Case Name: ATLANTIC REFINING COMPANY et al., Appellants, v. RAILROAD COMMISSION OF TEXAS et al., Appellees
Court: Supreme Court of Texas
Jurisdiction: Texas
Decision Date: 1961-03-08
Citations: 346 S.W.2d 801
Docket Number: No. A-7355
Parties: ATLANTIC REFINING COMPANY et al., Appellants, v. RAILROAD COMMISSION OF TEXAS et al., Appellees.
Judges: GRIFFIN, J., dissenting.
Reporter: South Western Reporter Second Series
Volume: 346
Pages: 801–823

Head Matter:
ATLANTIC REFINING COMPANY et al., Appellants, v. RAILROAD COMMISSION OF TEXAS et al., Appellees.
No. A-7355.
Supreme Court of Texas.
March 8, 1961.
Rehearing Denied May 31, 1961.
Black & Stayton, Small, Small & Craig, Austin, Houchins, Anderson, Smith & Null, Victoria, for appellant.
Will Wilson, Atty. Gen., Houghton Brownlee, Jr., Linward Shivers, Assts., for appellee, Railroad Commission of Texas.
Wallace H. Scott, Jr., & Charles E. Cren-shaw, Hart & Hart, Austin, Strasburger, Price, Kelton, Miller & Martin, Dallas, (Robert B. Payne, Dallas, with firm), for appellee, Bright & Schiff.
Walter R. Koch, Austin, for intervenors, Darsey, Darsey & Koch.

Opinion:
HAMILTON, Justice.
This suit was brought in the 98th District Court of Travis County by The Atlantic Refining Company, Tidewater Oil Company, Mrs. James R. Dougherty, a widow, Dudley T. Dougherty, Rachael D. Vaughan and husband, Ben F. Vaughan, Jr., and May D. Carr, a widow, hereinafter collectively referred to as appellants, to annul an order of the Railroad Commission of Texas, hereinafter called the Commission, prorating gas and condensate production from the Slick, Luling and First Massive pay zones among wells in the Normanna Gas Field, Bee County. On December 16, 1957, field rules were enacted for the Slick, Luling and Second Massive pay zones in the Normanna Field. At a second hearing on February 26, 1958, field rules were adopted for the First Massive pay zone in said field. Atlantic at both of these hearings protested the adoption of the Yz-Yz rule, and introduced the same evidence at both hearings, except at the first hearing the First Massive was not shown to be productive. Said field rules included a proration formula for production in said field on the basis of Yz per well and Yz according to the amount of acreage. Specific complaint was made of such order in so far as it allows the production of gas, including the liquid content thereof, or the condensate, from a well drilled by Bright & Schiff, a partnership, hereinafter called appellee, on a lot in the Normanna Town-site 79 feet wide and 130 feet long. Although this tract contains something less than ¾0 of an acre, it will be referred to hereinafter as the ,3-acre tract, or the "Town Lot". W. G. Darsey, Jr., Joe T. Darsey and Walter R. Koch intervened in this suit and assumed the status of defendants.
Trial was to the court without a jury. Subsequent to judgment being entered for appellees, the following finding of fact was filed:
"Production of gas and condensate from the well drilled by defendant Bright & Schiff upon its lease containing approximately .3 acre under the rules of defendant Railroad Commission of Texas prorating the production of gas from the reservoirs in the Nor-manna .Field, Bee County, Texas, will result in the drainage of a tremendous quantity of gas and condensate from other leases and tracts in the field, including leases and tracts in which plaintiffs own an interest, to said .3 acre lease, the precise amount of said drainage being incapable of ascertainment; and said drainage will not be compensated by drainage of gas and condensate from said lease containing approximately .3 acre to said other leases and tracts in the field, including leases and tracts in which plaintiffs own an interest."
Among the conclusions of law filed by the court is the following:
"2. Under the rule of unlimited right of capture laid down in Ryan Consolidated Petroleum Corp. v. Pickens [155 Tex. 221], 285 S.W.2d 201, the orders of defendant Railroad Commission of Texas complained of by plaintiffs are not invalid, even though production of gas and condensate under said orders will result in the uncompensated drainage of a tremendous quantity of gas and condensate from other leases and tracts in the Normanna Field, including leases and tracts in which plaintiffs own an interest, to the .3 acre lease upon which defendant Bright & Schiff has drilled its well."
