BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA If APPLICANT: CRUDE WELL EXPLORATION, LLC

RELIEF AMEND, MODIFY, CLARIFY, REQUESTED: INTERPRET TERMS, PROVISIONS,

COSTS AND EXPENSES FOR PLAN OF UNITIZATION FOR THE NUMA WEST RED FORK UNIT UNDER ORDER NO. 82758

LEGAL ALL OR PART OF SECTIONS 17, 18, 19, DESCRIPTION: 20,21 AND 22, TOWNSHIP 27 NORTH,

RANGE 4 WEST, AND SECTIONS 13, 14 AND 24, TOWNSHIP 27 NORTH, RANGE 5 WEST, ALL IN GRANT COUNTY, OKLAHOMA

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) CAUSE CD NO.

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) 201504392-T

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FILED APR 10 2017

) COURT CLERKS OFFICE - TULSA CORPORATION COMMISSION

OF OKLAHOMA

REPORT OF THE ADMINISTRATIVE LAW JUDGE

The cause came on for hearing before Curtis M. Johnson, Deputy Administrative Law Judge (AU), in the Oklahoma Corporation Commission's (Commission) courtroom, Kerr Building, Tulsa, Oklahoma, pursuant to notice given as required by law and the rules of the Oklahoma Corporation Commission for the purpose of taking testimony and reporting to the Commissioners.

HEARING DATES: March 4, April 26, September 28 & 29, 2016.

APPEARANCES: William H. Huffman, Attorney, appeared for the Applicant, Crudewell Exploration, LLC ("Crudewell"); and Lucas J. Munson and Mark B. Houts, Attorneys, appeared for the Respondent, Omimex Petroleum, Inc. ("Omimex")

CASE SUMMARY

Crudewell Exploration, LLC ("Crudewell") has requested this Commission amend, modify and interpret the Plan of Unitization for the Numa West Red Fork Sand Unit, determine the reasonableness of the costs, expenses and fees previously charged to the Unit by Omimex, determine the reasonable costs, expenses and fees to be charged to the Unit, to change the designation of operator under Order No. 82758 and to possibly provide that this Order become effective on a date prior to the signing thereof.

RECOMMENDATIONS

After hearing the Witnesses, considering the Exhibits, and hearing arguments of Counsel, the Administrative Law Judge ("AU") finds the Application should be denied in part, and Omimex should not be removed as operator, and said Order No. 82758 should not be modified concerning the selection or replacement of the Unit Operator. Furthermore, the ALJ finds the Pumper charges are determined to be reasonable and proper pursuant to the Plan. The ALJ also recommends the Application should be granted in part because Order No. 82758 should be modified to provide overhead charges of $375 per month for first 5 wells, $250 for the next 5 wells, and $125 for all wells over 10 for the 24 month period prior to September 16, 2014 and thereafter.

EXHIBITS

Exhibit #1 Crudewell Application to Amend, Modify, Clarify, Interpret Terms, Provisions, Costs and Expenses for Plan of Unitization for the Numa West Red Fork Unit Under Order No. 82758 in CD201504392-T Filed September 10, 2015.

Exhibit #2 Order No. 82758 which created the Numa West Red Fork Sand Unit. Exhibit #3 Crudewell Letter to Omimex complaining of overhead charges dated September 16, 2014. Exhibit #4 Crawley Petroleum Expenses Dated April 30, 2015. Exhibit #5 Numa West Redford Sand Unit 2015 Budget. Exhibit #6 Numa West JIB Revenue Analysis 201 l-YTD 2015. Exhibit #7 Tracking Production of Numa West Redford Sand Unit Wells. Exhibit #8 Lists of Active Old and New Wells. Exhibit #9 Diagrams of Numa West Unit Production and LOE. Exhibit #10 Copas Overhead Joint Operations Model Form Interpretation. Exhibit #11 Declaration of Unitization Numa West Red Fork Sand Unit Red Fork Sand Formation. Exhibit #12 Assignment of Oil & Gas Lease from Cities Service Oil and Gas Corporation to Lu-ray Petroleum, LLC dated May 5, 1987. Exhibit #13 Assignment of Oil & Gas Lease from Lu-ray Petroleum, LLC to Crudewell dated August 15, 2012. Exhibit 414 Overhead Summary. Exhibit #15 Copas Overhead Negotiation and Calculation Accounting Guideline. Exhibit #16 Fixed-Rate Overhead Survey 2009-2010.

SUMMARY OF PROCEEDING

1. Cause CD Nos. 201504392-T is the Application of Crudewell seeking to amend, modify, clarify, interpret terms, provisions, costs and expenses for plan of unitization for the Numa West Red Fork Unit under Order No. 82758 in Sections 17, 18, 19, 20, 21 and 22, Township 27 North, Range 4 West, and Section 13, 14, and 24, Township 27 North, Range 5 West, All in Grant County, Oklahoma.

2. The Commission has jurisdiction over the subject matter, and notice has been given in all respects as required by law and the rules of the Commission.

