Ammonite Oil & Gas Corporation v. Railroad Commission of Texas

Fourth Court of Appeals
San Antonio, Texas
MEMORANDUM OPINION
No. 04-20-00465-CV
AMMONITE OIL AND GAS CORPORATION,
Appellant
v.
RAILROAD COMMISSION OF TEXAS and EOG Resources, Inc.,
Appellees
From the 36th Judicial District Court, McMullen County, Texas
Trial Court No. M-18-0003-CV-A
Honorable Janna Whatley, Judge Presiding
Opinion by: Liza A. Rodriguez, Justice
Sitting: Rebeca C. Martinez, Chief Justice
Irene Rios, Justice
Liza A. Rodriguez, Justice
Delivered and Filed: October 27, 2021
AFFIRMED
This appeal arises from an oil and gas case involving an application by Ammonite Oil and
Gas Corporation to force pool its mineral interest in State-owned riverbed acreage with adjacent
oil wells operated by EOG Resources, Inc. The Texas Railroad Commission (the “Commission”)
denied and dismissed Ammonite’s application under the Mineral Interest Pooling Act and the trial
court affirmed the Commission’s order. Ammonite appealed to this court. We affirm.
04-20-00465-CV
BACKGROUND AND PROCEDURAL HISTORY
Ammonite is the lessee under an oil and gas lease granted by the State of Texas covering
riverbed acreage of the Frio River in McMullen County within the Eagle Ford Shale. EOG drilled
sixteen wells on adjacent tracts on both sides of Ammonite’s riverbed tract in the Eagleville Field.
Ammonite made an offer to EOG to voluntarily pool its riverbed acreage with EOG’s sixteen oil
wells. EOG rejected the offer. Ammonite then filed applications with the Commission pursuant
to the Mineral Interest Pooling Act (“MIPA”) to force pool its leased riverbed tract into sixteen
units with the wells operated by EOG. See TEX. NAT. RES. CODE ANN. §§ 102.001-.112.
Ammonite’s applications asserted that forced pooling was necessary under MIPA to prevent the
waste of its riverbed minerals and to protect its correlative right to a fair share of the common
reservoir’s production. The Commission consolidated Ammonite’s sixteen applications.
EOG objected to the MIPA applications and a contested administrative hearing was held
before Commission hearing examiners on January 25-26, 2017. EOG presented the expert
testimony of Tim Smith, a petroleum engineer. Ammonite presented no expert testimony in
support of its applications. In their proposal for decision, the hearing examiners recommended
approval of fifteen of Ammonite’s sixteen applications for forced pooling. Upon its review, the
Commission rejected the examiners’ recommendation and issued a Consolidated Final Order on
November 7, 2017 denying and dismissing all of Ammonite’s applications based on the following
findings of fact and conclusions of law:
Findings of Fact
1. Notice of the hearing was provided ….
2. In addition, notice was published ….
3. At various times on [sic] 2015, Ammonite sent voluntary pooling offers to EOG
for each of the sixteen (16) proposed MIPA units in these dockets.
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4. All sixteen (16) wells are classified as oil wells.
5. Ammonite proposed a unit of 550.02 acres for the EOG Naylor Jones Unit 26,
Well No. 2H. Ammonite proposed units ranging in size from 43.6 to 98.64
acres for the other fifteen (15) wells.
6. 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
sixteen (16) wells.
7. None of the sixteen (16) wells produce hydrocarbons from or drain the adjacent
riverbed tracts.
8. At the hearing, Ammonite agreed with a greater charge for risk than the 10%
listed in its voluntary pooling offer for each of the sixteen (16) wells if the
Commission recommended same.
9. Formation of the proposed MIPA units for the sixteen (16) existing wells will
not access or produce any of the hydrocarbon reserves under Ammonite’s
adjacent riverbed tracts.
10. Ammonite offered no expert witnesses or evidence of drainage areas of any
wells.
11. Compulsory pooling will not prevent waste, protect Ammonite’s correlative
rights, or prevent the drilling of unnecessary wells. The applicant failed to meet
its burden of proof to prove that the granting of the application is necessary to
prevent waste, protect correlative rights, or avoid the unnecessary drilling of
wells. In the record, there is simply no evidence showing that forced pooling
these wells will prevent waste or protect correlative rights—the wells have been
drilled and are producing; they do not and will not produce riverbed minerals.
