita, 190 Kan. 317, 341, 374 P.2d 578 (1962). The Supreme Court today authorizes the State Corporation Commission (Commission) to exercise jurisdiction under the Gas Conservation Act, K.S.A. 55-701 et seq., which confers no statutory authority, to compel the owners of an undivided mineral interest to join in unit operation of an oil and gas lease.
Nowhere in the majority opinion are we told the legal basis upon which the Commission exercises jurisdiction over the undivided mineral interests spawning this suit. The majority pro*609vides an exhaustive statement of the facts and expounds the legal positions taken by the parties to this dispute. However, the six paragraphs concluding the majority opinion give no satisfactory reason for remanding the case to the Commission. I find particularly objectionable the sixth and final paragraph which attempts to denigrate valid property rights and contract rights of the parties herein by calling them “bargaining rights,” which the owners defend by a “dog-in-the-manger position.”
In an effort to avoid as much confusion as possible, the facts in the majority opinion will be relied upon as a background for this dissent. However, the following facts require emphasis:
Mobil Oil possesses leases on the oil and gas development rights for the four 160-acre tracts included in the application for a noncontiguous acreage attribution exception. None of the leases contain a unitization or entirety clause, which allows easy attribution for production units. Mobil successfully negotiated new agreements with the owners of three tracts and All of the royalty interest owners of the disputed quarter section tract. The new agreements permit unitization of the leaseholds into one production unit. Gas produced from one well will be considered gas produced proportionately from each tract in the unit. The 3/7 interest owners in the disputed 160-acre tract negotiated with Mobil Oil, but could not reach an agreement modifying the existing lease.
At this point, a summary of relevant Kansas law on oil and gas rights and property rights of tenants in common is crucial. Kansas landowners own a present estate in the oil and gas in the ground. See Richards v. Shearer, 145 Kan. 88, 64 P.2d 56 (1937). This is the “ownership in place theory.” The nature of the landowner’s interest in oil and gas is the same as his interest in solid minerals. 1 Williams and Meyers, Oil and Gas Law §§ 203, 203.3. In Stratmann v. Stratmann, 204 Kan. 658, 662, 465 P.2d 938 (1970), we defined the terms “royalty interest” and “mineral interest,” stating:
“The term ‘royalty interest’ generally refers to a right to share in the production of oil and gas at severance. It is personal property and concerns the proceeds from oil and gás leases if and when there is production.
“The term ‘mineral interest’ as commonly used refers to the oil and gas in place and constitutes a present ownership of an interest in real property. (Shepard, Executrix v. John Hancock Mutual Life Ins. Co., 189 Kan. 125, 368 P.2d 19.) A prime characteristic of a mineral interest is the right to enter the land to produce *610and carry on production activities. This right may be leased to others. (Williams and Meyers, Oil and Gas Law, Manual of Terms, p. 232.)”
The mineral interest owners of the disputed 160-acre tract (Tract IV) are tenants in common; each owns an undivided fractional share of the gas beneath the tract. See Stratmann v. Stratmann, 204 Kan. at 664; Holland v. Shaffer, 162 Kan. 474, 479, 178 P.2d 235 (1947). As tenants in common each must have the right to occupy the whole in common with the cotenants. Fry v. Dewees, 151 Kan. 488, Syl. ¶ 2, 99 P.2d 844 (1940).
The common law rule of waste prohibited a cotenant from removing minerals from the land without the concurrent landowner’s consent. Following the present majority rule, Kansas permits a cotenant to produce oil or gas without joining other cotenants. See 2 Williams and Meyers, Oil and Gas Law § 502; see also Compton v. Gas Co., 75 Kan. 572, 89 Pac. 1039 (1907). However, the cotenant’s right to separately lease and develop his interest is accompanied by a duty to account to the other cotenants. A cotenant separately exploring and developing oil and gas must bear all the risk and expense of development. If production results, the developing cotenant may recover expenses out of the proceeds of production. After the well pays out, the proceeds of production must be shared proportionately with other cotenants. See Prewett v. Van Pelt, 118 Kan. 571, 235 Pac. 1059 (1925); Johnson v. Gas Co., 90 Kan. 565, 135 Pac. 589 (1913); 2 Williams and Meyers, Oil and Gas Law § 504.1; see also Annot., 5 A.L.R.2d 1368, 1380.
