Amicus Curiae Brief — Champlin Rfg. Co. v. Corporation Commission of Oklahoma

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oh he Sopene on of (el is

October Term, 1931.

No. 485

CHAMPLIN REFINING.COMPANY, Appellant;

ae vw. = C,

CORPORATION COMMISSION OF THE STATE OF OK- |

‘LAHOMA, AND PAUL WALKER, E. R. HUGHES, AND

C, C..CHILDERS, ETC., ET AL., Appellees. .

No. 486 .-

‘CORPORATION COMMISSION OF THE/ STATE OF OK-

LAHOMA, AND PAUL WALKER, E. R. HUGHES, AND C.

C, CHILDERS, ETC., ET AL., Uants,

ie Os. |

CHAMPLIN REFINING COMPANY, Appellee.

Brief of Oil States Advisory Committee,

Amici Curiae. |

CICERO I. MURRAY,

; _ ' Couinsel for Oil States

. Of Counsel: Advisory Committee.

WARWICK M. DOWNING, :

KENNER McCONNELL. J

(36,299-36,300)

I N D EX.

, . PAGE

- OPINION OF COURT er ay ee ee ee eA ~ 1

REASON FOR THIS BRIEF...................1... CORO | 2

ce Bs nioeicies 20

(a) The relative situation of the parties. 7. ccc eet 20

(bo) Orders of the Corporation ee 24

SUMMARY OF ARGUMENT... So cccceccccesesesneeseeteneeece ele 33

ARGUMENT .............. EN ee, HE Bee ea, is 35°

Point 1. Proper interpretation of the Oklahoma Congervation ‘Act’

(Oklahoma Session Laws 1915, p. 28) ........cccsccccccccccsssesessesssecssseeeeenceeseseenence 35

Point 2. When so interpreted this act does not offend the due

process clause of the Fourteenth Amendment—the equality and lib

erty of contract phases of appellant's contention under this h¥ading

eT Ey | ie Remcnemnmmnnenas Salen Sir me qqualpumsttesesncsscase 48

Point 8. Section 2 of the Oklahoma Conservation Act, the price

fixing provision, clearly is separable from the waste provisions of the

‘act, namely, sections 1, 3, 4 and 5, which alone are material to this con-

UII? icidetcemsinenssenitetmamanasinall menosnipbeeneseenenscee: anstusnssnessanesnseepeavesnesnaennnsiecnepsonesnoneess 62

Point 4, There is no such uncertainty in respect of the meaning

of the terms “waste,” “underground waste” and “Waste incident to the

production of crude oil and petroleum in excesis’ bf transportation or

market facilities.or reasonable market demands,” as these terms ap-

pear in section 3. of the act as to-render the act void on that ground”... 63

Point 5, .There was né delegation of legislative power by this act.

The legislative prohibitions are clear and certain’ and the power con-

ferred upon the Oklahoma Corporatidn_ Commission by the act wits

that of applying thastandards of waste as established by the legisla-

_ ture to the peculiar

cts of a case. In short, an administrative duty;

nothing more, was imposed upon the Corporation Commission -by the

Oklahoma Conservation ACt ........0..omedmsvsnsnsnnnnsnssnssssenee eR RS Cecio 66

Polm 6. The rules, regulations and orders of the Oklahoma Cor-

poration’ Commission assailed by appellant here as unconstitutional

and void clearly are within the provisions of the Oklahoma Conserv

tion Act; hence it follows that all such proceedings of the Commis-.

Bion are immune fromf gttack ..2.2...)...ccccccccecessecoecsececeesscsecestseeeceeessaeenseceeee * 67

. . ”

LEEOFD ELE LLOG LL O LALEEREOL POL ITE WO Mw ee - TOU ye NE) pee ere ae

’

INDEX—Conrmvro.

| PAGES:

” Point 7. The duties committed bial or dischatged by thé proration

umpire and operators’ committees, under the noe

_ Corporation Commission, do not have the effect of invalidating the

rules, regulationg)and orders. of the Commission a are of by, ap-

pellant in this case %

Point 8. Neither ‘the Okiahoma. Consergation Act, nor the rules,

_ regulations or orders of the Oklahoma Corporation Commission made.

thereunder, the subjects of assault here, offend the commerce clause

of. the Federal Constitution 4

WOONCLURION

: a a

Appendjz A—Letter of President Coolidge creating Federal Oil

Conservation, Board

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on of the Okiahoma .

o. -" STATUTES CITED.

SAMO n ones wanes

Child* Labor Tax Case, 259 U. S. 20

Act of June 4, 1931 : (California) 17

Act of August 12, 1931 (Texas) 17-18 °

California Statutes 1929, p. 923 57

Oklahoma 8. L. 1915, p. 28....... "35-47

Kansas 8S. L. 1931, pp. 332- 3. ; 2 16, 36

-Ray’s Adv. L. (Texas), Vol. & p. 42........ . 36

43 Stat. L. 754, 44 Stat. L: 310, 44 Stat. L. 1075, 45 Stat. L. 882, 45 Stat. -

L. 1626, 46 Stat. L. 235, 46 Stat. DN1362, POPES. 5 eR ee

REPORTS CITED. °

Fed. Oil Conservation Bd., Sept. 6, 1926........

Fed. Oil Conservation Bd., Feb. 25, 1929 5, 15

‘Fed. Oil Conservation Bd., May 28, 1930... - “ 7

: ale Ee Oe "CASES CITED. i

American Pebeen Case, 221 U. Ss. a 65

~ Bacon @ Walker, 204 1. S. 311....... 51

Bandini Petroleum Co. v. Superior Court, 293 Pac. 299. ‘aiaiiiininaniill 57-69, 65

Bandini Petroleum Co. \v. Superior Court, Sh ao Mh. 59, 66

Barbffer v. Connolly, 5s OU. @& &7........ wun 50

B. & O. R. R. Co. v. Interstate Commerce Commission, 2 221 U. 8. 612... 64

/ , Block v: Hirsh, 266°U. S. 186... ---ian9, 51, 62

Brown Holding Co. v. Feldman, 256 U. 8: 170. va 62

Buttfield v. Stranahan, 192 U.S. 470... 64°

Corporation Commission x. Lowe, 281 U: 8. | EO OS

Camfield v. United Pere oe oe 50

Chastleton Corp. v. Sinclair, 264 U. ae ae 59

‘ Cusack Co. ¥. Chicago, 242 U. S. 626... Te 70

Capital C airy @p. v. Ohto, 183 U. 8. 238.. : Pedenqrenstone 71

‘ Crescent Cotton Of C& v Mississiphi, 257 U. S. 129... A 71

Butank v. City of Michmond, 226 -U. S. 137

Euclid v.. Ambler, 272 U. S. 366......

Fallbrook ‘irrigation District v. ‘ pentneg 164 U. 8. 112...

Federal Trade Commission v. Beeehnut, ‘sa U.. 8. 441

; Field v. Clark, 143 U. S. 649 :

-Gitlow v. New York, 268 U. S. 652 sti

oie ~ 49

-Gorieb Vv. Fox, 273 U. 8. 687 .

Hadacheck ¥. Sebastian, 259 U. 8. 394

‘Hager v. Reclamation District, _111 Uz 8. 701... - ...

Hammér v. Dagetihart, 247 J. s. Ttinnn.

Hannibal Bridge Co. v. United States, 221 U. s. 194

weene

ee en

Pg ’

’

CASES CITED—Qowrinven.

. ° : ‘, PAGES

Heisler v. Thomas “niliery Co., 260 U.S. 246...... , 71

Hibben v. Smith, 1. U.S. 310 . 70

Hudson County Water Co. v. McCarter, 209 U. S. 349 59

Julian -v. Capshaw, (145 Okl. 237) 292 Pac. 841 48

Lent v. Tillson, 140 U. S. 316.. sani ; 70

Levy Vv. Segal, 258 -U. S. 242 we. 50

Lindsley v. Natural Carbonic Gas Co., _ 220 U. g, “6 49, 53

Mabler v. Eby, 264 U. S. 32 Sia 64

Marrs vy. City of Oxford, 32 Fed. (2d) 134 (8th Cir.).. : 55

Middleton v. Texas Power Company, 149 U. 8. 1652.......: 49°

Miller v. Schoene, 276 U. S. 272........ : 55, 60, 64, 70

Minnesota. Rate Cases, 230 U.-S. °362.. : ' 59

‘Monongahela Bridge :Co. v. United States, 216 U. S. 177........200.0020.. 65

Muller v. Oregon, 208° : S 2 Meena 51, 59

Mutual Film Corp. v. Industrial Comm., 236 U. s. 247 . 64 ©

‘Noble State Bank v. Haskell, 219. U. S. 104.. = ..50, 51

O’Gorman v. Hartford Insurance Company, 282 U. S. 261...............:....0cc- 50

Ohio Oil Company v. Indiana, 177 U. S.-190..... o sescensdy OO

Oliver Iron Co. v. Lord, 262 U. S. 172.....2......-2-ccsesoe 71

O’Neill v. Leamer, 239 U. S. 244 i 2

Oxford Oil Co. v. Atlantic Producing Co., 22 Fed. (2a) 597 ( sth 3S Bail

Pennsylvania Coal Company v. Mahon, 260.U. S. 393 ‘60

People v. Associated Oil Co., 294 Pac. 724.....2............ iaes ae

Plymouth Coal Company v. Pennsylvania, 232 U. S. 531... 50, 70

Rich v. Doneghey, 71 Okl. 204 eae oa 52

Slaughterhouse Cases, 16 Wall. 36.............. Se ONE OR 51

Standard Oil Company ¥. Marysville, 279 U. S. 582 49

St. Louis Railway v. Arkansas, 235 U. S. 350 60

Terrace v. Thompson, 263 U. S. 197 51

The Standard Of] Case, 221 Ui S. Voice Gece bun: ae

Union Bridge Co. v. United’ States, 204 U. 8. 364. eeeccesessssseseeceeeseceeee 65

Walls VY. Midland Carbon Co., 254 U. S. 300................. - wens 53

~ Weaver V. Palmer, 270-6. 3.-5.................... a..:/.. §9

Zahn v. Public Works, 274 U.S. B26... nn nnanennennescncsnsesnssonsseeee saseieseeeeDO,.56, 59

IN THE SUPREME COURT OF THE UNITED STATES.

neal Term, 1931.

No. 485

CHAMPLIN REFINING COMPANY, Appellant,

vs. 4

CORPORATION COMMISSION OF THE STATE OF OK-

LAHOMA, AND PAUL WALKER, E. R. HUGHES, AND

Cc. C. CHILDERS, ETC., ET sai Appellees,

"No. 486

CORPORATION: COMMISSION OF THE STATE OF OK-

LAHOMA, AND PAUL WALKER, E. R. HUGHES, AND

Cc. Cc. CHILDERS, ETC, ET AL., Appellants,

vs.

“CHAMPLIN REFINING COMPANY, Appellee.

BRIEF OF OIL STATES ADVISORY COMMITTEE,

AMICI CURIAE.

~ .

| (a) Opinion of Court Below: |

51 Fed. (2d) 823. Also Record Vol. 1, part 2, pp. 18-248,

_inelusive. : ,

This cause below was submitted to a . statutory court of

three judges, J udges Cotteral and Phillips rendering the

SOLIS PAP OIL

= Qaw to

majority opinion (Rec. Vol. 1, part 2, p. 218), District

Judge Kennamer —— (Ree. Vol. 1, part 2, p. 229).

(6) Reason for This Brief,

This suit, in a very vital way, involves the public i in-

terest: December: 19, 1924, President Coolidge addressed a -

letter to the Secretary of. War, the Secretary of the Navy,

the Secretary of the Interior, ‘and the Secertary of Com-.

merce, constituting these cabinet members as the Federal

Oil Conservation Board (App., p. 75). Continuously since |

then, thé Congress of the United States has made appropria- -_

tions for the use of the Federal Oil Board in carrying out |

the duties delegated to it by the President. Fifty thousand

dollars was appropriated in 1925 (43 Stat. L. 754) ; fifty

thousand dollars was appropriated in 1926 (44 Stat. L.

310) ; fifty thousand dollars was appropriated in 1927 (44

Stat. L. 1075) ; fifty thousand dollars was appropriated in

~ 1928 (45 Stat. L. 882) ; fifty thousand dollars was appropri-

ated in 1929 (45 Stat. L. 1626) ; seventeen thousand two hun-

_ dred twenty dollars was appropriated in 1930 (46 Stat. i.

235), and twenty thousand dollars was appropriated in _

1931 (46 Stat. L. 1362). In this letter of appointment, the

President, at.the very outset, observed: ‘‘Tt is evident that

the present methods of capturing our oil deposits is waste-

ful to an alarming degree in that it has become impossible to

“eonserve oil in the ground under our present. leasing and

royalty practices if a neighboring owner or lessee desires to

gain possession of his deposits.’’ The President, after

‘pointing out that our petroleum resources are limited,

stressed two basic considerations: First, that the national

. LEI GERZ EGLO R IS EMEA ED SNE GENS IIE IOI IE EL A ERR OE NN EO gE TE

security demanded adequate supplies of petroleum and its

‘products; and, secondly, that American industry generally

was supremely dependent ‘upon gasoline, fuel, and lubricat-

ing oil. The President, in his’ letter; then continues; ‘For

‘the purpose of giving this responsibility of government, in

all of its aspects, the consideration it-demands, I have con- ‘

stituted a Federal Oil Conservation Board, consisting of .

the Secretaries of War, N avy, Interior, and Commerce, a.

__ study. th government’s responsibilities and to enlist the

full co-operation of representatives of the oil industry in

the investigation. * * * I would express the desire that these

conferences may be open and exhaustive. The oil industry

itself might -be permitted to determine its’ own future. That

future might-be left to the simple working of the law of

supply and-demand, but for the patent. fact that the oil in-

dustry’ s welfare is so intimately linked with the industrial

prosperity and safety of the whole people, that government

and business may well join forces to work out this problem

of practical conservation.’’ (Italics ours.)

Immediately following the creation of the iden Oil

Board, that agency, in co-operation. with the American’

Petroleum Industry; entered upon an exhaustive investiga-

‘tion of the petroleum conservation needs of the United 7

States, and that investigation has proceeded from time

to time since. At intervals since September 6, 1926, the

Board has reported to the President upon this subject. Ex-

cerpts from the reports of the Board show the public as-

pect of the questions now before the court. In the report of

_ the Federal Oil Conservation Board of, September 6, 1926,

addressed to the President, it is said: ‘‘There must be nat-

<ae foo / |

ural concern over our future supply of oil because of the

manifest dependence of so large a part of our industrial

‘life, national defense, and domestic comfort, upon contin-

ued adequate supplies of lubricants for all machinery and

fuel for automotive engines. Our future resources in coal

and iron have been so determined by geological evidenced

and exploration that we can measure our proved supplies

by centuries. ‘But the4ocal character of oil deposits, their

geographical uncertainty, and the vast amount. of unpro-

ductive capital required for a long, advanced exploration,

prevent any such advance proof in the case of oil: The very .

nature of all minerals, in {gt they do not-reproduce them-

selves, of course, renders their extraction ¢ depletion of

assets. And, therefore, the resources of oil which are proven

at any given moment cannot, from the nature of things,

be otherwise than a reserve.; against current production.

They do not imply future production of oil.’’ (Report, Sept.

