### TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03

- 21

- 00258

- CV

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

v. Elsie Opiela and Adrian Opiela, Jr. , Appellee s

FROM THE 53 RD 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 Opie la , Jr., (Opielas) about a permit issued by the Railroad Commission of Texas to Magnolia Oil & Gas Operatin g LLC (col lectively, Appellants) to dr ill a horizontal oil well from one parc el of land , through another , and into land with minerals leased in part from the Opiela s. The dispute centers

on the laws , regulations, and judicial and Commi ssion decisions conc er ning pooling of tracts of
land for purposes of oil production along with production-sharing agreement s (P SA s) and
allocation wells

— methods of d es ignating how to share production

. The Opielas ’ leas e prohibit s pooling “ in any manner whatever ” for oil prod uc tion , and the Opielas did not sign a consent to pool or a PSA. Neverthe l ess, after a previous operator obtained a n allocation

- well permit, Magnolia obtained an amended permit to drill a PSA well upon the Commission ’ s f inding that Magnolia had m ade a good- faith showing that it had the right to drill and operate a horizo ntal
well in the minerals ow ned by the Opie las because at least 65% of th eir fellow interest holders2 had assented to shar e the production in some way

. T he Commission denied the Op ielas ’

co mp laint that Magnolia lacked a good

- faith claim to operate the A udioslave A 102H Well ( the W ell )

. T he tria l court reversed the Commission ’ s o rder and remanded th is cause to the
Commission , concluding that the Commission erred in finding that Mag nolia sho we d a good

- fa i t h claim of r ight to drill the Well

. The trial court also concluded that the Commission
erred in adopti n g and appl ying rul es for PSA well permits , deci ding that the Commission lacked the authority to r eview whether an applicant seek ing a we l l permit has right unde r a leas e or other relevant title documents to drill the Well , and failing to consider the po oling clause in the Opielas ’ leas e
. Appellan ts contend on appeal that existing r ules adopted through formal
notice

- and

- com ment rulemak ing pr ovide a n adequate frame work fo r the Commission to issue well permi ts for unpoo led mult i

- tr ac t horiz ontal wells

. The Commission contends that
substantial e vidence supported its conclusion that M agnolia was entitled to a drilling permit

. Magnolia con tend s that the trial court erred by holding that the Commission is required to
evaluate whe ther an operator has both a valid lease and pooling authority when drilling a
horizonta l well across multiple tracts. Magn olia also contends that the tr ial court re quir ed the
Commission to exceed its jurisdiction by adjudicating d isputes between private p arties o ver the authority to drill horizontal wells

. We will aff irm the tr ia l court ’ s judgment in part, reverse in part, and remand the
cause to the Commissi on f or f urth er proceedings.3 BAC KGROUND
P ooling , PSAs , and , to a lesser extent, allocation wells are cent ral to this dispute.

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

o f a well where prod uction fro m any of t he tra ct s in the poole d unit is treated as pro du ction from
all of the tra cts. See Hooks v. Samson Lone Star, LP , 457 S. W.3d 5 2, 62 (Tex. 2015). Like pooling, PSAs and allocation wells link adjacent pr operties for the production of mineral s, 1 but
Texa s st atutes and regulations do not expressly require pooling of tracts as a pre requ isite f or
every horizo ntal drilling of a wellbore that crosses property li ne s
. An allocation well is “ a horizontal well that traverses the boundary between two or more l ease s th at have not bee n 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 agre emen t, p roduction is al located to the ow ners 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
sha red irr espe ctiv e of w here take points are

. See E. Smith & J

. Weaver, Tex . Law of Oil & Gas § 9.9(B) , at 9

- 1 67

- 70 ( 2 d E d. 2020)

. The Opielas are among the successors to the mineral interest of Otha Person and My ra Person, who leased their land (the Tract) for mine ral e xploration in 195 5. T h e lease

a

uthorized a one - ei ght h royalty on oil pr oduced from the Tract and sta ted that “ [ n] othing

con taine d he re i n shall authorize Lessee in any manner whatever to pool said land or any part of

1 Magn olia submitted and the Co mmission accepted as showing good f aith consents to pooling by some royalty owners as th e equivale nt of signing the P SA and a good

- fai th c laim of
r ight t o dril l.4 the same for oil , and for the prod uctio n of oil from sai d land under this lease . . . . ” The Opiela s
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

. EnerV est Operating , L LC , a p p li ed t o the Commission on May 1, 2018 , for a dril l ing permit for an a llocat i on oil well

. EnerVest propos ed to drill on one prop erty a nd dire ct
the Well horiz ontally to cross under a road before entering the Tract underground

. On M ay 2 , 2018, t he Opielas f iled a complaint a sking the Commission t o refrain from issuing the permi t
because EnerVest did not have authority to po o l the T ra c t with a ny other property

. The day a f ter the complain t was filed, the Commission issued the permit u pon f inding that EnerVes t sho w ed 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 Op i e las ser v ed t he ir complaint on EnerV est

. EnerVest responded that it did not n eed to pool the tracts c rosse d by the well b ore under C ommissi on decisions in Devon and Klotzma n
. See Texas R.R. Comm ’ n, Com plaint of Monroe Properties,
Inc ., et al. t hat Devon En er g

y Pro d uctio n Co, L.P. D oes Not Have a Good Faith Claim to Operate the N l Help ed 120 (Alloc) Lease , Wel l No. 6H, Phantom (Wolfcamp) Field, Ward County, Texas , Docket No. 08

- 0 305330 (Dec. 18, 2017) ( order of dismissal) ( “ Devon ” ) ; T exas
R.R. Comm ’ n, Application of E O G Resources, Inc. for its Kl otzman Lease (Allocation) Well No.
1H , (S tatus No. 744730), E aglev i lle ( Eagleford

- Z) Field, Dewi tt County, as an Allocatio n Well
Drilled on Ac reage A ss ig n ed from Two Leases , Docket No. 02

- 0278 952 (Sept. 24, 2013) (final order) ( “

K

l otzman ” )

. Ener Vest conve yed its interest to Magnolia before t he c ontest

was resolved.
On August 2 9, 2018, Magnolia applied for a permit on the Well to be drilled as a
P S A well

. As part of their application, Magnolia submitted a Form W

- 1 and Form P

- 16 as5 required for a p plicants seeking a per mit for a horizontal well

. S ee 16 Tex. Admin. Cod e § § 3

. 5,

. 4 0( g) ( 2018) (cur rent ly co dified at § 3.40( i ) ), .86. 2 N either the Form W

- 1 in the record nor the
2 016 version of Form P

- 16 or the ins tructions for filling out the form in eff ec t in 2018 defined a
PSA well or mention a threshold percentage of sig na tor ies t o a PSA

. 3

T he C ommission issued Magnolia th e permit on Augus t 30 , 201 8

. The permit
i ncluded th is discl aimer :

Commission Staf f expresses no opinion as to whether a 100% ownership interest in each of the leases alone or in combination with a “ p r o ducti on sharing agreeme n t ” confers the right to dri ll across lease/unit lines or whether a poo ling ag reement is also required. H oweve r, until that issue is directly addressed and ruled upon by a Texas court of competent jurisdiction it appears that a 10 0 % inte res t in each of th e leases and a production sh aring agreement constitute a sufficient col orable claim to the right to drill a ho rizontal well as p roposed to authorize the removal of the regulatory bar and the issuance of a drilling permit by the Com m i ssion , a ssuming the pr o posed well is in compliance with all other relevant Commission re quirem ents.

