## Facts

- The State of Oklahoma issued an oil and gas lease covering part of the Arkansas River bed in Pawnee County to Champlin Refining Company.
- Acting under the lease and believing the State owned the minerals, Champlin drilled and completed two producing wells and drilled an additional nonproductive directional branch from a producing well.
- Separate title litigation later determined the State had no title and that private parties (including Aladdin Petroleum Corporation and Phillips Petroleum Company) owned the mineral interests.
- Pursuant to the title judgment, Champlin turned over the producing wells to the owners and paid the market value of oil and gas produced as of production dates, less reasonable drilling and operating costs.
- The mineral owners later sued in conversion seeking damages based on the highest market value of the produced oil and gas between conversion and trial under 23 O.S. § 64.
- The owners filed the conversion action after substantial delay (about five years for one group of owners and about seventeen months for another).
- Champlin sought to deduct, as part of reasonable costs, the expense of drilling the nonproductive directional branch; the owners opposed that deduction.

## Issues

1. Whether recovery of the highest market value between conversion and verdict under 23 O.S. § 64 requires proof that the owner commenced and prosecuted the conversion action with reasonable diligence.
2. What measure of damages applies to oil and gas produced by a good-faith operator under a lease later determined void (gross value versus value less reasonable costs of production).
3. Whether the cost of drilling an unprofitable directional branch from a producing well is a deductible reasonable cost of development/production in the accounting owed by a good-faith operator.

## Decision

- The Oklahoma Supreme Court reversed and remanded.
- The court held that the highest-market-value measure under 23 O.S. § 64 is available only if the owner proves reasonable diligence in commencing and prosecuting the action; absent such proof, damages are limited to ordinary conversion value rather than the highest later price.
- The court held that a good-faith operator under a void lease is liable for the value of oil and gas produced less reasonable costs of production.
- The court held that the cost of drilling the nonproductive directional branch was part of reasonable development costs and must be deducted in the accounting.

## Legal Principles

- Under 23 O.S. § 64, a plaintiff seeking the highest market value between conversion and verdict must prove the action was commenced and prosecuted with reasonable diligence.
- A good-faith oil and gas producer operating under a lease later held void is accountable for net value: the value of production minus reasonable drilling, development, and operating costs.
- Reasonable development costs deductible by a good-faith operator may include unsuccessful drilling undertaken as part of the development program, including an unprofitable directional branch from a producing well.

## Conclusion

The court limited enhanced conversion damages under 23 O.S. § 64 to owners who act with reasonable diligence and reaffirmed that a good-faith void-lease producer owes only net proceeds, including credit for reasonable unsuccessful directional drilling costs.


Champlin Refining Co. v. Aladdin Petroleum Corp., 205 Okla. 524, 238 P.2d 827 (Okla. 1951)