Ammonite Oil & Gas Corporation v. Railroad Commission of Texas and Eog Resources, Inc. ( 2024 )

Supreme Court of Texas
══════════
No. 21-1035
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Ammonite Oil & Gas Corporation,
Petitioner,
v.
Railroad Commission of Texas and EOG Resources, Inc.,
Respondents
═══════════════════════════════════════
On Petition for Review from the
Court of Appeals for the Fourth District of Texas
═══════════════════════════════════════
Argued September 13, 2023
CHIEF JUSTICE HECHT delivered the opinion of the Court, in which
Justice Lehrmann, Justice Boyd, Justice Devine, Justice Blacklock,
Justice Bland, and Justice Huddle joined.
JUSTICE YOUNG filed a dissenting opinion, in which Justice Busby
joined.
Oil and gas can migrate or “drain” through a permeable formation
into a vertical wellbore some distance away to be produced at the
surface. In an impermeable shale formation, the minerals drain only
through hydraulically created fractures in the formation radiating out
from a horizontal wellbore over a shorter distance. The rule of capture
“gives a mineral rights owner title to the oil and gas produced from a
lawful well bottomed on the property, even if the oil and gas flowed to
the well from beneath another owner’s tract.” 1 The rule “is a cornerstone
of the oil and gas industry and is fundamental both to property rights
and to state regulation.” 2 An owner concerned that a neighbor’s well is
draining his property can drill an offset well to prevent the drainage 3 or
offer to pool the properties to share in the production from the well. If
agreement cannot be reached, he can apply to the Railroad Commission
for forced pooling under the Texas Mineral Interest Pooling Act (MIPA
or the Act). 4
The minerals in the present case lie in the impermeable Eagle
Ford shale in a reservoir beneath a riverbed and land on both sides.
Horizontal wells produce from the land beside the river but cannot be
drilled entirely within the area beneath the riverbed itself because it is
narrow and winding. The wells beside the river do not drain the
minerals beneath the river because the fracking does not reach them,
and their owner complains that without pooling, they are left stranded.
With pooling, the riverbed owner would participate in production from
the riverside wells but without contributing to it, unlike usual pooling
with a vertical well. The Commission rejected applications to force-pool
1 Coastal Oil & Gas Corp. v. Garza Energy Tr., 268 S.W.3d 1, 13 (Tex.
2008).
2 Id.3 See id. at 14 (“The rule of capture is justified because a landowner can
protect himself from drainage by drilling his own well, thereby avoiding the
uncertainties of determining how gas is migrating through a reservoir.”).
4 TEX. NAT. RES. CODE §§ 102.001-102.112.
2
the minerals beneath the river—which are not being produced—with
those beside it—which are. The lower courts affirmed the Commission’s
order, 5 as do we, but for different reasons than the court of appeals gave.
I
A
The State owns the minerals beneath its more than 80,000 miles
of navigable rivers and waterways. The General Land Office leases these
mineral interests to private parties. Royalties from production are
dedicated to the permanent school fund, 6 which funds public K-12
education statewide.
Ammonite Oil & Gas Corporation is a family business that,
according to its owner, William Osborn, “focuses on [acquiring] State
riverbed leases and stranded State tracts, [and] getting them included
in adjacent pooled units.” “Stranded” minerals are those that cannot be
extracted from a tract with usual production methods due to the tract’s
size, configuration, and location. Ammonite acquires riverbed leases
from the State and then offers to pool them with adjacent interest
owners, thereby allowing production from the leases through drainage
that would not otherwise be possible. The benefit of increased
production to all interest owners in the pool incentivizes drilling that
does not leave the State’s minerals stranded. Ammonite profits from its
5 672 S.W.3d 33 (Tex. App.—San Antonio 2021).
6 See TEX. NAT. RES. CODE § 11.041(a)(1) (“In addition to land and
minerals granted to the permanent school fund under the constitution and
other laws of this state, the permanent school fund shall include . . . the
mineral estate in river beds and channels . . . .”); see also TEX. CONST. art. VII,
§§ 2, 5 (providing for the permanent school fund).
3
pooling, as does the State, which has greatly benefited from Ammonite’s
efforts. Osborn testified that Ammonite holds “about 60” riverbed leases
statewide, has made “nearly 150” pooling offers involving hundreds of
wells, and has worked out voluntary pooling agreements in all but four
cases. In this case, voluntary pooling agreements could not be reached
because the lessee of the minerals beside the riverbed tract refused
pooling on the ground that its wells do not drain the riverbed.
