Railroad Commission v. Shell Oil Co.

• Citation: 380 S.W.2d 556
• Decision Date: 27 May 1964
• Docket Number: No. A-9759,A-9759
• Parties: RAILROAD COMMISSION of Texas et al., Petitioners, v. SHELL OIL COMPANY et al., Respondents.
• Court: Supreme Court of Texas

Page 556

380 S.W.2d 556

RAILROAD COMMISSION of Texas et al., Petitioners, v. SHELL OIL COMPANY et al., Respondents.

No. A-9759.

Supreme Court of Texas.

May 27, 1964.

Rehearing Denied July 15, 1964.

Waggoner Carr, Atty. Gen. of Texas, Austin, Joseph Trimble and Linward Shivers, Asst. Attys. Gen., for Railroad Commission and others.

Walter R. Koch, Hart & Hart, Houghton Brownlee, Jr., Austin, for C. A. Green & R. J. McMurrey.

R. H. Whilden and James R. Connor, Houston, Dan Moody, Jr., Powell, Rauhut, McGinnis, Reavley & Lochridge, Frank Douglass, Austin, with above firm, Robert J. Stanton and H. D. Bushnell, Tulsa, Okl., C. F. Heidrick and E. M. Cage, Dallas, for Shell Oil Co. and others.

CULVER, Justice.

This suit was brought by Shell Oil Company, Amerada Petroleum Corporation, and Sun Oil Company, challenging the validity of an order of the Railroad Commission prorating the production in four separate oil reservoirs on the Quitman structure in Wood County on the basis of 50% per well and 50% on the acreage assigned to the well. The owners of two separate tracts, C. A. Green and R. J. McMurrey, intervened seeking to have the Commission's order upheld. C. A. Green owns a one-acre tract on which one well was drilled in December, 1960, and McMurrey has a well on a 2.03-acre tract drilled in June of the same year. The district court held that the order was not reasonably supported by substantial evidence and was therefore arbitrary, unreasonable, capricious and confiscatory. Accordingly, the order was set aside and enforcement enjoined. The Court of Civil Appeals affirmed. 369 S.W.2d 363.

Each of the four fields involved in this suit is a separate and distinct hydrocarbon reservoir not in communication with one another or with other reservoirs. All four are located on what is known as the Quitman structure. In accordance with its usual practice the Railroad Commission has assigned to each reservoir a new field designation, and has consistently treated each one as a field separate and distinct from any other on the same structure or elsewhere. These fields are designated as the Southeast Quitman (Kirkland), the Southeast Quitman (Rhodessa), the Southeast Quitman Goldsmith (Kirkland), and the Southeast Quitman Goldsmith (Rhodessa) Fields.

The contention of Shell and the other respondents is that the field proration order fails to protect their correlative rights and results in great uncompensated drainage from their leases to the small tract wells owned by the petitioner-intervenors, depriving them of the reasonable opportunity of producing their fair share of oil from the reservoirs, thus dispossessing them of their property without due process of law. In our opinion these contentions are well taken and we accordingly affirm the decision of the Court of Civil Appeals.

The basic position taken by the Commission and the two aligned intervenors is that Shell and the other respondents, in the light of their conduct from the time of the discovery of oil production on the Quitman structure in 1942, are barred by unreasonable delay, laches and estoppel from seeking to have the proration order of the Railroad Commission adjudged null and void. They rely principally upon the statement made in the Normanna case ¹ wherein we said:

'We are in agreement with the reasoning of the courts in the Humble and Standard Oil Company cases in holding that where producers have acquiesced in and have failed to complain of the Commission's proration orders for a long period, during which time other operators have expended vast sums in exploration and drilling operations, such producers should not be heard to complain.'

This statement is not applicable to the facts in this case for there has been on the part of Shell and the other respondents no acquiescence in or failure to complain promptly, much less for a long period of time, of the proration order here under attack. Moreover, the Commission and intervenors do not take issue with the evidence introduced on the trial that the intervenors have already recovered from the wells located on their two small tracts greatly more than the recoverable reserves which originally underlaid those tracts; that each well has returned a net income substantially in excess of its original cost and that any future production would be generated by uncompensated drainage from other tracts.

During the years following the initial discovery in the Quitman area, further development revealed the fact that the subsurface area is divided into a number of separate oil-producing horizons at depths varying from 4200 to 8500 feet. The Railroad Commission has, during the history of oil production from the Quitman structure and prior to the discovery of the fields here involved, adopted field rules providing for an allocation formula of 75% acreage and 25% per well in these various reservoirs or fields where it appeared that there were no tracts entitled to separate development of less than the standard size proration unit of 40 acres; but where there were smaller tracts within the probable productive limits of a particular reservoir, the Commission adopted a proration formula of 50% acreage, and 50% per well.

There are four of these reservoirs (each considered a separate field) on the Quitman structure for each of which the Railroad Commission had, after due notice and hearing, adopted a 50-50 formula. From none of these orders did Shell or the other respondents appeal, nor did they appeal from the orders fixing the formula in other reservoirs at 25% per well-75% on acreage.

The four fields dealt with hear were discovered in the latter part of 1959 and in January and February of 1960. After the expiration of the discovery allowable period, the Commission took under consideration the matter of adopting field rules for these reservoirs. Hearings and rehearings were conducted but no final order was entered until June of 1962 which provided that in each field the allocation of allowables should be on the basis of 50% per well and 50% on assigned acreage. Within the 15-day period allowed by the rules of the Commission, Shell and the other respondents duly filed motions for rehearing asking that the Commission rescind the 50-50 allocation formula and adopt as a part of the field rules applicable to each of these four fields an allocation formula which they alleged would afford to them, and to all others so interested, a reasonable opportunity to recover their fair share of the hydrocarbons in the fields. On July 18, 1962, those motions were denied by the Commission. This suit was filed thereafter on August 8, 1962.

Intervenors argue that since respondents had not appealed from the orders affecting other reservoirs or fields in the Quitman area but had in fact recommended to the Commission in some instances the...