TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-21-00258-CV

Railroad Commission of Texas and Magnolia Oil & Gas Operating LLC, Appellants 

v. 

Elsie Opiela and Adrian Opiela, Jr., Appellees 

FROM THE 53RD DISTRICT COURT OF TRAVIS COUNTY

NO. D-1-GN-20-000099, THE HONORABLE KARIN CRUMP, JUDGE PRESIDING

O P I N I O N

 This appeal arises from the complaint by Elsie Opiela and Adrian Opiela, Jr., 

(Opielas) about a permit issued by the Railroad Commission of Texas to Magnolia Oil & Gas 

Operating LLC (collectively, Appellants) to drill a horizontal oil well from one parcel of land, 

through another, and into land with minerals leased in part from the Opielas. The dispute centers 

on the laws, regulations, and judicial and Commission decisions concerning pooling of tracts of 

land for purposes of oil production along with production-sharing agreements (PSAs) and 

allocation wells—methods of designating how to share production. The Opielas’ lease prohibits 

pooling “in any manner whatever” for oil production, and the Opielas did not sign a consent to 

pool or a PSA. Nevertheless, after a previous operator obtained an allocation-well permit, 

Magnolia obtained an amended permit to drill a PSA well upon the Commission’s finding that 

Magnolia had made a good-faith showing that it had the right to drill and operate a horizontal 

well in the minerals owned by the Opielas because at least 65% of their fellow interest holders 
2

had assented to share the production in some way. The Commission denied the Opielas’

complaint that Magnolia lacked a good-faith claim to operate the Audioslave A 102H Well

(the Well).

The trial court reversed the Commission’s order and remanded this cause to the 

Commission, concluding that the Commission erred in finding that Magnolia showed a 

good-faith claim of right to drill the Well. The trial court also concluded that the Commission

erred in adopting and applying rules for PSA well permits, deciding that the Commission lacked 

the authority to review whether an applicant seeking a well permit has right under a lease or 

other relevant title documents to drill the Well, and failing to consider the pooling clause in the 

Opielas’ lease.

Appellants contend on appeal that existing rules adopted through formal 

notice-and-comment rulemaking provide an adequate framework for the Commission to issue 

well permits for unpooled multi-tract horizontal wells. The Commission contends that 

substantial evidence supported its conclusion that Magnolia was entitled to a drilling permit.

Magnolia contends that the trial court erred by holding that the Commission is required to 

evaluate whether an operator has both a valid lease and pooling authority when drilling a 

horizontal well across multiple tracts. Magnolia also contends that the trial court required the 

Commission to exceed its jurisdiction by adjudicating disputes between private parties over the 

authority to drill horizontal wells.

We will affirm the trial court’s judgment in part, reverse in part, and remand the 

cause to the Commission for further proceedings.
3

BACKGROUND

Pooling, PSAs, and, to a lesser extent, allocation wells are central to this dispute. 

“Pooling” refers to the combining of tracts from more than one oil and gas lease for the drilling 

of a well where production from any of the tracts in the pooled unit is treated as production from 

all of the tracts. See Hooks v. Samson Lone Star, LP, 457 S.W.3d 52, 62 (Tex. 2015). Like 

pooling, PSAs and allocation wells link adjacent properties for the production of minerals,1 but 

Texas statutes and regulations do not expressly require pooling of tracts as a prerequisite for 

every horizontal drilling of a wellbore that crosses property lines. An allocation well is “a 

horizontal well that traverses the boundary between two or more leases that have not been pooled 

and for which no agreement exists among the royalty owners as to how production will be 

shared.” Clifton A. Squibb, The Age of Allocation: The End of Pooling As We Know It?, 45 Tex. 

Tech L. Rev. 929, 930 (2013). Absent agreement, production is allocated to the owners of the 

mineral estate in the tract where minerals are captured by the wellbore. Id. at 934. Under a PSA, 

the interest owners on the various tracts agree how production from a multitract well will be 

shared irrespective of where take points are. See E. Smith & J. Weaver, Tex. Law of Oil & Gas 

§ 9.9(B), at 9-167-70 (2d Ed. 2020).

The Opielas are among the successors to the mineral interest of Otha Person and 

Myra Person, who leased their land (the Tract) for mineral exploration in 1955. The lease 

authorized a one-eighth royalty on oil produced from the Tract and stated that “[n]othing 

contained herein shall authorize Lessee in any manner whatever to pool said land or any part of 

1 Magnolia submitted and the Commission accepted as showing good faith consents to 

pooling by some royalty owners as the equivalent of signing the PSA and a good-faith claim of 

right to drill.
4

the same for oil, and for the production of oil from said land under this lease . . . .” The Opielas 

own 25% of the royalty interest and the remaining 75% of the royalty interest is owned by more 

than thirty interest holders who are not parties to this appeal.

EnerVest Operating, LLC, applied to the Commission on May 1, 2018, for a 

drilling permit for an allocation oil well. EnerVest proposed to drill on one property and direct 

the Well horizontally to cross under a road before entering the Tract underground. On May 2, 

2018, the Opielas filed a complaint asking the Commission to refrain from issuing the permit 

because EnerVest did not have authority to pool the Tract with any other property. The day after 

the complaint was filed, the Commission issued the permit upon finding that EnerVest showed a 

good-faith claim to the right to drill into the Tract. EnerVest began drilling four days after the

permit was issued, which was before the Opielas served their complaint on EnerVest. EnerVest

responded that it did not need to pool the tracts crossed by the wellbore under Commission 

decisions in Devon and Klotzman. See Texas R.R. Comm’n, Complaint of Monroe Properties, 

Inc., et al. that Devon Energy Production Co, L.P. Does Not Have a Good Faith Claim to 

Operate the N l Helped 120 (Alloc) Lease, Well No. 6H, Phantom (Wolfcamp) Field, Ward 

County, Texas, Docket No. 08-0305330 (Dec. 18, 2017) (order of dismissal) (“Devon”); Texas 

R.R. Comm’n, Application of EOG Resources, Inc. for its Klotzman Lease (Allocation) Well No. 