T he Opielas amended their comp laint about the EnerVest permit o n September 28, 2018 to challenge th e permit issued to Magnolia

. T he Opielas cont ended t h at Ma gnol ia

2 All cit ation s to the Texas A d ministrative Code will be to the ve rsion in effect in 2018 when the application s wer e made, unles s otherwise noted.

3 See Texas R.R. Co mm ’ n 2016 For m P

- 16 f or Acreage Designatio n (available at https :// web.archive.org /web/20160804030249/http://www.rrc.texas.gov/media/31924/p

- 16p

final.pdf ) ; see also Texas R.R. Comm ’ n 2016 Form P

- 16 Inst ru ctions ( av ai labl e at h tt ps://web.archive.org/web/20160804030249/ h ttp://ww w.rrc.texas.gov/media /3 1920/p

- 16

- instructi ons - final.pdf ). In Mag nolia ’ s reply i n sup port of its motio n to di smi ss the Opiel a s ’ complaint about the permit, filed December 7, 2018, Magnolia states that Form P

- 16 was “ las t revised January 2016. ” T he inst ruc tion s to For m P

- 16 we re revised in Feb r uar y 2019 and finalized in June 2019

— after the application, permit, compl aint , and he ar ing in this case. See Tex. R.R. C omm ’ n , Complaint of El sie Opiela an d Adrian Opi e la Regardin g Magnolia Oil & Gas Operatin g LLC ’ s (521544) Audioslave A Lease , Well No. 102H , Permit No. 839487, Sugarkane (Austin Chalk) Fi eld, Karnes County , Te x. , Oi l & Ga s Doc ket N o . 02

- 0315435 , 4

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

.6 could not h ave a good

- faith claim to op erate the Well because th e Opielas ’ lease d id not
authori ze pooling of th e T ra ct wi th others for oil producti on
. The hearings examiners heard the compla int on January 23, 20 19 , and is s ued their proposal f or d e cisio n (PFD) on Au gust 30, 2019

. Tex. R.R. C omm ’ n , Complaint of El sie Opiela
and Adrian Opi e la Regarding Magnolia Oil & Gas Operating LLC ’ s (521544) Audioslave A
Lease , Well No. 102H, Permit No. 839487, Sugarkane (Austin Chalk) Fi eld, Karnes County , Tex. , Oil & Gas Docket N o . 02

- 0315435 , 4

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

. T he examiners found
that the C ommission had previously de termined that written oil leas es coverin g tracts the Well

traverses are a reasonably satisfactory showi ng of a good

- fa ith cla i m to operat e an allocat ion well, and that written agreements with 65% of all mineral and working in te rest owners for each

tract the Well produces from would be sufficient to ge t a permit to o perate a well. T he

ex aminers also found that Magnolia ha d PSAs

— w hic h they f ound includ ed a PSA, consent to pool, or ratification o f unit

— wit h o ver 65% of the minera l and work ing interest o wners
. T he
PFD a lso includ e d conclusions of law that Magnolia provided a reasonably sat isfactory showing
of a good

- faith c laim to o per at e the Well and that d en i ed the Opielas ’ request that the
Commissio n revoke Mag nolia ’ s permit

. T he Commission ado pted the findings and conclusions
in t he PFD as its own in its F inal O rder ( “ the Order ” )

. 4 The Opie las sought judicial review

. Among th eir content ions, t he Opielas argued
that the Co mmission granted the permit pur suant to inf or

m al rul es reg arding PSA and allocation
wells that were promulgated o utside the APA and do not fall withi n any recognized exception to the requireme nt of formal r u le mak ing ; the y contended that rules for allocatio n and PSA well

4 Because t he Commission adopted th e PFD ’ s findings and conclusi on s in i ts Final Order, we wi ll sometimes refer to the findings and con clusions as t hose of th e Commission.7 permits are not found in the a d minist rative code

. They argued that the Commission erred by adopti ng its findings from previ ous con tested case s stat i ng that the Commission lacks jur i sdiction t o rev iew Magn olia ’ s authority under the lease bec ause the lease does not allow Magnoli a to d r il l the PSA well

. T he O pielas conte nded that Mag nolia does not have a good

- fa ith
claim of right to drill a well and that the issuance of the permit violated the C om mis sion ’ s
i n f ormal rules beca use the agreements used to reach the 65% threshold included c ons ents t o pool. The Opielas contended tha t the Commission disregarded T e xas Supreme Court precedent by concl uding it has no jurisdiction to review whether an ope r at or seeking a well permit has a good

- faith claim under the lease to drill a well. The O pi ela s co nte nded t hat the Commi ssion
failed t o examine the lea se and title documents u nder which Magnolia claims authority to drill
the Well

. T he Opie l as argued that th e C ommissio n erred in finding that Magnol ia ha d shown a good

- faith basis for th e ri ght to dr ill the Well because the ir lease prohibits the lessee from pooling t h is tr ac t with oth e rs , doe s not permit allocation o f productio n, and thus requi res that any

r o ya lty be attr ibu table to production solely from their tract

. The trial court conclu d ed as f o llows:

1. Th e Commi ssion erred in adopt ing rules for allocation and Production Sharing Agreement ( “ PSA ” ) well permits without complying with t he req u irement s of t h e Adm i nistrative Procedure A ct, Tex. Gov ’ t Code § 2 001.001 et seq., and f urther erred i n app lyi ng thos e r ules by issuing well permit s for the Audioslave A 102H Well (the “ Audioslave Well ” ).
2. The Commission erred in concluding it has n o auth o rity to revie w wheth er an appli cant seekin g a well permit has a ut hority under a lea se o r other relev a nt ti tle docume nts to dri ll the well.
3. The C ommission erred in failing to consider the pooling clause of the lease covered by the Audioslave Well i n dec i d ing tha t Magn o l ia ha s a good fai th claim t o operate the well.8 4. Th e Commission erred in finding that M agnol ia showed a g ood fai th claim of right to drill the Audioslave Well.

The trial court remanded the cause to the Commission , and t his ap peal followed.

