Current Issues at the Oklahoma Corporation Commission Ben

Current Issues at the Oklahoma Corporation Commission Ben Brown Attorney at Law OCAPL Educational Luncheon February 6 th, 2017

Agenda • • Publication Notice and Due Process Pre-Pooling Negotiations Pooling Orders are “Bare Bones” Documents Pooling multiple formations in one order: Fairfield v. Continental • C. F. Braun and Separate Units • Well by Well Provisions in Pooling Orders: B & W Operating • Commission Ruling on Fairfield v. Continental • Vertical Well Owners in New Horizontal Units • Horizontal Wells in Concurrent Development: Pooling v. JOA • Expiring Pooled Leasehold Interest

Publication Notice & Due Process • Boone Applications • Harry R. Carlile Trust v. Cotton Petroleum Corp. (1986 OK 16, 732 P 2 d 438) • Substantive and procedural obligations of using publication notice

Publication Notice & Due Process • Judgement roll must show: • Affidavit for Service by Publication filed • Adjudicative inquiry of due diligence employed • Finding of proper process and meaningful search of available sources

Publication Notice & Due Process Result: Pooling orders void as to those locatable parties

Pre-Pooling Negotiations Issue: Should an operator seeking to file a force pooling application be required to offer a joint operating agreement to parties it intends to list as respondents?

Pre-Pooling Negotiations Force pooling used when: Two or more owners of undivided oil and gas interests “have not agreed to pool their interests and where one such separate owner has drilled or proposes to drill a well on said unit to the common source of supply” 52 O. S. § 87. 1 (e)

Pre-Pooling Negotiations Commission Rules state: “Each pooling application shall include a statement by the applicant that the applicant exercised due diligence to locate each respondent and that a bona fide effort was made to reach an agreement with each such respondent as to how the unit would be developed. The applicant shall present evidence at the time of hearing” OAC 165: 5 -7 -7

Pre-Pooling Negotiations Protestant: Standard pre-pooling proposal offers two choices: 1. Lease to the applicant 2. Be subject to the pooling order

Pre-Pooling Negotiations Protestant: Joint Operating Agreement is the standard form used in the oil and gas industry to reach an agreement on the communitization of working interest rights and on unit development.

Pre-Pooling Negotiations Commission: No legal authority requiring applicant to offer a joint operating agreement as part of a good faith negotiation

Pre-Pooling Negotiations JOA is the only alternative to a pooling order in Oklahoma. Is no pre-pooling negotiation required?

Pre-Pooling Negotiations • Advantages to pooling • Simple • Operator-friendly • All parties under the same governing agreement • Can be privately amended by pre-pooling letter agreement

Pooling Orders are “Bare Bones” Documents Tenneco Oil Company v. El Paso Natural Gas (1984 OK 52, 687 P 2 d 1049) Custom in the oil and gas industry was to enter into private joint operating agreements which defined with some specificity the rights and obligations between working interest owners Lacking such an agreement, pooling process at Commission available

Pooling Orders are “Bare Bones” Documents Oklahoma Supreme Court: “In short, the forced-pooling order generally; and specifically in this case, is ‘bare bones. ’ Many, many problems encountered in the industry must be and were covered by a joint operating agreement”

Pooling Orders are “Bare Bones” Documents • Provisions sometimes requested addressing: • Delaying payment of well costs • Ability of an operator to propose multiple wells simultaneously • Escrowing payment of well costs • Timely return of participation funds if well is not timely drilled

Pooling Orders are “Bare Bones” Documents • Commission rejected those requests • If an applicant is not required to offer a JOA during prepooling “negotiations, ” how does a non-operator receive the protections offered by a JOA?

Pooling Multiple Formations in One Order Fairfield Minerals v. Continental Resources, CD 201406590/91 • • • Well drilled, all but 100’ of lateral remained in one formation Continental filed pooling application covering multiple formations Fairfield protested asserting CF Braun, but ALJ ruled for Continental Fairfield appealed, Appellate Referee ruled for Continental Fairfield appealed to Commission en banc, again asserting CF Braun; Continental asserted B & W Operating

C. F. Braun and Separate Units • C. F. Braun & Co. v. Corporation Commission (1980 OK 2, 609 P 2 d 1268) • 1980 Oklahoma Supreme Court case interpreting the Commission’s authority to include multiple common sources of supply in one pooling order

C. F. Braun and Separate Units • Ruling: • 13 common sources of supply are 13 separate and distinct drilling and spacing units • Whether a separate election is owed depends on facts and circumstances • Pooling order should reflect application and evidence presented

C. F. Braun and Separate Units • Vertical wells not usually an issue • If drilling horizontally, evaluate circumstances • Associated common sources of supply

Well by Well Provisions in Pooling Orders B & W Operating LLC v. Corporation Commission (____ OK CIV APP ___) • Oil and gas owner sought pooling order with well by well elections for subsequent wells • Court of Appeals cited Amoco v. Corporation Commission (1986 OK CIV APP 16, 751 P 2 d 203), which held Commission doesn’t have authority to pool by the wellbore

Well by Well Provisions in Pooling Orders Court of Appeals in B & W concluded that well by well provisions for subsequent wells would turn the pooling order into a wellbore pooling, in violation of Amoco

Commission Ruling on Fairfield v. Continental • Created four separate and distinct units • Shale (“Woodford”) Unit: Woodford CSS and ACSS IF the well inadvertently drifted or penetrated one or both • Mississippian CSS: Included for development purposes. Must be targeted • Hunton CSS: Should be dismissed for development purposes. No plans for development. • Springer CSS: Must be targeted • No authority to aggregate all separate CSS for all purposes

Commission Ruling on Fairfield v. Continental Key issue: Continental had its own “Plan of Development” for the area, but did not have a specific plan of development for the separate common sources of supply (CSS) in the two sections it sought to force pool. Its request to aggregate four separate CSS into a single “unit” conflicts with the Shale Reservoir Development Act (SRDA).