1H, (Status No. 744730), Eagleville (Eagleford-Z) Field, Dewitt County, as an Allocation Well

Drilled on Acreage Assigned from Two Leases, Docket No. 02-0278952 (Sept. 24, 2013) (final 

order) (“Klotzman”). EnerVest conveyed its interest to Magnolia before the contest 

was resolved.

On August 29, 2018, Magnolia applied for a permit on the Well to be drilled as a

PSA well. As part of their application, Magnolia submitted a Form W-1 and Form P-16 as 
5

required for applicants seeking a permit for a horizontal well. See 16 Tex. Admin. Code §§ 3.5, 

.40(g) (2018) (currently codified at § 3.40(i)), .86.2 Neither the Form W-1 in the record nor the

2016 version of Form P-16 or the instructions for filling out the form in effect in 2018 defined a 

PSA well or mention a threshold percentage of signatories to a PSA.

3

The Commission issued Magnolia the permit on August 30, 2018. The permit 

included this disclaimer:

Commission Staff expresses no opinion as to whether a 100% ownership interest 

in each of the leases alone or in combination with a “production sharing 

agreement” confers the right to drill across lease/unit lines or whether a pooling 

agreement is also required. However, until that issue is directly addressed and 

ruled upon by a Texas court of competent jurisdiction it appears that a 100%

interest in each of the leases and a production sharing agreement constitute a 

sufficient colorable claim to the right to drill a horizontal well as proposed to 

authorize the removal of the regulatory bar and the issuance of a drilling permit 

by the Commission, assuming the proposed well is in compliance with all other 

relevant Commission requirements.

The Opielas amended their complaint about the EnerVest permit on September

28, 2018 to challenge the permit issued to Magnolia. The Opielas contended that Magnolia 

2 All citations to the Texas Administrative Code will be to the version in effect in 2018

when the applications were made, unless otherwise noted.

3 See Texas R.R. Comm’n 2016 Form P-16 for Acreage Designation (available at

https://web.archive.org/web/20160804030249/http://www.rrc.texas.gov/media/31924/p-16pfinal.pdf); see also Texas R.R. Comm’n 2016 Form P-16 Instructions (available at 

https://web.archive.org/web/20160804030249/http://www.rrc.texas.gov/media/31920/p-16-

instructions-final.pdf). In Magnolia’s reply in support of its motion to dismiss the Opielas’

complaint about the permit, filed December 7, 2018, Magnolia states that Form P-16 was “last 

revised January 2016.” The instructions to Form P-16 were revised in February 2019 and 

finalized in June 2019—after the application, permit, complaint, and hearing in this case. See

Tex. R.R. Comm’n, Complaint of Elsie Opiela and Adrian Opiela Regarding Magnolia Oil & 

Gas Operating LLC’s (521544) Audioslave A Lease, Well No. 102H, Permit No. 839487, 

Sugarkane (Austin Chalk) Field, Karnes County, Tex., Oil & Gas Docket No. 02-0315435, 4-5, 

n.5,7 (Aug. 30, 2019) (PFD).
6

could not have a good-faith claim to operate the Well because the Opielas’ lease did not 

authorize pooling of the Tract with others for oil production.

The hearings examiners heard the complaint on January 23, 2019, and issued their 

proposal for decision (PFD) on August 30, 2019. Tex. R.R. Comm’n, Complaint of Elsie Opiela 

and Adrian Opiela Regarding Magnolia Oil & Gas Operating LLC’s (521544) Audioslave A 

Lease, Well No. 102H, Permit No. 839487, Sugarkane (Austin Chalk) Field, Karnes County,

Tex., Oil & Gas Docket No. 02-0315435, 4-5, n.7 (Aug. 30, 2019) (PFD). The examiners found 

that the Commission had previously determined that written oil leases covering tracts the Well

traverses are a reasonably satisfactory showing of a good-faith claim to operate an allocation 

well, and that written agreements with 65% of all mineral and working interest owners for each 

tract the Well produces from would be sufficient to get a permit to operate a well. The

examiners also found that Magnolia had PSAs—which they found included a PSA, consent to 

pool, or ratification of unit—with over 65% of the mineral and working interest owners. The

PFD also included conclusions of law that Magnolia provided a reasonably satisfactory showing 

of a good-faith claim to operate the Well and that denied the Opielas’ request that the

Commission revoke Magnolia’s permit. The Commission adopted the findings and conclusions 

in the PFD as its own in its Final Order (“the Order”).

4

The Opielas sought judicial review. Among their contentions, the Opielas argued 

that the Commission granted the permit pursuant to informal rules regarding PSA and allocation 

wells that were promulgated outside the APA and do not fall within any recognized exception to 

the requirement of formal rulemaking; they contended that rules for allocation and PSA well

4 Because the Commission adopted the PFD’s findings and conclusions in its Final 

Order, we will sometimes refer to the findings and conclusions as those of the Commission.
7

permits are not found in the administrative code. They argued that the Commission erred by 

adopting its findings from previous contested cases stating that the Commission lacks

jurisdiction to review Magnolia’s authority under the lease because the lease does not allow 

Magnolia to drill the PSA well. The Opielas contended that Magnolia does not have a good-faith 

claim of right to drill a well and that the issuance of the permit violated the Commission’s 

informal rules because the agreements used to reach the 65% threshold included consents to 

pool. The Opielas contended that the Commission disregarded Texas Supreme Court precedent 

by concluding it has no jurisdiction to review whether an operator seeking a well permit has a 

good-faith claim under the lease to drill a well. The Opielas contended that the Commission 

failed to examine the lease and title documents under which Magnolia claims authority to drill 

the Well. The Opielas argued that the Commission erred in finding that Magnolia had shown a 

good-faith basis for the right to drill the Well because their lease prohibits the lessee from 

pooling this tract with others, does not permit allocation of production, and thus requires that any 

royalty be attributable to production solely from their tract.

The trial court concluded as follows:

1. The Commission erred in adopting rules for allocation and Production Sharing 

Agreement (“PSA”) well permits without complying with the requirements of 

the Administrative Procedure Act, Tex. Gov’t Code § 2001.001 et seq., and

further erred in applying those rules by issuing well permits for the 

Audioslave A 102H Well (the “Audioslave Well”).

