Case Name: RAILROAD COMMISSION et al. v. SHELL OIL CO., Inc., et al.
Court: Texas Courts of Civil Appeals
Jurisdiction: Texas
Decision Date: 1941-06-25
Citations: 154 S.W.2d 507
Docket Number: No. 9125
Parties: RAILROAD COMMISSION et al. v. SHELL OIL CO., Inc., et al.
Judges: BLAIR, J., dissents.
Reporter: South Western Reporter Second Series
Volume: 154
Pages: 507–518

Head Matter:
RAILROAD COMMISSION et al. v. SHELL OIL CO., Inc., et al.
No. 9125.
Court of Civil Appeals of Texas. Austin.
June 25, 1941.
Corrective Opinion Sept. 24, 1941.
Dissenting Opinion Oct. 8, 1941.
Gerald C. Mann, Atty. Gen. and Edgar W. Cale and James P. Hart, Asst. Attys.. Gen., for appellant Railroad Commission, of Texas.
Wheeler & Wheeler, of Austin, for appellant Trem Carr.
H. E. Bell, of Houston, Powell, Rauhut & Gideon, of Austin, Joe T. Dickerson, of Tulsa, Okl., R. H. Whilden, of Houston,, and Greenwood, Moody & Robertson, of Austin, for appellees.

Opinion:
BAUGH, Justice.
This is a Rule 37 case. The well involved was drilled under a permit granted on October 1, 1937, to prevent confiscation of property. On appeal to this court this permit was set aside as invalid. See Richey v. Shell Pet. Corp., Tex.Civ.App., 128 S.W.2d 898. It was granted to Ida Richey, but it was not controverted that Trem Carr then owned the leasehold on the .67-acre tract involved, and that it inured to his benefit. On February 20, 1940, the Commission granted to Trem Carr a permit to drill well No. 1 on this same .67-acre tract. While granted as a permit to drill, it was in reality a permit to produce oil from the well already drilled, which permit was set aside in the former suit. In the instant case it was granted on the recited grounds, "to prevent confiscation of property and to prevent physical waste."
No contention is made here that the permit can be sustained on the ground of confiscation. Not only was that issue adjudicated on the former appeal (there being no intervening material change of conditions), but the evidence on the trial of the instant suit clearly negatived the necessity for such permit to prevent confiscation. It is contended, however, that there was substantial evidence before the Commission on the subsequent hearing to sustain the permit as necessary to prevent physical waste.
It is now settled that the question of confiscation involves primarily the private property rights of the adjacent leaseholders, is one essentially judicial in nature, and is not dependent upon whether waste of the natural resources will result or not. On that issue the exceptions to Rule 37 are grounded primarily on the duty and undertaking of the State, through the Railroad Commission, to see to it that one producer of oil shall not recover more than his fair share of the oil beneath his own land by excess drainage of oil from beneath the land of his neighbor. Numerous cases, involving exceptions to Rule 37 to prevent confiscation, have come before us wherein the drilling of such wells would admittedly cause waste, but the private property rights of the interested parties have been deemed paramount and the permits sustained notwithstanding the resultant waste caused.
It is to be noted also that "waste" as defined by the conservation laws and the rules of the Railroad Commission is not dependent wholly upon the recovery of the maximum quantity of the oil and gas in place beneath the surface. That is, loss of, or failure to produce, recoverable oil underground, is not the sole and only factor in the determination and prevention of waste by the Railroad Commission as authorized and defined by the conservation statutes. Factors and elements to be considered as causing waste are set forth in Vernon's Annotated Civil Statutes, in Art. 6014. After enumerating some six factors applicable to underground conditions, the legislature added three other conditions applicable above ground, including market demand, as elements of waste, and provided that the Commission may consider any or all of such definitions in making rules to prevent waste. Waste, as defined by the statutes, was not confined to underground waste, but included waste above the ground as well, however caused. Art. 6029 imposes upon the Commission the duty to make and enforce rules to prevent waste, and Sec. (1) thereof directs the Commission to regulate not only "drilling and producing operations" but also "the storage, piping and distribution" of oil and gas. Sec. 5 of Art. 6049c, Vernon's Ann.Civ. Stats., requires the Commission to consider, as elements entering into the question of waste, and as necessary to be considered in its prevention, "the production, storage, transportation, refining, reclaiming, treating, marketing or processing of crude petroleum oil or natural gas, and the reasonable market demand therefor, And for the same purpose the legislature, Acts 1935, 44th Leg., p. 180, Ch. 76, Sec. 9, Art. 6049d, Sec. 6, Vernon's Ann.Civ.Stats., authorized the Commission to allocate and apportion allowable production among the various pools in Texas based upon market demand.
