Oil and Gas Lawyer Blog
Our firm represents the Opielas, who are involved in a dispute with the Railroad Commission and Magnolia Oil & Gas over a horizontal well located partly on the Opielas’ property. The case has made its way from the Commission to the trial court in Travis County, then to the Austin Court of Appeals, and the case is now pending on petition for review in the Texas Supreme Court.
Briefly, the facts are these:
Enervest applied for a permit for an allocation well to be located partly on the Opielas’ ranch of 640 acres in Karnes County. When the Opielas purchased the ranch it was under an old oil and gas lease held by some producing vertical wells. The Opielas acquired all of the mineral estate but previous owners had sold 3/4ths of the royalty. The lease contains a pooling clause, but a special provision says there can be no pooling for oil wells.
The Opielas filed a protest to Enervest’s permit a few days after it was filed, but the Commission issued the permit despite the Opielas’ protest, and Enervest proceeded to drill the well.
After the well was drilled Magnolia took over operations. It completed the well, and it filed an application for an amended permit, seeking to permit the well as a production-sharing well. The Opielas also protested that permit. The Commission’s informal policy at the time was to grant a permit for a PSA well if the operator represented to the Commission that it had agreements from 65% in interest of the mineral and royalty owners in each tract crossed by the wellbore.
After a hearing before an administrative law judge at the Commission, the Commission issued Magnolia its requested permit. At the hearing Magnolia produced evidence that it had filed a pooled unit for the well and obtained ratifications of the pooled unit, or production sharing agreements, from at least 65% in interest of the owners of each tract crossed by the well. The Opielas argued that the royalty owners in its tract could not ratify a pooled unit that the Opielas’ as the mineral owners, had not approved and that expressly violated the terms of their lease.
The Opielas then filed suit against the Commission in Travis County district court, challenging the Commission’s decision. The suit is an appeal of an administrative order and so is in effect an appeal of that order, based on the record in the RRC hearing. The Commission’s order must be affirmed if there is “substantial evidence” to support the order.
The Opielas argued that the Commission’s order should be overturned, for two reasons: first, the Commission had violated the Administrative Procedures Act by informally adopting rules for issues of permits for production-sharing wells without following the requirements of that act; and second, because there was not substantial evidence that Magnolia had shown a good-faith basis for its right to drill the well under the Opielas’ lease. The Opielas argued that a PSA well is a form of pooling, expressly prohibited by the lease.
On May 12, 2021 the trial court issued its opinion on the Opielas’ appeal. It held that the Commission had violated the Administrative Procedures Act in failing to adopt formal rules for issuance of PSA wells; the Commission erred in concluding that it could not consider the terms of the Opielas’ lease in determining whether Magnolia had a good-faith claim of right to drill its well; and the Commission erred in finding that Magnolia produced substantial evidence of a good-faith claim of right to drill the well.
The Commission appealed the trial court ruling, and on June 30, 2023 the Austin Court of Appeals issued an opinion reversing the trial court and remanding the case to the Commission. The Court held that the Commission erred in granting the permit because Magnolia had not submitted proof that at least 65% in interest of the royalty owners in the tracts crossed by the well had signed production sharing agreements, in compliance with the Commission’s informal rule then in effect. The Court also held that drilling of and production from a PSA well is not a form of pooling. The Court did not rule on whether the Commission’s informal rule violated the Administrative Procedures Act.
The Opielas have petitioned for review in the Texas Supreme Court.