Appendix — Ashland Oil, Inc. v. Phillips Petroleum Co.

79-1241

: Supreme Ouest,

In the Supreme Court of the United States 1 L E D

October Term, 1979 i.

x | FEB 11 (980

Ct a ee | : MICHAEL ROOAK, JR.,

ASHLAND OIL, INC.,

Petitioner,

VS.

PHILLIPS PETROLEUM COMPANY, and UNITED

STATES OF AMERICA,

Respondents.

APPENDIX TO PETITION FOR A WRIT OF

CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE

TENTH CIRCUIT

GERALD SAWATZKY

FouLSTON, SIEFKIN, Powers & EBERHARDT

700 Fourth Financial Center

Wichita, Kansas 67202

Jay W. ELstcn

FULBRIGHT & JAWORSKI

800 Bank of the Southwest Building

Houston, Texas 77002

JoHN M. IMEL

Moyers, Martin, Conway, SANTEE & IMEL

320 South Boston Building, Suite 920

Tulsa, Oklahoma 74103

ARLOE W. MAYNE

Ashland Oil, Inc.

1409 Winchester Avenue

P.O. Box 391 :

Ashland, Kentucky 41101

Attorneys for Petitioner Ashland Oil.

Inc.

February 8, 1980.

E. L. MENDENHALL, Inc., 926 Cherry Street, Kansas City, Mo. 64106, (816) 421-3030

INDEX

Opinion, United States Court of Appeals for the Tenth

Circuit dated October 15, 1979 (607 F.2d 335) ........ la

Judgment, United States Court of Appeals for the

Tenth Circuit entered October SEY 4a

Order Denying Petition for Rehearing dated November

BA tills 6a

Opinion on Rehearing En Banc, United States Court

of Appeals for the Tenth Circuit dated May 10, 1977

Oe Pe ONE) ca ee ee 8a

Panel Opinion, United States Court of Appeals for

Tenth Circuit dated January 27, 1975 0 43a

Judgment, United States Court of Appeals for the

Tenth Circuit entered wey 2 MF 60a

Memorandum Opinion, United States District Court for

the Northern District of Oklahoms dated December

28, 1978 (463 F.Supp. 619) 2 62a

Opinion and Judgment, United States District Court for

the Northern District of Oklahoma dated August 13,

1973, as corrected on August 31, 1973 (364 F.Supp. 6) 99a

Excerpts From Record Concerning Plaintiff’s Reliance

OM SURE ID icc caenacen ne ee 119a

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

Nos. 79-1009, 79-1096, 79-1108

(Consolidated)

ASHLAND OIL, INC.,

Plaintiff-Appellant,

Cross-Appellee,

V.

PHILLIPS PETROLEUM COMPANY,

Defendant-Appellee,

Cross-Appellant,

and

UNITED STATES OF AMERICA,

Intervenor-Appellee,

Cross-Appellant.

Appeals From The United States District Court For The

Northern District Of Oklahoma

(D.C. # 67-C-238)

(Filed October 15, 1979)

Gerald Sawatzky, Wichita, Kansas (John M. Imel, Arloe

W. Mayne, Lillian Williams, W. O. Strong III, and of

counsel, Foulston, Siefkin, Powers & Eberhardt, Ful-

bright & Jaworski, and Moyers, Martin, Conway,

Santee & Imel, on the brief), for Plaintiff-Appellant,

Cross-Appellee.

Don L. Jemison, Bartlesville, Oklahoma, and L. K. Smith,

of Boone, Ellison & Smith, Tulsa, Oklahoma (Kenneth

Heady and C. J. Roberts, on the brief), for Defendant-

Appellee, Cross-Appellant.

2a

John E. Lindskold, Department of Justice, Washington,

D.C., for Intervenor-Appellee, Cross-Appellant.

Before SETH, Chief Judge, BARRETT and DOYLE, Cir-

cuit Judges.

PER CURIAM.

This case was remanded for the development of addi-

tional facts relating to and to provide a basis for the valua-

tion of the helium at the wellhead by the use of a work-

back method. See Ashland Oil, Inc. v. Phillips Petroleum

Company, 554 F.2d 381 (10th Cir.). The trial court was

to determine a proper starting place and value for such

method, the plant cost, return on investment, the costs

chargeable to production of liquid hydrocarbons, and re-

lated facts.

On remand the trial court selected as a starting point

the stated value of helium used in the contract between

Phillips and the Government. For a brief description of

‘he contract, see 554 F.2d at 384. This determination by

the court was based on the expert testimony relating

to pure helium values and other possible starting points

for the valuation of helium. A star.ing place for the

work-back method can be at any point in the production -

processing - sale chain where a dollar figure can be estab-

lished by reliable evidence, and which may be demon-

strated to be a realistic value. We see no objection to

the use of the contract value for this purpose. It was

a negotiated figure arrived at by parties dealing at arm’s

length. There may have been other considerations in-

volved, but on remand these do not appear to have been

substantial enough to cast doubt ‘for our purposes on the

contract price. This figure was not greatly different from

those used in the contracts for other extraction plants.

¢

3a

Using this figure the trial court made findings as to

plant investment and rate of return. These factual deter-

minations were made after a consideration of the testi-

mony and are supported by the record. The appellant

urges that there are factors which should not have been

included in the plant cost figure or in the total “capital

employed” upon which Phillips was entitled to compute

a return. However, again this was a fact-finding element,

and the result was supported by the record.

The parties are in essential agreement as to the costs

to be allocated to the production of liquid hydrocarbons.

The trial court’s figure on this element must be accepted.

The rate of return is a departure from the figure used

at the first trial, but this element was included in the

remand and again is supported by the testimony of the

several witnesses. It is within the fact-finding function

of the district court. On the prior appeal we expressly

approved the award of prejudgment interest. This factor

was not in the remand and became the law of the case.

Thus, as we previously held, plaintiff is entitled to pre-

judgment interest.

The plaintiff urges that postjudgment interest should

commence upon the date of the first judgment and not

at the end of the remand trial. However, we must hold

under 28 U.S.C. § 1961, in view of the extent to which

the case was reversed, “the judgment” for the purpose

of interest was that entered by the trial court on remand.

See Hysell v. Iowa Public Service Co., 559 F.2d 468 (8th

Cir.).

The judgment is affirmed as to the three dollar value

at wellhead for the helium, but is reversed as to pre-

judgment interest and remanded for the entry of a judg-

ment to include such interest.

4a

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

SEPTEMBER TERM—October 15, 1979

Before Honorable Oliver Seth, Chief Judge, Honorable

James E. Barrett and Honorable William E. Doyle,

Circuit J udges

Nos. 79-1009

79-1096

79-1108

(D.C. No. 67-C-238)

ASHLAND OIL, INC.,

Plaintiff-Appellant-

Cross-Appellee,

VS.

PHILLIPS PETROLEUM COMPANY,

Defendant-Appellee-

Cross-Appellant,

and

UNITED STATES OF AMERICA,

Intervenor-Appellee-

Cross-Appellant.

JUDGMENT

This cause came on to be heard on the record on

appeal from the United States District Court for the

Northern District of Oklahoma, and was argued by counsel.

5a

Upon consideration whereof, it is ordered that the

judgment of that court is affirmed as to the three dollar

value at wellhead for the helium, but is reversed as to

prejudgment interest. The cause is remanded to the

United States District Court for the Northern District of

Oklahoma for the entry of a judgment to include such

interest.

/s/ Howard K. Phillips

Howard K. Phillips, Clerk

6a

SEPTEMBER TERM—November 14, 1979

Before Honorable Oliver Seth, Chief Judge, Honorable

Robert H. McWilliams, Honorable James E. Barrett,

Honorable William E. Doyle, Honorable Monroe G.

McKay and Honorable James K. Logan, Circuit Judges

Nos. 79-1009

79-1096

79-1108

ASHLAND OIL, INC.,

Plaintiff-Appellant-

Cross-Appellee,

Vs e

PHILLIPS PETROLEUM COMPANY,

Defendant-Appellee-

Cross-Appellant,

and

UNITED STATES OF AMERICA,

Intervenor-Appellee-

Cross-Appellant.

This matter comes on for consideration of the petition

for rehearing and suggestion for rehearing en banc filed

by the appellant, Ashland Oil, Inc., in the captioned

causes.

Upon consideration whereof, the petition for rehearing

is denied by Chief Judge Seth, Circuit Judges Barrett and

Doyle, to whom the case was argued and submitted.

7a

The petition for rehearing having been denied by the

panel to whom the case was argued and submitted and

no member of the panel nor judge in regular active

service on the Court having requested that the Court be

polled on rehearing en banc, Rule 35, Federal Rules of

Appellate Procedure, the suggestion for rehearing en banc

is denied. Circuit Judge Holloway did not participate in

the consideration of the suggestion for rehearing en banc.

/s/ Howard K. Phillips

Howard K. Phillips, Clerk

8a

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

Nos. 73-1797, 73-1798, 73-1799

ASHLAND OIL, INC., Appellee, Cross-Appellant,

v.

PHILLIPS PETROLEUM COMPANY, Appellant,

Vv.

UNITED STATES OF AMERICA, Intervenor-Appellant.

Appeal From The United States District Court For The

Northern District of Oklahoma

(D.C. # 67-C-238)

(Filed May 10, 1977)

ON REHEARING EN BANC

Richard B. McDermott, Tulsa, Oklahoma (Lloyd G.

Minter and Don L. Jemison, Bartlesville, Oklahoma, with

him on the Brief), for Appellant, Phillips Petroleum Com-

pany.

Gerald Sawatzky, Wichita, Kansas (Jay W. Elston,

Houston, Texas, John M. Imel, Tulsa, Oklahoma, Arloe W.

Mayne, Ashland, Kentucky, W. O. Strong III, Houston,

Texas, and Foulston, Siefkin, Powers & Eberhardt, Wichita,

Kansas, Fulbright, & Jaworski, Houston, Texas, and Martin,

Logan, Moyers, Martin & Conway, Tulsa, Oklahoma, of

Counsel, with him on the Brief) for Appellee-Ashland

Oil, Inc.

9a

Floyd L. France, Attorney, Department of Justice,

Washington, D.C. (Peter R. Taft, Assistant Attorney Gen-

eral, Nathan G. Graham, United States Attorney, Hubert

A. Marlow, Assistant United States Attorney, E. Edward

Johnson, United States Attorney, Jon K. Sargent, Assis-

tant United States Attorney, Edmund B. Clark, Dennis A.

Dutterer, George R. Hyde, and Jacques B. Gelin, Attor-

neys, Department of Justice, with him on the Brief), for

Intervenor-Appellant, United Siates of America.

Before Lewis, Chief Judge, BrEITENSTEIN, SETH, Mc-

WittiaMs, Barrett and Doyte, Circuit Judges, sitting

en banc.

SETH, Circuit Judge.

Doyte, Circuit Judge, dissents. Dissenting opinion

attached.

This action was brought to recover the reasonable

value of helium intermixed with natural gas, extracted

therefrom, and sold by the defendant Phillips to the

United States. The plaintiff prevailed against the defen-

dant and the Government as intervenor in the lower court,

and they both appeal. Plaintiff also appeals, but only as

to the ultimate division of the proceeds derived from the

helium as ordered by the trial court.

The case was commenced in the Southern District of

Texas, but transferred at defendant’s request to the North-

ern District of Oklahoma. The complaint asserts juris-

diction based on diversity, and this ground was estab-

lished. The Government intervened as plaintiff, but was

realigned as a defendant.

The general description of the occurrence of helium,

its characteristics, and how it became an issue is described

in the several opinions hereinafter cited. It is, however,

10a

necessary to describe the contractual relationship which

existed between the defendant Phillips and the Bureau

of Mines during the pertinent time period as it bears on

the relationship with plaintiff.

The Helium Act (50 U.S.C. §§ 167 et seq.) was di- -

rected to the conservation of helium present in natural

gas and which was being wasted by the use of the gas

as fuel. It was determined that the best method to pre-

vent this loss was to intercept the flow of helium-bearing

natural gas after it had been gathered and where large

volumes were being transported by pipeline to the fuel

consumers, and to extract the helium therein intermingled.

At these points the pipeline companies had possession of

the gas stream.

The Bureau of Mines pursuant to the Helium Act en-

tered into contracts with those in possession of the natural

gas stream to purchase helium after it was extracted from

the stream. The record shows that this decision to con-

tract apparently was brought about by the inability of

the Bureau to then ascertain the identity of the interest

owners in the helium and to deal with them within any

reasonable time. The Bureau indicates that there were

some 30,000 landowners involved and several hundred

lessee-producers of the gas. The production is from sev-

eral states and the interest owners reside in many different

states. By the contracts with the defendant and others

the Bureau made possible the construction of extraction

plants and soon came into possession of the helium so

removed from the large gas stream. Waste of the helium

was so prevented, and the purpose of the Helium Act

was accomplished.

We are here concerned with the Government contract

with defendant Phillips whereby the helium was phys-

ically acquired by the Government, but the ownership and

lia

compensation problems were put off to another day. The

Bureau thus used by this contract the advantageous posi-

tion of one in=possession; postponed the inevitable legal

problems, and placed itself in the position of a defendant

when the problems came before a court.

In the contract between the United States as buyer

and the defendant as seller covering the purchase of

helium, a specific amount was provided as compensation

to defendant. The record shows that this figure was ar-

rived at by comparison of the estimated cost to the Gov-

ernment had it built its own plant. No relationship of this

figure to any then market values was developed in the

record. This was a base price of $10.30 per Mcf and was

subject to escalation under Paragraph 7.3. Paragraph 7.4

provided that in addition to such amount the buyer would

pay to the seller the amounts “. . . that Seller shall pay

subsequent to the date of this contract . . . to parties other

than itself... for the acquisition of helium in the natural

gas . . . or for any interest therein.” It provided that

such payments to qualify would have to be made with

the consent of the buyer, and that “consent” included

claims that “. . . have been judicially determined in favor

of any claimants by any Federal Court or the highest

appellate court of any state,” and payments made in ac-

cordance with the findings, principles, and conclusions of

such “judicial determination.” Under the contract for-

mula the defendant would pay the first $3.00 per Mcf to

third parties and the Government would pay the rest.

The result would be that the ultimate payment to the

“owners” was to be so shared by defendant and the United

States, with the United States providing an indemnifica-

tion for required payments above the stated amount.

There are other qualifications also,

It is obvious that this litigation wherein compensation

is demanded by the interest owners of the helium was

12a

contemplated and was provided for in the contract. It

was apparent that some knotty legal problems would have

to be met in order to determine who the interest owners

were, and to decide whether or not they had already been

compensated for the helium under the leases, the gas

purchase contracts, or the Natural Gas Act. These post-

poned legal problems were in large part decided in the

Consolidated Helium Cases (Northern Natural Gas Co. v.

Grounds, 441 F.2d 704 (lUth Cir.)), opinion by Judge

Breitenstein. The basic legal relationships among the

landowners, producers, and gas purchasers were there es-

tablished, as was the relationship of the Natural Gas Act

and the Helium Act. The controlling rules were set in

the Grounds opinion, en banc consideration was denied,

and the Supreme Court denied certiorari. 404 U.S. 951.

We decline to reconsider Grounds. Further, in Grounds we

held that “. . . the lessee-producers are entitled to the rea-

sonable value of the contained helium.”’ The problem of the

amount of reasonable compensation, and who should pay,

was not decided in Grounds, and was remanded to the

trial court. The Grounds case is again before this court

en banc and was consolidated for hearing with this case,

but is not considered in this opinion.

When the matter of compensation is in issue we ar

faced with a somewhat different aspect of the physical

and legal journey helium makes from the natural gas well

to the storage facilities of the Bureau of Mines than we

have considered before. The possession and interception

of the gas stream, the separation of the helium therefrom,

and its delivery to the United States under the contract

arrangement are, all still important, but the relationship

of the contracting parties to those who now have been

determined to own interests in the helium, and, of course,

the value of the helium are the center of focus.

l3a

The position of the United States as a party herein is

somewhat unusual. It filed a motion to intervene as a

party plaintiff with a “Complaint in Intervention of the

United States” attached. This motion was granted. The

Complaint of the Government stated that the court had

jurisdiction under 28 U.S.C. § 1345, cited 28 U.S.C. § 2201,

and recited the existence of the contract for the purchase

of helium from Phillips, asserted that Phillips had deliv-

ered to the United States “large quantities of a helium-

gas mixture” for which it had been paid “substantial

sums of money.” This complaint acknowledges that the

plaintiff Ashland is seeking the “fair market value” of

helium in the gas it sold to Phillips which was processed

for helium, and the helium in turn sold to the United

States under the contract referred to above. The Govern-

ment further alleges that Ashland has already been paid

for the helium content along with the hydrocarbons, and

in any event the value of the helium content is “nominal.”

