BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

IN THE MATTER OF THE PAYMENT OF PROCEEDS FROM PRODUCTION OF OIL AND GAS AS ESTABLISHED BY SECTION 34-60-118.5, C.R.S., FOR THE NIOBRARA, CODELL, AND J SAND FORMATIONS, WATTENBERG FIELD, WELD COUNTY, COLORADO

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CAUSE NO. 1

DOCKET NO. 180400290

TYPE: GENERAL

ADMINISTRATIVE

ORDER NO. 1-231

REPORT OF THE COMMISSION

The Commission heard this matter on December 17, 2018, at the Colorado Oil and Gas Conservation Commission, 1120 Lincoln Street, Suite 801, Denver, Colorado, upon applications pursuant to § 34-60-118.5, C.R.S. by The Elms at Meadowvale Community Association (“HOA” or “Payees”), pro se, and for an order to award payment of proceeds and interest due from Kerr-McGee Oil & Gas Onshore LP (Operator No. 47120) (“Kerr-McGee” or “Payer”) for production attributable to the Adam, George GU 1 Well (API No. 05-123-08503) (“Well”), from the Niobrara, Codell, and J Sand Formations in the Wattenberg Field, Weld County.

The Commission finds as follows:

1. The HOA is an interested party in the subject matter of the above-referenced hearing.

2. Kerr-McGee is an interested party in the subject matter of the above-referenced hearing.

3. Due notice of time, place, and purpose of hearing has been given in all respects as required by law.

4. The Commission has jurisdiction over the subject matter embraced in said matter and the parties interested therein, and has authority to promulgate the hereinafter prescribed order pursuant to the Oil and Gas Conservation Act (“Act”).

PROCEDURAL HISTORY

5. On October 19, 2017, the HOA sent a Form 37, Payment of Proceeds – Sales Volume Reconciliation Payor Contract Form, and information regarding, among other things, the payment of proceeds, sales volume reconciliation, revenue, and deduction details to Kerr-McGee.

6. On February 13, 2018, the HOA filed a Form 38, Payment of Proceeds Hearing Request, with the Commission requesting an order awarding payment of proceeds and interest due from Kerr-McGee for production attributable to the Well, and to award relief for all associated costs due to the HOA attributable to the payment due from Kerr-McGee (the “Application”).

7. Kerr-McGee responded to the Form 37 on March 7, 2018. Kerr-McGee denied that it owed a portion of the royalties claimed by the HOA.

8. On May 3, 2018, the Application was noticed for hearing. The Application was originally noticed for the Commission’s June 11-12, 2018 hearing, and as such, the protest deadline was May 25, 2018 pursuant to Rule 509.a.(1).

9. Kerr-McGee did not file a responsive pleading to the Application.

10. On December 10, 2018, the Hearing Officer issued a recommendation that the Commission grant the Application and order Kerr-McGee to pay $16,688.95 in proceeds and interest to the HOA.

HEARING

Kerr-McGee Default

11. Counsel for Kerr-McGee appeared at the December 17, 2018 hearing and entered his appearance on behalf of Kerr-McGee.

12. At the hearing, the Hearing Officer provided a summary of Kerr-McGee’s involvement in this matter. Kerr-McGee did not participate in correspondence with the Hearing Officer and HOA. Kerr-McGee did not file a protest or other written objection to the Form 38. Kerr-McGee was aware of this matter starting in October, 2017, when the HOA sent the Form 37 to Kerr-McGee but, until hearing, there had been no formal appearance or entry of appearance by Kerr-McGee.

13. At the hearing the Commission provided Kerr-McGee with an opportunity to argue that it was not in default.

14. Kerr-McGee admitted that it received the HOA’s Form 37, that it received the HOA’s Form 38, and that it received Notice of Hearing.

15. Kerr-McGee argued that it responded to the Form 37. The Hearing Officer agreed.

16. Kerr-McGee argued that the Form 38 was similar to a citizen complaint or enforcement matter and no response was required from the operator as it was already made a party by the Form 38. Kerr-McGee argued that it was the commission’s practice not to require a response to a complaint.

