Appendix — Pauley Petroleum, Inc. v. United States

Supreme Court, U.

FILED

1979

MICHAEL RODAK, JR., CLERK

Supreme Court of the United

Octosper Term, 1979

No 29 =1 Qua

PauLey Prrroteum Inc., Cotorapo Om AND Gas CORPORATION,

Mesa Petroteum Co., McCuntoca Om CorporaTIOn or CALI-

FoRNIA, Husky Ou. ComPaNy oF DELAWARE and MAcDONALD

Om CoRPORATION,

Petitioners,

—against—

Tue Unirep States or America, J. M. Huser Corporation,

Mmwest Ou Corporation, ASHLAND Om & Rerinine Com-

PANY, Kewanee Ou, Company and Forest Om Company,

Respondents.

ON A PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF CLAIMS

PETITIONERS’ APPENDIX OF DECISIONS

—---—— —

——— -—— —_——

Joun P. OBL

H. Ricuarp ScHUMACHER

80 Pine Street

New York, New York 10005

(212) 825-0100

Attorneys for Petitioners

Of Counsel:

Cant, Gorpon & REINDEL

Lewis A. SHAFFER

Joun C. Koutsos

80 Pine Street

New York, New York 10005

Epwarp Kuiewer, JR.

2210 Mercantile Bank Building

Dalles, Texas 75201

July 3, 1979

TABLE OF CONTENTS

Item A -

Opinion of Court of Claims dated

Jamaary 24, 1979. . ~cecrececee

Item B -

Order of Court of Claims dated

Jamanry 24, 1979. « «ec ccesece

(Modifying Opinion and Pindings)

Item C -

Order of Court of Claims dated

Getes Ge tere eect ecctooeewte

(Denying rehearing)

Item D -

Report of Trial Judge dated

De an r+ 6 ae. s 2s wie es

Item E -

Order of Court of Claims dated

arene aes. aete ewe oe eee eee

(Qurtailing Trial Judge's Reference)

Al

- A37

. A4l1

- A43

- A335

ae

bi het

IN THE

Rnited States Court of Claims

No. 197-69

(Decided January 24, 1979)

PAULEY PETROLEUM INC., ET AL. v. THE UNITED

STATES

John P. Ohl, attorney of record, for plaintiffs. H. Richard

Schumacher, Frank W. Krogh, Cahill Gordon & Reindel,

and Edward Kliewer, Jr., of counsel.

Myles E. Flint, with whom was Assistant Attorney

General James W. Moorman, for defendant.

Before Davis, NICHOLS, KUNzIG, BENNETT, and SMITH,

Judges, en banc.

OPINION

Davis, Judge, delivered the opinion of the court:

Claimants are oil-company lessees of federal offshore

lands in Santa Barbara Channel, California. Late in

January 1969 there occurred, on another leasehold in that

area, a very serious oil blowout. Plaintiffs’ leaseholds were

not physically affected by that incident but their conten-

tion is that their leasehold rights were frustrated, violated,

and taken by the Government’s conduct following the

blowout.

A-2

The case was tried before Trial Judge Hogenson who has

made extensive and careful findings of fact which we adopt

without substantial change.! In Part I of this opinion, we

summarize the facts pertinent to our decision. Part II deals

with a preliminary jurisdictional issue. In Part III we

review the arguments for recovery presented by the

companies, including a late motion setting forth an

additional, more restricted, theory of damages.

I

The Facts

A. The leases, and initial unsuccessful drilling (March

1968-January 1969): Plaintiffs make up a consortium of oil

corporations which acquired from the Government two

leases, numbered OCS-P-0218 and OCS-P-0226 (covering

tracts 375 and 384 respectively), of submerged lands on the

outer continental shelf in Santa Barbara Channel, off

California. After purchase of the leaseholds in 1968 and

various assignments of interests in that year, each com-

pany retained a percentage ownership ranging from 15.3%

to 2.5% in either or both tracts 375 and 384.

In the fall of 1967 notice for bids on outer continental

shelf land in the Santa Barbara Channel was published

Pauley Petroleum Inc. (Pauley) and other associated

companies bid and won the two leases. Before bidding

Pauley and some other companies in the joint venture had

conducted extensive exploration of the area. The leases

were executed in March 1968. Pauley and the original

lessees paid $43,503,147 and $30,351,447 in bonuses for

tracts 375 and 384, respectively. In addition, they were

required to pay $17,280 per annum for the basic five-year

term of each lease as a minimum rent. After winning the

bid, the consortium selected Pauley as the “operator” for

the purposes of managing exploration and drilling, and

established an operating committee to supervise all explor-

ation and development activities.

t Because of their length, we do not print the findings althoug:

, edo h we adopt them. B

direction of the court, the trial judge limited Sheath Gs aking tctel Sadmeat

oe

A-3

Under the Outer Continental Shelf Lands Act, Pub. L.

No. 212, 83d Cong., Ist Sess., 43 U.S.C. §§ 1331-1343 (1970)

(OCS Act), the legislation authorizing plaintiffs’ oil leases,

the Interior Department is the governmental agency with

general cognizance of operations under the leases, and the

Secretary has from time to time issued regulations and

orders relating to drilling and operations on the outer

continental shelf. The leases themselves were on a stan-

dard Interior form which granted an exclusive right to drill

and extract oil and gas. Lessees were also given the right to

erect drilling platforms and conduct geological explora-

tions. Each lease was made subject to the OCS Act, and

stated that all reasonable regulations were made a part of

the lease “* * * when not inconsistent with any express

and specific provisions herein, which are made a part

hereof.”

With Interior’s consent, the Pauley group conducted

exploration of the two tracts during the period from March

1968 through January 1969. The exploration involved

drilling of eight wells, seven on tract 373 (including one

redrill) and one on tract 384, and the total drilling costs

came to approximately $3.8 million. All eight wells were

dry holes, none producing oil in commercially usable

quantities. The trial judge found, and we agree, that “the

abandonment of all of the exploratory wells as not

commercially producible had to be discouraging to the

plaintiffs.” Several of the participants reflected their

disappointment by selling their investments cheaply, writ-

ing all or part of them off, or amortizing them over the

lease-terms.2 However, this unsuccessful drilling did indi-

2 As to three (Kewanee, TransOcean, and Ashland), our finding is “that such

parties had lost their enthusiasm about the success of the exploratory operations,

and did not share the optimistically high values of subject tracts as potentia!

reservoir areas as presented by the original plaintiffs in the trial of this case.”

Another company (Colorado) told its stockholders, in its report for 1968, that it had

written off the leasehold and drilling costs on these tracts because the leases did not

have reserves capable of commercial production. Husky reported to its stockholders

that the economies of development of these leases were marginal. Midwest and

Pauley alsc wrote off or amortized significant investment costs. Out of twelve

companies holding interests in the two tracts, seven offered to sell, sold, or wrote off

all or a substantial part of their investment by early 1969.

A-4

cate the presence of hydrocarbons, signifying the possibility

of oil reserves. Serious differences exist among the expert

witnesses as to the interpretation of the hydrocarbon

deposits and the potential value of any possible reservoirs

of oil.

B. The oil spill, government suspension of operations,

imposition of new regulations, orders, and filing procedures

(January 28, 1969-April 9, 1969): On January 28, 1969, a

Union Oil well on outer continental shelf lands in the

Santa Barbara Channel blew out, creating an oil slick of

about fifty square miles which caused severe property and

environmental damage. There immediately developed a

political climate of great concern over any future drilling

on continental shelf lands in the Channel. A further

consequence of the Union Oil disaster was the collapse of

the insurance market covering damages caused by offshore

oil spills.3

The most critical events for this case all occurred

between the oil spill on January 28, 1969, and plaintiffs’

filing of this suit on April 9, 1969—a period of somewhat

over two months. Without giving unnecessary details, we

shall itemize the principal government actions during this

period, many of which plaintiffs emphasize in this litiga-

tion.

1. From January 28 to February 3, 1969, all oil

companies which had operating wells in the Santa Barbara

Channel at the time of the Union Oil blowout—plaintiffs

were not among them—suspended operations voluntarily

at the Secretary of the Interior’s request, pending a review

of conditions there by the Government. After initially

clearing these companies for resumption of drilling on

February 3rd, Secretary Hickel, under sharp political

criticism, reversed himself and on February 7th sent

telegrams to the five companies then operating, ordering

5 Plaintiffs conceded at oral argument that the collapse of the insurance market

covering offshore oil spills was not caused by any of the government regulations or

actions subsequent to the Union Oil blowout. Rather, the collapse was the direct

result of a series of costly oil spill accidents, capped by the Santa Barbara blowout.

Our finding attributes this collapse of the insurance market to the Union well

blowout and oil spill, not to the subsequent governmental actions.

Cathal WII gs tmtetion ach

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A-5

them to cease all drilling and production. Pauley, which

was not then operating a well, did not receive a telegram.

During this period, Secretary Hickel informed Dr. Pecora,

Director of the Geological Survey in charge of offshore oil

regulations, that Hickel wanted three programs imple-

mented: (1) a determination of the cause of and methods to

stop the oil spill; (2) review of all relevant regulations and

orders; (3) review of the sufficiency of information given by

lessees to the Geological Survey. Dr. Pecora began imple-

menting Hickel’s program by establishing three task

forces. Two of these task forces were devoted to point 1 of

Hickel’s program, and the third was responsible for point

3—reviewing the sufficiency of technical information

provided by lessees. Dr. Pecora himself led a review with

various Interior Department officials of existing regula-

tions and orders.

Also on February 7, 1969, Secretary Hickel imposed

further requirements for clearing future drilling in the

Santa Barbara outer continental shelf. He instructed Dr.

Pecora that all actions on Santa Barbara leases were to be

cleared directly through the Secretary’s office. Dr. Pecora

by phone so informed the Geological Survey regional

supervisor for the Pacific, who prior to that time had been

delegated direct authority to grant drilling permits.

2. The federal action which most concerned plaintiffs

was the promulgation of a new regulation relating to a

lessee’s liability for oil spills. This was published in the

Federal Register on February 21, 1969, adding a new

subparagraph (b) to 30 C.F.R. § 250.42, as follows:

4 On February 10, 1969, Pauley sent a telegram to Secretary Hickel, referring to

Hickel’s February 7th telegram ordering the then-operating oil companies to

suspend operations. Pauley’s telegram stated that it was ready to drill and asked for

Secretary Hickel’s position. The Government’s response to the telegram is unclear.

The Director of the Geological Survey, Dr. Pecora, saw the telegram and the

telegram bears a handwritten notation that Pecora advised the Geological Survey

regional supervisor to respond, by emphasizing that a “detailed review for safety

factors requires deferment of decision to resume operations.” Dr. Pecora does not

recall specifically discussing the telegram with the regional supervisor and

apparentiy no official response was received by Pauley. The telegram also contains a

written notation by Dr. Pecora that a general telegram detailing additional

information required from Pauley would be sent, and a subsequent separate notation

that such a telegram was sent on March 1, 1969.

A-6

If the waters of the high seas are polluted by the drilling

or production operations of the lessee, and such pollution

damages or threatens to damage aquatic life, wildlife, or

public or private property, the control and removal of the

pollutant and the reparation of any damage, to whom-

soever occurring, proximately resulting therefrom shall

be at the expense of the lessee * * *

34 Fed. Reg. 2503-2504 (1969).

(As indicated in Part III, A, infra, a proposal to change this

regulation was announced early in May 1969 and a

modification was made in August 1969.)

Pauley apparently interpreted the new regulation to

impose absolute liability not only for costs of cleanup, but

also for any damage to a third party’s property from an oil

spill (no matter how caused), and that such liability applied

retroactively to existing leases.5 On March 12, 1969, a

special meeting of the Pauley group’s operating committee

was held, and one of the primary items on the agenda was

a discussion of problems caused by the alleged change in

the standard of liability. Pauley announced that it had

retained a law firm, and after a presentation by a member

of the firm, it was decided that the necessary papers for

filing a lawsuit would be prepared immediately. Two

members of the lessee group stated that they would join the

suit, and all other members were to advise Pauley as soon

as possible as to their decision. The minutes of the meeting

reveal that most of the members present stated they would

not participate in further Santa Barbara drilling while the

presumed “absolute liability” regulation remained in

effect.

3. On February 11, 1969, the Pauley group filed with the

Geological Survey’s Los Angeles office an application for a

5 The precise understanding of the change by Pauley (and its co-lessees) is difficult

to pinpoint. In a memorandum to all partners dated February 24, 1969, Pauley

exhibited some confusion as to the coverage of the revised liability standard:

As it now stands, the industry is liable for all damage whether or net any

negligence or fault existed. However, I believe this rule 250.42 [the amended

regulation] applies everywhere. The point is not too clear.

This February 24th memorandum also demonstrates that, almost immediately after

promulgation of the new regulation, Pauley was investigating a possible lawsuit by

the consortium.

RL nd 250 ed

A-7

permit to drill a second well on Tract 384. One of plaintiffs’

major complaints is that this application was never acted

upon. During February and March 1969, it is clear, Interior

was in the process of revising its orders controlling drilling

for and operating oil wells on the outer continental shelf

(so-called “OCS orders’’); the Pauley group was aware that

such a process was going on. On March 28, 1969, OCS

Order No. 10 was promulgated, terminating the prior OCS

Order on the subject, and imposing more stringent

requirements for casing, cementing, mud drilling and

blowout procedures. Order No. 10 stated that no drilling

would be allowed until all pipelines used to transport oil to

shore facilities were inspected by the Geological Survey.

The order did not say expressly that its requirements were

retrospective but it did state that each application to drill

had to fulfill the new requirements. On April 4, 1969 copies

of OCS Order No. 10 were provided to all OCS lessees in the

Santa Barbara Channel. The Pauley group never amended

its February 11th application (to drill a second well on

tract 364) so as to accord with Order No. 10.

4. Under the Secretary’s program, Interior also sought

further physical information from the Santa Barbara

Channel lessees who were directed, on March 1, 1969, to

furnish “all available geological, geophysical and structur-

al information.” The returns were studied on a lease-by-

lease basis and reports thereon were submitted to the

Secretary to aid in future clearances for drilling in the

Channel. On March 21st, the Secretary indicated that, as

soon as detailed studies were completed on the basis of this

new information, the oil companies would be allowed .o

resume operations in their present locations.

The Pauley group delayed its response to this demand

and never fully answered. On March 12, 1969, this matter

was discussed at a special meeting of the group’s operating

committee. The minutes state:

It was decided that the decision as to whether or not we

furnish the geological geophysical and structural infor-

mation demanded by the Secretary of Interior would be

held in abeyance until final decision has been made

regarding the filing of the proposed lawsuit.

A-8

A few days later, Pauley, as operator, repeated this idea in

a letter to one co-lessee, with copies to all the others.

Pauley also twice told the Geological Survey that it

.understood that the demand for new data did not apply to

the Pauley group unless a drilling permit was sought and

required. The Geological Survey agreed with this under-

standing. On April 4, 1969, five days before the institution

of the suit, Pauley furnished some but not the complete

data called for by Interior. Although the transmittal letter

said that the Pauley group would provide additional

information as needed, it never sent all the data sought by

Interior.®

On April 1, 1969, Secretary Hickel, after receiving

additional information from his task force clearance

program, approved for renewed operations five leases in

the Santa Barbara Channel, four of which had been earlier

suspended. Most other oil companies supplied the addi-

tional information required under the clearance program

and ultimately had their leases cleared. After clearance,

the Geological Survey regional supervisor had authority to

grant drilling permits and operations on the leases

pursuant to the normal regulations, as amended. In fact,

some actual drilling on other outer continental shelf

leaseholds in the Channel was resumed as early as April

1969. See Sun Oil Co. v. United States, 217 Ct. Cl. ___, 572

F.2d 786, 797, 798 (1978).

c. The filing of this suit (April 9, 1969): The petition in

this court was filed on April 9, 1969, raising as its foremost

claim that the new regulation promulgated on February

21, 1969—said to impose for the first time an “absolute

liability” standard for oil pollution—made plaintiffs’ leases

economically worthless and exposed them to unmeasurable

risks. Only six of the lessees joined in the petition.’ The

remaining partners® were later joined as involuntary

6 Although plaintiffs assert they had already filed all required information, the

Trial Judge found, and we agree, that plaintiffs did not fully supply the information

requested by Interior in March 1969.

7 These were: Pauley Petroleum Incorporated, Colorado Oil and Gas Corporation,

Mesa Petroleum Company, McCullough Oil Corporation of California, J.M. Huber

Corporation, and Husky Oil Company of Delaware.

® Midwest Oil Corporation, Kewanee Oil Company, Ashland Oil and Refining

A-9

plaintiffs; for the most part they did not participate

substantially in the proceedings but they have adopted the

position of the original plaintiffs. After the petition was

filed, there appears to have been no substantial communi-

cation between the Pauley group and Interior with respect

to the leases except in connection with the litigation, and

except that plaintiffs paid their annual rent of $17,280 (per

lease) until the basic five-year term of the leases expired in

1973.

Claimants have tried and present four theories of

government responsibility: first, that by changing the

lessees’ standard of liability in February 1969, the Govern-

ment frustrated the purposes of the leases; second, that if

the liability standard had all along been “absolute liabil-

ity,” plaintiffs are entitled to restitution for mutual

mistake because both sides were unaware that that was the

standard; third, that the Government breached the leases

by various acts; and, fourth, that the Government in effect

took the leases by eminent domain and must pay just

compensation.

Il.

