Bad Faith Lease Violation


#1

Bad Faith Lease Violation

Summary of the Facts:

  1. My mother’s 1977 lease was fulfilled by Phillips Petroleum on 2/19/1996 after completing 4 wells, one per quarter, as to the density of one well per 160 acres, as per lease terms and understanding of 1977 vertical leases. The Alig Unit production unit was transferred to Newfield in 2001.

  2. Newfield made an application to the commission to drill another well–a 640-acre oil spaced well–despite limitation in the lease to 160-acre oil spacing. Newfield was notified of this conflict and then pulled it back and filed for increased density well using old 640-gas spacing knowing they were drilling an oil well. Newfield willfully, knowingly, in bad faith and gamesmanship violated terms and conditions of said 1977 lease. In May 2017 Newfield was first notified of the conflict with my lease in a long line attempts to resolve the dispute.

  3. After protest as to the 640 spacing Newfield dismissed commission order 664222 . Newfield willfully, knowingly, in bad faith and gamesmanship filed an Application to Increase Density with a government agency to established a new 640 acre gas drilling unit knowing they were drilling for OIL, in direct violation of spacing clause to avoid a new lease, to their financial advantage and harming and diluting my mineral estate. Paragraph 6 of my lease States, “In order to properly develop and operate said lease premises so as to promote conservation of oil, gas and other minerals in and under that may be produced from said premises or in order to obtain larger production allowable from any government having control over such matters, however, such pooling to be of tracts contiguous to one another and to be into a unit or units NOT exceeding 160 acres each in the event of an oil well, or into a unit or units not exceeding 640 acres each in the event of a gas well."

  4. Newfield willfully, knowingly in bad faith mislead royalty owners and the Corp. Commission with an Application to Increase Density using a 1980 gas spacing order 164538 to establish the new 640 acre drilling unit named the “Katie Lease” for their planned oil well 1509 1H-36. Newfield’s new drilling unit has never been spaced for oil nor did Newfield pool the leases outside their new unit. From my view Newfield should either rely on the lease and the agreed to 160 acre voluntary oil spacing or obtain new horizontal leases. OTC Gross Production PUN #: 073-223182-0-0000 Legal Description: -AL-36-15N-09W Lease Name: KATIE API: 073-25663 Well Name/Number: 1509 1H-36 County Name: Kingfisher Well Classification: Oil County Percent: 100.0000%

  5. Newfield from its own testimony presented that the Alig unit is incapable of draining all of the producible hydrocarbons which also implies the unit wasn’t able to produce in commercial paying quantities. The Alig Unit was producing until the trespass well 1509 1H-36 was drilled and completed. The truth is Newfield was afraid to allow the Alig unit to drain the section and did not want to obtain new leases. I have reasonable belief that the Alig A1-4 wells, PUN 073-062720-00000, has failed to continue producing in paying quantities. Evidence from the Oklahoma Gross Production Tax records and monthly statements do not reconcile and highly suggest that the production unit was not producing in commercial paying quantities. Furthermore, and in accordance with the Oklahoma Production Revenue Standards Act, 5.2 O.S. 570.8(G}, I made two formal requests for information furnished to the operator(s) under the PRSA and records of receipts and payments of proceeds which have occurred over the last 5 years on PUN 073-062720-00000.

  6. Newfield violated the implied covenant of Good Faith and Fair Dealing traditionally found in contracts; however, few courts have explored the issue of whether an oil and gas lease is subject to the basic implied covenant of good faith and fair dealing traditionally found in contracts.

Newfield used 21st century technology to exploit royalty owners with antiquated vertical exploratory leases of 1977. Mineral owners were paid the bare minimum on exploratory leases which are still being held to those standards and are unable to obtain rewards of horizontal drilling and the true value of today’s leases.

Newfield’s Bad Faith and gamesmanship isn’t limited to lease violation. In fact, they have failed to respond to all my correspondence, objections, notices, request and demands. The Oklahoma Corporation Commission states, "The Commission has no jurisdiction or authority over lease disputes. Any problems or questions with regard to a leasing problem should be discussed with the person or company you leased to or with an attorney”. “‘Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.’” Id. at ¶ 26, 839 N.E.2d 49, quoting Restatement of the Law 2d, Contracts, Section 205, Comment a (1981).

Based on the foregoing, it can be logically concluded that an oil and gas lease is a contract, and because it is a contract, an oil and gas lease is subject to the implied covenant of good faith and fair dealing. Good faith means that the effort to combine acreage must consider the interest of both the lessee and the lessor. (Amoco Prod. Co. v Alexander, 622 S.W. 2d 563, 568 (Texas 1981). The Supreme Court of Oklahoma defined Good Faith in Sapulpa Petroleum Co. v. Mc Cray as: “Good faith consists of an honest intention to abstain from taking any unconscientious advantage of another, even though forms or technicalities of the law, together with an absence of all information or belief of facts which would render the transaction unconscientious.”

