Carlisle, William T.

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Southern Methodist University

SMU Law ReviewVolume 20 | Issue 4 Article 141966Oil and Gas Production from a Unitized Area - TheNonjoining OwnerWilliam T. CarlisleFollow this and additional works at: https://scholar.smu.edu/smulrThis Case Note is brought to you for free and open access by the Law Journals at SMU Scholar. It has been accepted for inclusion in SMU Law Reviewby an authorized administrator of SMU Scholar. For more information, please visit http://digitalrepository.smu.edu.Recommended CitationWilliam T. Carlisle, Oil and Gas Production from a Unitized Area - The Nonjoining Owner, 20 Sw L.J. 907 (1966)https://scholar.smu.edu/smulr/vol20/iss4/14reason arising out of the subject matter or the circumstances 48 thecourt refused to preclude review. The decision demonstrates that, "thetrue architects of reviewability are the courts."'"Leeds & Northrup and Scofield recognize that a charging party hasvital rights in a Board proceeding. Although the rights in each caseare of a different nature, they are both private rights which are to berecognized and enforced by the courts. The Second Circuit's refusal'to recognize private rights is in direct conflict with this reasoning. Andthe Board's merely affording the objecting party its reasons for thesettlement, in lieu of a hearing,"1 would also seem to conflict withScofield due to the fact that this is an incomplete recognition of thecharging party's administrative rights. The current trend is a properone. Although the Board should be given discretionary powers in cer-tain proceedings, often the right to a hearing outweighs the value ofabsolute administrative expediency. Perhaps to compensate for thistrend, the Board will slow down its complaint-issuing process, prefer-ring to exhaust all opportunities for settlement prior to issuing a com-plaint. Nevertheless, once a complaint has issued the charging party'sright to a hearing has been reinforced by the Leeds & Northrup deci-sion.George E. Seay, Jr.Oil and Gas Production From a Unitized AreaThe Nonjoining OwnerThe plaintiff, Roberts, owned an undivided half interest in a oneand one-half acre tract of land. James Craven and Estella Toddowned the other half interest in the tract. Superior Oil Company at-tempted to get all three cotenants to join a "Unitization and UnitOperating Agreement" for a unitized area consisting of several hun-dred acres. Roberts refused, but Craven and Todd executed separateoil and gas leases to Superior, each lease purporting to cover all of thetract. Although it drilled no wells on the one and one-half acre tract,Superior did obtain production from the unit. For some reason, notapparent from the opinion, Superior considered the Craven and Toddleases as representing one and one-half acres, instead of one-half of"JAFFE, JUDICIAL CONTROL OF ADMINISTRATIVE ACTION 339 (abr. student ed. 1965).49 Ibid.50 See notes 28-31 supra and accompanying text.3I See notes 26-27 supra and accompanying text.1966] NOTESSOUTHWESTERN LAW JOURNAL [Vol. 20one and one-half acres, and paid royalty on unit production accord-ingly.1Roberts still refused to ratify the lease but instead sued to recoverone-half of the unit production' allocated to the one and one-halfacre tract, less reasonable expenses.! The court of civil appeals affirmedthe trial court's finding that since Superior had allocated to itself theentire tracts pro rata share of production from the unit, it heldRoberts' share in trust and was required to account for the produc-tion, less expenses attributable to Roberts' land." Held, reversed andrendered: the nonjoining cotenant has no right to production fromanother tract in a unitized area since there is neither actual produc-tion from his land nor a contractual relationship with the unit.Superior Oil Co. v. Roberts, 398 S.W.2d 276 (Tex. 1966).I. A COTENANT'S INTEREST:THE EFFECT OF A UNITIZATION AGREEMENTTexas law recognizes absolute ownership of oil and gas in place,subject to the rule of capture.' The owner of property acquires titlenot only to the surface land but also to all oil and gas which he pro-duces from wells drilled and bottomed on his land, even to suchminerals which have migrated from the adjoining lands.! And where'Superior Oil Co. v. Roberts, 398 S.W.2d 276 (Tex. 1966).' The Texas Supreme Court spoke in terms of "working interest," when the court ac-tually meant to say "production." See the court of civil appeals decision, 