Sun Oil Co. v. Railroad Commission , 68 S.W.2d 609 ( 1933 )

This appeal is from an order of the district court of Travis county denying appellant's application for a temporary injunction to restrain the appellees Bennett, Ryan, and Scheultz from drilling three wells on a strip of land in Rusk county, Tex., 33 feet wide and 3,342 feet long, containing 2.59 acres, and to set aside the order of the Railroad Commission granting permits for said wells. Pending a determination of this appeal, this court entered on September 29, 1933, a temporary restraining order, restraining appellees from drilling wells Nos. 1 and 3 authorized by the Railroad Commission. This order did not, however, relate to well No. 2, near the center of the tract.

The case arose under the following pertinent facts: One Rich Lee and wife were former owners of a 240-acre tract in Rusk county, which included the strip in question and the lands to the north and south thereof, all held as one body of land. After their deaths, six of their children partitioned said lands in March, 1921. There was set aside to Malinda Schuler a 42-acre tract south of and adjoining in its entire length the 2.59-acre tract here involved. To Mary V. Flanagan there was set apart this 2.59-acre tract and a 39 1/3-acre track immediately south of and adjoining in its entire length Malinda Schuler's 42-acre tract. Thereafter, in August 1921, Mary V. Flanagan conveyed to Malinda Schuler this 2.59-acre tract in exchange for a 2 2/3-acre tract conveyed to her at the same time by Malinda Schuler out of the west end of the latter's 42-acre tract. This exchange gave to Malinda Schuler her 42 acres, including the strip here in controversy, all adjacent and constituting one contiguous body of land, and to Mary V. Flanagan her 42 acres of contiguous lands instead of having same separated by the Malinda Schuler tract as created in the original partition.

A seventh child of Rich and Mary Lee, who was then thought to be dead, and who was not considered in the partition of 1921, appeared in 1931 and claimed his one-seventh interest in all of said lands, and his interest in the Malinda Schuler tract, including the 2.59-acre tract, was acquired by appellant Sun Oil Company, leaving only a six-sevenths interest claimed by appellees. To avoid confusion and for the purposes of the issues here presented, we shall discuss the issues as if Malinda Schuler owned the entire estate in said lands at the time she and her son executed a lease thereon to the Sun Oil Company on July 21, 1930. It may also be noted that a suit is now pending on appeal in the Court of Civil Appeals at Texarkana wherein appellant contends, and which contention was decided against it by the trial court in that case, that its lease from Malinda Schuler and son in fact covers the strip here in controversy. But by written agreement, and to avoid a receivership, it was agreed, among other things, that, pending the outcome of the suit, appellees, subject to appellant's right to protest their application therefor, might drill such wells on said strip of land as the Railroad Commission would grant them permits for. The permits herein attacked were granted to appellees by the Railroad Commission on July 12, 1933, without notice to appellant, and without a hearing, and recited that same were granted to protect vested rights under exceptions to rule 37 of the Railroad Commission.

Several contentions are presented on this appeal, but, since we have concluded that one of them disposes of the entire controversy, we shall pretermit a discussion of the others. We are met at the threshold of the case with the question of whether the owners of the fee to the 42 acres, of which the 2.59-acre strip is a part, and which entire 42-acre tract was capable of development as a unit, under regulations of the Railroad Commission, in such manner as to extract therefrom all of the oil to which such owners were entitled, can by their voluntary act subdivide in small tracts said 42 acres so as to require exceptions to rule 37 and permit the drilling of more wells thereon than would otherwise be permitted under the conservation laws of the state and the rules of the Railroad Commission promulgated pursuant thereto; that is, can the owners of a tract of land capable of development as a whole, under the conservation laws of the state and valid rules of the Railroad Commission, voluntarily divide same into small tracts and thereby create in themselves or in their assignees "vested rights" in such small tracts which would entitle them to more wells thereon than they could have drilled thereon under the law but for such subdivision into small tracts. We have reached the conclusion that they cannot.

