### THEA-JTORNEY GENERAL

OFTEXAS

Honorable Olin Culberson, Commissioner Railroad Commission of Texas Austin, Texas

Dear Sir: OpinionNo. O-5008 * Re: Allocation of gas allowablesamong operatorsin gas fields under Article 6008,Vernon's Annotated Civil Statutes.

This is in response to the request contained In your letter ofDecember 10, 1942, for the opinion of this department upon the followingquestion:

"Pleaseadvise whether or not the RaLlroad Commission is legally required or authorized, when the aggregate lawful volume of the open flow
or daily potential capacity to produce of all wells located in a common reservoirproducing only sweet gas, Is in excess of the dally reasonablemarket demand for gas from such common reservoir, to restrict the withdrawals from such common reservoir to the amount of the reasonablemarket demand therefor and whether or not, in order to adjust correlative rights, the Commission is required to allocate to each&&well producinggas from such common reservoir a nextage of the dally uroductlve capacity of each-wellwhich may be produceddally during the followingmonth from eachwas well producinggas from such common reservoir=accor=e with the factors set out InArticle 6008 when such allocationmight result in the depriving of one ormore persons of
a market for the sale of gas which has already been obtained.

"In explanationof the last underscored lines ismeant whether such allocationwould reduce the volume of gas available from the common reservoir to the marketer of such gas and below the volumewhich he has contracted to deliver, keeping inmind that the volumewhich he is now selling to a bonaflde market is less than the volume the Commlsslon has foundwould produce physlcalwaste.Honorable Olin Culberson,page 2 

### 0-5008

"Irespectfully ask that you furnishme your opinionat your very earliest convenienceand, if possible,prior toDecember 16thwhen the Commission will hold Its next statewidehearing."

As we understand your inquiry,you desire to know whether or not It is the duty of the Commissiononce it sets ~thetotal allowable for gas from a particulargas field produclng sweet gas only, to allocate and apportion the total allowables among the variouswells ln the field in the manner set forth InArticle 6008, Vernon's Annotated Civil Statutes,when the necessary effect of such apportionmentas to a particular operator~111 be to deprive him (wlth the wells he currentlyhas) of sufficientgas to fulfillpreviously existing contract commitmentshe hasmade.

Pertinentprovisions of Article 6008 follow:

‘Sec. 10. It shallbe the duty of the Commission to prorate and regulate the dally gas well production from each common reservoir in the
manner and method herein set forth. The Commission shallprorate and regulate suchproduction for the protection of public and prlvate Interests:
"(a) Jn the prevention of waste as 'waste' isdefined herein.

"(b) In the adjustment of correlativerights and opportunitiesof each owner of gas in a common reservoir to produce and use or sell such gas as permitted in this Article.

'Sec. 11. The Commission shall exercise the authority to accomplish the purposedesignatedunder item (a) of Section 10 when the presence or imminence ofwaste is supportedby a findingbased upon the evidence introducedat a hearing to be held as herein provided.

"TheCommlsslon shall exercise the authority to accomplish the purposedesignatedunder item (b) of Section 10 when evidence Introducedat a hearing to be held as hereinprovlded will supporta finding made by the Commission that the aggregate lawful volume of the open flow or daily potential capacity to produce of all gas wells located in a common reservoir, is in excess of the dally reasonablemarket demand for gas from gas wells thatmay be produced from such common reservoir, to be utilized as permitted in this Article.Honorable Olin Culberson,page 3 0-5008

"Sec. 12. On or bafore the twentieth (20th) day of each calendarmonth the Commission shall hold
a hearing after notice has been given, as provided by lea, for the purpose of determining the aggregate daily capacity to produce of all gas wells ln a common reservoir, and as nearly as posslble, the daily volume-of gas from each common reservoir that will be produced from gas wells during the following month to be utilized as permitted in this Article. Upon such determination, the Commission,based upon evidence introducedat such hearing, shallallocate to each gas well producinggas from such common reservoir a percentage of the dally productive capacity of eachwell which may be produced daily during the followingmonth from each gas well producing gas from such common reservoir. Such percentage of the dally producing capacity of eachwell shall be regarded as Itsdaily allowableproduction of suchdally volume required for utilization from such common reservolr. The daily allowableproduction of each gas well shall L;dc;;p;ted and allocated as provlded In Sections 13