Conclusions of Law
1. Pursuant to Texas Natural Resources Code 102.016, notice of the hearing was
given to all interested parties . . . .
2. Ammonite failed to make a fair and reasonable offer to voluntarily pool as
required by Texas Natural Resources Code 102.013.
3. Force pooling will not prevent waste, protect correlative rights, or avoid the
drilling of unnecessary wells as required by Texas Natural Resources Code
102.011.
4. The Commission lacks authority to issue a compulsory pooling order for the
Naylor Jones Unit 26 No. 2H because Ammonite’s proposed unit size exceeds
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the limits authorized by Texas Natural Resources Code 102.011 and cannot be
reformed.
5. Because the applicant failed to meet its burden of proof to prove that the
granting of the application is necessary to prevent waste, protect correlative
rights, or avoid the unnecessary drilling of wells, the necessary pre-requisites
for MIPA pooling have not been established. Ammonite’s applications for all
sixteen (16) units must be denied.
Ammonite filed a petition for judicial review of the Commission’s Order in the district
court of the county where the land is located. 1 See TEX. NAT. RES. CODE ANN. § 102.111
(providing for judicial review of the Commission’s final order in a manner other than trial de
novo); id. § 102.112 (venue). Based on its review of the administrative record and the parties’
briefs, the trial court affirmed the Commission’s Order. Ammonite appealed.
On appeal, Ammonite asserts the Commission misinterpreted the MIPA requirements to
obtain a forced-pooling order under section 102.011 and deviated from its own precedent, and the
district court erred in failing to address those issues of law.
DISCUSSION
Standard of Review: Judicial Review of Commission’s Administrative Order
In a judicial review of the Commission’s decision in a contested case, the court applies the
substantial evidence standard of review. TEX. GOV’T CODE ANN. § 2001.174; R.R. Comm’n of
Tex. v. Torch Operating Co., 912 S.W.2d 790, 792 (Tex. 1995). “This is a limited standard of
review that gives significant deference to the agency in its field of expertise.” Torch, 912 S.W.2d
at 792. Under this standard of review, the reviewing court may reverse or remand for further
proceedings only if it concludes that the appellant’s substantial rights have been prejudiced
“because the administrative findings, inferences, conclusions, or decisions are: (A) in violation of
1
Ammonite did not challenge the Commission’s denial of its forced-pooling application for the EOG Naylor Jones
Unit 26, Well No. 2H, because the proposed unit size was too large. (See the Commission’s Finding of Fact #5 and
Conclusion of Law #4).
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a constitutional or statutory provision; (B) in excess of the agency’s statutory authority; (C) made
through unlawful procedure; (D) affected by other error of law; (E) not reasonably supported by
substantial evidence considering the reliable and probative evidence in the record as a whole; or
(F) arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise
of discretion.” TEX. GOV’T CODE ANN. § 2001.174(2); R.R. Comm’n of Tex. v. Tex. Citizens for a
Safe Future & Clean Water, 336 S.W.3d 619, 624 (Tex. 2011). Judicial review of the
Commission’s decision is based on the administrative record. TEX. NAT. RES. CODE ANN. §
102.111; R.R. Comm’n of Tex. v. Pend Oreille Oil & Gas Co., 817 S.W.2d 36, 40 (Tex. 1991).
A court applying the substantial evidence standard of review may not substitute its
judgment for that of the state agency “on the weight of the evidence on questions committed to
agency discretion.” TEX. GOV’T CODE ANN. § 2001.174; Mireles v. Tex. Dep’t of Pub. Safety, 9
S.W.3d 128, 131 (Tex. 1999). In reviewing fact-based determinations, a court must determine
whether, considering the reliable and probative evidence in the record as a whole, some reasonable
basis exists in the record for the agency’s action. TEX. GOV’T CODE ANN. § 2001.174(2)(E); Tex.
Indus. Energy Consumers v. CenterPoint Energy Hous. Elec., LLC, 324 S.W.3d 95, 105 n.60 (Tex.
