MacMillan v. Railroad Commission of Texas, 390.

• Decision Date: 28 July 1931
• Docket Number: No. 390.,390.
• Citation: 51 F.2d 400
• Parties: MacMILLAN et al. v. RAILROAD COMMISSION OF TEXAS et al.
• Court: U.S. District Court — Western District of Texas

51 F.2d 400 (1931)

MacMILLAN et al. v.RAILROAD COMMISSION OF TEXAS et al.

No. 390.

District Court, W. D. Texas, Austin Division.

July 28, 1931.

Saye, Smead, Wilson & Saye, of Longview, Tex., for plaintiffs.

C. L. Black, of Austin, Tex., amicus curiæ.

James V. Allred, Atty. Gen., and Maurice Cheek and Fred Upchurch, Asst. Attys.Gen., for Railroad Commission.

Marion S. Church, of Dallas, Tex., and Robert E. Hardwicke, of Fort Worth, Tex., for defendant Capers.

Conard E. Cooper, of Tulsa, Okl., amicus curiæ.

Before HUTCHESON, Circuit Judge, and WEST and BRYANT, District Judges.

HUTCHESON, Circuit Judge.

This is a suit brought by citizens of another state against the railroad commission of Texas, seeking to have declared unreasonable, unjust, and void, and to restrain the enforcement of, an order of the commission issued by that body in April, 1931, as a part of a program first entered upon by it in August, 1930, to put into effect, in the oil fields of Texas, the plan of operation referred to in this suit and generally as "Proration."

PlaintiffAlfred MacMillan, trustee, alleges himself to be the owner and operator of certain oil, gas, and mineral leases in Gregg and Rusk counties, in what is known as the East Texas oil fields.That his wells there are capable of producing 50,000 barrels of oil a day.That he has contracted with his coplaintiff, MacMillan Petroleum Company, the owner of oil refineries, pipe line systems, and other facilities in various fields, to sell them large quantities of oil, and that company has in turn contracted with others for delivery to them of large quantities of oil, interstate and foreign.

He alleges that he is operating his properties skillfully and in such manner as to prevent waste, and to cause no injury to producing sands of adjoining properties.That he has been ordered by the railroad commission, upon pain of penalties and contempt actions, to desist from operating his wells as he is now operating them, and to reduce the production therefrom to 1,455 barrels daily.That to do so would injure his wells, prevent his complying with the drilling obligations of his leases, thus subjecting him to suit for damages for cancellation, and would prevent his complying with his contracts for sale of the oil, subjecting him to heavy resulting losses.

He asserts that the order is void, because (1) depriving plaintiffs of their properties without due process of law, and denying them the equal protection of the laws; (2) it impairs the obligations of contracts entered into by them; (3) it is an interference with interstate commerce; (4) the order rests not upon legislative authority or direction, and has no relation to the conservation of resources or the prevention of their waste, but is a mere arbitrary order designed to control the output, price, and market of crude oil by reducing the supply of oil to the demand for it.

Plaintiffs further allege that these orders are being enforced against all operators in the East Texas field; that they are disastrously affecting market conditions in the field; and that adequate relief for plaintiffs requires that the orders be enjoined as to all operators in the field.It further alleges that plaintiffs sue for themselves and all others similarly situated who will join therein.The bill concludes with a prayer for temporary injunction pending suit, and for permanent injunction upon final hearing.

Upon the filing of the bill in the Austin division of the Western district of Texas, the statutory court was formed and the matter came on for hearing before that court on the application for temporary injunction.That hearing was continued until June 24, at which time upon the understanding that the court might act upon the application for temporary injunction before it reached its decision on the merits, the matter was on full proofs submitted to the court both on the application for temporary injunction, and on the merits.

By these proofs plaintiff established substantially as alleged, the facts as to his ownership and operation under leases, of the properties in question, the contracts for sale of oil therefrom, interstate and foreign, the fact that the properties were being operated carefully and efficiently, and apart from the proration theory, in accordance with approved operating methods, without injuring the sands of his neighbors.That he was keeping the actual output of his wells greatly below their potential.That the commission's umpire had given him notice to reduce his production of oil to the amount alleged.

