Court Opinion

ID: 5122568
Source: CourtListenerOpinion
Date Created: 2021-11-02 11:14:36.573798+00
Date Added: 2024-06-11T08:22:29.004021
License: Public Domain

Fourth Court of Appeals
                                     San Antonio, Texas
                                 MEMORANDUM OPINION

                                        No. 04-20-00465-CV

                         AMMONITE OIL AND GAS CORPORATION,
                                      Appellant

                                                  v.

                RAILROAD COMMISSION OF TEXAS and EOG Resources, Inc.,
                                   Appellees

                    From the 36th Judicial District Court, McMullen County, Texas
                                  Trial Court No. M-18-0003-CV-A
                              Honorable Janna Whatley, Judge Presiding

Opinion by:       Liza A. Rodriguez, Justice

Sitting:          Rebeca C. Martinez, Chief Justice
                  Irene Rios, Justice
                  Liza A. Rodriguez, Justice

Delivered and Filed: October 27, 2021

AFFIRMED

           This appeal arises from an oil and gas case involving an application by Ammonite Oil and

Gas Corporation to force pool its mineral interest in State-owned riverbed acreage with adjacent

oil wells operated by EOG Resources, Inc. The Texas Railroad Commission (the “Commission”)

denied and dismissed Ammonite’s application under the Mineral Interest Pooling Act and the trial

court affirmed the Commission’s order. Ammonite appealed to this court. We affirm.
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                           BACKGROUND AND PROCEDURAL HISTORY

       Ammonite is the lessee under an oil and gas lease granted by the State of Texas covering

riverbed acreage of the Frio River in McMullen County within the Eagle Ford Shale. EOG drilled

sixteen wells on adjacent tracts on both sides of Ammonite’s riverbed tract in the Eagleville Field.

Ammonite made an offer to EOG to voluntarily pool its riverbed acreage with EOG’s sixteen oil

wells. EOG rejected the offer. Ammonite then filed applications with the Commission pursuant

to the Mineral Interest Pooling Act (“MIPA”) to force pool its leased riverbed tract into sixteen

units with the wells operated by EOG. See TEX. NAT. RES. CODE ANN. §§ 102.001-.112.

Ammonite’s applications asserted that forced pooling was necessary under MIPA to prevent the

waste of its riverbed minerals and to protect its correlative right to a fair share of the common

reservoir’s production. The Commission consolidated Ammonite’s sixteen applications.

       EOG objected to the MIPA applications and a contested administrative hearing was held

before Commission hearing examiners on January 25-26, 2017. EOG presented the expert

testimony of Tim Smith, a petroleum engineer. Ammonite presented no expert testimony in

support of its applications. In their proposal for decision, the hearing examiners recommended

approval of fifteen of Ammonite’s sixteen applications for forced pooling. Upon its review, the

Commission rejected the examiners’ recommendation and issued a Consolidated Final Order on

November 7, 2017 denying and dismissing all of Ammonite’s applications based on the following

findings of fact and conclusions of law:

       Findings of Fact

       1. Notice of the hearing was provided ….

       2. In addition, notice was published ….

       3. At various times on [sic] 2015, Ammonite sent voluntary pooling offers to EOG
          for each of the sixteen (16) proposed MIPA units in these dockets.

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4.   All sixteen (16) wells are classified as oil wells.

5.    Ammonite proposed a unit of 550.02 acres for the EOG Naylor Jones Unit 26,
     Well No. 2H. Ammonite proposed units ranging in size from 43.6 to 98.64
     acres for the other fifteen (15) wells.

6. Ammonite did not provide survey data or a metes and bounds description of the
   riverbed to establish the precise acreage to be force pooled into any of the
   sixteen (16) wells.

7. None of the sixteen (16) wells produce hydrocarbons from or drain the adjacent
   riverbed tracts.

8. At the hearing, Ammonite agreed with a greater charge for risk than the 10%
   listed in its voluntary pooling offer for each of the sixteen (16) wells if the
   Commission recommended same.

9. Formation of the proposed MIPA units for the sixteen (16) existing wells will
   not access or produce any of the hydrocarbon reserves under Ammonite’s
   adjacent riverbed tracts.

