CHAPTER 6 OKLAHOMA FORCED POOLING
| Jurisdiction | United States |
(Sep 1985)
OKLAHOMA FORCED POOLING
Hall, Estill, Hardwick, Gable, Collingsworth & Nelson, P.C.
Tulsa, Oklahoma
TABLE OF CONTENTS
Page
I. AN OVERVIEW
II. THE LEGAL EFFECTS OF FORCED POOLING
A. The "Transfer" of Interests
B. The Quantum of Interest "Transferred" By Forced Pooling
C. Summary
III. JURISDICTION OF THE COMMISSION TO DETERMINE RIGHTS UNDER PRIOR POOLING ORDERS
A. Does The Applicant Own An Interest Sufficient To Allow It To Invoke The Commission's Jurisdiction In An Application To Pool Previously Pooled Drilling And Spacing Units?
B. Does An Application To Pool Previously Pooled Drilling and Spacing Units Constitute An Impermissible Collateral Attack On The Prior Pooling Order?
C. Does The Commission Have Jurisdiction To Hear An Application And To Determine Applicant's Rights Under A Prior Pooling Order?
1) The Application Puts At Issue The Legal Effect Of The Prior Pooling Order
2) The Commission Has Authority To Determine Facts Relating To Its Own Jurisdiction
D. Does The Commission Have Jurisdiction To Hear An Application To Pool Previously Pooled Drilling And Spacing Units And To Determine The Legal Effect Of Its Prior Pooling Order?
E. Is The Application To Pool Previously Pooled Drilling and Spacing Units A Forbidden Attempt To Try Title?
IV. CONCLUSION
EXHIBIT "A"
FOOTNOTES 6-24
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I. AN OVERVIEW
The provision in Oklahoma's statutes establishing forced pooling as it currently exists was enacted in 1947 as part of the oil and gas conservation laws.1 The Oklahoma forced pooling procedure was designed to eliminate the ability of unleased mineral owners and recalcitrant lessees to "hold-up" the drilling of wells for oil and gas. If a person who proposes to drill a well cannot agree with any other person owning an interest in the unit for the drilling of the well and the development of the unit, that proposing person may file an application with the Oklahoma Corporation Commission for a pooling of interests for the drilling of that well.2 Following a hearing, the Commission will determine an operator for the well, the completed well costs (which may serve as the basis for an advance against costs to be posted by participants pooled), and the compensation to be paid to any person not wishing to participate in the drilling of the well.
Prior to filing a pooling application with the Commission, the applicant must secure the names and current addresses of all such unleased mineral owners and lessees whom applicant wishes to pool. Diligence and accuracy are essential in properly naming and serving the persons to be pooled, as a deficiency in either can render the resultant order jurisdictionally defective.3 Also critical is the applicant's pre-filing effort to reach agreement with the other owners as to how the subject drilling and spacing units should be developed. The Commission's Rules of Practice require a statement in the application that the applicant exercised "due diligence to locate each respondent" and that the applicant made a "bona fide effort" to reach an agreement with each respondent.4 Evidence must be offered at the hearing demonstrating applicant's "diligence" and "bona fide effort" to reach such an agreement.
The applicant will be named operator of the proposed well if it so requests and no other party contests that right. However, even if a pooled party requests that it, rather than applicant, be named operator, the Commission's bias is to name applicant as the operator if applicant is the largest interest owner in the unit or if applicant has the support of the majority of the unit. The Commission will, however, designate another as operator if there is a strong showing casting great doubt upon the applicant's ability to operate, or if there is a great disparity between the size of the unit interest owned by the
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applicant and that owned by the pooled party requesting to be named operator. In determining who should be designated operator, the Commission considers a number of factors including (1) which party first proposed the well and filed its application to pool, (2) which party owns the largest share of the unit, (3) which party has operated wells in the area and (4) which party has experienced personnel who will supervise the drilling, completion and operation of the well.