3. Mr. Huffman began the Cause for the Applicant by calling Ray Cloer, Owner/Operator of Crudewell and Lu-Ray Petroleum, LLC ("Lu-Ray"), who has previously been qualified to testify as an expert on oil and gas matters before the Commission. Crudewell owns a 17.3566 percent interest in the Unit. Mr. Cloer operates wells in the State and indicated he has always monitored the costs of operations of those wells. Concern arose when Omimex raised the overhead rates and changed the contract pumper to a company pumper. Apparently, this was in anticipation of production as a result of the drilling of 15-16 wells. Omimex drilled 12 wells without overseeing the results of any of those 12 wells. Ultimately, the Unit has 31 wells operating.

Drilling the wells resulted in a spike in production. However, at present time, production is less than it was four years ago while overhead charges have risen from $6,000.00 per month to $18,000.00 per month. Pumper charges increased from $3,500.00 per month to $16,000.00 per month. The pumper is the same individual, performing the same duties as contract pumper now working as company pumper. Additionally, Omimex hired a contract pumper, the company pumper's son, to pump the wells on weekends. The overhead rate worked out to approximately $600.00 per well per month and $500.00 per well per month for the pumper. The total operating overhead for each well was $1,100.00 per month.

Mr. Cloer identified Exhibit 2, the Plan of Unitization for the Numa West Red Fork Sand Unit. The Exhibit was offered and accepted.

Crudewell sent a letter in September, 2014 objecting to these excessive charges. No action was taken by Omimex regarding this objection. Mr. Cloer identified Exhibit 3, the September, 2014 letter, which was offered and accepted into evidence. Mr. Cloer identified other units in the area and contacted the operators to judge current operating expenses. Mike Crawley at Crawley Petroleum operates the South Ponca unit and charges a total overhead rate for 25 wells at $6,571.00 per month. Dennis Trepagnier at Trepco operates two units: an Upper Booch Sand unit that has 12 wells and a total monthly overhead rate of $1,900.00 per month, and also the Riverbend Ranch Unit with 17 wells and a total monthly overhead rate of $2,500.00 per month. A note of the conversation with Mike Crawley was identified as Exhibit 4, which was offered and accepted into evidence.

Mr. Cloer testified that in a unit, once the accounting has been established for the first well, it is the same for revenue distribution for each additional well. In fact, the usual production technique is to produce into a common tank battery. As additional wells are added, there is not much modification required for the accounting.

An operator meeting was called by Omimex and in preparation of the meeting, a proposed budget was sent out. Mr. Cloer identified the proposed budget as Exhibit 5, which was offered and accepted into evidence. Mr. Cloer identified a Numa West JIB revenue analysis as Exhibit 6, which was offered and accepted into evidence. Since the filing of the Application, Omimex removed the company pumper and returned him to contract status with approximately $6,000.00 per month reduction in cost.

Mr. Cloer identified the production analysis as Exhibit 7, which was offered and accepted into evidence. This analysis shows there was an initial increase in production from the new wells which is now in decline. Mr. Cloer identified the well analysis as Exhibit 8, which was offered and accepted into evidence. The Unit originally had 47 wells operating, but now has 31 wells operating. Mr. Cloer identified Exhibit 9, a comparison of production vs. overhead expense, which was offered and accepted into evidence. The total operating expenses were approximately $20K-25K per month in January, 2011. Omimex began drilling 12 wells in June of 2012, and completed the wells in the fall of 2012. Three additional wells were drilled and completed in the fall, 2013. By January, 2014, the operating expense had risen to $75,000.00 per month (essentially tripled). The overhead was $6,557.00 per month in January, 2011, then rose to $6,611.00 per month in April, 2011, rose to $7014.00 per month in April, 2012, rose to $7,516.00 per month in July, 2012, then rose to $12,297.00 per month in August, 2012. In September, 2012, the rate dropped to $10,201.00 per month but again rose to $14,992.00 per month in August, 2013, then rose to $17,875.00 in December 2013. At the time of the filing of this Application, the overhead rate was $19,109.00 per month.

Based upon experience, operating multiple wells on one tank battery should decrease pumper expense. There were 16 original wells producing at a pumper charge of $3,500.00 per month or slightly over $200.00 per well per month. The contract pumper utilized while the company pumper was employed, had a rate of $1,500.00 per month. He worked on average 8 days a month or $200.00 per day to pump all 31 wells. In January, 2011 the contract pumper charge was $2,800.00 per month, in May, 2011 it rose to $3,200.00 per month, remaining at that rate until August, 2012 when it rose to $9,500.00 per month. The monthly rate and pumper expenses (vehicle, phone, etc.) rose as high as $19,000.00 in October, 2012 but averaged out to $15,000.00 per month.

Mr. Cloer proposed to Omimex an overhead rate of $375.00 per month for the first 5 wells, $250.00 per month for the second 5 wells, and $125.00 per month for all wells after the first 10 wells. This sliding scale is used where there are multiple wells on a lease or unit. Whether 10 wells or 30 wells, the cost and expense to joint account is no different. Mr. Cloer identified Exhibit 9, which was offered and accepted into evidence.

Mr. Cloer asserts company pumper expense was not a proper charge to the working interest owners. Under the Plan of Unitization's attached accounting procedure, monthly well overhead was supposed to cover first level supervision, so the company pumper would be covered by the overhead charge. The accounting procedure included the salaries and expenses of the production foreman. In Mr. Cloer' s opinion, the company pumper salary and expenses should have been covered by the overhead charge.

