An order of a state commission for limiting and prorating the
production of an oil field fixed the maximum allowable to any well
at 2.32% of its "hourly potential," but gave to "marginal" wells --
those which, if their low capacity were curtailed, would have to be
prematurely abandoned -- a special status, allowing each of them
production up to twenty barrels per day. Because of the large
number of such low-capacity wells, approximately 385,000 barrels,
out of a total daily "allowable" of 522,000 barrels for the entire
field, were exempt from the "hourly potential" formula. A company
whose wells were favorably situated and capable of large
production, but were allowed by the formula a daily production of
but twenty-two barrels each, claimed that the regulation
disregarded its right to the oil in place within its ground; that
it permitted others undue opportunity to capture oil draining from
its ground; that the "potential" method failed to give sufficient
weight to relevant factors in the measurement of oil in place,
especially to the depth of the company's reserves; that only an
allocation based upon acre feet of the oil sand, or its equivalent,
would be reasonable; that the order was, in effect, an allocation
on a flat per-well basis, regardless of great variation in the
capacity of wells and the density of well drilling on different
tracts; that excessive drillings allowed by the commission as
exceptions to its general spacing rule enabled densely drilled
tracts, by virtue of the "marginal" allowances, to drain away the
company's reserves, and that, for these reasons, the company's
property was taken without due process of law.
Held:
Page 310 U. S. 574
1. That, in view of the difficulties of the problem of fair
allocation, the speculation involved in an approach to its
solution, and the special function of the commission, a federal
court should not undertake to determine it upon the conflicting
testimony of experts. P.
310 U. S.
580.
2. In a controversy such as this, courts must not substitute
their notions of expediency and fairness for those which have
guided the agencies to whom the formulation and execution of policy
have been entrusted. Pp.
310 U. S.
580-581.
3. Whether a system of proration based upon hourly potential is
as fair as one based upon estimated recoverable reserves or some
other factor or combination of factors, is, in itself, a question
for administrative, and not judicial, judgment. P.
310 U. S.
581.
In a domain of knowledge still shifting and growing, and in a
field where judgment is therefore necessarily beset by the
necessity of inferences bordering on conjecture even for those
learned in the art, it would be presumptuous for courts, on the
basis of conflicting expert testimony, to deem the view of the
administrative tribunal, acting under legislative authority,
offensive to the Fourteenth Amendment.
4. In making exceptions to its general spacing rule and general
restrictive production formula in favor of small, irregularly
shaped tracts that otherwise might lose their oil by failure to
drill or inability to operate at a profit, the commission was
entitled to take into account not only the individual interests of
these small owners, but also effects on the State's economy. P.
310 U. S.
582.
5. It is not for the federal courts to supplant the commission's
judgment, even in the face of convincing proof that a different
result would have been better. P.
310 U. S.
583.
107 F.2d 70 reversed.
Certiorari, 309 U.S. 646, to review the affirmance of a decree
(28 F.Supp. 131) enjoining the enforcement of an oil proration
order.
Page 310 U. S. 577
MR. JUSTICE FRANKFURTER delivered the opinion of the Court.
The question before us is the validity, when challenged by
appeal to the Fourteenth Amendment, of an oil proration order
promulgated by the Railroad Commission of Texas insofar as it
applies to the respondent's wells.
To safeguard its oil resources, Texas has devised a regulatory
scheme for their production, and has placed its administration in
the Railroad Commission's hands. Revised Civil Statutes, Art. 6014
et seq. In conformity with this statute, which has
familiar procedural provisions, the Commission, in the fall of
1938, issued the assailed proration order covering the East Texas
oil field, where respondent's wells are located. By this order,
each well was allowed to produce 2.32% of its "hourly potential" --
that is, 2.32% of its hourly productive capacity under unrestricted
flow. But the practical operation of this order was largely cut
across by allowances made to "marginal wells." These are wells
which, if their low productive capacity were legally curtailed,
would have to be prematurely abandoned. Therefore, the Texas
statute gives them a special status. In accord with its policy
toward these marginal wells, the Commission freed them from the
burden of its hourly potential formula by allowing them production
up to twenty barrels a day. Because of the large number of these
low capacity units in the East Texas field, approximately 385,000
barrels out of a total daily "allowable" of 522,000 barrels were
exempt from the restricting formula, leaving only about 136,000 for
the class within which respondent's wells fell. Application to them
of the hourly potential formula resulted in an allotment of only
about twenty-two barrels a day to each well. Claiming that such a
mode of regulation disregarded its right to the oil in place
beneath its leases, respondent sought and obtained a decree from
the District
Page 310 U. S. 578
Court for the Western District of Texas enjoining the Commission
from carrying its proration plan into effect.
