Railroad Commission v. Graford Oil Corp.

• Decision Date: 09 November 1977
• Docket Number: No. B-6537,B-6537
• Parties: RAILROAD COMMISSION of Texas et al., Appellants, v. GRAFORD OIL CORPORATION et al., Appellees.
• Court: Texas Supreme Court

Page 946

557 S.W.2d 946

RAILROAD COMMISSION of Texas et al., Appellants, v. GRAFORD OIL CORPORATION et al., Appellees.

No. B-6537.

Supreme Court of Texas.

Nov. 9, 1977.

Rehearing Denied Dec. 7, 1977.

John L. Hill, Atty. Gen., Linward P. Shivers, Asst. Atty. Gen., Austin, Clark, Thomas, Winters & Shapiro, Barr McClellan, John Coates and Barry Bishop, Austin, for appellants.

Graves, Dougherty, Hearon, Moody & Garwood, Dan Moody, Jr., and Robert C. Grable, Austin, Hart & Hart, James P. Hart, Austin, for appellees.

GREENHILL, Chief Justice.

This is a direct appeal by Mitchell Energy Corporation and the Railroad Commission from a trial court judgment declaring an order of the Railroad Commission to be invalid and permanently enjoining the Commission from putting the order into effect.

The Railroad Commission's order consolidated nine gas fields ¹ into one field, and it promulgated spacing and production (proration) rules applicable to the consolidated field. The effect of the order was to treat the consolidated area as if it were a single, continuous reservoir. The order was opposed by Graford Oil Corporation and certain owners of unleased land.

After entertaining their actions and hearing the claims of the parties, the district court declared this order invalid on the three grounds: (1) the order did not contain a fact finding as required by statute, that the hydrocarbons it affected constitute a common reservoir; (2) there was not substantial evidence to support such a finding had it been made; and (3) the owners of unleased land in the affected area were denied due process because they were not given an opportunity to introduce evidence or to participate in a hearing before the Commission. We affirm the judgment of the trial court on all three grounds.

I.

Mitchell Energy Corporation (Mitchell) initiated this action in December of 1975 when it applied to the Commission for the consolidation of seven gas fields in Palo Pinto County. Later, two gas fields in Jack County were included in the application, bringing the total area of the lands in question to approximately 45,000 acres. The field rules for three of the fields proposed to be consolidated provided for 320-acre proration units, and production allocation was based on one hundred percent of acreage. The spacing rules applicable to the other six fields allowed wells to be drilled on twenty-acre tracts, but limited production of these wells to twenty-five percent of the potential capacity of the well without regard to acreage.

Notice of Mitchell's application was sent to the operators of record on the affected land, but notice was not given to persons who owned unleased land in the affected area. Approximately seventy-five such owners later intervened in the case, and they are referred to here as the McClure group.

On July 12, 1976, the Commission followed the examiners' recommendation and ordered the consolidation of the nine gas fields. The McClure group then filed their petition in intervention; and with Graford Oil Corporation (Graford Oil), they appealed to the district court. That court set aside the consolidation order and remanded the cause to the Commission for "further proceedings" because the Commission's order contained no findings of fact or conclusions of law as required by the Administrative Procedure and Texas Register Act Section 16(b). ²

On remand, Graford Oil and the McClure group filed motions before the Commission to reopen the hearing and to allow the admission of additional evidence. Instead of granting these motions and conducting further proceedings, the Commission overruled the motions and issued a new order of consolidation which incorporated by reference the hearing examiners' findings of fact and conclusions of law. In all other material respects, the new order was identical to the previous order of consolidation.

Graford Oil and the McClure group then made a second appeal to the district court. This time the district court held the Commission order invalid on grounds that there was no finding that all of the hydrocarbon accumulations encompassed by the order constituted a "common reservoir;" that there was not substantial evidence to support such a finding had it been made; and that the Commission failed to accord the McClure group due process. The trial court ruled against the Commission, and the Commission and Mitchell then brought this direct appeal to us. They contest the trial court's conclusions on the meaning of "common reservoir" within Article 6008, Section 2; the significance of the hearing examiner's findings of fact; and the sufficiency of the due process given to the owners of unleased lands by the Railroad Commission.