The complaint asserts that: “An actual controversy ex-

ists between the United States and Ashland as to whether

payments between Phillips and Ashland for the gas as

produced was payment for the helium content.” The

Government alsv asserts that it “. . . has a real and sub-

stantial interest in this litigation because of a provision

in its contract with Phillips under which it may be under

a duty to indemnify Phillips for additional payments... .”

The Government prayed for a determination that Ashland

had already been paid in full, and if not, that the fair

market value of the helium was “nominal.” Phillips and

Ashland answered the Government’s complaint. Ashland

in its answer prayed for costs and general relief.

As the trial opened, the attorney for Phillips suggested

that the United States be realigned as a party defendant.

The court then said: “The Court will order that the style

be changed to Ashland Oil and Refining Company, Plain-

l4a

tiff, versus Phillips Petroleum and United States of Amer-

ica as defendants.” The findings recite that at the Gov-

ernment’s request it was aligned as a defendant and was

an intervenor. The Uniied States participated in the trial,

cross-examined witnesses, put on a witness of its own, ob-

jected to the plaintiff’s findings, and submitted proposed

findings. The judgment entered ran against Phillips only.

The United States has fully participated in this appeal.

As indicated above, this action was brought by Ash-

land against the defendant Phillips to recover the reason-

able wellhead value of helium commingled with the FPC

jurisdictional Gas, but separated at defendant’s plants con-

structed pursuant to the Helium Act and delivered as

“conservation helium” to the Bureau of Mines. The suit

was tried within the holding of Northern Natural Gas Co.

v. Grounds, 441 F.2d 704 (10th Cir.) (The Consolidated

Helium Cases, or Grounds).

On this appeal Phillips devotes much of its brief and

argument to contentions which were advanced in Grounds,

there considered and rejected. It would serve no purpose

to again consider these arguments. Instead it is sufficient

to refer to the Grounds opinion for the disposition of these

points.

It must be accepted that the “value” sought to be

determined in this suit is basically a factual matter deter-

mined through the application of the appropriate legal

doctrines. This is the value at the wellhead of the helium

commingled with the natural gas there being produced.

The appellants here urge as a basic error by the trial

court that it chose the wrong method in arriving at this

“value.” The trial court determined that there was no

prevailing market value for the commingled helium, there

was no free competitive market for this helium at the

15a

wellhead. The court thus used a market value for the

ultimate product less the cost of beneficiation of the

helium-bearing gas. The defendants urge that the trial

court had sufficient evidence before it of a “market value”

of the commingled helium at the wellhead.

The defendants, on their “market value” theory, put

on testimony and exhibits as to transactions concerning

helium-bearing gas wherein a value was ascribed to the

helium component. These described events covered a

broad time span and a wide geographical distribution.

They involved both governmental agencies and private

parties.

The trial court, in holding that there was no free

competitive market, held that these transactions were of

no probative value because they were not comparable.

It thus concluded that the evidence failed to establish

a “market price” by comparable sales. We reach the

same conclusion. The transactions described by the wit-

nesses for the defendant were too remote in time or place,

and otherwise could not be considered as comparable.

The testimony did not show a free market condition to

establish a usable price. It is apparent that the gas stream

here concerned with all its components was directed by

the FPC, and was locked in by the jurisdictional gas.

There was not an opportunity for free pricing at any

point, nor for renegotiation of sales or the negotiation

with new purchases. The helium thus had to go along

with the stream. The purchasers of the stream here con-

cerned, of course, took the position that they owned the

entire contents, and were not required to pay anything

more. This litigation demonstrates the character of the

market, the Government domination of the market, and

the strength of bare possession.

l6a

In the market price evidence of the defendant, con-

siderable detail is presented as to purchases at the several

Government helium plants. These include the plants at

Exell, Otis, Cunningham, and Navajo. The helium pur-

chases or gas purchases at these plants were made during

World War II. The years which have passed since “The

War” would seem to cast more than a doubt that these

could possibly be comparable sales. The purchases at

the Navajo plant were renegotiated after the War in 1955

and 1959, but again this cannot be’ a comparable trans-

action. The stream from the Rattlesnake production had

no use as a fuel. It did have a high helium content,

but nothing is developed as to any other market for this

gas. The Government had for all practical purposes a

monopoly on sales of helium until about 1962.

There was also testimony as to purchases of gas by

the Government for the Keyes plant in 1958. The price

was somewhere near $2.00 per Mcf. The production costs

at this plant were about $15.50 per Mcf. The basic in-

terest of the seller was to make the residue gas marketable

by raising the BTU. The seller also assumed liability

for possible additional payments to third parties.

fhe Otis plant was also used to upgrade the gas for

fuel purposes by separating out the noncombustible por-

tions of the stream.

Phillips also introduced evidence as to several con-

tracts it had made for the payment for components of

the gas production purchased. Some mentioned helium,

some did not. This was a dollar price in some, and a

formula as for all other components in others. These

are not of particular significance, especially the casing-

head gas contracts, because there was no evidence that

the casinghead gas contained helium nor was ever pro-

_ cessed for helium. As to the other Phillips contracts,

l7a

there was no showing that the gas had a helium content

at all (with insignificant exceptions), nor that there was

ever a remote possibility of extraction, again with insig-

nificant exceptions. Contractual provisions in such a

context, even where helium was mentioned, are a mean-

ingless gesture of the parties, and cannot be considered

as evidence of comparable sales.

The Gas Sales Agreernent between Colorado Inter-

state and Alamo Chemica] Company (a Phillips affiliate

or subsidiary) was put in evidence. This provided for

the processing of gas produced in Morton County, Kansas,

for the removal of helium and liquefiable hydrocarbons.

The plant operator was to pay $2.00 per Mcf for helium

extracted at the plant. This price was not negotiated,

and it seems reasonable to assume that this was because

there was litigation pending as to the obligations to pay

for helium involving the parties. The contract limited

the sellers’ liability on the title warranty of helium to

$2.00 per Mcf. There was no contract provision for pay-

ment for hydrocarbons removed. This contract must be

considered for all practical purposes as a post-litigation

contract. There was also in evidence a gas exchange

agreement between Phillips and Pioneer Natural Gas

Company. This had a price for helium but there were

other contractual considerations such as delivery of gas

at other locations, and payment for only part of the

helium. This agreement cannot be considered as a com-

parable sale.

The testimony of the defendants and evidence was

thus directed to “other sales” in other places and other

times. There was no substantial showing that these were

“comparable sales.” Evidence of “other sales” falls far

short of establishing a market without comparability being

clearly established.

18a

In addition to the evidence relating to particular

contract provisions, and some sales, there was expert testi-

mony. The plaintiffs and defendants had expert witnesses

who testified as to what the value of helium should be.

This testimony produced by both sides is of theoretical

interest, presents a facet of the entire conservation pro-

gram, and a description of the few independent private

enterprises which tried to enter the field. No matter

how interesting, this evidence is only opinion evidence,

and does not establish facts. This testimony comes well

down on the scale of acceptable evidence as to value. It

is obvious that comparable sales or current market price

is the best, and second would come the work-back method.

The expert testimony of the type here presented would

come somewhere after that. The experts were extremely

capable, experienced persons who gave well considered

and conscientious expression of their opinions, but never-

theless it remained opinion evidence on a matter of ob-

jective facts.

We thus must agree that the trial court was correct in

seeking an alternative method to “market price” for estab-

lishing the reasonable value of, the helium component at

the wellhead. It is obvious that the comparable sales-

current market price is by far the preferable method when

it can be used. However, it cannot be used when the

elements necessary for its proper application are lacking.

The trial court thus had to resort to a work-back method

or price less costs of beneficiation. This was a less desir-

able method but perfectly valid. Under this method a

point was selected where there can be determined an estab-

lished price and the cost of processing or beneficiation

were deducted to move back to the place where the value

must be established.

The work-back valuation is well recognized in the

production and early processing of natural gas. It is com-

19a

monly used, according to this record, in placing a value

on feed stock for gasoline plants and related processing.

There is nothing unusual about the method, it is subject

to proof, and can be just as accurate as any other method,

but it is more difficult to apply. There is here concerned

a single plant constructed and operated for the specific

purpose of extracting helium. Other costs, and other ele-

ments, can be established. This work-back method was

used by the Government and the Court of Claims in mak-

ing payment to the Navajos for gas supplied to the Navajo

Helium Plant. See Navajo Tribe v. United States, 364

F.2d 320 (Ct.Cls.). The Government has used it on other

occasions such as for Kerr-McGee royalty payment in Ari-

zona, and under different circumstances. As to the work-

back as a method for valuation, see also Brown, Law

of Oil and Gas Leases, § 6.09; Harding v. Cameron, 220

F.Supp. 466 (W.D.Okl.); and Sneed, 25 Tax L. Rev. 641.

This method to establish value has not only been used

in the petroleum industry, but also in other natural re-

sources cases. See United States v. Wyoming, 331 US.

440; Black Crystal Coal Co. v. Garland Coal & Mining

Co., 267 F.2d 569 (10th Cir.); and Greer v. Stanolind Oil

& Gas Co., 200 F.2d 920 (10th Cir.). See also the gasoline

plant case, Freeland v. Sun Oil Co., 277 F.2d 154 (5th

Cir.), which is a common use in the industry.

Phillips argues that its right to acquire the helium

component was covered by its contracts, and neither the

Helium Act nor the Natural Gas Act altered these con-

tracts. Thus there was a Fifth Amendment violation if

its property was “given” to another. This court on the

Grounds case really decided this issue and there would

seem to be no need to consider it again other than to

state that Phillips acquired the whole stream or production,

but has only paid for part. We said in Grounds, “In

our opinion private contract law and the principles appli-

20a

cable thereto are not controlling.” Apparently the Govern-

ment has yet to pay Phillips for much of it also.

The appellant next argues that the value less expense

method was not only inapplicable, but it was improperly

applied in that the proof was deficient as to certain ele-

ments, that mistakes were made, and that “trifling recog-

nition” was given to certain evidence. We will take these

references to mean that there was not substantial evidence

on the several factors or elements of the method of valua-

tion.

As to the several elements, the appellants urge that

the amount used as the “return on investment” expense

was not sufficient. The trial court used a figure which

was part of the testimony of plaintiff's witnesses, and

the method by which it was arrived at was so presented.

There was no substantial contrary evidence presented at

trial although on appeal appellants assert deficiencies in

the. method. This elemenf* however was not adequately

developed by the proof and further hearing is required

on this element.

The appellants also object to the allowance made by

the trial court of $2.00 per Mcf for the “treatment” of

the “crude” helium sold to it by Phillips (to be incurred

by the Government before resale), as insufficient in that

it did not include transportation and storage. Matters

of expense to be incurred subsequent to the delivery and

perhaps some transportation from place of delivery to the

underground storage are not shown to have been omitted

from the $2.00 figure although it was denominated a “treat-

ment” or “processing” cost. In any event, these costs

are more properly attributable to the general conservation

program as the duration of the storage and additional

transportation are unknown factors under the record. The

-

2la

use of the deduction was proper and appellants have not

shown that it was not supported by substantial evidence.

The trial court. used a figure of $20.00 per Mcf for

the selling price of helium, and this was the starting figure

or element of the value less expense method. This figure

was testified to by the witness for the plaintiffs; this

price issue was not met by defendant by way of proof.

On remand the validity of this figure must be examined

by the trial court, and a determination made again as

to the proper starting value.

The Government, in an argument again based on con-

demnation doctrine, urges that the helium values were

created by its own purchase program—The Helium Con-

servation Program, and it should not have to pay for

such values. It cites several condemnation cases on this

point, and United States v. Fuller, 409 U.S. 488, which

in turn cited United States v. Cors, 337 U.S. 325. This

again concerned payment for something requisitioned by

the Government. The issue here is the determination of

value of a commodity which was purchased and sold by

the Government and by private concerns. It was a stock-

piling of a commercial product. This cannot be equated

to the cases where the condemnation or the reason for

condemnation increases the value of the land taken. The

helium has value by reason of its nature and usefulness.

The Government may have made this helium available

but did not create its value.

The appellants vigorously attack the use by the trial

court of the value of hydrocarbon liquids produced at

the helium plants in the value less expense calculations.

The trial court allocated part of the plant expense to

these liquids as by-products. The evidence is unclear that

an increase in the production of liquids would result from

the helium plant operation over what had been experienced

22a

before and over ordinary extraction plants. Appellants

maintained that the increase in liquid production did not

result at all from the treatment of the gas stream for

helium extractions. The record shows that increased

quantities of wet gas were directed to at least one of

the plants, and this could make a difference in the produc-

tion of liquids, but no figures were produced by defendants.

Under this state of the record, we must hold that the

trial court did not have adequate data to this element.

Different quantities of liquids were produced at different

plants, and this may result in different helium values

at different plants. In view of the evidence, this was

a consequence of the application of the expense element

in the formula. However, further evidence on this aspect

is needed.

The Government makes the point that the value of

helium at the wellhead determined by the trial court ex-

ceeds the base figure for the helium-nitrogen mixture it

was buying from Phillips under its contract. This may

be a consequence of the decision, but there is no reason

why the wellhead price should be determined by the con-

tract price. This payment was not necessarily the “price”

of the helium as other considerations were present. The

contract between the appellants was negotiated between

them alone, and the pricing was the evaluation by them

of the entire economic consequences of the transaction

including many significant factors such as its duration,

warranties, and indemnities. We have described the

contract at the outset of this opinion. Attention should

however be directed again to the evaluations made of

the legal questions, especially the title questions. Gov-

ernment agreed basically to pay Phillips for its interest

in the helium and then to pay more if other interest

owners established their claims. This has been done, but

23a

the price “paid” for all the interests in the helium has

not yet been determined. The value here sought to be

established is independent of the contract base amount,

and is to be of all interests of the proper parties.

We have considered Lippert v. Angle, 211 Kan. 695,

508 P.2d 920. It states the traditional preference for com-

parable sales proof with which we agree, but the case

does not involve the separate valuation of helium. The

plant was very small, and the situation is not comparable

in any way. See also Greenshields v. Warren Petroleum

Corp., 248 F.2d 61 (10th Cir.).

This appeal also raises issues as to the allowance

of nrejudgment interest, attorney fees, and the matter

of limitations. The trial court tried the case as a federal

question case, relying on our opinion in Texaco Inc. v.

Phillips Petroleum Co., 481 F.2d 70 (10th Cir.), which

was thereafter reversed by the Supreme Court in Phillips

Petroleum Co. v. Texaco Inc., 415 U.S. 125. That case

was concerned only with federal question jurisdiction un-

der 28 U.S.C. § 1331 (a), and not whether state or federal

law controls. The United States was not there a party.

Federal jurisdiction is here conceded.

The original Consolidated Helium Cases were based

on federal interpleader jurisdiction, and also federal law

was applied. The case before us on this appeal started

as a diversity suit, and the Government has asserted a

claim or an interest. We have described at some length

above the participation of the United States in this action,

especially the initial intervention as a plaintiff expressly

under 28 U.S.C. § 1345. It is apparent however that

its alignment at all times was with the defendant Phillips

on all important issues. No relief was sought by Ashland

directly against the United States. The trial court found

24a

the elements of a condemnation or seizure by the United

States, but this analysis of the manner in which helium

was acquired was considered in the Consolidated Helium

Cases, and the arguments were rejected.

As a matter apart from jurisdiction, we hold that the

trial court’s applicaticn of federal law was proper. The

action of the Government in entering the case as a plain-

tiff under 28 U.S.C. § 1345 is a significant factor to be con-

sidered. The real party in interest thus appeared formally

to challenge the claims of Ashland. The Government so

asserted that it had a real and substantial interest in the

litigation, and that an actual controversy existed between

it and Ashland. It is apparent that under the contractual

arrangement, the United States undertook to pay to Phil-

lips the amounts that Phillips “shall pay” to other parties

for the acquisition of helium in the natural gas above a

certain figure. This is in the nature of an indemnity agree-

ment and the contract contains qualifications and limita-

tions not here concerned. The United States is liable for

some of the additional amounts which Phillips will have

to pay. The Government has thus entered the litigation to

assert its own position and interest under the contract.

