Opinion ID: 2437936
Heading Depth: 1
Heading Rank: 1

Heading: Definition of Casinghead Gas

Text: The term casinghead gas is not defined in the pertinent title documents. At the time of the phase severance, however, there was a statutory definition of casinghead gas which had been in effect for many years. By failing to insert in the lease their own definition of the term casinghead gas, the predecessors in interest to our present parties evidenced their intent to incorporate the statutory definition of casinghead gas. See Von Hoffman v. City of Quincy, 71 U.S. (4 Wall.) 535, 550, 18 L.Ed. 403 (1866), quoted in Smith v. Elliott & Deats, 39 Tex. 201, 212 (1873) (laws which subsist at the time and place of the making of a contract ... enter into and form a part of it, as if they were expressly referred to or incorporated in its terms); see also Wessely Energy Corp. v. Jennings, 736 S.W.2d 624, 626 (Tex.1987). Energy-Agri and Amarillo Oil, however, attribute different meanings to the statutory definition of casinghead gas. The Natural Resources Code defines the term as any gas or vapor indigenous to an oil stratum and produced from the stratum with oil. Tex.Nat.Res.Code Ann. § 86.002(10) (Vernon 1988); see also Tex.R.R.Comm'n, 16 Tex.Admin.Code § 3.69 (West 1988). This definition is essentially identical to that existing at the time of the phase severance in this case. Cf. Act of Apr. 26, 1935, ch. 120, § 2(i), 44th Leg., 1935 Tex.Gen. & Spec. Laws 318, 319 (emphasis added), repealed by Natural Resources Code, ch. 871, art. I, sec. 2(a)(2), 65th Leg., 1977 Tex.Gen.Laws 2345, 2689 (any gas and/or vapor indigenous to an oil stratum and produced from such stratum with oil) (emphasis added). [1] Energy-Agri argues that the term casinghead gas, as defined by the Natural Resources Code, simply means any gas produced from a well that has been classified by the Railroad Commission as an oil well. Because the Railroad Commission has classified the Kimberlin numbers two and three wells as oil wells, Energy-Agri concludes that any gas produced from these wells is casinghead gas as a matter of law. Amarillo Oil counters that determining title to gas based on the classification of a well is inconsistent with the statutory definition of casinghead gas and ignores the key elements of the statutory definition, i.e., that the gas be indigenous to and produced from an oil stratum. Tex.Nat.Res.Code Ann. § 86.002(10) (Vernon 1988). The Natural Resources Code does not define the term oil stratum. It does, however, define oil well as any well that produces one barrel or more of oil to each 100,000 cubic feet of gas. Tex.Nat.Res. Code Ann. § 86.002(6) (Vernon 1978); see also Tex.R.R.Comm'n, 16 Tex.Admin.Code § 3.69 (West 1988). Reading this definition together with that of casinghead gas we see that the legislature has defined casinghead gas as any gas or vapor which is indigenous to and produced from a stratum that produces one barrel or more of crude petroleum oil to each one hundred thousand cubic feet of natural gas. Nevertheless, we must have a definition of oil stratum in order to apply the statutory definition of casinghead gas. Energy-Agri argues that since this court has used the terms horizon, reservoir, stratum and field interchangeably, they must all be the same and therefore all mean the same as a common reservoir. Energy-Agri then concludes that since it introduced in evidence a Railroad Commission document from 1935 stating the Commission's then-finding that the whole Panhandle Field is one common reservoir, it may produce gas from any of the separate formations in the field from its oil well and have it meet the statutory definition of casinghead gas. We disagree. Energy-Agri's argument overlooks the distinct geological facts of the cases it cites. For example, in Bolton v. Coats, 533 S.W.2d 914 (Tex.1975), it was alleged that there were separate oil productive horizons or segments of the Burnett sand (one formation) which were each [a] physically separate productive stratum. 533 S.W.2d at 917. Under such geological facts, the terms horizon, stratum, field and reservoir would all coincide. Similarly, in Benz-Stoddard v. Aluminum Company of America, 368 S.W.2d 94 (Tex.1963), the allegation was that there were ten distinct gas reservoirs, or horizons, that were separated and among which there is no communication of gas. 368 S.W.2d at 96. Under such geological facts, the terms horizons, reservoirs and fields may be used interchangeably. Such opinions do not state, and do not mean, that the terms always coincide. The term stratum has a fixed meaning in petroleum geology, much like the terms producing horizon, and horizons which appear in the Code. [2] A stratum is a single layer of rock deposited at roughly the same geological period of time which normally contains only one kind of rock. 1 H. Williams & C. Meyers, Oil and Gas Law § 102, at 3 (1989). Depending upon the particular geological facts, it may be the same as a formation if there is only one type and layer of rock that was deposited continuously and under the same general conditions, or it may be a part (one layer) of a formation. [3] A reservoir refers to an underground formation favorable to the accumulation of oil and gas and in which oil or gas, or both, is trapped. It is a term generally better illustrated than defined. 1 H. Williams & C. Meyers, Oil and Gas Law § 102, at 4 (1989). A reservoir may be created by a single cap layer of impermeable rock that prevents the hydrocarbons from moving further upward, by a geological fault that traps the oil and gas, or by a combination of faults and geological formations (including salt domes) which trap the oil and gas; the oil may be trapped in a single stratum (in which case the reservoir and the stratum are synonymous), or the reservoir may be comprised of several distinct strata. Id. at 4-5 (Figures 1-5 and accompanying text). If the geological structures comprising the reservoir are of the simpler cap rock form and contain several strata, then absent individual trap areas and similar complexities, the gas collects at the top of the fold in the upper strata, the oil collects on the sides, and water collects at the bottom. 