The parties agree on the controlling questions, and they agree that the basis of the Railroad Commission's authority to regulate the production in natural gas fields is set out in Article 6008, Section 10. That statute authorizes the Commission to prorate and to regulate, the daily gas production from "each common reservoir " in order to prevent waste or to adjust correlative rights. ³ It does not, however, authorize the Commission simply to combine several common reservoirs into a single field for proration purposes for administrative convenience. See Railroad Commission v. Shell Oil Co., 380 S.W.2d 556, 559 (Tex.1964); Benz-Stoddard v. Aluminum Co. of America, 368 S.W.2d 94 (Tex.1963).

Since the Commission must prorate as a separate field each common reservoir, the question here turns upon the construction given to the critical term "common reservoir." Article 6008, Section 2 defines a common reservoir as meaning:

. . . any oil and/or gas field or part thereof which comprises and includes any area which is underlaid, or which from geological or other scientific data or experiments or from drilling operations or other evidence appears to be underlaid by a common pool or accumulation of oil/or gas . . . .

The statute can be read two ways.

The Commission and Mitchell Energy read this definition to mean that an area is a common reservoir if it "appears to be underlaid by a common pool or (by an) accumulation of oil and/or gas." Graford Oil and the McClure group, on the other hand, read the statute as requiring that the area "be underlaid by a common pool or (by a common) accumulation of oil and/or gas." We agree with the latter reading of the statute in which "common" modifies both "pool" and "accumulation;" i. e., when it appears that the area "appears to be underlain by a common pool or (a common) accumulation of oil and/or gas."

Since we hold that a common reservoir consists of a common pool or a common accumulation of hydrocarbons, separate and distinct pools of oil or gas, which are not connected, and which do not communicate with one another, do not constitute a "common reservoir." Each separate pool or accumulation is, under the statute, a separate reservoir, even though several different reservoirs may underlie a single gas-producing area and an entire gas-producing area may often be loosely referred to as a "field." See Railroad Commission v. Rio Grande Valley Gas Co., 405 S.W.2d 304, 310 (Tex.1966). Consequently, the consolidation order in this cannot stand unless the consolidated area is found to be a common pool or common accumulation of hydrocarbons.

We now turn to the facts.

II. FINDINGS OF FACT

Section 16(b) of the Administrative Procedure Act, which all parties agree applies to this case, requires that final decisions of administrative bodies include findings of fact and conclusions of law, separately stated. ⁴ The findings should be such that a court, on reading them, could fairly and reasonably say that they support the ultimate findings of fact required for its decision. Miller v. Railroad Commission, 363 S.W.2d 244 (Tex.1963). Thus, when the trial court concluded that the record contained no fact finding that the consolidated area is a common reservoir, it properly held that the Commission's order was invalid since it did not comply with the A.P.A.

The findings of fact the Commission did make regarding the area in question are as follows:

1. That the Atoka Age Conglomerate Formation is generally distributed throughout the area which was the subject of this hearing.

2. That the formation consists of interspersed sections of conglomerate and shale which form generally correlatable but not continuous reservoirs some of which are productive of gas.

3. That the porosity and permeability of the conglomerate formation is such that one well would adequately drain a 320 acre gas reservoir in this formation.

4. The discontinuity of the lenses within the overall reservoir is such that not every well on a 320 acre unit would drain all of the lenses underlying all portions of such unit.

5. That the drilling of a second well on a 320 acre unit might permit the development of lenses not developed by a single well on such unit.

6. That a spacing pattern requiring minimum distances of 660 feet from property lines and 1320 feet between wells subject to exceptions after notice and hearing would be a reasonable spacing pattern for the development of the reservoir.

7. That because of the apparent correlation and apparent merging of the various lenses within the Atoka Conglomerate Section, the entire section can be reasonably developed as a single reservoir.

The Commission and Mitchell argue that fact findings numbers 1, 3, and 7 support the conclusion that the Atoka formation is a common reservoir. We do not agree. The first finding merely states that the geological formation, productive or not, extends throughout the affected area; and the seventh finding merely states the Commission's conclusion that the entire formation can be developed as if it were a common reservoir. Finding number 3 merely recognizes that a 320-acre reservoir in the formation would be drained by a single well.

The other findings show, however, that the Atoka formation is in fact composed of several...