Rule 37 and Horizontal Wells – a time to rethink the regulatory burden?

Apparently, at least the staff of the Railroad Commission is taking an unduly restrictive view on Texas Rule 37. This Rule provides that, without notice and an opportunity for hearing, no well shall be drilled nearer than 467 feet to a property line. 16 TEX. ADMIN. CODE §3.37 3.37 (Tex. R.R. Comm’n, Statewide Spacing Rule). The reason for the rule is to protect nearby mineral estate owners from being drained (probably otherwise with little civil action recourse). This rule, again apparently, is being interpreted by the Railroad Commission that when a horizontal well is drilled across distinct tracts, with distinct ownerships, all of the mineral estate owners in each traversed tract must be under lease or otherwise consenting. Otherwise, an exception must be obtained. They treat each tract traversed by the wellbore, other than presumably the tract on which there is the wellpad, as a property within 467 feet of the well, even though the wellbore actually traverses and produces from each tract (not nearby).

In almost any analysis of Texas oil and gas law, a starting point is to discuss a tract of land where there are multiple owners of the Mineral Estate (tenants in common or cotenants). In Texas, a cotenant has a right to lease his interests for oil and gas; and that his lessee may explore for oil and gas and produce oil and gas but must account to those cotenants who do not join in the lease for their share of the profits. Consequently, when the lessee drill and produce or gas, there are two courses open to the non-joining cotenants: 1. Take their proportionate part of the production less their proportionate share of the expenses of drilling and operating the well(s); or 2. Lease their proportionate part of the land and take their proportionate share of the royalty and cast upon the driller the burden of paying all of the expenses. LEOPOLD, TEXAS PRACTICE SERIES: LAND TITLE AND TITLE EXAMINATION, §14.32 (Thomson West, 3rd ed. 2019 Supp.).

Stated in plain English, an owner of an oil and gas lease may drill for and produce oil or gas without the necessity of obtaining a lease from 100% of the Mineral Estate owners. Oil and gas operations are not considered to be “common law” waste and therefore can be conducted without 100% participation by the owners of the right to drill (e.g. the mineral estate owners).

Of course, if you have not obtained a lease from “everyone” then a lot of revenues are going to be paid to these unleased owners – but that is a matter of well economics for the well driller to determine.

But, irrespective, a vertical well can be drilled without obtaining a lease from every last mineral estate owner (that infuriating .0001% mineral estate owner who is a holdout for a bigger bonus or higher royalty rate or otherwise just cannot be found).

But a horizontal well, which may be several thousand feet in horizontal length, can easily traverse many tracts of land. As long as there is a perforation of the wellbore covering each separately owned tract, there is “actual production” from that tract for lease maintenance purposes. Arguably, in this new age of horizontal wells, there are legal principles that may merit revisiting. But it is hard to argue that there is anything else but actual production from each traversed tract that has had a perforation within the geographic confines of its tract. The unleased owner is not merely being traversed, he is being drilled on and production is being obtained from his interest. The unleased owner is entitled to his share of production less expenses or may ratify an existing lease and share in the royalties.

So, now, let’s look at Rule 37. It says in pertinent part,

“….no well shall be drilled nearer than 467 feet to any property line, lease line, or subdivision line….”

Okay, got it – but wait a minute, no well is being drilled 467 feet from any property line, lease line, or subdivision line in the example I have just given. The well is being drilled “on the property”, on each tract traversed by the horizontal well. There is no “nearness” – the wellbore is right on the property.

The purpose of the Texas conservation statutes is to prevent the drilling of unnecessary wells – and to most efficiently recover an important natural resource – oil and gas. Rule 37 is inserted to give adjacent landowners some protection from drainage. That is all.

So, what’s the problem? if you drill a horizontal well, everyone in that tract participates, whether leased or not. And in a horizontal well, everyone in the tracts traversed and perforated participates, whether leased or not. So, while arguments can be made as to how to properly allocate production between the tracts being traversed, no one is getting drained by a horizontal well – everyone participates, whether leased or unleased.

Well, not so, at least according to those “who know” at the RRC. And that is – well, “because I said so.” No drainage, everyone participates, but a Rule 37 exception is necessary – because I said so; because I said so.

While “because I said so” may be a good reason for brushing one’s teeth, eating your vegetables, and being in bed by 10 p.m., it is not good regulatory policy. Oh, and by the way, the Rule 37 notice can be avoided or delayed by merely agreeing to a “no perf zone” covering the traversed tract where there are unleased interests and 467 feet in each direction from that tract. Thereafter, when it is time to produce from that tract, file the Rule 37 exception application – why would it ever be denied? So then, why have application processes that will never be turned down?

The Commission, the Staff, and the attorneys appearing before the Railroad Commission are engaging in a “sophistry” of sorts, asserting that this laborious and meaningless process somehow protects unleased owners from drainage or somehow furthers meaningful regulation or somehow assures the maximum efficient recovering of oil and gas – in fact, nothing could be further from the fact.

If the Commission truly wants to afford any protection to landowners, have the drilling applicant certify that each owner in each tract traversed by the horizontal wellbore will be allocated a share of production (hence the terms “allocation well” and “Production Sharing Agreement”). Interestingly, this is a good idea for oil companies – if oil or gas is not being allocated to each traversed tract, how is the company maintaining its leases? Oh, and interestingly, this gives the driller of the horizontal well absolute flexibility to produce from its wellbore in the most efficient manner and thereby extract the most oil and gas. I know that there is an open issue on how to properly allocate horizontal wellbore production to the various traversed tracts, and if landowners don’t like the way the driller allocates production – go to court. That is where that issue needs to be, anyway. By the way, beg as you may, unleased mineral owners will never get the Railroad Commission to resolve their disputes with drilling companies – royalties and allocation of revenues are not the Commission’s responsibilities – and the Commission will not get involved.

As is always the case, the oil and gas industry and its regulators will be under scrutiny, by the media, activists, and others – and allegations will always be made that the oil and gas industry is ineffectively regulated and that the regulators in merely in the “pocket” of “big oil.” So, establish a meaningful regulation – require the driller to certify that each tract traversed by a horizontal wellbore will be allocated a share of the wellbore production and that the driller has a right to traverse each tract covered by the horizontal wellbore.

Oh, and don’t be confused by further sophistry. Nearby adjacent tracts, not traversed by the horizontal wellbore, will still be protected by Rule 37.

Meaningful regulation, inexpensive regulation – Problem Solved!

What’s wrong with this approach? Why stick with meaningless and expensive regulation? – I welcome opposing views. Let the debate begin!

Edward Wilhelm and Jack Wilhelm provide assistance to oil and gas operators.

THE WILHELM LAW FIRM, 5524 Bee Caves Road, Suite B5, Austin, Texas 78746; (512) 236 8400 (phone); (512) 236 8404 (fax);

DISCLAIMER: The information on this site is not intended to and does not offer legal advice, legal recommendations or legal representation on any matter. You need to consult an attorney in person for legal advice regarding your individual situation.


Wilhelm Law Firm, 5524 Bee Caves Rd., Ste B-5, Austin, TX 78746 (512) 236-8400