Appendix — Energy Reserves Group, Inc. Hodel

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APPENDIX A

TEMPORARY EMERGENCY COURT OF APPEALS

OF THE UNITED STATES

No. 10-39

In RE THE DEPARTMENT OF ENERGY

Stripper WELL EXEMPTION LITIGATION

ENnerGcy Reserves Group, Inc., Suburban Propane Gas

Corporation, Marathon Oil Company and Sklar & Phillips

Oil Company; Sierra PETROLEUM Co., INc.; BRADEN-

ZeniTH, INc. and The Estate of S. H. Killingsworth; Mo.

BIL OI CorPporRATION, Mobil Producing Texas & New

Mexico, Ind. and Willie Ansley Bryson; STELBAR OIL

Corporation, INc., The Standard Oil Company, Ohio and

Theo M. Glenn, Jr. and Eleanor Glenn; Ropert DaLe

BRANDENBURG and Texaco, Inc.; Aux ol. USA, INc., Oris

C. PEAVEY, et al. and Sun Oil Company (Delaware); How.

ARD Stout, Lorena Houlton and Mary E. Hall, Co-

Trustees of the Charles S. Page Trust and Gulf Oil Corpor-

ation; Ropert E. Davis and Energy Consumers & Pro-

ducers Association, Inc., Ruthven, Inc., Pioneer Opera-

tions Company, Inc.; GORE R. Jones, et al.; PETROLEUM

MANAGEMENT INC.; ATLANTIC RICHFIELD Company, W. R.

Murrin, d/b/a Murfin Drilling Company, and Champlin

Petroleum Company; UNIon OI ComPANy OF CALIFORNIA;

CoasTAL States Gas Corp., Coastal States Gas Producing

Co., and Gas Producing Enterprises, Inc.; Exxon Corpor-

ATION; CONTINENTAL OI. Co.; Hunt O. Company; CRS.

TAL O Company and Ira Thomas May; Muskecon DEvVEL-

OPMENT Co.; OKLAHOMA ASSN OF ENERGY ConsUMERS &

Propucers; Paul B. FLetTcHer, Sr. and Anadarko

Production Company; IU InTPRNATIONAL OI. & Gas, INCc.;

Woop Ou. Co. and Dan Wa. ace d/b/a Columbus Oil Co.;

Wit I. Lewis Enterprises, INc.; Jimmie Austin d/b/a

Austin Drilling Company; Santa Fe Enercy Company;

Georce G. ANDERMAN and Donald R. Kirby; Patricia

ANNE LEONARD, ET AlL. FARMERS PETROLEUM CoorERA.

TIVE, Inc.; Kirkwoop OIL & Gas Company; PETROLEUM

CORPORATION OF TEXAS, GeEorGE W. War and Amoco

Production Company, PLAINTIFFS-APPELLEES,

V.

DEPARTMENT OF ENERGY. ET AL.

DEFENDANTS-APPELLANTS.

Appeal from the United States District Court

for the District of Kansas

MDL No. 378

(Argued: April 9, 1982 Decided: July 29, 1982)

Before GRANT, LARSON and Lacey, Judges.

Grant, Judge:

These multidistrict litigation cases, consolidated for disposi-

tion by the Judicial Panel on Multidistriet Litigation at the

United States District Court for the District of Kansas, pre-

sent the issue of the validity of Federal Energy Administration

(now the Department of Energy (DOE)) Ruling 1974-29 which

interprets the stripper well exemption as excluding injection

wells from well count, for purposes of applying the exemption

from allocation and price regulation which is accorded crude

petroleum produced from stripper well leases.’

The ruling in question, Ruling 1974-29 (39 Fed. Reg. 44414,

December 24, 1974), provides in its relevant part as follows:

Issue. Is an “injection” well a “well” for the of

purposes of the stripper well lease exemption of 10 CF 240.455

Ruling. No. bee heeds — BR J

— pay — — — including

sural gs igs, prc produced — 1— 1 is

— chao

3a

Background

The origin of these cases is with the decision of the United

States District Court for the District of Kansas in Energy

Reserves Group, Inc. v. Federal Energy Administration, 447

F. Supp. 1135 (D. Kan. 1978), In that case, Judge Theis in-

validated Ruling 1974-29 on the basis that it was promulgated

without satisfying the rulemaking requirements of the Admin-

istrative Procedure Act (APA). Importantly, Judge Theis did

not, in his ruling, reach other challenges to the validity of

Ruling 1974-29 but instead rested his decision solely upon

nonconformity with the APA. On appeal, this court reversed

that decision, in a plurality opinion, holding that the Ruling

was “Clearly Interpretative and Exempted From the Re-

quirements” of the APA. Energy Reserves Group, Inc. v.

Department of Energy, 589 F. 2d 1082, 1091 (Temp. Emer. Ct.

production did not exceed 10 barrels per day per wel! during the

calendar . “Average daily production” is further

Refined im 10 CPR 310.3200) as: .

The qualified total produetion erude

enen arte e u

ui, ea from a during the

year, by a number to the of days in that

i

i;

i

Hf

petroleum. Therefore, weil which dd ot actualy ye rie or pro

not fon ‘wells for, this purpose. Whether —

producing well was an “injection” well, a disposal well, a dry

:

.

:

3

8

:

i

7

i

da

App. 1978) (Energy Reserves I).“ In that appeal, the appellees

argued that Ruling 1974-29 was legislative in nature and effect

and this subject to the notice and comment requirements of

the APA. 5 U.S.C. § 553(b) and (c). That argument was re-

jected, — —

stantial — test eS — —

tive rule is “i ve” or “legislative,” Ruling 1974-

29 had no substantial impact on

— — —

exception of EP snd TAB.

90 FK. § 210.32, or both, it had no impact. In that

event the — the statute and valid legisla-

tive ion being interpreted, not from the interpreta-

tive ruling.

terpretation of the term“

used in § 406 ying eh y yh rage, ly AA. and in 10

C.F.R. 122 such it had no “impact” if such be a

test. The “impact, "if any, resulted f. , from the sta

ute and from the regulation 10 C. F. R. 210.32(b) found to

be valid by the district court. The interpretation of § 406 of

TAPAA and § 4(e) (2) (A) of EPAA to exclude ir

— Judge Christensen, in his concurring opinion,

— soma ons eet cnguteed ty

considerable stirring of waters in the arguments, no sig-

In that case, the court included a comprehensive review of the

history of the stripper well exemption but, because of the widespread

interest in these cases, we find it useful and necessary to repeat much

of that history here. See also Southern Union Production Company

v. Federal Energy Administration, 569 F. 2d 1147 (Temp. Emer. Ct.

App. 1978).

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nificant impacts to operate inst the ruling in

question. And a holding that — 1 21.

petroleum” means, as contemplated by the properly

adopted and isti ae and in view of the

seminal statute, a well that produces or yields such pet-

roleum directly rather than one which may be utilized asa

part of a system to obtain indirectly crude petroleum from

a producing well, seems essentially the sort of an in-

terpretation that must have been intended by the APA

exception to the rulemaking requirement.

589 F.2d at 1103 (emphasis supplied).

Following remand of these cases to the district court, the

DOE filed with this court a petition for writ of mandamus

directing the district judge to execute the mandate of our

previous decision. It argued that Energy Reserves I definitive-

ly and conclusively established the validity of Ruling 1974-29,

and the district court was without any authority to reach a

different result. This court, with Judge Christensen now writ-

ing for a unanimous panel, denied the DOE’s petition for the

writ. Duncan v. Theis, 613 F.2d 305 (Temp. Emer. Ct. App.

1979). Recognizing that the previous mandate could pose some

interpretation difficulties as to what exactly was decided and

what was not, Id. at 308, the court went on to declare:

It may well be beyond the issues thus clearly resolved

(he —— on appeal that in line with Judge

8 ive analysis and reasoning and as he has

suggested, 589 F.2d a aoe oe 7 regula-

tion its interpretation constituted not a reason-

able construction of the statute as well, but in addition

“may be the construction ultimately preferred by the

courts.” But since our decision did not definitely resolve

any statutory problem, there is presently no basis to cut

off further proceedings in the district court except for the

mandated judgment sought by the petitioners.

We deny the government's petition for a writ of man-

damus because of the narrow reach of this extraordinary

remedy, un ved issues as to the ruling in

—_— is arbitrary, capricious or unreasonable in the

ight of, or is in conflict with, or is beyond the authority

granted by controlling statutory provisions, the province

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and duty of the district court, consistent with the mandate

of this court and the doctrine of stare decisis, to exercise

ite reasonable discretion in determining interlocutory

— 1 — and judgments in the first

following the determination 1

t

issuance of the mandate of this court, and our confidence

that Judge Theis upon this clarification of what we

— — „ decision will not trans-

gress the fair meaning and 1

application of the doctrine of sture decisis

Id. at 309 (emphasis supplied) (footnotes omitted).

Thus, while denying the petition for a writ of mandamus, the

court expressed a rather strong belief that it had previously

implicitly held Ruling 1974-29 to be valid in all respects. This is

most clearly evidenced by footnote 4 which quotes approvingly

from Judges Becker and Christensen’s opinions in Energy

Reserves I:

Judge Becker expressly held that “Ruling 1974-29 is a

reasonable interpretation of the term ‘ave daily

A adm OCF E, $210.50) ten § 4(e) ( ©) a) of

— 1 41 TEE

4 5 or the seminal — — chi —

such petroleum directly rather than one

which may be utilized as a part of system to obtain

— ＋ wy from a producing well, seems

essentially the sort of an interpretation that must have

been intended the APA exception to the rulemaking

requirement.” F.2d at 1103.

Id. at 308 n.4.

To assist and guide the district court with respect to the

merits of any outstanding issues, the court footnoted its deci-

sion with Yablonski v. United Mine Workers of America, 454

F. 2d 1036 (D.C. Cir. 1971), cert. denied, 406 U.S. 906 (1972),

wherein the Court of Appeals for the District of Columbia

7a

addressed a situation not unlike the situation presented here.

In Yablonski, the issue was whether the district court had

failed to give “full effect” to a previous mandate from the Court

of Appeals. The court stated:

We had t t that the factual basis for our earlier

— ee ee

relevant its legal basis from the prinei

we identified as controlling. > the « same token, we be-

lieved that we had furnished the District Court with uns-

quivocal standards which successor counsel ... would

have to meet.

Id. at 1039, quoted at 613 F.2d at 309-10 n.10. After

“recapitulating” their initial holding, the Yablonski court pro-

ceeded to grant the petition, adding:

[Blut in the belief that issuance of a formal writ is

. We trade instead upon our confidence that

without more the District Court will now take action to

rectify the error which gave birth to the present proceed-

ing.

454 F.2d at 1042, quoted at 613 F. 2d at 309-10 n. 10 (footnote

omitted). In essence, Duncan v. Theis implicitly held that

Ruling 1974-29 is valid but, rather than resorting to the ex-

traordinary remedy of mandamus, left final determination of

that question with the sound judgment of the district court.

Following the decision in Duncan v. Theis, the district court

issued a lengthy opinion finding that 6 C.F.R. § 150.54(s) and

subsequent similar regulations, as interpreted by Ruling 1974-

29, are void and of no legal effect. In Re Department of Energy

Stripper Well Exemption, 520 F. Supp. 1232 (D. Kan. 1981).

This single paragraph summarizes the district court’s reason-

ing:

This Court therefore holds that the agency’s decision to

exclude injection wells from the well count for the pur-

fevond the of — 2 tye te * produetion was

authority of and was contrary to

T . as seen in

of the measure, as well as the

1 purpose an the application of appropriate

8a

canons of construction all indicate that injection wells

should be counted. These considerations outweigh any

deference due the agency’s intrepretation. Furthermore,

as is explained and Id tn the fo of this opin-

ion, the agency’s action was arbi ve pele So —

to —.— obliterate any — yw te of deference.

Id. at 1265-66. On this appeal, we review the district court’s

finding of invalidity. More specifically, we examine whether

the district court has correctly construed congressional intent;

whether Ruling 1974-29 exceeds the authority of the DOE; and

whether Ruling 1974-29 is arbitrary and capricious. We hold

Ruling 1974-29 to be valid and reverse the decision of the

district court.

Statutory and Regulatory History

Rapidly rising increases in world oil prices in 1973, accentu-

ated by the Arab oil embargo, presented the United States

with a serious inflationary problem. To halt the inflationary

spiral in domestic oil prices, the Cost of Living Council (CLC),

acting pursuant to the Economic Stabilization Act & 1970,

Pub. L. No. 91-39, 84 Stat. 796, 799, on August 22, 1973, issued

its Phase IV system of price controls, setting up a two-tier

price system on the first sale of all domestic production of crude

oil. Shortly thereafter, in two statutes enacted only eleven

days apart, Congress expressly exempted from price controls

oil produced from stripper well leases.

The stripper well exemption first appeared in the Trans-

Alaska Pipeline Authorization Act (TAPAA) which was signed

into law as Pub. L. No. 93-153 on November 16, 1973. 87 Stat.

*See6C.F.R. § 150, Subpart L (38 Fed. Reg. 22536 (1973)). Under

this two-tier system, a ceiling price was placed on the volume of crude

oil produced from a particular property equal to or less than the level

of production from that property in the same month of 1972 (old oil).

Crude oil produced in excess of 1972 levels and newly discovered oil

(new oil) were free of controls.

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576, 584; 42 U.S.C. § 1651 et seq. Section 406 thereof reads as

follows:

(a) The first sale of crude oil and natural gas liquids

produced from any lease whose average daily production

of such substances for the p ing calendar month does

not exceed ten barrels per well not be subject to price

restraints established pursuant to the Economic Stabiliza-

tion Act of 1970, as amended, or to any allocation program

for fuels or petroleum established pursuant to that Act or

to any Federal law for the allocation of fuels or petroleum.

(b) To qualify for the exemption under this section, a

lease must be operating at the maximum feasible rate of

production and in accord with recognized conservation

practices.

(e) The agency designated by the President or by law to

implement any such fuels or petroleum allocation p

is authorized to conduct inspections to insure compliance

with this section and shall promulgate and cause to be

published regulations implementing the provision of this

The Joint Statement of the TAPAA Committee of Con-

ference explained the presence of the provision in the Alaskan

Pipeline bill:

6. The Senate Bill had a number of miscellaneous provi-

sions that were not directly related to oil pipeline rights-

of-way. The House amendment had no comparable provi-

sions. The Conferees’ action was as follows:

- x * *

(c) The provision exempting the first sale of oil and

from stripper wells from the Ty. restraints of the Eco-

nomic Stabilization Act of 1970, and from any allocation

— r was adopted. A stripper well is defined as a well

ith an average daily production during the preceding

month of not more than ten barrels. In order to qualify for

the exemption the lease must be operating at a maximum

10a

feasible rate of production and in accord with recognized

conservation practices.

TAPAA Conf. Rep. No. 93-924, 93d Cong., Ist Sess., re-

printed in [1973] U.S. Code Cong. & Admin. News 2523, 2524

(hereinafter “TAPAA Conf. Rep.“.

Eleven days later, on November 27, 1973, the President

signed into law the Emergency Petroleum Allocation Act

(EPAA), Pub. L. No. 93-159, 87 Stat. 627, 15 U.S.C. § 751 et

seq. That Act contained an almost identical exemption, but

changed the qualifying period from the “preceding calendar

month” to the “preceding calendar year.” Section 4(e) (2)

thereof provided:

(A) The regulation promulgated under subsection (a) of

this section shall not apply to the first sale of crude oil

produced in the United States from any lease whose aver-

age daily production of crude oil for the preceding calendar

year does not exceed ten barrels per well.

(B) To qualify for the exemption under this paragraph, a

lease must be operating at maximum feasible rate of

production and in accord with recognized conservation

practices.

(C) Any agency designated by the President under sec-

tion 5(b) for such is . to conduct inspec-

tions to insure compli with this ph and s

promulgate and cause to be oy ished regulations

implementing the provisions of this paragraph.

The only apparent mention of stripper wells in the legislative

history of the EPAA appears in the Joint Explanatory State-

ment of the Committee of Conference.

(8) Stripper wells. The conference substitute contains a

vision relating to stripper wells. This provision, found

in section 4(e)(2) states that the regulation promulgated

under subsection (a) of this section shal! not apply to the

first sale of crude oil produced in the United States from

any lease whose average daily production of crude oil for

the preceding calendar year does not exceed ten barrels

per well. In order to qualify for the exemption, a lease

must be — — maximum feasible rate of produc-

tion and in with recognized conservation prac-

lla

tices. Any agency designated by the President under sec-

tion 5(b) of the conference substitute for such purpose is

authorized to conduct inspections to insure compliance

be po oa — ten age Sg —

i uirements implementing the provisions o

EPAA Conf. Rep. No. 93-628, 93d Cong., Ist Sess., reprinted

in U.S. Code Cong. & Admin. News 2688, 2699. However, in

the legislative history of the TAPAA, Congress directed that

in implementing the stripper well exemption, the administer-

ing agency was to “insure that the limited exemption of this

class of wells for the express purposes described . . . is not in

any way broadened.” TAPAA Conf. Rep. at 2532. To achieve

this end, the conferees emphasized that ihey expected the

administering agency to prevent manipulation “of lease units

in a manner that evades the price controi and allocation pro-

grams.” Id. The conferees ordered the agency to make certain

that:

[T)he exemption is narrowly defined and prudently

administered, and to insure that the incentive being

granted is properly limited in accord with congressional

intent.

