Untitled Texas Attorney General Opinion ( 1942 )

THEA-JTORNEY GENERAL
OFTEXAS
Honorable Olin Culberson, Commissioner
Railroad Commission of Texas
Austin, Texas
Dear Sir: Opinion No. O-5008
* Re: Allocation of gas allowables a-
mong operatorsin gas fields
under Article 6008, Vernon's
Annotated Civil Statutes.
This is in response to the request contained In
your letter of December 10, 1942, for the opinion of this
department upon the following question:
"Please advise whether or not the RaLl-
road Commission is legally required or authorized,
when the aggregate lawful volume of the open flow
or daily potential capacity to produce of all wells
located in a common reservoir producing only sweet
gas, Is in excess of the dally reasonable market
demand for gas from such common reservoir, to re-
strict the withdrawals from such common reservoir
to the amount of the reasonable market demand there-
for and whether or not, in order to adjust correlative
rights, the Commission is required to allocate to
each &&well producing gas from such common reser-
voir a nextage of the dally uroductlve capacity
of each-well which may be produced dally during the
following month from each was well producing gas from
such common reservoir=accor=e with the factors
set out In Article 6008 when such allocation might
result in the depriving of one or more persons of
a market for the sale of gas which has already been
obtained.
"In explanation of the last underscored lines
is meant whether such allocation would reduce the
volume of gas available from the common reservoir to
the marketer of such gas and below the volume which
he has contracted to deliver, keeping in mind that
the volume which he is now selling to a bonaflde
market is less than the volume the Commlsslon has
found would produce physlcal waste.
Honorable Olin Culberson, page 2 0-5008
"I respectfully ask that you furnish me your
opinion at your very earliest convenience and, if
possible, prior to December 16th when the Commission
will hold Its next statewide hearing."
As we understand your inquiry, you desire to know
whether or not It is the duty of the Commission once it sets
~the total allowable for gas from a particular gas field pro-
duclng sweet gas only, to allocate and apportion the total
allowables among the various wells ln the field in the man-
ner set forth In Article 6008, Vernon's Annotated Civil
Statutes, when the necessary effect of such apportionment as
to a particular operator ~111 be to deprive him (wlth the
wells he currently has) of sufficient gas to fulfill pre-
viously existing contract commitments he has made.
Pertinent provisions of Article 6008 follow:
‘Sec. 10. It shall be the duty of the
Commission to prorate and regulate the dally gas
well production from each common reservoir in the
manner and method herein set forth. The Commission
shall prorate and regulate such production for the
protection of public and prlvate Interests:
"(a) Jn the prevention of waste as 'waste'
is defined herein.
"(b) In the adjustment of correlative rights
and opportunities of each owner of gas in a common
reservoir to produce and use or sell such gas as
permitted in this Article.
'Sec. 11. The Commission shall exercise the
authority to accomplish the purpose designated under
item (a) of Section 10 when the presence or imminence
of waste is supported by a finding based upon the
evidence introduced at a hearing to be held as herein
provided.
"The Commlsslon shall exercise the authority
to accomplish the purpose designated under item (b)
of Section 10 when evidence Introduced at a hearing
to be held as herein provlded will support a finding
made by the Commission that the aggregate lawful
volume of the open flow or daily potential capacity
to produce of all gas wells located in a common
reservoir, is in excess of the dally reasonable market
demand for gas from gas wells that may be produced
from such common reservoir, to be utilized as per-
mitted in this Article.
Honorable Olin Culberson, page 3 0-5008
"Sec. 12. On or bafore the twentieth (20th)
day of each calendar month the Commission shall hold
a hearing after notice has been given, as provided by
lea, for the purpose of determining the aggregate
daily capacity to produce of all gas wells ln a com-
mon reservoir, and as nearly as posslble, the daily
volume-of gas from each common reservoir that will
be produced from gas wells during the following
month to be utilized as permitted in this Article.