A direct appeal from the adverse judgment holding the Commission's order valid and denying the plaintiffs the injunctive relief prayed for was brought to this court under Article 1738a, V.A.C.S., and Rule 499-a, Texas Rules of Civil Procedure. We hold that the order complained of is invalid.
In establishing the spacing pattern for the Normanna Field, it was determined that one gas well could reasonably drain 320 acres, and the Railroad Commission established a 320-acre spacing pattern in accordance with that determination. This spacing pattern is not at issue in this action.
Appellee Bright & Schiff applied for a permit to drill a well on its ,3-acre tract under exception to Rule 37 on the ground that it was necessary to prevent confiscation of the oil and gas in and under its tract of land. On that ground the Railroad Commission granted the permit. There was expert testimony presented by appellant to the effect that a reasonable estimate of the value of gas in place under said tract was $7,000, and that if appellee Bright & Schiff is allowed to produce a well under this order some two and one-half million dollars' worth of gas will be produced in twenty years, the estimated life of the field. Such evidence further showed that this order will allow said well to produce at a rate of over 200 times as much gas per acre as a well on the 320-acre unit would produce.
The ½-¾ formula means that Ys of the total field allowable must be divided equally among all the wells in the field and that ⅜ of the total field allowable will be divided among all the wells on a per acreage basis. Under this formula a well on a ,3-acre tract would be allowed to produce many times more gas per acre than would a well on a 320-acre tract be allowed to produce. The Railroad Commission introduced no evidence at the trial. Appellee Bright & Schiff used two expert witnesses. The substance of their testimony was that there were not enough known facts available on which to base an estimate of the total field reserves in the Slick, Luling and First Massive sands, the three pay zones in the Normanna Field which are here involved, and the reserves under the Bright & Schiff tract. Both of appellants' expert witnesses and both of Bright & Schiff's expert witnesses testified that the extent of the field to the south had not been determined, and based partly upon this fact appellee's witnesses said that the total field reserves could not be determined. Appellants' witnesses from the known facts estimated what in their opinion would be the extent of the field, and based on their estimate of the size of the field determined the total field reserves, using the volumetric method. This is a complicated formula which takes into consideration various factors such as porosity, con-nate water, pressure, condensate within the given volume of gas samples, abandonment pressure, productive acre feet, etc. Appel-lee's witnesses testified that there were not enough wells drilled and the wells had not produced long enough to furnish the information for this system to be accurate. They contend that too many assumptions had to be made to fill in for the unknown factors. For instance, appellants' witnesses estimated reserves under the Bright & Schiff town lot by assuming that a well on that tract would be an average well. There was no testimony at the trial as to what kind of well Bright & Schiff made on their tract. The well had not been drilled at the time of the Railroad Commission hearings, but it had been drilled at the time of the trial, and appellee did not choose to introduce any evidence as to whether said well was as good as an average well in the field. Appellee's witnesses do not say that the calculations made by appellants' witnesses of a $7,000 value of gas in place under the Bright & Schiff town lot are incorrect, but say that from the evidence introduced at the trial an estimate of such reserves could not be made. They do not say that the estimate of $2,500,000 value of the gas which will be produced by Bright & Schiff under the ½-¾ formula in twenty years is incorrect, but that it is not sufficient data upon which to base such estimate. Appellee's witnesses made no estimate whatsoever of the field reserves and made no estimate of reserves in place under the town lot well. There was no evidence introduced which would show that the town lot had any more gas per acre under it than was on the average under the other tracts in the reservoir. It appears from the record that whether the estimate of the field reserves made by appellants' witnesses was over estimated or under estimated, that there is not the slightest doubt but what there would be enormous drainage from the other tracts in the field, including those of appellants, to the Bright & Schiff tract under the ½-⅜ proration formula.
