FILED SEP 2 6 2016 BEFORE THE CORPORATION COMMISSIOIOURT CLERK'S OFFICE - OKC

OF THE STATE OF OKLAHOMA CORPORATION COMMISSION OF OKLAHOMA

I

LEGAL DESCRIPTION

LEGAL DESCRIPTION

MARATHON OIL COMPANY

MODIFICATION OF ORDER) CAUSE CD NO 1 NO. 587782 - CHANGE OF ) OPERATOR )

)

ALL OF SECTION 30, ) TOWNSHIP 15 NORTH, ) RANGE 11 WEST, BLAINE ) COUNTY, OKLAHOMA )

MARATHON OIL COMPANY

MODIFICATION OF ORDER) CAUSE CD NO. 201602162 NO. 580783 - CHANGE OF ) OPERATOR )

)

ALL OF SECTION 30, ) TOWNSHIP 15 NORTH, ) RANGE 11 WEST, BLAINE ) COUNTY, OKLAHOMA )

APPLICANT:

RELIEF SOUGHT

APPLICANT:

RELIEF SOUGHT

S BRIEF IN RESPONSE TO BRIEFS FILED BY [EC

AND JMA ENERGY

Introduction

The above-captioned matters came on for hearing before Paul E. Porter,

Administrative Law Judge for the Corporation Commission of the State of Oklahoma, on

July 14, 2016. At the conclusion of such hearing, the Administrative Law Judge requested

that Applicant, Marathon Oil Company ("Marathon"), and Protestants, Continental

Resources, Inc. ("Continental") and JMA Energy Company ("JMA"), submit legal briefs

addressing the issue of whetheif the facts herein show a change in conditions or a change in

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knowledge of conditions sufficient to justify the relief requested in these causes. This brief is

submitted in response to the briefs filed by Continental and IMA in these matters on

September 9, 2016. Terms defined in Marathon's initial brief are used herein.

Response to Continental

1. Change in Conditions.

Marathon notes that Continental corrected its previously incorrect attribution to

Phillips Petroleum Company v. Oklahoma Corporation Commission, 482 P.2d 607 (albeit

with another error in the citation). Marathon now understands that Continental at the hearing

herein relied on Chaparral Energy LLC v. C.E. Harmon Oil, Inc., 149 P.3d 1070, 2006 OK

CIV APP 1070. Because of the previous misattribution, Marathon now feels compelled to

respond fully and properly to the cited authority, as Marathon did not have the opportunity

previously.

Continental has taken a single sentence out of context from the Chaparral case: "a

change in ownership of the working interest is not a change of condition or change in

knowledge of conditions that affects the feasibility of recovering minerals from the

reservoir." Chaparral at ¶ 9. Continental has relied upon this sentence (taken out of context)

to assert that a change in ownership is not a sufficient change in conditions or change in

knowledge of conditions to change the operator under a pooling order. However, the

sentence in context of the case does not support Continental's argument. One cannot simply

cherry pick a sentence that sounds helpful, yank that statement out of context and then

consider the legal analysis c4mplete. One must consider the nature of the requested

F,

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amendment to the Commission order within the context of the facts offered to support such

an amendment.

Chaparral involved the request to amend and construe the order of unitization from

the Commission creating the N.W. Velma Hoxbar Unit. The order creating the unit was

entered in 1966 and sets forth the operating terms in the Plan of Unitization applicable to

such unit. Harmon Oil became operator of the unit in 1995, owning a 1% working interest.

Chaparral acquired 86% of the working interest in 2003 and sought to remove Harmon Oil as

operator. In the proceeding before the Commission, Chaparral alleged that its acquisition of

86% of the working interest was a sufficient change in conditions that justified modifying the

Plan of Unitization so as to remove Harmon Oil as operator and designate Chaparral as

operator. Chaparral later amended its application to request the Commission to construe the

Plan of Unitization concerning the provisions therein regarding the removal of the unit

operator and the selection of a successor operator, and to find that Chaparral had been

properly elected as operator under the provisions of the Plan. The Commission found that

Chaparral had failed to prove there had been a substantial change in conditions or change in

knowledge of conditions that would justify amending the Plan of Unitization to designate

Chaparral as operator and that the change in ownership was not a change in conditions or

change in knowledge of conditions that was sufficient to support modifying the Plan of

Unitization. The Commission found that Harmon Oil would continue to be the operator of

the unit.

