Travis County District Court Finds that Texas Railroad Commission Lacks Power to Issue Allocation and Production Sharing Well Permits

May 14, 2021 In Opiela v. Railroad Commission of Texas, No. D-1-GN-20-000099, the 53rd District Court of Travis County, Texas, concluded that the Texas Railroad Commission (“RRC”) violated the Administrative Procedure Act, Tex. Gov’t Code § 2001.001 et seq., by adopting rules for issuing allocation and production sharing well permits.  Further, the court held that the permit applicant, EnerVest (and subsequently Magnolia Oil & Gas), failed to make the requisite showing that it had a good faith claim of right to drill the proposed well under RRC rules.

In Opiela, the Plaintiffs objected to an application filed by EnerVest with the RRC for a drilling permit on a well, claiming that EnerVest lacked authority to drill an allocation well.  Plaintiffs asserted that the express authority allowing an allocation must be in the lease and Plaintiffs’ lease prohibited pooling, which also prohibited the issuance of an allocation well permit.[1]

After drilling the well, EnerVest then assigned its interest in the property to Magnolia Oil & Gas, who then applied to the RRC to amend the original permit application to convert the well from an allocation well to a production sharing agreement well.  The Plaintiffs objected to Magnolia’s existing permit involving the property, arguing that the RRC did not have the authority to grant a permit for horizontal drilling across multiple leased but unpooled tracts.  After the RRC adjudicated and dismissed Plaintiffs’ objection, Magnolia proceeded with its operations.

The RRC’s dismissal of Plaintiffs’ objection was consistent with the RRC’s long-standing practice of allowing allocation and production sharing wells.[2]  In those other RRC decisions, the RRC concluded that its position was not to adjudicate title and interpret leases, but to grant or deny permits to prevent waste and protect correlative rights, provided that the permit applicant established a good faith basis that it had a right to drill the proposed well.  In accordance with that practice, the RRC included disclaimers on allocation well permits.[3]

Plaintiffs appealed the RRC’s decision to the Travis County Court arguing that the RRC erred when it granted the allocation well permit due to the lack of pooling authority in the lease.  Ultimately, Opiela held that the RRC wrongfully granted the permit because Magnolia failed to establish a good faith claim of right to drill the well, as is required under RRC rules.  Magnolia asserted that its good faith claim was supported by the plain language of the lease permitting it drill a well on Plaintiffs’ tract and Texas authority supporting allocation and production sharing wells.  Further, Magnolia argued that the permit was supported by RRC’s precedent and public policy in maximizing the recovery of resources and preventing waste.  Although, the court held that the RRC erred and remanded the case to the RRC for further proceedings, the order did not explain why Magnolia’s showing was insufficient, nor did it explain the importance of the pooling clause.

Importantly, Opiela did not invalidate allocation or production sharing permits, per se.  Rather, Opiela, directed that RRC that it must scrutinize those permits to determine whether there is a good faith basis for the right to drill.  Opiela explained that it incorrect for the RRC to take the position that it does not interpret the lease “or other relevant title documents” when reviewing a permit application.  In other words, Opiela, contrary to other Texas decisions, is directing the RRC to conduct a detailed title analysis of the lease and any other relevant title documents prior to granting a permit.  Opiela appears to take a contrary position to the Texas Supreme Court’s position in Magnolia Petroleum Co. v. Railroad Comm’n of Texas, 170 S.W.2d 189 (Tex. 1943).[4]  As a result, Opiela also concluded that the RRC should have considered the effect of pooling clause of the lease in evaluating whether to grant an allocation or production sharing well permit.  However, such a requirement is in contrast to the type of permit sought.  An application for allocation or production sharing well is not application for a pooled unit well and the RRC should not be considering inapplicable or irrelevant provisions of a lease when determining whether to grant a permit or not.  Rather, those disputes should be between the lessor and lessee and adjudicated in the courts and not adjudicated in quasi-trial before the RRC.

Opiela is significant in that it is the first challenge to an allocation that has resulted in a decision issued by a district court.  Does Opiela represent an invalidation of allocation wells?  We do not believe so. Rather, Opiela attempts to impose additional obligations and requirements on the RRC prior to granting an allocation or production sharing well permit.  Opiela should not invalidate the thousands of allocation and production sharing well permits already issued throughout Texas.  If Opiela stands and is not reversed on appeal, then the RRC will be forced to develop additional steps and scrutinize the lease and potentially other relevant title documents before issuing an allocation or production sharing well permit.  Operators considering seeking an allocation well permit should evaluate the specific provisions in their lease and be prepared to make a more detailed showing to the RRC based upon the Opiela decision.  Additionally, Opiela is also a reminder that any decision of the RRC is subject to judicial scrutiny by the district court.

[FINAL JUDGMENT – Opiela v. Railroad Commission of Texas, No. D-1-GN-20-000099]

[1] Plaintiffs asserted that the following language in the oil and gas lease prohibited an allocation or production sharing well permit:  “Nothing contained herein shall authorize Lessee in any manner whatever to pool said land or any part of the same for oil, and for the production of oil from said land under this lease. . . .”

[2] See Klotzman v. Railroad Comm’n of Texas, No. GN-13-004306, filed Dec. 23, 2013, in the District Court of Travis County, 98th Judicial District; Monroe Properties, Inc. et al. v. R.R. Comm’n of Texas, No. D-1-GN-18-001111, 53rd Judicial District, Travis County, Texas.

[3] The disclaimer, in part, provides:

“Commission Staff expresses no opinion as to whether a 100% ownership interest in each of the leases alone or in combination with a “production sharing agreement” confers the right to drill across lease/unit lines or whether a pooling agreement is also required.…Issuance of the permit is not an endorsement or approval of the applicant’s stated method of allocating production proceeds among component leases or units…Payment of royalties is a contractual matter between the lessor and lessee. Interpreting the leases and determining whether the proposed proceeds allocation comports with the relevant leases is not a matter within Commission jurisdiction but a matter for the parties to the lease and, if necessary, a Texas court of competent jurisdiction.”

[4] The Texas Supreme Court has explained that a “reasonably satisfactory showing of good-faith claim of ownership in the property” is what is required to obtain a drilling permit and that the function of the RRC “is to administer the conservation laws.  It does not undertake to adjudicate questions of title or rights of possessions.  These questions must be settled in the courts.”  Magnolia Petroleum Co. v. Railroad Comm’n of Texas, 170 S.W.2d 189 (Tex. 1943).


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