200% of downhole and equipment costs and 100% of surface costs. ORRI Owners objected and eventually filed an application to the COGCC to determine whether such costs could be withheld during the cost-recovery period. The COGCC bifurcated the hearing into two issues. The first was whether consenting owners must pay ORRIs during the cost recovery period, which issue hinged on whether an ORRI is included in “royalty or other interest not obligated to pay any part of the cost thereof…” The second issue was whether the aggregate 30% ORRI was so egregious as to justify equitable relief under the Pooling Statute’s requirement that every pooling order “shall be upon terms and conditions that are just and reasonable …” The COGCC stayed the equitable arguments and at the September hearing in Durango, considered only the first issue. Arguments and Deliberations ORRI Owners took the position that the plain language of the statute, “royalty or other interest not obligated to pay any part of the cost thereof…” includes ORRIs. Hence, Operator must pay ORRI Owners during the cost-recovery period. ORRI Owners argued that the language was unambiguous, ergo no further statutory interpretation would be necessary. ORRI Owners also argued that operators are free to drill or not drill and should make the choice partially on the basis of lease burdens. Finally, ORRI Owners argued that numerous individuals and families rely on ORRIs for income and it would be unfair to them to rule for Operator. Operator argued that the language was ambiguous and therefore the Commission must consider other canons of statutory interpretation. Operator argued that the phrase “overriding royalty interest” is specifically used elsewhere in the Colorado Oil and Gas Conservation Act, C.R.S. §§ 34-60-101, et seq. (the “Act”) and that its exclusion from the Pooling Statute was intentional. Operator also argued that a non-operator could get around the cost-recovery provision of the Pooling Statute by conveying a 100% ORRI. Operator further argued that since an ORRI derives from and arises out of a WI, it is subject to the WI owner’s decision to participate or accept a risk penalty. Finally, Operator argued that parties are free to negotiate ORRI assignments that allow an ORRI to have a say in whether the WI participates or not. In deliberations, Commissioners found the use of “overriding royalty interest” elsewhere in the Act persuasive. They also agreed that it would frustrate the risk and reward mechanism of the Act if parties
could avoid penalties by carving out ORRIs. The Commissioners voted to deny ORRI Owners’ Application because the Pooling Statute does not require consenting owners to pay an ORRI that arises from a nonconsenting WI until the consenting owners have recovered their costs. Implications The COGCC’s ruling may be appealed to district court and eventually the Colorado Supreme Court. If it is upheld on appeal, the obvious result will be that operators will move ORRIs that arise from nonconsenting WIs from the “before payout” column to the “after payout” column of their DOI decks. While the issue is being appealed, however, operators should consider suspending such ORRIs. The COGCC’s ruling will also have other repercussions. Assignments and reservations of ORRIs will become more complicated in Colorado, with the issue of well participation likely to become a key negotiating point. Existing ORRI owners may choose to bring actions to force participation or recover proceeds when WI owners do not participate. Operators may decide to bring actions to recover erroneously paid ORRIs, especially for wells that are not going to pay out 200%. Alternatively, an operator may decide to net out such an ORRI against other wells. Conclusions Outside of rulemakings, there have been few hearings in recent history that could have the impact of this ORRI decision. There will inevitably be additional consequences of the Commission’s decision that will emerge over time. In the immediate future, operators, non-operators, and ORRI owners should begin planning for its effects. Operators may want to begin revising DOI decks. Nonconsenting WI owners may consider communications with ORRI owners about the possibility of diminishing, or even vanishing revenue streams. For any specific concerns about this decision, please contact either James Parrot or Jill Fulcher.
Copyright © 2017 Beatty & Wozniak, P.C. All Rights Reserved. Reprinted by permission.
The views expressed in this article are the views of the authors and not necessarily the views of the firm. Please consult with legal counsel for specific advice and or information.
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G r o w t h T h r o u g h E d u c a t i o n - J a n u a r y / F e b r u a r y / M a r c h
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