Railroad Commission of Texas v. C. F. DeBardeleben, Jr., 157 Tex. 518

Mr. Justice Culver delivered the opinion of the Court. This suit brought by respondent, DeBardeleben, attacked an order of the Railroad Commission that denied him exceptions to the Statewide Density Rule for four gas wells in the Bethany Field in Harrison and Panola Counties. The Court of Civil Appeals affirmed a judgment in favor of respondent. 297 S.W. 2d 203. In that affirmance we concur.

Substantially the only question for decision here is whether or not the evidence shows as a matter of law that respondent’s gas producing properties are being confiscated, or in other words, was the order of the Railroad Commission reasonably supported by substantial evidence. Originally the area now composing the Bethany Gas Field was treated by the Commission as two separate and distinct fields, Bethany to the south and lying principally in Panola County and Elysian Fields to the north in Harrison County.

As development progressed, the distance between these two fields was gradually narrowed to the point of mergence. On September 15, 1955 the Commission found that the two fields were producing from a common reservoir and ordered them combined under the designation of Bethany Field and under Bethany Field Rules. Prior to this combination the spacing and density rules in the two fields differed substantially. In the Bethany Field it had been determined that one well would effectively drain 640 acres and proration units were so set up with one well to the unit. In the Elysian Field the per well unit was 320 acres.

Petitioner admits that respondent’s leases were located in what might be called the “twilight zone” between the two fields and could possibly have been considered in either at the time of the original designation by respondent. Considerable latitude was permitted to the operator in determining in which field his properties should be placed. Respondent owned four units of approximately 640 acres each and designated by him and the Commission as being in the original Bethany Field. On each of these four tracts one well had been drilled according to the Bethany Rules.

The applications to drill these wells were made in the latter part of 1954 and early in 1955. Permits were issued, the wells were drilled and production obtained. In July 1955 respondent made application to drill four more wells on four additional units of 320 acres each, carved out of four 640 acre units. This was done without permission of or notice to the Comimssion. He falsely represented these tracts as lying within Elysian Field. His applications were examined, appeared to be in order and in compliance with the Elysian Field Rules of one well to 320 acres.

Permits were accordingly granted and the wells drilled. The Commission thereafter having discovered the misrepresentation refused to grant production allowables for these four wells and ordered them sealed. It then denied respondent’s application for exception to the Density Rule on the ground that the evidence did not justify an exception either for the prevention of waste or for the protection of correlative rights.

Although there are some extenuating circumstances, there can be no question but that respondent did obtain the permits in question through misrepresentation of fact and this conduct is not in the least to be condoned, as said by the Court of Civil Appeals.

Even so, if respondent would have been entitled to drill the four wells to protect against confiscation of and drainage from his property by offsetting wells to the north and east, that were drilled according to the Elysian Field and as close as 330 feet to respondent’s property line, while under the Bethany Rules respondent could drill no nearer his neighbor’s line than 1320 feet, we think production from these wells should not be denied.

Respondent’s claim of confiscation is based upon these points: (1) the reservoir under the Bethany and Elysian Fields is common, continuous and in free communication; (2) the pressure of the four original wells drilled on the 640-acre units is uniformly higher than that of the surrounding offset wells and it is an admitted physical fact that gas will flow from a high pressure area to a low pressure area if the reservoir is continuous and in communication; (3) the area that one well will drain had been determined by the Railroad Commission to be 640-acre units; (4) respondent’s original wells are on 640-acre units, but the offsets to the north and east are on 320-acre units, are closer to the northern and eastern limits of respondent’s units, and the offsets are producing more cubic feet per acre than respondent’s wells; (5) if respondent was allowed to produce from the four additional wells he would approximate the cubic feet per acre production of the offsets in the adjoining 320-acre units; (6) the Railroad Commission itself recognized the situation by reciting in its order, combining the two fields, that different rules for the two fields were causing “ineouitable conditions to exist;” (7) the drainage from respondent’s 640-acre units is uncompensated by any drainage to his properties from the south, east and west.