Id. at 2531 (emphasis supplied).

In order to implement the TAPAA stripper well exemption,

the CLC, on November 21, 1973, issued a regulation which

closely tracked the statutory language. 38 Fed. Reg. 32494

(1973); 6 C. F. R. § 150.54(s). “Stripper well lease” was defined

therein as:

a “property” whose average daily production of crude

petroleum and petroleum condensates, including natural

gas liquids, per well did not exceed 10 barrels per day

uring the preceding calendar month.

6 C. F. R. § 150.54(s) (2). “Average daily production” was de-

fined as: .

the qualified maximum total produetion of domestie erude

petroleum and petroleum condensates, including natural

gas liquids, produced from a property during the preced-

12a

ing calendar month, divided by a number equal to the

number of days in that month times the number of wells

which produced crude petroleum and petroleum con-

densates, including natural gas liquids, from that r-

ty in that month. To qualify as maximum total production,

each well on the property must have been maintained at

or ym feasible — of — seam —rTr—

with recognized conservation ices, signifi-

cantly curtailed by reason of — sie] failure or

other disruption in production.

Id. (emphasis supplied). After the EPAA was enacted, the

definitions of “average daily production” and “stripper well

lease” in the above regulation were amended on December 12,

1973, to reflect the “calendar year” period of § 4(e)(2)(4) of the

EPAA rather than the TAPAA’s period of a “calendar month.”

See 38 Fed. Reg. 34464 (1973). The phrase “wells which pro-

duced crude petroleum” was unaffected.‘

Section 4(e) (2) (e) of the EPAA authorized the President to

designate any agency to promulgate and publish regulations

implementing the EPAA. Pursuant to this grant of authority,

Executive Order 11748 (38 Fed. Reg. 33575, December 6,

1973) was issued on December 4, 1973, which delegated the

President’s authority under the EPAA and the Economic

Stabilization Act of 1970 to the Administrator of the Federal

Energy Office. On December 11, 1973, the FEO issued a notice

of proposed rulemaking which, inter alia, incorporated the

provisions set forth in Part 150 of Title 6 of the Code of Federal

Regulations, 38 Fed. Reg. 34434 (1973) (10 C.F.R. § 201.4),

and excluded stripper well leases from the regulations. 38 Fed.

Reg. 34416 (1973) (10 C.F.R. § 200.2(a)). Final regulations

were issued on December 27, 1973. 39 Fed. Reg. 744 (1974). In

early 1974, 10 C. F. R. § 210.32 was issued. Section (b) thereof

On January 16, 1975, 6 C. F. R. § 150.54(s), along with other

provisions of Chapters I, V. and VI in Title 6, were adopted by the

Department of Treasury. 40 Fed. Reg. 3572 (1975). Section 150.54

was effectively removed.

13a

defined “Average daily production” in the same manner as in 6

C.F.R. § 150.54(s). See 39 Fed. Reg. 35510 (1974). It was

subsequently amended on May 15, 1975, to read:

“Average daily production” means the qualified maximum

—.— of crude oil, including condensates, pro-

d from a property, divided by a number equal to the

number of days in the year times the number of wells that

produced oil, including condensates, from that prop-

erty in that year. To qualify as maximum total producton,

each well on the property must have been maintained at

the maximum feasible rate of production, in accordance

with recognized conservation practices, and not signifi-

cantly curtailed by reason of mechanical failure or other

disruption in production.

40 Fed. Reg. 22124 (1975) (subsequent amendments to 10

C.F.R. § 210.32 at 40 Fed. Reg. 24517, 31927, 40820 and 52843

are irrelevant for purposes of this appeal).

The problem resulting from the issuance of these regulations

is that nowhere, except possibly by implication, was the term

“well” defined to exclude injection wells. The FEA interpreted

the regulations to exclude injection wells from the well count in

calculating “average daily production” per well. The industry

strongly disagreed with this interpretation and argued that

injection wells should be included in the well count because

they were a necessary part of a secondary recovery system. In

response, the FEA, on December 19, 1974, issued Ruling

1974-29 which expressly excludes injection wells from the

Through an injection well, fluids are forced into an underground

oil reservoir to maintain reservoir pressure to help increase produc-

tion of nearby producing wells. See Wiggins Brothers, Inc. v. Depart-

ment of Energy, 667 F. 2d 77, 80 (Temp. Emer. Ct. App. 1981), cert.

denied. U. S.. 50 U.S. L. W. 3783 (1982); Energy Reserves I,

589 F. 2d at 1105 (Zirpoli, J., dissenting). Inclusion of injection wells

in the calculation of average daily production would enable a produc-

er to divide his total production from a property by a greater number

of wells, thereby allowing more production to qualify for the exemp-

tion by falling under 10 barrels per day per well.

Ida

calculation of average daily production in determining the ap-

plicability of the stripper well exemption from the price control

program. The following paragraph from the Ruling (quoted in

its entirety in n. I, supra) concisely articulates the FEA’s

reasoning:

Thus, the FEA tions by their specific lan

provide that only wells “which produce crude petroleum”

are to be counted in calculating average daily production

for the purpose of determining whether the stripper well

lease exemption applies. While injection techniques hel

to “produce” crude petroleum, they are not wells whic

themselves “produce” crude petroleum. Therefore, wells

which did not actually yield or produce crude petroleum

during the preceding calendar year are not production

wells for this purpose. Whether the non-producing well

was an “injection” well, a disposal well, a dry well, a spent

well or a shut-in well will not change this result.

This Ruling, here under challenge, has been consistently

adhered to since first issued.

Post-Enactment Developments

The stripper well lease exemption underwent a significant

change not very long after its enactment. Section 401 of the

Energy Policy and Conservation Act of 1975 (EPCA), Pub. L.

No. 94-163, 89 Stat. 871, 42 U.S.C. § 6201 et seq. and 15 U.S.C.

§ 751 et seq., repealed the stripper well lease exemption of the

EPAA and required the President to “establish ceiling prices”

for stripper well production. FEA regulations were amended

accordingly with 10 C.F.R. § 210.32 deleted on February 1,

1976. 41 Fed. Reg. 4939 (1976).

Just eight months later, however, on August 14, 1976, Con-

gress enacted the Energy Conservation and Production Act

(ECPA), Pub. L. No. 94-385, 90 Stat. 1125, 15 U.S.C. § 751 et

seq. Section 121 thereof amended § 8 of the EPPA of 1973 by

adding the following pro ‘sion:

(i) (1) The first sale price of stripper well crude oil shall

be exempt from the regulation promulgated under section

15a

so this Act as amended pursuant to the requirements of

section.

* * * *

(2) For the purposes of this subsection, “stripper well

crude oil” means crude oil produced and sold from a prop-

erty — maximum average ne — — crude oil

well during any consecutive I2- mont iod beginn-

eller December 31, 1972, does not — 10 barrels.

(3) To qualify for the exemption under this subsection, a

y must be producing crude oil at the maximum

ble rate throughout the 12-month qualifying period

and in accordance with recognized conservation practices.

(4) The President may define terms used in this subsec-

tion consistent with the purposes thereof.

90 Stat. at 1133, 15 U.S.C. § 757(i) (emphasis supplied). On

October 29, 1976, 10 C.F.R. § 212.54 was issued which pro-

vided in pertinent part:

“Av daily production” means the qualified max-

imum sched predation of crude oil (excluding condensate

recovered in non-associated uction) uced from a

property, divided by a number equal to the number of

ys in the 12-mon qualifying period times the number

of wells that produced crude oil (excluding condensate

recovered in non-associated production) from that proper-

ty in that 12-month qualifying period. To qualify as max-

imum total production, each well on the rty must

have been maintained at the maximum feasibie rate of

i the 12-month qualifying period and

accordance with recognized conservation practices, and

not significantly curtailed by reason of — failure

or other disruption in production.

R X * **

Stripper well rty” means a “property” whose

1 .— of erude o (excluding con-

densate recovered in non- associated production) per well

did not exceed 10 barrels per day during any preceding

16a

2 12-month period beginning after December

41 Fed. Reg. 48323 (1976) (emphasis supplied).

As the language of these provisions demonstrates, Congress

and the FEA refused to expand the stripper well exemption

beyond its scope prior to being repealed. Congress did, how-

ever, address the growing importance of secondary recovery

techniques. In doing so, it modified 15 U.S.C. § 757(d) (3) (C)

which allowed for a special adjustment for production from

marginal wells, including production from stripper wells, and

lumped together all secondary recovery techniques, a category

within which injection wells were intended to fall, for exemp-

tion purposes. See 15 U.S.C. § 757(j). The Conference Report

to the ECPA explained this action as follows:

The conferees are agreed that there exists great poten-

tial for augmenting domestic crude oil production through

the application of enhanced recovery techniques. There is

also a general agreement that current economic circum-

stances would permit adjustments to the pricing mechan-

ism contained in the Energy Policy and Conservation Act

to give needed additional incentives for the application of

i enhancement — „* which today are not

economical. The conferees not, however, agree to

the provisions of the Senate amendment which would

permit substantial price increases — — —

secondary enhancement techniques such as water flooding

and gas displacement. Moreover, the conferees did not

believe it wise to attempt to ereate in rigid statutory

language a special classi ion of domestic production

which — freed of 8 T 14 Unlike — — —

stri we uction, for which there is a

legislative and administrative — 8 3 not com-

mon agreement as to the practicality, feasibility or cost -

effectiveness of the various enhancement — 2 em-

ployed throughout the industry.

S. Conf. Rep. No. 94-1119, 94th Cong., 2d Sess., reprinted in

{1976} U.S. Code Cong. & Admin. News 2027, 2047. Thus, as

was recognized by Senator Jackson in later debate, see 123

Cong. Rec. 36059 (1977), Congress did provide in the EPAA a

procedure by which a producer could obtain an exemption for

17a

the costs of secondary recovery techniques, including injection

wells.

Senator Bartlett of Oklahoma, one of the principal architects

and proponents of the stripper well exemption, who had on

many occasions urged its expansion, stated in Senate debate on

March 31, 1976:

In the Emergency Petroleum Allocation Act of 1973—

per production to receive free market new

pricing 222 of the — place stri ae oz

price con n

the definition of i ion is ex to include

ion other than from we less

than 10 Dr =

category inc i igh watercut wells,

from some and offshore wells producing in excess

of 10 BPD, from marginal fluid injection projects.

122 Cong. Rec. 8757 (1976). In the Senate version of that “bill”

he mentions, S. 3233, injection wells were included, with a

proposed amendment to § 8 of the EPAA to include the follow-

— 1, crude oil at the maximum

ible rate and in accordance with ized conserva-

tion practices, and if injection wells are to be counted to

— fi 7 — — — .

purpose of increasing ultimate recovery or the producing

rate of crude oil from the property.

Id. at 8758. The Senate and House conferees failed to accept

that Senate amendment. It is obvious from the final measure

enacted by Congress, that Senator Bartlett did not succeed in

obtaining the “expanded” interpretation he sought. Congress

decided to maintain the scope and nature of the stripper well

exemption just where they were prior to being eliminated by

the EPCA.

18a

Following a public hearing on September 22, 1976, the FEA,

on October 29, 1976, adopted a stripper well exemption again

substantially similar to the previous regulations. That regula-

tion is quoted earlier in this opinion at page 15. 41 Fed. Reg.

48323 (1976). The stripper well exemption was placed in

essentially the same position it was in prior to being repealed.

Senator Bartlett’s efforts to obtain an expanded exemption

were unsuccessful. Nonetheless, he vigorously continued to

seek to amend the established law to include injection wells in

the well count. The most important act by Senator Bartlett for

purposes of this appeal occurred in the fall of 1977.

On October 31, 1977, during Senate debate on a bill to extend

the life of the EPAA of 1973, Senator Bartlett offered an

amendment (No. 1502) to the EPAA of 1973 “to clarify the

intent of the ‘stripper well’ amendment.” 123 Cong. Rec. 36058

(1977). His amendment provided that injection wells would be

counted, together with producing wells, to determine the

stripper well status of a lease. His amendment read as follows:

Sec.. Section Sci) (2) of the Emergency Petroleum

Allocation Act of 1973, as amended, is amended by adding

the following new sentence at the end thereof: “Includi

in the count of the total number of wells on a propert

be all wells producing crude oil and all wells utilized for the

of injecting water and or other materials into a

— — — — el

recovery.

Id. A lively debate ensued with the vast majority of speakers in

favor of the amendment. Senator Bartlett stated:

First, let me approach the cost question this way.

In looking at the produeing well alone, the costs in-

volved of the small producer are those costs of just produc-

ing that well, operating the ing unit, presumably,

keeping in ym ger line to the tank, keepi ~

pee up, normal expenses, pulling t

well occasionally, and so on.

The cost of operating an injection well in a waterflood is

„

19a

1 —— to bo tracted Riisty enter

the stripper well amendment, we should, therefore, count

the injection wells as oil wells for the purpose of qualify-

ing

Id. Senator Tower stated:

The inclusion of injection wells in the computation of a

ay wpe barrels-per-day average per well, for

of stri oil — — would be a nat and

beneficial It w bea which would make

the law more reasonable and less arbitrary. Most impor-

tant, it would add significantly to the Nation’s supp y of

domestic crude oil by extending the economic life of many

older, developed oil fields.

Id. at 36061. Senator Bellmon stated:

Mr. President, very briefly, I would simply like to say I

M of

injection wells when determining average daily produc-

tion. If these are not oil wells in the strict sense of the

word, they are certainly essential to oil production. I felt,

when — — the stripped well amendment initially,

they w be included. Interior Department has long

counted injection wells. a

Id. Senator Dole stated:

This amendment would let producers count both the

producing wells and the injection wells when he is calculat-

ing the number of barrels per well that he produces from

the property.

I think this would certainly be fair. While these injec-

tion wells are very costly, they uce no oil of their own

and thus they uce no ts for the producer. Yet,

without them there would be no production from such a

property at all. They deserve to be counted as part of the

total number of wells on the property.

Id. at 36062. And Senator Bumpers stated:

I had some reservations about the amendment, because

I felt there was some serious ntial for abuse here in

illing these salt injection we — 5 tee dy

tier of the stripper price, the decontrolled price. But

I with the people in my State who are in this

20a

business. Virt all the oil produced in my State is

stripper oil, and they teil me that as a practical matter,

this 1s not likely to abused, because these wells are

expensive to and to maintain, and that any figure we

establish here of the number of wells that can be used in

terms of the formula will be highly arbitrary.

Id. at 36063. The only speaker opposed to the amendment was

Senator Jackson, who argued:

Mr. President, I o this amendment and that

it be defeated. _— “_—

The proponents are ing here, in effect, that it clar-

ifies the intent of the so-called stripper well amendment.

Mr. President, I supported the original exemption from

price controls for the so-called stripper wells.

I point out that the language of the existing law express-

ly refers to wells producing crude oil. It does not include

injection wells, nor was it intended to. The effect of the

amendment would be to expand the number of crude-oil

pos properties which are exempt from price con-

trols.

The Department of Energy indicates that it is unable to

determine the amount of production that would be decon-

trolled. It is even more di t to determine whether and

to what extent the amendment would 47 any additional

—1 r over and above that which is already stimu-

ted by the current exemption for stripper wells.

Much of the oil to which the amendment would apply is

old oil which was discovered several years . The

amendment—so that we all understand—would allow the

price to jump from $5.25 to almost $14 over night. I see no

justification for this $9 per barrel windfall.

Mr. President, in connection with the colloquy between

the distinguished Senator from Colorado (Mr. Hart) and

the distingui Senator from Oklahoma (Mr. Bartlett),

I — out that the existing law, the Emergency Pet-

ro Allocation Act, does provide a procedure by which

the producer can, in fact, get an exemption for secondary

recovery, — & jection wells. In response to the

question posed by t nator from Colorado, the hitch is

2la

that these producers must demonstrate that the cost

fies the price. 277 — If the

2 See, 2

the existing law.

Mr. President, I feel very strongly that we must pro-

vide additional incentives to bring out the so-called hard-

to-get oil, where the cost can be demonstrated to be a

factor that warrants mee adjustment. I think that is what

we all seek. But should you turn around and grant a $9 per

1 increase where you cannot even come close to

justifying that kind of a price exemption?

Id. at 36959.

Senator Bartlett’s amendment was approved by the Senate

by a final vote of 62-24. Jd. at 36063. The House version

contained no such provision. The final conference agreement

also did not include this provision. See Joint Explanatory

Statement of the Committee of Conference, reprinted at [1978]

U.S. Code Cong. & Admin. News 8071, 8087.

Congressionai Intention

After reviewing the history of the regulations and Ruling

1974-29, the district court concluded that the exclusion of injec-

tion wells conflicts with congressional intent. The primary

reason articulated by the district court appears to be that

excluding injection wells from the count would run contrary to

the purpose of encouraging “the operation of marginally

productive wells to produce oil that otherwise would not be

produced.“ 520 F. Supp. at 1258. There is no question that

continued production from stripper wells was the paramount

sought after result from the exemption. Without it, the con-

tinued operation of many such wells would become economical-

ly infeasible and would have to be shut down. In a period of oil

shortage, reduced domestic production was not desired. De-

spite this laudable objective, the Congress and the FEA both

realized that the exemption also carried with it a real potential

for abuse. Il. e financial benefits to well operators to have their

leases declared “stripper well” was an enormous incentive for

manipulation of the exemption. The President and Congress

22a

vested with the FEA broad authority to prevent such abuses.

