Ammonite Oil & Gas Corporation v. Railroad Commission of Texas and Eog Resources, Inc.

Supreme Court of Texas

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No. 21-1035

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Ammonite Oil & Gas Corporation,

Petitioner,

v.

Railroad Commission of Texas and EOG Resources, Inc.,

Respondents

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On Petition for Review from the

Court of Appeals for the Fourth District of Texas

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JUSTICE YOUNG, joined by Justice Busby, dissenting.

The Mineral Interest Pooling Act deprives the Railroad Commission

of authority to consider a forced-pooling application unless the applicant

first made “a fair and reasonable offer to pool voluntarily.” Tex. Nat. Res.

Code § 102.013(b). What constitutes a “fair and reasonable offer” is

therefore important to Texas law. In my view, that issue is what

warranted granting Ammonite’s petition for review—specifically, whether

the court of appeals erred when it decided that Ammonite’s voluntary-

pooling offers were unfair and unreasonable because they included a 10%

risk-penalty term (or, as that court called it, a “charge for risk”). The

Court unanimously rejects the court of appeals’ conclusion. Because that

court mistakenly thought that the fair-and-reasonable-offer point

resolved the case, it did not proceed to review the Commission’s denial

of Ammonite’s applications on their merits under § 102.011 of the Act.

Rather than be the first court to consider the applications’ merits, we

should reverse and remand so that the court of appeals may do so.

Instead, the Court affirms the court of appeals’ judgment under

both § 102.013(b) and, separately, under § 102.011—in both instances for

reasons that the court of appeals never considered and, unfortunately, for

reasons that are also wrong. The Court, embracing what it believes is

the Commission’s view, says that Ammonite’s failure to show “drainage”

rendered its voluntary-pooling offers unfair and unreasonable. Worse

yet, the Court holds that the same fact—no drainage—also supports the

Commission’s determination that forced pooling is not even an option

under § 102.011.

Even if I thought it were proper to proceed to the legal questions

that the Court addresses, I would disagree with its approach and

conclusion for two principal reasons. First, the presence of drainage is

not dispositive of whether Ammonite made fair and reasonable voluntary-

pooling offers under § 102.013(b). It is at most relevant, and in this

context it is immaterial. Second, while drainage would be dispositive of

whether forced pooling could properly protect correlative rights,

Ammonite requests forced pooling (at least in part, if not wholly) for the

distinct § 102.011 “purpose” of “preventing waste”—not of minerals that

will be drained, but of minerals that will be stranded. The Commission

and this Court mistakenly treat Ammonite’s applications as resting solely

on “drainage” and “protecting correlative rights” when it is waste

through stranding that matters.

2

So here is my view. As a matter of law, Ammonite did make fair

and reasonable voluntary-pooling offers under § 102.013(b). If we do not

send the case back to the court of appeals, we should remand directly to

the Commission so that it can decide whether the forced pooling of

Ammonite’s mineral interest with EOG’s is proper under § 102.011 (an

issue the court of appeals did not reach and on which the Commission’s

explanation was conclusory at best, burdened as it was by a mistaken

understanding of the fair-and-reasonable-offer point). The Commission

should resolve any relevant and material factual disputes (such as the

feasibility of extending or reworking EOG’s wells, whether now or in the

future) and should exercise whatever discretion the law may give it based

on those findings. We should make sure that, when the Commission does

so, it does not rely on the erroneous impression that “no drainage” is alone

a sound basis to deny the pooling applications. The lack of drainage is

the very thing that allegedly makes the minerals here stranded. If they

are stranded, they constitute waste. And if there is waste, then pooling

is on the table and is sometimes mandatory. Drainage is not and never

has been required to establish “waste.”

But the Court should not, as it unfortunately does, decide the

§ 102.011 issue in the first instance and purport to defer to the agency

when doing so. First, there is nothing for the Court to decide under

§ 102.011 because its § 102.013(b) holding (with which I disagree)

disposes of the case. Second, even so, there is nothing yet to which the

Court can defer under § 102.011 because the Commission did not

articulate why it could not order forced pooling to prevent wasting

Ammonite’s stranded minerals. Texas administrative law requires

3

sufficient explanations of administrative actions before courts can uphold

them. This requirement, which ensures that agencies’ actions are always

based on the law and the facts, protects both the agencies themselves and

the regulated public.

In other words, “upholding” a Commission order on grounds that

the Commission never explained and may not even agree with hardly

reflects deference. If a hypothetical agency denies a permit because it

thinks that the law requires denial, for example, the denial might

actually be reluctant—the agency may well think that granting the

permit would be good policy. When freed from the legal misimpressions

that burdened this administrative proceeding, the Commission might

reach a different outcome—or perhaps the same outcome, but for wholly

different reasons, which a court may then review.

A court likewise does no favor to the hypothetical agency by saying

“the law does not actually require denial of the permit in the way the

agency thought, but since the agency reached that result, albeit for

mistaken reasons, we have imagined a few other reasons that would

support that result, and so we uphold the denial of the permit. Case

closed.” The one thing courts may never assume is that an agency is hell-

bent on a particular result, whether the law and the facts allow it or not.

Insisting on actual reasons is how courts help prevent even the perception

of such a mentality—a mentality that would be arbitrary and capricious

and thus impermissible for an agency whose actions must be rational and

reasoned.

With respect, therefore, I must dissent.

4

I

Many points in the Court’s opinion are correct. The Court

accurately states that “ ‘[s]tranded’ minerals are those that cannot be

extracted from a tract with usual production methods due to the tract’s

size, configuration, and location.” Ante at 3 (emphasis added). The

narrow, meandering riverbeds at issue here resemble such tracts, the

minerals beneath which are owned by the State—in this case, “the oil

and gas beneath a winding stretch of the Frio River . . . some 30 feet wide

and 7 miles long, about 21 acres in all.” Id. at 6. The lack of pooling

gives EOG no incentive to attempt to produce the minerals under the

river, and the Court correctly observes that pooling “incentivizes drilling

that does not leave the State’s minerals stranded.” Id. at 3. The Court

also recognizes that another prerequisite for pooling is that an interest

owner within the proposed pool (here, EOG) “has drilled or has proposed

to drill a well” in the unit. Id. at 5 (emphasis added) (quoting Tex. Nat.