Mr. Cloer testified the Application was initially served on Omimex and the notice published in Oklahoma and Grant Counties, Oklahoma. Due to the objection of Omimex, the pay-decks from Omimex and Crudewell were compiled and an Amended Application and Second Amended Notice were subsequently mailed to the owners in the Unit. The Second Amended Notice was published in Oklahoma and Grant Counties, Oklahoma. There has been no objection to the Amended Application from any owner. Several landowners called and complained about oil and water spills. Mr. Cloer visited the property to view the damage created by the spills and observed a saltwater pump spraying saltwater into the air.

Mr. Cloer testified that Lu-Ray owns a 1% interest in the Unit and is a sister company with Crudewell. He recommends that Lu-Ray be the designated operator. A ballot was presented to the working interest owners remaining after deducting the interest of Omimex. All of the remaining owners voted to remove Omimex as operator, and to appoint Lu-Ray as the operator. This vote on removal complies with the terms of the Unit Plan. The Plan does not require a

meeting, and the ousted operator cannot vote to succeed itself. Lu-Ray and Crudewell are sister companies and under COPAS, they are treated as a single entity for operational purposes. Lu-Ray is qualified to operate the Unit. Of working interest owners outside Omimex, Lu-Ray is the only bonded operator. Upon voting to remove Omimex, Omimex has since refused to turn over operations, and has not shown a willingness to do so.

4. Mr. Munson conducted cross examination of the Witness. The Witness testified Crudewell employs only one bookkeeper and 4 roustabouts. In contrast, Lu-ray has 5 people on the payroll. Lu-ray initially purchased the interest in the Unit and then transferred the interest to Crudewell on August 15, 2012. The Witness was asked to read Article 3.1 of the Plan of Unitization, Exhibit #2, into the record. It provides as follows:

"The Unit is authorized and empowered on behalf and for the account of all of the owners of the Oil and Gas Rights within the Unit Area, without profit to the Unit, to supervise, manage, and conduct the further development and operations for the production of Oil and Gas from the Unit Area pursuant to the powers conferred, and subject to the limitations imposed by the provisions of Section 287.1 et seq. of Title 52, Oklahoma Statutes 1961 and this Plan of Unitization."

The Witness contends Omimex has profited by overcharging the Unit for services. The Witness did admit he was unaware of Omimex' s monthly charges for operation of the Unit. The Witness contends Omimex should be breaking even every month on Unit operating charges.

The Witness referred to page 3, paragraph 4, of the Accounting Procedure attached to the Plan of Unitization, Exhibit 2. Paragraph 4 of the accounting procedure provides for a monthly charge of $300 per drilling well and $60 per month for the first five producing wells. The charge for the next five wells and any well over ten is blank. The Witness was asked to read paragraph 5 D on page 4 of the Accounting Procedure, which provides:

"The well rates shall be adjusted on the first day of April each year following the effective date of the agreement to which this Accounting Procedure is attached. The adjustment shall be computed by multiplying the rate currently in use by the percentage increase or decrease in the average weekly earnings of Crude Petroleum and Gas Production Workers for the last calendar year compared to the proceeding calendar year as shown by "The index of Average Weekly Earnings of Crude Petroleum and Gas Production Workers" as published by United States Department of Labor, Bureau of Labor Statistics. The adjusted rates shall be the rates currently in use, plus or minus the computed adjustment."

The Witness agreed this provision provided for calculating increases in operating costs which would have increased for the last 45 years during the term of the Plan of Unitization. When the Witness was asked if he thought any well over 5 wells in the Unit should be operated for free, the Witness responded he did not think the wells subsequent to the 5th well, since there are currently 43 wells in the Unit, should be operated at no cost. The Witness contends a reasonable charge for these additional producing wells would be $60 per well per month. The Witness agreed he did not know what the parties to the original agreement would charge for wells beyond the 5th well, since the accounting procedure was blank. The Witness further testified the Accounting Procedure on Page 3 provides charges to the joint account shall be a combined fixed rate of $60 per producing well up to the first five wells, in lieu of the direct expense and administrative overhead charges. The Witness agreed the fixed rate should increase over time as the number of wells increase, but the $60 per well charge should just apply to the first 5 wells. The Witness agreed the cost increase which occurred between June of 2011 and 2012 resulted from the drilling of 8 new wells in the Unit. The Witness stated $616 was the current overhead rate charge for each producing well. The Witness contends a more appropriate overhead rate would be $375 per producing well for the first five wells, $250 per producing well for the next five wells, and $125 per producing well for any well past the first ten wells. The Witness made several calls to Omimex in an attempt to determine the reasons for the increases in the overhead rate. The Witness agreed the Plan of Unitization, Exhibit 2, Page 13, Paragraph number 11.1 gives the Operator the exclusive right to develop and operate the Unit. The Witness also agreed that Page 12, Paragraph number 10.2, of the Plan of Unitization, Exhibit 2, was the provision which provided for the removal of the Unit Operator.