Jurisdiction

Before considering the merits, it is necessary to evaluate

defendant’s arguments that this court lacks jurisdiction

over plaintiffs’ two claims based on frustration and mutual

mistake. The first of these positions is that the claim for

rescission because of commercial frustration is really a

type of declaratory judgment action, over which this court

has no jurisdiction. See United States v. King, 395 U.S. 1

(1969). Defendant points to a paragraph of plaintiffs’

petition stating that plaintiffs are willing to “* * * submit

their interests in the leases to the jurisdiction of the Court

and subject them to such orders as the Court deems fit and

proper in the premises.” It is said that this part of

plaintiffs’ claim is really a request for rescission and for a

declaration of rights—a petition for a declaratory judg-

Company, Macdonald Oil Corporation, and Forest Oil Cerporation.

A-10

ment. But defendant blinds itself to the preceding para-

graph of plaintiffs’ petition on frustration, which asks for a

monetary award of some $73 million in bonus payments

and some sixty-nine thousand in rental fees for the two

leases. This is clearly more than a mere request for

declaratory orders by the court; it is a demand for a money

judgment. Since plaintiffs found their express request for a

money judgment on two of the jurisdictional bases of the

Tucker Act—“any Act of Congress * * * or upon any

express or implied contract * * *”—it is clear that this

court has jurisdiction. 28 U.S.C. § 1491 (1976); see Eastport

S.S. Corp. v. United States, 178 Ct. Cl. 599, 605, 372 F.2d

1002, 1007 (1967).

Moreover, the Government advances an erroneous syllo-

gism:

1) The Supreme Court in King held that the Court of

Claims has no jurisdiction to issue declaratory judg-

ments; ;

2) In order to reach a judgment plaintiffs ask for a

declaration of their rights under the leases;

3) A declaration of rights is a declaratory judgment and

therefore the Court of Claims lacks jurisdiction.

The crucial flaw is, of course, the equation of a ruling on

plaintiffs rights under the leases with a declaratory

judgment. A declaratory judgment is a particular statutory

remedy allowing a court to state the legal rights of the

parties without regard to a monetary remedy or the grant

of specific relief. Such monetary or specific remedy may

later flow from the court’s declaration, but it need not

follow, and if it does it is a separate, subsequent offspring of

the primary declaration. See 28 U.S.C. §§ 2201-2202 (1976);

Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 241 (1937);

Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667,

671-72 (1950). The classic illustration of a declaration

without regard for possible monetary remedies is United

States v. King, 395 U.S. 1 (1969). There this court found

that it could not grant a money judgment because King’s

monetary claim was time-barred under the statute of

limitations. However, the court mistakenly thought that it

could issue a declaration that King was entitled to a

A-11

change in his military retirement status. King v. United

States, 182 Ct. Cl. 631, 633-34, 660-62, 390 F.2d 894,

896-97, 913-15 (1968), rev'd, 395 U.S. 1 (1969). Here, on the

other hand, plaintiffs explicitly seek a monetary reme-

dy—return of over 73 million dollars, or more. They are not

asking for a simple declaration of rights in their leases

which may or may not result in a subsequent payment of

money outside of the court’s processes. As we recognized in

Gentry v. United States, 212 Ct. Cl. 1, 546 F.2d 343 (1976),

merely because the court must make a ruling of law (in

Gentry, declaring a statutory provision unconstitutional) in

order to arrive at a money judgment does not render this

court’s decision a “delaratory judgment” banned under

King. See 212 Ct. Cl. at 7-8, 546 F.2d at 345-46.

Defendant’s second jurisdictional attack—that plaintiffs’

claim for rescission because of mutual mistake or frustra-

tion is an equitable action—is based on the incorrect

premise that the Court of Claims has no equity jurisdiction.

This assumption we have previously described as an

“ancient but inaccurate shibboleth.” Quinault Allottee

Ass'n v. United States, 197 Ct. Cl. 134, 138 n.1, 453 F.2d

1272, 1274 n.1 (1972). The correct postulate. as Quinault

observed, is that this court has no jurisdiction to grant

specific equitable relief. Id. This principle does not pre-

clude the courts from exercising equitable powers as “an

incident of our general jurisdiction.” Klamath & Modoc

Tribes v. United States, 174 Ct. Cl. 483, 488 (1966).

Equitable doctrines can be employed incidentally to this

court’s general monetary jurisdiction either as equitable

procedures to arrive at a money judgment, Klamath &

Modoc Tribes v. United States, 174 Ct. Cl. 483, 490 (1966)

(use of accounting to aid in rendering money judgment);

Quinault Allottee Ass’n v. United States, 197 Ct. Cl. 134,

137-38 & n.1, 453 F.2d 1272, 1274 & n.1 (1972) (power to

use class action procedures to arrive at money judgment),

or as substantive principles on which to base the award of a

money judgment. See eg., United States v. Milliken

Imprinting Co., 202 U.S. 168, 173-74 (1906) (reformation of

contract as basis of money judgment); South Boston Iron

Works v. United States, 34 Ct. Cl. 174 (1899) (mutual

A-12_

mistake in final written contract terms as basis for money

judgment); Iowa- Wisconsin Bridge Co. v. United States, 114

Ct. Cl. 465, 504, 84 F. Supp. 852, 862-63 (1949), cert. denied,

339 U.S. 982 (1950) (reformation of deed to include

reservation of defendant’s easement as basis of money

judgment).

As originally enacted, the Tucker Act specifically per-

mitted the use of equity doctrines to arrive at a pecuniary

judgment. The original version of the Act gave this court

jurisdiction over all claims based upon the constitution,

laws, regulations, or contracts with the United States

“* * * in respect of which claims the party would be

entitled to redress against the United States either in a

court of law, equity, or admiralty * * *” Act of March 3,

1887 (Tucker Act), ch. 359, § 1, 24 Stat. 505 (emphasis

added). The Supreme Court in United States v. Jones, 131

U.S. 1 (1888), held that this language did not cover the

award of equitable remedies, but the Court also held that

the statutory language allowed the court to consider

equitable principles as a basis for awarding money

judgments:

It seems, therefore, that in the point of providing only for

money decrees and money judgments, the law is

unchanged, merely being so extended as to include

claims for money arising out of equitable and maritime

as well as legal demands. Id. at 18.

In United States v. Milliken Imprinting Co., 202 U.S. 168

(1906), the Court, speaking through Mr. Justice Holmes,

expressly held that under a “fairly liberal interpretation”

of the then-existing Tucker Act, the Court of Claims had

jurisdiction to reform a contract in order to arrive at a

money judgment. Id. at 173-74. The particular language in

the Tucker Act upon which both the Jones and Milliken

courts relied, “* * * in respect of which claims the party

would be entitled to redress against the United States

either in a court of law, equity, or admiralty * * *”, was

omitted in the 1948 recodification, but the Reviser’s Note

clearly indicated that no substantive change was intended.?

% The Note, which can be relied upon in interpreting a statute, Western Pacific

A-13

This court has always construed the 1948 version of the

Tucker Act as continuing the previously established use of

equitable doctrines. E.g., Iowa-Wisconsin Bridge Co. v.

United States, 114 Ct. Cl. 464, 504, 84 F. Supp. 852, 862-63

(1949), cert. denied, 339 U.S. 98° (1950); Klamath & Modoc

Tribes v. United States, 174 Ct. Cl. 483, 490 (1966). Often,

the court has awarded (or denied) a money judgment based

upon an equitable theory, without even discussing its

jurisdiction. See e.g., Rash v. United States, 175 Ct. Cl. 797,

804-05, 810-11, 360 F.2d 940, 944, 947 (1966) (mutual

mistake in sale of land contract resulting in rescission;

jurisdiction assumed); National Presto Indus. Inc. v. United

States, 167 Ct. Cl. 749, 760-61, 767-69, 338 F.2d 99, 106-07,

110-11 (1964), cert. denied, 380 U.S. 962 (1965) (mutual

mistake of fact; jurisdiction assumed); McNamara Constr.

of Manitobu, Ltd. v. United States, 206 Ct. Cl. 1, 4-5, 509

F.2d 1166, 1167-68 (1975) (reformation of contract under

theory of mutual mistake denied; jurisdiction assumed).

This continued assumption that we can properly use

equitable theories in passing upon suits for monetary

awards is grounded firmly on the Tucker Act’s history, on

unquestioned Supreme Court cases and on Court of Claims

de ‘sions; we reaffirm both the practice and the principle.!°

Ill

The merits

The two most significant dates in this case are the Union

Oil well blow-out-and-spill on January 28, 1969, and

plaintiffs’ speedy institution of this action some two

months later on April 9, 1969. The blow-out-and-spill

created an immediate, major environmental emergency

R.R. Corp. v. Western Pacific R.R. Co., 345 U.S. 247, 254-55 & n.11 (1953), states that

the quoted words: “* * * were omitted as unnecessary since the Court of Claims

manifestly under this section will determine whether a petition against the United

States states a cause of action.” The note continued by stating that at any rate the

Court of Claims no longer has admiralty jurisdiction (which is not at issue here). See

Reviser’s Note after 28 U.S.C. §1491 (1976).

10 See also the discussion of this point in Judge Nichols’ concurring opinion in

Mitchell v. United States, Nos. 772-71, 773-71, 774-71, and 775-71, decided this day.

A-14

with serious political overtones; it evoked continuous and

serious consideration by the Government, under great

pressure, of the best course to pursue. Steps were first

taken which proved tentative and later modified, but

plaintiffs were not content to wait until the Government

had had a fuller opportunity to plot its position. We

analyze plaintiffs’ theories of recovery in the strong light of

the undeniable fact that in these circumstances the Pauley

group allowed the Government only a short time in which

to make its decisions before their petition to this court

cried frustration, mistake, breach and taking.

A. Frustration: Plaintiffs’ first and most strongly pre-

sented claim is that the promulgation on February 21, 1969

of a new regulation governing lessee liability for oil spills

(30 C.F.R. 250.42(b), supra, Part I, B) imposed for the first

time strict liability to the government and to third parties,

and that this new standard, in conjunction with the

independent collapse of the insurance market for oil spill

damages,!! profoundly frustrated the dominant purpose of

their leases, after less than a year of their basic five-year

terms. Accordingly, plaintiffs say, they are entitled on this

ground to the return of the bonuses and rentals they paid

to the Government (over $74,000,000).

We do not take up point-by-point the individual substan-

tive arguments pressed by the parties.!2 To us, the decisive

factors are that (a) both before and after the amendment of

February 21, 1969, the standard of liability was uncertain

and ambiguous, as was the application of the February 21st

modification to existing leases like plaintiffs’; (b) the

February change was under continuous review by Interior

1! As noted in Part I, B, n.3, supra, there is no contention that the Government’s

modification of the liability regulation in February 1969 caused the disappearance of

insurance for oil spills. Nor do plaintiffs claim frustration on the basis of the

insurance collapse alone.

12 For instance, defendant claims that state law, not federal regulations, governed

the standard of liability for damages to third parties, and that the state law of

California already imposed a strict standard of liability on oil drilling as an

ultrahazardous activity. Plaintiffs respond that federal law established the standard

of liability because federal regulations preempted state law standards, and that, even

if state law controlled, under California law only oil drilling in inhabited areas is

necessarily ultrahazardous.

—

— 2

A-15

and was in fact modified later in 1969; (c) other oil

companies continued to operate in the Santa Barbara

Channel in 1969 despite the February amendment and the

insurance collapse; and (d) in the face of all these

circumstances plaintiffs did not seek authoritative clarifi-

cation or wait or push for the uncertainty to be cleared up,

but rushed in medias res to this court with their full-

fledged frustration claim. These elements (which we shall

spell out in turn) add up to a failure of proof by plaintiffs

that by the time the suit began (or thereafter) an

unexpected contingency had occurred which rendered

performance of their leases commercially impracticable.'3

(a). The standard of lessee liability for offshore oil spills,

prior to the February 1969 amendment, was plainly

unsettled. California law might apply!4 and, if so, it was

unclear what that law was (as shown by the differing

interpretations by the parties, see n.12, supra, of the one

decision on the matter by the Supreme Court of California,

Green v. General Petroleum Co., 250 Cal. 328, 270 P. 952

(1928)). To the uncertain extent federal law controlled, that

was supplied by the Secretary’s regulations under the

13 Helpful guidelines for a frustration or impossibility claim are set forth in

Transatlantic Financing Corp. v. United States, 363 F.2d 312 (D.C. Cir. 1966): (1) did

an unexpected contingency occur; (2)-was the risk of the contingency allocated

between the parties, either expressly or by custom; (3) did the occurrence of the

contingency render performance commercially impracticable? 363 F.2d at 315. See

also, Natus Corp. v. United States, 178 Ct. Cl. 1, 371 F.2d 450 (1967). We concentrate

in this case on the first and the third of these guidelines.

'4 Section 4(aX2) of the Outer Continental Shelf Act [43 U.S.C. § 1333(aX2)] stated

that the civil and criminal laws of each adjacent state as of the effective date of the

Act [August 7, 1953], shall be controlling “* * * [t]o the extent that they are

applicable and not inconsistent with this act or with other Federal laws and

regulations of the Secretary [of the Interior] now in effect or hereafter adopted

From the inception of the Act, commentators have noted that the determination of

which state laws are “applicable and not inconsistent” and thus incorporated as the

law of the United States under section 4(aX2), is an open and controversial question.

See Christopher, The Outer Continental Shelf Lands Act: Key to a New Frontier, 6

Sran. L. Rev. 23, 42 (1953). Judge Skelly Wright, then a judge in the United States

District Court for the Eastern District of Louisiana, commented thai it was difficult

to visualize a more uncertain area of the law than the choice of law for contract and

tort problems in the outer continental shelf. Wright, “Jurisdiction in the Tidelands”

in Legal Problems in the Tidelands; A Symposium, 32 TuLane L. Rev. 173, 184-86

(1958).

A-16

Outer Continental Shelf Act, and their coverage was

likewise ambiguous. 30 C.F.R. 250.30 (1969) stated that the

lessee shall: “* * * take all reasonable precautions to

prevent damage or waste of any natural resource or injury

to life or property or the aquatic life of the seas.” Section

250.40 further explicated the lessee’s duty to control oil

wells, subsection (a) requiring the lessee to take “all

reasonable precautions” to control wells and subsection (b)

mandating that the lessee adopt “all reasonable precau-

tions” to prevent any well biowouts, and to exercise “due

diligence” in controlling any blowout. The only specific

mention of the lessee’s duty to control pollution was

contained in section 250.42, which said that the lessee:

“* * * shall not pollute the waters of the high seas or

damage the aquatic life of the sea or allow extraneous

matter to enter and damage any mineral- or water-bearing

formation.” 30 C.F.R. § 250.42 (1969). None of the

regulations or orders spoke directly to the standard of

liability for damage to third parties through pollution or oil

spills.15

Plaintiffs insist that these provisions imposed no more

than liability for negligence, and that the February

amendment established absolute liability toward the Gov-

ernment and third parties,16 even though it did not use

that term. In this broad iterpretation of the amendment

they are supported by a contemporaneous press conference

statement by Secretary Hickel, but it is far from plain

what a court would have decided if plaintiffs had seen fit to

seek a declaratory judgment as to the amendment’s

18 The leases required the exercise of “reasonable diligence” in drilling and

producing wells and required the lessees to carry out all reasonable government

orders at their own expense “* * * [P]rovided, That the lessee shall not be held

responsible for delays or casualties occasioned by causes beyond the Lessee’s

control.” It was and is unclear whether this latter provision applied to anything

more than the carrying-out of federal orders, or whether it covered liability to third

parties at all.

16 Liability to third parties, if absolute, would clearly be of much more concern to

plaintiffs and to other Santa Barbara Channel operators. Plaintiffs refer to the

“staggering potential liabilities” to third parties if absolute liability prevailed. In

particular, they mention earthquakes causing oil spills. The San Andreas fault line

runs fifty miles from the Channel area at one point, and there exists the possibility

of a great earthquake in the region.

A-17

meaning or judicial review of the amendment. Certainly a

substantial argument could have been made that the

amendment, if it actually changed the standard of liability,

should not and could not apply to existing leases like

plaintiffs’.!7 Of course, we are not saying definitely that the

amendment altered nothing for plaintiffs; all we suggest is

that during February-April 1969, as before, there was

sufficient doubt of the applicable standard of liability so to

call for further exploration and further steps by plaintiffs

before they could properly claim total frustration via an

unexpected alteration in legal requirements.

(b). Also, in the spring of 1969 there was much concern

in the oil industry over this February standard-of-liability

amendment and it appears to have been under continuous

review within the Interior Department. Early in May (after

this suit had been brought) the Department announced a

set of proposed amendments to 30 C.F.R. part 250,

including the disputed section 250.42. 34 Fed. Reg. 7381,

7383 (1969). On August 22, 1969, after considering various

comments submitted pursuant to this notice and a sub-

sequent June notice, the Department promulgated amend-

ments to 30 C.F.R. part 250. Concerning section 250.42, the

preface stated that from the comments on 250.42(b) (i.e. the

February amendment):

* * * it appears that there is confusion and doubt

regarding the original intent and purpose of the Febru-

ary 21, 1969, amendment to set forth in greater detail

the existing responsibilities of an oil and gas lessee on

the Outer Continental Shelf for the control and removal

‘7 The February 1969 amendment to 30 C.F.R. § 250.42 (which added subsection

(b)) stated only that the lessee was obliged to pay costs of cleanup and “reparation of

any damage to whomsoever oc .. ving.” Whether this regulation would have been

read by courts as preempting state .. rt law and imposing a new federal standard of

strict liability on current leases is unceici\in. Some legal commentators on the Santa

Barbara oil spill assumed without discussion that state tort law governed liability to

third parties for oil spill damages. See Note, Pollution of the Marine Environment

from Outer Continental Shelf Oil Operations, 22 So. Car. L. Rev. 228, 237-39 (1970).

