# Appendix — Pauley Petroleum, Inc. v. United States

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1979
- **Citation:** 444 U.S. 898

## Text

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

= Pitas eine &

1 POI ME ENB As Mb OA a me) eT et

PO et en Ee ae en

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 r

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_0506%3A2. Public record. Not legal advice.