Railroad Commission v. Shell Oil Co.

Decision Date11 March 1942
Docket NumberNo. 7928.,7928.
PartiesRAILROAD COMMISSION et al. v. SHELL OIL CO., Inc., et al.
CourtTexas Supreme Court

Gerald C. Mann, Atty. Gen., James Noel, E. R. Simmons, Edgar W. Cale, Tom D. Rowell, Jr., James D. Smullen, Fagan Dickson, and Cecil Rotsch, Asst. Attys. Gen., and James P. Hart, of Austin, for Railroad Commission, petitioner.

Wheeler & Wheeler and J. W. Wheeler, all of Austin, for carrier, petitioner.

H. E. Bell, Joe T. Dickerson, and R. H. Whilden, all of Houston, Powell, Rauhut & Gideon, Greenwood, Moody & Robertson, J. B. Robertson, and Dan Moody, all of Austin, and Rex Baker, of Houston, for respondents.

Saye & Saye, of Longview, W. Dewey Lawrence, Oran Lowry, Earle B. Mayfield, and W. Edward Lee, all of Tyler, J. W. Hassell, of Dallas, and Robt. E. Hardwicke, Robt. E. Hardwicke, Jr., and Mark McGee, all of Fort Worth, amici curiae.

ALEXANDER, Chief Justice.

This is a Rule 37 case. The Legislature of this State by the enactment of Vernon's Ann.Civ.St. Article 6049c, conferred on the Railroad Commission of Texas the authority to regulate the oil industry for the purpose of preventing waste. Pursuant to the authority so vested in it the Railroad Commission of Texas adopted Rule 37, applicable to the East Texas oil field. For a copy of the rule, see Gulf Land Co. v. Atlantic Refining Co., 134 Tex. 59, 131 S.W. 2d 73, 77. The pertinent part of said rule is as follows: "Rule I. Spacing Rule. No well for oil or gas shall hereafter be drilled in said East Texas field nearer than 660 feet to any other completed or drilling well on the same or adjacent tract or farm; and no well shall be drilled in said field nearer than 330 feet to any property line, lease line, or subdivision line; provided that the Commission in order to prevent waste, or to prevent the confiscation of property will grant exceptions to permit drilling within shorter distances than above prescribed whenever the Commission shall determine that such exceptions are necessary either to prevent waste or to prevent the confiscation of property."

Trem Carr made application to the Railroad Commission of Texas for a permit to drill a well, being a second well on a .92-acre tract, being on a .67-acre subdivision thereof, which .92-acre tract was in turn a voluntary subdivision from a 20-acre tract. For a more detailed description of the tracts of land involved, see Richey v. Shell Petroleum Corp., Tex.Civ.App., 128 S.W.2d 898. The well in question was located approximately 120 feet from an adjoining well and within less than 660 feet of several other wells. The right to drill and operate the well was contested by the Shell Oil Company and other adjoining property owners. The permit was granted by the Railroad Commission of Texas, but on a trial in the District Court of Travis County it was cancelled. The judgment of the trial court was affirmed by the Court of Civil Appeals. 154 S.W.2d 507. Applications for writs of error by both the permittee and the Railroad Commission were granted by this Court.

It should be noted at the outset that the permittee makes no contention for a right to drill and operate the well in question on the ground that the same is necessary in order to prevent confiscation of his property. That question has heretofore been tried out, and the right to a permit on that ground denied. See Richey v. Shell Petroleum Corp., Tex.Civ.App., 128 S.W.2d 898. The sole contention here is that the drilling and operation of the well is necessary in order to prevent physical waste.

