Railroad Commission v. Shell Oil Co.

• Decision Date: 25 June 1941
• Docket Number: No. 9125.,9125.
• Citation: 154 S.W.2d 507
• Parties: RAILROAD COMMISSION et al. v. SHELL OIL CO., Inc., et al.
• Court: Texas Court of Appeals

Page 507

154 S.W.2d 507

RAILROAD COMMISSION et al. v. SHELL OIL CO., Inc., et al.

No. 9125.

Court of Civil Appeals of Texas. Austin.

June 25, 1941.

Corrective Opinion September 24, 1941.

Dissenting Opinion October 8, 1941.

Appeal from District Court, Travis County; Roy C. Archer, Judge.

Consolidated suits in equity by the Shell Oil Company, Incorporated, and by the Humble Oil & Refining Company, in which former corporation intervened, against Ida Richey, the Railroad Commission of Texas, and others, to set aside permits to drill oil wells. From an adverse judgment, the Railroad Commission of Texas and others appeal.

Judgment affirmed.

Gerald C. Mann, Atty. Gen. and Edgar W. Cale and James P. Hart, Asst. Attys. Gen., for appellant Railroad Commission of Texas.

Wheeler & Wheeler, of Austin, for appellant Trem Carr.

H. E. Bell, of Houston, Powell, Rauhut & Gideon, of Austin, Joe T. Dickerson, of Tulsa, Okl., R. H. Whilden, of Houston, and Greenwood, Moody & Robertson, of Austin, for appellees.

BAUGH, Justice.

This is a Rule 37 case. The well involved was drilled under a permit granted on October 1, 1937, to prevent confiscation of property. On appeal to this court this permit was set aside as invalid. See Richey v. Shell Pet. Corp., Tex.Civ.App., 128 S.W.2d 898. It was granted to Ida Richey, but it was not controverted that Trem Carr then owned the leasehold on the .67-acre tract involved, and that it inured to his benefit. On February 20, 1940, the Commission granted to Trem Carr a permit to drill well No. 1 on this same .67-acre tract. While granted as a permit to drill, it was in reality a permit to produce oil from the well already drilled, which permit was set aside in the former suit. In the instant case it was granted on the recited grounds, "to prevent confiscation of property and to prevent physical waste."

No contention is made here that the permit can be sustained on the ground of confiscation. Not only was that issue adjudicated on the former appeal (there being no intervening material change of conditions), but the evidence on the trial of the instant suit clearly negatived the necessity for such permit to prevent confiscation. It is contended, however, that there was substantial evidence before the Commission on the subsequent hearing to sustain the permit as necessary to prevent physical waste.

It is now settled that the question of confiscation involves primarily the private property rights of the adjacent leaseholders, is one essentially judicial in nature, and is not dependent upon whether waste of the natural resources will result or not. On that issue the exceptions to Rule 37 are grounded primarily on the duty and undertaking of the State, through the Railroad Commission, to see to it that one producer of oil shall not recover more than his fair share of the oil beneath his own land by excess drainage of oil from beneath the land of his neighbor. Numerous cases, involving exceptions to Rule 37 to prevent confiscation, have come before us wherein the drilling of such wells would admittedly cause waste, but the private property rights of the interested parties have been deemed paramount and the permits sustained notwithstanding the resultant waste caused.

It is to be noted also that "waste" as defined by the conservation laws and the rules of the Railroad Commission is not dependent wholly upon the recovery of the maximum quantity of the oil and gas in place beneath the surface. That is, loss of, or failure to produce, recoverable oil underground, is not the sole and only factor in the determination and prevention of waste by the Railroad Commission as authorized and defined by the conservation statutes. Factors and elements to be considered as causing waste are set forth in Vernon's Annotated Civil Statutes, in Art. 6014. After enumerating some six factors applicable to underground conditions, the legislature added three other conditions applicable above ground, including market demand, as elements of waste, and provided that the Commission may consider any or all of such definitions in making rules to prevent waste. Waste, as defined by the statutes, was not confined to underground waste, but included waste above the ground as well, however caused. Art. 6029 imposes upon the Commission the duty to make and enforce rules to prevent waste, and Sec. (1) thereof directs the Commission to regulate not only "drilling and producing operations" but also "the storage, piping and distribution" of oil and gas. Sec. 5 of Art. 6049c, Vernon's Ann.Civ. Stats., requires the Commission to consider, as elements entering into the question of waste, and as necessary to be considered in its prevention, "the production, storage, transportation, refining, reclaiming, treating, marketing or processing of crude petroleum oil or natural gas, and the reasonable market demand therefor, * * *." And for the same purpose the legislature, Acts 1935, 44th Leg., p. 180, Ch. 76, Sec. 9, Art. 6049d, Sec. 6, Vernon's Ann.Civ.Stats., authorized the Commission to allocate and apportion allowable production among the various pools in Texas based upon market demand.