6, 1926, p. 5.) |

After adverting to the fact that one-half of the. coun-

_- try’s oil production comes from about four per cent of the ©

- producing wells, namely, flush wells in new pools, this re-

port continues : “However, this dependence upon fortuitous

-discovery of new fields renders it imperative that every ef-

_ fort should be made to secure the maximum amount of oil

from the known fields’’ (p. 6). In speaking of the reser-

voir energy that chiefly produces oil, the Board observed:

‘‘The right of the state to prevent the waste of natural re-

sources is rendered more important in this matter by ‘the

newly discovered, or at least more widely recognized facts,

regarding the role of gas in the oil sand. Gas is more than

SPEND RR ip OTT IM + Se ok > 5

——

—§—

a commodity of smaller value associated with oil; it is the

efficient agent provided by nature for bringing the oil within _

the reach of men. Dissolved in the oil, the gas makes the

oil flow more freely to the well and there forces it upward,

and the longer the gas is retained in solution, the larger is

_the recovery of oil. Waste of gas is therefore a double

waste, and the impairment of the gas pressure in an’ oil

sand by one owner may prevent. his neighbors from recov-

ering any of the oil beneath their land, and himself from

securing more than a small part of the oil underlying his

“land”? (p..14). Among the recomméndations made in this

report was thé following: ‘‘* * * And state legislation, with

a declared purpose of conservation, should be enacted to

stop the waste of gas, the loss of its content of gasoline,

and the even greater loss incident to reduction of gas pres-

sure in the oil sands’’ (p. 24, italics ours). In the second re-

port of the Federal Oil Conservation Board filed with the

President January 16, 1928, it is said: ‘‘This fact that new

oil pools are being drilled and drained more rapidly than ©

ever before smmply foreshadows more sharply the ultimate —

fact that the time may come when substitutes for motor

fuel may be necessary’’ (p. 2). The'remainder of this re-

port constituted an inquiry of the Board into substitutes for

petroleum motor fuel. eyo a

The following excerpts are taken from the third re-

port of the Federal Oil Conservation Board to the Presi- |

dent, dated February 25, 1929: ‘‘The excess production com- -

mented upon by you when you created the Board in Decem-

her, 1924, unfortunately continues”? (p. 1). “* °° Larger .

ati as of the oil are being recovered from ‘the sands

ae ae

= 6 a

the true function of gas in bringing the oil to the well and

to the surface is/being appreciated and utilized. And, per-

haps best of all, is the definite trend toward co-operative

methods in developing and operating new fields and in re-

juvenating old fields. (p. 2.) ** * Fortunately, for the pub- ..

_ lie interest, the trénd in operating poliey of the stronger

* gompanies has been definitely in the direction of conserva-

- tion; immediate ‘development of a field no longer always

follows its discovery;. offset agreements have slowed de-

velopments in proved areas. Flush flow has been prorated

to prevent falling of markets with consequent loss to pro-

_ ducers both large and small, and the present shut-in produc-

tion ‘is of volume never approached i in previous years, All

‘itis is ree aera that affords the best evidence of the .

possibility of a high degree of self-regulation in the busi-

“ness of bringing oil to the surface (p. 2). * * * The possi-

bility of unrestrained individual action in what should await

regulated community action still:remains a menace to the

present stabilized rate of ‘production. * * * This natural

conflict in,thought between the intense individualists and ‘

the forward-looking leaders, together with the present

threat of competitive and intensive producing have prompt-

ed the Committee of the American Bar Association to

draft legislation, later referred td in this report, invok- ,

ing the police power of the state to regulate the correla-

tive position of the partieg-in interest in conserving an

irreplaceable and indispensable natural resource. Plainly,

the essential factor in handling underground reserves of

oil, admittedly the most economic form of storage, is full

' vv in unit (pool) control, whether by voluntary

agreement or by state enforcement (p..3). * ** In line with |

a recognized need for uniform state legislation that might

permit s0-operative or unit development and operation of

oil and gas oolg’ for the purpose of preventing waste, the

_ committee /on conservation of mineral resources of the

. American Bar Association, Section of Mineral Law, has

pursued the study and submitted its report supplemented

by a draft of two laws for state enactment. ‘One measure

would legalize voluntary agreements for economic purposes

and conservation by removing the ‘obstacles imposed ‘by

state aziti-trust laws ; the other measure would provide for

compulsory unit and co- -operative development and opera-

tion by invoking the police power of the state. * * * Your

Board regards this report from the Committee of the Amer-

‘jean Bar Association as such present significance and

‘permanent’ value that its inclusion here as Appendix “h??

(p. 26) is fully “warranted.” (p. 4) Jw

In the last report of the Federal Oil Conservation

Board made to the President that is available to us (Re- -

‘ port IV of. the Federal Oil’ Conservation Board to the

President of the United Siates, May. 28, 1930), it is said:

‘It matters not whether the oil reserves of the United

States are five. times a billion barrels or- twenty times a’

billion barrels, the supply is limited and cannot:be in-'

creased. Even the most ‘generous estimates place the date

at which our oil reserves will be practically depleted wnder

present rates of. consumption in the. comparatively near

future, In the interests of national defense and industrial —

prosperity, this generation should not be permitted to |

"waste this irreplaceable natural product and tte serious- |

: ye nn =

ly handicap future generations of America.’’ (p, 8, italics

ours.) The Board. then proceeded to stress the importarice

of gas energy and to condemn the intense and competitive,

drilling and operation of the separate tracts in an oil pool’

as a practice inimical to the,correlative rights of the own-

ers in the pool’ and to the public interest. It is said: ‘‘There

‘has also been a widespread realization of the importance

of natural gas in its function as a propulsive agent in the.

preduction of oil (p. 15). *.*** The natural unit in oil de-°

posits is the single pool, large or small, and unit. opera-

tion is in essence nothing more or less than acceptine a-

ture’s ‘decree and seeking to work in harmony with, ic (p. °

1g). ° °-* Over-production of -any eommodity is "heco-

nomic and if it involves depletiodn of a supply that canriot,

be replaced; over-production and the consequent wasteful-

ness effect a permanent injury. Especially’ is over-pro-

_ duction in the: ojl business -a public’ menace by reason of

the unnatural and unfair competition between co-owners

within. the same natural unit. It is this individualistic

strife characterized by ‘haste and waste that las been.a

large factor in inciting over-production in the past (Pp. 18,

italics ours)..* * * The co-operation implied in. the unit

operation plan thus makes far more rational production

than the present uneconomic drilling and pumping, but

this coopération within the pool does not preclude compe-

: tition between pools or fields. The community of interest

and action involved i in unit. operation. stops at the: natural.

boundary of the oil pool (p. 19, italics-ours). *** The unit

idea in producing oil is bound to win out because the natural

unit is the-oil pool.” Man may draw property lines on the .

& ‘

—~9o—

o" - + ‘

surface. making a checkerboard for title sennhiens ond :

lease lawyers to play on, but nature has fixed a.boundary ._

‘line around the underground deposit for geologists to dis- - —

cover and engineers to use in the development of the hid-

den resources. The unit operation plan is a back-to-nature

, movement. Codes of laws and judicial decisions relatin,

/ to oil deposits have accorded to the surface checkerboard a .

sanctity beyond its deserts, while the facts of nature as now

known, have received little attention and have commanded

less respect (p. 19, italics ours). * * * Of more recent date

than the general understanding of this ug@itground move-

ment of dil, after drilling has started, is the tardy realiza-

tion of the function that gas plays in winning oil for the

use of man. The natural gas associated with the oil in the

pool largely determines its mobility and <ontrols its move-

ment to the well and to the surface. _Deplete this gas supply ~~

and reduce the pressure, and recovery of some part of the

‘soil content ‘of. the pool becomes more difficult, or even im-

possible,-and to that extent the other owners are deprived :

' of = y is rightfully theirs (p. 21, italics ours). What is

needed now to effect this conservation movement is spe-

cific recognition by the courts of 'this community of inter-

est, by all’ the land owners in the content of the oil and gas

pool, in the oil and gas as-separate marketable commodities,

and in the gnergy in the gas, the pressure so easily dissi-.

. pated, but so essential to an adequate recovery of the ‘oil

included fe the minute pores of the sand, or sandstone, that

_ forms the reservoir. It is this loss of pressute whith prdf- |

its no one and damages all that takes on the character of -

a legal nuisance against which owners in the common reser-

o ®

+. .

a |

" ~

° ‘ies amply justify. tt of unth@peration as in 1 the .

. s i — 10¢- ey ‘

vier should be protected. Impairment, or lose of: the nda

agency that controls the ‘réduction. ossession’ of the oil ~

beneath. the surface f the propriy is in effect tak-

ing hy preperty (p. 2 italics ea) *** The. difficulty in |

"putting the plan into effect is the large advantage that a

" single owner of a small surfaze: holding may now seize for’ ”

himself under the nodes of the game as at present supported

by a well-aged- judicial opinion. Repeatedly, proposals’ for

agreements between property owners to promidte the ef--

ficient ahd econumic handling of their common prdperty

in ‘protection of their mutual rights have been vetoed. by a

_ small inifiority ‘of the parties i in interest. For these regsons

the Federal Oul Conseryation Board early urged the for-

Boats and. adoption of ‘vomedial measures permitting a

- better correlation - of underground property rights..Some -

affirmative action by either court or legislature, whereby.

‘the o0-eunal i rights. of all the owners may be recognized and —

" protected, is sorely needed, and this regulatory action way

well be predicated on the magnitude and gravity of the pub-

‘li interest involved. The prinéiple of justice betweén own-

ers would seem bees qn enough, but if more grounds

for action are requ ed, good technology and good a al

* publio'i erest”’ (p 23; ours).

The Solicitude ‘of the President regarding our futute

Ree of petroleum, as,éxpressed i in his letter constituting

~ the Federal Oil Board, ~ the exhaustive investigations of

rial

_ that Board by reason of the. responsibility assigned to it,

its reports embodying its conclusions and recommendations 7

- based upon its jeretige and d th sinetion of om,

oof : el :

. 2. ss fir <i J

. e ‘~ € oa oe °

. | [_ . 1- end 3 - :

, - manifested by the appropriations for the use: of the.

Board, indubitably point to the announcement of a naw na-

tional public policy of supreme concern to all the people

. of the United States. That policy, from: the viewpoint of:

the public interest, finds its absolute vindieation in the fol-

lowing propasitions, drawn from the letter of the Presi- +

dent and fro the excerpts from the er of the Federal ©

5 Oif” Conservation Board already. set forth:

(1) Petroleum i is an irreplaceable natural oe

i. 2) This being true, our supply for future use, whether

great or small, is necessarily limyed.

(3) We cannot determine the extent of our faturé supply

as we may do and have done in respect of the solid’ An

- minerald, New discoveries will be fortuitous. The quan-

tity of oil that may be recovered frqm existing fields

is uncertain, and the quantity that may be recovered °

from new fields i is shronded in even greater uncertainty.

(4) The foregoing cumsiderations reveal their-complete sig- ©

"nificance when we add thereto ‘two further facts. An

-adequate ‘supply of petroleum and petroleum ay

_is indispensable to the national security, and equally:

“0 to our whole: industrial fabric, and to the welfare of

_ the people i in their economic and social life. This phase |

%. of the case is ‘stressed by*the President’ and it is re=

in peatedly emphasized i in the utterqnces: of the Federal \

Oil Conservation Board, | a a he

(6 ) Based upoy the considerations above mention®d, the

. President, in his letter, and ‘the Federal Oil Conserva-

< .

- nine x

—12—

tion Board throughout its reports, emphatically voice

the alarm these high officials feel regarding the possi- —

bility, if not. the probability, of a petroleum shortage

in this country in the comparatively near future.

* ° (6) From the above, logically: it follows that it should‘be

the public policy of the United States to conserve thé —

. petroleum’ resources of our -country. Our petroleum. ,

_ reserves should be drawn on as needed, but every kind

of waste incident. to the production of oil should be

prohibited to safeguard, to the extent possible, our

supply for-the future. :

(7) The kind of waste now generally occurring] in the busi- |

ness of producing oil which the Féderal Oil Board in its

several reports consistently explains and condemns is .

the waste or inefficient use of the gas energy of the oil

pools of the country. ‘The force that iends mobility to

* the oil propels it to the well opening and lifts it to the

surface for. beneficial use. It is pointed out that the

waste or inefficient use of gas energy leaves oil in the.»

ground that should be-recovered through the proper

and non-wasteful utilization of the gas energy.

(8) The Board, as a comcllintty to the above pioneitaien, fe

finds (and scientific opinion in the oil industry supports

that finding abundantly if not universally). that the gas

pressure or energy in an oil pool, by reason of its es-

sential nature, functions in respect of the pool’ as a *

whole and not in respect of the separate surface hold-

ings into which the pool may’be divided. Where the

gas energy is permitted to function as nature intended,

e .

= 1s _

and where the operation i is efficient and without waste,

the percentage of oil recovery is infinitely greater than

. when each operator, through his own tract. within the |

pool, seeks to gain as much of the oil of the pool as pos-

sible, which is but another way of saying that he gains

a disproportionate share of the gas energy for ‘his °

own oil producing purposes, a practice almost invari-

ably attended by the feaiciasctsl use. and waste of the

gas energy. co 7

(9) Whatever the bindings of the American courts may. be

_. Yegarding the ownership of oil and‘ gas in place, or the

exclusive right of a surface proprietor through wells ©

on his own {gnd to capture all the oil and gas that may -

be produced therefrom, regardless of the effect on-the -

neighboring proprietors, it is only in the very recent’

~ eases involving the constitutionality of conservation

statutes that the full significance of’ the pool function

of gas energy has been: pressed upon the courts. The

Federal Oil Board, in advancing the cau ¢ of petroleum

conservation in the public interest, takes the position °

that the pool effect of gas energy calls for the laying

- down of a new legal concept based upon later scientific

-?, discoveries. This is by no means a novel procedure,

especially where constitutional questions are concerned.

The Federal Board has concluded that ‘the. gas energy

of an oil pool, by reason of its general effect through-

.) out the pool for oil producing purposes, is the common

and not the individual property of the surface propri-

etors. The Board further concludes that if this com-

munity of ownership, is once recognized distinct and

_ 14 ae +

‘far-reaching correlative rights and obligations between |

and among the surface proprietors regarding the use

- or the waste of their common property necessarily will

arise. | | 1 .

ft 10 a It is because of the communal character of the gas en-

ergy'in an oil pool that the Federal Oil Board reaches

the ultimate conclusion. that there is broad scope for :

the exercise of the police power of the oil producing

states to adjust and regulate the correlative rights and

obligations that result from this community owner

ship. IN PRESENTING THIS BRIEF IN THE

PUBLIC INTEREST, OUR ARGUMENT WILL BE

CENTERED UPON THE: COMMUNAL NATURE |

OF GAS ENERGY AS A:BASIS FOR THE EXER-

' CISE OF THE POLICE POWER OF THE STATE

OF OKLAHOMA AS EVIDENCED BY THE STAT- -

UTE CHALLENGED BY THE APPELLANTS IN

THIS CASE.

Having thus outlined the national public policy that is

involved in the questions presented in these cases, that

policy must be correlated with the public policy of the oil ”

producing states so that the application of the Oil States

Advisory Committee for. leave to file this brief. shall find

its justification upon the ground of public interest. In the

broader sense, the national public policy and_the public

policy of the oil producing states in respect of regulating

the production of oil to prevent waste are. identical. The

. Federal Oil Board, in its first report, clearly discerning ‘

the division of governmental power between the nation

—15—-

and the states, and doubting. the power of the federal gov-.