390 S.W.2d $50(1965).' Roberts sued for an accounting between cotenants, on the theory that by acceptingleases from Craven and Todd, Superior became a tenant in common in the mineral estateunderlying the one and one-half acre tract. Roberts equated the pooling of such tract andthe obtaining of production from the unit with actual production from the tract in ques-tion. Had Superior produced from Roberts' tract, it would have had to account to Robertsfor its share (an undivided one-half) of the minerals produced less the necessary and reason-able cost of production and marketing. Cox v. Davison, 397 S.W.2d 200 (Tex. 1965); Whitev. Smyth, 147 Tex. 272, 214 S.W.2d 967, 5 A.L.R.2d 1348 (1948). See text accompanyingnotes 8, 9, 16 and 27 infra.4 Superior Oil Co. v. Roberts, 390 S.W.2d 550 (Tex. Civ. App. 1965).'Ryan Consol. Petroleum Corp. v. Pickens, 155 Tex. 221, 285 S.W.2d 201 (1955);Brown v. Humble Oil & Ref. Co., 126 Tex. 296, 83 S.W.2d 935 (1935). See also Elliff v.Texon Drilling Co., 146 Tex. 575, 210 S.W.2d 558, 561 (1948), where the court stated:[T]he so-called rule or law of capture . . . is that the owner of a tract ofland acquires title to the oil or gas which he produces from wells on his land,though part of the oil or gas may have migrated from adjoining lands. Hemay thus appropriate the oil and gas that have flowed from adjacent landswithout the consent of the owner of those lands, and without incurring lia-bility to him for drainage. The non-liability is based upon the theory thatafter the drainage the title or property interest of the former owner is gone... under the law of capture there is no liability for reasonable and legitimatedrainage from the common pool.However, in Elliff the rule of capture did not relieve the party from liability to the ad-jacent owner for negligence in allowing a well to blow-out.6Ryan Consol. Petroleum Corp. v. Pickens, 155 Tex. 221, 285 S.W.2d 201 (1955).such owner leases his land for the production of oil and gas, the lessorand lessee own all the oil and gas that they bring to the surface.'The owner of an undivided mineral interest, even without the con-sent of his cotenants, may drill wells on common property; but hemust not exclude his cotenants from also drilling, and he must ac-count to his cotenants to the extent of their interest! In the recentdecision of Cox v. Davison," the Texas Supreme Court held that wherea well is drilled on common property, the nonjoining cotenant is en-titled to his proportionate share of the market value of the oil andgas, less reasonable expenses, with no allowance for interest.A pooling or field-wide unitization agreement arises when two ormore owners of separate tracts either grant oil and gas leases withprovisions allowing pooling (which leases are subsequently pooled) orgrant oil and gas leases and later enter into a separate unitizationagreement, pooling the tracts for production purposes. Their royaltyinterests under the leases are pooled for the period of the leases, withthe royalties usually being apportioned among the lessors in the ratioof their respective acreage contributions to the unit. Texas courts al-low a cotenant both to lease his undivided interest and to include it ina unitized area without the consent or joinder of his cotenant."' Ofcourse, the cotenant's actions bind only his undivided interest, andhis unitization agreements do not restrict the nonjoining party fromdeveloping his mineral interest within the regulations imposed by theRailroad Commission."In a fact situation like Roberts, involving both a nonjoining co-tenant and a unitization agreement, the court must first determinethe contractual relationships of the parties. Since a cotenant's actionsbind only his undivided interest, the nonjoining party can neitherreceive the benefits of unit production occurring off his property norcollect damages for injury to his property as a result of the operationof that unit."' He may be permitted to ratify the lease, if he does so'The rule of capture applies to the production of oil and gas as between owners of ad-jacent tracts. However, the rule of capture has no application between cotenants, since asbetween cotenants there is no question of drainage where the well is drilled and bottomedon common land.SPrairie Oil & Gas Co. v. Allen, 2 F.2d 566 (8th Cir. 1924); White v. Smyth, 147Tex. 272, 214 S.W.2d (1948). See also Humble Oil & Ref. Co. v. Kishi, 276 S.W. 190(Tex. Comm. App. 1925).9397 S.W.2d 200 (Tex. 1965).'0 Whelan v. Placid