Amarillo Oil Co. v. Energy-Agri Products, Inc.

Decision Date27 June 1990
Docket NumberNo. C-6649,ENERGY-AGRI,C-6649
Citation794 S.W.2d 20
PartiesAMARILLO OIL COMPANY, Petitioner, v.PRODUCTS, INC., Respondent.
CourtTexas Supreme Court

Tom W. Reavley, Steve Selby, Austin, James C. Sanders, Amarillo, for petitioner.

Ivan Hafley, Camp Wood, Jerry Courtney, Clarendon, Broadus A. Spivey, Paul E. Knisely, Austin, William J. Lowe, Clarendon, for respondent.

OPINION ON MOTION FOR REHEARING

RAY, Justice.

This court's opinion and judgment of March 8, 1989, are withdrawn and the following substituted.

At issue in this phase severance, oil and gas case is the ownership of gas produced from two wells, classified by the Railroad Commission as oil wells and operated by Energy-Agri Products, Inc. Amarillo Oil Company, the owner of the gas rights, sued to quiet title to the natural gas produced from these wells, and for temporary and permanent injunctions. Based on jury findings, the trial court rendered judgment that Amarillo Oil take nothing. The court of appeals dismissed the cause for want of jurisdiction, holding that the Railroad Commission had primary jurisdiction over the matter. 731 S.W.2d 113 (1987). We reverse the judgment of the court of appeals and render judgment quieting title to certain specified gas in Amarillo Oil. We hold Amarillo Oil is not entitled to injunctive relief. Having found error in the judgment of the trial court, we remand the cause in the interest of justice for a determination of Amarillo Oil's damages.

Amarillo Oil owns the gas rights under an assignment of a lease covering 61.42 acres of land located in Carson County. Energy-Agri owns the right to produce oil and casinghead gas under a farm-out agreement on the same acreage. This separation of oil rights from gas rights is common in the Panhandle Field and is known as phase severance. See Note, Phase Severance of Gas Rights from Oil Rights, 63 Texas L.Rev. 133, 133-37 (1984).

In 1952 Amarillo Oil's predecessors in interest drilled and completed the Hodges number one well in the brown dolomite formation, the uppermost producing formation of the Panhandle Field. Since that time the Hodges number one well has produced gas. In early 1982 Energy-Agri drilled and completed the Kimberlin number two well in the granite wash formation, one of the deepest producing formations of the Panhandle Field. This well, which was classified as an oil well by the Railroad Commission, produced only very small amounts of crude oil and casinghead gas.

In an attempt to increase production from the Kimberlin number two well, Energy-Agri perforated the casing higher in the well so it could produce from the brown dolomite formation. This allowed Energy-Agri to boost its rate of gas production from the Kimberlin number two well from an original "amount too small to measure" to 375,000 cubic feet a day. Production from the brown dolomite formation occurred with the knowledge and approval of the Railroad Commission. Energy-Agri also proceeded to drill and complete the Kimberlin number three well on the lease. Energy-Agri intended to perforate this well into the brown dolomite formation as it had the Kimberlin number two.

Amarillo Oil, however, filed suit to enjoin Energy-Agri from producing gas from the brown dolomite formation through its Kimberlin numbers two and three wells. Amarillo Oil additionally sought to quiet title to all the gas in the brown dolomite formation. It further pleaded for damages for the taking of its gas.

The action was tried to a jury. Amarillo Oil moved for an instructed verdict, urging that since Energy-Agri had no oil well completed in the brown dolomite, the gas it produced from that formation could not be casinghead gas. The trial court denied this motion and submitted the case to the jury on Amarillo Oil's alternative theory that the gas from the brown dolomite stratum could not be casinghead gas because no oil well could possibly be completed in that formation. Amarillo Oil failed to request any jury questions on the amount of damages. The jury answered the questions adversely to Amarillo Oil, and based on this verdict, the trial court rendered judgment that Amarillo Oil take nothing. Amarillo Oil appealed. The court of appeals dismissed the cause for want of jurisdiction, holding that Amarillo Oil's suit was an impermissible collateral attack on matters over which the Railroad Commission had the exclusive original jurisdiction.

The title documents in this case confirm that Amarillo Oil owns the gas rights and Energy-Agri owns the oil and casinghead gas rights. The dispute is over what is included in Energy-Agri's ownership of the "casinghead gas."

