Walker Operating Corp. v. F.E.R.C.

• Citation: 874 F.2d 1320
• Decision Date: 28 April 1989
• Docket Number: 85-2698,86-1195,Nos. 85-2683,s. 85-2683
• Court: U.S. Court of Appeals — Tenth Circuit
• Parties: WALKER OPERATING CORPORATION, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Phillips Petroleum Company; Northern States Power Companies; Lake Superior District Power Company; Natural Gas Pipeline Company of America; Iowa Public Service Company; Anadarko Production Company; Pan Eastern Exploration Company; Inter-City Gas; the Energy Issues Intervention Office of the Minnesota Department of Public Service; Northern Natural Gas Company, Division of Enron Corp.; Colorado Interstate Gas Company; Dorchester Master Limited Partnership; Mobil Producing Texas & New Mexico Inc.; Williams Natural Gas Company; Texaco Producing Inc.; Conoco, Inc., Intervenors. to 86-1201, 86-1204, 86-1205 and 86-1206 to 86-1208.

Page 1320

874 F.2d 1320

WALKER OPERATING CORPORATION, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent,

Phillips Petroleum Company; Northern States Power

Companies; Lake Superior District Power Company; Natural

Gas Pipeline Company of America; Iowa Public Service

Company; Anadarko Production Company; Pan Eastern

Exploration Company; Inter-City Gas; the Energy Issues

Intervention Office of the Minnesota Department of Public

Service; Northern Natural Gas Company, Division of Enron

Corp.; Colorado Interstate Gas Company; Dorchester Master

Limited Partnership; Mobil Producing Texas & New Mexico

Inc.; Williams Natural Gas Company; Texaco Producing Inc.;

Conoco, Inc., Intervenors.

Nos. 85-2683, 85-2698, 86-1195 to 86-1201, 86-1204, 86-1205

and 86-1206 to 86-1208.

United States Court of Appeals, Tenth Circuit.

April 28, 1989.

As Amended May 24, 1989.

Jerry D. Courtney, of Lowe & Courtney, Clarendon, Tex., for Stowers Oil & Gas Co., and Walker Operating Corp., Robert J. Kapelke, of Gorsuch, Kirgis, Campbell, Walker & Grover, Denver, Colo., with him on the briefs for Walker Operating Corp., and Miles O'Laughlin, of Pampa, Tex., of counsel, with him on the briefs, for Stowers Oil & Gas Co.

Renea Hicks (Jim Mattox, Atty. Gen., Mary F. Keller, Executive Asst. Atty. Gen. for Litigation, and Larry J. Laurent, Asst. Atty. Gen., on the briefs), Sp. Asst. Atty. Gen., Atty. of Record, for the Railroad Com'n of Texas.

Edward J. Grenier, Jr., Robert W. Clark, III, and Gail S. Gilman, of Sutherland, Asbill & Brennan, Washington, D.C., for Cabot Pipeline Corp.

Joe H. Foy, of Bracewell & Patterson, Houston, Tex., for J.B. Watkins.

Jody G. Sheets, of Gassaway, Gurley, Sheets & Mitchell, Borger, Tex., for Lucky Bird Petroleum, Inc.

John H. Conway (Catherine C. Cook, Gen. Counsel, and Jerome M. Feit, Sol., with him on the brief), Atty., for the F.E.R.C.

James L. Trump (Philip R. Ehrenkranz and Paul F. Forshay, of Squire, Sanders & Dempsey, with him on the brief), of Squire, Sanders & Dempsey, Washington, D.C., for Dorchester Master Ltd. Partnership.

John L. Williford and Jennifer A. Cates, Bartlesville, Okl., for Phillips Petroleum Co.

P.M. Schenkkan, of Vinson & Elkins, Austin, Tex., for Anadarko Petroleum Corp. and Pan Eastern Exploration Co.

Paul E. Goldstein, Jerome Mrowca, and Barbara A. Gustafson, Lombard, Ill., for Nat. Gas Pipeline Co. of America.

Patrick J. McCarthy, of Adams and McCarthy, Omaha, Neb., Frank J. Duffy, Vice President and Gen. Counsel, and Jane G. Alseth, of Northern Nat. Gas Co., Div. of Enron Corp., Omaha, Neb., and George J. Meiburger and Steve Stojic, of Gallagher, Boland, Meiburger and Brosnan, Washington, D.C., for Northern Nat. Gas Co., Div. of Enron Corp.

Gene R. Sommers, of Northern States Power Co., Minneapolis, Minnesota, for Northern States Power Companies.

Christopher K. Sandberg, of Atty. Gen.'s Office, St. Paul, Minn., for the Energy Issues Intervention Office of the Minnesota Dept. of Public Service.

Charles H. Shoneman, of Bracewell & Patterson, Washington, D.C., and David Lindberg, Houston, Tex., for Texaco Producing Inc.

Before LOGAN, and TACHA, Circuit Judges, and ANDERSON, District Judge. ^*

TACHA, Circuit Judge.

This case presents for review, pursuant to 15 U.S.C. Sec. 717r(b) and 15 U.S.C. Sec. 3416(a)(4), two orders issued by the Federal Energy Regulatory Commission (FERC). These administrative orders determined that certain oil well operators had violated federal law by the diversion of natural gas dedicated to interstate commerce and by selling that gas at a price in excess of the statutorily established maximum price. We hold that FERC had jurisdiction to issue those orders, that FERC's findings of fact were based upon substantial evidence, that its conclusions of law were reasonable, and that there are no procedural grounds for overturning the orders. We affirm.