The good faith standard placed upon the lessee’s exercise of the power to pool has been described as not permitting the lessee to use "the power to pool granted by the lessor in such a way as to be beneficial to the lessee while contrary to the interest of the lessor; instead, The oil and gas lease was historically seen as a transaction between two parties with unequal bargaining powers an unsophisticated farmer negotiating with an oil and gas corporation. See Merrill, The Law Relating to Covenants Implied in Oil and Gas Leases 1926 (2d Ed 1940 & Supp.1964);

It is well-established that every contract has an implied covenant of good faith and fair dealing that requires not only honesty but also reasonableness in the enforcement of the contract. PHH Mortg. Corp. v. Ramsey, 10th Dist. Franklin No. 13AP-925, 2014-Ohio-3519, ___ N.E.3d ___, ¶ 33 citing Littlejohn v. Parrish, 163 Ohio App.3d 456, 2005-Ohio-4850, 839 N.E.2d 49, ¶ 21 (1st Dist.).

Newfield first breech of the contract was upon filing with a government agency a notice and application for 640 oil spacing knowing they’re limited to the terms of 160 acre oil spacing.

The vertical lease was the understanding of the day in 1977 and was never meant to be applicable with today’s horizontal drilling.

Had the state legislature not relied on the Oklahoma Producers to write legislation it could have been possible that all horizontal wells would have been required to obtain new leases.

Looking for an attorney


#2

[quote=“Curtis_Cory, post:1, topic:35064”] I know you are upset. A lot of us have to live under these old leases. Perhaps a bit of clarity on timing and the geology may help and save you hunting for an attorney.

There was an earlier spacing at 640 acres at many horizons. Never has been at 160 acres.

The original spacing for the first well was actually 640 acres. The original spacing order was case 58541 and was signed Feb 22, 1979. Order 149991. Another spacing order was Case 66057 Order 166936. Extensive maps are attached to this order.

Alig “A” 1 produced from the Hunton and the Mississippian. Both of those reservoirs are below 10,000. 5/30/1980. The completion report shows the spacing. Gas well.

Phillips requested increased density in 1987. Case 138133 Order 313008. Requested an additional well since the A-1 well could not drain the complete 640 acres. “If proposed well is an oil well, it shall have an oil allowable. If such well is a gas well, all such gas wells will share a unit gas allowable.”

Alig “A” 2 was completed 2/13/88 as a gas well, also with 640 ac spacing for the Manning, Miss and Hunton.

Alig “A” 2 was recompleted 11/30/90 in the Chester Manning and Miss. All at 640 acres.

Alig “A” 3 was completed 4/30/94 also at 640 acres Hunton, Miss Solid, Manning.

Phillips requested increased density case 950003226 Order 396346 10/17/95. Good explanation of each of the wells and what they are draining and why another well is to be allowed. Again, the depth and the reservoir are important. These were conventional reservoirs

Alig “A” 4 was completed 2/19/96. Hunton, Mississippi Solid and Upper Chester all at 640 ac spacing. Cleveland perf were added in an amended file in 1997.

Newfield filed for Increased density case 201703285 Order 665651 in July 2017. Note that the reason for relief gives a good explanation and the allowable is stated.

The separate allowable was granted with order 201703286 Order 666070 on July 18, 2017 for the Katie 1509 1H-36 well. At 640 acres.

The Katie 1509 1H-36 was permitted in June 2017 for the Miss Solid. The well was completed for 328 bold and 1105 mcfpd.

The request for the drilling of the horizontal well clearly lays out the protection of correlative rights and the prevention of waste and established 640 ac spacing for oil to match the previous 640 ac spacing for gas.

I do not have a copy of your mother’s lease since I do not know her name, but there is usually a clause in them that says something similar to the following: “Lessee is hereby granted the right at any time and from time to time to unitize the leased premises or any portion or portions thereof, as to all strata or any stratum or strata, with any other lands as to all strata or any stratum or strata, for the production primarily of oil or primarily of gas with or without distillate. However, no unit for the production primarily of oil shall embrace more than 40 acres, or for the production primarily of gas with or without distillate more than 640 acres; provided that if any governmental regulation shall prescribe a spacing pattern for the development of the field or allocate a producing allowable based on acreage per well, then any such unit may embrace as much additional acreage as may be so prescribed or as may be used in such allocation of allowable. Lessee shall file written unit designations in the county in which the leased premises are located. Operations upon and production from the unit shall be treated as if such operations were upon or such production were from the leased premises whether or not the well or wells are located thereon. …”

The horizontal wells have historically been spaced at the 640 acre spacing allowed by the Shale Act. Each earlier well was appropriately spaced approved by the OCC for its depth and deliverability for the reservoirs named.