Indeed, in one of Pauley’s own contemporaneous memoranda there is language

suggesting uncertainty as to the application of the February amendment. See n.5, in

Part I, B, supra. Other oil companies apparently claimed that the new oil spill

regulation did not apply to them since it was not existing at the time the leases were

issued. See Nanda & Stiles, Offshore Oil Spills; An Evaluation of Recent United

States Responses, 7 San Disco L. Rev. 519, 529 (1970).

A-18

of pollutant, and that the amendment has been misun-

derstood. Accordingly, to eliminate any doubt or confu-

sion as to the original intent and meaning of the

February 21, 1969, interpretive amendment to §§ 250.42

and 250.43(b) is further amended for the — of

clarification, and a new paragraph (c) is added.

34 Fed. Reg. 13,544 (1969).

Section 250.42(b) [redesignated 250.43(b)] was amended

with slight wording changes, and a new subsection (c) was

added:

(c) The lessee’s liability to third parties, other than for

cleaning up the pollutant in accordance with paragraph

(b) of this section, shall be governed by applicable law.

34 Fed. Reg. 13,547 (1969).

There has been no authoritative interpretation of this

regulation, and we do not feel obliged to attempt one. It

suffices for our purposes that if plaintiffs had waited for

this change they might well have doubted that it estab-

lished for them the new standard of absolute liability

which they say they feared so much. At the least, they

might well have sought an authoritative construction (e.g.

through a declaratory suit) before taking the definitive step

of announcing and acting as if the leases had been wholly

frustrated by imposition of a new requirement that they

assume absolute liability.

(c). Despite the February 1969 amendment and the

collapse of the insurance market, other oil companies

drilled and operated in the Santa Barbara Channel in the

spring and summer and fall of 1959. See Part I, B, supra,

Part III, C, 2, infra. Plaintiffs seek to minimize this fact by

asserting that only the “major” oil companies could afford

such risks, and the smaller companies like plaintiffs could

not sustain the risk of drilling. This attempted distinction

will not work, in part because the law requires an objective

view of commercial frustration or impossibility—the fact

that a risk makes the contract unreasonable for a

particular party is no excuse. See Restatement (Second) of

Contracts, § 281, comment e (Tent. draft No. 9, 1974); Clark

Grave Vault Co. v. United States, 178 Ct. Cl. 52, 54-55, 371

A-19

F.2d 459, 461 (1967); 6 A. Corsin, ON Contracts § 1332.

Further, while plaintiffs assert that only “major” compa-

nies with greater capital resources and technology were

able to continue drilling, they make no attempt to show

that the liabilities were so great and so threatening that

any oil company other than one of the “seven sisters” could

not afford to drill in the Santa Barbara Channel. Indeed,

some of the plaintiffs, in their own annual reports

published after promulgation of the “new” liability stan-

dard, indicated plans to continue drilling as soon as the

temporary government “suspension” was lifted. At the

time of these reports there was no indication that futher

drilling was impossible due to excessive liability. The 1968

annual reports of Husky, Colorado’s parent company, and

Kewannee, all published in March 1969, indicate plans to

continue drilling if the government lifted its “suspension.”

This suggests that at least some of the plaintiffs did not

find the Government’s “new” liability regulation so im-

mediately prohibitive as to foreclose any possibility of

drilling.

(d). In view of what we have recited thus far, little need

be added to underline plaintiffs’ undue haste in running to

this court on April 9, 1969, with a claim of gross frustration

through the February 21, 1969 amendment to the regula-

tions. In February-April 1969 the situation was surely

unclear, «unsettled, and in flux. Neither the prior liability

standard nor the February one was at all definite. But, as

we have said, plaintiffs did not seek any authoritative

clarification nor did they wait for the solution or the

clarification which time could have brought. The result

was that, when the petition was filed, there was and could

be no proper showing that an unexpected change in the

standard of liability had actually occurred for plaintiffs, or

that their further performance had thereby been rendered

commercially impracticable. Nor have events since April 9,

1969 shown the existence of these elements of their

frustration claim. We do not say that plaintiffs necessarily

had to wait for a complete and final resolution of the whole

liability problem, but only that they could not correctly

A-20

claim frustration while it was legally so obscure that their

standard of liability had increased at all'*—and that, if it

had, they were in commercial fact precluded from drilling

and operating.

B. Mistake: Plaintiffs also present an alternative claim

of mutual mistake which they say warrants rescission of

the contracts and return of their bonus and rent payments.

This contention is that, even if a strict standard of liability

for oil spill damages existed at all relevant times in

California and governed plaintiffs’ operations, then both

sides were mistaken at the time of the leases—both

assuming (according to the claim) that a negligence

standard controlled oil drilling liability in the Santa

Barbara Channel.

The simplest answer to this point is that plaintiffs have

failed to prove either that the absolute liability standard

controlled (either under California law or under the federal

regulations) when the leases were made in 1968, or that at

that moment the Government thought that negligence was

the proper standard. Our discussion, Part III, A, supra, on

the frustration claim shows how indefinite and uncertain

the entire subject was and continued to be. A claim of

mutual mistake cannot find any footing in such spongy

ground. On the contrary, relief for mistake should rest on a

showing which is “clear and convincing.” 13 S. WILLISTON

On Contracts, (Third ed. 1957) § 1580.

In addition, the demand for rescission on the basis of

mutual mistake sinks because plaintiffs have failed to

prove any mistake as to a basic, fundamental, or central

18 In the presence of all this doubt, this court, in which the frustration claim is

pressed, cannot be expected to decide for itself, post hoc in 1979, that the standard of

liability was in fact drastically raised in February 1969 and therefore that plaintiffs’

frustration claim should now be sustained, looking backward to 1969. Decisions

upholding claims of frustration through changes in the law have rested on an

overwhelming showing that the alleged legal impediment actually existed at the

pertinent time. See Walker v. Continental Life & Accident Co., 445 F.2d 1072 (9th Cir.

1971); West Los Angeles Institute for Cancer Research v. Mayer, 366 F.2d 220 (9th Cir.

1966), cert. denied, 385 U.S. 1010 (1967). No such demonstration has been made here.

A court asked, long after the event, to find frustration through an alleged change in

the law should not be called upon to pick its own troubled way along very uncertain

ground. The claim of frustration presupposes that the disabling change in the law

was clear and definite at the time the suing party threw up its hands.

A-21

assumption of the contract. See 13 S. WiLListon ON

Contracts, (Third ed. 1957) § 1584. “The court must be

satisfied, that but for the mistake the complainant would

not have assumed the obligation for which he seeks to be

relieved.” Grymes v. Sanders, 93 U.S. 55, 60 (1876). The

standard of liability—especially as to third parties—has

not been shown to us to be such a subject. The lease terms

appear not to cover it, nor did the then regulations and

Interior Department orders;!9 there was no consideration

or discussion given by the parties to that issue when the

leases were negotiated; and there is no demonstration that

either party, let alone both, thought the issue central to the

contracts. See Grymes v. Sanders, 93 U.S. 55, 60-61 (1876);

Tombigbee Constructors v. United States, 190 Ct. Cl. 615,

622-23, 627, 420 F.2d 1037, 1040-41 (1970); Hannah v.

Steinman, 159 Cal. 142, 149, 112 P. 1094, 1097 (1911).

Compare National Presto Industries, Inc. v. United States,

167 Ct. Cl. 749, 763, 338 F.2d 99, 108 (1964), cert. denied,

380 U.S. 962 (1965) (parties explicitly negotiated new

manufacturing process which was of critical interest to

government; mutual mistake found) with Tombigbee Con-

structors v. United States, 190 Ct. Cl. 615, 623-24,

420 F.2d 1037, 1041 (1970) (no discussion of possible

flooding of proposed barrow for backfill; no mutual

mistake).

A related reason for rejecting plaintiffs’ mutual mistake

claim is the lack of any evidence (or even argument) that

the availability of oil spill insurance was a basic assump-

tion of the contract. Under plaintiffs’ hypothesis it was the

conjunction of a strict liability standard and the absence of

procurable insurance that together made the risks of

drilling unacceptably high. It is only a mistake about the

applicable liability standard, joined together with a mis-

19 Plaintiffs’ attempt to avoid this conclusion by arguing that language implying a

negligence standard—"reasonable diligence,” “reasonable precautions’—appeared

in the orders and the lease. However, none of the regulations, orders or lease terms

to which plaintiffs advert appeared to deal with liability to third parties, and even

for the government the adoption of a negligence standard (if state law called for

absolute liability) was unclear. The references to “reasonable diligence” and

“reasonable precautions” might not necessarily imply a negligence standard if state

law was contrary.

A-22

take about the availability of insurance, that would suffice

to show that the parties were mistaken about a basic

assumption of the contract—the level of risks in drilling.

But plaintiffs have not shown or argued that either party

made the continued availability of insurance a_ basic

assumption of the contract.2°

C. Breach: Plaintiffs’ claim for total breach of contract

has three prongs: (1) the Interior Department’s failure to

act on plaintiffs’ application of February 11, 1969, for

permission to drill a second well on tract 384; (2) Secretary

Hickel’s clearance procedures, which plaintiffs character-

ize as a “sham” and camouflage for an indefinite suspen-

sion of operations, and (3) the February 19, 1969 amend-

ment to the regulations (already discussed) which plaintiffs

say imposed for the first time a strict liability standard.

1. Reliance on the first two matters is practically

foreclosed by the trial judge’s factual conclusion (which we

accept) that

* * * plaintiffs have not intended since mid-March 1969,

after considering the new liabilit lation issued by

Secretary Hickel, to conduct further drilling operations

on subject tracts, and that this is the reason why they

failed to pursue the Department of the Interior's

clearance procedures to permit future drilling opera-

tions, and why they failed to file an application for a

permit to do further drilling in compliance with the

requirements of OCS order No. 10.

Finding 78(k).

This finding is well supported by the prior findings and by

the record (see Part I, A, B, supra; Part III, C, 2, infra)}—and

we do not and should not overturn it. See Davis v. United

2 Plaintiffs also raise a secondary argument: even if the government was not

mistaken, plaintiffs are entitled to rescission because the government made

representations that the standard of liability was negligence. This argument lacks

any merit. The facts do not indicate that the government made any representation,

explicit or implicit, as to third party tort liability. Further, plaintiffs’ allegation of a

government “misrepresentation” is far removed from the types of misrepresenta-

tions which induced a private party's reliance and therefore produced a ruling of

rescission in previous cases. See Staten Island Hygenia Ice & Cold Storage Co. v.

United States, 85 F.2d 68, 71 (2d Cir. 1936); Timber Investors, Inc. v. United States,

No. 61-75, slip op. at 5 & n.2 (Ct. Cl. Nov. 15, 1978); Tree Preservation Co. v. United

States, 172 Ct. Cl. 577, 581 (1965).

A-23

States, 164 Ct. Cl. 612, 616-617 (1964). Under this

conclusion, plaintiffs cannot well contend that they were

hurt either by the failure to uct on their drilling

application or by the clearance procedures.

2. In any event, we are satisfied that Interior’s conduct

with respect to plaintiff's operations was both authorized

and reasonable during the period from the Union Oil

blowout on January 28, 1969 to the institution of this suit

on April 9, 1969—and that thereafter Interior could

properly assume that plaintiffs desired to litigate, rather

than to drill or operate.

We must start, on this facet of plaintiffs’ petition, as on

the others, from the undeniable premise that the blowout

on January 28th created an important emergency in the

area of the Santa Barbara Channel. The oil spill covered

some fifty square miles, causing extensive damage to the

heavily populated coasts and to the marine ecosystem. This

ecological disaster evoked great popular concern in the

region, and the Federal Government obviously had to

review its position and consider what to do.

The Secretary had broad power, under the Outer

Continental Shelf Act, to prescribe necessary rules and

regulations, including “such rules and regulations as he

determines to be necessary and proper in order to provide

for the prevention of waste and conservation of the natural

resources of the outer Continental Shelf, and the protection

of correlative rights therein, and, notwithstanding any

other provisions herein, such rules and regulations shall

apply to all operations conducted under a lease issued or

maintained under the provisions of this subchapter.” 43

U.S.C. § 1334(aX1) (1970).2! Both this court and the Ninth

Circuit have already considered the Secretary’s powers

under the Act and have concluded that it grants him

considerable, though not plenary, authority to suspend

drilling operations or regulate leases in the interests of

#1 The wording “conservation of natural resources * * *” has been correctly

construed to give the Secretary power to consider all natural resources of the outer

continental shelf, not just mineral resources. Gulf Oil Corp. v. Morton, 493 F.2d 141.

144-45 (9th Cir. (1973); Union Oil Co. of Cal. v. Morton, 512 F.2d 743, 749-50 (9th Cir.

1975).

A-24

conservation. See Sun Oil Co. v. United States, 217 Ct. Cl.

___., 572 F.2d 786, 802 (1978) [Sun Oil}; Union Oil Co. of

Cal. v. Morton, 512 F.2d 743, 747-48 (9th Cir. 1975) [Union

Oil}; Gulf Oil Corp. v. Morton, 493 F.2d 141, 144 (9th Cir.

1973) [Gulf Oil).22

It is within this statutory framework that we must

evaluate plaintiffs’ claim of breach because Interior failed

to act, before this suit was brought, on their application

(filed February 11, 1969) to drill a well on tract 384. Under

the contractual provisions and practices, as well as under

the Administrative Procedure Act and established law, the

Department certainly had a reasonable time in which to

respond. See Sun Oil, 217 Ct. Cl. ___., 572 F.2d 786 (1978).23

22 The then regulations provided for the suspension of operations “* * * in the

interests of conservation” 43 C.F.R. 3383.5/a) (1969) or where the operations

endanger life or threaten immediate and serious damage to “the leased deposits or

other valuable mineral deposits” 30 C.F.R. 250.12(b) (1969). This latter provision was

amended, in August 1969, specifically to include “aquatic life,” “the environment,”

and “property.”

23 The APA sections cited by plaintiffs, section %b), 5 U.S.C. § 558(c) (1976) and

section 6d), 5 U.S.C. § 555/e) (1976), if applicable, both provide the Government with

a reasonable time. Section 558&c), which applies to any “license required by law,”

states that the agency “* * * within a reasonable time, shall set and complete

proceedings required to be conducted in accordance with sections 556 and 557 of this

title or other procedures required by law and shall make its decision.” (emphasis

added). Similarly, section 555(e) requires “prompt notice” of any denial of a request

in “any agency proceeding.” This provision, even if otherwise applicable, governs

only denials of applications, and Interior did not deny plaintiffs’ application.

Although an indefinite refusal to act might at some point constitute a “denial”, that

point was not reached here. Also, the standard of “prompt notice” in itself allows the

Government a reasonable time to respond. Cf. King v. United States, 492 F.2d 1337,

1345 n.27 (7th Cir. 1974) (indicating that district court on remand should allow

agency flexibility in meeting requirements of section 555(e) to prevent delay of

parole board decisions).

The cases plaintiffs cite as establishing a contractual obligation for a timely and

good faith response, George A. Fuller Co. v. United States, 108 Ct. Cl. 70, 69 F. Supp.

409 (1947), and Wah Chang Corp. v. United States, 151 Ct. Cl. 41, 282 F.2d 728 (1960),

also assume a “reasonable time” standard. The court in Fuller expressly

distinguished its facts (Government failure to timely furnish promised materials)

with “reasonable delays due to making changes * * *.” 108 Ct. Cl. at 100, 69 F. Supp.

at 414 (emphasis added). In Wah Chang, the court found an even broader exception

to the “quick response” standard urged here by plaintiffs—sovereign actions taken

by the United States for the greater public good. 151 Ct. Cl. at 50-51, 282 F.2d at 734.

Also see Tri-Cor, Inc. v. United States, 198 Ct. Cl. 187, 220-21, 458 F.2d 112, 131

(1972) (what is “reasonable delay” depends on circumstances of particular case) cited

in Sun Oil Co., 217 Ct. Cl. ___, 572 F.2d 786, 804 (1978), id. at ___., 572 F.2d at 805

n.26.

A-25

On the record before us, we have to conclude that the

delay here, in view of the crisis produced by the oil spill,

was reasonable.%4 After the spill, there was a need to

gather and evaluate additional data on the environmental

risks of drilling in the Santa Barbara Channel. Secretary

Hickel’s temporary suspension of drilling and task force

review of each lease was justified by the then-existing

circumstances and fully supported by the subsequent

enactment of the National Environmental Policy Act of

1969 (effective January 1, 1970). 42 U.S.C. §§ 4321-4332

(1976); see Union Oil, 512 F.2d 743, 749-50 (9th Cir. 1975).

Such an environmental review takes time, as we noted in

Sun Oil, 217 Ct. Cl. ___., 572 F.2d 786, 804-05 & nn. 25-27

(1978). As in Sun Oil, we find no support for the view that

Interior’s delay in this case was overly long. Pauley’s

February 11th application was received in the local

Interior office on February 17, 1969, and held in abeyance

pending the Department’s environmental review. By

March 1, 1969, Secretary Hickel sent a telegram to all

lessees requesting additional geological data, and on March

25th OCS Order No. 10 (see Part I, B, supra) was

promulgated, establishing new standards for drilling appli-

cations.25 By April 1, 1969, the Secretary cleared some of

the leases he had suspended from operations in February.

In sharp contrast to the steady progression of the

Interior Department’s review is plaintiff's own conduct.