STANDARDS O F R EVIE W
A court m ay not substitute its judgment for the judgment of t he state agency on
the weight of the evidenc e o n question s committed to agency d iscret ion but:

shall reverse or r emand the case for fu rther proceedings if subst a ntial r ig hts of the appe l lant h ave been pr ejudiced because the administrative findings, inference s, conclusions, or d ecision s are: ( A) in vi olation of a constitutional or st atutor y provisio n; (B) in exces s of the agency ’ s stat utory authority; (C) mad e throug h unlawful proced u re; ( D ) affected by other error of la w; (E) not reasonably supported by substantial evid ence con sid erin g the r eli able and p robative evidence in th e reco rd as a whole ; or (F) arb i trary or capricious o r characterized by a buse o f discre tio n or clearly un w arran te d exercise of discretion.

Tex

. Gov ’ t Cod e § 2001.174 ( 2 )

. Courts e xamine whether there is som e reas o nable basis in the
record for the action taken b y the a genc y , not wh e ther the agency reached the correct conclu sion

. R ailroad C omm ’ n v

. Torch Oper a ti ng Co

. , 912 S. W. 2d 790, 792 (Tex. 1995)

. Courts review an
ag e n cy ’ s legal conclusions for errors of law and it s findings of fact for support by substan tia l

e viden ce
. Westlake Ethylene Pipeline Corp. v. R ai lr oad Comm ’ n , 506 S.W.3d 676, 681 (Tex. App. 20 1 6)

. We may not substitute our judgment for the a gency ’ s on the weight of the evidence on questi ons c om mitted to the ag en c y ’ s discretion, but we a re not bound by errors of l aw. See
Tex. Gov ’ t Code § 2001.174; Office of Pub U til

. C ounsel v. T exas
- N

. M

. P ower Co. , 344 S.W.3d 446, 45 0 (Tex

. A pp.

— Austin 2011, p et. denied).9 Whe the r substantial evidence suppor ts the agency ’ s decision is a q uestion of law.
Texas Comm ’ n on Envtl. Quality v. Maverick County , 6 42 S. W.3d 537, 547 (Tex. 20 22)

. Courts presume that the Commis sion ’ s order i s suppor t e d by substanti al ev idence, and the complaining
part y ha s t he burd en to overcome that presumption. I d

. Substantial evi dence does not mean a large or considerable amount of evidence but is such relevant evidence as a reasonable mind might a ccept a s adequ a t e to supp ort a find ing of fact. L auderd ale v. Texas Dep ’ t o f Agric

. , 923 S.W.2d 834, 836 (Tex. App.

— Austin 1996, no wr it)

. Where an agency has specialized knowledge, the court may defer t o the agency ’ s expertise and responsibility to develop

re gulatory polic y
. In re SWEPI L.P. d/b/a She ll 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

c onstruing statutes. Patients Med. Ctr. v. F acility I ns. , 623 S.W

. 3d 33 6, 341 (Tex. 20 2 1). We

sta r t w ith the rule ’ s plain text. Mave rick C ou nty , 642 S.W .3 d at 544

. We must first determine
what the rule ’ s t ext means before deci d ing wheth e r the agen cy ’ s in terpr e tation contr adicts the

text. Id

. C o urt s w ill uphold an a g ency ’ s interpretat io n of its own rule if the inter p retat io n i s reasonable and doe s not contradict the rule ’ s pla in language. R ai lroad Comm ’ n v

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

DISCUSSI ON
T he parties do not d ispute tha t Mag nolia has a valid lease to drill on any of the

tracts contacted by the w ell bore

. The is sue is whether the record supports gran t i ng a permit for a PSA well under relevant and proper rules

. Appe llants contend that th e trial court shoul d have
affirmed the C ommis sion ’ s order because Mag nolia pro ved its entitle ment to the permit grant e d

. The Co mmissi o n cont end s that its order i ssui ng the permit based on a good

- faith claim to drill10 and operate the Well was supported by s ub stan tial evidence

. T he Commission als o con tend s
that , because it c omplied w ith notic e - and

- comment rulemaking to adop t rules and forms , it was
not requ ire d t o also pro mulgate by rulem aking the p olicy for issu ing a permit to drill an d opera te
a horiz on tal w ell. Mag nolia si m ilarl y conte n ds that the APA did not require the Commission to

c ondu ct formal r ulemaking before issu i n g pe r mi ts fo r unpoo led multi

- tr a ct horizontal w ell s given its b road statu t o r y autho r ity, regulations, and discre tion to exercise its e xp ertise. Magnolia

a l so contends that t he tr ial court erred by ho lding that the Comm iss ion is required to evaluate

w he th er an oper ator has b oth a vali d lease and poolin g authority when drilling a horiz o ntal well across multiple tract s. Magnolia further c on tends that the tr i al co urt required th e Com miss ion to
exceed its jurisdictio n by ho lding that the Commission mus t adju d ic a te d isputes betwe en priv ate

p arties over t he authority to dri ll horizontal a llocation wells as part of its goo d

- faith ev aluation of

an application for a dril ling permit. W e wil l evaluate these overlapping issues together in the
context of the t ri al cou rt ’ s judgment and the Commissio n ’ s order.

1. Appli cable statutes, r ul es, and decisional law backgroun d
T he Legis l ature gave the Commi ss ion jurisdictio n ov e r all oil and ga s we lls in
Texas

. Tex. Nat. Res. C ode § 81.051(a)(2). Conservation and development of all natural
resources of th is state is among the public right s and duties described in the Texas Constitution

. Tex. Const. art. XVI , § 59(a). The Leg i slatu re empowered th e Comm ission to “ make and

en force rules and orders for the conservation of oil an d gas and prevention of waste of oil and

gas. ” Tex. Nat. Res. C ode § 85. 201. C ommission r ules re quire a pplication for a permi t to dr il l

an oil well. 16 Tex. Admin. Code § 3 .5 (a). The ap plication for the permit must be filed “ on a form approved by t he C ommission , ” i d

. , which imp lies the Commission ha s the power to

a

pprove forms. T he Texas Supreme Court has held that , to show ent itlement to a permit, an11 o perat or must make a reason ably satisfactory showing of a good

- faith claim t o o perate the

propo sed wel l. Magnolia Petrol eum C o. v. Rail road Comm ’ n , 1 70 S.W.2 d 189, 191 (T ex. 1943)

. T he applicant can mak e a reasonably sati sfactory showing o f a good

- faith c laim of ownership ev en if another in good faith d ispu tes title. I d

. The Commission ’ s rule define s

“ good

- fai th claim ” as a “ fac tually supported clai m based on a recognized legal theory to a continuing possessory r ight in a mineral esta t e, such as evid enc e of a currently vali d oil and gas
lease or a re corded deed convey ing a fee interest in th e mineral es tate. ” 16 Tex. Admin. Code § 3.15(a)(5) ( regula ti ons f or surface

- equipment removal requi rements and ina ctive wel ls ); s ee also Tex. Nat . R es. Code § 89 .00 2 (11) ( using same def initio n in context of aba ndo ned wells

statute ) ; see als o Roland Oil Co. v. R ai lro ad Co mm ’ n , No. 03

- 12

- 00247

- CV, 2015 WL 8 70232

at *2 (Tex. App.

