Sun Oil Co. v. Potter

McClendon, chief justice. Rule 37 case. The appeal is from a final judgment refusing to set aside a permit to drill two wells upon an 8.97-acre tract in the East Texas Oil Field in addition to the two producing wells already on the tract. The wells here involved are the same as those in Humble Oil & Refining Co. v. Potter, Tex.Civ.App., 143 S.W.2d 135, wherein the then authorizing permits were set aside on the ground that each permit was granted upon a separate voluntary subdivision of the 8.97-acre tract; whereas the right of the tract as a whole furnished the proper basis for determining the validity of the permits. The judgment cancelling the permits was without prejudice to the rights of appellants to apply for permits for additional wells upon the entire tract. The instant permit was later granted, authorizing the two wells in the same locations as those annulled in the above prior suit. Ownership in fee of the 8.97 acres was in the Smith heirs (9 in number) prior to the discovery of the East Texas Oil Field (1930), at which time the surrounding contiguous lands were all owned by other parties. The tract was therefore entitled to development as a separate, detached tract. The history of the title in this respect is set forth in Sun Oil Co. v. Smith, Tex.Civ. App., 113 S.W.2d 683. The tract is located in the N.E. portion of the field. It is L shaped; the stem of which extending north-south is approximately 2,900 feet long, with an additional very narrow triangular strip extending northward from its north end. The 2,900-foot stem is about 150 feet wide at the north end and about 200 feet wide at the south end. The lower arm of the L extends east from the south end of the stem and is about 600 feet long by 60 feet wide. The Sun (Sun Oil Company) and the Humble (Humble Oil & Refining Company) own leases situated respectively east and west of the 8.97 acres. Other leases are to the north and south. The 8.97 acres was held in common ownership until July 18, 1934, when it was partitioned by consent decree into 9 separate tracts. August 3, 1934, the Sun brought a trespass to try title suit to recover the 8.97 acres, in which the Smith heirs recovered. This judgment was affirmed by the Texarkana Court (Sun v. Smith, above) and on March 23, 1928, application for writ of error- was dismissed. While this suit was pending (March 3, 1936) the owners of Lot 8 brought suit in trespass to try title for Lots 1-7 and 9; and in the alternative for specific performance of an alleged contract to execute a mineral lease thereon. Non-suit was taken in this case December 22, 1938. Meantime a receiver was appointed to take charge of all of the lots in the tract except No. 8, and upon application of the receiver permit was granted September 1, 1938, to drill a well (No. 2) located about 1,300 feet south of the south end of the stem on Lot No. 6. Permit was granted to drill the No. 1 well August 27, 1938, upon application filed April 12, 1938. This well is located on Lot 8 (not in receivership) about 800 feet south of the north end of the stem and about 800 feet north of well No. 2. Early in 1939 separate applications were made to drill a well on each of the other 7 lots (1-5, 7 and 9). These were granted except as to Lot 2, as to which it was denied. Four of these permits were set aside by the trial court and all by this court in the above case. The two permits allowed by the trial court were for wells located, one (No. 3) about 200 feet south of the north end and the other (No. 4) about 400 feet north of the south end'of the stem. As stated these are the two locations here involved, authorized under a single permit subsequently granted. *926 The first point urged by appellants (Sun and Humble) is one of practice. It is to the effect that the permit was improperly granted without requiring that the 8.97 acres “be reconstituted into a common ownership tract as it was before subdivision, or that all affected owners either join in the application or otherwise indicate their assent in some binding way.” The record facts follow: Potter and Birdsong made the application as operators to drill wells Nos. 3 and 4 on the 8.97-acre tract, naming J. R. Smith heirs as fee owners; the application showing that wells Nos. 1 and 2 had already been drilled on the tract. After the partition of July 18, 1934, the several owners leased the 9 lots by nine separate oil and gas leases of usual form for ten-year terms and thereafter as long as there was commercial production, retaining ⅛ royalty interest. At the time of the application all of these leases except that on Lot 8 were owned by Potter and Birdsong; and Birdsong owned a half interest in Lot 8. In the trial court Potter impleaded the fee owners and. sought to have their rights adjudicated. Upon plea of privilege by the fee owners this phase cf the case was transferred to Gregg County. While Sun and Humble appear to have excepted to the plea of privilege, no exception was taken by any party to the order of transfer. It has been ruled, whenever the question has been presented, that royalty owners are not necessary parties to a suit involving the validity of a drilling permit. Railroad Commission v. Shell, Tex.Civ. App., 164 S.W.2d 773; Shell Petroleum Corporation v. Railroad Commission, Tex. Civ.App., 137 S.W.2d 797; Railroad Commission v. Humble Oil & Refining Co., Tex. Civ.App., 101 S.W.2d 614. The lessees are invested with full control over the leased premises, including the right of possession and to develop and the incidental right to apply for the necessary drilling permits. These rights import corresponding duties of the lessees for breach of which they would be liable. The lessors had notice of the suit