Pauley did not respond to the Secretary’s March Ist

telegram requesting information until early April, just

before suit, and even then gave only a partial reply (see

Part I, B, supra); and in Pauley’s correspondence in March

with the Interior regional office the lessees made no

mention of or inquiry about the February drilling applica-

tion. Further, they made no attempt to inquire about the

** To repeat what this court has earlier observed concerning a similar delay: “The

point, which plaintiffs (Sun Oil, et al.) seem to lose sight of, is that the blow out gave

rise to a ‘whole new ball game.’ " Sun Oil, 217 Ct. Cl. at ___, 572 F.2d 786, 804 n.24

(1978).

28 OCS Order No. 10 terminated a prior order setting standards for drilling

permits, OCS Order No. 2. Although Order No. 10 was not made expressly

retroactive, plaintiffs made no attempt to inquire into the order's application to

Pauley’s February 11th application. See Part I, B, supra.

A-26

possible application to their permit request of the newly-

promulgated OCS Order No. 10. See note 25, supra. Then,

on April 9th, this suit was abruptly begun, and Interior

could rightly assume (particularly since plaintiffs did not

indicate otherwise) that the February 11th drilling applica-

tion was no longer being pressed.

Plaintiffs also see a breach in the special clearance

procedure initiated by the Secretary in February 1969.

These procedures, as we have said, involved the collection

of additional physical data by a federal task force, a review

of the particular lease with recommendations to be

forwarded to Washington, where the Secretary himself

would decide whether to clear the lease. Once cleared, the

lessees could then apply for further drilling permits from

the regional office, which could grant permits under the

standard procedures. See Part I, B, supra; cf. Sun Oil, 217

Ct. Cl. ___, 572 F.2d 786, 802-03 & n. 19 (1978). Plaintiffs

describe these procedures as a “sham” and a facade to

cover “arbitrary and ad hoc” bureaucratic actions, conceal-

ing Interior’s shutdown of all future drilling. This descrip-

tion of Interior’s procedures is a gross mischaracterization,

lacking the clearly convincing evidence required to refute

the presumption of government regularity and good faith.

See United States v. Chemical Foundation, Inc., 272 US. 1,

14~-15 (1926); Librach v. United States, 147 Ct. Cl. 605, 612

(1959); Sun Oil, 217 Ct. Cl. ___, 572 F.2d 786, 805 (1978).

Not only do plaintiffs fail to present clear and convincing

evidence of government deceit but the evidence points to a

diligent, albeit slow, government review. By April 1, 1969,

within two months of Secretary Hickel’s February 7th

telegram suspending the five operating leases, clearance

‘was granted on four of the five leases. Clearance for the

fifth suspended lease, delayed by the lessee’s slowness in

supplying additional information, was subsequently grant-

ed. See Sun Oil, 217 Ct. Cl. ___, 572 F.2d 786, 802-05 (1968)

(description of same—or very similar—review process for

Sun Oil Company).

Plaintiffs then say that, even if clearance was granted,

this was meaningless because no one was actually allowed

to drill. As a factual matter this is incorrect. Sun Oil found

A-27

that Sun Oil’s platform drilling was resumed on its Jeases

on July 21, 1970; that Union Oil was allowed to drill to

drain certain reservoirs in June and July of 1969; and that

Phillips Petroleum was allowed to resume drilling per-

manently on its lease in April 1969. 217 Ct. Cl. ___, 572

F.2d 786, 797-98, 800, 805 n.27.26 Later on, there were

suspensions for other reasons but subsequent actions by

Interior as to other lessees with potentially different oil

spill problems do not indicate that the whole program was

a facade from the beginning. There are decisions involving

subsequent drilling delays by the Department, finding that

at least parts of those delays were valid. See Gulf Oil, 493

F.2d 141, 146-48; id. at 149 (petition for rehearing denied)

(9th, Cir. 1973); Union Oil, 512 F.2d 743, 746, 751-52 (9th

Cir’ 1975). In any case, whether other oil companies were

later prevented from drilling after their clearance was

granted is now irrelevant—the present plaintiffs did not

even try for the preliminary clearance and have no

grounds to complain of Interior’s actions beyond the

clearance stage.

Much is made of the Interior Department’s supposed

failure to tell the Pauley group, despite its inquiries, what

was actually required for clearance. But we are satisfied

(see Part I, B, supra, and Part III, C, supra) that plaintiffs

made no real effort either to find out the requirements or

to comply with those demands which it knew to exist. None

of the minor items of federal omission cited by plain-

tiffs—all before the start of this litigation on April

9th—show that the Pauley group was unable to obtain the

necessary information if it had really wanted to.2’ Even if

6 Plaintiffs attempt to distinguish these drilling resumptions by stating that until

1974 no drilling was allowed in the “politically sensitive mid-Channel area” seaward

of Santa Barbara, and ail drilling which was allowed was in areas located in the

“extremities” of the Channel. However, the Union Oil drilling took place on the Dos

Cuadras field, the very field that was the site of the January 1969 blowout that

polluted Santa Barbara beaches. Not only is the Dos Cuadras field physically closer

to Santa Barbara, but a more “politically sensitive” area is hard to conceive. See Sun

Oil, 217 Ct. Cl. _, 572 F.2d 786, 798 (1978). In any event, plaintiffs cannot escape

the ultimate fact that at least some companies which obtained clearance were able to

resume operations. If plaintiffs had gone through the required procedures for

clearance and still not been allowed to drill, we might have a different case.

27 It ws unclear whether the clearance procedures should have been published

A-28

we put to one side our conclusory finding that after mid-

March 1969 plaintiffs no longer wished to drill (see Part III,

C, 1, supra), the underlying findings leave the greatest

doubt that plaintiffs were interested in March-April 1969

in pursuing any further drilling or oil operations.

3. A separate aspect of the breach claim is the February

21, 1969 change in the regulations which is said to have

suddenly imposed the absolute liability standard for the

first time. Reasoning similar to that which supports our

denial of the frustration claim (Part III, A, supra) impels us

to reject this breach claim as well. In the short period

between February 21st and April 9th (when this suit

began), the situation was so fluid and so unclear, the

wording and application of the amendment so uncertain,

that plaintiffs could not properly deem their contracts

totally breached by the mere promulgation of the new

regulation. At the time they began this action so hastily,

plaintiffs could not properly say or show that the mere

publication of the new regulation actually changed their

liability or even if it might have that that change was more

than purely theoretical or merely temporary, without real

impact on their operations or their contracts—in short, the

change, if any, in the standard of liability was not so

definite, nor did it have so direct an impact, as to be an

anticipatory breach of the leases. And events since the

litigation began have not improved plaintiffs’ position on

that score.

Even if the Government had expressly and clearly

imposed, in February 1969, a new standard of absolute

liability and that new standard had been plainly applicable

to pre-existing lessees like plaintiffs, we would not think

that the lease-contracts had been violated. The contention

of breach invokes a lease provision that the lease was

subject to the Outer Continental Shelf Act and “* * * to all

lawful and reasonable regulations of the Secretary of the

Interior * * * when not inconsistent with any express and

under the Administrative Procedure Act or the Freedom of Information Act, as

amended, 5 U.S.C. § 552(ax 1) (1976). However that may be, plaintiffs cannot claim a

total breach-of-contract because of such a failure;-they could have obtained the

information if they had wished to press their February drilling application.

A-29

specific provision herein, which are made a part hereof”

(emphasis added). But plaintiffs’ 1968 leases (even as read

to incorporate the then-existing regulations) did not

expressly or specifically cover the problem of liability for

oil spills—especially not the standard of responsibility for

damage to third parties. See Part ‘III, A and B, supra.

Accordingly, a new regulation explicitly establishing abso-

lute liability would not be “inconsistent with any express

and specific provision” of the leases.?8

We also have to take it, on the present record, that such

an express regulation would be “lawful and reasonable.”

As we have pointed out, the Continental Shelf Act

provides:

The Secretary may at any time prescribe and amend

such rules and regulations * * * in order to provide for

the prevention of waste and conservation of the natural

resources of the outer Continental Shelf * * * and,

notwithstanding any other provisions herein, such rules

and regulations shall apply to all operations conducted

under a lease issued or maintained under the provisions

of this subchapter. 43 U.S.C. § 1334(aX(1) (1970).

The Ninth Circuit, faced with precisely the same lease

provision in Union Oil, held that it did not preclude the

Secretary from issuing new regulations and applying them

to current leaseholders, but that the Secretary could not

cancel a lease based on a violation of a new regulation. 512

F.2d at 748-49. In Sun Oil this court analyzed the same

lease provision and concluded that the Secretary would be

liable under the lease only if his actions constituted an

“* * * unbridled, unjustified and unreasonable interfer-

ence” with lease rights. 217 Ct. Cl. at ___, 572 F.2d at 802.

Plaintiffs have not shown that in the circumstances

here—assuming, as we now do, that neither the leases nor

the original regulations covered the topic of the standard of

liability—the creation of absolute liability for pre-existing

28 If we are wrong and such a new regulation would be inconsistent with the lease

or with the prior law, then the new regulation would be unenforceable against

plaintiffs and the latter could defend against claims based on the new regulation. We

do not consider that mere promulgation of such an unforceable and invalid

regulation would be enough for the lessees to declare a total breach of the leases.

A-30

leases would be an unjustified or unreasonable interference

by the Government with those contracts. The widespread

dangers of massive oil spills had been emphasized by a

series of accidents, the latest of which was the Union Oil

blowout. Plaintiffs do not tell us that the conservation and

waste provisions of the Act would fail to support such a

regulation in this situation, and we can presume that there

would be adequate statutory authorization. The truth is

that the major problems an existing lessee might encounter

from such an express creation of a new standard of

absolute liability would flow, not from the new regulation

itself, but from the absence of insurance—a problem for

which in this case the Government was in no way

responsible.

D. Taking: Plaintiffs likewise maintain that the Secre-

tary’s new regulations and clearance program (which they

perceive as totally suspending all rights to use their leases)

constituted a fifth amendment taking of the leases. It

suffices in answer that, even if we accepted plaintiffs’

characterization of the facts (which, as discussed above, we

do not), there could be no such taking. Plaintiffs fail to

meet at least one of the prerequisites for a constitutional

taking—the requirement that the taking be authorized by

Congress. In order to establish a constitutional taking,

plaintiffs must show that the officer committing the

alleged taking has either express or implied legislative

authority to take the property. See, Hooe v. United States,

218 U.S. 322, 335-36 (1910); United States v. North

American Transp. & Trading Co., 253 U.S. 330, 333 (1920);

Regional Rail Reorganization Act Cases, 419 U.S. 102, 127

n.16 (1974); Coast Indian Community v. United States, 213

Ct. Cl. 129, 147-48, 550 F.2d 639, 649 (1977); Sun Oil, 217

Ct. Cl. ___, 572 F.2d 786, 819 (1978). See generally, 2

NICHOLS’ THE LAw oF EMINENT Domain, § 6.1 at 3-4 (rev.

3d ed. 1976).

Here, the Outer Continental Shelf Act contains no

authority for the Secretary to take property by completely

and indefinitely halting all ‘drilling (as plaintiffs’ claim

that Secretary Hickel did). Section 12(c) provides the only

express power for the Secretary of the Interior to suspend

A-31

.all operations, but this applied only during a war or

national emergency upon a recommendation by the Secre-

tary of Defense. 43 U.S.C. § 1341(c) (1970); see Sun Oil, 217

Ct. Cl. ___, 572 F.2d 786, 819 (1978).29 Sections 5(b) and &(i)

allow the Secretary to cancel leases, but only for violations

of regulations in force at the time of the lease issuance or

upon proof of fraud in the transaction. 43 U.S.C. § 1334(b)

(1970); id. at § 1337(i); see Union Oil, 512 F.2d 743, 747-48

(9th Cir. 1975). Nor is there any implication of a

congressional authorization to the Secretary to suspend all

drilling indefinitely. The Ninth Circuit in Union Oil

concluded:

Although 30 C.F.R. § 250.12 provides expressly that a

“suspension” shall be limited in time only by the

Secretary’s judgment that the environmental threat has

ended, and although 43 U.S.C. § 1334(aX1) authorizes

regulations providing not only for suspensions but for

any other action affecting operations which the Secre-

tary determines “necessary and proper” and “conserva-

tion of natural resources,” Congress clearly did not

intend to grant leases so tenuous in nature that the

Secretary could terminate them, in whole or in part, at

will. [footnote omitted]. 512 F.2d at 750.

The Court of Appeals concluded that the Secretary had no

implied authority to condemn leaseholds or to prohibit

their beneficial use: “But Congress no more impliedly

authorized the Secretary to take the leasehold by prohibit-

ing its beneficial use than by condemnation proceeding. A

suspension for which the fifth amendment would require

compensation is therefore unauthorized and beyond the

Secretary’s power.” 512 F.2d at 751.30 Sun Oil quoted parts

of the Union Oil decision and agreed with the Ninth

Circuit’s holding. 217 Ct. Cl. ___., 572 F.2d 786, 819 (1978).

29 Although the 1978 amendments to the OCS Lands Act (not applicable here) do

provide a new, broader authorization for cancellation of leases, the Secretary's power

is carefully circumscribed. See Outer Continental Shelf Lands Act Amendments of

1978, Pub. L. No. 95-372, § 204, 92 Stat. 629, 636-40 (to be codified in 43 U.S.C. §

1334).

30 Although the court in Union Oil went on to discuss whether the Secretary's

actions in that case constituted a “taking,” this language was not inconsistent with

the court's earlier analysis of the authority issue. Cf. Sun Oil, 217 Ct. Cl. ___., 572

F.2d 786, 819 n.50 (1978).

A-32

There is no reason to alter our conclusion. Plaintiffs cite

some other statutes as a possible basis of the Secretary’s

authority, but these have no pertinence.3! Nor is this a case

in which there has been legislative ratification of thereto-

fore unauthorized activity. It follows, even on the errone-

ous assumption that the Secretary suspended plaintiffs’

operations indefinitely and entirely, that there was no

constitutional exercise of the eminent domain power.

We have found that the Secretary did in fact suspend

plaintiffs’ drilling rights for a very short period, but we

have also held (see Part III, C, supra) that such a temporary

suspension was authorized by the Outer Continental Shelf

Act and reasonable in the circumstances. See Sun Oil, 217

Ct. Cl. ___, 572 F.2d 786, 802 (1978); Union Oil, 512 F.2d

743 (9th Cir. 1975); Gulf Oil, 493 F.2d 141, 144 (9th Cir.

1973). This short, temporary suspension was plainly not so

severe a property deprivation as to constitute a fifth

amendment taking. See United States v. Central Eureka

Mining Co., 357 U.S. 155, 168 (1958); Johnson v. United

States, 202 Ct. Cl. 405, 479 F.2d 1383 (1973); cf. 43 C.F.R. §

3383.5(a) (1969) (providing for abatement of rents and

royalties and extension of the lease term during a

suspension ordered by the Secretary).%2

E. Partial breach claim: On April 10, 1978, after this

case was ready for oral argument, plaintiffs belatedly filed

a motion to add a fifth count for recovery for a partial

breach. The counts on which the case had been earlier tried

and briefed were either for rescission, or taking, or a total

31 Eg. 40 U.S.C. § 257 (1976) grants any officer of the government power to

acquire land by condemnation “In every case in which the * * * [officer] has been, or

hereafter shall be, authorized to procure real estate for the erection of a public

building or for other public uses * * *” (emphasis added). Independent authority

must be shown. 16 U.S.C. § 760f (1976) did provide the Secretary of the Interior (now

transferred to the Secretary of Commerce) with authority to acquire lands, but only

for the purpose of that subchapter—studying migratory marine fish.

32 Plaintiffs have not asked for a refund of the proportionate part of the rents for

1969 attributable to the period from February 11, 1969 (when they filed their drilling

application) to April 9th (when they commenced the suit), and therefore we need not

consider whether 43 C.F.R. § 3383.5(a) (1969) applies_to this situation. Nor, for

obvious reasons, have plaintiffs sought a comparably short extension of their basic

five-year lease-terms which expired in 1973.

A-33

breach.33 The new partial breach claim was based on the

supposition that, although the Government had completely

suspended all drilling in 1969 for an indefinite period, by

1974 the Government had lifted its suspension in reaction

to the decisions in Gulf Oil and Union Oil, and to the

energy crisis. According to plaintiffs, this alleged suspen-

sion from 1969 to 1974 allows them to recover, if not for a

total breach, then for a partial breach; compensation for

such a partial breach, they say, would be delay damages

(said to be some 39 million dollars), plus an extension of

their leases for the over four-year length of the asserted

suspension. Defendant vigorously objects to the proposed

amendment, and because of the motion’s lateness the

matter is within the court’s discretion. We do not stop to

weigh whether we should exercise that discretion in

plaintiffs’ favor because our discussion of the original

claims of total breach shows that the new demand for

partial breach is also without merit. The factual predicate

of the new claim is that the Government suspended all

drilling in the Santa Barbara Channel from 1969 until

1974, and we have already rejected that position insofar as

plaintiffs are concerned. The motion to amend is therefore

denied.

IV.

