Railroad Commission v. Aluminum Co. of America

• Decision Date: 29 May 1963
• Docket Number: No. 11098,11098
• Citation: 368 S.W.2d 818
• Parties: RAILROAD COMMISSION of Texas et al., Appellants, v. ALUMINUM COMPANY OF AMERICA et al., Appellees.
• Court: Texas Court of Appeals

Page 818

368 S.W.2d 818

RAILROAD COMMISSION of Texas et al., Appellants, v. ALUMINUM COMPANY OF AMERICA et al., Appellees.

No. 11098.

Court of Civil Appeals of Texas, Austin.

May 29, 1963.

Rehearing Denied June 26, 1963.

Waggoner Carr, Atty. Gen., Joseph Trimble and Linward Shivers, Asst. Attys. Gen., Austin, Wm. H. Darden, Corpus Christi, Hart & Hart, Austin, William E. York, McAllen, Harry S. Pollard, Austin, Lee Jones, Jr., San Antonio, Miller B. Walker, Jr., Nick C. Nichols, Charles F. Cockrell, Jr., and Levert, J. Able, Houston, Wallace H. Scott, Jr., and Houghton Brownlee, Jr., Austin, for appellants.

Vinson, Elkins, Weems & Searls, James E. Allison, Jr., Houston, Clark, Thomas, Harris Denius & Winters, James H. Keahey, Austin, Charles F. Heidrick, Edwin M. Cage, Dallas, for appellees.

PHILLIPS, Justice.

This is an appeal from the judgment of the District Court setting aside an order of the Railroad Commission to Texas dated April 24, 1961 allocating the allowable production of gas and oil in the Appling Field, in Calhoun and Jackson Counties, Texas, and enjoining the Railroad Commission and its members from enforcing the order.

The order under attack, prorates gas on a 1/3 per well, 2/3 acreage basis and the oil on a 50 percent well, 50 percent acreage basis. ¹

The suit was filed in April of 1961 by the Aluminum Company of America, Crown Central Petroleum Corporation and Carl E. Siegesmund against the Railroad Commission of Texas and its members.

Later in April, 1961, Sun Oil Company intervened adopting for all practical purposes the allegations in the petition filed by the plaintiffs.

Thereafter petitions in intervention were filed on behalf of the following persons who aligned themselves with the Railroad Commission in defense of the above mentioned order: Tex-Star Oil and Gas Corporation, Coastal States Gas Producing Company, Claire Benz-Stoddard, Woods, Exploration and Producing Company, Inc., David Davidson, Karankawa Producing Company, Navidad Oil Corporation, Yuhi Oil and Gas Company, Ernestine B. Foyles, Audrey Kjorlaug, Thelma V. Bass, Trustee, Mrs. Nora L. Krueger, Charles L. Krueger, Don Culwell, Mrs. Opal B. Williams, Allen Lester, Rosemary Lester, Clifford B. Reneger, John Alexander, Individually and as Trustee, Robert L. Alexander, Thomas P. Alexander, Judd Alexander, J. E. Alexander, and Dr. G. J. Hayes, Southeastern Pipe Line Company, Joe Blalack and Herbert L. Dillon, Jr.

Plaintiffs filed a motion to strike the intervention of the Southeastern Pipe Line Company which was granted.

Plaintiffs filed a motion to strike defendants' and intervenors' pleas of laches, waiver, estoppel and limitation.

The defendants and defendant-intervenors filed a motion for summary judgment urging, principally, that as a matter of law the plaintiffs and Sun Oil Company were barred by unreasonable delay, laches and estoppel from seeking to cancel the allocation formula of the Railroad Commission.

The case came to trial in September of 1962 whereupon the court overruled the motion for summary judgment of the defendants and defendant-intervenors, granted the motion of the plaintiffs to strike defendants' and defendant-intervenors' pleas of laches, waiver, estoppel and limitation, to which order the Railroad Commission and defendant-intervenors excepted.

The court also, over the objection of the Railroad Commission and defendant-intervenors, entered an order refusing a trial by jury.

The court then proceeded to hear evidence from September 12, 1962, until October 1, 1962. Thereafter on October 9, 1962, the court entered judgment that the order of the Railroad Commission was without substantial evidence, should be declared null and void and enjoined the Commission from enforcing it. The Railroad Commission and certain defendant-intervenors have appealed to this Court. ²

We hold that the judgment of the trial court is correct.

The parties will be designated here as they were in the Trial Court.

