Appendix — Louisiana v. Department of Energy

82-1075 [Tes

No. DEC 23 1980

——————

(LEXANDEE L STEVaS,

IN THE CLERK

Suypwrenwe Cet of the United States

OCTOBER TERM, 1982

STATE OF LOUISIANA, TEXACO INC. and

THE LOUISIANA LAND AND EXPLORATION COMPANY,

Petitioners,

V.

DEPARTMENT OF ENERGY, and

JAMES B. EDWARDS, Secretary of Energy,

Respondents.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO THE

TEMPORARY EMERGENCY COURT OF APPEALS

OF THE UNITED STATES

ALLAN ABBOT TUTTLE

Counsel of Record

JAMES R. PATTON, JR.

GEORGE M. BORABABY

PATTON, Boccs & BLow

2550 M Street, N.W.

Washington, D.C. 20037

(202) 457-6000

Attorneys for Petitioner

State of Louisiana

ANDREW J. KIRKPATRICK, JR. JOUN R. Cope

WituiaM O. LAMOTTE, IIT THOMAS D. MANForD, III

RICHARD D. ALLEN Darct L. Rock

Morris, NICHOLS, ARSHT & TUNNELL BRACEWELL & PATTERSON

Twelfth & Market Streets 1825 I Street, N.W.

P.O. Box 1347 Washington, D.C. 20006

Wilmington, Delaware (202) 828-5800

(302) 658-9200 Attorneys for Petitioner

Attorneys for Petitioner Texaco Inc. The Louisiana Land And

Exploration Company

Other counsel for petitioners are listed on inside cover.

WILson - Epes Printing Co., Inc. - 789-0096 - WASHINGTON, D.C. 20001

THE HONORABLE DAvip C, TREEN

Governor, State of Louisiana

Tue HONORABLE WILLIAM J. GuSTE, JR.

Attorney General, State of Louisiana

THE HONORABLE FRANK P. SIMONEAUX

Secretary, Department of Natural Resources,

State of Louisiana

THE HONORABLE Patrick H. MARTIN

Commissioner of Conservation,

State of Louisiana

Harry E. Barsu, JR.

Davin R. FrouNn

CAMP, CARMOUCHE, PALMER, BARSH & HUNTER

A Professional Law Corporation

P.O. Drawer 2001

Lake Charles, Louisiana 70602

(318) 433-9355

Of Counsel for Petitioner State of Louisiana

STEPHEN H. BARD

Texaco Ine.

2000 Westchester Avenue

White Plains, New York 10650

(914) 253-4000

PATRICK T. CAFFERY

CAFFERY, OUBRE, GIBBENS & BLACKWELL

420 Iberia Street

New Iberia, Louisiana 70560

(318) 364-1816

Of Counsel for Petitioner Texaco Inc.

J. HENRY PHILLIPS, III

CHARLES D. MARSHALL, JR.

MILLING, BENSON, WOODWARD, HILLYER,

PiERSON & MILLER

Eleventh Floor

Whitney Building

New Orleans, Louisiana 70130

(504) 581-3333

Of Counsel for Petitioner The Louisiana Land

And Exploration Company

TABLE OF CONTENTS

APPENDIX A

Department of Energy v. State of Louisiana, 690

F.2d 180 (Temp. Em. Ct. App. 1982)—Opin-

cs ensnmansnsocvesccsorsosece

APPENDIX B

Department of Energy v. State of Louisiana—

Judgment of Temporary Emergency Court of

Appeals, October 4, 1982 .0000..0.cccccccccecceeteeeeee

APPENDIX C

Department of Energy v. State of Louisiana—

Order of Temporary Court of Appeals Denying

Rehearing, November 26, 1982 00.0.0...

APPENDIX D

State of Louisiana v. Department of Energy, 507

F. Supp. 1865 (W.D. La. 1981) 200000000000.

APPENDIX E

State of Louisiana v. Department of Energy, 519

F. Supp. 351 (W.D. La. 1981) ......... Sie AE

APPENDIX F

CL”)

APPENDIX G

Clarification to Mandatory Petroleum Price Regu-

lations Applicable to Domestic Crude Oil ............

APPENDIX H

List of All Parent Companies, Subsidiaries and

Affiliates of Texaco Inc. required by Rule 28.1....

la

2la

22a

45a

5la

52a

119a

la

APPENDIX A

TEMPORARY EMERGENCY COURT OF APPEALS

OF THE UNITED STATES

No. 5-65

DEPARTMENT OF ENERGY and JAMES B. EDWARDS,

Secretary of Energy,

Defendants-Appellants,

—against—

STATE OF LOUISIANA,

Plaintiff-Appellee,

TEXACO INC. and

THE LOUISIANA LAND AND EXPLORATION COMPANY,

Plaintiffs-Intervenors-A ppellees.

(And Consolidated Case No. 5-66)

Appeal from the United States District Court

for the Western District of Louisiana

(Civil Action No. 80-0812)

(Argued: May 14, 1982 Decided: September 17, 1982)

Judgment Entered: October 4, 1982

NANCY C. CRISMAN, Department of Energy, Washington,

D.C., with whom Frank W. Krogh, Judith A. Mather,

Department of Energy, Washington, D.C., were on the

brief; Paul M. Geier, David R. Hughes, Sarah Gottsman

and Colin C. Carriere, Office of the Solicitor, Washington,

D.C., Of Counsel, for Defendants-Appellants.

ALLAN ABBOT TUTTLE, Patton, Boggs & Blow, Washing-

ton, D.C., with whom James R. Patton, Jr. and George

M. Borababy of the same firm; Harry E. Barsh, Jr. and

David R. Frohn, Camp, Carmouche, Palmer, Barsh &

Hunter, Lake Charles, La., were on the brief for Plain-

tiff-Appellee.

John R. Cope, Roger L. Reynolds and Darci L. Rock,

Bracewell & Patterson, Washington, D.C., were on the

brief; J. Henry Phillips, III and Charles D. Marshall,

Jr., Milling, Benson, Woodward, Hillyer, Pierson &

Miller, New Orleans, Louisiana, Of Counsel, for Plaintiff-

Intervenor-Appellee, The Louisiana Land and Exploration

Company.

Andrew B. Kirkpatrick, Jr., William O. LaMotte, III and

Richard D. Allen, Morris, Nichols, Arsht & Tunnell,

Wilmington, Delaware, were on the brief; Stephen H.

Bard, Texaco Inc., White Plains, New York, and Patrick

T. Caffery, Caffery, Oubre, Gibbens & Blackwell, New

Iberia, Louisiana, Of Counsel, for Plaintiff-Intervenor-

Appellee, Texaco Ine.

Before METZNER, BECKER and HEMPHILL, Judges

METZNER, Judge.

The Department of Energy (DOE) appeals from two

orders of the District Court for the Western District of

Louisiana.’ The first order denied DOE’s motions to dis-

miss the complaint and to vacate intervention orders.

The second order granted the summary judgment motion

of the State of Louisiana (plaintiff-appellee) and Texaco,

Inc. and Louisiana Land and Exploration Company

(plaintiffs-intervenors-appellees). The issues raised by

DOE on these appeals concern exhaustion of adminis-

trative remedies, ripeness, standing, intervention and the

propriety of the disposition on the merits by granting

summary judgment to the appellees.

1 State of Louisiana v. Department of Energu, 507 F. Supp. 1365

(W.D. La. 1981); 519 F. Supp. 361 (W.D. La, 1981).

8a

The dispute between the parties arises out of a DOE

enforcement proceeding in which DOE claims that Texaco

improperly sold domestically produced crude oil to its

customers as new oil when the oil should have been classi-

fied as old oil which has a lower maximum price fixed by

the regulations. Texaco is charged with having exceeded

the authorized price for the period Augvst 19, 1973 to

September 1, 1976, by more than $748,000,000.

The State of Louisiana is involved in this litigation be-

cause it has collected severance taxes and royalties on vil

rights from lessees of state owned land based on the clas-

sification of this oil as new oil. The Louisiana Land and

Exploration Company (LL&E) is a private enterprise

which has royalty interests and working interests in

properties in which Texaco has a working interest.

The litigation commenced in the District Court of Dela-

ware in 1979 when Texaco, as plaintiff, and the State of

Louisiana and LL&E as intervenors, sought declaratory

relief as to the meaning and validity of certain regula-

tions and rulings of DOE. They also sought injunctive

relief as to the aforementioned pending DOE enforce-

ment proceeding against Texaco.

Specifically, plaintiffs sought a determination that

multiple producing reservoirs operated by Texaco and

LL&E and recognized by the Louisiana Office of Conser-

vation (LOC) as separate producing units be treated as

separate properties under DOE regulations for determir-

ing old and new oil even though they may be located on

a single premises. The court dismissed the complaints of

Texaco and LL&E as not ripe for judicial review. Tex-

aco, Inc. v. DOE, 490 F. Supp. 874 (D. Del. 1980).

Thereafter, Louisiana filed a voluntary dismissal of its

action disposing of that case.

Louisiana then instituted this action in the Western

District of Louisiana where the court granted Texaco and

4a

LL&E leave to intervene. The relief sought by the

amended complaint in this action is a declaration that

reservoir-wide producing units established and recognized

by Louisiana (LOC units) are separate properties for the

purpose of federal oil and gas pricing regulation. A find-

ing to this effect would classify the oil as new oil, and

Texaco would not be liable to a claim for overcharges as

to such oil.

I,

REGULATORY BACKGROUND

The Meaning of “Property” under the Federal

Price Control System

The two-tier pricing system for crude oil was prom-

ulgated by the Cost of Living Council (CLC) on August

17, 1978, under authority of the Economic Stabilization

Act of 1970. 38 Fed. Reg. 22536 (August 22, 1973).

Congress reaffirmed this authority with the enactment of

the Emergency Petroleum Allocation Act (EPAA). Pub.