This is initially a matter of dollars, but the Government

still has possession of a large part of the helium in ques-

tion, and this possession can put a somewhat different cast

on the problem. These circumstances and the intervention

could very well have changed the action to something other

than the usual diversity suit at least for the purpose of

the application of Erie v. Tompkins. This has interesting

possibilities, but in any event, the circumstances direct that

federal law be applied.

As indicated above, and as demonstrated in Northern

Natural Gas Co. v. Grounds, 441 F.2d 704 (10th Cir.), and

by the record here, the Government in the several cases

:

25a

before this court is faced with claims made by a multitude

of interest owners from many states relating to production

from Kansas, Oklahoma, and Texas. Each state has some-

what different legal doctrines relating, among other

things, to the nature of interests in oil and gas, and what

rights are created by oil and’gas leases. With the primary

liability for the dollars, and for the determination of

ownership resting with the United States which obtained

possession of the helium, we hold that the application of

the rule expressed in Clearfield Trust Co. v. United States,

318 U.S. 363, is indicated. One of the most significant fac-

tors is the one indicated above, that is, the fact that the

United States ended up with the helium. It directed, by

contracting, the diversion of the helium to itself before

resolving the obvious ownership problems with a multi-

tude of claimants having diverse legal relationships to the

helium, depending upon the place where the natural gas

was produced and upon their contractual positions. The

United States, again by contract, sought to handle these

problems by providing for reimbursement to Phillips, and

it may have done so. The Government nevertheless ob-

viously has the basic responsibility and liability, as it rec-

ognizes by its intervention.

Erie v. Tompkins does not demand the application of

state law to all diversity actions. The Court in the Clear-

field Trust case set out an exception which was there ap-

plied to “obligations” of the United States and later ex-

panded. The case concerned the forgery of a Government

check, and a delay in notice by the Government to the bank

beyond the period contemplated under state law. The Court

held that rights of the Government relating to commercial

paper it issues are determined by federal and not state

law. The Court said that the authority to issue the check

in question originated in the Constitution and statutes of

the United States and was not dependent on the laws of

26a

any state. In the matter before us, the helium was acquired

by the United States by contracts as authorized by federal

statutes. This contracting with private enterprise was sug-

gested by statute. As stated by the Court in the cited case,

“The desirability of a uniform rule is plain.” See also

National Metropolitan Bank v. United States, 323 U.S. 454,

limited by Bank of America v. Parnell, 352 U.S. 29. The

War Bond cases in state and federal courts lead to the

same result. See In re Stanley’s Estate, 80 P.2d 332

(Colo.). The Court in D’Oench, Duhme & Co. v. FDIC, 315

U.S. 447, also indicated a considerable area to be excluded

from the application of Erie. There an action by the FDIC

was brought on a note given to a bank by the defendant,

and the Court applied federal law. Also in the share-

holders’ liability action in Holmberg v. Armbrecht, 327

U.S. 392, in the solution of a limitations problem, the fed-

eral law was applied. Generally, see 59 Harv.L.Rev. 976,

and 105 U.Pa.L.Rev. 797.

Under Clearfield when the United States seeks to liti-

gate or seek a remedy arising from transactions it has en-

tered into in the ordinary commercial world to carry out its

program, it has been held that federal law may be ap-

plied. The federal courts can adopt a governing rule of law -

in such circumstances if there is no statutory direction to

the contrary. Clearfield expressly so held. 318 U.S. at 366.

See also United States v. Allegheny County, 322 U.S. 174.

Clearfield thus indicates that the Court may apply state

doctrines or parts of them as “federal law.” In United

States v. Standard Oil Co., 332 U.S. 301, the Court stated

that the interests of the Government and its legal relation-

ships may be so determined. The impact of the application

of state law upon the governmental interests is a factor of

great weight. See United States v. Mitchell, 403 U.S. 190.

The Court in United States v. Little Lake Misere Land

Co., 412 U.S. 580, considered the application of a Louisiana

nein la

27a

statute to the reservation of a mineral interest in land

acquired by the United States. The factors discussed above

were there treated, and the process was described as a

“choice of law” (federal or state) matter. The Court there

said:

“However, in a setting in which the rights of the

United States are at issue in a contract to which it is

a party and ‘the issue’s outcome bears some relation-

ship to a federal program, no rule may be applied

which would not be wholly in accord“with that pur-

pose.’” [The quotation included being from Mishkin,

105 U.Pa.L.Rev. at pp. 805-6. ]

The Court found further that the federal land acquisition

program in United States v. Little Lake Misere Land Co.

conflicted with the state law on the duration of reserved

mineral interests, and said: ‘The choice of law merges

with the constitutional demands of controlling federal leg-

islation; we turn away from state law by default.”

In the case before us, the United States was seeking to

carry out the Helium Conservation Program then con-

sidered of great urgency and importance. It sought to, and

did, acquire possession of the helium as directed by the

legislation. The action of the Bureau of Mines was effi-

cient and effective. In so doing it set up the contractual

barriers between itself and the landowners and gas pro-

ducers, and also put off the inevitable day of reckoning

as to ownership. Phillips is really only a nominal party

and looking at the substance, the Government has the re-

sponsibility arising from its acquisition and possession of

the helium. In the face of the multitude of claimants, the

variations in state law, and the Clearfield doctrine, the trial

court was correct in not applying Erie v. Tompkins.

28a

We find no merit to the contention of Phillips that it

is entitled to a setoff for any sums previously paid to

Ashland for purchases of jurisdictional gas.

The court in the Consolidated Helium Cases considered

the ownership of the interests, title to the helium, and de-

scribed how these passed down the gas stream. This de-

termination prevails. The trial court, as to the interest of

the landowners-lessors, apparently followed a confiscation-

condemnation theory and divided the value of the helium

to be recovered from defendant Phillips equally between

the lessors and lessees. Our opinion in the Consolidated

Helium Cases requires that this division be in accordance

with the lease terms, and thus the same division as ap-

plied to the hydrocarbons. The judgment of the trial court

making an equal division between lessor and lessee of the

proceeds attributable to helium values must be and is re-

versed with directions to enter judgment providing for a

division in accordance with the terms of the leases, and

the terms of other agreements relating to the shares of

production, or payment for shares of production, if such

be applicable.

The issue of limitations has been raised together with

the tolling of whatever statute may be applicable. This

litigation concerning the property interests in helium and

the right to compensation, considering the related cases,

has been protracted and equitable considerations applica-

ble to periods of limitation have come into play. See

deHaas v. Empire Petroleum Co., 435 F.2d 1223 (10th Cir.).

We must conclude that this action has not been barred.

American Pipe & Construction Co. v. Utah, 414 U.S. 538.

The trial court acted within its discretion under federal

law in the allowance of prejudgment interest. Royal In-

demnity Co. v. United States, 313 U.S. 289; St. Paul Mer-

29a

cury Indemnity Co. v. United States, 201 F.2d 57 (10th

Cir.).

As to attorney fees awarded by the trial court, we are

unable to find any statutory provision for them or any

rule of practice which would authorize such fees. The

Supreme Court has, since the trial court’s decision, de-

cided F. D. Rich Co. v. Industrial Lumber Co., 417 U.S.

116, a Miller Act case. The opinion includes a direct and

intensive consideration of attorney fees. The Court there

defines the basic rule:

“The so-called ‘American Rule’ governing the award

of attorneys’ fees in litigation in the federal courts is

that attorneys’ fees ‘are not ordinarily recoverable

in the absence of a statute or enforceable contract

providing therefor.’ ”

The Court concluded that Miller Act suits are “plain and

simple commercial litigation,” and the Court would not

change the American Rule “in the context of everyday

commercial litigation.” We must hold that this litigation is

not so dissimilar to Miller Act suits as to bring about a

different result as to attorney fees than expressed in F. D.

Rich Co. See also Alyeska Pipeline Co. v. Wilderness So-

ciety, 421 U.S. 240.

The judgment of the trial court is thus REVERSED as

to the award of attorney fees, and as to the equal division

between lessor and lessee of the proceeds attributed to the

value of the helium, as above indicated. The judgment is

also set aside as to the valuation determination with di-

rection to hear further the matters or elements of the work-

back method, referred to above, wherein there was in-

sufficient evidence in the record.

Thus some elements have been considered in this opin-

ion and ruled on.

30a

On remand the trial court shall also consider whatever

other elements that may be developed at further hearing,

in making the value less expense or work-back determina-

tion.

Thus, we affirm the use of the work-back method of de-

termining value and the use therein of the $2.00 figure for

treatment of crude helium. We set aside the values which

the trial court determined by the use of the work-back

method. On remand the trial court shall give further con-

sideration to, and receive such evidence as may be admis-

sible bearing on, (1) the proper starting value, (2) the

amount chargeable to return on investment, (3) the ex-

pense properly allocable to production of hydrocarbons,

and (4) such other matters, as are pertinent and not fore-

closed herein, that bear on the determination of value by

the work-back method.

We affirm the decision of the trial court that the action

is not barred by any statute of limitation and that pre-

judgment interest may be allowed. We reverse those por-

tions of the judgment that (1) allow attorneys’ fees and

(2) divide the recovery equally between the lessors and

the lessees. The lessors may recover only the amounts

determined by the royalty provisions of their leases.

AFFIRMED IN Part, REVERSED IN Part, and remanded

for further proceedings in the light of this opinion. Each

party shall bear its own costs.

Dove, Circuit Judge, dissenting.

I respectfully disagree with the result of the majority

opinion and, particularly, that part of it which affirms

the trial court’s use of the work-back theory or approach

in determining a reasonable value for the commingled

helium at the wellhead. My disagreement stems from

see

3la

the following: the work-back approach is not the preferred

way to determine market value of a commodity; the start-

ing point for determining value is wrong; and the result

of its application here is an excessively high price to the

government.

Both the government and Phillips Petroleum favor

the comparable sales plus expert testimony method; this

is the view that I prefer.

I.

WHETHER THE UNITED STATES CONTEMPLATED,

AS THE MAJORITY MAINTAINS, THE PAYING OF

A SUBSTANTIAL AMOUNT AT A SUBSEQUENT TIME

TO LESSEE-PRODUCERS AND LANDOWNERS

I must disagree with the conclusion in the majority

opinion that it was within the contemplation of the con-

tracting parties that there would be a large amount paid

to interest owners of the commingled helium at some future

time. My reasons are as follows:

The Bureau of Mines had entered into contracts for

the purchase of extracted helium with four companies,

including Phillips, who had possession of the natural gas

stream. By so doing the government avoided the necessity

for identifying and dealing with all possible interest owners

of the helium.

It is true that paragraph 7.4 of the contract with

Phillips provided for the partial indemnification of Phillips

by the United States for amounts paid subsequent to the

date of the contract for the acquisition of helium in the

natura! gas or for any interest therein. But to raise the

obligation of indemnification, the United States had to

consent to the payments or the payments must have been

judicially determined or they must have been made in

32a

accordance with guidelines established in judicial proceed-

ings. In the Phillips contract indemnification came into

being only after Phillips paid in excess of about $3.00

per mcf to third parties for interests in the helium.

The point that is here made is that although the gov-

ernment might have been aware of some indemnification

possibility, it did not contemplate the kind of payments

that would be necessary if the work-back method were

to be followed in both the Ashland and the Helex cases.

The findings of the trial court do not support the

statement in the majority opinion that it was contemplated

by Phillips and the United States that there would ulti-

mately be substantial compensation paid to the interest

owners. Memoranda written by the Associate Solicitor

of the Division of Mineral Resources, Department of the

Interior, and by the chief helium contract negotiator for

the Bureau of Mines mentioned the possibility of increased

contract prices if the government required the extraction

companies to give a warranty of title without some govern-

ment indemnification for helium payments. But there is

no evidence that the original amounts to be paid were

simply a down payment. There was no prior experience

of paying large sums of money for this helium. Mr.

Wheeler of the Bureau of Mines testified that in building

the cost model to arrive at a government negotiation posi-

tion, a $2.00 per mcf amount for the commingled helium

had been used because that amount reflected the govern-

ment’s experience in obtaining a supply of helium-bearing

gas. It had never paid more than $3.00 per mcf.

The $3.00 per mcf indemnification level was not an

arbitrary figure. It represented a ceiling above actual

payments on previous occasions. It was an estimation

of the probable maximum price that might be paid. There-

_ fore, it is not an established fact that here would be pay-

33a

ments in excess of $3.00 per mcf as the majority assumes.

Even if some excess above $3.00 per mcf was in the minds

of the negotiators of the contracts, it was not any great

amount. For example, there is no evidence that it was

contemplated that the price would go to $10.30. There

was no evidence of a belief that it would exceed $2.00

to $3.00. If it was thought that the $2.00 to $3.00 was

just the beginning, it seems likely that the extraction

companies would have not left the remaining amounts

up to $10.00 to $14.00 to chance. Their contemplation

would in some way have been expressed.

II.

WHETHER THE EVIDENCE OF COMPARABLE SALES

WAS, AS THE MAJORITY MAINTAINS, SO LACKING

IN PROBATIVE VALUE AS TO REQUIRE THAT IT

BE DISREGARDED

The reasons which the majority opinion gives for re-

jecting evidence of comparable sales for the purpose of

establishing reasonable value include, first, that the trans-

actions described by the witnesses which showed com-

parable transactions or sales were said to be too remote

in time or place. The opinion goes on to say that the

testimony did not show a free market condition capable

of establishing a usable price.

Secondly, it is said that the helium was part of the

gas stream and that this was subject to regulation by

the FPC and that this also restricted the opportunities

for renegotiation of sales or the negotiation “with new

purchases.”

The fact that the government was the dominant factor

in the market should not, we submit, produce a higher

price, for it only tends to show that there was no market

34a

for the conservation program gas, Stated differently, there

was no demand for it. Where that is the situation it

usually means that it is not worth much. The only reason

that it was worth something to the government was because

the government had some interest in conserving it. It

had some defense projects and space projects in which

it might be used and also there is belief by some that

in the future it might be of some value in creating an

atmosphere for the performance of special tasks. If, as

the opinion states, there is neither demand nor market

for this, it would seem reasonable to adopt a pricing policy

which gives to the lessee-producers such as Ashland actual

cost plus a reasonable profit.

My objection to the work-back method is in its arti-

ficiality. Interestingly, it fails to start with real cost fig-

ures—its beginning is with opinion evidence given by Mr.

Garwin, who was employed as manager of the Kerr-McGee

plant. He testified on behalf of Ashland. His opinions

were based on the price of pure helium sold by the gov-

ernment and private companies. He referred to present

sales of pure helium on the private market as being $20.00.

The government had charged $35.00 not because this rep-

resented a fair price. Rather, the government had no

choice since it was required by law to charge that amount.

The majority apparently has questions about the validity

of the $20.00 starting point. It does not give a reason

for its dissatisfaction. My objection is its gross excessive-

ness and its lack of reality.

Moving backward from a $20.00 price for pure helium

to the cost of the gas purchased by the government which

was not pure helium but was composed of about 50 per-

cent helium and 50 percent nitrogen, deductions for the

cost of extracting helium were made. The end result

are prices ranging from $11.76 to $16.98 per mcf for the

— — —

35a

years 1963-71. The government has already paid to Phillips

$10.30 per mcf which includes the cost to Phillips of build-

ing an extraction plant. Inasmuch as the government

is obligated to indemnify Phillips for all sums exceeding

$3.00, this means that the difference between the $11.76

to $16.98 figures and the $3.00 indemnification threshold

will in all probability be paid in addition by the govern-

ment.

The trial court and the majority opinion here made

no effort to isolate a rule or procedure to ascertain actual

market value either from the standpoint of comparable

sales or original cost or reproduction cost, It gave its

full and exclusive blessing to the work-back theory. The

legal objection to this is its secondary evidentiary character.

It is secondary because it is called into use only if it

is impossible to ascertain actual market value, from com-

parable sales, for example. It would have been valid

to have used it for comparison purposes, that is to test

end to compare the validity of the price arrived at by

some other more accepted method, but this has not been

done. We find them embracing it wholly and completely.

This was not justifiable since there was evidence of com-

parable sales either at the wellhead or at the inlet of

the plant.

It is more specifically objectionable because of the

$20.00 starting point. If they were going to select a stage

in the process and deduct costs in order to arrive at

the selling price at the wellhead or at the plant inlet,

they should not have started with a product which has ~

nothing whatever to do with this case, that is they should

not have attempted to discover a price for pure helium.