1 W. Summers, The Law of Oil and Gas § 4, at 9 (1954). A reservoir is generally synonymous with a field. Benz-Stoddard, 368 S.W.2d at 97. The main characteristic of a reservoir or field is that it is physically separate in the sense that there is no communication of the hydrocarbons with the surrounding geological structures. Bolton v. Coats, 533 S.W.2d at 917; Benz-Stoddard, 368 S.W.2d at 96. Starting from the petroleum geology definition for reservoir, the legislature has defined a common reservoir to be all or any part of any oil or gas field or oil and gas field that comprises and includes any area that is underlaid or that, from geological or other scientific data or experiments or from drilling operations or other evidence, appears to be underlaid by a common pool or accumulation of oil or gas or oil and gas. Tex.Nat.Res.Code Ann. § 86.002(4) (Vernon 1988). The term horizon refers to a plane of stratification assumed to have been once horizontal and continuous, or it may refer to a zone of a particular formation, such as the reservoir horizon, which is the portion of a formation that is of sufficient porosity and permeability to form a petroleum reservoir. H. Williams & C. Meyers, Manual of Oil and Gas Terms 442 (1987). A producing horizon is the same as a pay horizon, meaning the geological deposit in which oil and gas is found in commercial paying quantities. Id. at 696. Once again, depending on the particular geological facts, the horizon or producing horizon may coincide with the whole reservoir or field, or the reservoir may have several distinct producing horizons. By using the term stratum, which is a potentially smaller geological unit than field or reservoir, the legislature indicated its intent to limit the definition of casinghead gas to gas found in association with oil in an oil stratum. [4] Energy-Agri, however, also relies on a 1940 opinion in which the attorney general found the statutory definition of casinghead gas ambiguous and concluded: the term casinghead gas applies to all gas produced from any oil well. ... Since ... the term oil well includes any well which produces one barrel or more of crude petroleum oil to each 100,000 cubic feet of natural gas, a well producing oil at a gas-oil ratio of 100,000 cubic feet of gas or less per barrel of oil would be an oil well, and under our construction of the term casinghead gas, the gas from such well would be casinghead gas.... Op.Tex.Att'y Gen. No. 0-1760, at 3 (1940). As we have explained, the statutory definition of casinghead gas is not ambiguous. Because the intent of the legislature is apparent from the face of the statute, the attorney general opinion fails to adhere to the plain meaning rule. See Cail v. Service Motors, Inc. 660 S.W.2d 814, 815 (Tex. 1983); Board of Land Comm'rs v. Weede, Dallam 361, 361 (Tex.1840); see also Tex. Gov't Code Ann. § 311.011 (Vernon 1988). Furthermore, it is clear from the opinion that the attorney general did not address the case of a well's completion in more than one stratum, as we have in the present case. The ambiguity referred to in the attorney general opinion was whether the statutory definitions of sweet gas and sour gas also applied to casinghead gas. Energy-Agri's reliance on the portion of the opinion quoted above is seriously misleading because it is taken out of the context of the opinion. The concluding sentence in the paragraph immediately preceding the definition Energy-Agri quotes states: On the other hand, the Legislature evidently considered that where gas is produced as a necessary incident to the production of oil from an oil well, the value of the oil produced would warrant the use of the casinghead gas for any beneficial purpose. (Subsection 3, section 7, Article 6008). Id. Thus the attorney general concluded that restrictions on the use of sweet gas and sour gas were not meant to apply to casinghead gas. One reading the opinion in context could not reasonably conclude that it meant that gas produced from a perforation in a different stratum higher up the casing was casinghead gas solely because the well was classified as an oil well. In determining whether Energy-Agri is producing gas or casinghead gas from the Kimberlin wells, we must look at each completion in the brown dolomite and determine whether the production from that stratum, at that particular location, is sufficient to define it as an oil stratum, i.e., a gas-oil ratio of 100,000 cubic feet of gas or less per barrel of oil. If it is an oil stratum, then the gas produced therefrom is casinghead gas. We have previously held that the statutes recognize the possibility of a gas well and an oil well producing from different horizons of the same sand at different subsurface locations. Bolton v. Coats, 533 S.W.2d at 917. The fact that there is oil production sufficient for an oil well classification as to a location on a neighboring lease a significant distance away does not make the brown dolomite an oil stratum as to either of the Kimberlin wells. To be casinghead gas, the statute requires that it be produced from the stratum with oil.  By that language the legislature meant gas produced as a necessary incident to the production of oil. [5] We hold that Energy-Agri owns only the oil right to casinghead gas as defined by statute. Tex.Nat.Res.Code Ann. § 86.002(10) (Vernon 1978). When oil rights are severed from gas rights in a phase severance, and the parties do not otherwise specify in the conveying instrument, the party who owns the rights to casinghead gas owns only that gas or vapor which is indigenous to an oil stratum and is produced from that stratum along with oil, as contrasted to gas produced from a separate gas stratum through an oil well. Accordingly, Amarillo Oil is entitled to judgment quieting its title as against Energy-Agri to gas, other than casinghead gas as defined above, produced from the brown dolomite stratum through the Kimberlin numbers two and three wells.