Rule 37 was promulgated by the Railroad Commission in 1919, and was in force at the time the Schulers, under whom appellees claim, acquired title to the land here involved in 1921. Its validity has been upheld by the courts and is not here questioned. Bass v. R. R. Com. (Tex.Civ.App.)10 S.W.2d 589; Danciger Oil Ref. Co. v. R. R. Com. (Tex.Civ.App.)49 S.W.2d 837, and cases there cited. When first promulgated rule 37 provided for spacing of wells 300 feet apart and 150 feet from the property lines, and for exceptions to protect vested rights. It is now settled that orders of the Railroad Commission, validly issued in accordance with law, and when operating prospectively, are legislative in character and have "the force and effect of an enactment of the Legislature." West Tex. Compress Warehouse Co. v. Ry. Co. (Tex.Com.App.) 15 S.W.2d 558, 560; Missouri-Kansas T. Ry. Co. v. R. R. Com. (Tex.Civ.App.) 3 S.W.2d 489; Railroad Com. v. Uvalde Const. Co. (Tex.Civ.App.) 49 S.W.2d 1113; Coleman Gas Oil Co. v. Santa Anna Gas Co. (Tex.Civ.App.) 58 S.W.2d 540. As such, therefore, all parties leasing land for oil and gas subsequent to its promulgation are required to take cognizance of said rule 37. Being a valid order, sustained under the police power of the state, all parties affected by it must contract with reference to this well-recognized rule, and not in violation of it; and contracts, whether by conveyance or lease, covering the subject-matter to which it relates, must be entered into and construed in keeping with its terms. It is not necessary, so far as this controversy is concerned, for us to undertake to define the term "vested rights," nor to attempt to prescribe its limitations. Whatever the conditions under which vested rights may arise, certainly they must arise in conformity with law, and cannot grow out of a violation or an evasion of it. Any asserted right, therefore, the validity of which must be predicated upon a clear contravention of the terms and provisions of rule 37, cannot become a vested right.

To hold otherwise would be to set at naught the conservation laws of the state. There can be no distinction in principle between the right of the state through its Railroad Commission to limit the number of wells to be drilled in a given oil field on a given surface area, spaced at minimum distance from each other and its power to limit and prorate the amount of production from wells legally drilled. And the owners have no more right to contract, whether by lease, drilling contract, conveyance, partition, or otherwise, in such manner as to circumvent the purposes of this order of the commission, and thus acquire a right which, if permitted and enforced, would defeat those purposes, than they have to contract for the production from a given well of more oil than their allowable under a proration order of the commission, and by such contract acquire a vested right to do so. If the owner of a tract of land which is capable of development as a whole in such manner as to extract therefrom all the oil he is entitled to under the conservation laws of the state, be permitted, under the guise of vested rights, either to lease same in small tracts, or to lease a portion thereof and reserve unto himself a small strip (and there is no difference in principle) and thus secure one or more wells on each small tract, it is obvious that the conservation laws would be rendered nugatory.

The case here presented clearly illustrates what such a course would lead to. The area here involved is in a proven field where the sands are very porous and the oil very mobile. It is not controverted that a single well in that field will effectively drain ten acres surrounding it. Nor is it controverted that excessive drainage in a concentrated area will result in waste which is prohibited by the Conservation Act. After a full hearing the Railroad Commission determined, and amended its rule 37 accordingly, that wells should be spaced 660 feet apart in that field in order to prevent waste; i. e., one well to approximately 10 acres of land. According to their own rule, therefore, promulgated after an extensive hearing, wells in closer proximity producing equally would tend to create waste. If the three wells on this 2.59-acre strip, for which the commission granted permits, be drilled, a situation would be created, which the very rule itself seeks to prevent, calculated to cause waste, a condition which the statute imposes upon them the mandatory duty to prevent. The commission is the duly constituted agency of the state to ascertain what constitutes waste of oil and gas. This it must do after hearings and a careful investigation with reference thereto. And when it has promulgated a general rule, a power expressly delegated to it, after a full and careful consideration of the subject to which such rule relates, as amended rule 37 was, it cannot thereafter even itself arbitrarily grant exceptions thereto which would in effect indubitably destroy the efficacy of the rule itself.