". ernment to regulate the production of oil fronf lands pri-

-vately owned in the states, declared that the exercise of |

state power: was preferable. (Report, Federal Oil Con-

servation Board, September 6th, -1926, page 15.) In the

same report, the oil states are not only urged to enact

\ “conservation Statutes, especially designed to prevent the

waste of gas energy, but the several oil producing states"

“are ¢ also urged to co- -operate’ among themselves and with

the federal bureaus to this end (p. 5). In December, 1927,

the Federal Oil Board appointed a Committee of Nine, con-

: sisting of three federal: government representatives, name-

ly, the Assistant Secretary of the Interior, the Assistant

Secretary of Commerce, and the Chairman of the Federal

Trade Commission, three former presidents of the Ameri-

ean Petreleum Institute, and three members of the Ameri- —

can Bar Association, nominated by the Mineral Section of

that body, with the approval of the American Bar Associa-

tion, to assist the Federal Oil Board in itqinvestigation of

the practical and legal probléms send conservation.

This report was filed with the Feder .. January

28, 1928, and among the recommendations made was the

| study of state legislation to prevent gas waste. This report

was referred to the governors of the oil producing states by

the Federal Oil Consegvation Board. (Report ITI, Federal

_ Oil Conservation Board, Feb. 25, 1929, pp. 4-9-17).

Doubtless influenced by the appeal of the Federal] Oil

Board and motivated also by his own knowledge of the

“waste of our petroleum reserves, Governor William H.

Murray, of Oklahoma, called a meeting of the governors of

an ) ee .

certain oil states, or their representatives, to be held at

Fort Worth, Texas, March 1, 1931, looking to co-operation

among the oil producing states for vonservation. This meet-

/ ing was attended by Governor Murray of Oklahoma, Gov-

' ernor Sterling of Texas, the- conservation officers of Okla- -

shoma and Texas, and the representatives of the Governors

of Kansas and New Mexico. From this meeting came the

organization of the Oil States Advisory Committee at Tex-

arkana, Texas, March 9, 1931, the Governors of seven oi}

producing states, namely, Oklahoma, California, Kansas,

Wyoming, Louisiana, Arkansas, and Texas, having appoint-

ed representatives on said Committee. Later, the Commit-

tee was enlarged to include representatives of the Govern-

ors of the States of Ohioy.N ew Mexico, and Colorado. Since

the Committee was fully constituted, it, in co-operation with

the Federal Oil Conservation Board and the conservation

authorities of the states represented on the Committee, has .

labored to advance the cause of petroleum conservation

throughout the United States, and in particular in the sate tk

represented upon the Committee.

In the meanwhile, by act approved March 16, 1931, the

Kansas legislature. adopted an act prohibiting the produc-

tion of crude petroleum in such manner and under such con-

ditions as to constitute waste, and the term ‘‘waste’’ was

defined so as to include underground waste, and waste of

" gas energy. Where oil could be prodused only under con-

ditions constituting waste, ‘Tatable ‘from the pool :

affected was " provided for (Kans. 8. L. #931, pp. 332-333).

By act approved June 4, 1931, the California legislature pro-

) hibited Ge mpeetepion of crude petroleum in the State of

al kee

California in such manner ‘and under such conditions and

in such amounts as to constitute or result in waste. The

waste prohibited, as defined in section 2 of the act, was as

follows: ae be:

“‘Sec. 2. The term ‘waste’ as used herein ‘iad in-.

clude underground waste or destruction without bene-

ficial use, surface waste or destruction without bene-

ficial use, waste by reduction of the total quantity of

recoverable crude petroleum oil in any. underground

source of supply by the careless or improper drilling

or operation of wells, and the waste incident to or re-

sulting from the production of crude petroleum oil

when the current production together with the amount

of crude petrolenm oil and/or its-refined products in

| storage exceeds the current requirements for use with-

in and for shipment to points without the state, and for

the maintenance in storage. of -such reserves of crude

petroleum oil and/or its refined products as are rea-

‘ gonably necessary to meet and insure the continuity of .

an adequate supply of. crude. petroleum oil and/or its

refined products for such current requirements ag de-

termined upon'the basis of past experiencé, existing

conditions and estimated future requirements of crude

‘petroleum oil and its refined products for such use and

shipment. The loss by ewaporation or leakage and the

. increased hazard of loss from fire and other causes re-

sulting from the:storage of crude petroleum oil and/or

its refined products in excess of the quantities which

are reasonably necessary to insure continuity of an ade-'

quate supply for such current requirements js waste

within the meaning of this act.’’ (Statutes and Amend-

ments to the Codes ws California 1931, PP. 1267-1272,

inc.)

By act approved August 12, 1931, the Texas eisai

enacted a conservation statute providing that neither nat-

; y

| —19- (

ural gas nor crude Penner produged, trans-

. ported, stored, or a such manner, or under such ~

conditions as to co waste. This provision was fol-

lowed by this language: é

“As used herein, the term ‘waste,’ in 1 addition to

‘its ordinary meaning, shall include the operation of

any gil well, or wells, with the gas/oil ratio exceeding

that fixed for such well, or wells, by order of the Com-

mission,.and the Commission is hereby given authority

to fix a d determine by order such ratio. (g) Actual

physical waste incident to or resulting from so drilling,

equipping, locating, spacing, or operating wells as to

reduce or tend to reduce the ultimate total recovery of

crude petroleum, or natural gas, from any well ‘or pool.

(h) Waste incident to or resulting from the unneces-

sary, inefficient, excessive, or improper use of the gas,

gas energy, or water drive in any well or pool. * * *

. (k) Waste incident to the inequitable utilization of gas

energy, water drive, or.other natural force resulting

from the inequitable withdrawing from any common

pool; provided, however; that the Commission shall only

invoke this definition of waste for the purpose of pre-

venting discrimination in production as between. pro-

ducers disposing of their oi] and/or gas by means of

regulated carriers and those producers disposing of

their oil and/or gas by means of unregulated carriers.’’

(See. 1, Ray’s Advance §. L., Texas, Vol. 5, pp. 42-43,

italies ours. )

a By vests 7 of the act, the Railroad Commission of

Texas is given the power to establish rules and regulations

to prevent the kind of waste condenined by. the act and, here

the further provision rs :

. ‘*Tf it is the judgment of the ucidinden that any

reduction or adjustment in the production of oil or. .

gas from any well or pool i is necessary in order to pre-

vent the waste, as herein defined, of crude petroleum,

- or natural gas, from any such well, or pool, the Com--

mission shall determine how to accomplish such reduc-

tion or adjustment, and such order shall be made in “

such manner as to distribute, prorate or otherwise

' apportion such reduction, or adjustmefit, among the

wells committing such waste, or contributing thereto, as \

the facts justly and equitably require.’’ (Id., p. 46.)

The Oklahoma statute assailed here prohibite the ordi-

nary waste of petroleum, the underground waste thereof,

and the waste incident to the production of petroleum in

excess of transportation and marketing facilities or reason- ’

_able market demands. The California statute, -already re-

ferred to, with unimportant distinction, looks to the ac-

‘complishmentof this same purpose. On the theory that

the waste of gas energy constitutes perhaps ordinary waste,

» and certainly underground waste, and waste incident to the .

production of oil in excess of transportation and market-

ing facilities and reasonable ‘market demands, the Kansas

and Texas statutes, particularly the latter, with its nice P 2

treatment requiring non-wasteful and equitable use of gas. -f’

energy, may be analogized to the Oklahoma statafté chal-

lenged here, and hence, it comes about that the appellant’s.

assault of the Oklahoma statute challenges also the con- »

‘stitutionality of the latest effort made. by the thiee import-

amt oil producing states of Kansas, California, and Texas,

to prevent waste and to conserve the vast oil resources of

these states for the benefit of the American people. \

In short, these cases, if not sustained, either will strike\,

“wn or r seriously impede the carrying out of our. national - \

me?

Bae ¢,

= 20—

conservation policies, the efforts of the oil producing states

in the same direction, and the conservation statutes of the

four most important oil producing states in ne) perme .

Union—states now producing 86.48 per cent of the nation’s

supply of crude oil, as shown by the latest figures of the

Bureau of Mines. (American Pet. Institute Bulletin, Feb.

27th, 1932.) It is because of these things that the Oil States,

Advisory Committee, at a meeting held in Chicago Novem-

ber 12th, 1931, by resolution, delegated to the legal sub-

committee of:the Oi! States Advisory Committee the duty

of filing a brief on behalf of the Committee amici curiae,

the counsel filing this brief being the Oklahoma ‘member of

the Oil*States Advisory Committee, and the lawyers'-of |

- counsel being respectively the Colorado and the Ohio mem-

bers thereof. :

. (c) Statement of the Case.

‘Counsel for appellant, in their brief, have stated the

’ case rather fully, but clearly: from their point of view of

_ the applicable law. Counsel for appellees have submitted

a counter statement, roame appellant’s statement ,

in certaiti particulars 4nd supplementing it in othere. In

the circumstances, and to serve as a more ‘impartial re-

cital of the record, we propose to restate the case and

ae for the +. .of clearness to divide it into three parts. /

HE ee SirvaTIon oF THE Paprizs: soos

usi- .

lant. is a New Mexieo C ration, authorized to do

ness in Oklahoma. The principal appellees, Walker, Chil-

ders, and Hughes, are members of the Oklahoma Corpora-

) ‘ . . of “

. ie

Led p : —21—

tion Commission. (R. Vol. 1, part 2, p. 177.) Whilé the

parties last named are the formal. defendants, the inescap-

able fact remains that back of the defendants are fifty- |

two oil operators in the Oklahorfa City field who'are obey-

ing the ‘restraint orders that are assailed by the appellant

here. Appellant claims that the Oklahoma Conservation

Law and the restraint orders of the Oklahoma Corporation

Commission made théreunder, are unconstitutional.and void .

in that wey violate the Fourteenth Amendment and the

Commerce Clause. of the Federal Constitution. Appellant:

asks that the appellees, on these grounds, be anjotll d from

enforcing the act and the orders made thereunder. (R. Vol. -

1, part 1, p. 35.) Appellant is what is termed an integrated

oil concern. It. produces and transports crude petroleum

~ by pipe line, refines it, and markets the products of its re-

findry | in intrastate and interstate co erce, the’ larger

quantity of its refined products going into interstate com- '

merce. (R. Vol. I, part 2, p. 178.) At this stage, an observa-

tion that penetrates appellant’s whole case must be drawn.

Appellant, in the main if not entirely, predicates its case up- 4

on its integrated character. It combines its producing, trans-

porting, refining and marketing departments into a single -

enterprise and complains that, as a single enterprise, it is’

deprived of its property without due process, and that the

Oklahoma Conservation Law and the orders of the Cor-

poration Commission made thereunder offend the Com-

merce Clause. Such is. not the predicament of this case.

The Oklahoma Conservation Act and the orders of the .

Corporation Commission challenged here apply to a single

branch of the petroleum bisinese—that of aiid oil. So

| fh

—22—

“fee as the. record here i is » corioeaned, appellant : ocenpies the

- "Position, of a producer of oil, “and that alone. Ali of its i.

, other business activities must be disréggrded. So far as:

= the record. in this case is ‘concerned, appellant ’g. business .

. falls into. a single category, that of producing. oil, a mat.

-_ of local and notof national ‘gignificance. Pass) :

7 "Appellant holde oil leases in the town-lot section of a

the Oklahoma City oil field on twelve non-contiguous tracts.

The. smallest covers .16 of an be Two others: “cover one-

half” acre - tracts. The largest tract covers five’ acres. The

/ area of th remaining: tracts ranges between the two ex-

: trethes her indicated. (RB. Vol. I, part’, pp. 179-180.) AL,"

the. time of frial, appellant had nine. producing wells On. ..2

_ ‘these tracts and was drilling another, the average well

-” location covering. three and a half acres. (RB. Vol. I, part 2,

_: PP. 179-181,) Standing in sharp contrast with the small

“holdings. and intensive drilling bperations of appellant,

when “eorrelative rights are taken into account, is the fact .

that the Oklahoma City. field. éovered 10,000: acres of-pro-.

ductive territory wf Vol. I, part 2, p, 346), and that at’ the -

-time of the jriak beiflw beléw there were 746 producing wells in

. the Oklahoma City field. (R. Vol. I, part 2, p. 184.) In oth-

ér words, the average well location in the Oklahoma -City

pool, after taking jnto account appellant’ s small logations,,

was over 10 acres to the, well. Of even more compelling —

af, *, significance, ‘when: the producing activities of the appellant .

‘and the other operators in the Oklahoma City field are, _

“brought into contrast, are. these facts: The estimated oil -:

_ content’ per acre. of. vappellant " McCalep No. 1, located. “on.

- & y tract less —_ — acre in mm, was 33,000 barrels,

. 28

Al re

9 P -

—23—

In less than | one: year, ‘nie from Seiten 30, 1930,

“to June’ 25, 1931, this well produced 254,509.26: barrels ; ip

other words, abont sixteen times the estimate of. recover-

able oil per acre in that locality. . Appellant ’s Naden No. 1.

was drilled on a tract of one-half: acre in area,. ‘and. the

«amount, of recoverable oil ‘per acre attributed to the local- -

ity was 27,000 barrels. In ‘five months preceding the trial, i

ee this well had produced 225,913 04 barrels, or something Jess :

than eighteen times the quantity attributed to this well.

‘Seal No. 1 -and No. 2, belonging to the appellant, were lo- }

- cated.on a five-acre tract. The first of these wells had an

_ estimated recovery per acre of 13,000 barrels and the sec-

_ ond a recovery of 7,500-barrels per acre. In the four. months .

: preceding the trial, these two, wells produced i in excess: of

157,000 barrels. “At the time ‘of the trial, all of these wells

were yet capable of producing large quantities of oil. The

history, of appellant’s other wells, the estimated recovery ©

per acre, arid the quantity of oil. actually produced there-

‘from, does not ‘appear in the record. (R. Vol. I, part 2, PP. )

*MBT-182),-~ .

A: ee period preceding the’ $ trial appellant had taken

‘300,000 barrels. of oil from the four wells above mentioned

' in‘excess.of the quantity it was permitted to produce un- ~

ae der the \drders of the Corporation Commission. (R. Vol. I, .

= ‘part 2, p. 182.)° From these considerations, it follows that

_ appellant had taken large quantities of oil from lands hot

belonging to it and had used the gas-energy of the oil pool,

» to which it. had access, in a ‘wholly disproportiongte man-_

” ‘ner to. “produc this excessive quantity, and that, aside from

the natural equities between it and its neighbors. resulting

A sie

from the circumstances just mentioned, it Rad produced

300,000 barrels of oil from its wells above the limiiation ;

of the Corporation Cometatadton orders, all to the serious

’ detriment of its neighbors in the Oklahoma City pool, to

whom it owed reciprocal ‘and correlative obligations not

“only in. respect of the oil to: be recovered, but' in respect of ©

the ” energy that had to be utilized to produes the oil:

( B) Onvis OF THE Chinitaisiies Comagission ‘As the.

taking of property without due process always raises the

degree of regulation and restriction, the first point to ob- ©

‘serve as shown by the record i is the limited period wvithin

which the orders’ of the Corporation Commission com- 3

diana of by appellant: were operative. They were not only

the demand had been increased. (R. Vol. I, part 2, p. 97;

R. Vol. I, part 2, pp. 112-116; R. Vol. I, part 2, pp. 138, 145- |

ae 146; R. Vol. I, part 2, pp. 161-162; B. Vol.-I, part 2, pp.

