Atlantic Refining Co. v. Railroad Com'n of Texas, A-7355

• Decision Date: 08 March 1961
• Docket Number: No. A-7355,A-7355
• Citation: 346 S.W.2d 801,162 Tex. 274
• Parties: ATLANTIC REFINING COMPANY et al., Appellants, v. RAILROAD COMMISSION OF TEXAS et al., Appellees.
• Court: Texas Supreme Court

Page 801

346 S.W.2d 801

162 Tex. 274

ATLANTIC REFINING COMPANY et al., Appellants, v. RAILROAD COMMISSION OF TEXAS et al., Appellees.

No. A-7355.

Supreme Court of Texas.

March 8, 1961.

Rehearing Denied May 31, 1961.

Black & Stayton, Small, Small & Craig, Austin, Houchins, Anderson, Smith & Null, Victoria, for appellant.

Will Wilson, Atty. Gen., Houghton Brownlee, Jr., Linward Shivers, Assts., for appellee, Railroad Commission of Texas.

Wallace H. Scott, Jr., & Charles E. Crenshaw, Hart & Hart, Austin, Strasburger, Price, Kelton, Miller & Martin, Dallas, (Robert B. Payne, Dallas, with firm), for appellee, Bright & Schiff.

Walter R. Koch, Austin, for intervenors, Darsey, Darsey & Koch.

HAMILTON, Justice.

This suit was brought in the 98th District Court of Travis County by The Atlantic Refining Company, Tidewater Oil Company, Mrs. James R. Dougherty, a widow, Dudley T. Dougherty, Rachael D. Vaughan and husband, Ben F. Vaughan, Jr., and May D. Carr, a widow, hereinafter collectively referred to as appellants, to annul an order of the Railroad Commission of Texas, hereinafter called the Commission, prorating gas and condensate production from the Slick, Luling and First Massive pay zones among wells in the Normanna Gas Field, Bee County. On December 16, 1957, field rules were enacted for the Slick, Luling and Second Massive pay zones in the Normanna Field. At a second hearing on February 26, 1958, field rules were adopted for the First Massive pay zone in said field. Atlantic at both of these hearings protested the adoption of the 1/3-2/3 rule, and introduced the same evidence at both hearings, except at the first hearing the First Massive was not shown to be productive. Said field rules included a proration formula for production in said field on the basis of 1/3 per well and 2/3 according to the amount of acreage. Specific complaint was made of such order in so far as it allows the production of gas, including the liquid content thereof, or the condensate, from a well drilled by Bright & Schiff, a partnership, hereinafter called appellee, on a lot in the Normanna Town-site 79 feet wide and 130 feet long. Although this tract contains something less than 3/10 of an acre, it will be referred to hereinafter as the .3-acre tract, or the 'Town Lot'. W. G. Darsey, Jr., Joe T. Darsey and Walter R. Koch intervened in this suit and assumed the status of defendants.

Trial was to the court without a jury. Subsequent to judgment being entered for appellees, the following finding of fact was filed:

'Production of gas and condensate from the well drilled by defendant Bright & Schiff upon its lease containing approximately .3 acre under the rules of defendant Railroad Commission of Texas prorating the production of gas from the reservoirs in the Normanna Field, Bee County, Texas, will result in the drainage of a tremendous quantity of gas and condensate from other leases and tracts in the field, including leases and tracts in which plaintiffs own an interest, to said .3 acre lease, the precise amount of said drainage being incapable of ascertainment; and said drainage will not be compensated by drainage of gas and condensate from said lease containing approximately .3 acre to said other leases and tracts in the field, including leases and tracts in which plaintiffs own an interest.'

Among the conclusions of law filed by the court is the following:

'2. Under the rule of unlimited right of capture laid down in Ryan Consolidated Petroleum Corp. v. Pickens (155 Tex. 221), 285 S.W.2d 201, the orders of defendant Railroad Commission of Texas complained of by plaintiffs are not invalid, even though production of gas and condensate under said orders will result in the uncompensated drainage of a tremendous quantity of gas and condensate from other leases and tracts in the Normanna Field, including leases and tracts in which plaintiffs own an interest, to the .3 acre lease upon which defendant Bright & Schiff has drilled its well.'

A direct appeal from the adverse judgment holding the Commission's order valid and denying the plaintiffs the injunctive relief prayed for was brought to this court under Article 1738a, V.A.C.S., and Rule 499-a, Texas Rules of Civil Procedure. We hold that the order complained of is invalid.