"sec. 13. In determining the daily allowable productlon for each gas well the Commission shall take Into account the size of the tract segregatedwith respect to surfaceposition and common ownershipupon which such gas well or wells are located; the relation between the daily producing capacity of eachgas well and the aggregatedally capacity of all gas wells producing the same kind of gas In the same common reservoir or zone; and all other factorswhich are pertinent; provided that the Commlsslon shall not take into account the size of the tract upon which any gas well or wells are located ln excess of the efficient drainage area of suchwell or wells, producing at twenty-fiveper cent (25%) of the daily productive capacity,which dralnage area shallbe determined by the Commlsslon. In ascertaining the drainage area of
a well, the Commission shall take Into account such factors as are reflected In the productive capacity of
a gas well, Including formationpressure, the permeabillty and porosity of the producing formation, and the well bore's structuralposition, together with all other factors taken Into account by a reasonably prudent operator indeterminlng the dralnage
area for a gas well.

%eC. 14. It shallbe the duty of the Commlsslon, after notice and hearing, to ascertain andHonorable Olin Culberson,page 4 o-5008

determine the reasonablemarket demand for gas from gas wells to be usedfor light and fuel purposes and for all other lawfulpurposes towhich sweetgas may be put under the terms of thisArticle and by proper order to restrict the production of gas from all gas wells In said field producing such gas to an amount equal to market demand or to an amountwhich may be producedwithout waste as otherwisedefined; provided, however, the production of such gas shall in any eventbe restricted to the amount of the reasonablemarket demand therefor. In such order the Commisston shall allocate, distribute or apportion the total allowableproduction from such field. among the various gas wells affected by the order on's reasonablebasis, and as provided in Section 13. It shall likewisebe the duty of the Commlsslon to prorate the daily gas well production of sour gas produced from each commonreservoir of sour gas in' this State. The hearing for such purpose shallbe held at the same time as the hearingpertaining to the proration of sweet gas well production. The proration of sour gas well production shall be accomplished according to themanner and method herein provided for the proration of sweet gas well proauction.

"Sec. 15.’ Nothing contained in thisArticle shall require that the production from any gas well with a daily natural open flow of two hundred thousand (2~00,000)

cubic feet of natural gas or more to be restricted to a quantityless than fifty thousand (50,000)cubic feet of natural gas daily; and nothing herein shall require that the production from any gas well with a daily natural open flow of less than two hundred thousand (200,000)cubicye& of gas be reduced to a quantity less than twenty-fiveper cent (258) of Its natural open flow. * * +

saec. 20. In the event the Commission finds that the owner of any gas well has failed or refused to utilize or sell the allowableproduction from his well when such owner has been offered a connection or market for suchgas at a reasonable price, suchwell shall be excluded from consideration in allocating the daily allowableproduction from the reservoir or zone inwhlcb same Is locateduntil the owner thereof Signnifies to the Commissionhis desire to utilize or sell such gas. In all other cases all gas wells shallbe taken into account in allocating the allowableproduction among wells producing the same type of gas."Honorable Olin Culberson,page 5 0-5008

You will note that under the provisions of Section 10 of Article 6008 it ismade thea of the Commission to prorate and regulatedaily gas well production In the manner set forth In the article. The Legislature has declared that the steps set forth are to be taken:

(a) To prevent waste -when the presence or lmmlnence ofwaste Is supportedby a findfngbased upon the evidence introducedat a hearing to be held as provided. Section 11. We pretermitany discussion of the power of the Commissionto act to preventwaste, sl.nce we understand that the total market demand for the field is less than the amount the Commlssion has found may be producedwithout waste.