Plaintiffs contend that the defendant-intervenors own 1/2 of 1% of the acreage in the field which amounts to some 25 acres. That in spite of such a small percentage of ownership they are allowed by the order under attack to produce 20% of the gas and condensate. That the plaintiffs own more than 90% of the acreage in the field which consists of approximately 4000 acres. That if the order here attacked continues through the life of the field, defendant-intervenors and other owners of town lot wells will produce in the furture gas and condensate having a present value of more than $8,800,000 from beneath plaintiffs' leases in the 9 gas reservoirs in Fault Segment 'A', in which both large tract and small tract wells were completed at the time of the Commission's order. That the 57 town lot or small tract wells belonging to defendant-intervenors have been confiscating enormous quantities of gas and condensate from plaintiffs' wells and that such confiscation will continue until the field is exhausted unless this Court holds that the Commission's order of April 24, 1961 is invalid and the Commission is instructed to write an order which will be fair and just and protect the correlative rights of the owners and operators in the field.

Plaintiffs cite the case of Atlantic Refining Company v. Railroad Commission, often referred to as the Normanna Case, 162 Tex. 274, 346 S.W.2d 801 (1961) for the proposition that:

'The responsibility rests with the Commission to devise some rule of proration which will conserve the gas in the field in question and at the same time be fair and just to all parties without depriving any of them of his property.'

In the Normanna Case, referred to above, the Court struck down a 1/3-2/3 gas proration formula where the facts disclosed that the owner of a .3 acre tract was draining a substantial amount of gas from the adjoining tracts under the abovementioned formula. The Court said:

'Viewing all the facts in the light of the substantial evidence rule, we think the 1/3-2/3 proration formula is an unreasonable basis upon which to prorate the gas production from this reservoir. It does not come close to compelling ratable production; neither does it afford each producer in the field an opportunity to produce his fair share of the gas from the reservoir.'

The same result was reached in Halbouty v. Railroad Commission, Tex., 357 S.W.2d 364.

We hold that the case at bar is controlled by the decisions in the Normanna and Halbouty cases.

The order before this Court through its proration formula allows the defendant-intervenors and other small tract operators to confiscate unreasonable quantities of minerals underlying the adjoining land of the plaintiffs, is not supported by substantial evidence and is void. Hawkins v. Texas Company, 146 Tex. 511, 209 S.W.2d 338.

The Appling Field was discovered in 1953. The field consists of an extremely complicated multi-zone reservoir principally producing gas with a few relatively unimportant oil reservoirs interspersed in the field. Because these various zones which are separated vartically are broken into separate fault blocks or segments, there are thirty-eight separately prorated gas reservoirs and fourteen separately prorated oil reservoirs in this field. The field operated under statewide rule (25% of open flow potential, regardless of the size of the tract) until June of 1956, when the first special field rules were made applicable to the Middle Kopnicky Sand, Fault Segments A, B and C. The Middle Kopnicky Sand is the deepest producing zone and by far the thickest and most prolific producer and contains more than 80% of the field's gas and condensate reserves. The remaining nine field sands are progressively higher than and overlie the producing area of the Middle Kopnicky Sand. These sands are thinner and less prolific, but all are blanket sands within Fault Segment 'A'.

Besides the major fault which limits Fault Segment 'A' on the East in all reservoirs here involved, there are numerous smaller faults crossing Fault Segment 'A' of sufficient size to separate the upper sands into separate fault segments or reservoirs but these faults are not of sufficient magnitude to separate the Middle Kopnicky Sand into separate reservoirs. There are 13 such fault segments within Fault Segment 'A'. The April 24, 1961, order here under attack, promulgated rules for 52 oil and gas reservoirs, of which 38 are Fault Segment 'A'.

Four wells were drilled in 1956 on small tracts in the Port Alto and Karankawa Beach townsite areas. In 1956 plaintiffs sought field rules and urged the Commission to adopt a proration formula on the basis of 100% acreage, that is, that each landowner be allowed to produce only those reserves underlying his land. The Commission denied this request and imposed instead a 1/3-2/3 gas allocation formula. Thereafter the rules promulgated by the Commission in the various reservoirs contained allocation formulas on the basis of 1/3-2/3 for gas and 50-50 for oil.

Following the original four wells drilled on the small tracts in 1956, more wells were drilled on town lots in the succeeding years, most of these being multiple completions. After 19 such wells had been drilled plaintiff Aluminum Company of America and others asked for field rules allowing a 1/3-2/3 and 50-50 allocation formula for the first completion; however, they also sought a 100% acreage allocation formula for any subsequent completions in other reservoirs. At a hearing held in March of 1960, plaintiffs made this request of the Commission suggesting that such a formula would protect the correlative rights of the large tract owners and operators as well as those of the small tract owners and operators. Plaintiff Sun has consistently maintained that the field should be prorated on a 100% acreage basis. A total of 38 small tract wells have been drilled since plaintiffs first complained of the blanket application of the proration formula under attack making 57 small tract...