In a case we first reported more than a year ago, the Texas Supreme Court has upheld a Houston [14th] Court of Appeals decision affirming the denial of an oil and gas producer’s applications to force pool its interest with an adjacent mineral owner. At that time, we expressed some surprise that the Court felt compelled to wade into the case in part because it pitted the Railroad Commission, which exercised its statutory authority under the Mineral Interest Pooling Act (MIPA) in denying the applications, and the General Land Office, which as amicus curiae took issue with the Commission’s decision. As things turned out, the GLO’s (and the disappointed applicant’s) position attracted support from a pair of dissenting justices, suggesting perhaps that the a difference of opinion between interested state agencies indeed warranted the Court’s consideration.
First, let’s refresh the facts and procedural history of Ammonite Oil and Gas Corporation v. Railroad Commission of Texas and EOG Resources, Inc. (No. 21-1035; decided June 28, 2024). The case arose from Ammonite’s effort to pool its leased minerals in a state-owned riverbed tract (hence the GLO’s involvement) 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. 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 sought review in district court, which ruled for the RRC. 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 make “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 to establish each of the statutory showings, it dismissed the claim on jurisdictional grounds 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.
In a majority opinion by Chief Justice Hecht, SCOTX affirmed the court of appeals’ judgment, though it disagreed with the court grounding its decision on the jurisdictional argument. Whereas the court of appeals held that Ammonite’s offer was not “fair and reasonable” under § 102.013, thus depriving the RRC of jurisdiction over the application, the majority determined rather that the statutory requirement that the applicant make such an offer governs the applicant’s right to relief. Since MIPA did not define what constitutes a “fair and reasonable offer” to begin with, the majority left the determination “to the commission’s discretion,” whose “application” of the phrase is “conclusive, unless it is unreasonable” (citation omitted). Although the RRC did not explain why Ammonite’s offer was not “fair and reasonable,” the majority, citing Railroad Commission of Texas v. Broussard, 755 S.W.2d 951 (Tex. App.—Austin, 1988, writ denied), concluded that the commission can dismiss pooling applications if the evidence showed that the offeree (in this case EOG) “[was] not draining the [offeror’s] tract at present.” The majority pointed out that “[w]hile discussing Broussard, notable commentators on Texas oil and gas law observed that ‘[i]t is unfair to let an applicant share in production from a well that does not drain any oil or gas from the applicant’s tract.’” Moreover, the majority determined, Ammonite’s offer was unreasonable because it failed to suggest any technical solutions to facilitiate EOG’s access to Ammonite’s minerals, such as altering EOG’s drilling plans or extending existing wells. Consequently, because Ammonite’s offer was not “fair and reasonable,” the RRC had to dismiss its applications.
Justice Young, joined by Justice Busby, vigorously dissented. The dissenters would have held that Ammonite’s offer was indeed “fair and reasonable” because the offer proposed that Ammonite pay its share of production costs and included a 10% risk penalty. They further noted that Ammonite had made bona fide attempts to negotiate a voluntary pooling agreement but were rebuffed by EOG. Since neither EOG nor the RRC provided any response detailing the grounds upon which Ammonite’s offer failed the “fairness and reasonableness” test, the dissenters would reverse and remand for further proceedings. As to the majority’s view that the Broussard rationale applied to this case, the dissenters argued that Ammonite’s proposed pooling agreement would actually incentivize EOG to produce Ammonite’s “stranded” minerals since the two producers’ pool-interest would be allotted based on acreage owned, significantly favoring EOG. Consequently, the pooling agreement itself would constitute Ammonite’s contribution of “‘minerals of its own’ to the pool.” The dissenters further contended that nothing in § 102.013 required Ammonite to “have to prove that it was possible or practical to drill or extend wells into the riverbed to proceed past” the requirement of the statute.
Perhaps the biggest bone of contention between the majority and the dissent, however, was their divergent view on how the RRC interpreted its statutory charge. The majority saw no problem with the agency rejecting the application by essentially conflating § 102.013(b) (“fair and reasonable offer”) with § 102.011 (the three-factor consideration pertaining to “waste”), whereby the agency “promote[d] efficiency by eliminating the need to a second round of administrative adjudication after judicial review.” The dissenters, on the other hand, argued that the RRC should have analyzed § 102.011 in isolation, focusing on whether Ammonite’s minerals were indeed “stranded” and the feasibility of “de-stranding” them. The agency thus acted in an arbitrary and capricious manner that constituted an abuse of discretion under the APA. Addressing this conclusion, the majority noted that at the time the RRC reviewed the case, EOG’s wells were already drilled and did not access the riverbed at all. Thus, pooling could not have de-stranded the minerals and prevented waste in any event. The problem with the dissent’s view, then, was that § 120.011 specifically speaks to avoiding the necessity of “drilling unnecessary wells,” not requiring an offeree to drill new ones in hopes of some incremental production. And, as the majority observed, EOG did nothing to deprive Ammonite of its minerals, which by the nature of their location made them difficult to access in the first instance regardless of EOG’s drilling activity on its own leases.
In addition to providing a full-blown geek-out for oil and gas lawyers, this decision reveals something of a philosophical split on the larger issue of how much discretion state agencies may exercise in the adjudication of matters under their statutory jurisdiction. In this particular case, we might add, the agency that made the contested decision is a constitutionally-created body headed by three elected statewide officeholders, not a statutory creation under the direction of gubernatorial appointees. Should that make a difference? Nothing in either opinion suggests that it should, but if we’re doing philosophy here, we think it worth asking whether an elected commission has a different, and perhaps broader, level of discretion than an appointed one by virtue of its constitutional status.
TCJL Research Intern Shaan Rao Singh contributed to the research for and composition of this article.