Summary

Each of the legal theories advanced by plaintiffs is

ultimately premised on a single basic perception of the

circumstances—that the Secretary’s new liability regula-

tion, alone or together with the Department’s inaction on

the Pauley group’s drilling application and the Departmen-

tal clearance program, effectively shutdown plaintiff's

drilling and operations in the Santa Barbara Channel for

an indefinite period. It is on that hypothesis that plaintiffs

justify their filing of this suit so relatively soon after the

Union Oil blowout late in January 1969. We have come to a

33 The claims for total breach we have considered and rejected above in Part III, C.

A-34

different conclusion—that the liability regulation of Febru-

ary 1969, the delay in acting on plaintiffs’ drilling

application, and Interior’s clearance program were all

interim and temporary reasons, not unreasonable in the

situation at that time, which were taken in the immediate

aftermath of a major environmental disaster in the

Channel and did not absolutely or indefinitely foreclose

future operations by plaintiffs. On this view, all of

plaintiffs’ claims—whether frustration, mutual mistake,

total or partial breach, or taking—must fail.

True, plaintiffs paid some 73 million dollars plus annual

rent for leases with a minimum five-year term and drilled

only for eleven months, but this unhappy result was

ultimately the product of their own rush to this court.

Plaintiffs did not try to ascertain the effect on them of the

new liability regulation nor did they wait to see if (as in

fact actually happened within six months) the government

might change the ambiguous regulation. They did not

attempt to comply with the new clearance procedures in an

attempt to have their leases cleared (as did other Channel

lessees). They did not pursue their drilling application.

Instead, in the midst of a transition period of great

uncertainty, they quickly made the worst possible in-

terpretations of the government’s actions and came at once

to this court with claims that the lease-contracts were

wholly at an end and that they were entitled to receive

back their entire investment, at the least, and possibly over

300 million dollars in lost future profits.

As a court of law, we cannot give plaintiffs any relief

because they had no legal rights, vindicable here, when

they brought suit, and have not acquired any in the course

of the litigation. Perhaps the legislative or executive

branches could, as a matter of grace or policy, extend their

lease-terms to permit them to drill further (if they still

wish to) in the effort to discover oil in commercial

quantities, but of course we cannot take that step.™ .

34 Congress has recently amended the Outer Continental Shelf Lands Act to deal

with some of the problems which have surfaced in this litigation. Congress

established a fund to pay for oil spill cleanup costs and damage liabilities to private

third parties; the President was also directed to review whether private oi! pollution

A-35

For the reasons given in this opinion, we hold that

plaintiffs are not entitled to recover and that their petition

must be dismissed.

CONCLUSION OF LAW

Upon the foregoing opinion and upon the findings, the

court concludes as a matter of law that plaintiffs are not

entitled to recover and that the petition is dismissed.

insurance was reasonably available. Outer Continental Shelf Lands Act Amend-

ments of 1978, Pub. L. No. 95-372, §§ 301-305, 92 Stat. 629, 670-78 (1978).

ITEM B

Order of Court of Claims

dated January 24, 1979

(Amending Certain Findings)

A-37

IN THE UNITED STATES COURT OF CLAIMS

No. 197-69

PAULEY PETROLEUM, INC., ET AL

Ve

THE UNITED STATES

Before DAVIS, NICHOLS, KUNZIG, BENNETT AND

SMITH, Judges, en banc

ORDER

This case comes before the court on its

own motion, and this order has relation to

footnote number one which appears in the

opinion rendered this date by the court.

IT IS ORDERED this date that said footnote

is amended by adding at the end of the first

sentence thereof the following phrase:

"with minor modifications."

IT IS FURTHER ORDERED that the modi-

fications therein referred to are those as set

forth in the attached appendix to this order.

BY THE COURT

Oscar H. Davis

Judge, Presiding

January 24, 1979

A-38

APPENDIX

Modifications to trial judge's findings

as provided for in the court's opinion of this

1) Pinding 19(£) at p. 12: Strike

entirely and replace with: " In 1968

Secretary Udall created a buffer zone

seaward of the state sanctuary. The

government excluded oil leasing and

Grilling activities from this area. In

1969, after the Union Oil blowout, Secre-

tary Hickel renamed the initial buffer

zone a "Federal ecological preserve” and

designated additional areas as a new

buffer area."

_ 2) Finding 61(g), table at p. 68: Strike

table entirely and replace with attached

table.

3) Pinding 70(0) at p. lll: At line 6

strike figure of "$2,196,787" and replace

with figure of "$2,916,787."

4) Pinding 70(0)(5) at p. 113: At line 3

strike "1.3 and 1.5 percent" and replace

with "13 and 15 percent."

A-39

5) Finding 72(f) at p. 117: At line 14

omit comma after word "channel" and replace

with period. Strike the following re-

maining language on lines 14-16:". . . and

as late in his tenure as September 15,

1970, that channel lessees had not drilled

because they had not been granted permits."

6) Finding 75(b) at p. 122: At line 23

omit comma after word "changes" and

replace with period. Strike remaining

language in that sentence: ". .. and

also a copy of Pauley's letter of protest

about-the new regulation."

A-40

Tract 375

Oil Barrels Gas (thousand cubic feet)

—I—S™_=_=aE|=a>E>aEaEaq_S]|—||||—=—]|S|S|S|S|S=S=—=—===_=

Total Primary Total Primary

& Secondary Primary & Secondary Primary

South Structure

Middle Pico

South flank

Ist zone 18,540,814 ( 12,265,050) 2,961,651 ( 7,137,666)

2nd zone 2,452,903 ( 1,585,500) 755,014 ( 1,222,897)

3rd zone 12,409,992 ( 7,999,118) 5,363,011 ( 6,616,676)

North flank -

lst zone 11,610,050 ( 7,962,304) 1,149,866 ( 3,870,017) ITEM C

2nd zone 6,861,567 ( 4,480,200) 1,745,728 ( 3,148,249)

3rd zone 7,666,334 ( 4,892,477) 2,845,967 ( 4,193,531)% Order of Court of Claims

aa hag 9,89 3 ( 7,199,843) 8,156,336 ( 12,837,975) | —_— oer

Nort ? 1,17 ? , a | b] 1 ? ’

7 . (Denying rehearing)

Upper Miocene

South flank 232,772,143 (140,701,033) 133,552,024 (235,557,420)

Monterey

South flank 137,322,075* (137,322,075) 186,758,000 (186,758,000)

North Structure

(within 375)

Upper Repetto 51,011,907 ( 30,125,142) See n.** ( 72,835,899)

Upper Miocene 55,205,875* ( 55,205,875) 168,316,583 (168,316,583)

Sespe 43,261,512* ( 43,261,512) 185,737,228 (185,737,228) |

Tract 384

North Structure

(within 384) :

Upper Repetto 91,712,570 ( 54,303,496) See n.** (130,328,390)

Upper Miocene 22,879,250* ( 22,879,250) 69,756,287 ( 69,756,287) :

Sespe 16,024,092* ( 16,024,092) 68,796,772 ( 68,796,772) ])

* The reservoirs in these uctive horizons are not considered to be receptive to sec-}

ondary recovery operations. us, figures shown in the column headed “Total Primary &

Secondary” are the same as those in the column headed “Primary”.

** Total primary and secondary gas reserves for Tracts 375 and 384 in this formation

im the North Structure are 103,133,472 MCF.

a 7 Te an

Ai

IN THE UNITED STATES COURT OF CLAIMS

é No. 197-69

PAULEY PETROLEUM, INC., ET AL

Ve

THE UNITED STATES

Before DAVIS, Judge, Presiding, NICHOLS,

ITEM D

Report of Trial Judge

dated March 19, 1976

KUNZIG, BENNETT AND SMITH, Judges, en banc

ORDER

This case comes before the court on

plaintiffs’ motion, filed March 2, 1979, for

rehearing pursuant to Rule 15l(b), with re-

ference to the opinion entered herein on

January 24, 1979, dismissing the petition.

Upon consideration thereof, together with the

response in opposition thereto, without oral

argument.

IT IS ORDERED that the plaintiffs’ said

motion for rehearing be and the same is

denied

BY THE COURT

Oscar H. Davis

Judge, Presiding

April 6, 1979

A-43

IN THE UNITED STATES COURT OF CLAIMS

TRIAL DIVISION

No. 197-69

(Filed: March 19, 1976)

PAULEY PETROLEUM INC., COLORADO OIL AND

GAS CORPORATION, MESA PETROLEUM CO.,

MCCULLOCH OIL CORPORATION OF CALIFORNIA,

J. M. HUBER CORPORATION, and HUSKY

OIL COMPANY OF DELAWARE,

Plaintiffs,

MIDWEST OIL CORPORATION, ASHLAND OIL AND

REFINING COMPANY, KEWANEE OIL COMPANY,

MACDONALD OIL CORPORATION, and FOREST OIL

COMPANY ,

Involuntary ,plaintiffs,

V.

THE UNITED STATES

Defendant.

REPORT OF TRIAL JUDGE TO THE COURT

John P. Chl, attorney for plaintiffs. i.

Richard Schumacner, of counsel. Jonn P. Chl

attorney for Ashland Oil and Refining Company

and Macdonald Oil Corporation; James W. licDade,

attorney for Forest Oil Company; Walter Perry

Dornaus, attorney for Kewanee Oil Company;

Oscar E. Swan, Jr. and Charles Bruce, attorneys

for Midwest Oil Corporation.

Myles E. Flint and John 4. Germeraad,

attorneys for defendant, with whom were Assis-

tamt Attorney General Kent Frizzell and Deputy

Assistant Attorney General Walter Kiechel, Jr.

A-44

PINDINGS CF FACT

Pursuant to the order of the court

dated November 10, 1975, HOGENSON, Trial Judge,

finds the following facts:

1. Plaintiffs who commenced this suit by

filing their petition on April 9, 1969, are

corporations, with office locations as follows:

Pauley Petroleum Inc. (Pauley), Los

Angeles, California;

Colorado Oil and Gas Corporation

(Colorado), Denver, Colorado;

Mesa Petroleum Co. (Mesa), Amarillo,

Texas;

iicCulloch Oil Corporation of California

(McCulloch), Los Angeles, California,

now named McCulloch Oil Corporation;

J. M. Huber Corporation (Huber),

Denver, Colorado;

Husky Oil Company of Delaware (Husky),

Calgary, Alberta, Canada, formerly

Husky Oil Company.

Huber is a New Jersey corporation. The others

are Delaware corporations.

2. (a) ‘The petition alleges that five

other corporations own partial interests in one

A-45

or both of the two oil and gas leases subject

of tnis suit. Such corporations, nerein called

involuntary plaintiffs, and their office

locations, are as follows:

Midwest Oil Corporation (Midwest),

Fort Worth, Texas;

Kewanee Oil Company (Kewanee),

Tulsa, Oklahoma;

Ashland Oil & Refining Company

(Ashland), Oklanoma City, Oklahoma,

now Ashland Oil, Inc.;

Macdonald Oil Corporation (Macdonald),

Dallas, Texas;

Forest Oil Corporation (Forest),

Denver, Colorado.

They are corporations respectively of Nevada,

Delaware, Kentucky, Delaware and New York.

(6b) Defendant's answer filed July 25,

1969, admits the alleged partial ownerships of

these five involuntary plaintiffs, and asserts

that they are indispensable parties to this

suit.

(c) On motion of the original plain-

tiffs, the court caused notices to be served on

the five involuntary plaintiffs, advising them

A-46

of the pendency of this action and directing

them to appear and assert their interests.

(d) By appropriate pleadings, filed

between September 11, and October'13, 1969,

each of them appeared, asserting partial

ownership of one or both of the leases, and

requesting that if an award be made in favor of

the original plaintiffs, a like award be made

for such involuntary plaintiff in proportion to

its interest in the leasehold tracts.

(e) The present interests of the

plaintiffs-in each of the leases are as herein-

after detailed.

3. (a) The two oil and gas leases, suoject

of this suit, were entered into on Marcn l,

1968, between Pauley and certain other plain-

tiffs, as lessees, and Gefendant, as lessor,

acting by its Bureau of Land iianagement,

Department of the Interior.

(6) The leases, numbered OCS-P-0218 and

OCS-P-0226, cover respectively tracts 375 and

384 of submerged lands on the Outer Continental

Shelf in the Santa Barbara Channel off the

coast of California. Each tract is three miles

A-47

square, containing 5,760 acres. Tract 384 lies

adjacent to 375 to the north. They form

together a rectangular area of 18 square

miles, 6 miles long and 3 miles wide.

(c) The original lessees and their

respective percentange interests in the leases

were as follows:

Lessee Tract 375 Tract 384

Pauley 25.341 31.250

Colorado 15.340 15.625

Huber 12.500 15.625

Husky 12.273 10.000

Midwest 12.273 12.500

Kewanee | 10.000 2.500

Ashland 12.273 12.500

100.000 100.000

Pauley's respective interests in the two tracts

included a 10 percent interest in each of them,

being held by Pauley in its name for J. Ray

McDermott, Inc. (iicDermott).

4. (a) Subsequent to the execution of

the leases, various assignments were made of

interests therein. Such assignments were

authorized by the terms of the leases, and

cromptly approved by defendant.

A-48

(0) In April 1968, Pauley assigned

portions of its interest in tract 375 to

Macdonald and Mesa.

(c) In April 1968, Kewanee exercised

its option to expand its interest in tract 384

to 10 percent, and accordingly, Pauley, Colorado,

Huber, Ashland and midwest assigned vortions of

tneir respective interests in that tract to

Kewanee.

(d) In March through ay 1968, Pauley

assigned portions of its interest in tract 334

to ifesa, Macdonald McCulloch and Forest.

(e) In Cctooer 1968, Pauley assigned

the 10 percent interest in each of the leases,

which it was holding for McDermott, to the

latter's Subsidiary, TransOcean Oil, Inc.

(TransOcean).

(f) After these 1968 assignments,

the lessees and their percentage interests

in tracts 375 and 384 were as follows:

A-49

Lessee Tract 375 Tract 384

Pauley 8.841 6.000

Colorado 15.340 12.500

Mesa 2.500 2.500

McCulloch -0- 2.500

Huber 12.500 12.500

Husky 12.273 10.000

Midwest 12.273 10.000

Kewanee 10.000 10.000

Ashland 12.273 10.000

Macdonald 4.000 4.000

Forest -0- 10.000

TransCcean 10.000 10.000

Se In March 1969, TransOcean

sold and assigned its 10 percent interest

in tract 375 for a total price of $50,000

in varying proportions to Pauley, Mesa and

Macdonald.

(d) In March 1969, TransCcean

sold and assigned its 10 percent interest

in tract 384 for a total price of $50,000

in varying proportions to Pauley, Forest,

Mesa, McCulloch and Macdonald.

(c) In Cctober 1969, Kewanee sold and

assigned its 10 percent interest in tract 375

in varying proportions to Pauley, dusky, Mesa,

Colorado, and Macdonald for a total price of

$25,000.

A-50

(d) Since the last of the above-men-

tioned assignments, the bercentage interests of

the various plaintiffs (original and involuntary)

in tracts 375 and 384 have been and now are as

follows:

Plaintiff Tract 375 Tract 384

Pauley 21.001 8.789

Colorado 17.340 12.500

Mesa 5.500 3.500

McCulloch -0- 3.662

Huber 12.500 12.500

Husky 14.273 10.000

Midwest 12.273 10.000

Kewanee -0- 10.000

Ashland 12.273 10.000

Macdonald 4.840 4.400

Forest — -0- 14.649

100.000 100.000

6. (a) The ocean waters of the Santa

Barbara Channel extend some 70 miles in an

east-west direction. They are bounded on the

north by the California mainland coast extending

fram Point Conception on the west to the city

of Ventura on the east.

(6) Santa Barbara, California, is

located on this stretch of coastline, about 25

miles west of Ventura.

A-51

(Cc) East of Santa Barbara, the coast

curves southeasterly to Ventura, and then

extends southerly, forming the eastern boundary

of the channel.

(d) At the southeastern end of the

channel lies its entrance from the south,

where the channel waters are about 10 miles

wide, lying between Port Hueneme on the main-

land coast and Anacapa Island.

(e) The southern boundary of the

channel is marked by an east-west string

of islands, fairly close in succession,

first Anacapa, and in turn to the west, Santa

Cruz, Santa Rosa and San Miguel Islands.

(£) All of these islands are parts

of California.

(g) Fran its entrance between Port

Hueneme and Anacapa Island, the channel

broadens immediately to distances of from

20 to 30 miles between each of the other

islands and the California mainland coast.

(h) At is western end, where tne

mainland coast turns northerly at Point

A-52

Conception, the channel Opens broadly into the

Pacific Ocean.

geet ) eee Prolonged controversy existed

between the United States and California

concerning title to the Submerged lands in

the Santa Barbara Channel, and defendant

did not undertake to lease any of such lands

until 1966.

(5) In 1947, the Supreme Court held

that the United States, not California, held

title to the lands underlying the Pacific Ocean

Seaward of the ordinary low-water mark on the

coast of California, outside of inland waters.

United States vy. California, 332 u.s. 19, 787,

804 (1947). ‘The Court expressly stated that

the basic difference between the Parties was

which government, federal Or state, had the

rignts in and power of control of vast quant i-

ties of oil and gaS underneath the suomerged

lands.

(Cc) The term "inland waters” was not

defined, and Shortly litigation ensued Detween

the United States and California as to whethez

the Santa Barbara Channel and other waters were

A-53

such. While this case was still pending, two

significant Federal statutes were enacted.

(dq) In 1953, by the Submerged Lands

Act, 67 Stat. 29, the United States made a

general cession to each state with an ocean

coastline (Atlantic, Pacific, or Gulf of

blexico) of submerged lands offshore within 3

miles, or as far beyond that as a state's

boundary extended offshore when such state

became a member of the Union. California

thus acquired title to those lands extending 3

Miles under the Pacific Ocean fram its coast-

line. The term "coastline" was defined in part

as meaning "the line marking the seaward

limit cf inland waters":

(¢) In the same year, dy the Outer

Continental Shelf Lands Act, 67 Stat. 462, the

United States declared that it held title to

those shelf lands seaward from the submerged

lands ceded to the various coastal states by

the Submerged Lands Act. The Secretary of the

Interior is and was authorized to lease such

lands on the Outer Continental Shelf thus

established. The legislative history shows

that the Congress had the basic purpose to

“A-d4

provide a leasing policy to encourage the

discovery and development of the ail potential

of such lands, and the Act directs the Secre-

tary of the Interior to prescribe rules and

regulations relating to leasing of such lands

and aS to operations under any such lease.

