Opinion:Southstar Exploration v. Corporation Commission of State of Okla., 2022 OK CIV APP 9
Subject Matter:Oil and Natural Gas Law
Date Decided:March 21, 2022
Trial Court:Oklahoma Corporate Commission
Route to this Court:Appeal of the determination of participation costs established by an Oklahoma Corporation Commission pooling order appointing Southstar as operator over a well within a previously established drilling and spacing unit.
Facts:SouthStar took over operations of the Graves 2-32 and Minter 1-32 saltwater disposal well, and thereafter commenced operations on the McLish in December 2016. SouthStar and 7C Land and Minerals Company (7C) each bid upon the lease for the minerals underlying the McLish. 7C was the successful bidder. Both parties submitted competing pooling applications.

The ALJ determined SouthStar’s application to pool the unit in the McLish should be granted, as well as its request to be appointed operator over the Graves 2-32. The ALJ also determined the cost of development and production to be SouthStar’s proposed $1,647,601.00, representing the sums spent to drill the original well in 2006 when operated by Crusader, to which 50% would be chargeable to the McLish, for a total of $411,900.25 to be borne by 7C. This cost was in addition to half of the $255,812.00 cost to recomplete the well ($127,906.00) and half of $41,907.43 ($20,953.72) for saltwater disposal ($1.75 per barrel). The Commission limited costs to the salvage value of the well, in addition to recompletion costs and lease operating expenses and $0.50 per barrel for saltwater disposal, and determined participants’ share of costs to be $194,822.22Southstar appeals the Commission’s determination of these costs. 7C appeals the Commission’s order that it prepay its share of costs when it elected to participate in the pooled unit.
Standard of Review:The Supreme Court’s review of appealable orders of the Corporation Commission shall be judicial only, and in all appeals involving an asserted violation of any right of the parties under the Constitution of the United States or the Constitution of the State of Oklahoma, the Court shall exercise its own independent judgment as to both the law and the facts. . . Upon review, the Supreme Court shall enter judgment, either affirming or reversing the order of the Commission appealed from. Oklahoma Const. Art. IX, § 20.
Analysis:SouthStar contends that the Commission’s employment of salvage value to determine actual and reasonable well costs to be shared by 7C is contrary to law; that the Commission’s determination of actual and reasonable well costs is not supported by substantial evidence; and that the pooling order’s saltwater disposal costs are not supported by substantial evidence. The applicable law to SouthStar’s first complaint is 52 O.S. Supp. 2017 § 87.1(e), which plainly requires the Commission to consider whether an actual expenditure was required to be made, and whether it is an unreasonable amount. The Court determined that according to Wood Oil Company v. Corporation Comm’n, 1950 OK 207, ¶¶20-21, SouthStar is not entitled to expenses for the drilling it did not incur itself, because Crusader drilled the well and paid the expenses. Giving effect to the full language of the statute (and section 87.1(e) as a whole), it requires recovery of expenses necessary to develop and produce the McLish and requires that those expenditures not exceed what is reasonable. The Commission’s reliance on salvage value to limit the actual expenditures recoverable is not contrary to the statute, when used to determine what is reasonable. In response to the complaint about the pooling order’s saltwater disposal costs, the ALJ, the Appellate Referee and the Commission each determined $0.50 to be a reasonable charge for saltwater disposal.

7C contends that SouthStar holds certain funds in suspense adequate to cover its share of development and production costs, and it is inequitable to require 7C to advance funds when adequate security exists and it did not need to prepay for the pool. SouthStar held in suspense another pool of money—$256,084.39—pending determination of 7C’s rights in the lease in the separate litigation. No insight was offered into the determination that it was necessary to 7C to advance costs other than the Commission’s decision that it did not have jurisdiction over the suspended funds. The record also contains no information regarding the funds and whether SouthStar still has them or not. Therefore, the Commission’s Order on this point is unsupported by substantial evidence and is therefore remanded for further proceedings on this matter. 7C should not have been required to advance costs.
Outcome:The Court reverses the Commission’s Pooling Order, dated February 8, 2021 on this point only, remands for further consideration, and affirms cost calculations.
Vote:3-0. Fischer, C.J., Barnes, P.J., and Hixon, J. (author) concur.