The current answer to this question is no. In R.R. Comm’n of Tex. v. Opiela, the Austin Court of Appeals concluded that PSA/allocation wells are not the same as pooling under Texas law. The Opiela’s filed their Petition for Review with the Supreme Court of Texas in November 2023. The first issue presented by the Opielas is:
Did the Court of appeals err in concluding that the [RRC] has the authority to issue a permit for a PSA well because production through a PSA well is not the same as pooling?
Respondents Magnolia Oil & Gas Operating, LLC (“Magnolia”) and the RRC, filed their respective Responses to Petition for Review on April 29, 2024
The debate over whether pooling authority is required to drill a multi-tract horizontal well in Texas has raged for well over a decade. There are those that argue pooling authority is required to drill a multi-tract horizontal well under Texas law. Two major arguments are advanced on this side of the debate. First, the typical oil and gas lease allows a lessee to drill wells only on the land either covered by the oil and gas lease, or on land with which that lease is pooled. Second, the drilling of PSA/allocation wells are by definition pooling because they involve the combination of separate tracts to obtain a drilling permit. On the other side is the arguments that the typical oil and gas lease does not prohibit drilling across lease lines and that PSA/allocation wells do not involve pooling under Texas law because, among other things, no cross-conveyance of mineral and royalty interests between tracts occurs.
The Opiela case is based on an administrative appeal of a PSA permit issued by the RRC to Magnolia in 2018. The Opielas, lessors of 25% of the undivided interests under one of the tracts crossed by Magnolia’s PSA well, filed a complaint with the RRC contesting the permit, arguing that because their lease prohibited pooling without their written consent, Magnolia had no good faith claim to operate the well. After a hearing, a proposal for decision (“PFD”) was issued determining that Magnolia had a good faith claim to operate the well and that Magnolia had PSAs covering 65% of the mineral and working interests in the tracts traversed by the well. The PFD also denied the Opiela’s request to revoke Magnolia’s permit. The RRC adopted the PFD as its Final Order.
The Opielas appealed to the Travis County District Court on multiple grounds, including whether the RRC’s informal adoption of rules for permitting PSA/allocation wells violated provisions of the Administrative Procedures Act (“APA”) and whether the RRC committed error in determining that Magnolia had a good faith claim to operate the well when the lease prohibited pooling (and therefore also prohibited the drilling of an allocation well). The court concluded that the RRC had committed error in issuing the permit, and remanded to the RRC.
Magnolia and the RRC appealed to the Austin Court of Appeals, which reversed the portion of the district court’s order concluding that the RRC erred by failing to consider the pooling prohibition in the Opiela’s lease and affirmed the district court’s ruling that Magnolia had not demonstrated a good faith claim to operate the well as a PSA well because only approximately 15.625% of the mineral and working interest owners in the Opiela’s tract had signed a PSA. Thus, the court remanded the case to the RRC for further proceedings. The appellate court declined to address the issue of whether the RRC rules allowing PSA/allocation well permits violate the APA.
With respect to the issue of whether pooling authority is required to drill a PSA/allocation well, the Opiela opinion highlights that “pooling” “is not expressly required by Texas statutes or regulations for horizontal drilling of a wellbore that crosses property lines,” leaving room for private contractual agreements establishing how production will be shared. The appellate court also drew distinctions between “pooling” and PSA wells and concluded “that production through a PSA well is not the same as pooling under Texas Law.” Thus, the “lack of pooling authority alone does not prohibit drilling under a PSA.”
In their Petition for Review, the Opielas argue that this conclusion is error because “[t]here is no functional distinction between pooling and PSA/Allocation wells.” They note that “pooling” is commonly defined as “the integration of areas and interests in order to form a drilling unit.” They further argue that allocation and PSA wells, like pooled units, “combine multiple tracts to create a single drilling unit,” “drain minerals from a common reservoir or geologic formation,” and “allocate production from a single well among multiple properties.”
Magnolia and the RRC’s respective Responses argue that pooling is not required for multi-tract horizontal drilling because: (1) the Austin Court of Appeals so held; (2) the typical oil and gas lease allows the drilling of a horizontal well that traverses the lease from tract boundary to tract boundary, it follows that the typical lease would allow the lessee to connect a series of such horizontal wells without implicating the need to pool; (3) Professor Ernest E. Smith’s support of the argument that pooling is not required provided a “recognized legal theory to a continuing possessory right in the mineral estate” (i.e., a good-faith basis) for issuing Magnolia the permit; (4) the well was not on a pooled unit, no cross-conveyance of interest has occurred, and the well was not permitted as a pooled unit well; and (5) no statute or case law compels the RRC to require pooling in order to permit multi-tract horizontal wells.
The Opiela’s filed their Reply Brief on May 28, 2024. As of the date this article was submitted, the Texas Supreme Court has taken no action on the Petition. Whether the Supreme Court of Texas accepts or denies the Opiela’s Petition for Review, the question of whether pooling is required for the drilling of multi-tract horizontal wells under a typical oil and gas lease will finally have an answer.