and evidently none of them desired to contest the validity of the permits. Their rights as between themselves, or between lessees and themselves were matters beyond the jurisdiction of the Commission. See Railroad Commission v. Miller, Tex.Civ. App., 165 S.W.2d 504, and cited cases. The Commission alone had authority in the first instance to determine 1) whether additional wells were necessary, and if so 2) their proper spacing. We think its authority in this regard was properly invoked. The permits were granted to prevent both waste and confiscation of property. As to the waste issue: there were no conditions peculiar to this tract that would warrant the exception. It was contended, however, that there was an area in the northern and another area in the southern portion of the tract which were so situated with reference to the surrounding wells as to require the two wells in question in the interest of proper development for greatest ultimate recovery. See Woods v. Humble Oil & Refining Co., Tex.Civ. App., 120 S.W.2d 464. Mr. Hudnall, the witness advancing this theory, conceded (as his map clearly demonstrates) that these areas are drained in accordance with the spacing pattern set by the rule (1 well to 10 acres), in that no portion of either area is more than 466 feet from a producing well. The holding in the Wood case is therefore not here in point. As to confiscation: the record shows that with wells Nos. 1 and 2 the tract has an advantage both as regards density in the eight times surrounding area and the locations of the wells in that area; and that with wells Nos. 1 and 2 the net drainage is toward the tract and not away from it. Appellees contend that the permit-tees are entitled to the two wells in question in order that the tract may equalize the per acre production of the Sun and Humble which had accumulated up to the time the permits were granted to drill wells Nos. 1 and 2. This contention is predicated upon the following quotation from our opinion in the prior case (Humble Oil & Refining Co. v. Potter, 143 S.W.2d at page 137): “* * * The record in the instant case shows that the Sun, one of the appellants here, by suit wherein it claimed to own the leasehold on the 8.97-acre tract itself, prevented any development of this property until the latter part of 1938; that both the Sun and the Humble had, for many years prior thereto, through wells within drainage distance on each side of this strip of land, been extracting large quantities of oil from the pool. It was shown that the Humble has, up to May 1, 1939, extracted through wells on its adjoining 100-acre tract to the west, according to reports filed by it, 6,564 barrels per acre from beneath its tract; and that up to that time the two *927 wells finally drilled on the 8.97 acres had extracted only 350 barrels per acre therefrom. The Sun likewise had been producing for years from its lease adjoining the strip on the east, and had, through its suit against appellees, long delayed and prevented them from recovering any of the oil beneath their lands. It thus becomes manifest that the owners of the 8.97-acre tract have not been given a fair and equal opportunity with their neighbors to recover their fair share of the oil in place beneath their tract. Since all i wells in this area were given the same daily allowable, their property rights, not taking into account any question of waste, a matter which the Commission must determine, could be protected in the light of these facts, by giving to them a greater density of drilling on their tract.” At the time that opinion was written it had been the uniform holding of this court that the Commission was without authority to grant a permit when there was a bona fide dispute over the title to the property. See Tide Water Oil Co. v. Railroad Commission, Tex.Civ.App., 76 S.W.2d 553; Altgelt v. Texas Co., Tex.Civ.App., 101 S.W.2d 1104, 1105, error dismissed; Railroad Commission v. Magnolia Petroleum Co., Tex.Civ.App., 163 S.W.2d 446. In this last case this holding was expressly overruled (141 Tex. 96, 170 S.W.2d 189, 190), the Supreme Court holding that, in this regard, the spacing rule did not materially change the situation as it existed at common law. After stating that in reaching our above holding “it seems to have been erroneously assumed that such permit affirmatively authorizes the permittee to take possession of the land and drill,” the Supreme Court say: “* * * We do not think the permit has this effect. The function of the Railroad Commission in this connection is to administer the conservation laws. When it grants a permit to drill a well it does not undertake to adjudicate questions of title or rights of possession. These questions must be settled in the courts. When the permit is granted, the permittee may still have no such title as will authorize him to drill on the land. If other parties are in possession of the property, as in the present case, they may defend their possession by self-help, or by injunction proceedings. Before the permittee can drill, he must first go to court and establish his title. In that suit, upon proper showing, he may have a receiver appointed to drill the well and hold the proceeds to await the final judgment on the title issue. On the other hand, if he has possession, or can obtain possession peaceably, his adversary may resort to the courts for a determination of the title dispute, and therein ask for an injunction or for a receivership. In short, the order granting the permit is purely a negative pronouncement. It grants no affirmative rights to the per-mittee to occupy the property, and therefore would not cloud his adversary’s title. It merely removes the conservation laws and regulations as a bar