According to the “rule of capture,” the owner of land and those leasing from him own all the oil and gas produced from wells located on the land. Carlock v. Krug, 151 Kan. 407, 411, 99 P.2d 858 (1940). When several tracts of land are unitized or pooled, gas production from a well on any tract is considered produced proportionately from each tract in the unit. Pooling or unitization agreements in leases permit gas production without drilling a well on each and every tract of land in the unit.
The Commission has the authority to encourage pooling or unitization to prevent waste and protect correlative rights. 6 Williams and Meyers, Oil and Gas Law § 933.4. However, the Commission’s authority to compel unitization is governed strictly by statute. K.S.A. 55-1301 et seq.; Republic Natural Gas Co. v. Baker, 197 F.2d 647 (10th Cir. 1952). The Kansas Unitization Act *611permits unitization and unit operation of a gas pool or part of a gas pool if certain field conditions are met (55-1304), and the unit plan is approved by 75% of the working interests and royalty owners. (55-1305.) After notice and hearing, if the unit application complies with all statutory requirements, the Commission may order unit operation. (55-1304.) The Act authorizes the Commission to compel unitization on the nonsigning 25% royalty owners. In pertinent part, K.S.A. 55-1308 provides:
“Property rights, leases, contracts, and other rights or obligations shall be regarded as amended and modified only to the extent necessary to conform to the provisions and requirements of this act and to any valid order of the commission providing for the unit operation of a pool or a part thereof, but otherwise shall remain in full force and effect.” (Emphasis added.)
All parties have stated that the Commission has no jurisdiction to compel unitization, citing Republic Natural Gas Co. v. Baker, 197 F.2d at 650. It must be conceded Republic stated compulsory unitization is not possible without statutory authority. It must be noted, however, the Kansas Unitization Act (K.S.A. 55-1301 et seq.) was adopted in 1967 subsequent to the Republic decision, yet none of the parties to this dispute attempt to differentiate between the Gas Conservation Act (K.S.A. 55-701 et seq.) and the Unitization Act, which permits the issuance of a unitization order only upon the application of a working interest owner. K.S.A. 55-1303; 16 Kan. L. Rev. 567. The court is not concerned with the provisions of the Unitization Act in this action. The provisions of the Unitization Act have not been invoked.
The jurisdiction of the Commission herein was invoked by an application for the assignment of an allowable and for a noncontiguous acreage attribution exception for a well to be drilled in the Panoma Council Grove Gas Field, Stevens County, Kansas. It requested an exception from the noncontiguous acreage attribution restrictions of the Basic Proration Order applicable to that field. The Commission responded precisely as it should have under the Gas Conservation Act.
The Kansas Unitization Act is important to a resolution of this case. The Act evinces a legislative intent to permit compulsory unitization under statutorily controlled circumstances. The Act specifically authorizes the Commission to modify property, lease, and contract rights in favor of unit operation of gas pools. In contrast, the Gas Conservation Act, 55-701 et seq., does not *612specifically authorize the Commission to modify property or contract rights. This contrast looms significant when we recall our decision in Bennett v. Corporation Commission, 157 Kan. 589, 596, 142 P.2d 810 (1943), where we stated, “The commission has a limited jurisdiction. It possesses no powers not given it by the statute.” K.S.A. 55-1314 states that the Unitization Act shall be supplemental to and part of the Oil and Gas Conservation Acts, K.S.A. 55-601 et seq., and 55-701 et seq.
In my opinion, the conclusion to be drawn is that the Kansas legislature granted the Commission new powers in the Unitization Act. Those powers were made a part of the existing Conservation Acts. It is logical to assume those powers did not previously exist. Specifically, Commission authority to modify property, contract, and lease rights to accomplish unit operation of gas pools did not exist until 55-1308 was adopted. K.S.A. 55-1308 permits Commission modification of those rights only in conjunction with statutorily limited compulsory unitization.
The following summary will focus attention on the specific issues in dispute:
1. By a lease with the 3/7 interest owners of Tract IV Mobil is obligated to develop, drill and produce gas pursuant to the rule of capture. All proceeds from gas produced from a well on Tract IV are accountable to only Mobil and the Tract IV owners.
2. Mobil seeks to produce gas from a gas pool in the most cost efficient and least wasteful manner. An attempt to accomplish this by forming a voluntary unit operation failed.
