Shell Petroleum v. United States

Opinions of the United

1999 Decisions States Court of Appeals

for the Third Circuit

6-24-1999

Shell Petroleum v. USA

Precedential or Non-Precedential:

Docket 97-7639

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Filed June 24, 1999

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 97-7639

SHELL PETROLEUM, INC.,

and Subsidiary Corporations,

Appellant

v.

UNITED STATES OF AMERICA

On Appeal from the United States District Court

for the District of Delaware

D.C. Civil Action No. 93-cv-00508

(Honorable Joseph J. Farnan, Jr.)

Argued September 17, 1998

Before: SLOVITER, SCIRICA and ALITO, Circuit Judges

(Filed June 24, 1999)

MARK L. EVANS, ESQUIRE

(ARGUED)

Kellogg, Huber, Hansen, Todd &

Evans

1301 K Street, N.W.

Suite 1000 West

Washington, D.C. 20005

WILLIAM O. LaMOTTE, ESQUIRE

Morris, Nichols, Arsht & Tunnell

1201 North Market Street

P.O. Box 1347

Wilmington, Delaware 19899

Attorneys for Appellant

STEVEN W. PARKS, ESQUIRE

(ARGUED)

RICHARD FARBER, ESQUIRE

United States Department of Justice

Tax Division

P.O. Box 502

Washington, D.C. 20044

Attorneys for Appellee

OPINION OF THE COURT

SCIRICA, Circuit Judge.

This is an appeal of the denial of a tax credit under the

Crude Oil Windfall Profit Tax Act, Pub. L. 96-223, 94 Stat.

229 (1980) (codified in scattered sections of 7, 19, 26, and

42 U.S.C.) (repealed in part 1988) ("COWPTA") which grants

oil producers an income tax credit of $3.00 for each barrel-

of-oil equivalent of "oil produced from . . . tar sands"

extracted through wells drilled between January 1, 1980

and December 31, 1992. The resolution of this case turns

on the proper definition of "oil produced from tar sands,"

which the Act does not define. Shell contends the definition

should be derived from commonly accepted usage in the

petroleum industry and asserts that when the statute was

enacted in 1980, "tar sand oil" meant "oil so viscous[1] that

it cannot be recovered economically through `primary

production methods'[2]-- i.e., methods used in ordinary oil

_________________________________________________________________

1. "Viscosity is the measure of a fluid's resistance to flow. In an oil

reservoir, viscosity is the measure of the oil's resistance to movement

through the reservoir rock to the well-bore. Given uniform pressure and

rock properties, a more viscous oil will move through the reservoir more

slowly than a less viscous oil." Shell Petroleum, Inc. v. United States,

996

F. Supp. 361, 362 n.1 (D. Del. 1997).

2. Crude oil is ordinarily extracted through wells from underground

reservoirs, which are formations of sand or rock containing tiny pore

spaces permeated with oil. There are three types of production through

wells: Primary production depends on the inherent pressure in an oil

reservoir. Secondary production involves the injection of gas or water

into a reservoir to increase pressure. Tertiary (or enhanced) production,

2

fields." The government maintains the proper definition may

be found in Department of Energy Ruling 1976-4, which

defines "tar sands" as "[t]he several rock types that contain

an extremely viscous hydrocarbon which is not recoverable

in its natural state by conventional oil well production

methods including currently used enhanced recovery

techniques." Department of Energy Ruling 1976-4, 10

C.F.R. ch. II Rulings 371, 372 (1980).3 Shell concedes that

it is not entitled to a refund if we accept the DOE Ruling

definition. Following a bench trial, the District Court

adopted the definition of tar sands crafted by the DOE

Ruling and denied the refund. See Shell Petroleum, Inc. v.

United States, 996 F. Supp. 361, 372 (D. Del. 1997).

Because we substantially agree with the District Court's

well reasoned opinion, we will affirm.

I

A

Beginning in 1973, world oil prices quadrupled in less

than a year after the Organization of Petroleum Exporting

Countries embargoed oil sales to Western nations and then

fixed prices above market levels. See Gary D. Allison,

Energy Sectionalism: Economic Origins and Legal

Responses, 38 Sw. L.J. 703, 705 (1984). Congress

responded with the 1973 Emergency Petroleum Allocation

_________________________________________________________________

such as the injection of steam into the reservoir, increases its

temperature (making the oil less viscous) or alters its other

characteristics. Shell's definition classifies oil recoverable only by

means

of secondary or enhanced/tertiary production methods as tar sand oil.

In the petroleum industry, crude oil is commonly designated as "light,"

"medium," or "heavy," depending on its density; heavier oils are generally

more viscous. Primary production is effective with lighter, lower-

viscosity

oil, but more viscous oils require secondary or enhanced production

methods.

3. The Ruling was initially issued by one of DOE's predecessor agencies,

the Federal Energy Agency. By the time COWPTA was enacted, the

Ruling had been redesignated a DOE Ruling in the Code of Federal

Regulations."

3

Act (EPAA), Pub. L. No. 93-159, 87 Stat. 627 (1973)

(codified as amended at 15 U.S.C. SS 751-760h) (expired

1981), authorizing the President to regulate prices and

allocate supplies of crude oil and related petroleum

products.

In 1976, the Federal Energy Agency, which administered

EPAA, issued Ruling 1976-4 in response to "inquiries with

respect to the applicability of the [EPAA price and supply

controls] to the so-called synthetic fuels (or crude oil

substitutes) processed from oil shale, tar sands, coal, and

other natural deposits that must be mined[4] before the

crude oil substitute can be extracted." Department of

Energy Ruling 1976-4, 10 C.F.R. ch. II Rulings at 371.