to drilling the well, and leaves the permittee to his rights at common law. Where there is a dispute as to those rights, it must be settled in court. The permit may thus be perfectly valid, so far as the conservation laws are concerned, and yet the permittee’s right to drill under it may depend upon his establishing title in a suit at law. In such a suit the fact that a permit to drill had been granted would not be admissible in support of permittee’s title.” The record does not show that there has been any prevention of development of the 8.97 acres other than that which might be implicit in the Sun’s assertion of title thereto and prosecuting to final adverse judgment the suit to establish that asserted title. Under the above Supreme Court holding, such assertion of title and suit to establish it constituted no legal impediment to obtaining from the Commission the necessary permits for development; and the rights of the respective parties were the same as at common law in the absence of any spacing rule whatever. We do not understand that the mere assertion and prosecution of a claim of title to lands gives any right of action for damages (recoupment) against the claimant in favor of the ultimately adjudged true owner. It is true, of course, that such assertion of title and suit may constitute a serious impediment to profitable disposition of the land, or financing its development. But these are impediments which exist independently of any conservation laws; and the same legal remedies for their removal exist after as well as before such laws were passed or any spacing or other regulations were promulgated thereunder. The fact that an owner has been prevented by unfavorable or fortuitous circumstances from developing his property, creates in him no right of action against his neighbors, merely because they have profited by his misfortune. So long as they have done no act constituting an unlawful *928 interference with his rights, he can not hold them liable for the consequences resulting from his unfortunate circumstances. Had the Sun withheld from the true owners of the 8.97 acres its lawful possession, or restrained or otherwise prevented development through legal action, there would have, of course, arisen a legal liability for the injury inflicted by the unlawful infringement of legal rights. But even so, this would be a private matter between Sun and the owners, and not one that could be adjudicated by the Commission. Nor would permission to drill additional wells and thereby extract from the common pool in which others than the Sun have interests sufficient oil to recoup the loss be an appropriate remedy to satisfy a claim for injury inflicted by the Sun alone. The Humble, which is as vitally interested in the matter as the Sun, has been guilty of no wrong. This is likewise true of lessees to the north and south, though their interests may not be relatively so great. Moreover, enforcement of the right of recoupment for past injurious action (if in fact it exists) is in its every aspect a judicial and not a legislative or administrative function. The Commission, in administering the conservation laws, deals with situations as they exist at the time its orders are made; and such orders are prospective and not retrospective in operation, just as are its orders in the field of rate making. See Missouri-Kansas & T. R. Co. of Texas v. Railroad Commission, Tex.Civ. App., 3 S.W.2d 489, affirmed Producers’ Refining Co. v. Missouri, K. & T. R. Co. of Texas, Tex.Com.App., 13 S.W.2d 680; 42 Am.Jur., pp. 331, 332, § 39. The Commission has no strictly judicial functions, and only such quasi-judicial functions (such as fact finding), as are incidental to its properly delegated legislative and administrative functions. The legislature has no strictly judicial functions; and has no power to delegate to a board a function which it does not itself possess. For a discussion of this subject see 42 Am.Jur., pp. 329-331, §§ 36 and 38. Appellees cite the Marrs case (Marrs v. Railroad Commission, Tex.Sup., 177 S.W.2d 941) as sustaining their contention that the Commission may authorize recoupment for past inequalities in production by granting additional wells. We find nothing in the Marrs decision to warrant this conclusion. That was a suit to enjoin proration orders to prevent further drainage of plaintiff’s properties. A low pressure area had been created on properties of the defendants which under operation of the proration orders under attack caused drainage of plaintiffs’ properties. It was to prevent this drainage, not to recoup for past inequalities, that the injunction was granted. It is true that the past history of the field’s development an'd the effect of the proration orders upon production were reviewed; but there is nothing in the opinion of the Supreme Court to warrant the conclusion that the Commission was authorized in its future proration orders to allow recoupment for past inequalities; but only that the Commission’s proration orders should afford the plaintiffs the right to extract their fair share of the recoverable oil (or its equivalent) underlying their land at the time the orders are made. We do not understand that the right of recoupment for past inequalities was raised or considered in the Marrs case. There is also this distinction between the Marrs and the instant case. There, the past inequality was due to the Commission’s proration orders which had prevented and were preventing the plaintiffs from getting their fair share of the recoverable oil. Here, the only prevention asserted was due to the acts of one of the adjoining leaseholders. No act or refusal to act of the Commission or of any other leaseholder had any preventive