Chaparral appealed this decision and asserted in its first proposition of error that the

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Commission erroneously found that Harmon Oil was and continued to be the unit operator

under the Plan of Unitization. The Court found that under 52 O.S. § 287.4(a), the designation

of the unit operator under a plan of unitization is to be by vote of the lessees in the unit in the

manner provided for in the plan of unitization and not by the Commission. The Court found

that the Plan of Unitization did set forth a procedure by which the unit operator could be

removed and a successor operator appointed. The Court found that Chaparral had failed to

put on evidence showing that it had complied with the procedures set forth in the Plan of

Unitization for removal of Harmon Oil as the unit operator.

The second point of error raised by Chaparral in its appeal was that the Commission

erroneously found that Chaparral failed to prove a change in conditions to justify amending

the Plan of Unitization to designate Chaparral as operator. In this regard, Chaparral had

initially asserted that the acquisition of 86% of the working interest in the unit was a change

in conditions or change in knowledge of conditions requiring the modification of the Plan of

Unitization so as to designate Chaparral as operator under the Plan. Furthermore, Chaparral

had argued that if Harmon Oil continued to operate the unit, waste would occur because

Harmon Oil did not plan to use tertiary recovery methods while Chaparral did plan to use

them if it became operator. The Court found that the parties had submitted conflicting

evidence as to the feasibility of tertiary recovery and that in essence, Chaparral had failed to

prove that tertiary recovery was feasible or that waste would occur if Harmon Oil remained

as operator. In this context, the Court stated that a "change in ownership of the working

interest is not a change of condtion or knowledge of conditions that affects the feasibility of

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recovering minerals from the reservoir." In other words, in the context of the case, the Court

stated that the fact that Chaparral had acquired 86% of the working interest in the unit is not a

change in conditions or change in knowledge of conditions that affects or relates to whether

tertiary recovery is feasible so as to increase the recovery of hydrocarbons from the reservoir.

While Chaparral proved they owned 86% of the working interest in the unit, this did not

prove that tertiary recovery was feasible. Chaparral appeared to be asserting that because it

owned 86% of the working interest in the unit, being the majority owner, it should be

designated as operator under the Plan of Unitization regardless of the provisions of the

applicable statute or the Plan of Unitization. Furthermore, Chaparral appeared to be arguing

that because it was the majority owner and because it desired to conduct tertiary recovery

operations, Chaparral should be designated as operator under the Plan, again regardless of the

provisions of the applicable statute or the Plan. The flaws in Chaparral's arguments were that

Chaparral's actions did not comply with the provisions of the Plan of Unitization and that

Chaparral failed to prove that tertiary recovery operations in the unit were feasible.

The single sentence taken out of context by Continental does not stand for the

proposition that a change in ownership does not constitute a change in conditions or change

in knowledge of conditions that would justify amending a pooling order so as to designate a

new operator thereunder. Continental ignored the entire substance of Chaparral, instead

taking one quote out of context without reading or analyzing the entire case.

Chaparral involved an order that created a unit under 52 O.S. § 287.1 et seq. and

adopted a plan of unitization $n connection therewith. Such plan of unitization contained

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provisions for the removal of the unit operator and the selection of a successor operator. By

statute, the Commission does not designate the operator of such a unit. The pooling orders

involved herein (the "Pooling Orders") are not unitization orders. The Pooling Orders do not

contain provisions that set forth the manner and method of selecting an operator or removing

an operator and selecting a successor operator. The designation of the operator under the

Pooling Orders is solely within the jurisdiction of the Commission. Crest Resources

Exploration Corp. v. Corp. Comm 'n, 1980 OK 133, 617 P.2d 215. The Commission is not

restricted by statute (as in connection with a unit formed under 52 O.S. § 287.1 et seq.) in

designating an operator under the Pooling Orders. The change in conditions or change in

knowledge of conditions shown to exist by Marathon in these cases to amend the Pooling

Orders to designate Marathon as operator of the Mississippi common source of supply is

significantly different than the change in conditions or change in knowledge of conditions

asserted by Chaparral to amend the Plan of Unitization in Chaparral. A significant change in

ownership, and therefore, a drastic change in the risk to be absorbed by the relevant parties,

is a relevant change in conditions that justifies the requested amendment of the Pooling

Orders. As stated in Marathon's initial brief, the most important factor in the selection of an

operator is working interest ownership.'