(£) In 1965, the Supreme Court

decided the case involving the Santa Barbara

Channel, and on January 31, 1956, issued its

formal decree. The Court held and decreed that

the channel was not "inland waters," and that

the United States held title to the channel's

suomerged lands, except that California owned

those contiguous to its mainland ccast and to

the coasts of its islands bordering the channel,

within the 3-mile limit provided by the Sub-

merged Lands Act. United States v. California,

381 U.S. 139 (1965), 382 U.S. 448 (1966).

(g) Tne Cuter Continental Shelf in

the channel is fringed on the north and east by

the 3-mile limit of California submerged lands

off its mainland cyxast, and on the south by

such limit off its border islands. Along and

around such islands, the 3-mile limit is a

continuous, though irregular, line, because the

islands in succession are less than 6 miles

A-55

apart. Of course, the OCS lands extend out of

the channel at its southeast entfance and

also at the broad western expanse of the

channel into the main body of the Pacific

Ocean.

8. (a) The first lease sale by defendant

of a submerged tract on the Outer Continental

Shelf in the Santa Barbara Channel occurred on

December 15, 1966. This was a special sale of

one tract, authorized by Secretary of the

Interior Udall and advertised for bids, pending

completion of a general program for lease sales

of Federal. tracts in the channel.

(b) The tract involved was located

immediately adjacent to a California suomerged

tract off the mainland coast from Carpinteria,

a coastal community intermediate between Santa

Barbara and Ventura. Standard Oil and Atlantic-

Richfield, as lessees of the California tract,

were producing oil from a field, known as

Carpinteria Orfshore (sometimes Serena), which

underlay both tracts. This field was discovered

in 1966.

(c) To avoid Grainage of oil from the

Federal cortion of the field by continuing

A-56

production fram wells on the California tract,

defendant conducted a sale of its tract..

(d) Phillips Petroleum, Continental

Oil and Cities Service, with a high bid of

$21,189,000, obtained lease OCS-P-0166 covering

the tract.

(e) Pauley, Colorado and Huber, and

two other oil companies, submitted an unsuccess-

ful bid on such tract.

9. (a) Pursuant to a California statute

enacted in 1955, which authorized the state to

lease lands up to 3 miles offshore, California

leased a number of submerged tracts along the

Mainland coast of the Santa Barbara Channel.

(5) Prior to that time, production of

Oil -nad occurred from offshore extensions of

four mainland fields, Rincon, Summerland,

Elwcod and Capitan, witn wells drilled fram the

Shore. The first two were located between

Ventura and Santa Barbara, and the latter two a

few miles west of Santa Barbara.

A-d7

(c) California's first offshore

production platform was set in place above the

waters of the Santa Barbara Channel over the

newly discovered Summerland Offshore oil

field in 1958. The tract involved is located

offshore (within the 3-mile limit) between

Carpinteria and Santa Barbara, adjacent to the

one on which the Carpinteria Offshore field was

discovered in 1966.

(d) Several additional offshore

fields (oil or gas) were discovered in the

3-mile belt seaward of the channel's mainland

shore -- Gaviota (gas) in 1958; Cuarta (oil)

and Conception (oil) in 1959; Waples (gas) in

1960; Coal Oil Point (oil) in 1961; Alegria

(oil)> Caliente (gas) and Molino (gas) in 1962;

and South Elwood (oil) in 1966. These fields

are spaced offshore along the mainland coast

between Santa Barbara and Point Conception.

10. (a) About 60 natural seeps of oil and

gas have existed for many years offshore and

along the margin of the Santa Barbara Channel

between Ventura and Point Conception.

{

3

H

}

4

A-58

(6) The major seepage is off Coal Oil

Point, a few miles west of Santa Barbara, where

16,250 barrels of oil escape into the waters

each year. Near the shore at Santa Barbara are

eight of such seeps. A concentration of

Seeps exists off Point Conception. Five seeps

occur in the channel near the border islands.

ll. (a) During and prior to the bidding

period, and after the OCS channel general lease

Sale, it was commonly known that earthquake and

Shipping hazards existed in the channel with

respect to petroleum exploratory and develop-

mental activities.

(0) The channel is a seismically

active area, naving two major faults and

numerous minor ones. ne of the major faults

is the Oakridge fault which crosses subject

tract 384, as hereinafer described. since

1900, the channel has experienced numerous

minor earthquakes, and two in excess of magni-

tude 6 on the Richter scale.

(c) In mic-1968, a swarm of relatively

small earthquakes occurred in the eastern half

Or the channel, and about a dozen of them were

A-59

of magnitude 4, or larger, with the largest

scaling 5.2.

(d) Earthquakes of magnitude 6 or

more are expected to occur within the channel

area, with several of such events within the

next century. At or near its epicenter, such

an earthquake has the force, directly by

vibration or by causing ground ruptures, sea

waves, landslides or turbidity of water currents,

to destroy or seriously damage man-made struc-

tures, and to fracture or break underground

entrapment structures of oil pools, permitting

oil to rise and escape into the channel waters.

Such an earthquake could sever well casings,

fracture submerged pipelines, dislodge wellhead

installations, and destroy or damage platforns.

12. (a) The established coastwise shipping

lanes along California traverse the Santa

Bardara Channel. As mapped and promulgated by ©

the United States Coast Guard, the north-

bound and southbound lanes are each 1 mile

wide, with a 2-mile strip between them. The

northbound lane, being the closer of the two to

the mainland, oasses about 1/2 mile south of

the southern edge of tract 375.

A-60

(6) The channel sometimes experiences

heavy fogs and occasionally storms causing high

seas.

(c) During drilling operations on

tract 375, freighters passed close to the

drilling vessel involved.

13. (a) The channel area has in general a

mild climate. Beaches and other recreational

facilities exist along the coasts of Santa

Barbara and Ventura Counties, the two mainland

counties bordering the channel, with scenic

mountainous terrain near the sea.

(b) The tourist trade is large.

Boating, surfing and sport fishing are major

attractions. Commercial fishing operations are

substantial.

14. The channel area is a wildlife habitat.

tlany seals and sea lions populate the channel

islands. Numerous grey whales migrate northward

through the channel in February and March and

southward in November and December.

A-61

15. (a) The Federal leases accomplished

on the Outer Continental Shelf in the channel

cover most of the eastern half.

(b) In the western halr, there is a

large central area of unleased lands, fringed

on the north and south by east-west zones of

leased tracts, each extending between the

central area and the 3-mile limit of California

submerged lands.

(c) Defendant's leased tracts nave

water depths in the main on the order of

magnitude of 250 feet, being shallower toward

the shore, but progressively deeper toward the

unleased central area where water depths plunse

to 1,800 feet.

(d) Subject tract 384 has water

depths increasing from 220 to 340 feet from

northeast to southwest. Subject tract 375 has

water depths of 300 feet in its northeast

quarter, increasing to acout 360 feet in its

central area, progressively deeper south-south-

westerly to a maximum of 750 feet in the

extreme southwest corner.

A-62

(e@) The leased lands on the Outer

Continental Shelf in the Gulf of tkxico have

considerably shallower waters and extend much

farther offshore than the Federal tracts in the

Santa Barbara Channel.

16. (a) Following the determination in

1965 that defendant owned the Outer Continental

Shelf lands in the channel, the Department of

the Interior undertook to develop a plan for

the development of the oil and gas resources

generally believed to exist in such lands.

(b) Considerations prompting early

Feaeral action were that the Pacific Coast

region was an oil deficit area dependent upon

oil imports from the Gulf Coast, from Alaska,

and from overseas to complete recuirements,

that the troubled state of affairs in the

Middle East threatened continued Supplies of

Oil on the world market, and there existed a

great need for additional Federal revenues to

meet the demands of the Vietnam war and to

finance domestic programs.

17. (a) Prior to 1965, California had

authorized, and a number of oil companies had

A-63

Grilled "core holes" in the OCS lands of the

channel. Such holes varied in depth from

3,000 to 6,000 feet. A “core hole” is a

relatively shallow exploratory well, the

logging of which provides clues as to the

nature of the underground formations. The data

obtained under the California program was

available to some, but not all, potential

bidders for Federal leases.

(b) To avoid competitive disadvantage,

the Department of the Interior in November 1965

authorized a “twinning” program whereby oil

companies drilled 53 "core holes," duplicating

to that extent those previously permitted by

California. Eacn twin hole was located within

100 feet of the state hole, and was limited to

the same depth.

-18. (a) Gm December 29, 1966, Secretary

cf the Interior Udall caused a notice to be

published in tne Federal Register, asking oil

companies to nominate or designate in a non-

binding way Federal tracts in the channel,

which would be of interest to them in bidding

for leases. The purpose was to furnish

a guide to defendant in determining wnat tracts

to offer for lease. On February 27, 1967,

A-64

Pauley, after consultation with Colorado and

Huber, nominated tracts 375 and 384 among

others.

(6) At the same time, the Secretary

issued a press release which stated that leases

resulting from nominations would carry adequate

safeguards for protection of natural beauty and

aquatic life in the offshore area.

19. (a) Ecological and aesthetic factors

were considered by defendant in planning the

ceneral lease sale.

(6) Secretary of the Interior (dall

made inquiries of his staff concerning possible

effects of earthquakes on drilling operations

in the channel. ke received what he deemed

adequate assurances in that regard.

(c) At two meetings held at Santa

Barbara, California, and at Washington, D.C.,

Interior officials met with and heard the views

of Santa Barbara reoresentatives. Assistant

Secretary Moore, head of the Mineral Resources

Division which included the Geological Survey

responsible for administration of leases on the

A-65

Outer Continental Shelf, made a tour by helicop-

ter along the mainland coast of the channel,

and ooserved the platforms over the state sub-

merged lands, as well as the one on the Federal

drainage tract. He saw what he described as

Slicks or sheens on the water, which he ascribed

to oil from natural seeps. |

(d) California hac established and

was maintaining, without any leasing, the Santa

Barbara Oil Sanctuary, a l6-mile stretch of its

3-mile strip of suomerged lands along the

coastal area of Santa Barbara. City representa-

tives expressed concern that Federal leasing of

tracts adjacent to the state sanctuary would

result in construction of platforms which would

spoil the beauty of the area. They urged

estadlishment of a Federal reserve area seaward

of the state sanctuary.

(e) Another factor considered by

Interior officials, wnich was discussed with

California state officials, was that operation

of any wells on adjacent Federal tracts

would drain oil from any reservoir extending

under tne state sanctuary.

A-66

(£) Secretary Udall established the

Federal Ecological Preserve and the Federal

Suffer Zone, which in succession extended a few

miles seaward from the state sanctuary. Some

tracts in such areas were nominated by various

oil companies, but not offered for sale, except

for one tract, on which bids were received and

rejected by defendant.

20. (a) The Santa Barbara Channel general

lease sale, as recommended by Assistant Secre-

tary Moore and approved by Secretary Udall, was

accomplished in early 1968 after com-

petitive bidding.

(6) The official notice of "Oil and

Gas Lease Sale," published in the Federal

Register on December 23, 1967, called for

submission py February 6, 1968, pursuant

to section 8 of the Outer Continental Shelf

Lands Act, 67 Stat. 462, 468, 43 U.S.C. § 1337,

and the regulations issued thereunder, 43

C.F.R., part 3380, of sealed bids to the

Manager, Pacific Coast Outer Continental Shelf

Office, Bureau of Land Management, Los Anceles,

California, for the lease of oil and gas in 110

numbered and descrided tracts in the Santa

Barbara Channel. Subject tracts were included.

A-67

(c) The notice indicated that the

lease agreement would be the Bureau of Land

Management's standard form 3380-1 (February

1966).

(d) The notice provided that a

separate bid was to be submitted for each

tract, that bids would be considered on the

basis of the highest cash bonus offered for a

tract, to be not less than $15 per acre, and

that defendant reserved the right to reject any

and all bids even though they exceeded such

minimum. The notice further stated that

leases would provide for a royalty rate of

one-sixth, and a yearly rental or minimum

royalty of $3 per acre. It also stated:

All leases issued pursuant to tnis

offer will be subject to the special

‘conditions of Geological Survey Supervisory

Order No. 9, which orovides tnat platforms

will be of sufficient size to accommodate

20 or more weils and that platforms will

be of acceptable design, properly camou-

flaged, and suopject to such other condi-

tions as may be prescribed to protect

yey 28 Sat haat eee te

S¥iem > Get Ge - ae bt

oe)

A-68

aesthetic values. Operations uncer sucn

leases will also be subject to provisions

for the protection of fishing coper-

ations and aquatic values.

The referenced order became Pacific Regional

CCS Order No. 9 on January 3, 1968, when

promulgated over the signature of the Super-

visor, Pacific Region, Oil and Gas Branch,

United States Geological Survey.

(e) With respect to various designated

tracts located in the western half of the

channel, the notice provided that the lessee

would be subject to the stipulation that lessee

assumes all risk of damage to sersons and

property on the leased premises, which occurs

by reason of activities of defendant being

conducted aS a part of activities of the Air

Force western Test Range, regardless of fault

or negligence by defendant, and whether or not

based upon any concept of strict or absolute

liability or otherwise; and that lessee agrees

to indemnify defendant against any such claims.

(£) The Air Force western Test Range

was located at Vandenberg Air Force Base in the

A-69

vicinity of Point Conception. The tracts made

subject to the stipulation were 24 or more

miles west of plaintiffs’ tracts 375 and 384.

21. (a) The lease sale was held, as

scheduled, on February 6, 1968, and defendant's

Bureau of Land Management shortly issued leases

covering 71 tracts in the Santa Barbara Channel,

and collected aggregate bonus payments of

$602,719,261.

(0) The leased tracts were generally

the same size and shape as plaintiffs' tracts,

being each 3 miles square, containing 5,760

acres. Variations were due generally to the

irregularity of the 3-mile limit lines of the

California tracts.

(c) Following the sale, Secretary

Udall issued a press release, extolling the

investment by the petroleum industry of its

money and talent in the development of the

domestic resource base in a period of concern

over the balance of payments posture of the

United States, stating that undoubtedly much of

tne competition in the sale stemmed from a

realization that new domestic supplies were

ee

A-70

needed for a burgeoning domestic energy market,

particularly significant in the crude deficit

region of the Pacific Coast, and commenting

that the Santa Barbara Channel area had been

under intensive geologic investigation for

several years, that more was known about it

than any comparably sized area along the entire

coast of the United States, and that competitive

interest is significantly heightened when

sound geologic data is available to indicate

high mineral potential.

22. (a) Pauley and the other original

lessees of subject leases submitted the highest

bids of $43,503,147 and $30,351,447 respectively

on tracts 375 and 384, wnich were accepted by

defendant. These amounts, recited in the

leases as consideration therefor, were paid, at

Or cefore the execution of such leases, to

defendant py Pauley on behalf of itself and the

other lessees.

(0) In addition, eacn lease required

payment in advance of an annual rental of $3

per acre for 5,760 acres, or $17,280 per year.

(Cc) Prior to each of the first four

lease years, commencing respectively on iiarch 1

A-71

of 1968, 1969, 1970 and 1971, Pauley paid to

defendant, on behalf of itself and the other

lessees, the respective annual rentals for each

tract. Tnus, the total advance payments of

rentals paid on each tract amount to $69,120.

(d) At the conclusion of the trial of

this case, the annual rental payments for the

fifth year of the primary terms of subject

leases had not become due and had not been

paid.

(e) For the third and fourth lease

years, commencing respectively on Marcn 1 of

1970 and 1971, each rental payment was made

"without prejudice to the rights of the

lessees," and defendant cashed the payment

cnecks witnout comment.

+23. (a) Prior to incorporation in 1959,

the Pauley company was owned and operated by

Edwin W. Pauley as an individual. In 1950 and

1951, ne conducted seismic surveys in the Point

Conception area of the channel. In 1956, his

company was the operator for a group, including

Petroleum, which explored California channel

lands within the 3-mile limit along the mainland

——-

A-72

coast. Pauley ran some 900 miles of seismic

surveys of such submerged lands between Santa

Barbara and Point Conception, drilled about

100 core holes in that area to depths of 2,000

to 3,000 feet, employed geologists to dive and

recover about 2,000 rock samples from the ocean

floor, and had geologists prepare mappings of

onshore areas adjacent to such channel lands.

(0) In 1958, the Pauley-Phillips

group obtained California oil and gas leases of

two tracts of such channel lands, tract A acout

15 miles west of Santa Barbara, and tract £

near Point Conception, and in 1962, a lease

covering tract 9A several miles west of tract

A.

(c) Pauley discovered the Naples gas,

the Conception oil and the Molino gas fields,

oreviously mentioned, respectively on tracts A,

E and 9A. Prior to acquisition, Pauley drilled

seven and five core holes respectively on

tracts A and —. After acquisition, Pauley

drilled seven and 12 exploratory wells respec-

tively on tracts A and E. The third well

drilled on tract A was a discovery well. Tract

A-73

9A has four producing gas wells, completed on

the ocean floor, with pipelines to shore.

