On October 27, 2021, the San Antonio Court of Appeals upheld a Texas Railroad Commission denial and dismissal of an application made under the Mineral Interest Pooling Act. The applicant was the mineral lessee of state-owned riverbed acreage, and the offset operator drilled and produced 16 Eagle Ford shale wells on both sides of the riverbed tract. The Railroad Commission found that the mineral lessee did not make a fair and reasonable offer to pool voluntarily under MIPA, a finding which was affirmed by the San Antonio Court of Appeals.
Under MIPA, a mineral interest owner may apply for an order from the Texas Railroad Commission that would force pool a mineral interest with proposed or existing wells within the same proration unit and common reservoir. As a prerequisite to an application for a force pooling order, MIPA requires a fair and reasonable offer to voluntarily create a pooled unit. If a fair and reasonable offer to create a voluntary unit is not accepted, the mineral interest owner may file an application for a forced pooling order with the Commission.
As part of the application, the mineral interest owner must also demonstrate that the forced pooled unit would accomplish at least one of three objectives: (1) avoid the drilling of unnecessary wells; (2) protect correlative rights; or (3) prevent waste.
In reviewing the Railroad Commission decision, the San Antonio Court of Appeals considered whether the contested case hearing record contained substantial evidence supporting the proposition that the applicant did not make a fair and reasonable offer to form a voluntary unit. Although the Railroad Commission found that the applicant’s offer was not fair and reasonable because the applicant failed to: (1) provide a survey to establish the precise acreage to be pooled; (2) establish that any of the 16 wells at issue drained from the riverbed tract; or (3) include an adequate risk penalty—the appellate court focused its analysis on the risk penalty.
The applicant’s offer to form a voluntary unit contained a 10% risk penalty for the 16 wells already drilled. The offset operator introduced expert testimony that a 10% risk penalty is unreasonably low for Eagle Ford wells, and that a 100% risk penalty is more appropriate. The applicant did not introduce any expert testimony to the contrary, and admitted that a higher charge for risk would be fair and reasonable. As such, the appellate court found that substantial evidence existed to support the Commission’s finding that a fair and reasonable offer was not made. The decision highlights the requirement that MIPA offers contain fair and reasonable terms in every respect, as well as the importance of expert testimony.
Michael Reer is a shareholder with the firm Harris, Finley & Bogle, P.C. and may be reached at mreer@hfblaw.com. The case is Ammonite Oil and Gas Corporation v. Railroad Commission of Texas et al., No. 04-20-00465-CV, 2021 WL 4976324 (Tex. App.—San Antonio Oct. 27, 2021, no pet. h.) (mem. op.).