10. Ammonite offered no expert witnesses or evidence of drainage areas of any
    wells.

11. Compulsory pooling will not prevent waste, protect Ammonite’s correlative
    rights, or prevent the drilling of unnecessary wells. The applicant failed to meet
    its burden of proof to prove that the granting of the application is necessary to
    prevent waste, protect correlative rights, or avoid the unnecessary drilling of
    wells. In the record, there is simply no evidence showing that forced pooling
    these wells will prevent waste or protect correlative rights—the wells have been
    drilled and are producing; they do not and will not produce riverbed minerals.

Conclusions of Law

1. Pursuant to Texas Natural Resources Code 102.016, notice of the hearing was
   given to all interested parties . . . .

2. Ammonite failed to make a fair and reasonable offer to voluntarily pool as
   required by Texas Natural Resources Code 102.013.

3. Force pooling will not prevent waste, protect correlative rights, or avoid the
   drilling of unnecessary wells as required by Texas Natural Resources Code
   102.011.

4. The Commission lacks authority to issue a compulsory pooling order for the
   Naylor Jones Unit 26 No. 2H because Ammonite’s proposed unit size exceeds

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            the limits authorized by Texas Natural Resources Code 102.011 and cannot be
            reformed.

        5. Because the applicant failed to meet its burden of proof to prove that the
           granting of the application is necessary to prevent waste, protect correlative
           rights, or avoid the unnecessary drilling of wells, the necessary pre-requisites
           for MIPA pooling have not been established. Ammonite’s applications for all
           sixteen (16) units must be denied.

        Ammonite filed a petition for judicial review of the Commission’s Order in the district

court of the county where the land is located. 1 See TEX. NAT. RES. CODE ANN. § 102.111

(providing for judicial review of the Commission’s final order in a manner other than trial de

novo); id. § 102.112 (venue). Based on its review of the administrative record and the parties’

briefs, the trial court affirmed the Commission’s Order. Ammonite appealed.

        On appeal, Ammonite asserts the Commission misinterpreted the MIPA requirements to

obtain a forced-pooling order under section 102.011 and deviated from its own precedent, and the

district court erred in failing to address those issues of law.

                                                DISCUSSION

        Standard of Review: Judicial Review of Commission’s Administrative Order

        In a judicial review of the Commission’s decision in a contested case, the court applies the

substantial evidence standard of review. TEX. GOV’T CODE ANN. § 2001.174; R.R. Comm’n of

Tex. v. Torch Operating Co., 912 S.W.2d 790, 792 (Tex. 1995). “This is a limited standard of

review that gives significant deference to the agency in its field of expertise.” Torch, 912 S.W.2d

at 792. Under this standard of review, the reviewing court may reverse or remand for further

proceedings only if it concludes that the appellant’s substantial rights have been prejudiced

“because the administrative findings, inferences, conclusions, or decisions are: (A) in violation of

1
 Ammonite did not challenge the Commission’s denial of its forced-pooling application for the EOG Naylor Jones
Unit 26, Well No. 2H, because the proposed unit size was too large. (See the Commission’s Finding of Fact #5 and
Conclusion of Law #4).

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a constitutional or statutory provision; (B) in excess of the agency’s statutory authority; (C) made

through unlawful procedure; (D) affected by other error of law; (E) not reasonably supported by

substantial evidence considering the reliable and probative evidence in the record as a whole; or

(F) arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise

of discretion.” TEX. GOV’T CODE ANN. § 2001.174(2); R.R. Comm’n of Tex. v. Tex. Citizens for a

Safe Future & Clean Water, 336 S.W.3d 619, 624 (Tex. 2011).                  Judicial review of the

Commission’s decision is based on the administrative record. TEX. NAT. RES. CODE ANN. §

102.111; R.R. Comm’n of Tex. v. Pend Oreille Oil & Gas Co., 817 S.W.2d 36, 40 (Tex. 1991).

       A court applying the substantial evidence standard of review may not substitute its

judgment for that of the state agency “on the weight of the evidence on questions committed to

agency discretion.” TEX. GOV’T CODE ANN. § 2001.174; Mireles v. Tex. Dep’t of Pub. Safety, 9

S.W.3d 128, 131 (Tex. 1999). In reviewing fact-based determinations, a court must determine

whether, considering the reliable and probative evidence in the record as a whole, some reasonable

basis exists in the record for the agency’s action. TEX. GOV’T CODE ANN. § 2001.174(2)(E); Tex.