5. Mr. Houts continued cross examination of Mr. Cloer. The Witness was uncertain at the time Lu-ray acquired their interest whether there was a potential for future development costs to be charged to the Unit. When the Witness was asked if Omimex applied a different overhead rate after the new wells were drilled, the Witness responded Omimex had escalated overhead charges since the Unit's inception. The Witness contends $60 per producing well charged for the first five wells back in 1970 was not unreasonable. The Witness stated the 3.5 million dollars charged to drill 3 new wells in the Unit took priority in his consideration of Unit costs. The Witness further testified he did not review any joint interest billings from 1970, 1985, or prior to Lu-ray acquiring it's interests. The Witness stated he had no reason to believe there would only be overhead charges on the first five wells in the Unit. The charges started at $60 per producing well and have increased pursuant to COPAS Bulletin rate increase to $600 per producing well. The Witness was uncertain if this per well overhead charge was applied to every well in the Unit. In 2011 the Witness started to question these overhead charges. The Witness could not give any reason why the $60 overhead charge per producing well should not be applied to every well in the Unit. The Witness stated Lu-ray acquired it's interest in the Unit in 1987. The Witness agreed the overhead rate needed to be adjusted because the Unit was only supposed to be in operation for 15 years and Lu-ray acquired it's interest in the 15th year of the Unit's existence. The Witness further agreed he wanted Lu-ray or Crudewell named operator of the Unit and they would only charge $375 per month per well for the first five wells, $250 per month per well for the next five wells, and $125 per month for all wells after the first ten. The Witness acknowledged Omimex reduced it's overhead charges to match Lu-ray's and Crudewell's estimate, and he stated those charges were reasonable. The Witness testified if Lu-ray or Crudewell is named operator, overhead charges will be kept at these rates for five years and only increased if the price of oil exceeds $60 per barrel, and only then following a vote of the Operating Committee to increase the rate. The Witness stated this is the modification he is requesting to the unitization agreement.

Mr. Houts questioned the Witness regarding Exhibit 4, Crawley Petroleum ("Crawley") Expenses Dated April 30, 2015. The Witness stated this Exhibit was prepared by his assistant Jackie from an email or voice message from Crawley. This Exhibit shows Crawley' s monthly charge of $6,571.55 for operating 13 vertical wells, 4 horizontal wells, 7 injection wells, and 1 water supply well. The Witness was not certain of the amount of production obtained from this Unit, and did not know Crawley' s monthly overhead charges for operating the Unit. The Witness did know that Crawley was an interest owner in the Unit, not a contract operator. The Witness was unaware of the number of employees working for Crawley.

Mr. Houts questioned the Witness regarding Exhibit 9, Diagram of Numa West Unit Production and LOE. The Witness testified his assistant Jackie also prepared this Exhibit. The Witness agreed this Exhibit illustrates an increase in production after new wells were drilled.

Mr. Houts asked the Witness about his objection to paying the Pumper out of Unit charges. The Witness stated his objection resulted from the Pumper being made a Foreman and full time salaried employee of Omimex. When this occurred, Omimex should have paid their Foreman. He should not have been paid as a direct charge against the Unit. The Witness was not certain if the term Foreman was mentioned in the Plan of Unitization. The Witness did not know how many roustabouts were dedicated to the Unit or if they were contract workers or employees of Omimex. The Witness did agree the Pumper had been switched from an Omimex employee back to a contract worker, and admitted he had never met or observed the Pumper on the Unit.

Mr. Houts questioned the Witness regarding the appropriate charges for operating the Unit. The Witness explained the Plan of Unitization prohibits the Operator from generating a profit from Unit operating charges. The Witness asserts Omimex must have been generating a profit because Omimex decreased the rates they were charging to the amounts proposed by Crudewell. The Witness did agree he was requesting the Commission increase the overhead charges from those reflected in the Plan of Unitization. When the Witness was asked what his Company charged for overhead, he responded $200 to $300 per well per month with one tank battery. The Witness was aware Omimex had a Geologist on staff and stated Omimex covered the cost of a Geologist through overhead charges. When the Witness was asked if he had ever reduced overhead charges based on a request of a non-operator, the Witness responded yes. At times he reduced costs as a result of declining commodity prices or due to unit profitability issues.

Mr. Houts asked the Witness why Crudewell had not paid their Unit operations costs. The Witness agreed Exhibit C of the Plan of Unitization provides payment of costs does not prejudice a non-operator's protest of certain charges. The Witness stated Crudewell paid all Unit costs except overhead, because Omimex has not responded to written requests for an explanation of those charges. The Witness did agree the Plan of Unitization did not provide for withholding costs that are in dispute.

Mr. Houts asked the Witness what he was requesting of the Commission with the Plan of Unitization. The Witness agreed he was not seeking to have the Order vacated. He explained that Crudewell was just seeking to have the Commission determine the proper overhead charge for the Unit. The Witness did agree Omimex had reduced it's overhead rate to the amount requested by Crudewell. The Witness stated the Commission needs to determine the amount of past overcharges for overhead rates, and determine the operator for the Unit. The Witness agreed this would mean he was asking the Commission to make the determination of proper overhead charges retro-active. The Witness further agreed the pending District Court action was also seeking to change the operator.