In establishing the spacing pattern for the Normanna Field, it was determined that one gas well could reasonably drain 320 acres, and the Railroad Commission established a 320-acre spacing pattern in accordance with that determination. This spacing pattern is not at issue in this action.

Appellee Bright & Schiff applied for a permit to drill a well on its .3-acre tract under exception to Rule 37 on the ground that it was necessary to prevent confiscation of the oil and gas in and under its tract of land. On that ground the Railroad Commission granted the permit. There was expert testimony presented by appellant to the effect that a reasonable estimate of the value of gas in place under said tract was $7,000, and that if appellee Bright & Schiff is allowed to produce a well under this order some two and one-half million dollars' worth of gas will be produced in twenty years, the estimated life of the field. Such evidence further showed that this order will allow said well to produce at a rate of over 200 times as much gas per acre as a well on the 320-acre unit would produce.

The 1/3-2/3 formula means that 1/3 of the total field allowable must be divided equally among all the wells in the field and that 2/3 of the total field allowable will be divided among all the wells on a per acreage basis. Under this formula a well on a .3-acre tract would be allowed to produce many times more gas per acre than would a well on a 320-acre tract be allowed to produce. The Railroad Commission introduced no evidence at the trial. Appellee Bright & Schiff used two expert witnesses. The substance of their testimony was that there were not enough known facts available on which to base an estimate of the total field reserves in the Slick, Luling and First Massive sands, the three pay zones in the Normanna Field which are here involved, and the reserves under the Bright & Schiff tract. Both of appellants' expert witnesses and both of Bright & Schiff's expert witnesses testified that the extent of the field to the south had not been determined, and based partly upon this fact appellee's witnesses said that the total field reserves could not be determined. Appellants' witnesses from the known facts estimated what in their opinion would be the extent of the field, and based on their estimate of the size of the field determined the total field reserves, using the volumetric method. This is a complicated formula which takes into consideration various factors such as porosity, connate water, pressure, condensate within the given volume of gas samples, abandonment pressure, productive acre feet, etc. Appellee's witnesses testified that there were not enough wells drilled and the wells had not produced long enough to furnish the information for this system to be accurate. They contend that too many assumptions had to be made to fill in for the unknown factors. For instance, appellants' witnesses estimated reserves under the Bright & Schiff town lot by assuming that a well on that tract would be an average well. There was no testimony at the trial as to what kind of well Bright & Schiff made on their tract. The well had not been drilled at the time of the Railroad Commission hearings, but it had been drilled at the time of the trial, and appellee did not choose to introduce any evidence as to whether said well was as good as an average well in the field. Appellee's witnesses do not say that the calculations made by appellants' witnesses of a $7,000 value of gas in place under the Bright & Schiff town lot are incorrect, but say that from the evidence introduced at the trial an estimate of such reserves could not be made. They do not say that the estimate of $2,500,000 value of the gas which will be produced by Bright & Schiff under the 1/3-2/3 formula in twenty years is incorrect, but that it is not sufficient data upon which to base such estimate. Appellee's witnesses made no estimate whatsoever of the field reserves and made no estimate of reserves in place under the town lot well. There was no evidence introduced which would show that the town lot had any more gas per acre under it than was on the average under the other tracts in the reservoir. It appears from the record that whether the estimate of the field reserves made by appellants' witnesses was over estimated or under estimated, that there is not the slightest doubt but what there would be enormous drainage from the other tracts in the field, including those of appellants, to the Bright & Schiff tract under the 1/3-2/3 proration formula.

The statute which gives the Railroad Commission authority to regulate gas fields is Article 6008, V.A.C.S. The following is the substance of the sections of said act which are here pertinent:

Section 1 of said article states that the purpose of the act is to protect public and private interests against certain evils by prohibiting waste and compelling ratable production.

Section 10 enjoins the Commission to so regulate production as to prevent waste and adjust correlative rights.

Section 11 provides that the Commission shall exercise its authority to prevent waste when the presence of waste or imminence of waste is found, and shall exercise its authority to adjust correlative rights when the market demand for gas is exceeded by the capacity of the wells to produce gas from any reservoir.

Section 12 provides that when the Commission has determined that conditions in a gas reservoir exist which give it authority to regulate, then it shall proceed to regulate and prorate the gas production in such reservoir on a reasonable basis, and that the allowable allocated to each well shall be such as to give each well its fair share of the...