Oil and Gas Lawyer Blog
As evidenced by the fight between Williams MLP Operating and EXCO Operating over EXCO’s flaring of Eagle Ford wells on the Briscoe Ranch, now pending on appeal in the 345th District Court of Travis County, flaring continues to be an issue in Texas. I thought a little history might enlighten the subject.
Controversy over gas flaring is not new. In the 1940’s flaring of gas was also an issue in Texas, and the Texas Railroad Commission successfully fought to reduce flaring as a waste of Texas’ valuable resource.
In the early days of oil exploration and production there was very little market for natural gas. It could not be stored and had to be transported by pipeline. In 1930 oil sold for about a dollar a barrel, and gas sold for 3.6 cents per mcf. Six mcf of methane gas produces the same heat as one barrel of oil. So based on heat equivalency, oil was five times more valuable than gas.
The giant Panhandle Gas Field was discovered in 1918 with the completion of the Masterson No. 1. Three additional wells soon followed, and those four wells were tested in March 1920 at 160 million cubic feet per day. Initially no one could be found to buy the gas. The City of Amarillo spent $60,000 advertising the resource but found no buyers. The city offered free gas for five years to any industry that would move to Amarillo. No takers.
But, by 1929 several gas pipelines were laid to move the gas to distant markets and fifty-three gasoline plants and twenty-four carbon black plants had been constructed. The value of gas had been realized.
Still, finding a market for most gas wells was a problem. Some reservoirs, however, contained gas that was rich in heavier hydrocarbons in addition to methane. Some of these heavier hydrocarbons become liquid at atmospheric pressures and temperatures, and so when the gas is produced the liquid hydrocarbons, sometimes called natural gasoline, become valuable in their own right. Natural gasoline may have the same characteristics as gasoline used in auto engines and was sometimes used for that purpose. So operators began to “strip” the natural gasoline from the produced gas and to flare the remaining produced gas.
Conversely, wells that produce oil often produce natural gas along with that oil. Gas produced from an oil well is referred to as casinghead gas. As oil fields came into production in the 1930s, operators began to flare their casinghead gas.
Where the principal production from a well is gas, the operator can regulate the well’s production to satisfy the pipeline’s operational requirements and market conditions. But where casinghead gas is produced as the byproduct of production from an oil well, the operator does not want to reduce its oil production to satisfy the requirements of the gathering company that takes its casinghead gas, so the market for casinghead gas in the 1930s was almost nonexistent and it was invariably flared. Motorists could drive at night for hours through oil fields without turning on their headlights.
Flaring of gas from a conventional oil reservoir was also wasteful in another way. In gas-driven reservoirs, the pressure in the reservoir drives the oil to the surface; that pressure is provided by the gas in the reservoir. If the gas is produced, the reservoir pressure declines and production is lost. In the 1930s “pressure maintenance” operations were invented to alleviate this problem. The produced gas is stripped of its liquid content and injected back into the reservoir to maintain reservoir pressure.
In 1899, the Texas legislature passed a comprehensive conservation law that, among other things, prohibited flaring of gas from a well classified as a gas well. That was followed by a law in 1925 that permitted flaring of casinghead gas from an oil well. The statute defined a gas well as any well in which the ratio of gas to oil produced was more than 100,000 cubic feet of gas to one barrel of oil. Any other well was an “oil” well.
The whole concept of the distinction between an “oil well” and a “gas well” is an artificial construct arising out of the Railroad Commission’s regulatory framework. Different reservoirs contain different mixtures of oil and gas. Some wells produce mostly gas, some mostly oil, and some a mixture of both. Operators tried to get the Commission to include as”oil” in the formula lighter hydrocarbons that were gas in the reservoir but condensed into a clear liquid at the surface. The Commission refused, and the courts backed it up. Clymore Prod. Co. v. Thompson, 13 F.Supp. 469 (W.D. Tex. 1936). So operators either had to sell their gas, shut in their wells, or recycle the gas back into the reservoir after stripping the liquids. By 1942 there were more than twenty-nine gas cycling plants in Texas.
But in the Panhandle Field, under lobbying pressure, the Texas legislature passed a statute in 1993 permitting Panhandle operators to continue to strip and flare gas under certain conditions. A federal court also placed severe restrictions on the Commission’s authority to regulate gas in the interstate market, freeing many gas strippers from flaring restraints. Finally, in 1935 the legislature passed House Bill 266, which forbade the production of gas in any manner that would cause underground waste, and gave the Commission authority to enforce the act. The courts upheld the Commission’s authority, thus eliminating flaring from gas wells in Texas.
But this did not solve the problem of flaring of casinghead gas, which increased as new giant fields were discovered: Conroe (1931), Tom O’Connor (1934), Wasson (1936), Levelland (1938), Hawkins (1940), etc. Initially, the Commission was unwilling to address the problem. Then came William J. Murray.