2. The Commission erred in concluding it has no authority to review whether an 

applicant seeking a well permit has authority under a lease or other relevant 

title documents to drill the well.

3. The Commission erred in failing to consider the pooling clause of the lease 

covered by the Audioslave Well in deciding that Magnolia has a good faith 

claim to operate the well.
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4. The Commission erred in finding that Magnolia showed a good faith claim of 

right to drill the Audioslave Well.

The trial court remanded the cause to the Commission, and this appeal followed.

STANDARDS OF REVIEW

A court may not substitute its judgment for the judgment of the state agency on 

the weight of the evidence on questions committed to agency discretion but:

shall reverse or remand the case for further proceedings if substantial rights of the 

appellant have been prejudiced because the administrative findings, inferences, 

conclusions, or decisions are:

(A) in violation of a constitutional or statutory provision;

(B) in excess of the agency’s statutory authority;

(C) made through unlawful procedure;

(D) affected by other error of law;

(E) not reasonably supported by substantial evidence considering the reliable 

and probative evidence in the record as a whole; or

(F) arbitrary or capricious or characterized by abuse of discretion or clearly 

unwarranted exercise of discretion.

Tex. Gov’t Code § 2001.174(2). Courts examine whether there is some reasonable basis in the

record for the action taken by the agency, not whether the agency reached the correct conclusion. 

Railroad Comm’n v. Torch Operating Co., 912 S.W.2d 790, 792 (Tex. 1995). Courts review an 

agency’s legal conclusions for errors of law and its findings of fact for support by substantial 

evidence. Westlake Ethylene Pipeline Corp. v. Railroad Comm’n, 506 S.W.3d 676, 681 (Tex. 

App. 2016). We may not substitute our judgment for the agency’s on the weight of the evidence 

on questions committed to the agency’s discretion, but we are not bound by errors of law. See

Tex. Gov’t Code § 2001.174; Office of Pub Util. Counsel v. Texas-N.M. Power Co., 344 S.W.3d 

446, 450 (Tex. App.—Austin 2011, pet. denied).
9

Whether substantial evidence supports the agency’s decision is a question of law. 

Texas Comm’n on Envtl. Quality v. Maverick County, 642 S.W.3d 537, 547 (Tex. 2022). Courts 

presume that the Commission’s order is supported by substantial evidence, and the complaining 

party has the burden to overcome that presumption. Id. Substantial evidence does not mean a 

large or considerable amount of evidence but is such relevant evidence as a reasonable mind

might accept as adequate to support a finding of fact. Lauderdale v. Texas Dep’t of Agric., 

923 S.W.2d 834, 836 (Tex. App.—Austin 1996, no writ). Where an agency has specialized

knowledge, the court may defer to the agency’s expertise and responsibility to develop 

regulatory policy. In re SWEPI L.P. d/b/a Shell Western E & P, 103 S.W.3d 578, 587 (Tex.

App.—San Antonio 2003, no pet.).

Courts interpret agency regulations using the same principles we apply when 

construing statutes. Patients Med. Ctr. v. Facility Ins., 623 S.W.3d 336, 341 (Tex. 2021). We 

start with the rule’s plain text. Maverick County, 642 S.W.3d at 544. We must first determine 

what the rule’s text means before deciding whether the agency’s interpretation contradicts the 

text. Id. Courts will uphold an agency’s interpretation of its own rule if the interpretation is 

reasonable and does not contradict the rule’s plain language. Railroad Comm’n v. Texas Citizens 

for a Safe Future & Clean Water, 336 S.W.3d 619, 624 (Tex. 2011).

DISCUSSION

The parties do not dispute that Magnolia has a valid lease to drill on any of the 

tracts contacted by the wellbore. The issue is whether the record supports granting a permit for a

PSA well under relevant and proper rules. Appellants contend that the trial court should have

affirmed the Commission’s order because Magnolia proved its entitlement to the permit granted. 

The Commission contends that its order issuing the permit based on a good-faith claim to drill 
10

and operate the Well was supported by substantial evidence. The Commission also contends 

that, because it complied with notice-and-comment rulemaking to adopt rules and forms, it was

not required to also promulgate by rulemaking the policy for issuing a permit to drill and operate 

a horizontal well. Magnolia similarly contends that the APA did not require the Commission to 

conduct formal rulemaking before issuing permits for unpooled multi-tract horizontal wells 

given its broad statutory authority, regulations, and discretion to exercise its expertise. Magnolia

also contends that the trial court erred by holding that the Commission is required to evaluate 

whether an operator has both a valid lease and pooling authority when drilling a horizontal well 

across multiple tracts. Magnolia further contends that the trial court required the Commission to 

exceed its jurisdiction by holding that the Commission must adjudicate disputes between private 

parties over the authority to drill horizontal allocation wells as part of its good-faith evaluation of 

an application for a drilling permit. We will evaluate these overlapping issues together in the 

context of the trial court’s judgment and the Commission’s order.

1. Applicable statutes, rules, and decisional law background

The Legislature gave the Commission jurisdiction over all oil and gas wells in

Texas. Tex. Nat. Res. Code § 81.051(a)(2). Conservation and development of all natural 

resources of this state is among the public rights and duties described in the Texas Constitution. 

Tex. Const. art. XVI, § 59(a). The Legislature empowered the Commission to “make and 

enforce rules and orders for the conservation of oil and gas and prevention of waste of oil and 

gas.” Tex. Nat. Res. Code § 85.201. Commission rules require application for a permit to drill 

an oil well. 16 Tex. Admin. Code § 3.5(a). The application for the permit must be filed “on a 

form approved by the Commission,” id., which implies the Commission has the power to 

approve forms. The Texas Supreme Court has held that, to show entitlement to a permit, an 
11

operator must make a reasonably satisfactory showing of a good-faith claim to operate the 

proposed well. Magnolia Petroleum Co. v. Railroad Comm’n, 170 S.W.2d 189, 191 (Tex. 