Confiscation, as that term is used here, means the denial to an owner or lessee of a fair chance to recover the oil or gas in or under his land or the equivalent in kind. Railroad Commission of Texas v. Gulf Production Co., 134 Texas 122, 132 S.W. 2d 254; Gulf Land Co. v. Atlantic Refining Co., 134 Texas 59, 131 S.W. 2d 73. A valid contention that a tract of land is being drained and the property being confiscated must be based upon a finding that the reservoirs underlying the tracts are actually one reservoir with free communication between the tracts.

The Railroad Commission’s order of September 13, 1955 provides in part as follows: “Whereas, fro mevidence adduced at said hearing and from information contained in Commission records and reports, it appears to the Commission that, among other things, The Elysian Fields and Bethany Fields area, each of which had developed separately for several years, had, through such continuing development operation joined and become a common field with the reservoirs underlying such area recognized as common and continuous throughout the two-field area * * (Emphasis supplied.) Only two witnesses testified on the trial of this case.

Jack K. Baumel, a consultant petroleum and natural gas engineer, was a witness for respondent. Mr. Baumel was in the employ of the Railroad Commission for some fifteen years and was Director of Production and Chief Engineer in charge of the Oil & Gas Division for ten years ending in 1952. John S. Cameron, engineer in charge of the Commission’s gas department, testified in behalf of the Railroad Commission. The testimony of the witness, Baumel, substantiates the respondent’s contentions. That testimony is set forth in considerable detail in the Court of Civil Appeals’ opinion and will not be reinstated here. Mr.

Cameron stated that his idea of a common reservoir is one that is continuous and in reasonable communication throughout its length and breadth through a semi-permeable formation of some sort. Mr. Cameron refused to testify regarding the drainage in this case, giving as his reason that he was not sufficiently acquainted with the formation of the reservoir. On the other hand Mr.

Baumel was positively of the opinion, based as he says, on engineering data, and his knowledge of the pressures and structures in this area, that drainage from respondent’s properties is taking place and will continue unless these additional wells are allowed to operate. Otherwise, he says, the respondent does not have a fair chance to recover the gas and liquid hydrocarbons in the Pettit zone underlying his properties.

Considering the amount of production from respondent’s four original wells and the actual tests run on the new wells, Baumel calculates that, if the new wells are granted allowables, respondent on his tracts will approximate the per acre production of his neighbors to the north and east in what was formerly Elysian Field, but that under present conditions respondent would lose half of the recoverable gas under his acreage by the drainage to offset wells on the northeast, Based on the Commission’s assumption that one well would effectively drain an area of 640 acres, there are seven producing offsets that reach well within respondent’s properties.

In fact each of three of these offsets would appear from their proximity to drain from respondent’s units on two sides. The petitioner-Commission takes the position that respondent’s problem is not one of drainage, but rather that his wells are poor producers and that three of the four original wells are unable to make their quota to which they are entitled under the Bethany Field formula, while the seven offsetting wells produce their full allowable.

Petitioner argues that the comparison of bottom hole pressures between respondent’s original wells and the offsets does not necessarily prove drainage to respondent’s disadvantage. Petitioner cites the testimony of respondent’s witness, Baumel, to the effect that porosity in this Pettit zone throughout the East Texas area is spotty, and that it can differ so greatly within a small local area that a distance of less than a mile may result in the difference between a good well and a poor one.

This testimony, says the petitioner, can be relied unon as establishing that it is not at all unusual for poor communication to occur locally between neighboring wells within this field and the fact that pressures have not equalized after a number of years of development would show that there is no free and unrestricted communication throughout the field. On the other hand, Mr. Baumel was speaking of the Pettit zone generally through East Texas.

He testified that as a result of extensive study he had determined that respondent’s property is favorably situated in regard to the trend of porosity in that particular area and that concentrated drilling operations near respondent’s property confirm that conclusion. He asserted that if production was discontinued pressures would tend to equalize but not while seven offset producers to respondent’s four wells are producing twice as much gas per acre.

Assuming as we must, in keeping with the testimony that an equal amount of gas per acre underlies respondent’s property as that contained under those to the north and east, if respondent’s four original wells are poor producers it would seem that fact in itself would tend to show rather that respondent without the additional wells would not have a fair chance of producing the gas underlying his properties at least so long as the rate of production preponderates so heavily in favor of his neighbors to the north and east.