Prevention of such abuse and manipulation is one of the

reasons for Ruling 1974-29. This concern is evident throughout

the history of the exemption. It is most evident in the TAPAA

Conference Report which provides:

15. Section 406, relating to stripper oil wells. was a

Senate floor amendment to S. 1081. The Conferees have

adopted the general concept of the floor amendment, but

have added new provisions to insure that the exemption is

narrowly de and prudently administered, and to in-

sure that the incentive being granted is properly limited in

accord with congressional intent.

* & *

The Congress intends that the provisions of this seetion

will be strictly enforced and ted by the administer-

ing agency to insure that the limited exemption of this

class of wells for the express purposes described above is

not in any way broadened. To achieve this, Congress

authorizes on-site inspections to insure compliance. Con-

gress also directs that the administering agency shall

promulgate 21 to implement the provisions of

this section before it becomes operative. The Conferees

expect the administering agency to utilize State data

production —— lath —— by regula-

tion safeguards against the manipulation of gerrymander-

ing of lease units in a manner that evades the price control

and allocation programs.

These regulations shall be so designed as to provide

safeguar is against any abuse, over-reaching or altering of

normal j tterns of operations to achieve a benefit under

this section which would not otherwise be available. Con-

gress specifically intends that the regulations shall,

among other things, prevent any “gerrymandering” of

leases to ave wn high production wells with a num-

ber of low production stripper wells to remove the high

production wells from price ceilings. The sole purpose and

— of this — — 406 is to oe y so wells—

those producing less than ten barrels per day in produc-

tionand to insure tha the crude ol they produce continues

to be available for U.S. refineries and U.S. consumers. It

23a

is not intended to confer any benefit on the owners and

operators of wells producing in excess of ten barrels per

day.

The Congress also intends that the regulations provide

eS limitations and provisions in the definition of

* to insure that an administratively workable sys-

tem is established which does not permit abuse.

TAPAA Conf. Rep. at 2531-33. A failure on the part of FEA to

take action would have been a breach of its assigned responsi-

bility to eliminate the potential for abuse. Injection wells were

an area of possible abuse and the FEA acted accordingly. Their

exclusion was within the scope of congressional intent and

agency authority. See Grace Petroleum Corp. v. Department

of Energy, 456 F. Supp. 945, 949-50 (W. D. Okla. 1978).

Another important factor to consider is the original intended

scope of the exemption. At the time the stripper well exemp-

tion was first enacted in 1973, it was clear to Congress that a

relatively small percentage of this country’s total oil produc-

tion would be affected. Congress was legislating an exemption

from price controls for only that “11.2 per cent of our domestic

oil production,” 119 Cong. Rec. 23873 (1973), or that “very

small percentage of the crude that is available for refining

purposes.” Id. at 23876. Even the strongest proponents of the

exemption recogni7ed the rather limited scope of the exemp-

tion. During Senate debate of the TAPAA, Senator Bartlett

stated that:

A stripper well is a low productivity, marginally eco-

nomic well. It can produce just enough oil to remain above

the break-even point. By definition a stripper well aver-

ages 10 barrels of oil per day or less. These wells provide

1.25 million barrels of oil per day. . . . In 1972, stripper

wells accounted for 11.2 per cent of our domestic oil

production.

119 Cong. Rec. 23873 (1973). During that same debate, Sena-

tor Cook of Kentucky stated:

I do not think there is any question about the fact, if we

are ing about stripper wells with production of 10

barrels a day and less, that we are talking about a very

24a

small percentage of the crude that is available for refining

purposes.

Id. at 23876. It is obvious from the congressional debates onthe

TAPAA and the EPAA that the exemption was to have a

narrow range of applicability. Any broader exemption would

render the price controls on oil practically meaningless. In-

terestingly, nowhere in the statutes or the governing Con-

ference Report is there to be found even a mention of injection

wells.

Tue appellees in this case admit that they seek an exemption

which would have an impact far in excess of that ever con-

templated by Congress. During oral argument, their counsel

stated:

In 1973 and for many, many years, secondary recovery of

oil, which is what we are dealing with here, constituted 30

to 50% of this nation’s oil production. The evidence in the

record is that in 1973 alone seco recovery by means

of waterflood operations, accounted for over one billion

SS

which is ion to sa e

wae bet required to — — that 2 —

impact on one half of the production that they are regulat -

ing is absolutely ludicrous.

The amount of oil subject to the exemption under appellees’

interpretation is much greater than originally anticipated and

intended. Such an expansion might very well have been de-

sired by Congress under the oil market conditions which pre-

vailed following enactment. But such an interpretation on our

part would conflict with the clear intention expressed when the

exemption was first created. If an expansion in coverage was

intended to include injection wells in the count, it was for the

legislature and not this court to now do so.

From 1973 to 1977, the FEA applied a single and unequivoc-

al interpretation of the stripping well regulations. Even after

the exemption was repealed and reenacted, Congress did not

choose to modify Ruling 1974-29 even though it had the oppor-

tunity to do so. While the district court practically ignored this

25a

fact, we consider it a significant and probative indication of

Congress’ approval of Ruling 1974-29.

When we add to that the fact that the Conference Committee

on the Energy Tax Act of 1978 (Pub. L. No. 95-618, 92 Stat.

3174) refused to accept the Bartlett amendment contained in

the Senate version of the bill, which amendment would have

amended the definition of stripper oil to include water and

other injection wells in computing the average daily production

per well, we are presented with clear and convincing evidence

that Congress intended to include only “wells that produced

crude petroleum” when it enacted and reeacted the stripper

well exemption. We also cannot help but recognize that prior to

the reenactment of the stripper well exemption in the ECPA,

the EPAA had been extended three times without disturbing

or modifying Ruling 1974-29. See Pub. L. No. 93-511, 88 Stat.

1608 (1974); Pub. L. No. 94-99, 89 Stet. 481 (1975); Pub. L. No.

94-133, 89 Stat. 694 (1975). By these actions, we believe Con-

gress spoke loudly, clearly and unequivocally that its intention

was not to enlarge or expand upon the “narrowly defined and

prudently administered” exemption which it had originally

mandated in the TAPAA Conference Report.

“Arbitrary and Capricious” Finding

As an alternative holding, the district court concluded that

the exclusion of injection wells was arbitrary, capricious and an

abuse of discretion. This paragraph summarizes the court’s

position on this issue:

Based on this undisputed record, the Court must con-

clude that to the extent that the regulation excludes injec-

tion wells from the well count, it was issued in a manner

which was arbitrary, capricious, and a gross abuse of

discretion. The record discloses that the exclusion con-

tained in the regulation was not the result of any sembl-

ance of reasoned decision making, but rather was the

result of happenstance, and an unintended construction of

language contained in the regulation. The agency failed to

consider any factors which could be deemed relevant. The

agency failed to consider any facts. The agency did not

26a

consider whether excluding injection wells would further

or hinder the co i purposes underlying the strip-

per well exemption. Bluntly stated, neither ignorance of

the subject matter nor vacuity of thought processes can

amount to consideration as a t t process accomplish-

ment of a government agency. agency's process in

arriving at the regulatory exclusion of injection wells must

be — “arbitrary” under any construction of that

word.

520 F. Supp. at 1272 (footnote omitted). It is obvious from a

reading of the court’s opinion that it simply disagreed with the

FEA’s interpretation of the stripper well exemption regula-

tion. But disagreement is not the standard of review to be

applied. The district court has misapplied the correct standard

of review in reaching its decision and misconstrued existing

precedent. The most appropriate place to begin is with this

court’s two previous decisions in this matter.

Energy Reserves I and Duncan v. Theis

Neither of our previous decisions in this matter expressly

ruled on the validity of Ruling 1974-29. Nevertheless, the

discussion of the court in each case fully establishes the error of

the district court’s decision. In Energy Reserves I, Judge

Becker stated that:

The interpretation of § 406 of TAPAA and § 4(e)(2)(A) of

EPAA to exclude injection wells in computing “average

daily production” was a reasonable contemporaneous con-

ge of the statute and created no new law or legisla-

tive i

589 F.2d at 1098 (emphasis supplied). Judge Becker also

added:

There is no fundamental unfairness in the application of

Ruling 1974-29 because it is a reasonable inte ation of

the stripper well exemption of EPAA, TAPAA and the

regulation 10 C.F.R. § 212.32(b).

Id. at 1101 (emphasis supplied). And in his concurring opinion,

Judge Christensen importantly expressed his view that:

And a holding that “a well which uced crude pet-

roleum” means, as contemplated by 2 properly adopted

27a

and subsisting regulations and in view of the seminal

statute, a well that produces or yields such petroleum

directly rather than one which may be utilized as part of a

system to obtain indirectly crude petroleum from a

producing well, seems essentially the sort of an in-

tion that must have been intended by the APA

exception to the rulemaking requirement.

Id. at 1103 (emphasis supplied).

In Duncan v. Theis, supra, we sought to :eemphasize our

views as we remanded the case to the district court for its

determination of those enumerated remaining issues. We

stated:

In sum, the present situation is that the consistency of

Ruling 1974-29 with the APA has been finally established

and, in connection with the ruling on the issue before the

court and particularly in dealing with the question of sub-

stantial impact, both judges concurring in the result clear-

ly indicated the majority view that the ruling in question

id not 2 any substantial departure from the

meaning of the regulation, and for this reason had no

substantial —＋ as an oa ape ruling. Whether the

regulation itself was within the ey of the FEA to

promulgate, despite its conceded p ural regularity,

or whether it was arbit or capricious does not so

me — appear from a consideration of the decision as a

whole.

The unjustified ees i of the government on the

one hand to acknowledge this differentiation in its effort to

block all further proceedings before Judge Theis by way of

discovery or otherwise, and on the other hand the mis-

taken position of some of the plaintiffs that our decision

essentially settled nothing, or at most only the issue of

ural validity” as affecting the parties involved in

peal, may account in some measure for the difficul-

ties the lower court and the parties now profess to see

within our mandate. Yet, it was rendered clear during the

oral argument on the petition for mandamus now before us

that the decision of this court set at rest the question of the

compliance of the ruling in question with the APA because

28a

it was simply a restatement of the meaning and effect of

the regulation on which it was based.

613 F. 2d at 308 (footnotes omitted). In an effort to avoid any

misunderstanding regarding the specific reason for our denial

of the petition for mandamus relief, we wrote:

In so withholding the peremptory writ we do not mean

to be understood as — or suggesting that the bind-

ing meaning and effect of the mandate is limited to express

or formally mandatory language as distinguished from its

reasonable meaning, spirit and effect in context of the

decision agreed upon by the majority of the judges of the

court, that our decision, even though involving the main,

concurring and dissenting opinions, is not mandatory and

binding upon remand in the light of context, spirit, unity of

opinion and reasonable effect, that as to refiners who were

not parties to the appeal, but who are now before the same

court in essentially the same position as those who were,

the doctrine of stare decisis is not controlling upon the

district court, nor that interlocutory injunctions or dis-

covery programs inconsistent with a mandate or repug-

nant toa ay od application of the doctrine of stare decisis

4 beyond the reach of a peremptory writ or other reme-

y.

Id. at 310-11 (footnotes omitted). Thus, while not expressly

holding that Ruling 1974-29 is fully valid, there should have

been no serious doubt that the court believed such was the

case. Contrary to the belief of Judge Theis that the panel in

Energy Reserves I was merely “sounding off,” see 613 F. ad at

310 n.11, the discussion and analysis of all three judges, while

not binding on other courts, represent authoritative in-

terpretations of Ruling 1974-29. They speak all too clearly on

the very issue the district court was asked to decide.

This view, as well as our final holding in these cases, is

completely supported by this Court’s recent decision in Wig-

gins Brothers, Inc. v. Department of Energy, 667 F.2d 77

(Temp. Emer. Ct. App. 1981), cert. denied, _ U.S.. 50

U.S. L. W. 3783 (1982), a case practically on all fours with this

case. The issue there was simply whether, under a proper

construction of the Marginal Property Rule [10 C.F.R.

29a

§ 212.72 (as amended effective June 1, 1979)), injection wells

may be counted ‘as wells that produced oil. Id. at 87. Just as

is the case here, the regulation fails to define the key phrase

“wells that produced oil.” The district court construed this

phrase as including injection wells based upon its “plain mean-

ing.” Id. at 81-82. In reaching that decision, the district court

gave considerable weight to the industry’s interpretation as

well as the treatment which had been given injection wells by

other energy regulatory bodies. Id. at 82. The district court

also disregarded the preamble to the rule in favor of the rule’s

plain meaning. Id. That preamble, published in the Federal

Register, incorporates Ruling 1974-29, the centerpiece of this

appeal.

Writing for this court in Wiggins, Judge Becker concluded

“that injection wells may not be counted as ‘wells that pro-

duced oil’ in the application of the Marginal Property Rule.” /d.

at 87. Paramount in the court’s reasoning was the “clearly

expressed” and “obvious intention” of the DOE to exclude

injection wells from the count. Ruling 1974-29 was found to be

controlling as well as a definition of “average daily production”

which specified that it “must be determined in the same way as

it is done for stripper well properties, and the provisions of the

relevant stripper well property rulings will be applicable.

Id. at 87. The opinion makes undeniably clear that the Margin-

al Property Rule is to be interpreted in the same manner as the

stripper well exemption which the court correctly understood

as excluding injection wells. In three separate passages, the

court found dispositive our earlier rulings in Energy Reserves I

and Duncan v. Theis, supra.

Finally, the prior decisions construing the interpreta-

tive stripper well Ruling 1974-29 to be consistent with a

similar under! statute are decisive. Energy Reserves

ey we v. DOE, 589 F. 2d 1082 (Em. App. 1978), clar-

ified in Duncan v. Theis, 613 F.2d 305 (Em. ‘App. 1979).

667 F.2d at 89.

The critical phrase “average daily uction” had ear-

lier acquired a meaning by 1 interpretation

30a

in Ruling 1974-29 that excluded injection wells in calculat-.

ing whether average daily production was 10 barrels or

less for the purpose of the statutory stripper well lease

exemption and regulation 10 C. F. R. § 210.32(b) (the lat-

ter of two consistent implementi a Energy

Reserves Group, Inc. v. DOE, F.2d 1082 (Em. App.

1978), clarified in Duncan v. Theis, 613 F.2d 305

(Em.App. 1979).

Id.

The reported practices and interpretations of state

commissions and the Department of Interior

for other purposes, relied on by the District Court, are not

effective to rebut the cont ing and administra-

tive interpretation of the steal Pemerty Rule by

DOE. This was ex ly held in En Reserves Group,

Inc. v. DOE, 589 P. 2d 1082, at 1098-1099 (Em. App. 1978),

— in Duncan v. Theis, 613 F.2d 305 (Em. App.

Id. at 90. While the district court below experienced difficulty

in understanding the interpretations given Ruling 1974-29 in

Energy Reserves I and Duncan v. Theis, this court in Wiggins

did not. We agree with Wiggins’ analysis of Ruling 1979-29 and

conclude that injection wells are not to be counted for purposes

of the stripper well exemption. The agency’s interpretation of

the stripper well is neither “plainly erroneous [nJor in-

consistent with the regulation.” Wiggins, 667 F. ad at 88 (cites

omitted).

Justification for Ruling 1974-29

The district court attacked with unrestrained vigor the

reasonableness of Ruling 1974-29. 520 F. Supp. at 1272-73. In

its view, there was no logical reason for distinguishing injec-

tion wells from producing wells. We note the district court’s

reliance on industry practices in reaching its decision, but

under the “arbitrary and capricious” standard we must apply,

we do not believe Ruling 1974-29 is invalid for several reasons.

The most important reason has already been articulated.

Including injection wells in the count could possibly lead to a

3la

serious abuse of the purposes of the exemption. A lease opera-

tor could be encouraged to convert old abandoned wells or to

drill additional injection wells to obtain the benefits of the

exemption. The financial benefits resulting from the exemp-

tion of an entire leasehold from price controls could significant-

ly exceed the costs of the injection wells. This scenario was

surely not desired by Congress. It would be grossly unfair to

suggest that injection wells would spring up all over the coun-

try if injection wells were included in the well count, but it is

not unreasonabie to suggest that such a result could occur.

Ruling 1974-29 eliminates any potential for such abuse.

Perhaps it could be considered an extreme measure but it is not

arbitrary or capricious.

The core of appellees’ argument is that injection wells are

“wells that produced crude oil” under the regulation. A plain

reading simply does not support that conclusion. At minimum,

a reasonable reading would distinguish injection from produc-

ing wells. See Grace Petroleum, supra, 456 F. Supp. at 949. An

injection well is a secondary recovery technique, and such

techniques were not considered by Congress when creating

the exemption and drafting the language of the statutes. Con-

gress had numerous opportunities to modify the exemption to

include injection wells in the count but consistently refused to

do so. For the court to interpret the language to include them

would constitute a flagrant disregard of a clear and contrary

congressional intention.