The statute which gives the Railroad Commission authority to regulate gas fields is Article 6008, V.A.C.S. The following is the substance of the sections of said act which are here pertinent:
Section 1 of said article states that the purpose of the act is to protect public and private interests against certain evils by prohibiting waste and compelling ratable production.
Section 10 enjoins the Commission to so regulate production as to prevent waste and adjust correlative rights.
Section 11 provides that the Commission shall exercise its authority to prevent waste when the presence of waste or imminence of waste is found, and shall exercise its authority to adjust correlative rights when the market demand for gas is exceeded by the capacity of the wells to produce gas from any reservoir.
Section 12 provides that when the Commission has determined that conditions in a gas reservoir exist which give it authority to regulate, then it shall proceed to regulate and prorate the gas production in such reservoir on a reasonable basis, and that the allowable allocated to each well shall be such as to give each well its fair share of the gas to be produced from such reservoir.
Section 13 provides that the Commission shall, in determining the allowable produc tion for each well, take into consideration the size of the tract on which the well is located and the daily producing capacity of the well and "all other factors which are pertinent."
Section 15 provides that nothing contained in the article shall require the Commission to fix the allowable for any well below 50,000 feet per day, provided said well has a producing capacity of 200,000 feet or more, and not less than 25% of its open natural flow when it is less than 200,-000 feet per day.
Section 22 provides that the Commission shall have broad powers to effectuate the provisions and purposes of the act.
Appellants maintain that the proration rule adopted by the Railroad Commission, viewed in the light of the substantial evidence rule, is unreasonable, arbitrary and confiscatory, and does not allow appellants to produce their fair share of the gas from the reservoir, and for this reason the order should be declared invalid and that its enforcement should be enjoined. Appellee contends in effect that the Railroad Commission can take into account what a .3-acre tract could have produced under the rule of capture before conservation laws restricted drilling and production in fixing a proration formula, and even though such formula results in an enormous drainage from the larger tracts to the small tract, the order is valid.
Appellants, in support of their contention that the Commission, in adjusting correlative rights in a gas field which it has undertaken to regulate, is required to so prorate as to prevent substantial drainage from one tract to another, cite the case of Corzelius v. Harrell, Tex.Civ.App., 179 S.W.2d 419, in which the Supreme Court granted writ of error, but dismissed it as moot, 143 Tex. 509, 186 S.W.2d 961. In that case Harrell owned about 94.8 per cent of the gas reserves in the Bammell Field, and Corzelius owned about 4.1 per cent thereof. Harrell was cycling gas, that is, was producing about 35 million cubic feet of gas per day from his leases, was extracting the liquid content therefrom, and was injecting the remaining dry gas, about 33 million cubic feet, into the reservoir from which it had been produced. As the result of this cycling operation Harrell was drying up the wet gas reserves beneath the lease owned by Corzelius. Corzelius, on the other hand, was producing between four and five million cubic feet of gas per day from his lease, and was transporting this gas to an industrial fuel market in the City of Houston. Harrell had requested the Commission to prorate production of gas as required by Article 6008, V.A.C.S. The court held that the Commission was under the duty of fairly prorating gas production as between Harrell and Corzelius, not only the gas in the reservoir, but the liquid content thereof. In discussing this situation the court said [179 S.W.2d 425]:
"The record shows that Corzelius is producing by volume in excess of his fair share of the total net volume allowable from the field, and to that extent is creating a local net drainage, by volume, from Harrell's holdings. Harrell, on the other hand, though withdrawing by net volume only 2 MMCF. daily, is processing 35 MMCF, extracting therefrom the valuable liquids, and is already reducing (draining) the liquid content of the gas from Corzelius's holdings. Corzelius is entitled to produce his fair share of the recoverable liquids, as well as his fair share of the volume of recoverable gas. Thus each is draining from the other's holdings, though of different elements of the total gas content."