28 F. Supp.
131. With modification not here relevant, the Circuit Court of
Appeals affirmed the decree. 107 F.2d 70. We brought the case here
by certiorari, 309 U.S. 646, because of the importance of the
matter in the administration of the Texas law and kindred
conservation statutes.
As sustained by the findings of the District Court and accepted
by the Circuit Court of Appeals, respondent's claims may be
summarized by what follows. The Commission's proration formula, as
applied, permits other leaseholders, more leniently treated, to
capture oil at a more rapid rate than is possible for the
respondent, thereby draining away oil which underlies respondent's
leased lands. This is due both to the allocating formula itself,
and more especially to the permission granted marginal wells to
produce without limit up to twenty barrels a day. The "potential"
method of allocation fails to give sufficient weight to relevant
factors in the measurement of oil in place, especially to the depth
of respondent's reserves situated in the "Fairway," a deep and rich
portion of the East Texas field. Only an allocation based upon
acre-feet of sand or its equivalent would be a reasonable means of
measuring the oil in place beneath respondent's leases, and any
formula failing to do this takes respondent's property without due
process of law. Moreover, the allowance made to marginal wells
absorbs so much of the total "allowable" as to make the
Commission's order, in effect, an allocation on a flat per well
basis, regardless of great variation in the capacity of the wells
and the density with which different leases have been drilled. An
important factor in producing this result is the permission
frequently granted by the Commission, under power conferred upon it
by statute, for departure from its spacing and drilling rules
whereby the field has
Page 310 U. S. 579
been drilled with an irregular density. As a consequence, the
more densely drilled tracts adjoining respondent's leases may, by
virtue of their marginal allowances, produce oil in such quantities
as to drain away respondent's reserves. Such is the basis for
respondent's resistance to the order.
Underlying these claims is as thorny a problem as has challenged
the ingenuity and wisdom of legislatures. In major part, it was
created by the discovery of vast oil resources and by their
development under rules of law fashioned in the first instance by
courts on the basis of analogies drawn from other fields of the
common law. In Texas, according to conventional doctrine, the
holder of an oil lease "owns" the oil in place beneath the surface.
LeMar v. Garner, 121 Tex. 502, 50 S.W.2d 769;
Stephens
County v. Mid-Kansas Oil & Gas Co., 113 Tex. 160, 254 S.W.
290; 1 Summers, Oil and Gas (2nd ed.), page 16, ยง 5. B ut equally
recognized is the "rule of capture," which subjects the lessee's
interest to his neighbors' power to drain his oil away. Therefore,
to speak of ownership in its relation to oil is to imply a
contingency of control not applicable to ordinary interests in
realty.
See Ely, The Conservation of Oil, 51 Harv.L.Rev.
1209, 1218-22. Each leaseholder,that is to say, is at the mercy of
all those who adjoin him, since oil is a fugacious mineral, the
movements of which are not confined by the artificial boundaries of
surface tracts. This gap between the geological nature of the oil
pool and the formal surface rights of the lessees is frequently
bridged by the drilling of "offset wells" at the boundary of each
surface tract, so that owners may protect themselves against the
exercise of one another's capture rights. Partly to mitigate the
undesirable consequences of this unsystematized development, the
oil-producing states, Texas among them, have enacted conservation
laws with appropriate administrative mechanisms to control drilling
and production. The
Page 310 U. S. 580
general scheme of the Texas statute is not challenged. Its
constitutionality is here settled.
Champlin Rfg. Co. v.
Commission, 286 U. S. 210.
But merely writing laws is only the beginning of the matter. The
administration of these laws is full of perplexities. State
agencies have encountered innumerable difficulties in trying to
adjust the many conflicting interests which grow out of the rule of
capture and its implications. The experience of Texas illustrates
that a brood of litigation almost inevitably follows the inherent
empiricism of these attempted solutions.