Continental also asserts that the change in ownership involved herein is the "only

evidence presented by Marathon in this case to justify their position." Continental's Brief at

2. This statement clearly is without merit. Marathon refers the Administrative Law Judge to

1 Charles Nesbitt, A Primer on Force Pooling of Oil and Gas Interests in Oklahoma, 50 Okla. B. J. 648, 653 (1979).

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the facts portion of Marathon's initial brief in this matter to show what changes in condition

or changes in knowledge of conditions are supported by the record herein. Marathon will not

recite the section in full, but the following additional changes in conditions or changes in

knowledge of conditions occurred since the entry of the Pooling Orders (in addition to

Marathon becoming the majority owner in the Mississippi common source of supply in

Section 30): (1) Continental abandoned any plan of development of the Mississippi common

source of supply by not commencing a well and by allowing its BIA leases to expire, (2) the

Shale Reservoir Development Act became effective, allowing and promoting multiunit

horizontal wells in shale formations such as the Meramec portion of the Mississippi common

source of supply, and (3) knowledge of the positive economics of the Meramec in the general

area was gained as "new development" occurred (according to counsel for Continental) 2

showing a change in conditions or change in knowledge of conditions in connection with

such interval in such area. This is all in addition to the change in ownership. Continental

asserts that the only change in conditions or change in knowledge of conditions involved

herein is the change in ownership whereby Marathon became the majority working interest

owner in the Mississippi common source of supply, while at the same time Continental

asserts that the change in the knowledge of the Meramec (occurring after the entry of the

Pooling Orders) is the very change that caused Continental to become interested in

developing the Mississippi common source of supply in Section 30. Continental cannot have

it both ways.

2. Abandonment.

2 Transcript at 59, line 5. 7

The evidence in this matter that supports the change of operator under the Pooling

Orders, as described above, also similarly supports the fact that Continental previously

abandoned any intent to develop the Mississippi common source of supply in Section 30. In

its brief, Continental stated, "In Oklahoma the doctrine of abandonment is applied only in

cases where an intention to abandon is accompanied by physical relinquishment. An

expressed intention not to drill until conditions change is not indicative of an intent to

abandon but rather an assertion of reliance upon the prudent operator rule." Continental Brief

at 3.

It is clear that Continental abandoned its leasehold in the Mississippi common source

of supply by allowing the BIA leases to expire as to such formation. This constitutes the

physical relinquishment element of abandonment (and strongly suggests an intent to

abandon). The prudent operator rule cannot now forgive Continental's complete failure to

develop the Mississippi common source of supply in Section 30 since the entry of the

Pooling Orders; a "prudent operator" that actually has any intention of drilling a horizontal

well in the Mississippi common source of supply in Section 30 at some point in the future

would not allow the BIA leases to expire and thereby relinquish 224 acres of leasehold in

such common source of supply in such section.

As to intent, Continental's actions proved that Continental had little to no interest in

drilling a well in the Mississippi common source of supply after the entry of the Pooling

Orders. Continental now expreses, in its own defense, that Continental never intended to

abandon rights in or the development of the Mississippi common source of supply. However,

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the Oklahoma Supreme Court has held that this statement by Continental of its own intent

inherently adds nothing to Continental's position, that Continental's statement is not

conclusive of what its true intention was, and that the statement may be contradicted by all

the facts and circumstances which are before the court. Kansas, 0. & G. Ry. Co. v. Rogers,

1947 OK 235, 191 P.2d 209, 212. In other words, Continental's actions speak louder than its

words. Marathon will not repeat the facts here, but requests the Administrative Law Judge to

review all of the facts to determine whether Continental ever had any intent to develop the

Mississippi common source of supply prior to the change in knowledge that the Meramec

interval was an economic play.

Response to JMA

Much of JMA's arguments may be summed up as: JMA has entered into a private

contract with Continental concerning the Pooling Orders, and if Continental is no longer the

operator under the Pooling Orders of the Mississippi common source of supply, JMA's rights

under the private contract may be affected. JMA seems to believe that there is some vested

rights in its private contract that the Commission may not negatively impact. This is untrue.