Oil Co., 274 S.W.2d 125 (Tex. Civ. App. 1954).I Title 102, Oil and Gas, VERNON'S ANN. CIv. STAT.; Dobson v. Arkansas Oil & GasCo., 218 Ark. 160, 235 S.W.2d 33 (1950).,"Tide Water Associated Oil Co. v. Scott, 159 F.2d 174 (5th Cir. 1964).1966] NOTESSOUTHWESTERN LAW JOURNALpromptly."3 However, in the absence of compulsory pooling statutes,'4courts look with disfavor upon a nonjoining owner's waiting until theunit achieves production and then either seeking more favorable leaseterms or defeating the purposes of the unit by drilling his own wellwhich drains the unit field."Secondly, the court must consider both actual production andconstructive production. Where there is actual production from awell bottomed on the nonjoining cotenant's tract, the rule of Coxv. Davison"s entitles the nonjoining cotenant to his proportionateshare of the market value of the oil or gas, less reasonable expenses(with no allowance for interest). Where production is from a well onanother tract, courts have often applied the theory of constructiveproduction to allow recovery. The theory is based on the clause in theunitization agreement whereby production from any tract withinthe unit constitutes production from all tracts in the unit. In Sprad-ley v. Finley," for example, a cotenant leased his undivided mineralinterest for a term of fifteen years "and so long thereafter" as oil orgas was produced, and such lease was later pooled under a unitizationagreement containing a constructive production clause. 8 The courtheld that production from another tract within the unit served toextend the lease beyond the primary term, i.e., that production fromthe unit constituted production from the tract in question under theterms of the lease agreements. The concept of constructive produc-tion, however, applies only to those parties who were privy to theunitization agreement. 9II. BOGGESS v. MILAMs° AND CALIFORNIA CO. v. BRITT"1In two cases prior to Superior Oil v. Roberts, courts in other statesheld that the owner who refuses to join a unitization agreement has" Texas courts will not allow the non-joining royalty owner to wait an unreasonabletime after the development of the lease before ratifying, nor will the courts permit the non-joining royalty owner to act in bad faith in ratifying the lease. Furthermore, the court willnot require that the lessee hold open his ratification offer for an unlimited or unreasonablelength of time. Nugent v. Freeman, 306 S.W.2d 167 (Tex. Civ. App. 1957) error ref. n.r.e.Ward v. Gohlke, 279 S.W.2d 422 (Tex. Civ. App. 1955) error ref.; Texas & Pac. Coal& Oil Co. v. Kirtley, 288 S.W. 619 (Tex. Civ. App. 1926) error ref."4 TEx. REv. Civ. STAT. ANN. art. 6008c (1965)."Corley v. Mississippi State Oil & Gas Bd., 234 Miss. 199, 105 So. 2d 633 (1958).5e 397 S.W.2d 200 (Tex. 1965); see text accompanying note 9 supra.17157 Tex. 260, 302 S.W.2d 409 (1957)."s"If production is found on the pooled acreage it shall be treated as if production ishad from this lease, whether the well or wells be located on the premises covered by thislease or not." Spradley v. Finley, 157 Tex. 260, 302 S.W.2d 409 (1957)." Note 11 supra.20 127 W. Va. 654, 34 S.E.2d 267 (1945)." 247 Miss. 718, 154 So. 2d 144 (1963).[Vol. 20NOTESno right to production obtained from another tract within the unit."In Boggess v. Milam," a West Virginia decision, the complainant,W. W. Boggess, owned an undivided one-tenth interest in a 116-acretract. The cotenants, owning five-sixths of the remaining undividedinterest, unitized the 116-acre tract with an adjoining 53-acre tract.Boggess expressly refused to join such lease and unitization agree-ments. Shortly after the signing of the agreements, a gas well wasdrilled and bottomed on the adjoining 53-acre tract. The plaintiffsued to recover his alleged proportionate interest in the net value ofthe entire production obtained from the well on the adjoining 53-acretract. Boggess, claiming to be a tenant in common with the otherowners in the unit, contended that the unitization agreement de-stroyed the separate identities of the two tracts, thus merging thetracts into one for operating purposes.The West Virginia Supreme Court concluded that the lessee wasnot liable, in the absence of a contractual obligation, to the owner ofland adjoining a tract upon which the lessee had a producing oil orgas well. Since Boggess had refused to join both the lease of the 116-acre tract and the unitization agreement, he acquired no contractualrights; nor