It is thus manifest that the bringing to the surface of the maximum amount of recoverable oil beneath a given tract or given area is but one of the elements or factors to be considered in determining the issue of physical waste. Three major methods of waste prevention have been adopted by the Commission: (1) Spacing of wells (Rule 37) to prevent excessive drilling. (2) Proration of production from wells already, drilled, so as to keep total production reasonably within market demand. (3) Prevention of excess storage above ground, particularly in earthen or open air tanks. While other regulations, restrictions and inhibitions governing the production, transportation, storage, refining and sale of oil have been made and promulgated by the Commission, the three methods above stated are the ones of major import. Of these the spacing rule is the one of longest standing, having been originally promulgated in 1919, and continuously adhered to since that date, though the distances between wells, and from property lines, have been changed as conditions, in the judgment of the Commission, required. As applied to the East Texas field these distances have for several years continuously been 330-660 feet. The 150-300-foot spacings originally prescribed for this field were increased, after a full and comprehensive hearing before the Commission, on September 2, 1931 (see Tide Water Associated Oil Co. v. Railroad Comm., Tex.Civ.App., 120 S.W.2d 544, 546), upon the finding of the Commission that the lesser spacing "threatens to cause actual physical waste due to the too rapid dissipation of gas energy in the production of oil, and also due to the too rapid encroachment of water ." This September 2, 1931, order states that the fact basis on which the increased distances were prescribed was to prevent "actual physical waste of oil and gas." See Stanolind Oil & Gas Co. v. Midas Oil Co., 123 S.W.2d 911, 915, writ dismissed. While the Commission has in subsequent amendments to Rule 37 made purported findings or recitations that "the closer the wells are drilled the greater will be the recovery from the area so drilled," at no time has it modified its rule or changed the spacing provisions thereof as to the field as a whole, or as to any designated portion thereof. The import of these recitals and the effect thereof on the spacings provided in the Rule were fully discussed in the Midas case, supra, to which we refer without reiteration here. Manifestly, if closer spacings than those prescribed by the Rule are necessary to prevent waste, then the findings by the Commission that the 330-660-foot spacings fixed by the Commission after full hearing were necessary to prevent "actual physical waste of oil and gas" are clearly wrong and cannot be sustained. If there be no reasonable relationship between the prevention of waste and the spacings required by the Rule, then ,the Rule is without factual basis to sustain it, and must fall as arbitrary. If the contention of appellant be sustained that the recitals relied upon be construed as an official finding by the Commission that the more wells drilled in the East Texas field "the greater will be the recovery from the area so drilled" constitute an official finding by the Commission that denser drilling than allowed under the Rule is necessary to prevent waste, then the Commission is placed in the paradoxical situation of finding as a factual basis for promulgating their rule, that 330-660-foot spacing of wells is necessary to prevent waste; but that they must administer it under a fact finding that the closer wells are to each other, the less waste there will be. To state this consequence carries its own refutation. The result would be a repudiation by the Commission itself of its own rule as a conservation measure.
Whether the more wells more oil theory be true, in fact or not, the Commission has never made it a basis for any change in its prescribed spacings. The difficulty with such a contention is that it assumes that waste will be prevented solely by the extraction from the underground pool, the maximum amount of recoverable oil; and fails to take into account what would occur above ground if the field were densely drilled to do that. Prevention of above ground waste is as much a part of conservation program as is the prevention of underground waste; and in the former excess storage and market demand are important factors. Excess production, therefore, through dense drilling, even though it recover a greater percentage of recoverable oil from the pool, if by doing so it glut the market, cause excess storage above ground, create fire hazards, etc., thus causing waste above ground not compensated by the added recovery from beneath it, is not conserving the natural resource. Thus the Commission must weigh the one against the other, even admitting the contention of "more wells more oil" to be correct and regulate both so as to accomplish the objective of the conservation laws. In doing so the Commission has continuously adhered to the 330-660-foot spacings for wells, supplemented this by restricting, through al-lowables, the production from the wells already drilled, and has imposed complete shut down of all wells on designated days during the month.