According to FEA,

at the time of enactment of the EPAA, domestic

production of crude oil substitutes derived from oil

shale, coal and tar sands was, as it is now, undertaken

only for experimental purposes, and the synthetic

products obtained thereby were not commercially

available for use as refinery or petro-chemical

feedstocks and were not expected to become

commercially available for several years.

Id. at 372. Therefore, FEA concluded that synthetic fuels

processed from tar sands were not subject to the EPAA

regulatory scheme. See id. at 373.

The Emergency Petroleum Allocation Act proved

counterproductive. Price controls reduced incentives to

produce oil domestically and increased domestic oil

consumption overall, making America more dependent on

expensive imported oil. See Atlantic Richfield Co. v. United

States Dep't of Energy, 655 F.2d 1118, 1121 (Temp. Emer.

Ct. App. 1981). Oil prices fell in real terms after 1975, but

world oil prices doubled in 1979, when the Iranian

revolution severely curtailed oil exports. See Allison, supra,

at 705-06. The Carter administration announced in 1979 it

would phase out price controls, dramatically increasing

_________________________________________________________________

4. Tar sand oil can be produced by mining the tar sand and

subsequently separating the oil from the mined rock through physical

and chemical processes.

4

domestic producers' short-term profits. See H.R. No. 96-

304, at 5-7 (1979), reprinted in 1980 U.S.C.C.A.N. 587,

592-94. For this reason, Congress responded to the price

decontrols with the Crude Oil Windfall Profit Tax Act. Title

I ("Windfall Profit Tax on Domestic Crude Oil") imposed an

excise tax on revenue from producer sales of crude oil,

designed to capture the windfall profit. See 26 U.S.C.

SS 4986-98 (1982) (repealed 1988). To avoid suppressing

the domestic oil supply, new production and other

production considered sensitive to price fluctuations were

taxed at lower rates or exempted. See id.SS 4987(b), 4991-

93; S. Rep. No. 96-394, at 2 (1979), reprinted in 1980

U.S.C.C.A.N. 410, 414. More importantly for our purposes,

Title II ("Energy Conservation and Production Incentives")

sought to reduce American dependence on imported oil by

various means, including a tax credit "for producing fuel

from a nonconventional source." 26 U.S.C.A. S 29 (West

Supp. 1999) (as amended 1981, 1983, 1984, 1986, 1988,

1990, 1992, and 1996) (originally designated S 44D).5

_________________________________________________________________

5. Credit for producing fuel from a nonconventional source

(a) Allowance of credit.--There shall be allowed as a credit

against

the tax imposed by this chapter for the taxable year an amount

equal to--

(1) $3, multiplied by

(2) the barrel-of-oil equivalent of qualified fuels--

(A) sold by the taxpayer to an unrelated person during the

taxable year, and

(B) the production of which is attributable to the taxpayer.

. . . .

(c) Definition of qualified fuels.--For purposes of this section--

(1) In general.--The term "qualified fuels" means--

(A) Oil produced from shale and tar sands

. . . .

(f) Application of section.--This section shall apply with respect

to

qualified fuels--

(1) which are--

(A) produced from a well drilled after December 31, 1979, and

before January 1, 1993

26 U.S.C.A. S 29.

5

Among the fuels qualified to receive the credit was "oil

produced from shale and tar sands" through wells drilled

between January 1, 1980 and December 31, 1992. Id.

SS 29(c)(1)(A), (f)(1)(A).

B

In 1983 and 1984, the tax years in question, Shell

Petroleum, Inc. and certain subsidiary corporations owned

working interests in properties in the Midway Sunset Field,

Kern County, California. Part of the Midway Sunset Field

lies over a reservoir known as "the Potter Sand formation"

or "Potter Sands." For over a decade Shell had been

extracting oil from Potter Sands through two steam

injection techniques (steam soak, begun in 1963, and

steam flood, begun in 1971). By 1980, both were well

established and widely accepted enhanced recovery

techniques in the petroleum industry.6

In its 1983 and 1984 tax returns, Shell did not seek the

nonconventional source tax credit for Potter Sands oil, but

in 1991 Shell filed amended tax returns claiming credits of

$5,351,150 for Potter Sands oil produced during 1983 and

1984 from wells drilled after December 31, 1979. The tax

credits were denied and Shell timely filed suit. Relying in

part on the "instructive" analysis of Texaco Inc. v.

Commissioner, 101 T.C. 571 (1993),7 the District Court, as

_________________________________________________________________

6. The record does not disclose whether any oil was produced from Potter

Sands during 1983 and 1984 other than through steam injection, but

Shell does not claim to have used any technology that was not well

established in 1980.

7. Texaco argued certain high-viscosity crude oil it had produced was tar

sand oil. The Tax Court accepted that when COWPTA was enacted "tar

sand oil" was "generally understood" within the petroleum industry as oil

that "could not be economically produced through a well using only

primary recovery methods," see Texaco, 101 T.C. at 575-76, but rejected

that definition for two reasons. First, Congress sought to subsidize

"alternative energy sources [that] typically involve new technologies." S.

Rep. No. 96-394, at 87, reprinted in 1980 U.S.C.C.A.N. at 496. Crude oil

produced with technology widely available when the credit was enacted,

the Texaco court reasoned, was not such an energy source. See Texaco,

101 T.C. at 576-77. Second, Title I defined oil produced using tertiary

6

noted, entered judgment for the United States. See Shell,

996 F. Supp. at 371. Shell now appeals.8

As we will discuss, Title I of COWPTA establishes that

Shell's Potter Sands oil is crude oil. But the structure of the

statute and the legislative history establish that crude oil is

not tar sand oil. Therefore, Shell's oil cannot be tar sand

oil. Furthermore, the legislative history establishes that the

nonconventional source tax credit was intended to foster

new energy technologies, whereas Shell's Potter Sands oil

was produced in 1983 and 1984 using widely available

means of production.

