Opinion
No. 04-05-00488-CV
Delivered and Filed: June 28, 2006.
Appeal from the 49th Judicial District Court, Webb County, Texas, Trial Court No. 2005-Cvq-000823-D1, Honorable Manuel R. Flores, Judge Presiding.
Reversed and Rendered.
Sitting: Sarah B. DUNCAN, Justice, Karen ANGELINI, Justice, Sandee Bryan MARION, Justice.
MEMORANDUM OPINION
On February 10, 1975, the predecessor-in-interest of ConocoPhillips and Kaiser-Francis Oil Company (collectively "Conoco") leased 1053 acres in Zapata County from the predecessors-in-interest of Maria Eva U. Ramirez and El Refugio, Ltd. (collectively "Ramirez") for a primary term of five years. After the expiration of the primary term, the acreage the lessee is entitled to hold is governed by paragraph 18 of the lease, which provides in part as follows:
At the end of five years after the expiration of the primary term hereof, Lessee covenants and agrees to execute and deliver to Lessor a written release of any and all portions of this lease which have not been drilled to a density of at least forty (40) acres for each producing oil well and three hundred and twenty (320) acres for each producing or shut-in gas well from depths above 5,000 feet from the surface of the ground and 640 acres for each producing or shut-in gas well from depths below 5,000 feet from the surface of the ground except that in case any rule adopted by the Railroad Commission of Texas or other regulating authority for any field on this lease provides for a spacing or proration establishing different units of acreage per well, then such established different units shall be held under this lease by such production, in lieu of the units above mentioned. . . .
In short, paragraph 18 provides that, at the end of five years after the expiration of the primary term, the lessee is entitled to hold 640 acres for each gas well drilled below 5,000 feet unless the Railroad Commission has "adopted" a rule "for" the field in which the gas well is drilled; if the Railroad Commission has "adopted" a rule "for" a field, the lessee is entitled to the acreage specified in that rule.
The parties agree the lease's primary term expired on February 10, 1980; and, five years later, on February 10, 1985, two wells were producing gas from a depth greater than 5,000 feet: the Serafin No. 1 gas well and the Serafin No. 4 gas well. The parties further agree that the Railroad Commission "adopted" a rule "for" the field in which the Serafin No. 4 gas well was drilled; and that field rule entitles Conoco to 176 acres surrounding the Serafin No. 4 gas well. But the parties disagree on whether the Railroad Commission "adopted" a rule "for" the field in which the Serafin No. 1 gas well was drilled. Ramirez argues the Railroad Commission "adopted" two rules — statewide Rules 37 and 38 — "for" this field and, under these rules, the lessee is entitled to only forty acres around the well. Conoco argues statewide rules are not "adopted" "for" a field and therefore do not trigger the "except clause" in paragraph 18; accordingly, Conoco argues, it is entitled to 640 acres around the well. The trial court rendered judgment in Ramirez's favor, ruling that Conoco is entitled to only forty acres around the Serafin No. 1 gas well in accordance with the statewide rules. Conoco appealed. Because we agree with Conoco that statewide rules are not "adopted" "for" a field, we reverse the trial court's judgment and render judgment in Conoco's favor.
Rule 37, the Statewide Spacing Rule, provides in relevant part:
The distances mentioned in subsection (a) [— 1200 feet between wells and 467 feet between any well and a property line —] are minimum distances to provide standard development on a pattern of one well to each 40 acres in areas where proration units have not been established.
16 Tex. Admin. Code § 3.37(b) (2006) (Tex.R.R. Comm'n, Statewide Spacing Rule). Because this part of statewide Rule 37 remains unchanged since 1985, we cite to the current rule.
In 1985, Texas Railroad Commission Rule 38, Well Densities, provided in relevant part:
No well shall be drilled on less, but may be drilled on more, acreage than that hereafter prescribed as the proper amount for all oil and gas fields wherein only spacing rules, either special or statewide, are applicable . . . 467-1200 [feet] . . . 40 [acres].
16 Tex. Admin. Code § 3.38(b)(1), adopted effective Jan. 1, 1976 (repealed and replaced 1989) (current version at 16 Tex. Admin. Code § 3.38(b)(1) (Tex.R.R. Comm'n, Well Densities) (hereinafter cited as Former Rule 38(b)(1)).
"To regulate oil and gas production, the Railroad Commission of Texas has adopted general rules applicable throughout the State. . . ." R.R. Comm'n of Tex. v. WBD Oil Gas Co., 104 S.W.3d 69, 70 (Tex. 2003). However, "because these general rules cannot adequately address the widely varying conditions found in the thousands of oil and gas reservoirs in Texas, the Commission may issue orders with detailed regulations for a specific field, which the Commission calls field rules." Id. Because the general rules apply statewide, they must be promulgated in accordance with the rulemaking provisions of the Texas Administrative Procedure Act; field rules, on the other hand, apply to a specific field and a specific group of operators and must therefore be adopted under the adjudication provisions of the TAPA. See id. at 71. These differences make clear that a statewide rule is not a field rule. Accordingly, we hold that, because statewide Rule 37(b) and Former Rule 38(b)(1) were not "adopted" "for" the field in which the Serafin gas well No. 1 was drilled, they are not field rules and therefore do not trigger the "except" clause in paragraph 18.
