Contacted at his seaside villa, Captain Renault exclaimed his shock that Elsie and Adrian Opiela are asking the Texas Supreme Court to review questions surrounding the Railroad Commission’s approval of a drilling permit for a Production Sharing Agreement well.

The Commission’s “65% Rule” for multi-tract horizontal wells is invalid because the Commission does not have the authority to make such a rule. There must be either valid pooling authority or compliance with the Mineral Interest Pooling Act, neither of which were present here. The Commission adopted the ad hoc 65% Rule for issuing horizontal well permits without following formal rulemaking procedures required by the Administrative Procedure Act.  

You might recall that the Austin Court of Appeals confirmed the Commission’s decision to approve a permit without considering the anti-pooling provision in the Opiela’s oil and gas lease. The court also found that the Commission was wrong in concluding that the permit applicant Magnolia Oil & Gas Operating had shown a good faith claim of right to drill the well. We discussed the court of appeals opinion here and the district court ruling here.

The Opielas challenge the court of appeals ruling on several grounds. Here is our (oversimplified?) summary of Opiela’s assertions in their petition for review:

The 65% Rule

In permit applications for horizontal wells across multiple tracts, the operator represents that it will allocate production according to a formula that the mineral interest owners have not agreed to. The Commission may not issue such permits when the mineral and royalty owners have not consented to pooling or how to allocate production.

The Commission routinely approves permits for wells across tracts without determining whether it has authority to develop its approval policies and without notice to the mineral and royalty owners of property rights that are affected by the Commission’s actions.

The anti-pooling clause

The Court of Appeals incorrectly held that pooling authority was not necessary to drill the PSA well because pooling of tracts is not expressly required by Texas statutes or regulations for horizontal drilling for a wellbore that crosses property lines.

The Court of Appeals incorrectly held that even if the Commission did consider the anti-pooling clause, the clause was not implicated because a permit for horizontal drilling under a PSA is not pooling under Texas law. There is no functional distinction between pooling and PSA/allocation wells.

In determining whether Magnolia had a good-faith claim to drill a horizontal well across Opiela’s tract the Commission ignored a clause in Opiela’s lease that prohibits pooling “in any manner whatsoever”. With this clause in place, Magnolia cannot have a good-faith claim to drill a well.

Determination of parties’ property and contract rights

The Court of Appeals incorrectly concluded that the Commission was not required to consider the anti-pooling clause because the Commission has no power to adjudicate parties’ rights under a lease or other title documents.

The anti-pooling clause in the lease is relevant because, while the Commission lacks authority to make the binding determination of property rights it does have the authority and duty to examine property rights in the performance of its regulatory responsibilities to determine whether an applicant has a good-faith claim.

The Commission’s APA-compliant rules recognize that a good-faith claim for creating a pooled unit requires appropriate contractual authority and such authority is not present here.

There’s more to come on this.

Your musical interlude