Upon such determination, the Commission, based upon
evidence introduced at such hearing, shall allocate
to each gas well producing gas from such common reser-
voir a percentage of the dally productive capacity of
each well which may be produced daily during the fol-
lowing month from each gas well producing gas from
such common reservoir. Such percentage of the dally
producing capacity of each well shall be regarded as
Its daily allowable production of such dally volume
required for utilization from such common reservolr.
The daily allowable production of each gas well shall
L;dc;;p;ted and allocated as provlded In Sections 13
"sec. 13. In determining the daily allowable
productlon for each gas well the Commission shall take
Into account the size of the tract segregated with
respect to surface position and common ownership upon
which such gas well or wells are located; the relation
between the daily producing capacity of each gas well
and the aggregate dally capacity of all gas wells
producing the same kind of gas In the same common reser-
voir or zone; and all other factors which are perti-
nent; provided that the Commlsslon shall not take
into account the size of the tract upon which any gas
well or wells are located ln excess of the efficient
drainage area of such well or wells, producing at
twenty-five per cent (25%) of the daily productive
capacity, which dralnage area shall be determined by
the Commlsslon. In ascertaining the drainage area of
a well, the Commission shall take Into account such
factors as are reflected In the productive capacity of
a gas well, Including formation pressure, the permea-
billty and porosity of the producing formation,
and the well bore's structural position, together
with all other factors taken Into account by a reason-
ably prudent operator in determinlng the dralnage
area for a gas well.
%eC. 14. It shall be the duty of the Commls-
slon, after notice and hearing, to ascertain and
Honorable Olin Culberson, page 4 o-5008
determine the reasonable market demand for gas from
gas wells to be used for light and fuel purposes and
for all other lawful purposes to which sweet gas may
be put under the terms of this Article and by proper
order to restrict the production of gas from all gas
wells In said field producing such gas to an amount
equal to market demand or to an amount which may be
produced without waste as otherwise defined; pro-
vided, however, the production of such gas shall in
any event be restricted to the amount of the reason-
able market demand therefor. In such order the Com-
misston shall allocate, distribute or apportion the
total allowable production from such field.among
the various gas wells affected by the order on's
reasonable basis, and as provided in Section 13.
It shall likewise be the duty of the Commlsslon to
prorate the daily gas well production of sour gas
produced from each common reservoir of sour gas in'
this State. The hearing for such purpose shall be
held at the same time as the hearing pertaining to
the proration of sweet gas well production. The pro-
ration of sour gas well production shall be accom-
plished according to the manner and method herein
provided for the proration of sweet gas well pro-
auction.
"Sec. 15.’ Nothing contained in this Article
shall require that the production from any gas well
with a daily natural open flow of two hundred thou-
sand (2~00,000)cubic feet of natural gas or more to
be restricted to a quantityless than fifty thousand
(50,000) cubic feet of natural gas daily; and nothing
herein shall require that the production from any gas
well with a daily natural open flow of less than two
hundred thousand (200,000) cubic ye& of gas be re-
duced to a quantity less than twenty-five per cent
(258) of Its natural open flow. * * +
saec. 20. In the event the Commission finds
that the owner of any gas well has failed or refused
to utilize or sell the allowable production from his
well when such owner has been offered a connection or
market for such gas at a reasonable price, such well
shall be excluded from consideration in allocating the
daily allowable production from the reservoir or zone
in whlcb same Is located until the owner thereof Sign-
nifies to the Commission his desire to utilize or sell
such gas. In all other cases all gas wells shall be
taken into account in allocating the allowable pro-
duction among wells producing the same type of gas."
Honorable Olin Culberson, page 5 0-5008
You will note that under the provisions of Section
10 of Article 6008 it is made the a of the Commission to
prorate and regulate daily gas well production In the manner
set forth In the article. The Legislature has declared that
the steps set forth are to be taken:
(a) To prevent waste - when the presence or lmmln-
ence of waste Is supported by a findfng based upon the evidence
introduced at a hearing to be held as provided. Section 11.
We pretermit any discussion of the power of the Commission to
act to prevent waste, sl.ncewe understand that the total mar-
ket demand for the field is less than the amount the Commls-
sion has found may be produced without waste.
