Presentation:
Oil & Gas Law
Chapter 2: State Regulation of Production
Professors Wells
September 2, 2015

State Regulation of Production:
Ohio Oil Co. v. State of Indiana
Ohio Oil Co. v. State of Indiana , 177 U.S. 190:
1.
Facts
2.
Court reasoning
“Hence it is that the legislative power, from the peculiar nature of the right and the objects upon which it is to be exerted, can be manifested for the purpose of protecting all the collective owners, by securing a just distribution , to arise from the enjoyment, by them, of their privilege to reduce to possession, and to reach the like end by preventing waste .”
2

Flaring in Texas
What is the reason for flaring today?
Texas has more intrastate natural gas pipeline miles (over 43,000) than any other State.
3

State Regulation of Production:
Pattie v. Oil and Gas Conservation Commission
Patti v. Oil and Gas Conservation Commission , 402 P.2d 596:
1.
Facts: Field Spacing Rule: 1 well every 160 acres (1/4 section) and within 640 square feet of each center.
2.
Court reasoning
“It would be ‘inequitable’ and ‘unjust’ not to allow one to have an exception to the drilling pattern in order to allow that driller to get his share of petroleum– provided, of course, that the exception does not cause waste.”
NE ¼ of §15
W 1/2 of §14
Whitlash West Field
330’ 330’
4

State Prorationing of Production:
Champlin Refining Co. v. Corporation Commission of OK
Champlin Refining Co. v. Corporation Commission of Oklahoma , 186 U.S. 210:
1.
Facts
2.
Court reasoning
“right to take and thus to acquire ownership is subject to the reasonable exertion of the power of the state to prevent unnecessary loss, destruction, or waste.”
5

State Prorationing of Production:
Railroad Commission of Texas v. Rowan & Nichols Oil Co.
Railroad Commissioner of Texas v. Rowan & Nichols Oil Co.
, 311 U.S. 570:
1.
Facts
2.
Court reasoning
“Nothing in the Constitution warrants a rejection of the Railroad Commission’s expert conclusions. Nor, on the basis of intrinsic skills and equipment, are the federal courts qualified to set their independent judgment on such matters against that of the chosen state authorities. For its own good reasons Texas vested authority over these difficult and delicate problems in its Railroad
Commission. Presumably that body, as the permanent representative of the state’s regulatory relation to the oil industry equipped to deal with its ever-changing aspects, possesses an insight and aptitude which can hardly be matched by judges who are called upon to intervene at fitful intervals.”
Historical Note: By July 10, 1931:
•   19 largest producers had 57% of acreage and 36% of production
•   Next 20 largest had 12% of acreage and 15% of production
•   Remaining 586 producers had 20% of acreage and 49% of production
6

State Prorationing of Production:
Atlantic Refining Co. v. Railroad Commission of Texas
Atlantic Refining Co. v. Railroad Commissioner of Texas , 346 S.W.2d 801:
(Normana Decision)
1.
Facts
2.
Court reasoning
“we feel compelled to hold , under the facts of this case, that the 1/3-2/3 proration formula promulgated by the Railroad Commission for the Normana Field is invalid. The order allows a well on a .3-acre tract to produce gas at a rate many times greater per acre than a well on a 320acre tract is allowed to produce, and we find no substantial evidence in the record justifying such a wide discrepancy in the rate of production. Viewing all the facts in the light of the substantial evidence rule, we think the 1/3-2/3 proration formula is an unreasonable basis upon which to prorate the gas production from this field. It does not come close to compelling ratable production; neither does it afford each producer his fair share of the gas from reservoir.”
Impact :
•   Did away with the “living allowable.” Without a per well factor and guarantee to make a profit, small tract owners would need to pool.
•   Death-knell for small tract drilling. The small tract owner would be granted a permit for drilling a well, but the prorationing formula would serve to protect correlative
rights of other landowners.
7

State Prorationing of Production:
Pickens v. Railroad Commission of Texas
Pickens v. Railroad Commissioner of Texas , 387 S.W.2d 35:
1.
Facts
2.
Court reasoning
“There is evidence that this formula will encourage unitization. . . . The question is not one of unitization or pooling. That question was not before the Commission and is not before us. The question here is whether the order which the Commission entered, when tested by the usual rules, is or is not reasonably supported by substantial evidence. We have held that it is.”
8