Instead they should have looked to prices of conservation

helium gas with 50 percent helium content and the

remainder nitrogen, for this is the product that is sold

36a

to the government, The beauty of starting with crude

conservation helium is that they had a demonstrable sale

in front of them and that is the sale from Phillips to

the government for the sum of $10.30 for conservation

helium. From this point it would only have been neces-

sary to deduct the costs of extraction and of transportation

from the wellhead to the extraction plant. Had they done

this they would have come up with a price close to $3.00.

It could be more or less. For comparison purposes they

could look at the actual sales at the wellhead or at the

plant inlet and this would have given them a true picture.

It is worthy of note that this is exactly what Judge Brown

did in the Helex cases, and his result is realistic and

reliable. Judge Brown, needless to say, did not accept

the work-back theory as an exclusive formula.

In the cases which have used the work-back method,

I find that in each instance the court started out with

a clearly supported market price and not a contrived one—

a price well established in a real market for the specific

commodity to be valued—or with proceeds from the actual

sale of the commodity at some later point in its processing.

See Freeland v. Sun Oil Company, 277 F.2d 154 (5th Cir.

1960); Black Crystal Coal Co. v. Garland Coal and Mining

Co., 267 F.2d 569 (10th Cir. 1959); Greer v. Stanolind

Oil and Gas Co., 200 F.2d 920 (10th Cir. 1952). See also

Stafos v. Missouri Pacific Railroad Co., 367 F.2d 314 (1966).

This court in United States v. Sowards, 370 F.2d 87,

91 (1966), showed that no one method need be exclusive

unless it clearly establishes the price. It pointed out that

the federal concept of market value is closely related to

selling price on the market and that the best evidence

is comparable sales even though the determination is not

limited to that method. It approved the use of other

_ data where there are no comparable sales and noted that

ee

37a

in condemnation cases market value may also be based

upon reproduction costs or capitalization of net income

or an interaction of these methods together with com-

parable sales. It said that all of this must look to

what a willing seller would sell for and a willing buyer

would pay. The Soward decision nevertheless showed a

preference for comparable sales. On the other hand, the

work-back method is to be resorted to only where every-

thing else fails.

In summary, then, it was wrong to adopt the work-back

method as an exclusive one. It was wrong to start at the

point where the trial court started and, of course, the re-

sult is an untenable one because it unnecessarily produces

an excessive price.

What about the comparable sales which the majority

opinion condemns?

We must bear in mind that the contracts entered into

by the government looked to prices in 1961. The Keyes

plant was cited for example and this involved purchases

of gas by the government in 1958 at prices approximating

$2.00 per mcf at the extraction plant inlet. The production

costs were about $15.50 per mcf, but the basic interest of

the seller was to make residue gas marketable by raising

the BTU. This was the approach that was used in the Otis

plant also. It was seeking to upgrade gas for fuel purposes.

I would submit that the fact that there was this kind of

motivation does not outlaw the comparable sales evidence.

Removal of helium as an aid to the heating quality of the

gas ought not to render the evidence of the sale non-

cogent.

The purchases of the government plants at Navajo,

Exell, Otis and Cunningham are said to be out of time be-

cause they occurred in 1945 during the War. They are

38a

hardly more remote from 1961 than are the sales cited by

Mr. Garwin, that is the $20.00 sales which occurred in rela-

tively recent times. There were also purchases of helium-

bearing gas for the Navajo plant in 1955, 1959, and 1962;

all at about $2.00 per mcf for helium context at the plant

inlet.

The gas sales agreement between Colorado Interstate

and Alamo Chemical Company, a Phillips affilate, which

were at $2.00 per mcf does not appear to be out of line.

The 1945 Navajo sales just referred to were determined

by the Court of Claims to have a value of $2.99 per mcf.

The fact that they occurred in 1945 could be taken into

account, but this is a two-edged sword because there was

some actual demand for this gas during the World War

II period.

I am not saying that the comparable sales should be

accepted as gospel. This does not mean, however, that we

should bury our heads in the sand to them. We can at

least view them without fear of being contaminated. The

probative value of actual sales is that they provide a more

rational and realistic view of value than does some theo-

retical approach such as the work-back approach because

these are actual demonstrations. The majority opinion does

not tell us where the social or other value is in the work-

back theory. As suggested before, it might be palatable

if actual cost figures were used in arriving at a starting

point. It is, however, lacking in palatability when the

opinion of the chief witness for Ashland that $20.00 is a

fair price for pure helium is accepted completely as the

starting point for a work-back process.

The foregoing is important because we are dealing not

with $100,000 or even a few million. Ultimately if the

work-back formula is used this could mean—and we con-

sider not only this case but its companion, the Helex II

39a

cases which have yet to be handed down but which are

likely to follow this same formula—hundreds of millions

of additional dollars to be paid by the government for a

commodity which at best has an uncertain value now and

which does not promise to have any added value in the

future.

III.

WHETHER TODAY’S DECISION WILL RESULT IN THE

GOVERNMENT’S BEING COMPEL ED TO PAY AN

UNREASONABLY HIGH PRICE, AN AMOUNT WHICH

IS BEYOND THE MARKET VALUE OF THE HELIUM

GAS

What would be the effect if the work-back method were

applied to the Helex II cases?

Most of the helium in the United States occurs in Kan-

sas, Oklahoma and Texas. It is not surprising, therefore,

that the companion case to this present one, the so-called

Helex II cases, arose in Kansas. The enormity of the oc-

currence was probably responsible for the helium conserva-

tion program in the beginning. These Kansas cases have

been before this court previously. They were filed in 1964.

The first one was decided at trial in 1968. It is reported in

292 F. Supp. 619. That decision was reviewed by this court

in 1971. Northern Natural Gas Co. v. Grounds, 441 F.2d

704. This initial case was primarily concerned with title

to the helium. Following remand, trial was had in order to

determine value. As in the instant case, the government

had already paid a substantial amount, about $12.00 per

mcf, which purported to represent the cost of the extrac-

tion plants as well as the cost of the helium. The action was

in interpleader. Its purpose was to determine the value of

the helium and hence the obligation, if any, of the govern-

ment or a party to pay additional amounts. At the trial

40a

evidence of comparable sales was not dissimilar to the evi-

dence offered at the Ashland case. There was a difference.

A good deal of opinion and interpretative evidence was

offered on behalf of the government. In sum, the govern-

ment presented a real case in this instance—a much

stronger case than was brought forth in Ashland. The trial

court’s findings were much different. Utilizing the com-

parable sales, and the opinion: evidence, the trial court

found that the value of helium at the wellhead was .60 to

.70 per mcf. As a result, the government was not required

to pay any more than $12.00 which it had paid for the

gas at the well plus extraction expense including building

a plant. This was because the value found was less than the

$3.00 amount beyond which the government was required to

indemnify. The additional amount, .60 to .70 had to be paid

by the Helex companies to the lessee-producers.

If the formula approved in the present case were

to be applied to the Helex cases there may be a far differ-

ent result. I am not saying that it will. I do not know.

The trial record is superior in the Helex cases and this

could change it. On the other hand, the work-back doc-

trine is firmly adopted. If this present Ashland ruling

becomes a precedent for the upcoming Helex II cases,

the result could be a disaster to the government in that

it could virtually double its cost. The price could go

from $12.00 (the amount already paid and which under

the Helex trial court’s decision is the entire sum), to as

high as $24.00.

The Ashland case is in sharp contrast. The trial court,

as we already know, employed the work-back method in

arriving at values of commingled helium. The prices which

it adopted were $11.76 to $16.98 per mcf for the years 1963-

72. This was in addition to the $10.30 already paid by the

government to Phillips to cover the total cost of extraction

ee eS eee =

4la

plus cost of gas at the well. The majority opinion in this

case gives restricted approval to the work-back method. It

remands for additional proceedings to reconsider three fac-

tors used. In remanding the case the majority opinion

has not, as we have also noted, given the trial court any

guidance as to what is sought and as to how these factors

are to be determined. Therefore, the outcome of the re-

mand as it affects the values in the Ashland case cannot

be anticipated. These values may be lower or they could

just as easily be higher. Thus, both the viewpoint and

the result in Ashland are entirely different from the ap-

proach and result in the Helex II cases. That is why

I am apprehensive as to possible results in the Helex cases

when the court gets around to applying the work-back

theory as now enunciated to the Helezx cases.

We are mindful that the government has already paid

the extraction companies a total of about $12.00 per mcf

for the 36,500,000 mcf’s of crude helium in Helex. This

is a sum of about $438 million for helium which has been

purchased and which has been stored under the conserva-

tion program. We cite it to show the magnitude of this

purchase and the extent to which the government would

be called upon to indemnify if the work-back method

were to be applied in the Helex II cases. If the pattern

of the present case continues, there could be additional

payment of from $9.00 to $12.00 per mcf. It remains

to multiply 36,500,000 mcf by the $9.00 or $12.00 addition

in order to view the dismal views.

I submit that the Helex II cases ought to have been

the precedent and the model rather than the Ashland

case.

42a

Finally, this entire helium conservation program is

affected with a public interest. As the majority notes,

there is no competition to provide low prices. It is a

monopoly condition and the determination of reasonable-

ness of prices has devolved on the courts. The court

should, of course, see to it that the companies involved

in the production of the helium receive fair compensation.

Fair compensation does not mean that the participants

should receive profits of the possible magnitude indicated

here.

43a

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

Nos. 73-1797, 73-1798, 73-1799

ASHLAND OIL, INC., Plaintiff,

v.

PHILLIPS PETROLEUM COMPANY, Defendant,

and

UNITED STATES OF AMERICA, Intervenor.

(Filed January 27, 1975.)

Richard B. McDermott, Tulsa, Oklahoma (Lloyd G. Minter

and Don L. Jemison, Bartlesville, Oklahoma, with him

on the Brief), for Appellant.

Gerald Sawatzky, Wichita, Kansas (Stanley G. Andeel and

Charles E. Cole, Jr., Wichita, Kansas, Jay W. Elston,

Houston, Texas, John M. Imel, Tulsa, Oklahoma, Ar-

loe W. Mayne, Ashland, Kentucky, J. M. O’Loughlin,

Houston, Texas; Foulston, Siefkin, Powers & Eber-

hardt, Wichita; Kansas, Fulbright & Crooker, Houston,

Texas, and Martin, Logan, Moyers, Martin & Conway,

Tulsa, Oklahoma, of Counsel, with him on the Brief),

for Appellee.

Jacques B. Gelin, Attorney, Department of Justice, Wash-

ington, D.C. (Wallace H. Johnson, Assistant Attorney

Hubert A. Marlow, Assistant United States Attorney,

Edmund B. Clark, Floyd L. France, and Dennis A.

Dutterer, Attorneys, Department of Justice, with him

on the Brief), for Intervenor-Appellant.

Before BREITENSTEIN, SETH and Dov Lg, Circuit Judges.

SETH, Circuit Judge.

This action was brought to recover the reasonable

value of helium intermixed with natural gas, extracted

therefrom and sold by the defendant Phillips to the United

States. The plaintiff prevailed against the defendant and

the Government as intervenor in the lower court, and

they both appeal. Plaintiff also appeals, but only as to

the ultimate division of the proceeds derived from the

helium as ordered by the trial court.

The case was commenced in the Southern District

of Texas, but transferred at defendant’s request to the

Northern District of Oklahoma. The complaint asserts

jurisdiction based on diversity and this ground was estab-

lished. The Government intervened as plaintiff, but was

realigned as a defendant.

The general description of the occurrence of helium,

its characteristics, and how it became an issue is described

in the several opinions hereinafter cited. It is, however,

necessary to describe the contractual relationship which

existed between the defendant Phillips and the Bureau

of Mines during the pertinent time period as it bears

on the relationship with plaintiff.

The Helium Act (50 U.S.C. §§ 167 et seq.) was

directed to the conservation of helium present in natural

gas and which was being wasted by the use of the gas

as fuel. It was determined that the best method to prevent

this loss was to intercept the flow of helium-bearing natural

gas after it had been gathered and where large volumes

were being transported by pipeline to the fuel consumers,

and to extract the helium therein intermingled. At these

points the pipeline companies had possession of the gas

stream.

£0 een Se a Ee

Se ee ee eee

45a

The Bureau of Mines pursuant to the Helium Act

entered into contracts with those in possession of the nat-

ural gas stream to purchase helium after it was extracted

from the stream. The record shows that this decision

to contract apparently was brought about by the inability

of the Bureau to then ascertain the identity of the interest

owners in the helium and to deal with them within any

reasonable time. The Bureau indicates that there were

some 30,000 landowners involved and several hundred les-

see-producers of the gas. The production is from several

States and the interest owners reside in many different

states. By the contracts with the defendant and others

the Bureau made possible the construction of extraction

plants and soon came into possession of the helium so

removed from the large gas stream. Waste of the helium

was so prevented, and the purpose of the Helium Act

was accomplished.

By the contract with defendant Phillips the helium

was physically acquired, but the ownership and compensa-

tion problems were put off to another day. The Bureau

thus used by this contract the advantageous position of

one in possession; postponed the inevitable legal problems,

and placed itself in the position of a defendant when

the problems came before a court.

In the contract between the United States as buyer

and the defendant as seller covering the purchase of

helium, a specific amount was provided as the sales price;

further, in paragraph 7.4 it was provided that in addition

to such amount the buyer would pay to the seller the

amounts “. . . that Seller shall pay subsequent to the

date of this contract . . . to parties other than itself .. .

for the acquisition of helium in the natural gas ... or

for any interest therein.” It provided that such payments

to qualify would have to be made with the consent of

46a

the buyer, and that “consent” included claims that “. . .

have been judicially determined in favor of any claimants

by any Federal Court or the highest appellate court of

any state,” and payments made in accordance with the

findings, principles, and conclusions of such “judicial deter-

mination.” Under the contract formula the defendant

would pay the first $3.00 per Mcf to third parties and

the Government would pay the rest. The result would

be that the ultimate payment to the “owners” was to

be so shared by defendant and the United States.

It is obvious that litigation such as this wherein com-

pensation is demanded by the interest owners of the helium

was contemplated and was provided for in the contract.

It was apparent that some knotty legal problems would

have to be met in order to determine who the interest

owners were, and to decide whether or not they had al-

ready been compensated for the helium under the leases,

the gas purchase contracts, or the Natural Gas Act. These

postponed legal problems were in iarge part considered

in the Consolidated Helium Cases (Northern Natural Gas

Co. v. Grounds, 441 F.2d 704 (10th Cir.)). The basic

legal relationships among the landowners, producers, and

gas purchasers were established, as was the relationship

of the Natural Gas Act and the Helium Act. The problem

of reasonable compensation, and who should pay, was not

decided and was remanded to the trial court. These were

decided under federal law in a federal interpleader action.

When the matter of compensation is in issue we are

faced with a different segment of the physical and légal

journey helium makes from the natural gas well to the

storage facilities of the Bureau of Mines than we have

considered before. The possession and interception of the

gas stream, the separation of the helium therefrom, and

its delivery to the United States under the contract ar-

47a

rangement all become important. The relationship of the

contracting parties to those who now have been determined

to own interests in the helium, and the values of the

helium are the center of focus.

The position of the United States as a party herein

is somewhat unusual. It filed a motion to intervene as

a party plaintiff with a “Complaint in Intervention of

the United States” attached. This motion was granted.

The complaint of the Government stated that the court

had jurisdiction under 28 U.S.C. § 1345, recited the ex-

istence of the contract for the purchase of helium from

Phillips, asserted that Phillips had delivered to the United

States “large quantities of a helium-gas mixture” for which

it had been paid “substantial sums of money.” This com-

plaint acknowledges that the plaintiff Ashland is seeking

“fair market value” of helium in the gas it sold to Phil-

lips which was processed for helium, and the helium sold

to the United States under the contract referred to. The

Government further alleges that Ashland has already been

paid for the helium content along with the hydrocarbons,

and in any event the value of the helium content is “nomi-

nal.” The complaint asserts that: “An actual controversy

exists between the United States and Ashland as to

whether payments between Phillips and Ashland for the

gas as produced was payment for the helium content.”

The Government also asserts that it “. . . has a real and

substantial interest in this litigation because of a provision

in its contract with Phillips under which it may be under

a duty to indemnify Phillips for additional payinents.. .”

The Government prayed for a determination that Ashland

had already been paid in full, and if not, that the fair

market value of the helium was “nominal.” Phillips and

Ashland answered the Government’s complaint, Ashland

in its answer prayed for costs and general relief.