The district court’s error in its decision is its total reliance on

production incentives. It fails to adequately weigh the other

side of the coin. Price controls on oil was the fundamental

purpose of the legislation. It is obvious that Congress in no way

intended to create an opportunity for mass evasion of those

controls. The stripper well exemption was designed as an

extremely limited and narrow exemption, and the DOE in-

terpretation gives full effect to this intent. There is no reason in

this case not to give the agency’s own construction of its regula-

tion great deference, see Udall v. Tallman, 380 U.S. 1 (1965);

Pasco, Inc. v. Federal Energy Administration, 525 F. 2d 1391

(Temp. Emer. Ct. App. 1975), especially so here inasmuch as

we find the agency’s interpretation reasonable. Energy Con-

sumers and Producers Association, Inc. v. Department of

Energy, 632 F.2d 129 (Temp. Emer. Ct. App.), cert. denied,

449 U.S. 832 (1980). We are not the legislative body responsi-

ble for this nation’s energy policies. The wisdom or lack thereof

of Ruling 1974-29 is properly left with the Congress. Our

review is a narrow one and we will not unnecessarily and

improperly intrude upon the public policy decisions made by

the other branches of Government. Simply stated, there is

nothing about Ruling 1974-29 which renders it arbitrary or

capricious. It reasonably attempts to effectuate the con-

gressional policies expressed throughout that body’s numer-

ous efforts to formulate and implement an effective national

energy policy.

Conclusion

In summary, we find:

1) The legislative history of the stripper well exemption

amply supports the DOE’s position that injection

wells were not intended by Congress to be included in

the well count;

2) Ruling 1974-29 is not beyond the authority of the DOE

— by the controlling statutory provisions;

3) Our prior decision in Energy Reserves I, Duncan v.

Theis and and Wiggins have correctly decided that Ruling

1974-29 is a reasonable ——— of the applica-

ble statutes and regulations; and

4) The stri well — as interpreted by Rul-

ing 1974-29, are nei arbitrary nor capricious.

For all these reasons, the decision of the distriet court is

reversed, and these consolidated cases are remanded to the

district court with instructions to enter judgment for the

defendants-appellants.

33a

APPENDIX B

In re THE DEPARTMENT OF ENERGY

SrRIEPPER WELL EXEMPTION

LITIGATION.

ENERGY Reserves GROUP, Ixc. Suburban

Propane Gas Corporation, Marathon Oil Company and Sklar

& Phillips Oil Company

V.

DEPARTMENT OF ENERGY, et al.

SIERRA PETROLEUM Co., INc.

V.

DEPARTMENT OF ENERGY, et al.

BRADEN-ZENITH, Inc. and The Estate of

S. H. Killingsworth

V.

DEPARTMENT OF ENERGY, et al.

Mosit O1 Corporation, Mobil Producing

Texas & New Mexico, Ind. and Willie Ansley Bryson

V.

DEPARTMENT OF ENERGY, et al.

STELBAR OIL CorporaTion, INc., The Standard

Oil Company, Ohio and Theo M. Glenn, Jr. and Eleanor Glenn

V.

DEPARTMENT OF ENERGY, et ul.

Robert Dale BRANDENBURG

and Texaco, Inc.

V.

DEPARTMENT OF ENERGY, et al.

34a

AMIN OIL, INc.

v.

DEPARTMENT OF ENERGY, et al.

Otis C. PEAVEY, et al. and Sun Oil

Company (Delaware)

V.

DEPARTMENT OF ENERGY, et al.

Howard Stout, Lorena Houlton and Mary E. Hall, Co-

Trustees

of the Charles S. Page Trust and Gulf Oil Corporation

V.

DEPARTMENT OF ENERGY, et al.

Robert E. Davis and Energy Consumers & Producers

Association, Inc., Ruthven, Inc., Pioneer Operations Com-

pany, Inc.

v.

DEPARTMENT OF ENERGY, et al.

George R. Joxks, et al.

V. f

DEPARTMENT OF ENERGY, et al.

PETROLEUM MANAGEMENT, INC.

V.

DEPARTMENT OF ENERGY, et al.

ATLANTIC RICHFIELD COMPANY

V.

DEPARTMENT OF ENERGY, et al.

35a

W. R. Murry, d/b/a Murfin Drilling Company,

and Champlin Petroleum Company

V.

DEPARTMENT or ENERGY, et al.

Union OI Company or CALIFORNIA

V.

DEPARTMENT OF ENERGY, et al.

CoasTaL States Gas Corp., Coastal States

Gas Producing Co., and Gas Producing Enterprises, Inc.

V.

DEPARTMENT OF ENERGY, et al.

EXXON CORPORATION

V.

DEPARTMENT OF ENERGY, et al.

CONTINENTAL OIL Co.

V.

DEPARTMENT OF ENERGY, et al.

Hunt O ComPANYy

V.

DEPARTMENT OF ENERGY, et al.

CrystTaL OIL Company and Ira Thomas May

V.

DEPARTMENT OF ENERGY, et al.

MUSKEGON DEVELOPMENT Co.

V.

DEPARTMENT OF ENERGY, et al.

36a

OKLAHOMA Ass'N OF ENERGY

ConsuMERS & PRODUCERS

V.

DEPARTMENT OF ENERGY, et al.

Paul B. FLetcuer, Sr. and Anadarko Production Company

V.

DEPARTMENT OF ENERGY, et al.

Iu INTERNATIONAL OIL & Gas, INc.

V.

DEPARTMENT OF ENERGY, et al.

Woop O. Co. and Dan Wallace d/b/a

Columbus Oil Co.

V.

DEPARTMENT OF ENERGY, et al.

WILL I. Lewis ENTERPRISES, INc.

V.

DEPARTMENT OF ENERGY, et al.

Jimmie Ausrix d/b/a Austin

Drilling Company

V.

DEPARTMENT OF ENERGY, et al.

SANTA FE ENERGY COMPANY

V.

DEPARTMENT OF ENERGY, et al.

George G. ANDERMAN and Donald

R. Kirby

V.

DEPARTMENT OF ENERGY, et al.

37a

Patricia Anne LEONARD, et al.

v.

DEPARTMENT OF ENERGY, et al.

FARMERS PETROLEUM

COOPERATIVE, INC.

V.

DEPARTMENT OF ENERGY, et al.

Kirkwoop Ol & Gas CoMPANY

V.

DEPARTMENT OF ENERGY, et al.

PETROLEUM CORPORATION

Or TEXAS

V.

DEPARTMENT OF ENERGY, et al.

Civ. A. Nos. 77-1146, 77-1087, 76-429-C6,

78-1070, 78-1176, 78-1230, 79-1387, 78-

1410, 78-1513, 77-1456, 78-1235, 78-1509,

79-1204, 79-1258, 79-1318, 79-1319, 79-

1320, 79-1321, 79-1322, 79-1325, 79-1384,

79-1385, 79-1386, 79-1388, 79-1389 and

79-1416.

MDL No. 378.

United States District Court,

D. Kansas

July 14, 1981.

TuEIs, Chief Judge.

These multidistrict litigation (MDL) cases now come on for

final decision of the Court. Trial of these cases, after extensive

38a

pretrial proceedings and litigaticn involving two appeals by

the defendants to the Temporary Emergency Court of Appeals

(TECA), was finally held to this Court from January 19, to

February 6, 1981. After considering the evidence presented at

trial, and after studying the briefs of the parties, and review-

ing the appellate decisions in the consolidated cases, the Court

enters this opinion.

A brief review of the pretrial proceedings may be illuminat-

ing and certainly, in this Court’s opinion, accounts for the

singularly bellicose and adamant efforts of the Government,

through their various counsel, to resist trial on the merits of

the issue of law common to all of these cases. Originating as a

single case to enjoin as illegal the governmental enforcement of

the regulations of the then Federal Energy Administration

(FEA), now Department of Energy (DOE), prohibiting those

plaintiff oil companies from including fluid injection wells in a

well count to establish pricing levels for crude oil produced

from stripper wells on plaintiffs’ leases, under a stripper well

exemption in the legislative act, other cases were soon filed

which were consolidated into one action. These cases were

ruled on by this Court in its decision reported in Energy

Reserves Group, Inc. v. Federal Energy Administration, 447

F. Supp. 1135 (D. Kan. 1978), which held FEA Ruling 1974-29,

excluding the count of injection wells, was legislative in nature

rather than interpretive of the regulation, and therefore void.

This decision was appealed to the Temporary Emergency

Court of Appeal, resulting in a reversal of the Court’s decision

in a 2 to 1 decision of the three learned judges of TECA, in

which each judge rendered a separate opinion. This decision is

reported as Energy Reserves Group, Inc. v. Department of

Energy, 589 F. 2d 1082 (TECA 1978). In short summary, the

TECA majority held valid Ruling 1974-29 as a reasonable

interpretation of the regulation implementing the statutory

stripper well exemption, and remanded for trial the issue of

whether the regulation was valid under the intent of Congress

as expressed in the statute and its legislative history, and

whether the regulation was arbitrarily and capriciously

adopted by the administrative agency. By this time case litiga-

tion was burgeoning on the identical issues in many other

federal court districts and forwarded to this district and com-

bined for disposition of this Court as multidistrict litigation

under order of the Judicial Panel of Multidistrict Litigation in

June, 1979, reported as In re Dept. of Energy Stripper Well

Exemption Litigation, 472 F. Supp. 1282 (1979). Governmen-

tal resistance to this Court’s efforts to get the case ready for

trial and its unilateral insistence that the litigation had been

terminated by TECA in the 1978 appeal, resulted in yet

another appeal to mandamus this Court, reported as Duncan,

Sec’y. of Energy v. Theis, Chief Judge, 613 F.2d 305

(Em.App.1979). TECA rejected the government counsels’

contention that TECA had decided this case in its prior opin-

ion, and that there was no subject matter for litigation and

decision. After continued resistance by the government at

every stage of the pretrial discovery proceedings, trial finally

began on January 19, 1981.

The government’s theory of absolutism in the rightness of its

conduct, its refusal to recognize the adversarial aspect of our

legal system, and general truculence, are aptly illustrated by

an early assertion in its Post-Trial Brief, wherein it is stated:

“Although the trial held in this matter was extremely improper —

and unnecessary .. .”

Generally, the whole history of this litigation has been the

government’s premise that its administrative decisions are

judicially unreviewable, and the minds and actions of the ad-

ministrative decision-makers may not be probed to determine

the basis for such action. This position has been vigorously and

adversarily disputed by an array of competent counsel from

some of the leading law firms around this nation. As a result of

an earlier injunction order in this case there has been accumu-

lated in trust under court supervision a fund approximating

one billion dollars, which awaits judicial distribution upon the

termination of this litigation.

40a

The issues now before the Court in the trial and for decision

are: (1) whether the regulation itself, interpreted by TECA as

excluding injection wells from the well count, was reasonable

and valid within congressional intent of the statutory ex-

emption; and (2) whether the promulgation of the regulation

(C.F.R. 154(s)), was arbitrary and capricious. Since the incep-

tion of this litigation these two issues have always been the

principal underlying legal points for ultimate decision.

To better understand the parameters of this dispute the

Court considered engineering facts underlying crude oil

production generally and secondary recovery in particular,

various state procedures governing secondary recovery, and

the treatment of injection wells in secondary projects under

certain fede al programs. The Court’s conclusions with respect

to these matters constitute the first portion of this opinion.

The Court then sets out the controlling statutes, regulations

and ruling. This section is followed by the holding of this Court

that Congress intended injection wells to be included in the

well count, and a lengthy explanation as to how the Court

reached this conclusion and why the DOE’s contrary position is

not binding on the Court.

The Court then concludes that even if the statute did not

mandate including injection wells, the manner in which the

Department excluded the wells from the well count was

arbitrary and capricious.

For those reasons, the Court has found that the stripper well

exemption regulation, as interpreted by Ruling 1974-29, is

invalid and must be struck down. The Court, in this opinion,

has also ruled on certain post-trial motions, and these rulings

are contained in part V of this opinion and order.

4la

I. FACTUAL AND REGULATORY BACKGROUND

The organic theory of the origin of oil is accepted by 99.9% of

engineers. (Whiting, T. 132033).' This theory holds that oil

came from organisms that lived in and adjacent to inland seas

during geologic times. Plant and animal residues were depo-

sited in these inland seas and over time were covered with

sediment and subjected to great heat and pressure. (Whiting,

T. 139). This heat and pressure “destructively distilled” those

organisms and generated petroleum. (Id.) This petroleum then

is believed to have migrated from the place it originated, the

source beds, through very small pores in the underground rock

until it was caught in some kind of geologic “trap” which

prevented further migration. Three of these geological traps

are illustrated in P.X. 1-14 through P.X. 1-17. Oil caught in

such a trap constitutes an oil reservoir.

The rock formations which contain this oil must possess two

characteristics to allow the oil to move within the reservoir.

The rock must have “porosity” and “permeability.” Porosity is

an indication of the storage capacity of a rock. (Whiting, T.

140.) Porosity must be present to have an accumulation of oil.

(Whiting, T. 141.) Porosity is the measure of the microscopic

pore spaces between the grains of sand in the rock formation.

An artist’s conception of this characteristic is shown on P.X.

1-9. Permeability occurs where microscopic pore spaces are

interconnected in a manner such that oil can move through the

rock. The rock must have permeability in order to transmit oil.

Samples of the type rock which contain the oil in the under-

ground reservoirs are shown in P. X. 170-171.

The Court will refer to citations to the trial transcript by citing

the witness and the page in the transcript, e.g., (Whiting, T. 132-33.)

Depositions will be cited similarly, only “D.” will be used to denote

deposition testimony. Plaintiffs’ exhibits are cited P. X.“ and the

number. Defendants’ (Government's) exhibits are cited G. X. and

the letter.

42a

The production of oil is the process of forcing the oil from the

rocks in which it is found into a well bore for transportation to

the surface. Primary recovery is an oil recovery process which

utilizes the natural energies in a reservoir to displace the oil

from the reservoir into the well bore of an output well. (Whit-

ing, T. 154.) The three major forms of natural energy within an

oil reservoir are the “gas cap drive,” the “natural water drive,”

and the “solution gas drive.” These three naturally occurring

drive forces are illustrated in P. X. 1-20, 1-22 and 1-21.

“Gas cap drive” occurs where a quantity of undissolved gas

exists within a reservoir. When a recovery well is completed in

the formation, the pressure from the free gas forces the oil into

the well bore through which it is transported to the surface. As

the recovery continues, the gas cap expands to displace oil in

the rock pores and force the oil into the recovery well bore.

(Whiting, T. 160.)

A natural water drive reservoir occurs where there is a

water reservoir underlying the oil reservoir. In this situation,

as oil is withdrawn from the reservoir, the water underlying

that oil forces itself up, displacing oil as it expands into the oil

bearing formation, forcing the oil into the recovery well bore.

Solution gas, or dissolved gas drive, is the third primary

drive mechanism. Because of the high pressures naturally

occurring within an oil reservoir, natural gas is forced into

solution in the oil. When a recovery well is completed the

reservoir pressure is reduced, and the dissolved gas begins to

come out of solution. The process is the same as when a bottle of

a carbonated beverage is opened. When the cap is taken off,

some of the dissolved carbon dioxide within the beverage

comes out of the liquid. When the gas in the reservoir comes

out of solution, it expands and forces oil out of the pore spaces

in the rock and into the well bore. (Whiting, T. 155-56.) The

point at which dissolved gas begins to come out of solution is

referred to as the “bubble point.”

There is a limit to the amount of oil that can be recovered

utilizing the naturally occurring reservoir energy. A natural

43a

gas cap or natural water drive allows for the recovery of 20 to

50 percent of the oil contained in the reservoir. (Whiting, T.

169, 170.) A solution gas drive mechanism allows for the

recovery of 15 to 25 percent of the oil contained in the reser-

voir. (Whiting, T. 169; O'Neal, T. 268.)

Secondary recovery is a recovery process in which the

naturally occurring reservoir energy is augmented by addi-

tional energy in the form of matter injected into the producing

formation. (Whiting, T. 163.) A water injection system in-

creases the production of oil in two ways. First, the injection

helps to maintain the pressure within the reservoir. The injec-

tion process provides the power to move oil through the reser-

voir to the recovery well. Second, water injected into an oil

reservoir physically displaces the oil and moves it toward the

recovery well. Water injection has been recognized for about

fifty years as an accepted efficient method of augmenting oil

recovery. (Whiting, T. 164.)

A water injection recovery system requires at a minimum

two oil wells. One well is the injection well and is used as a

vehicle to inject water into the oil formation. The other well is

the recovery well and is used as the conduit to remove the oil

forced into the well bore. Typically, an injection well is a

former recovery well which has been converted to injection.

Physically, there is little difference between the structure of

an injection well and the structure of a recovery well. Plain-

tiffs’ Ex. 35, which is attached to this opinion as Appendix “A,”

shows the similarity of physical structure between a typical

injection well and a typical recovery well.

Drive mechanisms should not be confused with lift mechanisms.

Lift mechanisms are the devices utilized to transport the oil from the

bottom of the well bore to the surface. Drive mechanisms are the

mealis of forcing the oil through the rock into the well bores. Various

means of lifting the oil are available, the specifics of the devices are

not important to the resolution of this case.

da

From an engineering standpoint, there is an appropriate

time at which to initiate waterflooding so as to maximize

recovery from a reservoir. (Whiting, T.172). The optimum

time, however, the “bubble point,” is that time at which the

dissolved gas in the oil starts to come out of solution. Delay in

initiating injection past the “bubble point” decreases ultimate

recovery, since the mobility of the oil decreases. (Whiting, T.

