# Halbouty v. Railroad Commission > Texas Supreme Court · February 14, 1962 · 163 Tex. 417 URL: https://www.frixlaw.com/law-library/cases/9674645 ## Case - **Full name:** Michel T. Halbouty Et Al, Appellants v. Railroad Commission of Texas Et Al, Appellees - **Court:** Texas Supreme Court - **Decided:** February 14, 1962 - **Citations:** 163 Tex. 417; 5 Tex. Sup. Ct. J. 246; 357 S.W.2d 364; 16 Oil & Gas Rep. 788; 1962 Tex. LEXIS 714 - **Precedential status:** Published - **Opinion:** Dissent by Smith - **Judges:** Culver, Smith - **Cited by:** 41 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9674645 ## How later opinions describe it (automated extraction) - finding Commission, in exercising its regulatory discretion, may give greater or less weight to relevant factors in setting production limitations ## Opinion text SMITH, JUSTICE, dissenting on Motion for Rehearing. I respectfully dissent. Upon further consideration, I find that *436 to agree with the majority would place me in a completely inconsistent position with that of former decisions of this Court, especially those wherein I was the author of the majority opinions. This is especially true when considered in the light of the decisions in Ryan Consolidated Petroleum Corporation v. Pickens, 155 Tex. 221 , 285 S.W. 2d 201 , and other cases discussed herein. Not only that, the majority opinion bears out my fear that the Normanna decision was the opening wedge to compulsory pooling by judicial decree. See my dissent in Atlantic Refining Company v. Railroad Commission, 162 Tex. 274 , 346 S.W. 2d 801 . However, expressions in the majority opinion in that case lead me to think that possibly the holding announced by the majority only applied to that particular case. I am inclined to believe that many of the oil and gas attorneys were of a similar view. When I wrote the dissent in Normanna, it was my deliberate purpose to guard against compulsory pooling by judicial decree. I find the Court now following the advocates of compulsory pooling in the present case, although the Normanna case did not actually deny the right of separate development to owners of small tracts. I am now convinced that the Halbouty decision effectually denies such right and apparently authorizes compulsory pooling without any legislative authorization. The right of separate development of small tracts has long been recognized by the Texas courts. In fact, it has become a settled rule of property. The fact that the rule was announced in so-called Rule 37 cases does not mean that such rule is confined in application to such cases. The Railroad Commission of Texas has in the past rigidly followed the law as announced by this Court in Ryan and other cases and has adopted rules consistent with the principles of law announced in cases prior to Normanna. The Railroad Commission steadfastly adhered to the law and has awaited action of the Legislature, the only department of government that has the legal power to compel compulsory pooling. After the Normanna decision, the Railroad Commission was confronted with the difficult task of adopting rules and regulations for the Normanna Fields. The Railroad Commission obviously reached the conclusion that the Normanna decision could mean nothing other than compulsory pooling. On September 27, 1961, the Railroad Commission adopted new rules for the Nor-manna Fields. The Commission in its order took cognizance of two short paragraphs in the Normanna opinion wherein the Court *437 said that the 2/3-1/3 rule did not come close 1 to compelling ratable production and that the responsibility 2 was upon the Commission to devise some rule of proration which would conserve the gas in the field in question and at the same time be fair and just to all parties. It should be noted that the Normanna opinion carefully avoided specifically directing the Railroad Commission to adopt a rule encompassing compulsory pooling. In fact, it gave no specific direction in this respect. However, the Commission was of the opinion 3 that compusory pooling was demanded by the Normanna decision. Rule 3b, 4 and other provisions in the special order is *438 sued on September 27, 1961, strongly indicate that the Commission felt that this Court had by the Normanna decision released the Commission from the duty of following the well-settled rules of property which had been firmly announced by this Court in the decisions hereinafter cited. The Halbouty decision confirms the action of the Commission of September, 1961. In other words, Halbouty said, in effect, to the Commission that it correctly concluded, in adopting the September, 1961 rules, that it had the authority under the Normanna decision to fix an allowable for wells on small tracts in the absence of statutes providing for compulsory pooling. The Halbouty decision falls in line with the advocates of compulsory pooling and for the first time informs the litigants as to what the majority really had in mind when it wrote the Normanna decision. However, I wish to point out that even after Normanna, the advocates of compulsory pooling recognized that the Texas courts had definitely established the right of separate development. May I digress to say that we do not have before us here the question of whether or not the property rule prevailing in Texas has caused gross inequities. The question is: Are we going to depart from the Court’s consistent adherence to the rule that a