17. Kerr-McGee also argued that, as of June or July of 2018, it was aware that there was a hearing scheduled for September 17-18, 2018 Commission meeting, but Kerr-McGee coordinated with the HOA to have that hearing continued to the December 17-18, 2018 Commission meeting. Kerr-McGee provided the Commission with an email conversation between Kerr-McGee, the Hearing Officer, and the HOA wherein a continuance to the December 2018 meeting was discussed. Kerr-McGee argued that following the continuance to the December meeting, a prehearing conference in which Kerr-McGee was scheduled to participate was vacated.

18. Kerr-McGee stated that it sent an email to Donna Schmidt, the representative of the HOA appearing at hearing, on October 31, 2018, conferring on the date for the hearing in this matter. Kerr-McGee also provided the Commission with a copy of the October 31, 2018 email. Ms. Schmidt did not respond to the email.

19. Kerr-McGee requested a continuance to the January 28-29, 2019 Commission meeting. The HOA opposed the continuance.

20. The Hearing Officer disagreed that a Form 38 and payment of proceeds matter was analogous to an enforcement matter and stated that the notice sent to Kerr-McGee included a protest deadline of May 25, 2018.

21. The Commission deliberated and voted unanimously to deny Kerr-McGee’s requested continuance and to proceed with the default hearing on the Application.

HEARING ON MERITS

22. The Commission accepted the HOA’s evidence in written form.

23. The Commission voted unanimously to adopt the Hearing Officer’s recommendation to grant the Application.

COMMISSION FINDINGS AND CONCLUSIONS

KERR-MCGEE DEFAULT

24. Kerr-McGee received the HOA’s Form 37, Form 38, and Notice of Hearing. Kerr-McGee failed to file any responsive pleading to the HOA’s Form 38 or to the Notice of Hearing. Kerr-McGee’s counsel also did not enter an appearance until the December 17, 2018 hearing on the Application.

25. Pursuant to Rule 503.f., in order to receive copies of the pleadings filed in a specific proceeding, a party who received notice of the application shall file with the Secretary a protest or intervention in accordance with the Rules of the Commission.

26. Kerr-McGee is a sophisticated operator and has appeared in many proceedings before the Commission as an applicant and as a protestant.

27. Kerr-McGee was well aware of the fact that this matter was set for hearing at the December 17-18, 2018 Commission meeting as it coordinated a continuance to the December 17-18 meeting with the HOA. On October 31, 2018, Kerr-McGee also asked the HOA if it intended to go to hearing at the December 17-18 meeting.

28. “[T]o be considered an ‘appearance’ a defendant's actions must be responsive to the plaintiff's formal court action, and that plaintiff's knowledge that a defendant plans to resist a suit is, standing alone, insufficient to constitute an ‘appearance.’” Sisneros v. First Nat. Bank of Denver, 689 P.2d 1178, 1181 (Colo. App. 1984) (citations omitted).

29. Kerr-McGee did not appear in this matter until after the hearing had begun. Kerr-McGee was thus in default.

PAYMENT OF PROCEEDS HEARING

30. Section 34-60-118.5 of the Oil and Gas Conservation Act (“Act”) provides the legal requirements for the Commission to enter an order directing an operator make payment for interests in a well.

31. Subsection 5.5 of § 34-60-118.5 provides that before hearing the merits, the Commission must first determine whether a bona fide dispute exists regarding the interpretation of a contract defining the rights and obligations of the payer and payee. If the Commission finds such a dispute exists, it must decline to hear the matter.

32. “This statute makes clear that the Commission can order a payment be made only to one who is ‘legally entitled’ to payment.” Grynberg v. Colorado Oil & Gas Conservation Comm'n, 7 P.3d 1060, 1063 (Colo. App. 1999). “Section 34-60-118.5 does not create an entitlement to proceeds; it presumes the existence of such an entitlement and imposes deadlines for the payment to those legally entitled to receive payment. The statute demonstrates the General Assembly's intent to grant to the Commission jurisdiction only over actions for the timely payment of proceeds and not over disputes with respect to the legal entitlement to proceeds under the terms of a specific royalty agreement.” Id. at 1062.