Having predicated the spacings prescribed in Rule 37, on the fact findings by the Commission that same are necessary to prevent "physical waste of oil and gas" and having continuously adhered thereto, it is clear that testimony of witnesses that such spacings are not necessary to prevent waste, but that waste would be prevented by lesser spacings between wells, and the drilling of the entire field to a much greater density than the Rule permits, wholly disregards the other resulting factors which would contribute to causing waste, and constitutes an attack upon the wisdom and efficacy of the Rule itself as a conservation measure. We have consistently held that such testimony is but such an attack, and does not constitute substantial evidence before the Commission justifying an exception to the Rule as necessary to prevent waste. Railroad Comm. v. Marathon Oil Co., Tex. Civ. App., 89 S.W.2d 517, writ refused; Magnolia Pet. Co. v. Railroad Comm., Tex.Civ.App., 93 S.W.2d 587, writ refused; Railroad Comm. v. Gulf Production Co., Tex.Civ.App., 115 S.W.2d 505, affirmed by Supreme Court in 134 Tex. 122, 132 S.W.2d 254; Lippincott v. Atlantic Ref. Co., Tex.Civ.App., 128 S.W.2d 847, writ dismissed.
The rule laid down in the Atlantic case (Gulf Land Co. v. Atlantic Ref. Co., 134 Tex. 59, 131 S.W.2d 73, 82) is whether the order attacked factually "is reasonably supported by substantial evidence." Manifestly, it is for the court to judicially determine what constitutes substantial evidence in support of the order. Mere representations before the Commission, opinions and testimony of witnesses at variance with, and in direct contradiction to, prior fact findings of the Commission itself, arrived at after extensive hearings, and which constitute a collateral, if not a direct, attack upon those findings, do not constitute "substantial evidence" which will support, by way of exception, a departure from an established Commission rule.
And it is not amiss to here observe that, in the writer's opinion, considerable confusion has been caused in considering Rule 37 cases, by failure to make clear a distinction between a general rule promulgated by the Commission (such Rule 37), legislative and prospective in character, applicable to an entire oil field, essential to the conservation of oil, which has the force and effect of a statute; and the application (e. g. by granting or refusing a permit as an exception) of that rule to a particular set of facts obtaining in some designated local area. The mere application of the Rule to the concrete facts of an individual case is quasi judicial and largely an administrative act in carrying out the general Rule. A permit for an exception is not, therefore, any change in the terms, necessity for, or binding effect of the general Rule. It has been frequently held that the burden is upon the applicant to show that he is entitled to an exception to the Rule. That is, that without it, his property will be confiscated; or that-waste will occur. And it is clear to the writer's mind that in the face of the Commission's own findings that these spacings, as a general pattern, are necessary to prevent physical waste, before an applicant is entitled to an exception on that ground he must show that the underground conditions, where the well is sought, are different from those obtaining generally in that area. If they are not, and the Commission, as in the instant case, authorizes and permits a well within 120 feet of another producing well it must in fairness, and to prevent discrimination, give every other applicant similarly situated a like permit as a matter of right. It cannot unreasonably discriminate between tracts similarly situated. Atlantic case, supra. Such a course would, as we have often observed, nullify the Rule itself and render it nugatory. And the Commission having promulgated a general rule, applicable to all alike, and having expressly stated the factual basis for it, is itself bound by it and is without authority to violate or ignore its own rule, unless substantial ground for doing so is shown to exist. Atlantic case, supra.
Coming now to the facts of the instant case: The well in question was a second well on a .92-acre tract, being on the .67-acre subdivision thereof, which .92-acre tract was, in turn, a voluntary subdivision from a 20-acre tract (see former appeal, Richey v. Shell Pet. Corp., Tex.Civ.App., 128 S.W.2d 898); and was located approximately 120 feet from the John E. Taylor well No. 1 thereon. In the hearing before the Commission in the instant case, two witnesses testified on the issue of waste. Witness Byram for the applicant testified at length. Without detailing his testimony here, the portion relied upon by applicant to sustain the permit is fairly reflected in the following: "It is my opinion that the more wells are drilled the greater will be the recovery of oil from the field provided the rate of flow is properly restricted throughout the life of the field." He also testified that some oil under the .67-acre tract would be trapped and lost unless this well were permitted; but that the same would be true of any other similar area in the field, if not drilled to an equal density. Further, that in this, and the eight times area surrounding the 20.92 acres from which this small tract was segregated, the underground conditions — that is, sand thickness, porosity, permeability, potentials, etc. —were substantially uniform; and that if the entire field were drilled to a density equal to that created by the well in question, and all permitted to produce under the existing allowables, waste would undoubtedly result.
