A Big Decision on Texas PSA and Allocation Wells? Not so Fast.

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In Opiela v. Railroad Commission of Texas and Magnolia Oil and Gas Operating, LLC, an Austin district court determined that the Commission’s Final Order granting a permit for a Production Sharing Agreement well in Karnes County did not comply with the Administrative Procedure Act. Here is the Commission’s hearing examiners’ recommendation. It is 18 pages, but we won’t venture into the weeds. In particular, the court said that the Commission erred in:

• Approving the initial unit well permit for the Audioslave A 102H well in Karnes County;
• Determining it had no authority to review whether an applicant seeking a well permit has authority under a lease or other relevant title documents to drill a well;
• Failing to consider the pooling clause of a lease in deciding an operator’s good-faith claim to operate a well; and
• Finding that the operator showed a good-faith claim of right to drill the well.

Plaintiffs asserted:

• Because the Commission has no formal rules that mention PSA or allocation wells, there is no statutory or administrative authority to issue PSA permits or allocation well permits.
• Allocation wells violate Statewide Rule 26, which requires that all liquid hydrocarbons be measured before leaving the lease, and Statewide Rule 40, which requires that operators establish a pooled unit if they want to combine acreage from separate leases to form a drilling unit.

The well was designated as a PSA wellbore (the previous operator had designated it as a allocation well). The plaintiffs’ arguments were based on the fact that they did not consent to pool their lease or sign a PSA or ratify a pooled unit. Magnolia responded by relying on the Commission’s requirements for additional documentation that is required for allocation wells in the form of underlying written agreements for all tracts from which hydrocarbons will produce.

The examiners recommended that the Commission find that it had authority to grant drilling permits for wells on tracts covered by PSA’s. The Commission agreed and lessors sued.

“Maybe”, you say?

The case, and its ramifications, is far from over. The district court judgment is sure to be appealed, but first the dispute must return to the Commission for proceedings consistent with the judgment. For its part, the Commission has not altered its practices and processes for the issuance of PSA and allocation well permits.

And a musical interlude.

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