In the last eight years, Texas lessees have drilled thousands of allocation wells, which are horizontal wells that traverse two or more unpooled tracts. The Texas Railroad Commission (“RRC”) has granted allocation well permits to drill so long as the lessee demonstrates a good faith claim or ownership or the right to drill on both leases. However, mineral owners have challenged the drilling of these wells, arguing that they exceed the terms of the lease. Key questions are (1) whether the wells can be drilled, and whether the RRC can legally grant allocation well permits, and (2) how royalties on allocation well production are to be distributed among the various interests. Texas courts have not answered these questions, though several cases are instructive, as discussed in a prior blogpost. But that may soon change.
On March 2, 2018, a group of landowners (collectively, “Monroe”) filed suit in Travis County district court to appeal the RRC’s dismissal of their complaint against Devon’s allocation well in the Phantom Wolfcamp in the Delaware Basin in Ward County. At the RRC, Monroe argued that Devon had no contractual or legal right to drill the allocation well, and the RRC’s grant of an allocation well permit improperly circumvented the lease’s limitations. The Commission refused to answer these legal questions based on an earlier RRC decision, and dismissed Monroe’s complaint in December 2017. Now, Monroe has appealed the dismissal to the district court, setting the stage for a judicial determination on these important legal issues.
Specifically, Monroe seeks judicial review of the RRC’s actions, arguing, among other things, that the Commission acted unlawfully (1) by issuing an allocation well permit to Devon, and (2) in determining that neither pooling authority nor a production sharing agreement is required to establish a good faith claim to drill an allocation well. Though it is always possible that the parties settle the dispute before the court rules on these issues, a trial court ruling and subsequent appellate decision would clarify the legality of allocation wells in Texas and perhaps provide additional guidance on the proper allocation formula. Given the ubiquity of allocation wells in Texas, a judicial determination is sure to have important ramifications for the industry. For example, if the court holds that allocation well permits are illegal, under RRC rule, lessees would be required to halt all production until valid permits are obtained. But until the industry receives direction from the courts or legislature, the legality of allocation wells remains unsettled in Texas.
Thompson & Knight LLP