173-179.) As the order-of June 30, 1930, fairly i is typical

- of all the other orders attacked by appellant, the substance

of this order will be here given. The order begins : ‘‘Comes ‘4

- now Wirt Franklin, petitioner herein, by his counsel, and

this matter being set for hearing on this date, avd the

Commissign having heard and: considered’ the evidence of

the petitioner, and the evidence. of any and all persons in-

» terested in said petition, and being advised in the premises, : )

_finds as follows:. (Italics ours.) (BR. Vol. I, part 2,.p. 85.)

“e he That due notice. of. the hearing had ‘been given. S. x

-. limited to the brief period of three. months each, but pro--

vision was made for a re-adjustment of the limitation with--

in the three months’ period should new evidence show that.

—25-

| ; i

‘Vol: II, part 2, p. 86.) * * * That Sie i is an over-produe-

tion of crude oil, in the State of- Oklahoma attended by

l.* * * unless restrained °° * (will) commit’

1 waste of crude oil, economic waste, under-ground . ;

. waste, surface waste, and waste\ incident to the P ction |

of waste, it will be necessary to eniforce proportionality of :

‘taking from the wells and leases in the flush and semi-flush a

Pools, ‘and unless proportionality - -is required, injustice :

would be done as betwee. producers i in the same-pool * *.* -

~~ in that drainage would occur. from. one lease to another

and undue proportion of the gas pressure would be. utilized

by some operators to the detrimett of the others. (RB. Vol:

II, part 2, pp. 87-88, ) **°* That the potential production.

_ of erude oil from existing wells in Oklahoma on and -ful-

lowing the first day of July, 1930, will be approxiniately

~- 1,362,000 barrels per day, and that the daily demand from.

2 Oklahoma is and will be approximately 650,000 barrels per

. y day during the months of. J uly, ‘August, and September, |

1930. That, therefore, théFe is an excess of potential ‘pro-' -

; duction « over consumption of 7 12,000 barrels per, day, which’

cannot be. produeed without waste, as defined ‘by the Stat-

utes of Oklahoma.’’ (R. Vol. H, part 2, p:88:) The Com- eo

‘mission found that a different’ percentage of | reduction.

' should be applied to the several oil pools brought under

the order. (R. Vol, II, part 2, pp. 89-90.) That the wells of

pa ize : a et ’ : s

small settled production should not‘ be limited because to

do so would cause the abandonment of thousands of them,

thus causing the waste (economie waste) of a valuable ‘nat-

ural resource. (R. Vol. II, part, 2, p. 92.) That the appli-

eation of different. percentages of reduction was necessary

‘because the several pools subjected to the order possessed

their peculiar and separate markets. (R. Vol. II, part | ae

92. ) That the varying percentages: of reduction were peces- .

sary to prevent: discrimination between and among the.

pools subject to the order. (R. Vol. II, part 2, p. 93.) Upon -

.the basis of these specific findings, the Corporation Com- _ .

mission, by its rules and regulations, and in the order em-

bracing the findings, put the findings into effect as a te-

straint upon production to prevent waste. (R. Vol. I, part

22%) --- on, ; ‘Ss

caddie illuminating | on the dese matter of waste

as the basis of the orders attacked i is the opinion of Wakes,

Chairman, in the Order of February 10, 1931 (B. Vol II, ©

part 2, p. 190). Upon/ the matter of, economic waste, the

3 Commissioner. said:

“‘Beonomie waste, 80 far as this hearing is con-.

cerned, is too closely alli to physical waste to per-

mit intelligent severance therefrom. -Thus, one of the

protestant’s chief a onanh ‘to increasing the allow-.

> _able takings from the Oklahoma City field is based on

the claim that Bugh increased takings would tend to -

absorb markets| which are now caring for. the small, -

_ or so-called stripper wells,. generally estimated at from |

30,000 to 60,000 wells in the State of Oklahoma, -de-

pendent.upon the definition of a stripper well, and the

_ amount: of crude petroleum that would. a 4 a

- e +

Ds + ¢

well within that class. In any event, it is contended

' that.a flood of oil from the Oklahoma City pool would

disastrously affect some 60,000 wells in the state, out-

_ side the Oklahoma City pool, and would close many

of them down for a long time, and that during this —

time these wells would, because of water and other dam-

age, become in such condition that their operation

would no longer be practical. This would constitutd

both physical and economic waste, physical in the sense

of the destruction of valuable properties both to indi-.

viduals and to the state, and economic, in the destruc-

tion of these’ properties and coincident injuries con-

nected therewith, not only-to the wells themselves, but

to the state and’ its people.’’ (R. Vol. 2, part 2, p. 194.)

In the same opinion Walker observed:

_ _, 5413, of nearly 6,000,000 barrels,.there would be a pro-

duction in the Oklahoma Gity field of approximately .

_one ard one-half billion. cubic feet of*natural gas, the

| greater proportion.of which would be blown _ the

‘‘ Another, and an exceedingly important: problem |

directly connected with the question of physical waste,

- but also bearing upon the question of economic. waste

and the ultimate recovery of .the field (underground

waste), is the question of natural:gas wastage in con-

nection with the production of crude petroleum. A wit- . ‘

ness, a competent petroleum engineer, testified that

if the wells in the Oklahoma City field were opened to -

’ ten per cent capacity daily flow (under this order they

were opened to a lesser flow) assumably based upon _

the Commission’s estimated. potential in its Order No.

air and dissipated. (Italics ours.) .

‘Involved in this wastage of: natural gas to ari ex-

. tent which to the layman’s mind seems criminal and.

which to any mind ougiit to be conceded to be improvi-

‘. dent, is the question of the destruction of gas energy,

.—28—

the potent and necessary element or power in the re-

covery of crude petroleum. Oklahoma City wells are

exceedingly deep, generally producing crude petroleum

from a depth below 6500 feet, and the gas energy so

necessary to tfieir production, once dissipated, cannot

be restored. The relationship of wastage of natural -

gas from these wells and the allowable takings of crude —

petroleum from the wells is an important and neces-

sary one. We should not permit unlimited flow from

_ these wells until we can be convinced that the natural

gas energy is being conserved to the best advantage.’’

(R. Vol. 2, part 2, pp. 195-196.) (Italics ours.)

- (C) ¥rxvrnes or toe: Covrr Betow. That each of the

. orders attacked by appellant was entered upon the proper:

| application by petition of some interested person; the ap-

| plication was set for hearing, of which due and reasonable

» notice was given to all persons and dlasses interested: -there-

in, as provided i in section 6 of the act; testimony was taken

at the hearings on said applications, and the findings of fact —

upon which the regulations ‘were based were made upon

the evidence introduced at the hearings. The evidence taken

by the Commission upon the various hearings was not in-

troduced in evidence in this suit except an abstract of that .

ies 3 the evidence taken at one of the hearings on the -

question of waste. The abstract of the evidence before the.»

" Commission so introduced sustained the findings of fact 3

: thereon. The allegations of the third amended and supple-

| mental bill of complaint that the several orders complained

; _of were entered and | promulgated by the Commission with-

out havihg h . the testimony of witnesses under oath,

' ‘without having heard’ mS ‘sort of ye evidence upon which

/ . ‘

. La 7 .

. : = ° ’

, e : > .

" —29—

‘to base said viline, and the fiidinize of fact were not sup-

‘ported by any evidence before it, are. not sustained by the

evidence herein (RB. Vol. I, part 2, p. 190). (Italics ours. )

That applicant owns a pipe line of 18 000 barrels a day

capacity, running from its Oklahoma City properties to its -

Enid refinery. * * * There is no evidence that closing i in, or

pinching in ‘wells in the Oklahoma City field will cause wa-

ter to ae e oil and gas sand, or damage appellant’s

wells, or results in waste of oil or gas (R. Vol. I, Part 2, p.

182). * * *- That to permit, oil wells in flush or semi-flush °

pools to flow wide open for a considerable length of time

results in the use of an excessive amount of gas pressure

and uneconomic and wasteful use of’ gas energy in recov-

ering and lifting the oil, and a tremendous: loss i in ultimate

recovery. oe Proper and economic utilization of this

gas energy | is of particular importance in a pool such as

the Oklahoma City pool where the wells are of tremendous

depth and the cost of artificial recovering and raising the

oil will be unusually great (R. Vol. I, part 2, pp. 185-186).

*** That the orders of the. Corporation Commission re-

garding the preservation of ‘natural gas and gas pressure

are established by ” evidence (B. Vol. I, part 2, pp. 197-

198). ** * ;

That the full oie from: the Oklahoma City field 3

on the date of said order (October 28, 1930), and during the

| period of time covered thereby, and since then, and at this _

fime, could not. and cannot be produced without waste, in-

eluding’ physical waste and waste incident to the: produc-

tion of crude oil or petroleum in excess of the reasonable .

market demand for oil therein dnd- that j in said order and.

—Go-

subse, “ent orders the Commission restricted the market

demand for oil therein as then ascertained to exist, and

that the present restriction of the production of oil therein

conforms to the amount of the reasonable market demand

for oil produced therefrom (R. Vol. I, Part 2, p. 198). * .*

, That. the Commission adjusted any inequalities i in: the orders

which are challenged here (R. Vol. I, Part 2, i?

“That the time basis of proration in effect in the Oklahoma

* City field for a time was adapted to the circumstances of .

said field * *.* (R. Vol: I, Part 2, pp. 201-202, 204). That the -

Commission, i in none of its orders, has discriminated against

the Oklahoma City pool in favor of any other prorated area.

(R. Vol. I, Part 2, p. 207). ° ée That the varying, percent-

vages of limitation were justified because each pool had a

different market (RB. Vél. I, part 2, p. 207)..° * * That none

'- of the orders of the Corporation Commission have been

made or entered ifto for the purpose of fixing or maintain-

‘tg the price of crude oil (R. Vol. I, part.2, p. 209).

| The following finding of the court below i is inserted in -

full. It reads:

“There was introduced i in evidence an ‘agreed nar-

‘rative statement of the evidence before the Commis-

_ sion on the subject of waste. We find from said narra- ©

tive statement that it was proved to the Commission .

and well established that the commission of both sur- .

face waste, underground waste, and waste incident to

the production of crude oil in excess of reasonable mar-

ket d ds, would have occurred in each of the pro-

pat in thé absence of the making of the prora-

orders, and rules and regulations herein attacked

ti ;

by the plaintiff for the prevention of such wastes. We

find that the evidence before the Commission on the

subject of waste clearly establishes that the commis-

sion of such wastes was immiment.’ ’* (R. Vol. I, part

2, p. 210.)

. hat the orders of the Corporation + Commission” a?

pisces the flowing of wells in the Oklahoma City field open

and continuously would cause serious underground waste.:

* * * This is also established by the evidence (R. Vol. I, part

ip HBF). ‘ :

” Onthe question of inequality between “dotbseten and ©

. the other operators in the Oklahoma City field, the court

below found that fifty-three different corporations and in- —

‘dividuals were operating in the field,- thirty-six of which

were non-integrated, that is, entirely dependent on outside

purchasers for a ‘market, and eight were partially inte-

gated, therefore, partly dependent: on outside purchasers

for a market. Only nine of the. fifty- three prodvecrs in

the field were in the class of the appellant. They were in

: ‘position to market all of their production, were it not for

the restraint of the orders of the Corporation Commission.

Thus, nine producers of the Oklahoma City pool éwning 12

Per cent of the wells therein and 10 per cent of the pro-— |

duction therefrom, due to their peculiar. situation, when ~

that term has no meaning under the record_of this case,

could’ take advaritage of the other forty-four producers —

owning 88 per cent of the wells in the field and 90 per cent ral

_ of the production therefrom (B. Vol. I, part 2, p. 183)...” .

The foregoing, in our opinion, states the record in its

_ true perspective. The ‘appellant is intent on. serving its

: selfish interests, regariions of the effect of its action upon

—32—

its fellow-operators. To it, the Fourteenth Amendment is a

sword, and not. a shield. The subject-matter of-the suit is

property of a character that, by its very nature, establishes

correlative rights and obligations among the-producers in

- the same oil pool, if there is such a concept within the realm

of Aruerican law; a legislative edict was enacted within the

broad sphere of the police power designed to adjust and

\ regulate these correlative rights and obligations, and an ~

\ \ administrative body midst all the pee the si subject *

implies seeks to administer the law in order-that equality

and justice might be upheld; and, finally, a federal court

three judges, sitting in the atmosphere of these things,

shearing tstimony of the witnesses a uphold-

ing in every important respect hoth the act e orders »

of the Oklahoma Corporation Commisg#th. In this setting, —

ate! shall procéed to the argument of the legal questions

: that are presented. | |

oe 7

sirttesot, ts of ARGUMENT.

Point 1. Propet interpreation of the Oklahoma Con-

servation Act ( Oklahoma Session’ Laws 1915, p. 28).

| ' Point 2. “When SO interpreted this act does not of-

_ fend. the due process clause of the Dousteunth Amendment..

. —the equality and liberty of contract phases of appellant’s

“_ eontention under this heading will not be discyssed.

Point 3. Section 2 of the Oklahoma Conservation Act,

the price-fixing provision, * Nearly is separable from the

_ _., waste provisions of the act, namely: Sections 1, 3, 4 and 5,

song which alone are material to this controversy.

Point 4. There is no such uncertainty.in respect of the’ -

‘meaning ‘of the terms ‘“waste,’’ ‘underground waste’’ and :

“waste incident to the .production of crude oil and-petro-

leum in exedis of transpértation or market facilities or rea.

sonable market demands”’ as these terms appear in ‘section

. | 3 of the act as to render the act void on that ground.

Point 5. There was no delegation of legislative power

~ by. this act. The legislative prohibitions are clear and cer-

tain and the power conferred upon the Oklahoma Corpora- |

tion Commission by the act was that of applying the stand-

ards-of waste as established by the legislature to tle pe-

nt “enuliar facts of a case. In short, an administrative duty, ~’

nothing more, was imposed upon the Corporation: Commis- i

sion by the Cehcane Conservation Act.

fies ee ae

Point 6. The rules, regulations: and porvon of the Ok

| Jahoma Corporation Commission’ assailed by appellant here

as unconstitutional and void clearly are within’ the provi-

sions of the Oklahoma Conservation Act; hence it follows.

3 that all such proceedings of ™ Commission are immune

Gos ‘from attack.

Point 7. The duties contmitted to, or discharged by the.-

7 Proration Umpire and’ Operators’ Committees, under the

- direction of the Oklahoma Corporation Commission, do not

have the effect of. invalidating the rulés, regulations and

orders of the Commission complained of by appellant in this —

—— ae ; | ba »*

Point 8. Neither the Oklahoma Conservation Actnor

— the rules, regulations or.orders of the Oklahoma Corpora-

tion Commission made thereunder, the subjects of assault

here, offend the commerce clause of the Federal Constitu- .

tion. tee e 2m

oN, vw x

6. a

‘ARGUMENT. _

—

5 e

7 Point x

‘Proper interpretation of the Oklahoma Conservation

Act (Oklakoma Session Laws 1915, p. 28):

> (As this brief proceeds, it will be demonstrated that the

rules, régulations and orders of the Oklahoma Corporation ©

Commission challenged in this suit by appellant exclusive-

ly are based upon the waste provisions of the Oklahoma .