II

" `Where . . . resolution of a question of federal law turns

on a statute and the intention of Congress, we lookfirst to

the statutory language and then to the legislative history if

the statutory language is unclear.' " Murphy v. Dalton, 81

F.3d 343, 350 (3d Cir. 1996) (quoting Blum v. Stenson, 465

U.S. 886, 896 (1984)). As noted, COWPTA does not define

"oil produced from tar sands," but "where Congress has

used technical words or terms of art, it is proper to explain

them by reference to the art or science to which they are

appropriate." Corning Glass Works v. Brennan, 417 U.S.

188, 201 (1974) (internal quotation marks and alterations

_________________________________________________________________

production methods available in 1980 as crude oil subject to the windfall

profit tax. But the discussion of Title I in the legislative record

indicated

that Congress considered "oil produced from tar sands" to be synthetic

petroleum, which Congress distinguished from crude oil. Therefore, the

Tax Court concluded that oil producible using tertiary recovery methods

could not be tar sand oil unless Congress had intended to give different

meetings to the term "oil produced from tar sands" as used in the text

of Title II and in the Title I Committee Reports, an unlikely scenario.

See

id. at 579-80.

8. The District Court had original jurisdiction under 28 U.S.C.A.

S 1346(a)(1) (West 1993). We have appellate jurisdiction under 28

U.S.C.A. S 1291 (West 1993). Questions of statutory interpretation are

reviewed de novo. See United States v. West Indies Transport, Inc., 127

F.3d 299, 307 (3d Cir. 1997). Findings of fact made following a bench

trial are reviewed for clear error. See Cooper v. Loper, 923 F.2d 1045,

1049 (3d Cir. 1991).

7

omitted). We ordinarily look to the meaning of a statutory

term at the time the statute was adopted. See MCI

Telecomm. Corp. v. American Tel. & Tel. Co., 512 U.S. 218,

228 (1994) (explaining that "the most relevant time for

determining a statutory term's meaning" is the time when

the statute became law); see also McDermott Int'l, Inc. v.

Wilander, 498 U.S. 337, 342 (1991) (interpreting statute as

of the date of its passage); Perrin v. United States, 444 U.S.

37, 42 (1979) (same). In this case, the District Court did

not rely on the industry understanding of "tar sand oil," in

part because "[t]he testimony offered at trial suggests that,

in fact, there was no industry consensus regarding a

definition of tar sands in 1980 when Section 29 was

enacted." Shell, 996 F. Supp. at 369. 9 Shell contests the

court's factual finding and argues that, even in the absence

of an industry consensus, the court should have limited

itself to selecting among definitions that were acceptable to

some petroleum experts in 1980.

A

Contending the District Court misunderstood its theory

of the case, Shell contests the court's finding there was no

consensus definition of "tar sand oil" in 1980. The District

Court described Shell's definition of tar sand oil as

[a]ny consolidated or unconsolidated rock (other than

coal, oil shale, or gilsonite) that either: (1) contains a

hydrocarbonaceous material with a gas-free viscosity,

at original reservoir temperature, greater than 10,000

centipoise,[10] or (2) contains a hydrocarbonaceous

material and is produced by mining or quarrying.

Shell, 996 F. Supp. at 369. At trial, Shell referred to this

_________________________________________________________________

9. The Texaco Court, on a different record, found that "no single

definition of tar sands was universally recognized" when COWPTA was

enacted but that the industry "generally understood" the term to refer to

oil too viscous to be produced economically using only primary

production techniques. Texaco, 101 T.C. at 573.

10. Within the petroleum industry, viscosity is measured in centipoise

(cp). The viscosity of water is approximately 1 cp, while that of molasses

is 7,000 cp.

8

definition as the "viscosity standard" and on appeal calls it

the "quantitative standard." Shell concedes this standard

was not generally accepted until 1983 but asserts that, in

1980, petroleum engineers agreed that "tar sand oil" was oil

too viscous to be produced using primary production

methods (the "primary production definition"). Furthermore,

Shell maintains that petroleum experts in 1980 were able

to identify tar sand and tar sand oil by inspection. Shell

calls this experience-based identification of tar sand oil the

"qualitative standard." According to Shell, the viscosity

standard was a conservative quantification of the earlier

primary production and qualitative definitions. 11 Because

the trial court made no findings with respect to the other

proposed definitions or their relationships to the viscosity

standard,12 Shell seeks a remand to determine whether the

qualitative or the primary production definition was widely

accepted by the industry in 1980 and whether the Potter

Sands oil meets those definitions.

But Shell did not properly assert these additional

industry definitions at trial. In the Pretrial Order, entered

three days before trial, Shell listed only two "Issues of Law

Which Remain to Be Litigated":

(1) Whether the consensus definition of tar sand oil as

having a viscosity greater than 10,000 centipoise,

measured gas-free, at original reservoir temperature,

identifies "oil produced from . . . tar sand" under 26

U.S.C. S 29 in 1983 and 1984?

(2) Whether FEA ruling 1976-4 . . . has any utility in

identifying "oil produced from . . . tar sand" under 26

U.S.C. S 29?

_________________________________________________________________

11. The Texaco court found the quantitative viscosity definition to be

"consistent with the oil and gas industry's definition of tar sands as of

April 1980," when COWPTA was enacted. See Texaco, 101 T.C. at 574.