In no event could the Schulers, even under authority of the commission to grant exceptions where legally authorized, as owners of the entire 42-acre tract, legally create a condition by their own voluntary acts which would vest in them or in their assigns any right to such exception, and thus be enabled to do indirectly that which they were forbidden by law to do directly; i. e., procure more wells on their lands than they were otherwise legally entitled to. Without undertaking to pass upon what facts or circumstances will authorize an exception to rule 37, we do expressly hold that no owner of lands which can be developed as a whole under the conservation laws of the state and the valid rules of the Railroad Commission in force at the time he undertakes to do so can by his voluntary acts divide same into small tracts by severance of the minerals, lease, or otherwise, and thus create in himself, or in any assignee or vendee under him, any vested right to any exception to the conservation rules of the commission which would enable him to circumvent the conservation laws and valid rules of the commission designed to make such laws effective. Such owner, whether of the leasehold, the minerals, or the fee, must contract in consonance with such laws and rules and subject to their provisions. Otherwise he is entitled to no exceptions to, nor relief from, the burdens they impose.

Rights in the individual to the use of his property are subordinate to rights of the state under its police power to regulate, curtail, or even prevent entirely such use if the public welfare requires it. He can by his voluntary acts obtain no vested right in himself which would defeat or impair the state's proper exercise of that power.

This conclusion renders unnecessary the discussion of the other issues raised. We think the Railroad Commission erroneously granted the permits attacked and that they had no authority to do so under the uncontroverted facts of this case. In passing, and without discussing that issue, we think it is clear, under the statute (article 6036a, Vernon's Ann.Civ.St., Acts 1929, 41st Leg., p. 694, c. 313, § 5), that appellant was entitled to notice and an opportunity to be heard on appellees' application for such permits, which was not accorded it. Magnolia Pet. Co. v. Edgar (Tex.Civ.App.) 62 S.W.2d 359; Rabbit Creek Oil Co. v. Shell Pet. Corporation, 66 S.W.2d 737, decided by this court on November 15, 1933.

For the reasons stated, the judgment of the trial court is reversed, and judgment here rendered granting to appellant the injunction prayed for against the appellees pending a trial of this case on its merits, upon appellant executing a proper bond in such sum as may be agreed to by the parties, or in case of failure to so agree to be fixed by the court, and conditioned as provided by law.

Reversed and rendered, with instructions.

On Motion for Rehearing. Appellees, other than the Railroad Commission, urgently insist in their motion for a rehearing that the action of the Railroad Commission, in granting the permits involved, is clearly sustainable under the commission's amendment of June 13, 1933, authorizing the granting of exceptions to rule 37 (that is, as to spacing at minimum distances from other wells or from property lines), "to protect any property against undue drainage by reason of the operation of the wells of any other operator. * * *" This amendment to the rule was added to former exceptions embodied in the rule itself which the commission would grant where necessary "to prevent waste, or to protect vested rights. * * *" They also urge that, even though the recitals in the permits were that same were granted to protect vested rights, the uncontroverted evidence showed undue drainage of said 2.59 acres by wells of other operators, and that the latter ground would sustain the permits. We agree with appellees that, if the permits can be sustained upon other legal grounds than those improperly recited in the order of the commission, the courts should not strike them down, and so held in Lon A. Smith et al. v. Maurice Stewart, 68 S.W.2d 627, decided by this court on January 2, 1934.