(b) To adjust correlativerights and c~~hp~Et:;es~~ of the various owners of gas in the reservoir. is to adjust these correlativerights and opportunltleswhen the evidence introducedat the hearing required by Article 6008 ~111 supporta flndlng that the aggregate lawful volume of the open flow or dally potential capacity to produce of all gas wells located in a common reservoir, is in excess of the daily reasonablemarket demand. Sectlon 11.

The mechanics for the CornmIssion to follow in exercising the duties previously expressedare set forth In Sections 12 and 13. Section 12 requires the Commission to hold
a hearing on or before the twentiethday of eachmonth. The purpose of the hearing is to determine:

(a) The aggregate dally c;~;;z; ~~~t,"~;~;of all gas wells In the common reservoir.

,we call your attention to the provisions of Sectlon 8 whereby it ismade the duty of all operators to determIne during the months of January and July of eachyear the open flow and rock pressure of each of their gas wells, and to file verified reports thereofwith the Commission on or before the tenthdays of thosemonths.

(b) The Commission 1s also required to determine
as nearly as possible the daily volume of gas from each common reservoir thatwill be produced from gas wells during the month to follow to be utlllzed for the lawfulpurposes for which gas may be used as set forth In Section 7 of Article 6008. This requirement Is reiterated In Section 14 wherein the Commission Is required to ascertaln eachmonth the reasonablemarket demand for gas to be used for light and fuel and all other lawfulpurposes. Having made this finding, it IS then the duty of the Commission to restrict the Droduction of gas from all Ras wells to an amount eaual to market demand;
or if only a lesser amountmay be producedwithout causing waste. then to an amount that may be produced without waste.Honorable Olin Culberson,page 6 0-5008

When the Commissionhas heard evidenceand made its determination, It is then required to allocate to each gas well proauclng gas from such commons reservoir, a percentage of its dally productive capacity,which will also be's percentage of the total reasonablemarket demand for the field. Thls~is thewell's allowable for themonth to follow. The Commissionmay not assign an arbitrarypercentage to each well. It is required to take Into consideration the'factors and follow the formula set forth in Section 13. Moreover, if after an allowable has been thus assigned eachwell, It is found that any individualowner has failed or refused to utilize or sell the allowableproduction from his wells when he has been offered a connection or market at a reasonable price, the wells of that operatorare thereafter to be excluded from consideration in allocating the total daily allowable production from the reservoiruntil the operator signifies his desire to sell or utilize such gas. Section 20. We do not understand this section to be involvedun@er the facts submitted.

Thus you will note that Article 6008 not only authorizesbut specificallyrequires the Commission to allocate
or apportion the totalmarket demand for a sweet gasfield among the variouswells for the purpose of adjusting the correlative rights and opportunitiesof the various owners. Article 6008 provldes no exception for instancesoccasioned when an operatorhas contracted to sellmore gas than his allowable or apportlonment.

We offer the followingqualification to the foreWm. Under the provisions of Sectlon 15 of Article 6008, the Commission is not required to restrict any gas well having a daily natural open flow of two hundred thousand (200,000) cubic feet of natural as or more to a quantity less than fifty thousand (50,000 k cubic feet of natural gas daily; nor is the Commissionrequired to reduce the allowable of,awell having a daily natural open flow of less than two hundred thousand (200,000)cubic feet to a quantity less than twentyfive per cent of its natural open flow.