48a

As the trial opened, the attorney for Phillips sug-

gested that the United States be realigned as a party

defendant. The court then said: “The Court will order

that the style be changed to Ashland Oil and Refining

Company, Plaintiff, versus Phillips Petroleum and United

States of America as defendants.” The findings recite

that at the Government’s request, it was aligned as a

defendant and was an intervenor. The United States par-

ticipated in the trial, cross-examined witnesses, put on

a witness of its own, objected to the plairitiff’s findings,

and submitted proposed findings.. The judgment entered

ran against Phillips only. The United States has fully

participated in this appeal.

As indicated above, this action was brought against

the defendant Phillips to recover the reasonable wellhead

value of helium commingled with the FPC jurisdictional

gas, but separated at defendant’s plants constructed pur-

suant to the Helium Act and delivered to the Bureau

of Mines. The contract between the defendant and the

Bureau of Mines is considered above. The suit was tried

within the holding of Northern Natural Gas Co. v. Grounds,

441 F.2d 704 (10th Cir.) (The Consolidated Helium Cases,

or Grounds).

On this appeal Phillips devotes much of its brief and

argument to contentions which were advanced in Grounds,

‘ there considered and rejected. It would serve no purpose

to again treat these arguments in this opinion. Instead

it is sufficient to refer to the Grounds opinion for the

disposition of these points.

The Grounds case was remanded for a determination

of the reasonable value of the helium in issue, the other

points having been decided, and the basic legal relation-

ships determined. Thus here we are faced with the value

2 aie ——

49a

problem, and some related issues which have not come

from the remanded case but from another direction.

It must be accepted that the “value” sought to be

determined in this suit is a factual matter arrived

at through the application of the proper legal doctrines.

The appellants do not attempt to separate the factual issues

from the legal issues in the application of Rule 52.

The appellants urge as a basic error on the part of

the trial court that it chose the wrong method in arriving

at a valuation. The defendants put on extensive testimony

and exhibits as to transactions concerning helium-bearing

gas wherein a value was ascribed to the helium component

on a market value theory. These events covered a broad

time and geographical space, and involved both govern-

mental agencies and private parties. The trial court held

that there was no free competitive market, and inferen-

tially held that these transactions were of no probative

value because they were not comparable. Instead the

trial court used a different valuation method—a value

less expense of beneficiation.

The appellants urge that the use of such a value less ex-

pense method was error in the face of their market value

evidence. The Government on this point cites a number of

condenination cases, including United States v. Miller, 317

U.S. 369; United States v. Sowards, 370 F.2d 87 (10th

Cir.); and United States v. Featherston, 325 F.2d 539 (10th

Cir.). The record discloses that the rejection by the trial

court of the evidence of “sales” was well within its discre-

tion. As indicated above, the transactions which ha7,/an

arguable similarity were very remote in time or place, and

those closer in time and space had little or no similarity. As

a matter of law, the trial court was within its discretion, in

view of the evidence before it, in selecting the value less ex-

50a

pense formula as a secondary method. There was ample

evidence before it on the elements of the method.

The appellants also argue that the value less expense

method was improperly applied in that the proof was

deficient as to certain elements, that mistakes were made,

and that “trifling recognition” was given to certain evi-

dence. We will take these references to mean that there

was not substantial evidence on the several factors or

elements of the method of valuation.

As to the several elements, the appellants” urge that

the amount used as the “return on investment” expense

was not sufficient. The trial court used a figure which

was part of the testimony of plaintiff’s witnesses, and

the method by which it was. arrived at was so presented.

There was no substantial contrary evidence presented at

trial although on appeal appellants assert deficiencies in

the method. This was a factual determination and there

was substantial evidence to support the trial court’s find-

ings although we might not have reached the same result.

The appellants also object to the allowance made by

the trial court of $2.00 per Mcf for the “treatment” of

the “crude” helium sold to it by Phillips, but to be incurred

by the Government before resale by it, as insufficient

in that it did not include transportation and storage. Mat-

ters of expense to be incurred subsequent to the delivery

and perhaps some transportation from place of delivery

to the underground storage are not shown to have been

omitted from the $2.00 figure although it was denominated

a “treatment” or “processing” cost. In any event, these

costs are more properly attributable to the general conser-

vation program as the duration of the storage and addi-

tional transportation are unknown factors under the record.

The use of the deduction was proper and appellants have

5la

not shown that it was not supported by substantial evi-

dence.

The trial court used a figure of $20.00 per Mcf for

the selling price of helium, and this was the “value” ele-

ment of the value less expense method. This figure was

testified to by the witness for the plaintiffs, and the amount

is well within the Bureau of Mines Yearbook figures for

the several years in issue. The evidence supports this

figure also, and this price issue was not directly met by

defendant by way of proof.

The Government, in an argument again based on con-

demnation doctrine, urges that the helium values were

created by its own purchase program—The Helium Con-

servation Program, and it should not have to pay for such

values. It cites several condemnation cases on this point

and United States v. Fuller, 409 U.S. 488, which in turn

cited United States v. Cors, 337 U.S. 325. This again

concerned payment for something requisitioned by the

Government. The issue here is the determination of value

of a commodity which was purchased and sold by the

Government and by private concerns. This cannot be

equated to the cases where the condemnation or the reason

for condemnation increases the value of the land taken.

The helium has value by reason of its nature and useful-

ness. The Government may have made this helium aveil-

able but did not create its value.

The appellants vigorously attack the use by the trial

court of the value of hydrocarbon liquids produced at

the helium plants in the value less expense calculations.

The trial court, on the basis of extensive testimony, and

also on exhibits consisting of letters from Phillips, allo-

cated part of the plant expense to these liquids as by-

products. The evidence is clear that an increase in the

52a

production of liquids would result from the helium plant

operation. This would be an increase over what had been

experienced before and over ordinary extraction plants.

The witnesses calculated the amount to be so used in

the formula. This was not contradicted in amount by

appellants, as instead they maintained that the increase

in liquid production did not result at all from the treatment

of the gas stream for helium extraction. The record shows

that increased quantities of wet gas were directed to at

least one of the plants and this could make a difference

in the production of liquids, but no figures were produced

by defendants. Instead the defendants maintained in the

face of overwhelming evidence to the contrary that the

helium extraction made no difference. Under this state

of the record, we must hold that the trial court was justi-

fied in using the figures it did as they were supported

by substantial evidence. Different quantities of liquids

were produced at different plants, and this resulted in

different helium values at different plants. This, in view

of the evidence, was a consequence of the application of

the expense element in the formula. Evidence on this

issue was presented by the parties as indicated above,

and although the result may not have been as precise

as it could have been, it is again a factor supported by

substantial evidence. ihe

The Government makes the point that the value of he-

lium at the wellhead determined by the trial court exceeds

the base price for the helium-nitrogen mixture it was buy-

ing from Phillips under its contract. This is the conse-

quence of the decision, but there is no reason why the well-

head price should be determined by the contract price. The

contract between the appellants was negotiated between

them alone, and the pricing was the evaluation by them of

the entire economic consequences flowing from the con-

oe ”

53a

tract including many significant factors such as its duration,

warranties, and indemnities. We have described the con-

tract at the outset of this opinion. Attention should how-

ever be directed again to the evaluations made of the legal

questions, especially the title questions. The Government

agreed basically to pay Phillips for its interest in the

helium and then to pay more if other interest owners es-

tablished their claims. Thus the price “paid” for all the

interests in the helium has not yet been determined. The

considerations leading to this method were described above.

The value here sought to be established is independent of

the contract base amount and covers all interests of the

proper parties.

We have considered Lippert v. Angle, 211 Kan. 695,

508 P.2d 920. It states the traditional preference for com-

parable sales proof. The case does not involve the separate

valuation of helium. The plant was very small, and the

situation is not comparable in any way. See also Green-

shields v. Warren Petroleum Corp., 248 F.2d 61 (10th Cir.).

This appeal also raises issues as to the allowance of

prejudgment interest, attorney fees, and the matter of

limitations. The trial court tried the case as a federal

question case, relying on our opinion in Texaco Inc. v.

Phillips Petroleum Co., 481 F.2d 70 (10th Cir.), which was

thereafter reversed by the Supreme Court in Phillips Pe-

troleum Co. v. Texaco Inc., 415 U.S. 125.

The original Consolidated Helium Cases were based on

federal interpleader jurisdiction, and also federal law was

applied. The case before us on this appeal started as a

diversity suit. We have described at some length above

the participation of the United States in this action, espe-

cially the initial intervention as a plaintiff expressly under

28 U.S.C. 1345. It is apparent however that its alignment

at all times was with the defendant Phillips on all impor-

54a

tant issues. No relief was sought by Ashland directly

against the United States. The trial court found the ele-

ments of a condemnation or seizure by the United States,

but this analysis of the manner in which helium was ac-

quired was considered in the Consolidated Helium Cases,

and the arguments were rejected.

As a matter apart from jurisdiction, we hold that the

trial court’s application of federal law was proper. The

action of the Government in entering the case as a plain-

tiff under 28 U.S.C. § 1345 is a significant factor to be con-

sidered. The real party in interest thus appeared formally

to challenge the claims of Ashland. The Government so

asserted that it had a real and substantial interest in the

litigation, and that an actual controversy existed between

it and Ashland. It is apparent that under the contractual

arrangement, the United States ‘s to pay to Phillips the

amounts that Phillips “shall pay” to other parties for

the acquisition of helium in the natrual gas. Thus the

United States is liable for the additional amounts which

Phillips will have to pay by reason of this action. The Gov-

ernment has here entered the litigation to assert its own

position and interest.- This is initially a matter of dollars,

but the Government still has possession of a large part of

the helium in question, and this possession can put a some-

what different cast on the problem. These circumstances

and the intervention could very well have changed the ac-

tion to something other than the usual diversity suit at

least for the purpose of the application of Erie v. Tomp-

kins. This has interesting possibilities, but in any event, the

circumstances direct that federal law be applied. -

As indicated above, and as demonstrated in Northern

Natural Gas Co. v. Grounds, 441 F.2d 704 (10th Cir.), and

by the record here, the Government is ultimately faced

with claims made by many thousands of interest owners

———

55a

from many states relating to production from Kansas,

Oklahoma, and Texas. Each state has different legal doc-

trines relating, among other things, to the nature of in-

terests in oil and gas, and what rights are created by oil

and gas leases. With the primary liability for the dollars,

and for the determination of ownership resting with the

United States which obtained possession of the helium, we

hold that the application of the rule expressed in Clear-

field Trust Co. v. United States, 318 U.S. 363, is indicated.

One of the most significant factors is the one indicated

above, that is, the fact that the United States ended up

with the helium. It directed, by contracting, the diversion

of the helium to itself before resolving the obvious owner-

ship problems with ‘a multitude of claimants having di-

verse legal relationships to the helium, depending upon

the place where the natural gas was produced and upon

their contractual positions. The United States, again by

contract, sought to handle these problems by pzoviding for

reimbursement to Phillips, and it may have done so. The

Government nevertheless obviously has the basic responsi-

bility and liability, as it recognizes by its intervention.

Erie v. Tompkins does not demand the application of

state law to all diversity actions. The Court in the Clear-

field Trust case set out an exception which was there ap-

plied to “obligations” of the United States and later ex-

panded. The case concerned the forgery of a Government

check, and a delay in notice by the Government to the bank

beyond the period contemplated under state law. The

Court held that rights of the Government relating to com-

mercial paper it issues are determined by federal and not

state law. The Court said that the authority to issue the

check in question originated in the Constitution and stat-

utes of the United States and was not dependent on the

laws of any state. In the matter before us, the helium was

acquired by the United States by contracts as authorized

56a

by federal statutes. This contracting with private enter-

prise was suggested by statute. As stated by the Court in

the cited case, “The desirability of a uniform rule is

plain.” See also National Metropolitan Bank v. United

States, 323 U.S. 454, limited by Bank of America v. Par-

nell, 352 U.S. 29. The War Bond cases in state and federal

courts lead to the same result. See In re Stanley’s Estate,

80 P.2d 332 (Colo.). The Court in D’Oench, Duhme & Co.

v. FDIC, 315 U.S. 447, also indicated a considerable area to

be omitted from the application of Erie. There an action

by the FDIC was brought on a note given to a bank by the

defendant, and the Court applied federal law. Also in the

shareholders’ liability action in Holmberg v. Armbrecht,

327 U.S. 392, in the solution of a limitations problem, the

federal law was applied. Generally, see 59 Harv. L. Rev.

976, and 105 U.Pa.L.Rev. 797.

Under Clearfield when the United States seeks to liti-

gate or seek a remedy arising from transactions it has

entered into in the ordinary commercial world to carry out

its program, it has been held that federal law may be ap-

plied. The federal courts can adopt a governing rule of

law in such circumstances if there is no statutory direction

to the contrary. Clearfield expressly so held. 318 U.S. at

366. See also United States v. Allegheny County, 322 U.S.

174. Clearfield thus indicates that the Court may apply

state doctrines or parts of them as “federal law.” In

United States v. Standard Oil Co., 332 U.S. 301, the Court

stated that the interests of the Government and its legal

relationships may be so determined. The impact of the

application of state law upon the governmental interests is

a factor of great weight. See United States v. Mitchell, 402

U.S. 190.

The Court, in United States v. Little Lake Misere Land

Co., 412 U.S. 580, considered the application of a Louisiana

57a

statute to the reservation of a mineral interest in land ac-

quired by the United States. The factors discussed above

were there treated, and the process was described as a

“choice of law” (federal or state) matter. The Court there

said:

“However, in a setting in which the rights of the

United States are at issue in a contract to which it is

a party and ‘the issue’s outcome bears some relation-

ship to a federal program, no rule may be applied

which would not be wholly in accord with that pur-

pose.’” [The quotation included being from Mishkin,

105 U.Pa.L.Rev. at pp. 805-6. ]

The Court found further that the federal land acquisition

program in United States v. Little Lake Misere Land Co.

conflicted with the state law on the duration of reserved

mineral interests and said: “The choice of law merges

with the constitutional demands of controlling federal leg-

islation; we turn away from state law by default.”

In the case before us, the United States was seeking to

carry out the Helium Conservation Program then consid-

ered of great urgency and importance. It sought to, and

did, acquire possession of the helium as directed by the

legislation. The action of the Bureau of Mines was effec-

tive. In so doing it set up the contractual walls between

itself and the land owners and gas producers, and put off

the inevitable day of reckoning as to ownership. Phillips

is really only a nominal party and looking at the substance,

the Government has the responsibility arising from its ac-

quisition and possession of the helium. In the face of the

multitude of claimants, the variations in state law, and

the Clearfield doctrine, the trial court was correct in not

applying Erie v. Tompkins.

58a

We find no merit to the contention of Phillips that it

is entitled to a setoff for any sums previously paid to Ash-

land for purchases of jurisdictional gas.

The court in the Consolidated Helium Cases considered

the ownership of the interests, title to the helium, and

described how these passed down the gas stream. This de-

termination prevails. The trial court, as to the interest of

the landowners-lessors, apparently followed a confiscation-

condemnation theory and divided the value of the helium

to be recovered from defendant Phillips equally between

the lessors and lessees. Our opinion in the Consolidated

Helium Cases requires that this division be in accordance

with the lease terms, and thus the same division as applied

to the hydrocarbons. The judgment of the trial court

making an equal division between lessor and lessee of the

proceeds attributable to helium values must be and is

reversed with directions to enter judgment providing for

a division in accordance with the terms of the leases, and

the terms of other agreements relating to the shares of pro-

duction, or payment for shares of production, if such be

applicable.

The issue of limitations has been raised together with

the tolling of whatever statute may be applicable. This

litigation concerning the property interests in helium and

the right to compensation, considering the related cases, has

been protracted and equitable considerations applicable to

periods of limitation have come into play. See deHaas

v. Empire Petroleum Co., 435 F.2d 1223 (10th Cir.). We

must conclude that this action has not been barred. Ameri-

can Pipe & Construction Co. v. Utah, 414 U.S. 538.

The trial court acted within its discretion under federal

law in the allowance of prejudgment interest. Royal In-

demnity Co. v. United States, 313 U.S. 289; St. Paul Mer-

aA ak 5 OBR Ra ay

59a

cury Indemnity Co. v. United States, 201 F.2d 57 (10th

Cir.).