Conservation Act (Oklahoma Session Laws. 1915, p. 28). -

Appellant, however, strains to conne ct section ® of the —

_. act, a price-fixing Provision, with the sections of the act .

“dealing with waste, and upon that foundation much, if not.

all, of its case depends. We propose to interpret the waste

hie sections of the-act first to show that they, taken together,

manifest a single legislative design and purpose. We shall

Y then take up section 2 of the act, the price-fixing provision,

“to demonstrate that it’has no connection whatever with the

. waste sections; that section 2 and the waste sections are not

in any wise interdependent, but, on the contrary, that sec-

- tion 2, in its turn, manifests a legislative intent entirely:

| sgparate and distinct from the prohibition” of waste, :

: Having thus ‘outlined our objective, we, shall analyze

the material’ fections of the statute. Section 1 provides :

. “That the production of crude oil or petroleum in

the State of Oklahoma in such manner, and under such —

conditions as to constitute oateg is on prohibited.’’

\ (Italie ours.)

-& ae

fose ee — 98+

This prohibitory section of the Oklahoma Conservation

‘Law was followed. exactly in the Kansas Conservation Law

(Kans. S. L. 1931, p. 332). In California, by an agt adopted

after the Oklahoma act, the Oklahoma model was employed,

but more comprehensive language used. Here the produc-

' tion of crude petroleum in the State of California in such

manner, and ‘under such conditions, and in-such amounts as

to constitute or result in waste, was prohibited. (Statutes

and amendments te the Code. of California. 1931, p. 126%.) .

The Texas act. also adopted after the Oklahoma act provided

that neither natural gas nor crude petroleum shall be pro-

duced, transported, stored or used in any manner or under . ©

such conditions as to constitute, waste. (Ray’s Advance 8.

L. Vol. 5, p. 42.) Hen

in the main ‘the prohibitory section of the Oklahoma act

_ has beer carried into the atatutory law of three other-vil ..

producing states. The condémnation. of waste in. section 1 |

of the Oklahoma act is all- o. At a glance, the pro-

duction of petroleum in Oklahoma in such manner as: to

constitute waste would forbid all kinds of waste, but the

statutory intent went decidedly rther. The production

of petroleum under conditions that, bepaght about, waste

~ was likewise: prohibited. This latter hrase is of high sig-

nificance. . Prohibiting production in s ich a manner as to

we have the impressive fact that

cause waste would satisfy all the mechanical requirements -_

for conservation, but another ‘factor w added. Condi-

. tions existing at the time the oil was produced, that i is, eX-

' traneous.conditions, were to be taken into ack ount, and if

the production, plus these conditions, = waste,

then that kind of waste was prohibited. At least, this much

—87—

must be. condeded. Where the two abelian manner of Pro-

duction and conditions at the time of production, are both ©

. established as standards to determine the» existence, of |

waste, the statute in the very. nature of things must be’

» given the very broadest application. This brings us to Siey

. related section dealing with waste, namely, section 3:

- “That the term: ‘waste’ as used heréin, . in addi- .

‘tion to its ordinary meanimg shall include ecoyomic.

waste, underground waste, surface waste and waste in-

_ cident. to the production of crude oil or petroleum in ex-

cess of transportation or marketing facilities, or rea-

- sonable market demands." The Corporation Commis-

sion shall have authority to make rules and regulations

_ for the prevention of such waste and for the protection _.

of all'fresh water Strata and oil and gas pecking strata -

encountered in ay well drilled for oil. ”

We must arrive at the applicablé meaning of this def-

nition section -by process of elimination. The Oklahoma

legislature must be presumed to have enaeted its conser-

vation act in the light of the underground. nature and habits

of oil and gas, and of their physical association and rela-

tionship underground. . This court. also ‘must. take judicial

Knowledge of these conditions. Beginning our process of

| elimination, first we shall deal with-the concept, ‘‘Ecohomic .

- Waste.”? Under the clear terms of the act, the words, ‘‘eco-»

nomic waste’? bear no direct relation to price or: price-

fixing. That subject, according to a complete code of its

own, is dealt with in section 2 of the act, and there only! On |

* the other hand, the term, ‘‘economic waste,”’ does bear a

- relationship to overproduction by reason of the nature of

the business of producing oil. The Federal Oil Board has

| ae 4

found that one-half of the nation’s oil supply comes from

the small wells of settled preduction which number over

300, 000. There i a price level that determines the co continued

qperation or the abandonment of these wells. Therefore,

an acute and prolonged overproduction coming from flush

and sSemi-flush fields that undermines the economi¢ price |

which alone will sustain the opération of the small wetts of

the country, not only threatens, but actually brings about

an ‘abandonment of thousands of gmall wells, thus leaving”

in the ground’ oil that otherwise would be recovered. This —

is an outright’ economic waste, and while the concept has an

” indirect relation to price, its basic import is to sustain a

condition that will save the small wells of the country which

from every point of view constitute the. backlog of our oil

supply. | iy

| The’ term, ‘‘surface ‘waste’? doubtless would embrace 7

these elements: (@) The actual dumping ‘of produced oil

on the surface without use. (b) The storing of produced

oil in earthen receptacles, that is, in drains or ditches that _

were dazimed for the purpose, or in excavations dug for

the: purpose which would result in the seepage of oil into

the earth that never could be recovered for use. The de-

iterioration of ‘the oil -thus’ stored through the high per-

centagé of evaporation in respect of the more volatile and .

valuable content, .and in time of heavy rains the overflow-

ing of the earthen receptacles of whatever character upot .

the land or into neighboring streams with the actual phys-

Nical loss of oil that would result. That these elements of —

waste had already been encountered. by the Oklahoma Cor-

° 7;

;

_~ -se—

oenidinn! Commission; and that they were iin ‘the minds of .

the Oklahoma Legislature when the Conservation Act un-

“der consideration here was passed, clearly appears from

appellees’ brief.' (c) The storage of oil above ground. in

. steel tanks. At the time of the passage of this act, it was

» not the| custom.to make tanks of this character gas tight.

It is doubtful if any gas tight steel ‘tanks were in use in

- Oklahoma at the time. In these circumstances, a substantial

loss of the lighter parts of the stored oil was inevitable. . °

“Now gas tight tanks are in very general use, but there is

_ . still a degree of loss by evaporation. : The record is not

clear regarding the extent of this. ae .

The terms “ordinary waste’ td “‘undérground —

waste’’ are so related according to our theory of this case. 4

that they may be treated together. Plainly enough, the . 7

term ‘‘ordinary waste’’ would include the acfual destruc-°

Aion before beneficial use of any article of economic value.

‘As a corollary, the term equally should include failure to

obtain for use an article of economic value. THE case, as a

matter of wastie, becomes infinitely stronger when the ~

-failure to produce the article results in such a condition

that it can never. be recovered for commercial use. The

term ‘‘ordinary waste’’ must have a relative meaning, and

the above reasoning is strongly ‘fortified. when we reiffem. ~

ber that we are dealing with a natural resource that carmot..

‘be replaced, ‘the supply of which is limited. Dealing then .

_ With the concept ‘‘ordinary waste’’ in its relative signifi-

cance, we are brought to the function of the gas energy of

an oil pool which, if wasted; or if inefficiently used, leaves

. oil in the ground that cannot be a but which would

ae ome

by v .

—40—

* have sine recovered by the non-wasteful ‘and efficient use

' of the gas energy of the pool. In these cirenmstances, we

” think there is solid ground for contending that the waste,

or inefficient use of gas energy, constitutes ordinary waste’.

within the meaning of this act. But we are not obliged to . .

‘ rest-our case here. Underground waste, as such, specifical-

ly is prohibited by the act. Now, what, in the sense employed

_ here, does the term ‘‘underground waste’® mean? It does

not refer to the mechanical process that should be em-

ployed for the protection of the-saturated oil and gas for-

- mations when penerated by wells, because that kind of:

- conservation expressly is taken care of in the last part of -

the section under consideration, and in the following lan-

guage: ; * 2. * a4 ee pis

' “The Corporation Commission shall have author- |

¢ ity to make rules and regulations * * * for. the protec- |

tion of all fresh waiter ‘starta (a matter not related to \

oil) did oil and gas bearing strata encountered i in .any

* well drilled for oil.’

So thé- matter comes to this: Underground wie’ means

exactly what the two words employed in the phrase connote,

namely: Underground waste refers 't6 the leaving of. oil

in the ground that i in the natural circumstances of the case

-“eould be recovered: for commercial tse. A priori—if the

‘ leaving of oil in the ground is the thing condemned, we:

paraphrase section fF of the act in the following language:

The production of crude-oil or petroleum i in Oklahoma, in

such manner,.or under. such conditions, as to-leave undéer- -

Bere substantial quantities thereof that afterwards can-

‘not be recovered, is amas prohibited. If then, the, waste

2 aeons >:

’

of the gas energy pf an 1 oil pool, or even the inefficient use .

thereof, causes un rground waste in the sense developed

a here, this manner or method of improvident production —

falls within the prohibitions of the Oklahome Conservation .

‘Act. . in

The waite definition of isi 3 tintin with reason- _

able market demand is a dependent and not an independent 3

- provision. Here we do not have a positive legislative dec-- _

Jaration that the mere production of oil in Oklahoma i in ex-

cess of reasonable market demand is prohibited. Here again

‘the concept ‘‘waste’’ rather than the concept “qverprodue:

tion’’ controls. It is-only when waste as defined in the stat-

ute results from or grows out of excess production that

the clause ‘relating to market dernand’’ becomes opera-

tive. But this precisely i is the condition shown by the rec-

ord, As a foundation for the rules, regulations and orders

‘of the Corporation Conimigsion assailed here, the Commis-. _

_ sion found’ that the following kinds of waste were being

committed. ; First,. surface waste. Second, economic: waste

in the sense that small wells throughout the state were be-

ing abandoned because of overproduction ‘and, finally, and

with’ greater emphasis;that underground waste, as above

. explained, was being committed. ‘The. court below, ‘after

; full: hearing, affirmed. these findings. It matters not that

| there may ‘be some ground for saying that both the Corpo-

ration Commission and the court ‘below dealt, with excess

; produetion, as a type of waste condenined as such by the,

vstatute. Even on this point, the record clearly does not ~

“support the appellant. The substantial thing is that both

the Corporation Commission and the court below found

. out.

. -%

-, _—42—

pte types of waste apsdigenily condemned ie the act ‘were

being. committed ; that they were the result of excess pro-

- duction and that the limiting | of production to reasonable —

market demands would prevent such waste. Thus the whole ,

purpose’ of the Oklahoma Conservation Act was carried.

“We turn now to éection 4 of the act which reads:

_ “Sectgon 4. That whenever the full production ; se

from any common source of supply ‘of crude oil or pe

ee Oe tor 8 Stee eat cone

. ‘tions constituting waste, as herein defined, then any.

: person, firm: or corporation, having the right te drill «

| into and produce oil from avy such common source of —

supply, may take therefrom: ‘only such proportion of -

all crude oil and petroleum that may be produced there-

as 7 - without waste, as the production of the well or ©

' s of any. such person, firm 9# corporation, bears to |

the total production of such eommon source of supply.

. The Corporation Commission is authorized to so regu- .

- Jate the taking of crude oil or pétroleum from any or.

all such comnion sources of supply, within the State

of Oklahoma, as to prevent the inequitable 6¥ unfair

taking, from a commun 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 nacncted source of supply as ageing

| another. ws %

This section deals exclusively with watte and is but ;

= part of the waste scheme of the act as.already manifested

_ in sections 1 and 3 thereof. In interpreting section 4,.we —

must remeniber the migrating propensiti of oil and gas -»

underground, ‘end particularly, the pool effect of gas en- |

ra aa x : a *

ergy. By niin tion 1 and Bike profaslon fe |

_ . troleam in @xcéss of the feasonable mark demand is pro--

: hibited when the effect of such excess uction is

waste. _ But & restraint of this character immediately brings

‘into the matter thé correlative situation of the operators

producing from the same pool. The inequalities that would

result from the enforcement of settions i and 3 are cor--

rected: by sébtion 4. ‘Under this section where there is, ex-

concour cy eaves Selene eae

' _ no operator may take more

Ks tion and, in consequence,

the gas energy of inn wes — nie Seen pil; sg

- thought is émphasized by later provision of the section:

“The Corpofation Commisin is authorized to 60

regolate the taking of crude oil & petroleum from any

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 crude oil or

_ petroleum by. any person, firm or _corporation.”’

Thus far section 4 deals with the prorating of — in,

a single pool. The section’ concludes: —

ME OO ty prevent unreasonably disctimination in

, favor of any one such common sources of supply as

against another.’’

What does this’ last phrase meant When sections 1, 3 and

4 are considered together up to the point of the quotation

| just made, they dedi with the several oil pools of the state

- as separate units in the matter of waste. Especially is this

true in respect of ‘the limiting of production to: reasonable

market demand to prevent waste. The nature of the subject-

—44—

“a matter dealt with necessitates this separate treatment.

: Logically, proration should be enforced only in respect of

an oil pool. where all the production therefrom canhot’ be

marketed because of the interdependence of the operators

in that pool upon the: available market. Furthermore, the

record in this case clearly shows that each oil pool has its

peculiar ‘market outlet. All purchasers do not serve all the .

pools and even: where they do, the extent of their facilities -

to take the oil vary as between the pools. Hence, we have —

. ‘the meaning of the phrase last quoted.-Each separate pool —

is to possess.its own market and there shall be riftable tak- :

. ing within each pool where excess production therefrom f

results i in waste. Finally, then, the unreasonable discrimi-

pation between and among pools here forbidden simply

. Means that when the Corporation Commission of Oklahoma

, phall limit production under this ‘act, its orders ina rea-

_. sonable way shall preserve for each separate pool its ac-

tual market and prorate that market among the sever

operators in the pool. The record shows conclusively that

| ‘this is exactly what the Oklahoma Corporation Commission

did under the rules, regulations and orders assailed’ By the

appellant here.

Section 5 is the consloding section dealing exclusively

with waste, and we here insert it: ae

“Section 5. That for the purpose of detereniiiag:

. such production, a gayge of each well shall be taken

under rules and regulations to. be prescribed by the .

Corporation Commission, and said Commission is au-’

thorized.and dirdcted to make and pfomulgate, by prop-

Sag order, such offer rules and regulations, and to em-

—45— re

ploy or appoint such agents, with the consent of ie ‘

Governor, as may be. necessary to enforce this act.’

