Summary
weighing the risks and benefits of retroactive pooling to both parties
Summary of this case from N. Oil & Gas, Inc. v. Cont'l Res., Inc.Opinion
No. 37956.
Filed February 18, 1972.
1. Oil and Gas: Statutes: Words and Phrases. Chapter 57, article 9, R.R.S. 1943, contemplates that a determination of the correlative rights of adjoining owners in a pool of oil or gas shall be determined on a fair, reasonable, and equitable basis. 2. Oil and Gas. Correlative rights must be determined and fixed on the basis of circumstances present in each individual case. 3. ___. A pooling order allocating shares in the production of a well, and costs encountered, may be made retroactive when equity and justice require. 4. ___. Ordinarily an adjoining owner is not justified in awaiting the successful outcome of drilling operations before entering into a pooling agreement or applying for a pooling order.
Appeal from the district court for Scotts Bluff County: TED R. FIEDLER, Judge. Reversed and remanded with directions.
Robert J. Bulger, for appellants.
Lyman Meister, Howard P. Olsen, and Frank Glebe, for appellees.
Heard before WHITE, C. J., SPENCER, BOSLAUGH, SMITH, McCOWN, NEWTON, and CLINTON, JJ.
This case arises out of an application of the appellants, Farmers Irrigation District et al., to the Nebraska Oil and Gas Conservation Commission for entry of a compulsory pooling order as to oil production from Government Lot 3, Section 18, Township 22 North, Range 53 West of the 6th P.M., Scotts Bluff County, Nebraska, located in what is known as the North Minatare Field. The application was filed January 16, 1967, and asks that the pooling order be made retroactive to October 15, 1964; the date of commencement of production from a well, known as the White Feather Petroleum Company, Inc., Emery No. 2, drilled on Government Lot 3. The commission entered a pooling order; determined the allocation between the two separate leases which cover a separate portion of Government Lot 3; made the allocation effective as to all production subsequent to October 15, 1964; and charged the working interest owners in the two leases with their allocated shares of all drilling completion, storage, supervision, transportation, and other costs necessary to the well. The appellees appealed to the district court for Scotts Bluff County, which court after trial reversed the order of the commission and determined that the Farmers Irrigation District and its lessee, Sun Oil Company, did not prove the facts and allegations contained in their application to the commission and that any minerals owned by the Farmers Irrigation District and its lessee "cannot be pooled." We reverse the judgment of the district court and remand the cause with directions to the district court to affirm the order of the commission.
The Farmers Irrigation District is the owner of a strip of land 150 feet wide extending across the south part of Government Lot 3. This strip appears to contain approximately 4.19 acres. Sun Oil Company holds an oil and gas lease covering this tract. No well was drilled thereon. The appellees, other than White Feather Petroleum Company, Inc., are the owners of the balance of Government Lot 3, containing about 43.92 acres. White Feather is the holder of the oil and gas lease on that tract. White Feather drilled a producing well in the approximate center of Government Lot 3 which became productive about October 15, 1964. On about December 22, 1964, Sun gave notice to White Feather and others of its lease and claimed a proportionate share of the production from the Emery No. 2 well. Appellees then disputed ownership of appellants' land and thereby questioned their right to any of the oil produced. This resulted in the filing of an action on August 27, 1965, to determine ownership of the land. The action was decided in favor of appellees and reversed on appeal to this court. See Sun Oil Co. v. Emery, 183 Neb. 793, 164 N.W.2d 644, decided January 31, 1969. Proceeds of production from the well have been held back and distribution awaits the outcome of this litigation.
Two questions are presented. First, were the interests of the parties subject to "pooling"? Second, may the pooling order be made effective retroactively to the date production commenced?
A determination of these questions will require a determination of the purpose and intent of the Oil and Gas Conservation Act found in Chapter 57, article 9, R.R.S. 1943. The act was adopted in 1959. See Laws 1959, c. 262, p. 899. Discussions of the act on the floor of the Legislature are not available, but a transcript of the proceedings before the Committee on Public Works reveals statements made by E. C. Reed, State Geologist, and Ken Monroe, representative of the oil industry. Both supported the act. When asked for a definition of correlative rights, they answered as follows: "Mr. Reed: It is about the only thing that is going to give the landowner any degree of protection. It is open to different interpretations. It has to do with the protection of each man's rights as opposed to another's rights in a fair consideration of the rights of everyone. You are not protecting correlative rights if you let one producer take oil out from under the adjoining person's land indiscriminately.