As to attorney fees awarded by the trial court, we are

unable to find any statutory provision for them or any

rule of practice which would authorize such fees. The

- Supreme Court has, since the trial court’s decision, decided

F. D. Rich Co. v. Industrial Lumber Co., 417 U.S. 116, a

Miller Act case. The opinion includes a direct and in-

tensive consideration of attorneys fees. The Court there

defines the basic rule:

“The so-called ‘American Rule’ governing the

award of attorneys’ fees in litigation in the federal

courts is that attorneys’ fees ‘are not ordinarily re-

coverable in the absence of a statute of enforceable

contract providing therefor.’ ”

The Court concluded that Miller Act suits are “plain and

simple commercial litigation,” and the Court would not

change the American Rule “in the context of everyday

commercial litigation.” We must hold that this litigation

is not so dissimilar to Miller Act suits as to bring about a

different result as to attorney fees than expressed in F. D.

Rich Co.

The judgment of the trial court is thus REverseEp as to

the award of attorney fees, and as to the equal division

between lessor and lessee of the proceeds attributed to the

value of the helium, as above indicated. The judgment is

AFFIRMED in all other respects.

60a

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

MARCH TERM—May 10, 1977

Before The Honorable David T. Lewis, Chief Judge,

The Honorable Jean S. Breitenstein, Senior Circuit Judge,

The Honorable Oliver Seth, Circuit Judge,

The Honorable Robert H. McWilliams, Circuit Judge,

The Honorable James E. Barrett, Circuit Judge, and

The Honorable William E. Doyle, Circuit Judge

No. 73-1797

No. 73-1798

No. 73-1799

(D.C. No. 67-C-238) |

ASHLAND OIL, INC.,

Plaintiff-Appellee and Cross-Appellant,

VS.

PHILLIPS PETROLEUM COMPANY,

Defendant-Appellant,

vs.

UNITED STATES OF AMERICA,

Intervenor-Appellant.

JUDGMENT

This cause came on to be heard en banc on the con-

solidated record on appeal from the United States District

Court for the Northern District of Oklahoma and was

argued by counsel and submitted to the Court.

RSI RCs cant wai SA Sd Re a Sen nel te NS es SS NE A AIOE Bt ot

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Upon consideration whereof, it is the judgment of this

Court that the judgment of the district court is affirmed in

part and reversed in part as more fully set forth in this

Court’s opinion. The cause is remanded to the United

States District Court for the Northern District of Oklahoma

for further proceedings in light of the opinion of this Court.

Each party shall bear its own costs.

/s/ Howard K. Phillips

Howard K. Phillips

Clerk

/s/ Linda A. Hall

Deputy Clerk

62a

IN THE UNITED STATES STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF OKLAHOMA

No. 67-C-238

ASHLAND OIL, INC.,

Plaintiff,

vs.

PHILLIPS PETROLEUM COMPANY,

Defendant,

and

UNITED STATES OF AMERICA,

Intervenor.

MEMORANDUM OPINION

(Filed December 28, 1978)

Gerald Sawatzky of Foulston, Siefkin, Powers & Eberhardt,

Wichita, Kansas; John M. Imel of Martin, Logan,

Moyers, Martin & Conway, Tulsa, Oklahoma; and W.

O. Strong, III, Ashland Oil, Inc., Houston, Texas, At-

torneys for Plaintiff Ashland Oil, Inc.

Don L. Jemison, Phillips Petroleum Company, Bartlesville,

Oklahoma; and L. K. Smith of Boone, Ellison & Smith,

Tulsa, Oklahoma, Attorneys for Defendant Phillips

Petroleum Company.

John E. Lindskold, Dennis A. Dutterer and Andrew F.

Walch, Department of Justice, Washington, D. C.; and

Hubert H. Bryant, United States Attorney, and Hubert

A. Marlow, Assistant United States Attorney, Attorneys

for Intervenor United States of America.

Cy a ee ee 4h

63a

Before LUTHER BOHANON, United States District Judge

Introduction

(See also Findings Nos. 1-13)

Plaintiff Ashland seeks compensation for helium con-

tained in the natural gas stream acquired from plaintiff

by defendant Phillips, which was subsequently extracted

and sold separately to the United States government.

Originally tried in 1973, this case was remanded on appeal

to retry controlling factual issues. In the first trial plain-

tiff and defendants’ legal theories and approaches were suf-

ficiently divergent to prevent a joining of issues. Conse-

quently, crucial factual considerations were never fully

developed evidentially. At retrial the significant factual

matters were developed more fully and thoughtfully than

before. Thus, the court must be amenable to discarding

earlier erroneous conclusions. The interests of justice, aptly

perceived by the circuit court opinion in this case, require

no less.

In adjudicating this controversy a second time, the

court was assisted by the appellate court’s enunciation of

certain controlling legal principles. The basic legal re-

lationships among the landowners, producers and gas pur-

chasers were established, notably including the lessee-

producer’s right to the reasonable value of the contained

helium. Northern Natural Gas Company v. Grounds, 441

F.2d 704 (10th Cir. 1971); Ashland Oil, Inc. v. Phillips Pe-

troleum Company (hereafter Ashland v. Phillips), 554 F.

2d 381 at 384 (10th Cir. 1975).

The prime responsibility of this Court is to determine

the reasonable value of the helium herein when com-

mingled at the wellhead with other natural gas. Ashland

v. Phillips, supra at 385-386. Such “value” is basically a

factual matter to be ascertained through application of the

64a

appropriate legal doctrines. Ashland v. Phillips, supra at

385. Optimally, a product’s “fair market value” is deter-

minable by examining comparable sales of the same product.

Ashland v. Phillips, supra at 387. Significantly, some sales

of commingled helium offered in evidence here were too

remote in time, and otherwise incomparable, to be relied

on solely.

The “Work-Back” Method

The next best approach is the “work-back” or “value

less expense” method whereby a raw material’s value is

extrapolated by using as a starting point an end product

of that material whose value is certain. The costs of

transforming the raw material from the stage where its

value is unknown to that where its value is certain are

subtracted from the starting value to reveal the value

being sought.

“The work-back valuation is well recognized in

the production and early processing of natural gas... .

There is nothing unusual about the method, it is subject

to proof, and can be just as accurate as any other

method, but it is more difficult to apply.” Ashland

v. Phillips, supra at 387.

Effective application of this method requires selec-

tion of an appropriate starting value in the form of a

processing stage whose product possesses a value certain;

accurate assessment of the costs accruing between the

known stage and the one in question is also essential. In

developing a resource from a raw material into a finished

product, each production stage will add economic value to

what was initially only the value of the raw material.

The value added at each stage of production is essentially

the cost of resources used in taking the material through

that stage of production. The work-back method es-

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65a

sefitially establishes at each production stage the value of

the product at that point. By subtracting out all produc-

tion costs, the value of the raw material is revealed.’ Ap-

plication of this approach, however, can be difficult. Market

structures vary at different production stages and cor-

relating figures from one stage to the next can require

abstruse analytical calculations, easily resulting in error.

The selected starting point should be as close as possible

to the production stage in question.”

With these theoretical considerations in mind, two

potentially viable starting points emerge. One is helium

in its crude form; the other is helium in its pure Grade A

refined form, the starting point initially adopted by this

court.

1. “Yes, I am familiar with the workback method of dis-

covering the value of a raw material where there are no com-

parable sales that can be used to attribute value to it. Essentially,

as I understand it, if a raw material is scarce enough to command

a price or to have an economic value, then, this raw material may

go through several stages of production and production process

to turn it into an end product. At each of the production stages,

there will be value added to what was originally a value of the

raw material. The value added at each stage of production is

essentially the cost of resources used in taking the material

through that stage of production.

Now, then, a workback amounts to determining at some stage,

at some market, at one of the stages of production, what the

value of the product up to that point really is. Then, we subtract

out the costs and that should leave us with the economic value of

the raw material, if the starting point is correct, if the workback

is correctly done.” (Tr. 368-369, Dr. Richard H. Leftwich, Regents

Professor of Economics and former head of the Department of

Economics at Oklahoma State University.)

2. “...[I]f you work back through several successive stages

in going from one stage of the production process to another,

there are likely to be errors involved, errors involved in compu-

tations. There will be errors involved because market structures

differ at differing stages of production, and the more stages of

production that you work back through, the more likely we are

to compound these errors and to wind up with an erroneous

computation, an erroneous value for the raw material.... [I]t

seems to me that the appropriate starting point is the closest

identifiable market to the raw material.” (Tr. 369-370, Dr.

Leftwich, supra)

See also the testimony of Dr. Ezra Solomon, Dean Witter

Professor of Finance at Stanford University, at Tr. 418.

66a

Refined Helium Market

(See also Findings Nos. 14-18)

If one fact has clearly emerged at retrial, it is the

inappropriateness of using refined helium prices as a start-

ing value in extrapolating commingled helium’s value at

the wellhead.

Possession of a production phase where the raw mate-

rial has been processed to a point of possessing a value

certain is crucial to the work-back method, whose efficacy

is based on employing known data to extrapolate the un-

known. Refined helium prices for the time period relevant

to this case were not only distorted by monopolistic market

conditions which prevented pure helium’s prices from re-

flecting the product’s “fair market value,” but even more

significantly there was never any relationship whatsoever

established between the commingled helium in this case

and any refined helium market.

All of the commingled helium in this case was pro-

cessed into crude helium and placed in underground storage

by the government, where it remains today. None has

been refined in Grade A helium.* It was acquired with

3. “. .. [T]he crude helium that has been put into the

government’s Cliffside field . . . was never produced to supply

current demands. ... We don’t know when it’s going to be used.

We don’t know what purpose it’s going to be used for, and we

don’t know what price it’s going to be sold for sometime in the

future, when and if it’s ever used... .

So, it’s setting there, and it’s in the Cliffside field, and there

is 36 billion cubic feet of it. Now, 2 billion cubic feet of that

was put in there by the Bureau of Mines, so only 34 billion cubic

feet represents helium that was obtained from the conservation

companies ....” (Tr. 321-322, Henry P. Wheeler, Jr., former

Assistant Director to the Bureau of Mines responsible for the

government’s helium conservation program)

“Q Of all of the helium acquired under the conservation

program is all of it in storage at Cliffside?

A Yes, it is.” (Tr. 283, 284, Ray D. Munnerlyn, Chief of

the Helium Division of the Bureau of Mines)

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67a

conservational intent and for consumption at some unde-

termined future time. Any suggestion that the helium

in this case could have been refined and subsequently

sold at then prevailing market prices of $20 to $35 per

Mcf is at variance with what the most persuasive evidence

before this court demonstrates to be the truth.‘

Refined helium prices during the period in question

consistently were distorted by effects of a monopolistic

seller’s market and never were determined by free and

open competition. Government prices based on long-term

policy considerations completely dominated the market in

the initial years significant to this case, and were influen-

tial throughout the entire course of the pertinent time

period. Introduction into the refined helium market of

even a small percentage of the large helium quantities

at issue here would have plummeted prices industry-wide,

not only because any reasonable competition would have

constituted an effective assault on the then prevailing arti-

ficially high price structure, but also due to the relatively

inelastic helium demand at the time. Only a small number

of end uses for refined helium exist, and those end uses

can absorb only limited quantities of refined helium.®

When a product is available in quantities greatly exceeding

anything the market requires or can absorb, the excess

amount is worth very littlesand will tend to severely

4. “. . . Ashland’s calculations assume that if more crude

had been refined, that the price would not have changed. Basic

economic principle called the law of demand tells us that this is

false, and the numerical analyses that I have just gone through

show just how false this kind of an assumption, an underlying

assumption can be. Because only a very small increase in the

quantity of crude refined would lead to a relatively large decrease

in the price of the Grade A helium.” (Tr. 794, Dr. Ronald

Braeutigam, Professor of Economics at Northwestern University)

5. “There are a small number of end uses of refined helium

and each of these end uses can absorb only limited quantities of

refined helium.” (Tr. 386, Dr. Leftwich, supra)

68a

depress prices, as competition forces sellers to unload their

product for virtually anything they can get.®

Large quantities of crude helium were produced and

sold in the United States during the years in question.

In comparison, very small quantities of refined helium

were bought and sold. In light of the inelasticity of de-

mand for refined helium, and the marked disparity volume-

wise between crude and refined helium, the best evidence

indicates that a 1 percent increase in the refinement of

available crude helium would have led to a drop in refined

helium prices of at least 5 percent, and possibly in excess

of 9 percent, depending on the year chosen.’ Introduction

of a large quantity of such helium into the market would

have driven the price down to near zero.°

The salient fact questions herein can in no manner

be resolved by reference to the refined helium market.

The helium here was never refined, and it never influenced

or was affected by any refined market. Simply stated,

in this case refined helium prices represent an inappro-

priate and unsatisfactory starting point for application of

6. “We could have gone out and been very hard bargainers,

playing one of these companies against the other, because ob-

viously some of them are going to get something for their helium

and some of them were not....” (Tr. 324, Wheeler, supra)

7. “. .. [T]he volume of the crude helium was something

like five to nine times the volume of the helium in the Grade A

market, depending on which year you pick. So, for example, if we

were to take one percent of the crude in any given year that

had been produced and convert that to Grade A, then, you would

get from five to nine percent change in the quantity of Grade A

helium. And using this information on elasticity of demand, we

conclude that the one percent increase in the quantity of crude

which is refined would lead to a drop in price in the Grade A

market, at least five percent, and maybe even more than nine

percent, depending on the year we pick.” (Tr. 793, Dr. Braeuti-

gam, supra)

8. “If a very large quantity of Grade A helium or refined

helium were thrown on the market, this would drive the price

down to near zero.” (Tr. 387, Dr. Leftwich, supra)

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69a

the work-back method. The best evidence repeatedly em-

phasizes the ineffectiveness of attempting to infer the value

of large quantities of crude or commingled helium, based

upon the relatively small number of refined helium market

transactions.°

Crude Helium Market

(See also Finding No. 19)

The other potential starting point for application of

the work-back method is the crude helium market. It

represents the first processing stage at which helium per

se is freely marketed and the first form into which com-

mingled helium is separated. The close proximity of the

two stages makes work-back calculations easier and more

reliable. During the relevant years, crude helium produc-

tion was much more comparable in quantity to commingled

helium production than was refined helium production,

9. “It is simply not proper to infer the value of a large

amount of crude helium, based upon the small amount of helium

in the Grade A market. And to illustrate this. Suppose we did

start with that $20 price of Grade A helium and suppose following

the workback method we subtracted off the cost of converting

crude helium to Grade A helium to arrive at some kind of net

price for crude helium. The next step in the workback method

then would be to try to compute a value for all of that crude

helium, and this would be done by taking the net price that we

calculated and multiplying it by the quantity of crude. The

problem which arises is simply this. It imputes a value to all

of the crude helium, based upon the $20 attached to only a very

small volume in the Grade A market. In other words, the method

that was proposed by Ashland assumes, in principle, if not in

fact, that we could have refined all of that crude helium and sold

it in the Grade A markets and that the price would not change

from $20. This violates the fundamental law which economists

call the law of demand, namely, we know that if the quantity of

Grade A helium had been larger, that the price would have

dropped. And this is exactly the point that Ashland has ignored

in coming up with this workback method and applying the $20

figure as though we can impute a value to all of that crude

heliurn based on that quantity, which is very small in the Grade

A market.” (Tr. 789-790, Dr. Braeutigam, supra)

~

70a

and all the helium at issue was sold and maintained in ~

crude helium form. The crude helium market was by

far the largest helium market existent during the pertinent

ten year period. Beginning the work-back method here

would allow us to make computations on the basis of

events and transactions which actually occurred, and would

minimize the need for speculation of the type refined

helium figures require.

Supply and demand characteristics of the crude helium

market were similar in size and structure to those which

would have attended a commingled helium market if one

had been independently identifiable, and the comparability

of these economic factors makes comparisons between the

commingled and crude stages much more realistic than

comparisons with the refined stage.

Several factors made crude helium prices more repre-

sentative of helium’s fair market value at that level than

pure helium prices were at the refined level. When the

conservation program was initiated, a great many potential

sellers received notice from the government of its intention

to buy crude helium, and some 13 or 14 companies ex-

pressed interest in contracting as crude helium suppliers.

The contracts which finally emerged, including Phillips’

contract, followed extensive “good faith’ and “arm’s

length” negotiations. The price paid for crude helium to

the “‘Helex” companies, including Phillips, averaged about

$12 per Mcf. While the evidence reveals that the crude

helium market was not a perfectly competitive market

in the classical economic sense, throughout most of the

relevant period there were at least four sellers in the

market, dealing at prices freely negotiated, and substantial

amounts of crude helium were exchanged within a fairly

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. harrow range of prices.” This market was at least im-

perfectly competitive and significantly more competitive

than the refined market. A rather well developed crude

helium market existed, then, during the time period rele-

vant here, generally operating within a price range of

$11.00 to $14.00.

