If you follow the Texas Railroad Commission closely, you should read Ammonite Oil & Gas v. Railroad Commission of Texas, in which the Supreme Court rejected a mineral owner’s effort to force pool an interest under the Mineral Interest Pooling Act. (Read here for the Austin Court of Appeals ruling and the underlying facts). If you are like the rest of us, read on.
The offers were not “fair and reasonable”
The Commission must dismiss a MIPA forced-pooling application if it finds that a fair and reasonable offer to pool voluntarily has not been made. EOG’s wells as permitted would not reach Ammonite’s riverbed minerals. The Commission rejected the applications because Ammonite failed to make a fair and reasonable offer and because forced pooling would not prevent waste, protect correlative rights, or require the drilling of unnecessary wells. The Court held that the Commission’s conclusion that Ammonite failed to make a fair and reasonable offer to voluntarily pool was reasonable.
All production would be from EOG’s lease and none from Ammonite’s. Thus, proceeds from the pool would not be allocated on the basis of the parties’ respective contributions to production.
The MIPA does not define a fair and reasonable offer. Thus, a decision on that question is left to the discretion of the Commission. The decision must only be supported by substantial evidence, which gives significant deference to the agency.
The Court concluded that the Commission’s rejection of the applications because Ammonite’s offers were not fair and reasonable was based on EOG’s wells as permitted, which did not drain Ammonite’s riverbed tract, and Ammonite did not ask EOG to modify its drilling plans and made no effort to show that it was possible for EOG to revise its plans or extend the wells to reach the riverbed.
That Ammonite proposed to obtain a share of EOG production without Ammonite’s contribute any minerals of its own could justify the Commission’s considering the offer unfair on its face.
The Court also discussed the MIPA-required risk charge.
Stranded minerals?
The Commission made no finding about whether Ammonite’s riverbed minerals were stranded. EOG’s expert testified that drilling a well to produce Ammonite’s minerals might be viable in the future. Ammonite criticized that testimony as beyond speculative but did not put on expert testimony of its own.
The Commission assumed Ammonite’s minerals are stranded but concluded that because the EOG wells were already completed and there was no drainage, granting Ammonite’s applications would not prevent waste or protect correlative lights.
The DISSENT
Justices Young and Busby were happy with anybody. They saw it this way:
The Court of Appeals should have reviewed the Commission’s denial of Ammonite’s applications on the merits.
Ammorite did make fair and reasonable voluntary pooling offers. The Commission’s failure to explain why Ammonite’s offers were not fair and reasonable in itself requires reversal and remand.
The case should be remanded to the Commission so it could decide whether forced pooling of Ammonite’s interest was proper under MIPA §102.011 (which the Commission did not do). The Commission’s explanation on that issue was conclusory at best based upon its mistaken understanding of the fair and reasonable offer point.
The lack of drainage is the very thing that allegedly makes the minerals stranded. Stranded minerals constitutes waste. If there is waste then pooling is on the table and sometimes is mandatory.
The Commission’s application of the statutory language to the facts was at best unexplained and thus unsustainable as a matter of law. Without knowing anything more than the bottom-line conclusion it is anyone’s guess whether the Commission’s order was reasonable.
Your musical interlude.
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