(d) Pauley's previous experience in

otfshore oil exploration included operations

off the coasts of Mexico and Louisiana in the

Gulf of Mexico, off Long Beach, California, and

in the Persian Gulf.

24. (a) In anticipation of a Federal

leasing program, Pauley in 1966 entered upon an

extensive program exploratory of the OCS lands

in the Santa Barbara Channel.

(6) On December 14, 1966, Pauley

entered into a joint venture agreement with

Colorada and Huoer covering this program.

Pauley made available to Colorado and Huber

exploratory data which it had already acquired,

and the three agreed to share in proportion to

their respective interests the costs of further

exploratory operations in the channel area.

(c) Pauley neld a 3/4 interest, ana

Colorado and Huber each a 1/8 interest in the

joint venture. Pauley was reserved the right

to have additional joint venturers snare

its interest.

A-74

(d) Pauley was designated as the

operator of the program. The agreement stated

that Pauley's total costs on the exploratory

program to October 1, 1966, were $1,466,555.

As agreed, Colorado and Huber reimbursed Pauley

in proportion to their respective shares, and

each paid Pauley $183,200.

(e) The joint venture agreement

provided the terms of an operating agreement to

become effective if leases were obtained.

25. (a) From February to the fall of

1966, pursuant to the Federal "twinning"

program, Pauley and other companies participated

with Continental Oil Company, with the latter

as Operator, in drilling 22 core holes in the

eastern half of the channel, acquiring total

core hole information of 96,000 feet.

(5) From December 1966 to February

1967, Pauley joined with Texaco in drilling

five twin core holes, and with Mobil for three

core holes, all in the eastern half of the

channel.

A-T5

(c) In addition, information relating

to other core holes was obtained by Pauley by

trades with other companies. Pauley had data

on a total of 76 core holes in the OCS channel

lands prior to its bidding in February 1968.

Eight of such holes were drilled on or near

tracts 375 and 384.

(d) Pauley had available and used the

sonic electric, the induction electric, and the

density electric logs, the mud logs and the

diometer logs, all made in the drilling of the

core holes, and also analyses of sidewall

samples made, and paleontologin reports of

cuttings and omer samples to determine age of

the rocks at varying depths.

26. (a) In 1966 and 1967, Pauley ran some

2,308 miles of seismic survey lines extending

east-west and north-south over the Federal

channel lands, except in the deep central

area in the western half of the channel.

Seismologic interpretations were prepared fran

the soundings made and recorded. On tracts 375

and 384, the original survey lines were

—— Se ee ——™

A-76

1/2 mile apart in a grid pattern, and some

additional lines were run.

(b) Seismologists use seismic data to

make a determination as to the structural

configuation and depths of subsurface rock

layers, and this is submitted to geolo-

gists to aid them in deciding whether geologic

Structures exist which could entrap oil.

Pauley employed that procedure senerally, and

particularly as to tracts 375 and 384.

(c) The survey vessel tows seismic

equipment, which includes an energy source,

such a. an electric arc, which at intervals of

a fer seconds emits a wave of energy which

penetrates the ground through successive rock

layers. At each of the successive interfaces

between rock layers, part of the energy of the

wave is reflected, due to velocity change, and

is returned to geophones, or receivers, also

being towed by the vessel.

(d) Recordings are made of time lags

between each emission and its successive

reflections. As the vessel moves along a

orescribded course, variations in such time lags

indicate changes in tne Gepths of rock layers.

A-T7

(e) Qly primary reflections, each

having a direct course from the energy source

to a particular interface and back to the

receiver, are usable in the seismic mapping.

The interpretation of the seismologist is

complicated by the necessity to eliminate

multiple reflections which in their courses

have gone back and forth between interfaces,

reverberations between the bottom and the

surface of the sea, diffractions, refractions,

ghosting and random noise. The seismologist

makes adjustments to his mapping, called

migrated sections, because of the return at an

angle of primary reflections from an inclined

rock layer, to show the true vertical position

of soundings.

27. (a) Dr. Burdette A. Ogle, Ph.D in

geolosy, 1951, University of California (Berke-

ley), was retained in January 1967, by the

rauley-Colorado-Huber group, and made a study of

the onshore part of the Ventura Basin extending

50 miles eastward from the Santa Barbara

Channel, from the north margin of the basin

into the Santa Monica Mountains. The area

studied had a large number of producing oil

wells.

A-78

(0) The channel is the offshore

extension of the Ventura Basin, which is a

large east-west sedimentary basin with its

onshore areas to the north and east of the

channel. The basin is bounded on the north by

the Santa Yenz Mountains, on the east by the

San Gabriel Mountains, on the south by the

Santa Monica Mountains, with the southern

boundary extending througn the channel islands,

and with the western boundary coterminous with

the western end of the channel. The basin is

Characterized by anticlinal trends and large

reverse faults, extending in an east-west

direction, and some 60 fields along sucn trends

are or have been producing oil, with the

Majority of production being onshore.

(c) In nis study, Dr. Ogle obtained

detailed infomation as to the geologic trends

on snore, which might be projected as continuing

offshore into the channel. Such information

concerned types and deoths of rock layers,

their contour features, such as anticlinal,

synclinal, faulted, or otnerwise, and the

existence of sands and trapping structures

He used the records of 100 wells, selected fron

200 which had been drilled in the area of

study.

A-79

(4d) An expert petroleum geologist,

specializing in the finding of oil and gas, Dr.

Ogle had had considerable experience in handling

petroleum exploration programs, waS managing

partner of a firm of consulting geologist, a

leader in various associations of petroleum

geologists, and author of publications in that

field. ie had extensive experience in the

study of the Santa Barbara Channel, surrounding

onshore areas, and other oil-producing areas of

Southern California.

(e) In January 1967, he had completed

preparation of a composite mao of the regional

structural trends and oil fields in the Ventura

Basin, showing projections of some of the

trends into the Santa Barbara Channel. On such

map, he marked four areas in the channel, which

he concluded offered the best potential for

offshore exploration, one of such areas covering

the locations of tracts 375 and 384.

(f) With the aid of Robert N. Hacker,

another consulting geologist, Dr. Ogle spent 7

months on the study for the Pauley group, and

in September 1967, submitted 20 large sheets of

drawings, which set forth 13 cross sections of

A-80

geologic structural formations across the

basin, structure mapping, and stratigraphic

correlation charts prepared from well logs.

(¢) Dr. Ogle's submissions and his —

consulting services were used by the Pauley

group in the preparation of bids on tracts 375

and 384, as well as other tracts.

(h) Dr. Cgle had brought Huber into

the Pauley group in 1966, and he then obtained

and n~y holds a 2 percent interest in Huber's

Share of gross sales of oil and gas from

each of subject leases. After the execution of

such leases, ne provided consulting services to

Huber, Midwest, Colorado and Forest on the

drilling operations conducted by Pauley,

aS operator, on tracts 375 and 384.

-28. (a) Absent an unconformity in a

particular location, due to erosion or lack of

continuity of deposition, the successively

deeper strata or geologic formations and their

respective ages of deposition in the Ventura

Basin, and particularly in the Santa Barbara

Channel, are as follows:

A-81

Formation Age

Upper Pico Pleistocene

Middle Pico Pliocene

Lower Pico

Upper Repetto

Repetto

Upper Miocene Miocene

Monterey

Rincon

Topanga-San Onofre

Vaqueros Ol igocene

Sespe

Alesria

Llajas Eocene

(b) Dr. Ogle advised the Pauley group

that the Sespe formation had major potential

for offshore production of petroleum, that all

three Pico and the Repetto formations were

orime objectives, and that the Upper iiiocene,

fractured Monterey, Topanga, Vaqueros, and

Eocene formations had potential for offshore

production. His advice was based upon his

study for the Pauley group, and upon his

knowledge from previous investigations that oil

tields in or near the Ventura Basin were

producing from various of such formations.

ae Mar! POE Le eka

A-S2

29. (a) The West Montalvo oil field,

which has produced 30 million barrels of oil

with ultimate yield expected to be 50 million,

islocated on the mainland coast of the channel,

partially offshore, a few miles south of

Ventura, California, and about 15 miles east of

tracts 375 and 384.

(6) The Oakridge fault extends along

the northernmost edge of this field and

continues offshore across the northern part of

tract 384.

(c) The Oakridge-Montalvo trend is

cne of two major onshore anticlinal trends

which extend east-west through the Ventura

Basin into the channel, each passing through

mainland oil fields. The Oakridge-iMontalvo

gasses through the west Montalvo field and the

supject tracts, extending through the eastern

half of the cnannel.

(d) Lying to the north of the Oakridge-

Montalvo trend, the Rincon trend is the other

major onshoce-offshore trend. Just before

entering the channel, the Rincon trend passes

A-83

through three adjacent coastal oil fields, the

Ventura Avenue, the San Miguelito, and the

Rincon, the latter being partially offshore,

and then continues westerly in succession

through the offshore Carpinteria (sometimes

Serena), the offshore Dos Cuadras, and other

offshore oil fields in the northernmost part of

the channel to Point Conception.

(e) The major syncline of the Ventura

Basin extends east-west and lies between the

Rincon trend on the north and the Oakridge-

Montalvo trend on the south, both onshore and

offshore.

(f) Four other significant east-west

anticlinal trends in the Ventura Basin are the

Three-Mile, the Five-Mile the Pitas Point, and

the Simi-Oxnard trends. The first two named

are’ short trends in the western half of the

channel, a few miles off the mainland coast,

and to the south of but near the Rincon trend

in that area.

(g) The Pitas Point trend is also a

relatively short trend located in the eastern

nalf of the channel, with no indications of

A-84

onshore existence, but it is closely parallel

to the Rincon trend, immediately south thereof,

and north of the major syncline.

(h) The Simi-Oxnard trend, with only

probable projections into the channel along the

channel islands, is a major east-west onshore

anticlinal trend, extending south of the

Oakridge—Montalvo trend. On the Simi-Oxnard is

the Oxnard oil field, located to the southeast

of the west Montalvo field, with other oil

fields easterly on the trend.

(i) There has been substantial

production of oil and gas from the Rincon

trend, both onshore and offshore, from the

Oakridge-Montalvo onshore, and from the Simi-

Oxnard onshore, with some from the offshore

Three-Mile trend. There has been no production

from the offshore Pitas Point and Five -Mile

trends, although discoveries of oil and gas

have been made on the latter.

(j) The South Mountain oil field has

been the most productive on the Oakr idge—Montalvo

trend, with 121 million barrels produced. ‘The

Rincon has been the most productive of the

trends in the basin. Its Ventura Avenue

A-85

field has produced 740 million barrels of oil.

The Oxnard oil field is the most productive on

the Simi-Oxnard trend, having produced 31.8

million barrels.

(k) Production in the Rincon trend

has been primarily from the Pico and Repetto

formations, and in the Oakridge-Montalvo, from

the Pico and Sespe formations. [Ihe Pliocene

formations in the Oakridge-viontalvo have not

been as productive as on the Rincon trend,

because of the Revetto formation is thinner on

the Oakridge-ontalvo than on the Rincon.

(1) In the area ot the Ventura Zasin

lying east of the City of Santa Sarbara, the

majority of production has been from the Pico

and Repetto formations of the Pliocene age,

with some from the Miocene. In the area west

of the City, production is fran the Vaqueros

and Sespe formations of the Oligocene age.

(m) The offshore Dos Cuadras oil

field on the Rincon trend is the one on which

the Union oil well blowout and oil spill

occurred, hereinafter mentioned. Such field

is about 6 miles south-southeast of the central

part of the coast of Santa Barbara, California.

——

A-86

It is adjacent to the Federal Econological

Preserve, and only about a mile from fram the

Santa Barbara Oil Sanctuary. It is about 7

miles north-northwest of the northernmost

boundardy of subject tracts.

(n) The lease (OCS-P-0241) of the

tract (402) on which the Union oil well blowout

occurred was acquired from defendant by Union

Oil, Gulf Oil, Texaco and Mobil at the general

channel lease sale of February 6, 1968.

30. (a) In 1965, Dr. Ogle made a study of

the West Montalvo oil field, considering

possible development of the field to the south,

and found that in the northern part, the

major oil production was from the Sespe forma-

tion, with oil also produced from the Repetto,

and gas from the Middle Pico, and that in the

southern part, there was oil production from

the Sespe.

(6) The Sespe was generally 4,000

feet thick in this area, and the producing

zones were generally from 1,000 feet below the

top of the Sespe to its base. Oil production

from the Sespe was from separate fault blocks,

A-87

formed by the updip fault being intersected by

various cross faults, with displacement being

from 50 to 100 feet, with each fault block

being a "piece of pie" structure at a different

interval of depth in the Sespe.

(c) Oil as trapped in such blocks,

and production occurred from them, even though

Sespe sands at higher levels were water wet, as

much in some places as the upper 2,000 and

3,000 feet of the Sespe.

(ad) This same structural trapping of

oil in the Sespe below water wet sand occurred

in the South Mountain oil field, east of West

Montalvo on the Oakridge-Montalvo trend,

and in the Oxnard field, southeast of West

Montalvo.

- 31. As part of Pauley's preparation to

bid, a miniature submarine was employed by

geologists to make observations of the ocean

floor in the area extending from the northwest

side of Santa Cruz Island to Santa Rosa Island,

and geologists worked as scuba divers there, to

help project the geology of the islands out

into the center of the channel.

A-88

32. (a) Following the formation of the

Pauley-Colorado-Huber group, Pauley during 1967

endeavored to enlarge the number of participants

in its Santa Barbara Channel venture, and

contacted over 100 other oil companies. None

made any commitment until defendant had published

its notice of the lease sale on December 28,

1967. Shortly thereafter, a number of such

companies undertook an intensive review

of the data Pauley had developed on the channel.

(b) On January 23, 1968, Pauley,

Colorado, Huber, Husky, Midwest, Kewanee and

Ashland executed a letter of intent concerning

suomission of joint bids on channel tracts.

(c) On January 29, 1968, these same

companies and McDermott and Forest entered into

a joint bidding agreement, with Pauley designated

as initial operator of any lease in which it

acquired and interest. A proposed operating

agreement was attached. For business reasons,

McDermott desired to be unknown as a bidder,

and it was agreed that McDermott's portion of

any bid would be made in Pauley's name.

(d) By agreements made during February

2-5, 1968, Pauley assumed a portion of Forest's

A-89

obligations, and assigned some of its interest

to Mesa and Macdonald under the bidding agree-

ment.

(e) Prior to bidding, representatives

of the companies in the bidding group met at

Pauley's office in Los Angeles, and after

hearing the proposals of each company, decided

the channel tracts on which to bid, and the

amounts of the bids. Pauley's president was

chairman of the meeting. He was authorized to

vary the agreed amount of each bid by approxi-

mately one percent.

(£) Bidding together or in various

combinations, the originallessees (Pauley,

Colorado, Huber, Husky, Widwest, Kewanee and

Ashland) suomitted bids on 1l tracts and

exposed in excess of $150 million at the sale.

33. On their successful bids on tracts 375

and 384, the respective bonuses of $43,503,147

and $30,351,447 paid to defendant for subject

leases were contributed by the various members

of the Pauley group as follows:

——

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A-91

34. These same members of the Pauley

group reimbursed Pauley for its prebid experndi-

tures on the Santa Barbara Channel venture to

the extent of $1,490,474, as follows:

Colorado ~ $ 249,427

Mesa 40,620

McCulloch 20 , 000

Huber 249,427

Husky 140 ,000

Midwest 140,000

Kewanee 140,000

Ashland 140,000

Macdonald 56,000

Forest 175,000

McDermott 140,000

(TransOcean

35. (a) Om February 7, 1968, the members

of the Pauley group on each of subject tracts

executed an operating agreement. As to each of

such tracts, Pauley was designated as operator,

and an Operating Committee was established,

composed of one representative to be named by

each member to exercise supervision and control

of all matters pertaining to exploration,

development and operations, with each member's

vote proportionate to its percentage interest

in the tract. As to each tract, the members

authorized the drilling, casing and testing of

one test well, with the well to be drilled toa

A-92

reasonable depth, not required to be deeper

than 10,000 feet, with any subsequent wells to

be approved by the Operating Cammittee.

(b) On or about February 19, 1968,

each member of the Pauley group duly filed with

defendant's Geological Survey a statement

designating Pauley as operator of subject

leases.

36. (a) During the ll-month period,

March 1, 1968 through January 3l, 1969,

the Pauley group expended $2,748,192 and

$1,177,104 respectively on tracts 375 and 384

for drilling and other operations to find oil

and gas.

(6) Such expenditures were ratably

allocable to the member companies under their

Operating agreements in accordance with their

respective interests in the leases.

(c) Of the total expenditures on

tract 375, TransOcean paid $274,819, as did

Kewanee, and of those on tract 384, TransOcean

paid $117,710.

37. (a) A Hydrocarbon reservoir exists

when certain essential geologic conditions

A-93

prevail in the subsurface. There must be a

trapping mechanism composed of impermeable

material, such as shale, overriding and en-

closing to some depth porous and permeable

material, such as sandstone, and there must be

commercially producible oil or gas contained in

the reservoir rock within the trap. Of course,

a geologic trap may exist without hydrocarbon

presence.

(Do) There are three major types of

traps, i.e., anticlinal, stratigraphic, and

fault traps, which individually or in combina-

tion have been the geologic structures which

have generally held pools or reservoirs of oil

and gas.