This section provides the machinery to emails the Coie’ ce

poration Commission to carry out the waste provisions of Y

_ the act. Initially, to enforce ratable taking the: gauge of

; all wells subjected™thereto, i ig required. The record shows ~

that this was done i in all fields subject to proration under : t

the rules and regulationgof the Corporation Commission, eee

_ except: Oklahoma City. There, for a ‘périgd: as 'shown by

the record, time proration was applied and later, ‘a four- _

_ hour gauge was provid@®, and this limited gauge was taken

‘as shown by the record. because the production of the field

was so far above the market outlet that this restricted gauge

’ only éould be taken. We maintain, however, that the taking

of gauges to enforce proration was not the exclusive method

_ provided by the. act. hig section reads: ; . sah ee

«@ © * said Gommission is authorized and directed .

to make agd promulgate, by proper onder, such other

> rules and Tegulations.* * * as ma necessary to en--

force this act.’’ Se ;

In the Oklahoma City field, in providing for time prora-

tion, the Commission 0 the only method ‘of prora-

tion applicable to conditiofs in that field. That method was

“ndéptéed to.enforce the act and, in the circumstances, was _

clearly within the provisions-of section 5. |

Heretofore, we have analyzed sections L 3,4 and 5, all

of which bear upon the subject of waste, are Ghatcauisa .

and provide a complete code for the prevention of waste, as— *

such, in Oklahoma. -We now quote section 2 which bears

: ty x Trae . é 4

‘no relation to waste, and which we conténd is entirely*in-

dependent of the waste sections of the ‘act upén which the

5 Tules, regulations. and orders of the Corporation Commis-

- sn and the findings of we court below entirely were predi-

cated. ‘

. “Section 2. That the sickle of iii él cma

leum from any oil-bearing sand or-sands in the State

of Oklahoma at a time when there is hot a market de-

' mand therefor at the well at a price equivalent to the

_ actual value of such crude oil or petrolewm is hereby

prohibited, and the actual value of such erude oil or

» petroleum at any.time shall be the average value as

“near as may be ascertained in _ United States at re-

| tailef the by-products of such crude oil or petroleum

ae |

~' |

the Pusiness of transporting, refining and marketing

*. the same, and the Corporation Commission of this state

. is hereby (in) sic vested with the authority and power

ng ce less the cost a a a reas@nable profit in

to investigate and determine from time to time the ac-

‘tual value of such crude oil or petroleum by the stand-

ard herein provided, and when so determined said Com-

mission shail promulgate its findings by its orders duly

‘made and recorded, and publish the-same in some news-

paper of general circulation in the state.” ° - :

ee demonstrate the isolation and independence of section

2, it is to be observed that section 1 prohibits Waste, and

that aldne. Section 3 defines waste, and that: alone. Sec-

tion 4, providing for proration, operates upon ‘conditions |

-eohstituting waste, and upen no other basis whatever. Sec-

tion 5 provides the machinery for enforcing the waste pro-'

visions. In section 2, the term ‘‘waste’? j is not at any time,

or at any place, employed. It contains its own prohibrtory

‘provisions. It does not depend upon the General prohibi-

; : \

t er , }

-_¢ 6 : i | oe

a - Q PATOL Y MN OCR ILG ETE BDO OER

4 eee ae i a ¥

tion of ‘waste set forth i in section 1. This section, in its es® . |

, Bence, does these things: Prohibits the taking of crude: oil"

* fom Oklahoma at less than its actual value. and then pro-

vides the machinery. for the determination of this value, It

‘is a price-fixing section, pure and simple, and is ‘entirely

independent. of, and _separable from, the four sections of.

. the act upon which the rules, regulations and orders of the

Corporation Commission challenged here were based. Sec-

tion 2:neither ¢ directly, nor indirectly, has any place,in ‘this

proceeding. Appellant’s case would have been stronger if

section 2 had contained no prohibitory vlause, but would —

have left that. legislative direction to section 1, and it Fould

have been stronger also from the viewpoint of the appel-

lant "if it had defined as waste, the taking of oil from Ok- -

tahoma at léss than its actual value. Neither of these things.

occurring, the independent, a and separable character of sec-

tion 2 is at ———. ial 5!

. .% ,

Sutmmarizifig then, we interpret the Oklahoma Conser-

_ ‘vation Act under the following propositions :

“(1 ) Sections 1, 2, 3, ess Sains all of the waste provi-

sions of the statute and evidence a common design and

purpose on the at) of the Oklahoma legislature to ae

vent, waste.

(2) Where there is an excess of inlining over reason:

able market demand in any oil pool in Oklahoma, and

where that excess productign results in waste as defined

- by the statute, the Corporation Commission of the state

‘may réduce production to the reasonable market de- ©

;

7 ad . cal

. : s rs

. -

4 EE Ae tats dr ala hea a tat ats i rea ianee aea 7

° ;

(4)

(5)

—48— °

‘mand to prevent. the kinds of waste that are prohibited 7

by the statute, and that arisé from thé overproduction.

od . ; , ae 2 ; :

The record shows“that this was what ‘was done by the

. rules, regulations and orders of the Corporation Com-

mission assaijed | here.

The proration provision, namely: Section 4, may be

enforced only when waste obtains. The record shows

that this. provision was carried out according to the

-intent, of the act.

The unreasonable discrimination between pools pro- |

vision of section 4 means that the market outlet of each”

pool reasonably shall be protected in limiting the pro-

duction of the pools of the state subjected to limitation, |

and here again the record shows that the statutory in- |

(6)

tent was carried out.

Section 2 deals with price only; provides its own rules

.of conduct, sets up the machinery for its enforcement

and is a provision separable from and independent of

‘ the waste sections of the statute.

Point 2.

When s0° interpreted this act does ast offend the due _

process clause of the Fourteenth Amendment—the equality

and liberty of contract phases of appeliant’s contention un-

der this. heading will not be discussed. |

In Julian v. Capshaw, (145 Oki: 237 ) 292 Pac. 841; the

Supreme Court of Oklahoma upheld the constitutionality of

the Oklahoma Conservation Act ehallenged here, and the va- —

—49—

_ lidity of an order of the Oklahoma Corporation Commis-

sion similar to’ the orders attacked here. It.is true that the

proceeding’ was an original one for a writ of prohibition to

restrain the enforcement of ‘the order, but notwithstand- <

ing this limitation the holding is an. authority upon both

the constitutionality’ of the act and the orders of the Cor-

, poration Commission.’ The order assaulted limited produc-

tion-and classified the several fields subject thereto, apply:

_ ing different percentages of reduction, and prorated the

allowable production of each field subject to the’ order,

among the operators thereof. -In substance, all the conten-

_tions that were made ‘here, were made in this" case, yet the

court upheld both the act and the order.

In the light of this holding, and at the very outset, we

. invoke the presumption of constitutionality always attach-

ing to a legislative act and, in addition, the announcements

of this court that the wisdom of the local legislature in’

passing, and that of the highest court in the state in sus-

taining the legislation, is entitled to the greatest weight in:

the decision of the question here presented, because of their,

familiarity with local conditions and needs.

_ —Lindsley v. Natural Carbenic. Gas Company, 220

U. S. 61;

- Fallbrook Irrigation District v. Bradley, 164 U. 8.

112; .. . x

Middleton v. Texas Power’ Company; 149 U. S,

152; ,

Block v. Hirsh, 256 U. 8.135; —

Gitlow v. New Y ork, 268 U. S. 652 ; .

Standard-Oil Company v. Marysville, 279 U. 8.

5825

som

. ene, 4 ~~

Corporation Commission v. Lowe, 281 U. S. 43); sai

O’Gorman v, Hartford . Insurance Company, 282

U.S. _

® eS | cor $

Equally tapertant’. inyhe decision of this case is the

well-settled doctrine that when the eo enny- of a

statute is open to doubt or debate, or if it is susceptible, ©

of two constructions, one favoring, the other or

constitutionality of the statute, it: should be ‘upheld Gori

v. Fox, 273 U. 8. 6b? Zahn v. Public Works, 274 U. S. 325;

Levy v. Segal, 258.U. S. 242; Plymotith Coal Company v. |

Pennsylvania, 232 U. 8S. 631; St. Louis. Railway v. Ar-

ne kansas, 235 U. S.-350-

The essence of the question under ‘this heading is to

contrast. the police power of the states with the Fourteenth »’”

Amendment. In outlining the scope of the police power as:

against the Fourteenth Amendment, ‘the following funda-

mentals should not: be overlooked. ;

It need be ‘said in a general way that the aor power

extends to all the great public needs, Cam

| States, 167 U. 8. 518; Noble State Bank v. Haske

- §. 104. It is the most esséntial of powers,.at times the m

insistent and always one of the least limitable bf the powers

of government. Eubank v. City of Richmond, 226 VJ. S. 137.

Police power not only includes regulations to promote

the health, peace, morals and good order of the people, but

also the power to legislate 90 as to increase the industries

of the state, develop its resources and-add to its weatlh and

prosperity. Barbier v. —, 113U.8. 27. |

v. United |

» - a

oS oo = Bl

8 y, .

— It.is also held that the concept ‘sialhee power) is based

“upon the principle that every person ought to so use his.

property as not to injure his neighbors. and that private

interest must be made subservient to the general interests

ie community. Slaughterhouse Cases, 16 Wall 36; Eu-

clid v. Ambler, 272 U. S. 365.

Local conditions should be taken into account in deter-

mining the extent of the police power. Bacon: v. Walker,

_ 204 U.S. 311; Terrace v. sateen, 263:U. S. 197. °

The scope of the police power depends upon viinillihams

as they change from time to time. A measure that would

be invalid in a state of society or under economic conditions

previously existing might be heid constitutional by ‘reason ©

of a change of circumstances. Euclid ‘v. Ambler, supra;

Zahn v. Board. of: Public Works, supra; Block v. Hirsh,

supra. o

Where a strong and preponderant opinion prevails in

the state that a particular statute is greatly and immediate- .

ly necessary to the public welfare, that factor has dn im--

portant influence in establishing the limitation of the police

power in the particular case. Muller v. Oregon, 208 U. 8.

412; Noble State Bank y. Haskell, supra.

. - Appellant devotes about four pages of his brief in.

_ declaring the rights that are created by oil and gas leases

under the laws of Oklahoma. (Appellant ’sbrief, pp. 33-

37.) These considerations totally are beside the mark. The

duestion that is before the court in this’ case is the degree

in which appeHant’s rights are regulated by the Oklahoma

Conservation Act and the orders of the Corporation Com-

Pe . | ‘

f° —62-

mission made thereunder. Even then they gain slight com-

fort fromthe Oklahoma cases they cite, Not a one of them —

deals with the correlative rights between: operators in the

same pool. In Rich v. Doneghey, 1 ‘Okl. 204, the leading

_, Oklahoma’ case, defining the rigths of an oil lessee, decided

| “in 1918, three years after the adoption of the Conservation

Act here involved, the court observed :

| But with respect to such oil and gas, they had

certain rights designated by the same courts as a qual-

. ified ownership th€reof, but which may be. more ac-

curately stated.as exclusive rights. subject to legisla-

tive control against waste * * * .”

It sesittee not to what dignity or sanctity the oil and gas

rights,of the appellant might reach. Those rights, what-

‘ever their character, were still subject to a valid régula-

_.tion of the police power of Oklahoma, and the degroe of

' that regulation is the question here, and nothing else, In

contrasting’ appellant’s property. rigfits and the exercise

of the police power of the State of oma as evidenced,

by its Conservation Act and the.orders of the Corporation “

Commission, we shall follow two methods. First, we will |

use the oil and gas police regulations to: sustain our posi-

tion, and then turn to other police regulations, of fat-reach-

ing chafacter, regulating the use of sities that have .

been upheld by this court.

Both the appellant and the appellees in respect of their

several contentions have cited Ohio Oil Company v. Indiana,

177 U.S. 190, perhaps the leading case applicable here, but

it appears to us that the true attitude of this decision in

its immediate application’ is not made clear. The Indiana

. mY

—83—

statute ‘assailed in the Ohio Oil Company case, on its face, —

was a simple one. It simply prohibited the escape of oil or

gas froin any well two days after it was drilled in. But

this case went to the Supreme Court of the United States

on the ruling of the court below on a demurrer to the answer

of the defendant. In that answer the defendant alleged

‘ that it was engaged exclusively in the business of produc-

irig oil, and not gas, and that it had a‘large investment in

its oil business; that it used the gas to recover its oil, and °

could not recover it otherwise; -that no means had been

devised to effect this result save through the use of gas.

In this predicament the case went to the. Supreme Court —

of the United States. Here, i in effect, there was a complete

deprivation of property, not a partial deprivation of : the

character depended:upon by the appellant in this case. Bas-

ing its decision upon the doctrine of correlative rights ob-

taining in an oil pool, the court. held that the statute did

not violate the Fourteenth Amendment. Tandsley v. Nat-

ural Carbonic Gas Company, 220 U. 8. 61, also cited by both

_ parties, goes off on the doctrine of regulation~of correla-

tive rights. Here again we have an absolute authority that

correlative rights may be adjusted and — = the

police power of the state. .

While Walls v. Midland ‘Carbon Company, 254 U. 8.

: 300, involves the regulation, of correlative rights under the

_ police power it assumes the broader phase. of..a state’s in-

terest in its natural resources and for that reason requires

more extended comment. Here the Carbon Company, which °

challenged the constitutionality of the Wyoming Act! ix

question, had made an investment of $375,000.00 in ‘a plant

—54—

for ‘the manufacture of carbon block from natural gas in

Wyoming before the passage of the act. Phe prohibition

‘of the act was not absolute. It applied only when the gas

supply was within ten miles of an incorporated town or

’ industrial plant, and even then it did not ‘apply if the resi- ’

due gas, that is, the gas remaining after-it was used for

‘the manufacture of carbon black, was utilized for manufac- |

turing or domestic purposes. With these exceptions the use

of gas was declared to. be a: wasteful 4nd extravagant use

. and such use prohibited. The gas supply of the Carbon

Company came within the condemnation of the act; that »

‘is, it was within ten miles of the City of Lovell: Further-

more, it was not using the residue gas for industrial aid -

domestic purposes. The correlataye phase of the case arose -

from the fact that the Lovell Gas and Electric Company,

an industry furnishing gas and electricity to the town of.

Lovell, obtained its supply of gas for these purposes from

tie same reservoir that’ the Carbor, Company was obtain-

ing its gas. The proof showed that the town of Lovell would

have an adequate supply of gas for thirty years from the

_.. reservoir, if the wasteful uses resorted to by the Carbon

Company iri the manufacture of carbon black were not per-

petrated. On the other hand, if its use were permitted to

continue there was‘available to the town a supply for three

years only. The court under the doctrine of correlative

rights, and under the authority of the Ohio Oil and Linds-

ley cases, sustained the act. It is clear from this holding

that an element of the decision was the state’s interest in

the.preservation of its natural resources which carried the

case beyond the Ohio Oil and Lindsley cases. This language

‘of Judge McKenna is enlightening :

‘‘And there is great disproportion -betwee

gas and the product (carbon black), and neiduatiie :

there was presented to the judgment and policy of the

state a comparison of utilities which involved as (well

the preservation of the: natural resources of the state,

and the equal participation in. them & the people of

the state. And the duration’ of this utility was for the

consideration of the state, and we do not think that -

the state was required by the Constitution of the United

States to standtidly. by while these resources were dis-_

proportionately used, or used in such way that tended

to their depletion, having no power of interference.”’

| (Italies ours.) ie

Not’ only do we here have a clear announcement of the

state’s power to preserve its natural resources for the use

of its people, but we have the doctrine that in considering

the constitutionality of a state police statute, the Supreme —

Court of the’ United States may weigh the relative economic

advantages that will result to the state with the statute or

without it. Such, clearly,was the attitude of this cowrt in

Miller v. Schoene, 276 U. 8. 272, where, in effect, the value

of éedar trees and the value of apple orchards of Virginia

were compared in upholding a police statute of the state

' designed to protect the apple industry of Virginia.