L. 98-159; 15 U.S.C. § 751 et seq.

CLC established two categories of domestically pro-

duced crude oil: old oil, which was subject to a price

ceiling, and new oil, which could be sold at a higher free

market price. For each “property” operated by a given

producer, the classification of the oil was calculated

monthly. The amount of oil produced from the property

in the corresponding month of 1972 was the benchmark

for classifying current production. Production less than

the benchmark was old oil. Production in excess of the

benchmark was new oil.

Because the two-tier system was thus based on a

property-by-property comparison of current production

with 1972 production, the definition of the term “prop-

erty” was of fundamental importance. The CLC defini-

tion, however, was rudimentary:

5a

“ ‘Property’ is the right which arises from a lease

or from a fee interest to produce domestic crude

petroleum.”

6 C.F.R. § 150.354, as amended 38 Fed. Reg. at 22538

(1973).

By September 1975, the Federal Energy Administra-

tion (FEA) had taken over the administration of the

pricing system and issued the first interpretation of the

property definition. In Ruling 1975-15 (40 Fed. Reg.

40832 (September 4, 1975)), the FEA addressed the

question of how property designations should be made

where several geologically distinct producing reservoirs

were contained within the boundaries of a single leased

tract. The agency stated that for purposes of the price

regulations, “the property concept is one that identifies

the right to produce crude oil, whether that right arises

from a lease or from a fee interest.” Jd. Since the “right

to produce” was the proper basis for making property

designations, geological considerations such as reservoir

boundaries were irrelevant.

On December 22, 1975, the Energy Policy and Con-

servation Act (EPCA) was enacted as an amendment to

EPAA. Pub. L. 94-163. This legislation contemplated

revisions to optimize production from domestic properties

subject to a statutory maximum weighted average first

sale price of $7.66 per barrel. The President had to de-

termine that any departure from the then current con-

trols would be likely to result in greater production from

such properties. EPCA § 401, 15 U.S.C. § 757.

On August 20, 1976, FEA amended the property defi-

nition as part of an overhaul of the regulations pursuant

to the EPCA. The original definition of property was

continued with the following addition:

“A producer may treat as a separate property

each separate and distinct producing reservoir sub-

6a

ject to the same right to produce crude oil, provided

that such reservoir is recognized by the appropriate

governmental authority as a producing formation

that is separate and distinct from, and not in com-

munication with, any other producing formation.”

41 Fed. Reg. 36172, 36184 (August 26, 1976) ; effective

September 1, 1976. The FEA stated that the amended

definition of property comports with the objective provided

in EPCA that producers are provided with an incentive

“to develop new deep reservoirs which would result in all

new crude oil production.” Moreover, it “removes the

disincentive some producers faced with respect to prop-

erties where declining production from existing reser-

voirs offset new production from other reservoirs which

would otherwise have qualified for treatment as new

crude oil.” Jd. at 36179.

In the preamble to this amendment, FEA made it clear

that reservoir-by-reservoir property designations would

not, in general, be accepted as a basis for calculating

quantities of old and new oil produced prior to September

1. Such an interpretation of the old property definition

was, in FEA’s view, “expansive” and “unwarranted,”

and the agency concluded that retroactive ratification of

property designations based on this interpretation would

be unfair to those producers who had “adhered closely to

the regulations.” Jd. at 36177. Thus, the new property

definition would have prospective effect only and the va-

lidity of property designations before September 1976

would be determined by reference to the old definition.

Further, in interpreting the old definition, the preamble

sets forth in detail certain circumstances under which

a leased premises might permissibly have been subdi-

vided into several federal properties. Jd. at 36176-77.

State recognition of geologically distinct reservoirs is not

one of the circumstances listed.

Ta

FEA reissued the text of the August 20 preamble as

Ruling 1977-1. 42 Fed. Reg. 3628, 3629 (January 19,

1977). Six days later, FEA issued Ruling 1977-2, which

reaffirmed the policy adopted in Ruling 1977-1 and set

forth certain clarifications not relevant here. 42 Fed.

Reg. 4409 (January 25, 1977). Although the agency

policy here in question was originally enunciated in the

August 20, 1976, preamble, the plaintiffs attack the 1977

rulings because the validity of the regulation is not being

challenged.

Texaco’s Property Designations

Like many other states, Louisiana regulates the pro-

duction of petroleum within its borders. Its purpose is

conservation. As part of the regulatory scheme, LOC

“for the prevention of waste and to avoid the drilling

of unnecessary wells [establishes] a drilling unit or units

for each [reservoir].” La. Rev. Stat. Ann. 30:9(B).

Thus, a LOC unit never encompasses more than a single

reservoir.

In making property designations for the purpose of the

two-tier pricing system, Texaco frequently chose to des-

ignate reservoir-wide LOC production units as separate

properties, even though more than one unit may be found

within the confines of a single leased tract. Plaintiffs

challenge the validity of Rulings 1977-1 and 1977-2 inso-

far as they would preclude such designations prior to

September 1, 1976. DOE claims that these LOC units

are not to be considered as separate properties before

that date.

II.

This court will first address the issues raised on the

appeal from the denial of DOE’s motion to dismiss (507

F. Supp. 1365). These issues are failure to exhaust

administrative remedies, ripeness, standing and inter-

vention.

8a

Exhaustion

DOE claims plaintiffs’ action was not properly before

the district court because plaintiffs have yet to exhaust

administrative remedies.

It urges that the administrative proceedings at issue

in this case will determine whether pricing regulations

have been violated. Upon completion of these proceedings,

DOE’s Office of Hearings and Appeals may issue a Re-

medial Order (RO). 10 C.F.R. § 205.199(B). Section

508(c) of the Department of Energy Organization Act

provides that an RO shall be reviewable in a hearing on

the merits before the Federal Energy Regulatory Com-

mission. 42 U.S.C. § 7193(c), 10 C.F.R. § 205.199(C).

DOE further contends it is the final FERC order which

constitutes the “final agency action” from which judicial

review may be sought. While Section 503(c) is often as-

serted to preclude review prior to final agency action,

it is clear that the section is inapplicable to the case

at hand.

As stated earlier, plaintiffs challenge the facial va-

lidity of FEA Rulings 1977-1 and 1977-2, upon which the

DOE enforcement proceeding is predicated. There is no

administrative appeal from a ruling. 10 C.F.R. § 205.154.

The statutory exhaustion requirement of Section 503(c)

does not apply to such challenges. Despite DOE’s con-

tentions to the contrary, the court below was correct in

finding that plaintiffs challenge the interpretation rather

than the enforcement proceeding.

The exhaustion doctrine, asserted in numerous other

actions involving DOE,’ requires that “no one is entitled

to judicial relief for a supposed or threatened injury un-

til the prescribed administrative remedy has been ex-

2 See, Pennzoil Co. v. DOE, 466 F. Supp. 238 (D. Del. 1979);

Northern Natural Gas Co, v. DOE, 464 F. Supp. 1145 (D. Del.

1979); Phillips Petroleum Co. v. Federal Energy Administration,

435 F. Supp. 1239 (D. Del. 1977), aff'd sub nom. Standard Oil Co.

v. DOE, 596 F.2d 1029 (TECA 1978).

9a

hausted.” Myers v. Bethlehem Shipbuilding Corp., 303

U.S. 41, 50-51 (1938). However, this doctrine is subject

to numerous exceptions. See, McKart v. United States,

395 U.S. 185, 193-195 (1969). For example, among the

exceptions are proceedings where the issues sought to be

litigated are purely legal and where the agency has either

taken a final position with respect to such issues or will

not address them during the compliance proceeding. See,

e.g., Pennzoil v. DOE, supra note 2 at 248-244; Phillips

Petroleum Co. v. Federal Energy Administration, supra

note 2 at 1248.

DOE, in this case, has made it clear it will not con-

sider the validity of the challenged rulings at a subse-

quent stage of the compliance process. Counsel for DOE

made such representation at oral argument before this

court. This fact distinguishes this case from several re-

cent TECA decisions in which the complaints were dis-

missed for failure to exhaust. See, National Distillers

and Chemical Corp. v. DOE, 662 F.2d 754, 756 (TECA

1981) ; Missouri Terminal Co. v. Edwards, 659 F.2d 139,

145 (TECA 1981) ; Hawthorne Oil & Gas Corp. v. DOE,

647 F.2d 1107, 1114 (TECA 1981). Thus, the district

court’s consideration of plaintiffs’ legal claims did not

violate the doctrine of exhaustion, as the challenged rul-

ings are, in fact, “final agency action.”

Ripeness

DOE argues the district court should not have con-

sidered plaintiffs’ claims because they were not ripe for

judicial review. The test for ripeness in the pre-

enforcement review context, which DOE asserts plaintiffs

have not met, requires a finding that the following four

factors be satisfied:

(1) the issues presented are purely legal,

(2) the issues arise out of final agency action,

10a

(3) the controversy has a direct and immediate im-

pact on plaintiffs’ business, and

(4) litigation of the controversy will expedite final

resolution of the matter rather than delay or

impede effective agency enforcement efforts.

Abbott Laboratories, Inc. v. Gardner, 887 U.S. 186

(1967) ; Toilet Goods Association, Inc. v. Gardner, 387

U.S. 158 (1967); Bankers Life & Cas. Co. v. Callaway,

530 F.2d 625 (5th Cir. 1976) ; Pennzoil Company v. DOE,

supra note 2; Phillips Petroleum Co. v. Federal Energy

Administration, swpra note 2.

Having determined that there has been “final agency

action,” this court need not further discuss the first two

elements of the test.

In regard to the expedition/delay issue, this court

looks to the case of Northern Natural Gas Co., supra

note 2, which held:

“If the plaintiffs ultimately prevail here, the need

for an agency enforcement action will be narrowed

substantially, and possibly eliminated. If DOE pre-

vails here, the judgment against the plaintiffs will

be binding upon them in any other proceeding.

While DOE contends that the plaintiffs must first

challenge the regulations in an agency enforcement

action, it has not suggested any cogent reasons why

that procedure would be more efficient, or why this

action will delay or impede any action it desires to

institute.”

464 F. Supp. at 1155. Accord, Pennzoil, supra note 2;

Dow Chemical U.S.A. v. Consumer Product Safety

Comm’n, 459 F. Supp. 378, 8387 (W.D. La. 1978). Thus,

it is clear that the court below correctly concluded the

fourth element had been satisfied.