1943). The applicant can make a reasonably satisfactory showing of a good-faith claim of 

ownership even if another in good faith disputes title. Id. The Commission’s rule defines

“good-faith claim” as a “factually supported claim based on a recognized legal theory to a 

continuing possessory right in a mineral estate, such as evidence of a currently valid oil and gas 

lease or a recorded deed conveying a fee interest in the mineral estate.” 16 Tex. Admin. Code

§ 3.15(a)(5) (regulations for surface-equipment removal requirements and inactive wells); see 

also Tex. Nat. Res. Code § 89.002(11) (using same definition in context of abandoned wells 

statute); see also Roland Oil Co. v. Railroad Comm’n, No. 03-12-00247-CV, 2015 WL 870232 

at *2 (Tex. App.—Austin Feb. 27, 2015, pet. denied) (mem. op.).

In the 1943 Magnolia case, the Texas Supreme Court held that the Commission 

does not undertake to adjudicate questions of title or rights of possession when it grants a drilling 

permit. 170 S.W.2d at 191. The Commission’s role in granting permits is to administer the 

conservation laws of Texas and to determine whether they bar drilling the well. Id. Title 

questions are a matter of common law that must be settled in the courts. Id. The trial court in

Magnolia canceled a drilling permit granted by the Commission to E.A. Landman because the 

trial court found there was a bona fide controversy regarding whether Landman or Magnolia had 

proper title to the leasehold. Id. at 190. The court of appeals reversed the judgment canceling 

the permit but suspended it pending determination of the title suit in the county where the land

was. Id. In reversing both the trial and appellate courts, the Texas Supreme Court wrote that

granting a permit “merely removes the conservation laws and regulations as a bar to drilling the 

well . . . . Where there is a dispute as to those rights, it must be settled in court.” Id. at 191. The 
12

court concluded, “If the applicant makes a reasonably satisfactory showing of a good-faith claim 

of ownership in the property, the mere fact that another in good faith disputes his title is not 

alone sufficient to defeat his right to the permit; neither is it ground for suspending the permit or 

abating the statutory appeal pending settlement of the title controversy.” Id.

While the Legislature has enacted statutes governing pooling of lands for oil and 

gas production, it has not done so for PSAs for horizontally drilled wells. The Legislature has 

considered bills amending the Natural Resources Code to expressly authorize—if not expressly 

prohibited by a lease, deed, or other contract and if granted a permit by the Commission—

drilling and producing oil or gas from wells that traverse multiple tracts to prevent waste, 

promote conservation, or protect correlative rights. See, e.g., Tex. H.B. 1552, 84th Leg., R.S.

(2015); see also Tex. S.B. 367, 87th Leg., R.S. (2021). Bills to establish a statutory structure for 

unitization of separate tracts and involve the Commission in determining whether the unitization 

plan is fair, reasonable, and equitable for all interests have also been introduced but not passed. 

See Tex. S.B. 177, 85th Leg., R.S. (2017); Tex. H.B. 100, 83rd Leg., R.S. (2013).

Similarly, the Commission has not adopted Administrative Code rules specific to

PSAs, though it has requested information about PSAs through its forms5 and has granted permits

for wells that were the subject of PSAs. The Commission has both rulemaking and adjudicatory 

powers with which to regulate oil and gas production. Railroad Comm’n v. Lone Star Gas Co., 

5 See, e.g., 16 Tex. Admin. Code §§ 3.40(g) (Assignment of Acreage to Pooled 

Development and Proration Units), 3.86(g)(4) (Horizontal Drainhole Wells) (requiring filing of 

Texas R.R. Comm’n 2022 Form P-16 for Acreage Designation, available at 

https://www.rrc.texas.gov/media/tppn4axe/p-16.pdf (filer must state that “[a]ll tracts listed will 

actually be traversed by the wellbore or the filer has pooling authority or other contractual 

authority, such as a production sharing agreement, authorizing inclusion of the non-drill site tract 

in the acreage assigned to the well.”)).
13

844 S.W.2d 679, 688 (Tex. 1992). The Commission may exercise “informed discretion” whether to 

use rulemaking or adjudication, but should choose rulemaking except in cases when there is a 

danger that rulemaking would frustrate the effective accomplishment of the Commission’s 

functions. Id. at 689. The Commission’s adjudicatory decisions do not necessarily bind it in future 

adjudications, but an agency must explain its reasoning when it appears to depart from its policy or 

there is an apparent inconsistency in its decisions. Texas State Bd. of Pharmacy v. Witcher, 

447 S.W.3d 520, 534 (Tex. App.—Austin 2014, pet. denied). In 2008, two of the three 

Commissioners voted to approve a permit application pursuant to a PSA and directed staff that

permit applications for PSA wells “should be approved when the usual criteria are met and the 

operator certifies that at least 65% of the working and royalty interest owners in each component 

tract have signed the production sharing agreement.” Texas R.R. Comm’n, Formal Comm’n 

Actions, Hearings Div., p. 3, Status #665639 (Sept. 9, 2008) (available at 

https://web.archive.org/web/20161222204413/https://www.rrc.texas.gov/media/9027/090908.pdf).

6

2. The Commission’s power to issue permits for multi-tract horizontal wells without 

pooling

The trial court held that the Commission erred by failing to consider the pooling 

clause of the lease covered by the Well in deciding that Magnolia has a good-faith claim to 

operate the Well. The Opielas’ lease provides:

Nothing contained herein shall authorize Lessee in any manner whatever to pool 

said land or any part of the same for oil, and for the production of oil from said 

land under this lease, and in the event oil is discovered on and under said land 

Lessor shall receive as his royalty the full one-eighth of all the oil produced and 

6 All sites listed by URL in this opinion were last visited June 26, 2023.
14

saved from said entire tract of land leased hereunder, as herein in Paragraph 3 

provided.