33. Absent such a dispute, the Commission has jurisdiction under Subsection 5 to determine: 1) the date upon which proceeds are due to a payee; 2) whether a delay in payment was justified for reasons set forth in the statute; and 3) the amount of proceeds, plus interest, due to the payee. §34-60-118.5(5), C.R.S.

34. Subsection 3 provides that compliance with payment deadlines must be suspended when payments are withheld because: 1) the payee failed to confirm their interest; 2) the payer had reasonable doubt as to the payee’s identity, location, or title; or 3) the payer and payee were parties to ligation regarding payment. §34-60-118.5(3), C.R.S.

35. Subsection 7 requires that a payee must first give the operator written notice by certified mail of such failure to pay and the operator is allowed twenty days after receipt of the required notice in which to pay or respond in writing explaining the reason or nonpayment. §34-60-118.5(7), C.R.S.

36. Subsection 2 provides that, for the sale of oil, payments must be made to interest owners no later than sixty days following the end of the calendar month in which production is sold. §34-60-118.5(2), C.R.S.

37. Subsection 4 provides the operator must pay the interest holder “simple interest” on the amount of proceeds withheld, such interest rate is set forth in Subsection 4. §34-60-118.5(4), C.R.S.

38. Under Subsection 6, the Commission has discretion to assign the administrative costs of this proceeding to any party and in any proportion the Commission deems appropriate. The Commission also has discretion to award reasonable attorney fees and costs to the prevailing party. §34-60-118.5(6), C.R.S.

39. As Kerr-McGee did not appear to present any evidence to contradict that presented by the HOA, the Commission accepts the evidence and allegations presented by the HOA as true.

40. The HOA is a successor in interest to an oil and gas lease (“Lease”) dated October 7, 1970. The Lease is silent as it does not address the allocation of post-production costs. Despite the fact that there is an applicable Lease, there is no dispute that requires the interpretation of the Lease. Therefore, the Commission is only being asked to calculate the amount owed to the HOA, which is within its jurisdiction under Subsection 5.

41. The HOA presented Kerr-McGee with written notice of the failure to make payment for their interests pursuant to Subsection 7.

42. Kerr-McGee was the operator of the Well for the months which the HOA was not paid for its interest.

43. Kerr-McGee failed to make payment the HOA for its interest from January 2000 through March 2007.

44. HOA has an interest in the Well which entitles it to payment. The HOA owns a 0.0194485 royalty interest in production from the Well.

45. The calculations made in the HOA’s Exhibits A1, G, and H properly calculate the amount due to the HOA pursuant to the Act, including interest as provided for in the Act.

ORDER

IT IS HEREBY ORDERED:

1. The Application is GRANTED.

2. Kerr-McGee shall pay the HOA $11,469.06 for the production proceeds owed from the Well.

3. Kerr-McGee to pay the HOA $5,219.89 for the interest owed from the applicable period.

4. Interest on the amounts due to Applicants shall continue to accrue at the rate provided for in §34-60-118.5(4), or in accordance with any other applicable statute for postjudgment interest, whichever is appropriate.

IT IS FURTHER ORDERED

1. The provisions contained in the above order shall become effective immediately.

2. The Commission expressly reserves its right, after notice and hearing, to alter, amend or repeal any and/or all of the above orders.

3. Under the State Administrative Procedure Act the Commission considers this Order to be final agency action for purposes of judicial review within 35 days after the date this Order is mailed by the Commission.

4. An application for reconsideration by the Commission of this Order is not required prior to the filing for judicial review.

ENTERED this 16th day of January, 2019, as of December 17, 2018.

OIL AND GAS CONSERVATION COMMISSION OF THE STATE OF COLORADO

Mimi C. Larsen, Secretary