(b) To adjust correlative rights and c``hp~Et:;es``
of the various owners of gas in the reservoir.
is to adjust these correlative rights and opportunltles when
the evidence introduced at the hearing required by Article
6008 ~111 support a flndlng that the aggregate lawful volume
of the open flow or dally potential capacity to produce of
all gas wells located in a common reservoir, is in excess of
the daily reasonable market demand. Sectlon 11.
The mechanics for the CornmIssionto follow in exer-
cising the duties previously expressed are set forth In Sec-
tions 12 and 13. Section 12 requires the Commission to hold
a hearing on or before the twentieth day of each month. The
purpose of the hearing is to determine:
(a) The aggregate dally c;~;;z; ``~t,"~;~; of all
gas wells In the common reservoir. , we
call your attention to the provisions of Sectlon 8 whereby it
is made the duty of all operators to determIne during the
months of January and July of each year the open flow and rock
pressure of each of their gas wells, and to file verified re-
ports thereof with the Commission on or before the tenth days
of those months.
(b) The Commission 1s also required to determine
as nearly as possible the daily volume of gas from each com-
mon reservoir that will be produced from gas wells during the
month to follow to be utlllzed for the lawful purposes for
which gas may be used as set forth In Section 7 of Article
6008. This requirement Is reiterated In Section 14 wherein
the Commission Is required to ascertaln each month the reason-
able market demand for gas to be used for light and fuel and
all other lawful purposes. Having made this finding, it IS
then the duty of the Commission to restrict the Droduction
of gas from all Ras wells to an amount eaual to market demand;
or if only a lesser amount may be produced without causing
waste. then to an amount that may be produced without waste.
Honorable Olin Culberson, page 6 0-5008
When the Commission has heard evidence and made its
determination, It is then required to allocate to each gas
well proauclng gas from such commonsreservoir, a percentage
of its dally productive capacity, which will also be's per-
centage of the total reasonable market demand for the field.
Thls~is the well's allowable for the month to follow. The
Commission may not assign an arbitrary percentage to each
well. It is required to take Into consideration the'factors
and follow the formula set forth in Section 13. Moreover,
if after an allowable has been thus assigned each well, It is
found that any individual owner has failed or refused to
utilize or sell the allowable production from his wells when
he has been offered a connection or market at a reasonable
price, the wells of that operator are thereafter to be exclud-
ed from consideration in allocating the total daily allowable
production from the reservoir until the operator signifies
his desire to sell or utilize such gas. Section 20. We do
not understand this section to be involved un@er the facts
submitted.
Thus you will note that Article 6008 not only au-
thorizes but specifically requires the Commission to allocate
or apportion the total market demand for a sweet gasfield
among the various wells for the purpose of adjusting the cor-
relative rights and opportunities of the various owners.
Article 6008 provldes no exception for instances occasioned
when an operator has contracted to sell more gas than his
allowable or apportlonment.
We offer the following qualification to the fore-
Wm. Under the provisions of Sectlon 15 of Article 6008,
the Commission is not required to restrict any gas well hav-
ing a daily natural open flow of two hundred thousand (200,000)
cubic feet of natural as or more to a quantity less than
fifty thousand (50,000k cubic feet of natural gas daily; nor
is the Commission required to reduce the allowable of,a well
having a daily natural open flow of less than two hundred
thousand (200,000) cubic feet to a quantity less than twenty-
five per cent of its natural open flow.
It follows then that it is our opinion, and you
are so advised, that If the Commission finds at its next
monthly hearing that the total reasonable market demand for
the field in question is less than an amount which may be pro-
duced without waste, and that undue drainage Is taking place
from one well or wells within the field to another well or
wells therein it will be the duty of the Commission to appor-
tion the total market demand among the various wells in the
field so as to prevent, if possible, such undue drainage.