(Emphasis added.) The Opielas have not consented to pooling or signed a PSA and contend that

the PSA well is “pooling by another name” and, as such, is prohibited by the lease; thus, they 

argue, the Commission cannot correctly find that Magnolia has a good-faith claim to the right to 

drill a horizontal well into the tract. The requirement that an applicant file a Form P-16 for a 

permit for a horizontal well appears in Rule 40, entitled the Assignment of Acreage to Pooled 

Development and Proration Units. 16 Tex. Admin. Code § 3.40(g). We must examine the 

relationship of pooling and PSAs to determine whether the assertion of right to drill under a PSA

triggers and infringes on an anti-pooling clause in a lease.

Pooling is the subject of a chapter of the Natural Resources Code and other 

statutes in that code, in contrast to the silence regarding PSAs. See Tex. Nat. Res. Code ch. 102; 

see also, e.g., id. §§ 71.051-.057, 101.011-.013. Pooling is often done to allow smaller tracts to 

combine to meet requirements for spacing or density of wells. See Browning Oil Co. v. Luecke, 

38 S.W.3d 625, 634 (Tex. App.—Austin 2000, pet. denied). Mineral operations anywhere in the

combined tracts, or unit, are treated as if occurring on all tracts in the unit. Id. Pooling links 

properties such that the owners of the pooled tracts own joint undivided interests in the royalty 

earned from production under any of the tracts pooled. Id. Proceeds from production from one 

of the pooled tracts are shared by all owners of the tracts in proportion to the individual tract’s 

proportion of the pooled acreage. Id.; see also Hooks, 457 S.W.3d at 62-63. A lessee has no 

power to pool absent express authority in its leases. Luecke, 38 S.W.3d at 634.

Pooling of tracts is not expressly required by Texas statutes or regulations for 

horizontal drilling of a wellbore that crosses property lines. Commentators have noted that, as of 
15

the start of 2022, no statute or regulation yet addressed either PSA or allocation well permits. 

2 E. Smith & J. Weaver, Tex. Law of Oil & Gas § 9.9(B), at 9-167-68 (2d Ed. 2020). Though 

stating that PSAs could form “super-pooled units”—a term not found in Texas statutes or rules—

that combine pooled acreage into larger pools, the commentators describe PSAs as beginning 

with private contractual agreements among the owners and operators of pooled or unpooled 

tracts that will be traversed by a horizontal well. Id. at 9-169. A horizontal well is initially 

drilled vertically, then turns horizontal and can extend for hundreds of feet across multiple tracts. 

38 S.W.3d at 634. Each tract traversed by the horizontal wellbore is a drillsite tract, and each

production point on the wellbore is a drillsite. Id. Importantly, lessors in Luecke were not 

entitled to production from other lessors’ tracts unless there had been a cross-conveyance of 

property interests; without valid pooling, the division of royalties was based on what production 

could be attributed to the lessors’ tracts with reasonable probability. Id. at 646. By contrast, 

under a PSA, the interest owners on the various tracts agree how production from a well will be 

shared. 2 E. Smith & J. Weaver, Tex. Law of Oil & Gas § 9.9(B), at 9-170.

Before the hearings examiners in this case, James Clark, qualified as an expert

witness on the Commission’s procedures for permitting and other regulatory matters, testified

that the PSA in this case divided production based on the effective lateral length on each tract.

7 

Clark testified that “if it were a pooled unit, it would be neither a PSA nor an allocation,” but that 

a lessee who had pooling authority perhaps could choose whether to pool or use a PSA. We 

conclude that production through a PSA well is not the same as pooling under Texas law.

7 A similar method is used to apportion production for an allocation well. See Springer 

Ranch, Ltd. v. Jones, 421 S.W.3d 273, 286 (Tex. App.—San Antonio 2013, no pet.).
16

Consistent with our conclusion, the record indicates that the Commission simply 

ignored the anti-pooling clause as irrelevant to the Well permit. In rejecting the Opielas’

complaint about the permit, the Commission cited its decisions upholding permits for allocation

wells despite the absence of pooling authority in leases. In Klotzman, the Commission rejected 

its hearing examiners’ recommendation that the permit be denied because of the lack of pooling 

authority under the leases being combined to form the developmental unit for the horizontal well. 

Texas R.R. Comm’n, Application of EOG Resources, Inc. for its Klotzman Lease (Allocation), 

Well No. 1H(Status No. 744730), Eagleville (Eagleford-2) Field, Dewitt County, as an 

Allocation Well Drilled on Acreage Assigned from Two Leases, Oil and Gas Docket 

No. 02-0278952 (Final Order issued Sept. 24, 2013) (Klotzman) at 1. The Commission 

concluded that the lessee had a good-faith claim to drill the Well essentially because an 

exception to spacing rules could be granted because the lessee had all of the working interest to 

the leases affected by the Well. Id. at 1-2. The Commission dismissed a similar challenge to 

another allocation well in Monroe, concluding that the issue was decided in Klotzman. Texas 

R.R. Comm’n, Complaint of Monroe Properties, Inc., et al. that Devon Energy Production Co, 

L.P. Does Not Have a Good Faith Claim to Operate the N I Helped 120 (Allot) Lease, Well No. 

6H, Phantom (Wolfcamp) Field, Ward County, Texas, Oil and Gas Docket No. 08-0305330 

(Order of Dismissal issued Dec. 18, 2017). The Commission’s reliance on Klotzman indicates 

that it did not necessarily fail to consider the lease’s pooling clause but that it found that the 

anti-pooling clause did not prevent Magnolia from showing a good-faith claim of the right to 

operate and drill the Well. Further, a lack of pooling authority alone does not prohibit drilling

under a PSA.
17

The trial court erred by concluding that the Commission erred by failing to 

consider the lease’s pooling clause in assessing the good faith of Magnolia’s claim of a right to 

drill on the property.8

3. The Commission’s authority to adjudicate the validity of leases

Magnolia contends that the trial court erred by holding that the “Commission

erred in concluding it has no authority to review whether an applicant seeking a well permit has 

authority under a lease or other relevant title documents to drill the well.” The PFD stated: 

The Commission does not adjudicate questions of title or right to possession, 

which are questions for the court system. A showing of a good faith claim does 

not require an applicant to prove title or a right of possession. It is sufficient for 

an applicant to make a reasonably satisfactory showing of a good faith claim.