We now address the question of whether this contro-

versy has a direct, immediate impact upon plaintiffs;

lla

considering first, whether Louisiana, as plaintiff, has

satisfied this element. Louisiana’s interest in this litiga-

tion lies in its status as a sovereign and as a landowner.

As a sovereign, it receives a severance tax based on the

price at which oil and gas produced within the state are

first sold or transferred; as a landowner, Louisiana

leases its lands to producers and receives a royalty

based on the price at which oil and gas are first sold

or transferred.

Operating throughout the State of Louisiana are pro-

ducers, other than Texaco, which make royalty and

severance tax payments to Louisiana. These producers

have acceded to the views they believe are expressed in

Rulings 1975-15, 1977-1 and 1977-2, and have refunded

the overcharges resulting from their earlier treatment

of multiple LOC’s located on a single premises as multi-

ple properties. Consequently, Louisiana has _ received

claims for refunds of corresponding amounts of royalties

and severance tax payments.

Louisiana’s only remedy, outside of immediate resolu-

tion of the “property” controversy, is to defend the nu-

merous claims being made for refunds. This is precisely

the situation found in State of Florida v. Weinberger,

492 F.2d 488, 492 (5th Cir. 1974), where Florida had

to choose between undertaking “likely financial outlay

and certain legislative and administrative effort,” or un-

dergoing the “risk [of] the at least temporary loss of

funding which a conformity hearing . . . could well

produce.”

Thus, Louisiana is not merely a complainant whose

rights are affected only on the contingency of future ad-

ministrative action. See, Columbia Broadcasting System,

Inc. v. United States, 316 U.S. 407 (1942). The trial

court correctly held Louisiana faced sufficient hardship

to be properly before the court.

12a

Standing

DOE claims that Louisiana lacks standing to maintain

this action.

In order to overcome this contention, Louisiana has to

show that it has suffered injury in fact and that its in-

terests are within the zone of interests to be regulated

by regulations and rulings under consideration. Associa-

tion of Data Processing Service Organizations, Inc. v.

Camp, 397 U.S. 150 (1970).’ It is clear that Louisiana

has met both parts of the test.

As indicated above, Louisiana is suing both as a sov-

ereign and as a landowner. In both capacities it will

lose revenues if the position of DOE is sustained. DOE

has stated that it will maintain its present position as to

the interpretation which it urges upon the court. The

issue of the correct interpretation will not be resolved

in the compliance proceedings. Louisiana is faced with

refunding royalties and severance tax payments already

made if the position with DOE is sustained. Finally,

Louisiana clearly meets the zone of interest test as a

landowner.

Intervention

The court below permitted intervention by Texaco and

LL&E as of right under Rule 24(a) of the Federal

Rules of Civil Procedure. The pertinent part of that

rule provides in subparagraph (2) that intervention as

of right is granted:

“(2) when the applicant claims an interest relat-

ing to the property or transaction which is the sub-

ject of the action and he is so situated that the dis-

position of the action may as a practical matter

impair or impede his ability to protect that interest,

8 There is serious question as to whether the Supreme Court has

abandoned the zone test. See, K. Davis, Administrative Law

Treatise § 22.02-11 (Supp. 1982).

13a

unless the applicant’s interest is adequately repre-

sented by existing parties.”

It may be argued that the interests of Texaco and

LL&E are adequately represented by the State of Louisi-

ana. On the other hand, there is force to the argument

that Texaco, faced with a claim of overcharge amount-

ing to some $748,000,000 should not be compelled to have

someone else represent its interest. However, it is not

necessary to decide this point.

We find that there is adequate basis to permit inter-

vention pursuant to Rule 24(b). There is no doubt that

the claims of Texaco and LL&E and the main action

have a common question of law, and that is all that the

court has before it. Their intervention has not and

will not delay or prejudice the adjudication of Louisiana

and DOE’s rights in the main controversy.

With intervention being properly allowed, we need not

reach the issues as to the intervenors of ripeness, ex-

haustion of administrative remedies or the res adjudi-

cata effect to be given to the decision of the Delaware

District Court in Texaco, Inc. v. DOE, 490 F. Supp. 874

(D. Del. 1980).

III.

SUMMARY JUDGMENT

The court below granted plaintiffs’ motion for sum-

mary judgment which challenged the validity of Rulings

1977-1 and 1977-2 on two grounds. First, plaintiffs con-

tend that FEA’s failure to recognize reservoir-wide LOC

production units as separate “properties” per se is an

unreasonable interpretation of the property definition

promulgated by the CLC in 1973. Second, plaintiffs con-

tend—and the district court held—that they are entitled

to summary judgment because their interpretation was

reasonable in a period of agency confusion during which

the only indicia of agency policy were contrary to the

l4a

policy ultimately adopted, and the interpretation was

abandoned prospectively at the same time it was im-

posed retroactively. We disagree with plaintiffs’ conten-

tions and reverse the order below.

Reasonableness of FEA’s Interpretation

As we have already pointed out, the basic building

block of the two-tier system for pricing old and new oil

is the property concept. CLC’s 1973 definition of “prop-

erty” is “the right which arises from a lease or from a

fee interest to produce crude petroleum.”

Although the words “lease” and “fee’’ appear in the

definition, the parties agree, and this court has held,

that: “The focus of the ‘property’ definition is upon the

‘right to produce,’ not the fee or leasehold nature of the

ownership interest.” Grigsby v. Department of Energy,

585 F.2d 1069, 1083 (TECA 1978), cert. denied, 440

U.S. 908 (1979). As pointed out in Grigsby at 1083

n. k, “the FEA has never stated that ‘property’ is al-

ways defined by the lease.”

Absent extraordinary circumstances, the court will

defer to an agency’s interpretation of the meaning of its

own regulation unless the interpretation is “plainly

erroneous or inconsistent with the regulation.” Udall v.

Tallman, 380 U.S. 1, 17 (1965), quoting Bowles v. Semi-

mole Rock Co., 325 U.S. 410, 414 (1945). Under this

standard of review, we find that Rulings 1977-1 and

1977-2 are reasonable insofar as they refuse to sanction

the treatment of reservoir-wide LOC production units as

separate properties.

When CLC created the two-tier pricing system in

August 1973, it was seeking to “strike a balance” be-

tween the policy of restraining price increases and that

of stimulating increased domestic production of crude

oil. CLC Press Release, Aug. 10, 1973 (quoted in Ruling

1977-1, 42 Fed. Reg. 3628, 3630 (Jan. 19, 1977)).

15a

Three months after the program was established, EPAA

was enacted. Congress directed that the price control

and allocation system be continued and reaffirmed tie

dual objectives of the pricing system. “Most importantly,

the President must, in exercising this authority, strike

an equitable balance between the sometimes conflicting

needs of providing adequate inducement for the produc-

tion of an adequate supply of [oil] and of holding down

spiraling consumer costs.” H. Conf. Rep. No. 93-628,

reprinted in [1973] U.S. Code Cong. & Ad. News 2688,

2703.

It was FEA’s responsibility, in interpreting the 1973

property definition, to reconcile these “sometimes con-

flicting needs.” FEA might rationally have chosen either

to rely on the property interest or on concepts of state

regulation in clarifying the meaning of the “right to

produce.” It chose the former.

Its analysis, set forth in Ruling 1977-1, begins with

the finding “that the literal meaning of the term ‘prop-

erty’... is generally to be understood as synonymous

with the physical ‘tract’ or ‘premises’ as to which a

working interest is established by an oil and gas lease,

or by a fee interest.” 42 Fed. Reg. at 3631. The agency

pointed out that: “Inasmuch as the lease is the basic

document of the oil and gas industry, there should have

been no doubt but that CLC intended by its definition of

property to signify the premises described by an oil and

gas lease” as the property in the vast majority of in-

stances. 42 Fed. Reg. at 3632. Finally, this Ruling con-

firms what the agency had said two years before in In-

terpretive Ruling 1975-15 to the effect that separate

reservoirs under a single lease constitute a single unit.

40 Fed. Reg. 40832, 40833 subsection F.

The agency has been consistent in this interpretation

even though during 1976 it indicated the possibility that

it might change its mind and adopt the definition con-

tended for by the appellees here. On two occasions it

16a

offered a proposed new rule for comment. 41 Fed. Reg.

1564, 1571 (Jan. 8, 1976); 41 Fed. Reg. 16179, 16180

(April 16, 1976). After considering the comments re-

ceived and giving the matter further thought, the agency

rejected the proposals. 41 Fed. Reg. 4931, 4938-39 (Feb.

8, 1976); 41 Fed. Reg. 36172 (Aug. 26, 1976). The

amended regulations were adopted effective September 1,

1976. They continued the prior definition of property up

to September 1976 but changed the definition for the

future. This was not an admission that the original

definition and its interpretations were wrong or vague.

It merely signified the determination of the agency that

in the future the LOC unit designation would better

achieve the goal of the pricing system to find new oil.

The preamble to the amended regulations stated that

they wei? promulgated pursuant to EPCA. Section 401

of that act mandated revisions in the price control pro-

gram to optimize domestic production while maintaining

an initial weighted average first sale price for domes-

tically produced oil not in excess of $7.66 per barrel.

15 U.S.C. § 757. See also S. Conf. Rep. 94-516, pp.

190-91, reprinted in [1975] U.S. Code Cong. & Ad.

News 1956, 2031-38. FEA explicitly found that the

amendment to the property definition would offer the in-

dustry greater incentive to increase exploration and

production and thus determined that the amendment

would further the policy enunciated by Congress. 41

Fed. Reg. 36172, 36178-79 (Aug. 26, 1976).

We find this analysis reasonable and its results to be

consistent with the property definition and the policies

underlying the two-tier pricing system. While Texaco in

fact may have been uncertain as to whether designation

of reservoir-wide LOC production units as separate

properties was unwarranted, their confusion does not

require this court to overturn an administrative inter-

pretation of a regulation which is not clearly erroneous.