Mr. Houts asked the Witness how Crudewell went about electing a new operator for the Unit. The Witness stated a letter was sent to non-operators February 11 th to advise interest owners in the Unit of Crudewell' s request to remove Omimex as Operator. The Witness affirmed this correspondence was not provided to Omimex. Page 13 Paragraph number 10.3 of the Plan of Unitization, Exhibit #2, provides a " ...successor Unit Operator shall be selected by the Operating Committee..." While Paragraph 10.2 of that Exhibit requires a '...vote of two or more Lessees representing ninety percent (90%) or more of the voting interest remaining after excluding the voting interest of Unit Operator." The Witness asserts that 100% of the remaining Lessees voted to remove Omimex as Operator. The Witness did agree the operator being removed cannot vote to succeed itself, but could vote for another operator. The Witness admitted Omimex was not provided with the February 1 1th letter concerning changing Operator, nor were they provided with an operator ballot. Referring to Page 11, Paragraph 9.3 of Exhibit #2 concerning the meeting of the Operating Committee, the Plan of Unitization requires " ...no less than 14 days written notice..." The Witness admitted no such notice was provided to Omimex. Nor did Crudewell call a meeting of the Operating Committee to remove Omimex as Operator. The Witness contends he did not have to call a meeting of the Operating Committee to remove Omimex as Operator, and did not have to allow Omimex a vote for Unit Operator. The Witness stated Lu-ray was elected Operator and they currently hold 1% interest in the Unit. However this interest was acquired after the ballot was sent and Lu-ray was elected Operator.

6. On redirect examination Mr. Cloer testified the Operator has to be a lessee under the Plan, but the defmition of lessee is "an owner of an interest by virtue of a lease, operating agreement, fee title or otherwise", so it can be by virtue of some other agreement. Crudewell and Lu-Ray have an agreement concerning operations. He believes that in order to set an overhead rate, you have to look at factors such as service rates, economics of the unit, efficiency of production, but those rates should be competitive for the area. Paragraph 7, Page 4 of the accounting procedure provides that the parties may mutually agree to modify the specific rates where they are found to be insufficient or excessive. In practice, this is where the rates are out of line with rates in the area or prevailing rate. A review of the accounting procedure showed there was no overhead rate for any wells beyond the first 5 wells; however, he is recommending a modification to set a rate for wells after the first 5.

Mr. Cloer believes the Company Pumper falls under the category of Production Foreman as described in the Accounting Procedure. As such, his salary would be included in the monthly well overhead and not a separate expense. After the filing of the Application, Omimex changed the Pumper back to contractor status, and reduced the monthly well overhead to a sliding scale. This reduced the operating expenses by approximately $21,000.00 per month. Crudewell is current on the billings except the amount in dispute, which is subject to modification in this Cause.

7. Mr. Huffman called Dorsey Roach, Petroleum Landman, who has previously been qualified to testify as an expert on oil and gas matters before the Commission. Mr. Roach testified he is a frequent lecturer and instructor on COPAS, Joint Operating Agreements, Unitization, accounting procedure and other energy matters. He was on the committee that drafted the most current Model Form Operating Agreement.

Mr. Roach agreed that Crudewell complied with the Plan to remove Omimex as operator of the Unit. No meeting was required. The ballots were mailed and returned. The problem with selecting a successor Operator in this case is that Omimex controls 70% and if a majority is required to approve a new Operator, Omimex can veto any new operator. As a result, it becomes impossible to select a new Operator and Omimex continues to operate by default.

In reviewing the accounting procedure a strict application shows there is no charge for any well after the first 5. The accounting guidelines and model form interpretations provide that as additional wells are added, the costs go down and that cost savings needs to be passed on to the working interest owners. A sliding scale is recommended by COPAS.

Mr. Roach agreed the Company Pumper would qualify as the Production Foreman under the Accounting Procedures and the salary would be included in the monthly operating expense that was charged to each well.

Mr. Roach attended the meeting with Omimex on objections to the excessive expenses and was unable to secure an agreement to reduce the rates. The rates proposed by Mr. Cloer are reasonable and should be implemented by the Commission.

Mr. Roach is familiar with industry standards and practices, and agrees that affiliated businesses are treated as a single entity. The 2005 COPAS and 2015 revisions to the Model Form Joint Operating Agreement all address affiliated entities and a company that owns 50% or more of a company is an affiliate and both are treated as a single entity. A good example is Exxon Corporation and Exxon Company USA. The corporation owns the interest and company operates the wells. The Commission frequently names an entity as operator that does not own an interest, however, an affiliated company owns the interest. For example Chesapeake Exploration, LLC may own the interest while their affiliate, Chesapeake Operating, Inc. operates the well. He believes the Commission should modify the Plan to reflect the current industry standards and practices.