The testimony introduced by the permittee in support of his application for the permit consisted largely of the testimony of expert witnesses. One of these witnesses testified: "It is my opinion that the more wells are drilled the greater will be the recovery of oil from the field provided the rate of flow is properly restricted throughout the life of the field." Another witness testified that under the whole area in this section of the oil field water is tending to come up irregularly or unevenly; that at the time of the hearing it had not reached such a stage that oil was being trapped thereby, but that in his opinion eventually, twenty or twenty-five years later, when the then-existing wells are finally drowned out the water will come up around the present wells, causing some oil to be trapped in small areas between the present wells. Other witnesses testified that some oil under the .67-acre tract would ultimately be trapped and lost unless the drilling of this well was permitted. All of the testimony showed, however, without any substantial dispute that the same conditions as above set out would be true of any other similar area in the oil field if not drilled to an equal density. The testimony further showed that in this, and the eight times area surrounding the 20.92 acres from which this small tract was segregated, the underground conditions — that is, sand thickness, porosity, permeability, potentials, etc. — were substantially uniform. Another expert witness testified on behalf of the permittee that in his opinion the drilling of the well in question "will add to the total production both of the entire field and of the area and of the tract. It (my opinion) is based primarily upon two premises. One is that the sand on the top forty feet of the Woodbine in that area is exceedingly tight and consequently the effective drainage area of a well in that tight sand is much less than it is normally throughout the field. The second is that it has been my observation on the wells that have already been plugged and abandoned in the East Texas field that very few, if any, of them drained all of the recoverable oil in a ten acre area, and in most cases the drainage area can be restricted down to where it was less than two acres." This same witness, however, admitted that the same would be true with reference to any other section of the East Texas oil field where the wells were drilled more than 120 feet apart.

It will be noted that Rule 37, copied above, as adopted by the Railroad Commission provides generally for the spacing of wells 660 feet apart, but provides that the Commission may grant exceptions to permit drilling within shorter distances whenever the Commission shall determine that such exceptions are necessary to prevent waste. The Commission has never fixed any standard or rule by which it would be guided in determining under what circumstances an applicant would be entitled to such a permit, except that it will grant the permit "whenever the Commission shall determine that such exceptions are necessary to prevent waste." The briefs do not make it exactly clear under what circumstances the Commission proposes to grant such exceptions, but apparently its position is that since the statute has conferred upon it the authority to regulate the oil industry for the prevention of waste, and has therefore authorized it to determine the density of the wells in the field, it has the right, from time to time, as the facts develop, to change its opinion as to the needed density of the field; that upon hearing proof that "the more wells the more oil will be produced," it may conclude that a closer spacing of wells is needed, and in order to accomplish this purpose it may grant special permits to such individual applicants as it desires for the drilling of wells at less than 660 feet apart; and that at other times upon the hearing of substantially the same proof it may reach the conclusion that the field, for the time being, has reached the saturation point, and that no more wells are needed, and it may therefore refuse other applicants the special permits requested by them. In other words, its contention, as shown by the briefs filed by the Attorney General, is that it has the discretion of determining the density of wells that should prevail in the field, and that it can bring about and control such density by the granting or withholding of special permits as it deems proper.

The Railroad Commission takes the position that any permit to drill a well as an exception to the spacing provisions of Rule 37 is sustainable on the ground of preventing waste if there is testimony of expert witnesses to the effect that the more wells are drilled, the more oil will ultimately be recovered from the field. It is admitted that this theory, if correct, would apply equally to all parts of the field. Reduced to its last analysis, it appears to be the contention of the Railroad Commission that in the exercise of its authority to regulate the oil industry it has the power to grant or refuse a special permit in its discretion.

This contention is unsound because it is based on a construction of the rule that would render it unconstitutional and void. It would grant to the Railroad Commission arbitrary power to discriminate between individuals without any standard or guide to govern it in the exercise of its discretion. Rule 37, like all other general orders of the Railroad Commission, is subject to the same principles of construction as are generally applied in construing statutes. It is a well-established principle of constitutional law that any statute or ordinance regulating the conduct of a lawful business or industry and authorizing the granting or withholding of licenses or permits as the designated officials arbitrarily choose, without setting forth any guide or standard to govern such officials in distinguishing between individuals entitled to such...

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