12. The District Court discussed the viscosity standard at length but did

not mention the qualitative or primary production definitions. The court

supported its finding that there was no consensus definition in 1980

with citations to testimony by a Shell expert and to a Shell Proposed

Finding of Fact, see Shell, 996 F. Supp. at 369, which discussed the lack

of agreement on a quantitative distinction between tar sand oil and

heavy oil.

9

Shell Petroleum, Inc. v. United States, No. 93-508, slip op. at

15 (D. Del. Aug. 24, 1995) (Pretrial Order) (first and third

ellipsis in original). The pretrial order controls the

subsequent course of the trial unless modified to prevent

manifest injustice. See Fed. R. Civ. P. 16(e); Hassan v.

Stafford, 472 F.2d 88, 95 (3d Cir. 1973). This order was

never modified, nor did Shell request a modification.

Indeed, Shell's opening statement confirmed to the court its

theory of the case:

[W]e will provide testimony that will show that the

10,000 centipoise definition of tar sand oil was the

subject of considerable discussion, considerable

thought among industry experts and knowledgeable

Government officials prior to 1980 and in the--

throughout the year, the early 1980's.

And the point is here that, although tar sand experts

knew what tar sands were, there was no precise and

generally acceptable demarcation between tar sand oil

and other heavy oils.

The statement does not advance the theories Shell now

proposes.

Shell has directed our attention to passages in the

pretrial order, to passages in briefs submitted to the

District Court, and to certain testimony elicited without

objection at trial13 in which it claims it raised its other

definitions. Generally, pretrial orders are liberally construed

to permit the parties to advance their cases, see United

States Gypsum Co. v. Schiavo Bros., 668 F.2d 172, 181

n.12 (3d Cir. 1981), and an issue can be tried by consent

when testimony relevant to the issue is introduced without

objection, see Douglas v. Owens, 50 F.3d 1226, 1236 (3d

_________________________________________________________________

13. Many of these passages are themselves not properly before us,

because Shell has not included them in the appellate record. The

appellant is required to provide a record to support the claims it makes

on appeal. See Fed. R. App. P. 10(b), 11(a); Scarfo v. Cabletron Sys.,

Inc.,

54 F.3d 931, 963 (1st Cir. 1995); Schmid v. United Bhd. of Carpenters,

827 F.2d 384, 386 (8th Cir. 1987); United States v. Hart, 729 F.2d 662,

671 (10th Cir. 1984). Based on the excerpts Shell has quoted to us, the

passages outside the appellate record on which Shell relies are no

stronger than those in the record.

10

Cir. 1995). But a party still must unequivocally put its

position before the trial court at a point and in a manner

that permits the court to consider its merits. See Keenan v.

City of Philadelphia, 983 F.2d 459, 471 (3d Cir. 1992)

("[T]he crucial question regarding waiver is whether

defendants presented the argument with sufficient

specificity to alert the district court"); Portis v. First Nat'l

Bank, 34 F.3d 325, 331 (5th Cir. 1994) ("The raising party

must present the issue so that it places the opposing party

and the court on notice that a new issue is being raised.").

We believe that Shell did not raise its primary production or

qualitative definitions in an unequivocal manner. 14

_________________________________________________________________

14. For instance, Shell noted in the section of the pretrial order

entitled

"Statement of What Plaintiffs Expects [sic] to Prove,"

During 1980, the Viscosity Standard became DOE's standard for

distinguishing between tar sand oil and other heavy oils. Prior to

adoption of the Viscosity Standard in 1980, Defendant's agency

DOE, and its predecessor the Bureau of Mines, relied on physical

inspection of core and oil samples to identify tar sand. Shell's

Potter

Sands and the oil produced therefrom are tar sands and tar sand

oils under the 1980 DOE practices.

In this passage, Shell asserted that DOE, but not the petroleum industry

as a whole, identified tar sand using Shell's qualitative standard. Shell

did not claim its Potter Sands oil satisfied the qualitative standard: it

stated that its oil was tar sand oil according to"the 1980 DOE

practices," an ambiguous phrase which could have referred either to the

qualitative standard or to the quantitative viscosity standard, allegedly

adopted in 1980. But statements made in the same section of the

pretrial order suggest that Shell was advancing the quantitative standard

at trial:

Tar sand is rock containing crude oil with a viscosity exceeding

10,000 cp measured gas-free at original reservoir temperature. . .

.

The consensus of industry and the United States government in

1980 was that an agreed terminology for tar sands oil to adequately

distinguish it from other heavy oils was needed. . ..

Here, Shell explicitly urges the quantitative standard on the court and

acknowledges that the standards in use in 1980 were unacceptable to

the consensus of petroleum experts. Even a liberal interpretation of this

language will not embrace the position Shell takes on appeal.

Shell was more explicit in its post-trial proposedfindings of fact and

conclusions of law, stating, e.g., "The degree of viscosity of tar sand

oil

11

We have frequently noted "the well-established rule that

absent compelling circumstances an appellate court will not

consider issues that are raised for the first time on appeal."

Patterson v. Cuyler, 729 F.2d 925, 929 (3d Cir. 1984).15

"This general rule applies with added force where the timely

raising of the issue would have permitted the parties to

develop a factual record," because we cannot know on

appeal what evidence the adverse party would have

presented or brought out through cross-examination.

Harris v. City of Philadelphia, 35 F.3d 840, 845 (3d Cir.