8. Mr. Houts cross examined the Witness. In the Witness' opinion Omimex should have charged overhead on only the first five wells. He explained the COPAS Bulletin provides a sliding scale to reduce the cost per well when more wells are added like the first five then from five to ten, and so on. The Witness admitted he had never seen a plan of unitization that provided $60 per well for the first 5 producing wells then left all the other provision for wells after the first five as zero. He testified he could not tell why the parties would have left this blank, but since they did, it is a zero charge for overhead on any well past the first five. The Witness could not refer to any accounting procedure or document that supports his interpretation of this provision of the Plan of Unitization. The Witness agrees if the parties could not come to some type of an agreement regarding overhead charges then the Commission would have to make that determination. The Witness testified that normally there is an overhead charge for each well. Again the Witness contend Omimex violated the Plan of Unitization by charging more than just the $60 per well per month on the first five wells. Omimex was charging $60 per well per month on every producing well in the Unit, and then Omimex added the escalation figure to the amounts to increase the monthly rate per well operated from $620 to $630. The Witness contends the overhead charges for the Unit should be around $6000 per month. He argued the overhead should be on a sliding scale with $375 per well on the first five wells, $250 per well on the next five wells, and $125 per well on all wells after the first ten. The Witness agreed this would mean he was asking the Commission to raise the overhead charges reflected in the Plan of Unitization. The Witness also agreed Omimex's actual cost to operate the Unit is relevant to determining the amount of these charges. Mr. Houts had the Witness refer back to Crudewell's letter to Omimex, Exhibit A. The Witness agreed Omimex's per well overhead charge was $60 per producing well with an inflationary factor and those escalations followed proper accounting procedures. The Witness further agreed Crudewell's Letter made no mention of the first five well charges, the second five well charges, and the charges for all wells over ten wells. There was no mention of charges for wells beyond the first five.

The Witness testified concerning the selection of a new Unit Operator. He contends Omimex could reject every other proposed Operator of the Unit because they have the majority of ownership in the Unit. Furthermore Lu-ray is the only interest owner in the Unit that could become Operator of the Unit since they are the only interest owner besides Omimex that is bonded in Oklahoma.

Mr. Houts questioned the Witness regarding what unit overhead charges cover. The Witness responded office rent, utilities, administrative personnel, geologist, petroleum engineer, cell phones, and general office expenses. Mr. louts asked the Witness if these costs are just reimbursement for charges then why do other operator's costs make any difference? The Witness responded if those operators are operating similar wells in the same area, the costs should be similar.

9. On redirect examination, Mr. Roach testified he has seen the correspondence between Crudewell and Omimex. Omimex has not agreed to turn over operations and is opposed to a change of operations. With only two qualified parties to operate the wells, and one removed, only one is left: Crudewell/Lu-Ray.

Mr. Roach applied the COPAS guidelines and when setting rates and applying the inflation factor, competitive rates must be applied. At this point in the proceeding the Applicant rested it's Cause.

10. Mr. Houts began the Cause for the Respondent by calling Mr. Clark P. Storm, Vice President of Land and Legal for Omimex. The Witness testified the Unit consists of 2400 acres and produces 165 barrels of oil per day. The original estimate of the lifetime of the Unit was 15 years. The Witness stated Omimex' s geologist and engineer did not spend one hundred percent of their time on this Unit. He personally only spends a few hours a week working on operations of the Unit, but that time increases when drilling operations occur.

11. Clark Storms testified under cross examination that after reading the Commission Order, the Commission retained jurisdiction to modify, amend, or interpret the Order.

12. Mr. Houts called Rajeev R. Lal, a Petroleum Engineer for Omimex, to testify for the Respondent. The Witness explained he is responsible for operations at Omimex. He oversees production optimization and water flood optimization. He testified this Unit is a heterogeneous reservoir and it has complexities. Mr. Clint Holman is the pumper on the Unit. He testified Crudewell and Lu-ray objected to making Mr. Holman a full time employee of Omimex. The Witness stated Paragraph 11.3 of the Plan of Unitization, Exhibit 2, provides the Operator shall select employees and their rate of pay. The Witness further added Omimex is responsible for 75% of the costs of operating the Unit.

13. Mr. Huffman conducted cross examination of Rajeev R. Lal. The Witness testified Mr. Holman, the pumper, does gauging and some grid work with the pumping but Omimex hires third party contractors for certain other work. He said third party contractors are told what to do and Mr. Holman oversees what they are doing and delegates in accordance to safety and how tasks should be done. He instructs Mr. Holman on how things should be done. He would make a third party contractor aware of what needs to be done and the time frame to perform the task, for safety reasons.

Mr. Holman was not hired full time because of the drilling of additional wells. Mr. Holman was hired because of production and ongoing operations. Based upon the history of the field and his knowledge, he has a good idea how the Unit will perform. He anticipates operations on the Unit to remain the same, now and in the future.

14. Mr. Houts called Royce Porter to testify for Omimex. The Witness testified he works for the Waterman Company in Oklahoma City and is responsible for conducting oil and gas audits. The Witness graduated from Oklahoma State in 1981 with a Bachelors Degree in economics and math. The Witness also holds a Masters degree in business from Golden Gate University.

The Witness addressed the issue concerning the compensation paid to Mr. Holman, the Pumper, and if it should have been a direct charge or an overhead charge. The Witness explained direct charges cover work performed on the Unit, while overhead charges are performed outside the Unit for the benefit of the Unit. Therefore, when the Pumper is working on the Unit that constitutes a direct charge to the Unit. Omimex was making direct charges to the Unit for a Pumper from $10,000 to $12,000 per month. In the Witness' opinion he did not think these charges were excessive and the fee should be the same whether the Pumper is an employee or contractor. The Witness also stated Mr. Holman is not a Foreman, his salary should be a direct charge to the Unit. The Witness did agree it was in Omimex' interest to keep Unit costs low because they were responsible for paying 75% of those costs.