The court goes on to hold that it was the duty of the Railroad Commission to prorate production from the reservoir in question so that Corzelius' operations would not drain from Harrell's holdings, and that Harrell's operations would not drain from Corzelius' holdings. In support of its holding in the Corzelius case the court cited and quoted extensively from Henderson v. Terrell, D.C., 24 F.Supp. 147, 153. That case involved an order of the Railroad Commission of Texas prorating the production of sour gas for carbon black in the West Panhandle Field and involved the construction of Article 6008a, V.A.C.S., which directed, the Commission to so allocate production between wells as to prevent cognizable and preventable drainage of gas from tracts of land in sour gas producing areas. However, the court in the Harrell case construed that opinion as being applicable to the situation here, where the Commission is required by said Article 6008 to allocate production between the wells so as to allocate to each well its fair share of gas from the reservoir. The court quoted with approval the following from the opinion in Henderson v. Terrell:
"We think the statute is simply and clearly phrased to give effect to a public policy, and to exercise the police power in respect to matters which the courts of Texas and of the United States uniformly hold it is the right of the state by statute, to control. This right extends to preventing one person from unduly draining from under the lands of another, oil and gas lying in a common pool equally when the undue drainage is for wasteful uses, and when the rule of capture no longer applying, because of lawful statutory limitation, one of the owners, by drawing more than his due proportion of the limited share, is draining the lands of his co-owners.
"We find nothing unreasonable in the statute, nothing unreasonable in the orders. For all that the statute does, all that the orders do, is to make limitation and proration effective by putting an end to an existing unreasonable drainage condition, and preventing its continuance in the future. Neither the statute nor the order operates retrospectively, either punitively or repar-atively; both operate prospectively. So operating, they merely say to plaintiffs 'you may produce from your wells of the total amount limited in a due proportion with every other well in the field. You may not produce more'."
After this quotation the Court of Civil Appeals said in the Corzelius case: "The decision in that case (Henderson v. Terrell) rests, in our opinion, upon sound and well-established legal doctrine which controls the issues in the instant case." [179 S.W.2d 425]
While the Supreme Court granted a writ of error in the Corzelius case and dismissed it as moot in 186 S.W.2d 961, the opinion of the Supreme Court did not in any way disturb the holding of the Court of Civil Appeals. It appears that at the time the Supreme Court passed on the matter a new and different order had been entered by the Railroad Commission and the order passed on by the Court of Civil Appeals was not then in effect. However, the Supreme Court, in Corzelius v. Harrell, 143 Tex. 509, 186 S.W.2d 961, at page 968, did have this to say:
" 'To adjust correlative rights' the Commission is authorized by this law to consider many items that relate to the production of gas, and it further provides that the Commission shall consider 'all other factors which are pertinent.' The courts have frequently srts-tained the exception to Rule 37 'to prevent confiscation of property', (originally 'to protect vested rights'). The criterion fixed by the Legislature relating to the adjustment of correlative rights is as definite as that fixed by law to authorize the Commission 'to prevent confiscation of property' under Rule 37. Trapp v. Atlantic Refining Co, Tex.Civ.App, 169 S.W.2d 797; Nash v. Shell Petroleum Corporation, Tex.Civ.App, 120 S.W.2d 522; Atlantic Oil Production Co. v. Railroad Commission, Tex.Civ.App, 85 S.W.2d 655; Gulf Land Co. v. Atlantic Re fining Co., 134 Tex. 59, 131 S.W.2d 73."