B
When pooling agreements cannot be reached, MIPA gives the
Commission limited authority to order pooling of interests in a common
reservoir. MIPA is “unique[] compared to the compulsory pooling acts of
other states” 7 because it requires an applicant to make a good-faith
effort to form a voluntary-pooling agreement with the other interest
owners in the proposed unit before the Commission will entertain an
application. “The obvious intent of the legislature” in crafting MIPA was
“to encourage voluntary pooling”, and so it “is more aptly described as
‘an Act to encourage voluntary pooling—rather than an Act to provide
compulsory state action.’” 8 “The spirit of the act” is “shown by the
requirement that an applicant must exhaust all efforts at contractual
agreements before compulsory pooling can be obtained”. 9
Section 102.013(a) requires an applicant to “set forth in detail the
7 R.R. Comm’n of Tex. v. Pend Oreille Oil & Gas Co., 817 S.W.2d 36, 40
(Tex. 1991).
8 Id. (quoting Ernest E. Smith, The Texas Compulsory Pooling Act, 43
TEXAS L. REV. 1003, 1009 (1965)).
9 Ernest E. Smith, The Texas Compulsory Pooling Act, 44 TEXAS L. REV.
387, 391 (1966).
4
nature of voluntary pooling offers made to the owners of the other
interests in the proposed unit.” 10 “The commission shall dismiss the
application if it finds that a fair and reasonable offer to pool voluntarily
has not been made by the applicant.” 11 Otherwise, the Commission
proceeds to determine whether forced pooling is appropriate under the
Act. Section 102.011 sets out the Commission’s authority to issue a
forced-pooling order. Preliminarily, there must be “two or more
separately owned tracts of land . . . in a common reservoir . . . for which
the commission has established the size and shape of proration units”;
there must be separate interest owners within an existing or proposed
unit who “have not agreed to pool their interests”; and it must be that
“at least one of the owners . . . has drilled or has proposed to drill a well
on the existing or proposed proration unit”. 12 If these prerequisites are
satisfied, then “for the purpose of avoiding the drilling of unnecessary
wells, protecting correlative rights, or preventing waste,” the
Commission “shall” order pooling. 13
Section 102.017(a) provides that “all orders effecting the pooling
shall be made on terms and conditions that are fair and reasonable and
will afford the owner or owners of each tract or interest in the unit the
opportunity to produce or receive his fair share.” 14 The Commission’s
final order is subject to judicial review under the substantial-evidence
10 TEX. NAT. RES. CODE § 102.013(a).
11 Id. § 102.013(b).
12 Id. § 102.011.
13 Id.
14 Id. § 102.017(a).
5
standard in the Administrative Procedure Act. 15
C
In January 2015, the General Land Office leased Ammonite the
oil and gas beneath a winding stretch of the Frio River in McMullen
County some 30 feet wide and 7 miles long, about 21 acres in all. The
State reserved a 25% royalty, with Ammonite required to pay
development and production costs out of its 75% working interest. EOG
Resources, Inc. leases the minerals on the land adjoining the river on
both sides. All the minerals in the area lie in a common subsurface
reservoir, the Eagleville (Eagle Ford-1) Field. The Eagleville is
impermeable shale from which oil and gas can be produced only by
horizontal drilling. At the time Ammonite acquired its lease, EOG had
permits for, and was somewhere in the process of drilling, 16 wells in
the area—11 on one bank and 5 on the other.
Between April and October 2015, Ammonite sent EOG a series of
letters proposing the formation of 16 pooled units—one corresponding to
each well. Ammonite attached to each offer letter the drilling plat for
the corresponding well that EOG had filed with the Commission as part
of its permit application. Each letter references “the existing well on the
proposed unit” and “proposes that EOG contribute to the unit the
acreage approximately as shown on [the] plat and outlined in yellow.”
15 See id. § 102.111 (“A person affected by an order of the commission
adopted under the authority of this chapter is entitled to judicial review of that
order in a manner other than by trial de novo.”); TEX. GOV’T CODE § 2001.174
(providing that if the law authorizing judicial review of a decision in a
contested case “does not define the scope of judicial review” then the
substantial-evidence standard applies).
6
Each letter includes the approximate surface acreage for each party’s
contribution to the proposed unit and a rough, narrative description of
its location. The drilling plats show that none of EOG’s wells, as
permitted, would reach the riverbed. None of Ammonite’s letters
suggested that any well be modified to access riverbed minerals. Since
all production would be from EOG’s leases and none from Ammonite’s,
proceeds from the pool could not be allocated on the basis of the parties’
respective contributions to production. Instead, Ammonite proposed
that proceeds be allocated based on each party’s leased acreage in the
pool.
Ammonite proposed to pay its share of production costs from its
share of royalties, along with an additional “risk penalty”. A “risk
penalty” is a charge on a nonoperator working-interest owner to ensure
that the economic risk assumed by the operator in drilling and
completing a well is reasonably shared by all who stand to benefit. MIPA
requires that a forced-pooling order include “a charge for risk not to
exceed 100 percent of the drilling and completion costs.” 16 For that
reason, a risk penalty is commonly proposed in a voluntary-pooling offer
though not statutorily required. 17 Ammonite’s offer letters to EOG
provided for a 10% risk penalty “or such greater penalty as may be
prescribed by the Railroad Commission if a[] MIPA case should have to
be adjudicated before that agency.”