The Witness was questioned regarding his interpretation of the Operating Agreement charge per well. The Witness believes the charges for the second 5 wells and any well over the first 10 was a typo. He did admit he had seen Operating Agreements similar to this one in East Texas, but they provided for well operating costs of $100 for each well operated. Other agreements provided for a 10% reduction in the cost for the second 5 wells and an additional 10% reduction for all wells over the first 10. The Witness did agree Omimex had properly applied Paragraph 5, Application of Administrative Overhead or Combined Fixed Rates, of the Accounting Procedures attached to the Plan of Unitization. The Witness sponsored Exhibit 14, Overhead Summary, which illustrated Omimex was charging overhead costs of $616 per well, $18,493 per month and $221,915 annually. Exhibit 14 was accepted into evidence. The Witness explained these charges were average salaries for employees that could be charged to the Unit overhead costs. The Witness did not agree that prevailing costs charged in the general area should dictate the overhead charges, rather the Plan should provide the formula for estimating these charges. The Witness stated this result from the fact that overhead charges are negotiated in the Plan of Unitization and are not merely benchmark rates or estimated from average costs charged in the area.

The Witness contends Omimex's overhead well charges are reasonable. As support for this contention the Witness sponsored Exhibit 16, Fixed-Rate Overhead Survey 2009-2010. This Exhibit was accepted into evidence. The Witness testified the Unit wells are 5000 feet deep, and Omimex was charging a monthly well overhead of $535 per well in 2009 to 2010. If this amount is compared to fixed rate overhead charges illustrated on Exhibit 16 we see an average charge of $496 and a median cost of $485. Based upon these figures when compared with Omimex's monthly overhead charge of $535 the Witness contends this establishes Omimex's charge is reasonable. The Witness then explained when escalation rates are factored in to calculate a current overhead rate, it calculates to the $611 per well rate Omimex is currently charging to operate the Unit Wells. The Witness added Fixed Overhead Rates like Exhibit 16 are no longer published, so he had no current publication to compare Omimex's current rates.

The Witness testified regarding whether past well charges can be challenged. He contends that charges prior to 2013 cannot be challenged because it is deemed correct and payable. He asserts if a Unit owner disputes the charges, a joint interest audit should be made to verify charges are correct. If an error is discovered during the audit, an exception should be sent to put the operator on notice. The auditor has 90 days to conduct the audit and the operator has 180 days to respond to any exception. Written exceptions are part of the audit process and normally have a dollar amount associated and provided with the exceptions. The Witness was asked to refer to Exhibit 3, Crudewell Letter to Omimex complaining of overhead charges dated September 16, 2014. The Witness agreed this correspondence does not mention anything about overhead charges for all wells in excess of the first 5, nor does it request an audit.

15. Mr. Huffman conducted cross examination of the Royce Porter. The Witness stated the rate Exhibit is a single well rate, and stated that a single tank battery has nothing to do with the rate. The rates are for Oklahoma and not specific to Grant County. He did not have any information on rates in Grant County. He has not looked at any operators in the immediate area. He did not go back to see if the rate previously charged was below the contract permitted rate, and only verified if the current rate was permitted.

Mr. Porter testified when he audits, he is not concerned with whether the costs increase as additional wells are added, but instead is looking at the contractual agreement and if the charge is allowed. It is irrelevant if the rate is reasonable or unreasonable. The going rate in the area is not relevant. He does not look to see if the costs to the operator escalated, since he does not have access to that data. In looking at the 1974 COPAS procedures, the economies of scale are discussed and it takes into consideration a sliding scale. Asked if a well rate was below the permitted rate, could that indicate a sliding scale? He said it could indicate many things.

When asked if a working interest owner believes the operator is profiting from operations and the operator refuses to lower the rate, what option does the working interest owner have? He did not know.

Mr. Porter understood the pumper was essentially doing the same job as both a contract worker and as a company employee.

Mr. Porter agreed the accounting procedure does not have a rate for the second 5 wells and all wells after the first 10. He had to assume the parties were applying the $60 well rate to all wells in order to reach his conclusion.

Mr. Porter stated he was not aware of the outcome of the meeting. If Omimex refused to address the issues raised by Crudewell, could he point to any relief in the accounting procedure in the Plan? He stated he could not.

CONCLUSIONS OF LAW

After taking into consideration all of the facts, circumstances, evidence and testimony presented at hearing the ALJ finds as follows:

1. The ALJ recommends the Application of Crudewell seeking to Amend, Modify, Clarify, Interpret Terms, Provisions, Costs and Expenses for Plan of Unitization for the Numa West Red Fork Unit under Order No. 82758 be denied in part, and granted in part.