1994) (internal quotation marks omitted). Finding no

"compelling circumstances" requiring consideration of

_________________________________________________________________

was commonly expressed as oil that could not be commercially produced

through a well using primary recovery methods." Post-trial briefs are not

generally appropriate places to raise one's theory of the case. In any

event, this brief also fails to assert Shell's position clearly. The

sentence

just quoted was followed by an assertion that the industry shared "[a]

common understanding that the line of demarcation at which tar sand

oil became more viscous than heavy oil needed to be established

quantitatively" and was contained in a section entitled, "The Court may

consider the industry and government expert development of the 10,000

cp viscosity distinction between tar sand and other heavy oils in applying

the earlier enacted 26 U.S.C. S 29 for `oil produced from . . . tar

sands'."

Considering the post-trial findings of fact and conclusions of law in its

entirety, we conclude Shell continued to assert the viscosity standard

after trial.

As discussed infra, the testimony on which Shell relies could not

support the factual findings Shell proposes to seek on remand.

Furthermore, Shell explained to the District Court that the viscosity

standard emerged in 1983 out of ongoing industry discussion. The

evidence introduced regarding the pre-1983 standards was consistent

with this background information regarding the development of the

quantitative viscosity standard. Hence, neither the government nor the

court had reason to believe Shell was raising a new theory of the case.

See Douglas, 50 F.3d at 1236 ("[A]n issue has not been tried by implied

consent if evidence relevant to the new claim is also relevant to the

claim

originally pled, because the defendant does not have any notice that the

implied claim was being tried.").

15. Furthermore, to promote orderly trial procedures, appellate courts

are sensitive to the importance of respecting the pretrial order on

appeal.

See Correa v. Hospital San Francisco, 69 F.3d 1184, 1195 (1st Cir.

1995).

12

Shell's theories, we decline to exercise our discretion to do

so. See American Bearing Co. v. Litton Indus., 729 F.2d 943,

949-50 (3d Cir. 1984).

Furthermore, our review of those portions of the record

Shell has brought to our attention leads us to conclude

that the possibility the District Court would find the facts

as Shell describes them is remote. The strongest evidence

Shell has cited comes from a report by its expert, Dr.

Khalid Aziz, who wrote,

Typically described [prior to 1980] as `extremely

viscous,' the tar sand oil was further depicted as oil

that could not be produced commercially on primary

production. The literature most commonly describes

`tar sand' as a naturally occurring rock formation

containing a hydrocarbon so viscous that it cannot be

economically produced through wells using only

primary recovery methods.

But Dr. Aziz testified at trial,

[P]rior to 1980, I did not see that there was a

consensus in the industry as far as a precise definition

of tar sand was concerned . . . .

But by 1980 a consensus did start to build--did not

reach a consensus point, but did start to build around

the use of 10,000 centipoise. . . .

In 1983, the definition of tar sands oil was well-

established as the viscosity base definition that we

have been talking about, viscosity of greater than

10,000 centipoise at reservoir conditions on a gas-free

basis. . . .

. . . .

[Before 1980, e]veryone knew that oils from tar sands

were highly viscous. And I think people simply looked

at the extreme and--looked at them as highly viscous,

but they didn't know where to draw the line between

tar sand oils and heavy oils. . . .

Dr. Aziz also confirmed at trial the accuracy of a statement

he had written in his report: "In 1980 the phrase`oil

produced from tar sands' was commonly understood to

13

mean all crude oil more viscous than heavy oil. However,

there was no universally-accepted precise distinction

between heavy oil and tar sand oil."

Similarly, Shell has called our attention to this testimony

of a former DOE petroleum engineer:

The general description that [DOE] used of tar sand [in

1979/1980] . . . was any rock containing a very

viscous oil. And you could expand on that. In many

cases we said it was too viscous to flow through the

reservoir or to the well bore, or too viscous to be

produced by primary recovery methods, for instance.

The witness was also asked how he identified tar sand

when he first began working with it in 1970 and replied, "I

looked at it and I knew it was tar sand." But on cross-

examination, the witness agreed that "in the industry, as of

April of 1980, there was no consensus definition of [sic]

distinguishing heavy oil from tar sand oil." Because Shell's

own experts testified there was no consensus definition of

tar sand oil in 1980, it is unlikely Shell could prevail on

remand. Where the possibility of a different outcome is

remote, remand for consideration of factual issues not

raised at trial is inappropriate. See Hormel v. Helvering, 312

U.S. 552, 558 (1941).

B

Assuming no definition was universally accepted in the

petroleum industry in 1980, Shell insists the District Court

should have limited itself to selecting one of the definitions

used by petroleum engineers at that time. In that regard,

Shell argues the congressional record should have been

consulted only for that limited purpose.

Reliance on expert definitions of terms of art is a sound

"general rule of construction," Massachusetts v. Blackstone

Valley Elec. Co., 67 F.3d 981, 986 (1st Cir. 1995), but Shell

has cited no authority supporting the proposition that,

where no definition of a term of art is broadly accepted in

the relevant technical field, a court is permitted only to

choose among rival expert definitions. Where technical

experts differ in their use of a term, the presumption that

14

Congress has adopted an industry definition grows weaker

and the courts will rely more heavily on other tools to

ascertain Congress's meaning. Thus, in Atlantic Mutual

Insurance Co. v. Commissioner, 523 U.S. 382, ___, 118 S.Ct.