In searching the exact question now considered, Ozford

Oil Company v. Atlantic Producing Company, 22 Fed. (2d)

597 (Fifth Circuit), and Marrs v. City. of Ozford, 32 Fed.

(2d) 134 (Eighth Circuit), must not be overlooked” In

narrow ground. a Act of the —_ Lagialatese couifetred

upon the Railroad Commisgjon of that. state the power to

-adopt rules and regulations to conserve the oil.and gas re-

sources of the state. Under, this general authority, the

Railro#* Commission of Texas promulgated Rule 37 which

provided among other things that no wells shall be drilled

nearer than 150 feet to any property. line ‘provided that

the Commission, in order to prevent waste, or to protect.

' vested rights, should grant exceptions, permitting. drilling

_. within shorter distances. Here, the.Oxford Company owned -

my a leaseyon a long strip 9f3190 feet, 56 feet wide at one end

| and 8 feet’ wide at the other. It was in the situation of.

the appellant here. It owns small tracts interspersed with

larger ones. Owing to the limited extent of .its holding,- to

obey the order of the Texas Railroad Commission literally,

was to deprive it of the right to drill entirely, other com-

panies holdiy rather extensive acreage adjoining the strip.

The Oxford Company claiméd the right to drill ten wells

on Jts strip. Under the reserve power of the Railroad Com- :

' .mispion, it permitted the Oxferd Company bcations for

four wells. Suit was brought by the Oxford Company to —

enjoin the drilling limitation imposed upon it by the sup-

‘pleffental order of the ‘Railroad Commission on the ground. ~

that its property was taken without due_process of law..On | |

‘ thé doctrine of corrélative rights, and mder the. authority |

of Ohio yl Company v. Indiana and Landsley v. Natural

"Carbonic Gas Company, it was held that it was withinsthe

power of the legislature to lay down a general rule for the

protection of the mineral rights. of the owners of ‘adjoin- -

ing land ‘and to leave the details of enforcihg that rule to

. e 3 “

7 : > si : . = -

. . 6 we %

, ° y=

= - . ° .

z e } o

/ 6 zs . :

a- a és .

. b= . a

' ‘ ay a ay wi

‘ ’

.—57—

an siabulalinalsiie’ agency. The pertinent thing being that ,

it was claimed that the Fourteenth Amendment was Violat- _

ed by this holding, it is important to observe t that a writ of

™~ certiorari was denied by this court. 277 U.‘S, 285. Of ‘equal,

._ if not, greater importance in contrasting police power and

’ que process is the City y of Oxford case. This case involved .

a town-lot drilling propositionsidentical to the situation: of

the appellant. The towp of Oxford, Kansas, by ordinance,

had provided, in effect, that no more than one well Should

be drilled to a townsblock ; that the owners of the leases

_ covering the yother lots in the block should be permitted |

to participate in the production from this well by contrib-.

uting to the cost of drilling and operation on a footage

basis. Marrs, claiming the right to ‘d¥ill on his own lot

‘regardless of this ordinance, brought suit to enjoin: the

enforcement thereof under the. onrteenth Amendment.

This awas an piemapase of the adjustment of. correlative, .

rights. The court held that the statute was intended to pro-

tect rather than to destro y correlative rights and that’ un-

der the Ohio case the ordinance was sustainable. Here

again, notwithstanding the alleged serious charatter of the

right infringed under the Fourteenth Amendment, a writ

Zi _ of certiorari wasedenied by. this court. 280.U. S. 063.

This brings us to the recent Bandini. cases from Cali,

fortiia which, in the main deal with cdrrelative rights and

the exercise of the Pe en power of the state fo adjust and

-_regylate. them. In the Bandini case, the Act of California

forbade the ‘unreasonable waste of natural gas. (California

| Statutes 1929, p. 923. ¢ Under the statute a-decree was en-

tered. the Superior Court for Los Angeles Cotinty estab-

lishing a gas oil Yatio for the préduction of oil from the

Santa Fe Springs field applicable to the Bandini Petro-

~ 1éum Company, and under this ratio the: daily production

of the Bandini Company substantially was cut in half, name-

ly, an unrestricted flow of 19,554 barrels was limited to

10,211 barrels. The statute, and its application, was attacked

as unconstitutional by: the Bandini Company as a taking

of property under. the Fourteenth Amendment, While the

‘publie interest aspect was referred to by the Court of

Appeals, the decision in its essence was based upon the co-

existing correlative | rights of adjoining owners and the — |

police statute upheld’ on that basis. We are not unmindful

of the fact that this case came to the Court. of Appeals on

_ the narrow ground of’ applying to that court for ‘a writ of

prohibition to enforce the injunction of the trial court.

‘Bandini Petroleum Company v. Superior Court,..293 Pac.

899. Ona broader ground, however, the same decree went

_to the Suprethe Court of California in People v. Associated

_ Oil Company, 294 Pac. 717. Here, while the matter of cor-

relative rights was referred to, the conclusion is inescapable ~

‘ that the real basis of the decision of the Supreme Court of

California was that of the public interest in the natural

resources. of the state, the court saying : 7

natural resources may be regulated. and the unreason-

able waste thereof may be prohibited in the exercise of

. the police powemof the state.”’ |

When the Bandini case came to this court from the writ |

_ of prohibition refused by the California Court of Appeals, -

this court yery properly, within the limitations of the case —

- 5O-~

before it, upheld the California statute as one not imping- |

ing the Fourteenth Amendment on its face, stressed the —

matter of protecting correlative rights, and yet observed.

~ that the Stipreme Court of California in another angle, in

the same litigation, had emphasized the public’ interest

phase of this question. Bandini Petroleum Company v. Suz

pertor Court, 76 L. ed. 123. |

Departing from the‘oil cases and addressing ourselves

to the fundamentals, again we refer to certain settled prin-

ciples. No definite rule can be laid down to determine the

police power of the states. Hudson County Water Com-

pany v. McCarter, 209 U.S. 349. In the Euclid case, it x

said: 7 |

“The line which this field (police power) ‘separates

the legitimate from the illegitimate assumption of

power is not capable of process delimitation. It varies

with circumstances and conditions.’’ Euclid v. Ambler

Realty Come, 71 L. ed.171. 7

The burden is on the party attacking the constitutionality

of the particular statute to establish the invalidating facts.

Minnesota.Rate.Cases, 230 U.S. 352; Weaver v. Palmer, 270,

| U.S. 402. If a regulatory statute is clearly. arbitrary and ;

unreasonable i in its infringement of property rights, it falls

within the condemnation of the due process clause. Gorieb |

_v. Fox, supra; Zahn v. Board of Public Works, supra; Eu-

bank v. City of Richmond, supra. Late decisions evidence

a ‘Pronounced tendency on the part ofthe court toward

a closer scrutiny of the factual situation when called upon

to determine the constitutionality of a police statute. Mul-

ssi v. Oregon, supra; Chastleton Corporation v. Sinclda

“—60—

264°U. S. 543. Within these general principles we will ad-

vert to those cases where police statutes of the states have

been upheld.

The Zoning Cases in principle are in themselves sig-

nificant. Hadacheck v. Sebastian, 259 U. S. 394, the brick

vee - zoning ordinance not be effective. Under wed or- |

v. Schoene, 276 U. 8. 979, these was a lindo of the eco-

nomic situation of Virginia. Cedar trees,'on the one side,

not 80 important to the economics of the state. Apple or-

chards, on the other, one of the most important industries

of the state. A statute designed to protect. the latter and

- annihilate the former was upheld. In short, the classic lan-

guage of Mr. Justice Houmss, in Pennsylvania Coal Com-

pany v. Mahon, a case cited by the appellant, the degree of

| taking is the test between the police power on one side and

the Fourteenth Amendment on the other. If the regula-

tion goes too far in the taking of: property, it. offends the

‘Fourteenth Amendment. If not, the statute is valid. Penn-

sylvania Coal Company v. Mahon, 260 U. S. 393. +

Applying these principles to this case, we have the fol-

lowing situation: Appellant owns isolated oil tracts in the

Oklahoma City field less than 35 acres in extent. Against

this the field has 10,000 acres of’ producing territory. The

appellant owns ten producing wells; 88 per cent of the

wells, as shown by the record, and 90 per cent of the pro-

duction from the field, are obeying the orders of the Cor-

poration Commission. Appellant claims that by reason of

—61— .

ite: peculiar ave namely, its pipe thee outlet, and its

ability: to handle all of its production, it should be per-.

mitted to do so. It makes this contention against 88 per

cent of the wells of the field and against 90 per cent of the

production. It ignores completely its correlative obliga-

tions to its eighbors of which it has already taken tre-

. mendous advantage, and it ignores the drainage cha character- a

istics of the Low and more important still, it ignores the

gas energy factér which, produceé the oil. Against this un-

_ - bridled and purely mechanical and capitalistic advantage

of the appellant stands the unfortunate situation of its -

neighbors. Every barrel of oil and every thousand feet of

. gas energy which the appellant shall use above that al-

lowed its neighbors redounds to its peculiar advantage. The. -

’ desigh of the Oklahoma Conservation Act and the design

of the orders ‘of the Oklahoma Corporation Commission _

- were to prevent this. The appellant : ‘never was deprived

of taking its fair share of any oil from its property. Iv

was never deprived of taking its fair share of the gas

energy to produce that oil: All that the-act and the orders

of the Corporation Commission complained of did, was to

hold it to an,equality of taking betw een it and the other’

operators in the field. In these circumstances, it ‘was ‘7

valid: and reasonable exercise of the police. power.

Another circumstance of important bearing enters in-

to the decision df\this case. The Oklahoma Conservation

- Act applies only uring periods of overproduction. Further- |

more, the orders complained of are for thrée months’ pe-

riods subject to re-adjustment. Both the act and the orders —

are emergency requirements. This would sustain their va-

* sf e .

-0lUS id

a ° anes

a .

lidity even if they. Were otherwise invalid. Block v. Hirsh,

256 U.S. 135; Brown Holding Company v. Feldman, 256

oh ee 170. Deprivation “of the liberty to contract is’ but a

_phase of the property clause of the. Fourteenth Amend-

“ment, and the equality clause of that amendment is so com-

pletely beyofd the scope of.this case that we shall not take

time to argue either of these questions. :

‘Poin T 3.

‘tine 2 of the Oklahoma Consexviantion’ Act, the price

‘ion. -provision, clearly is separable from the Whste pro-

Visions of the act, namely, sections 1, 3, 4 and 5, which alone

are material to this controversy. _

"This subject has been treated as fully:as-it can be treat-

ed by us under Point 1. We think that we there demonstrat-

ed that section 2 is an independent and distinct provision

of the act, and since section 10 provides that the invalidity

of any section of the act shall not affect the validity of the

remaining portion thereof, we are content to submit this

feature of the case on the proposition that if the court shall

uphold the waste sections as constitutional, no merit shall’

be found in the contention of counsel ‘for appellant that

the waste sections and section 2 are dependent and non-

separable.

a —63—

Point 4.

al .

There is no such uncertainty in respect of the meaning

‘of the terms “waste,” “underground waste” and ‘‘waste in- ~

cident to the production of crude oil and petroleum in ex- _

‘cess of transportation or market facilities or reasonable .

market demands,” as these terms appear in section 3 of the

act as to render the act void on that ground. -

— We must admit a certain difficulty in understanding

the charges of uncertainty by counsel for appellant. They. .

are unrelated, confusing, and in the strict merits of tHis

case lead nowhere. If we are right in our interpretation of

the meaning ofthe terms ‘‘ordinary waste’’ and ‘‘under-

ground waste’’ under Point 1, those two terms at least

are not open to the charge of statutory: uncertainty. If the

term ‘‘econemic waste”’ has the qualified meaning we there

attributed to it, that phrase equally is proof against the

charge of untertainty. What. counsel for appellant ap-

parently do not apprehend is that the market demand

clause is a dependent one, and that it is operative only when

one or more of’ the other elements of waste defined by the

. statute appear. Such;:precisely, was the nature of the or-

. ders entered by the Corporation Commission, The Com-

mission found that there was physical waste, underground

- ; waste, and economic waste, and the lower court held that

these findings were sustained by the evidence. In addition; -

the evidence before the court below sustained findings to

the same effect. This leaves open a single question, the

phrase, ‘‘amreasonable market demand.’’ In our view of the

case, this means nothing more or less than market demand.

«“

ireeenensesserascnennesmemeneenennemeen rensgeer tenors VIER? Wr

—64- . a

The term ‘‘reasonable,”’ gives to this provision the elastic-

ity which modern, commercial intercourse necessarily dée-

- mands. No one can determine the exact extent of the mar-

ket demand of any commodity in the United States largely |

dealt in at a given point of time. The word ‘‘reasonable,’’ |

was the natural one to be ‘attached to thig concept in all the

circumstances. of the case. The record further shows that. _

the Oklahoma Corporation Commission: made every proper

effort to ascertain the reasonable market demand every

time it made an order. The orders were of three months’ ’

duration only, and to adjust any ‘possible inequalities lib-

erty was given to increase, or decrease, the allowable out-.

‘ + put to the demand within the three months’ period.

The courts, long ago, departed from the strict princi*

ples of exact. statutory certainty? especially so where the

general rule of conduct was laid down by the statute to be.

‘carried out by an administrative body. . The complexities :

of modern, industrial and commercial life necessarily re-

quire this relaxation of former precedengs” The authorities

upon this question are-without number. Mahler v. Eby, 264

U.S. 32; Field'v. Clark, 142-U. 8. 649; Buttfield v. Strana-

han, 192 U. 8. 470; Mutual Film Corporation, v. Industrial -

Commie 236 U.S, 247. Unfair methods of competition :

. Federal Trade Commission v. Beechnut, 257 U.S. 441. The

Cedar Rust case of Virginia held not ‘uncertain. Miller. v.

Schoene, 276 U. S. 272. Regulation of hours of employ-

. ment, except in case of emergency, upheld. B. & O. "R. R. Co,

v. Interstate Commerce Commission, 221 U. S. 612. There

| is no uncertainty under a, statute giving to the Secretary

of War the power to determine that a bridge is an unrea-

65—

_ 8onable obstruction to navigation. Union Bridge Co. v.

United States, 204 U.'S. 364; Monongahela Bridge @o. v.

United States, 216 U. S. 177; Hannibal Bridge Co. v. United

States, 221 U.8. 194. To emphasize the thought considered

here, this court, because of the very complexity of, the sub-

- ject dealt with, read:the word ‘‘unreasonable’’ in an abso-

‘lute statutory mandate against an unlawful restraint of

trade. The Standard Oil Case, 221 U. S. 1; the American

- . Tobacco Case, 221 U. S. 119.

‘Keeping in mind that reasonable market demand is a

dependent, rather than an independest-provision ef section

3, that it operates only when exact criteria of waste are dé-

- termined by the Corporation Commission, we have the com-

_pelling precedengs before .us of the two California cases

where the’statute, in express terms, condemned the unrea-

sonable waste of gas and yet where, to ascertfin that there

had been an unreasonable waste of gas, complex factors

had to be taken into account. The charge of uncertainty

was made before the California Court.of Appeals and-be-

fore the Supreme Court as well, and there rejected. Bandini |

Petroleum Co. Vv Superior Court, 293 Pac. 905; People v.