16 TEX. NAT. RES. CODE § 102.052(a).
17 See Am. Operating Co. v. R.R. Comm’n of Tex., 744 S.W.2d 149, 153
(Tex. App.—Houston [14th Dist.] 1987, writ denied) (“There is no statutory
requirement that an offer to voluntarily pool contain a risk penalty.”).
7
EOG rejected Ammonite’s offers, citing the terms of its leases
prohibiting it from accepting any voluntary-pooling offer. 18 EOG also
considered the offers not to be fair and reasonable because, since none
of its wells could reach the minerals beneath the riverbed, Ammonite
was proposing to share in production from EOG’s wells without
contributing to it. As EOG explained:
Any recoverable oil and gas that may exist beneath
Ammonite’s lease will remain beneath its lease regardless
of any pooling of the acreage into EOG’s producing wells.
The sole effect of force pooling in these cases would be to
transfer the revenues from oil and gas produced entirely
from EOG’s leases and units to Ammonite.
D
Ammonite filed 16 MIPA applications with the Commission, one
for each proposed unit, and the parties proceeded to a consolidated
contested-case hearing on all applications. 19 By the time of the hearing
in January 2017, each well was completed, and none was draining the
riverbed tract.
Ammonite’s counsel announced in his opening statement to the
hearing examiners that “Ammonite [would] not . . . put on a technical
18 EOG does not argue that the no-pooling clause in its lease would
override the Commission’s statutory authority to force-pool EOG’s minerals. In
this opinion, we assume without deciding that EOG’s contractual prohibitions
against pooling would not prevent the Commission from force-pooling EOG’s
minerals under MIPA.
19 MIPA does “not apply to land owned by the State of Texas nor to land
in which the State of Texas has an interest directly or indirectly”, TEX. NAT.
RES. CODE § 102.004(a), but the State can consent to the statute’s application,
id. § 102.004(d), and Ammonite obtained the consent of the Commissioner of
the General Land Office to file its applications.
8
case, and . . . [would] not put on evidence that [EOG is] draining the
riverbed” because Ammonite’s position is that MIPA “does not require
drainage.” All MIPA requires, according to Ammonite, is “that the tract
with which you seek to pool is embraced in a common reservoir with the
unit for the existing well.” Ammonite argued that two of MIPA’s bases
for requiring forced pooling with EOG’s wells applied: to prevent waste
and protect correlative rights. 20
Ammonite called only one witness, its owner, Osborn, who
testified as a fact witness about Ammonite’s business and its
voluntary-pooling offers to EOG. Osborn testified that he chose 10% for
his risk-penalty offer because Professor Ernest Smith of The University
of Texas School of Law “suggests that as a minimum one should offer 10
percent.” Osborn testified that his letters also specified his willingness
to pay any penalty prescribed by the Commission to convey that
“whatever [the Commission] think[s] is fair works for me.”
Ammonite’s counsel asked Osborn about the feasibility of drilling
his own horizontal well to drain the riverbed minerals included in his
lease. He testified that he had not “seen an instance where an operator
has been able to drill a horizontal well that meanders along the course
of the river”. Asked whether he “[thought] it would be possible” to drill
such a well, the examiners sustained EOG’s objection that the opinion
“is . . . not an opinion that a layman can give.”
EOG argued that, as a matter of law, Ammonite’s offers were not
fair and reasonable—and MIPA does not authorize forced pooling—
20 See id. § 102.011.
9
because EOG’s wells do not drain the riverbed. Ammonite, EOG argued,
is “asking the owners of all of the oil and gas under our tract from which
the oil is being produced from all 16 wells, to give up a part of that oil or
gas to a tract that’s not contributing anything.”
EOG put on one witness, petroleum engineer Tim Smith, who
testified as an expert. Smith explained that “the Eagle Ford formation
is an unconventional resource play” with unique “reservoir and rock
characteristics.” Specifically, the shale in the Eagle Ford Field has
“ultralow permeability”, such that “there’s no flow through the reservoir
rock unless there’s a fracture”. This means that “[h]orizontal drilling
and hydraulic fracture stimulation techniques are required if the wells
are going to have a chance at commerciality.”
“Any individual well and resource play”, Smith said, “is anything
but a sure thing. The nature of these reservoir rocks is they’re extremely
heterogeneous”. Although “[m]ost wells will succeed in establishing
production”—absent a mechanical failure, “there won’t be any dry
holes”—“not all wells will generate enough revenue after drilling,
production, [and] stimulation . . . to return those costs and a profit for
the operator.” To be successful in an unconventional resource play like
the Eagle Ford Field, an operator must drill “a whole portfolio” of wells,
and the wells must be “optimal[ly] spac[ed]” with respect to the
operator’s lease line and one another to “maximiz[e] recovery and
prevent[] waste to the greatest extent possible.” Smith noted that “EOG
has 500,000 acres in the resource play” and its success will be
determined “at the portfolio level”, not by any individual well.