(Footnotes omitted.) In their findings of fact and conclusions of law, the Commission found a 

good-faith claim of right to operate despite the possibility of a bona-fide lease dispute and found 

that lease disputes are beyond the jurisdiction of the Commission. This conforms to the Texas 

Supreme Court’s holding that “[w]hen [the Commission] grants a permit to drill a well it does 

not undertake to adjudicate questions of title or rights of possession. These questions must be 

settled in the courts.” Magnolia, 170 S.W.2d at 191. The Commission has no power to 

determine property rights. Jones v. Killingsworth, 403 S.W.2d 325, 328 (Tex. 1965). The

Commission is similarly limited from adjudicating the validity of contractual agreements such as 

pooling agreements. See Railroad Comm’n v. Rau, 45 S.W.2d 413, 416 (Tex. Civ. App.—

8 We note that whether Magnolia has breached the Opielas’ lease, improperly taken their 

oil, or violated laws or regulations when producing oil from the Tract are questions separate from 

Magnolia’s good-faith claim to operate the Well and may be properly the subject of a judicial 

suit like the one filed by the Opielas and currently pending in Karnes County. See Opiela 

v. EnerVest Operating LLC, No. 18-06-00153-CVK (81st Dist. Ct., Karnes County, Tex.).
18

Austin 1931, writ dism’d) (cited by Kawasaki Motors Corp. USA v. Texas Motor Vehicle 

Comm’n, 855 S.W.2d 792, 799 (Tex. App.—Austin 1993, no writ)). The Commission did not 

err by concluding that it had no power to adjudicate the applicant’s rights under a lease or other 

relevant title documents, and the trial court erred to the extent it determined otherwise.

The Opielas assert that the Commission found in Findings 15-19 “that contractual 

authority is irrelevant to evaluating a good-faith claim and that the Commission has no 

jurisdiction to consider the contents of the lease.” We do not find such a sweeping assertion of 

irrelevancy and lack of jurisdiction to “consider” the contents of the lease by the Commission in 

the cited findings, which are set out below; considering the contents of the lease is not the same 

as adjudicating rights under it. But even if the Commission entirely refused to look at the lease, 

the Opielas have not shown prejudice to their substantial rights. The Opielas’ complaint that the 

Commission failed to consider the lease terms focuses on the anti-pooling clause. As we have 

concluded that the permit for horizontal drilling under a PSA is not pooling under Texas law, the

anti-pooling clause was not implicated, and any refusal by the Commission to review that clause

or the lease as a whole during its review of the good faith of Magnolia’s claim of right to operate

and drill did not prejudice the Opielas’ substantial rights. The trial court erred by 

concluding otherwise.

4. The Commission’s adoption of rules

The trial court held that the Commission erred in adopting rules for allocation and

PSA wells without complying with the requirements of the APA and in applying those rules to 

issue a permit for the Well. The trial court did not specify which rules were erroneously 
19

adopted. The parties narrowed the field somewhat in their briefing,

9 then narrowed the list 

further at oral argument to focus on rules not adopted through the APA, including forms.

10 The

Opielas also complain of the adoption of the standard that an operator can obtain a permit for a 

PSA well by getting 65% of the interest holders to sign the PSA.

9 In their briefing, the Opielas discussed Rules 5, 26, 40, 80, and 86. See 16 Tex. Admin. 

Code §§ 3.5, .26, .40, .80 .86. There is no dispute that any relevant version of these rules was 

adopted and amended pursuant to APA procedures and, more critically, that the two-year period 

for challenging the rulemaking process has passed. See Tex. Gov’t Code § 2001.035(b). To the 

extent that the trial court’s judgment addressed noncompliance with APA rulemaking procedures 

in the adoption of Rules 5, 26, 40, 80, and 86, it exceeded the scope of this permit complaint and 

was erroneous.

10 The Opielas contend that, although Rule 80 was amended under the APA, forms 

adopted under its provisions are void because the Commission uses Rule 80 to amend forms 

without going through APA rulemaking procedures. See Tex. Gov’t Code § 2001.035(a) (rule is 

voidable unless agency adopts it in substantial compliance with APA procedures). Amended 

Rule 80 provides: “Notice of any new or amended forms shall be issued by the Commission.” 16 

Tex. Admin. Code § 3.80(a) (effective in 2014 (39 Tex. Reg. 5148 (July 7, 2014)). When

adopting the amendment to Rule 80, the Commission stated: 

The policy requires the Commission to promulgate, abolish or amend forms only

upon the approval of a majority of Commissioners at a public meeting. . . . Where 

required by Texas law to promulgate, abolish, or amend a certain form through 

rulemaking procedures conducted under the Texas Administrative Procedure Act, 

the Commission will continue to do so. Otherwise, the Commission will consider 

staff’s recommended form revisions in an open meeting. Staff will place the 

proposed form revisions on the Commission’s website for public review and

comment for a period of time proportionate to the subject and degree of change.

39 Tex. Reg. 5148. Appellants contend that the Commission’s adoption of forms under the Rule 

80(a) process substantially complies with the APA procedures. An amicus argues, however, that

the amended Rule 80(a) is void because it purports to amend the APA itself by modifying 

rulemaking processes for forms and, among other arguments, that forms purporting to amend or 

replace a form created under APA rulemaking are void because the definition of rule “includes 

the amendment or repeal of a prior rule.” See Tex. Gov’t Code § 2001.003(6)(B).

Because resolution of these issues regarding Rule 80 would not alter our resolution of the

appeal, we need not address them.
20 

The parties extensively argued these rulemaking-related issues. But because

resolution of these issues would not alter our resolution in the next section of the core issue in 

this case—whether Magnolia made a reasonable showing of a good-faith claim of the right to 

drill the horizontal PSA well into the Tract and was entitled to the permit—resolving them is not 

necessary to final disposition of the appeal. See Tex. R. App. P. 47.1. 

