FACTUAL AND PROCEDURAL BACKGROUND
The facts of this case are undisputed. This matter involves two oil wells, Wells No. 8 and No. 10, situated on adjacent tracts of land, which are subject to the Holly and Holly B Leases respectively. PITCO's predecessor-in-interest entered into a farmout agreement (1) with Sledge's predecessor-in-interest and reserved a 5% overriding royalty interest (2) in Well No. 8. Currently, PITCO holds this 5% overriding royalty interest and Sledge has the working interest. (3) As a lessee under the Holly and Holly B Leases, Sledge is the designated operator of both adjoining tracts.
In 1998, Sledge submitted an application to the Commission to drill Well No. 10 on a tract covered by the Holly B Lease. This tract shares a lease line with the Holly Lease tract where Well No. 8 is situated. Because Well No. 10 was located closer to this line than the relevant field rules allow, (4) Sledge applied for a drilling permit under an exception to the Commission's rule 37. Rule 37 requires that all "affected persons" be given notice of applications filed under the rule and an opportunity for a hearing. Id., § 3.37(a)(2), (3). An applicant like Sledge, who seeks an exception to the spacing requirement, must provide a list of the mailing addresses of all "affected persons" who are entitled to receive notice of the request for an exception. See id. § 3.37(a)(2)(A). Sledge did not report PITCO's overriding royalty interest to the Commission and waived notice to itself as a designated operator. Without notifying PITCO, the Commission granted the drilling permit to Sledge. Sledge completed the drilling of Well No. 10 and commenced production.
After the Commission granted Sledge's permit, PITCO filed a complaint with the Commission requesting that the agency "initiate a show-cause proceeding requiring Sledge to show cause why its Holly B Well No. 10 should not be shut in pending a hearing . . . and, upon such hearing, why the well should not be plugged and abandoned, having not been drilled pursuant to the rules and regulations of the Commission." The Commission did not place the complaint on its docket and, after finding no basis for a hearing, denied PITCO's request. PITCO filed a motion for rehearing with the Commission. PITCO's motion was overruled by operation of law. See Tex. Gov't Code Ann. § 2001.146(c) (West 2000).
Subsequently, PITCO filed suit against the Commission in Travis County district court. PITCO requested that the court revoke Sledge's permit due to insufficient notice and order that production from Well No. 10 be halted pending the outcome of the proceedings. As lessee of the adjacent tracts, Sledge intervened to defend the Commission's decision. The Commission contеsted the district court's jurisdiction over this case. The district court denied the Commission's plea to the jurisdiction. After a bench trial, the district court rendered judgment in favor of PITCO. The court's judgment reversed the Commission's grant of a drilling permit to Sledge for Well No. 10 and remanded the matter to the Commission to determine whether Sledge is entitled to a well permit at the current location. The Commission and Sledge appeal this final judgment. See id. § 51.012 (West 1997). We first address the threshold issue of whether the district court had jurisdiction to consider this case.
DISCUSSION
Jurisdiction
A challenge to subject-matter jurisdiction raises a question of law and therefore we
review a district court's ruling de novo. Mayhew v. Town of Sunnyvale,
Specifically, a plea to the jurisdiction contests the district court's authority to
consider a cause of action. Tsumi, Inc. v. Tex. Parks & Wildlife Dep't,
In its pleadings, PITCO asserts jurisdiction under section 85.241 of the Texas Natural Resources Code and invokes the procedures and standard of review in sections 2001.171 and 2001.174 of the Administrative Procedure Act ("APA"). The parties agree that the APA itself does not confer jurisdiction. The Commission acknowledges that in suits such as this one, jurisdiction may be available under section 85.241 of the Texas Natural Resourcеs Code.
Section 85.241 of the Texas Natural Resources Code provides as follows:
Any interested person who is affected by the conservation laws of this state or orders of the commission relating to oil or gas and the waste of oil or gas, and who is dissatisfied with any of these laws or orders, may file suit against the commission or its members in a court of competent jurisdiction in Travis County to test the validity of the law or order.
Tex. Nat. Res. Code Ann. § 85.241 (West 1993). As a remedial statute, this section should be
construed liberally. Wrather v. Humble Oil & Ref. Co.,
The Commission, however, argues that the letter ruling by the assistant director of the agency's oil and gаs section is "not a Commission law or order as meant by section 85.241." According to its petition, PITCO's suit arises from the Commission's decision not to consider PITCO's complaint. The Commission denied PITCO's request for a show-cause hearing in a letter ruling, which stated that the assistant director was "closing . . . [his] file on this matter." In a subsequent memorandum addressing PITCO's motion for rehearing, the assistant director recognized that this letter ruling presented a "hybrid" situation. The assistant director acknowledged that while no hearing was conducted and the letter ruling disclaimed that it was a final order of the Commission, the ruling was also "nоt a traditional staff interim ruling" because it "effectively dismissed PITCO's complaint and no further Commission action on the complaint was contemplated." The assistant director recommended that the Commission treat PITCO's submission as a motion for rehearing and deny the motion on its merits.