Smith elaborated that ultimate commercial success in a resource
10
play like the Eagle Ford Field requires “[i]mmense capital investment
in leasehold expense, acquired drilling expertise, acquired completion
expertise, scientific data accumulation, experimentation, and
technology development.” Those capital costs to understand the “science
in a particular basin” amount to hundreds of millions of dollars, Smith
stated. For that reason, Smith testified, “a risk factor of 100 percent is
appropriate for a single well in a[] MIPA proposal.”
About whether the riverbed minerals could ultimately be
recovered, Smith testified that while none of EOG’s existing 16 wells are
capable of draining the minerals, they could possibly be recovered in the
future. “You cannot draw the conclusion . . . that these minerals . . . are
stranded and will not be recovered”, Smith stated. “[I]t is very
conceivable . . . that under the right economic climate, after there’s more
development out here, that . . . technology would find a way to do that.
And so [recovery] is not a foregone conclusion.” “[H]orizontal wells of a
commercially viable drainhole length could be drilled” to reach the
riverbed minerals “[u]nder the right economic conditions,” Smith
testified, although “a different economic climate with higher oil prices”
would probably be needed.
E
The hearing examiners recommended approval of 15 of
Ammonite’s applications. 21 The Commission rejected the examiners’
proposal for decision, giving two reasons: “Ammonite failed to make a
21 One of the 16 proposed units would have contained 550 acres,
exceeding the maximum size under MIPA. Id. (stating that a pooled unit “shall
in no event exceed 160 acres for an oil well . . . plus 10 percent tolerance”).
11
fair and reasonable offer to voluntarily pool as required by [MIPA
Section 102.013]”, and “[f]orce pooling will not prevent waste, protect
correlative rights, or avoid the drilling of unnecessary wells as required
by [MIPA Section 102.011].” 22 The Commission found that formation of
the proposed pooling units would not “access or produce any of the
hydrocarbon reserves under Ammonite’s adjacent riverbed tracts” and
that “Ammonite offered no . . . evidence of drainage” of its minerals by
EOG’s wells. Ammonite does not contest these findings but argues that
pooling is required to prevent its minerals from being stranded,
resulting in waste.
Ammonite filed a petition for judicial review. The trial court
issued an order denying the petition and ruling that Ammonite take
nothing, noting that “there is more than a scintilla of evidence to support
the findings and decision” of the Commission. The court of appeals
affirmed, holding only that because Ammonite’s pooling offers proposed
a 10% risk factor when Smith testified without contradiction that a
100% risk factor would be appropriate, substantial evidence supports
the Commission’s finding that Ammonite’s offers were not fair and
reasonable. 23
We granted Ammonite’s petition for review.
II
We first consider whether Ammonite’s pooling offers to EOG were
fair and reasonable. Because MIPA requires the Commission to
22 As noted above, Ammonite does not argue that a forced-pooling order
would avoid the drilling of unnecessary wells.
23 672 S.W.3d at 41.
12
“dismiss” an application if it finds that a fair and reasonable
voluntary-pooling offer has not been made, 24 our older cases referred to
this initial inquiry as jurisdictional. 25 Since then, “we have been clear
. . . that the question whether a [party] has . . . ‘satisfied the requisites
of a particular statute’ pertains ‘in reality to the right of the [party] to
relief rather than to the . . . jurisdiction of the [tribunal] to afford it.’” 26
Satisfying the Commission that a fair and reasonable offer was made is
merely the first of two hurdles an applicant must clear to obtain a
forced-pooling order under MIPA. It is not a prerequisite to the
Commission’s jurisdiction.
MIPA does not define a fair and reasonable offer to pool. 27
“Reasonable minds may, of course, differ on what constitutes a fair and
reasonable offer.” 28 It “must be one which takes into consideration those
relevant facts, existing at the time of the offer, which would be
24 TEX. NAT. RES. CODE § 102.013(b).
25 See Pend Oreille, 817 S.W.2d at 40 (“If the commission finds that the
applicant did not make a qualifying offer, it lacks jurisdiction over the
petitioner’s application and must dismiss it.” (citing Carson v. R.R. Comm’n of
Tex., 669 S.W.2d 315, 318 (Tex. 1984))).
26Pike v. Tex. EMC Mgmt., LLC, 610 S.W.3d 763, 774 (Tex. 2020)
(quoting Dubai Petroleum Co. v. Kazi, 12 S.W.3d 71, 76-77 (Tex. 2000)).