See Ely,
op.
cit. supra, at pp. 1225-1229; Marshall and Meyers, The Legal
Planning of Petroleum Production: Two Years of Proration, 42 Yale
L.J. 701. For some years, the Texas Commission has been engaged in
experimental endeavor to devise appropriate formulas for a fair
allotment of the allowable production. The commitment of such a
delicate task to the administrative process has not escaped
challenge in the courts, and, at times, the challenge has been
successful.
Compare MacMillan v. Railroad
Commission, 51 F.2d
400;
Constantin v. Smith, 57 F.2d
227;
Peoples' Petroleum Producers v.
Smith, 1 F. Supp.
361;
Amazon Petroleum Corp. v. Railroad
Commission, 5 F. Supp.
633. But such cases are only episodes in the evolution of
adjustment among private interests and in the reconciliation of all
these private interests with the underlying public interest in such
a vital source of energy for our day as oil. Certainly, so far as
the federal courts are concerned, the evolution of these formulas
belongs to the Commission, and not to the judiciary. A controversy
like this always calls
Page 310 U. S. 581
for fresh reminder that courts must not substitute their notions
of expediency and fairness for those which have guided the agencies
to whom the formulation and execution of policy have been
entrusted.
General as these considerations may be, they are decisive of the
present case. Both the District Court and the Circuit Court of
Appeals appear to have been dominated by their own conception of
the fairness and reasonableness of the challenged order. For all we
know, the judgment of these two lower courts may have been wiser
than that of the Commission, and their standard of fairness a
better one. But whether a system of proration based upon hourly
potential is as fair as one based upon estimated recoverable
reserves or some other factor or combination of factors is, in
itself, a question for administrative, and not judicial, judgment.
According to the Commission's experts, theories of allocation urged
by the respondent and accepted by the courts below would, in fact,
give to respondent more than its fair share of the oil in the
field. Respondent, the Commission's witnesses contend, would gain
undue benefit from the constant eastward migrations of oil caused
by the gradual influence of subsurface pressure gradients -- and
this at the expense of other lessees in geologically less fortunate
portions of the field. The Commission's experts further insisted
that, though much technical progress has been made, estimates of
recoverable reserves beneath the surface of a particular tract
remain largely an indeterminate venture, and that hourly potential
actually takes into account, at least in some measure, all relevant
factors for ascertaining recoverable reserves. Certainly in a
domain of knowledge still shifting and growing, and in a field
where judgment is therefore necessarily beset by the necessity of
inferences bordering on conjecture even for those learned in the
art, it would be presumptuous for courts, on the basis of
conflicting expert testimony, to deem the view of the
administrative
Page 310 U. S. 582
tribunal, acting under legislative authority, offensive to the
Fourteenth Amendment.
Compare South Carolina Hwy. Dept. v.
Barnwell Bros., 303 U. S. 177,
303 U. S. 191
et seq.
Equally enmeshed in a conflict of expertise is the claim, most
vigorously urged by respondent, that, taken in connection with
exceptions made by the Commission to its spacing rules and with the
unrestricted twenty-barrel allowance to marginal wells, the
proration order substantially places production on a flat per well
basis. Such a result, according to respondent's claim as accepted
by the lower courts, gives a constitutionally inadmissible
advantage to smaller and more densely drilled tracts as against
those owned by respondent. But this claim really presents a more
specialized aspect of the general problem. In regulating flow of
production, the treatment to be accorded to small and irregularly
shaped tracts which do not fit neatly into the Commission's general
scheme for spacing has presented a difficulty almost as great as
the framing of proration formulas.
Compare Walker, The
Problem of the Small Tract under Spacing Regulations, 17 Tex.L.Rev.
157 (Supp.Bar Association Proceedings). To deny the holders of
these tracts permission to drill might subject them to the risk of
losing their oil in place or of being put at the mercy of adjoining
holders. In many instances, therefore, the Commission has granted
exceptions to its general spacing rule on the basis of which
investments have been made and wells drilled. If these wells, most
of them small, were restricted to production on the basis of an
hourly potential formula, it might be unprofitable to operate them
at all. Not only are the individual interests of these small
operators involved, but their effect on the state's economy is an
appropriate factor to be taken into account when plans are devised
to keep the wells open.
