Champlin Refining Co. v. Corporation Commission of Oklahoma , 51 F.2d 823 ( 1931 )

COTTERAL and PHILLIPS, Circuit Judges.

This is a suit brought by Champlin Refining- Company, a corporation, to enjoin the enforcement of certain oil proration orders made by tbe corporation commission of tbe state of Oklahoma. Tbe case bas been finally beard and submitted on tbe merits'; tba facts appear from the special findings of fact filed herewith and need not be reiterated here.

Tbe orders in question are predicated on the provisions of the Act of February 11, 1915, S. L. 1915, page 35, sections 7964-7963, inclusive, C. O. S. 1921, which is set out in footnote.¹

Counsel for plaintiff contend: First, that the statute on which the orders are predicated is unconstitutional; and, second, if the statute is valid that the orders themselves violate the constitutional rights of plaintiff and are void.

The Validity of the Statute.

We observe at the outset that the burden rests upon the plaintiff to establish that the statute infringes the constitutional guaranties whieh it invokes, and if the statute is susceptible of a construction which conforms to constitutional requirements, doubts must be resolved in favor of and not against the state. Toombs v. Citizens Bank of Waynesboro, 281 U. S. 643, 647, 50 S. Ct. 434, 74 L. Ed. 1088; United States Airways v. Shaw (D. C.) 43 F.(2d) 148, 150.

The statute has a dual aspect: First, as a penal statute to prevent waste and to protect the coequal rights of the several owners of land situate over a common pool of oil and gas to take from the common source of supply; and, second, a regulatory statute to be supplemented by rules, regulations, and orders of the commission to accomplish the same ends.

The penalties provided are for violations of the statute and no penalties are provided for violations of the rules and' regulations promulgated by the commission.

We are of the opinion that the statute is too indefinite and uncertain to be sustained as a penal statute. Smith v. Cahoon, Sheriff, 283 U. S. 553, 51 S. Ct. 582, 75 L. Ed. -. An oil operator should not be required at the peril of severe criminal penalties to determine in the operation of his oil and gas wells whether he is committing economic waste or producing in excess of reasonable market demands because such terms are not defined in the act and are of uncertain and doubtful meaning. Likewise, a producer from a common source of supply should not be required to determine at the peril of such penalties whether he can operate at full production without committing economic waste or producing in excess of reasonable market demands.

Furthermore, it is unreasonable to require an operator to choose between two approved methods of operation, the results of whieh cannot be forecast with precise accuracy, in dealing with the ordinary problems confronted in the drilling and operation of oil and gas wells, at the peril, if he makes the wrong choice, that some underground waste will result and he thereby become subjected to such severe penalties, under a statute whieh affords no guide for the operator under such circumstances. However, except in one particular hereinafter mentioned, the validity of the act as a penal statute is not before us.

Oil and gas are natural resources whieh cannot be replaced, and the power of the state to impose reasonable regulations to prevent waste in the production, handling, and marketing thereof is undoubted. Ohio Oil Co. v. Indiana, 177 U. S. 190, 20 S. Ct. 576, 584, 44 L. Ed. 729; Lindsley v. Natural Carbonic Gas Co., 220 U. S. 61, 31 S. Ct. 337, 55 L. Ed. 369, Ann. Cas. 1912C, 160; Walls v. Midland Carbon Co., 254 U. S. 300, 41 S. Ct. 118, 65 L. Ed. 276; Cooley’s Constitutional Limitations (8th Ed.) vol. 2, pp. 1319-1321.

The right of the state to make reasonable regulations for the protection of the coequal rights of landowner’s over a common-pool of oil or gas to take from the common source of supply and to prevent one from-taking in an undue proportion to the detriment of the others, and to prevent one from-committing waste to the injury of the rights of the others, is well settled. Ohio Oil Co. v. Indiana, supra; Lindsley v. Natural Carbonic Gas Co., supra; Walls v. Midland Carbon Co., supra; Oxford Oil Co. v. Atlantic-Oil Producing Co. (C. C. A.) 22 F.(2d) 597; Id. (D. C.) 16 F.(2d) 639; Marrs v. City of Oxford (D. C.) 24 F.(2d) 541; Id. (C. C. A.) 32 F.(2d) 134, 138, 67 A. L. R. 1336.