— Austin Feb. 27 , 2015 , pet. denied ) (mem. op. ).
In t he 1943 M agnolia case , t he T e xas Su p re me Cou rt held that the Commis sion
do es not undertake to adju d icate questions o f ti tle or rights of posse ssion wh e n it grant s a drilling permit

. 170 S.W

. 2d at 191. The Commission ’ s role in gran ting permits is to admi n ister the

cons ervation l aws of Te xas a nd to de termine whether they bar dri lling the well

. Id

. T it le questions are a m at ter of common law tha t must b e settled in the courts

. Id. T he trial court i n Magnolia canceled a drilling per mit granted by t he Commi ssion to E.A. L andman be cause th e
tria l c ourt found there was a bo n a fide contr oversy regarding wh ether Landman or M a gn olia h ad proper title t o the l e asehol d. Id. at 190. The court of appe a ls reversed the judgment canc eling the pe rmit but suspended it pe nding determi nation of t h e title suit in the c ounty where the land

was. Id. In rever sing both the trial and appel l ate courts , t he Texas Supr eme Co urt wrote that granting a permit “ merely r emoves th e conser vation laws and regulations as a bar to drilling the
well . . . . Wher e there is a dis pu t e as to those rights , it m ust be settled in court. ” Id. at 191. The12 cour t conclud e d, “ I f the applic ant makes a reasonably satisfactory showing of a good

- faith claim of ownership in the property, the me re fact that another in good faith d isputes his ti tl e is n ot
alone suffic ient t o defeat his right t o th e permit ; neither is it ground fo r suspending the p ermit or abating the statutory appeal pending set tlement of the t i tle controversy. ” Id

. While the Legislature has enacted statutes gove rn ing pooling of l a nds f or oil and

gas produc tion, it has not done so for PSAs for horizont a lly drilled wells. T he Legi slature has
considered bill s amending the Natural Resour ces Code to expressly authorize

— if not expressly prohibite d by a lease, de e d, o r o ther contract an d if g ranted a permit by th e Commis sion

— drilling and produc ing oil or gas from wells that traverse mul tiple tracts to prevent waste, promote conservati on, or protect correlative rights

. See , e.g., Tex. H.B. 15 52 , 8 4 th Leg., R.S. (20 15) ; se e also Tex. S.B. 3 67 , 87th Leg., R.S. (2021 )

. Bill s to establish a statutory structure for
unitization of sepa rate tr acts and involve the Commission in determining wh ether the unitization plan is fair, reasonable, and equitable for all int erests have also b een introduced but n ot passed.
See Tex. S.B. 1 77 , 85th Leg., R.S. (2017); Tex. H.B. 1 00 , 83rd Leg., R.S. (20 13)

. Similarly, the Commission has not adopted Adminis trativ e C ode rules specific to
P SA s , though it has request ed information about PSAs throu g h its forms 5 an d has granted per mits
for w ells that were the subject of PSAs

. The Commission has both rulemak ing and adjudicatory

power s with which to regulate oil a nd gas pr oduction. Railroad C omm ’ n v. Lone Star Gas C o. ,

5 See , e.g. , 1 6 Te x. Adm in . C ode § § 3

. 4 0 ( g ) ( Assignment of Acreage to Pooled Development and Pr oration Units) , 3 .86(g)( 4) (Horizontal Drainhole Well s) (requ irin g filing of Texas R.R. Comm ’ n 2022 For m P

- 16 for Acreage Desig nation , av a ilable at https://www.rrc.texas.gov/media/tppn4axe/p

- 16.pdf ( file r must stat e that “ [a] ll tracts listed will actually be traversed by the w ellbore or the filer has pooling authori ty or othe r contractu al authori ty, such as a p roduct io n sh ar ing agreement, authorizing inclu sion of the non

- drill site tract in the acreage assigned to t he well. ” ) )

.13 844 S. W.2d 679 , 688 (Tex. 1992)

. The Commissio n may ex ercise “ infor med di scretion ” whether to use rulemaking or adju dication, but sho uld choose rule making except in cases when there is a danger tha t rul emaking would fr ustrate the ef fect ive accomplishment of the Commission ’ s functions. Id. at 689. Th e Com m ission ’ s adjudi catory decisions do not necessarily bind it in future
ad

jud ication s, but an agenc y must explain its rea soning when it appears to d epa rt f rom its policy or ther e is an a pparent inconsistency in its decisions. Texas Stat e Bd. o f Pharmac y v. W itcher , 447 S.W .3d 52 0, 534 (Tex. App.

— Austin 2014, pet. denied ). In 2008 , two o f the three
Com missioners voted to approve a permit application pur suant to a PSA an d direct ed staff that permit application s fo r PSA wells “ should b e ap proved when the u su al criteria are me t and the operator certifies that at least 65% of the working and royalty interes t owners in each componen t tract have signed the pro duction sharing a greement. ” Tex as R.R. Comm ’ n, Formal Comm ’ n Actions, Hearings Div., p. 3 , Status #665 6 39 ( S ept. 9, 2008) (av ail ab le at https://web.arch ive. org/web /201612222 04413/https://www.rrc.texas.gov/media/9027/090908.pd f )

. 6

2. T he Commission ’ s power t o iss ue permits for multi

- tract horizontal wells without p oolin g
The trial court held that the Com mission erred by fai ling t o consider the pooling
claus e of the lease co vered by the Well in deciding that M agno lia has a good

- faith claim to

o perate the W e ll

. T he Opie la s ’ lease provides :

N othing contained here in shall authorize Lessee i n any manner wha tever to po ol said l and or any part of the same f or oi l , and for the production of oil from said land under this lease, and in the event oil is d iscovered on an d unde r said land Lessor shall receive as his royalty the full one

- eighth of all the oil produce d an d

6 A ll sites listed by URL i n this opinion were last visited June 26 , 2023.14 saved from sai d entir e tract of land leased he reunde r, as her ein in Paragr a p h 3 provided.

( Emph asis added.) T he Opiela s have not consented to pool i ng or signed a PSA and cont e nd that
the PSA well is “ pooli ng by another name ” and, as such, is prohib ited by the lease ; t hus, th ey
argue, the Commiss ion cannot cor rectly find that Magnolia has a good

- faith c laim to the right to
drill a horizon tal well in t o the tract. T h e re quirement that an applicant file a Form P

- 16 for a permit for a ho rizontal well a ppears i n Rule 40 , e ntitled the Assignment of Acr eage to Po oled Development and Pro ration Units. 16 Tex. A dmin . Code § 3.40( g ). We must examine th e rela t ionsh ip of pooling and PSAs t o determine whe t h er th e assertion of right to dril l under a PSA triggers and infringes on a n anti

- po oling clause in a lease. Pooling is the subject of a chapter of the Nat ural Resources Code a nd other

sta tutes in that code , i n con trast to the silence regarding PSAs

. See Tex. Na t. Res. Code ch. 10 2 ; see also, e.g., id. §§ 7 1 .05 1

- .05 7 , 101.011

- . 013

. Po oling is often done to allow smaller tracts to
combine to meet requirements for spacing or density o f wells

. See Br owning O i l Co. v

. Luecke , 38 S.W.3d 625, 634 (Tex. App.