1413 (1998), aff'g 111 F.3d 1056 (3d Cir. 1997), the

Supreme Court considered a property and casualty

insurer's challenge to the IRS's administrative

interpretation of "reserve strengthening" as used in the Tax

Reform Act of 1986 S 1023(e)(3)(B), reprinted in note

following 26 U.S.C.A. S 846 (West 1988). After concluding,

based on a review of the expert testimony at trial, that the

term had no established meaning in the field of property

and casualty insurance, the Court accorded Chevron

deference to the agency regulation without further reference

to insurance industry usage. See Atlantic Mutual, 118 S.Ct

at 1417 18. Here, there is no agency interpretation to defer

to, but we rely on traditional tools of statutory

interpretation in adopting the DOE definition. 16

III

We believe the definition of "tar sand oil" in DOE Ruling

1976-4 is the one most compatible with congressional

intent. As noted, Title I of COWPTA defines oil produced

using enhanced extraction techniques as crude oil. Shell's

definition, on the other hand, would categorize oil produced

using enhanced extraction techniques as tar sand oil.

Congress clearly distinguished tar sand oil from crude oil

and considered tar sand oil a crude oil substitute. Because

oil produced using enhanced extraction techniques, such

as Shell's Potter Sands oil, is not a crude oil substitute, it

could not qualify for the nonconventional source tax credit.

Furthermore, Shell's definition would categorize crude oil

produced with technologies widely available when COWPTA

was enacted as tar sand oil. But Congress enacted the

_________________________________________________________________

16. We note that in appropriate cases the Supreme Court has looked to

the legislative record to confirm that Congress intended to adopt the

technical definition of a term of art, see Louisiana Publ. Serv. Comm'n v.

FCC, 476 U.S. 355, 371-73 (1986); Corning Glass Works, 417 U.S. at

198-201, or has declined to accept a trade definition that conflicted with

the legislative history, see Idaho Metal Works v. Wirtz, 383 U.S. 190,

199-205 (1966).

15

nonconventional source credit to encourage the

development of new technologies that would produce crude

oil alternatives.

A

As noted, Shell's Potter Sands oil was produced through

steam injection, an enhanced (or tertiary) recovery method.

As the District Court's reading of the statute demonstrated,

oil produced using tertiary recovery methods (which the

statute calls "tertiary oil"), is crude oil subject to the

windfall profit tax imposed in Title I. See Shell, 996 F.

Supp. at 370.17 Shell does not dispute this conclusion. But

Shell contends that tertiary oil can be classified as both

crude oil and tar sand oil, arguing that its Potter Sands oil,

extracted through enhanced (tertiary) recovery methods, is

also tar sand oil eligible for the Title II tax credit. Relying on

_________________________________________________________________

17. For tax purposes, Congress divided crude oil into three tiers. See 26

U.S.C. S 4991(c)-(e). Tier 1 oil was taxed at the highest rate, tier 3 at

the

lowest. See id. SS 4987(b)(1), (3). Tier 3 oil included "incremental

tertiary

oil," id. S 4991(e)(4), defined (with qualifications and adjustments not

relevant here) as the difference between the amount of oil produced in a

month from a property using a "tertiary recovery project" and the

average monthly oil production from that property prior to passage of the

Act, id. S 4993(a)-(b). As we understand this provision, all oil produced

from a tertiary recovery project is tertiary oil, and any increase in

production after the Act was passed is incremental tertiary oil. Cf. 10

C.F.R. S 212.78(c) (1980) (defining "incremental crude oil"). Tertiary

recovery projects are those employing "tertiary recovery methods," see 26

U.S.C. SS 4993(c)(1)(B), (c)(2)(A), which include "steam drive injection"

and "cyclic steam injection," id. S 4993(d)(1), 10 CFR S 212.78(c) (1979).

The District Court found, and Shell does not contest, that these are the

procedures Shell used at Potter Sands. See Shell, 996 F. Supp. at 370

& n.4.

It is clear that all tertiary oil, and not just incremental tertiary oil,

is

taxable crude oil. There is no chemical distinction between incremental

and non-incremental tertiary oil and the statute specifies no way to

identify the incremental or non-incremental "part" of a month's

production. Furthermore, if non-incremental tertiary oil were not crude

oil, it would not be subject to the windfall tax, see 26 U.S.C. SS

4986(a),

4991(a), in which case only increases in production of tertiary oil would

be taxed, contrary to Congress's intent to stimulate new oil production,

see S. Rep. No. 96-394 at 27, reprinted in 1980 U.S.C.C.A.N. at 437.

16

the legislative history, the District Court found that

Congress did not consider crude oil to be tar sand oil, nor

would Congress have imposed an excise tax and granted a

tax credit to the same type of oil in the same statute.

Because Shell's Potter Sands oil was indisputably crude oil

subject to the windfall profit tax, we hold, like the District

Court, it cannot also be tar sand oil eligible for the tax

credit.

1

On this point, the legislative history is instructive. In its

report on Title I (imposing the windfall profit tax), the

Senate Finance Committee specified, "The term `crude oil'

. . . applies only to natural crude petroleum and does not

include synthetic petroleum, such as oil from shale or tar

sands." S. Rep. No. 96-394, at 56, reprinted in 1980

U.S.C.C.A.N. at 465. The Conference Committee similarly

explained, "The term `crude oil' . . . does not apply to

synthetic petroleum such as oil production from shale or

tar sands." H.R. Conf. Rep. No. 96-817, at 114 (1980),

reprinted in 1980 U.S.C.C.A.N. 642, 667. Based on this

legislative history, the District Court concluded,"Congress

explicitly distinguished crude oil from tar sands, and

understood tar sands to be a crude oil substitute." Shell,

996 F. Supp. at 370; accord Texaco, 101 T.C. at 579.

Because Congress specified that oil extracted using

enhanced production techniques is crude oil, oil extracted

using enhanced production techniques cannot be tar sand

oil, a crude oil substitute.