It is also urged that, power being delegated to the commission to promulgate rule 37, the same power authorizes them to abrogate, repeal, or amend it as circumstances may require and that therefore the exceptions to the rule granted by the commission carry the same degree of efficacy, and have the same binding force as the rule itself. If the exceptions are authorized upon legal and valid grounds, such contention is undoubtedly correct. But, unless they are, such contention is not.

In every enunciation of rule 37, and all amendments thereto, a minimum spacing of wells from each other and/or from property lines has been required except in the salt dome fields. Its basis is essentially that of conservation of the natural resources. If proper spacing of wells for that purpose is not necessary, the rule is without foundation to sustain it. To this spacing limitation upon the drilling of wells, and for purposes of conservation, has been added, among other things, proration of, or limitation upon, production. But never has the commission abandoned its spacing requirement as necessary to prevent waste, except, as stated, in the Gulf Coast fields. We take it, therefore, that the commission deemed proper spacing of wells as absolutely essential in order to prevent waste. It is true that different spacing requirements, save as to salt dome fields, have been found necessary, and have been prescribed by the commission for different oil fields as underground formations, depth, and water and gas pressure may require. But the spacing requirement has been uniformly incorporated in rule 37 since its promulgation so far as the East Texas field is concerned. Exceptions, therefore, must have their basis either as necessary to prevent waste (the same purpose sustaining the spacing requirement itself) or to protect some vested right of the owner. While the matters of offsets and of undue drainage have been added as exceptions, they are in final analysis, so far as the owners are concerned, but phases of vested rights. And if the owner of the land, by his voluntary act, creates a condition or seeks thereby to invest himself with a right which he would not have otherwise been entitled to under the general provisions of rule 37, such act is but to circumvent the rule and to render it incapable of enforcement.

Protection against undue drainage is but a protection of a right legally vested; and, if the owner creates, by his attempt to circumvent the spacing requirements of rule 37, and by his voluntary act in the face of rule 37 a condition causing undue drainage of his particular small tract, which he has voluntarily set apart or has acquired for the purpose of production, the efficacy of said rule 37 would be destroyed as effectually in one manner as in another. If by such action he can secure the right to drill a small tract, which he has voluntarily segregated from his larger tract, on the ground of adjoining drainage, he has worked a nullification of said rule 37 as effectively as if he had obtained a permit under any other exception to the rule. Undue drainage, therefore, resulting from his own voluntary act in creating a condition which produces it, does not vest in him, or in his assigns, any right to an exception, in order that he may be relieved of a situation that is the result of his own choosing. Otherwise by alienating his land in small tracts in a proven field, when any one of such tracts should be drilled, to protect against undue drainage, the surrounding tracts would be entitled to an exception, if appellees' contention is correct, until eventually all such tracts must be drilled and rule 37 as to spacing entirely set at naught. This condition he cannot voluntarily create in the face of rule 37, and thus under the guise of a vested right nullify its provisions and purposes.

The very term "exception" necessarily implies a departure from a rule otherwise found necessary to prevent or minimize waste. It must be in derogation of the general rule as to proper spacing; otherwise it is not an exception. We do not dissent from the proposition that an owner of land, acquired without reference to rule 37, and of the oil beneath it, cannot by such rule be deprived of his property or denied the proper use or development of it. But that is not the issue here presented. What we mean to hold, and all we mean to hold, is that, as the owner of a tract of land capable of development as a whole in consonance with the conservation laws of the state and the rules of the commission found necessary by it to prevent waste, he cannot so divide it into small tracts as to create in himself a right to require the commission to depart from its general rule as to spacing wells in that particular field, and thereby be enabled to secure for himself or to those to whom he conveys, a greater number of wells on his lands than he would otherwise be entitled to. This is not a denial to him of protection of a vested right legally existing; but only that no such right vests, or can vest in him or in his assignees, under the facts and circumstances here presented, which brings his claim for a permit within the purview of rule 37 or the exceptions therein authorized.

Appellees' motion is therefore overruled.

Overruled.