Res. Code § 102.011).

The Court correctly observes that Ammonite began its efforts to

negotiate with EOG once “EOG had permits for, and was somewhere in

the process of drilling, 16 wells” that went right up to the riverbed but

stopped just shy of it on both sides. Id. at 6. Likewise, the Court notes

that EOG chose to complete those wells as planned, rather than consider

extending them just a bit to reach the river, despite Ammonite’s pooling

efforts. Id. at 8 (“By the time of the hearing . . . , each well was completed,

and none was draining the riverbed tract.”). The Court further agrees

that the Commission did not (and in the Court’s view had no need to)

assess the “hotly contested” question of the wells’ “completion status . . .

5

at the time [Ammonite’s] offers were made.” Id. at 18.

This set of agreed premises, in my view, largely supports why it

is premature to resolve Ammonite’s applications under § 102.013(b). I

describe my reasoning in greater detail below, along with the points on

which I disagree with the Court.

A

The Commission cannot consider forced pooling unless the

applicant—here, Ammonite—discharges its statutory obligation to

pursue voluntary pooling. Ammonite had to make EOG “a fair and

reasonable offer to pool voluntarily” before it could turn to the

Commission. Tex. Nat. Res. Code § 102.013(b).1

1 Historically, this mandate has triggered “jurisdictional review.” Carson

v. R.R. Comm’n, 669 S.W.2d 315, 316 (Tex. 1984). “If the commission finds that

the applicant did not make a qualifying offer, it lacks jurisdiction over the

petitioner’s application and must dismiss it.” R.R. Comm’n v. Pend Oreille Oil

& Gas Co., 817 S.W.2d 36, 40 (Tex. 1991) (citing Carson, 669 S.W.2d at 318).

Happily, the Court today clarifies that § 102.013(b) is “not a prerequisite

to the Commission’s jurisdiction.” Ante at 13. This clarification fits alongside

many others in which this Court continually emphasizes that no statute should

be regarded as having “jurisdictional” force—in the sense of affecting authority

and risking collateral attack later—without text that makes that result

unmistakably clear, thus putting everyone on notice of it. See, e.g., Unity Nat’l

Bank v. Scroggins, 671 S.W.3d 677, 679 n.5 (Tex. 2023) (Young, J., concurring

in denial of petitions) (“As the U.S. Supreme Court put it recently, even when

talking about a statute, ‘this Court will treat a procedural requirement as

jurisdictional only if Congress clearly states that it is.’ ” (quoting Wilkins v.

United States, 598 U.S. 152, 157 (2023))). Section 102.013(b) prescribes a basis

for the Commission to dismiss a forced-pooling application: the applicant’s

failure to have adequately attempted voluntary pooling by making an adequate

offer. The target of the pooling effort can preserve this ground as a basis for a

court to set aside a pooling order if the Commission does not dismiss on that

ground. But if the target never even contests that prerequisite, an eventual

order should not be subject to attack on that basis—and certainly not collateral

6

The question is therefore whether Ammonite’s offers were so poor

that the Commission should not even have considered the forced-pooling

applications. I think that, as a matter of law, Ammonite met its minimal

burden—at the very least, any failure to do so was not for a reason the

Commission expressed. Either way, we should remand.

As a preliminary point, it should seem unlikely that Ammonite

could not get out of the gate by making sufficient offers. The Court notes

that Ammonite has made approximately 150 voluntary-pooling offers

across Texas to help develop the State’s minerals, and it “has worked out

voluntary pooling agreements in all but four cases.” Ante at 4. Those

agreements must generally have been regarded as “fair and reasonable”

by the other side of the transaction, given that recourse to the Commission

was hardly needed, if ever. Yet despite such a successful record,

Ammonite here is accused not only of submitting applications that do not

warrant forced pooling, but of having failed even to make adequate

prerequisite offers for its applications to be considered on their merits.

Possibly—but unlikely, in the same way we might think it possible but

unlikely that a batter who could hit 146 straight home runs would then

strike out. The Court observes that it is unclear if any of these prior

“offers involved horizontal wells incapable of reaching riverbed minerals,

like EOG’s.” Id. at 18 n.42. But my point is that Ammonite is at least

deeply familiar with the prerequisites of the process. So, yes, maybe it

flubbed making “fair and reasonable” offers here—but, given Ammonite’s

track record, examining such a contention with skepticism is sensible.

attack. I agree with the Court that § 102.013(b) is “merely the first of two

hurdles an applicant must clear to obtain a forced-pooling order under MIPA.”

Ante at 13.

7

In my view, Ammonite satisfied § 102.013(b) by making fair and

reasonable voluntary-pooling offers to EOG. Each offer was a letter about

two pages long and accompanied by a plat depicting the proposed pooling

unit. EOG would serve as the operator of any wells within each proposed

unit. In return, Ammonite offered to pay its share of the drilling, operation,

rework, and plugging costs from its share of potential royalties, plus

Ammonite would self-impose a 10% risk penalty.2 Most of the letters

conclude by inviting EOG to meet and discuss the offers, presumably to

facilitate negotiation. This reflects a “bona fide attempt to reach a

contractual agreement.” Id. at 18 n.41 (quoting Carson v. R.R. Comm’n,

669 S.W.2d 315, 318 (Tex. 1984)).

EOG, by contrast, did not make a bona fide attempt. Instead, EOG

rejected Ammonite’s offers out of hand. It conducted no negotiations and

made no counteroffers.3 Although “MIPA does not require a counteroffer,

it is a factor to consider in determining whether an offer is fair and

2 In the oil-and-gas industry, the term “risk penalty” is used

interchangeably with terms like “non-consent penalty” or “risk charges.” See

Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 665 (Tex. 2005). As to what a

risk penalty is, see infra note 4 and accompanying text.