Shell contends this legislative history should be

interpreted in light of expert testimony that tar sand oil in

its natural state is not synthetic oil but rather crude oil

that can be processed into synthetic oil. But the clear

import of the Committees' Reports is that all oil produced

from tar sands is synthetic petroleum, not crude oil.

Furthermore, because only crude oil is subject to the

windfall profit tax, see 26 U.S.C. SS 4986(a), 4991(a), the

intent behind the Committee Reports is to exempt tar sand

oil from the tax by specifying that it is not crude oil. But

according to Shell, the processing of tar sand oil into

synthetic oil is generally unnecessary in the continental

17

United States.18 Shell has proposed no reason why

Congress would exempt from the windfall profit tax the

production of tar sand oil that is later processed into

synthetic oil if the processing serves no useful purpose in

important oil-producing parts of the country. Finally, it is

worth noting that the Federal Energy Agency, in Ruling

1976-4, spoke of tar sand oil as a "so-called synthetic fuel[ ]

(or crude oil substitute)." 10 C.F.R. ch. II Rulings at 371.

This language supports the view that, when COWPTA was

enacted, tar sand oil was not generally considered to be

crude oil, subject to the windfall profit tax.

The District Court concluded that Congress did not

regard oil capable of extraction through enhanced

production methods as tar sand oil when COWPTA was

enacted. We agree. The statute establishes that tertiary oil

(oil extracted with enhanced production methods) is a type

of crude oil, but Congress, like the FEA, did not consider

tar sand oil to be crude oil. Therefore, tertiary oil cannot be

tar sand oil. As the District Court explained, under Shell's

interpretation, tertiary oil (oil produced by enhanced

recovery methods)

would be taxed as crude oil and, therefore, excluded

from the category of tar sands. That same oil, however,

would be defined as tar sands under Section 29

according to Shell's definition. This would result in two

different definitions of tar sands under Title I and Title

II. Clearly, this was not the intent of Congress.

Shell, 996 F. Supp. at 370-71 (footnote omitted).19 Because

_________________________________________________________________

18. Shell has represented, citing the testimony of its experts, that tar

sand oil is refined into synthetic crude oil primarily to permit it to

flow

through pipelines in cold weather, and that such refining is rare in the

continental United States because of our warmer climate.

19. Similarly, the Texaco court explained that, under the definition Shell

now advances,

[h]igh viscosity crude oil produced using secondary and enhanced

oil recovery methods would be characterized as crude oil (which

does not include oil from tar sands) for purposes of title I, while

the

same high viscosity crude oil would be characterized as oil

produced

from tar sands for purposes of title II. While the reference to tar

18

Shell does not contest the District Court's finding that its

Potter Sands oil is tertiary oil, Shell's oil cannot be tar sand

oil eligible for the tax credit.

2

The logic and structure of the act also demonstrate that

crude oil is not tar sand oil. If oil producible using

enhanced recovery methods, including the oil produced at

Potter Sands, were classified both as crude oil and as tar

sand oil, it would be subject to the windfall profit tax and

also eligible for the nonconventional source tax credit. The

District Court declined to interpret the statute this way

"[a]bsent some evidence that Congress intended such an

anomalous result." Shell, 996 F. Supp. at 371. We agree.

See United States v. McKie, 112 F.3d 626, 631 (3d Cir.

1997) (discussing courts' "obligation to construe statutes

sensibly and avoid constructions which yield absurd or

unjust results").

Shell defends its interpretation by pointing out that

under COWPTA the windfall profit tax was phased out as

the price of oil fell whereas the nonconventional fuels credit

was phased in under the same conditions. Shell suggests

that the tax collected in years when oil prices were high

was to be used to finance the subsidy when oil prices fell.

Essentially, Shell suggests that the tax and credit together

functioned as a rough-and-ready producer price

stabilization scheme. But the legislative record is devoid of

any suggestion that Congress intended such a result.

Instead, the Senate Finance Committee explained that the

Act "uses a large part of the revenue from the windfall profit

tax to finance tax incentives for a wide range of alternate

sources of energy." S. Rep. No. 96-394, at 8, reprinted in

1980 U.S.C.C.A.N. at 419. It appears Congress wanted to

_________________________________________________________________

sands in defining crude oil for purposes of title I is not

determinative

in defining tar sands for purposes of title II, we do not think

that

Congress would have used the term "tar sands" in fundamentally

different ways within the same legislative enactment without

clearly

expressing an intent to do so.

101 T.C. at 580.

19

transfer windfall crude oil profits to producers of a distinct,

"alternate," class of energy sources. Furthermore, Shell

concedes that, on its reading of the statute, oil produced

from Potter Sands would have received both a tax and a

credit in 1981 and 1982. If Congress had sought to

stabilize producer prices for tar sand oil, we do not see why

Congress would have imposed a tax and provided a subsidy

in the same year.20 Therefore, we believe the District Court

correctly found that Congress did not intend to classify the

same oil as both taxable crude oil and tar sand oil eligible

for the tax credit. Since oil produced using enhanced

recovery methods, such as Shell's, was subject to the

windfall profit tax, it cannot have been eligible for the

nonconventional source tax credit.

3

In summary, Shell's proposed definition, unlike DOE's,

would classify oil producible through enhanced recovery

techniques as tar sand oil. Because this classification

would be contrary to the statutory scheme and to

congressional intent, the District Court properly adopted

the definition from DOE Ruling 1976-4.

B

Congress's explanation of the purpose of COWPTA

provides further reason to reject Shell's proposed definition.