3. For unstated reasons, compulsory unitization, pursuant to K.S.A. 55-1301 et seq., has not been accomplished.
4. Mobil filed an application with the Commission under K.S.A. 55-701 et seq., and the Revised Basic Proration Order for the Panoma Council Grove Gas Pool. The Commission must grant permission before new gas wells may be drilled in the Panoma Council Grove Gas Pool. An exception is required before noncontiguous acreage attribution to an allowable is permitted. The basic acreage unit for an allowable is 640 acres.
5. The Commission reviewed the Mobil application and granted an allowable and a noncontiguous acreage attribution exception on three tracts. The Commission order stated in pertinent part:
*613“The Commission is able to regulate only in a manner prescribed by this state’s legislature. The statutory directives in Article 7 of the Kansas Statutes Annotated are primarily aimed at preventing waste and protecting the correlative rights of those with interests in the production of natural gas in the state. At no point in the gas conservation statutes is the Commission able to require the compulsory formation of a production unit without the consent of those with interests in the royalties. Even though the formation of a production unit of separate tracts in the Panoma Council Grove Field may be desirable for the prevention of waste and the protection of correlative rights, the authority to require it may not be implied from the gas conservation statutes. As a result, the Commission is without jurisdiction to approve the attribution of an undivided 4/7 interest of the Northeast Quarter (NE/4) of Section 31, to the G. W. Shell No. 1 Well.
“It is clear that the Applicant would not be able to produce gas from only 4/7 of that acreage. Rather, the Applicant would be taking gas from the entire quarter section. Thus, attributing the undivided 4/7 interest would either have an effect similar to a partitioning of the interests in this property, or violate the rights of those with the remaining undivided 3/7 interests in the quarter section, and thus possibly compel them to join in the unit. The Commission is unable to bring about either of these results.” (Emphasis added.)
6. This lawsuit challenges those Commission findings.
In my opinion the Commission and the trial court were eminently correct.
This court gives great weight to the Commission’s factual determinations and the interpretation of its own rules and regulations. In Colorado Interstate Gas Co. v. State Corporation Comm., 192 Kan. 1, 18, 386 P.2d 266 (1963), cert. denied 379 U.S. 131 (1964), we stated:
“It may be stated as a general proposition of law that the determination of market demand and establishing allowables is a responsibility which the legislature has lodged in the Commission. The courts are without jurisdiction to determine the method the Commission should use or the factors which it should consider. The courts may examine the methods used for the purpose of determining whether the Commission has acted within the power and authority delegated to it by the legislature.
“In considering the validity of the Commission’s determination, the courts can consider only the statutes granting the Commission’s authority and the Commission’s basic order with such amendments as are properly made thereto. The determination is a question of fact. What facts are to be considered and the relative weight to be accorded them are matters left to the Commission’s discretion. Unless the determination is arbitrarily or capriciously made without supporting evidence, the courts cannot interfere and substitute their judgment for that of the Commission. The question for the reviewing court is the power of the Commission to make the order, not its wisdom, propriety or expediency in having made it. (Interstate Comm. Comm. v. Ill. Cent. R.R., 215 U.S. 452, 54 L.Ed. 280, 30 S.Ct. *614155.) In City of McPherson v. State Corporation Commission, 174 Kan. 407, 257 P.2d 123, in considering the authority of the reviewing court under a similar statute, this court said:
“ . . Its function was to consider what the Commission had considered, not to inject its own views into what should have been considered by the Commission. The court had no authority under the statute to review the work of the Commission except in the manner and to the extent the statute gave it such authority. . . ” (p. 414.) (Emphasis added.)
See Columbian Fuel Corp. v. Panhandle Eastern Pipe Line Co., 176 Kan. 433, 440, 271 P.2d 773 (1954).
We also discussed the Commission’s responsibility under the Gas Conservation Act in Colorado Interstate Gas Co. v. State Corporation Comm., 192 Kan. at 24-25, stating:
“The Commission has three responsibilities under the Gas Conservation Statute. It must first of all prevent waste of the natural resource. It must allow sufficient production to meet the market demand if such can be done without waste. It must protect correlative rights.
