Caselaw Update: Opiela v. Railroad Commission of Texas
Over the past decade, allocation wells have become both more common and more highly contested in Texas. Allocation wells straddle the borders between multiple tracts or units which are unpooled, but typically under development by the same operator. They are usually employed when more production may be gained by drilling one horizontal well along a boundary rather than separate wells on each side. The drilling of an allocation well requires approval from the Texas Railroad Commission (“RRC”), which has been issuing such permits since 2010. However, the Commission’s authority to do so was recently questioned in a Travis County District Court case.
Disputes arise around allocation wells when the operator must determine the proper royalties to be paid to each mineral owner whose estate the well traverses. There is no caselaw affirming the permissibility of allocation wells under oil and gas leases or establishing what evidence an operator must offer to support its allocation scheme. Allocation wells are not pooled units; therefore, the rules and regulations governing pooled units are inapplicable. In practice, operators essentially allocate production to each impacted mineral owner based on a reasonable estimate of the owner’s proportionate share of the well. While there is no caselaw which directly addresses the specific computations for payment of royalties earned from allocation wells, or how an operator might avoid liability to interest owners who believe they are being underpaid, a Texas appellate case could be interpreted to provide some guidance. In Browning Oil Co. v. Luecke, the court held that an operator should pay “what production [could] be attributed to [mineral owners’] tracts with reasonable probability.” The court endorsed a lateral length allocation method, which determines the percentage of production by dividing the entire length of the lateral well by the portion of the well traversing the mineral owner’s land. This method is currently the most commonly used to calculate allocation well royalties. However, the law is unsettled as to the issue: not only did the Luecke case not involve an allocation well, the opinion was also issued by a lower appellate court. As a result, mineral owners often contest permitting and drilling of allocation wells involving their estate, but typically settle out of court.
Recently, a Travis County District Court became the first to challenge the underlying authority of the RRC to issue allocation well permits. In Opiela-v.-RRC-Final-Judgment-003, mineral owners protesting an allocation well appealed the Commission’s decision to grant the allocation well permit by directly attacking the RRC’s authority to grant it in the first place. In a novel decision, Judge Karin Crump held that the Commission violated the Administrative Procedure Act (“APA”) by issuing allocation well permits without first going through proper rulemaking procedures as required by the Act. The APA requires agencies to give notice of potential new rules and accept and consider public feedback prior to their implementation. This process would open the Commission and its policies to public scrutiny and possible judicial challenges.
The Opiela order creates confusion over the validity of any permit issued until the Commission either successfully appeals the order or establishes a formal rule regarding allocation wells in accordance with the APA. Previously issued permits may be revisited, and any future permits may be issued according to different standards. Generally, this ruling may result in a heavy impact on the future of allocation drilling in Texas. Operators whose future operations are based on planned allocation wells could be faced with delays and significant losses if the Opiela holding results in the promulgation of new rules by the RRC.
Kuiper Law Firm, PLLC specializes in oil and gas issues and will continue to monitor legal developments related to allocation wells. If you have any questions about the information in this article, or how it applies to you and your operations, do not hesitate to contact us.