2010). “Substantial evidence requires only more than a mere scintilla, and ‘the evidence on the
record actually may preponderate against the decision of the agency and nonetheless amount to
substantial evidence.’” Torch, 912 S.W.2d at 792-93 (quoting Tex. Health Facilities Comm’n v.
Charter Medical-Dallas, Inc., 665 S.W.2d 446, 452 (Tex. 1984)). “The issue for the reviewing
court is not whether the agency reached the correct conclusion, but rather whether there is some
reasonable basis in the record for the action taken by the agency.” Id. at 792; Mireles, 9 S.W.3d
at 131 (courts must affirm administrative findings in contested cases if there is more than a scintilla
of evidence to support them); Charter Medical, 665 S.W.2d at 453 (agency’s decision will be
sustained if the evidence is such that “reasonable minds could have reached the conclusion the
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agency must have reached in order to justify its action”). The court presumes the agency’s
findings, inferences, conclusions, and decisions are supported by substantial evidence and the
appealing party bears the burden to demonstrate otherwise. Maverick Cty. v. R.R. Comm’n of Tex.,
No. 03-14-00257-CV, 2015 WL 9583873, at *2 (Tex. App.—Austin Dec. 29, 2015, pet. denied)
(mem. op.).
With respect to the agency’s conclusions of law, a court reviews them de novo under
traditional principles of statutory construction. Tex. Citizens for a Safe Future, 336 S.W.3d at 624;
see Wimberley Springs Partners, Ltd. v. Wimberley Valley Watershed Assoc., No. 03-13-00467-
CV, 2017 WL 2229876, at *3 (Tex. App.—Austin May 19, 2017, no pet.) (mem. op.) (reciting
statutory construction principles). However, the agency’s interpretation of a statute it is authorized
to enforce and construe is given some deference. Tex. Citizens for a Safe Future, 336 S.W.3d at
624-25 (agency’s interpretation of statute it is charged with enforcing is entitled to “serious
consideration” as long as the construction is reasonable and does not conflict with the statute’s
plain language). The Supreme Court has recognized that the Railroad Commission “has long been
the agency charged with regulating matters related to oil and gas production, and is given broad
discretion in its administration of oil and gas laws.” Id. at 630 (citing TEX. NAT. RES. CODE ANN.
§ 85.202(b)). As such, “[t]he Commission must have discretion in determining the minutiae of its
statutory mandates.” Id. at 631. “Such deference is particularly appropriate where the statutes and
rules at issue concern a matter within the core expertise of the agency.” Wimberley Springs, 2017
WL 2229876, at *3.
On appeal from a district court’s review of an administrative order, the appellate court
reviews the district court’s decision de novo. Tex. Dep’t Public Safety v. Cuellar, 58 S.W.3d 781,
783 (Tex. App.—San Antonio 2001, no pet.).
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Mineral Interest Pooling Act (MIPA)
Under MIPA, a mineral interest owner may apply for a forced pooling order from the
Commission to pool its property with other owners’ proposed or existing wells on the same
proration unit within a common reservoir. TEX. NAT. RES. CODE ANN. § 102.011. The applicant
must first make a fair and reasonable offer to the owner/operator(s) of the other well(s) to
voluntarily create a pooled unit prior to filing an application under MIPA. TEX. NAT. RES. CODE
ANN. § 102.013; Pend Oreille, 817 S.W.2d at 39-40 (qualifying pooling offer invokes the
Commission’s jurisdiction over a MIPA application). If a fair and reasonable voluntary pooling
offer is not accepted, the mineral interest owner/lessee may file a MIPA application with the
Commission for forced pooling. TEX. NAT. RES. CODE ANN. § 102.011 (pre-condition to forced
pooling is that the owners have not agreed to voluntarily pool their interests). To obtain
Commission approval of its MIPA application, the mineral interest owner must meet one of three
statutory requirements by establishing that the proposed force-pooled unit(s) would (1) avoid the
drilling of unnecessary wells, (2) protect correlative rights, or (3) prevent waste. TEX. NAT. RES.