“In a gas field such as the Kansas-Hugoton where five major companies are taking gas through separate pipelines not connected to the same wells, the responsibilities placed upon the Commission will clash. If the market demand cannot be supplied without waste, or if correlative rights cannot be protected without waste, or if correlative rights cannot be protected without unduly restricting production needed for the market demand, one of the three, waste, market demand, or correlative rights, must suffer. The dominate purpose of the Gas Conservation Statute is to prevent waste. (Kansas-Nebraska Natural Gas Co. v. State Corporation Commission, 169 Kan. 722, 222 P.2d 704.)
“The Commission cannot require or guarantee that each well owner will produce and sell his entire allowable. The Commission is required to afford each owner the ‘right or opportunity’ to produce his share. As far as the Commission’s duty under the basic order goes, it is fulfilled when each owner is legally ‘free to produce’ and not denied the ‘right or opportunity’ to produce his allowable.
“The Commission could not be required to shut in an entire gas field to protect correlative rights where some of the producers desired to cease production and hold a gas field for a reserve. The Commission could not be required to unduly restrict production in a gas field because some producers desired to deplete the gas at a very low rate regardless of the reason.
“When waste, market demand, and correlative rights are in conflict the Commission must determine which is to be given preference. If the decision of the Commission is supported by evidence, the courts cannot interfere.”
After reviewing the record on appeal, considering all the arguments of the parties, and analyzing the applicable legal principles, this court should uphold the Commission order and affirm the trial court. There is sufficient evidence to support the Commission’s factual findings, and the Commission properly interpreted its rules and regulations to exclude jurisdiction over the undivided royalty interests in Tract IV.
*615Both geological and legal theory support the Commission’s factual statement that Mobil could not produce gas from only the 4/7 interest in Tract IV, and that Mobil would be taking gas from the entire quarter section. Each of the seven cotenants owns an undivided share of all the gas beneath Tract IV. The gas cannot be physically apportioned into seven shares. Gas is fugacious; it does not obey man-made boundaries. The concept of unit operation of gas production is the result of that reality. Indeed, the gas is described as being in “pools,” and the Commission has determined one well may adequately drain 640 acres. See Somers v. Harris Trust & Savings Bank, 1 Kan. App. 2d 397, 400, 566 P.2d 775 (1977); and Revised Basic Proration Order for the Panoma Council Grove Gas Pool; see generally Smith v. Home Royalty Association, Inc., 209 Kan. 609, 498 P.2d 98 (1972); Johnson v. Gas Co., 90 Kan. 565, 573, 135 Pac. 589 (1913).
Mobil’s expert witness, L. C. Case, an engineering specialist, provided evidentiary support for the Commission’s finding that attribution of the 4/7 undivided interest to the allowable could compel the 3/7 undivided interests to join the unit operation. On cross-examination of L. C. Case by Dale M. Stucky, the following information was elicited:
“Q. You say if the Brecheisens don’t sign this agreement there is no way that they can get production? Is that what you are saying?
“A. No, sir. I’m saying that the people who did sign would have no way to get production in the Northeast Quarter of 31 if we are not permitted to attribute that portion of the undivided interests who did sign.
“Q. Why is that?
“A. Nobody is going to go in and drill a well on a 3/7 interest and with 4/7 interest outstanding. That would be my opinion.
“Q. Nobody is going to drill a well on what?
“A. A 3/7 interest.
“Q. You mean on the 3/7 interest that the Brecheisens own? Is that what you are saying?
“A. Yes.
“Q. So what you are saying is that the effect of this Commission’s order would be to compel my client to come in on this unit because nobody would drill a well after the Commission granted an allowable on 3/7 interest, including Mobil; is that correct?
“A. Not so long as Mobil still has the leasehold on that 3/7 interest, they wouldn’t come in and drill.
“Q. In other words, so long as Mobil hangs on to that leasehold and 3/7 interest, they are just out of luck if the Commission grants this allowable and they don’t join the unit?
*616“A. That would be true, yes.
“Q. And Mobil isn’t about to give up this voluntarily?
“A. Not that I am aware of.
“Q. I see. So this is kind of an ‘either-or’ proposition, as far as you are concerned? Either they get into this unit or they never have any production?
“A. As things would stand at this time, yes.
“Q. So now you are proposing that this Commission enter an order that you say will make it impossible for you to develop their acreage under their lease as it now exists?
“A. No, sir, it won’t make it impossible.
“Q. Improbable?
“A. No. The unit agreement as proposed is open-ended. They can join our unit at any time they wish.