5. The finding that Magnolia made a reasonably satisfactory showing of a good faith 

claim to operate the Well

The trial court held that the Commission erred in finding that Magnolia showed a 

good-faith claim of right to drill the Well. Appellants contend that the Commission correctly 

granted the permit because Magnolia met the 65% threshold for agreement of the mineral and 

working interest holders on each tract. The Commission’s findings of fact included 

the following: 

7. For a PSA, the operator certifies to the Commission that at least 65% of the 

mineral and working interest owners from each tract have signed an 

agreement as to how proceeds will be divided.

8. Regarding the Person Tract, 65.625% of the mineral interest owners signed 

either a PSA, consent to pool or ratification of unit, all setting forth a method 

of dividing proceeds.

. . . . 

12. According to the instructions for Form P-16 Acreage Designation, which is a 

form filed when applying for a drilling permit, the term PSA is defined as 

follows: 

PSA (PRODUCTION SHARING AGREEMENT WELLBORE): For 

purposes of this document, a horizontal wellbore crossing two or more 

tracts/leases and for which the operator certifies that at least 65% of the 

MINERAL and WORKING interest owners from each tract within the 

developmental unit have signed an agreement as to how proceeds will be 

divided. The wellbore need not be perforated within each tract of the 

developmental unit. 
21

13. All of the written agreements relied on by Magnolia as PSAs contain an 

agreement as to how proceeds will be divided.

14. Magnolia has PSAs with at least 65% of all mineral interest owners and 

working interest owners for each of the tracts traversed by the Well.

15. The Commission has previously determined that written oil and gas leases

covering the tracts the well traverses are a reasonably satisfactory showing of 

a good faith claim to operate an allocation well. It follows that written 

agreements with 65% of all mineral interest owners and all working interest 

owners for each tract the well produces from is sufficient to get a permit to 

operate a well, in this case a PSA well.

16. Magnolia has a good faith claim to operate the Well.

17. Complainants claim that their contractual lease covering the Person Tract 

does not contain pooling authority and Complainants have not signed a PSA 

such that Magnolia does not have a right to drill the Well. Complainant also 

claims that some of the documents relied on by Magnolia are not PSAs and 

some of the mineral interest owners of the Person Tract who did sign 

agreements did not have authority.

18. While Complainants may have a bona fide lease dispute as to whether 

Magnolia has a right to operate, that is insufficient to defeat Magnolia’s good 

faith claim.

19. While the Complainants may have a bona fide lease dispute with Magnolia, 

the determination of whether there has been a breach and the appropriate 

remedy is outside the jurisdiction of the Commission.

PFD at 16-17. The Commission also adopted the conclusion of law that “Respondent provided a 

reasonably satisfactory showing of a good faith claim to operate the Well.” See Tex. Admin. 

Code § 3.15(a)(5).

The Commission’s conclusion that Magnolia made the requisite showing of a 

good-faith claim plainly rests on satisfaction of the 65% threshold of agreement to the PSA that 

is not found in the Texas Administrative Code. If, as the Opielas contend, the 65% threshold is 

an improperly adopted rule, then the Order is founded on an error of law and must be reversed. 
22

If, as Appellants contend, the 65% threshold as articulated by the Commission in 2008 is a

properly created standard, we conclude that the Order is not supported by substantial evidence.

The Commission did not in its Order, including the findings and conclusions, cite a

source for the origin of the 65% threshold to demonstrate a good-faith claim to operate the Well

and entitlement to a permit to operate the Well.

11 In their briefing, the parties trace the 

formalization of that authority to the 2008 minute entry in which two of the three Commissioners 

approved a permit while “directing staff that wells that are permitted based on a production sharing 

agreement should be approved when the usual criteria are met and the operator certifies that at 

least 65% of the working and royalty interest owners in each component tract have signed the

production sharing agreement.”12 (Emphasis added.) The Commission’s 2008 pronouncement 

did not assert that multiple different PSAs could be signed or that other documents could be the

equivalent of a PSA for purposes of reaching the 65% threshold. Here, the Commission found that 

Magnolia represented that at least 65% of mineral interest owners had signed “an agreement as to 

how proceeds will be divided,” which on the Tract included “either a PSA, consent to pool, or 

ratification of unit.” The evidence shows that only 15.625% of the interest owners on the Tract 

signed a PSA; the remaining nearly 50% signed some other document. Substantial evidence does 

not support a finding that 65% of the interest owners “signed the production sharing agreement.” 

11 As discussed below in greater depth, the definition cited in Finding 12 tracks the 

instructions to Form P-16 as revised in February 2019 and finalized in June 2019—after the

application, permit, complaint, and hearing in this case. See PFD at 5 n.7, 16.

12 Texas R.R. Comm’n, Formal Comm’n Actions, Hearings Div., p. 3, Status #665639 

(Sept. 9, 2008) (available at 

https://web.archive.org/web/20161222204413/https://www.rrc.texas.gov/media/9027/090908.pdf).
23

Recognizing that a PSA and other documents could be functional equivalents, we 

will examine further. The Commission’s Findings 7 and 15 describe a broader scope of 

agreements as demonstrating that a PSA exists to include “an agreement” or a “written 

agreement.” The Commission found that 65.625% of the interest owners had signed “written 

agreements” with Magnolia, including consents to pool. An exhibit in the administrative record 

details that, of the interest owners on the Tract, 15.625% signed a PSA, 0.563% signed a 

ratification of designation of unit, and 49.437% signed a consent to pool. But the Commission 

does not require pooling to permit a PSA well and, as we have concluded, PSAs are not the same 

as pooling because the property interests involved and production divisions are not the same. 

Consequently, even while granting due deference to the Commission’s expertise in regulating this

complex industry, see SWEPI L.P., 103 S.W.3d at 587, we are not persuaded that signing a consent 

to pool can substitute for signing a PSA absent a good-faith showing that the consents to pool and 

the PSA call for the same sharing of production for the horizontal well across tracts that are not 

pooled. Magnolia did not certify and the Commission did not make such a finding in this record, 

nor is there any indication in the application that pooling of the three tracts occurred.

13 Even if we 

13 Examining the terms of the agreements could expand the scope of the Commission’s 

inquiry into reviewing the parties’ agreements and, therefore, could exceed the normal scope of 

inquiry in which the Commission engages at the permitting stage. Indeed, Clark testified that he 

does not “think that the Commission ever sees a sharing agreement or a pooling unless it’s 

represented to be a pooled unit.”