Honorable Olin Culberson, page 7 0 -5008
Further, it is our opinion that the Commission has
this duty to perform even though as to an individual opera-
tor the apportionment received Is less than his contract com-
mitments. 411 contracts are made subject to a valid exercise
of the police power. In view of the fact that the Commission
is required to nass upon the reasonable market demand for a
field and its proper apportionment among the operators, month-
ly, the parties to the contract In question must have contem-
plated that the operator's apportionment was subject to
fluctuation. Moreover, no operator couldlawfu?.lysell more
gas than he owns (more than his reasonable share in the com-
mon reservoir) and thereby bind the Commission to fix his
allowable in accordance with contract commitments. Gillespie
v. Railroad Commission, 161 S.W. (2d) 159.
We presume that the question as to your duty and
authority under Article 6008 arises from the language used
by We Court in Thompson v. Consolidated Gas Company, 300
U.S. 55, 81 L. Ed. 510.
The Consolidated case held invalid a gas proration
order of the Commission prorating gas in the Panhandle fields
and allocating the total among the various operators.
The Supreme Court set forth the specific findings
of the trial court to the effect that the order was not in-
tended to prevent waste; or to adjust correlative rights in
the common reservoir for the purpose of averting un-iust
drainage from the reserves of those lacking uine line connec-
tions. The Court further held that these findings were ad-
equately supported by the evidence.
The Court thereupon concluded that an order entered
by the Commlssion for the sole purpose of compelling those who
have merket outlets to purchase gas from others having no con-
nections is lawful saying that the law reports "present no
more glaring instance,,ofthe taking of one man's property and
giving it to another.
However, Mr. Justice Brandeis was careful to point
out in his opinion that the order was not entered to prevent
undue drainage and that:
"We assume also that the State may ConstitU-
tionallg prorate production in order to prevent un-
due drainage of gas from the rzserves of Well Owners
lacking pipe line connections.
Honorable Olin Culberson, page 8 O-5008
Cur interpretation of the Consolidated cage is tb,at
the Railroad Commission may legally apportion gas between wells
If it has found either that waste or drainage is taking place.
Such interpretation is strengthened by the interpretation
accorded the Consolidated case by Judge Hutcheson, speaking
for the statutory three-judge Federal Court in Henderson v.
Terrell. 24 Fed. Sup. 147. There the statute and the order
entered pursuant thereto was attacked,as being a restriction
on plaintiffs' production, although plaintiffs were pro-
ducing without waste, in order to compel plaintiffs to share
the market for their gas with owners and operators of wells
having no market. The Court differentiated the facts in the
Consolidated'case w~iththe facts in the Henderson case in
this language:
"Indeed, the takings from those wells had
been far in excess of the amount of gas which
had originally underlain the structure there,
but notwithstanding this, there had'been such
rapid and heavy migration into the low pressure
area, caused by the heavy production of plain-
tiffs' and others In that area, that there was
still nearly as much gas under plaintiffs' lands
as had originally been there.
"The proof thus demonstrated beyond perad-
venture, that In restricting plaintiffs' proauc-
tion in the future, the orders did not operate
injuriously as to them, as the orders entered
in Consolidated Case, had operated in subjecting
the plaintiffs' properties there to a contiffuance
of the drainage they had already undergone.
The Court concluded as to the order and statute:
"We see nothing in the provision at all
violative of due process. We see in it only
a reasonable, Indeed, almost a necessary exer-
cise of the police power to protect owners of
wells, whose unrestricted right of capture the
statute has lawfully invaded, in order to pro-
tect the gas reserves from dissipation in infer-
ior uses, form having their gas drained away by
the disproportionate taklngs, form the reservoir,
of their owners.'
It is our opinion, therefore, that the Commission
isrequired to perform the duties prescribed by Article
``O~x;;tlt has found conditions of waste or undue drainage
.
Honorable Olin Culberson, page 9 0-5008
Yours very truly
ATTORNEYGENERAL OF TEXAS
By a/ Lloyd Armstrong
Lloyd ArmstrMg
Assistant
LA:EP
APPROVED DEC 17, 1942
S/Gerald C. Mann
ATTORNEYGEN~AL OF TEXAS