2. The ALJ finds Omimex is the current Operator of the Unit and the actions taken by Crudewell did not remove Omimex as the Unit Operator. Paragraph 10.2 Removal of Unit Operator of the Plan of Unitization, Exhibit 42, provides a "Unit Operator may resign at any time..." In this Cause it is clear Omimex did not resign as the Unit Operator. Paragraph 10.2 goes on to provide ". . . [t]he Operating Committee may remove Unit Operator by the affirmative vote of two or more Lessees representing ninety percent (90%) or more of the voting interest remaining after excluding the voting interest of Unit Operator..." While Crudewell did obtain ninety percent of the voting interest remaining after excluding the voting interest of Omimex, Crudewell did not provide Omimex with the " ...fourteen (14) days written notice..." of the Meeting of Operating Committee as required by Paragraph 9.3 of the Plan of Unitization. Furthermore, Crudewell's failure to provide said notice kept Omimex from exercising it's ability to vote for a Successor Unit Operator provided by Paragraph 9.4 and 10.3 of the Plan of Unitization. While the ALJ agrees with Crudewell's contention that Omimex could not vote to succeed it's self as Operator as provided in Paragraph 10.3 of the Plan of Unitization, Omimex should still have the opportunity to vote for a successor operator, as provided in the Plan of Unitization. For these reasons the AU concludes Omimex was never properly removed as Unit Operator. Furthermore, the Plan of Unitization does not need to be modified to remove Omimex as operator, because the Plan provides a process to remove the Unit Operator

3. The ALJ does recommend modifying the Plan of Unitization regarding overhead charges to be included in the Plan. The ALJ contends this would not constitute a collateral attack on a prior Commission Order because a change of conditions and change in knowledge of conditions..." has occurred since the issuance of Order No. 82758, Exhibit 2. (See Union Texas Petroleum, A Div. of Allied Chemical Corp. v. Corporation Com'n of State of Okl.. 651 P.2d 652 (Okla. 198 1)) First, when the Unit was originally established it was estimated to last for 15 years. The Unit has now been in existence for more than 46 years. Second, the Plan of Unitization only provided for overhead charges on the first five wells. There are currently 43 producing wells in the Unit. For these reasons the ALJ contends a "...change of conditions..." has occurred which would allow modification of the overhead charges in the Plan of Unitization. To determine the proper amount to modify for these overhead charges, the ALJ relies on Omimex's agreement to reduce it's overhead charges to the amounts requested by Crudewell/Lu-Ray. Based upon this agreement and the undisputed testimony at the hearing, concerning the reasonableness of these rates, the ALJ recommends the overhead charges should be modified in the Plan of Unitization to $375 per month for the first 5 wells, $250 for the next 5 wells, and $125 for all wells over 10.

4. Regarding the charges for the contract pumper versus an employee pumper, the ALJ agrees with Omimex' s argument that these charges would have been the same, because the Pumper's only duties for Omimex were restricted to duties on the Numa West Red Fork Sand Unit. Since the Pumper's duties were solely restricted to the Unit that would constitute a direct charge to the Unit, as testified to by Mr. Porter and provided by the Accounting Procedures, Page 2, II Direct Charges, which provides "... Operator shall charge the Joint Account with the following items..." Paragraph 2 of that provision provides for "Labor" charges and subparagraph A. states " ...[s]alaries and wages of Operator's employees directly engaged on the Joint Property in the conduct of the Joint Operations..." If, however, the Pumper was a contract pumper, II. Direct Charges Paragraph 6 covers "Services" and subparagraph A provides for "... [t]he costs of contract services and utilities procured from outside sources other than services covered by ... Paragraph 2 Section III." Furthermore, the undisputed testimonies of Omimex's Witnesses established the Pumper did not direct or manage other employees. Therefore he was not a "Production Superintendent", as provided by the Accounting Procedures. Additionally, none of Crudewell's Witnesses observed the Pumper in the performance of his duties on the Unit to contradict this testimony. Therefore, the ALJ concludes the Pumper charges were properly and reasonable charged to the joint account as a direct charge.

5. Omimex should reduce overhead charges in excess of the agreed sliding charges accruing during the period which consists of the " .. .twenty-four (24) month period..." prior to September 16, 2014 and thereafter. The AU selected this date because this is the date of Crudewell's Letter questioning the appropriateness of these charges. The "Adjustments" provision of the Accounting Procedure, Page 1, Paragraph 6, provides " .. .all bills and statements rendered to Non-Operators by Operator during any calendar year shall conclusively be presumed to be true and correct after twenty-four (24) months following the end of any such calendar year, unless within the said twenty-four (24) months period a Non-Operator takes written exception thereto and makes claim on Operator for adjustment..." The ALJ contends Crudewell' s Letter of September 16, 2014, serves as such " .. .written exception..." to these overhead charges. Therefore, overhead charges which accrued during this 24 month period and thereafter should be reduced to $375 per month for first 5 well, $250 for the next 5 wells, and $125 for all wells over 10.

6. Thus the ALJ recommends the Application of Crudewell seeking to Amend, Modify, Clarify, Interpret Terms, Provisions, Costs and Expenses for Plan of Unitization for the Numa West Red Fork Unit under Order No. 82758 be denied in part and granted in part. The Application should be denied concerning Crudewell' s request to remove Omimex as operator and reduce Pumper charges. The ALJ does recommend the modification of the Order to reduce overhead charges to $375 per month for the first 5 wells, $250 for the next 5 wells, and $125 for all wells over 10.

Respectfully submitted this 10 th day of April, 2017

a; Z ~ ̂-- JA 4Z 1~ ~ CURTIS

Deputy Administrative Law Judge