(c) Anticlinal trap. An anticline is

an upfold of rock layers which dip in opposite

directions from the crest of the fold, or in

all directions from an anticlinal dome. A

syncline is shaped like an inverted anticline,

and the downdip layers on one side of an

anticline are updip layers of an adjacent syn-

Cline. An anticlinal trap is composed of an

impermeable layer of rock overlying a porcus

and permeable layer in which hydrocarbons are

held within the arch of the anticline, with

A-94

horizontal enclosure of the reservoir rock

furnished by pinching out or fault blocking of

that layer against impermeable material, or by

continuity of the overriding layer in an

anticlinal dome.

(d) A typical stratigraphic trap

exists when a porous and permeable material

updips and terminates in a surrounding body of

impermeable rock, with horizontal enclosure

furnished by pinching out or fault blocking of

the reservoir rock. However, stratigraphic

traps, holding oil, are commonly found,

in which the sandstone reservoir rock is

completely enclosed by shale which was formed

from mud which enveloped separate areas of sand

in the deposition of sediments.

(e) Fault trap. A fault is a break

in the earth's crust, with major or minor

movement fracturing the once-continuous rock

layers along the plane of the fault, generally

inclined from the vertical. When substantial

displacement has occurred, the layers on

one side of the fault have moved upward or

downward in relation to the corresponding

layers on the other side. After the displace-

ment, a fault trap exists when a porous and

A-95

permeable layer, updipping on one side of

the fault, is blocked by an impermeable layer

on the other side, and when other conditions

are present, such as the existence of trapping

mechanisms in other directions.

(£) Reservoir rock must have effective

porosity and permeability, to permit the

holding and transmission to the well bore of

economically producible amounts of hydrocarbons.

Consolidated sandstone often has such characteris-

tics, and geologists refer to it as "sand" or

"Sands." In Southern California, it is

not uncommon for reservoir material to be

unconsolidated sands. Dense materials may be

interspersed through a hydrocarbon reservoir,

if effective porosity and permeability exist.

38. (a) Ronald G. Heck, with a B.S.

degree in geology in 1956, Brigham Young

University, and one year of postgraduate study

there, is a registered geologist of California,

and a certified petroleum geologist of the

American Association of Petroleum Geologists.

From 1957 to 1961, he was employed by Sun Oil

Company, doing wellsite geology and geologic

mapping in the Ventura Basin and other areas of

Southern California. From 1961 to late 1968, he

A-96

was employed by Pauley, and then joined Dr.

Ogle's firm of consulting geologists.

(b) Most of Heck's work with Pauley

was on the Santa Barbara Channel. He prepared

geologic maps of Pauley's tract 9A of California

channel lands, participated in the geologic

evaluation on Pauley's unsuccessful bid on

California channel tract 22A, and prepared

all of the geologic maps for Pauley's unsuccess-

ful bid on the first Federal channel tract

leased. He was Pauley's project manager on its

prebid exploration of the channel for the

Federal general lease sale.

(c) In such exploration program, he

prepared geologic maps showing the types,

depths and structures of formations existing in

various parts of the channel, and particularly

in and near tracts 375 and 384. He used the

migrated sections and seismic data of the

Channel surveying, interpretations of the well

logs of the core holes, valeontologic analyses

of cuttings and samples from the core holes,

and Dr. Ogle's study and projections of onshore

geologic conditions into the channel.

A-97

(d) Mr. Heck's maps indicated the

existence of trapping mechanisms in various

rock formations, which were known to be produc-

tive of oil and gas elsewhere in the Ventura

Basin, and which presumably would be productive

in the channel. These maps and support-

ing data were reviewed by the various companies

in considering whether to enter into a bidding

agreement with Pauley, and were used by Pauley

and the others who did submit bids.

(e) The electric logs (sonic, neutron,

induction and density) made available fram the

core hole drilling, like those later made by

Pauley in its postbid exploratory wells, were

recordings of measurements obtained by use of

technical equipment in each core hole. Such

recordings are used by well log analysts

to measure porosity (pore volume for accumula-

tion of fluid per unit of volume of each

formation), hydrocarbon saturation (percentage

of oil and gas of the fluid in a porous forma-~

tion), permeability (measure of ease or dif-

ficulty of fluid movement through a formation),

and resistivity (measure of extent of in-

vasion of drilling fluid, called mud, into a

formation).

A-98

(f) Interpretations of electric log

data are used by a geologist to identify

various formations, such as sandstone, silt-

stone, shale or limestone, and also to ascertain

the dip of a formation from one well location

to another.

(g) During drilling operations, a

fluid, called mud, is pumped into the pipe

composing the drill stem, from which the mud

flows out of an aperture in the bit assembly,

and returns in the bore hole outside the drill

pipe to the surface and into a mud pit for

further circulation. Before recirculation, gas

or oil shows contained in the mud from a

subsurface formation are removed. The mud

column has a hydrostatic pressure greater than

the subsurface formations encountered, to avoid

a blowout of the well, whenever possible. A

mud log is kept by the wellsite geologist.

It is a compilation of data indicated at

successive depths of drilling, such as varia-

tions in the rate of drilling (indicative of

changes in types of formations), types and

depths of rock as determined from cuttings

carried in the mud stream, shows in the mud of

oil or gas in a formation, and the taking of

sidewall or core samples or cuttings for

paleontologic or other analyses.

A-99

(nh) A dipmeter is a four-armed tool

inserted in the bore hole, which makes contact

with the sidewall at four points, measures the

resistivity of waters in the rock units, and

furnishes data, recorded on a dipmeter log,

from which calculations are made as to the

dip, strike and direction of trend of formations.

(i) Paleontologic analysis is a

determination of the geologic age of a rock

sample by microscopic observations of the

species of foraminifera therein. By classifica-

tion of foraminifera as to age of deposit,

paleontologists have established foraminiferal

zones in successively deeper formations, and by

microscopic examination, a rock sample can be

identified as taken from a particular zone of a

certain formation, e.g., zone 3l of the Middle

Pico of the Pliocene age.

39. (a) With respect to his prebid

Mapping of subject tracts, Mr. Heck prepared

two sets of geologic cross sections and contour

maps, one set covering subject tract 384 and

its adjacent tract 385 to the west, and the

other set, subject tract 375 and its adjacent

tract 376 to the west.

A-100

(b) As to tracts 384 and 385, he made

theee north-south cross sections, one each

across 384 and 385, and the third across tract

386, closely parallel to and coextensive with

the western boundary of tract 385. Each cross

section was along the pertinent part of a

north-south seis line which had been run by

Pauley.

(c) Cross section of tract 384. This

cross section extends north-south on seis line

32A across tract 384 near its western boundary,

and also includes that seis line in the northern

part of tract 375. Five core holes, each

drilled on or near the pertinent part of the

seis line, are drawn in accordance with their

relative locations, being spaced along the

cross section from north to south. The core

hole in the center of the cross section has a

total depth of 3,261 feet, the two to the

north, respectively 5,560 and 5,773 feet,

and the two to the south, 6,250 and 6,527 feet.

The cross section, with an overall depth of

11,000 feet, shows anticlinal structure of the

various formations, with the crest at the

center, and the formations dipping north and

south therefrom. The top lines of the Middle

Pico, Lower Pico, Repetto and the estimated top

A-10L

of the Miocene are shown. Mr. Heck drew such

lines, primarily using the pertinent migrated

section of the seis line, together with projec-

tion of onshore data, but with respect to

depths reached in the core holes, also used the

corresponding points shown on the electric logs

and paleontologic reports of cuttings to

determine the tops in each core hole and

project them from well to well through the

cross section. Two faults are shown, based

primarily on the seismic data, the Oakridge

fault thrust zone at the north end, and a

lesser fault at the south end of the cross

section. Each fault was penetrated by one of

the core holes. Gas shows were indicated in

the lower depths of the core hole at the center

of the cross section. A large central block was

drawn aS an area of assumed accumulation of

hydrocarbons.

(d) Cross sections of tract 385. ‘Two

cross sections relating to tract 385 were

drawn, one along seis line 34A, extending

north-south a short distance west of tract 384,

and the other along north-south seis line 40A

across tract 386, closely parallel to the

western boundary of tract 385. Each of these

cross sections showed one nearby core hole,

ee

A-102

with respective depths of 5,032 and 5,719 feet.

These cross sections, each with an overall

depth of about 11,000 feet, also showed anti-

clinal structure of the subsurface formations,

with the crest near the center, and the contour

lines of the tops of four zones in the Middle

Pico, and of the estimated tops of the Lower

Pico, Repetto, and Miocene. The line 34A cross

section showed the Oakridge fault thrust zone

at its north end and also four minor faults,

with three minor faults shown on the line 40A

cross section. Displacement of formations

along fault planes are shown. A large block in

the center of the line 34A cross section, drawn

in the Pico and Repetto formations, is indicated

as the area of assumed accumulation of hydro-

carbons.

(e) Contour maps of tracts 384 and

385.. Using his pertinent cross sections, as

well as the seismic and other data, Mr. Heck

prepared four contour maps covering tracts 384

and 385 and the northern part of tract 375.

Each map portrays by contour lines the anti-

Clinal top of one of the four successively

deeper formations, there being one map for each

of the Middle Pico, Lower Pico, Repetto and

Miocene formations. Each formation is in

A-103

general shown as a domelike anticline, elongated

east-west through tracts 384 and 385. Fram

north to south, the structure lies between

the Oakridge fault thrust zone, extending

east-west through the northern parts of tracts

384 and 385, and the east-west synclinal axis,

extending through the northern parts of

tract 375 and 376. The crest of the structure

is located in the western half of tract 384 and

the eastern half of 385, with the dip of each

formation in all directions from the crest.

The successively deeper contour lines of each

formation around the overall structure are

generally displaced at fault lines, which are

shown to exist across or along the structure.

At 100-foot intervals, the contour lines on the

Middle Pico map are from depths of 3,500 to

5,000 feet; on the Lower Pico, 4,900 to 6,000

feet; on the Repetto, 6,200 to 7,500 feet; and

on the Miocene, 7,900 to 8,600 feet. On the

maps of the upper three of the formations, Mr.

Heck showed a large area in the crest of each

formation as assumed accumulation of hydrocarbons.

(£) In the same manner as on tracts

384 and 385, Mr. Heck prepared four north-south

cross sections with respect to subject tract

375 and its adjacent tract 376 to the west,

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three on 375 and ome on 376, each along the

pertinent part of a north-south seis line which

had been run by Pauley. .

(g) Cross section of tract 375 along

seis line 28. This seis line extends north-south

a short distance west of the east boundary of

the tract. This cross section, with an overall

depth of 6,500 feet, shows anticlinal structure

of the various formations, with the crest in

the southern half, and formations dipping

moderately to the north and sharply to the

south of the crest. Two major faults are

shown, ome at the center and the other at the

north end of the cross section, and in between

those two, two minor faults, with displacement

of the formations shown along the fault planes.

The tops of four zones of the Middle Pico,

and the tops of the Lower Pico, Repetto and

Miocene are portrayed. One core hole is drawn,

having a depth of 2,100 feet, located in the

northern half of the cross section.

(h) Cross section of tract 375 along

seis line 30. This seis line extends north-south

a short distance east of the center of the

tract. The cross section, with an over-

all depth of 7,000 feet, shows anticlinal

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structure like the cross section of this tract

along seisline 28. The same central major

fault, and one minor fault in the northern

half, are shown, with displacement along the

fault planes. The tops of four zones of the

Middle Pico, and the tops of the Lower Pico,

Repetto and Miocene are portrayed. One core

hole is located between the two faults, having

a depth of 4,900 feet, with oil shows below

4,800 feet, with a blowout of the well indicated

at total depth. A contour line just below the

top of the Repetto, updipping from the minor to

the major fault, and crossing the location of

the blowout of the core hole, is indicated as

the top of an oil zone in the Repetto.

(i) Cross section of tract 375 along

seis line 30A. This seis line extends north-

south a short distance west of the center of

the tract. The cross section, with an overall

depth of 6,900 feet, shows anticlinal structure

similar to cross sections of this tract along

seis lines 28 and 30, except that the crest is

at the center. The central major fault is

Slightly off the crest on the north dip or

flank of the anticline, and a minor fault is

shown in the northern half. Displacements

along the faults are shown. The tops of four

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zones of the Middle Pico, the tops of the Lower

Pico amd Repetto, and the assumed top of the

Miocene are drawn. The Repetto is shown to

exist north of the major fault, and to a slight

extent on the crest, but not on the south dip

or flank of the anticline. - Between the two

faults, a contour line updipping fram the minor

to the major fault, is designated as the top of

an oil zone in the Repetto. One core hole is

shown on this cross section, having a total

depth of 3,402 feet, located toward the

southern end of the cross section. Oil and gas

shows occurred below 3,000 feet, and in that

zone of the Middle Pico, oil sands are indicated

on the cross section as existing in the dip of

the formation from the central fault to the

south end of the cross section.

(3) Cross section of tract 376

along seis line 34. This seis line extends

north-south on tract 376 a short distance west

of the west boundary of tract 375. The cross

section, with an overall depth of 7,000 feet,

also shows anticlinal structure like the three

cross sections of tract 375. A minor central

fault and a major fault at the north end show

displacement of the formations. The tops of

four zones of the Middle Pico, the tops of the

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Lower Pico and Repetto, and the assumed

top of the Miocene are drawn. One core hole,

with total depth of 6,527 feet, is shown,

drilled through the major fault at the north

end.

—— -

(k) Contour maps of tracts 375 and

376. $Using his pertinent cross sections, as

well as seismic and other data, Mr. Heck

prepared six contour maps covering tracts 375

and 376. They show an anticlinal structure of

the successively deeper formations, complicated

by faulting. As drawn, the structure terminates

at its east end at a major north-south cross

fault located at and near the eastern boundary

of tract 375. From the major cross fault, the

structure extends eastwest through the central

and southern parts of tract 375, and into the

central area of tract 376. The crestal area

of the structure is in the eastern half of

tract 375, adjacent to the major cross fault.

The successively deeper contour lines on each

map (drawn at 100-foot intervals of depth

terminate at the major cross fault, but other-

wise show dips of the formations rather sharply

te the north and south, and gradually to the

west, thus forming an elongated, but truncated,

anticlinal dome. There is one contour map

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for each of the tops of four zones of the

Middle Pico. For the first zone, the contour

lines are from 1,400 to 2,000 feet in depth;

for the second, from 1,700 to 4,000 feet; for

the third, from 2,000 to 4,500 feet; and for

the fourth, from 2,600 to 5,000 feet. On the

Lower Pico map, the contour lines drop from

flank of the overall structure, the contour

lines drop from 3,600 to 6,000 feet. the

Repetto map, showing only the north flank of

the overall structure, the contour lines drop

from 4,600 to 6,000 feet. Each map indicates

its formation as drawn to be an assumed area of

accumulation of hydrocarbons, except some

fringe areas of contour lines.

(1) Mr. Heck's cross section and

contour maps, relating to both tract 375 and

384, showed an anticlinal structure (the south

structure) extending through the central

and southern parts of tract 375, and another

anticlinal structure (the north structure)

through tract 384 and the northern part of

tract 375, with a syncline extending between

the north and south structures.

40. (a) Mr. Robert E. Rakestraw, B. E.

(1952) and M.S. (1962) in petroleum engineering,

+

a A

A-109

University of Southern California, a registered

professional petroleum engineer of California,

prepared Pauley's prebid engineering evalua-

tions of tracts 375 and 384, as well as others,

in consultation with other personnel, and in

reliance on Mr. Heck's geologic maps, with

their assumed accumulations of oil amd gas.

(b) Mr. Rakestraw had nad considerable

experience for 12 years as an evaluation,

production and reservoir engineer employed by

“Richfield Oil Corporation, now Atlantic

Richfield Company, in oil fields in Southern

California. He thereafter served as a consul-

tant on such matters for the state of California

for one year and for the Government of Algeria

for several months. In 1967 and 1968, he was

employed by Pauley as Manager of Economics and

Evaluations, and from 1969 to the present, as

Manager of Production and Engineering.

(c) The prebid evaluations of tracts

375 and 384 related only to primary recovery of

oil and gas therefrom, i.e., that which would

result from the natural energy of gas expansion

within a reservoir. Secondary recovery is

accomplished by injection of energy which, in

conjunction with remaining natural energy, acts

es a ee *

A-110

to aco~mplish recovery of additional oil and

gas which would remain in a reservoir, not

otherwise producible after major reduction of

the natural energy. Secondary recovery may be

undertaken while primary production is in

progress. The commonly used method of secondary

recovery is injection of water, called water-

flooding, into the reservoir. Secondary

recovery by such method was included by Mr.

Rakestraw in his postbid evaluations of

tracts 375 and 384, as hereinafter related.

(d) As to the existence, locations,

depths, thicknesses, lithology, geologic

formations, and areal extents of oil and gas

reservoirs underlying tracts 375 and 384, Mr.

Rakestraw relied upon the geologic maps and

other data furnished by Pauley's geologists.

From this data, he computed the volumes

of reservoir rock.

(e) After the calculation of reservoir

volumes, the successive steps in the engineering

evaluation of an oil and gas field are: (1)

estimation of the volume of oil and gas

underlying the property and the amounts thereof

that can be produced; (2) projection of the

rate of production of such oil and gas over a

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period of years; (3) conversion of that produc-

tion into gross income based on existing market

values of oil and gas; (4) determination of net

income by subtraction of direct and indirect

costs to explore, develop and produce such oil

and gas; (5) calculation of the present worth

of the net income; and (6) application of a

probability of success (risk factor) to the

present worth.

(£) To accomplish the first two

steps, Mr. Rakestraw undertook by analogy to

other fields to ascertain the reservoir

characteristics of subject tracts. He obtained,

reviewed and analyzed production curves,

reservoir statistics, published reports and

corre

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