As noted, Shell obtained crude oil from Potter Sands using

technologies already well established in 1980. But the

alternative fuel production credit was added by the Senate

Finance Committee "to encourage energy conservation and

production of alternate energy sources." S. Rep. No. 96-

394, at 6, reprinted in 1980 U.S.C.C.A.N. at 417. "These

alternative energy sources," the Committee explained,

_________________________________________________________________

20. We note that Congress provided targeted subsidies to tertiary oil in

Title I by taxing increases in tertiary production at the lower, tier 3

rate,

see supra n.17, and exempting altogether oil sold to finance tertiary

extraction projects by independent producers, see 26 U.S.C.

SS 4991(b)(4), 4994(c)(1), (c)(4)(A), (c)(4)(D); 10 C.F.R. S 212.78

(1980);

H.R. Conf. Rep. No. 96-817, at 93, reprinted in 1980 U.S.C.C.A.N. at

646.

20

"typically involve new technologies, and some subsidy is

needed to encourage these industries to develop to the

stage where they can be competitive with conventional

fuels. The information gained from the initial efforts at

producing these energy sources will be of benefit to the

entire economy." Id. at 87, reprinted in 1980 U.S.C.C.A.N.

at 496. Because continued use of a widely available means

of crude oil production is not an "initial effort[ ]" that will

stimulate the development of new energy technologies, we

agree with the District Court that oil producible with

tertiary extraction methods available in 1980, such as

steam injection, does not qualify for the nonconventional

source credit. See Shell, 996 F. Supp. at 367 ("[D]omestic

crude oil would not logically be categorized as an

alternative energy source. . . . Rather, [Congress]

endeavored to credit the production of alternative fuels or

so-called crude oil substitutes."); accord Texaco, 101 T.C. at

577 ("[S]ection [29] was not intended to subsidize the

production of crude oil but, to the contrary, was intended

to encourage the development of crude oil substitutes.").

Shell maintains the District Court imposed a "new

technologies" requirement not found in the statute on those

seeking the tax credit. We disagree. The energy sources

eligible for subsidy are those specified in 26 U.S.C.A.

S 29(c)(1). Many of those sources were defined by Congress.

See id. S 29(c)(2)-(3); H.R. Conf. Rep. No. 96-817, at 138-41,

reprinted in 1980 U.S.C.C.A.N. at 689-93; S. Rep. No. 96-

394 at 87-88, reprinted in 1980 U.S.C.C.A.N. at 496-97. So

long as the energy produced is of one of the specified types,

the taxpayer is eligible for the credit, whether or not the

taxpayer used new technology. But where the definition of

an energy source is unclear, Congress's directive that the

eligible energy sources to be subsidized "typically involve

new technologies" assists us in interpreting the provision.

Congress's intent is best implemented through the DOE

definition, which excludes energy sources produced with

technologies already widely used or exploited when the Act

was passed.

21

IV

In this case, as the District Court noted, "[t]he definition

of `tar sands' contained in the [DOE] Ruling is completely

congruous with Congress' intent to both encourage the

development of new technologies and limit the Section 29

credit to crude oil substitutes that could not be obtained

using conventional methods." Shell, 996 F. Supp. at 367.

Shell points out that the DOE Ruling was issued in

response to "inquiries with respect to the applicability of

the [EPAA price and supply controls] to the so-called

synthetic fuels (or crude oil substitutes) processed from . . .

tar sands . . . and other natural deposits that must be

mined before the crude oil substitute can be extracted."

DOE Ruling 1976-4, 10 C.F.R. ch. II Rulings at 371. Shell

interprets this language to mean that FEA had received

inquiries involving only tar sand oil that was both extracted

from mined tar sand and processed into synthetic crude oil.

Shell argues that FEA adopted an artificially narrow

definition of "tar sands" in order to ensure that its Ruling

would exclude only such oil from EPAA regulation. We are

not convinced. It seems unlikely that FEA would have

knowingly propounded an inaccurate definition, even for a

limited purpose, rather than simply specifying that its

Ruling applied only to tar sand oil that is extracted from

mined tar sand and processed into synthetic crude oil. We

note that the Ruling's definition does not limit tar sands oil

to oil extracted from tar sands after mining. Therefore we

agree with the District Court in adopting the DOE Ruling's

definition of tar sands for purposes of the nonconventional

fuels tax credit.21

_________________________________________________________________

21. Shell also argues that Ruling 1976-4 is too obscure to be relied on

in defining "oil produced from tar sands." But the statute adopted

certain definitions contained in the EPAA regulations, such as "stripper

well," "newly discovered oil," "qualified tertiary recovery project,"

"tertiary

recovery method," "tertiary incentive revenue," "allowed expenses" (in

certain contexts), "front-end oil," "front-end tertiary project," and

"crude

oil", see 26 U.S.C. SS 4991(d)(1)(A), (e)(2), 4993(c)(1)(A), (d)(1)(A),

4994(c)(2)(C), (c)(3)(A), (c)(4)(B), (c)(4)(D), 4996(b)(1), (b)(8) and

also

specified that the "base level" used in defining incremental tertiary oil

is

to be "determined under rules similar to" EPAA regulations, see id.

S 4993(b)(1). In its report on the bill, the Senate Finance Committee

wrote, "Reference to the energy regulations also would be important

when the Secretary or producers must make determinations by analogy

22

V

For the foregoing reasons, we will affirm the judgment of

the District Court.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

_________________________________________________________________

to the energy regulations, e.g., computing the base level for a tertiary

project," S. Rep. No. 96-394 at 57, reprinted in 1980 U.S.C.C.A.N. at

466-67, and endorsed administrative interpretations of the regulations,

see id., reprinted in 1980 U.S.C.C.A.N. at 467. We give due regard to

Ruling 1976-4, a DOE interpretation of the EPAA regulations, in

applying 26 U.S.C. S 29.

23