— Austin 2000 , pet. den ied )

. Mineral o pera tions any where in the
comb ined trac ts, or u nit, are treated as if occurring on all tracts in the unit. Id

. Pooling link s propertie s such that the owners of the pooled t racts own join t undivided interest s in the royalty earned from production under any of the trac ts poo led

. Id. Proceeds from p ro duction from one of the pooled trac ts are shared by all owners of the tracts in proportion to the individu al tract ’ s
prop ortio n of t he pooled a creage
. I d. ; see also Hooks , 4 57 S.W.3d at 62

- 63

. A lessee has no

po wer to pool abs ent ex press authori t y in its lease s
. Lue ck e , 38 S.W.3d at 634.
P ooling of tracts is no t expressly required by Texas statutes or regulations f or horizo n t al dr illing of a wellbore that crosses property li ne s
. Commentator s have noted that , as of15 the start of 2022, no statute or regu lation yet addressed either PSA or allocation well permits

. 2 E. Smith & J

. Weaver, Tex . Law of Oil & Gas § 9.9(B) , at 9

- 1 67

- 6 8 ( 2 d E d. 2020)

. T hough stating that PSAs could form “ super - pooled units ”

— a term not found in Te xas statutes or rules

— th at combi ne pool ed acreage into larger poo ls, the commentators describe PSAs as b eginning with private contractual agreements among the ow ner s and operators of po o led or unpooled

tr acts t hat will be traversed by a horizont al well. I d. a t 9

- 1 69. A horizonta l well i s initiall y drilled vertically, then turns horizontal an d can ext end for hundre ds of feet across multiple tracts.
38 S.W.3d a t 634. Each tract traversed by the horizontal wellbore is a drillsite tract, and each product ion poin t on the wellbore is a drill sit e. I d. Importantly, lesso rs in Luecke we re not
entitled to production from other lessors ’ tracts unless there ha d been a c ross - conve y ance of property interests; without valid pooling , the division of royaltie s was ba sed on w hat produ ction
could be attri buted to the lessors ’ tra cts with reasonable probab ility

. Id. at 64 6

. By contrast,

u nder a PSA , the interest owners on the va rious tracts agree how production from a well will be
sha red

. 2 E. Smith & J. Weave r, Tex . Law o f Oil & G as § 9 .9(B) , at 9

- 17 0

. B ef ore the hearings examiner s in this case , Jame s Clark , qualified as an ex p er t
witness on the Commission ’ s procedures for permi t ting and othe r regula tory matt ers, testified
that the PSA in this case divided p ro duction b ased on t he effect ive later al length on each trac t

. 7
Clark testified that “ if it were a pooled unit, it would be neither a PSA nor an allocation , ” but that

a lesse e who had poo ling authority pe rhaps could choose whether to pool or use a PSA

. W e conclude that p rod uction th rough a PSA well is n ot the same as pooling under Texas law

.

7 A s imilar method is used to appo rtion production for an al locati on wel l

. S ee S pr inger Ranch, Ltd. v. Jones , 421 S.W.3d 2 73, 286 (Tex. App.

— San Antonio 2013, no p et. ).16 Consistent with our conclusion, the record indicates that the Commission sim ply
i g nored the anti

- pooling clause a s irr elevant to th e Well permit

. In rejecting the Opie las ’ complaint about the permit , t he Commissio n cit ed its decisions up holding permits for alloc ation
well s despite the absence of pooling a u thority in leases

. In K lotzm a n , the Commission reje cted its hearing examiners ’ recommendation that the permit b e denied because o f the lack of poolin g authority under the lea ses be ing combined to form th e developmental unit for the horizontal well.
Texas R.R. Comm ’ n , A pplicatio n of E O G Reso urce s, Inc. for its Klotzman Leas e (Alloca tion),
We ll No. 1 H (Status No. 744 730), Eag leville ( Eagleford

- 2

) Field , Dewitt Count y, as a n Allocation Well Drilled on Acreag e Assigned from Two Leases , Oi l and Gas Docket
No. 02

- 0278952 ( F in al Order i ssued S ept. 24, 2013) ( Klotz man ) at 1. The Commission
conclu ded that the lessee had a g ood

- faith claim to drill the Well ess e ntially beca use an exception to spacing rules could be gr anted bec ause the l es see had all of the working interest to
the leases af fecte d by the Well

. Id. at 1

- 2. T he Commission dismissed a similar challenge to
anothe r allocat ion well in Monroe , concludin g th at t he i ssu e was decided in Klotzman

. Texas
R.R. C omm ’ n, Co mplaint o f Monroe Properties, Inc., et al. that Devon Energy Pr o du ctio n C o , L.P. Does Not H ave a Good Faith Claim to Operate the N I Helped 120 (Allot) Le as e, Well No. 6H, P hantom (Wolfca mp ) F ield, War d C ount y, Texas , Oil and Gas Docket No. 08

- 030 5330 (Ord er of Dis missal i ssued Dec. 18, 2017)

. The Commission ’ s reliance on Kl otzman i ndicat es
that it did not necessarily fail to consider the lease ’ s poo ling c lause bu t that it found that t he
anti

- pooling clau se did no t preve nt Magnolia from showing a good

- faith claim of the right to operate and drill the Well

. Further, a lac k of p ooli ng authority alone does not pr ohibit drilling
under a PSA

.17 T he trial court erred by concludin g that the Commissio n erred by f a iling to

c onsider the lease ’ s pooling claus e in assessing the good faith of Magnolia ’ s claim o f a right to
drill on th e pr op erty. 8

3. The Commission ’ s authority t o adjudicate the validity of leases
M agnolia contends that th e t rial court erred by holding th at the “ Co mmi ssio n erred in concluding it h as no authority to review whether an applicant seeking a well permit has

au thor it y under a le ase or other relevant ti tle documents to drill the well. ” T he PFD s ta te d :

T he Commi ssion does not adjud icate question s of title or right to possession, which are questions for the court system . A showing o f a good faith claim does no t re qu ire an applicant to prove title or a ri ght of possession. It is sufficient for
a n appli cant to mak e a reasonabl y satis factory showin g of a good faith claim.