did either instrument affect his interest, favorably orunfavorably. The court reasoned that nonjoining cotenants shouldnot be allowed to prevent or impair the development of unitized tractswhere they had been given a fair and equal opportunity to join theunitization agreement.In California Co. v. Britt' the Mississippi Supreme Court followedthe Boggess decision. With substantially the same fact situation asBoggess, Britt, the nonjoining cotenant, brought a claim for drainageof the oil beneath his tract against California Company, the operatorof the unitized field. The supreme court reversed the lower court de-cision and held that California Company incurred no liability fordrainage."III. ADHERENCE TO THE RULES IN TEXASThe court of civil appeals in Roberts,'A in effect, attempted to ex-tend the concept of constructive production to allow the nonjoining"California Co. v. Britt, 247 Miss. 718, 154 So. 2d 144, 148 (1963).23127 W. Va. 654, 34 S.E.2d 267 (1945).2 2 4 7 Miss. 718, 154 So. 2d 144 (1963)."s Id. at 147. There was dicta in this case to the effect that if Britt had not been offereda fair and reasonable opportunity to enter the unitization agreement on equal terms with theother parties in the unit, then Britt could have recovered equity. As to what constitutes a"fair and reasonable" offer to voluntarily pool, see the new Texas Compulsory Pooling Act,TEX. Ruv. Crv. STAT. ANN. art. 6008c (1965).26390 S.W.2d 550 (Tex. Civ. App. 1965).1966]SOUTHWESTERN LAW JOURNALcotenant to recover a pro rata share of unit production when his co-tenant purported to convey a full interest in the tract. It held that al-though the lease and unitization agreements executed by Craven andTodd conveyed only their interests, and not Roberts' share, Robertsbecame a cotenant with Superior. The court cited a former case"7 forthe rule that where a cotenant severs oil or gas from the mineral estatewithout the consent of the other cotenants, he must pay the other co-tenants their proportionate share of the production, less reasonable ex-penses. The Texas Supreme Court2 cited Boggess v. Milain' and Cali-fornia Co. v. Britta0 for authority that the unitization agreement doesnot effect a merger of title but merely consolidates the contractualinterests under the leases. The court concluded by saying that Su-perior's accounting methods-paying the full one-eighth royalty onone and one-half acres to Craven and Todd-gave Roberts no basis onwhich to recover from Superior. However, Roberts might have beenable to maintain a suit for slander of title if he could have shown first,malice-the bad faith purchase of Roberts' title for the purpose ofasserting a claim against the land and a repudiation of Roberts' title-and, second, that he suffered special damages. 1IV. CONCLUSIONThe Texas Supreme Court was correct in following the Boggessand Britt cases and applying them to the situation where a cotenantpurports to unitize the full interest in a tract where there is a non-joining cotenant. The purpose of the unit is to maintain fieldwidepressure and achieve maximum efficiency in production. The non-joining owner should not be allowed to defeat this purpose by wait-ing until production is obtained and then claiming an accounting asto production instead of a royalty interest. In fact, if the nonjoiningowner has been offered a reasonable opportunity to join or ratify theunit agreement, the operator should not be compelled to continue"White v. Smyth, 147 Tex. 272, 214 S.W.2d 967 (1948); see note 3 supra and textaccompanying note 8 supra."' Superior Oil Co. v. Roberts, 398 S.W.2d 276, 278 (Tex. 1966).127 W. Va. 654, 34 S.E.2d 267 (1945).30247 Miss. 718, 154 So. 2d 144 (1963).3'Kidd v. Hoggett, 331 S.W.2d 515 (Tex. Civ. App. 1959) error ref. n.r.e. See alsoReaugh v. McCollum Exploration Co., 139 Tex. 685, 163 S.W.2d 620 (1942); cf., Shieldv. Shield, 286 S.W.2d 252 (Tex. Civ. App. 1955) error ref. n.r.e., a concurrent owner whoexecutes an oil and gas lease on the subject property and receives the bonuses, rentals, orroyalties payable under the lease is in the same position as a concurrent owner who himselfdevelops and operates the property, and is personally liable to account to his cotenants forall sums so received by him.[Vol. 20

Oil and Gas Production from a Unitized Area - The Nonjoining Owner

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Oil and Gas Production from a Unitized Area - The Nonjoining Owner

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