177.) Recovery lost because of slow initiation of secondary

recovery can never be recaptured by use of primary recovery

or waterflooding. Delays past the optimum point in initiating

waterflooding cause an absolute decrease in recoverable oil

reserves. The early initiation of injection also results in less

recovery than in a properly waterflooded field, since the natu-

ral displacement power of the dissolved gas is wasted. (Whit-

ing, T. 173, 175.)

The increased recovery resulting from water injection is

shown on P.X. 1037 to P.X. 1-40. The increased recovery is

normally expected to be from 67 to 150 percent of the amount of

oil recovered using primary methods. (O'Neal, T. 268, 311.)

Institution of a secondary recovery project using water-

flooding is a complex and expensive undertaking. Before in-

itiating waterflooding, a producer must determine whether an

oil-bearing formation is suitable for secondary recovery. Dis-

solved gas drive reservoirs seem to be the best candidates for

secondary recovery, since the natural energy is more quickly

dissipated, leaving more oil in place. (Platt, T. 698-99; Whiting,

T. 170.) The engineers and geologists must make laboratory

studies to determine if additional oil could be recovered by

injection of fluid into the reservoir. (Platt, T. 700.)

If it is found that water injection would be beneficial, then

the entire oil field must be “unitized.” Different portions of an

oil field may be leased by different companies. Efficient

waterflooding requires that the entire reservoir be under a

single plan. Unitization is the process through which the vari-

ous leaseholders are brought into one d entity for the exploita-

tion of the field. (O'Neal, T. 246-47; Watt, T. 703.)

45a

A producer must obtain a source of water to inject into the

reservoir. Fresh water might be obtained from a river, as was

done in the Salem Unit (Eley, T.400), or from wells, as was

done in the Northwest Cha Cha Unit (Shearin, T.544). Salt

water might be obtained from a variety of sources (Platt,

T.701). While the costs of obtaining the water vary, they may

be high. The water from the water supply must be chemically

treated and filtered to be suitable for injection. (See P. X. 28.)

Injection of water which is not compatible with water already

present in a reservoir could cause a plugging of the pore space

in the oil-bearing rocks, which in turn could prohibit continued

injection, or otherwise be detrimental to the recovery process.

(Platt, T.708; Burt, T.1035-36.) The water is injected at high

pressures which could vary between 1000 p. s. i. and 6000 p. s. i.

(Platt, T.709.) These injection presures require large injection

pumps. (McConnell, D.18.) (See, P.X. 41, P.X. 29-2.)

Wells to inject the water must either be drilled, or recovery

wells must be converted to injection wells. Costs of drilling an

injection well are comparable to the costs of drilling a recovery

well. (McConnell, D.17.) The conversion of wells from recove-

ry wells to injection involves first performing remedial work on

the recovery well. (Platt, T.710; P.X. 35.) Next, tubing is

placed in the well casing and a packer is placed around the

bottom of the tubing. (Platt, T.711.) A well head sufficient to

withstand the high pressures is installed on the top of the well.

(Id.)

Various patterns of the placement of injection wells can be

used in a secondary recovery project. The pattern which is

selected depends upon the geologic characteristics of the reser-

voir, such as the permeability of the rock, the reservoir pres-

sure and the oil characteristics. (O'Neal, T.269.) Recognized

patterns include the peripheral flood pattern (O’Neal, T.270;

P. X. 7), the five spot flood pattern (O'Neal, T.270-1; P. X. 8),

and the inverted nine spot pattern (ONeal. T.271; P. X. 8). The

five spot and the nine spot pattern result in an injection well to

recovery well ratio of one to one and one to three, respectively.

(O’Neal, T.270-71.)

16

Long pipelines for transporting the water from its source to

the treatment plant to the injection pumps and then to the

injection wells may be required. These pipelines may need to

be specially treated to withstand corrosive forces and the high

pressures associated with the injection process. (Platt, T.709,

710.) Other facilities may be necessary for separation of oil

from the water lifted by the recovery wells. Facilities may be

necessary for preparing recovered water for reinjection, or

disposing of recovered water in some other manner.

The important contribution that oil recovered through

waterflooding operations makes to the oil needs of this coun-

try, and the necessary role of injection wells in that process, is

undisputed. In 1973, approximately one billion barrels of oil

were produced through the injection process. (Platt, T.722-

23.) Thirty to fifty percent of all oil produced in the United

States was attributable to fluid injection projects. (Platt,

T.743.) The injection well is a necessary and indispensible

ingredient in the secondary recovery process. Professor Whit-

ing, on cross-examination, was asked:

“Q. When you testified that an injection well is a uc-

ing well or a well that produces crude oil, didn’t you

— are ey — — age fp pent

emitting of oi t uction well, the recove

well, of the curnes ¢ he earth? of

A. I will say once again—and I guess other times if you

insist on it—I teach my students that there is no

question about the ntal premise that there

are three necessary of a secondary recovery

system. Elements of it. The reservoir, the input

well, and the production well—using your words.

All of those are essential ingredients, and I think I

should answer your question by saying without an

injection well in secondary recovery there would be

no oil production into the well bore of the production

well you are talking about. It is an essential in-

gredient of the system. Without an injection well

47a

you don’t have secondary rec . This has been

recognized I know for 40 years.” (Emphasis added.)

(Whiting, T.193.) The Government expert, Mr. Burt, agreed

with Professor Whiting, as follows:

Right. And, therefore, wouldn't you agree that an

injection well is an absolute and necessary essential

part of a secondary recovery waterflood producing

system?

A. I don't think I ever said otherwise. I've always said

it was essential to have an injection point.”

(Burt, T. 1062-63.) Mr. O'Neal testified that injection wells and

recovery wells are “hydraulically linked.” He explained:

“A. ‘Hydraulic linkage’ is merely a form of reservoir

communication in one sense. As I mentioned before,

we started out with a tiny sample of rock that is in a

reservoir that is in a stannic conduit, the pore

8 , but those things are connected, they are not

efficient pipelines, but they are connected from one

end of the reservoir to another. And that is what you

are able to utilize in conducting a waterflood, is that

you use that communication, and then by injecting

water into the well on the left you force that water

out into the oil-bearing formation, and that provides

the energy to move the oil and the water, and it also

is sweeping the oil out of those pore spaces.

Q. Allright. Mr. O’Neal, as I understand it, then, there

is an hydraulic linkage between the injection well

here and the recovery well here, is that correct?

A. That is correct. Those two wells are used in pairs.”

(O’Neal, T.273-74.) The relationship described is rather like a

pipeline with the injection well acting as one end and the

recovery well acting as the other end. Nothing can flow out of

the one end of the pipeline in the absence of something being

forced into the other end. An injection well provides the force.

On cross-examination the witness clarified this relationship:

“Q. Now you testified in response to a question by Mr.

Beck, the summary question, that producing, that

18a

injection wells, are wells that produce crude oil. Lou

mean by that, do you not, that they help produce

crude oil, isn’t that a fact?

A. No. As I said for me the injection well, number one,

is a well that produces e oil, like that which was

demonstrat on the model—

A. All right. What I said was that an injection well

forces, by the use of water, puts energy in the reser-

voir, displaces oil through the reservoir and up

the recovery well. And, I said more than assist

said it was the prime mover, because if I did not put

that injection well in, I would have no more oil

production.” (Emphasis added.)

(O’Neal, T.351-52.) Mr. Eley testified similarly:

“A waterflood, certainly a waterflood, such as the Salem

Unit—and this unit is typical of a successful waterflood

unit — I can see it as a hydraulic system, you inject water

into the injection wells, and put energy in the formation

which moves oil and water to your recovery wells where

you recover. In the absence of water injection, you would

pot ＋ in this field, you would have no production at all.

And , today as of October 1, 1980, our injection

program resulted in the production of an additional

118 million barrels of oil, and will ultimately produce an

additional 138 million barrels of oil. Now, this is, again, oil

that would not be produced in the absence of injection

wells. Injection wells are an essential part of your injec-

tion operation, and certainly in this sense injection wells

do produce crude oil.”

(Eley, T.434.) All of these principles were clearly and

graphically demonstrated through the model of the oil reser-

voir. Movies of this demonstration were submitted as P. X. 175

and P.X. 176.

The defendant did aptly point out that other types of wells

are present on oil leases. No other type of well, however,

contributes to the recovery process in the manner that both

49a

injection and recovery welis do. These are the only two types of

wells which cause oil to flow within the reservoir.

In many states, the entire process is heavily regulated. The

materials submitted by the plaintiffs show that California,

Colorado, Illinois, Kentucky, Michigan, Nebraska, New Mex-

ico, Texas, Utah and Wyoming, all require producers to obtain

permits prior to drilling a well for injection purposes. All of

these states and Arkansas, Kansas, Montana, and Oklahoma

require application and approval prior to instituting water

injection. The approval necessary to institute waterflooding

seems to be obtainable only after furnishing extensive studies

on the feasibility of waterflooding. In Kansas, for example, an

application to inject must show:

“(1) the location of the intake well; (2) the location of all oil

and gas wells, including abandoned and drilling wells and

dry holes, d the names of landowners and lessees within

one-half mile of the intake well; (3) the formation from

which wells are producing or have produced; (4) the name,

description and depth of the formations to be flooded; (5)

the openhole depths of each formation to be flooded; (6) the

elevations of the top of the oil-or-gas-bearing formation in

the intake well and the wells producing from the same

formation within one-half mile radius of the intake well; (7)

the log of the intake well or such information as is

available; (8) descriptions of the intake well casing; (9)

descriptions of the liquid, stating the kind, where obtained

and the estimated amounts to be injected daily; (10) the

names and addresses of the operators notified of the

application and the date that such notice was given; (11)

such other information as the commission may require to

ascertain the flooding may be safely and legally made.”

Kan.Admin.Reg. No. 82-2-502. Other states have similar

requirements. See, e.g., Rule 401, Rules and Regs. of Neb. Oil

and Gas Comm.; Rule 228.3, Gen. Rules and Regs. of Oil and

Gas Comm. of Montana. See also, P. X. 48, which is form H-1 of

the Texas Railroad Commission and is required to be com-

pleted prior to initiation of injection.

These natural and regulatory barriers to the institution of

waterflooding render the process quite expensive. Even the

50a

defendant’s expert engineer acknowledged: “The cost of a

waterflood system is more than primary.” (Burt, T. 1073.) This

fact was affirmed by other experts who testified: Shearin,

T.536; McConnell, D. 15-20; Platt, T.700-04. Moreover, as apt-

ly pointed out by the Government’s engineer, water injection is

subject to the risk of failure. (Burt, T.1033, 37; G.X. G2-A

through G2-E.)

State agencies have afforded injection wells special treat-

ment in proration programs, to insure that their contribution

to the production process is recognized. One of the goals of a

system of proration or allowables is to maximize the ultimate

recovery from each field, thereby preventing waste and con-

serving oil. (Coker, T.598; Baumel, T.663.)

This Court was treated to an extensive lesson in the method

allowables are determined in Texas. The actions of the Texas

regulators, the Texas Railroad Commission, are of particular

interest since that oil rich state accounts for approximately

one-third of the total oil production in the forty-eight con-

tinental United States. (Platt, T.723; Coker, T.624.) Mac Cok-

er, who served the Texas Railroad Commission for 28 years,

Jack K. Baumel, who worked for the Commission for 15 years,

and designed the system of yardstick allowables used in Texas,

and Bob Harris, who currently is director of the Oil and Gas

Division of the Commission, provided the Court with a full

picture of the functions of the allowable system in Texas. No

individuals could possibly be more qualified to testify about the

Texas practices than these three individuals, and their credi-

bility was unsullied.

To establish an allowable for a water flood project, each well

must undergo a test prior to injecting water into the formation.

This test is required of all wells which are either converted

from recovery wells or drilled as injection wells. (Coker,

T.608.) The test required determines how much oil the well can

yield in a twenty-four hour period. Thus, even if a well was

drilled to be operated as an injection well, the operator must

use that well as a recovery well for twenty four hours to

determine how much oil that well can recover in that period.

5la

(Coker, T.609.) The amount of oil that the well emits in that

test period is assigned to that well as its allowable. (Coker,

T.610.)

When the test is completed and the wells are converted to

injection wells, the allowable of those wells are transferred to

other specific recovery wells on the property. (Id.) Thus, if

prior to injection, an injection well has an allowable of five

barrels per day, and a recovery well has an allowable of six

barrels per day, the allowable of the injection well can be

transferred to the recovery well so that the recovery well could

extract eleven barrels per day. (Coker, T.611.)

If the waterflood operation is able to produce more oil than

this allowable permits, a different set of allowables comes into

play. Rule 48, Texas Railroad Commission. The first step in

increasing the allowable for waterflood projects is to assign a

“marginal allowable” to the wells on the property. The allow-

ables for the injection wells are transferred to the recovery

wells. If the waterflood produces more than this allowable

permits, a yardstick allowable is assigned to each well, includ-

ing injection wells, and the allowables from the injection wells

are transferred to the recovery wells (Coker, T.638.) Other

higher allowables can be assigned after a hearing and are

assigned on a lease basis rather than a well basis. (Coker,

T.615-619. )

Mr. Coker made clear the reasons for allowing the transfer

of allowables from injection to recovery wells:

“The transfer of an allowable concept was initiated by the

- Railroad Commission for two primary reasons: One, as an

incentive to operators to initiate secondary recovery in

order to increase the ultimate recovery from the various

fields. Further, the transfer allowable concept was

adopted and has been utilized for at least 40 years in

recognition of the fact that the water injection wells are an

integral part of the recovery system in secondary recove-

ry projects.”

52a

(Coker, T.629.) State conservation practice recognizes the im-

portance and necessity of secondary recovery, and the essen-

tial contribution of the injection well to secondary recovery.

Louisiana has also recognized the role of injection wells in

their allowable system. Not only does Louisiana allow the

transfer of allowables from injection weils to recovery wells on

a unit, but Louisiana also allows an extra allowable to be

assigned to a property for each injection well. This bonus

allowable “was an incentive for operators to initiate secondary

recovery early in the life of a reservoir or earlier than might be

normally done to ensure that the maximum recovery from the

reservoir is obtained.” (Boudreaux, D.15.)

Oklahoma and New Mexico also allow the transfer of allow-

ables in waterflood operations. New Mexico Oil Conservation

Div. Rules and Regs., Rule 701 (1968); Corporation Commis-

sion of Oklahoma Rules and Regs., 2-240, 2-250, 2-261 (1973).

The material before the Court shows no state in which produc-

tion from secondary recovery projects is treated in a manner

identical to production from primary recovery projects. The

systems of allowables shown in the records before this Court

show that the state regulators all recognize the role played by

enhanced recovery techniques and the necessary role of injec-

tion wells in the production of crude oil. The state regulators

recognize that the goals of the proration system—to prevent

waste and to ensure maximum recovery of oil from a

reservoir—can be achieved by providing for the role of injec-

tion wells when setting allowables.

Historically, federal agencies have recognized the identity of

contribution to the oil production process made by recovery

wells and injection wells on secondary recovery projects.

In 1944, the director of the Office of Economic Stabilization

granted “stripper wells” an increase in price. The plan was

* Notably, an allowable will not be given a salt water disposal well,

unless that well is an injection well. Rule 47, Texas R.R. Comm.

53a

designed to keep stripper wells in operation, to encourage

reopening and cleaning out of old wells, and to make secondary

recovery projects feasible.” 9 Fed. Reg. 7769. Pools“ which

were averaging less than nine barrels of oil per well per day

were allowed to increase prices. The regulations required

calculation of:

“Daily Ave r well production of pool during month

of Dasenber in terms of 42-gallon ls. (The num-

ber of wells to be considered the number of wells produc-

ing as of December 31, 1943.)” (Id.)

Although is it unclear whether this definition was subject to

one standard interpretation or not, the only evidence this

Court has as to the application of this provision to injection

wells is the undisputed testimony that in Texas injection wells

were included in determining qualification for the increased

prices under that federal regulation. (Baumel, T.668, 671.)

Section 263 of the Internal Revenue Code allows operators

an option either to deduct or capitalize intangible drilling and

development costs “in the case of oil and gas wells.” This

provision has been implemented to include all intangible ex-

penditures “incident to and necessary for the drilling of wells

and preparation of wells for the production of oil and gas.”

Treas.Reg.Sec. 1.612-4(a). The I.R.S. recognizes that the

costs incurred in drilling an injection well should be treated in

the same manner as those costs incurred in drilling a recovery

well, and are chargeable to capital or deductible as expenses.

Rev. Rul. 69-583, 1969-2 C. B. 41. The I. R. S. thus has held that

injection wells are within the term “oil wells” as used in Section

263 of the Internal Revenue Code.

The Mineral Land Leasing Act of 1920, Pub. L. No. 146. Ch.

85, 41 Stat. 437, authorized the execution of oil and gas leases

by the Secretary of the Interior on federal lands at royalties to

be determined by the Secretary on the basis of competitive

bidding. The Act itself provided a stripper well exemption

from these standard royalty provisions:

“Whenever the average daily production of any oil well

shall not exceed ten barrels per day, the Secretary of the

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Interior is authorized to reduce the royalty on future

production when in his judgment the wells can not be

successfully operated upon the royalty fixed in the lease.”