Associated Owl Co., 294 Pac. 724. In the latter case, the

court said: 7 :

‘*The best mean ratio, or the amount of gas which

bears a reasonable proportion to the amount of cil pro-

duced, may.vary for each reservoir or deposit of oil,

depending upon the natural characteristics above men-

tioned, and may, and probably does, vary for each well

drilled into the same reservoir, depending upon the

locatipn ‘of the well and other factors. Therefore, be-

cause of the many and varying conditions peculiar: to

’

— 66—

each reservoir and to each well, which will bear upon a

determination of what is a reasonable proportion of

gas to the amount of oil produced, it may be said that

it would be impossible for ‘the legislature to frame-a

measure based on ratios.or percentages or definite pro- -

portions that would operate without discrimination,

and that what. is a fair proportion of gas to thé amount

of oil produced from each well or reservoir is a mat- .

ter. which may be ascertained to a fair degree of cer-

tainty in each individual case.’’ . ;

This court adopted the ‘ reasoning of the Supreme Court :

of California.” Bandini ‘Petroleum Co. v. Superior Court,

76 L. ed. 128. As it was impossible, under the California

statute, to lay down a different. rule regarding the waste of

gas, than the one prohibiting the unreasonable waste of -

‘such gas, then, in a similar state of affairs, it was equally ,

' impossible for the Oklahoma legislature todo more than to

prevent waste by limiting production to the reasonable mar-’

ket demand, when production in excess of that figure result.,

ed in one or More of the kinds of waste nondgmond by the

* statute. | .

Potnt §.

“There was no delegation of legislative power by this

act. The legislative prohibitions are clear and certain and

the power conferred upon the Oklakoma Corporation Com-

mission by the act was that of" applying the standards of

waste as established by the legislature to the peculiar facts

of a case. In short, an administrative duty, ‘nothing more,

was imposed upon the Corporation Commicsion by the Ok-

lahoma Conservation Act. —- re KN

- TRour argyments under the earlier uae of this brief

—d

Ye —67——

shall be sustained, there is no basis fer: reversal under this -

heading. The Oklahofa Conservation Act, within. adequate

‘bounds, lays down requisite rules of conduct. To adminis-

ter these rules withjn the clear necessities of the case, ad-

ministrative duties are irhposed upon the Oklahoma Cor-

poration Commission to carry them into effect. The duties

so imposed are quite i in keeping with similar responsibilities

cast upon federal and stéte agencies, upheld by decisions

‘too numerous to mention. In light of the recent decisions

as distinguished from the more rigid requirements of the

earlier cases, there is no possible basis forthe upholding

of th» proposition that.is here negatived. The- Oklahoma

statu. states the rule of conduct. The Oklahoma Corpora-

~ tioga Commission, after notice and hearing, applies it to the’

facts of the particular. case, and, with these two circum- ‘

" stances admitted, -the affirmative of the question we tre now

urging clearly comes within : the modern principles of ad-.

ministrative law.

_. Point 6. |

The rules, regulations and orders of the Oklahoma Cor-

poration Commission assailed by appellant here as uncon-

stitutional and void clearly are within the provisions of the

Oklahoma, Conservation Act; hence it follows that all such

‘ « proceedings of the Commission are immure from attack.

Under the act, the Oklahoma Corporation Commission:

entered the arders assailed by the appellant after due no-

tice and full hearing, thus answering ‘two of the important

| of waste clearly and specifically condemned by the act were |

2 :

Bete nnneernnee aieieiiaa a are ° eonitwner

° .

oat ‘ oie

océur ring, namely, surface waste, underground waste, and

economic waste. Repeatedly, the waste of gas. energy in

the Oklahoma City field and. its effect upon ultimate recov-

ery was adverted to by the’ Confmission. Aside from every,

other consideration, the finding that any one of the wastes

- just. referred t6 was occurring: would have supported the

orders. Then, the Commission supplied the ultimate re-

quirement and purpose of the Oklahoma Conservation. Act.

_by finding that these wastes and each of them were caused

‘by the production of-ofl. in excess of the reasonable market

_ demand. The underlying purpose of the Oklahoma statute

‘was, to prevent waste and , so, far as this case is concerned,.

waste. was. ‘to be prevented by adjusting production to the

market. Not ‘only this, but the ‘other elements of the stat- :

» -ute strictly were. followe. The ultimate fact of excess pro-

duction being ascertained, the allowable production was al- _

located, to the pools of th@ state, each obtaining its actual -

market outlet so ‘that there should be no discrimination be-.

. tween pools; one of the things condemned by the ‘statute.

* Then, in addition, and within each of the pools, each opera-

tor was to obtain his share of the market allowed for his —

pool. ‘The orders, in their very essence, . represented noth-

ing more-or less than a sane, equitable and fair working out

- of the economics of the situation, and this, precisely, was

what the Oklahoma Conservation Act was designed to. ‘acl

complish: The trial court not only upheld all the findings

yom which the ordegg. of the Corporation Commission were

based, and the orders: entered in pursuance thereof, but

heard all the new evidence appellant had to offer, and: upon,

. that foundation. found against the appellant. ‘If, then, -we

‘

oe =

¥ : Ci | : | a

have correctly intespfated the Oklahoma | Conservation Law

and, if that law when SO interpreted § ‘stands above the Four-

& teenth . ndment, we eniphasize the consideration’ that

"the orders assailed”here clearly are within the provisions «

of the act, and therefore they, too, withstand any assaylt

“made in, virtue of the Fourteenth Amendment..

a i | P OINT 7.

_. The Suihien committed to, ‘a discharged by the prora-

*tion umpire and operators’-committees, under the direction os

of the Oklahoma Corporation/Commission, dé not have the

* effect. of invalidating the rules, regulations and orders of

* the Commission complained of by appellant i in this case. :

/ . The negative of the abovg proposition i is strongly urged

by counsel for appellant, so strongly in fact that it made

some impression on the majority opinion of the conrt be- ; 7

¥ low. As we view the case, neither eounsel for appellant nor

- the court below sensed this proposition in its true propor-

. tion. That proportion i is that ‘regardless of what was done

by the umpire and regardless of what was done by the oper-

_atofs’ committee, the judgment of the Corporation Com-

mission was het ultimate thing. That, and that alone,con- —

trolled. Under the statute, the Corporation Commission |

had the power to appoint the umpire, with the approval of

_ the governor, which was done. aindependently: of the stat- .

‘ute it probably had the informal right to consult the ad- —

vice of operators’ committees skilled in this business. These,

- in a statutory. sense, were helpful aids. An impartial search

Cit of of $8 Goiparation a: controlled and

thie i is the important thing. While the midsedlty 3 in its. opin-

ion below criticizedthe actions of the umpire and the opera-

tors’ committee, it clearly sensed this principle. In sustain-

ing our position in this regard, the irrigation and drainage

in these proceedings. Frequently, they had a part in the ac-

tual direction of the project, and yet in no instance was this |

indirect, participation permitted to over-ride the constitu- -

, tionality of the act for the obvious reason that there was.

. a statutory body. that ultimately gave its official sanction

to what was done. Fallbrook Irrigation District v. Bradley,

164 U.S. 112% Hager v. Reclamftion District, 111 U.S. 701;

O’N el v. Leamer, 239 U. 9.244. To illustrate the exact

contention that we are making here, some of the other hold-

ings of this: court should be referred to. Where the adop-

tion of a set-back ordinance depended updn the will of a cer- ‘i

tain percentage of the interested parties, it was held to viot

late the Fourteenth Amendment. Eubank v. Céty of Rich-

mond, 226 U. S..137. But, where the question was deter-

mined by official sanction, although initiated by the prop-

"erty owners, the rule. was different. Gorieb v. Fox, 274 U.

S. 603. Even more compelling is Miller v. Schoene, 276 U. _

_ §. 217, where’ the proceeding could be instituted by parties

holding an adverse property interest, but where the official

sanction of a single public official was thegetermining fac-

tor. tad

- ° ouching this question generally, we refer to Cusack |

Co. v; Chicago, 242 U. 8: 526; Lent v. Tillson,.140 U. S. 316;

Hibben v. Smith>191 U. S. $10. In Plymouth Coal Company

v. Pennsylanvia, 232 U.S. 531, an act of the Pennsylvania

—71—

. legislature required the owners of adjoining coal properties

to leave'a pillar of coal along the property lines of sufficient

thickness to cover the safety of employees. The width of the

pillar was to be determined by the engineers of the adjoin-—

ing properties together with the district mine inspector.

It was here contended that the act was unconstitutional |

under the ‘Fourteenth Amendment. No one can’ read this

case without perceiving that while the engineers of the ad-

_ joining properties were to act with the mine inspector, it

was the judgment of the mine inspector that controlled.

. This, precisely, is the case here presented. Under the rec-

ord, the: judgment of the Oklahoma Corporation Cominis-

mission, first in entering, and then in carrying out the or-

_ ders complained of, always controlled. This puts the case

" ‘above the Fourteenth Amendment.

‘f PornrT 8.

Neither the Oklahoma Conservation Act, : nor the rules,

regulations er orders of the Oklahoma Corporation Com- -

- mission made thergainder, the subjects of assault here, of-

fend the commerce clause of the Federal Constitution.

We cannot believe that counsel for appellant are ad- -

vancing the affirmative of this proposition aggressively. To,

. do 80, is to strike down every conception which the. American

lawyer has of the givision of power between the nation and

the states. The Pen of oil is a matter or local and

‘not of national ‘concern.: Heisler -v. Thomas’ Colliery Co.,

260 U.. S. 245; Oliver Iron Co. v. Lord, 262 U. 8. 172; ; Capi-

tal City Dairy Co. v.. {ONo, 183 U. 8. 238 ; Crescent Cotton

—I-

Oi] Co. v. Mississipri, 257.U. S. 129. In Ohio Oil Co. v.

Indiana, involving an. oil conservation et, this court

' . held that the matter. was one of local and, national regula-

tion. Inthe child labor cases, ‘division of power between the

: national governinent and the state governments under- the

‘ecommerce clause was most vigorously advocated. Perhaps

no aspect of this problem came to the court with more over-

~ whelming public opinion behind it, one way or the other.

The court held the regulation of child labor in a manufac-

turer’s enterprise of a state was one of state and not na- -

, tional concern. Hammer v. Dagenhart, 247 U. 8. 251. Even

where the same object was attempted ta be accomplished _

‘by the tax power, the ruling was the same. Child Labor —

Tax Case, 259 U. S. 20. As a fundamental proposition two

| principles obtain. Interstate commerce does not attach until

the movément in the current of interstate commerce begins.

Secondly, that the product is intended for interstate ¢om- —

merce, has nothing to do with it. In these circumstances,

_ the regulation of production in Oklahoma t a local:

purpose, that is to prevent waste, is essentially local. If

we cannot uphold this principle, the division of national

and state power as ‘ordained by the constitution becomes

a nullity. On this branch of the case, if -we. can sustain

the other contentions that we have ergs here, we fe have no.

doubt about the result. |

Conclusion. ie

This brief is ~written from the viewpoint of the Oil -

| States Advisory Committee. We have-read the brief of

counsel: for appellant, buit we ie never seen, the brief of

-counsel for the appellees. We have referred to the crea-

tion of the Federal Oil Conservation Board by the president

and the creation of this committee which, in effect , grew ”

| out of that action. Our interest in the questions presented :

here are far more fundamental than the interest of either

of the parties. With every possible allowance, we cannot

escape the conviction that the appellant takes a purely |

individualistic and selfish point of view. It has a market

outlet for all its oil. It has the capital to provide that out- .

. let. IY ignores completely that the business of. i

oil 1s distinguishable from other private, - indi du

~ e erprise, In an oil pool, it is but one of a nurther 0

operators who must make use of the same general fotee, é

_ the gas energy, and that necessarily establishes not only

correlative obligations on its part, but correlative rights

against it and in. favor of the other perators in the pool.

- The Oklahoma law is a far- reaching attempt on the part of

- an American state to reach this difficult and complex ques-

tion. tn the main, the model - established by the statute :

- has been followed ‘in three other important oil producing

states. It-is because of these things that the Oil States Ad-

-visory Committee, in the public interest, deemed it a duty to

file this brief.

Respectfully submitted, -

Cicero I. Murray, *

< Counsel and Oklahoma Member of the —

Oil States Advisory Committee.

»,

Of Counsel: ©

Warwicr M. Downie,

Colorado Member of the Oil

States Advisory Committee.

KENNER McConneELL,

‘Ohio Member ‘of the Oil

States Advisory Committee.

-or sea or in the air.

—75—

APPENDIX A.

‘‘ December 19, 1924.

‘*To the Secretary of War, _ Be

' Secretary of the Navy,

Secretary of the Interior,

Secretary of Commerce.

‘*Smrs: It is evident that the present:methods of cap-

turing our oil deposits is wasteful to an alarming degree —

in that it becomeg impossible to conserve oil in the ground

under our present leasing and royalty practices if a neigh-

boring owner or lessee desires to gain possession of his —

deposits.

‘“Developing aircrafts indicate that our national de-

fense must be supplemented, if not dominated, by aviation.

It is even probable that the supremacy of nations may

. be determined by- the possession of available petroleum

and its products. — <

. “T am advised that our- corset oil supply i is kept up

only by drilling many thousands of new wells each year,

and that the failure to bring in producing wells for a two-

year period would slow down the wheels of industry and

bring serious industrial depression. The problem of a fu-

ture shortage in fuel and lubricating oil, not to mention

gasoline, must be avoided or our manufacturing productiv-

: ity will be curtailed to an extent not easily calculated.

* “We are not today, however, facing’ an undersupply of

oil.. The production of,our 300,000 wells is in excess of .

our immediate requirements. That overproduction in it-

self encourages cheapness, which in turn leads to wasteful-

‘ness and disregard of essential’\yalues. Oil, of which our.

_ Yesources are limited, is largely/ taking the ‘place of coal,

- the supply of which seems to

unlimited, but coal cannot

take the Place of oil in most® ‘af its higher nes, on. } ten

~ /

a? a 76+

[APPENDIX] *

‘*For. the purpose of giving this responsibility of gov-

ernment in all its aspects the consideration it demands,

I have constituted .a Federal Oil Conservatidn Broad con-

sisting of the Secretaries of War, Navy, Interior, and Com-

merce, to study the government’s responsibilities and to

enlist the full cooperation. of representatives of the oil in-

‘dustry in the investigation.” The government itself is at

present one of the largest lessors of oil lands, and the pub-__,

lic domain still includes large undeveloped regerves of vil,

so that the administration of ‘oil resources is a practical

_ question with the Department pf the Interior. .

, ‘‘T would express the desire that these conferences may -

be open and exhaustive. The oil industry itself might be

permitted to determine its own future. That future might

be left, to the simple working of the law ‘of supply and

demand but: for the patent fact that the oil industry’s wel-

fare is so intimately linked with the industrial prosperity

and safety of the whole people, that government.and busi- —

negs can. well join forces to work out this problem of prac-

. tical conservation, —

‘*Last March I appointed a commission to advise me

on the special subject of the best policy to insure the future

supply of fuel oil for the Navy. That commission will con-

tinue to function in its limited field and might to advant-

age sit with the Conservation Board in the conferences I

expect will be between these four Secretaries directly con- _

cerned and the outstanding producers of petroleum. Simi-

larly, the members of the Conservation Board will call

-, apon their technical advisers in the bureaus to contribute’:

.to the full discussion of ways and means of safeguarding

“the national security through conservation of our ‘oil.

‘Very truly yours,

“‘Carvix Cooumar.’’- aes.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.