It follows then that it is our opinion,and you are so advised, that If the Commission finds at its next monthly hearing that the total reasonable market demand for the field in question is less than an amount which may be produced without waste, and that unduedrainage Is takingplace from one well or wells within the field to anotherwell or wells therein itwill be the duty of the Commission to apportion the total market demand among the variouswells in the field so as to prevent, if possible, such unduedrainage.Honorable

this duty Olin Culberson,page 7 0-5008

Further, it is our opinion that the Commissionhas to perform even though as to an individualoperator the apportionmentreceived Is less than his contract commitments. 411 contractsare made subject to a valid exercise of the police power. In view of the fact that the Commission is required to nass upon the reasonablemarket demand for a field and its proper apportionmentamong the operators,monthly, the parties to the contract In questionmust have contemplated that the operator'sapportionmentwas subject to fluctuation. Moreover,no operator couldlawfu?.ly sellmore gas than he owns (more than his reasonable share in the common reservoir)and therebybind the Commission to fix his allowable in accordancewith contract commitments. Gillespie
v. Railroad Commission, 161 S.W. (2d) 159.

We presume that the question as to your duty and authorityunder Article 6008 arises from the language used by We Court in Thompson v. ConsolidatedGas Company, 300 U. S. 55, 81 L. Ed. 510.

The Consolidated case held invalida gas proration order of the Commissionprorating gas in the Panhandle fields and allocating the total among the various operators.

The Supreme Court set forth the specific findings of the trial court to the effect that the orderwas not intended to prevent waste; or to adjust correlativerights in the common reservoir for the purpose of averting un-iust drainage from the reserves of those lacking uine line connections. The Court further held that these findingswere adequately supportedby the evidence.

The Court thereupon concluded that an order entered by the Commlssion for the solepurpose of compelling thosewho havemerket outlets to purchase gas from others havingno connections is lawful saying that the law reports "presentno more glaring instance,,of the taking of oneman's property and giving it to another.

However, Mr. Justice Brandeiswas careful to point out in his opinion that the orderwas not entered to prevent undue drainage and that:

"Weassume also that the Statemay ConstitUtionallgprorate production in order to prevent undue drainage of gas from the rzserves of Well Owners lackingpipe line connections.Honorable Olin Culberson, page 8 O-5008

Cur interpretationof the Consolidated cage is tb,at the Railroad Commissionmay legally apportion gas betweenwells If it has found either that waste or drainage is takingplace. Such interpretation is strengthened by the interpretation accorded the Consolidated case by Judge Hutcheson, speaking for the statutory three-judgeFederal Court inHenderson v. Terrell. 24 Fed. Sup. 147. There the statuteand the order enteredpursuant theretowas attacked, as beinga restriction
on plaintiffs'production, although plaintiffswere producing without waste, in order to compelplaintiffs to share the market for their gas with owners and operators of wells havingno market. The Court differentiated the facts in the Consolidated'casew~iththe facts in theHenderson case in this language:

"Indeed,the takings from thosewells had been far in excess of the amount of gas which had originallyunderlain the structure there, but notwithstanding this, there had'been such rapid and heavymigration into the low pressure area, caused by the heavy production of plaintiffs' and others In that area, that therewas stillnearly as much gas under plaintiffs' lands
as had originallybeen there.

"Theproof thusdemonstratedbeyond peradventure, that In restrictingplaintiffs'proauction in the future, the ordersdid not operate injuriouslyas to them, as the orders entered in ConsolidatedCase, had operated in subjecting the plaintiffs'properties there to a contiffuance of the drainage they had already undergone.

The Court concludedas to the order and statute:

"We see nothing in the provisionat all violative of due process. We see in it only
a reasonable, Indeed,almost a necessary exercise of the police power to protect owners of wells, whose unrestricted right of capture the statute has lawfully invaded, in order to protect the gas reserves from dissipation in inferioruses, form having their gas drained away by the disproportionatetaklngs, form the reservoir, of their owners.'

It is our opinion, therefore, that the Commission isrequired to perform the duties prescribed by Article ~~O~x;;tlt has found conditions of waste or undue drainage

.Honorable Olin Culberson,page 9 0-5008

Yours very truly

ATTORNEYGENERAL OF TEXAS

By a/Lloyd Armstrong Lloyd ArmstrMg Assistant

LA:EP

APPROVEDDEC 17, 1942 S/Gerald C. Mann ATTORNEYGEN~AL OF TEXAS