Page 310 U. S. 583
A flat per well allowance to these producers was not an
unnatural answer to the problem. Whether, as contended by the
respondent, the maximum figure set by the Commission is too high in
that it leads to the capture of oil from beneath its leases by
neighboring operators, and whether a lower limit might suffice to
assure profitable production -- these questions take us into that
debatable territory which it is not the province of federal courts
to enter. The record is redolent with familiar dogmatic assertions
by experts equally confident of contradictory contentions. These
touch matters of geography and geology and physics and engineering.
No less is there conflict in the evidence as to the solidity of
respondent's apprehension that there will be drainage of the oil
beneath its surface by neighboring wells. The Commission's experts
insist that the threat, if existent at all, is speculative, and
that the Commission's power of continuous oversight is readily
available for relief if real danger should arise in the future.
Plainly these are not issues for our arbitrament. The state was
confronted with its general problem of proration and with the
special relation to it of the small tracts in the particular
configuration of the East Texas field.
310 U.
S. In striking the balances that have to be struck with
the complicated
Page 310 U. S. 584
and subtle factors that must enter into such judgments, the
Commission has observed established procedure. If the history of
proration is any guide, the present order is but one more item in a
continuous series of adjustments. It is not for the federal courts
to supplant the Commission's judgment, even in the face of
convincing proof that a different result would have been
better.
The challenged decree must therefore be
Reversed.
|
310
U.S. 573|
* We are here not concerned with a statute, or orders under it,
not thought to enforce state policy "for the prevention of waste,
and the protection of correlative rights of owners in the common
pool," but directed solely
"to compel those who may legally produce, because they have
market outlets for permitted uses, to purchase gas from potential
producers whom the statute prohibits from producing because they
lack such a market for their possible product."
Thompson v. Consolidated Gas Co., 300 U. S.
55,
300 U. S. 69,
300 U. S.
77.
MR. JUSTICE ROBERTS, dissenting.
The petitioners' proration order is challenged not merely as
unfair or unreasonable, but as confiscatory of the respondent's
property. Upon the allegations of the bill, the District Court had
jurisdiction. Although the problem of proration presented technical
and difficult questions, and although the Commission was vested
with a broad discretion in dealing with them, these facts could not
justify the court's abdicating its jurisdiction to test the
Commission's order. The case was tried
de novo, and
neither the full record made before the Commission nor its findings
appear in the evidence, except for what is contained in the
Commission's orders. After a painstaking trial, and upon detailed
and well supported findings of fact, the court reached the
conclusion that the order worked a confiscation of respondent's
property. [
Footnote 1] The
court said: "The respondents' [petitioners'] engineers frankly
admitted that the present scheme of proration is nothing more or
less than one on a per well basis." Referring to such a basis, the
court added:
"It is sufficient to say that it takes no account of the
difference in the wells, of the richness or thickness of the sand,
of the
Page 310 U. S. 585
location upon the structure, of the porosity or permeability of
the sand, of the estimated oil reserves, or of the acreage upon
which the respective wells are situated. The worst property is
raised to the level of the best, and the best is lowered to the
level of the worst."
The court concluded that the order operated to appropriate, for
the benefit of others, the respondent's oil without
compensation.
The Circuit Court of Appeals approved and adopted the findings
and conclusions of the District Court. [
Footnote 2]
The opinion of this court, in my judgment, announces principles
with respect to the review of administrative action challenged
under the due process clause directly contrary to those which have
been established. A recent exposition of the applicable principles
is found in the opinion of Mr. Justice Brandeis, written for a
unanimous court, in
Thompson v. Consolidated Gas Utilities
Corp., 300 U. S. 55,
dealing with a proration order affecting gas, entered by the same
commission which entered the order here in issue. I think that
adherence to the principles there stated requires the affirmance of
the decree.
THE CHIEF JUSTICE and MR. JUSTICE McREYNOLDS join in this
opinion.
[
Footnote 1]
28 F. Supp.
131, 134, 135.
[
Footnote 2]
107 F.2d 70.