Appellants also cite the case of Marrs v. Railroad Commission, 142 Tex. 293, 177 S.W.2d 941, 948, by this court. This was an oil proration case, but it involved the question of drainage such as we now have before us. The case was concerned with a proration order affecting the McElroy and Church Fields in Crane and Upton Counties, in Texas. The Church Field, which was initially considered to be separate from the McElroy Field, was densely drilled on a 10-acre pattern and was substantially depleted at the time proration became effective, only 15% of its original recoverable reserves remaining. The Inside McElroy, which was later discovered and was being drilled and developed on a spacing pattern of 17.8 acres, was revealed as connecting up the McElroy and Church Fields. At the time proration went into effect 80% of the recoverable reserves of the Inside McElroy Field remained in the ground. Prior to the effective date of proration, and to protect the Inside McElroy from drainage to wells in the Church Field area, the Gulf Oil Company drilled a tier of wells along its southern boundary which it permitted to flow at full capacity. However, under the restricted allowables established by the Commission this was no longer possible, and Gulf and Marrs asked the Commission to annul the proration order, which allowed the Church Field to produce almost as much as the McElroy, on the ground that the oil in place under their leases was being confiscated through uncompensated drainage to the Church Field. In setting aside the order, the court said:
"Under the settled law of this State oil and gas form a part and parcel of the land wherein they tarry and belong to the owner of such land or his assigns (31 Tex.Jur. 518; Texas Co. v. Daugherty, 107 Tex. 226, 176 S.W. 717, L.R.A.1917F, 989; Stephens County v. Mid-Kansas Oil & Gas Co., 113 Tex. 160, 254 S.W. 290, 29 A.L.R. 566; Lemar v. Garner, 121 Tex. 502, 50 S.W.2d 769; Hager v. Stakes, 116 Tex. 453, 294 S.W. 835); and such owner has the right to mine such minerals subject to the conservation laws of this State. Every owner or lessee is entitled to a fair chance to recover the oil or gas in or under his land, or their equivalent in kind, and any denial of such fair chance amounts to confiscation. Gulf Land Co. v. Atlantic Ref. Co., 134 Tex. 59, 131 S.W.2d 73; Railroad Commission of Texas et al. v. Gulf Production Co., 134 Tex. 122, 125, 132 S.W.2d 254.
"Under the findings of the trial court the allowables as fixed by the Railroad Commission for the two areas are entirely out of proportion to the potentials thereof. They are not in proportion to the oil under the different area?. It is very evident that petitioners are not being permitted to mine their just proportion of the oil. There is several times as much oil underlying petitioners' land as there is under the land in the Church-Fields area, yet those in the Church-Fields area are being permitted to mine nearly as much oil as are petitioners. As the oil is taken from the depleted Church-Fields area it is replaced by oil drained from petitioners' property. If petitioners were free to fend for themselves they could mine the oil under their land and thus prevent its escape to the adjoining area. But the orders of the Railroad Commission here complained of prevent petitioners from so doing. As a result, petitioners are being forever deprived of their property. It is the taking of one man's property and the giving it to another."
Appellants also cite Brown v. Humble Oil & Refining Company, 126 Tex. 296, 83 S.W.2d 935, 944, 99 A.L.R. 1107, which is a case involving the construction of Rule 37 and the exceptions thereto. In an exhaustive opinion holding invalid the Com mission's order in granting a permit under exception to Rule 37 the court said:
"Conditions may arise where it would be proper, right, and just to grant exceptions to the rule so as to permit wells to be drilled on smaller tracts than prescribed therein. Also, conditions may arise where it would be proper, right, and just to permit tracts to be subdivided and such subdivisions drilled after the adoption of the rule; but in all such instances it is the duty of the commission to adjust the allowable, based upon the potential production, so as to give to the owner of such smaller tract only his just proportion of the oil and gas. By this method each person will be entitled to recover a quantity of oil and gas substantially equivalent in amount to the recoverable oil and gas under his land.
"The commission, in order to prevent waste, has the power to limit the rate of flow in the same way that it has the power to regulate spacing. See Champlin Refining Co. v. Corporation Commission, 286 U.S. 210, 52 S.Ct. 559, 76 L.Ed. 1062, 86 A.L.R. 403; Danciger Oil & Refining Co. v. Railroad Commission (Tex.Civ.App.) 49 S.W.(2d) 837. This right to control the rate of flow in order to prevent waste also enables the commission to offset the advantage obtained by one who is given an exception to the spacing rule by limiting his allowable production to the extent necessary to overcome this advantage. In this way the commission, by controlling the oil stored in the common reservoir, is enabled to carry out the dominant purpose of preventing waste, and, at the same time, permit each owner to enjoy the opportunity fully to realize upon his estate by developing and recovering his oil and gas. "
In the case of Railroad Commission of Texas et al. v. Gulf Production Company, 134 Tex. 122, 132 S.W.2d 254, 255, the question involved was the validity of a Railroad Commission order granting a permit under exception to Rule 37 which had been granted "to prevent the confiscation of property." The application was for a third well on a 4.77-acre tract. In holding that the order was invalid, this court said:
"In the Gulf Land Company case, supra, [Gulf Land Company v. Atlantic Refining Company, 134 Tex. 59, 131 S.W.2d 73] we held that the term 'confiscation,' as used in Rule 37, refers principally to drainage. We also held that every owner or lessee is entitled to a fair chance to recover the oil or gas in or under his land, or their equivalents in kind, and that any denial of such fair chance would be confiscation. We still adhere to such holdings. We think it would follow from the above rule that when an owner or a lessee has been given a fair chance to recover his oil and gas, as above defined, he has received his legal rights in regard thereto. We think the opinion of the Court of Civil Appeals demonstrates that the facts of this record show, as a matter of law, that the two wells Tippett already has on this tract of land will protect him against confiscation, — that is, will insure him a fair chance to recover the oil and gas in and under his land, or their equivalents in kind. We think the opinion of the Court of Civil Appeals further demonstrates that the facts of this record show, as a matter of law, that a third well on this tract would enable Tippett to recover more than his fair share of the oil and gas in or under his land, or their equivalents in kind. Under such a record, the granting of this permit to prevent confiscation was an abuse of power on the part of the commission, and therefore unlawful."