Energy Consumers and Producers Association v. DOE,

17a

632 F.2d 129, 142 (TECA), cert. denied, 449 U.S. 832

(1980) ; Udall v. Tallman, supra.

Plaintiffs rely heavily on Grigsby v. DOE, supra, for

the proposition that a LOC production unit constitutes

a property for EPAA purposes, as a matter of law. But

this case is not apposite.

Grigsby was concerned with a portion of Ruling

1975-15 which is not pertinent here. The case addressed

an entirely different question: how to adjust property

designations after a “unitization” by the state of Louisi-

ana. The state in 1969 had ordered that five separately

owned tracts and leases be pooled into a single produc-

tion operation. It is not uncommon for operators of two

or more adjoining leases producing from the same reser-

voir to pool their interests, surrendering their individual

rights to produce to a single operator in return for a

share of the total production. This often occurs after

the reservoir has reached the declining stages of produc-

tion and is usually accompanied by the introduction of

enhanced recovery techniques. The operator coordinates

production from the constituent leases, shutting in some

wells and converting other previously producing wells

into injection wells. 40 Fed. Reg. at 40832. In Louisi-

ana, such an aggregation of leases is recognized by the

LOC as a discrete production unit.

The realignment of the pattern of production would

have played havoc with the federal pricing system had

FEA permitted lease-by-lease property designations to

continue in force after a unitization. It would have re-

sulted in the recognition of artificially high quantities of

new oil from some of the participating leases, while

other leases would be producing less or not at all. It

would have permitted an operator to gerrymander pro-

duction patterns by shifting producing wells from one

lease to another.

Ruling 1975-15 dealt with this problem by declaring,

inter alia, that the entire unitized premises constituted

18a

the property for federal price control purposes. In

Grigsby, the court upheld this interpretation as applied

to a group of leases in Louisiana which had been unit-

ized by LOC order. A more recent decision by this court

has reaffirmed the rule that where the issue is unitiza-

tion pursu. at to a LOC-type order, the unit is the

“property.” Pennzoil Co. v. DOE, 680 F.2d 156 (TECA

1982). The Court specifically indicated that it was not

considering the issue presented here. 680 F.2d at 178

n, 42.

We find no inconsistency in our determination in this

case with the holding in Grigsby or Pennzoil in the light

of the issues presented, There is no invitation to gerry-

mander where severa! reservoir-wide production units

are within a single lease, and therefore, there was no

reason for FEA in this setting to depart from its gen-

eral position that the lease defines the property.

Standard Oil Doctrine

Citing our decision in Standard Oil Co, v. DOE, 596

F.2d 1029 (TECA 1978), the court below held that

FEA’s interpretation of the property definition was not

to be given preference over the plaintiffs’ reasonable in-

terpretation because deference to a retroactive agency

interpretation is not warranted when the agency’s inter-

pretation, though reasonable is not compelled, 519 F,

Supp. at 353. A similar argument was made by the oil

producer in Pennzoil, supra, Judge Christensen care-

fully analyzed the Standard Oil doctrine and found it

inapplicable in that case. We find that the doctrine is

similarly inapplicable here for the very same reasons 80

cogently expressed by Judge Christensen, and rest on

that opinion without further explication.

However, we would make one additional observation to

support our conclusion, The wording of Ruling 1975-15

put the plaintiffs on notice that multiple reservoirs in a

single lease or fee ownership would not be considered

19a

as separate properties even though they were separate

LOC units for state purposes. More specifically, the rul-

ing stated:

“While the FEA recognizes that various state and

other federal regulatory authorities may, for other

purposes, have monitored production levels on other

bases (¢.g., by physical boundaries or by producing

formations or reservoirs), it is necessary that the

price regulations embody a uniform concept, the

parameters of which can be readily applied to all

domestic production, regardless of varying state

classifications. For this reason, FEA regulations

utilize, as a reference, a property concept, based

upon the right to produce crude oil, that can be

readily identified for all producers.

. » « In the majority of cases, involving only one

lease that remains unchanged since 1972, a producer

will simply compare his current monthly production

for the property (the lease in those cases) against

the corresponding monthly production for the lease

in 1972.”

40 Fed, Reg. 40882 (September 4, 1975).

The ruling concluded by stating:

“F, Production From More Than One Reservoir

on a Single Property. Because the property concept

is based upon the right to produce crude oil, whether

arising from a lease or from a fee interest, the ex-

istence of two or more separate and distinct reser-

voirs will not in itself create two or more separate

‘properties’, Therefore .. . where a producer holds

a single right to produce crude oil from two or more

reservoirs, together the two or more reservoirs con-

stitute a single property; where there are separate

20a

and distinct rights to produce crude oil from each

reservoir, each reservoir accordingly represents a dif-

ferent property.”

Id, at 40833,

There is nothing confusing in this wording as applied

to our specific problem, Plaintiffs knew that they were

using a different interpretation in determining whether

the oil being produced was old or new. They never sought

an agency interpretation to sustain their position, Rather,

they seem to have proceeded on the theory that their in-

terpretation was reasonable and that it would afford

them protection against such a claim as now being made

by DOE, This, of course, is no defense, The history of

the regulations, rulings and interpretations demonstrates

that there was no justification for their position,

The order permitting Texaco and LL&E to intervene

and finding that plaintiffs are not precluded from main-

taining this action by reason of failure to exhaust admin-

istrative remedies, lack of ripeness or standing to sue,

is affirmed, The order granting summary judgment to

appellees is reversed and summary judgment is directed

to be entered for appellants.

So ordered.

2la

APPENDIX B

TEMPORARY EMERGENCY COURT OF APPEALS

OF THE UNITED STATES

No, 5-65

DEPARTMENT OF ENERGY, et al,,

» Plaintiff-A ppellee,

STATE OF LOUISIANA,

and Plaintiff-A ppellee,

TEXACO, INC,, et al.,

Plaintiffa-Intervenors-A ppellees,

Before METZNER, BECKER and HEMPHILL, Judges,

JUDGMENT

This cause came to be heard on the record on appeal

from the United States District Court for the Western

District of Louisiana, and was argued by counsel,

In consideration whereof, IT IS ORDERED that the

order permitting Texaco and LL&E to intervene and

finding that plaintiffs are not precluded from maintain-

ing this action by reason of failure to exhaust adminis-

trative remedies, lack of ripeness or standing to sue, is

affirmed, The order granting summary judgment to

appellees is reversed and summary judgment is directed

to be entered for appellants,

For THE Court

DONNA M, BoLp

Clerk

by: /s/ Andrew R, McCorkle

ANDREW R, McCorkLe

Deputy Clerk

October 4, 1982

(District Court No, 80-0812)

22a

APPENDIX C

TEMPORARY EMERGENCY COURT OF APPEALS

OF THE UNITED STATES

No, 5-65

DEPARTMENT OF ENERGY and JAMES B, EDWARDS,

Secretary of Energy,

Defendants-A ppellants,

v.

STATE OF LOUISIANA,

Plaintiff-Appellee,

TEXACO, INC, and

THE LOUISIANA LAND AND EXPLORATION COMPANY,

Plaintiff-Intervenors-Appellees,

Before METZNER, BECKER and HEMPHILL, Judges.

ORDER

Upon consideration of Appellees’ Petition for Rehear-

ing and Suggestion for Rehearing En Bane,

IT IS HEREBY ORDERED that said petition and

suggestion are DENIED, The Mandate is to issue De-

cember 8, 1982.

For THE Court

DONNA M, BoLp

Clerk

by: /s/ Andrew R. McCorkle

ANDREW R, McCorKLE

Deputy Clerk

November 26, 1982

23a

APPENDIX D

UNITED STATES DISTRICT COURT

W. D, LOUISIANA

LAFAYETTE-OPELOUSAS DIVISION

Civ, A. No, 800812

STATE OF LOUISIANA,

Plaintiff,

Texaco, INC,, THE LOUISIANA LAND AND

EXPLORATION COMPANY,

Intervening Plaintiffs,

Vv.

DEPARTMENT OF ENERGY AND

CHARLES W, DUNCAN, JR., Secretary of Energy,

Defendants,

Feb, 20, 1981

MEMORANDUM OPINION

SHAW, District Judge.

Originally, plaintiff, State of Louisiana, petitioned this

Court to declare that oil and gas production units that

are established and recognized by Louisiana’s Office of

Conservation (“LOC”) constitute separate “properties”

under federal oil and gas pricing regulations. Plaintiff

further requested this Court to enjoin defendants, the

Department of Energy and Charles W. Duncan, Jr., See-

retary of Energy, (“DOE”),’ from proceeding adminis-

1 As used herein, “DOE” will sometimes refer to the Department

of Energy and ita predecessor agencies, including the Federal

Energy Administration ("FEA") and the Federal Energy Office

(“FEO”), collectively, as well as to defendant, Charles W, Duncan,

Jr., Secretary of Energy, On February 4, 1981, James B, Edwards,

24a

tratively or judically against producers of oil within the

State on the erroneous theory that such units are not

separate “properties”,

On January 30, 1981, plaintiff filed an amended com-

plaint, waiving its broader claim that all LOC units

constitute separate “properties” and requested that the

Court declare: (1) that at all times since August, 1978,

reservoir-wide producing units established and recognized

by Louisiana have been separate “properties” for the pur-

pose of federal oil and gas pricing regulations; (2) that

Louisiana and producers could properly have treated

such units as “properties”; (3) that certain federal rul-

ings, to the extent they purport to preclude the designa-

tion of reservoir-wide production units established by

Louisiana as separate properties, are invalid, null and

void, or alternatively, are not the only valid interpreta-

tion of the definition of property and therefore, cannot

be applied retroactively; and, (4) for costs and various

injunctive relief,

DOE, pursuant to Rule 12(b) of the Federal Rules of

Civil Procedure, has moved to dismiss the complaints

filed herein by the State of Louisiana on the grounds

that this Court lacks jurisdiction because:

1. The plaintiff lacks standing to maintain this

action;

2. The claims asserted in the complaint are not ripe

for judicial review and do not present a justici-

able case or controversy;

and,

8. The plaintiff has failed to exhaust its administra-

tive remedies,

DOE also moved this Court to vacate its orders granting

Texaco, Inc, (“Texaco”) and the Louisiana Land and Ex-

ploration Company (“LL&E”) permission to intervene

Secretary of Energy, and successor in office to Charles W, Duncan,

Jr,, was substituted as defendant in place of Charles W. Duncan,

25a

on the ground that the Court lacks jurisdiction under

Rule 24(a) of the Federal Rules of Civil Procedure.