The Commission will normally afford a pooled party two options. One is to participate in the well by paying that party's proportionate part of the actual cost thereof, but not in excess of what is reasonable.5 The other is to accept compensation in lieu of that party's right to participate in the working interest in the well. The second option may encompass several alternatives and is intended to reflect the "fair market value" of the pooled owner's interest.6 The pooled party is always afforded an option to receive a cash bonus fixed by the Commission in lieu of the party's right to participate in the well. Other non-participating alternatives given depend upon the specific facts of the case as to actual transactions in the pooled unit and surrounding area. One frequently granted alternative option is a so-called "farmout option" wherein the pooled party is given the right to receive an overriding royalty in lieu of any cash bonus. Depending on the evidence presented at the hearing, the override may be convertible to some fraction of that party's working interest after payout. In addition to the right to participate or to receive compensation in lieu of such right, a pooled party who is an unleased mineral owner is also by law entitled to a one-eighth royalty.
Parties pooled are generally given fifteen days from the date of the pooling order to elect to participate or select one of the non-participating options. By the terms of the order, the designated operator is customarily permitted six months to commence the well, failing which the order expires. The order carries no obligation to commence. The operator must only propose, not promise, to drill a well.7 The order will sometimes defer the time for the pooled party's election until some future event. This typically occurs when the operator does not intend to commence drilling until completion of an offsetting well. In that case, the order may defer election until a stated number of days after the operator's notice to spud the pooled well.
By the terms of the pooling order, the designated operator is obligated to pay the cash bonus to all parties pooled who either affirmatively elect or, by default, are deemed to have elected to take the cash bonus as compensation in lieu of their right to participate in the working interest in the well. Failure by the operator to tender the bonus payment to a pooled party within the time period prescribed by the order does not render the pooling order "ineffective" as to that party's interest.8 With respect
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to a pooled party's receipt of the cash bonus, it has been held that the cashing of the bonus payment "under protest" pending an appeal of the order constituted inconsistent acts of acceptance and repudiation of the pooling order. In that circumstance, the court dismissed the appeal of the party who had accepted the "fruits" of the order.9
A pooling order generally specifies that within five or ten days following the election period, a person electing to participate in the well will be required to pay the operator its proportionate part of the estimated completed cost for such well as determined at the hearing and set forth in the order. By the terms of the order, failure to timely pay will be deemed revocation of an election to participate and, instead, an election to take the cash bonus or other non-participating option specified in the order. Participating pooled parties normally have the right to make other financial arrangements acceptable to the operator. Typically, a major oil company or other financially responsible person will be permitted to sign an Authority for Expenditure and/or an acceptable operating agreement in lieu of making a cash deposit. However, the operator need not permit a pooled party to execute an operating agreement, but may require participation under the pooling order. This can have an important operational impact. A party participating under a pooling order has no casing point election or other voice in the drilling of the well, but is bound to pay its share of the actual, reasonable costs and expenses of drilling and completing the well even though they may exceed the estimated costs set out in the order. On the other hand, the typical operating agreement grants to all parties an election at casing point to join or not join in any completion attempt. As will become evident later, another important difference in participation under an operating agreement as opposed to a pooling order is that an operating agreement usually covers the proposal and drilling of all wells in a unit while pooling orders presently purport to cover only the initial unit well.
II. THE LEGAL EFFECTS OF FORCED POOLING
A. The "Transfer" of Interests
Case law construing Oklahoma's forced pooling statute does not specifically define the nature of the interest a party acquires or relinquishes by virtue of a pooling order issued by the Corporation Commission. Generally, it can be said that the interest of the owner who elects not to participate in the drilling of the well proposed in the pooling application "transfers" his working interest to the operator (or participating owners) by operation of law and the pooling order.10 Oddly enough, this "transfer" of ownership is often not evident in the chain of record title as parties to a pooling proceeding do not customarily record a copy of the pooling order
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in the county in which the land is situated. Despite this lack of recordation, it is apparent from recent judicial decisions that...
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