In Magnolia Petroleum Co. v. Railroad Commission, Tex.Civ.App., 93 S.W.2d 587, 588, writ refused, the court in considering Magnolia's right to drill an eleventh well on its tract said:
"The right of each individual leaseholder extends no further than the opportunity to extract his fair share of the oil, measured by a reasonable approximation of the amount of oil in place under his leasehold."
In Atlantic Oil Production Co. v. Railroad Commission, Tex.Civ.App., 85 S.W.2d 655, 657, writ dismissed, the court in considering the right of the operator to drill a third well on his tract said:
"Appellee is entitled, and entitled only, to be accorded an equal opportunity with surrounding lessees to recover his fair share of the recoverable oil; or, stated differently, to recover the approximate amount of oil lying in place under his lease."
In addition to the case of Ryan Consolidated Petroleum Corporation v. Pickens, 155 Tex. 221, 285 S.W.2d 201, cited by the trial court in support of its judgment, the appellees rely principally upon the Hawkins Field case, Railroad Commission v. Humble Oil & Refining Co., Tex.Civ.App., 193 S.W.2d 824, writ refused, n. r. e., and the Yates Field case, Standard Oil Co. v. Railroad Commission, Tex.Civ.App., 215 S.W.2d 633, writ refused, n. r. e. The Ryan case was not a proration case. It was a contest between Ryan on the one hand and Pickens and Coffield on the other over the production from four lots in the Hawkins Town-site. These lots originally constituted a tract under single ownership, and were subdivided after Rule 37 became effective. Pickens acquired a lease on Lots 10 and 11 and Ryan on Lots 12 and 13. Both applied to the Commission for permits to drill on the four lots. The application of Pickens was granted and that of Ryan was denied. After considerable litigation over the validity of the permits Pickens' permit was upheld in court, and he drilled his well upon Lots 10 and 11. Ryan filed suit for equitable relief, alleging confiscation of the oil and gas under Lots 12 and 13 by Pickens and Coffield. The only issue presented in the court was that of "who was entitled to the production from the Pickens well". The court said [155 Tex. 221, 285 S.W.2d 207]:
"Petitioner's contention that this case is one for equitable relief should not be sustained for the further reason that its position is inconsistent with the law of capture, which is a well-settled rule of property in this jurisdiction. The rule of capture is simply this — that the owner of a tract of land acquires title to the oil and gas which he produces from wells drilled thereon, though part of such oil or gas may have migrated from adjoining land. The Railroad Commission is without power from the Legislature or by decisions of this Court to do anything more than declare illegal the drilling of wells which are prohibited by Rule 37. The Railroad Commission cannot change the law of Texas. The Legislature of this State has heretofore conferred broad, extensive and exclusive regulatory powers upon the Railroad Commission of Texas in the regulation of the oil industry of this State, but the Commission has not been given the power to determine property rights as between litigants. The courts, whether sitting as court of law or equity, determine such matters in accordance with existing laws in Texas."