PITCO alleges in its petition that the motion for rehearing was overruled by operation of law. Appellants have not challenged PITCO's factual allegations as fraudulent. Consequently, we accept this allegation as true and, for purposes of this proceeding, conclude that a final order existed.
Relying on Shell Petroleum v. Railroad Commission, the Commission also argues
that, as a matter of law, jurisdiction does not exist under this section because PITCO is not
"affected." See Shell Petroleum Corp. v. R.R. Comm'n,
Rule 37 Notice Provision
The question before us therefore is whether the notice provision of rule 37 requires the Commission to notify an overriding royalty interest holder when its lessee's interest extends to an adjacent tract for which the permit is sought, entitling the overriding royalty interest holder to a hearing. The Commission argues that the district court should not have employed a "substantial evidence" standаrd of review because this is not an appeal from a contested-case hearing. Rather, the Commission contends that the only valid posture of this case is as an original action in the district court. PITCO contends that the substantial evidence standard is appropriate because the Commission's response to PITCO's complaint constituted a final order. We agree.
Final orders of the Commission are "deemed to be prima facie valid and subject
to review under the substantial evidence rule." Imperial Am. Res. Fund v. R.R. Comm'n, 557
S.W.2d 280, 284 (Tex. 1977); accord Tex. Gov't Code Ann. § 2001.174; R.R. Comm'n v. Pend
Oreille Oil & Gas Co.,
We may not substitute our judgment for that of the state agency "on questions
committed to agency discretion. . . ." Tex. Gov't Code Ann. § 2001.174; accord Sizemore, 759
S.W.2d at 116. The appealing party bears the burden of showing a lack of substantial evidence.
Tex. Health Facilities Comm'n v. Charter Med.--Dallas, Inc.,
At the heart of this notice dispute is PITCO's desire to challenge the Commission's decision to grant Sledge a drilling permit. PITCO maintains that the permit is invalid due to insufficient notice, asserting that the Commission must hear from all "affected parties" before it can properly determine if waste will occur. PITCO claims Well No. 10 is unnecessary and that no one else was available to present this information to the Commission. We turn to the notice provision of rule 37 to determine if it required the Commission to notify PITCO of Sledge's permit application.
We construe administrative rules according to the same traditional principles as
statutes. Rodriguez v. Serv. Lloyds Ins. Co.,
The notice provision, rule 37(a)(2)(A), sets forth the persons to whom notice must be given when the applicant seeks an exception to minimum lease-line spacing and reads as follows:
A. When an exception to only the minimum lease-line spacing requirement is desired, the applicant shall file a list of the mailing addresses of all affected persons, who, for tracts closer to the well than the greater of one-half of the prescribed minimum between-well spacing distance or the minimum lease-line spacing distance, include:
(i) the designated operator;
(ii) all lessees of record for tracts that have no designated operator; and
(iii) all owners of record of unleased mineral interests.
16 Tex. Admin. Code § 3.37(a)(2)(A) (2000). PITCO acknowledges that it does not fall within any of the specified categories of interests presumed to be entitled to notice.
PITCO, however, asserts that rule 37(a)(2)(A) does not establish an exclusive list of interests entitled to notice. We agree. The Commission's use of the word "include" in the provision signifies that the list is not exclusive. Tex. Gov't Code Ann. § 311.005(13) (West 1998). (6) In addition, in the preamble to its rule 37 amendment in 1997, the Commission recognized the need for a non-exclusive list. 22 Tex. Reg. 8973, 8973 (1997). The question then is what interests are encompassed beyond the enumerated list in the provision by the language "affected persons." Appellants (7) argue that, by its terms, the notice provision of rule 37 does not require the Commission to notify royalty interest owners. Appellants contend that PITCO is not an "affected person" because its overriding royalty interest is nonpossessory. PITCO asserts that the distinction between possessory and nonpossessory interests is irrelevant because nonpossessory interests, such as those held by royalty owners, retain their character as property interests. PITCO also complains that the distinction is unreasonable because the Commission notifies other interest owners without the right to drill, such as lessees who are not operators, mineral owners, and surface owners under other Commission rules.
We reject PITCO's argument that the Commission notifies other interest owners
without the right to drill. Mineral owners and lessees, as possessory interests, have a right to
develop their mineral resources. Stephens City v. Mid-Kansas Oil & Gas Co.,
The parties agree that the three categories of interests specified in the rule 37 notice
provision are comprised of possessory interest owners. 16 Tex. Admin. Code § 3.37(a)(2)(A).