3 Contrary to the Court’s suggestion, ante at 18–19, EOG does not

portray itself as having “negotiated” with Ammonite about a potential

voluntary-pooling agreement. Here is how EOG describes (in its briefing to this

Court) its response to Ammonite’s offers: “EOG responded to the offer letters

through its counsel—rejecting the offers, stating its reasons for rejecting the

offers (including citations to relevant case law), and asking for proposed dates

for an evidentiary hearing before the Commission on Ammonite’s MIPA

applications.” EOG also acknowledges that it made no counteroffers: “The fact

that EOG did not make counteroffers to Ammonite’s offers is one factor for the

Commission to consider in determining whether an offer is fair and reasonable.”

(Internal quotation marks omitted.) Nor did the Commission find that EOG

negotiated with Ammonite. In short, EOG’s response was not “let’s talk” but

rather “pound sand.”

8

reasonable.” R.R. Comm’n v. Pend Oreille Oil & Gas Co., 817 S.W.2d 36,

43 (Tex. 1991). This approach is consistent with the statutory text and

structure, given that “ ‘[t]he obvious intent of the legislature’ in crafting

MIPA was ‘to encourage voluntary pooling.’ ” Ante at 4 (quoting Pend

Oreille, 817 S.W.2d at 40). EOG’s rejection without a counteroffer

suggests, at minimum, that § 102.013(b)’s threshold inquiry should be

resolved in Ammonite’s favor—even if Ammonite ultimately cannot

obtain forced pooling.

The Court sees it otherwise, but I am not sure why. It correctly

observes that the “Commission did not explain why Ammonite’s pooling

offers were not fair and reasonable.” Id. at 14. Why not end there? The

unexplained basis of the § 102.013(b) conclusion justifies reversal and

remand on this point. See Tex. Gov’t Code § 2001.174(2)(F) (requiring

reversal of agency action that is “arbitrary or capricious or characterized

by abuse of discretion or clearly unwarranted exercise of discretion”). No

less for Texas than federal agencies, courts must “insist that an agency

examine the relevant data and articulate a satisfactory explanation for

its action.” FCC v. Fox Television Stations, Inc., 556 U.S. 502, 513 (2009)

(internal quotation marks omitted).

Nor do any of the Commission’s findings plausibly fill this

explanatory gap. For its part, the court of appeals concluded that the

problem was Ammonite’s proposed 10% risk penalty, a conclusion that—

although wrong—was at least based on the Commission’s express

findings. To explain why the court of appeals’ rationale is wrong, I briefly

discuss what risk penalties are, because they help explain how

Ammonite’s offers were more rather than less fair and reasonable.

9

As our sister high court explained it, “[a] 200 percent risk penalty

means the nonconsenting owner will relinquish his or her right to receive

his or her share of production revenue until the consenting parties recover

two times the nonconsenting owner’s share of the expenses.” Gadeco,

LLC v. Indus. Comm’n of N.D., 812 N.W.2d 405, 409 (N.D. 2012). A risk

penalty helps “ensure that the economic risk assumed by the operator in

drilling and completing a well is reasonably shared by all who stand to

benefit.” Ante at 7. It “is designed to allow reasonable compensation for

working interest owners who undertake the risk of developing new

wells.” Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 665 (Tex. 2005);

see also Application of Kohlman, 263 N.W.2d 674, 675 (S.D. 1978)

(explaining that a “risk penalty” serves to “provide extra compensation

from production (if oil is found) to the drilling party”).4

Even though Ammonite offered this extra compensation, the court

of appeals concluded that “there is a reasonable basis for the

4 In discussing the backdrop of its statutory risk-penalty provisions, the

North Dakota Supreme Court explained how such penalties make pooling

outcomes more reasonable and fair:

Courts and state governments recognized that it is unfair for a

nonconsenting owner or nondriller lessee to be relieved of the

costs and risks associated with drilling a producing well, but at

the same time reap the benefits of another’s efforts in extracting

oil or gas from beneath his or her land. In an effort to ensure that

nonparticipating owners do not benefit from the successful

outcome of risks they do not take, states have authorized

penalties typically called a “nonconsent penalty” or “risk penalty”

to be imposed on nonconsenting working interest owners as a

reasonable way to allocate risks and balance the diverse interests

involved in the pooling of oil and gas interests.

Gadeco, 812 N.W.2d at 407–08 (internal citations and quotation marks

omitted) (discussing N.D. Cent. Code § 38-08-08).

10

Commission’s fact finding and conclusion that Ammonite’s voluntary

pooling offers were not fair and reasonable based on a 10% charge for risk

being unreasonably low according to Smith’s uncontroverted testimony.”

672 S.W.3d 33, 41 (Tex. App.—San Antonio 2021) (referencing Finding

No. 8 and EOG’s expert witness Tim Smith). As the Court notes today—

another point on which we agree—risk penalties are not even required to

be offered at all, see ante at 7 & n.17, and the statute caps the maximum

possible risk penalty at 100%, id. at 7 & n.16 (quoting Tex. Nat. Res. Code

§ 102.052(a)). Ten percent was a starting offer, and Ammonite made clear

that there was room to grow.

Ammonite told EOG all along that it would accept whatever risk

penalty the Commission might prescribe, including the 100% statutory

maximum. EOG even acknowledges in its briefing to this Court that its

own “petroleum engineer expert witness Tim Smith testified that a 100%

risk penalty would be reasonable.”5 (Emphasis added.) But instead of

negotiating for something higher than 10%, or even demanding 100%,

EOG refused to negotiate at all. See supra note 3.