27 One provision states that an offer by an interest owner “within an
existing proration unit to share on the same yardstick basis as the other
owners within the existing proration unit are then sharing shall be considered
a fair and reasonable offer.” TEX. NAT. RES. CODE § 102.013(c). Another states
that an “offer to pool . . . is not considered fair and reasonable if it provides for
an operating agreement containing” certain enumerated terms. Id. § 102.015.
Neither provision applies here.
28 Pend Oreille, 817 S.W.2d at 40.
13
considered important by a reasonable person in entering into a
voluntary agreement concerning oil and gas properties.” 29 But absent a
statutory definition, a decision whether an offer is fair and reasonable
“is left to the commission’s discretion.” 30 The decision must only be
supported by substantial evidence 31—“a limited standard of review that
gives significant deference to the agency in its field of expertise.” 32 “At
its core, the substantial evidence rule is a reasonableness test or a
rational basis test.” 33 “The commission’s application of the statutory
term to the facts in each case is conclusive, unless it is unreasonable.” 34
A
The Commission did not explain why Ammonite’s pooling offers
were not fair and reasonable, and two of its observations have proven
misleading.
First, the Commission noted in its findings that “Ammonite did
not provide survey data or a metes and bounds description of the
riverbed to establish the precise acreage to be force pooled into any of
the [16] wells.” Ammonite complains that the finding is irrelevant
because no more detailed description of the area to be pooled was
29 Carson, 669 S.W.2d at 318.
30 Pend Oreille, 817 S.W.2d at 40.
31 Id. at 42 (stating that “courts must apply the substantial evidence
rule” in Section 2001.174(2)(E) of the Administrative Procedure Act when
reviewing the Commission’s decision under Section 102.013 of MIPA).
32 R.R. Comm’n of Tex. v. Torch Operating Co., 912 S.W.2d 790, 792
(Tex. 1995).
33 Pend Oreille, 817 S.W.2d at 41.
34 Id. at 42.
14
required. But Ammonite suggests that an inadequate description played
a role in the Commission’s denial of the applications. There was no
complaint, and the Commission did not indicate, that the omissions
made the pooling offers confusing or uncertain. To the contrary,
Ammonite supplied plats showing where EOG’s wells were located and
what acreage was proposed to be pooled. Both the Commission and EOG
argue here that Ammonite’s applications were denied because of the
effect of the pooling offers, not the imprecise boundaries of the proposed
units. Ammonite’s concerns about this finding are misplaced.
Second, the Commission’s findings note that “[a]t the hearing,
Ammonite agreed with a greater charge for risk than the 10% listed in
its voluntary pooling offer[s] . . . if the Commission recommended same.”
The court of appeals concluded that Ammonite’s willingness to agree to
a higher risk penalty and Smith’s testimony that the penalty should be
100% show that Ammonite’s offers of a 10% penalty were not fair and
reasonable when made. But the court’s conclusion cannot be squared
with the text of Ammonite’s offers, which were for a 10% penalty “or
such greater penalty as may be prescribed by the Railroad Commission”.
And the court’s conclusion cannot be squared with the lack of any
requirement that a pooling offer include a risk penalty at all.
Understandably, the Commission has not undertaken here to defend the
court’s conclusion. There is no evidence that EOG rejected Ammonite’s
pooling offers because of the proposed risk penalty, especially when
Ammonite was willing to pay any penalty the Commission determined
15
was appropriate. 35
B
So why did the Commission conclude that Ammonite’s offers were
not fair and reasonable? Because they were based solely on EOG’s wells
as permitted, which did not drain Ammonite’s riverbed tract, and
Ammonite made no effort to show that it was possible for EOG to redo
its drilling plans or extend existing wells to reach the riverbed. Thus, as
EOG argued, it is undisputed that Ammonite proposed to obtain a share
of EOG’s production without Ammonite’s contributing any minerals of
its own. Section 102.017(a) of MIPA requires that pooling orders afford
each interest owner “the opportunity to produce or receive his fair
share.” 36 The offer Ammonite made required it to produce nothing and
EOG’s lessors to receive less, which the Commission could consider
unfair on its face.
Further, Smith testified that commercial success in the Eagle
Ford Field requires a massive capital investment. Because of the field’s
geological characteristics, “any single well[] carries a significant
inherent risk of commercial failure.” For EOG to give Ammonite a share
35 In the dissent’s view, the court of appeals’ risk-penalty analysis is the
specific issue that warranted our granting Ammonite’s petition for review. Post
at 1 (Young, J., dissenting). Now that we have concluded that analysis was
wrong, the dissent would have us end our review here and remand the case to
the court of appeals, thereby condemning the parties to additional years of
litigation and their associated costs. Yet we frequently address issues the court
of appeals did not reach in the interest of judicial economy. Because the
remaining issues in this case are fully briefed and their resolution clear,
judicial economy supports our making this Court the final stop for this
litigation.
