| Opinion: | Toklan Oil and Gas Corp. v. Citizen Energy III, 2022 OK CIV APP 37 |
| Subject matter: | Oil and Gas |
| Date Decided: | December 10, 2021 |
| Trial Court: | Oklahoma Corporation Commission |
| Route to this Court: | Toklan sought review of Order No. 718145 of the Oklahoma Corporation Commission granting Citizen Energy III’s application for an order pooling the interest, designating the operator, and adjudicating the rights and equities of oil and gas owners in a certain tract located in Cusher County. |
| Facts: | Citizen Energy communicated with Toklan to acquire Toklan’s working interest in a 1,280 acre horizontal drilling and spacing unit. The parties were unable to come to an agreement, but Citizen Energy nevertheless drilled an Upper Meramec well in the unit. Prior to the Upper Meramec drilling, Toklan sold an overriding royalty interest to Pescador, LLC in the amount equal to the positive difference between 30% and the existing leasehold burdens. After the well was completed, Citizen Energy pooled oil and gas owners and a hearing before an administrative law judge (ALJ) was held. Citizen Energy asserted that Toklan and Custer Partners, LLC had assigned the overriding royalty interest to Pescador, which then burdened Toklan and Custer’s interest to be burdened to a 70% net revenue interest. Citizen Energy alleged that the overriding royalty interest overburdened Toklan and Custer’s interest to a degree that was not indicative of fair market value, which evidence and testimony supported. The Corporation Commission ALJ agreed with Citizen Energy’s expert that the negotiations prior to the well’s construction before the assignment indicated that the assignment was made to circumvent the Commission pooling proceedings. The ALJ ordered the overburden should be reduced to 20%. On appeal, the Commission Oil and Gas Appellate Referee affirmed the ALJ’s order in Order No. 718145 in valuing the fair market value of Toklan’s interest. |
| 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 facts. In all other appeals from orders of the Corporation Commission the review by the Supreme Court shall not extend further than to determine whether the Commission has regularly pursued its authority, and whether the findings and conclusions of the Commission are sustained by the law and substantial evidence. Okla. Const. art. IX, § 20. |
| Analysis: | The Court determined that there were two principal questions to this case, the first was whether the Order shifting royalty burdens away from Citizen Energy and modified contractual rights related to overriding royalty interests traversed the bounds of the Commission’s jurisdiction and second, whether the Order was too vague for judicial construction. The Court answered the first question in the negative, that the Commission did have the jurisdictional authority because the Commission is a tribunal of limited jurisdiction, having only the authority that is expressly given it in the Oklahoma Constitution and State statutes. Thus, in exercising its pooling authority, the Commission was unable to reach modification interests. Unit operators must pay all of a pooled lessee’s override obligations, despite the clear potential for abuse. O’Neil v. American Quesar Petroleum Co., 1980 OK 2, ¶ 9. Therefore, the Commission was barred from modifying contractual rights related to the royalty interests. In answering the latter question of vagueness, the Court determined that because the Commission lacked jurisdiction to execute its Order, the Commission needed to reidentify the fair market value of Toklan’s interest in light of the O’Neil decision. O’Neil supports the proposal that unit operators must pay or stand the overriding interest if Toklan did not participate in pooling. The Court determined that the Order was too vague because the Commission needed to make specific findings and conclusions about how a reduction in the royalty burdening Toklan’s interest was to occur. 75 O.S. § 312. The Commission failed to answer whether royalty and overriding royalty owners of record on the leasehold were to convey to Citizen Energy some portion of their interests, what portion of the total reduction would be conveyed to owners of lessor royalty, and what portion by owners of the overriding royalty. Despite Citizen Energy bringing forth evidence of the fair market value, the Court was unable to determine from the Order how a downward adjustment in the total royalty burdening Toklan’s interest was to occur. |
| Outcome: | Reversed and Remanded with directions to make specific findings and conclusions responsive to the issues identified herein, applying principles of law identified in O’Neil. |
| Vote: | 3-0. Goree, P.J., Mitchell, J., Prince, J. (author) concur. |
| Other: | N/A |