In the Ohio Oil Case the court said: “On the other hand, as to gas and oil the surface-proprietors within the gas field all have the-right to reduce to possession the gas and oil-beneath. They could not be absolutely deprived of this right whieh belongs to them, without a taking of private property. But there is a coequal right in them all to take-from a common source of supply the two-substances whieh in the nature of things are united,-though separate. It follows from the-essence of their right and from the situation of the things as to which it can be exerted, that the use by one of his power to seek to-convert a part of the common fund to actual possession may result in an undue proportion being attributed to one of the possessors of the right to the detriment of the others, or by waste by one or more to the annihilation of the rights of the remainder. ' Hence it is that the legislative power, from the peculiar nature of the right and the objects upon whieh it is to be exerted, can be manifested for the purpose of protecting all the collective owners, by securing a just distribution, to arise from the enjoyment, by them, of their privilege to reduce to possession, and to reach the like end by preventing waste.”

It is within the power of the Legislature to lay down general rules for the prevention of waste and for the protection of such coequal rights of the several owners of land over a common pool and to' delegate to an administrative agency the power to promulgate rules and regulations covering matters of detail for carrying such general rules into effect. Plymouth Coal Co. v. Pennsylvania, 232 U. S. 531, 34 S. Ct. 359, 58 L. Ed. 713; Oxford Oil Co. v. Atlantic Oil Producing Co., supra; 12 C. J. p. 847, § 330.

Section 10 of the act provides "that the Invalidity of any section, sub-division, clause ■or sentence of this act shall not in any manner affect the validity of the remaining portion thereof.”

Sections 1, 3, 4, 5, 6, and 7 of'the act provide a complete scheme for the enforcement through rules and regulations promulgated by the corporation commission of the general rules provided in sections 3 and 4 for the prevention of waste and for the protection of the coequal rights of the several owners of land over a single pool of oil and gas to take from the common source of supply, and may, in our opinion, be severed from the remaining portion of the act. Ohio River & W. R. Co. v. Dittey et al., 232 U. S. 576, 34 S. Ct. 372, 58 L. Ed. 737; Grand Trunk R. Co. of Canada v. Michigan R. R. Commission, 231 U. S. 457, 34 S. Ct. 152, 58 L. Ed. 310; Phoenix R. Co. v. Geary, 239 U. S. 277, 36 S. Ct. 45, 60 L. Ed. 287; Grenada Lbr. Co. v. Mississippi, 217 U. S. 433, 30 S. Ct. 535, 54 L. Ed. 826; Western Union Telegraph Co. v. City of Richmond, 224 U. S. 160, 32 S. Ct. 449, 56 L. Ed. 710.

We are not concerned with the question ■of whether such sections provide the best method of preventing waste and protecting such rights. The determination of that question is a legislative prerogative. Chicago, B. & Q. R. Co. v. McGuire, 219 U. S. 549, 569, 31 S. Ct. 259, 55 L. Ed. 328; Block v. Hirsh, 256 U. S. 135, 41 S. Ct. 458, 65 L. Ed. 865, 16 A. L. R. 165. The question here is whether such provisions are reasonably calculated- to prevent such waste and protect such rights and are not an unreasonable interference with the rights of such owners to enjoy their property.

The production of oil and gas in excess of transportation or marketing facilities or in excess of market demands results in above-ground storage. At the time this statute was enacted, as shown by the orders of the commission, it resulted in large amounts of such storage in earthen reservoirs, with resultant waste through seepage and evaporation. It is a well-known fact in the oil industry that oil can be best stored underground. Furthermore, it is established by the evidence that to permit oil wells to flow at their maximum flush production results in the use of an excessive amount of gas pressure, an uneconomical and wasteful use of gas energy in lifting the oil, and a tremendous loss in ultimate recovery. This is of particular importance in a pool such as the Oklahoma City pool where the wells are of tremendous depth and the cost of artificially raising the oil will be unusually great. It is important that the wells shall be permitted to produce with the lowest practical gas-oil ratio, to the end that the gas pressure shall be preserved throughout a long period and the greatest ultimate recovery of gas and oil obtained.