Indus. Energy Consumers v. CenterPoint Energy Hous. Elec., LLC, 324 S.W.3d 95, 105 n.60 (Tex.

2010). “Substantial evidence requires only more than a mere scintilla, and ‘the evidence on the

record actually may preponderate against the decision of the agency and nonetheless amount to

substantial evidence.’” Torch, 912 S.W.2d at 792-93 (quoting Tex. Health Facilities Comm’n v.

Charter Medical-Dallas, Inc., 665 S.W.2d 446, 452 (Tex. 1984)). “The issue for the reviewing

court is not whether the agency reached the correct conclusion, but rather whether there is some

reasonable basis in the record for the action taken by the agency.” Id. at 792; Mireles, 9 S.W.3d

at 131 (courts must affirm administrative findings in contested cases if there is more than a scintilla

of evidence to support them); Charter Medical, 665 S.W.2d at 453 (agency’s decision will be

sustained if the evidence is such that “reasonable minds could have reached the conclusion the

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agency must have reached in order to justify its action”). The court presumes the agency’s

findings, inferences, conclusions, and decisions are supported by substantial evidence and the

appealing party bears the burden to demonstrate otherwise. Maverick Cty. v. R.R. Comm’n of Tex.,

No. 03-14-00257-CV, 2015 WL 9583873, at *2 (Tex. App.—Austin Dec. 29, 2015, pet. denied)

(mem. op.).

       With respect to the agency’s conclusions of law, a court reviews them de novo under

traditional principles of statutory construction. Tex. Citizens for a Safe Future, 336 S.W.3d at 624;

see Wimberley Springs Partners, Ltd. v. Wimberley Valley Watershed Assoc., No. 03-13-00467-

CV, 2017 WL 2229876, at *3 (Tex. App.—Austin May 19, 2017, no pet.) (mem. op.) (reciting

statutory construction principles). However, the agency’s interpretation of a statute it is authorized

to enforce and construe is given some deference. Tex. Citizens for a Safe Future, 336 S.W.3d at

624-25 (agency’s interpretation of statute it is charged with enforcing is entitled to “serious

consideration” as long as the construction is reasonable and does not conflict with the statute’s

plain language). The Supreme Court has recognized that the Railroad Commission “has long been

the agency charged with regulating matters related to oil and gas production, and is given broad

discretion in its administration of oil and gas laws.” Id. at 630 (citing TEX. NAT. RES. CODE ANN.

§ 85.202(b)). As such, “[t]he Commission must have discretion in determining the minutiae of its

statutory mandates.” Id. at 631. “Such deference is particularly appropriate where the statutes and

rules at issue concern a matter within the core expertise of the agency.” Wimberley Springs, 2017

WL 2229876, at *3.

       On appeal from a district court’s review of an administrative order, the appellate court

reviews the district court’s decision de novo. Tex. Dep’t Public Safety v. Cuellar, 58 S.W.3d 781,

783 (Tex. App.—San Antonio 2001, no pet.).

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       Mineral Interest Pooling Act (MIPA)

       Under MIPA, a mineral interest owner may apply for a forced pooling order from the

Commission to pool its property with other owners’ proposed or existing wells on the same

proration unit within a common reservoir. TEX. NAT. RES. CODE ANN. § 102.011. The applicant

must first make a fair and reasonable offer to the owner/operator(s) of the other well(s) to

voluntarily create a pooled unit prior to filing an application under MIPA. TEX. NAT. RES. CODE

ANN. § 102.013; Pend Oreille, 817 S.W.2d at 39-40 (qualifying pooling offer invokes the

Commission’s jurisdiction over a MIPA application). If a fair and reasonable voluntary pooling

offer is not accepted, the mineral interest owner/lessee may file a MIPA application with the

Commission for forced pooling. TEX. NAT. RES. CODE ANN. § 102.011 (pre-condition to forced

pooling is that the owners have not agreed to voluntarily pool their interests).         To obtain

Commission approval of its MIPA application, the mineral interest owner must meet one of three

statutory requirements by establishing that the proposed force-pooled unit(s) would (1) avoid the

drilling of unnecessary wells, (2) protect correlative rights, or (3) prevent waste. TEX. NAT. RES.