(Footnotes omitted. ) In the ir f indings of fact a nd conclusions of law , the Comm ission f ou n d a

g o od

- faith claim of right to operate despit e the possibility of a bona

- fide l ease dis put e and found

t hat lease disputes a re beyond the jurisdiction of the Commission. This conforms to th e Texa s Supreme Court ’ s holding that “ [w]hen [the Commission] gra nts a permit to drill a well it does

not undert ake to adjudicate questions of tit le or ri ghts of possessi on. These questions must be
settl ed in the courts. ” Magnolia , 170 S.W.2d at 1 91. The Commiss ion has no po wer to determine property rights. Jones v. Kil l i ngsworth , 403 S.W.2d 325, 328 (Tex. 1 965)

. The Commission is similarly lim ited fro m adjudicating t he validity of contr actual agreeme nts such as pooling agreements. See Railroad Comm ’ n v. Rau , 45 S.W.2d 413, 416 (Tex. Civ. App.

—

8 We note that w hether Magnolia has breached the Opielas ’ l ease , improperly taken their oil, or v iolated l aws or regul ations when producin g oil from t he Tra ct are quest ion s separate from Magnolia ’ s good

- fa ith cl aim to operate the W ell and may be prope rl y the subject of a ju dicial suit like the one f iled by the Opiel as and currently pending in K arnes C ounty. See Opiela
v. EnerVest Operating LLC , N o. 18

- 06

- 001 53

- CVK ( 81st Dist . Ct., Karnes County, Tex .)

.18 Austin 1931, writ dism ’ d) (ci te d by Kawasaki M otors Corp. USA v. Texas Motor Vehicle
Comm ’ n , 855 S.W.2d 79 2, 7 99 (Tex. App.

— Austin 1993, no wr it))

. T he Commission did not err by concl uding t hat it had no power to adjudicate the applicant ’ s rights under a lease or other
relevant t itl e d ocuments, and the trial court erred to the extent it determined other wise

. T h e Opielas assert tha t the Commissio n fou nd in Finding s 15

- 19 “ that contractual authority is irrelevant to evaluating a good

- faith claim and t hat the Commission has no jurisdic t ion to consider the co ntents of the lease

. ” We do not f ind such a swee ping asse rtion of irrelevancy and lack of jurisd i ction to “ cons ider ” the contents of the lease by the Commission in
the cited findings , which are set out below ; con sidering the conten t s of th e lease is not the same as adjudicating rights under it

. But even if the Commission entirely refu sed to loo k at t he lease , the Opielas have not shown prejudice to thei r subst antial rights. T he Opielas ’ comp laint that the
Commission failed to consi d er the lease terms focuses on the anti

- pooling clause. As we have
conclude d t ha t the permit for hor izon tal drill ing und er a PSA is no t pooling under Texas law , th e
anti

- p ooling clause was not imp licated , and any refusal by the C ommission to review that c l ause

o r the lease as a whole during its review of the good f aith of Ma gnolia ’ s c laim of ri ght to o pe r ate

a nd drill did n ot prej udice t he Opielas ’ substantial rights

. The trial court erred by
conclu ding otherwise.

4. T he Commission ’ s ado ption o f rules
The t r ial co urt held that the Commission erred i n adopting rules for allocation and
PS A wells without comp l ying with the requi rements of the A PA and in appl ying those rules to
i ss ue a permit for the Well

. The t rial court did not specify whi ch rule s were errone o usly19 a dopted

. The parties narrowed the field somewhat in their briefing , 9 then n arrowed the list
fu rther at oral argume nt to focus on rules not adopt ed through the APA, including forms

. 10 T he Opie las al so complain of the adoption of th e standard that an o perato r can obtain a permit for a PSA well by getting 65% of the intere st holder s to sign the PSA

.

9 In their briefing, the Op ielas dis cussed Ru le s 5 , 26, 40, 80, and 86. See 16 Tex. Admi n. Code § § 3.5, .26, .40, .80 .86

. T he re is n o dispu te that a ny relevant version o f these rules was ad opted and a m ended pu rsuant to APA proce dures and , more critically, tha t the two

- year period for chall engi n g the r ulemaking process has p assed. See Tex. Gov ’ t Code § 2001.035(b). To th e ext ent that the tri al court ’ s judgment addressed noncompliance with A PA r ul emakin g pr oc ed ures in the adoption of Rules 5, 26, 40, 80, and 86, it exceeded the sco pe of th i s per mit com plaint and was erroneou s.

10 T he Opielas contend that , although Rul e 80 was amend ed under the A P A , fo rm s adopted under its provisions are void becau se the Commi ss ion uses Rule 80 to amend forms without going through APA rulemaking pro cedures

. See Tex. Go v ’ t Code § 2001.035(a) ( rule is
v oidable unless agency adopts it in substantial complianc e wit h APA pr ocedure s )

. Amended R

ule 80 provi des: “ Not ice o f any new or a mended forms shall be issued by the Com missi on. ” 16 Te x. Admin. C ode § 3.80(a) ( effective in 2014 ( 39 Tex. Reg. 514 8 (July 7, 2014) )

. W hen adopting the amendment to R ule 80, the Commiss ion stat ed : The policy req uires the Commissi on to pr omulga te , ab ol ish or amend forms only upon the approval of a majority of Commissi oners at a public meeting. . . . Where required by Texas law to pr o mulgate, abolish, or amend a certain form through ru lemaking procedures conducted under th e Texas A dmi nistr ative Pr oced ur e Act, the Commission will continue to do so. Otherwise, the Commi ssion will consider staff ’ s recommended form revi sions in an open m eeting. Staff will place the proposed form revisions on the Commission ’ s website for publi c review and comm ent fo r a pe ri od of time proportionate to the subject and degree of chan ge.
39 T ex. R eg. 5148. Appellants contend that the Commi ssion ’ s adoption o f forms under the Rule 80(a) process substantially co mplies w ith the APA pro cedure s. A n am icus argu es , howe ver, t hat th e amended Rule 80(a ) is void because it purports to ame nd the APA it self b y modif ying rulemakin g pr ocesses for forms a nd , a mong other ar guments, that for ms purporting to amend or replace a f orm cre ated under APA rulema king are void because t he defini tion o f rule “ includes the amendment or rep eal of a prior ru l e. ” See Tex. Gov ’ t Code § 2001.003(6)(B ). Because resolution of these issues re garding Rule 80 would not alter our resolution of the appea l, we need not addres s them.20 T he parties extensive ly argued the se rulemaking- related issues. But b ecause resolution of these issue s would not alter our resolution in the next section of the c ore issue in
this case

— whether Magnolia made a reaso nable showing of a goo d- faith claim of the right to
drill the horizontal PSA well into the T ract and w as entitled to the permit

— resolv ing them is not necessary to final disposition of the appeal. S ee Tex . R. App. P. 47.1.

5. The f inding that Magnolia made a reason abl y satisf actory show ing of a good faith cla im to oper ate the Well
Th e trial court held that th e Commission erred in finding that M agnolia showed a good- fai th claim of right to drill the We ll. A ppellants contend that the Commissi on correctly granted the p ermit because M agnolia met the 65% threshold for agreement of the min eral and working int er est holders on each tract

. The Commission ’ s fin din gs of fac t inclu d ed
th e following:

7. For a PSA, t he op erator certifies to the Commission that at least 65% of the mi neral and wo rk ing interest owner s from each tract ha ve signed an agr eement as to how proceeds will be divid ed.
8. Regarding the Person Tract, 65. 625% of the mineral inter est owners signe d eithe r a PSA, consent to pool or ratification of unit, all setting forth a meth od of dividing proce eds.