CODE ANN. § 102.011. The applicant has the burden to present substantial evidence showing that
its voluntary pooling offer was fair and reasonable and that one of the three statutory requirements
for forced pooling exists. Pend Oreille Oil & Gas Co. v. R.R. Comm’n of Tex., 788 S.W.2d 878,
885 (Tex. App.—Corpus Christi-Edinburg 1990), aff’d in part, 817 S.W.2d 36 (Tex. 1991). Here,
the Commission found that Ammonite’s voluntary pooling offers to EOG were not fair and
reasonable and dismissed Ammonite’s MIPA applications on that basis. The Commission also
found that Ammonite failed to meet its burden to establish one of the three statutory requirements
for forced pooling and alternatively denied Ammonite’s applications.
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Fair and Reasonable Offers to Voluntarily Pool
We first address the jurisdictional issue that led to the Commission’s dismissal of
Ammonite’s forced-pooling applications – its determination that Ammonite’s voluntary pooling
offers were not fair and reasonable. See Pend Oreille, 817 S.W.2d at 40. A fair and reasonable
offer to voluntarily pool is a precondition to any forced-pooling application under MIPA. TEX.
NAT. RES. CODE ANN. §§ 102.011, 102.013. If an applicant’s voluntary pooling offer is not fair
and reasonable, the Commission lacks jurisdiction over the forced-pooling application and must
dismiss it. Id. § 102.013(b) (“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.”); see Carson v. R.R.
Comm’n of Tex., 669 S.W.2d 315, 316 (Tex. 1984) (characterizing the issue as jurisdictional). The
court explained in Carson, “[i]n the absence of a finding of reasonable offers a dismissal ... may
be more in keeping with the spirit of the act … the Texas statute differs from similar statutes of
other states by its emphasis on voluntary pooling … If a bona fide attempt to reach a contractual
agreement is not considered a condition precedent to invoking the compulsory process, much of
the deliberately unique language in the Texas statute is rendered meaningless.” Id. at 318 (quoting
E. Smith, The Texas Compulsory Pooling Act, 44 Tex. L. Rev. 387, 393 (1966)). Thus, “[t]he Act
… is more aptly described as ‘an Act to encourage voluntary pooling—rather than an Act to
provide compulsory state action.’” Pend Oreille, 817 S.W.2d at 40 (quoting E. Smith, The Texas
Compulsory Pooling Act, 43 Tex. L. Rev. 1003, 1009 (1965)).
The MIPA does not define the phrase “fair and reasonable offer to pool voluntarily.” See
TEX. NAT. RES. CODE ANN. § 102.013. The meaning is therefore “left to the Commission’s
discretion” in each case. Pend Oreille, 817 S.W.2d at 40. The voluntary pooling offer must,
however, be “one which takes into consideration those relevant facts, existing at the time of the
offer, which would be considered important by a reasonable person in entering into a voluntary
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agreement concerning oil and gas properties.” Id. at 41 (citing Carson, 669 S.W.2d at 318). The
fairness and reasonableness of the pooling offer is judged from the viewpoint of the party being
asked to pool. Id. at 43. A court reviews the Commission’s findings and conclusions about fair
and reasonable pooling offers by examining the relevant facts in existence at the time of the offer.
Id. at 41. Section 102.013(a) requires the MIPA applicant to “set forth in detail the nature of the
voluntary pooling offer made.” TEX. NAT. RES. CODE ANN. § 102.013(a); Carson, 669 S.W.2d at
317.
Even though the requirement of a fair and reasonable pooling offer is considered a
jurisdictional issue, a reviewing court still applies the substantial evidence standard and affords
substantial deference to the Commission’s decision as to whether the offer was fair and reasonable.
Pend Oreille, 817 S.W.2d at 41-42 (noting that Carson involved a unique situation where the
jurisdictional issue could be resolved as a matter of law). As discussed above, the substantial
evidence standard is “[a]t its core … a reasonableness test or a rational basis test.” Id. at 41. It
follows then that “[t]he commission’s application of the statutory term [“fair and reasonable offer
to pool voluntarily”] to the facts in each case is conclusive unless it is unreasonable.” Id. at 42;
Tex. Health Facilities, 665 S.W.2d at 453 (the agency’s action will be sustained if the evidence is
such that reasonable minds could have reached the same conclusion the agency must have reached
to justify its decision); R.R. Comm’n of Tex. v. Broussard, 755 S.W.2d 951, 955 (Tex. App.—
Austin 1988, writ denied) (determination of whether voluntary pooling offers are fair and
reasonable is a mixed question of fact and law which is entitled to substantial deference).
