Railroad Commission v. American Trading & Production Corp.

• Decision Date: 01 April 1959
• Docket Number: No. 10663,10663
• Citation: 323 S.W.2d 474
• Parties: RAILROAD COMMISSION of Texas et al., Appellants, v. AMERICAN TRADING AND PRODUCTION CORPORATION, Appellee.
• Court: Texas Court of Appeals

Page 474

323 S.W.2d 474

RAILROAD COMMISSION of Texas et al., Appellants, v. AMERICAN TRADING AND PRODUCTION CORPORATION, Appellee.

No. 10663.

Court of Civil Appeals of Texas, Austin.

April 1, 1959.

Rehearing Denied April 22, 1959.

Will Wilson, Atty. Gen., James N. Ludlum, First Asst. Atty. Gen., Houghton Brownlee, Jr., Asst. Atty. Gen., Rayburn L. Foster, Harry D. Turner, Bartlesville, Okl., Carl W. Jones, Midland, Wallace H. Scott, Jr., Austin, Raymond A. Lynch, Midland, for appellants.

Frank C. Ashby, Midland, Harry S. Pollard, Austin, for appellee.

HUGHES, Justice.

Appellee American Trading and Production Corporation, hereinafter called American, sued the Railroad Commission of Texas and its members, in the nature of a statutory appeal, to vacate an order of the Commission denying American's application for a permit to drill a well on a 160 acre tract, being the NW/4 of Section 29, Blk. 38, Township 2 South, T. & P. Ry. Co. Survey, in Midland County. The tract is in the Azalea (Strawn) gas field in such county and the well was sought as an exception on the ground of confiscation only, ¹ to the Commission's statewide density order and special field rules which prohibit the drilling of a gas well on less acreage than a 640 acre proration unit.

Appellants Murphy H. Baxter, Joseph I. O'Neill, Jr. and Phillips Petroleum Company, owners of offset leases, intervened in the Trial Court and are aligned with the Commission.

Upon a nonjury trial final judgment was rendered setting aside the order of the Commission and enjoining it from interfering with American in drilling the well in accordance with its application.

The validity of this judgment depends upon the existence of the 160 acre tract upon which the well was to be drilled as a separate tract prior to the time the 640 acre density rule of the Commission became applicable to the area in which the tract is located.

It is the contention of appellants that the 160 acre tract was subdivided (separated from a 320 acre tract) subsequent to the effective date of the density rule and hence such subdivision is illegal and will not support the sought for exception on the ground of confiscation. ² This was also the ground upon which the Commission denied the permit to drill.

The facts which control the outcome of this appeal follow:

Section 29, supra, containing 640 acres of land was owned in fee in undivided interests by members of the Heidelberg family in September 1954. In September and November of that year American became the owner of the 7/8ths mineral leasehold estate in the section under eight oil and gas leases each lease covering an undivided interest in the entire section.

Since the execution of these leases there has been no change in the fee title to Sec. 29 or in the 1/8th royalty interest reserved by such leases.

On October 31, 1955, when statewide spacing Rule 37 provided regular 20 acre drilling units American and Murphy H. Baxter entered into an agreement whereby American agreed to assign to him, upon completion of a test well, certain leasehold interests including such interests in four alternate 80 acre portions of Section 29. Upon completion of such well assignments were made (March 29, 1956) as agreed and thereafter Baxter assigned certain undivided leasehold interests to various persons.

On November 1, 1956, Baxter and his assigns entered into an exchange assignment and agreement with American as a result of which the Baxter group became the owner of the leasehold interest covering the NE/4 and the SW/4 of Section 29 and American became the owner of the leasehold interest covering the NW/4 and the SE/4 of Section 29.

On November 12, 1956, American made a farm-out agreement with Joseph I. O'Neill, Jr., whereby O'Neill obligated himself to drill to completion a test well on the NW/4 of Section 30, Block 38, T-2-S, T. & P. Ry. Co. Survey, which agreement provided:

'Confirming our recent discussions, this letter will constitute our bottomhole agreement regarding a test well for oil and/or gas which you hereby obligate yourself to drill at a well site located in the approximate center of the NW/4 of Section 30, Block 38, T-2-S, T. & P. Ry. Co. Survey, in Midland County, Texas, on a 160-acre tract of land which we are farming-out to you under this agreement.