CODE ANN. § 102.011. The applicant has the burden to present substantial evidence showing that

its voluntary pooling offer was fair and reasonable and that one of the three statutory requirements

for forced pooling exists. Pend Oreille Oil & Gas Co. v. R.R. Comm’n of Tex., 788 S.W.2d 878,

885 (Tex. App.—Corpus Christi-Edinburg 1990), aff’d in part, 817 S.W.2d 36 (Tex. 1991). Here,

the Commission found that Ammonite’s voluntary pooling offers to EOG were not fair and

reasonable and dismissed Ammonite’s MIPA applications on that basis. The Commission also

found that Ammonite failed to meet its burden to establish one of the three statutory requirements

for forced pooling and alternatively denied Ammonite’s applications.

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       Fair and Reasonable Offers to Voluntarily Pool

       We first address the jurisdictional issue that led to the Commission’s dismissal of

Ammonite’s forced-pooling applications – its determination that Ammonite’s voluntary pooling

offers were not fair and reasonable. See Pend Oreille, 817 S.W.2d at 40. A fair and reasonable

offer to voluntarily pool is a precondition to any forced-pooling application under MIPA. TEX.

NAT. RES. CODE ANN. §§ 102.011, 102.013. If an applicant’s voluntary pooling offer is not fair

and reasonable, the Commission lacks jurisdiction over the forced-pooling application and must

dismiss it. Id. § 102.013(b) (“The Commission shall dismiss the application if it finds that a fair

and reasonable offer to pool voluntarily has not been made by the applicant.”); see Carson v. R.R.

Comm’n of Tex., 669 S.W.2d 315, 316 (Tex. 1984) (characterizing the issue as jurisdictional). The

court explained in Carson, “[i]n the absence of a finding of reasonable offers a dismissal ... may

be more in keeping with the spirit of the act … the Texas statute differs from similar statutes of

other states by its emphasis on voluntary pooling … If a bona fide attempt to reach a contractual

agreement is not considered a condition precedent to invoking the compulsory process, much of

the deliberately unique language in the Texas statute is rendered meaningless.” Id. at 318 (quoting

E. Smith, The Texas Compulsory Pooling Act, 44 Tex. L. Rev. 387, 393 (1966)). Thus, “[t]he Act

… is more aptly described as ‘an Act to encourage voluntary pooling—rather than an Act to

provide compulsory state action.’” Pend Oreille, 817 S.W.2d at 40 (quoting E. Smith, The Texas

Compulsory Pooling Act, 43 Tex. L. Rev. 1003, 1009 (1965)).

       The MIPA does not define the phrase “fair and reasonable offer to pool voluntarily.” See

TEX. NAT. RES. CODE ANN. § 102.013. The meaning is therefore “left to the Commission’s

discretion” in each case. Pend Oreille, 817 S.W.2d at 40. The voluntary pooling offer must,

however, be “one which takes into consideration those relevant facts, existing at the time of the

offer, which would be considered important by a reasonable person in entering into a voluntary

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agreement concerning oil and gas properties.” Id. at 41 (citing Carson, 669 S.W.2d at 318). The

fairness and reasonableness of the pooling offer is judged from the viewpoint of the party being

asked to pool. Id. at 43. A court reviews the Commission’s findings and conclusions about fair

and reasonable pooling offers by examining the relevant facts in existence at the time of the offer.

Id. at 41. Section 102.013(a) requires the MIPA applicant to “set forth in detail the nature of the

voluntary pooling offer made.” TEX. NAT. RES. CODE ANN. § 102.013(a); Carson, 669 S.W.2d at

317.

       Even though the requirement of a fair and reasonable pooling offer is considered a

jurisdictional issue, a reviewing court still applies the substantial evidence standard and affords

substantial deference to the Commission’s decision as to whether the offer was fair and reasonable.

Pend Oreille, 817 S.W.2d at 41-42 (noting that Carson involved a unique situation where the

jurisdictional issue could be resolved as a matter of law). As discussed above, the substantial

evidence standard is “[a]t its core … a reasonableness test or a rational basis test.” Id. at 41. It

follows then that “[t]he commission’s application of the statutory term [“fair and reasonable offer

to pool voluntarily”] to the facts in each case is conclusive unless it is unreasonable.” Id. at 42;

Tex. Health Facilities, 665 S.W.2d at 453 (the agency’s action will be sustained if the evidence is

such that reasonable minds could have reached the same conclusion the agency must have reached

to justify its decision); R.R. Comm’n of Tex. v. Broussard, 755 S.W.2d 951, 955 (Tex. App.—

Austin 1988, writ denied) (determination of whether voluntary pooling offers are fair and

reasonable is a mixed question of fact and law which is entitled to substantial deference).