First, the Commission cannot review, interpret or enforce private contracts. The Commission

should not make the determination in these cases based on protecting private contractual

rights, but instead must make this determination based on the prevention of waste and the

protection of correlative right. At the hearing in these causes, the private agreement

between Continental and JMA 'vas never introduced and the specific provisions thereof were

never discussed. As a practical natter, it is impossible for the Commission to determine what

impact, if any, the designation of Marathon as Operator under the Pooling Orders will have

on the private agreement since the provisions of the agreement are not in the record.

The Oklahoma Supreme Court has held that private parties' vested rights in private

contracts may not overcome Commission action authorized by statute. In Union Oil Co. of

California v. Brown, the court held that a Commission order respacing a section, which had

the effect of suspending a lessor's ability to seek the release of a lease by operation of law,

was statutorily authorized and not a prohibited interference with the lessee's rights. 1981 OK

112 at ¶ 10. The court opined, "It is instructive to note in this connection that the oil and gas

conservation statutes are an exercise of the police power of the State and through the exercise

of that power, vested rights may be affected." Id. at fn. 2 (emphasis added), citing to

Anderson Prichard Oil Corp. v. Corp. Comm 'n, 205 Oki. 672, 241 P.2d 363 (1951). The

"vested rights" referred to by the court are rights in the leases (private contracts). The

designation of a new operator under a pooling order certainly is an exercise of the police

power of the State, by the Commission, under the pooling statute. The Commission may

grant the relief requested in these proceedings, even if that has some negative impact upon

JMA' s private contractual rights.

Regarding the Commission's power in relation to private contract, the Oklahoma

Supreme Court has previously held, "The right of the Legislature to act under the police

power of the state is a part of the existing law at the time of the execution of every contract,

and as such becomes in

Gas & Roy. Own. v. Cord

of law a part of that contract." Landowners, Oil,

6 OK 225, 420 P.2d 542, 544, citing Okla. Natural

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Gas Co. v. Long, Okla., 1965 OK 153, 406 P.2d 499 (emphasis added). In Landowners, the

court further stated:

"If we follow protestant' argument that the Commission could not modify the private agreements or its previoUs order, it would result in a common source of supply being spaced by the lessor and lessee rather than by Commission and if approved by Commission, Commission would be without authority to modify such agreement and order." Id.

This language indicates that the force pooling statute is so strong so as allow the Commission

to enter orders that may adversely affect private contracts. The Commission is empowered in

these proceedings to grant the relief necessary to prevent waste and protect correlative rights

without regard to JMA's private contract with Continental. If the Commission accepts JMA's

argument, then the Commission is, in effect, improperly allowing Continental and MA

through the private contract to dtermine who should be operator under the Pooling Orders.

The Oklahoma Supreme Court has enunciated a strong limitation on private contracts

with regard to Commission matters. In Tenneco Oil Co. v. El Paso Natural Gas, the Supreme

Court described the same:

The limitation being alvays omnipresent is that no private contract or operating agreement may cause or grant a license to commit waste, or diminish correlative rights, control of which is exclusively within power of the Corporation Commission. 1984 OK 54, 687 P.2d 1049, 1053 (emphasis in original).

When JMA entered into a private contract with Continental, JMA had no guarantee that

Continental would remain the operator of every unit covered by the Pooling Orders in

perpetuity. JMA had no guarantee that the Commission would not enter any particular order

that might impact JMA. MA is a very sophisticated oil and gas player that is educated on the

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Commission's power. JMA entered into a contract with Continental concerning the Pooling

Orders with full knowledge that the Commission could act to amend the Pooling Orders to

prevent waste and protect correlative rights, even if such amendments might adversely

impact rights under the private agreement. The private contract cannot limit or control the

Commission's actions in these matters. In fact, in these matters, the private contract that JMA

is asking the Commission to protect or enforce is not even a part of the record in these

matters. JMA is asking the Commission to deny the applications in these matters in order to

protect rights under a private contract, the provisions of which have not been disclosed to the

Commission. The Commission does not have sufficient information to determine, if at all,

how its actions in these matters may affect this private contract.