Sections 3 and 4 of the act, when supplemented by proper rules and regulations of the commission, are reasonably calculated to prevent such wastes and to protect such coequal rights of the several owners of land over a common pool. And, in our opinion, are clearly within the competency of the Legislature.

It is asserted by counsel for plaintiff that the statute and the orders have for their purpose an interference with the law of supply and demand, by decreasing the normal supply of oil and gas and thereby raising the price, and that they are price-fixing in character. It may be that the restriction on production imposed by the statute will prevent a supply in excess of the market demands and thus indirectly tend to sustain the price of oil and gas. But such is not the main purpose of the statute, and the fact that it may have an indirect effect on prices does not, in our opinion, render it invalid.

Counsel for the plaintiff further contend that the provisions of section 6, authorizing the commission to punish as for contempt a violation of its orders, is a delegation of judicial power to a legislative branch of the government, in violation of section 1, article 4, of the Oklahoma Constitution. The commission has not invoked that provision of the act for the enforcement of the proration orders against the plaintiff and the validity of such portion of section 6 is not here presented. If it is in fact invalid, the orders of the commission may be enforced by appropriate proceedings in mandamus or injunction. 51 C. J. 83, § 149.

Validity of the Orders.

Counsel for plaintiff contend that the orders themselves are void: First, because they have for their object the fixing of prices by limiting the supply of oil; second, because they are predicated on information furnished by agents of the commission, who receive a salary for their work from certain of the producers in the fields affected by such orders; and, third, because no lawful gauges have been taken of the wells in such fields, as required by section 5 of the act.

The theory upon which the orders are predicated is that oil from a given pool shall not be produced in excess of the market demands therefor in order to prevent wasteful storage and wasteful use of gas pressure in lifting the oil.

Counsel for plaintiff assert that, since it is able to take oil in excess of the amounts permitted by such orders and to transport and market the same without the commission of any waste, a denial of its right so to do amounts to a deprivation of its property in contravention of the Fourteenth Amendment. The plaintiff is a. so-called integrated producer; that is, it owns both producing wells, pipe lines, refineries, and marketing facilities. Other producers have no pipe line, refinery, or marketing facilities, and if they should be permitted to produce in excess of market demands they would have to store the same and this would result in waste. On the contrary, if plaintiff should be permitted to take all the oil it could utilize without waste, it would encroach upon the rights of other producers not having pipe line, refinery, and marketing facilities, to take from the common source of supply. Under these circumstances, we are of the opinion that the limiting of the taking to the market demands is a reasonable regulation for the prevention of waste and the protection of the coequal rights of the owners of land over such pool. “Where the public interest is involved preferment of that interest over the property interest of the individual, * * * is one of the distinguishing characteristics of every exercise of the police power which affects property.” Miller v. Schoene, 276 U. S. 272, 280, 48 S. Ct. 246, 247, 72 L. Ed. 568, and eases there cited.

As observed with respect to the act itself, the object of the orders is to prevent waste and to protect the coequal rights of the owners of land over the common pool, and the fact that such orders tend to- prevent the oversupply of oil and gas in excess of market demands and indirectly affect the prices thereof, does not make them price-fixing in character, and for that reason invalid.

The employment by the commission of agents and employees who are paid by groups of producers in the fields affected by such orders to gather the data and information on which such orders are in part predicated is subject to condemnation. It is only calculated to breed suspicion and distrust and to destroy confidence in the integrity of the commission. However, the evidence does not establish that such agents and employees have been guilty of favoritism or dishonesty, or that the commission has acted arbitrarily or discriminated in favor of the groups paying such'agents. Furthermore, while the system is objectionable, it has been in vogue over a long period of time, during which a session of the state Legislature occurred. Such Legislature did not see fit to provide any funds with which to pay such agents and thereby gave implied legislative sanction to the practice.

While we think the practice of employing agents paid by producers interested in such orders should be discontinued, we find no basis in the evidence because thereof for striking down the orders.

The fact that the Seminole field is permitted a greater percentage of its potential production than is the Oklahoma City field is not necessarily a discrimination in favor of the former. The Seminole field is an older one, is more favorably located with reference to the large interstate pipe lines, and naturally has a larger market demand. It has passed the period of flush production. These circumstances justify a larger percentage of allowable production for the Seminole field.