tract, no matter how small, is entitled to one well as a matter of right unless the tract is a part of a voluntary subdivision, and that the Legislature is the only body that can bring about compulsory pooling? It is well recognized that the Texas rule of property stands for the proposition that in Texas the owner of a small tract is entitled to one well as a matter of right and that to limit the allowable for that well to a figure commensurate with the recoverable oil and gas in place beneath the tract would make the well an unprofitable one and his right to drill a well on his tract would be a futile thing. This rule of property has been completely destroyed by the Halbouty decision, particularly when this Court said: “So far as the appellees’ complaint that a striking down of the 1/3-2/3 formula would probably entail heavy financial loss to them, it may be said that they drilled their wells at their own risk. There is some indication in the record by bill of exception that they were offered unitization that would prevent confiscation and afford to them a fair share of the mineral proceeds from the common source. * * * ” Clearly, without statutory standards, the Railroad Commission cannot adequately exercise the power of compulsory pooling *439 now given to it by Halbouty. On the other hand, the owners of small tracts are left at the mercy of the standards fixed by the owners occupying the position of Halbouty and Henderson — this, without regard to whether the small tract owners are wealthy, middle class, or poor. In this case, the offers to pool made by Halbouty and Henderson are most indefinite, this because there exists no legislative guide fixing the standards for determining how expenses and revenue is to be shared. Each operator who is fortunate enough to have gotten together several small tracts is left to make his own ground rules. This cannot be sound. For example, in this case, Halbouty offered to pool and unitize his leases with others, but all that his offer said on the subject of expenses was that Halbouty will “pay and bear his ratable share of the cost of drilling and operating costs”. I think Dillon’s argument on this particular phase of the case is sound and I quote: “Does ‘ratable’ mean on the basis of surface acreage? If so, it would obviously be an unfair basis of pooling or unitization, if the thin leases of Halbouty on the east were unitized with tracts in the center of the field having very thick and productive sands. Or, on the other hand, does ‘ratable’ mean that the costs and revenue would be divided on the basis of estimated acre feet of net productive sand? If so, whose estimate is to be taken as the criterion? Must the Railroad Commission set up a schedule of acre feet, resolving the tremendous conflicts between experts as to how many acre feet are beneath the various tracts? “To illustrate the difficulties, it may be pointed out that with reference to the Henderson-Doornbos No. 2 Unit, Halbouty’s expert estimated that it had 420 acre feet, whereas Henderson’s expert estimated that it had 1,760 acre feet, or an increase of 319% over the estimate of Halbouty’s witness. Similarly, as to the Henderson-Doornbos No. 1 Unit, Henderson’s expert gave his client’s lease an estimated 2,165 acre feet, as compared to Halbouty’s witness’s estimate of 768 acre feet, or an increase of about 180%. Similarly, as to the Henderson-Montrose Unit, Halbouty’s expert estimated that it had only 7,764 acre feet, whereas Henderson’s expert estimated that it had 14,300 acre feet. In other words, Mr. Henderson’s expert increased the estimate of Halbouty’s expert by 84%. “We assume, from what the Court has said, that the Railroad Commission must decide whether acreage, or acre feet, *440 or estimates of reserves in place, or some other standard will be the basis for allocating expenses and revenues among the owners of tracts which are forced to unitize and the Commission must resolve any conflicts between experts in estimating productive acreage or acre feet or reserves in place. Even though the owners of small tracts feel that their acre feet or reserves are being grossly underestimated, in relation to similar estimates for adjoining tracts, still they would have to accept whatever the Railroad Commission decides if they are to share in the pool or unit. Presumably, also, the large unit operators must accept the Commission’s decision under the threat that, if they do not, the small tract owners will be allowed to produce enough gas to pay back costs plus some profit. In that event, we respectfully ask, if the large unit operators either refuse to pool or unitize or will not accept the decision of the Railroad Commission regarding their share of any proposed unit, by what legal authority is the Railroad Commission then empowered to authorize the owners of small tracts to go ahead and separately develop their tracts and receive an allowable which will permit them to drain more gas than they originally had in place ? Is the legal test of ‘confiscation’ in such cases to be something other than the denial to the owners of large tracts of the right to recover the gas in place beneath their tracts?” The right of separate development of small tracts, where the owners did not voluntarily pool with other tracts, has never been questioned in former decisions. Even though the Legislature in Article 6014, Vernon’s Annotated Civil Statutes, gave the Railroad Commission