By Persis Dean and Kelly Swanson

The Texas Supreme Court will review a state regulator’s rejection of 16 applications submitted by Ammonite Oil & Gas Corp. (“Ammonite”) to force pool its mineral estate with adjacent wells operated by EOG Resources Inc. (“EOG”).

On June 2, 2023, the Texas Supreme Court granted Ammonite’s petition for review which argued that the Texas Railroad Commission misinterpreted the forced pooling provisions under the Texas Mineral Interest Pooling Act (“MIPA”).[1] Ammonite alleges that these misinterpretations, which prompted the denial of its applications, will cause its mineral estates to be left stranded.

Procedural History

The Texas Permanent School Fund owns the mineral estates under Texas rivers.[2] Ammonite is a lessee of acreage in the Frio River in McMullen County with the Texas Permanent School Fund reserving a 25% royalty in the minerals produced.[3] Surrounding Ammonite’s tract on both sides of the river are 16 wells owned and operated by EOG.[4]

In 2015, Ammonite offered to voluntarily pool its riverbed acreage into 16 units with the wells operated by EOG.[5] If tracts are “pooled,” a unit well is deemed to have produced from all the pooled tracts, meaning all tract owners will share in the well’s production. Ammonite’s voluntary offer included a 10% charge on Ammonite’s working interest in exchange for EOG’s risk.[6] EOG refused. Ammonite then filed 16 applications with the Railroad Commission to attempt to force pool its leased riverbed tract with EOG’s wells.

Before the Railroad Commission is granted jurisdiction over forced pooling applications, the applicant must make a fair and reasonable offer to voluntarily pool. If the commission determines that the applicant did not make a fair and reasonable offer,[7] then the commission lacks jurisdiction and must dismiss the application.[8] Following the showing of a fair and reasonable voluntary offer, the Railroad Commission is authorized to order mineral owners to pool their interests if the applicant proves that forced pooling would either (1) avoid the drilling of unnecessary wells; (2) protect correlative rights; or (3) prevent waste.[9]

Ammonite argued that forced pooling was necessary for the second and third reasons—it would protect its correlative right to a fair share of the common reservoir’s production and prevent waste of its riverbed minerals. [10]

At the administrative hearing, an EOG expert testified that a 10% charge for risk was neither fair nor reasonable.[11] A “charge for risk” is a payment intended to pay back the operator for the risks undertaken in drilling wells. EOG’s expert testified that a 100% risk charge was proper because the tract will require a significant number of wells, rather than just one well in a single unit, in order to be commercially successful.[12]

Ammonite asserted that its proposed 10% charge for risk is reasonable in an unconventional resource play like the Eagleville Field because a 10% charge had been approved by the commission in similar resource play situations.[13] However, Ammonite conceded that a higher charge for risk would be fair and reasonable, and it “would not be adverse.”[14]

Despite the hearing examiners recommending approval for 15 of the 16[15] applications for forced pooling, the commission rejected the recommendations and denied all 16 applications.[16]

Overall, the commission found that Ammonite did not make a fair and reasonable offer to EOG and forced pooling would not prevent waste. It based its decision on the following factual findings:

• Ammonite failed to provide survey data or a metes and bounds description of the riverbed to establish the precise acreage to be pooled (Finding of Fact #6);
• None of the EOG’s 16 wells produce hydrocarbons from or drain Ammonite’s riverbed tracts (Finding of Fact #7);
• Ammonite agreed that a greater charge for risk than the 10% listed in its voluntary pooling offers was reasonable (Finding of Fact #8);
• Ammonite offered no expert witnesses or evidence of drainage areas of any wells (Finding of Fact #10).[17]

Following the commission’s denial of its applications, Ammonite filed a petition for judicial review in the McMullen County District Court, where the court affirmed the commission’s order.[18] Ammonite then appealed to the Fourth Court of Appeals in San Antonio, which affirmed the district court’s order.[19] On January 12, 2022, Ammonite filed a petition to the Texas Supreme Court arguing that the denial of its applications relied on incorrect interpretations of MIPA.[20]

