Ammonite Oil & Gas Corp. v. R.R. Comm'n of Tex., No. 21-1035, 2024 WL 3210180 (Tex. June 28, 2024)
In this case, the Texas Supreme Court affirmed the Railroad Commission’s rejection of 16 applications to force pool a narrow winding tract of riverbed minerals with neighboring horizontal wells pursuant to the Texas Mineral Interest Pooling Act (“MIPA”). The Court held that, because the wells would not drain the riverbed minerals, and because the applicant did not propose or prove that the wells could be drilled differently or extended to reach the riverbed minerals, substantial evidence supported the RRC's determination that the applicant failed to make a “fair and reasonable” offer to voluntarily pool as required by MIPA.
The applicant, Ammonite Oil Gas Corporation, was in the business of acquiring State riverbed leases and then getting them included in adjacent pooled units. In 2015, Ammonite acquired a lease of State minerals covering a narrow and winding stretch of the Frio River. EOG Resources, Inc. owned oil and gas leases on lands adjoining the river on both sides. EOG had permits for 16 horizontal Eagle Ford shale wells along the river banks, and was in the process of drilling the wells.
Ammonite sent EOG a series of letters proposing the formation of 16 pooled units, one for each well. Ammonite referenced “existing well[s]” and attached the plats associated with EOG’s existing drilling permits. Those plats reflected that none of EGO’s wells would reach the riverbed. Ammonite did not include any proposal or show that the wells could be drilled differently or extended to reach and produce Ammonite’s minerals. EOG rejected Ammonite’s offers.
Ammonite filed 16 MIPA applications with the Railroad Commission, one for each well. Ammonite did not put on any evidence of drainage or other technical evidence.
By the time of the hearing, all of the wells had been drilled, and it was uncontested that they were not draining the riverbed tract. EOG argued that, without evidence of drainage, Ammonite’s pooling offer was not “fair and reasonable.” EOG characterized Ammonite as seeking to obtain a share of production from EOG’s wells without contributing anything to them. EOG presented unrebutted expert testimony opining that Ammonite’s riverbed minerals could possibly be drilled and produced in the future with changes in technology or markets. EOG’s expert also testified that the wells require significant capital investment, and that any single well carried a significant risk of commercial failure, such that success must be measured at the portfolio level with optimal spacing to maximize recovery and prevent waste. The Railroad Commission rejected the applications.
The Texas Supreme Court first analyzed the “fair and reasonable offer” requirement for a MIPA application. Because that phrase is not defined in MIPA, its application is subject to the Railroad Commission’s discretion, to which courts give substantial deference. In the Court’s view, the Railroad Commission was acting within its reasonable discretion, because EOG’s wells, as permitted, did not drain the riverbed tract, and Ammonite made no effort to show that it was possible for EOG to modify its drilling plans or extend its existing wells to reach the riverbed.
The Court noted that MIPA requires pooling orders to afford each owner a “fair share,” yet Ammonite was effectively seeking a share of EOG’s production without contributing any minerals of its own. Further, the Court pointed to EOG’s unchallenged expert testimony, and reasoned that requiring EOG to give Ammonite a share of production without anything in return would increase the risk that the wells would not be commercially viable.
Ammonite made a number of arguments that were rejected by the Court, and the Court’s reasoning may be notable to practitioners. Ammonite argued that its offers were fair and reasonable when made because, at that time, “it would have required little additional drilling for each well to reach the riverbed tracts.” The Court rejected this argument, reasoning that Ammonite’s offers were based solely on the wells as they were permitted, which would not reach or produce riverbed minerals. In the Court’s view, in order to be fair and reasonable, Ammonite would have had to propose and demonstrate the feasibility of different drilling, extending the wells, or of drilling additional wells. Ammonite’s offers did neither, and therefore the Court held the Railroad Commission could reasonably hold they were unreasonable on their face.
The Court then turned to the Railroad Commission’s second basis for rejecting Ammonite’s application: its finding that Ammonite’s requested order would not prevent waste or protect correlative rights. In the Court’s view, waste is something that “reduces or tends to reduce the total ultimate recovery of oil … from any pool.” “Correlative rights guarantee a mineral interest owner an opportunity to produce a ‘fair share’ of the reserves underlying his land.” Ammonite argued that the location of EOG’s wells leaves Ammonite’s riverbed mineral stranded, thereby resulting in waste and denying Ammonite its fair share. In the Court’s view, even if Ammonite’s riverbed minerals were left stranded, a forced-pooling order would not change that because EOG’s wells were already drilled and producing at the time of the Railroad Commission’s order, and those wells cannot produce riverbed minerals. Ammonite characterized EOG’s expert testimony that future technology might allow riverbed drilling as “beyond speculative,” but the Court rejected that argument explaining that Ammonite had the burden of proof and failed to put on any rebuttal expert testimony.
Ammonite also argued that a forced pooling order at this time would still prevent waste by incentivizing EOG to drill new wells or rework existing ones to extend into the riverbed. In the Court’s view, the Commission’s refusal to stretch its “limited authority to force pooling this far” was not unreasonable and was consistent with its prior decisions of refusing to exercise MIPA authority without proof of existing drainage. The Court also cited commentary explaining that, if additional drilling is required to drain the acreage sought to be pooled, then the requested force pooling should be denied in order to avoid the drilling of unnecessary wells.
Ammonite also argued that EOG should have originally proposed the wells to extend into the riverbed. The Court rejected that argument, as there was no proof that Ammonite offered its consent to that drilling, and Ammonite made no attempt to prove that it would have been technically or commercially feasible for EOG to do so.