effect. This further circumstance demonstrates the purely judicial character of recoupment as a remedy for loss through past prevented production. Any proper criterion of recoupment must of necessity be based upon value of product and not its quantity alone. If defendants were entitled to recoupment in kind for the oil they were “prevented” from producing between August 3, 1934, and March 23, 1938, they would be entitled, and entitled only, to the quantity of oil equal in value to that which they were thus prevented from producing. A barrel of oil in 1935 may or may not equal a barrel of oil in 1944. If the price at a particular date in 1944 were taken, the relative values might, with reasonable accuracy, be calculated. But the recoupment in kind can not be thus accomplished but must be spread over a number of years in the future; and it is a matter of common knowledge that the price of oil has widely fluctuated in the past and is subject to wide fluctuation in the future. These circumstances further demonstrate that if the Commission had the power to make adjust *929 ments for the purpose of recoupment, increase in the allowable and not the granting of additional wells would be the proper remedy. See Brown v. Humble Oil & Refining Co., 126 Tex. 296, 83 S.W.2d 935, 87 S.W.2d 1069,. 99 A.L.R. 1107, 101 A.L.R. 1393. Aside from the above holding, and conceding (arguendo only) that recoupment through additional wells may be allowed by the Commission, the record we believe shows that recoupment in quantity has already been effectuated. The wells in this and adjoining leaseholds are all upon a 20-barrel per day allowable, and are allowed to produce 22 days per month. Wells Nos. 1 and 2 therefore produce 880 barrels per month. There are fourteen wells in the 8 times area which are allowed to produce 6160 barrels per month gross, or 770 barrels per month for the same area as the 8.97 acres. The latter is therefore producing 1,320 barrels per annum more than its fair share under this comparison. The testimony of Mr. Heath shows (and the data upon which it is based are not questioned) that the accumulated per acre production of the Sun and Humble leases during the pendency of the Sun suit was 2,- 796 barrels. On the same basis the 8.97-acre tract was entitled to 25,380 barrels. The two additional wells had a yearly allowable of 10,560. If we add the 1,320 barrels per year excess which wells Nos. 1 and 2 were producing, we have 11,880 barrels. On this basis it would take only 2.13 years to effectuate recoupment. The first two wells have been producing since the fall of 1938 and all four since the fall of 1939. It is therefore manifest that recoupment was effectuated prior to January 1, 1942 — more than a year before the case was tried. These figures are based upon the entire Sun and Humble leases. There was no showing of the exact production during the Sun suit pendency of the 8 times area. We have, however, made a computation which we think is more than fair to defendants, based upon the 8 times area. There are several factors which show this liberality which we think unnecessary to discuss in detail. As stated, the record shows that in comparison with the 8 times area the 8.97-acre tract was entitled to produce 770 barrels per month. The Sun suit pendency period was 43⅜ months; and the loss in production 33,623 barrels, to recoup which with the four wells would require only two years and nine months; which time had elapsed several months before the trial. Mr. Hudnall testified that with only wells Nos. 1 and 2 it would take 163 years to equal the accumulated production of the 8 times area. The data upon which this calculation was made is not shown. Based upon 1,320 barrels per year excess (and this figure is accurate), this would make the re-coupment quantity amount to 184,160 barrels. There is nothing in the record to substantiate this figure. Mr. Heath testified that taking the entire per acre production of the Sun and Humble leases from the beginning through 1940 the recoupment period with only wells Nos. 1 and 2 would terminate in 1955. His data are not questioned. But, as stated, all four wells had been producing since the fall of 1939, and recoupment had been fully consummated prior to the trial. One other issue remains, which relates to well No. 4. Appellees contend that this well is essential to prevent confiscation due to the fact that after both wells Nos. 1 and 2 shall have been drowned out by water encroachment there will still be a large quantity of oil under the southern portion of the tract to which appellees will be entitled, but which they can not recover unless well No. 4 is allowed. The facts in this regard show that the water encroachment is from the northwest and that under present trends wells Nos. 1 and 2 will eventually be drowned out before all recoverable oil shall have been exhausted from the southern portion of the tract. This situation is accentuated by the fact that there is a rise in elevation of the oil stratum from north to south. This difference in elevation, however, is only 4 feet between well No. 2 (-3225) and well No. 4 (-3221). If it be conceded that appellees will be entitled to this additional well after wells Nos. 1 and 2 have been drowned out, that fact would not justify the well at this time, and production thereunder for an indefinite number of years prior to the time it will be needed for this purpose. Just when the appropriate situation may arise is uncertain, in any event; and may also depend upon conditions unforeseeable at the present time. The judgment of the trial court is reversed, the permit is cancelled and production thereunder permanently enjoined. Judgment reversed; permit cancelled. BLAIR, J., dissents.