Face Challenges Confidently

226 Seagull Energy E & P, Inc. v. R.R. Comm’n of Tex.

Thursday, September 3rd, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Seagull Energy E&P, Inc. v. Railroad Comm’n of Texas, 226 S.W.3d 383 (Tex. 2007) holds that a mineral owner’s property right to commingled oil or gas or both extends collectively to the commingled whole rather than separately to each commingled deposit. The Texas Railroad Commission’s (“Commission” ) field rules are not applied separately to each strata (or sand) in a commingled field, and an operator can prove an unconstitutional taking only by proving confiscation (drainage) from the reservoir as a whole, rather than from an individual, commingled sand.
“Commingling” occurs when one or more otherwise separate strata or accumulations of hydrocarbons are simultaneously produced through the same string of pipe in the wellbore. A “sand” in oil and gas usage loosely refers to an area known to contain oil or gas or both. “When sands are discontinuous, it is difficult to correlate the distinct zones throughout the area, meaning that a producer may be able to complete a well into a particular sand that its adjacent neighbors cannot and vice-versa.” Multiple sands might or might not be in communication and thus might or might not be a single reservoir. Sands which do not naturally communicate with each other may be treated as one reservoir when the Commission authorizes commingled production. Commingling may be beneficial by extending the life of sands too small to justify separate wells or whose pressure is too low to support extraction.
In this case, involving the Waskom (Cotton Valley) Field, there were twelve commingled sands, and a producer could complete a well in any number of sands found on its property. The field rules required 80 acres for one well and at least 1,320 feet between wells completed in or drilling to the same reservoir on the same lease.
Seagull Energy E&P, Inc. (“Seagull”) owned a 115.64-lease in the Waskom Field. Beneath Seagull’s lease were three vertically separate sands: the Stroud, the C, and the Taylor. Seagull completed one well into the C Sand in 1991, and in 2000, Seagull was granted a permit to complete a new well in all three sands. Because Seagull did not have sufficient acreage to support two wells, and because its two wells were only 1,200 feet apart, Seagull could not produce both wells without an exception to spacing and density rUles. Because concurrent production would violate the Waskom special field rules, Seagull shut-in the first well before production began from the new well. Although the new well was successfully completed in the Stroud and Taylor sands, it was not successfully completed in the C Sand. Seagull then sought a permit from the Commission to reopen the first well, so it could produce from the C Sand. The Commission denied the permit after concluding that Seagull was not entitled to an exception from the special field rules, because Seagull had not shown confiscation or drainage from the commingled reservoir as a whole.
Seagull argued that the Commission’s refusal to allow it to produce from the C Sand amounted to an unconstitutional taking of Seagull’s gas. Seagull claimed it had a vested property right in each gas deposit under its land. The Commission responded that there was not a taking because the three gas deposits were commingled into one common reservoir in which Seagull had a permitted and producing well. The confiscation must be from the whole reservoir, and not from an individual sand.
The issue was whether a property owner’s right to commingled oil and gas extends separately to each deposit or to the commingled whole. The court acknowledged that while a mineral owner has the right to its fair share of the minerals under its property, the right does not extend to specific oil and gas beneath the property. Based on the record before it, the court determined that the Commission’s actions did not amount to a taking, because Seagull failed to show that concurrent production from both wells was necessary to prevent drainage to the common reservoir.
The significance of the case is the holding that within a commingled field there can be no confiscatory taking unless there is a showing that there is drainage to the common reservoir. Proof of drainage of a particular sand within that reservoir will not suffice. The Commission may consider the commingled deposits as though they are one reservoir when regulating drilling and production in the commingled field.