broad authority to enact orders to prevent waste, the Legislature was very careful in paragraph (g) of this statute to expressly declare that it was not the intention of the Legislature to require repressuring of an oil pool or that the separately oiuned properties in any pool be unitized under one management, control or ownership. The Normanna decision is now being used as express authority from the Supreme Court of Texas to the Railroad Commission to ignore such cases as Ryan Consolidated Petroleum Corporation v. Pickens, supra; Pickens v. Ryan Consolidated Petroleum Corporation, Tex. Civ. App., 219 S.W. 2d 150 , wr. ref. n.r.e.; Halbouty v. Darsey, Tex. Civ. App., 326 S.W. 2d 528, 532 , wr. ref. n.r.e.; Nale v. Carroll, Tex. Civ. App., 266 S.W. 2d 519, 526 , affirmed 155 Tex. 555 , 289 S.W. 2d 743 ; Coates v. De Gracia, Tex. Civ. App., 286 S.W. 2d 691, 694 ; Section 1 of Article 6008b, Vernon’s Annotated Civil Statutes; Dailey v. Railroad Commission, Tex. Civ. App., 133 S.W. 2d 219 , wr. ref.; Stanolind Oil & Gas Company v. Railroad Commission, *441 Tex. Civ. App., 96 S.W. 2d 664 , no wr. hist.; Nash v. Shell Petroleum Corporation, Tex. Civ. App., 120 S.W. 2d 522 , wr. dism.; Railroad Commission v. Delhi-Taylor Oil Corporation, Tex. Civ. App., 302 S.W. 2d 273 , wr. ref. n.r.e.; Halbouty v. Darsey, Tex. Civ. App., 331 S.W. 2d 835 , no wr. hist.; Atlantic Refining Company v. Railroad Commission, Tex. Civ. App., 330 S.W. 2d 494 , wr. ref. n.r.e.; Railroad Commission v. Humble Oil & Refining Company, 151 Tex. 51 , 245 S.W. 2d 488 . My contention is simply this: The statutes now in effect do not compel unitization. Therefore, the Railroad Commission has no legal authority to enter orders which would have the effect of requiring or compelling unitization. This very argument was persuasive and no doubt caused this Court in the Ryan case to adopt the view as expressed in the final majority opinion that without legislation requiring compulsory pooling, the Court had no power to enact such legislation. Thus, the Court adhered to the separate tract development theory under the well-settled rule of property. In the Ryan case, we discussed the fact that the State of Mississippi and other states had adopted unitization and pooling statutes, but expressly held that the rule of capture “has become a vested property right” and the “Legislature of Texas has not seen fit to enact legislation which would authorize the Railroad Commission to adopt and promulgate rules which would have the effect of rendering ineffective the rule of capture recognized in all the decisions in this State.” The opinion of the majority in the present case, nullifying the proration order in the Port Acres Field, does exactly what the Ryan case said the Legislature of Texas has not seen fit to do. It not only authorizes, but it even requires the Railroad Commission to adopt and promulgate rules which would have the effect of rendering ineffective the rule of capture as recognized in all previous decisions in Texas. It cannot be said that the Ryan case was decided without due regard to all the problems we have presented in the present case. It was argued in the Ryan case that the majority opinion in that case permitted the confiscation by Pickens & Coffield of minerals belonging to Ryan. The dissenting opinion stressed the contention that the majority opinion was based primarily on the rule of capture and strongly urged that Ryan was entitled to equitable relief to the extent that it should share in the ownership of all oil produced from Pickens and Coffield’s land and that to allow the rule of capture to prevail would amount to an unconstitutional confiscation of Ryan’s property, the theory being that “under our law no one has a right simply to capture the property of someone else”. This Court rejected that theory. We said: *442 “Petitioner’s [Ryan] contention that this cause is one for equitable relief should not be sustained for the further reason that its position is inconsistent with the law of capture, which is a well-settled rule of property in this jurisdiction. The rule of capture is simply this — that the owner of a tract of land acquires title to the oil and gas which he produces from wells drilled thereon, though part of such oil or gas may have migrated from adjoining land. The Railroad Commission is without power from the Legislature * * * to do anything *■ * * .” We rejected the State of Mississippi authorities primarily on the ground that our Legislature had not adopted statutes to “safeguard, protect and enforce the co-equal and correlative rights of owners in a common source or pool of oil and gas to the end that each such owner in a common pool or source of supply of oil and gas may obtain his just and equitable share of production therefrom * * I still say, as we said in Ryan, that the Legislature of Texas has not seen fit to enact legislation which would authorize the Railroad Commission to adopt and promulgate rules which would have the effect of rendering ineffective the rule of capture recognized in all the decisions in this State. The majority, on the other hand, now refuses to consider the physical facts with regard to “the peculiar characteristics of oil and gas”, which has been established. See Brown v. Humble Oil & Refining Company, 126 Tex. 296 , 83 S.W. 2d 935 , 87 S.W. 2d 1096 . Justice Wilson, the writer of the dissent in Ryan, said that the principles of geology and