See, e.g., Browning Oil Co. v. Luecke, 38 S.W.3d 625, 633 n. 5 (Tex.App.-Austin 2000, pet. denied) ("Field rules are special rules that modify the Railroad Commission's [statewide regulations affecting] well spacing, density, prorationing, and casing requirements for designated fields to deal with differences in reservoir conditions."); Seagull Energy E P, Inc. v. R.R. Comm'n of Tex., 99 S.W.3d 232, 235-36 (Tex.App.-Austin 2003, pet. granted) (distinguishing statewide and field rules).
Ramirez makes three arguments to the contrary. First, she argues paragraph 18 is ambiguous and points to the testimony of her expert that it was the Railroad Commission's policy for a proration analyst to "adopt" statewide rules "for a particular field when the field is discovered and application is made to the [Commission] by the operator." However, parol evidence is not admissible to vary the terms of an unambiguous contract; and a contract is ambiguous only if it is susceptible to more than one reasonable interpretation. See Universal C.I.T. Credit Corp. v. Daniel, 150 Tex. 513, 243 S.W.2d 154, 157 (1951). In light of the longstanding distinction in Texas jurisprudence between statewide and field rules, we hold paragraph 18 is unambiguous: it clearly provides that, if the Railroad Commission does not "adopt" a rule "for" a field, the lessee is entitled to 640 acres around a gas well drilled below 5,000 feet; if the Railroad Commission does "adopt" a rule "for" a field, the lessee is entitled to the acreage specified in that rule. Ramirez's ambiguity argument, as well as her interpretation of paragraph 18 and her expert's testimony, also erroneously equates the quite different concepts of "adoption" and "application." To "adopt" means "to accept formally and put into effect," while to "apply" means "to put into operation or effect." Webster's Ninth New Collegiate Dictionary 58, 97 (1984). Under Texas law, an operator's application for a permit does not cause the Railroad Commission to "adopt" statewide rules; rather, the Commission promulgates statewide rules through a formal rule-making procedure. The Commission "adopts" specific field rules following a formal adjudicative proceeding a type of proceeding that indisputably did not occur before statewide Rule 37(b) and Former Rule 38(b)(1) were applied to the field in which the Serafin No. 1 gas well was drilled. In short, although these statewide rules apply to the field in which the Serafin No. 1 gas well was completed, these rules were not "adopted" "for" the field. Accordingly, the "except" clause in paragraph 18 does not apply as a matter of law; and parol evidence from Ramirez's expert is irrelevant.
See Nat'l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 521 (Tex. 1995) (per curiam).
Ramirez next argues that paragraph 18 is inconsistent with and trumped by the statewide rules. However, the statewide rules merely establish minimum spacing and density requirements. See 16 Tex. Admin. Code § 3.37(b) ("The distances mentioned in subsection (a) [— 1200 feet between wells and 467 feet between any well and a property line —] are minimum distances to provide standard development on a pattern of one well to each 40 acres in areas where proration units have not been established."); Former Rule 3.38(b)(1) ("No well shall be drilled on less, but may be drilled on more, acreage than that hereafter prescribed as the proper amount for all oil and gas fields wherein only spacing rules, either special or statewide, are applicable . . . 467-1200 [feet] . . . 40 [acres]"). Paragraph 18, on the other hand, establishes the acreage the lessee is entitled to hold five years after the expiration of the primary term. Indeed, if we were to construe statewide Rule 37(b) and Former Rule 38(b)(1) as determining the amount of acreage the lessee is entitled to hold five years after the expiration of the primary term, it would render the part of paragraph 18 that applies in the absence of a field rule meaningless. The statewide rules would always control.
Ramirez also argues the drafters intended paragraph 18 to protect against the remote contingency "that spacing or proration rules by a governing body may not exist at the time Paragraph 18 is triggered," so that a lessee could hold the entire acreage with just one well. However, this construction of paragraph 18 ignores its plain language and structure: the first proviso states the general rule (in the absence of a field rule, the lessee will hold 640 acres around a gas well drilled deeper than 5,000 feet), while the second proviso states the exception (if a field rule is adopted, the lessee will hold the acreage specified in the field rule). Under Ramirez's construction, the structure of paragraph 18 is turned on its head: the first clause would never apply, while the second "except" clause would state both the general rule (fields governed by the statewide rules) and the exception (fields governed by field rules). This construction would be not only nonsensical but contrary to general rules of construction. Cf. Knight v. Chicago Corp., 144 Tex. 98, 188 S.W.2d 564, 566-67 (1945) ("Immediately following the above clause and in the same sentence is a proviso introduced by the words ` provided, however,' which are followed by the restrictive provisions. That proviso must be construed as a limitation or restraint upon the authority defined in the clause immediately proceeding it. . . . The parties undertook only to restrict the powers defined and not to enlarge thereon. To hold otherwise would be to make a restriction upon a power cover a broader field than the power itself.").
In sum, although statewide Rule 37(b) and Former Rule 38(b)(1) apply to the field in which the Serafin No. 1 gas well was drilled, they were not "adopted" "for" this field. Accordingly, pursuant to the plain language of paragraph 18, Conoco is entitled to hold 640 acres surrounding the Serafin No. 1 gas well. The trial court therefore erred in ruling to the contrary. Therefore, we reverse the trial court's judgment to the extent it declares that, as of February 10, 1985, Conoco held forty acres located around the Serafin No. 1 gas well and render judgment that, as of February 10, 1985, Conoco held 640 acres located around the Serafin No. 1 gas well.