Section 5 provides that for the purpose of determining proportionate production under section 4, a gauge of each well shall be taken under rules and regulations prescribed by the commission. The act leaves the method and details for taking such gauges to the commission. If the gauges result in permitting each owner to take the same proportion of his actual potential production, it is immaterial what method of gauging is used or whether potential production is determined by measurement of actual production. A gauge of the wells in the Oklahoma City field at the same time with all wells open to full production would be physically impossible. The available storage and transportation facilities would be wholly inadequate to handle the oil produced. The method employed in the Oklahoma City and Seminole fields arrived at approximately accurate results. The orders fixed the allowable of every producing well in the Oklahoma City field at substantially the same relative proportion of their respective potentials. They did likewise in the other fields. We think there was a substantial compliance with section 5 of the act, and that no discrimination between producing wells resulted from the method by which the potentials thereof were determined. The Validity of the State Court Proceedings.

The .facts with reference to such proceedings are set forth in paragraph 34 of the third amended and supplemental bill of complaint and need not be repeated here. They are predicated on the provisions of section 9 of the act. This provision is penal in character and is for the purpose of punishing violations of the provisions of the act itself, (not the orders of the commission), as a criminal statute. For the reasons hereinbefore indicated, we think this section is void and that such proceedings in the state courts should be enjoined.

Interstate Commerce.

We are clearly of the opinion that the scheme of proration is not invalid as a regulation of or burden on interstate commerce. It is true that a substantial portion of the oil produced in this state goes into' the channel of such commerce. But in order to conflict with the regulatory power of Congress, there must be a direct burden thereon. In this ease, the interference is entirely too remote in character. The principle is too well settled to require citation, that the congressional power of regulation attaches only when interstate transportation has begun. Proration enforced under state powers cannot be said to affect commerce in oil to which producers have acquired no title. While they have a right to take the oil, yet title does not vest in it until it is reduced to possession. Ohio Oil Co. v. Indiana, supra; Rich v. Doneghey, 71 Okl. 204, 177 P. 86, 3 A. L. R. 352; Alexander v. King (C. C. A.) 46 F.(2d) 235. The production of oil is analogous to the manufacture of goods or the mining of coal._ Neither is interstate commerce, although the product may be later shipped to other states. Hammer v. Dagenhart, 247 U. S. 251, 38 S. Ct. 529, 62 L. Ed. 1101, 3 A. L. R. 649, Ann. Cas. 1918E, 724; Delaware, L. & W. R. Co. v. Yurkonis, 238 U. S. 439, 35 S. Ct. 902, 59 L. Ed. 1397. See, also, West v. Kansas Nat. Gas Co., 221 U. S. 229, 31 S. Ct. 564, 55 L. Ed. 716, 35 L. R. A. (N. S.) 1193; Pennsylvania v. West Virginia, 262 U. S. 553, 43 S. Ct. 658, 67 L. Ed. 1117, 32 A. L. R. 300; Foster-Fountain Packing Co. v. Haydel, 278 U. S. 1, 49 S. Ct. 1, 73 L. Ed. 147.

These are the views of a majority of the court. We have not taken the time necessary to prepare a more formal opinion, because we deemed it important to make an early disposition of the cause.

1 “Section 1. Waste prohibited. That the production of crude oil or petroleum in the State of Oklahoma, in such manner and under such conditions as to constitute waste, is hereby prohibited.

“Section 2. Production and sale regulated — corporation commission. That the taking of crude oil or petroleum from any oil-bearing sand or sands in the State of Oklahoma at a time when there is not a market demand therefor at the well at a price equivalent to the actual value of such crude oil or petroleum is hereby prohibited, and the actual value of such crude oil or petroleum at any time shall be the average value as near as may be ascertained in the United States at retail of the by-products of such crude oil or petroleum, when refined less the cost and a reasonable profit in the business of transporting, refining and marketing the same, and the Corporation Commission of this State is hereby invested (vested?) with the authority and power to investigate and determine from time to time the actual value of such crude oil or petroleum by the standard herein provided, and when so determined said Commission shall promulgate its findings by its orders duly made and recorded, and publish the same in some newspaper of general circulation in the State.