As can be determined from this language, the court defined "the rule of capture" in clear and unmistakable terms, and as defined "the rule of capture" is simply this: the owner of a tract of land acquires title to the oil which he produces from wells thereon, although part of such oil or gas may have migrated from the adjoining land. The permit to drill was granted for the four lots. Whichever one got the permit and drilled the well was entitled to all the oil produced. The court refused to recognize the voluntary subdivision of the lots after Rule 37. The court in its definition clearly followed the law as declared by the Commission of Appeals in Japhet v. McRae, 276 S.W. 669, 672, in which the court said:
"It .seems to us that the only safe rule, and the only one free from much confusion, is one which gives the oil to the man who owns the land upon which the well is located."
The effect of the holding in this case was that Pickens and Coffield, having been granted the well permit for the four lots, could legally produce the oil under the four lots, and under "the rule of capture" as defined above they owned all of the oil produced from the well. Except for the voluntary segregation of Lots 10 and 11 from Lots 12 and 13 after Rule 37, Pickens arid Coffield would not have had the exclusive right to produce the oil from under all four lots. Prior to Rule 37 Ryan could have drilled a well and produced oil from under Lots 12 and 13. It was the application of Rule 37 which gave Pickens and Coffield the right to produce such oil and not the rule of capture. It was, however, the rule of capture which prevented Ryan from collecting damages from Pickens and Coffield for the oil drained from beneath Ryan's lots.
In the' case presently before the court The Atlantic Refining Company et al. are not seeking to collect damages from Bright & Schiff for gas drained from beneath their lease, but are seeking to have an order of the Railroad Commission declared invalid, the enforcement of which they allege will necessarily result in the drainage of gas from their leases to the Bright & Schiff lease. If we should hold valid the Railroad Commission order, of which The Atlantic Refining Company et al. herein complain, The Atlantic Refining Company et al. would have no recourse for damages against Bright & Schiff regardless of the alleged drainage. The rule of capture as defined in Ryan Consolidated Petroleum Co. v. Pickens and Coffield et al. would prevent such relief. The gas produced by Bright & Schiff,would belong to them regardless of the fact that 199/200 of the gas produced may have come from the leases of appellants. We therefore say that the Ryan case is not authority for the trial court's conclusion of law set forth, supra, nor the holding of the court that the Railroad Commission order is valid.
As we construe the opinion in the Humble case, 193 S.W.2d 824, the court held in that case that the Commission could, in fixing well allowables, take into consideration certain factors such as the cost of production to the owner of a small tract and the savings realized by owners of large tracts who would not be required to drill wells to offset drainage in administering conservation laws. Further, that court said that the allowable to an owner of a small tract could not be reduced to the point where his well could not be drilled and operated at a reasonable profit. The opinion, elsewhere, however, after citing Brown v. Humble Oil & Refining Company, 126 Tex. 296, 83 S.W.2d 935, 87 S.W.2d 1069, and Corzelius v. Harrell, 143 Tex. 509, 186 S.W.2d 961, recognizes the restrictions which the conservation laws have placed upon the common law right of an owner to drill as many wells on his land as he pleases and to produce as much as he pleases. At page 832 of 193 S.W.2d the court commented:
"Any restriction upon the number of wells drilled or the amount of production therefrom is essentially an infringement upon the right of private property, and can only be upheld as a conservation measure. In the exercise of this right of curtailment it is generally recognized that the rules and regulations adopted must, as far as practical, and within reasonable limitations, afford the several property owners a fair opportunity to produce the recoverable oil underlying their lands or its equivalent."
The record in the Humble case shows that the Railroad Commission's rules had been in effect in that field for a considerable period of time without the validity of such rules having been challenged in the courts.
The Standard Oil Company case (Standard Oil Co. v. Railroad Commission, Tex.Civ.App., 215 S.W.2d 633, error refused, n. r. e.), involved oil proration in the Yates Field. The Yates Field was discovered long prior to the conservation laws and the Standard Oil Company had concurred with the rules established and agreed to by the operators in that field. After proration became effective the Railroad Commission merely adopted the rules which had already been set up with the recommendation and consent of the operators. In upholding the order of the Railroad Commission the court pointed to the fact that there were sharp conflicts in the testimony of witnesses as to the effect of the Commission's order, and that the parties had complied for a long period without protest or objection.
