Magnolia Petroleum Co. v. Railroad Commission

This is a rule 37 case. The Railroad Commission, on April 29, 1936, granted to the Century Refining Company a permit as an exception to rule 37, to drill a well on a narrow strip of land containing 1.6 acres in the East Texas field in Rusk county. This strip ran east and west, being 1,094 feet long, 47.5 feet wide at its west end, and 25 feet wide at its east end. Adjoining it on the north is the 41.7-acre lease of the Ward Oil Corporation; and on the south a 17-acre lease of the Magnolia. The well in question was authorized 401 feet west of the east end of this strip and midway between its north and south boundaries. The permit recited that same was granted to prevent confiscation of property.

The Magnolia, which protested the application before the commission, brought this suit to set aside the permit and enjoin the drilling or operation of said well. From an adverse judgment against it in a trial to the court on the merits without a jury, the Magnolia has appealed.

The Magnolia asserted the invalidity of said permit, among others, on the ground that the owners had voluntarily segregated this 1.6-acre tract from the 41.7-acre tract to the north of it, capable of development as a whole without exceptions, after rule 37 became applicable to this field; that the Railroad Commission had on February 12, 1935, denied the application of the Century Refining Company for a permit to drill two wells on this same strip of land on the ground that it was a voluntary subdivision, that no material change in conditions had occurred between the date of such denial and the date of the second application, and that such denial therefore became res adjudicata of the second application; that the well in question, being only about 20 feet from the lines of the leases to the north and south, would require the drilling of equidistant offsets on each side in order to prevent drainage, and so create such a density of drilling as to cause great waste; that title to this strip together with another similar strip to the east of the 41.7-acre tract was acquired by limitation prior to the lease thereof by the owners for oil, the two strips aggregating in area 5.57 acres, and having been segregated from the 41.7-acre tract, should be treated as one tract; and, since the strip to the east of the 41.7-acre tract, which adjoins the east end of this 1.6-acre tract, already had two producing wells thereon which afforded a fair opportunity to recover an amount of oil equal in quantity to that in place beneath the entire 5.57 acres acquired by limitation and segregated from the 41.7-acre tract, that no additional wells were necessary on either strip of land to prevent confiscation.

The attached map shows the various tracts and the location of producing wells thereon. The circle near the center of said map indicates the location of the well here in controversy:

[EDITORS' NOTE: MAP IS ELECTRONICALLY NON-TRANSFERRABLE.]

The ownership of the lands in question is somewhat involved. W. B. Giles acquired fee title to the 41.7-acre tract in 1877. He was married at that time, and to him and his first wife, who died in 1886, were born seven children. He subsequently married again and of the second marriage were born four children. All of said children are still living. W. B. Giles died intestate in November, 1929, but shortly prior thereto he and his second wife conveyed to two of his children by his second wife, C. C. and J. E. Giles, an undivided 1/2 interest in the 41.7-acre tract, with the proviso that any excess therein should be owned jointly by all of his eleven children. On May 20, 1930, C. C. and J. E. Giles executed an oil and gas lease on the 41.7 acres which, by proper assignments, is now owned by the Ward Oil Corporation. On February 4, 1931, in a partition suit to which all of said children were parties, an agreed judgment was entered, setting aside to C. C. and B. F. Giles the 41.7-acre tract; and to all eleven of said children jointly the excess (which includes the strip of land here involved) over and above the 41.7 acres. As stated, the title to this excess was acquired by W. B. Giles, the father, by limitation which ripened into title prior to 1919. On October 27, 1934, all of said children joined in a lease of this strip of land to the Century Refining Company. Lease had already been executed by the Giles heirs in 1932 on the strip acquired by limitation to the east of the 41.7-acre tract, two wells drilled thereon, and the agreed facts show that the title to that strip is in litigation. Prior to the partition, therefore, it appears that the seven children by the first marriage inherited a half interest in the 41.7-acre tract upon the death of their mother; that two of the children of the second marriage owned the other half interest therein through a conveyance from their father; and that all the eleven children and the surviving wife (the character and extent of whose interest therein not being here in question) owned jointly the strip of land here involved. In a suit between the Ward Oil Corporation, as plaintiff, and the Century Refining Company and the Giles heirs as defendants, the Ward Oil Corporation was awarded a 2/11 interest (obviously acquired through C. C. and B. E. Giles) in the lease on this 1.6-acre tract, and the Century Refining Company a 9/11 interest therein. Thereupon a working agreement with reference to the drilling of said well by the Century Refining Company on the 1.6 acres, and its operation thereafter by the Ward Oil Corporation, was entered into between these two corporations on February 11, 1936, prior to the granting of the permit here in controversy.

We do not understand appellees to contend that the partition agreement of February 4, 1931, did not constitute a subdivision of the strip in question from a larger tract under common ownership capable of development as a whole without the necessity of exceptions to rule 37, but their argument is that because of the working agreement made between the Ward Oil Corporation and the Century Refining Company, this strip, for development purposes, should be treated as if it were a part of the Ward 41.7-acre tract; and that when so considered under our holding in Humble Oil Refining Co. v. Railroad Commission, 68 S.W.2d 625, because of the number of wells thereon, as compared with the number on surrounding leases, including the 17-acre lease of the Magnolia, they are entitled to more wells than had been drilled on such aggregate acreage, in order to obtain their fair share of the oil in place beneath it. That is, that if the 41.7 acres plus the limitation title strip to the east containing 3.96 acres on which there are two wells, and the strip of 1.6 acres here involved, without the well in issue, be treated as one tract, there are only nine wells thereon, or a density of one well to more than 5 acres. Whereas, on the Magnolia tract of 17 acres to the south there are six wells, a density of one well to 2.86 acres; and on the Ortiz lease to the east eight wells on 16.12 acres.