Definition of "Casinghead Gas"

The term "casinghead gas" is not defined in the pertinent title documents. At the time of the phase severance, however, there was a statutory definition of casinghead gas which had been in effect for many years. By failing to insert in the lease their own definition of the term "casinghead gas," the predecessors in interest to our present parties evidenced their intent to incorporate the statutory definition of "casinghead gas." See Von Hoffman v. City of Quincy, 71 U.S. (4 Wall.) 535, 550, 18 L.Ed. 403 (1866), quoted in Smith v. Elliott & Deats, 39 Tex. 201, 212 (1873) ("laws which subsist at the time and place of the making of a contract ... enter into and form a part of it, as if they were expressly referred to or incorporated in its terms"); see also Wessely Energy Corp. v. Jennings, 736 S.W.2d 624, 626 (Tex.1987). Energy-Agri and Amarillo Oil, however, attribute different meanings to the statutory definition of "casinghead gas."

The Natural Resources Code defines the term as "any gas or vapor indigenous to an oil stratum and produced from the stratum with oil." Tex.Nat.Res.Code Ann. § 86.002(10) (Vernon 1988); see also Tex.R.R.Comm'n, 16 Tex.Admin.Code § 3.69 (West 1988). This definition is essentially identical to that existing at the time of the phase severance in this case. Cf. Act of Apr. 26, 1935, ch. 120, § 2(i), 44th Leg., 1935 Tex.Gen. & Spec. Laws 318, 319 (emphasis added), repealed by Natural Resources Code, ch. 871, art. I, sec. 2(a)(2), 65th Leg., 1977 Tex.Gen.Laws 2345, 2689 ("any gas and/or vapor indigenous to an oil stratum and produced from such stratum with oil") (emphasis added). 1

Energy-Agri argues that the term "casinghead gas," as defined by the Natural Resources Code, simply means any gas produced from a well that has been classified by the Railroad Commission as an oil well. Because the Railroad Commission has classified the Kimberlin numbers two and three wells as oil wells, Energy-Agri concludes that any gas produced from these wells is casinghead gas as a matter of law. Amarillo Oil counters that determining title to gas based on the classification of a well is inconsistent with the statutory definition of casinghead gas and ignores the key elements of the statutory definition, i.e., that the gas be "indigenous to" and "produced from" an "oil stratum." Tex.Nat.Res.Code Ann. § 86.002(10) (Vernon 1988).

The Natural Resources Code does not define the term "oil stratum." It does, however, define "oil well" as "any well that produces one barrel or more of oil to each 100,000 cubic feet of gas." Tex.Nat.Res.Code Ann. § 86.002(6) (Vernon 1978); see also Tex.R.R.Comm'n, 16 Tex.Admin.Code § 3.69 (West 1988). Reading this definition together with that of "casinghead gas" we see that the legislature has defined casinghead gas as any gas or vapor which is indigenous to and produced from a stratum that produces one barrel or more of crude petroleum oil to each one hundred thousand cubic feet of natural gas. Nevertheless, we must have a definition of "oil stratum" in order to apply the statutory definition of casinghead gas.

Energy-Agri argues that since this court has used the terms "horizon," "reservoir," "stratum" and "field" interchangeably, they must all be the same and therefore all mean the same as a "common reservoir." Energy-Agri then concludes that since it introduced in evidence a Railroad Commission document from 1935 stating the Commission's then-finding that the whole Panhandle Field is one "common reservoir," it may produce gas from any of the separate formations in the field from its oil well and have it meet the statutory definition of "casinghead gas." We disagree.

Energy-Agri's argument overlooks the distinct geological facts of the cases it cites. For example, in Bolton v. Coats, 533 S.W.2d 914 (Tex.1975), it was alleged that there were separate oil productive horizons or segments of the Burnett sand (one formation) which were "each [a] physically separate productive stratum." 533 S.W.2d at 917. Under such geological facts, the terms "horizon," "stratum," "field" and "reservoir" would all coincide. Similarly, in Benz-Stoddard v. Aluminum Company of America, 368 S.W.2d 94 (Tex.1963), the allegation was that there were ten distinct "gas reservoirs, or horizons," that were "separated" and "among which there is no communication of gas." 368 S.W.2d at 96. Under such geological facts, the terms "horizons," "reservoirs" and "fields" may be used interchangeably. Such opinions do not state, and do not mean, that the terms always coincide.

The term "stratum" has a fixed meaning in petroleum geology, much like the terms "producing horizon," and "horizons" which appear in the Code. 2 A "stratum" is a single layer of rock deposited at roughly the same geological period of time which normally contains only one kind of rock. 1 H. Williams & C. Meyers, Oil and Gas Law § 102, at 3 (1989). Depending upon the particular geological facts, it may be the same as a "formation" if there is only one type and layer of rock that was deposited continuously and under the same general conditions, or it may be a part (one layer) of a formation. 3

A "reservoir" refers to an underground formation favorable to the accumulation of oil and gas and in which oil or gas, or both, is trapped. It is a term generally ...

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