       Here, the Commission reached the legal conclusion that Ammonite’s voluntary pooling

offers to EOG were not “fair and reasonable” as required by MIPA section 102.013 (Conclusion

of Law #2) and dismissed the MIPA applications on that basis. The Commission’s conclusion was

based on its factual findings that: Ammonite failed to provide survey data or a metes and bounds

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description of the riverbed to establish the precise acreage to be pooled (Finding of Fact #6); none

of the EOG’s sixteen wells produce hydrocarbons from or drain Ammonite’s riverbed tracts

(Finding of Fact #7); and Ammonite agreed that a greater charge for risk than the 10% listed in its

voluntary pooling offers was reasonable (Fact Finding #8). Upon review, the district court

determined that the Commission’s fact findings were supported by more than a scintilla of

evidence in the administrative record and affirmed. We must determine whether the record

contains substantial evidence to support the Commission’s findings and conclusion regarding

Ammonite’s voluntary pooling offers. Pend Oreille, 817 S.W.2d at 41-42.

       We begin with the Commission’s finding regarding Ammonite’s proposed charge for risk

in its pooling offers to EOG. The only evidence in the administrative record with respect to the

charge for risk contained in Ammonite’s voluntary pooling offers consists of the terms of the offers

sent by Ammonite to EOG (Ammonite’s Exhibits #37-43) and the testimony of Tim Smith, EOG’s

expert witness. Ammonite’s voluntary pooling offers to EOG proposed formation of sixteen (16)

pooled units subject to a mutually acceptable joint operating agreement with EOG as operator and

a 10% charge for risk attached to the working interest component. At the administrative hearing,

Ammonite asserted that its proposed 10% charge for risk is reasonable in an unconventional

resource play like the Eagleville Field and a 10% charge has been approved by the Commission in

similar resource play situations. Ammonite conceded that a higher charge for risk would be fair

and reasonable and “would not be adverse.”

       Smith testified that Ammonite’s proposed 10% charge for risk was unreasonably low and

that a 100% charge for risk would be fair and reasonable. Smith explained that a “charge for risk”

is intended to compensate the operator for the risks undertaken in drilling wells and “to cover the

cost of money.” Smith testified and presented documentary evidence showing that the Eagle Ford

shale play within the Eagleville Field has extremely limited permeability necessitating the use of

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unconventional drilling and completion techniques that result in a substantial percentage of wells

drilled not being commercially successful. Smith explained that Ammonite’s inclusion of only a

10% charge for risk in its pooling offers was unreasonably low because a large resource play like

the Eagle Ford requires an investment in large amounts of acreage and the drilling of a significant

number of wells in order to be commercially successful, not just drilling one individual well in a

single unit. Smith opined that, under the circumstances, a 100% charge for risk would be

reasonable and more appropriate. Ammonite presented no expert testimony or technical evidence

to controvert Smith’s testimony that the 10% charge for risk in Ammonite’s offers was not fair

and reasonable.

       Based on the deferential standard of review, the Commission’s decision must be upheld if

there is some reasonable basis in the record for its decision, i.e., substantial evidence. Torch, 912

S.W.2d at 792-93; Pend Oreille, 817 S.W.2d at 42 (commission’s application of term “fair and

reasonable offer to pool voluntarily” to the facts of the case is conclusive unless it is unreasonable).

We conclude there is a reasonable basis for the Commission’s fact finding and conclusion that

Ammonite’s voluntary pooling offers were not fair and reasonable based on a 10% charge for risk

being unreasonably low according to Smith’s uncontroverted testimony. Substantial evidence

supports the Commission’s decision and its dismissal of Ammonite’s MIPA applications for lack

of jurisdiction. We therefore do not reach Ammonite’s other issues on appeal.

                                            CONCLUSION

       Based on the foregoing reasons, we affirm the district court’s order upholding the

Commission’s decision.

                                                    Liza A. Rodriguez, Justice

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