Phillips Contract Price

Since the evidence of both Ashland and defendant

Phillips offers work-back calculations based on Phillips’

actuai extraction costs, employing Phillips’ actual contract

price as a starting value would be ideal if shown to repre-

sent a fair and reasonable price for crude helium."! The

Phillips contract was one of four negotiated with the four

“Helex” companies and, like the others, resulted from ex-

tensive “arms length” negotiations. The court is now per-

suaded that Phillips’ contract price of approximately $10.30

per Mcf represented a fundamentally fair and reasonable

price for crude helium. This contrasts with the first trial,

10. “I think that to start with we have a market which I

would not characterize at the crude level as being a perfectly

competitive market, certainly, in the classical economic sense.

However, we do have throughout most of the time period I’m

talking about eviderce that we had at least four sellers in that

market, and they were entering into contracts at prices which

were not dictated, either by the government or by anyone else.

They were freely negotiated prices. I would characterize the

market as perhaps imperfectly competitive ....”’ (Tr. 801, Dr.

Braeutigam, supra)

“So with these exchanges and very very substantial amounts

of crude helium being exchanged, within a fairly narrow range of

prices, I think there is no question but what we had a very good

ear for crude helium existing.” (Tr. 375-376, Dr. Leftwich,

supra

11. ‘“. .. [S]Jince the workback cost figures that are being

used in this case are Phillips’ cost figures, Phillips’ workback

cost figures, then it appears to me that they ought to be applied

to a Phillips’ price, rather than taking Phillips’ cost figures and

applying it to some nebulous overall price. If we are going to

use Phillips’ costs, let’s use Phillips’ price to do our workback.”

(Tr. 391, Dr. Leftwich, supra) ‘1

72a

wherein the evidence demonstrated no relationship be-

tween the negotiated contract price and the fair market

value of the helium. See Ashland v. Phillips, supra at

384.

Ashland’s argument that the contract figure did not

represent the full and complete helium “price,” due to

the contract’s indemnity clause, is persuasive on its face

but was shown at retrial to be factually unsound. At

issue is contractual provision 7.4 of the Phillips contract,

wherein the government agreed to indemnify Phillips for

amounts in excess of $3.00 paid to third parties for their

helium ownership rights. Such provision implies that the

complete crude helium price was contemplated to be the

base figure of approximately $10.30 plus additional pay-

ments required by third party ownership interests. The

evidence now establishes that the base figure was con-

sidered by the parties to be the full and complete price

for the crude helium and that it, in fact, constituted a

fair and reasonable price. Phillips’ negotiators had been

advised by legal counsel that Phillips possessed sole and

complete title to all of the contracted helium. Phillips

was willing to so warrant its title and was intent on

negotiating a contract price reflecting the full and complete

value of the crude helium. Approximately half of the

helium Phillips contracted to sell was produced from its

own gas wells and indisputably belonged to Phillips, and

the base contract figure unquestionably represented full

payment as to this one-half.* Significantly, the indem-

12. “... [I]n the case of Phillips, one-half of its total crude

sales to the government consisted of commingled gas that was

not subject to the indemnity provision. And the price they sold

that half at was no different than the price they sold the other

half at, which did have something to do with the indemnity pro-

vision, which would suggest to me that they could not have given

a great deal of weight to that provision in determining the ne-

gotiated price they settled on.” (Tr. 423, Dr. Solomon, supra)

dth Lb wil ney ipod Oe

73a

nification clause was never requested by Phillips, and was

never a focal point of negotiations, but was merely inserted

at the government’s behest to provide continuity with pre-

viously negotiated contracts containing the same clause.

Ashland’s contentions that the negotiated contract

price was depressed by the potential threat of government

condemnation of the helium is not supported by the rec-

ord. The negotiated price essentially represented that dol-

lar figure necessary to induce Phillips to bring forth the

amount of crude helium the government wanted to pur-

chase from Phillips.’* Any evidence indicating a variance

between the contract price and the helium’s worth would

seem to indicate that perhaps the price was slightly too

high, since Phillips’ bid was accepted for reasons influenced

by conservation considerations even though slightly higher

than one of its competitors.

Processing Costs

(See also Findings Nos. 25-31)

In computing a cost figure to be applied in the work-

back method, this court was ‘irected on remand to receive

further evidence on, inter alia, the appropriate amount

chargeable to costs as a return on investment and the

amount of helium plant expense properly allocable to pro-

duction of hydrocarbons and thus not properly chargeable

to costs. Having determined that a 15 percent rate of

return on investment is appropriate for reasons detailed

in the court’s attendant findings of fact, and having ad-

justed the cost figures to allow for hydrocarbon expenses,

the court has examined computations based on crude he-

lium values, including Phillips’ contract price, in compari-

13. “[The Phillips contract price] was a price that was

necessary to induce Phillips to bring forth the amount of crude

helium that the government, wanted to purchase from Phillips.”

(Tr. 391, Dr. Leftwich, supra)

74a

son with Phillips’ actual costs. The court believes that

the fair market value of Ashland’s helium at the crude

helium stage was in the vicinity of $10.50 to $12.00 per

Mcf. Phillips’ actual extraction costs during this period

averaged out between $6.50 and $7.00 per Mcf at Sherman,

and slightly in excess of $10.00 per Mcf at Dumas, Select-

ing a range of costs between $6.50 and $8.00 per Mcf

as being fair, the work-back method reveals that Ashland’s

recovery should be between $2.50 and $5.50 per Mcf.

Exact Computations

No automatic and exact solution to the problem of

valuing commingled helium simplistically emerges from

application of the work-back method to the relevant data.

A rigid statistical approach preoccupied with mathematical

precision would generate rather widely differing values

for different “shipments” of commingled helium, depending

upon the year of production and the processing plant uti-

lized.* Even then such precision could be attained only

by delineating an artificially exact crude helium value

as a starting point.

The exact contract price between Phillips and the

government varied from year to year and plant to plant.

The $10.30 price referred to earlier is less expressive of

a precise crude helium value than it is of a figure located

within a reasonable range of crude helium values. The

work-back method reveals only that the commingled he-

lium in this case should be valued somewhere between

$2.50 and $5.50 per Mcf, depending upon the comparative

weight assigned to the various relevant statistics.

14. Strict application of the work-back method would indi-

cate that helium processed through the Sherman plant was

worth $2.22 more at the wellhead than helium processed through

the Dumas plant. (See Tr. 930. John C. Dunn, Economic and

Financial Consultant)

ee mY oe!

75a

Quantum Meruit

Recovery in this case rests upon the doctrine of “quan-

tum meruit,” wherein the law implies an agreement and

allows recovery of “what is reasonable” and what one

“reasonably deserves” for benefits conferred in the absence

of an express contract. Brown v. Wrightsman, 175 Okla.

189, 51 P.2d 761, 763 (1935) “Quantum meruit” applies

where actual contractual intent and mutual assent by the

parties is lacking; compensation is afforded based upon

reason and justice. Hillyer v. Pan American Petroleum

Corporation, 225 F.Supp. 425 (N.D. Okla. 1963). This rule

of law stresses the inequity of a party refusing to pay

for benefits received knowingly and with consent, from

someone lawfully authorized to expect remuneration there-

for. Kramer v. Wilson, 226 S.W.2d 675 (Tex. 1950); Parks

v. Kelley, 147 S.W.2d 821 (Tex. 1941).

Fair Market Value

(See also Findings Nos. 32-35)

The economic value of commingled helium is not as

high as evidence at the first trial led the court to believe.

It is not, on the other hand, inconsequential. The circuit

court of appeals has correctly emphasized that helium

has value by reason of its nature and usefulness, and

that the government’s conservation program may have

preserved such value and made it available, but it did

not create such. Ashland v. Phillips, supra at 389.

Significantly, however, the evidence at retrial estab-

lished that helium’s uses are limited and its demand is

relatively small. This helium demand consistently has

been dwarfed by the size of potential supplies. During

the period of the helium conservation program and in

the years immediately thereafter (1963-1977), only about

40 percent of the helium produced in helium-rich natural

76a

gas was recovered. Since the conservation program was

completed, approximate'y 80 to 90 percent of the helium

produced from the major helium-rich gas fields has been

discarded at the wellhead and allowed to escape to the

atmosphere due to the absence of a viable market.

Even in 1968, during the peak of the helium conser-

vation program, 3.36 billion cubic feet of helium was pro-

duced in natural gas, but only 4.59 billion cubic feet was

recovered. 3.77 billion cubic feet was vented into the

air.

Over 188 billion cubic feet of commingled helium in

proved probable reserves of helium-rich gas (containing

0.3 percent helium or more) had been identified as of

1977. An additional 171 billion cubic feet of helium com-

mingled in reserves of less-rich natural gas (containing

less than 0.3 percent helium) has been identified. This

reserve total of 359 billion cubic feet of commingled helium

compares with helium consumption in 1977 totalling 0.9

billion cubic feet.’®

The helium owners in this case were fortunate that

their helium was selected to be conserved, Most of the

nation’s helium owners possessed no opportunity to sell

at any price and received no compensation whatsoever

for their helium. While plaintiffs are entitled to “reason-

able compensation,” this amount must fairly equate with

the helium’s “fair market value.”

A market exists wherever two or more parties contact

one another to engage an exchange, and where the parties

agree on the terms thereof. The “fair market value” of

an item is reflected in the price at which both buyers

and sellers are willing to engage an exchange, and the

15. United States Exhibit No. 28.

77a

price at which neither shortages nor surpluses will occur.

It is the price at which sellers are induced to bring to

market those quantities that buyers are willing to buy

at that price. Normally, for a “market” and a “fair market

value” to exist, the market price must be sufficient to

cover costs of production and a normal profit to the sellers.'®

Henry P. Wheeler, Jr., former Bureau of Mines em-

ployee in charge of the helium conservation program, and

the government negotiator with the Helex companies, tes-

tified that the government could have purchased all of the

commingled heiium it desired for $2.00 per Mcf.’*7 This

analysis is generally supported by the record, including

evidence of market conditions existent at the time.

In negotiating with Helex companies, government ne-

gotiations employed a “work-up” method to value the

16. “. .. [A] market exists wherever two or more parties

contact one another to engage an exchange, and where the parties

agree on the terms of exchange.” (Tr. 370, Dr. Leftwich, supra)

“. . . [T]he market value of any item is reflected by the

price at which both buyers and sellers are willing to exchange

the item and a price at which neither shortages, nor surpluses,

will occur.

Now, I would like to observe further here that the market

value of an item is a price at which sellers are just induced to

bring to market the quantities that buyers are willing to buy

at that price. In other words, the value or the market price

of an item must be sufficient to cover cost of production and a

normal profit to the sellers, to the producers and the sellers.

The contract prices as a group that the conservation companies

received from the government I think must be very close to

a market value for crude helium. I think they must be very

close to what a competitive price would be.” (Tr. 376-377, Dr.

Leftwich, supra)

17. “. . . I would say that any application of any theory

which comes out with an answer which is much different from

$2, either plus or minus a little bit, there is something wrong

with the method, because it does not adequately reflect the situ-

ation that existed at the time.

Q And why do you say that, sir?

A _ I was there, I knew what it cost to go out to get helium-

bearing natural gas, and I know that I could have gotten

all we wanted for $2, or less, and that’s what it was

worth.” (Tr. 337-338, Wheeler, supra)

78a

commingled helium. Similar in principle to the “work-

back” method, this approach added cost increments to a

selected wellhead starting value in order to arrive at the

crude helium’s reasonable value. This “work-up” method,

whose results provided the bases for the resulting con-

tracts, was predicated on the use of a $2.00 per Mcf value

for helium at the wellhead. (See Phillips’ Exhibit 71).

Dr. Leo Garwin, plaintiff's own expert witness, recognized

commingled helium’s value during the years in question

as being between $2.00 and $3.00. Also, at least one 1966

sale between private parties utilized a $2.00 per Mcf price.”

Plaintiff's efforts to predict an eventual high economic

value for helium possess little dependability or relevance

18. Tr. 838-848. Dr. Leo Garwin, Consulting Engineer. See

finding of fact No. 35.

19.

“Now did Kansas-Nebraska enter into an agreement with

Cities Service .. .?

Yes, sir, there is a—there is a provision in the processing

agreement for a payment for the right to extract the helium.

All right, sir. Do you recall what that payment—

Yes, sir, its $2.00 per mcf.

Of contained helium?

Yes. sir.

Is that contained helium extracted?

Extracted, yes, sir.

And can you tell the court generally how the $2.00 price was

arrived at?

My memory is that at the time we were negotiating that

arrangement with Cities, we only had one pattern to go by,

which was a contract between Colorado Interstate and the

government at the Keyes, that’s K-e-y-e-s, plant and that

was $2.00. We are willing to accept that and Cities was

willing to pay that, so that’s what we arrived at.

Q. All right, sir. And do you recall about what year that

would have been in?

A. I think that was probably about 1966, I guess.”

(Tr. 14-15. Defendant Phillips’ Exhibit No. 39. Deposition of

S. D. Ford, Jr., vice president of production and gas supply with

Kansas-Nebraska Natural Gas Company)

> OPOPOHPOH Pp &

79a

to this case’s issues. Estimates of future demand for most

commodities, including helium, are less than reliable.”

In any event, plaintiff's measure of recovery is tied to

commingled helium’s value as computed at the time of

Phillips’ sale. Speculation portends that exorbitant prices

may eventually attach to such natural resources as land,

water, wood and perhaps even clean air, yet their present

economic value is governed by present availability rather

than potential future scarcity.

A full and careful review of the record in this case

reveals a myriad of considerations relevant to an ap-

propriate valuation of Ashland’s helium commingled at

the wellhead, none of which, however, individually estab-

lish an exact dollar figure. The full range of reasonable

values disclosed by the proper application of ‘‘work-back”

methodology, the structure and salient economic factors of

the various helium markets during the period in question,

the expert testimony of record, and the equitable considera-

tions collectively suggest that the reasonable value of the

commingled helium in this case is between $2.00 and $3.00

per Mcf regardless of the year of production or the ex-

traction plant utilized.

This determination, and the bases therefor, are here-

inafter detailed.

In addition to the findings and conclusions in the pre-

ceding text, and by way of elaboration thereon, the court

delineates the following:

20. “Estimates of the future demand of any commodity are

notoriously unreliable and helium is no exception.” (Plaintiff's

Exhibit 2-31, p. 16, A REPORT TO THE PRESIDENT AND THE

CONGRESS OF THE UNITED STATES ON THE ENERGY-RE-

LATED APPLICATIONS OF HELIUM AND RFECOMMENDA-

TIONS CONCERNING THE MANAGEMENT OF THE FEDERAL

HELIUM PROGRAMS. See also Tr. 982)

80a

FINDINGS OF FACT

Introduction

1. Helium is an unusual element; it is a gas which

is inert and noncombustible and is the second lightest

known element. Helium is so inert that it will not chem-

ically react or combine with other elements and thus re-

mains as helium forever. It is tasteless, colorless, odorless

and invisible. For a more complete description of helium,

its unusual characteristics, its uses, and where found, etc.,

see Northern Natural Gas Co. v. Grounds, supra and in the

opinion of U. S. District Judge Wesley E. Brown, 292 F.

Supp. 619 (D.C. Kan., 1968).

2. In the 1940’s, the United States Bureau of Mines

was the sole producer of helium in the nation, and it pur-

chased commingled helium in the pipeline at the same price

as the natural gas itself, ranging from 5 to 8 cents per

Mcf.*? In the late 1950’s the Bureau of Mines purchased

helium contained in natural gas in the pipeline for its

Keyes plant operation at the price of approximately $2.00

per Mcf contained helium; the Bureau of Mines was willing

to pay a premium price for the gas because of the high

helium content (2.0 percent rather than 0.5 percent con-

tained helium) which resulted in savings in production

costs.

