Face Challenges Confidently

014 Jinkins v. Bryan

Tuesday, September 1st, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the cases may be of significance to you.
 
Jinkins v. Bryan, 763 S.W.2d 539 (Tex. App.–Amarillo 1988, writ denied) and Raw Hide Oil & Gas Inc. v. Maxus Exploration Company, 766 S.W.2d 264 (Tex. App.–Amarillo 1988, application for writ pending), are two very recent cases out of our Amarillo Court of Appeals that address the meaning of the words “stratum” and “oil” as used in the Texas statutes. In the Texas Panhandle, it is common for oil and casinghead gas rights to be severed from gas rights. As reported in the April 1989 PPROA News Bulletin (page 2), the Supreme Court has ruled in Amarillo Oil Company v. Energy Agri-Products. Inc. (motion for rehearing pending) that when the parties do not define casinghead gas for themselves, then the statutory definitions existing at the time of the severance will be presumed to be a part of the instrument of severance. Because the statutory definitions of gas and casinghead gas turn on the meaning of the words “stratum” and “oil,” the precise meaning of these words is very important. The Supreme Court gave us no guidance in Energy-Agri to explain the meaning of these words and cited neither of these two cases, so it is unknown whether either case was considered at the time the Energy-Agri opinion was written.
 
Jinkins v. Bryan
 
Jinkins alleged that Bryan was producing “dry gas” from the Brown Dolomite formation belonging to Jinkins and that Bryan was marketing such production as casinghead gas. The central issue was whether gas produced from the Brown Dolomite formation was “dry gas” or “casinghead gas.”
 
“Dry gas” is defined in Texas Natural Resources Code Annotated § 86.002(7) (Vernon 1978) as “gas produced from a stratum that does not produce oil.” Bryan asserted that if oil was present anywhere in the Brown Dolomite formation under the tract in question, then the gas produced from the Brown Dolomite under that tract was not “dry gas” as defined by law. Jinkins asserted that even if summary judgment evidence showed that oil was being produced from somewhere within the Brown Dolomite, that production, in and of itself, was not sufficient because the term “stratum” as used in the statute is not synonymous with, nor would it necessarily include, the entire Brown Dolomite formation. The trial court gave Bryan a take-nothing summary judgment against Jinkins. The Court of Appeals reversed and sent the case back down for a trial on the factual dispute as to whether the gas in question was “dry gas” or “casinghead gas.”
 
The Amarillo Court of Appeals held that separate producing horizons can exist within a single formation such as the Brown Dolomite and further stated that:
 
[I]n this state there are only two generic types of natural gas, i.e., “dry gas” and “casinghead gas.” …[I]t was the legislative intent that “dry gas” would include all gas which is not indigenous to an oil stratum and produced from that stratum with oil.
 
A “stratum” which is producing oil within the purview of section 86.002(7) is a producing horizon producing more than one barrel of oil to each 100,000 cubic feet of gas. Gas produced from such a horizon would be “casinghead gas” within the statutory purview. Contrariwise, gas produced from a horizon producing less than one barrel of oil to each 100,000 cubic feet of gas would be “dry gas.”
 
The case is important because the Court equates “stratum” with “producing horizon” and concludes that multiple “producing horizons” may exist within a single formation. Each producing horizon must meet the test of one barrel of oil to each 100,000 cubic feet of gas to qualify as an oil stratum. Therefore, to determine whether the gas produced is “dry gas” or “casinghead gas,” the producing horizon must be identified and the amount of oil relative to the amount of gas being produced from that horizon must be measured.
 
Raw Hide Oil & Gas Inc. v. Maxus Exploration Company
 
Raw Hide, the oil and casinghead gas rights owner, completed its wells in the Brown Dolomite. This was the same formation from which Maxus, the gas rights owner, had been producing gas since 1938. The existence or non-existence of oil in the Brown Dolomite was the critical issue in defining whether the substance produced by Raw Hide was “gas” or “casinghead gas.” The court incorporated into the instrument of severance the statutory definition of casinghead gas. Because of the date of the instrument, the court used the definition as it existed in 1938. That definition was substantially similar to the statutory definition existing today, and it defined casinghead gas as “any gas and/or vapor indigenous to an oil stratum and produced from such stratum with oil.”
 
The most interesting issue on appeal was the challenge to the question and instructions submitted to the jury on the critical issue in the case. The jury was asked:
 
Do you find from a preponderance of the evidence that oil exists in any of the following formations under the Raw Hide Fate Lease? …
 
The jury answered “No.” The jury question was accompanied by the court’s special instruction which read:
 
You are instructed that the word “oil” means crude petroleum oil, that is liquid both in the reservoir and at the surface, that is native to the reservoir and that is producible under normal operating conditions.
 
Raw Hide argued that the instruction was too restrictive because it required the jury to determine that oil was “producible under normal operating conditions.” Raw Hide reasoned that the existence of any oil is the critical issue regardless of whether the oil is producible under normal operating conditions. The court rejected this argument, citing the statutory definition of casinghead gas as authority.
 
A second issue in the Raw Hide case was to determine who had the burden of proving by a preponderance of the evidence how much of the gas produced was casinghead gas and how much was dry gas. It was undisputed that Raw Hide had commingled dry gas from the Brown Dolomite formation with oil and casinghead gas from other formations. The court held that the party drilling and completing wells in a manner that creates the allocation and ownership problems must bear the burden of proof.
 
The case is important because it holds that the party commingling dry gas and casinghead gas must prove how much of each was produced, and because it reads into the statutory definition of casinghead gas the requirements that oil be liquid in the reservoir and at the surface and that it be producible under normal operating conditions.