“Q. But if the Commission grants the order, you say there will just be a 3/7 left, and there is no way that this lease could be developed other than their coming in and knuckling under to Mobil? That is what you testified, wasn’t it?
“A. The only way, in my opinion, that their interest could be developed, if they don’t choose to join the unit, is for them to in some way acquire their interest in the Council Grove that is attributed to some other well.
“Q. You mean they would have to come to Mobil and ask them to give the lease back, or something? Is that what you are saying?
“A. That is the only way I can see how they could put this acreage into production if—
“Q. If the Commission grants the allowable you ask?
“A. Right.
“Q. And you said Mobil isn’t about to release that?
“A. I am not aware that we have any plans such as that at this time.”
There is also support for the Commission’s decision it lacked jurisdiction to partition the interests in Tract IV. Mobil wanted the Commission to attribute the consenting 4/7 undivided interest in Tract IV. The well would then be drilled on one of the other tracts, and the 4/7 interest cotenants would circumvent their legal duty to account to the 3/7 interest cotenants. See 1 Meyers, The Law of Pooling and Unitization § 14.04, p. 506 (2d ed. 1967). When cotenants disagree as to proper use and development of the minerals under the land the remedy is to partition their interests. If partition is not accomplished by voluntary contractual agreement the cotenants may petition the district court for partition. See Miller v. Miller, 222 Kan. 317, 320, 564 P.2d 524 (1977); Kuhn v. Kuhn, 112 Kan. 155, 210 Pac. 343 (1922); see also 59 Am. Jur. 2d, Partition §§ 1, 30. Partition of oil and gas interests is a matter expressly within the jurisdiction of the district courts. K.S.A. 60-1003; see Home-Stake Production Co. v. Tri-State Pipe Co., 197 Kan. 163, Syl. ¶ 1, 415 P.2d 377 (1966); Strait v. Fuller, 184 *617Kan. 120, 334 P.2d 385 (1959); Gillet v. Powell, 174 Kan. 88, 254 P.2d 258 (1953); Holland v. Shaffer, 162 Kan. 474, 178 P.2d 235 (1947). As the earlier discussion of the Kansas Unitization Act explained, the Commission has very limited powers to modify property, lease and contract rights. (K.S.A. 55-1308.)
Writing in dissent to Bennett v. Corporation Commission, 157 Kan. at 598, former Justice Parker (later Chief Justice) stated:
“Because a statute is constitutional — and I concede the oil proration statute is- — it does not follow that all orders made under it are valid. A statute may be absolutely unassailable on constitutional questions and yet a board or commission charged with the duty of enforcing its provisions may so interpret its force and effect and apply it to a particular situation as to deprive an individual of rights guaranteed to him by the constitution. The commission’s authority is limited by the language of the statute under which it derives its power and if it attempts to proceed beyond the scope of that grant the court should refuse to sustain its action.”
Finally, a few comments are in order regarding the matters “noted” at the end of the majority opinion. Note 1 states that “theoretically at least” the grant of an allowable on the requested 571 acre unit would not disturb the 3/7 interests in Tract IV. That statement is superfluous and deceptive. Hopefully this dissent has demonstrated that factually and legally the grant of the requested allowable would disturb the 3/7 interest in Tract IV.
Note 3 abandons this court’s standards of review for Commission decisions and substitutes unsupported factual statements for the original factual findings of the Commission.
Note 4 only half explains the cotenants’ right to separately develop mineral interests. No mention is made of the cotenant’s duty to account to other cotenants when gas is produced from the tract.
Note 5 is interesting, but misses the point. The Commission lacks jurisdiction to issue an order attributing undivided interests in a tract of land to an allowable for a gas well.
The first two sentences of note 6 ignore the testimony of Mobil’s engineering specialist, Mr. L. C. Case. Mobil is obviously attempting to force the 3/7 interest into the unit. In addition, more than “bargaining rights” are involved. Valid contract rights are at stake; specifically, the lease between Mobil and the 3/7 interest owners. Legitimate property rights are also at stake; specifically, the 3/7 undivided royalty interest. The majority would be wise to reconsider the concluding words in Republic *618Natural Gas Co. v. Baker, 197 F.2d at 650: “The law does not imply a power in the regulatory bodies or the courts to take the property of one party and give it to another in order to effectuate a just result.”
It is respectfully submitted the judgment of the lower court should be affirmed.
Prager and Herd, JJ., join the foregoing dissenting opinion.