36 TEX. NAT. RES. CODE § 102.017(a).
16
of production would only increase the risk that these wells would not
generate enough revenue to cover costs and return a profit.
The Commission’s conclusion here is also consistent with one of
its prior decisions, upheld in Railroad Commission of Texas v.
Broussard. 37 There, the Commission’s order dismissed a pooling
application under Section 102.013 because the evidence showed that the
offerees’ wells were not draining the offeror’s minerals at the time the
offer was made. 38 The opinion quotes the Commission’s order as stating
that “[t]he critical factor to be considered as regards Broussard’s offer
being fair and reasonable from the protestants’ view point is that their
well is not draining the Broussard tract at present”. 39 While discussing
Broussard, notable commentators on Texas oil and gas law observed
that “[i]t is unfair to let an applicant share in production from a well
that does not drain any oil or gas from the applicant’s tract.” 40
Ammonite argues that its offers must be viewed in the context of
the time they were made, when most of the 15 wells at issue had not
been spudded, much less completed. From a map of the wells’ locations
37 755 S.W.2d 951 (Tex. App.—Austin 1988, writ denied).
38 Id. at 952-954.
39 Id. at 953.
40 3 ERNEST E. SMITH ET AL., TEXAS LAW OF OIL AND GAS § 12.3[B][1] at
12-38 (LexisNexis Matthew Bender 2023).
The dissent criticizes our citation to Broussard. Broussard is one of the
only published judicial decisions in Texas—maybe the only one—involving
comparable facts. We cite it to show that the Commission’s position here is
consistent with the position it took four decades ago, which is surely a factor
that goes towards the reasonableness of the Commission’s decision in this case.
17
vis-à-vis the riverbed, Ammonite asserts that “it would have required
little additional drilling for each well to reach the riverbed tracts”. In
fact, the completion status of each well at the time the offers were made
is hotly contested, but the Commission did not have to resolve that
dispute because Ammonite’s offers were based solely on the wells as
permitted, which the letters referred to as “existing” and “recently
drilled”. The letters do not mention the possibility of extending any well.
When EOG responded that “no well [is] actually capable of draining
Ammonite acreage” and, thus, pooling to reduce its own share of
production would not be fair and reasonable, citing Broussard,
Ammonite offered no technical solution. 41
For these reasons, we hold that the Commission’s conclusion that
“Ammonite failed to make a fair and reasonable offer to voluntarily pool
as required by [MIPA Section] 102.013” is reasonable.
C
The dissent faults EOG for refusing to negotiate a pooling
agreement with Ammonite. 42 The evidence is that the parties
communicated their respective positions at some length. After
Ammonite filed its applications with the Commission but before the
hearing, EOG’s counsel wrote to review their course of dealing. The
41 Cf. Carson, 669 S.W.2d at 318 (observing that the offeror’s “refus[al]
to negotiate” because “it did not feel obligated to do so” is inconsistent with
Section 102.013, which requires “a bona fide attempt to reach a contractual
agreement” (quoting Smith, supra note 9, at 393 (third quotation))).
42 After all, the dissent observes, Ammonite had made many successful
voluntary-pooling offers before. But Ammonite has not argued, and there is no
evidence, that any of those offers involved horizontal wells incapable of
reaching riverbed minerals, like EOG’s.
18
parties, he said, had engaged in “a number of emails and other
discussion[s] over the past year or more relating to [Ammonite’s]
proposals”. To summarize, he wrote, “EOG respectfully declines”
Ammonite’s offers because of “the fact that none of EOG’s wells are
capable of draining any portion of Ammonite’s leasehold.” Ammonite’s
minerals could not be pooled with EOG’s because EOG could not access
them. “[L]ack of drainage”, he wrote, “is of controlling importance.”
Ammonite has not disputed that EOG’s wells could not access its
minerals. It stipulated to that fact before the Commission. Offering to
pool with EOG minerals it could not access was not reasonable. The only
possible way to form a pool was for EOG to modify or extend its wells,
or drill additional wells, to reach the riverbed. If that were Ammonite’s
proposal, it would have been required to demonstrate that such
operations were feasible. It did not do so, and there was evidence it could
not do so.
The dissent complains that the Commission’s order was not more
discursive. But the obstacle to Ammonite’s pooling proposals was simple
and unavoidable. No further explanation was required. The dissent’s
insistence on more from the Commission is inconsistent with
Ammonite’s burden of proof and the deferential substantial-evidence
review this Court is bound to apply.