We are equally convinced that respondent also established that this loss is not compensated for by drainage to his properties to the south, east and west. Respondent’s original wells seem to be reasonably well offset by producers on adjoining properties on those sides and the pressure for each of these offsets in the Pettit zone is well below that of respondent’s four wells. It is admitted that the gas will not flow from a low to a high pressure area but the converse of that is true.

In our opinion the evidence establishes that confiscation of respondent’s properties is taking place and that the decision of the Railroad Commission to the contrary is not reasonably supported by substantial evidence. It is argued that the permits issued by the Commission to drill the four additional wells were void, being in violation of the Commission’s rules and regulations and that the permittee received no authority to drill under such an illegal permit so that the issue of confiscation should never have been reached.

Therefore the petitioner says that judgment should be reversed and rendered and DeBardeleben required to seek his remedy before the Commission in a proper manner. On this point petitioner cites Railroad Commission of Texas v. Gulf Production Co., supra; Gulf Land Co. v. Atlantic Refining Co., supra, and Gillespie & Sons v. Railroad Commission, Texas Civ. App., 161 S.W. 2d 159, er. ref. From an examination of these authorities they appear to lend little aid or support to petitioner’s contention. In Railroad Commission v. Gulf Production Company, the court found that there was neither waste nor confiscation.

In Gulf v. Atlantic Refining Company, the principal ruling was to the effect that where a subdivision came into existence after the effective date of Rule 37 it was not entitled to protection against confiscation. In Gillespie v. Railroad Commission confiscation was not involved. Petitioner also relies upon Railroad Commission v. Magnolia Petroleum Co., Texas Civ. App., 125 S.W. 2d 398, er. ref. In this case the Commission granted an exception to Rule 37 to prevent confiscation, but the permittee had drilled the well at a location different from that specified in the permit.

The Court of Civil Appeals affirmed the trial court’s judgment setting aside the Commission’s order and enjoining production from the well because there was not a substantial compliance with the order, although the court considered that drainage sufficient to justify an exception to Rule 37 had been shown. The judgment was entered without prejudice to the applicant’s right to apply to the Commission for an order to drill at a proper location.

In that case it was observed that although the Commission made no objection to the location of the well this did not validate non-compliance with the order for the reason that the Commission could only act after notice and hearing. We think this case is not applicable to our facts. No objection is urged here so far as the locations of the wells are concerned. The argument is further presented that respondent has in no way made a proper application to the Commission for an exception to the Density Rule.

Petitioner says that the necessary steps include the filing of a Form 1 application for each well accompanied by a certified plat showing (1) the entire unitized tract on which the proposed well is to be located, (2) the acreage assigned to the proposed well, and (3) the acreage previously assigned to all other wells. Petitioner says that a judgment adverse to respondent in this case would not work a forfeiture of his four wells; that he should go back and file the proper application for an exception to the density and spacing rules and then have the Commission determine the matter of confiscation.

We do not agree with this contention. In the first place all of the facts were before the Commission at the time of the hearing. Respondent’s petition asserts that the Railroad Commission on its own motion on December 20, 1955 gave notice of hearing to be held to consider whether these wells should be granted an exception to the Statewide Density Order. Be that as it may, the order of the Commission recites that “whereas, after due notice, the Railroad Commission of Texas held a hearing on January 11, 1956, to consider the application of C. F.

DeBardeleben, Jr. for exceptions to the Density Order applying to four wells in the Bethany Field, Panola and Harrison Counties, Texas, * * The application was not rejected on account of any lack of sufficiency, but the Commission, after reciting fully all of the facts found “that no good and sufficient reason was advanced at said hearing which would justify exception to said special field rule either for the prevention of waste or for the protection of correlative rights.” The order further recited that the motion for rehearing was denied.

Under this record we fail to see any recourse open to respondent other than the one he took of applying to the court for redress. We likewise do not understand how the reversal and rendition of this case in favor of the Commission would not be a final adjudication of respondent’s rights to produce from the four wells unless, of course, the Commission should reverse itself on the finding of confiscation. The judgment of the Court of Civil Appeals is affirmed. Opinion delivered July 24, 1957.