Ammonite: The Commission is Misapplying MIPA

According to Ammonite, its applications should not have been dismissed because (1) its risk penalty offer was not “unreasonably low” under MIPA; and (2) MIPA does not require a forced pooling applicant to demonstrate “drainage” to establish “waste.”[21]

Specifically, Ammonite argued there is a conflict between the Fourth and Fourteenth Court of Appeals on whether a risk-penalty offer is necessary in voluntary pooling applications.[22] The Fourteenth Court has previously held that “[t]here is no statutory requirement that an offer to voluntarily pool contain a risk penalty.”[23] Thus, a forced pooling application cannot be dismissed because an applicant “who took the non-statutorily required step of including a risk-penalty offer in its voluntary-pooling offer proposed a minimum penalty figure that the reviewing court thought ‘unreasonably low.’”[24]

Here, Ammonite alleged that the Fourth Court wrongly disposed of the case on the ground that its risk-penalty offer in its offer to voluntary pool was “unreasonably low.”[25] Under the Fourth Court’s approach, an “operator can torpedo an application for forced pooling by simply laying behind the log and refusing to negotiate, as this case illustrates.”[26]

Further, Ammonite maintained that its risk-penalty offer cannot be deemed unreasonably low because it offered to pay any amount imposed by the commission.[27] Ammonite said it made the 10% offer based on EOG’s public statements that it had a 100% success rate in all its wells on the Eagle Ford Shale.[28] The Texas Supreme Court needed to grant its petition to resolve this conflict in the Courts of Appeal.[29]

Next, Ammonite argued that the commission incorrectly required the forced pooling applicant to demonstrate “drainage” of its tracts to prove “waste.”[30] In this argument, Ammonite is seemingly conceding that it did not prove that EOG’s wells were draining the hydrocarbons from its tract of land. However, Ammonite asserted that waste of its hydrocarbons is still occurring because it is not possible to drill a well on its winding riverbed acreage.[31] Thus, denying the forced pooling application would “cause waste by stranding the Eagle Ford Shale reserves underlying the Frio River riverbed tracts.”[32] The Texas General Land Office agreed with Ammonite’s characterization and called drilling horizontal well beds across riverbeds like the Frio River “virtually impossible.”[33]

EOG: The Commission Was Correct, Force-Pooling Will Not Prevent Waste

EOG argued in its response brief that the commission came to the correct conclusion in denying Ammonite’s applications.[34] First, Ammonite did not make a fair and reasonable offer.[35] Second, it did not prove the existence of any of the three gateways warranting forced pooling—that forced pooling is necessary to prevent drilling of unnecessary wells, protect correlative rights, or prevent waste.[36]

The commission concluded in its findings of fact that the existing wells on EOG’s units do not produce hydrocarbons from the riverbed acreage.[37] Thus, EOG argued, forced pooling will have no impact except to dilute the interests of other mineral and royalty owners whose leases genuinely contribute to production.[38]

Railroad Commission: We Got It Right the First Time

The commission contended that its denial of Ammonite’s applications for forced pooling was warranted because Ammonite’s voluntary pooling offers were not fair and reasonable, and it correctly interpreted MIPA in finding that forced pooling in this situation would not prevent waste.[39]

Specifically, the commission argued that Ammonites offer of a mere 10% risk penalty for voluntary pooling where it would also agree to any penalty up to 100%, but only in compulsory proceedings, rendered the offer neither fair nor reasonable.[40] The offer must be “fair and reasonable” measured at the time of the voluntary offer to pool, not after a compulsory order, the commission explained.[41]

Further, the commission argued that it reasonably determined that pooling would not prevent waste where the geological evidence showed Ammonite’s minerals would remain in the ground even if pooling was forced. If the applications were granted, Ammonite would be awarded a share of production even though its minerals cannot be produced through EOG’s wells. Contrary to Ammonite’s assertion that its minerals are “stranded,” the commission argued that the record shows that Ammonite can produce the riverbed by simply drilling its own wells.

