Buttes Resources Co. v. Railroad Com'n of Texas, A14-85-928-CV

Citation732 S.W.2d 675
Decision Date30 April 1987
Docket NumberNo. A14-85-928-CV,A14-85-928-CV
CourtCourt of Appeals of Texas
PartiesBUTTES RESOURCES COMPANY, Appellant/Appellee, v. RAILROAD COMMISSION OF TEXAS & J.L. Schneider, Jr., Appellees/Appellants. (14th Dist.)

Glenn E. Johnson, Leland B. Kee, Austin, for appellant/appellee.

Frank Douglas, Jose Manuel Rangel, John W. Camp, Austin, for appellees/appellants.

Before J. CURTISS BROWN, C.J., and MURPHY and ROBERTSON, JJ.

OPINION

J. CURTISS BROWN, Chief Justice.

This is a Mineral Interest Pooling Act (MIPA) case. At J.L. Schneider's request, the Railroad Commission of Texas issued an order pooling 22 acres leased by Schneider with parts of a unit operated by Buttes Resources Company (Buttes). Buttes appealed to the district court in Brazoria County, where the gas well was located. The district court upheld the pooling order except that it changed the effective date of the order so that it would not be retroactive. Buttes appeals to this court, again contesting the pooling order. Schneider and the Railroad Commission appeal the trial court's action in changing the order's effective date. We affirm the trial court's judgment.

A brief factual background is necessary to the understanding of the issues presented. Buttes completed a discovery gas well called Drisdale No. 1 in January 1976. Buttes completed Reese No. 1, a second successful gas well to the southwest of Drisdale No. 1 in November 1976. Temporary gas field rules were adopted by the Railroad Commission effective November 28, 1977. The temporary rules became permanent without protest in September 1979.

In determining the field rules the Railroad Commission adopted Buttes's reservoir estimates and map, which indicated that both wells drained a common reservoir. To the north and east of the Drisdale No. 1 Unit's 179 acres lay another 55 productive acres in the reservoir. Buttes held leases on those 55 acres, but let them expire beginning in 1979. Schneider began buying leases on tracts within that 55 acres in 1979. After securing those leases he approached Buttes in an attempt to pool his 55 acres with the Drisdale No. 1 Unit. Drisdale No. 1 Unit is a voluntarily pooled unit operated by Buttes. After several telephone inquiries, Schneider met with a vice president of Buttes in Dallas on June 9, 1981. He was told that Buttes had no interest in pooling. Schneider, through his attorneys, made a formal written offer to Buttes Resources by a letter dated July 22, 1981. That offer was refused by Buttes in a July 29, 1981, letter. Without making his offer to any other interest owners, Schneider, on December 29, 1981, applied to the Railroad Commission for an order to force pooling his 55 acres with the Drisdale No. 1 Unit.

The subject gas field is a water-drive reservoir. Schneider's acreage is "down-structure"; that is, the reservoir is encountered at a deeper depth on his acreage than it is on some of the Drisdale Unit's acreage. As the Drisdale No. 1 well produces, gas is drained off Schneider's acreage onto the Drisdale Unit's acreage and is displaced by water.

At the time of the MIPA hearing on Schneider's request, Schneider acknowledged that 33 acres of the originally productive 55 acres had been "watered out." He requested that all 55 acres be included in the unit, but in the alternative, suggested that the 22 acres not yet invaded be pooled. The commission pooled only 22 acres, but left Buttes the option to voluntarily include all 55 acres in the unit so that Buttes could maintain a proration formula based on originally productive acreage, as is the usual practice in water-drive reservoirs.

In its first point of error Buttes asserts that the Railroad Commission had no jurisdiction to order compulsory pooling under the Mineral Interest Pooling Act because Schneider did not make a fair and reasonable offer to the owners of the interests in the proposed unit as required in section 102.013 of the act. Tex.Nat.Res.Code Ann. § 102.013(a), (b) (Vernon 1978).

Schneider's July 22 letter outlined an offer "made to Buttes Resources Company as operator of the unit and agent for all other interest owners in this unit." The offer proposed that Schneider's 55 acres be pooled with the 179 acres in the Drisdale Unit with production allocated on the basis of each owner's pro rata share of the productive acreage within the new pooled unit. The offer proposed that each new participant share in the costs of drilling and completing the well on the basis of his pro rata share of the acreage contributed to the new unit. Each owner could elect to pay these costs by either tendering cash within 30 days of notification that the unit had become effective or by having Buttes deduct from production the payment, plus a 100 percent risk penalty.