I.

The Texas Panhandle is the site of a vast hydrocarbon reservoir, the overlying surface area of which is some 124 miles long and averages approximately twenty miles in width. This reservoir contains both oil-producing and gas-producing formations, with the most significant formation for natural gas production being the brown dolomite. Often, a gas producing horizon overlies an oil producing horizon. Furthermore, when a formation produces both gas and oil, the hydrocarbons constituting oil, being denser than those constituting gas, usually will be found in the lower portions of that formation. Within a specific well, the contact line between the gas zone and the oil zone is referred to as the "gas-oil contact."

Within this area, generally referred to as the Panhandle Field, the spacing of oil wells and of gas wells must comply with state regulations that establish specific oil well and gas well proration units. A proration unit here is "[t]he area in a pool that can be efficiently and economically drained by one well, as determined by [the agency regulating production]." H. Williams & C. Meyers, Oil and Gas Terms 777 (7th ed. 1987); see 15 U.S.C. Sec. 3301(8). The Railroad Commission of Texas has designated oil fields by county within the Panhandle Field area and has established ten- or twenty-acre oil proration units for the oil wells in these fields. Likewise, the Railroad Commission has divided the Panhandle Field area into two gas fields, establishing 640-acre gas proration units in the Panhandle West Gas Field and 160-acre gas proration units in the Panhandle East Gas Field. Within the Panhandle Field, the gas rights and the oil rights to the same surface area often are separate leasehold estates held by separate parties. Thus, at times, separate and multiple leasehold estates may apply to the various hydrocarbons produced from a single well bore. See Dorchester Gas Producing Co. v. Harlow Corp., 743 S.W.2d 243, 250-51 (Tex.Ct.App.1987, writ denied).

Because a gas proration unit and an oil proration unit can occupy the same surface area, and because of the "split lease" situation, in the Panhandle Field area it is possible--and quite often the case--that the proration units for several oil wells might overlap a single gas well's proration unit, with the oil wells being operated by a different operating company from that operating the gas well. As the Fifth Circuit recently noted, "[w]ith the advent of new drilling and legal strategies, the so-called 'split leases' have now for several years produced a steady flow of gas, controversy, and litigation." Pan E. Exploration Co. v. Hufo Oils, 855 F.2d 1106, 1109 (5th Cir.1988).

From its early days the geological and regulatory realities of the Panhandle Field have led periodically to friction between oil producers and gas producers, especially over problems arising from the perforation of oil well casings in a gas-producing horizon above the oil-producing horizon in which the well was completed. The gas producers saw this activity, sometimes called "high perforation," as resulting in production of natural gas to which they held proper title.

In the Panhandle Field area, production of oil usually will result in some natural gas also being produced from the oil well. This, in fact, occurs in the area that is the subject of these proceedings, because there the "free gas phase overlies and is in contact with a black oil zone." Stowers Oil & Gas Co., 30 FERC p 63,017, at 65,031 (1985) (recommended decision). At a minimum, this type of gas--from an oil-producing horizon and inevitably produced along with the oil from that horizon--is known as "casinghead gas." The parties here dispute what else is included in that term.

The statutory and regulatory structure of Texas oil and gas law recognizes the possibility of gas and oil production from the same well. Texas statutes therefore classify specific producing wells as "oil wells" or as "gas wells" based on a specific well's "gas-oil ratio." ¹

In 1983 the FERC enforcement staff began a preliminary investigation into natural gas sales by oil operators in the Panhandle West Gas Field. The investigation focused on the activities of thirty-seven oil well operators whose oil wells and oil proration units were located on the same surface acreage (the subject acreage) as the gas wells and gas proration units of Dorchester Gas Producing Company (Dorchester). In February 1984 FERC issued an order requiring the thirty-seven oil well operators to show cause why they should not be found to have violated section 7(b) of the Natural Gas Act (NGA), 15 U.S.C. Sec. 717f(b), by the diversion of natural gas dedicated to interstate commerce, and section 504(a)(1) of the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. Sec. 3414(a)(1), by selling that gas at a price in excess of the statutorily established maximum price. Stowers Oil & Gas Co., 26 FERC p 61,207, 61,478-80 (1984) (show cause order).

A hearing was conducted, and in January 1985 the administrative law judge (ALJ) issued a recommended decision that found thirty-five of the oil well operators in violation of one or both of the statutory provisions. Stowers Oil & Gas Co., 30 FERC p 63,017, at 65,048-49 (1985) (recommended decision). The ALJ found that the evidence against the two remaining operators was inconclusive and required further investigation. Id. at 65,049.

In determining whether the operators had sold natural gas at a price in excess of its statutory ceiling price, the ALJ first had to determine whether that gas was being produced from reserves that Dorchester had dedicated to interstate commerce. Any gas produced from a Dorchester gas proration unit is dedicated gas. Although the operators' oil proration units and the Dorchester gas proration units sometimes occupy overlapping surface areas, the ALJ concluded that the Texas regulatory scheme used each well's gas-oil contact to divide the overlying gas proration units from the underlying oil proration units. Therefore, if the operators had produced gas from above the gas-oil...