Since the original horizons were spaced at 640 acres due to their depth, you may be confusing a 160 ac allowable versus a 640 spacing. Spacing is based upon the deliverability of a reservoir and is depth and pressure based. The allowable is a whole different issue. Each of those old wells encountered virgin pressure, so they were not draining each other.

It might be nice if we could get new leases for horizontal wells, for those of us held by old wells and old leases, but they were a contract that is binding That horse has been out of the barn for many years now and thousands of wells. The legislature would have to change the rules. For this section, your wells were spaced at 640 to begin with, so you may not get much traction.


#3

Are you with or know Barnes law?


#4

No relation-married into the name, but I sure get a lot of mail from them. Makes me smile every time I open their envelopes, wondering who they are.


#5

The Oil industry’s 1977 lease “granted the moon” with an agreed, express condition that drilling for oil would be limited to a maximum of 160 acres. Newfield violated the lease the very moment it filed to change oil to 640 acres.

Paragraph 6: Spacing and Pooling Clause Lessee, at its option, is hereby given the right and power to pool or combine the acreage covered by this lease or any portion thereof with other land, lease or leases in the immediate vicinity thereof, when in lessee’s judgment it is necessary or advisable to do so in order to properly develop and operate said lease premises so as to promote the conservation of oil, gas or other minerals in and under and that may be produced from said premises, or in order to obtain a larger production allowable from any governmental agency having control over such matters, such pooling to be of tracts contiguous to one another and to be into a unit or units NOT EXCEEDING 160 ACRES EACH IN THE EVENT OF AN OIL WELL, OR into a unit or units NOT EXCEEDING 640 ACRES EACH in the event of a gas well. Such pooling may include all oil, gas and other minerals or may be limited to one or more such substances and may extend to all such production or may be limited to one or more zones or formations. Lessee shall execute in writing and record the conveyance records of the county in which the land herein lease is situated an instrument identifying and describing the pooled acreage. The entire acreage so pooled into a tract or unit shall be treated for all purposes except the payment of royalties on production from the pooled unit, as if it were included in this lease. If production is found on the pooled acreage , it shall be treated as if production is had from this lease, whether the well or wells be located on the premises covered by this lease or not. In lieu of the royalties elsewhere herein specified, lessor shall receive on production from a unit so pooled only such portions of the royalty stipulated herein as the amount of his acreage placed in the unit or his royalty interest therein on an acreage basis bears to the total acreage so pooled in the particular unit involved.


#6

Ahh, slightly different wording. Good luck…

On the good side of the 640 acre spacing, you get the benefit of all wells drilled in the 640 acre spacing. Otherwise, for smaller spacing, you only get the benefit of the wells that overlap the spacing unit.


#7

You are mixing two different types of spacing. The pooling clause in the lease limits a voluntary spacing or bringing together of tracts by the lessee to 160 acres for oil and 640 acres for gas. The origination of this clause allowed companies to put tracts together so that one well could be drilled on a larger tract. The establishment of drilling and spacing units at the OCC is a type of regulation. In a way, it is similar to zoning. The OCC believes it is best to establish certain formations on a 640-acres basis. The first one is a contract. The second one is a type of government regulation. The case of Hladik v. Lee dealt with this–

We conclude intent of pooling clause was that any spacing unit established by Corporation Commission would, insofar as it covered same lands and formations, supersede a declared unit created pursuant to pooling clause, at least in circumstances of present case where no production was had from declared unit prior to time order establishing spacing unit was issued.

In support of this holding we note 4 Kuntz, The Law of Oil and Gas, s 48.3, which states at page 214:

‘‘When a unit created pursuant to statute conflicts with a voluntary unit, the statutory unit will prevail. The rights of the lessors and lessees of land included in the voluntary unit will be governed by their agreement. If the voluntary unit is created by an exercise of the pooling power, a statutory unit subsequently created will supersede the voluntary unit, and if only a part of the voluntary unit is included in the statutory unit, payment of royalty will be made on the basis of acreage included in the statutory unit.’


#8

Fact: 640 acre oil spacing was never established nor validly formed by application in Sec 36. Furthermore, 640 acre oil spacing is a scam. It is designed only to hold mineral owner’s acreage hostage and should be repealed based on the fact that not one horizontal well could adequately drain a 640 acre drilling unit.