The other witness before the Commission on the waste issue was R. W. Bourg, geologist for the Humble Oil & Refining Company, who agreed with Byram's testimony that the underground conditions and per acre content of oil in the sand under the 20.92 acres, and the eight times surrounding area were uniform, average, and approximately the same, based upon logs of wells in the area. He also testified that the well in question because of its proximity to the John E. Taylor well, and its relation to the surrounding more widely spaced wells, would cause rather than prevent waste.
Prior to the decision of the Supreme Court in the Atlantic case, in cases involving exceptions to Rule 37, this court considered both waste and confiscation, even though the permit recited only confiscation as ground for the exception, in order to determine whether the exception could be sustained on any ground. In the numerous cases brought before us involving the issue of waste, predicated upon dense drilling of a particular area, the evidence pro and con has been of substantially the same nature, and has been brought forward in so many records that this court would be justified in taking judicial notice of its general nature and import. It is not amiss to observe, as disclosed by prior adjudicated cases, that where the Commission has refused an exception on the ground that to grant it would cause waste, and their order of refusal is attacked by suit of the applicant, the Commission itself has relied upon the same character of evidence to sustain its order as is relied upon by interested parties to set aside a permit granted on that ground to show that such well will cause rather than prevent waste. The record presented in the recent case of Railroad Comm. v. Arkansas Fuel Oil Co., Tex.Civ.App., 148 S.W.2d 895, writ refused, so shows. That is, that where underground conditions, well potentials, and daily allowables are substantially uniform, the drilling of a local area or tract to a greater density than the surrounding area generally will create a low pressure area in the densely drilled portion, cause dissipation of gas energy, accelerated water encroachment, resulting coning of water around the well bore, and trapping of oil which would not occur if more uniform spacings were required. Such is the basis of the spacings prescribed in Rule 37.
The Railroad Commission having determined and put into effect the pro-ration rule as a necessary supplement to the spacing rule, and as based on the total number of wells already producing in this field, it is manifest that such testimony as to more wells and less allowable amounted to a collateral attack on the method adopted by the Commission to prevent waste. It was, in effect, that the Commission's method of control was wrong; and that the Commission instead should permit closer drilling than Rule 37 provides, and restrict the production, if that be necessary, to keep the top allowable within proper limits. Manifestly this was but a collateral attack on the methods adopted by the Commission, and cannot be deemed substantial evidence in support of a departure, by exception in a particular case, from the Commission's general rules. Consequently, the hearing before the Commission discloses no substantial evidence to sustain the exception. The burden was on the applicant to show that the exception was needed to prevent waste. Railroad Comm. v. Magnolia Pet. Co., 130 Tex. 484, 109 S.W.2d 967; Atlantic case, supra. The only competent evidence presented to the Commission showed the contrary.
. On the trial hereof, these two witnesses testified, and in addition, the witness Hud-nall. While they testified, upon cross examination, at considerable length, the witnesses Byram and Bourg both testified that the underground conditions, well potentials and allowable production were substantially uniform, and that there was no more reason for permitting the instant well only 120 feet from another producing well than in any other part of the field. That under the facts ascertained by them from logs of wells already drilled in this area, including the well involved, it would tend to create, rather than prevent, waste.
Appellant relies, in the main, upon the testimony of the witness Hudnall. He did not testify before the Commission, but did testify at great length upon the trial hereof. His testimony was, in effect, that the Commission's spacing rule was wrong; that if tlie entire field were drilled to a density of three wells per acre and all al lowed to produce at an allowable of 20 bbls. per well per day, more oil would be ultimately recovered; that with this density (a well each 120 feet) the 400,000 wells would not produce in excess of two million barrels per day, which would not cause waste. He admitted, however, that storage and pipe line facilities in the field would not take care of more than a million barrels per day; but that the other million barrels could be removed by tank trucks of 20 to 40 barrels capacity, thus requiring 30,000 to 40,000 truck loads daily. Nor did he indicate where it would be transported and how disposed of. He did admit that under his theory of ultimate recovery of the maximum amount of oil from the pool the price of oil would probably be reduced to S or 10 cents per barrel. This testimony manifestly disregards above ground waste, fire hazards, excess storage, and market demand, all of which must be taken into consideration by the Commission under express direction of the conservation laws themselves. Such testimony, as we have heretofore held in cases involving the same character of testimony of the same witness, is but an attack upon the efficacy and wisdom of the Commission's own rules. It is also in direct conflict with the express fact findings of the Commission itself as a basis for increasing such spacings from 150-300 feet to 330-660 feet, hereinabove quoted. It does not therefore constitute substantial evidence as a basis for an exception to the Rule.