Background Facts

On July 19, 1973, the Cost of Living Council (“CLC”)

proposed a “two-tier” pricing system for crude oil to be-

come effective on August 19, 1973.

The two-tier system was designed to achieve two goals

simultaneously. It was to control inflation by limiting the

price of oil then being produced to an established “ceiling

price”. At the same time, it would stimulate increased

production by allowing newly discovered crude oil to be

sold at a higher free-market price.

Basically, the two-tier system requires producers to de-

termine, on a property-by-property basis, the portion of

their crude oil production that must be sold at the lower

tier price, and the portion eligible to be sold at the upper

tier price. These determinations are made by comparing

each property’s current monthly production with the

property’s historic monthly production, designated as the

“Base Production Control Level” (“BPCL”). The portion

of current production from each property equal to, or less

than, the BPCL must be sold at the lower tier ceiling

price, and that portion that exceeds the BP’ . may be

sold at the upper tier ceiling price.

Therefore, oil produced from currently producing

“properties” was “old oil” subject to the ceiling price.

Increased production from existing “properties” and pro-

duction from newly-discovered “properties” could be sold

at a higher, uncontrolled price. The basic building block

of the two-tier system was the “property” concept. In its

August, 1973 notice, CLC defined “property” as follows:

“Property” is the right which arises from a lease or

from a fee interest to produce domestic crude petrol-

eum. (38 Fed.Reg. 22536, 22538 (August 22,

1973) )

That definition was codified at 6 C.F.R. § 150.354.

26a

Numerous producers, including the intervenors in this

case, construed this regulation to permit them to treat

their various LOC units as separate “properties”.*

DOE, however, remained silent as to the interpretation

and application of that most basic concept for almost two

years. Its first elaboration of the definition occurred in

FEA Ruling 1975-15 announced on August 29, 1975.

That ruling indicated that FEA, the predecessor of DOE,

considered the “right to produce” to be the core concept

of the “property” definition:

For purposes of the price regulations then, the prop-

erty concept is one that identifies the right to produce

crude oil, whether that right arises from a lease or

from a fee interest. (40 Fed.Reg. 40832 (September

4, 1975) )

On April 13, 1976, FEA issued a notice of proposed

rulemaking designed, among other things, to clarify the

“property” concept further. In this notice, FEA proposed

to elaborate Ruling 1975-15’s recognition “that the lease

or fee interest does not in every instance suffice to de-

scribe the producing entity, and, therefore, may not be

adequate to describe the property.” 41 Fed.Reg. 16179,

16180 (April 16, 1976) FEA observed that:

(W)hen the right to produce crude oil, although

arising from several lease or fee interests, is more

2It is the contention of plaintiff and intervenors herein that a

crude oil producer, following the promulgation of the original

property definition in 1973, could have reasonably and lawfully in-

terpreted the definition of property at 10 C.F.R. § 212.72 to permit

the designation as a separate “property” of any less-than-leasehold

interest, where such property designation is based upon either:

a. the recognition of an oil or gas production unit by the LOC;

b. the existence of separate and distinct pools or reservoirs

within a lease or fee interest;

c. the accounting for, and payment of, royalty fees; or,

d. the calculation and payment of severance tax payments.

27a

correctly described by the unit, it is appropriate for

the FEA to recognize the same producing entity as

the property for purposes of determining lower and

upper tier quantities.

FEA acknowledged the desirability of conforming its

“property” definition to historical state regulatory con-

cepts:

(T)he pre-existing regulatory concepts, of state reg-

ulatory agencies and historical systems of produc-

tion accounting that transcend the variations among

state regulatory requirements ought to be afforded

the maximum practicable significance under FEA

regulations. (/d.)

It noted that these historical practices would modify a

right to produce:

Broadly stated, then, the right to produce crude oil

may be described in the first instance by a lease or

fee interest, but is subject to the possible further

modification if some other producing entity has been

recognized by the applicable state authority, which

describes a different right to produce. (Jd.)

FEA then gave particular recognition to Louisiana

unitization procedures:

For example, in Louisiana, where unitization may be

compelled by the Commissioner of Conservation, the

recognition by the state of producing entities is gen-

erally based upon factors other than merely surface

boundaries. Such productive entities are called

“units,” although the term does not always denote

the combination of separate lease or fee interests

into the type of “unitization” described in Ruling

1975-15. It may, instead, indicate the recognition of

the geological limits of a producing reservoir which

lies entirely within the surface boundaries of a single

lease. Such units may be formed in Louisiana as a

28a

result of a formal proceeding, and they then become

‘separate producing entities recognized by the state.

The balance of production from the non-unitized por-

tion of the lease is then also recognized by the state

as a producing entity. Accordingly, in Louisiana

each state recognized unit may therefore appropri-

ately describe a property, with each lease upon which

is reported non-unitized production also appropri-

ately describing a separate property.

Accordingly, for purposes of FEA price regulations,

the property concept may appropriately recognize

such producing entities, as recognized by state bod-

ies, whether the entity is the lease, some portion of

the lease, or the unitization of parts of two or more

leases. (Jd.)

However, the FEA declined to adopt the regulatory

changes proposed in April, and on August 20, 1976, FEA

issued the rule which is the focus of this lawsuit. 41 Fed.

Reg. 36172 (August 26, 1976). FEA added an additional

provision to the “property” definition:

“Property” means the right to produce domestic

crude oil, which arises from a lease or from a fee

interest. A producer may treat as a separate prop-

erty each separate and distinct producing reservoir

subject to the same right to produce crude oil, pro-

vided that such reservoir is recognized by the appro-

priate governmental authority as a producing forma-

tion that is separate and distinct from, and not in

communication with, any other producing forma-

tion. (Id, at 36184)

The first sentence of this new definition merely repeated

the CLC definition, as reworded, without substantive

change, by FEA in February, 1976. The second sentence

was to have prospective application from September 1,

1976, to permit producers prospectively to treat “as a

separate property each separate and distinct producing

reservoir subject to the same right to produce crude oil,

provided such reservoir is recognized by the appropriate

governmental regulatory authority as a producing forma-

tion that is separate and distinct from, and not in com-

munication with, any other producing formation.”

FEA discussed at some length its interpretation of the

basic “property” definition and adopted the position that

“property”, as defined by CLC in 1978, and as reformu-

lated in 1976,

is generally to be understood as synonymous with

the physical “tract” or “premises” as to which a

working interest is established by an oil and gas

lease, or by a fee interest. (/d. at 36174)

In so doing, the plaintiff claims that FEA abandoned

its previously stated position that “property” could be de-

fined by “rights to produce” other than the leasehold or

fee interest (¢.g., LOC unitization orders).

Moreover, FEA concluded that:

CLC, by its definition of the term “property” in-

tended to refer to the premises described in the oil

and gas lease pursuant to which crude oil was being

produced. It also appears that this is the reasonable

meaning of the definition that CLC used and that

the definition should have been so understood. (J/d.)

By imputing this intention to CLC, FEA held that

“property” had ab initio meant the premises defined by a

lease or fee interest.

On January 13, 1977, FEA issued Ruling 1977-1. 42

Fed.Reg. 3628 (January 19, 1977) It restated verbatim

the “interpretive portions of the August 20 Notice”, in-

cluding its interpretation of the 1978 “property” cefini-

tion and the clarifications thereto. Jd. at 3629.

On January 19, 1977, FEA issued Ruling 1977-2. 42

Fed.Reg. 4409 (January 25, 1977) This ruling iterated

the interpretation of Ruling 1977-1 that the “literal ap-

plication” of the “property” definition was “ ‘premises

described by an oil and gas lease.’” Jd, at 4410.

On the basis of these rulings, DOE has instituted ad-

ministrative enforcement proceedings against producers

of oil in Louisiana, claiming that their treatment of LOC

units as “properties” has resulted in over a billion dol-

lars in overcharges.

The Office of Special Counsel (“OSC”) initiated an

audit of Texaco’s domestically produced crude oil sales on

August 1, 1977. On January 24, 1978, OSC issued a No-

tice of Probable Violation (“NOPV”) to Texaco, which

set forth the findings of the audit and identified particu-

lar instances where OSC had tentatively concluded that

Texaco had sold domestically produced crude oil at prices

in excess of the maximum lawful selling price. Certain of

these instances were with respect to crude oil produced

from properties in Louisiana.

The Proposed Remedial Order (“PRO”) * issued to

Texaco on May 1, 1979, alleged that Texaco had violated

the price regulations applicable to the first sales of do-

mestically produced crude oi] and that for the period Sep-

tember, 1973, through March, 1979, the overcharges re-

sulting from these violations amounted to not less than

$748,801,210.00, plus interest. Louisiana claims that if

it must repay all the taxes and royalties that it has col-

lected on that alleged overcharge, its liability for that

item alone could amount to $160 million. Texaco filed a

timely Notice of Objection to the PRO. The ongoing ad-

®If DOE determines that violation of its regulations has oc-

curred, the next step is issuance of a Proposed Remedial Order

(“PRO”), which must set forth the proposed findings of fact and

conclusions of law upon which it is based. 10 C.F.R. §§ 205.192(a)

and (d). If the PRO is contested by the recipient by filing a Notice

of Objection, the matter proceeds to an adversary, adjudicatory

proceeding before the Office of Hearings and Appeals (“OHA") of

the DOE. 10 C.F.R. § 205.193(a).

8la

ministrative proceedings before the Office of Hearings

and Appeals (“OHA’’) are currently in the discovery

stage.