State Prorationing of Production:
Review Problem 2-29
Problem : The Railroad Commission has issued an order that sets a production limit of 300,000 cubic feet of gas per day. The field gas-oil ratio is 2,000 cubic feet of gas per each barrel of oil, and the maximum oil that could be produced is 150 barrels.
Your client’s well is located high on the reservoir and produces 5,000 cubic feet for every barrel of oil. So, the maximum oil that your client can produce is 60 barrels of oil (i.e., 300,000 cubic feet of gas allowable divided by 5,000 cubic feet per barrel of oil).
9

State Regulation of Drilling Permits:
Gulf Land Co. v. Atlantic Refining Co.
Gulf Land Co. v. Atlantic Refining Co.
, 131 S.W.2d 73:
1.
Facts
2.
Court reasoning
“It is the law that every owner or lessee of land is entitled to a fair chance to recover the oil and gas in and under his tract, or there equivalents in kind. Any denial of such fair chance would be ‘confiscation’ . . . . The right to be protected against ‘confiscation’ under the Commission oil and gas rules is not absolutely unconditional or unlimited ….
* * * *
We therefore hold that in passing on the question as to whether or not a well permit should issue as an exception to the spacing provisions of Rule 37 to prevent waste, the
Commission is not compelled to absolutely confine itself to the lone question as to whether such well will save oil that otherwise would be lost, but may also take into consideration waste above the ground, and the orderly and scientific development of the field.”
* *
2.35 acres of
Gulf Land Co.
* **
*
10

State Regulation of Drilling Permits:
Nash v. Shell Petroleum Corporation
Nash v. Shell Petroleum Corporation , 120 S.W.2d 522:
1.
Facts
2.
Court reasoning
“The question of intent is not material. The effect of the act of segregation as applied to the particular fact situation is the controlling factor. On the other hand, if the purpose of the subdivision be in fact to circumvent the spacing rule, the voluntary segregation rule would no doubt be applied regardless of the situation otherwise.”
11

State Regulation of Drilling Permits:
Shell Petroleum Corporation v. Railroad Commission
Shell Petroleum Corporation v. Railroad Commission , 133 S.W.2d 194:
1.
Facts
0.835 acres
(Whitehead)
227 acres
Shell Lease from
Douglas on 9/11/1930
2.
Court reasoning
“There was nothing to show that such conveyance was for the purposes of, or in conetmplation of, oil development. Manifestly such was not the purpose of such conveyance. But where lands are leased expressly for the purpose of oil development, an entirely different situation is presented. In the latter instance, whether the lease be in proven territory or not, the conservation laws become applicable to the subsequent development thereof; and the rights of the parties become referable to the rules and regulations of the Commission governing the development of the property which the lessor himself contemplated and which he required of the lessee. Under these circumstances, application of the provisions of the rule, as a conservation measure, is as essential in a given areaa before the discovery of oil as it would be after such discovery.”
12

State Regulation of Drilling Permits:
Benz-Stoddard v. Aluminum Co. of America
Benz-Stoddard v. Aluminum Co. of America , 368 S.W.2d 94:
1.
Facts
2.
Court reasoning
“We hold, therefore, that since the Commission is authorized to treat each completion in a separate reservoir as a separate well, it may grant multiple completions in each reservoir in which it finds there will be confiscation.”
13

Rule 37(g) Exceptions
Rule 37(g)(2) :
(2)   Any subdivision of property creating a tract of such size and shape that it is necessary to obtain an exception to the spacing rule before a well can be drilled thereon is a voluntary subdivision and not entitled to a permit to prevent confiscation of property if it were either:
(A)   Segregated from a larger tract in contemplation of oil, gas, or geothermal development; or
(B)   Segregated by fee title conveyance from a larger tract after the spacing rule became effective and the voluntary subdivision rule attached.
(3)   The date of attachment of the voluntary subdivision rule is the date of discovery of oil, gas, or geothermal resource production in a certain continuous reservoir, regardless of the subsequent lateral extensions of such reservoir, provided that such rule does not attach in the case of segregation of small tract by fee title conveyance which is not located in an oil, gas, or geothermal resource field having a discovery date prior to the date of such segregation .
(4)   The date of attachment of the voluntary subdivision rule for multiple reservoir fields located in the same structural feature and separated vertically but not laterally (i.e., the multiple reservoirs overlap geographically at least in part), shall be the same date as that assigned to the earliest discovery well for such multiple reservoir structures.
(5)   If a newly discovered reservoir is located outside the then productive limits of any previously discovered reservoirs and is classified by the commission as a newly discovered field, then the date of discovery of such newly found reservoir remains the date of attachment for the voluntary subdivision rule, even though subsequent development may result in the extension of such newly discovered reservoir until it overlies or underlies older reservoirs with prior discovery dates.
(6)   The date of attachment of the voluntary subdivision rule for a reservoir that has been developed through expansion of separately recognized fields into a recognized single reservoir and is merged by commission order is the earliest discovery date of production from such merged reservoir, and that date will be used subsequent to the date of merger of the fields into a single field.
14