3. Pursuant to the authority granted by Congress in

the Helium Act Amendments of 1960 (50 U.S.C. §167

et seq.), the United States entered into long-term crude

helium purchase contracts with four companies, the

“‘Helex” companies, to construct plants for the extraction

of helium from natural gas streams being produced from

the Hugoton-Panhandle area. Each of the contracts was

21. One Mcf is one thousand (1,000) cubic feet.

8la

executed on a different date, had three different initial

unit prices per Mcf during each year of the contract for

the life of the contract. The maximum annual obligation

for each contract was different under the limitations im-

posed by Congress, i.e., only the sum of $47.5 million could

be expended annually to buy helium under the Govern-

ment’s program to conserve helium. A summary of the

contracts is set forth in Table 1 below:

TABLE 1

SUMMARY OF HELIUM CONSERVATION CONTRACTS

Maximum’ Estimated Helium

Gq

3

s

q

“

bs

’

Plant Initial Annual Volume (million

Location Unit Price Obligation cubic feet)

and Date (for 1,000 (million Annual Life of

Company of Contract cubic feet) dollars) Average Contract

Northern Bushton,

Helex Kansas

Company 8-15-61 $11.24 $9.5 675 13,500

Cities Ulysses,

Service Kansas

Helex, Inc. 8-22-61 11.78 9.1 610 12,200

National Liberal,

Helium Kansas

Corp., 10-31-61 11.78 15.2 1,053 21,060

Phillips Dumas, Texas)

Petroleum and ) 2 plants

Company Sherman Co., )

Texas

11-13-61 10.30 13.5 788 15,766

Weighted average—$11.29

TOTAL $47.5 3,126 62,526

4. In addition to Phillips Petroleum Company, the last

of the Helex companies to enter into a conservation con-

tract with the United States, agreements for the purchase

of crude helium were reached with National Helium Corp.,

Cities Service Helex, Inc., and the Helex Company (later

Nortkern Helex Company).

82a

5. The crude helium conservation system consists of

5 privately owned crude helium production plants, a main

pipeline running from Bushtown Plant in Kansas to the

storage site at the Cliffside field in Texas and lateral pipe-

lines running from the main pipeline to certain Grade A

helium production plants. Three of the conservation plants

are located in Kansas: the Bushtown Plant of Northern

Helex, the Jay Hawk Plant of City Service Helex and the

Liberal Plants of National Helium. The plants at Sherman

and Dumas, Texas, belong to Phillips Petroleum.

ouues

° Pee

COLORADO

KANSAS

mewta

Trae @ gd

\ te) Tee

oo ‘

F acj Sherman |

oonsirs i

Lage exes | OKLAHOMA

me, 1 pm

| ee es os

soe ia porn, gaa

omwe =@®

ESSENTIAL LINK in the nation’s heiium conservotion progrem is ¢ 353-mile pipeline constructed

ing fi j nec ond four government

by the federc! government in 1962 ond connecting five goprag fee field neer Amerillo, Tex.

opercted extroction pions fo en underground storege oreo in the

83a

6. Under the terms of its contract of November 13,

1961, Phillips agreed to sell the United States a helium gas

mixture fiom two plants it proposed to build at Sherman

and Dumas, Texas. The plants were constructed to extract

for delivery and sale to the government, per the contractual

terms, a helium gas mixture (crude helium) of at least 50

percent helium, with the remainder being essentially nit-

rogen. The nominal capacity for production of crude hel-

ium for the Sherman and Dumas plants was 360,000 Mcf

per year and 428,000 Mcf per year, respectively. Produc-

tion began at the Sherman plant in December, 1962, and

at the Dumas plant in April, 1963.

7. Three private plants which in 1978 were producing

Grade A helium from crude helium, are connected to the

helium conservation system by way of private pipelines,

These are the plants of Kansas Refined Helium Company,

City Service Cryogenics and the Alamo Chemical and

Gardener Cryogenics plants, all in Kansas. Of the

three Bureau of Mines plants in the conservation system,

only the Keyes plant in Oklahoma is still producing Grade

A helium from a crude helium stock. The Excell plant

and Amarillo plant in Texas are no longer producing Grade

A helium for the Bureau of Mines, but are now used

to control the pressure in the helium storage reservoir

(Excell) and to liquify helium (Amarillo).

8. Other relatively small capacity private plants pro-

ducing Grade A helium, which are not connected by pipe-

line to the conservation system, are Linde Division of

Union Carbide in Kansas and the Navajo plant of Western

Helium Corporation in New Mexico.

9. Helium storage exists in both the pipeline system

and the storage system reservoir at Cliffside. Once crude

helium enters into the pipeline system, it is considered

84a

in storage and unless dedicated to fulfilling the require-

ments of the conservation contract is freely transferable

from the Helex Company plant owners to the owners

of the private Grade A helium producing plants.

10. A total of 33,760,506 Mcf of crude helium was

acquired by the United States under the conservation pro-

gram. Under the contracts, this helium was priced at

$405,049,136.89, an average price of $12.03 per Mcf as shown

in Table 2 below:

TABLE 2

HELIUM CONSERVATION CONTRACTS SUMMARY

Average

Amount Volume Price

Company $ Mcf $/Mcf

Northern bei

Helex Co. $ 51,864,201.12 4,475,921 $11.5874

Cities Service

Helex, Inc. 84,719,570.87 6,720,927 12.6053

National

Helium Corp. 154,775,285.89 12,217,628 12.6682

Phillips

Petroleum Co. 113,690,079.01 10,256,030 11.0852

TOTAL F $405,049,136.89 33,670,506 $12.0298

11. Of these amounts, Phillips conveyed to the United

States 10,256,030 Mcf of helium, priced under the contract

at $113,690,079.01, an average of $11.0852 per Mcf.

12. At the time of termination in 1973, the govern-

ment had approximately 35 billion cubic feet of helium

in storage in the Cliffside Field in Texas, and it was

estimated that about four billion cubic feet of helium was

contained in the government-owned native gas in that

field. It was also estimated that approximately 5.5 billion

85a

cubic feet of helium would be recovered in the Keyes

plant under its natural gas supply agreement. This assured

the government a supply of 44.5 billion cubic feet of helium.

As a result, the Secretary of the Interior found on Feb-

ruary 2, 1973, that the objective of the Helium Act had

been met. The objectives were to

“foster and encourage individual enterprise in the de-

velopment and distribution of supplies of helium, and

at the same time provide, within economic limits . . .

a sustained supply of helium which, together with

supplies available or expected to become available

otherwise, will be sufficient to provide for essential

government activities.” 50 U.S.C. 167m.

13. Approximately 42.8 billion cubic feet of helium

is presently stored in Cliffside. Of this 42.8 billion, 32.2

billion was purchased under the helium conservation con-

tracts; 1.5 billion was accepted in storage under court

order; 3.5 billion was produced at Bureau of Mines plants;

and 4.0 billion is contained in native gas. All of the

approximately 34 billion cubic feet of helium acquired

under the conservation program remains in storage at Cliff-

side. Assuming that the 34 billion cubic feet obtained

from the conservation companies was worth $10 per Mcf,

the government has an investment in the helium stored

at Cliffside of $340 million. Assuming, again, that the

invested money could draw 10 percent interest a year

if properly invested, the United States is paying at least

$34 million a year in interest to keep the helium in stor-

age. The storage cost is about the largest cost item associ-

ated with the helium acquired under the conservation pro-

gram.

86a

Refined Helium Market

14. No relationship exists between Grade A helium

prices and either the crude helium sold by Phillips to

the United States or the crude helium sold to the United

States pursuant to any other conservation contracts. All

such crude helium was placed in underground storage

by the government and so remains. None has been refined

into Grade A helium. It was not produced to supply

current demands, but was produced to be saved and not

wasted when the helium-bearing natural gas went to mar-

ket, It is not known when the stored crude helium will

be used; the purpose for which it will be used; nor the

price at which it will be sold.

15. During the ten years involved in this case, ap-

proximately 92 billion cubic feet of helium was produced

at the wellhead; 48 billion cubic feet of helium was not

recovered, but instead was wasted into the atmosphere

as the natural gas containing such helium was marketed.

44 billion cubic feet of helium was recovered in the United

States, all of which was. initially recovered as crude

helium. Of this amount, 36 billion cubic feet was placed

in underground storage by the government and remains

there at this time. Of this 36 bllion cubic feet in storage,

34 billion cubic feet represents all the crude helium sold

by Phillips and the other conservation companies to the

government. Of the 44 billion cubic feet of helium ex-

tracted and saved, only 8 billion cubic feet was refined

into Grade A helium and only approximately 3.3 billion

cubic feet was sold to private customers during the years

in question. It is now clear that it would be improper

to attempt to value the 34 billion cubic feet of conserva-

tion crude helium in storage by any price the 3.3 billion

cubic feet of refined helium may have sold for. To do

so would require the assumption that all of the 34 billion

87a

cubic feet of stored crude helium could have been refined

and sold in the Grade A market. It is clear that such

could not have been done without drastically ‘reducing

the price of Grade A helium.

16. The prices paid for Grade A helium during 1963

through 1972 are not sufficiently reliable as indications

of value to serve as a starting point. It is uncontroverted

that the government’s 1961 price of $35.00 was adopted

for the express purpose of creating sufficient income from

government sales of refined helium to pay Phillips and

the other conservation companies for the crude helium

they were selling the government for storage, as well

as to pay all other expenses associated with the storage

program. Previous to that price, the government was

selling Grade A helium to government users at $15.50

per Mcf and to private users at $19.00 per Mcf. The

$35.00 price was never intended to represent a fair market

value for helium. Nonetheless, the $35.00 price was the

only price available during all of 1963, 1964, 1965 and

a substantial portion of 1966. During those years there

was only one other seller of Grade A helium (Kerr McGee),

and one of Ashland’s witnesses, then an employee of Kerr

McGee, affirmed that Kerr McGee purposely fixed its price

to be equal to the posted government prices - whatever

they might be - so that whatever the government price

was, the Kerr McGee price was also. The helium the

government sold during the ten years involved herein was

produced by the government itself and was not purchased

from the Helex companies.

17. After 1966 there was little stability of Grade A

prices. Although Grade A helium producers began oper-

ations in 1966 through 1968 and the prices which they

charged were significantly less than $35.00 per Mcf, there

was no particular proximity of prices. One seller of Grade

88a

A helium in 1966 (Kansas Refined Helium) sold its

product for an average price of $16.37 per Mcf and in

1967 for $17.68 per Mcf. At the same time other sellers

in 1967 were selling the same product for $25.57 and $35.00

per Mcf. A former Kerr McGee employee testified that

he was personally familiar with an attempt to sell

Grade A helium at $15.00 per Mcf in 1967. Weighted

average Grade A helium prices charged by private parties

f.o.b. the plant decreased from $25.39 per Mcf in 1966

to $20.21 in 1972, although Kerr McGee reduced its posted

price to $19.00 in 1969 and maintained such until April

25, 1972.

18. During the 1962-1972 period the volume of Grade

A refined helium sales varied substantially; sales of 611,000

Mcf in 1962 rose to 929,000 Mcf in 1969 and then steadily

fell to 580,000 Mcf in 1972. As private companies began

producing Grade A helium, the government’s share of the

commercial market continuously decreased from a high

of about 135,600 Mcf in 1962 to a low of 6,279 Mcf in

1972.

Crude Helium Market

19. There is now, and was at all times since the

commencement of the conservation contracts, a market

for crude helium. This market consists of all crude helium

sold to the government for storage purposes under the

Helium Conservation Act, as well as all sales and purchases

between private parties, all within a fairly narrow range

of prices. Phillips’ Exhibits 43, 44 and 45 describe the

details of very substantial crude helium exchanges. Ex-

hibit 43 reflects that the government purchased, between

1963 and 1972, approximately 31,400,000 Mcf of contained

helium. Private parties exchanged more than 675,000 Mcf

in just slightly more than six years beginning in late

89a

1966 and ending in 1972, and approximately 686,000 Mcf

in the three years thereafter. The crude helium market

was by far the largest helium market in existence during

the ten years herein. Numerous witnesses, including rep-

resentatives of many of the purchasers and sellers of crude

helium, testified that a well defined market for crude

helium existed. The president of National Helium stated

that a crude helium market existed and continues to exist,

as did the vice president of Northern Helex. Similar ex-

pressions were received from representatives of Cities Ser-

vice and Kansas Refined Helium, crude helium’s largest

private purchaser. Each testified extensively regarding

the circumstances of each sale, the volumes sold, the prices

received and the contract terms generally.

Phillips Contract Price

20. In the original trial of this case very little evi-

dence was offered describing the negotiations which led

to the contracts above-mentioned and, particularly, to the

contract of November 13, 1961, between Phillips and the

United States, and no relationship between the contract

prices and any then existing markets or market values

was developed of record. Credible written and oral evi-

dence of these matters is now before the court.

21. As previously mentioned, the Phillips contract,

which was the last of the four contracts to be negotiated

with the Helex companies, resulted from intense negotia-

tions between Mr. Henry Wheeler, the former Director

of the Helium Conservation Program, representing the

United States, and officials of Phillips Petroleum Com-

pany. Funds were available for only one more conserva-

tion contract with a crude helium producing company;

and two companies, Phillips and Colorado Interstate, were

both interested in acquiring a government contract. Dur-

90a

ing negotiations with Phillips, Mr. Wheeler negotiated the

price downward to $10.30 Mcf. Meanwhile, Colorado In-

terstate had offered to convey crude helium to the govern-

ment at a price of $10.10 per Mcf. Despite the small

price advantage offered by Colorado Interstate, Mr.

Wheeler selected Phillips Petroleum because by doing so

a greater volume of helium would be conserved.

22. Article 7.4 of the Phillips’ contract provided that

the United States would indemnify Phillips for any amount

over approximately $3.00 per Mcf which Phillips might

be required to pay third parties for acquisition of the

commingled helium. Phillips had not requested that this

indemnification be placed in the contract. Mr. Henry

Wheeler testified that the clause was included so that

the government would be treating all of the contractors

alike. The testimony of Mr. Wheeler and Mr. Cullender,

a member of the Phillips team that negotiated the contract,

and the deposition of Mr. Wilson, the negotiator for Na-

tional Helium, all established that Article 7.4 had no in-

fluence whatsoever on the price the United States paid

for crude helium. The evidence reflects that Phillips be-

lieved it had title to the helium when it entered into

the contract, that it did not request the indemnity provi-

sion, and in fact, did not consider its effect.??

Originally, Phillips had submitted a written proposal

of $11.48 per Mcf wherein it offered to warrant its title.

The government rejected such offer because it thought

the price too high. The government countered with its

own proposed contract, suggesting a figure of approxi-

22. In any event, more than one-half of the helium sold

by Phillips to the government was not covered by Article 7.4 for

it was produced from Phillips’ own gas wells. Since paragraph

7.4 is irrelevant as to Phillips owned gas, the sale of helium pro-

duced by Phillips from its own wells represents a substantial

comparable sale which clearly supports the use of Phillips’ con-

tract price as the starting value.

C—O

9la

mately $10.30 per Mcf. Such proposal contained no provi-

sion for title warranty by Phillips, but instead included

the government indemnity clause discussed earlier.

Neither side’s actions evidenced a belief that the title ques-

tion raised any issue of serious economic import.

23. The $10.30 price in the Phillips contract, adjusted

only by the price index provision in paragraph 7.3, was

deemed by both Phillips and the government as the com-

plete price and value of the crude helium. The indemnity

provision was not deemed or intended by either as part

of the purchase price. Similarly, the National Helium

negotiator testified that in his opinion the contract price

agreed between the government and National Helium was

exactly representative of the crude helium’s value at the

time of the execution of the contract.

In addition, the United States’ power of condemnation

does not appear to have been a factor in the negotiation

of the conservation contracts, since use of such power

was neither threatened nor suggested. Phillips’ concern

was not that the United States would seek to condemn

the helium, but, rather, that the United States would enter

into a contract with some other party for the purchase

of crude helium and thereby deny Phillips the opportunity

to sell its helium to the United States.

a

24. As noted above, in 1966 several sales of substantial

quantities of crude helium occurred between private par-

ties, and sales continued to be made during all the years

in question. In all instances the sellers sold the crude

helium for prices comparable to those set forth in the

conservation contracts and at least four substantial sales

between 1967 and 1972 involved full title warranty by

the seller. These sales with full title warranty strongly

indicate that the conservation contract prices were not

unduly low and were not forced downward by the presence

92a

of the indemnification clauses. The indemnification clauses

caused no one to undervalue the helium.

Processing Costs

25. Effective application of the work-back method

requires that the proper costs be deducted from the proper

starting value. In this case the relevant costs are all

helium plant expenses allocable to helium production, plus

an appropriate return on the amount of capital employed

in such production.

26. Disputes between the parties on “cost” issues in-

clude disagreements as to the amount of. plant expenses

allocable to helium, the amount of capital allocable to

helium, the rate of return to be allowed and whether

in calculating this rate of return there should be included

a sum sufficient to cover income taxes.

27. Phillips’ accounting witness utilized essentially

the same “capital

This text is long and has been trimmed here. Open the source document for the complete record.