The apparent purpose of this exemption was to allow marginal

wells preferential treatment to prevent abandonment and to

insure maximum production.

In 1935, as a part of a general revision of this act, the

exemption was rewritten to provide:

“Whenever the average daily production of the oil wells on

an entire lease or on any tract or portion thereof segre-

gated for royalty — shall not exceed ten barrels per

well per day, or where the cost of production of oil or gas is

such as to render further produetion economically imprac-

ticable the Secretary of th .:terior, for the purpose of

encouraging the greatest ui nate recovery of oil and in

the interest of conservation of naturai resources, is autho-

rized to reduce the * on future production when in

his judgment the wells cannot be successfully operated

upon the royalty fixed in the lease.” (Emphasis added.).

Ch. 599, Sec. 1, 49 Stat. 676 (Aug. 8, 1935). In 1936, the

statutory measure was implemented through a provision

which provided that only wells which yielded commercial

volumes of production during part of a month were to be

considered in ascertaining the well count for determining aver-

age daily production. Injection wells were to be counted. 56

I.D. 415, 427 (1936). This holding has remained unchanged and

is currently embodied in Section 221.49 of 30 C. F. R.:

“Sliding and step-scale royalties are based on the ave

daily production per well. The supervisor shall —

which wells on a leasehold are commercially productive

. . but only wells which yield a commercial volume of

production during at least of the month shall be

— in ascertaining the average daily production

per well.

“(b) Wells approved by the supervisor as input wells shall

be counted as producing wells for the entire month if so

55a

used 15 days or more during the month, and disregarded if

so used — 15 days — the month.“

Although the statutory stripper well exemption from the

royalty rates was subsumed into a general provision granting

the Secretary of the Interior power to modify royalty rates,

the exemption continues in the administrative practices of the

Department of Interior.

The testimony of John Duletsky provided the Court with

great insight into the manner in which this provision was

actually applied by the Department of Interior (DOD. Mr.

Duletsky had been a long time employee of the DOI and had

served as a senior official in a position within the DOI which

dealt with the application of this regulation. The Court be-

lieves that there could be no individual more knowledgeable

about the treatment of injection wells for purposes of the step

or sliding scale royalty than Mr. Duletsky. He testified that to

be counted as a well for purposes of determining average daily

production, an injection well had to meet two conditions. First,

the injection well had to be completed in the correct oil bearing

formation. Second, the well must have been injecting water

into the oil bearing formation for at least fifteen days a month.

(Duletsky, T.577-78.) He dispelled any doubt that the term

“input well” used in the regulation, is synonymous with the

term “injection well.” (Duletsky, T.575-76.) This testimony is

buttressed by plaintiffs’ Exhibit 45, which is a chapter from the

DOI Conservation District Manual, containing rules and pro-

cedures relating to the variable regulatory rate and well count.

See, P.X. 45, pp. 6-7.

Duletsky stated it was his belief that the inclusion of injec-

tion wells was brought about by the Government’s concern “in

the public interest to maximize the ultimate recovery from a

reservoir, prevention of waste, and conservation.” (T.579.)

Duletsky’s testimony shows that the DOI treats injection

wells in a manner similar to recovery wells for purposes of

determining well count. An active injection well is routinely

counted as a well for determining average daily production per

56a

well. A shut-in injection well is usually treated as a shut-in

recovery well and excluded from the well count. Beyond all

question, DOI regulation 221.49(b) is not a narrow, limited

exception niggardly administered by a secretary who ex-

ercises discretion to exclude injection wells. This section estab-

lishes the general proposition that active injection wells are

productive wells and are to be included in the well count for

purposes of the variable royalty.“

II. STATUTORY BACKGROUND

In the early 1970s, acting pursuant to the Economic

Stabilization Act of 1970, 12 U.S.C.A. Sec. 1904 (note), the

Cost of Living Council (CLC) promulgated a comprehensive

series of regulations governing the maximum prices at which

domestic crude oil and refined petroleum products could be

sold. In general, the regulations established a “two tier” price

system for production from each “property,” and set a ceiling

on the prices charged for the first sale of domestic crude oil.

This system was designed to halt the inflationary spiral of

crude oil prices while limiting the disincentive effect of oil price

regulations. 6 C.F.R. Sec. 150.354.

The statutory stripper well exemption originated as an

amendment to S. 1081 (TAPAA) offered by Senator Bartlett,

United States Senator from Oklahoma, a principal oil-

producing state, on the Senate floor. This original amendment

read:

“Those oil leases whose daily average production per well

does not exceed that of a stripper well of not more than ten

Other types of wells are not allowed to be counted. Abandoned,

disposal, water source, observation wells, are not permitted to be

counted. Under certain circumstances, shut in wells are allowed to be

counted only if approved by the Supervisor. P. X. 45, p. 6.

57a

barrels of oil day shall be exempt from any allocation or

price restraints established by any act of law.”

This amendment was adopted by the Senate and subsequently

amended by Senator Jackson to read:

ain aon ae uids produced

from any lease whose average — 1 —

sibstances does not exced ten barrels pr well shall not

be subject pursuant to the

Economic Stabilization Act of 1970 as amended. or to any

— — for fuels or petroleum established pur-

suant to that or to any Federal law for the allocation of

a pen

Senator Jackson also amended the amendment to provide that

the agency designated to administer the allocation program be

allowed to promulgate regulations implementing the exemp-

tion.

The exemption as amended was enacted as Section 406 of the

Trans-Alaska Pipeline Authorization Act, Pub.L.93-153, 87

Stat. 590 (codified at 12 U.S.C. § 1904). The Conference Com-

mittee added a provision requiring leases to be operated at the

Sec. 406(a) The first sale of crude oil and natural gas liquids

produced from any lease whose average daily production of such

substances for the preceding calendar month does not exceed ten

barrels per well shall not be subject to price restraints established

pursuant to the Economic Stabilization Act of 1970, as amended, or to

any allocation program for fuels or petroleum established pursuant to

that Act or to any Federal law for the allocation of fuels or petroleum.

(b) To qualify for the exemption under this section, a lease must be

operating at the maximum feasible rate of production and in accord

(e) The agency designated by the President or by law to implement

any such fuels or petroleum allocation program is authorized to

conduct inspections to insure compliance with this section and shall

promulgate and cause to be published regulations implementing the

provisions of this section.”

maximum feasible rate. Regulations implementing this ex-

emption were published by the Cost of Living Council (CLC) at

38 Fed. Reg. 32494 (November 26, 1973) (6 C. F. R. Sec.

150.54(s)). These regulations defined the terms “average daily

production” as follows:

“Average daily production” means the qualified maximum

total production of domestic crude . and pet-

month, my by Taher ea a 5 to ~ number of days in

that month the number of wells which produced

crude — petroleum condensates, including

natural gas liquids, from that property in that month. To

qualify as maximum total production, each well on the

y must have been maintained at the maximum

— ged a — in accordance with

——— — — — —

reason of failure — 2 — 8 produe-

On November 27, 1973, the President signed into law the

Emergency Petroleum Allocation Act of 1973 (EPAA), Pub. L.

No. 93-159, 87 Stat. 628 (codified at 15 U.S.C. See. 751).

Section 4(a) of the EPAA required the President promulgate

regulations providing for the mandatory allocation of crude oil,

residual fuel oil, and each refined petroleum product, in

amounts and at prices specified in regulations.

Subparagraph 4(e)(2)(A) of the EPAA also contained a strip-

per exemption.* Regulations implementing this provision were

ANA) The regulation promulgated under subsection (a) of this

section shall not apply to the first sale of crude oil produced in the

United States from any lease whose average daily production of

crude oil for the preceding calendar year does not exceed ten barrels

per well.

(B) To qualify for the exemption under this paragraph, a lease must

be operating at the maximum feasible rate of production and in

accord with recognized conservation practices.

O) Any agency designated by the President under section 5(b) for

such purpose is authorized to conduct inspections to insure com-

published as a revised version of 6 C.F.R. Sec. 150.54(s), 38

Fed. Reg. 34464 (December 14, 1973). These regulations were

identical to the earlier regulations in all respects important to

this case.

On December 4, 1973, the President issued Executive Order

No. 11748, establishing the Federal Energy Office (FEO) and

delegating to the FEO primary responsibility for administer-

ing and enforcing the petroleum allocation and pricing provi-

sions of the EPAA. 38 Fed. Reg. 33575 (December 6, 1973).

The FEO thereafter adopted Mandaiory Petroleum Price

Regulations which incorporated the petroleum pricing regula-

tions that had originally been promulgated by the CLC. The

CLC’s stripper well lease exemption was ultimately in-

corporated in these regulations, when on January 14, 1974,

FEO adopted and reissued the CLC definitions of “stripper

well lease” and “average daily production.” 10 C.F.R.

§ 210.32(b), being identical to 6 C.F.R. § 150.54(s).

On May 7, 1974, the President signed into law an act of

Congress known as the Federal Energy Administration Act of

1974 (FEAA), 15 U.S.C. Sec. 761 et seq., Pub. L. No.93-275, 88

Stat. 96. The FEAA established the Federal Energy Adminis-

tration (FEA) and authorized the President to delegate to the

FEA authority vested in the President by law.

On June 25, 1974, the President issued Executive Order No.

11790. 39 Fed.Reg. 23185 (June 27, 1974). That Executive

Order, in addition to giving notice that the FEAA was to

become effective as of June 27, 1974, abolished the FEO,

revoked Executive Order No. 11748, and delegated to the

FEA all authority vested in the President by the EPAA. The

duty of administering and enforcing the petroleum allocation

and pricing provisions of the EPAA was thereby assigned to

pliance with this paragraph and shall promulgate and cause to be

published regulations implementing the provisions of this para-

the FEA, and the implementing regulations became the re-

sponsibility of the FEA.

On December 19, 1974, the FEA issued Ruling 1974-29, 39

Fed.Reg. 44414 (December 24, 1974). That Ruling held that

injection wells were not to be counted as weils for purposes of

determining whether the average daily production per well

from a property exceeded ten barrels in the preceding calendar

year.

The relevant portions of the Ruling read as follows:

“ISSUE: Is an ‘injection well’ a ny for the purpose of

1

property was or well in

calendar year, for the stripper well lease

— of 10 C. F. R. § 210.32?

“RULING: No. Under the FEA regulations, the first sale

. — ural — = —— —

nat gas any stri

S

tion regulations. A stri well lease is defined as a

10 barre whose average daily prod uction did not exceed

ls per per day per well dur well during — — calendar

ear. ‘Av tion’ is Ir de in 10

CF. F. R. § 210. 210, 32(b) as:

‘The qualified maximum total production of domestic

crude petroleum condensates, 17 24 — >

quids, produced from a property during the

calendar year, divided — — equal to the number

of wells which produced crude petroleum and petroleum

condensates, luding natural gas liquids — that

property in that ol

“Thus, the FEA by their specific

provide that only w whieh produce crude dernen

jj caste cheteaeer e

for the purpose of whether the stripper —

lease exemption applies. „ per te

themselves ‘produce’ crude petroleum. Therefore, wells

which did not actually yield or produce crude petroleum

during the preceding calendar year are not production

6la

wells for this purpose. Whether the non-producing well

was an ‘injection’ well, a disposal well, a dry well, a spent

well or a shut-in well will not change this result.”

III. THE DOE'S EXCLUSION OF INJECTION WELLS

CONFLICTS WITH CONGRESSIONAL INTENT

As stated in this Court’s order of June 11, 1980, the Court

believes that TECA has held that the regulation defining aver-

age daily production itself mandated the exclusion of injection

wells from the well count. Ihe focus of this decision, therefore,

is upon the underlying regulation and not upon the ruling.

The legal foundation and proper procedure for this Court to

follow in reviewing the regulation at issue in this case was

stated by the Supreme Court in Citizens to Preserve Overton

Park v. Volpe, 401 U.S. 402, 91 S.Ct. 814, 28 L.Ed.2d 136

(1971). Three distinct inquiries are required. First, this Court

must determine whether the actions of the agency were within

the agency’s authority. Second, the Court must decide

whether the action by the agency was “arbitrary, capricious or

an abuse of discretion, or otherwise not in accordance with

law.” Finally, this Court must decide whether the agency’s

actions followed the necessary procedural requirements.

In the prior proceedings in this case the third inquiry has

been satisfied. Both the regulation and ruling at issue have

been determined to be procedurally valid. The Court need now

only consider the first two issues.

The defendant contends that the agency’s interpretation of

the statute to exclude injection wells from the well count must

control this Court. Much of the problem with this position, as

will be more fully noted, is that the only real clue of how the

agency viewed the statute is the result it reached in holding

that injection wells cannot be counted.

The Court is acutely aware that an agency’s interpretation of

a statute which the agency is authorized tu administer is enti-

tled to “substantial deference.” Quern v. Mandley, 436 U.S.

725, 736, 98 S.Ct. 2068, 2076, 56 L.Ed.2d 658 (1978). This

62a

deference, however, does not render an agency’s interpreta-

tion exempt from judicial scrutiny. The deference due any

interpretation “is constrained by our obligation to honor the

clear meaning of a statute, as revealed by its language, pur-

pose and history.” International Brotherhood of Teamsters v.

Daniel, 439 U.S. 551, 99 S.Ct. 790, 800, 58 L. Ed.2d 808 (1979).

“The weight to be given to an administrative interpreta-

tion depends upon ‘the thoroughness evident in its con-

sideration, the validity of its reasoning, its consistency

with earlier and later pronouncements, and ail of those

factors which give it power to persuade, if lacking power

to control.

Standard Oil Co. v. D.O.E., 596 F.2d 1029, 1056

(Em. App. 1978), quoting Skidmore v. Swift & Co., 323 U.S.

134, 140, 65 S.Ct. 161, 164, 89 L.Ed. 124, 129 (1944). The Court

has an obligation to examine anew the legislative history and

purpose of the statute.’

The interpretation given the statute did not evolve as a

result of a comprehensive evidentiary hearing, as is done in

many instances. Nor does the interpretation given the statute

appear to have been the product of the expertise of the agency.

Rather, the interpretation seems to have been the product of

the agency’s reading of congressional intent, principally from

language of the Act alone. Divining congressional intent be-

hind a statute is a task to which courts are at least equally

suited as are administrative agencies. This fact mitigates

against according the interpretation extra authoritative

weight.

In Barlow v. Collins, 397 U.S. 159, 166, 90 S.Ct. 832, 837, 25

L.Ed.2d 192 (1970), the Supreme Court was faced with a

challenge to a regulation promulgated by the Secretary of

The Court believes that this obligation is even greater in the

present case where the Court has found the interpretation to have

been arrived at in an arbitrary and capricious manner. See part IV,

infra.

63a

Agriculture which defined “making a crop.” The Court held

that defining that term was not a discretionary judgment of the

Executive Branch:

“On the contra y, ince the only or principal) dispute re-

lates to the meaning of the statutory term, the con-

troversy must ultimately be resolved, not on the basis of

matters within the special e..npetence of the Secretary,

but by judicial application of canons of statutory construc-

tion. Texas Transmission I I. Shell Oil Co.,

363 U.S. 263, 268-70, 80 S.Ct. 1122, 1126-1127, 4 L.Ed.2d

1208. ‘The role of the courts should, in particular, be

viewed hospitably where . the question sought to be

reviewed does not significantly e the agency’s ex-

pertise. “Where the only or principal dispute relates to the

meaning of the statutory term .. .” (the controversy)

presents issues on which courts, and not (administrators)

are relatively more expert.’ Hardin v. Kentucky Utilities

Co., 390 U.S. 1, 14, 88 S.Ct. 651, 658-659, 19 L. Ed. 2d 787

(Harlan, J. dissenting).”

See also, Wilderness Society v. Morton, 479 F. 2d 842, 866

(D. C. Cir. 1973), cert. denied, 411 U.S. 917, 93 S.Ct. 1550, 36

L.Ed.2d 309 (1973); UPG, Inc. v. Edwards, 647 F.2d 147, at

156 n.23 (Em. App. 1981).

The defendant argues that other factors are also important

in determining whether the agency interpretation should be

given extra authoritative weight. Three questions are general-

ly considered when looking at an agency interpretation. Was

the interpretation contemporaneous with the enactment of the

statute? Has the interpretation consistently been followed

over a long period of time? Was the interpretation outstanding

at the time of a reenactment of the statute? Energy Consum-

ers and Producers Association, Inc. v. D. O. E., 632 F. 2d 129,

143 (Em. App. 1980).

It is true that, in this case, the regulation was issued con-

temporaneously with the statute. It is equally true, however,

that the regulation was not drafted with the intent either to

exclude or to include injection wells from the well count. There

raged within the agency a great debate as to whether injection

64a

wells were within the statutory exemption. The documentary

material before the Court shows that the proper interpretation

to be given the regulation and statute was debated until the

time that Ruling 1974-29 was promulgated. See, e. g., P. X. 72,

73, 75, 85, 92, 131, 132, 136, 137, 139, 140. See also, G. X. Z-1.

All individuals involved in the agency action with respect to

injection wells who came before this Court agreed that the

inclusion of injection wells in the stripper well exemption was

an unresolved issue until the time of the Ruling.

