Opinion ID: 1796655
Heading Depth: 1
Heading Rank: 2

Heading: duty to apply for administrative relief

Text: The Railroad Commission rules in the Hastings, West Field, prohibit the drilling of a well nearer than 660 feet to any other well and nearer than 330 feet to any property line or lease line. The rules allow the Railroad Commission to grant drilling permits as an exception to the spacing regulation. These exceptions are commonly referred to as Rule 37 permits. This rule provides: [T]he Commission in order to prevent waste or to prevent the confiscation of property will grant exceptions to permit drilling within shorter distance than above prescribed whenever the Commission shall determine that such exceptions are necessary to prevent waste or to prevent confiscation of property. The Alexanders contend Amoco should have drilled replacement wells in the extreme updip corner of each lease. The wells would be within 50 feet of the lease line and 200 feet apart. The wells could not be drilled unless the Railroad Commission granted Rule 37 permits. Amoco did not apply for the permits. The Court of Civil Appeals held that when Amoco determined the leases were watering out, prudent operation demanded drilling replacement wells unless it would be economically unfeasible. If Rule 37 permits were required, Amoco should have applied for them in furtherance of its duty to prudently operate the leases. Because Amoco failed to apply, the Court of Civil Appeals held, the Alexanders were entitled to show the exceptions most likely would have been granted and they suffered damages because of Amoco's failure. Amoco states the holding of the Court of Civil Appeals amounts to the imposition of an implied covenant obligating a lessee to seek exceptions to regulations limiting the drilling and production of wells. Amoco argues there is no Texas authority for imposing an obligation to seek administrative relief and there is no duty to seek administrative relief. We disagree with Amoco's argument that there is no duty to seek administrative relief. Amoco owed the Alexanders the duty to do whatever a reasonably prudent operator would do if the Alexanders were its only lessor in the field. The duty to seek favorable administrative action may be classified under the implied covenants to protect the lease, or to manage and administer the lease. Regardless of the category, the standard of care in testing Amoco's performance is that of a reasonably prudent operator under similar facts and circumstances. Shell Oil Co. v. Stansbury, 410 S.W.2d 187, 188 (Tex.1966); 5 H. Williams & C. Meyers, Oil and Gas Law § 804 (1980). We do not agree with the Court of Civil Appeals if its holding means that in every case of field-wide drainage the lessee must seek Rule 37 exceptions. There may be facts where the prudent operator would not seek administrative relief. The probability that the Railroad Commission will grant or deny the permit is a consideration to be made by the prudent operator. The jury, from evidence justifying granting or denying the permit, can determine if a reasonably prudent operator would have applied for the permit. The jury found Amoco failed to operate the Alexander leases as a reasonably prudent operator. Does this finding, based in whole or in part on Amoco's failure to apply for Rule 37 permits, establish liability for failure to drill the replacement wells? If it does not, what remedies do the Alexanders have? They have no rights in the management or operation of the oil leases. Amoco, as operator, could quickly determine when the wells began watering out. Amoco, because of its conflicting interests, had no economic incentive to protect the Alexander leases. The downdip lessors, after their leases have watered out, have no opportunity to capture the oil updip. It is the failure to act as a reasonably prudent operator that triggers the loss. If the Railroad Commission denies the Rule 37 permits, after a reasonably prudent application, the operator has no liability for not drilling the wells. We hold that an operator, who fails to act as a reasonably prudent operator by not seeking Rule 37 permits, is liable for loss caused by the failure to drill the wells.