There is no legal authority for JMA's argument that the Commission in these

proceedings is precluded from granting the relief requested based on JMA's private contract

with Continental. JMA's assertions amount to nothing more than JMA's preference of who

the operator is under the Pooliig Orders (and the preference of a minority interest holder,

owning just 32 acres, at that) 4 . The Commission should grant the relief requested herein;

otherwise, Marathon's correlative rights as the owner of the largest interest in the Mississippi

common source of supply in Section 30 would be diminished in violation of Tenneco Oil Co.

cited above.

JMA conjures hypotheticals that are not supported by the record in an effort to color

an argument that naming M*rathon as operator under the Pooling Orders would be

3 The private agreement or agreement are not a part of the record herein. Marathon does not know the terms of this contract. The Commission does n4a know the terms of this contract. 4 Tr. at 61, 1. 25.

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impracticable and cause significant problems. In this regard, IMA has manufactured a

hypothetical where Marathon becomes the operator of the Mississippi common source of

supply, Continental retains operatorship of the Woodford common source of supply, and then

Marathon drills a horizontal well that inadvertently penetrates and is completed in both of the

Mississippi and Woodford separate common sources of supply. In that scenario, "there would

be two (2) operators for the two (2) separate common sources of supply in the same lateral,

Marathon in the Mississippian and Continental in the Woodford." JMA Brief at 4. There is

no evidence in the record that this might even be an issue in this area. The record shows that

a horizontal well can be drilled in the Woodford common source of supply without exiting

that common source of supply and encountering any other common source of supply. Even if

this unlikely scenario were to occur, the Commission would retain the ability to amend the

Pooling Orders to address who should be the operator of the wells in the twocommon sources

of supply.

JMA also expresses consternation that if Marathon were named the operator of the

Mississippi common source of supply under the Pooling Orders, then upon receipt of a

proposal from Marathon for a subsequent well in the Mississippi common source of supply,

JMA would have to elect (without the benefit of their current private agreement with

Continental) whether or not to participate in such proposed subsequent well. JMA further

states that if it elected not to participate in Marathon's proposed Mississippi well, JMA

would be precluded from parti4ipating in any future wells drilled under the Pooling Orders.

Paragraph 6 of each of the Poling Orders provides that "[a]nytime an owner elects or is

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deemed to have elected not to participate in a subsequent well, then that owner shall not be

allowed to participate in future wells drilled on the drilling and spacing units covered

hereby." This provision is applicable to all owners covered by the Pooling Orders regardless

of whether Continental is the operator under the Pooling Orders or whether Marathon is the

operator of the Mississippi conimon source of supply under the Pooling Orders. At the time

of the entry of the Pooling Orders, the Commission found in paragraph 5 of each of the

orders that the above-quoted prpvision of paragraph 6 of such orders is "just and reasonable

and will afford each owner in the unit the opportunity to recover or receive without

unnecessary expense his just and fair share of the production from the unit." JMA did not

object to the entry of the Pooling Orders with the above-described provisions. JMA is asking

the Commission to reject the above-quoted provisions and in place thereof, to accept and

enforce some private agreement, the terms and provisions of which have not been disclosed.

Furthermore, JMA is free to negotiate any similar private arrangement with Marathon.

JMA also requests that Marathon's applications be denied because "Continental is

proposing single unit development for Mississippi" and "JMA supports single unit

development and is protesting any proposed multiunit development of the Mississippi."

JMA Brief at 5. However, JMA failed to mention that under the Shale Reservoir

Development Act and the rules of the Commission, a multiunit horizontal well drilled in

Sections 30 and 31 would be the functional equivalent a single unit well drilled in Section 31

under the attendant pooling ordr, and also a single unit well drilled in Section 30 under the

Pooling Orders. Under the applicable statute and the Commission rules, allocation factors

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C

would by assigned by the Commission to any multiunit horizontal well drilled in Sections 30

and 31. These allocation factors will allocate the costs incurred in connection with a

multiunit horizontal well, as well as the production and proceeds from such a well, to the

units in which the completion interval of the multiunit horizontal well is located. In this

instance, the multiunit horizontal well is proposed by Marathon to be drilled in the 640-acre

units formed for the Mississippi common source of supply in Sections 30 and 31. Therefore,

the allocation factors that the Commission would assign to such a multiunit horizontal well

would appropriately allocate the costs of and the production and proceeds from such

multiunit horizontal well to each of the applicable units in said Sections 30 and 31. Under the