. . . . 12. A ccording to the instructions for Form P-16 A creage D e si gnation , which is a form filed when app lyin g for a dri lling perm it, the term PSA i s def ined as follows:
PSA (PRODUCTION SHARING AGREEMENT WELLBORE) : For purpos es of this document, a horizontal wellbore crossing two or more tra cts/leases and for which the operator certifies that at least 65% of th e MINERAL and WORKING interest owners f rom e ach tract within the developmental unit have signed an agreement as to ho w p roceeds will be di vided. The wellbore need not be per for ate d within each tract of the devel opmental unit.21 13. All of the written agree ments relied on by Magnolia as PSAs c o n tain an agreement as to how proceeds will be divided.
14. Magnolia has PSAs w i th at least 65% of a ll mineral interest owners and worki ng interest owners for each of the tra cts traversed by the Well.
15. The Com missi on has previously determined that wri t t en oi l and gas leases covering the tracts the well traverses are a reasonably s at isfactory showing of
a good faith clai m to operate an allocation well. It follows that writt en agreements with 65% of all mineral i nter est owners and all working interest o w ne rs f or each tract the well produces from is sufficient to get a permit to oper at e a well, in this case a PSA well.
16

. M agnolia has a good faith claim to operate the Well.
17. Complainants claim that their cont ract ual lease covering the Person Tract d o es not contain pooling authority and Complainants have not signed a PSA such tha t Magnolia does not have a right to dril l th e Well. Com plainant also claims that some of the do cuments relied on by Magnolia are not P SAs and some of the m ineral interest own e rs of the Person Tract who did sign agreements did not have authority.
18. Whil e Complainants may h ave a bona fide leas e disp ute as to whether Magnolia has a right to operate, that is insufficient to defeat Magnoli a ’ s good faith claim

. 19. While the Com p lainan ts may have a bona fide lease dispute with Magnolia, the determination of wh ether there has be en a breach and the appropriate reme dy is outside the jurisdiction of the Commission.

P FD at 16

- 17. The Commission a lso a dopted the conclusion of l aw tha t “ Resp on dent provided a
reasonabl y satisf acto ry showing of a good faith claim to o perate the Well. ” See T ex. Admin.
Cod e § 3.15 (a)( 5).
The Commission ’ s conclusion that Magnolia mad e the re quisite showing of a good

- f a ith claim plainly rests on s atisfac t i on of the 65% thr eshold of agreement to the PSA that
is not found in the Texas A dm inistrative Code

. If, as the Opielas contend, the 65% threshold is

an improperly adopted rul e, then the Orde r is founded on an error of law and must be reversed

.22 If

, as A p p ellant s contend , the 65% threshold as articulated by the Commission in 2008 is a

p roper ly created st andard, we conclude that the Order i s not supported by substantial ev idence.
The Commission did not in its O rder , including the find i ngs and con clusions, cite a

sou rce for the origin of the 65% threshold to demonstrate a good

- f aith cl ai m to operate the W ell
and en titlement to a permit to o perate the Well

. 11 In their briefing , the parties trace the
formalization of that authority to the 2008 minute e ntry in wh ich two of the three C ommissioners approved a permit while “ directing staff th at wells that ar e pe rmitted based on a p roduction sharin g agreement should b e approved when the usual criteria are met and the operator certifies that at
l east 65% of the work i n g and royalty interest owners in each componen t tract have signed the productio n sharing agreement

. ” 12 (Emp hasis added. ) The Commissio n ’ s 2008 pron ouncement
did not assert that multiple different PSAs could be signed or that other documents could be the equiva lent of a PS A for purposes of reaching the 65% thresho ld. Here, t he Commi ss ion found that Mag nolia rep resented th at at least 65% of min eral interest owners ha d signed “ an agree ment as to how proce eds will be divid ed , ” which on the Tract included “ e i ther a PSA, consent to pool , or ratification of unit

. ” The evidence shows that on ly 15.625% of the interest owners on t h e Tract signed a PSA ; the remaining nea rly 5 0% signed some other document. S ubstantial evidence does not support a finding that 65% o f the i nt erest owners “ s igned the production sharing agreement

. ”

11 As discusse d b elow i n grea te r de pth, t he definition cited in Finding 12 tracks the inst ruction s to For m P

- 16 as revised i n Feb r uary 2019 and finalized in June 2019

— after the application, permit, complaint , and hearing in th is case. See PFD at 5 n.7 , 1 6.

12 Texas R. R. Comm ’ n, For ma l Comm ’ n Actions, Hearings Div., p. 3, Statu s #665639 (Sept. 9, 20 08) (av ailab le at https://web.archive.org/web /20161222204413/https://ww w.rrc .texas .gov/m ed ia/9027/090908.pd f )

.23 Recogn izing th at a PSA and other documents could be functional equiv alents , we

w ill examine further. The Commission ’ s Findings 7 and 15 descr ibe a broader sc ope of
agreement s as demonstr a t ing t hat a PSA exists to inclu de “ an agreem ent ” or a “ written
agreement. ” T he Co mmission found t ha t 65.6 25% of the int erest owners had signed “ writ ten agreements ” with Magnolia, including consent s to pool. A n exhibit in the administr a tive record
detail s that , of the in t erest owners on the Tract, 15

. 625% signed a P SA, 0 .563% sig ned a ratification of de signation of unit , a nd 49.437% signe d a consent to pool

. But the Commission does not require poo ling to permit a PSA well and, as we have concluded , PSAs a re not the same

as pooling because the property interests involved and product io n divisions are not the same

. Consequen tly, even w hile granti ng due deference to the Commission ’ s e xpertise in regulating this complex ind ustry, see SWEPI L.P. , 103 S.W.3d at 587 , w e are not persuaded that signing a consent to pool c an substitute for sign i n g a PSA absent a g ood

- fa ith showing th at the consent s to pool and
the PSA call for t he same sharing of produc tion fo r the horizontal well ac ross tracts that are not pooled. Magnolia did not certify and th e Commission did not make s uch a fin ding i n this re cord , nor is ther e any indication in the application that pooling of the three tracts occurred

. 13 Even if we

13 E xamining the terms of the agreemen ts c ould expand the scop e of the Commission ’ s inquiry in to reviewing the parties ’ agreements and , the refore , could exceed the normal scope of inquiry in which the Commission eng ages at th e perm it ting stage. Indeed, Clark testif ie d tha t he does not “ think that t he Co m mi s sion ever sees a sharing agreement or a pooling unless it ’ s represented to be a poole d u nit. ” We not e , however, that the conse nts to pool for persons listed as ow ners of th e Tract do not all ca ll for the same divisi on of p roduction as the PS As