“Section 3. Waste defined — protection. That the term 'waste’ as used herein, in addition to its ordinary meaning, shall include economic waste, underground waste, surface waste, and -waste incident to the production of crude oil or petroleum in excess of transportation or marketing facilities or reasonable market demands. The Corporation Commission shall have authority to make rules and regulations for the prevention of such wastes, and for <the protection of all fresh water strata, and oil and gas bearing strata, encountered in any well drilled for oil.

“Section 4. Production regulated — discrimination of purchaser prohibited. That whenever the full production from any common source of supply of crude oil or petroleum in this State can only be obtained under conditions constituting waste as herein defined, then any person, firm or corporation, having the right to drill into and produce oil from any such common source of supply, may take therefrom only such proportion of all crude oil and petroleum that may be produced therefrom, without waste, as the production of the well or wells of any such person, firm or corporation, bears to the total production of such common source of supply. The Corporation Commission is authorized to so regulate the taking of crude oil or petroleum from any or all such common sources of supply, within the State of Oklahoma, as to prevent the inequitable or unfair taking, from a common source of supply, of such crude oil or petroleum, by any person, firm, or corporation, and to prevent unreasonable discrimination in favor of any one such common source of supply as against another.

“Section 5. Wells gauged — governor to consent. That for the purpose of determining such production, a gauge of each well shall be taken under rules and regulations to be prescribed by the Corporation Commission, and said Commission is authorized and directed to make and promulgate, by proper order, such other rules and regulations, and to employ or appoint such agents with the consent of the Governor, as may be necessary to enforce this act.

“Section 6. Enforcement of act — hearings before corporation commission. That any person, firm, or corporation, or the Attorney General on behalf of the State, may institute proceedings before the Corporation Commission, or apply for a hearing before said Commission, upon any question relating to the enforcement of this act, and jurisdiction is hereby conferred* upon said Commission to hear and determine the same. Said Commission shall set a time and place, when and where such hearing shall be had and give reasonable notice thereof to all persons or classes interested therein, by publication in some newspaper or newspapers, having general circulation in the State, and in addition thereto, shall cause reasonable notice in writing to be served personally on any person, firm or corporation complained against. In the exercise and enforcement of such jurisdiction, said Commission is authorized to determine any question or fact, arising hereunder, and to summon witnesses, make ancillary orders, and use mesne and final process, including inspection and punishment as for contempt, analogous to proceedings under its control over public service corporations, as now provided by law.

“Section 7. Appeals to supreme court — effect on orders. That appellate jurisdiction is hereby conferred upon the Supreme Court in this State to review the action of said Commission in making any order, or orders, under this act. Such appeal may be taken by any person, firm or corporation, shown by the record to be interested therein, in the same manner and time as appeals are allowed by law from other orders of the Corporation Commission. Said orders so appealed from shall not be superseded by the mere fact of such appeal being taken, but shall be and remain in full force and effect until legally suspended or set aside by the Supreme Court.

“Section 8. Penalty for violation. That in addition to any penalty that may be imposed by the Corporation Commission for contempt, any person, firm, or corporation, or any officer, agent or employee thereof, directly or indirectly violating the provisions of this act, shall be guilty of a misdemeanor, and upon conviction thereof, in a court of competent jurisdiction, shall be punished by a fine in any sum not to exceed five thousand dollars ($5,-000.00), or by imprisonment in the county jail not to exceed thirty (30) days, or by both fine and imprisonment.

“Section 9. State may secure receiver — extent and manner. That in addition to any penalty imposed under the preceding section, any person, firm or corporation, violating the provisions of this act, shall be subject to have his or its producing property placed in the hands of a receiver by a court of competent jurisdiction, at the suit of the State through the Attorney" General, or any county attorney, but such receivership shall only extend to the operating of producing wells and the marketing of the production thereof, under the provisions of this act.

“Section 10. Validity of relative sections of act. That the invalidity of any section, sub-division, clause or sentence of this act shall not in any manner effect the validity of the remaining portion thereof.”