reservoir dynamics then known upheld his view and would eventually meet “with the same acceptance in judicial thought that they are accorded in business and financial thinking”. We rejected such thinking then and should do so now. I agree with Dillon et al when they say, in their motion for rehearing, that the present decision in this case creates immediately many complex problems and, in the absence of legislation on the subject, leaves the Railroad Commission without a proper standard to be used in discharging its duties so far as oil and gas is concerned. The motion points out some of these problems, such as: “For example, exactly what does the Court mean when it says in its opinion (page 16) that ‘the landowner is not restricted to the particular gas that may underlie his property originally but is the owner of all which he may legally recover’ ? What is the test of what an owner can ‘legally recover’? Is it the equivalent of the gas which was originally in place beneath his tract? If so, must he stop producing his well when he has *443 recovered such amount of gas, even though the reservoir beneath his tract has by that time been again refilled by gas which has been drained from other properties? “For example, every witness who testified in this case said that the appellant, Halbouty, would recover under the present proration formula substantially more than 100% of the recoverable gas originally in place beneath his lease, and it was admitted in Halbouty’s main brief in this Court that he will recover over 26% of the field reserves, whereas it is estimated that his leases have only 22% of the field reserves under them. Must Halbouty stop producing when he has recovered 100% of the original reserves in place beneath his units? If he produces more than this, is he liable to Henderson for excessive drainage, since Henderson will suffer by excessive drainage to Halbouty’s tracts (meaning by ‘excessive’ an amount exceeding the gas originally beneath the Halbouty leases) ?” [Emphasis added.] I agree with Dillon et al when they say: “Increased knowledge of engineering and geological facts about oil and gas reservoirs has not changed the fundamental nature of oil and gas as fluid substances which move in the reservoir, without regard to property lines, in response to pressure differentials, which are established by either natural or artificial forces. Where and how and to what extent such movements will take place cannot be predicted with certainty even now, particularly where wells are spaced widely apart and only estimates or intelligent guesses can be made as to the condition of the reservoir in the large undrilled areas between the wells. To apply, as the Court apparently has done in the opinion in this case, the same rules of property to oil and gas which are applied to solid minerals, is not only an abandonment of established rules of property but also an attempt to ignore fundamental physical facts.” There is no sound reason for the abandonment of the rules of property which have been long established in Texas. No previous decision has held that the Railroad Commission must deny a living allowable to a first well on a separate tract. The Dillons et al., and other small tract producers in the Port Acres Field, have spent millions of dollars in drilling costs alone. If this decision is permitted to stand these people cannot possibly recover their costs because the allowables for such wells will be limited so far below their producing capacity that they can recover only the *444 equivalent of the gas in place beneath each tract. No previous decision, including the Normanna decision, has intimated, much less held, that the Railroad Commission would be required to cut the allowables of the many Port Acres wells to the point where they could recover only a very small fraction of their cash investment. In the Normanna case, the Court indicated only that the predicted net profit to the Bright & Schiff well was unreasonably high. I think everyone will agree that the Normanna case was revolutionary, but, at the same time, there was nothing even in that case indicating that the Railroad Commission would be required to destroy the investments of the owners of wells lawfully drilled upon separate tracts. In this connection, I concurred in the result reached in the case of Railroad Commission of Texas et al v. Murel Williams, 163 Tex. 370 , for the reasons stated in a concurring opinion delivered on April 11, 1962. I concurred in the result only for the reason that, in my opinion, the Court in the Williams case was lending encouragement to the advocates of compulsory pooling in their effort to effectively destroy the rules of property heretofore announced and followed by The Supreme Court of Texas. In my opinion the allocation formula attacked in this case is reasonably supported by substantial evidence. The District Court correctly excluded the testimony of Commissioner Murray. I agree with Dillon et al. when they say: “The proration orders attacked in this case are legislative orders, in that they apply generally to all producers in the Port Acres Field and are prospective in operation. Therefore tests which would apply to judicial or quasi-judicial decisions cannot properly be applied to the proration orders involved^ in this case. Certainly no one would contend that a statute could be attacked on the ground that the legislators voting for the statute had previously