Royalty and overriding interests have no possessory right or interest in a tract. Standard Oil Co.
v. Marshall,
Courts must defer to an agency's interpretаtion of its own regulations unless the
interpretation is plainly erroneous or inconsistent with the language of the rule. United States v.
Larionoff,
The Commission has statutory jurisdiction over oil and gas wells in Texas. Tex.
Nat. Res. Code Ann. § 81.051(a)(2) (West 1993). The question of proper well location is "one
vested peculiarly in the Commission as an administrative body, and one which cannot be exercised
by the courts." Stewart v. Humble Oil & Ref. Co.,
Appellants argue that the longstanding policy of the Commission has never required
the agency to notify royalty owners of rule 37 applications. See Shell Petroleum Corp., 137
S.W.2d at 798; Rabbit Creek Oil Co. v. Shell Petroleum Corp.,
Appellants urge that our opinions in Shell Petroleum v. Railroad Commission and
Rabbit Creek Oil v. Shell Petroleum support their reasoning. In Shell Petroleum this court
considered whether royalty owners were necessary or proper parties to a suit to contest a drilling
permit. Shell Petroleum Corp.,
In the drilling and spacing of wells the lessee represents the royalty owners in so far as they may have any interest therein. They were so represented in the making of the applications for the permits and in all proceedings thereunder before the Commission; to which proceedings they were not made parties and in which they did not participate other than by such representation.
Id.
In Rabbit Creek Oil, this Court addressed whether adjacent landowners and lessees
were entitled to notice under rule 37 and determined that only the adjacent lessees must be
notified. Rabbit Creek Oil Co.,
The rule deals with the practical matter of giving notice to the party most vitally interested in the drilling of a well as an exception to the rule. . . . [The] interest [of adjacent lessees] also requires them to procure all the oil possible under their leases, and the lessees' interest in the oil is greater than that of thе owner of fee, who usually receives only one-eighth of the oil as royalty.
Id. at 739-40.
PITCO asserts that the supreme court's decision in HECI Exploration Co. v. Neel
contradicts appellants' contention that a lessee represents royalty interest owners before the
Commission. HECI Exploration Co. v. Neel,
Unlike this case, the dispute in HECI arose from the lessor-lessee relationship and the respective duties that each party owed to the other under their oil and gas lease. Here, the suit originates from the Commission's dismissal of PITCO's complaint regarding the validity of Sledge's drilling permit. We conclude that the ruling in HECI has no bearing on this case and reject PITCO's argument.
PITCO contends that Shell Petroleum and Rabbit Creek Oil are distinguishable from
this case because the lessees and the royalty interest owners in those cases shared a common
interest. PITCO alleges that an inherent conflict of interest exists between Sledge and itself as an
overriding royalty interest due to Sledge's position as a common lessee of the Holly and Holly B
Leases. Furthermore, PITCO urges that the Commission need only extend notice to royalty
interest holders who have a conflict of interest with their lessees. PITCO's solution, however,
requires the Commission to discern whether such conflicts of interest exist. In effect, PITCO asks
the Commission to exceed the scope of its authority. See Magnolia Petroleum Co. v. R.R.
Comm'n,
Appellants point out thаt PITCO's overriding royalty interest was created by the farmout agreement between PITCO's predecessor-in-interest and Sledge's predecessor-in-interest. As a result, appellants argue that PITCO's proper remedy should result from the terms of that agreement. We agree.
Texas law recognizes that the instrument in which an overriding royalty is reserved
dictates the obligations of the lessee to the royalty owner; the relationship established by the
instrument is contractual in nature. Sunac Petroleum Corp. v. Parkes,
Here, the farmout agreement reserved an overriding royalty interest, which PITCO presently holds. PITCO asserts no additional interest with respect to Well No. 8. PITCO argues that Sledge's ability to drill Well No. 10 affects its interest in Well No. 8 and, as a result, it is entitled to notice under rule 37. PITCO seeks damages for the injury to its interest resulting from the Commission's grant of the drilling permit to Sledge for Well No. 10. We note that under the farmout agreement, PITCO may seek damages to remedy any injury to its overriding royalty interest. (10) We conclude that the Commission's interpretation of "affected persons" is not plainly erroneous or inconsistent with the rule's language and defer to that interpretation.
The Commission reviewed PITCO's complaint that the drilling permit was invalid because PITCO had not received notice of Sledge's rule 37 application. Sledge's rule 37 application contained a plat showing that Sledge was the operator for all tracts adjacent to the Holly B Lease, the location of Well No. 10. Sledge asserted that the rule 37 exception was necessary to drill an offset well to protect the interests under the Holly B Lease. As evidenced by the letter ruling, the Commission denied the complaint after determining that as its own offset, Sledge had satisfied the notice provision.