He specifically established the setting on foot by the commission, in conjunction with committees of oil operators, of the proration plan, and the issuance of proration orders for the state of Texas, and for the East Texas oil fields as alleged.He further established in an overwhelming way by the recitations in the orders of the commission of August 14 and November 24, 1930, January 23, April 4, April 22, and April 29 of 1931, by the testimony of Terrell, chairman of the railroad commission, and of members of the oil proration committees, local and central advisory, by the testimony of each witness who took the stand, and by the letter of R. D. Parker, chief supervisor, oil and gas division of the railroad commission of the state of Texas,¹ that both the occasion and the compelling reasons for the establishment by the railroad commission of proration, originally and as now continued, were the disrupted and disorderly state of the oil business through the menace of overproduction.

The evidence offered by plaintiffs and by defendants made it plain that the real genesis of the plan and of the orders in question is to be found, and that they find their effective working only, in coping with market demand.

That while the proration orders for East Texas were not based openly, as elsewhere, on nominations by oil purchasers as to the amount of oil they would agree to buy, they were in fact, though covertly, based upon the same compelling consideration, the drastic reduction of output so as to bring it into relation with market demand.The commission set about to accomplish this result in that field:

(1) By fixing a low allowable production for each owner, not per well, but per unit of twenty and forty acres, in effect allowing the same production from each unit, whether it had one or ten wells upon it.Thus with one stroke the commission limited the output from existing wells, and prevented further development by, in the language of one of defendants' counsel, "treating the owner as if he were a fool for having drilled four wells, where one would be enough."

(2) After the fixing of the arbitrary allowable for the field, as one of the witnesses testified, "so low as definitely to be on the safe side," the commission set on foot a supplicatory campaign among the purchasers and transporters of East Texas oil, earnestly entreating purchasers to buy proration oil in substantial quantities, and the purchasers and transporters to boycott all producers not complying with the commission's order.Parker's letter, Note 1, supra.

Plaintiff further established that though there was evidence that the proration plan of ratable and moderate withdrawals would, if properly applied, have some effect to prolong the life of a field by delaying the intrusion of water and thus to enable more oil ultimately to be obtained, in the light of present knowledge this was largely theory and speculation, and that such plan could only be properly applied in each field after careful test and experimentation there.

Plaintiff established that the allowable for the East Texas fields was fixed at an arbitrary basis, arrived at without test or experimentation, either on plaintiff's property or in the field generally, as to the amount that might be safely withdrawn by each owner from his property without causing any physical waste.He made it clear that the allowable had been fixed arbitrarily and that therefore the plan so adopted and promulgated had the same relation to physical waste as an order not pinching in, but shutting the wells down absolutely would have, differing from such an order not in kind, but only in degree.That the plan was therefore bound to result in arbitrarily depriving plaintiffs of the right to produce their oil in accordance with their prudent judgment and desire, without any precedent finding having been made that the amount which plaintiffs desired to produce would actually cause physical waste.Plaintiffs, in short, established that the only kind of waste which the orders are designed to and do deal directly with, is economic waste, the loss of market price because of market glut.That such effect, if any, as they might have to prevent not economic, but physical waste, does not come fairly within the purpose or effect of the order, but is a purely accidental incident thereto.

It would serve no useful purpose to burden this opinion with a summary of the evidence upon which these conclusions rest, for it in faithful detail but follows that given in hearing after hearing before committees, public bodies, and courts in the oil producing states of this country and daily appearing in countless articles and interviews, inspired and uninspired, upon the condition of the oil industry.Indeed, so importantly has this policy of proration as the cure for market glut been advanced, so currently and so widely debated as a matter of public concern has the necessity for its adoption been, so known to every man, that this court could fairly have taken judicial cognizance of the matters disclosed by the evidence; that with supply both actual and potential outrunning present demand, those interested in the oil business in this state not only financially, but as a matter of public and general concern have been first by private agreement, and latterly by invoking the aid of the commission, endeavoring to put into effect for the purpose of limiting...