Following the institution of administrative proceedings

against it for alleged overcharges, Texaco filed suit

against DOE in the United States District Court for the

District of Delaware on July 3, 1979.

Louisiana and LL&E were granted leave to intervene

as of right in the Delaware action, under Rule 24(a) of

the Federal Rules of Civil Procedure, by order of the

Court.

On August 27, 1979, DOE moved to dismiss the action

on the ground that the action was not ripe for pre-

enforcement review and that the plaintiffs had not ex-

hausted their administrative remedies.

On May 6, 1980, the Honorable Judge Walter K.

Stapleton issued his Order and Opinion in Texaco, Inc.,

et al. v. Department of Energy, et al., 490 F.Supp. 874

(D.Del.1980) (“Texaco”). Judge Stapleton dismissed the

complaints of Texaco and LL&E, and found that the

court lacked jurisdiction because the claims were not ripe

for judicial review. Judge Stapleton declined to rule on

DOE’s motion to dismiss the complaint of Louisiana, not-

ing his intent to await the Answer of the agency in which

it could assert improper venue under 28 U.S.C. § 1891 (e).

On May 15, 1980, Louisiana noticed its voluntary dis-

missal of the action in Delaware, and on May 27, 1980,

it filed the instant action in the U.S. District Court for

the Western District of Louisiana. This Court granted

Texaco’s motion to intervene in this action by an Order

issued June 23, 1980. It similarly granted LL&E leave

to intervene in this action by an order issued July 2,

1980.

32a

Lack of Standing

DOE claims that since Louisiana is alleging injury to

its citizens generally as a result of lost tax revenues,

Louisiana is attempting to bring this action as parens

patriae on behalf of its citizens. Without conceding that

loss of tax revenues is solely an action based on parens

patriae, plaintiff had admitted in its argument‘ that it

does not sue in parens patriae on behalf of its citizens

but for loss of tax revenues.

Therefore, it must be decided whether or not Louisiana

has a proprietary interest to sue as a taxing sovereign

and royalty owner to determine standing. In Association

of Data Processing Service v. Camp, 397 U.S. 150, 90

S.Ct. 827, 25 L.Ed.2d 184 (1970), the Supreme Court

delineated a two-part test for determining whether a

party has standing to challenge administrative action;

first, the plaintiff must demonstrate that it has suffered

an injury in fact, and, second, that the plaintiff's inter-

ests are arguably within the zone of interests to be pro-

tected or regulated by the statute in question.

DOE asserts that Louisiana cannot meet the first part

of the test since its claim of injury is no more than spec-

ulation that it may be required to reimburse producers

for overpayments of severance taxes and royalties in the

future. Louisiana may, however, start receiving less

severance taxes and royalties in the not too distant fu-

ture. Further, the argument by the DOE that only the

possibility exists that the agency will determine that pro-

ducers have violated the federa! price regulations because

of their designations of LOC units as separate proper-

ties is not realistic and cannot be accepted by this Court.

To turn that argument around, it is more likely there is

only a possibility that the agency will determine that pro-

ducers have not violated the federal price regulations.

-

* Page 50 in oral argument, October 3, 1980,

DOE contends that Louisiana cannot meet the second

requirement of the standing test because its interests do

not come within the zone of interests to be protected.

DOE asserts that Section 211 of the Economic Stablization

Act of 1970, 12 U.S.C, § 1904 is extended only with re-

spect to final agency action and in the instant case, the

agency has issued no final determination that producers

of crude oil are in violation of the federal price regula-

tions for their designation of LOC units as separate

properties.

It should be noted that Louisiana is not challenging the

enforcement proceedings that DOE has brought against

producers in Louisiana, but the DOE's position on prop-

erty which Louisiana asserts is final. This position was

made by DOE in the Texaco case, and it was properly re-

jected by the Court, at 490 F.Supp. 885, 886:

(P)laintiffs primarily seek not review of the agency’s

enforcement proceeding currently proceeding against

Texaco, but rather extraenforcement review of the

DOE regulatory pronouncements upon which the en-

forcement proceeding is concededly predicated, Rul-

ings 1975-15, 1977-1, and 1977-2, as well as the no-

tice issued August 20, 1976... (I)t is unmistak-

able . . . that their quarrel is with the regulations

rather than the compliance proceeding.

Further, the DOE conceded that the OHA is bound to

treat the challenged regulation as valid in the Delaware

action. As Judge Stapleton explained at 490 F.Supp. 886

n. 17:

At oral argument counsel for the DOE conceded that

the OHA would be bound to treat the challenged reg-

ulations as valid and took no position as to FERC’s

authority to disregard them or to find them to be

invalid, Tr. of Oral Argument at 118.

A DOE ruling is an interpretation of general applicabil-

ity. 48 Fed.Reg. 3569 (January 26, 1978). Such a ruling

is not subject to administrative appeal. 10 C.F.R.

§ 205.154 (1980).

84a

It is clear as Judge Stapleton found: Neither the

DOEA nor the relevant regulations indicate that

DOE will consider the validity of the challenged reg-

ulations at a subsequent stage of the compliance

process. (490 F.Supp. at 886)

An agency position “is clearly ‘final agency action’. . .

(where it) will not be the subject of any further pro-

ceedings at the (agency).” Lcee, Inc. v. Federal Energy

Regulatory Commission, supra, 611 F.2d at 557, As the

Lake Charles Division of this Court has stated:

The label an agency attaches to its action is not dis-

positive. The action may be reviewable even though

it is an announcement of a rule or policy that the

agency has not yet put into effect. Dow Chemical,

supra, 459 F.Supp. at 386.

Claims Not Ripe for Judicial Review and Plaintiffs

Have Failed to Exhaust Administrative Remedies

DOE takes the position that the claims raised by

Louisiana are not ripe for judicial review.

The application of the ripeness doctrine to pre-

enforcement judicial review of administrative actions re-

quires that the reviewing court, before undertaking re-

view of a purported agency action, finds that the follow-

ing four factors are all present: (1) the issues presented

are purely legal, (2) the issues arise out of final agency ac-

tion, (8) the controversy has a direct and immediate im-

pact on plaintiff's business, and (4) litigation of the con-

troversy will expedite final resolution of the matter rather

than delay or impede effective agency enforcement efforts.

Abbott Laboratories, Inc. v. Gardner, supra; Toilet Goods

Association, Inc, v. Gardner, 387 U.S. 158, 87 S.Ct. 1520,

18 L.Ed.2d 697 (1967); Bankers Life & Cas. Co, v, Calla-

way, 530 F.2d 625 (5th Cir, 1976) ; Pennzoil Company v.

Department of Energy, 466 F.Supp. 288 (D.Del.1979) ;

Phillips Petrolewm Co, v. Federal Administration, 435

F. Supp. 1289 (D.Del. 1977).

The question as to whether the issues presented are

purely legal has been partially covered, Louisiana is not

asking this Court to examine any particular LOC unit to

determine if it meets the regulatory “criteria”, Rather,

Louisiana asks this Court to examine the applicable reg-

ulations, rulings and interpretations and to declare what

the proper “criteria” are. Any factual controversy as to

whether producers’ designations properly conformed to

the correct interpretation of “property” is severable from

the issue of what that correct interpretation is.

The essence of Louisiana’s claims is that DOE, in its

August 20, 1976 rulemaking, restated in Ruling 1977-1,

improperly interpreted the 1978 CLC definition of “prop-

erty”. This claim raises two purely legal issues: (i)

whether DOE’s interpretation is valid; and, (ii) if

DOE’s interpretation is valid, whether it is the only rea-

sonable interpretation and thereby entitled to retroactive

application.°

As Judge Stapleton found in the Texaco case, this Court

also finds that plaintiff herein does not ask this Court to

determine whether any property involved in the RO pro-

ceeding does or does not violate Rulings 1975-15, 1977-1,

and 1977-2. The resolution of the legal issues raised by

plaintiff do not fall within the special competence of the

DOE or require further development of a factual record.

Each requires this Court only to examine the language of

the regulations, in the context of the Congressional intent

behind the applicable statutes, and the relevant regulatory

decisions.

DOE contends that there has been no “final agency ac-

tion” on the position that LOC units per se may not be

treated as separate properties for purposes of price regu-

lations. The DOE’s interpretation in Rulings 1977-1 and

5 Whether DOE employed the proper administrative procedures in

arriving at its interpretation has been withdrawn from the Court's

consideration in view of Louisiana's Amended Complaint,

86a

1977-2, in this Court’s opinion, constitutes the Depart-

ment’s final position on the “property” definition,

The regulations allow certain state-recognized produc-

ing reservoirs to be treated as separate properties by

virtue of state recognition alone, but such treatment

would be effective only from September 1, 1976, onward.

That final position has certainly caused injury to

Louisiana,

Even if OHA can reconsider DOE’s “property” inter-

pretation, this Court should not withhold review. Herein,

the lines are drawn, the positions are taken and the mat-

ter is ripe for judicial review. State of Florida v, Wein-

berger, 482 F.2d 488 (5th Cir, 1974),

DOE asserts that the controversy does not have a direct

and immediate impact on Louisiana, and that a potential

injury to its treasury is insufficient to support a finding

of the kind of hardship which is sufficiently direct and im-

mediate as to render the issue appropriate for judicial

review at this stage. In support of this position, DOE

relies on the decision of the Delaware case, wherein Judge

Stapleton stated that Texaco and LL&E were not con-

fronted with a direct and immediate hardship, supra,

490 F.Supp. at Page 888:

In the typical case, though the Court conducts a

searching inquiry to determine whether the party

seeking relief satisfies the hardship requirement of

the ripeness doctrine, it is taken for granted that the

plaintiff is subject to the challenged action, that

compliance with the action is expected by the agency,

and that compliance will entail costs for the plaintiff.

See, ¢.g., National Automatic Laundry and Cleaning

Council v. Schultz, [148 U.S. App.D.C, 274], 448

F.2d 689 (D.C.Cir, 1971) ; Pennzoil v. Department of

Energy, swpra, 466 F.Supp. 288; Romeo Community

Schools v. Department of Health, Education, and

Welfare, 488 F.Supp. 1021, 1028 (E.D,.Mich.1977).