Key Points the Supreme Court Will Potentially Weigh in On

The Texas Supreme Court’s decision will likely note several interesting issues regarding the scope and interpretation of the MIPA. The following are potential issues the court could opine on:

• Whether a risk penalty must be proposed in order to constitute a fair and reasonable voluntary offer to pool resources
• Whether drainage of a tract’s minerals is necessary to prove waste, or whether waste can be proved through other means
• The level of evidence necessary to get approval from the commission on an application for forced pooling

Persis Dean is a partner and Kelly Swanson is an associate at Schiffer Hicks Johnson PLLC, a Houston-based trial law firm.

[1] Pursuant to Tex. Nat. Res. Code Ann. § 102.011, MIPA grants the Railroad Commission the authority to approve applications for forced pooling.

[2] Tex. Nat. Res. Code §11.041(a).

[3] Petition for Review for the Supreme Court of Texas at 13, Ammonite Oil & Gas Corporation v. Railroad Commission of Texas and EOG Resources, Inc., No. 21-1035.

[4] Id.

[5] Id.

[6] Ammonite Oil & Gas Corp. v. R.R. Comm’n of Tex., No. 04-20-00465-CV, 2021 WL 4976324, at *5 (Tex. App.—San Antonio Oct. 27, 2021, pet. granted).

[7] MIPA does not define the phrase “fair and reasonable offer to pool voluntarily.” See Tex. Nat. Res. Code Ann. § 102.013. The meaning is therefore “left to the Commission’s discretion” in each case. R.R. Comm’n of Tex. v. Pend Oreille Oil & Gas Co., Inc., 817 S.W.2d 36, 40 (Tex. 1991).

[8] Railroad Com’n of Texas, 817 S.W.2d at 40 (citing Carson v. R.R. Comm’n of Tex., 669 S.W.2d 315, 318 (Tex. 1984)).

[9] Tex. Nat. Res. Code Ann. § 102.011.

[10] Ammonite Oil and Gas Corporation, 2021 WL 4976324, at *1.

[11] Id. at *5.

[12] Id.

[13] Id.

[14] Id.

[15] One of the proposed units was found to have exceeded the maximum size for oil units. Id. at *2.

[16] Id. at *1.

[17] Id. at *4.

[18] Id. at *2.

[19] Id. at *5.

[20] Petition for Review for the Supreme Court of Texas, Ammonite Oil & Gas Corporation v. Railroad Commission of Texas and EOG Resources, Inc., No. 21-1035.

[21] Id.

[22] Petition for Review for the Supreme Court of Texas at 10, Ammonite Oil & Gas Corporation v. Railroad Commission of Texas and EOG Resources, Inc., No. 21-1035.

[23] Am. Operating Co. v. R.R. Comm’n of Tex., 744 S.W.2d 149, 153 (Tex. App.—Houston [14th Dist.] 1987, writ denied).

[24] Petition for Review for the Supreme Court of Texas at 24, Ammonite Oil & Gas Corporation v. Railroad Commission of Texas and EOG Resources, Inc., No. 21-1035.

[25] Id. at 12.

[26] Id. at 25.

[27] Id. at 26.

[28] Id. at 25.

[29] Id. at 12.

[30] Id. at 28.

[31] Id. at 29-30.

[32] Id. at 30.

[33] Id. at Appendix 4.

[34] EOG Resources, Inc. Response to Petition for Review at 5, Ammonite Oil & Gas Corporation v. Railroad Commission of Texas and EOG Resources, Inc., No. 21-1035.

[35] Id. at 14.

[36] Id. at 15.

[37] Id. at 16.

[38] Id. at 1.

[39] The Railroad Commission of Texas’s Response to Petition for Review at 9. Ammonite Oil & Gas Corporation v. Railroad Commission of Texas and EOG Resources, Inc., No. 21-1035.

[40] Id. at 14.

[41] Id.