If the Commission was authorized to compel EOG to modify or
increase its wells to access the riverbed, it could do so only if access was
possible. To be reasonable, Ammonite’s pooling offers must have shown
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that it was possible. They did not. 43
III
Having concluded that Ammonite did not make a fair and
reasonable pooling offer, the Commission was required to dismiss
Ammonite’s application for forced pooling under Section 102.013. But
the Commission went further 44 and addressed Ammonite’s application
under Section 102.011, concluding that Ammonite’s request would not
prevent waste or protect correlative rights, the two statutory bases for
requiring forced pooling that Ammonite invoked. 45 Thus, we do not end
our analysis with the terms of Ammonite’s offers but examine whether
the Commission’s interpretation of MIPA as applied to this case is
correct.
Ammonite argues that this case presents “a narrow legal
question—whether proof of drainage is required to obtain MIPA pooling
43 A 100% risk penalty would not have made Ammonite’s offers
reasonable. In claiming otherwise, the dissent relies on a paraphrasing of Tim
Smith’s testimony that takes it out of context. See post at 11 (Young, J.,
dissenting). Smith did not testify that including a 100% risk penalty would
have transformed Ammonite’s offers into reasonable ones under MIPA. Smith
testified that because of the risk that any individual well drilled in the Eagle
Ford will not return enough revenue to offset its costs, “a risk factor of 100
percent is appropriate for a single well in a[] MIPA proposal.”
44 As we explained in Part II, the requirement of a fair and reasonable
offer affects the applicant’s right to relief—not the Commission’s jurisdiction
to grant it. No jurisdictional issue is presented in this case, and it is well within
the Commission’s discretion to address the requirements of both
Section 102.013 and Section 102.011 to promote efficiency by eliminating the
need for a second round of administrative adjudication after judicial review.
45 TEX. NAT. RES. CODE § 102.011. Ammonite did not argue that forced
pooling with EOG would avoid the drilling of unnecessary wells, the third basis
for pooling under MIPA.
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to ‘prevent waste’”. Ammonite contends that if proof of drainage is not
required, then the location and completion of EOG’s wells leaves the
riverbed minerals stranded, resulting in waste and requiring pooling. In
this Court, the Commission assumes Ammonite’s minerals are stranded
but asserts that granting Ammonite’s applications will not prevent
waste or protect correlative rights.
We disagree that Ammonite has correctly stated the issue before
us. It is not whether the Commission could ever force-pool stranded
minerals like Ammonite’s even though they were not being drained. The
Commission has refused to foreclose that result. Rather, the issue is
whether the Commission could have concluded in the circumstances
presented in this case that forced pooling would not prevent waste—or
relatedly, protect correlative rights—given the undisputed lack of
drainage of Ammonite’s minerals by EOG’s wells.
“Waste” is defined by statute to include “loss incident to or
resulting from drilling, . . . locating, spacing, or operating a well or wells
in a manner that reduces or tends to reduce the total ultimate recovery
of oil . . . from any pool”. 46 “Pool” is defined as “a common reservoir.” 47
The parties agree that their minerals are in a common reservoir in the
Eagleville Field. 48 “Correlative rights guarantee a mineral interest
owner an opportunity to produce a ‘fair share’ of the reserves underlying
46 Id. § 85.046(a)(6); see also Gulf Land Co. v. Atl. Refin. Co., 131 S.W.2d
73, 80 (Tex. 1939) (“The term ‘waste,’ as used in oil and gas Rule 37,
undoubtedly means the ultimate loss of oil.”).
47 TEX. NAT. RES. CODE § 85.001(a)(2).
Tim Smith testified that no geographical formations separated
48
Ammonite’s riverbed minerals in the field from EOG’s.
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his land.” 49 Ammonite’s stranded minerals cannot presently be produced
because EOG has located and completed its wells in such a way that
they do not reach the riverbed. Without forced pooling with EOG’s wells,
Ammonite reasons, its minerals are stranded—wasted—and it cannot
produce its fair share of the minerals in the reservoir shared with EOG’s
minerals.
But a forced-pooling order could not, at the time the Commission
reached its decision, have prevented waste. The Commission made no
finding about whether the riverbed minerals are stranded, but if they
are, a forced-pooling order would not change that fact because, as the
Commission’s order states, “the wells have been drilled and are
producing; they do not and will not produce riverbed minerals.” The
Commission likewise could have concluded that a forced-pooling order
would not protect Ammonite’s correlative rights. Ammonite’s right to all
the minerals beneath the riverbed was undisturbed by EOG’s wells.
However, neither Ammonite nor EOG could produce them given the
location of EOG’s wells. The Commission does not concede that forced
pooling is beyond its power. It contends that forced pooling is not
required in these circumstances when EOG is not depriving Ammonite
of its minerals.
Ammonite argues that EOG, in seeking permits for its 16 wells,
should have proposed that they be located and drilled to extend beyond
its lease boundaries and into the riverbed. Ammonite does not suggest
49 R.R. Comm’n of Tex. v. Lone Star Gas Co., 844 S.W.2d 679, 683 n.2
(Tex. 1992) (quoting Texaco Producing, Inc. v. Fortson Oil Co., 798 S.W.2d 622,
624 (Tex. App.—Austin 1990, no writ)).