Here, the Commission reached the legal conclusion that Ammonite’s voluntary pooling
offers to EOG were not “fair and reasonable” as required by MIPA section 102.013 (Conclusion
of Law #2) and dismissed the MIPA applications on that basis. The Commission’s conclusion was
based on its factual findings that: Ammonite failed to provide survey data or a metes and bounds
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description of the riverbed to establish the precise acreage to be pooled (Finding of Fact #6); none
of the EOG’s sixteen wells produce hydrocarbons from or drain Ammonite’s riverbed tracts
(Finding of Fact #7); and Ammonite agreed that a greater charge for risk than the 10% listed in its
voluntary pooling offers was reasonable (Fact Finding #8). Upon review, the district court
determined that the Commission’s fact findings were supported by more than a scintilla of
evidence in the administrative record and affirmed. We must determine whether the record
contains substantial evidence to support the Commission’s findings and conclusion regarding
Ammonite’s voluntary pooling offers. Pend Oreille, 817 S.W.2d at 41-42.
We begin with the Commission’s finding regarding Ammonite’s proposed charge for risk
in its pooling offers to EOG. The only evidence in the administrative record with respect to the
charge for risk contained in Ammonite’s voluntary pooling offers consists of the terms of the offers
sent by Ammonite to EOG (Ammonite’s Exhibits #37-43) and the testimony of Tim Smith, EOG’s
expert witness. Ammonite’s voluntary pooling offers to EOG proposed formation of sixteen (16)
pooled units subject to a mutually acceptable joint operating agreement with EOG as operator and
a 10% charge for risk attached to the working interest component. At the administrative hearing,
Ammonite asserted that its proposed 10% charge for risk is reasonable in an unconventional
resource play like the Eagleville Field and a 10% charge has been approved by the Commission in
similar resource play situations. Ammonite conceded that a higher charge for risk would be fair
and reasonable and “would not be adverse.”
Smith testified that Ammonite’s proposed 10% charge for risk was unreasonably low and
that a 100% charge for risk would be fair and reasonable. Smith explained that a “charge for risk”
is intended to compensate the operator for the risks undertaken in drilling wells and “to cover the
cost of money.” Smith testified and presented documentary evidence showing that the Eagle Ford
shale play within the Eagleville Field has extremely limited permeability necessitating the use of
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unconventional drilling and completion techniques that result in a substantial percentage of wells
drilled not being commercially successful. Smith explained that Ammonite’s inclusion of only a
10% charge for risk in its pooling offers was unreasonably low because a large resource play like
the Eagle Ford requires an investment in large amounts of acreage and the drilling of a significant
number of wells in order to be commercially successful, not just drilling one individual well in a
single unit. Smith opined that, under the circumstances, a 100% charge for risk would be
reasonable and more appropriate. Ammonite presented no expert testimony or technical evidence
to controvert Smith’s testimony that the 10% charge for risk in Ammonite’s offers was not fair
and reasonable.
Based on the deferential standard of review, the Commission’s decision must be upheld if
there is some reasonable basis in the record for its decision, i.e., substantial evidence. Torch, 912
S.W.2d at 792-93; Pend Oreille, 817 S.W.2d at 42 (commission’s application of term “fair and
reasonable offer to pool voluntarily” to the facts of the case is conclusive unless it is unreasonable).
We conclude there is a reasonable basis for the Commission’s fact finding and conclusion that
Ammonite’s voluntary pooling offers were not fair and reasonable based on a 10% charge for risk
being unreasonably low according to Smith’s uncontroverted testimony. Substantial evidence
supports the Commission’s decision and its dismissal of Ammonite’s MIPA applications for lack
of jurisdiction. We therefore do not reach Ammonite’s other issues on appeal.
CONCLUSION
Based on the foregoing reasons, we affirm the district court’s order upholding the
Commission’s decision.
Liza A. Rodriguez, Justice
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