It is also urged by appellant that the testimony of Hudnall that the Woodbine sand, which is the highly saturated productive sand underlying the East Texas field, in this particular area was overlaid by a 40-foot strata of shale or tight sand, containing oil, which was not common to the field as a whole; that in such strata of tight sand a well would not drain more than 2 acres, and that without the well in question much of the oil in this 40-foot strata would be lost. He further testified that if this were the only justification for such well it should be drilled into, and allowed only to produce from, this upper strata; and if that were done, he would not advise the drilling of it because he did not think it would ever produce enough oil to repay the expense of drilling. It was not controverted, however, that the well in question was drilled into the Woodbine sand and was producing from that sand just as other wells in this area.
As above stated, this testimony was not presented to the Commission, but upon the trial of the case. While the statute, Sec. 8, Art. 6049c, provides that orders of the Commission "shall be deemed prima facie valid," this is but a presumption subject to rebuttal by proof. And when such order is judicially attacked on the grounds that it is not supported by the facts on which it purports to rest, the existence, vel non, of those facts is to be judicially determined upon a trial under the rules of evidence as in other cases, except that the order carries the statutory presumption in support of its validity. If there be no evidence either way, the presumption prevails. Or, as is sometimes stated, if the evidence pro and con on the issue involved be evenly balanced, the added presumption will control. 17 Tex.Jur., § 100, p. 328; Annotation, 121 A.L.R. 1078.
But in the trial of such facts the court, or jury, must, as in other cases, pass upon the credibility of the witnesses and the weight to be given their testimony. In the instant case, on the issue of waste, and as differentiating the underground conditions prevailing in the area of this particular well from those prevailing generally, and thus affording a basis for an exception to the general rule, Hudnall testified that there existed a 40-foot strata of tight oil permeated sand above the lower porous highly permeated Woodbine sand. The other two witnesses, both qualified geologists, based upon their examination of logs of wells in this area, including that of the well in question, both testified that no such upper 40-foot strata of saturated, permeable oil producing sand existed in this well; but that the layer or strata, of which Hudnall testified, was what was termed Austin chalk, non porous-and non productive of oil. Under these circumstances, and in the light of Hudnall's other testimony, the trial court was authorized to find that no underground conditions existed in the area of this particular well which would differentiate it from the surrounding area generally and thus afford a factual basis to sustain an exception to the general rule. By holding the permit invalid, he is presumed to have so found, and his findings will not be disturbed.
We are not here concerned with the wisdom of the Commission's rules prescribed by it to conserve the natural resources. Rule 37 has repeatedly been held to be a valid rule. After promulgating a valid rule, the Commission itself is as much bound by it as are oil producers. It cannot arbitrarily ignore it, nor arbitrarily apply it so as to cause discrimination as between oil fields or particular areas in oil fields. If facts do not exist which authorize or justify a departure or deviation by way of exception from such valid rule, such exception becomes arbitrary.
Because of the fact that this case presents an instance where a permit, once declared invalid as not sustained by the facts on winch it was based, was again granted by the Commission on a different ground, we have considered, perhaps at undue length, the issue discussed. For the reasons stated, the trial court's judgment is affirmed.
Affirmed.
BLAIR, J., dissents.
Corrective Opinion.
BAUGH, Justice.
Our attention has been called to the statement in our original opinion that the witnesses Byram and Bourg testified Before the Commissioner on the hearing of the application for the permit involved; and also that both of said witnesses testified on the trial hereof in the trial court. In this we were in error. Both of these witnesses did testify before the Commission, but the witness Byram did not testify in the trial court. The character of the testimony of such witnesses, however, whether before the Commission or before the court, was to the effect stated in our opinion. This correction is made in the interest of accuracy, and does not affect the issues presented on the appeal nor the conclusions reached in our opinion.