Will any forced oil production reduction in Oklahoma fly against a 1988 Oklahoma Supreme Court ruling?

If and when Oklahoma Corporation Commissioners decide whether to order a reduction in crude oil production in the state as requested by one energy group, it could be in direct contradiction to a 1988 Oklahoma Supreme Court ruling.

But the Commission might already be in conflict with the Supreme Court ruling on the case of Conoco Inc. v. the Corporation Commission. The case involved a lawsuit that challenged the Corporation Commission’s order setting allowable production rates for unallocated gas wells, something the Commission also did in March of this year.  The 2020 action by Commission Chairman Todd Hiett and Commissioner Dana Murphy was to set a proration formula requiring operators between April 1 and Sept. 30 to limit an unallocated gas well’s absolute open flow to 50% or to cap its maximum allowable production at 2 million cubic feet a day whichever is greater.

When the action was taken with Commissioner Bob Anthony not taking part in the vote, there was no mention of the Supreme Court ruling on the very thing Commissioners Hiett and Murphy finally went ahead and adopted.

Conoco argued in 1988 that the Commission “lacked statutory authority to promulgate rule setting allowable production rates for unallocated gas wells on state-wide basis,” and in its ruling the Supreme Court agreed.

Does the ruling apply in the actions of the Corporation Commission 32 years later? The response from the Oklahoma Attorney General’s office was, “we can’t interpret the law for you.”

The date was March 15, 1988 and the court ruled against then Corporation Commissioners James Townsend, Bob Hopkins and Norma Eagleton.

The Commission had taken the action and Conoco challenged it before the State Supreme Court, arguing the Commission lacked authority to issue such a rule and on grounds that the procedure by which the rule was issued was defective.

In his written opinion, Justice Robert E. Lavender wrote, “It is clearly established that the authority of the Corporation Commission relating to the conservation of oil and gas is limited to the powers expressly or by necessary implication granted to it by Constitution or by statute Further, the exercise of the Commission’s authority, to be valid, must be in strict conformity with the grant of power.”

His opinion did not focus just on gas as challenged by Conoco but included “oil” as well.

When the request for a mandated reduction of oil was made last month by the Oklahoma Energy Producers Alliance, the group focused on the “waste” of oil, which Justice Lavender addressed as well in his ruling 32 years ago. The OEPA has argued it is a “waste” of Oklahoma’s oil to see it sold at rock-bottom prices and wants the regulators to order a forced reduction of crude production across the state.

Justice Lavender in his ruling confirmed the Corporation Commission does have the authority to limit production but only from “common sources of supply.” Finding a common source or pool of oil in Oklahoma is something of a challenge—especially a common source across the entire state. He also indicated that “waste” is defined to “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 ruling said before the Commission can order any reduction, it must first make an official finding that “the total production of any common source of supply will result in waste.” It must also hold a hearing and make a jurisdictional determination or order to the particular source of supply.

“There could be no determination that waste was being committed by reason of excess of production over market demand until the market demand was properly found and determined,” he opined.

He felt the Commission gave “lip service” to the argument that it was required to proceed in its regulation of production. Justice Lavender also struck down at the time the idea the Commission had previously increased allow levels of production, saying there had been no challenge of the actions before the Supreme Court.