Commission Ruling on Fairfield v. Continental • The SRDA refers to a “Unit” as “a drilling and spacing unit for a single CSS created pursuant to Section 87. 1 of this title. ” • Additionally, a multi-unit horizontal well (MUHW) may only be unitized to drill a horizontal well in a “targeted reservoir. ” A “targeted reservoir” means any “shale reservoir. ”

Commission Ruling on Fairfield v. Continental • As defined by the SRDA, a “shale reservoir” is: “a CSS which is a shale formation that is also designated by the Commission through rule or order and shall also includes any Associated Common Source of Supply (ACSS) as defined in this section. ”

Commission Ruling on Fairfield v. Continental • An ACSS is: • A CSS subject to a drilling and spacing unit formed by the Corporation Commission • Located in all or a portion of the lands in which the completion interval of a MUHW is located • Is immediately adjoining the shale common source of supply in which the completion interval of the horizontal well is located • AND which is inadvertently encountered in the drilling of the lateral of such horizontal well when such well is drilled out of or exits, whether on one or multiple occasions, such shale CSS.

Commission Ruling on Fairfield v. Continental • To be considered an ACSS, statue requires that the CSS: • Be “immediately adjoining” the shale • Be “inadvertently encountered” by a horizontal multi-unit lateral

Commission Ruling on Fairfield v. Continental • The ACSS is not intended for piggy-backing the ACSS as either the primary target for the MUHW, or inclusion of the ACSS in a pooling for later development as a targeted reservoir. • The inclusion of the ACSS as a part of the “shale reservoir” is solely for the purpose of, and limited to, possible inadvertent penetrations.

Commission Ruling on Fairfield v. Continental • For Example: • “Woodford Unit” consists of • Woodford CSS AND ACSS consisting of • Mississippian CSS- but only for the purpose of inadvertent penetration during the drilling of the lateral in the Woodford CSS • Hunton CSS- but only for the purpose of inadvertent penetration during the drilling of the lateral in the Woodford CSS

Commission Ruling on Fairfield v. Continental • As stated in Amoco, three distinct requirements arise from 52 O. S. § 87. 1(e) (1) The statute mandates developing the spacing unit as a unit (2) The statute authorizes pooling when the terms and conditions are just and reasonable (3) The statute requires that owners will receive a just and fair share of the oil and gas.

Commission Ruling on Fairfield v. Continental • The Commission focused on the second requirement: • The statute authorizes pooling when the terms and conditions are just and reasonable • Wellbores which could be drilled for ACSS not as a part of the shale reservoir for the MUHW, but as separate wells would need to be addressed (by terms in pooling order for separate elections or by a separate pooling order). • It is NOT just or reasonable for owners in a unit who are not interested in a MUHW to be forced to relinquish their interests in a CSS that can be drilled by stand alone wells in one unit.

Commission Ruling on Fairfield v. Continental • “For the special tool known as the MUHW, the Commission’s jurisdiction is limited to the provisions of the SRDA…” • “…the Commission’s and the producers’ options shall be constrained and limited as herein determined by the Commission. ”

Vertical Well Owners in New Horizontal Units How do the rights of oil and gas owners previously pooled in vertical (non-horizontal) drilling and spacing units relate to a new pooling for a horizontal unit formed for the same formation?

Vertical Well Owners in New Horizontal Units OAC 165: 5 -15 -3(g): Pooling order for a horizontal unit “shall provide that if any owner should elect not to participate in the development of the horizontal spacing unit, said owner’s interest in the production from the well or drilling and spacing unit which existed prior to the formation of the horizontal well unit shall not be affected”

Vertical Well Owners in New Horizontal Units Vested rights – Commission has already determined a party’s legal rights for the formation

Horizontal Wells in Concurrent Development: Pooling v. JOA = Portion of unit covered by JOA

Horizontal Wells in Concurrent Development: Pooling v. JOA • Contract Area does NOT allow for Horizontal development in this instance; JOA does not apply • POOL

Horizontal Wells in Concurrent Development: Pooling v. JOA = Portion of unit covered by JOA

Horizontal Wells in Concurrent Development: Pooling v. JOA • Contract Area will accommodate Horizontal development in this instance • If interest is owned and party is subject to JOA, propose under JOA. If not a party to JOA, POOL. • When in doubt, list parties as curative respondents!

Horizontal Wells in Concurrent Development: Pooling v. JOA = Portion of unit covered by JOA

Horizontal Wells in Concurrent Development: Pooling v. JOA • In this instance, amend JOA for Multi -unit development OR pool • Contractually agreed upon Exhibit “A” to JOA; can’t be amended with OCC ruling

Expiring Pooled Leasehold Interest Eagle Energy Production LLC v. Corporation Commission (2015 OK CIV APP 51, 351 P 3 d 750) • Oil and gas lease in effect on date application was filed • Lease expires, THEN pooling order issues • Court of Appeals ruled pooling order WOULD NOT burden rights of mineral owner/lessor under that lease

Expiring Pooled Leasehold Interest Harding & Shelton Inc. v. Sundown Energy Inc. (2006 OK CIV APP 123, 130 P 3 d 776) • Oil and gas lease in effect on date application was filed • Pooling Order issues, THEN lease expires • Court of Appeals ruled pooling order WOULD burden rights of mineral owner/lessor under that lease

Ben Brown Attorney at Law bebrown@cox. net 7335 South Lewis Suite 204 Tulsa, Oklahoma 74136 (918) 382 -9437 609 S. Kelly Ave Suite K-4 Edmond, Oklahoma 73003 (405) 330 -0725