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that its property could be invaded without its consent, nor did it offer to
consent when making its pooling offers while EOG was permitting and
completing its wells. As the Commission points out, Ammonite never
offered technical evidence showing that drilling and completing EOG’s
wells differently to reach the riverbed minerals was feasible, reasonable,
or economically viable. 50 EOG argues that the Commission’s spacing
rules would have precluded drilling its wells as Ammonite suggests. 51
Tim Smith also testified that because of the low permeability of rock in
the Eagle Ford Field, to achieve commercial success, an operator must
space its wells optimally with respect to one another and its lease line.
Ammonite responds that the Commission may grant an exception to
spacing rules when one is necessary to prevent waste. 52 But Ammonite
points to no authority requiring an operator to seek a spacing exception
for the purpose of preventing a neighbor’s minerals from being stranded,
especially if doing so could result in a failure to maximize production of
the operator’s own minerals.
50 The dissent acknowledges that Ammonite had the burden of proof on
this issue and “shares [our] doubt” that Ammonite carried it. Post at 26 (Young,
J., dissenting). But the dissent faults the Commission for failing to make a
finding on an issue that Ammonite did not present, and going further, would
remand to the Commission to give Ammonite a do-over.
51 See 16 TEX. ADMIN. CODE § 3.37(a)(1) (statewide spacing rule
prohibiting an oil well from being “drilled nearer than 467 feet to any property
line[] [or] lease line”). Through field rules, the Commission can make different
spacing requirements for a particular field than are in the statewide rule. See
Torch Operating Co., 912 S.W.2d at 791.
52 See 16 TEX. ADMIN. CODE § 3.37(a)(1) (stating that “the commission,
in order to prevent waste or to prevent the confiscation of property, may grant
exceptions to” the statewide rule).
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Finally, Ammonite argues that a pooling order allowing it to
share in production would prevent waste by incentivizing EOG now to
drill new wells or rework its existing ones, allowing production of the
riverbed minerals as part of the pool. The Commission’s refusal to
stretch its limited authority to force pooling this far is consistent with
past decisions and not unreasonable. The Broussard court, before
affirming the Commission’s order dismissing Broussard’s MIPA
application, observed that “the Commission based its decision primarily
on the fact that, although recovery operations might cause drainage to
occur sometime in the future, no gas was being drained” from
Broussard’s tract at the time the pooling offer was made. 53 Ammonite’s
theory also contravenes MIPA’s policy of “avoiding the drilling of
unnecessary wells”. 54 Commentators have explained that “if an
additional well is necessary to drain the acreage sought to be forcibly
pooled, then pooling should also be denied because pooling would not
avoid the drilling of unnecessary wells” or further another statutory
policy. 55 Ammonite, as the MIPA applicant, had the burden of proof to
demonstrate to the Commission the technological and economic
feasibility of reworking EOG’s wells to reach the riverbed, which it did
not do.
Ammonite argues that the case should be remanded to the
Commission for additional evidence and findings regarding the viability
of extending or altering EOG’s wells going forward to access the riverbed
53 755 S.W.2d at 953.
54 TEX. NAT. RES. CODE § 102.011.
55 3 SMITH ET AL., supra note 40, § 12.3[A][6], at 12-28.
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minerals. But Ammonite chose to present its applications for pooling
without such changes. The Commission fully decided the issues
presented by the applications and evidence. A remand to give Ammonite
the chance to present a different case is not appropriate.
Waste “reduces or tends to reduce the total ultimate recovery of
oil . . . from any pool”. 56 There is no evidence that Ammonite’s minerals
cannot ultimately be produced. The evidence is to the contrary. Tim
Smith testified that while it may not presently be possible to drill a
horizontal well within the confines of a winding riverbed, changes in
technology and markets may make such drilling viable. “You cannot
draw the conclusion”, he stated, that Ammonite’s minerals are stranded
and “will not be recovered.” Ammonite criticizes Smith’s testimony as
“beyond speculative”, but Ammonite—the party with the burden of proof
before the Commission—failed to put on any expert testimony of its own.
Ammonite has failed to show that forced pooling of its acreage
with EOG’s wells is necessary to prevent its minerals from ultimately
being lost. Ammonite applied for a share of EOG’s revenue without
contributing to it. The Commission’s conclusion that forced pooling
would not prevent waste or protect correlative rights is not
unreasonable.
56 TEX. NAT. RES. CODE § 85.046(a)(6).
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* * * * *
The judgment of the court of appeals affirming the Commission’s
final order is affirmed.
Nathan L. Hecht
Chief Justice
OPINION DELIVERED: June 28, 2024
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