Linda Buck, in May, 1974, prepared a memorandum, the

purpose of which “was to devise a method of proposing a

clarification to wha. we believed to be an ambiguous regula-

tion.” (Buck D. 41.) George Biondi recognized in July of 1974,

that the issue was unresolved. (Biondi, D.36-7.) See also, Wal-

ker, D. 59, 64, Ware T. 957, 1005-16, 1009-10. Phillip Essley

recognized that the regulation did not conclusively decide the

issue, and that the issue was not finally determined until the

release of Ruling 1974-29 in December, 1974, more than one

year after the passage of the stripper well exemption. (Essley,

T. 1208-15.)

Since the construction ultimately arrived at by the agency

was not one made “soon after the time of enactment,” it does

not qualify as a contemporaneous construction. Russ v. Wil-

kins, 624 F. 2d 914, 923 (9th Cir. 1980). The evidence before the

Court shows that there was no single contemporaneous con-

struction of the statute or regulation to exclude injection wells

from the well count. This factor does not indicate that extra

authoritative weight need be given the agency interpretation.

Nor does the evidence show that there was one consistent

and uniform application of the statute and regulation to ex-

clude injection wells. The record before the Court contains

examples of times at which oil producers were advised to count

injection wells.

On December 6, 1973, Robert Weldon, who was then

Engineering Supervisor of Joint Operations for Clinton Oil

Company (now Energy Reserves Group, Inc.), contacted the

65a

CLC to determine whether injection wells could be included in

the well count. Mr. Weldon was referred to Andrew Drance, of

the CLC, who advised him that injection wells were to be

included in the well count. (Weldon, D. 21-4.) Mr. Drance’s

position within the agency was close to that of the regulation’s

draftors.

On December 7, 1973, Ernest T. Pelikan, who was then in

the Management Services Department of Arthur Young &

Company, contacted the CLC on behalf of Suburban Propane

Gas Corporation, another of the plaintiffs. Mr. Pelikan also had

a telephone conversation with Andrew Drance and was

advised that injection wells could be included in the well count.

(Pelikan, D.27-8.)

In January, 1974, August Erickson, then Vice-President of

Sklar & Phillips, contacted Eugene Waters of the Internal

Revenue Service, the agency delegated responsibility at that

time for enforcing the petroleum pricing regulations. On Janu-

ary 30, 1974, Waters and W. M. Meriwether, of the I.R.S.,

telephoned Erickson and advised him that injection wells could

be included in the well count. (Erickson, D. 28-31.) The oral

advice that injection wells could be counted was confirmed by a

letter from Waters on January 31, 1974 (P.X. 54).

In late 1973, James H. Roark and Car! E. Stone, of King

Resources Company (now Phoenix Resources Company) were

advised by I.R.S. officials in Oklahoma City that injection

wells could be included in the well count. (Roark, D.12-3, 46).

In October, 1974, Larry White, Dallas Area Manager of the

F.E.0.’s Region VI Office, advised a New Mexico producer

that injection wells could be included in the well count in

calculating average daily production under the stripper well

exemption regulation. (White, D.26, 39, 71-7.) White based

this advice on the regulations and on Form P-1 of the Texas

Railroad Commission, Oil & Gas Division, which included in-

jection wells as producing wells. (White, D.85-7, 99, 101.)

White’s advice was founded in part on a mid-May, 1974, letter

from the Regional Counsel of Region VI, advising a Dallas-

based company that injection wells were to be included in the

well count, a copy of which he had seen. (White, D.26-8, 32,

75-6.) White established a training program for the agency’s

auditors in Region VI. (White, D. 82-7.) This program,

adopted by the national office, instructed auditors that the

stripper well exemption permitted producers to include injec-

tion wells in the well count. (White, D.82-7.)

On October 2, 1974, M. H. McConnell, of Phillips Petroleum

Company, traveled to Washington, D.C., to obtain guidance

from agency ofiicials concerning the injection well issue.

McConnell was referred to and met with Roy Whitson, Rendel

Alldredge, and a Mr. Kourkoumelis of the F.E.A. After a

lengthy conference, McConnell was advised that injection

wells should be counted. (McConnell, D.304.)

In August and September, 1974, Audie Moore, of Kewanee

Oil Company, also visited Washington, D.C., to obtain guid-

ance as to the meaning of the agency’s stripper regulation. He

initially met with Rendel Alldredge and Bob Kahl, of the

F.E.A. (Moore, D.29.) At that meeting, Alldredge and Kahl

expressed the view that injection wells could be included in the

well count. (Moore, D.30-1.) In order to obtain additional con-

firmation, however, Moore met on September 4, 1974, with

four other officials of the Compliance Division of F.E.A. At the

conclusion of that meeting Moore was advised that injection

wells could be included in the well count. (Moore, D.37-8.)

The defendant’s argument that only official interpretations

should be examined is patently incorrect, and has been re-

jected by the Court on at least one prior occasion. See Order

filed June 11, 1980. TECA, in Standard Oil Co. v. Department

of Energy, 596 F.2d 1029, 1056 (Em.App.1978), held that

statements of lower level officials should not be disregarded:

“The FEA contends that only the FEA’s General Counsel,

his staff, and other ‘high level policy makers’ had the

authority to issue official interpretations of its regula-

tions. Consequently, it argues, in determining what the

agency's interpretation was this court should ignore the

actions of the FEA auditors and other lower level officials

67a

during the relevant — This court held in California

Molasses Co. v. California & Hawaiian Sugar Co., 551

F. 2d 1230, 1233, 1239 (Em. App. 1977), that the interpreta-

tion of agents of the IRS, which had been ¢ with

enforcing price controls, were entitled to deference by the

courts. We recognize, as the FEA , that California

Molasses is not precisely in point. We do conciude, how-

ever, that the statements by the FEA auditors and other

lower level officials are entitled to weight in determining

the thoroughness of the FEA’s consideration of its regula-

tions, the validity of its reasoning, and its consistency with

earlier and later pronouncements.”

This Court considered the evidence of the interpretation given

by lower level officials only as it impacted on the consistency

and contemporaneous construction issues.

The defendant contends that the Standard Oil rule is appli-

cable only where the only announced public position is contrary

to the formal interpretation eventually adopted by the agency.

596 F.2d at 1056. The defendant does not explain why the

broad statement cited above should be so limited. If this Court

were to accept this argument, the “consistency” inquiry would

be relevant only where the agency’s final position is contrary to

all advice theretofore given. This Court can see no reason that

the consistency inquiry would not be equally applicable in this

case where not all the advice expressed was contrary to the

final position. The concerns raised by the defendant more

nearly reflect on the extent of consistency or inconsistency

rather than whether it is properly an issue for this Court.

The record before the Court does disclose that perhaps the

bulk of the advice given by the agency was to the effect that

injection wells should not be counted. The reason that this

advice was given does not seem to be that the interpretation

was uniformly accepted as the “true” interpretation of the

regulation or statute—rather, the interpretation was the most

favorable to the agency, and represented the most conserva-

tive advice. Linda Buck identified the reasons that this advice

was given:

“Q. Okay. Now, let’s talk a little bit about the advice

you—what the advice you gave to crude oil produc-

68a

ers was characterized. As I understand what your

testimony has been thus far, the advice you gave to

crude oil purchasers when an ey was made

about the —— well issue was basically in four

parts: one, that the regulation was unclear and ambi-

guous; a ry | issue was — — in —

agency; t , that the agency was working on the

issue; and four, because the — remained unre-

solved, that if the producer included injection wells

in the well count they did so at their own risk.

A. I hope I said it that well; but, yes, that is the ess-

ence.” (Buck, D.74-5.)

The Court concludes that the current interpretation is not

one which has been followed consistently over a long period of

time, such as would justify snecial deference.

The third inquiry the Cost must make in determining

whether the interpretation is entitled to special deference is

whether the interpretation was outstanding at the time of a

reenactment of the statute. The stripper well exemption was

reenacted in § 121 of the Energy Cunservation and Production

Act of 1976, P. L. 94-385, 90 Stat. 1125 (1976). At that time

there was no attempt to change the interpretation. This fact is

a reason for deference to the existing interpretation. See,

Energy Consumers and Producers Association, Inc. v.

D. O. E., 632 F.2d 129, 144 (Em. App. 1980). The weight to be

accorded this fact, however, is greatly lessened by the fact that

there was actual disagreement with the interpretation by Con-

gress following the reenactment.

In 1977, Senator Bartlett proposed that the siripper well

provision be amended to add:

“Included in the count of the total number of wells on a

property shall be all wells producing crude oil and all wells

unit for the purpose of injecting water and/or other

materials into a producing reservoir for the purpose of

enhancing oil recovery.”

69a

123 Cong. Rec. S. 18212 (Oct. 31, 1977). Senator Jackson, a

senator from the non-oil producing state of Washington,

opposed this amendment:

“The proponents are urging here, in effect, that it clarifies

the intent of the so-called stripper well amendment. Mr.

President, I supported the original exemption from price

controls for the so-called stripper wells.

“I point out that the language of the existing law expressly

refers to wells producing crude oil. It does not include

injection wells, nor was it intended to. The effect of the

amendment would be to expand the number of crude oil

3 properties which are exempt from price con-

trols.”

123 Cong.Rec.S. 19213. Senator Bellmon, of Oklahoma,

purportedly familiar with oil industry practices, on the other

hand, supported the amendment:

“Mr. President, very briefly, I would simply like to say I

consider it to be senseless not to permit the counting of

injection wells when determining average daily produc-

tion. If these are not oil wells in the strict sense of the

word, they are certainly essential to oil production. I felt,

when we passed the stripped [sic] well amendment initial-

ly, they would be included. The Interior Department has

long counted injection wells. I am not sure Members of the

Senate realize this, but the Interior Department has long

counted injection wells in the administration of the Feder-

al mineral leasing program. This is not anything new we

are 2 do. It has been the custom already in the

Interior Department and has been for some time.

“When we originally enacted the stripper exemption, and

when we reenacted it in 1976, I certainl believed that the

FEA (now the Department of Energy) would follow the

very sensible precedent set by the Interior Department.”

123 Cong.Rec.S. 18215. The Senate disagreed with Senator

Jackson. The proposed amendment passed the Senate, but no

similar provision was contained in the House bill, and the

Conference Committee failed to adopt the proposed amend-

ment. Conference Committee on Energy Tax Act, House

70a

Conf. Rep. No. 95-1773, 95th Cong. 2d Sess. 57 (Oct. 11, 1978)

[1978] U.S. Code, Cong. & Admin. News 8087.

The Court believes that the simple fact that Congress was

debating its original intent in enacting the stripper well ex-

emption long after reenactment critically weakens the claim

that reenactment constituted ratification. This Court, there-

fore, believes that this factor does not require additional

weight be accorded the interpretation.

The Court believes that none of these factors require the

Court to grant the agency’s interpretation deference to the

extent that the Court must be bound by that holding. This

Court must exercise its obligation to review the statute and

legislative history to determine whether the agency’s position

can be sustained, or whether the meaning, purpose and history

of the statute requires a contrary construction.

The starting point for any consideration of the meaning of a

legislative enactment is the language of that act. The statutory

stripper well exemption refers to “crude oil. . . from any lease

whose average daily production of such substances . . . does

not exceed ten barrels per well. . In the context of this

statute, the word “well” is unrestricted. Unless some indica-

tion to the contrary is present, the Court must conclude that

the term “well” is intended to be given its ordinary meaning.

No one has seriously contended that an injection well is not

within the generic term “well.” The Court believes that simple

reliance upon the statutory language is a dangerous approach

to determining the meaning of the statute. As stated in New

York State Commission on Cable Television v. F.C.C., 571

F. 2d 95, 98 (2 Cir. 1978), cert. denied, 439 U.S. 820, 99 S. Ct. 85,

58 L.Ed.2d 112:

Mere incantation of the plain meaning rule, without

placing the language to be construed in its proper frame-

work, cannot substitute for a ye analysis. For we

must remember Judge Learned Hand's stricture that

t here is no surer br! to misread any document than to

read it ry .’ Guiseppi v. Walling, 144 F.2d 608,

624 (2d Cir. 1944) (coneurring), aff'd sub nom. Gemsco,

Inc. v. Walling, 324 U.S. Ct.

(1945). And as Professor Cox wisely noted,

ever that the courts must always follow the

letter of a statute regardless of the outcome, nor does an

y

The issue is where to strike the balance.’ Cox, J

Learned Hand and the ee of Statutes,

Harv. L. Rev. 370, 376 (1947). iate methodolo-

gy, then, is to look to the ‘common sense’ of the statute or

regulation, to its purpose, to the practical consequences of

—1—.— len 89

or ight inquiry might shed.

United Housing Foundation, Inc. v. Forman, 421 U.S.

837, 849, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975); United

States v. American Trucking Associations, Inc., 310 U.S.

534, 543-44, 60 S.Ct. [1059] [1063-1064] 1069, 84 L.Ed.

1345 (1940).“

The legislative history behind the stripper well exemption

can best be described as sketchy.

The Conference report to the TAPAA exemption contains

some indication of the intent of Congress in passing this ex-

emption:

“The purpose of exempting small stripper wells—wells

whose av daily does —— ten bar-

rels well from t — restraints of the Economie

Act (now IV) and from any system of

mandatory fuel allocation is to insure that or in-

direct price do not have the effect of resulting in

any los of domestic crue dee from the prema

ture shutdown of stripper wells for economic reasons.”

[1973] U.S. Code, Cong. and Admin. News, 2417, 2523, 2531.

The Conference report noted that this exemption:

“(will encourage owners and operators of stripper wells

to maintain production and to keep these wells in opera-

tion for longer periods of time than would be possible if the

value of their crude oil production were determined under

Phase IV price ceilings. This increased incentive will, it is

anticipated, permit stripper well operators to make new

72a

investments in the eligible wells and improve the r-

— ether —— for moving this eb ts austen”

Id. at 2532. Senator Bartlett, also an Oklahoma senator and the

drafter of this exemption, noted the benefits of the exemption

when he proposed the measure:

“There are three reasons that adoption of this amendment

will help to maintain current oil production:

First. The ability for the of a stripper well to

coh — pee or his — —

high costs uipment necessary to lift the crude oi

of the producing formation has been depieted. For ex-

ample, a ing well could be operated longer because of

the more fav economics.

Second. There would be an incentive to do remedial

work on the well. Most remedial — —1

investment for the operator. Whether or not he makes this

investment depends upon the likelihood of recovering his

investment with a reasonable profit.

The third reason is that secondary oil recovery proj

would be encouraged. Proj that up to — 2 —

— — 4 2.2 —

ers’ file cabinets would now move forward to help flush

more oil out of the stingy oil reservoir.”

119 Cong. Rec. 23874 (July 14, 1973). Sponsors of the measure

repeatedly pointed out that this measure would allow wells to

provide oil that otherwise would have to be purchased from

foreign countries. See, Remarks of Sen. Hansen, 119 Cong.

Rec. 23875-76; Remarks of Sen. Cook, 119 Cong. Rec. 23876;

Remarks of Sen. Bartlett, Id. Senator Fannin pointed out that

the proposed amendment was “really a conservation measure

and provides an incentive not to leave oil in the ground.” 119

Cong. Rec. at 23877. .

The subject of secondary recovery was also mentioned by

the senators. Senator Cook suggested that:

wells, 10 bares or — is — — —

The lives of those wells have passed, and they are in

73a

of bleeding that well or ing to the best of

their ability to get what is left. owever, once they stop

that, that source is gone.”

“I merely want to say that most of the stri production

that a major would have—and it would be very little—

would be production that the major is hoping to waterflood

or use a 1 — program, which is a

and is a very high cost operation,

pomp at y may later produce a lot more oil.”

“This is a conservation and I think it is needed,

of who is provi the money and the lead-

These statements and the entirety of the legislative history

show the underlying purpose of the statute. The stripper well

exemption was designed to encourage the operation of

marginally productive wells to produce oil that otherwise

would not be produced. Congress clearly believed that it was

better to allow owners of leases with marginally economic

wells to increase price to the level of foreign oil prices than to

have the oil left permanently in the oil reservoir. Congress

made the policy determination that that point was reached

when the per well production of a lease reached ten barrels per

day.

Congress, however, recognized that granting this exemp-

tion created an opportunity for abuse.

“The intends that the provisions of this section

will be y enforced and e

ion aaunen 1— Gat 8

cls of wells forthe express — Pte

ADM fly By nnn o achieve this, Congress

gress also directs that — administering agency shall

promulgate to implement the i of

.

ex agency ilize 4

regarding production volumes, and to provide by regula-

tion safeguards against the manipulation or gerrymander-

74a

ing of lease units in a manner that evades the price control

and allocation

gress specifically intends that the regulations shall,

among other . vent ‘gerrymandering’

leases to av — L with a .

ber of low production :

day.” (E

U.S. Code, Cong. and Admin. News, 2532-53.

The plaintiffs argue that the legislative references to

secondary recovery clearly show an intent to include injection

wells in the well count. The Court has carefully reviewed all the

legislative history and is unable to conclude with any degree of

certainty that the congressmen who considered this amend-

ment indicated their intent to include or exclude the counting

of injection wells. Clearly, the amendment was intended to be

applicable to and to encourage oil recovery utilizing normal

secondary recovery methods. While this amendment alone,

does not conclusively establish an intent to require the count-

ing of injection wells, it does reference state data and produc-

tion practices as well as normal patterns of operations in the oil

industry.

