Railroad Com'n of Texas v. A.K. Guthrie Operating Co., V-F

• Decision Date: 02 December 1987
• Docket Number: No. 14708,V-F,14708
• Citation: 742 S.W.2d 86
• Parties: RAILROAD COMMISSION OF TEXAS andPetroleum, Inc., Appellants, v. A.K. GUTHRIE OPERATING COMPANY, Appellee.
• Court: Texas Court of Appeals

Page 86

742 S.W.2d 86

RAILROAD COMMISSION OF TEXAS and V-F Petroleum, Inc., Appellants, v. A.K. GUTHRIE OPERATING COMPANY, Appellee.

No. 14708.

Court of Appeals of Texas Austin.

Dec. 2, 1987.

Rehearing Dismissed Jan. 13, 1988.

Jim Mattox, Atty. Gen., Jose Manuel Rangel, Asst. Atty. Gen., Austin, for Railroad Com'n of Texas.

Paul Herrmann, McElroy, Williams & Sullivan, Austin, for V-F Petroleum, Inc.

Frank Douglass, Carroll Martin, Scott, Douglass & Luton, Austin, for appellee.

Before GAMMAGE, ABOUSSIE and SMITH ^*, JJ.

GAMMAGE, Justice.

This is an appeal from a judgment of the 167th Judicial District Court of Travis County, reversing an order of the Texas Railroad Commission ("Commission"). The Commission denied a request to change the allocation formula in the Sara-Mag (Canyon Reef) Field from 50% acreage and 50% well to 100% acreage. The district court reversed the Commission's order and directed the Commission to adopt a 100% acreage allocation formula. We will reverse the judgment and remand the cause to the district court for review of the administrative record under the substantial evidence standard.

An allocation formula is the means the Commission uses to distribute oil or gas production among wells in a field. ¹ The Commission adopted a 50% acreage and 50% well assignment in the Sara-Mag (Canyon Reef) Field in 1954. In March 1982, appellant V-F's predecessor in interest filed an application for a permit to drill a well on a substandard-sized tract (a Rule 37 exception) in the Sara-Mag Field. At the hearing on the Rule 37 exception, appellee Guthrie (an adjoining land owner) filed a request to change the allocation formula for the field to 100% acreage. The purpose of Guthrie's request was to make it unprofitable for "small-tract" owners to drain his land.

In December 1982, the Commission denied Guthrie's request. After exhausting his administrative remedies, Guthrie appealed the Commission's order to the district court. In August 1983, the district court entered judgment reversing the Commission and remanding the cause for further proceedings not inconsistent with the court's judgment. In June 1984, the Commission reopened the hearing on Guthrie's application, but after receiving further evidence the Commission once again denied Guthrie's request to change the allocation formula in the Sara-Mag (Canyon Reef) Field to 100% acreage. Guthrie again exhausted his administrative remedies and appealed to the district court. The district court again reversed the Commission and it is from that judgment that the Commission now appeals.

In the judgment appealed from, the district court concluded the present allocation formula in the Sara-Mag Field is illegal and has been illegal since the court rendered its first judgment. In that earlier judgment, the district court stated:

[The Commission's order] is in conflict with Atlantic Refining Company v. Railroad Commission of Texas, , 346 S.W.2d 801 (Tex.1961) [ (the Normanna case) ], Railroad Commission of Texas v. Shell Oil Company, 380 S.W.2d 556 (Tex.1964) [ (the Quitman case) ], [and] Halbouty v. Railroad Commission of Texas, , 357 S.W.2d 364 (Tex.1962) [ (the Port Acres case) ]. As such, the ... [Commission's] [o]rder is affected by an error of law in violation of Section 19(e)(4) of the APA.

In its first point of error, the Commission contends the district court misinterpreted the above-cited case law relied upon in the court's first judgment. We agree.

In the early 1960's, beginning with the Normanna case, the Texas Supreme Court began invalidating Commission allocation formulas that included a well factor. Normanna, 346 S.W.2d at 811 ( 1/3 well and 2/3 acreage formula invalid where .3-acre tract produces gas at a rate many times greater than a 320-acre tract and no substantial evidence in record to support wide discrepancy in rate of production); Port Acres, 357 S.W.2d at 376 ( 1/3- 2/3 formula struck down when formula not reasonably supported by substantial evidence); and Quitman, 380 S.W.2d at 560-61 ( 1/2- 1/2 formula held invalid when causing unreasonable amount of...