"Mr. Monroe: It all goes back to the early days of the oil industry when the law of capture was the way you operated an oil field. It was soon learned that this was infringing on the rights of others who had a mutual interest in this field. Correlative rights means `mutual interest.'"
It is clear that the Legislature understood the protection of "correlative rights," as provided in the act, meant a restriction of the old common law rule of "capture." To ascertain to what extent this was done requires a detailed consideration of the language contained in the act. It must also be borne in mind that under the law of capture, there were no restraints on the drilling of wells. He who drilled was entitled to the oil produced. To protect himself, a neighbor under whose land the pool extended had to, and could, drill his own well.
Referring now to the various sections of Chapter 57, article 9, R.R.S. 1943, we find certain pertinent provisions. Section 57-901, R.R.S. 1943, provides: "It is hereby declared to be in the public interest to foster, to encourage and to promote the development, production and utilization of natural resources of oil and gas in the state in such a manner as will prevent waste; to authorize and to provide for the operation and development of oil and gas properties in such a manner that the greatest ultimate recovery of oil and gas be had; and that the correlative rights of all owners be fully protected; * * *
"It is the intent and purpose of sections 57-901 to 57-921 to permit each and every oil and gas pool in Nebraska to be produced up to its maximum efficient rate of production, subject to the prohibition of waste as herein defined and subject further to the enforcement and protection of the correlative rights of the owners of a common source of oil or gas so that each common owner may obtain his just and equitable share of production therefrom." (Emphasis supplied.)
Section 57-902, R.R.S. 1943, prohibits waste and section 57-903, R.R.S. 1943, defines one form of waste as follows: "* * * waste shall also mean the abuse of the correlative rights of any owner in a pool due to nonuniform, disproportionate, unratable or excessive withdrawals of oil or gas therefrom causing reasonably avoidable drainage between tracts of land or resulting in one or more owners in such pool producing more than his just and equitable share of the oil or gas from such pool; * * *." (Emphasis supplied.) This section also defines correlative rights as follows: "Correlative rights shall mean the opportunity afforded to the owner of each property in a pool to produce, so far as it is reasonably practicable to do so without waste, his just and equitable share of the oil or gas, or both, in the pool; * * *." (Emphasis supplied.)
Section 57-905(4), R.R.S. 1943, confers authority on the Oil and Gas Conservation Commission to prevent waste and to regulate the drilling, producing, and spacing of wells.
Section 57-906, R.R.S. 1943, requires a permit from the commission before a well may be drilled.
Section 57-907, R.R.S. 1943, authorizes the commission to limit the production of oil and gas from each pool to an amount that can be produced without waste and further provides: "Whenever the commission limits the total amount of oil and gas which may be produced in any pool in this state to an amount less than that amount which the pool could produce if no restriction was imposed, the commission shall allocate or distribute the allowable production among the several wells or producing properties in the pool on a reasonable basis, preventing or minimizing reasonably avoidable drainage from each developed area not equalized by counter-drainage, so that each property will have the opportunity to produce or to receive its just and equitable share, subject to the reasonable necessities for the prevention of waste." (Emphasis supplied.)
Section 57-908, R.R.S. 1943, provides: "(1) When required to prevent waste, to avoid the drilling of unnecessary wells, or to protect correlative rights, the commission shall establish spacing units for a pool, * * *. (2) The size and the shape of spacing units are to be such as will result in the efficient and economical development of the pool as a whole, and that size shall be the area that can be efficiently and economically drained by one well. (3) * * * the commission shall include in the order suitable provisions to prevent the production from the spacing unit of more than its just and equitable share of the oil and gas in the pool." (Emphasis supplied.)