5 EOG’s acknowledgement undermines the Court’s assertion that “[a]

100% risk penalty would not have made Ammonite’s offers reasonable.” Ante

at 20 n.43. Also undermining the Court’s assertion is the hearing examiners’

recommendation of a risk penalty half that size: “In order to balance this

conflicting evidence and the other factors, it is recommended that a 50% charge

for risk based on the facts of this case, is fair and reasonable as is required by

§ 102.017 of the MIPA.” See also Tex. Nat. Res. Code § 102.017(a) (“After notice

and hearing, all orders effecting the pooling shall be made on terms and

conditions that are fair and reasonable and will afford the owner or owners of

each tract or interest in the unit the opportunity to produce or receive his fair

share.”). The hearing examiners are not the Commission, obviously, but my

point is that everyone has well understood Ammonite’s flexible offer, and the

hearing examiners did not even think going past 50% was necessary, so offering

even more than that is highly unlikely to be an insufficient offer.

11

In any event, the Court—again, correctly—observes that “[t]here

is no evidence that EOG rejected Ammonite’s pooling offers because of the

proposed risk penalty.” Ante at 15. EOG identified two reasons for why

Ammonite’s offers would be “unreasonable” no matter what those terms

were: (1) there was no indication EOG’s existing wells were draining

Ammonite’s minerals (see infra Part I.C) and (2) EOG’s leases otherwise

prevented it from accepting any voluntary-pooling offers, no matter how

fair and reasonable.6 The court of appeals relied on the supposedly

inadequate risk-penalty offer, which the Court today unanimously

rejects. Ante at 15–16.

B

The Court could therefore remand to the court of appeals, which

has not considered anything beyond its erroneous risk-penalty conclusion.

The Court instead stretches to find a basis to sustain the threshold

determination that Ammonite failed to make a fair and reasonable offer,

and this is where I must part ways with the Court.

The Court expresses the desire to defer to the Commission. I agree

that our precedent indeed recognizes the Commission’s authority under

§ 102.013(b): “The commission’s application of the statutory term to the

facts in each case is conclusive, unless it is unreasonable.” Pend Oreille,

817 S.W.2d at 42. But the Commission’s “application” here is, at best,

wholly unexplained and thus unsustainable as a matter of law. Without

6 The Court “assume[s] without deciding” that such a contractual artifice

could not avoid forced pooling altogether. Ante at 8 n.18. What is to decide?

It seems self-evident that if “forced” pooling was off the table merely because a

lessor and lessee agreed by contract not to voluntarily pool with others, then

there would be no such thing as forced pooling—anyone could avoid it at will.

12

knowing anything more than the bottom-line conclusion, it is anyone’s

guess whether that bottom-line conclusion is “reasonable.” The result is

conclusory, not “conclusive.”

The best way to show why is to start with the Commission’s

factual findings that are at least plausibly linked to its conclusion that

Ammonite’s pooling offers were unfair or unreasonable. It made only

eleven such findings, which fit on a single page. Five factual findings

could (possibly) relate to the “fair and reasonable offer” conclusion:

6. Ammonite did not provide survey data or a metes and

bounds description of the riverbed to establish the precise

acreage to be force pooled into any of the sixteen (16) wells.

7. None of the sixteen (16) wells produce hydrocarbons from

or drain the adjacent riverbed tracts.

8. At the hearing, Ammonite agreed with a greater charge

for risk than the 10% listed in its voluntary pooling offer

for each of the sixteen (16) wells if the Commission

recommended same.

9. Formation of the proposed MIPA units for the sixteen

(16) existing wells will not access or produce any of the

hydrocarbon reserves under Ammonite’s adjacent riverbed

tracts.

....

11. Compulsory pooling will not prevent waste, protect

Ammonite’s correlative rights, or prevent the drilling of

unnecessary wells. . . .

I am willing to take these findings as true, but doing so does not

support, much less establish, that Ammonite’s offers were unfair or

unreasonable. Finding No. 8, as I have explained, affirmatively supports

Ammonite. And Finding No. 6 describes a circumstance (omitting survey

data or a metes-and-bounds description) that at most might render

13

Ammonite’s offers unclear but, absent further explanation, not unfair or

unreasonable. I agree with the Court that Finding No. 6 is irrelevant and

that Ammonite provided enough information for anyone to discern the

pool’s exact contours. See ante at 14–15.

Three Findings remain: Nos. 7, 9, and 11. They are relevant but

are of no greater help to the § 102.013(b) conclusion. Those three findings

concern the fact that EOG’s wells currently do not produce or “drain”

minerals from Ammonite’s riverbed acreage. This ground is the one that

EOG pressed and that the Court today embraces, so I address in greater

detail why it cannot do the trick either. According to EOG, the “no

drainage” fact means any offer from Ammonite would be inherently

“unfair and unreasonable” and the Commission could do nothing but

dismiss under § 102.013(b). After all, the argument goes, EOG’s wells do

not drain Ammonite’s minerals, so Ammonite would receive payments

from EOG’s production without contributing to that production (unless

EOG extended its wells, at least, because of the lack of drainage).

But the Court is not quite right to describe as “undisputed” that

Ammonite’s pooling offers would, if accepted, give Ammonite “a share of

EOG’s production without Ammonite’s contributing any minerals of its

own.” Ante at 16 (emphasis added). To the contrary, this assertion is

disputed. Pooling would authorize EOG to produce Ammonite’s riverbed

minerals, thereby “de-stranding” them so that they are not wasted.

That is the nature of pooling.7 Any future production from Ammonite’s

7 Ammonite explained in its briefing to this Court that pooling “would

enable EOG’s ‘current or future wells to produce from such undrained acreage,

both on EOG’s acreage and the Frio Riverbed tracts.’ ” Ammonite added at oral

14

minerals, moreover, would primarily benefit EOG, not Ammonite. All

the pools would be proportional to the parties’ contributed acreage—as

a result, Ammonite’s interest in the pooled units would be less than 1%

to EOG’s 99%. So if Ammonite’s minerals were produced, EOG would

receive 99% of that production (after benefiting from the potential 100%

risk penalty, too). In other words, Ammonite is indeed “contributing . . .

minerals of its own” to the pool.