Shale Reservoir Development Act, a multiunit horizontal well is treated as a well in each of

the affected units and is subject to all of the rules otherwise applicable to any other well in

any of the affected units. 52 O.S. § 87.8 B.3. Whether a single unit well is drilled in Section

30 and a single unit well is drilled in Section 31, or a multiunit horizontal well is drilled

under the Shale Reservoir Development Act in Sections 30 and 31, the outcome to JIMA is

the same. As far as the Pooling Orders are concerned, there is no functional difference

between a single unit well in Section 30 versus a multiunit horizontal well drilled in Sections

30 and 31 with allocation factors being assigned to the well so as to properly allocate the

costs of and the production and proceeds from such well to Section 30. JMA's concern

regarding whether a multiunit horizontal well or a single unit well is proposed under the

Pooling Orders unfounded as it relates to whether Marathon should be designated as operator

under the Pooling Orders.

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Under both of the Pooling Orders, any owner who participated in the initial unit well

covered by the Pooling Orders is allowed to propose a subsequent well. Whether Marathon

or Continental is the operator under the Pooling Orders does not restrict JMA's right to

propose a single unit well. JMA would have that right under the Pooling Orders regardless of

who is the designated operatoi under such orders. In this regard, the Administrative Law

Judge should note that JMA owns only 32 acres in the units covered by the Pooling Orders.

JMA is a minority owner. Whether a multiunit horizontal well or a single unit well is drilled

in Section 30 and Section 31, JMA will be exposed to significantly less risk than Marathon.

While the Pooling Orders do allow JMA to propose subsequent wells, Marathon will be the

party who will assume the most risk and incur the most cost in connection with any

subsequent well in the Mississippi common source of supply.

JMA as a minority interest owner (32 acres) seems to be protesting this proceeding in

an effort to assert control over how operations in Section 30 will be conducted, as least

insofar as forcing the drilling of a single unit well, regardless of whether that has an impact

on the correlative rights of Marathon. The rights and obligations of the parties in these

matters are controlled by the Pooling Orders. JMA is not the operator under the Pooling

Orders, nor is JMA seeking operations. If JMA desires a single unit well to be drilled, then

JMA may propose that under the Pooling Orders. JMA supports Continental remaining as

Operator of all common sources of supply under the Pooling Orders; however, Continental

has agreed that the most efJective, efficient and economic manner of developing the

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Mississippi common source of supply is by a multiunit horizontal well, 5 but Continental does

not own interests in the offset sections so as to be able to drill such a multiunit horizontal

well. JMA's protest of the applications herein is an effort to control what type of well is

drilled in Section 30 which undr the circumstances appears to be inappropriate.

CONCLUSION

Based on the foregoing, Marathon respectfully requests that the Administrative Law

Judge find that additional or nw data has been obtained since the dates of the entry of the

Pooling Orders which show a substantial change in conditions or a change in knowledge of

conditions that supports and requires the Commission to amend the Pooling Orders so as to

designate Marathon as the opertor thereunder of the Mississippi common source of supply.

Respectfully submitted,

By: ROBERT A. MILLER, OBA No. 6224 4101 Perimeter Center Drive, Suite 200 Oklahoma City, OK 73112 Telephone: (405) 917-5000 Telefacsimile: (405) 917-5005 Electronic Mail: millerocclaw@aol.com

ATTORNEY FOR APPLICANT

5 Tr. at65,1. 11. 17

(ERTIFICATE OF MAILING

I hereby certify that a true and correct copy of the foregoing brief of Marathon Oil Company was mailed this 26' 4ay of September, 2016 to each of the following:

David Pepper Hartzog, onger, Cason & Neville 201 Robrt S. Kerr Avenue 1600 Bar.k of Oklahoma Plaza Oklahoma City, OK 73102

Charles L. Helm Helm & Boone 105 N. Hudson Avenue #700 Oklahoma City, OK 73102

Paul E. Porter Administrative Law Judge Oklahoma Corporation Commission P.O. BoX 52000 Oklahoma City, OK 73152

by depositing it in the U.S. Mail, first class, postage prepaid.

I further certify that a copy of the foregoing brief Marathon Oil Company was mailed to, or filed in, the Office of the Court Clerk of the Oklahoma Corporation Commission on the 26th day of September, 2016.

ROBERT A. MILLER

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