If the well in question had been authorized on this basis and had been located accordingly, this theory might be sustained. But the well in question was not so applied for nor was it so granted. Had the Ward Oil Corporation (which owned a 2/11 interest in the Century's lease on this strip, in addition to its lease on the 41.7-acre tract) joined with the Century Refining Company's application with such objective, a different situation would be presented. But only the Century Refining Company sought a permit, and that for the development of the 1.6-acre tract only; and this application was protested by the Ward Oil Corporation before the commission. The working agreement between the two corporations clearly discloses that its purpose was, not to enable the Ward Oil Corporation to secure a greater development of its 41.7-acre tract, but to protect its 2/11 interest in the 1.6-acre lease against the Century Refining Company in the latter's development of that tract. We find nothing in this agreement to prevent the Ward Oil Corporation from seeking an offset to the well in question on the north to prevent undue drainage of its tracts, just as the Magnolia would probably do on the south. The record clearly discloses we think, that the confiscation which the commission undertook to prevent as the support of its order is referable solely to the 1.6-acre tract in question, and to the lease of the Century Refining Company thereon, separate from and independent of the 41.7-acre tract to the north thereof. This is further demonstrated by the fact, as shown by the attached map, that disregarding this strip and treating it as a part of the 41.7-acre tract owned by the Giles heirs, there were already drilled three wells to the north of it and three wells to the south of it staggered at approximately equidistant locations from the common dividing line.

Under the facts and circumstances above stated, the rules announced by this court in Humble Oil Refining Company v. Railroad Commission,68 S.W.2d 625, approved by the Supreme Court and repeatedly adhered to in subsequent decisions unnecessary to cite here, and the amendment promulgated by the commission itself on May 29, 1934, predicated upon these decisions, wherein it is provided that the commission would not consider such subdivisions of property made subsequent to the promulgation of the original spacing rule on the question of confiscation of property, we conclude that the permit in question was not authorized and is therefore invalid.

Appellees urge that under the statute the order of the commission granting the permit is prima facie valid; that the appellant had the burden of proving that the well was not necessary either to prevent waste or to prevent the confiscation of property; and that appellant had not discharged this burden. As to confiscation, what we have already said disposes of this issue. When appellant showed that the permit was granted in contravention of the decisions of the courts as to this particular field, and in contravention of the commission's own promulgated general rule prohibiting such a permit, manifestly it met this burden on the confiscation issue. On the question of waste, the general rules of the commission as we have heretofore held amount to a finding that such would be the result under the facts of the instant case. A permit or order authorizing a particular well as an exception to the general rule defining what constitutes waste cannot rise to the dignity of a general rule, promulgated after extensive hearings, which is prospective and legislative in character and applicable to the field as a whole. The very fact that an exception is necessary to authorize such well at all shows that it is in derogation of such general rule which forbids it; and unless facts exist which remove it from the operation of the general spacing rule it cannot be sustained. As stated by this court in Sun Oil Co. v. Railroad Commission, 68 S.W.2d 609, and in Atlantic Oil Pro. Co. v. Railroad Commission, 85 S.W.2d 655, the spacing distances provided in rule 37 necessarily implies, a finding by the commission that wells located at lesser distances from each other than those prescribed by the rule, and producing equally, will tend to cause waste. If this were not so, the rule would be without basis to sustain it. It also necessarily constitutes a finding that, as applied to the field generally (and the subsurface conditions common to the field were shown to exist in the area here involved), a well will drain an area within a radius of 330 feet of such well We take it that the wells to the north and those to the south of this strip were located when rule 37 provided spacings of 150-300 feet. At the time this well was authorized, however, the rule prescribed spacings of 330-660 feet. Manifestly a well located within 20 feet of the Magnolia's line, both under the evidence introduced and under rule 37 itself, would drain oil from beneath the Magnolia's lease and affect its property rights within the meaning of the statute authorizing it to bring this suit.

The Ward Oil Corporation is not a party to this appeal. It has not asserted that this 1.6-acre tract should be treated as a part of its 41.7-acre lease for development purposes. The fact that it protested before the Railroad Commission the granting of the permit here attacked indicates the contrary. Obviously the Railroad Commission in passing on the application here involved considered and acted upon it as applied to the 1.6 acres above, and independent of the Ward 41.7-acre lease. That being true, the Century is in no position to assert that a disparity in density of drilling exists between the Ward tract and the Magnolia tract. That is a matter for the Ward Oil Corporation to assert with reference to its tract as a whole, and it is not here complaining. If the commission had granted an additional well on this basis, treating the 41.7 acres and the 1.6 acres as one tract, in the light of the wells already drilled on the 41.7 acres, no valid reason exists under its own rules for placing such additional well within 20 feet of the boundary line of appellant's lease, and within less than 330 feet of four other wells already drilled.

Having reached the conclusion that the only support upon which the permit granted, under the undisputed facts, can rest, is that it was necessary to protect rights of the Century Refining Company in and to this 1.6-acre tract, considered separate and apart from adjacent leases; that the Railroad Commission granted it on that ground and for that purpose; and such strip being a voluntary subdivision, segregated in 1931 from a larger tract capable of development as a whole without the necessity of such exception; we conclude that no well was authorized thereon. That being true, the other contentions made on this appeal become immaterial and need not be further considered.

The judgment of the trial court is therefore set aside and the permit granted by the Railroad Commission is held invalid for the reasons stated. Since, however, the judgment was not superseded on this appeal, and the record does not disclose what action has been taken by the Century Refining Company since the trial hereof, the judgment is reversed and the cause remanded to the trial court with instructions to enter such orders in accordance with this opinion as the facts and circumstances may warrant.

Reversed and rendered in part and in part reversed and remanded.