EOG cannot dispute—at the § 102.013(b) stage—its ability to

produce those minerals (and then keep 99% of them). Some of its key

arguments against pooling here have been predicated on the notion that

Ammonite’s scanty acreage presumably can be developed in the future—

the minerals are not going anywhere and development is not impossible.

Had Ammonite and EOG reached a pooling agreement, or if the

Commission had imposed one, then Ammonite says EOG “could have

reached and produced” the riverbed and, “[i]n fact, it could still reach and

produce those minerals even today.” (Emphasis omitted.) EOG claims

that the ability to produce the riverbed minerals in the future means

there is no real need for pooling today. But it also means that if the

acreage is pooled today, then EOG will get the production benefit

tomorrow (or whenever it decides to produce). That right surely is a good

incentive for EOG to do what it can to develop those minerals, which

otherwise are apparently stranded and thus wasted. Forced pooling aims

to eliminate such waste. EOG could get the benefit of the pool whenever

it wants. Thus, only for now, and only for as long as EOG wishes, would

argument, “EOG has the right, once there’s pooling, to access those minerals

itself.”

15

Ammonite be a net winner (and, even now, Ammonite’s winnings could

be significantly reduced by the self-imposed risk penalty).

Of course, producing the riverbed—by extending EOG’s existing

wells or completing new ones to reach the riverbed—may turn out to be

technologically or commercially impractical. But that is putting the cart

before the horse. The Court observes that Ammonite’s offer letters did

“not mention the possibility of extending any well” into the riverbed, as if

the State and Ammonite would pursue pooling and then try to deny access

to the pooled minerals. Ante at 18.8 Ammonite did not have to prove that

it was possible or practical to drill or extend wells into the riverbed to

proceed past § 102.013(b).9 Presumably it was and remains practical and

possible, in the same way the Court believes it is practical or possible for

Ammonite to drill the riverbed by itself in a future technological or

economic climate. See id. at 11, 25. In any event, EOG did not reject

Ammonite’s offers based on impracticability or impossibility. Nor did the

Commission make a finding or conclusion on these grounds. Neither

should we—and certainly not at this stage.

8 It seems implied that, upon pooling, EOG would have the authority to

reach the riverbed either by extending existing wells or drilling new ones. See

also supra note 7. To the extent this was unclear, the offers were likewise

unclear. But lack of clarity would not render them inherently unfair or

unreasonable, particularly when no effort to seek clarity was found because no

negotiation was undertaken. In any event, it seems unlikely that Ammonite

(or its lessor, the State) planned to stop production of the minerals they seek to

pool—and if that was their plan, it would seem to be a rather easy basis for the

Commission to deny their applications.

9 The Court references my “share[d] . . . doubt” regarding Ammonite’s

carrying its “burden of proof.” Ante at 23 n.50. To be clear, I share that doubt

with respect to the second issue regarding § 102.011, not with respect to the first

issue regarding § 102.013(b). I discuss the concern in Part II below.

16

C

“No drainage,” in short, does not warrant the dispositive weight

that the Court gives it.

The Court does not say that drainage is essential to showing waste,

but it does say that the lack of drainage is a “critical factor” in determining

not just whether Ammonite’s applications should succeed under

§ 102.011, but whether Ammonite’s voluntary-pooling offers were fair and

reasonable under § 102.013(b). See id. at 17 (quoting R.R. Comm’n v.

Broussard, 755 S.W.2d 951, 953 (Tex. App.—Austin 1988, writ denied)).

As used here, at least, this “no drainage” theory does not truly probe

§ 102.013(b) inasmuch as it relies on forced-pooling assumptions under

§ 102.011. It relates to whether, despite Ammonite making a fair and

reasonable offer, the Commission might nonetheless decline to compel

pooling for some other collateral reason. After all, Ammonite’s theory is

that, without pooling, its riverbed minerals are “stranded” and thus

“wasted.” If so, Ammonite’s pooling applications ought to be addressed

under § 102.011, not dismissed under § 102.013(b) for a suspiciously

§ 102.011-like reason. Otherwise, applications like these suffer from an

incurable threshold defect—Ammonite could never invoke the

Commission’s authority to enter a forced-pooling order under § 102.011

because, as a matter of law, “no drainage” would preclude the existence

of a fair and reasonable pooling offer under § 102.013(b). That odd result

would be true regardless of the offer’s terms, any bona fide attempt at

contracting, or whether the wells could be made to drain in the future.

Such an approach improperly shifts § 102.013(b)’s focus away from

facts showing whether there is “a fair and reasonable offer to pool

17

voluntarily” (e.g., how the offeror proposes that operation costs and

production revenue within the proposed unit be shared) and toward facts

showing whether forced pooling is warranted (e.g., facts like “no drainage”

and “stranding”).10 The § 102.011 merits inquiry would subsume the

§ 102.013(b) threshold inquiry, essentially wiping away the modest

opening question that is simply there to ensure that, before the

Commission considers pooling, the parties have been incentivized to work

together. Merging the two statutes as the Court does today can only

achieve the exact opposite result.

Of course, I do not suggest that “no drainage” is wholly irrelevant

at the threshold stage. But it would matter in a way that informs that

threshold inquiry without being an automatic bar to proceeding beyond it.