Buttes suggests four reasons the offer was not adequate: (1) it did not provide for adequate payment of expenses and risks incurred in drilling; (2) it included nonproductive acreage; (3) it was not made to all interest owners prior to filing the compulsory pooling application; and (4) it included land not under Schneider's control at the time it was made.

A fair and reasonable offer to pool voluntarily is a jurisdictional prerequisite to a compulsory pooling order. Carson v. Railroad Commission, 669 S.W.2d 315, 316 (Tex.1984); Tex.Nat.Res.Code Ann. § 102.013(b) (Vernon 1978). The supreme court has declined to define a fair and reasonable offer, but the court has instructed that "the 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 in entering into a voluntary agreement concerning oil and gas properties." Carson, 669 S.W.2d at 318.

First Buttes suggests that Schneider's offer was not fair and reasonable because it failed to include a cash payment to Buttes as a risk factor (or risk penalty) for drilling of the wildcat well. That is, the offer did not require that Buttes be compensated prior to the payment of proceeds from the well to Schneider.

A risk factor or penalty may be a necessary element in some offers to pool. For example, an owner who had the opportunity to participate before drilling began may need to include a risk factor or penalty in order to make a fair and reasonable offer after he has chosen to "ride down the well." In this case Schneider did not wait to see if the well would be a producer before seeking to join the unit. He could not have acquired leases to the 55 acres earlier because they were held by Buttes.

We also note that Schneider's offer was structured in the same manner that the legislature has directed the Railroad Commission when ordering pooling. See Tex.Nat.Res.Code Ann. § 102.052(a) (Vernon 1978). We hold that the offer was not unreasonable simply because it failed to include a cash payment of a risk penalty.

Second, Buttes asserts that the offer was not reasonable because it proposed to pool acreage that was no longer productive. Buttes emphasizes that the Railroad Commission is empowered to pool only acreage that is productive at the time of the compulsory pooling order. Tex.Nat.Res.Code Ann. § 102.018 (Vernon 1978). From that Buttes seems to reason that it was unreasonable for Schneider to offer to pool more acreage than can be force-pooled by the Commission. We hold that the offer to include all 55 acres in the unit was not unreasonable in light of the Railroad Commission's policy regarding production allocations in water-drive reservoirs and other factors. In water-drive reservoirs the Commission usually counts all the originally productive acreage in applying the proration formula for production allocation. The "allowable" need not change as the producing acreage shrinks. In recognition of this policy, the Commission's final order in this proceeding expressly provided that "for proration purposes, formerly productive acres may be assigned to the unit, provided that Buttes Resources Company either has that acreage pooled at present or chooses to voluntarily include that acreage." From Buttes's standpoint, the advantages of retaining a larger allowable would at least partially offset the disadvantages of including all 55 acres in the unit proposed by Schneider.

We also have considered other factors. The Railroad Commission, on three occasions, has determined that the originally productive acreage in the reservoir included the 55 acres. The last occasion was in the latter part of 1980 when the Commission force-pooled into the Buttes Reese Gas Unit the 50 acres south and west of that unit. Buttes made no attempt to include the 55 acres north and east of the Drisdale Unit No. 1 even though the Commission had determined the acreage to be productive and Buttes held the leases on that land. We realize that a compulsory pooling action is not the forum in which to decide whether Buttes wrongly drained acreage under lease without compensating its lessors. However, these facts did add leverage to Schneider's position as a representative of the lessors of the 55 acres and can be considered now in determining whether the offer was reasonable.

Next Buttes complains that the offer does not meet the requirements of section 102.013 of the MIPA because it was not made to all interest owners before Schneider made his application to the Commission.

Schneider's offer was made to Buttes "as operator of the unit and agent for all other interest owners in this unit." Buttes denies that it had any authority to pool the other interest owners, but when it answered Schneider's offer in writing it did not alert Schneider to that problem nor did it cite it as a reason not to accept the offer. Buttes's response was: "It is our very firm position that the acreage in question is not productive and would be of no benefit to the Drisdale Gas Unit. As such, we must refuse your offer for voluntary pooling."

All interest owners were mailed the offer ...

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