Bill Murray graduated from the University of Texas in 1936 as a petroleum engineer. He went to work on the staff of the Commission in 1938, and one of his jobs was to observe well tests to determine the volume of casinghead gas being flared. Bill left the Commission to work for the Federal Petroleum Administration for War until 1943, then did a stint in private industry. Then in December 1943, as a private citizen, he attended a special hearing at the Commission to discuss flaring. The three commissioners at that time were Ernest O. Thompson, Olin W. Culberson and Beauford H. Jester. Pressure was being put on them by the federal government to address the flaring problem, thus resulting in this hearing.
Commission staff reported at the hearing that more than four hundred billion cubic feet of casinghead gas had been produced in Texas in 1943, of which only 3,690,787,000 cubic feet had been flared – less than 1 percent. Ernest Thompson stated that this was reasonable and that flaring was not an issue. But then Murray stood up. He said he knew from his experience observing wells that the flaring figure was a gross underestimate, and he said that from ten to twenty-five times the official estimate was being lost. His statement caused a stir and embarrassed the commissioners into doing something. So they appointed a committee to study the problem and invited Murray to chair it. But when he saw who else was on the committee, he declined to serve and asked instead to lead a smaller group composed only of engineers. The commissioners agreed.
Murray’s committee report was released in November 1945, and it caused a firestorm. It concluded that the oil industry was wasting almost a billion and a half cubic feet per day of casinghead gas – 57 percent of total casinghead gas production.
Some in the industry complained about Murray’s report, but others realized they had to do something to address the problem. By that time the US was in WWII, there was a huge demand for oil and gas, and the price of gas began to rise. In the meantime, the Federal Power Commission began hearings on the problem and threatened to get involved. Still, the Commission stalled.
Then, in 1947, Beauford Jester was sworn in as governor, leaving a vacancy on the Commission, and he appointed Bill Murray to serve out his term on the Commission. Immediately the attitude of the Commission on gas flaring did an about-face.
On April 1, 1947, the Commission ordered that all 615 oil wells in the Seeligson Field in South Texas be shut in until a cycling and compression plant could be completed and flaring could be eliminated. Shell, Sun and Magnolia, operators in the field, filed suit to challenge the order, represented by former governor Daniel J. Moody. Attorney General Price Daniel represented the Commission. In Railroad Commission v. Shell Oil Co., 206 S.W.2d 235 (1947), the Texas Supreme Court upheld the Commission’s order.
In Commission v. Shell, the operators argued that the Commission had no authority to enter the order to shut in its wells, and the trial court agreed. The Commission then appealed directly to the Supreme Court. The only issue before the Court was the Commission’s authority to order the field shut in until the oil could be produced without flaring the gas. Citing the Texas Constitution, Article XVI section 59a, adopted in 1917, which states that the conservation and development of natural resources in Texas is a public right and directs the legislature to pass laws to protect natural resources, and the statutes defining and prohibiting “waste” and authorizing the Commission to prohibit waste, the court unanimously held that the Commission had authority to issue its order. The law cited by the court is now in Chapter 85 of the Texas Natural Resources Code. Section 85.045 says “the production, storage, or transportation of oil or gas in a manner, in an amount, or under conditions that constitute waste is unlawful and is prohibited.” Section 85.046 then lists a non-exclusive set of practices that constitute waste.
After Commission v. Shell, the Commission issued a series of orders shutting down seventeen oil fields for flaring. In Railroad Commission v. Flour Bluff Oil Co., 219 S.W.2d 506 (Tex.Civ.App.-Austin 1949, error ref’d), Flour Bluff, Humble and others sued to enjoin the Commission from enforcing its order shutting in the Flour Bluff Field. Petitioners argued that installing compressors to reinject the gas for pressure maintenance would not be “economically justified.” The Court responded:
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 (Sec. 59a, Art. 16, Tex. Constitution, Vernon’s Ann.St.), for private enterprise would not need the compulsion of law to conserve these resources if the practice were financially profitable.
Other challenges to Commission flaring orders also failed. The Commission’s authority to regulate flaring from oil wells was established.
Bill Murray was elected to the Commission in 1947, 1948, 1950, 1956 and 1962. Following his election in 1962 newly elected Govern
or John Conally questioned his involvement in the industry while serving on the Commission and asked Attorney General Waggoner Carr to launch an investigation; Murray resigned from the Commission on April 10, 1963. He was later vindicated by the grand jury, which found no evidence of any wrongdoing.
Murray later served as an energy consultant and conservationist for the City of Austin, City Public Services of San Antonio and many other groups, and was a sought-after speaker. He died on August 3, 2004 and is buried in the Texas State Cemetery.
This post borrows liberally from a 1981 article in the Southwestern Historical Quarterly, Vol. 84, No 33, by David F. Prindle.