. For example, the co nsent t o pool signed by William J. O ’ Brien III states : The production on which Ow ners ’ [] royalty is calculated shall be that proportion of the total unit p ro ductio n which the net acrea ge of the Property inc luded in the unit bears to the total surface acrea ge in th e unit , but only to the extent such proportion of unit production is so ld by Lessee

. By contrast, a PSA signed for Peggy Person st ates :24 consider the 65% threshold from the Commission ’ s 2008 directive a proper ly a dopted rule or decisional pre cedent, the record does not con tain substa n tial evidence t h at Magnolia satisfie d that rule by c ertifying tha t 65% of the i nterest owners have signed the PSA , undermining Fin ding 14

. 14

T he Commission ’ s Fin ding 12 quotes the definition of a PSA from Form P

- 16 as allowing pro of of a P S A to include c ert ification th at 65% of interest o wners have signe d “ an
agreeme nt a s to how p roceeds will be divided

. ” But this quotation tracks the 2019 ins tructions for
Form P

- 16 , wh il e the permit con tested here was granted based on ap plication s filed in May and Aug ust 2018

— applicat ion s that predate us e of th e de finit ion of PSA in the F orm P

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

- 16 as revised in June 2019

. 15 The hearing

The prop orti onate sha re of production a llocated to each Shari ng We ll Prope rty will be c alculated by a fraction whi ch ha s as it s de n ominator the Completed Lateral Leng th of the Sharing Well a nd which has a s it s numerator the di s ta n ce (in feet) that the Completed La tera l Leng th lies within the Sh aring Well Property.

14 As noted above, if the 6 5% threshold is not a p roper ly a dopted rule, the Commission ’ s Order would fail to satisfy the s ubstanti al

- evidence standard because the Order would be founded on an error of la w and arbit rar y
. See Tex. Gov ’ t Code § 2001.174 (2).

15 Th is definition appears in the inst ructions fo r the 201 9 version of Form P

- 16

. See PFD at 4 n.5 ; see also See Texas R.R. Co mm ’ n 2019 Form P

- 16 Instr uctions ( av ailable at https://static1.squarespace. com/static/60a1390c3f872 04 622d78356/ t/60a4 4ce65 9676b7 00c0e4 0b 3/1621380326686/p

- 1 6

- instructions

- dr illin g - perm its.pdf ); 2019 Form P

- 16 (available at https:// static 1.squ arespace.com/static/60a1390c3f87204622d78356/t/60a 44cc8 c37bb e 66f9284b6 d/1621380296941/p

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

. In Mag nolia ’ s reply i n sup po rt of its mo tion to d i smiss the Opiela s ’ com plaint a bout the permit, filed December 7 , 2018, Magnolia states that Form P

- 16 was “ last revised January 2016. ” N ei t her t he 2016 version of F orm P

- 16 n or its instructions defined a P SA well. See Texas R. R. Co m m ’ n 2 016 For m P

- 16 fo r Acreage Designation ( available at https://web.archive.org/w eb/20160804030249/http://www.rrc.texas.gov/media/31924/p

- 16p

final.p df ) ; s ee also Texas R.R. Comm ’ n 2016 Form P

- 16 I nst ructions ( available at htt ps ://web.archive.org/w eb/201 60804030249/ http://ww w.rrc.texas.gov/media/3 1920/p

- 16

- instructions

- fin al.pdf ).25 on the complaint about the pe rmit concluded in January 2019. Even a ssuming th at the 2019
revisions to th e instructions f o r Form P

- 16 were p roperl y adopted , they do not control revi ew of
the application and permit a t issue here. Regardless of whether the 2016 versio n of Form P

- 1 6 was properly adopted, n either th at form no r the instruction s used to complete t he applications he re containe d the expand ed definition of the agreements tha t would meet the 65% threshold.
S ubstantial evidence does not sup p or t a finding or conclusion that Magnolia showed a good

- fa ith claim to opera te a PSA well ba s ed on a certificat io n that at lea st 65% of the wo rking an d ro ya lty
interest owners in each componen t tract have signed the PSA as required b y the 2008 Comm ission
directive. The tri al court did not err by fin ding the Commission erred by co ncludin g otherwis e.

6. Allocation well alternative Mag nolia invite s us i n the al tern ative to render judgment gr anting the permit as an

a ll ocation well. Though witness Clar k opined at the hearing that Magnolia would have been
entitled to an allocation

- well permit, w e do no t find reverting to the previously ob tained an d

c hallen ged pe rm it and rendering judgm ent that the allocation

- well permit be issued to be among the disposit ions availabl e because the Order before us does not pertain to an allocation well

per mit

. Se e Tex. G ov ’ t Code § 2001. 174

. In the alterna tive, Mag nol ia req uests th at we remand

Without determining whether the forms and instructions are ru les, we not e that a substantive rule will be applied only prospectively unless it appears by fair implication from the language used th at it was the intent of t he legislature (or agency) to make it applicable to both past and future transactions

. Pantera Energy Co. v . R ailroad Comm ’ n , 150 S.W.3d 466, 473

– 74 (Te x. App.

— Austin 2004 , no pet. )

. B ecause the p ermit at iss ue in th is case was g ranted and t he Opiel as ’ c omplaint about it denied based on an application completed in 2018 , the 2 0 19 re visions of the forms and their status as a ny sort of rule do not control o ur review of the Co mmissi on ’ s 2 01 9 decision and we ne ed n ot consider whether t he 2019 (or later) r ev isi ons to Form P

- 16 and related instructions are imp roperly adopted ru les

. See Te x. R. App. P. 47.1

.26 to the Co mmission to consider whether the Well may be permitted as an a llocatio n well. We will
remand for further proceedings , the content and nature of which will be det ermined b y the parties , th e C ommissio n , and th e relevan t l aw and rules

.

CONCLUSI ON
We reverse the parts of the trial court ’ s judgment in which it determined (1) tha t

t he Commission erred in concluding it has n o auth o rity to revie w whether an applica nt se ekin g a

we ll permit has aut hor ity under a lease or other re lev a nt title d ocuments to dri ll the Well , and (2) that t he C ommission erred in failing to consider the pool ing clause of the lease covered by
the Well i n dec i d ing tha t Magn olia has a good

- f ait h claim t o oper ate the W ell. We af firm the parts of the tria l c ourt ’ s judgm en t in which it determin ed tha t t he Commission erred in finding that Magnolia showed a good

- fai th claim of right to drill the Well and that th is cause should
be remanded.
We revers e the Commiss ion ’ s Order and r ema nd th is ca u se to the Commi ssi on for
furth er proceedings.

_ _

___ ___________ __________________ _

____ ___ D arlen e Byrne , Ch ief J ustice

Bef ore Chief Just ice Byrne, J ust ices Kelly and S mi th Dissenting Opini on by Justice Kelly
Affirmed in P art , Reversed in Part and Remand ed
Filed: June 30 , 2023