For example, “no drainage” may affect the respective bargaining power of

the parties contemplating a voluntary-pooling agreement. Cf. Carson, 669

S.W.2d at 318 (“those relevant facts, existing at the time of the offer, which

would be considered important by a reasonable person in entering into a

voluntary agreement concerning oil and gas properties”). Here, “no

drainage” weakens Ammonite’s bargaining power by reducing the

likelihood that the Commission would grant Ammonite a forced-pooling

order under § 102.011. EOG could legitimately leverage this fact in

10 The presence of drainage is a very different matter. If a well drains

from other acreage, that can be probative of whether forced pooling is necessary

to protect correlative rights. See Texaco Producing, Inc. v. Fortson Oil Co., 798

S.W.2d 622, 624 (Tex. App.—Austin 1990, no writ) (“A producer who

demonstrates that reserves underlying his land are being drained, and that he

does not have an opportunity to offset that drainage, establishes injury to

correlative rights as a matter of law.”), cited with approval in R.R. Comm’n v.

Lone Star Gas Co., 844 S.W.2d 679, 683 n.2 (Tex. 1992). “Stranding,” as I discuss

below, is probative of whether forced pooling is necessary to prevent waste.

18

attempting to obtain the best terms or even to reject voluntary pooling—

but not to block § 102.011 review automatically. A fair and reasonable

offer in this context might factor in any unlikelihood that Ammonite would

obtain an eventual forced-pooling order—hence, no doubt, Ammonite’s

willingness to go up to the statutory maximum for risk penalties.

But by the same token, EOG’s leverage would diminish if

Ammonite’s (or any offeror’s) request for pooling has merit—say, because

their minerals are “stranded” and thus wasted absent pooling. A

reasonable offeree would consider the threat of an eventual government-

issued forced-pooling order if the offeree could not negotiate a voluntary-

pooling agreement with the offeror.

None of this, however, should be resolved as a prerequisite when a

plausible offer is made, particularly when no negotiation ensues. The “no

drainage” and “stranding” contentions are merely offsetting facts for

§ 102.013(b)’s purposes; if a voluntary arrangement proves elusive despite

an offer like Ammonite’s, the matter should move to the § 102.011 stage.

The Court’s primary authority for allowing “no drainage” such

weight is a 1988 writ-denied case from the Austin Court of Appeals,

Railroad Commission v. Broussard. See ante at 17–18, 24. The Court

emphasizes that Broussard “is one of the only published judicial decisions

in Texas—maybe the only one—involving comparable facts.” Id. at 17

n.40. It is cited “to show that the Commission’s position here is consistent

with the position it took four decades ago.” Id. Our judicial review does

not hinge on whether an agency’s “position” is consistent with one it took

decades ago. Our priority should be whether the agency properly

exercised the discretion the legislature bestowed upon it. It should be

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alarming that the non-binding Broussard is the only authority involving

supposedly “comparable” facts that the Court can scavenge from the

depths of our dusty law library.

More importantly, the Court’s premise is incorrect. Broussard

does not involve “comparable” facts. It involved a “no drainage” fact

pattern—not a “no drainage” and “stranding” pattern. Unlike here, there

it was “undisputed that, for the [offeror’s] offer to be determined to be fair

and reasonable, one of the wells belonging to [offeree] must have been

draining gas from under [offeror’s] property.” Broussard, 755 S.W.2d

at 953 (emphasis added). But here, Ammonite concedes its acreage is not

being drained. That is the point: unlike the Broussard offeror, Ammonite

invokes MIPA to prevent stranding (and thus prevent waste), not to

remedy drainage (and thus protect correlative rights). Those are

fundamentally different grounds for ordering forced pooling.

Broussard also provides no detail regarding the actual offer terms

being scrutinized for their fairness and reasonableness (e.g., risk penalty,

cost sharing, etc.). Surely a § 102.013(b) analysis must begin and end

with the terms of the offer at issue. In between lies the context: the facts

and circumstances of a given case (like “no drainage” and “stranding,” or

unique geology, or anything else that sets the parties’ respective

bargaining power), and then the offeror’s willingness, or not, to put

enticing terms like a substantial risk penalty on the table.11 Even if

Broussard were a precedent of this Court, I doubt it should play anything

like the role it does in the Court’s analysis today.

11 The Court, by contrast, ends its analysis with the context of “no

drainage” rather than the offers’ terms: “we do not end our analysis with the

terms of Ammonite’s offers.” Ante at 20. In my view, that approach is wrong.

20

* * *

I would hold that all the Commission’s findings—however

supported they may be—cannot establish its legal conclusion that

Ammonite’s pooling offers were unfair or unreasonable under

§ 102.013(b). Ammonite made offers consistent with MIPA’s purpose of

encouraging voluntary pooling. Ammonite would pay its fair share of

costs plus a self-imposed risk penalty. If this was unsatisfactory,

Ammonite was willing to negotiate. EOG rejected Ammonite’s offers—

without making any counteroffers—on grounds of “no drainage.”

Rejecting the offers to voluntarily pool was, of course, EOG’s prerogative.

But as a result, it became Ammonite’s prerogative to submit forced-

pooling applications for review on their merits under § 102.011.

II

The Court’s (mistaken) holding that Ammonite made no fair and

reasonable offers means that the Commission itself could go no further

into the merits of those offers, so on its own reasoning, the Court should

not reach § 102.011.12 Indeed, the court of appeals affirmed solely on the

first issue regarding § 102.013(b), so (properly, based on its holding) it did

12 Under the Court’s own theory that Ammonite did not make a fair and

reasonable voluntary-pooling offer, the Court should affirm and say no more.

Section 102.013(b) forecloses any basis upon which Ammonite could receive forced

pooling absent having made a fair and reasonable voluntary-pooling offer. Yet the

Court proceeds to state that “[t]he Commission’s conclusion that forced pooling

would not prevent waste or protect correlative rights is not unreasonable” under

§ 102.011—as if the Commission could order forced pooling notwithstanding

Ammonite’s failure to make a fair and reasonable offer. Ante at 25. That

implication is incorrect and the Court’s statement predicated on it is thus not

remotely necessary to its disposition. If I agreed with the Court that Ammonite

failed to make a fair and reasonable voluntary-pooling offer, then I would still

oppose the Court’s decision to make an additional holding under § 102.011.