It is thus manifest that the bringing to the surface of the maximum amount of recoverable oil beneath a given tract or given area is but one of the elements or factors to be considered in determining the issue of physical waste. Three major methods of waste prevention have been adopted by the Commission: (1) Spacing of wells (Rule 37) to prevent excessive drilling. (2) Proration of production from wells already drilled, so as to keep total production reasonably within market demand. (3) Prevention of excess storage above ground, particularly in earthen or open air tanks. While other regulations, restrictions and inhibitions governing the production, transportation, storage, refining and sale of oil have been made and promulgated by the Commission, the three methods above stated are the ones of major import. Of these the spacing rule is the one of longest standing, having been originally promulgated in 1919, and continuously adhered to since that date, though the distances between wells, and from property lines, have been changed as conditions, in the judgment of the Commission, required. As applied to the East Texas field these distances have for several years continuously been 330-660 feet. The 150-300-foot spacings originally prescribed for this field were increased, after a full and comprehensive hearing before the Commission, on September 2, 1931 (see Tide Water Associated Oil Co. v. Railroad Comm., Tex.Civ.App., 120 S.W.2d 544, 546), upon the finding of the Commission that the lesser spacing "threatens to cause actual physical waste due to the too rapid dissipation of gas energy in the production of oil, and also due to the too rapid encroachment of water * * *." This September 2, 1931, order states that the fact basis on which the increased distances were prescribed was to prevent "actual physical waste of oil and gas." See Stanolind Oil & Gas Co. v. Midas Oil Co., 123 S.W.2d 911, 915, writ dismissed. While the Commission has in subsequent amendments to Rule 37 made purported findings or recitations that "the closer the wells are drilled the greater will be the recovery from the area so drilled," at no time has it modified its rule or changed the spacing provisions thereof as to the field as a whole, or as to any designated portion thereof. The import of these recitals and the effect thereof on the spacings provided in the Rule were fully discussed in the Midas case, supra, to which we refer without reiteration here. Manifestly, if closer spacings than those prescribed by the Rule are necessary to prevent waste, then the findings by the Commission that the 330-660-foot spacings fixed by the Commission after full hearing were necessary to prevent "actual physical waste of oil and gas" are clearly wrong and cannot be sustained. If there be no reasonable relationship between the prevention of waste and the spacings required by the Rule, then the Rule is without factual basis to sustain it, and must fall as arbitrary. If the contention of appellant be sustained that the recitals relied upon be construed as an official finding by the Commission that the more wells drilled in the East Texas field "the greater will be the recovery from the area so drilled" constitute an official finding by the Commission that denser drilling than allowed under the Rule is necessary to prevent waste, then the Commission is placed in the paradoxical situation of finding as a factual basis for promulgating their rule, that 330-660-foot spacing of wells is necessary to prevent waste; but that they must administer it under a fact finding that the closer wells are to each other, the less waste there will be. To state this consequence carries its own refutation. The result would be a repudiation by the Commission itself of its own rule as a conservation measure.

Whether the more wells more oil theory be true, in fact or not, the Commission has never made it a basis for any change in its prescribed spacings. The difficulty with such a contention is that it assumes that waste will be prevented solely by the extraction from the underground pool, the maximum amount of recoverable oil; and fails to take into account what would occur above ground if the field were densely drilled to do that. Prevention of above ground waste is as much a part of conservation program as is the prevention of underground waste; and in the former excess storage and market demand are important factors. Excess production, therefore, through dense drilling, even though it recover a greater percentage of recoverable oil from the pool, if by doing so it glut the market, cause excess storage above ground, create fire hazards, etc., thus causing waste above ground not compensated by the added recovery from beneath it, is not conserving the natural resource. Thus the Commission must weigh the one against the...