March 18, 2022 — In Ammonite Oil & Gas Corp. v. R.R. Comm’n of Tex, the San Antonio Court of Appeals heard an appeal regarding the Mineral Interest Pooling Act (MIPA). Under MIPA, the owner of a mineral estate may ask the Texas Railroad Commission (TRC) to force other tracts owners within both the same proration unit and within a common reservoir to pool their interest with that of the applicant.
To invoke MIPA, an applicant must 1) “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;” 2) file a MIPA application to force pooling; 3) make a showing that the forced pooling would prevent the drilling of unnecessary wells, protect correlative rights, or prevent waste. The Act does not define what constitutes a fair and reasonable offer, meaning that the TRC is charged with determining the nature of a fair offer. In other words, the TRC decides on a case-by-case basis whether an offer meets the definition of fair and reasonable. If the offer is not fair, then the TRC is said to lack jurisdiction over the issue and must dismiss the case.
The facts here are simple: Ammonite offered to pool 16 units, subject to a mutually agreeable JOA where EOG Resources would act as the operator. Ammonite proposed a 10% charge for risk attached to the working interest, a payment to EOG that would compensate them for the risk of drilling additional wells in the forcibly pooled unit. EOG’s expert testified that Ammonite’s offer did not adequately compensate EOG for the risk and that a 100% charge for risk was the proper amount due to the limited permeability of the rocks within the Eagle Ford shale. The expert further noted that unconventional drilling and completion techniques often result in wells that are not commercially successful. Since the Eagle Ford shale requires substantial investment in acreage, the number of wells EOG would have to drill to potentially recoup costs, the expert argued, would be excessive.
Further findings that the TRC took into account included:
Accordingly, the TRC found that the first requirement of MIPA, a fair and reasonable offer, was not met.
When the Court of Appeals conducts a judicial review of the TRC’s decision in a case, it will apply the substantial evidence standard. This means that a court may only reverse and remand if it finds the TRC’s proceedings were “in violation of constitutional or statutory provision,” “in excess of the agency’s statutory authority,” “made through unlawful procedure,” “affected by other error of law,” “not reasonably supported by substantial evidence,” or it the decision was “arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion.” This standard of review does not entail the court weighing the evidence provided during the administrative hearing and coming to a decision regarding its fairness. Rather, the court’s role here is to determine whether some reasonable basis existed to justify the TRC’s decision. This is a low bar.
This case is fundamentally an administrative law case and demonstrates the deference Texas courts give to agency decision-making processes. In applying the substantial evidence standard of review here, the court determined that the TRC’s dismissal of Ammonite’s MIPA application was proper based on some of the reasons noted above. These factors were more than enough to show the TRC had “some reasonable basis” for their decision, which is all the deferential standard employed by the court requires. As a matter of policy, the TRC does not want to force landowners to pool their lands. It would prefer that lessors and lessees come to a mutually agreeable contractual agreement without involving the courts. Accordingly, the purpose of MIPA is to encourage voluntary pooling, not to be the proverbial stick in a mineral owner’s toolbox when a carrot cannot convince an adjoining owner to voluntarily pool.
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