The defendant’s counsel! in this case argues that the legisla-

tive history conclusively demonstrates that Congress intended

only recovery wells be included in the well count. In support of

.. .” or “stripper wells that produce. or “production from

such wells. .” See defendant's post trial brief at 13. Several

observations can be made about this theory. First, this in

75a

terpretation is potentially in conflict with the wording of the

statute, which focused not on wells which produced, but rather

which looked to leases which produced. Were this Court to

accept the defendant’s theory, the exemption would clearly be

constricted beyond the meaning of its plain words.

Second, this argument can only begin to be persuasive if the

only possible intended meaning of the senators who used the

word “produce” was “emut from the wellhead.” The Court finds

it impossible to conclude that such a narrow meaning was

intended by these senators. It is equally plausible that these

senators were using the word “produce” in the same sense that

eminent experts used that word when they described how

injection wells “produce” oil. See pp. 1244-1246, supra, or as

the DOI used the word when talking of “commercially produc-

tive” wells.

The defendant attempted to bolster this theory by parading

before the Court a large number of forms utilized in the oil

industry to record production data. The defendant contended

that these documents somehow established that “produce” has

the limited meaning defendant ascribes to it. This Court de-

clines the defendant's invitation to elevate forms over sub-

stance. The fact that some of these forms utilize the term

“production well” to describe recovery wells does not mean

that only these wells “produce” crude oil. In fact, many of these

forms utilize the word “produce” in the more general sense

suggested by the plaintiffs. (Burt, T.1045.) The Court con-

cludes that the Congressmen did not intend to prohibit the

counting of injection wells when they made references to wells

which “produce” crude oil. “Produce,” when used by these

Congressmen, was not intended to act as a narrow term of art

to denote only recovery wells.

The Court noted that it does not appear that these remarks

by senators were relied upon in the original formulation of the

regulation. Indeed, even the Ruling does not rely upon these

remarks in holding that injection wells cannot be counted. The

Court believes that this theory of Congressional intent is a post

76a

hoe rationalization of the attorneys representing the Depart-

ment, rather than the determination of an agency official. The

Supreme Court, in Investment Company v. Camp, 401 U.S.

617, 91 S.Ct. 1091, 28 L.Ed.2d 367 (1971), cautioned against

relying upon such theories. That case dealt with the in-

terpretation to be given provisions in a banking statute at pp.

628 and 1097 of the respective cited case reporters, viz:

“The difficulty here is that the Comptroller adopted no

expressly articulated position at the administrative level

as to the apr ey beg ne me of the provisions of §§ 16 and

21 as they affect investment funds. The Comptroller

promulgated +o 9 without opinion or accompany-

ing statement. His subsequent report to Congress did not

vert to the prohibitions of the Glass-Ste Act.

To be sure, counsel for the Comptroller in the course of

this litigation and specifically in his briefs and oral -

ment in this Court, has rationalized the basis of Regula-

tion 9 with great professional competence. But this is

hardly tantamount to an administrative interpretation of

$$ 16 and 21. In Burlington Truck Lines v. United States,

371 U.S. 156, 83 S.Ct. 239, 9 L.Ed.2d 207, we said, The

courts may not accept appellate counsel’s post hoc

ionalizations for agency action. For the courts to

— 1 their or KL 4 _— —— 1 of 2

agency] is incompatible with the orderly ioning o

the process of judicial review.’ Id., at 168-169, 83 S.Ct. at

246. Congress has delegated to the administrative official

and not to appellate counsel the responsibility for

elaborating and enforci — . — It is the

administrative official not appellate counsel who pos-

sesses the 1 that can enlighten and rationalize the

search for t — L intent of C . Quite

obviously the Comptroller should not grant new authority

to national banks until he is satisfied that the exercise of

this authority will not violate the intent of the i

laws. If he faces such questions only after he has .

there is substantial danyer that the momentum generated

by initial val a Senay impair the enforcement

of the laws that Congress enacted.”

Defendant’s counsel also argues that the exemption was only

designed to reach wells which were traditionally considered

a

Stripper wells. This argument does appear to be something

more than post hoc rationalization by department attorneys, as

there is some evidence that this belief was present within the

agency. It does not appear, however, that this consideration

played any part in the decision concerning the regulation. This

belief cannot be found in Ruling 1974-29 or in any materials

which were circulated within the agency concerning the issue

of whether to include or exclude injection wells. Ruling 1974-

28, however, contains some reference to the belief that the

stripper well exemption was to be construed only to include

wells traditionally labelled “stripper wells.” That Ruling

stated in part:

“This interpretation of a stripper well lease comports with

industry usage and the congressional intent in providing

for a stripper well lease exemption in the Emergency

Petroleum Allocation Act of 1973. The phrase ‘stripper

well’ has long been understood in the petroleum indust

to refer only to a well which produces oil, or oil wit

associated gas. The ‘stripper well’ concept, commonly me-

asured at ten barrels per day, has never extended to

— ange production of liquids is always marginal by

39 Fed. Reg. 4414 (Dec. 24, 1974). Senator Bartlett, the sena-

tor who proposed the amendment recognized the traditional

definition of a stripper well: “By definition a stripper well

averages 10 barrels of oil per day or less.” 119 Cong. Rec. 23873

(July 14, 1973). Reliance on the traditional definition of strip-

per wells, however, potentially leads to results contrary to the

language of the statute. The language of the statute focused on

leases, not on individual wells. The scope of the exemption was

not drawn to be coextensive with the traditional scope of the

term “stripper well.” Since the exemption focused on a lease, a

given recovery well could emit 100 barrels a day, and if the per

well average on the lease was 10 barrels a day or less the well

would qualify as a stripper well.

In the post-trial brief the defendant argues:

“There is absolutely no indication, however, that Con-

gress, in drafting this statute, was focusing on anything

78a

other than low production wells in the primary production

hase. There is not a whisper in the statute or Conference

port on injection wells or secondary recovery opera-

tions.

“When the statute was written, in 1973, less than half of all

stripper well production came from properties with

recovery projects. Essley Tr. at 1144. There-

fore, most stripper well operators did not even have injec-

tion wells on their properties. If Congress had intended to

benefit this specialized type of production it would have

said so. It certainly cannot be presumed that it intended

such a benefit.”

The Court believes that this argument grossly distorts both

the facts and the Congressional History of the Stripper Well

Exemption. As noted earlier, at the time of the enactment of

the measure by the Senate there was direct reference on the

senate floor to the fact that the biggest percentage of produc-

tion from stripper wells is secondary or tertiary recovery. See

Remarks of Senators Cook and Bartlett quoted at pages 35 and

36. Moreover, the defendant’s own expert testified that forty

or forty-five percent of the stripper well properties were being

waterflooded. It is totally inconceivable that Congress in-

tended to exclude nearly half of the properties subject to the

exemption. Indeed, it is probable that the defendant's expert

was incorrect in his assessment of the number of wells engaged

in secondary recovery operations. In 1973, over forty-five

percent of the production from stripper wells was produced by

enhanced recovery methods, according to statistical material

from the Interstate Oil Compact Commission. See P. X. 157.

Depending upon how this statistic was computed, it could well

be that well over fifty percent of the stripper wells were

producing oil as a result of a waterflood or fluid injection

operation.

Likewise, in view of the undisputed engineering testimony

in this case that ordinarily production costs on a primary

producing well, i.e., those costs attributable to lifting the oil

through the well bore are constant whether the volume of

production is 100 barrels or 5 barrels a day, it is much more

79a

likely that the senatorial remarks about increased expense of

stripper production referred to the expert testimony concern-

ing the considerable extra capital outlay necessary to install a

fluid injection system for secondary or tertiary recovery.

In light of these undeniable facts, the defendant's contention

that the stripper well exemption was intended to apply only to

“wells in the primary production phase” is ludicrous. Thus,

mere reliance on what the agency perceived to be the tradition-

al scope of the term “stripper well” is, at best, a poor indicator

of Congressional intent. The defendant aptly notes: “The legal

question is not what the terms mean in the trade, but what

Congress intended when it used those terms.” Mobil Oil Corp

v. F. E. A., 566 F.2d 87, 92 (Em. App. 1977).

Moreover, the Department's contention about the industry's

understanding of the meaning of “stripper well“ cannot stand

in light of the evidence. The engineering experts on each side

differed over whether an injection well has always been in-

cluded in the industry usage of the phrase “stripper well.”

Compare, Whiting, T.210-12, with Burt, T.1047. The Court

believes that the clearest indication of prior usage of the term

“stripper well” can be found in the prior practices of the De-

partment of Interior. As noted earlier, the DOI long included

injection wells in the concept of stripper wells. This undeniable

fact renders unpersuasive any argument that the industry

does not include injection wells within the concept of stripper

wells. Also, the unanimity and credibility of plaintiffs’ expert

oil engineers negates the Department's contention.

Contrary to the assertion of defendant’s counsel that the

only purpose of the exemption was the narrow one of exempt-

ing only recovery wells, the agency has always recognized that

there were other purposes underlying the exemption. Ruling

1974-28 spoke of the purposes of the stripper well exemption:

“The of the Congress, in extending exempt status

for the Erst sale of ‘stripper well’ production in the

Emergency Petroleum Allocation Act of 1973 (Pub. L. 93-

159) (EPPA), was to assure economic viability and con-

tinued production of crude oil from marginal oil wells. The

80a

legislative history of this exemption reveals that Congress

understood the ‘stripper well’ concept in the same way

that the oil industry applies the phrase, namely with refer-

ence to oil wells with such low production levels of crude cil

that the producer received only a marginal return over

cost of production.”

Ruling 1975-12 also recognized a more fundamental purpose of

the exemption when that ruling spoke of “the congressional

policy of increasing the incentive and economic feasibility of

maintaining production of crude oil from stripper well leases

through advanced production techniques.”

The defense counsel’s argument about the intent of Con-

gress seems to be based on the premise that the exemption was

an arbitrary decision to grant relief to a narrow class of oil well

owners which did not include owners of some properties with

injection wells. The Court cannot agree with this basic ap-

proach. The Court believes that there were discernible reasons

for the granting of the exemption. The defendant’s approach

begs the question of why Congress desired to grant an exemp-

tion to keep marginal wells operating. The purpose of the

exemption as indicated by its legislative history, and even

recognized by the DOE, was clearly to conserve oil resources

and to encourage greater exploitation of margina: properties.

The exemption must be construed in light of this purpose.

There are other indications of what Congress may have

intended with respect to the counting of injection wells.

“Where the mind labors to discover the design of the legisla-

ture, it seizes everything from which aid can be derived.”

United States v. Fisher, 2 Cranch 358, 386, 2 L. Ed. 304 (1805).

The Court must consider these indications.

At several points in the Senate debate over the stripper well

exemption, Senator Bartlett referred to the World War II

subsidy program. 119 Cong. Rec. 23875. During the trial plain-

tiffs demonstrated that in Texas injection wells were counted

to determine whether a property qualified for the subsidy. Any

inference that this fact creates is weakened by the testimony

that the Washington administrators of the suosidy may not

Sla

have been specifically told that injection wells were being

included in the well count. (Baumel, T. 678-79.) The evidence

which showed that injection wells were counted to determine

qualification for the subsidy, however, was the only indication

of how those wells were treated in the subsidy program. This

program was cited as a precedent by the exemption’s sponsor.

Congress may have intended to require that treatment of

injection wells under TAPAA and EPAA exemptions be simi-

lar to the treatment accorded injection wells in the World War

II program. The onlv evidence this Court has of how injection

wells were treated under the prior program is the showing by

plaintiffs that the injection wells in Texas were counted. This

Court must conclude that this evidence provides a very limited

amount of support for the plaintiffs’ proposition that Congress

intended to count injection wells.

This Court also believes that it is very probable that the

legislators who sponsored and supported this exemption were

familiar with the state practices and the treatment accorded

injection wells by various states. The plain language of the

exemption bears out this belief. Section (b) of the TAPAA

exemption provided:

“To — for the exemption under this section, a lease

must be operating at the maximum feasible rate of produc-

tion and in accord with recognized conservation Practices.

. (Emphasis added.)

States have for many years recognized water injection as a

conservation measure and have taken action to encourage this

procedure. The high probability is that the senators may very

well have been aware of the practice of the states in counting

injection wells as producing wells for various purposes, and

may have intended a like treatment.

Use of the generic term “well” also indicates no intent to

strictly limit the type of wells which could be counted. Indeed,

the much more restrictive phrase “oil and gas wells,” used in

the IRS Code has been held to include injection wells. It runs

counter to common sense to believe that a broader general

term should read more restrictively than a narrow expression.

82a

This Court believes that the most compelling evidence of

what Congress intended by the stripper well exemption can be

found in the DOI’s interpretation of the stripper well exemp-

tion contained in the Mineral Land Leasing Act of 1920. The

stripper well exemption contained in the 1935 amendments to

that act exempted oil from the usual royalty rates, “Whenever

the average daily production of the oil wells .. shall not

exceed ten barrels per well.. This language is not signifi-

cantly different than the TAPAA and EPAA exemptions

which speak of leases whose “average daily production

does not exceed ten barrels per well.

Since the 1930’s, the Department of the Interior has had in

effect a regulation implementing this statutory exemption. As

discussed earlier, this regulation identifies an active injection

well as a commercially productive well, and specifies that

injection wells should be counted. The underlying statute has

been reenacted with this interpretation in force, and no effort

has been undertaken to overturn this interpretation. In light of

the consistent application of the DOI interpretation, and in

light of the reenactment of the underlying statute, this Court

must conclude that the DOI’s interpretation and manner of

treating injection wells was the one Congress intended.

N.L.R.B. v. Bell Aerospace Co., 416 U.S. 267, 275, 94 S.Ct.

1757, 1762, 40 L.Ed.2d 134 (1974); N. L. R. B. v. Boeing Com-

pany, 412 U.S. 67, 74-5, 93 S.Ct. 1952, 1957, 36 L.Ed.2d 752

(1973).

When Congress utilized language in a statute strikingly

similar to language in an earlier statute, which language had

been consistently interpreted, absent some strong indication

to the contrary, Congress intended that the interpretation of

the new statute be similar to that given the earlier statute. As

heretofore noted, the purposes of the two statutes were simi-

lar. This Court can only conclude that the intent of Congress in

using the phrase “average daily production . . per well” was

to include injection wells in the well count.

The defendant seems to think that the IRS and DOI regula-

tions and statutes can be dismissed out of hand. The defendant

88a

ignores the long-standing practice of construing language in

haec verba in similar ways. See, e.g., Oscar Mayer & Co. v.

Evans, 441 U.S. 750, 99 S.Ct. 2066, 2071, 60 L.Ed.2d 609

(1979); Northeross v. Board of Education of Memphis City

Schools, 412 U.S. 427, 93 S.Ct. 2201, 2202, 37 L.Ed.2d 48

(1973). (“The similarity of language in [the two provisions] is,

of course, a strong indication that the two statutes should be

interpreted pari passu.”) As stated in Northcross, this indica-

tion is even stronger when the statutes share a common raison

d'etre.

Sutherland, in his treatise on statutory construction recog-

nized the principle:

“On the basis of analogy the interpretation of a doubtful

statute may be influenced by language of other statutes

which are not specifically related, but which apply to

similar persons, things, or relationships. By referring to

other similar legislation, a court is able to learn the pur-

and course of legislation in general, and by transpos-

the clear intent expressed in one or several statutes to

a similar statute of doubtful meaning, the court not only is

able to give effect to the probable intent of the legislature,

but also to establish a more uniform and harmonious sys-

tem of law.” (§ 53.03.)

An example of this process which the treatise cites is Over-

street v. North Shore Corporation, 318 U.S. 125, 63 S.Ct. 494,

87 L.Ed. 656 (1943). Overstreet involved the meaning to be

given the phrase “engaged in commerce,” which was used in

the Fair Labor Standards Act. The Court held that the test to

be applied was that test utilized under the Federal Employers’

Liability Act. The Court recognized that the two statutory

provisions were “not strictly analogous, but they are similar,”

and noted that they were aimed at the same problem. 318 U.S.

at 131-32, 63 S.Ct. at 498.

Sutherland also points out the value of this approach:

“Harmony and consistency are positive values in a |

system by reason of serving the interests of impartiality

and izing arbitrariness. The practice of construing

statutes by reference to other statutes is based upon the

sound public policy of advancing those values.” (§ 50.01.)

Sda

The desirability of harmony and consistency of law is easily

seen in the present case. Certain properties subject to both the

DOI stripper well regulations and the DOE stripper well

regulations, are involved in this litigation. The disparate treat-

ment accorded injection wells by these cabinet level depart-

ments has prompted one producer to ask: “How can one de-

partment of the Executive Branch (Department of Interior)

lawfully count injection wells while two other departments

(DOE and Department of Justice) are . . . defending in the

courts the federal regulations which make the counting of

injection wells illegal?” Exhibit to plaintiffs’ trial brief 53. As

stated in our original opinion, such a situation in a democratic

government poses a legal monstrosity or contradiction that

undermines the necessary citizen confidence in the fairness

and/or justice inherent in our governmental system. Con-

sistency is a jewel to which government should adhere. See 447

F.Supp. at 1149-50.

The definitive test for the proper interpretation of any

statutory provision is whether a given interpretation will fulfill

the congressional goals and purposes of the statute. The

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