Examples
(1)   A statewide spacing rule of 40 acres per well. The nearest production is many miles away. A farmer owns 50 acres leases the north ten acres for oil and gas development. Is the lessee entitled to an exception to the statewide spacing rule of 40 acres per well?
(2)   The nearest production is many miles away. A farmer owning 50 acres deeds the north ten acres to Baker. Subsequently,
Baker leases to E&P Developer. Can E&P Developer receive an exception to the 40-acre statewide rule on this ten acres?
15

Summary of the Time of Attachment Rule
1.
Leases in unexplored territory that subdivide land into tracts smaller than the statewide spacing rule create voluntary subdivisions .
2.
Deeds in unexplored territory that subdivide land into small tracts do not create voluntary subdivisions.
3.
Leases on large (parent) tracts automatically trigger voluntary subdivision rule, and subsequent subdivisions by deed are voluntary subdivisions as a matter of law even if the leased land is unproven and unexplored.
4.
Leasing activity adjacent to a tract in unexplored territory does not necessarily trigger the voluntary subdivision rule.
5.
Deeds that subdivide land into small tracts in proven territory create voluntary subdivisions
Summary of Rule
“A subdivision of property into a small tract requiring a spacing exception will not be granted an exception to prevent confiscation, if the subdivision occurred by lease or while the land was under lease, or if the subdivision occurred by deed after oil and gas were discovered in the area.
However, such a subdivided small tract may receive an exception based on waste.”
16

State Regulation of Drilling Permits:
Exxon Corp. v. Railroad Commissioner of Texas
Exxon Corp. v. Railroad Commissioner of Texas , 571 S.W.2d 497:
1.
Facts
2.
Court reasoning
“Consideration of reasonable economic facts upon which operators must act is one of the underlying bases for Rule 37 itself. . . . . The adoption of the spacing rule represents an economic decision that the density of development should be regulated and restricted, at least in part to prevent physical or economic waste from the drilling of wells which are not reasonably necessary to drain a reservoir adequately.
In the present case, common sense dictates that the economic waste that would result from BTA’s drilling a completely new well, simply so as not to crowd its existing well, is a most relevant consideration.”
17

State Regulation of Drilling Permits:
Ryan Consolidated Petroleum Corp. v. Pickens
Ryan Consolidated Petroleum Corp. v. Pickens , 285 S.W.2d 201:
1.
Facts
2.
Court reasoning
“When Pickens & Coffield secured the leasehold rights in Lots 10 and 11 they were charged by law with notice of the fact that they could not drill a well thereon except to prevent waste or by reason of the preference right as the first lessee of Lots 10 and 11 of the four lots involved, or by reason of a finding by the Railroad Commission that the best location for the one well to prevent confiscation was one of their lots.”
18

Drilling Permit:
Rule 37 Problem Set Page 2-56
19

Drilling Permit:
Rule 37 Problem Set Page 2-56
20

Drilling Permit:
Rule 37 In the Horizontal Context
Horizontal Well Diagram #2A
(Field Wide “Box Rule”)
Penetration
Point 467 feet
33 feet
Surface
Location
Lease Line
Terminus
Brownacre Tract
Box Rule: As long as horizontal drainhole is within the dotted box, it will be considered to have been drilled
467 feet from lease line.

Surface
Location
Drilling Permit:
Rule 37 In the Horizontal Context
E
N
A
G
R
E
C
R
E
Penetration
Point
Horizontal Well Diagram #2B
(Basic Rule 86(b) Situation)
33 feet
467’
Lease Line
Terminus
Brownacre Tract
Rule 86(b) provides as a statewide rule that the Rule 37 distance requirements apply for that portion of the wellbore that comprises the Horizontal Drainhole.

Drilling Permit:
Rule 37 In the Horizontal Context
Horizontal Well Diagram #2C
(Modification of Rule 86 by Fieldwide “Take-Point Rule”)
Penetration
Point
33 feet
Surface
Location
E
N
A
G
R
E
C
R
E
450’
17’
First Perforation or
“Take-Point”
Terminus
Brownacre Tract
The Railroad Commission has regularly modified the statewide Rule 86(b) provision to incorporate a “takepoint” rule. Where a particular field adopts a “take-point rule,” then the the Rule 37 distance requirements apply for that portion of the wellbore that starts from the first take-point” and ends at the last take-point.