87a

In the instant case, however, Texaco denies that com-

pliance with the DOE regulations it seeks to chal-

lenge will impose any costs upon it by asserting, in

its “secondary” position, that it has not violated

those regulations, While the pricing dilemma Texaco

would face might satisfy the hardship requirement

were it clear that it violated the regulations, I do

not understand how Texaco can be placed on the

horns of a pricing dilemma by regulations with

which it purports to comply and with which the DOE

has yet to determine it does not comply. In short,

Texaco has failed to allege or show that compliance

with the DOE regulations it challenges will impose

any costs upon it, let alone place it on the horns of an

ongoing pricing dilemma,

DOE contends that Louisiana’s position in the present

controversy is the same as that of LL&E in the Delaware

case, and that position finds some support in Judge

Stapleton’s opinion, at Pages 34-35;

In the absence of either a final DOE determination

that LOC units in which LL&E holds a... royalty

interest are designated as properties in violation of

the challenged regulations or a concession to that

effect by LL&E, therefore, the hardship it fears is

simply too speculative to permit judicial review at

this time.

« om a .

Like Texaco’s and LL&E’s complaints, Louisiana's

makes the alternative assertions that Texaco’s LOC

units may be designated as properties consistent with

the challenged regulations and that the regulations

are invalid only to the extent that they purport to

prohibit such designations, Accordingly, any hard-

ship which Louisiana may suffer as a result of DOE

action with respect to Texaco’s pricing practices is

also too speculative under the ripeness doctrine to

justify immediate judicial review.

However, Louisiana contends that it is presently re-

ceiving reduced royalties from some oil produced from

properties it owns and is receiving diminished severance

taxes from some of the oil produced in the State,

Producers who have followed, or are following, DOE's

ruling that the leasehold, rather than the LOC unit, de-

fines the “property” have paid and are paying to Louisi-

ana, reduced severance taxes and royalties,"

In Com, of Pa, by Shapp v. Kleppe, 174 U.S.App.D.C,

441, 583 F.2d 668 (1976), the Court recognized the prin-

ciple that lost tax revenues could confer standing where

there existed “some fairly direct link between the state's

status as a collector and recipient of revenues, and the

legislative or administrative action being challenged,”

The injury need not occur prior to judicial review and

agency action may be reviewable even though it is never

to have any formal effect. Dow Chemical v, Conawmer

Product Safety Commission, 459 F.Supp. 3878, 386

(1978). In State of Florida v. Weinberger, supra, 492

F.2d at 492, the Court found sufficient injury to Florida

in the choice between undertaking “likely financial out-

lay, and certain legislative and administrative effort” or

* Producers who have stopped treating LOC units as “propertie,”

on the basis of DOE's view of “property” as a leaschold have

sought from the State recoupment of allegedly excess royalties

paid, On September 11, 1978, there were pending before the State

Mineral Board claima for recoupment of supposedly excess royal

ties paid, based on oil pricing decisions by companies where there

had been no FEA audit, of $393,842,81, Not all of these claima

were based on changes in the treatment of “properties”, However,

one claim waa by Shell Oil Company for $86,116.00 based on its

view that it had improperly treated an LOC Proration Reservoir

as a separate “property” and had overpaid royalties in that amount,

Also, Kerr-MeGee Corporation, on being accused by DOE of over-

charges in excesa of one million dollara because it treated LOC

reservoir unita as separate “properties”, demanded recoupment of

$128,501.19 in royalties,

89a

undergoing the “risk (of) the at least termporary loss

of funding which a conformity hearing . . . could well

produce.”

Louisiana is not merely a complainant whose rights are

affected only on the contingency of future administra-

tive action. Producers other than Texaco which make

royalty and severance tax payments to Louisiana have

acceded to the views which they believe are expressed in

Rulings 1975-15, 1977-1, and 1977-2, and have thereby

refunded the overcharges resulting from their earlier

treatment of multiple LOC’s located on a single premises

as multiple properties, and have made claims against

Louisiana for refunds of corresponding amounts of

royalty and severance tax payments.

Therefore, it appears that only prompt resolution of the

overriding legal question—to interpret the regulation

which defines property as a right to produce from a

lease or a fee interest—can alleviate any injury that

Louisiana has experienced as a result of DOE’s action.

The Court feels that the resolution of this legal ques-

tion will foster rather than impede the final resolution of

this matter.

Action Should Be Stayed Under the

Doctrine of Primary Jurisdiction

DOE contends that this action should be stayed under

the doctrine of primary jurisdiction. In Mississippi

Power & Light Co. v. United Gas Pipe Line, 582 F.2d

412 (5th Cir. 1976), cert. denied, the Fifth Circuit

elucidated the purpose of primary jurisdiction:

When legal disputes develop that directly affect an

industry subject to regulation, the need arises to in-

tegrate the regulatory agency into the judicial deci-

sion making process. One method to accomplish in-

tegration is to have the agency pass in the first in-

stance on those issues that are within its competence.

40a

In short, the agency should have the first word (Id.

at 417 (emphasis added).)

As suggested by plaintiff, here the DOE had the “first

word” but its first word was also its final word. In Phil-

lips Petroleum Co. v. Federal Energy Administration,

supra, the Court stated 435 F.Supp. at Page 1249:

The FEA has already had the first word and made

final decision on the legal issues for determination

before this Court. Plaintiffs here simply seek re-

view of the final agency decision, calling into ques-

tion the meaning and validity of the relevant regu-

lations. Thus, the doctrine of primary jurisdiction

is inapplicable to this litigation with respect to the

issues finally determined by the FEA. (435 F.Supp.

at 1249 (citations omitted; emphasis added).)

In Standard Oil Co. v. Federal Energy Administra-

tion, 440 F.Supp. 328, 371 (1977), the Court declined to

accept FEA’s invitation to refer to the agency issues to

which the agency had reached a final position.

Texaco and LL&E as Intervenors

Since this Court feels that Louisiana is properly before

the Court, is is unnecessary to consider whether Texaco

meets the standards for ripeness or exhaustion of admin-

istrative remedies, and Judge Stapleton’s decision in the

Delaware case is not a bar to Texaco’s intervention in

this action. Therein, Judge Stapleton held that Texaco

failed to m * one of the four requirements of ripeness

but that holding cannot be a bar on the ground of res

judicata because ripeness is not required for intervention

as of right under Rule 24 of the Federal Rules of Civil

Procedure. At this point, the question is whether the

prospective intervenor has a sufficient stake in the out-

come and enough to contribute to the resolution of the

controversy to justify his inclusion. Trbovich v. United

Mine Workers, 404 U.S. 528, 92 St.Ct. 630, 30 L.Ed.2d

4la

686 (1972).' Since the regulations and rules placed in

issue by Louisiana herein are the same regulations and

rules under which the DOE has charged Texaco with ex-

ceeding by almost $800 million the authorized price for

domestic crude produced by Texaco, it is clear that

Texaco has a sufficient stake in this controversy.

What has been said in regard to Texaco is equally ap-

plicable to LL&E. LL&E is a working or royalty inter-

est owner in a number of crude oil producing properties

in Louisiana, the production of which consistently has

been accounted for and priced on the basis that LOC units

may be designated as separate “properties” under the

Mandatory Petroleum Price Regulations (“MPPR”). In

the event that LL&E’s contention that LOC units consti-

tute separate properties is rejected, recently initiated in-

ternal audits which have been conducted by LL&E have

revealed that crude oil production from certain of the

LL&E properties have been sold at a price which would

be unlawful under the MPPR. Consequently, LL&E will

be subject to substantial refund and penalty require-

ments, and the decision adverse tv the plaintiff, Louisi-

ana, in this litigation, would have immediate and sub-

stantial harmful impact upon the interests of LL&E.

Furthermore, if 10 C.F.R. § 212.72 is construed to dis-

allow LOC units as separate properties, LL&E has ascer-

tained and now concedes that it has no other factual or

legal basis for the prices charged for crude oil production

from a number of its substantial Louisiana properties at

issue in the enforcement proceedings.

For the record, this Court would differ with Judge

Stapleton’s conclusion that since plaintiff contends that

producers have not violated federal price regulations, the

claims are not ripe for judicial review. We live in a real

™See also Shapiro, Some Thoughts On Intervention Before

Courts, Agencies, and Arbitrators, 81 Harv.L.Rev. 721, 726 (1968),

cited in Trbovich v. United Mine Workers, 404 U.S. at 536 n.7, 92

S.Ct. at 635 n.7.

42a

world. This Court cannot, under real world standards,

believe that the PRO issued by the DOE to Texaco on May

1, 1979, alleging overcharges approaching $800 million

are totally unfounded under the DOE’s applied criteria

and will be rejected in the administrative proceedings.

As the Court stated in Phillips Petrolewm v. Federal En-

ergy Administration, supra, 485 F.Supp. at 1248 (1977),

“A Court should not stand aside just because there is

available to the plaintiff some collateral agency proceed-

ings that hold out the possibility of some kind of relief.”

Conclusion

In 1978, following the presidential decision to freeze

the price of domestic crude oil, the CLC promulgated reg-

ulations under which the price at which crude oil could

be sold depended on the vintage of the “property” from

which it was produced. CLC defined “property” as “the

right which arises from a lease or from a fee interest to

produce domestic crude petroleum”. Since that time,

Louisiana and producers within the state have regarded

LOC-recognized production units as “properties” under

that definition.

Whether the designation of LOC units per se as “sep-

arate properties” is valid under the proper interpreta-

tion of the regulatory definition of property is not before

the Court. The agency will apply the federal regulations

which set forth when a property may be designated as a

property. Louisiana has a separate criteria which it uses

for the purpose of its conservation !aws; i.e, LOC

designations.

However, the DOE remained silent after 1973, as to

the interpretation and application of the property concept

for almost two years and producers construed this regu-

lation to permit them to treat LOC units as separate

properties. Was that reasonable? Not necessarily so.

