Fair and Reasonable Offer Required Before Force-Pooling in Texas

Gray Reed
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Gray Reed

Ammonite Oil and Gas Corporation v. Railroad Commission of Texas illustrates the difficulties faced by lessees attempting to force-pool a tract under the Mineral Interest Pooling Act.  In this case, the applicant Ammonite failed to make a “fair and reasonable offer” to voluntarily pool before applying to the Railroad Commission.

Facts

Ammonite held a lease from the State of Texas covering riverbed acreage in the Eagle Ford Shale. EOG drilled 16 wells on adjacent tracts on both sides of Ammonite’s tract. Ammonite offered to voluntarily pool its acreage with EOG’s. EOG rejected the offer, and Ammonite applied to the Commission to force-pool its tract pursuant to the Mineral Interest Pooling Act.

The Commission dismissed Ammonite’s applications based on several findings of fact and conclusions of law, but the primary conclusion at issue was that Ammonite failed to make a “fair and reasonable offer” to voluntarily pool as required by the MIPA.

Question: Were Ammonite’s voluntary pooling offers fair and reasonable?

Answer: No.

Reasoning:

For the Commission to approve a MIPA application, the mineral owner must meet one of the three statutory requirements by establishing that proposed force-pooled units would:

  • avoid the drilling of unnecessary wells,
  • protect correlative rights, or
  • prevent waste.

The “fair and reasonable offer” test

A “fair and reasonable offer” is a precondition to any forced-pooling application under MIPA. If the applicant fails to meet that test, the Commission lacks jurisdiction over the application and must dismiss it. Because the MIPA does not define “fair and reasonable” the Commission is given great deference and discretion in interpreting that standard in each case. The fairness and reasonableness of the pooling offer is judged from the viewpoint of the party being asked to pool.

The Commission’s dismissal of the application was based on its factual findings that:

  • Ammonite failed to provide survey data or a metes and bounds description to establish the precise acreage to be pooled;
  • None of the 16 EOG wells produce from or drain Ammonite’s riverbed tracts; and
  • Ammonite’s proposed 10 percent charge for risk was unreasonably low because a large resource play like the Eagle Ford requires an investment in large amounts of acreage and the drilling of a significant number of wells in order to be commercially successful, not just drilling one well in a single unit. Expert testimony, which was accepted, explained that a 100 percent charge for risk would be appropriate.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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