We are in agreement with the reasoning of the courts in the Humble and Standard Oil Company cases in holding that where producers have acquiesced in and have failed to complain of the Commission's proration orders for a long period, during which time other operators have expended vast sums in exploration and drilling operations, such producers should not be heard to complain.
In the case of Railroad Commission v. Mackhank Petroleum Co., Tex.Civ.App., 186 S.W.2d 351, cited by appellee, the court held that under the field spacing pattern the complaining party could drill additional wells and protect himself from drainage. The opinion of the Supreme Court in 144 Tex. 393, 190 S.W.2d 802 did not deal with the allocation issue.
In the Rowan and Nichols cases (Railroad Commission v. Rowan & Nichols Oil Company, 310 U.S. 573, 60 S.Ct. 1021, 84 L.Ed. 1368, and Railroad Commission v. Rowan Oil Company, 311 U.S. 570, 61 S.Ct. 343, 85 L.Ed. 358), both of which involved oil proration orders in East Texas,- and which are cited and relied on by appellee, the Supreme Court reversed the judgment of the lower courts setting the Commission orders aside. In so doing the court pointed out serious conflicts in the testimony, saying that in the face of such conflicts Federal Courts should not substitute their judgments for those of the Commission. In effect, it concluded that the validity of such orders should be left to the final decision of the courts of Texas.
After reviewing and considering the principles expressed in the cases above referred to in connection with the plain provisions of Article 6008, V.A.C.S., we feel compelled to hold, under the facts of this case, that the ⅛-⅜ proration formula promulgated by the Railroad Commission for the Normanna Field is invalid. The order allows a well on a .3-acre tract to prodúce gas at a rate many times greater per acre than a well on a 320-acre tract is allowed to produce, and we find no substantial evidence in the record justifying such a wide discrepancy in the rate of production. Viewing all the facts in the light of the substantial evidence rule, we think the ½-⅜ proration formula is an unreasonable basis upon which to prorate the gas production from this reservoir. It does not come close to compelling ratable production; neither does it afford each producer in the field an opportunity to produce his fair share of the gas from the reservoir. Appellee says that prior to the conservation laws one could drill as many wells as he pleased and produce as much gas as he pleased, and under that situation may have been able to drain as much or more gas from his neighbors as this proration order will allow it to do, and that for that reason this proration order is valid. They contend that whatever advantage a small tract would have had prior to conservation laws, it is entitled to a similar advantage under the proration laws. We do not think the principles stated in the cited cases by this court support that view.
As pertaining to the question generally before this court see: Vol. 31, Texas Law Review, pp. 113 to 122; article entitled "Oil-Well Spacing Regulations and Protection of Property Rights", by Robert E. Hardwicke; Vol. 12, Baylor Law Review, article entitled "A Century of Correlative Rights", by R. O. Kellam; Vol. 16, Texas Law Review, article entitled "Property Rights in Oil and Gas and Their Effect Upon Police Regulations", by A. W. Walker.
It has been suggested in some of the briefs that this court might set some, rule or standard by which the Commission should be guided in regulating the production of gas. This the court will not undertake to do. We recognize that the Railroad Commission alone is authorized to make the rules regulating the production of oil and gas. While such rules are subject to review by the courts, a court cannot substitute its judgment for that of the Commission. A court can only pass on the validity of a rule or order when properly presented to it for review. The responsibility rests with the Commission to devise some rule of proration which will conserve the gas in the field in question and at the same time be fair and just to all parties without depriving any of them of his property. As is provided in said Article 6008, Section 22, the Commission is given broad discretion in accomplishing the purpose of giving each party an opportunity to produce its fair share of the gas in the reservoir.
The judgment of the trial court is reversed and this cause is remanded with instructions to enter judgment declaring the proration order of the Commission invalid and granting the injunction preventing the enforcement thereof.
GRIFFIN, J., dissenting.
WALKER and STEAKLEY, JJ., not sitting.
On Motion for Rehearing
Rehearing denied.