The Texas Supreme Court will review a case challenging a Railroad Commission order denying an oil and gas operator’s application to force pool its mineral interest with another operator.
Ammonite Oil and Gas Corporation v. Railroad Commission of Texas and EOG Resources, Inc. (No. 04-20-00465-CV; No. 21-1035, granted June 2, 2023) arose from Ammonite’s effort to pool its leased minerals in a state-owned riverbed tract of the Frio River in McMullen County. EOG drilled 16 wells on adjacent acreage on both sides of Ammonite’s tract. In 2016, Ammonite filed an application under Chapter 102, Natural Resources Code (the “Mineral Interest Pooling Act, or “MIPA), to force pool its interest with EOG’s to prevent waste and protect its correlative rights for a fair share of production from a common reservoir. Prior to making the application, Ammonite approached EOG about a voluntary pooling agreement but no such agreement ensued. EOG objected to the application and hearing examiners conducted a contested case hearing in January 2017. They recommended approval of 15 of the 16 applications filed by Ammonite. The RRC, however, rejected the examiners’ recommendations and dismissed Ammonite’s applications on jurisdictional grounds. Ammonite appealed.
The San Antonio Court of Appeals affirmed. In an opinion by Justice Rodriguez, the court held that substantial evidence supported the RRC’s finding that Ammonite failed to invoke the Commission’s jurisdiction under Chapter 102. Under that chapter, an applicant must first establish the Commission’s jurisdiction by making “a fair and reasonable offer” to other owners or operators to voluntarily create a pooled unit before applying for forced pooling with the RRC. § 102.013; case citation omitted). If the other owners or operators reject the offer, the applicant 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.” § 102.011. Although the RRC made findings of fact and conclusions of law that Ammonite failed on each of the statutory showings, it dismissed the claim based on Ammonite’s failure to make a “fair and reasonable” offer for voluntary pooling. The court of appeals thus focused its attention on that issue.
Observing that the statute does not define a “fair and reasonable offer to pool voluntarily” and leaves the question to the RRC’s discretion, Justice Rodriguez looked to case authority for the proposition that a “voluntary pooling offer must . . . 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 if entering into a voluntary agreement concerning oil and gas properties,” a question that must be “judged from the viewpoint of the party being asked to pool” (citations omitted). Although 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” (citation omitted).
Turning to the RRC’s decision that Ammonite’s offer was not fair and reasonable, the court noted that the RRC’s “conclusion was based on its factual findings that Ammonite failed to provide survey data or a metes and bounds description of the riverbed to establish the precise acreage to be pooled.” It likewise found that none of EOG’s wells produced hydrocarbons from or drained Ammonite’s tracts and that Ammonite agreed that a greater charge for risk than the 10% it offered was reasonable. Relevant to his point, EOG’s expert opined that Ammonite’s offer of 10% was “unreasonably low and that a 100% charge for risk would be fair and reasonable” based on the physical characteristics of the Eagleville field in which the tracts were located. Additionally, the offer was low because drilling in the Eagleford Shale generally “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.” By contrast, the court noted, Ammonite “presented no expert testimony or technical evidence to controvert” the testimony of EOG’s expert.
The court thus concluded that substantial evidence supported the Commission’s findings and order to dismiss for lack of jurisdiction. We are very interested and somewhat curious as to why SCOTX granted review in this case. One reason is probably that some very fine lawyers filed the petition, very fine indeed. Their petition argues that the hearing examiners’ finding that the voluntary offer was indeed “fair and reasonable” at the 10% was supported by substantial evidence and previous decisions below. It argues further that the court of appeals’ approach conflicts with that taken by the Houston [14th] Court of Appeals, “undermines MIPA’s policy favoring negotiation,” and ignores the fact that Ammonite said they would pay anything the Commission ordered, 10% or otherwise. Finally, the petition asserts that the RRC mistakenly construed the statute’s directive “to prevent waste” to mean “drainage” (thus “stranding” Ammonite’s mineral under the riverbed) and that voluntary pooling “would have permitted production of minerals from the State’s riverbed acreage.” SCOTX’s decision to review may also be attributable in part to an amicus letter filed by the Texas Land Office requesting the Court to accept review and “take careful note of both the language of the MIPA and the very real impacts of riverbed stranding on the [Permanent School Fund’s] mission to support public education.”
In any event, a case pitting the Railroad Commission against the Land Office should be fun to watch. Those in the industry with friends on both sides will certainly be attentive.