21

not reach the second issue regarding § 102.011. On the assumption that

some court should be examining § 102.011, therefore, the Court could

reverse and remand for the court of appeals to do so in the first instance

rather than doing so ourselves. This Court should typically be the last

court rather than the first court to address legal issues. See In re Troy S.

Poe Tr., 646 S.W.3d 771, 780 (Tex. 2022) (“As a court of last resort, it is

not our ordinary practice to be the first forum to resolve novel questions,

particularly ones of widespread import.”). If we wish to make an

exception to the principle that this Court is a court of review, not of first

view, we ought to do so only for an urgent reason. Nothing urgently

requires this Court to be the first to resolve issues about this particular

refusal to force the pooling of this particular acreage.

Yet the Court marches onward, so I do too. In doing so, I conclude

that the Commission also erred in making its § 102.011 determination.

So if § 102.011 matters (and I do not see how it could matter to the Court

if there was no fair and reasonable offer from Ammonite), then we should

remand to the agency. See Tex. Gov’t Code § 2001.174(2). The following

analysis, in other words, relies on the dubious assumption that addressing

§ 102.011 is necessary.

Section 102.011 mandates forced pooling “for the purpose of . . .

preventing waste.” It is undisputed that, at least in theory, stranding

minerals can constitute “waste.”13 The statute, as the Court notes, ante

13 At oral argument, EOG’s counsel clarified: “Stranding can be waste,

absolutely. Stranding can be waste, but that’s not the question for this Court.

The question for this Court is whether the MIPA forced pooling order would

prevent that waste.” Similarly, the Commission’s counsel stated: “The Railroad

Commission understands that stranded minerals can constitute waste.”

22

at 21, defines “waste” to include “loss incident to or resulting from . . .

locating, spacing, or operating a well or wells in a manner that reduces or

tends to reduce the total ultimate recovery of oil . . . from any pool,” Tex.

Nat. Res. Code § 85.046(a)(6) (emphasis added). Stranding minerals so

that they remain in place while all the nearby ones are extracted surely

can “tend[] to reduce” the “ultimate recovery” of the stranded minerals—

it is speculative whether or when they will be recovered. The very act of

stranding can make any future recovery far harder.

Recognizing stranded minerals as waste makes sense, given that

Texas policy “is to encourage the recovery of minerals.” Key Operating &

Equip., Inc. v. Hegar, 435 S.W.3d 794, 798 (Tex. 2014). Ammonite’s

minerals appear stranded beneath the riverbed, and thus at least

potentially wasted, absent pooling. (Recall, too, that the State leased its

minerals to Ammonite. Ante at 3–4.14) EOG’s expert Tim Smith testified

that it would be impossible for Ammonite to drill a commercially viable,

horizontal well solely within the riverbed acreage. Ammonite would need

at least some access to EOG’s adjacent acreage to produce the riverbed.

In concluding that forced pooling would not prevent waste,

however, the Commission made no findings or conclusions regarding

Ammonite’s minerals being “stranded.” Instead, its most pertinent

14 I refer to the State here, and below, because today’s decision affects it

and not just Ammonite. See ante at 3 (“The State owns the minerals beneath its

more than 80,000 miles of navigable rivers and waterways.”). If the law, when

accurately stated, disproportionately harms the interests of the State, so be it;

no one is seeking special treatment for the State. But the significant interests

at issue surely warrant more analysis and explanation from the Commission up

front and less from the Court today, given the posture of the case. Even worse,

though, the Court’s premature decision is erroneous, and its error unjustifiably

leads to adverse consequences mostly on the State.

23

findings focused on the “no drainage” facts:

7. None of the sixteen (16) wells produce hydrocarbons from

or drain the adjacent riverbed tracts.

....

9. Formation of the proposed MIPA units for the sixteen (16)

existing wells will not access or produce any of the

hydrocarbon reserves under Ammonite’s adjacent riverbed

tracts.

10. Ammonite offered no expert witnesses or evidence of

drainage areas of any wells.

11. Compulsory pooling will not prevent waste, protect

Ammonite’s correlative rights, or prevent the drilling of

unnecessary wells. The applicant failed to meet its burden

of proof to prove that the granting of the application is

necessary to prevent waste, protect correlative rights, or

avoid the unnecessary drilling of wells. In the record, there

is simply no evidence showing that forced pooling these

wells will prevent waste or protect correlative rights – the

wells have been drilled and are producing; they do not and

will not produce riverbed minerals.

The “no drainage” facts are undisputed and are properly

emphasized in the § 102.011 context. Consequently, pooling to protect

Ammonite’s correlative rights may be unlikely because EOG’s operations

do not drain Ammonite’s minerals. See supra note 10. But the “novel

question” in this case, see Troy S. Poe Tr., 646 S.W.3d at 780, is whether

Ammonite’s minerals are “stranded” (everyone seems to agree that they

are) and, if so, how that finding would interplay (if at all) with the “no

drainage” findings in making the ultimate conclusion on ordering pooling

to prevent “waste.”

These points remain unresolved and should be remanded to the

Commission to provide clarity. Maybe “stranding” would compel a forced-

24

pooling order in light of the policy favoring mineral recovery (including

the State’s own minerals, which have been leased to Ammonite). Maybe

“stranding” would not compel a forced-pooling order, if producing the

riverbed minerals is speculative. This Court cannot be sure because the

Commission made no findings on whether, for example, EOG could

practicably extend existing wells or drill new ones to recover the riverbed

upon pooling. For a similar reason, I am unpersuaded by the Court’s

reasoning that forced pooling (a) “could not, at the time the Commission

reached its decision, have prevented waste” (b) “because, as the

Commission’s order states, ‘the wells have been drilled and are producing;

they do not and will not produce riverbed minerals.’ ” Ante at 22.

