## Facts

- The Texas Railroad Commission (Commission) administered a statewide spacing rule (Rule 37) that generally prohibited drilling a well closer than 1,200 feet to another well completed in the same horizon on the same tract.
- Rule 37 authorized the Commission to grant an exception when necessary to “prevent waste” or “prevent the confiscation of property.”
- BTA Oil Producers (BTA) held a lease on a tract of land and drilled Wedge No. 2 to the Montoya reservoir at roughly 13,000 feet.
- As Montoya reserves neared depletion, BTA sought to plug back and recomplete Wedge No. 2 at a higher depth (about 12,000 feet) in another producing interval.
- BTA already had a well (Wedge No. 1) completed at the higher depth, and BTA’s proposed recompletion location for Wedge No. 2 would be less than 1,200 feet from Wedge No. 1, requiring a Rule 37 exception.
- In its application, BTA presented geological and engineering testimony that wells in the area were not adequately capturing oil at the 12,000-foot level near the Wedge No. 2 bore.
- BTA also presented economic evidence that, although it was physically possible to drill a new well at a location that complied with Rule 37, doing so could not be economically justified compared to using the existing Wedge No. 2 wellbore.
- Exxon Corporation (Exxon), an opposing operator, objected that the Commission could not rely on economic considerations to grant a “waste” exception and that the order lacked substantial evidentiary support.
- The Commission granted the exception and found that failing to allow the recompletion would result in waste because oil near Wedge No. 2 was not being recovered.
- Exxon sued in the District Court of Travis County to set aside the order; the district court affirmed.
- Exxon appealed to the Supreme Court of Texas.

## Issues

1. May the Railroad Commission consider economic feasibility— including the cost advantage of recompleting an existing wellbore—when deciding whether a Rule 37 spacing exception is necessary to prevent waste?
2. Was the Commission’s order granting the waste-based exception supported by substantial evidence?

## Decision

- The Supreme Court of Texas affirmed the district court’s judgment and upheld the Commission’s order granting BTA a Rule 37 exception.
- The Court held that the Commission may consider economic factors, including the practicality and cost savings of using an existing wellbore, in determining whether an exception is needed to prevent waste.
- The Court held that substantial evidence supported the Commission’s finding that, without the exception, recoverable oil at the relevant depth near Wedge No. 2 likely would not be produced.

## Legal Principles

- Rule 37 allows spacing exceptions to prevent waste or prevent confiscation; an agency order granting an exception must be upheld if supported by substantial evidence.
- “Waste” in Texas conservation law is not limited to surface loss; it can include the nonrecovery of otherwise recoverable hydrocarbons when, as a practical matter, they will not be produced under existing constraints.
- In evaluating a waste-based exception, the Commission may consider whether a spacing-compliant alternative (such as drilling a new well) is economically unjustified so that the hydrocarbons probably would remain unrecovered.
- Under substantial-evidence review, courts do not reweigh conflicting testimony; they ask only whether the record contains evidence that reasonably supports the agency’s findings and decision.

## Conclusion

Exxon Corp. v. Railroad Commission holds that the Texas Railroad Commission may take economic feasibility into account—including the availability of an already-drilled wellbore—when granting a Rule 37 spacing exception on the ground of preventing waste, and that the Commission’s waste finding and permit decision will be sustained on judicial review when supported by substantial evidence.


Exxon Corp. v. Railroad Commission, 571 S.W.2d 497 (1978)