Section 57-909, R.R.S. 1943, provides: "(1) When two or more separately-owned tracts are embraced within a spacing unit, * * * the commission * * * shall be empowered to enter an order pooling all interests in the spacing unit * * *. Each such pooling order * * * shall be upon terms * * * that are just and reasonable, and that afford to the owner of each tract or interest in the spacing unit the opportunity to recover or receive, * * *, his just and equitable share. Operations incident to the drilling of a well upon any portion of a spacing unit covered by a pooling order shall be deemed, for all purposes, the conduct of such operations upon each separately-owned tract in the drilling unit by the several owners thereof. That portion of the production allocated to each tract * * * shall, when produced, be deemed for all purposes to have been produced from such tract by a well drilled thereon." (Emphasis supplied.) This section also provides sharing of the expense of drilling and producing.
In conformity with the authority conferred on it by section 57-911, R.R.S. 1943, the commission adopted Rule 313, subsection (b) of which is as follows: "All wells drilled to sources of supply at estimated depths in excess of two, thousand five hundred (2500) feet for which no spacing pattern has been established by existing wells shall be drilled on 40-acre legal subdivisions or equivalent lots and not less than five hundred (500) feet from the boundaries of said legal subdivisions." (Emphasis supplied.)
The pooling order requiring a pooling of the interests of appellants and appellees was entered in conformity with the requirements of the act and under the authority expressly conferred in sections 57-908 and 57-909, R.R.S. 1943, and allocated production as therein directed. We conclude that the pooling order was valid and enforceable.
The primary question is the second mentioned. Can the order allocating production be made retroactive to the date production commenced? Under the common law rule of capture, appellees would have been entitled to all oil produced and appellants only remedy would have been to drill its own well. With the adoption of the Oil and Gas Conservation Act, a landowner could no longer so protect his interest. It became necessary to get a drilling permit and the act contemplates that there shall be only one well if that one can adequately pump out the oil in the pool. Here the appellants are entirely dependent for protection on the pooling order allocating to them a share in the production and the costs of production of appellees' well. The several sections of the act consistently stress the protection of correlative rights. They are clearly designed. to protect adjoining landowners under whose lands a pool may extend. To do so in a fair, reasonable, and adequate manner, and to permit an adjoining owner to obtain, recover, and receive his just and equitable share, the pooling order may be made retroactive to the time production started and, insofar as costs are concerned, to the start of drilling operations. Unless the order may be made effective retroactively, it may on occasion verge on the confiscatory.
We do not mean to say that this should be done in every instance. All pertinent factors affecting the particular case under review must be considered. There is ordinarily no good reason why an adjoining owner should not ask for a voluntary pooling agreement at the time his neighbor starts to drill and thereby share in the expense, as well as in production, whether or not. the well proves successful. The statutes clearly intend that rights shall be resolved upon an equitable basis. To permit an adjoining owner to sit back and await the successful outcome of drilling operations without asking for a pooling agreement would place the entire risk and the entire expense upon the party drilling in the event of an unsuccessful operation. This would ordinarily be inequitable and not justify a retroactive order. Section 57-909, R.R.S. 1943, contemplates that when an adjoining owner fails to enter into a voluntary pooling agreement, a spacing and pooling order may be entered on the application of any interested party. The drilling party may recover the share of the expense allocated to the adjoining owner by deducting it from the adjoining owner's share of the oil or gas produced. This enhances the risk taken by the drilling party who may encounter a dry well and is a factor which must also be considered in weighing equities. In this case, due to the early notice of a claim to pooling rights given appellees by appellants, and to the obvious delaying tactics pursued by appellees, although proceedings before the commission were not commenced as early as they might have been, we are inclined to believe that limiting the pooling order to the date of commencement of such proceedings is not justified and that the order should be made retroactive at least to the date notice of appellants' claim was given. This occurred very soon after completion of the well and in view of the fact that the commission's order allocated drilling, as well as production expense, to appellants, we find the order to be fair and equitable. We direct that such order be reinstated and adhered to. The judgment of the district court is reversed and the cause remanded with directions to enter judgment as herein directed.
REVERSED AND REMANDED WITH DIRECTIONS.