Drilling Permit:
Rule 37 In the Horizontal Context
Horizontal Well Diagram #2D
Benefit of the “Take-Point Rule”: The No-Perf Zone
Penetration
Point
Surface
Location
First Perforation or
“Take-Point”
X < 467’
G
R
E
E
N
A
C
R
E
Terminus
Brownacre Tract
The Railroad Commission has regularly modified the statewide Rule 86(b) provision to incorporate a “takepoint” rule. Where a particular field adopts a “take-point rule,” then the the Rule 37 distance requirements apply for that portion of the wellbore that starts from the first take-point” and ends at the last take-point.
The “take-point” rule coupled with the operator have a “no-perf zone” allows the horizontal wellbore to be drilled as platted but the portion that would violate the Rule 37 distance requirements are not perforated. The
“No-Perf Zone” is indicated in the shaded portion of the diagram.

State Regulation of Pooling:
Carson v. Railroad Commission of Texas
Carson v. Railroad Commission of Texas , 669 S.W.2d 315:
1.
Facts.
642.39 Pooled Unit
Carson
(Lessor)
Tract 7
2.
Issue: Is an offer to share in production on an acreage basis fair to Carson?
3.
Court reasoning
“[T]he offer must be one which takes into consideration those relevant facts, existing at the time of the offer, which would be considered important by a reasonable person in entering into a voluntary agreement concerning oil and gas properties.”
25

State Regulation of Pooling:
Mineral Interest Pooling Act (“MIPA”)
§102.003 Applies to reservoirs discovered after March 8, 1961
§102.011 Maximum pooled unit
§102.012 Parties that can apply
§102.013 Fair offer to voluntarily pool as precondition to compulsory pooling application
§102.014 Muscle-In provision only applies to small tract owners
§102.052 Risk premium limited to 100% of drilling and completion costs
26

MIPA:
Review Problem 2-70
27

MIPA:
Review Problem 2-74
28

State Regulation of Unitization:
Dobson v. Arkansas Oil & Gas Commission
Dobson v. Arkansas Oil & Gas Commission , 235 S.W.2d 33:
1.
Facts
2.
Court Reasoning
29

State Regulation of Unitization:
California Co. v. Britt
California Co. v. Britt , 154 So.2d 144:
1.
Facts
2.
Court Reasoning
“Since California has not trespassed upon appellee’s land, has not drilled a well on it, and has violated no rights of appellees, it is not liable to them in tort.”
30

State Regulation of Unitization:
Baumgarten v. Gulf Oil Corp.
Baumgarten v. Gulf Oil Corp.
, 168 N.W.2d 510:
1.
Facts
2.
Court Reasoning
Baumgarten
31

State Regulation of Unitization:
Railroad Commission of Texas v. Manziel
1.
Facts: Normal field spacing of 660’ from lease line
2.
Court Reasoning
“We conclude that it, in the valid exercise of its authority to prevent waste, protect correlative rights, or in the exercise of other powers within its jurisdiction, the
Commission authorizes secondary recovery projects, a trespass does not occur when the injected, secondary recovery forces move across lease lines, and the operations are not subject to an injunction on that basis. The technical rules of trespass have no place in the consideration of the validity of the orders of the Commission.”
Question: Does the above language indicate that the operator is immune from tort liability as long as they have complied with the commission orders and operated nonnegligently?
Manthis Well
(330’ from lease ine)
Eldridge #11
(206’ from lease line)
32

Unitization:
Hypothetical Manziel v. Whelan Case page 2-98
33

State Regulation of Unitization:
Tidewater Oil Co. v. Jackson
Tidewater Oil Company v. Jackson , 320 F.2d 157:
1.
Facts
2.
Court Reasoning
“[I]t is safe to assume that, though a water flood project in Kansas be carried on under color of public law, as a legalized nuisance or trespass, the water flooder may not conduct operations in a manner to cause substantial injury to the property of a non-assenting lessee-producer in the common reservoir, without incurring the risk of liability thereof.”
34

State Regulation of Unitization:
Railroad Commission of Texas v. Flour Bluff Oil Corp.
Railroad Commission of Texas v. Flour Bluff Oil Corp.
, 219 S.W.2d 506:
1.
Facts
2.
Court Reasoning
“If the prevention of waste of natural resources such as gas is to await the time when direct and immediate profits can be realized from the operation, there would have been little need for the people of Texas to have amended their Constitution by declaring that the preservation and conservation of natural resources of the State are public rights and duties and directing that the
Legislature pass such laws as may be appropriate thereto, . . . for private enterprises would not need the compulsion of law to conserve these resources if the practice were financially profitable.”
35