We note, however, that the consents to pool for persons listed as owners of the Tract do 

not all call for the same division of production as the PSAs. For example, the consent to pool

signed by William J. O’Brien III states:

The production on which Owners’[] royalty is calculated shall be that proportion 

of the total unit production which the net acreage of the Property included in the 

unit bears to the total surface acreage in the unit, but only to the extent such 

proportion of unit production is sold by Lessee.

By contrast, a PSA signed for Peggy Person states:
24

consider the 65% threshold from the Commission’s 2008 directive a properly adopted rule or 

decisional precedent, the record does not contain substantial evidence that Magnolia satisfied that 

rule by certifying that 65% of the interest owners have signed the PSA, undermining Finding 14.

14 

The Commission’s Finding 12 quotes the definition of a PSA from Form P-16 as

allowing proof of a PSA to include certification that 65% of interest owners have signed “an

agreement as to how proceeds will be divided.” But this quotation tracks the 2019 instructions for 

Form P-16, while the permit contested here was granted based on applications filed in May and 

August 2018—applications that predate use of the definition of PSA in the Form P-16 instructions 

as revised in February 2019 and June 2019 or Form P-16 as revised in June 2019.

15 The hearing 

The proportionate share of production allocated to each Sharing Well Property 

will be calculated by a fraction which has as its denominator the Completed 

Lateral Length of the Sharing Well and which has as its numerator the distance (in 

feet) that the Completed Lateral Length lies within the Sharing Well Property.

14 As noted above, if the 65% threshold is not a properly adopted rule, the Commission’s 

Order would fail to satisfy the substantial-evidence standard because the Order would be 

founded on an error of law and arbitrary. See Tex. Gov’t Code § 2001.174(2).

15 This definition appears in the instructions for the 2019 version of Form P-16. See PFD 

at 4 n.5; see also See Texas R.R. Comm’n 2019 Form P-16 Instructions (available at 

https://static1.squarespace.com/static/60a1390c3f87204622d78356/t/60a44ce659676b700c0e40b

3/1621380326686/p-16-instructions-drilling-permits.pdf); 2019 Form P-16 (available at 

https://static1.squarespace.com/static/60a1390c3f87204622d78356/t/60a44cc8c37bbe66f9284b6

d/1621380296941/p-16p-final.pdf) (revised 6/2019).

In Magnolia’s reply in support of its motion to dismiss the Opielas’ complaint about the

permit, filed December 7, 2018, Magnolia states that Form P-16 was “last revised January 2016.”

Neither the 2016 version of Form P-16 nor its instructions defined a PSA well. See Texas R.R.

Comm’n 2016 Form P-16 for Acreage Designation (available at

https://web.archive.org/web/20160804030249/http://www.rrc.texas.gov/media/31924/p-16pfinal.pdf); see also Texas R.R. Comm’n 2016 Form P-16 Instructions (available at 

https://web.archive.org/web/20160804030249/http://www.rrc.texas.gov/media/31920/p-16-

instructions-final.pdf).
25

on the complaint about the permit concluded in January 2019. Even assuming that the 2019 

revisions to the instructions for Form P-16 were properly adopted, they do not control review of 

the application and permit at issue here. Regardless of whether the 2016 version of Form P-16 was 

properly adopted, neither that form nor the instructions used to complete the applications here 

contained the expanded definition of the agreements that would meet the 65% threshold. 

Substantial evidence does not support a finding or conclusion that Magnolia showed a good-faith 

claim to operate a PSA well based on a certification that at least 65% of the working and royalty

interest owners in each component tract have signed the PSA as required by the 2008 Commission 

directive. The trial court did not err by finding the Commission erred by concluding otherwise.

6. Allocation well alternative

Magnolia invites us in the alternative to render judgment granting the permit as an 

allocation well. Though witness Clark opined at the hearing that Magnolia would have been 

entitled to an allocation-well permit, we do not find reverting to the previously obtained and 

challenged permit and rendering judgment that the allocation-well permit be issued to be among 

the dispositions available because the Order before us does not pertain to an allocation well 

permit. See Tex. Gov’t Code § 2001.174. In the alternative, Magnolia requests that we remand 

Without determining whether the forms and instructions are rules, we note that a 

substantive rule will be applied only prospectively unless it appears by fair implication from the 

language used that it was the intent of the legislature (or agency) to make it applicable to both 

past and future transactions. Pantera Energy Co. v. Railroad Comm’n, 150 S.W.3d 466, 473–74 

(Tex. App.—Austin 2004, no pet.). Because the permit at issue in this case was granted and the 

Opielas’ complaint about it denied based on an application completed in 2018, the 2019 

revisions of the forms and their status as any sort of rule do not control our review of the 

Commission’s 2019 decision and we need not consider whether the 2019 (or later) revisions to 

Form P-16 and related instructions are improperly adopted rules. See Tex. R. App. P. 47.1.
26

to the Commission to consider whether the Well may be permitted as an allocation well. We will 

remand for further proceedings, the content and nature of which will be determined by the 

parties, the Commission, and the relevant law and rules.

CONCLUSION

We reverse the parts of the trial court’s judgment in which it determined (1) that 

the Commission erred in concluding it has no authority to review whether an applicant seeking a 

well permit has authority under a lease or other relevant title documents to drill the Well, and 

(2) that the Commission erred in failing to consider the pooling clause of the lease covered by 

the Well in deciding that Magnolia has a good-faith claim to operate the Well. We affirm the 

parts of the trial court’s judgment in which it determined that the Commission erred in finding 

that Magnolia showed a good-faith claim of right to drill the Well and that this cause should

be remanded.

We reverse the Commission’s Order and remand this cause to the Commission for

further proceedings.

__________________________________________

Darlene Byrne, Chief Justice

Before Chief Justice Byrne, Justices Kelly and Smith

 Dissenting Opinion by Justice Kelly

Affirmed in Part, Reversed in Part and Remanded

Filed: June 30, 2023