As permitted by the provision, Sledge waived notice to itself as the designated operator of these tracts. 16 Tex. Admin. Code § 3.37(a)(2)(A)(i) (2000). In doing so, Sledge invoked rule 37(h)(2), which authоrizes the director of the Oil and Gas Division of the Commission to grant a requested spacing exception without holding a hearing, if written waivers of objection are received from all persons to whom notice would be given under rule 37(a)(2). Id. § 3.37(h)(2). We determine that the Commission could have reasonably concluded that Sledge's waivers of notice satisfied the requirements of rule 37(h)(2) and granted Sledge a drilling permit for Well No. 10. Moreover, we hold that substantial evidence supported the Commission's decision to deny PITCO's complaint and that PITCO was not entitled to notice of Sledge's аpplication under rule 37.
Due Process
PITCO further challenges the constitutionality of rule 37. In particular, PITCO claims that because the Commission failed to provide it with proper notice of Sledge's rule 37 application, the agency violated PITCO's due process rights under the United States and Texas Constitutions. U.S. Const. amend. XIV, §1; Tex. Const. art. I, § 19. PITCO asserts an undisputed property right, namely, its overriding royalty interest in Well No. 8.
In Rabbit Creek Oil, this court considered whether the failure of rule 37 to require
notice to fee owners of adjacent lands, while providing notice to adjacent lessees, rendered the
notice provision of rule 37 unconstitutional. Rabbit Creek Oil Co.,
CONCLUSION
We conclude that the district court properly exercised jurisdiction and we affirm the сourt's judgment to the extent that it denies the Commission's plea to the jurisdiction. We also conclude that substantial evidence supported the Commission's decision to deny PITCO's complaint. Accordingly, we reverse that part of the judgment of the district court and render judgment that the Commission correctly determined that PITCO was not an "affected person" entitled to notice of the rule 37 exception application filed by Sledge for Well No. 10 on the Holly B Lease.
Jan P. Patterson, Justice
Before Chief Justice Aboussie, Justices B. A. Smith and Patterson
Affirmed in Part and Reversed in Part
Filed: November 9, 2000
Publish
1. A farmout agreement is a common form of agreement between operators in which a lessee
agrees to assign its lease to another operator who is willing to drill. Mengden v. Peninsula Prod.
Co., 2. "The term 'overriding royalty' has a well-defined meaning in Texas. It is an interest,
which is carved out of, and constitutes a part of, the working interest created by an oil and gas
lease." In re GHR Energy Corp., 3. A working interest is an operating interest under an oil and gas lease that рrovides its owner
with the exclusive right to drill, produce, and exploit the minerals. 8 Williams & Meyers, supra
note 1, 1191. This interest bears all of the operating and drilling costs and is held subject to the
payment of royalties. Id.
4. This dispute occurs within the Amacker-Tippett, SW (Wolfcamp) Field, for which the
5. Section 2001.174(2) requires a court to reverse or remand a case for further proceedings:
if substantial rights of the appellant have been prejudiced because the administrative findings, inferences, conclusions, or decisions are
(A) in violation of a constitutional or statutory provision;
(B) in excess of the agency's statutory authority;
(C) made through unlawful procedure;
(D) affected by other error of law;
(E) not reasonably supported by substantial evidence considering the reliable and probative evidence in the record as а whole; or
(F) arbitrary and capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion.
Tex. Gov't Code Ann. § 2001.174(2) (West 2000).
6. Subsection (13) reads as follows: "'Includes' and 'including' are terms of enlargement and
not of limitation or exclusive enumeration, and use of the terms does not create a presumption that
components not expressed are excluded." Tex. Gov't Code Ann. § 311.005(13) (West 1998).
7. Because the positions of Sledge and the Commission do not diverge, when appropriate we
will refer to them collectively as "appellants."
8. Tex. R.R. Comm'n, Rule 37 (1919) (since amended); see also Brown v. Humble Oil & Ref.
Co., 9. 10. Thе Commission also acknowledges that PITCO may have a civil action against Sledge
based on (1) the farmout agreement creating the overriding royalty interest, (2) a duty of fair
dealing, or (3) both grounds. Williams & Meyers, supra note 1, § 420.2, at 365. The Texas
Natural Resources Code provides jurisdiction for suits for damages. Tex. Nat. Res. Code Ann.
§ 85.321 (West 1993). We render no opinion on the suggestion as this issue is not before us.
lease. Mengden,
2. "The term 'overriding royalty' has a well-defined meaning in Texas. It is an interest,
which is carved out of, and constitutes a part of, the working interest created by an oil and gas
lease." In re GHR Energy Corp.,
3. A working interest is an operating interest under an oil and gas lease that provides its owner with the exclusive right t