'1. You agree to commence actual drilling at the above described well location on or before November 30, 1956, and to diligently continue the drilling of said well without interruption and in a good and workmanlike manner until you have drilled and tested to a total depth from the surface of at least 10,500 feet, unless you have established commercial production of oil and/or gas, or have tested a conclusive volume of salt water, at a lesser depth in the Strawn (Pennsylvanian) Limestone formation. It is further understood and agreed that the drilling and completion of said well shall be a firm obligation undertaken at your sole risk, cost and expense, and said well shall be completed either as a commercial producer or finally plugged and abandoned as a dry hole on or before March 1, 1957.

'2. Within fifteen (15) days after receipt and acceptance by us of final well data showing that the aforesaid well has been completed either as a commercial producer or finally plugged and abandoned as a dry hole, as herein provided, we agree to execute and deliver an assignment or assignments to you of all our rights, title and interest in and to the oil, gas and mineral leases on the following described tracts of land in Midland County, Texas, towit:

'The NW/4 and the SE/4 of Section 30, and the NW/4 and the SE/4 of Section 29, Block 38, Township 2 South, T & P RR Co. Survey, * * *.

'The aforesaid assignment or assignments, and the delivery thereof to you, shall be subject to all of the terms and conditions of this agreement and of the basic leases concerned and will further provide that you shall pay all delay rentals which may thereafter become due under your portion of the above described oil and gas leases until such time as you shall give notice as provided in Paragraph 10 hereof of your intention to permit your portion of said leases to lapse in whole or in part and tender a reassignment to us;

'Save and except, that said assignment or assignments shall reserve unto Assignor, American Trading and Production Corporation, its successors and assigns, an overriding royalty of 3/8ths of 8/8ths of all the oil, gas and other minerals produced and saved from said lands under the terms of the basic leases or any renewals or extensions thereof, free of all costs, except taxes; and, save and except that the overriding royalty reserved unto Assignor on all the oil, gas and other minerals that may be obtained from any formation shallower than a total depth of 9,000 feet from the surface shall be reduced to 1/8th of 7/8ths of the total amount produced and saved by natural flow, and further shall be reduced to 1/16th or 7/8ths of the total amount produced and saved as to such portion or portions of the total production as may be obtained by pumping or other artificial lifting methods.

'3. Furthermore, it is understood and agreed that within one hundred twenty (120) days after said first well has been drilled and completed either as a commercial producer or has been finally plugged and abandoned as a dry hole, as herein provided, you shall commence the actual drilling of a second test well on another of the four 160-acre tracts of land hereinabove described, and thereafter a third test well, and so on, with not more than one hundred twenty (120) days elapsing between the completion of one well and the commencement of another, until the above described tracts of land shall have been explored and developed to the density of one well to each 160 acres of land, more of less, all of which wells shall be drilled and tested in the same manner and to the same ultimate depth as herein set forth as regards the first test well;

'Provided, however, that should you fail to commence said second test well, or any subsequent test wells within the period of time allowed, you agree to forthwith reassign to us the oil, gas and mineral lease or leases on all of the remaining undeveloped 160-acre tracts of land hereinabove described, said reassignment to cover the full working interest under said tracts as originally assigned to you by us, retaining for yourself only each producing well and the 160 acres of land, more or less, surrounding such well. * * *

'In the event that you, or your successors or assigns, should elect to allow your portion of the above described oil and gas leases to lapse in whole or in part by the nonpayment of any delay rentals which may become due thereunder after you have acquired title thereto and before and commercial production has been established thereon, or, in the event that during the last year of the primary term of said lease you, or your successors or assigns, shall not be producing oil or gas from the above described lands, and should elect not to drill thereon and said oil and gas leases would thus expire and terminate by virtue of lack of production, then and in either of such events it is agreed that you, or your successors or assigns, at least ninety (90) days before the due date of the next maturing delay rental or before expiration of the primary term of said leases, as the case may be, shall notify American Trading and Production Corporation in writing of your intentions to permit your portion of said leases to lapse or expire in whole or in part and shall tender to American Trading and Production Corporation for acceptance or rejection an assignment or assignments in the same form and with the same covenants as the assignment or assignments made by American Trading and Production Corporation covering the full interest under oil or such portion of the said oil and gas leases as would so lapse or expire.'

In compliance with this agreement O'Neill drilled a test well...