committed themselves, by agreements among themselves or otherwise, to a policy embodied in the statute, before it was passed. The only question would be whether the statute, based on evidence heard by the Court, is or is not in conformity with constitutional requirements. So, it is submitted, in this case, where a legislative order of the Railroad Commission is concerned, the Court should not inquire into the policies, motives, or methods of the Commission which caused it to adopt this formula rather than some other.” A helpful discussion of the scope of judicial review of oil and gas orders of the Railroad Commission is contained in the opinion *445 in Railroad Commission v. Magnolia Petroleum Company, 130 Tex. 484 , 109 S.W. 2d 967 . That case refers to and quotes from the opinion in Railroad Commission v. Galveston Chamber of Commerce, 105 Tex. 101 , 145 S.W. 573 . The same rule announced in the above cases was more recently stated by this Court in Railroad Commission v. Houston Natural Gas Corporation, 155 Tex. 502 , 289 S.W. 2d 559 , 573: “Earlier in this opinion we pointed out that where the attack upon a legislative act of the Railroad Commission is that it violates the Constitution because it is confiscatory, we would not ‘investigate the methods adopted by the Commission in fixing its rates, nor the motives or purposes which prompted such action’. Railroad Commission v. Galveston Chamber of Commerce. 105 Tex. 101 , 145 S.W. 573, 580 . The Commission may have used altogether erroneous methods and an erroneous conception of the law but if it arrived at a correct rate — and the court will test this rate against its own finding of fact — then the rate should be sustained.” The courts should simply test the validity of the order involved here on the basis of whether it is supported by substantial evidence. There is no logical reason why the Railroad Commission should be restrained from continuing in effect the allocation formula adopted August 18, 1958, for the Port Acres Field. I would affirm the judgment of the trial court. Opinion delivered May 23, 1962. . “It does not come close to compelling ratable production; neither does it offer each producer in the field an opportunity to produce his fair share of the gas from the reservoir.” . “The responsibility rests with the Commission to devise some rule of proration which will conserve the gas in the field in question and at the same time be fair and just to all parties without depriving any of them of his property;” . “WHEREAS, From a study of the full record adduced at said hearing, which included technical reservoir data and legal briefs submitted by the several interested parties, the Commission is of the opinion and finds that an acreage allocation formula would reasonably provide each party an opportunity to produce its fair share of the gas in a reservoir, but because of the additional responsibility placed upon the Commission, that is, to arrive at a means of preventing confiscation of a small tract’s reserves while allowing each operator to produce its fair share of the gas in a reservoir, as knotty a problem as has ever been placed before the Commission, must be solved, that such solution in all probability is best resolved through the use of a special allowable that would encourage a small tract owner to negotiate with his neighbors for fair and just treatment, but would also provide a sufficient allowable to such small tract to encourage a reasonable attitude in such neighbors so that they would endeavor to work out this common problem; * * . “Rule 3b. Any operator having the right to drill a gas well upon a tract containing less than 100 acres, after application, notice and hearing prior to the drilling of the well, may, if in the judgment of the Commission the facts so justify, be given a definite and fixed special allowable, provided the well is completed as a producing well, higher than the allowable that would be fixed for any well completed upon such tract by reference to said allocation formula upon proof to the Commission (1) that the drilling and completion of a well upon said tract is not economically feasible; and (2) that each and every owner of the right to drill upon acreage immediately adjacent to said tract of less than 100 acres has refused to allow the pooling of said tract with enough of said immediately adjacent acreage to create a drilling unit of at least 100 acres upon fair and reasonable terms, that is, upon such terms as would allow the owners to drill, complete and operate the well to be drilled thereon and as would provide that all income received from 7/8ths of the production from said well and all expense of drilling, completing and operating said well should be shared among the owners of the working interest in said drill-site unit upon an acreage basis. Such special allowable shall control the production of gas from said well during its producing life, except that said allowable shall be related properly to total field production as the same may fluctuate and said special allowable, if granted, shall in no event exceed the allowable of a gas well completed on 'a tract containing 100 productive acres; provided further, however, that any well drilled before the adoption of this rule will be treated, for purposes of this rule, as though it had not yet been drilled.” --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9674645. Public record. Not legal advice.