Just because EOG’s wells may “have been drilled” does not bar

forced pooling. As the Court acknowledges, § 102.011 expressly

contemplates pooling in just this situation—where an owner like EOG

“has drilled” (i.e., already) on the proposed unit. Id. at 5 (quoting Tex.

Nat. Res. Code § 102.011). Nor does the analysis turn on whether the

Commission’s order would assuredly or without any doubt “prevent

waste.” Section 102.011 authorizes forced pooling “for the purpose of . . .

preventing waste.” Id. (emphasis added) (quoting Tex. Nat. Res. Code

§ 102.011); see also Tex. Nat. Res. Code § 102.017(a) (pooling orders

shall afford owners “the opportunity” to produce their fair share). A

Commission order might serve the purpose of preventing waste if the

order could reasonably incentivize producing the riverbed.

The § 102.011 inquiry here should instead focus first on whether

Ammonite’s minerals are “stranded.” If so, then they were (and remain)

wasted. “Pooling is one method to prevent waste.” Key Operating, 435

25

S.W.3d at 798. The next question might be whether, upon pooling, EOG

could practicably extend its existing wells (or complete new ones) to

recover Ammonite’s minerals from the riverbed. Assuming EOG could,

then Ammonite’s minerals could be produced and would no longer be

stranded, with the net effect from a pooling order possibly being that EOG

and Ammonite (and by extension, the State and the public fisc) each get

increased proceeds from production. In the words of Ammonite’s counsel

at oral argument: “Huzzah—everybody gets paid.”15

The Court identifies a fair counterpoint to this hypothetical,

namely that “Ammonite, as the MIPA applicant, had the burden of proof

to demonstrate to the Commission the technological and economic

feasibility of reworking EOG’s wells to reach the riverbed.” Ante at 24.

I share the Court’s doubt about whether Ammonite carried its burden of

proving how its minerals would be produced and de-stranded if the

Commission granted forced pooling. I also have doubt, however, about

why EOG rushed to complete wells that comply with its leases—no

voluntary pooling allowed!—rather than proactively work with

Ammonite to avoid stranding and wasting the riverbed minerals in the

first place. But resolving any such doubts at this point, or even

determining how to resolve them, is not the answer.

Here is why. The Commission made no findings on whether

15 In full, counsel explained: “Once you pool it, then everybody shares. . . .

There is a recovery by the people in the pool. EOG teamed with Ammonite.

So, at that point, if you ultimately get recovery, huzzah—everybody gets paid.

There’s no double recovery by Ammonite. There’s increased recovery by

everybody, which is what’s contemplated.” See also supra note 7 and

accompanying text.

26

Ammonite proved its minerals were stranded and thus wasted,16 nor did

the Commission say anything about the feasibility of EOG de-stranding

the minerals. The Commission found only that “Ammonite offered no

expert witnesses or evidence of drainage areas of any wells.” (Emphasis

added.) Omitting any discussion of Ammonite’s minerals being stranded

is noteworthy given that stranding—not drainage—was the most viable

basis for Ammonite’s MIPA applications and that there is at least some

evidence of stranding.17

The omission is “arbitrary” and “capricious” and reflects an “abuse

of discretion.” See Tex. Gov’t Code § 2001.174(2)(F).18 An “agency’s

decision is arbitrary or results from an abuse of discretion if the

agency . . . failed to consider a factor the legislature directs it to consider.”

City of El Paso v. Pub. Util. Comm’n, 883 S.W.2d 179, 184 (Tex. 1994).

16 “In this Court, the Commission assumes Ammonite’s minerals are

stranded . . . .” Ante at 21.

17 The Court again uses Broussard to support the conclusion that

dismissal is proper where, as here, no minerals are being drained. See ante at 24

(quoting Broussard, 755 S.W.2d at 953). Broussard deserves no consideration

here. It addressed whether there was a fair and reasonable voluntary-pooling

offer under § 102.013(b). The court of appeals there did not reach the merits of

the forced-pooling application, and there was no argument regarding minerals

being “stranded” and thus “wasted” under § 102.011. See supra Part I.C

(discussing Broussard).

18 The Court focuses exclusively on “substantial evidence” in its two

citations of § 2001.174. See ante at 5–6 & n.15, 14 & n.31. But § 2001.174

provides for far more scrutiny than that—it expressly directs courts to remand

when an agency’s “findings, inferences, conclusions, or decisions are” “in

violation of a constitutional or statutory provision,” “affected by other error of

law,” or “arbitrary or capricious or characterized by abuse of discretion or clearly

unwarranted exercise of discretion.” Tex. Gov’t Code § 2001.174(2)(A), (D), (F).

Suggesting that “substantial evidence” is all that matters is inconsistent with

the governing statute. And here, the order must be set aside under § 2001.174(2)

for reasons that have nothing to do with “substantial evidence.”

27

The Commission’s order fails to consider whether Ammonite’s minerals

were wasted (because of stranding) and, if so, whether forced pooling

could be ordered to prevent their stranding. Instead, the order reflects

the Commission’s erroneous belief that Ammonite had to prove drainage

to obtain pooling, even for the purposes of preventing waste. That belief

conflates the relationship between drainage (and protecting correlative

rights) with stranding (and preventing waste). See Tex. Gov’t Code

§ 2001.174(2)(D). So no matter how supported the Commission’s factual

findings may be, they do not support its legal conclusion that forced

pooling was improper for purposes of preventing waste under § 102.011.

* * *

I would therefore reverse and remand either to the court of appeals

(to consider § 102.011 in the first instance, with attention to “stranding”

and “waste”) or, if we must address § 102.011 ourselves first, then to the

Commission (to reconsider and articulate clearer explanations of its

§ 102.013(b) and § 102.011 conclusions). It may very well be that, upon

further proceedings, Ammonite’s MIPA applications would still fall short.

But because the Commission’s order and the record before us do not yet

support that conclusion, I must respectfully dissent.

Evan A. Young

Justice

OPINION FILED: June 28, 2024

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