There may be LOC units that cannot be reasonably in-

43a

terpreted to be consistent with the goals to control infla-

tion and stimulate increased production.* The DOE will

have to make such a determination under its ongoing pro-

ceedings. On the other hand, there may be LOC units

that clearly qualify, but not because they are LOC units.

In the August, 1976 preamble to the amended definition

of property, the FEA implied that as originally drafted,

§ 212.72 prohibited the designation of LOC units as prop-

erties and asserted for the first time that 1975-15 had ex-

pressly precluded the designation of “separate pools and

reservoirs” as individual properties even if recognized

by state regulatory agencies. Further, the FEA an-

nounced its intention to enforce this interpretation on a

retroactive basis against producers, and at the same time,

permitted producers to treat as a separate property,

each separate and distinct producing reservoir but only

prospectively from September 1, 1976." This Court can

only conclude that if this is just and right, then all we

have been taught in the past is wrong. The meaning of

“property” as treated herein should be constant. It should

not change with a chage in the economic and political cli-

mate. If the DOE will accept LOC reservoir-wide units

as property after September 1, 1976, it was certainly

reasonable for producers to treat them as properties be-

fore 1976.

It is clear that the original property definition was am-

biguous and subject to various “good faith interpreta-

tions”. 41 Fed.Reg. 3172 (Aug. 20, 1976).'"° Even when

®The DOE contends that the primary Congressional objective

was to stem the tide of inflation by limiting the price of oi] and

“nowhere did Congress require the President to affirmatively en-

courage oil production”. Due to the seriousness of the oil shortage,

it goes without saying that a primary goal of Congress was to in-

crease production, otherwise there would be no reason to establish

an upper tier price.

41 Fed.Reg. 36172, 37179 (August 26, 1976).

10In Grigsby v. Department of Energy, 585 F.2d 1069, modified

om rehearing, 585 F.2d 1080 (Em.App.1978), cert. denied, 440 U.S.

44a

you play “pin the tail on the donkey”, the rules require

that you turn the blindfolded participant in the right di-

rection. The cases are clear that a post hoc agency in-

terpretation of an ambiguous regulation should not be en-

forced retroactively against a regulated party who adopted

and applied an alternate reasonable interpretation of the

regulation during the period between the initial promul-

gation of the ambiguous regulation and the later agency

interpretation. Standard Oil Co. v. Federal Energy Ad-

ministration, 453 F.Supp. 203 (1978) ; Phillips Petroleum

Co. v. Federal Energy Administration, 449 F.Supp. 760

(1978) ; Standard Oil Company v. Department of En-

ergy, 596 F.2d 1029 (Em.App.1978).

The defendants’ Motion to Vacate the orders granting

intervention to Texaco and LL&E is DENIED, and the

Court will allow intervention by Texaco and LL&E under

Rule 24(a) of the Federal Rules of Civil Procedure.

The Court will deny the defendants’ Motion to Dismiss

the complaint of Louisiana, and consider the question of

whether separate and distinct producing reservoirs that

qualify as .eparate properties under the amended 1976

definition would have been a valid and reasonable inter-

pretation under the regulatory definition of properties

from August 19, 1973, to September 1, 1976."

908, 99 S.Ct. 1216, 59 L.Ed.2d 456 (1979), the Court held that

“property is to be defined as the ‘right to produce’”, at Page 1083:

The focus of the “property” definition is upon the “right to

produce,” not the fee or leasehold nature of the ownership

interest ...

> 7 * *

The “right to produce” arises from a combination of sources,

including, but not limited to, the nature of the ownership

interest, contractual extension or restriction of ownership in-

terest, and orders of state regulatory agencies ... Although

the fee or leasehold interest may be the origin of the “right

to produce”, such a “right to produce” is controlled, limited,

or extended by contractual agreement and state authoriiies.

11 August 19, 1973 was the effective date of the two-tier pricing

system for crude oil and September 1, 1976 was the effective date

DOE interpreted property as used in the 1973 definition to be

synonymous with the surface acreage of the lease or fee interest.

45a

APPENDIX E

UNITED STATES DISTRICT COURT

W. D. LOUISIANA

LAFAYETTE-OPELOUSAS DIVISION

Civ, A. No, 800812

STATE OF LOUISIANA,

Plaintiff,

TEXACO, INC.,

THE LOUISIANA LAND AND EXPLORATION COMPANY,

Intervening Plaintiffs,

Vv.

DEPARTMENT OF ENERGY and CHARLES W. DUNCAN, JR.,

Secretary of Energy,

Defendants.

July 7, 1981

Camp, Carmouche, Palmer, Barsh & Hunter, Harry

E. Barsh and David R. Frohn, Lake Charles, La., for

plaintiff.

Morris, Nichols, Arsht, & Tunnell, Andrew B. Kirk-

patrick, Jr. and Lawrence A. Hamermesh, Wm. 0.

LaMotte, Wilmington, Del., for intervenor—Texaco.

Bracewell & Patterson, Roger L. Reynolds, and Darci

L. Rock, Washington, D.C., Milling, Benson, Woodward,

Hillyer, Pierson & Miller, J. Henry Phillips, III, New

Orleans, La., for LA Land & Exploration Co.

Allan Abbot Tuttle, Patton, Boggs & Blow, Washing-

ton, D.C., for State of La.

Caffery, Oubre & Dugas, Patrick T. Caffery, New

Iberia, La., for defendants.

J. Ransdell Keene, Frances O. Allen, Shreveport, La.

and Dennis G. Linder, Branch Director, Michael T.

46a

Scott, Civil Division, Dept. of Justice, Washington, D.C.,

Nancy Cirsman and Judith Mather, Regulatory Litiga-

tion Division, Washington, D.C., David R. Hughes, Dept.

of Spec. Counsel, Washington, D.C., for Dept. of Energy.

Frederick W. Veters, New Orleans, La., Stephen H.

Bard, Texaco, Inc., White Plains, N.Y., for Texaco.

RULING ON MOTION

SHAW, District Judge.

This matter involves a Motion for Summary Judg-

ment by plaintiffs, State of Louisiana (“Louisiana”),

Texaco, Inc. (“Texaco”), and the Louisiana Land and

Exploration Company (“LL&E”), in accordance with

Rule 56(a) of the Federal Rules of Civil Procedure. The

plaintiffs in this case respectfully ask this Court to

declare:

1. That reservoir-wide LOC production units are

“properties” within the meaning of the original

property definition;

2. That the contrary position of the DOE is errone-

ous; and,

8. That, under all the circumstances, crude oil pro-

ducers in Louisiana have been entitled to rely,

since August, 1973, upon a reasonable interpreta-

tion of the “property” definition to treat separate

reservoir-wide LOC units as properties under the

MPPR. The plaintiffs further request this Court

to enjoin the defendants from seeking to enforce

a property definition which conflicts with the

above declarations of law.

In addition to the Finding of Fact and Conclusions

of Law set forth in State of Louisiana v. Department of

Erergy, 507 F.Supp. 1865 (1981), this Court makes the

following additional findings and conclusions:

47a

The defendants, Department of Energy (“DOE”),

claim that the Court has invented an issue which is not

actually before it, as the plaintiffs never adopted and

applied the interpretation of “property” suggested by the

Court. As to the first point, the Court cannot accept

the honor, for one cannot claim as his invention that

which is obvious. Plaintiffs could have applied the in-

terpretation suggested by the Court as it would have

afforded the lesser relief which was included in the

greater relief sought.

DOE contends that there is nothing contained in any

statewide orders or the appropriate statutes which indi-

cates that LOC engages in a determination of reservoir

dimensions prior to the issuance of a drilling permit.

It is undisputed that Louisiana recognizes production

units based on the geological limits of a producing reser-

voir which lies entirely within the surface boundaries

of a single lease. State of Louisiana v. Department of

Energy, supra, at 1368. The right to produce may arise

from more than one basis or designation. If producers

elect one method they should not be required to abandon

another. For instance, Texaco selected a bookkeeping

method that it already had in place and correlated with

an interpretation of “property” which included reservoir-

wide LOC units as “properties”.

The LOC is the agency primarily responsible for the

regulation of the production of oil and gas within the

State of Louisiana. The Commissioner has jurisdiction

and authority over all persons and property necessary

to enforce the laws of Louisiana relating to the conser-

vation of oil and gas. LSA-R.S. § 30:4(A). The Com-

missioner is also specifically authorized by statute to

make reasonable rules, regulations and orders to limit

and prorate the production of oil and gas from any pool

or field for the prevention of waste. LSA-R.S. § 30:4(C).

The fulfillment of this objective requires that the in-

tegrity of the oil and gas reservoir, or pool, be main-

48a

tained. Therefore, the exhibits and affidavit filed in

support of the Motion for Summary Judgment clearly

show that each separate and distinct producing reser-

voir is recognized and can be determined by LOC as a

producing formation that is separate and distinct from,

and not in communication with, any other producing

formation. The comprehensive system established by LOC

was in operation prior to the establishment of the two-

tier system for regulating crude oil prices by CLC.

In Grigsby v. Department of Energy, 585 F.2d 1069

(Em. App. 1978), TECA held that the drilling unit and

not the lease, controlled and defined the “property” desig-

nation. A large percentage of crude oil production in

Louisiana, is derived from premises owned by the state

and leased to producers. Such leases extend to cover

many square miles and encompass many reservoirs. If

the property was the lease, even the most successful

efforts at new or increased production for some reser-

voirs might be offset by the general decline in produc-

tion from existing producing reservoirs resulting in less

incentive to discover and develop new reservoirs contrary

to the goal to stimulate increased production. Because

reservoir-wide production units reflect geological facts,

they are not subject to gerrymandering. Thus, the desig-

nation of such units as properties is consistent with the

objectives of the two-tier pricing system established in

1973.

As this Court stated in its original opinion, deference

to an agency interpretation is not warranted when an

agency attempts retroactively to impose an interpretation

of an ambiguous regulation, when that interpretation,

even if reasonable, is not compelled, and when the regu-

lated parties have adopted equally reasonable, if not

more reasonable, interpretations of the regulation. Stand-

ard Oil Co. v. Department of Energy, 596 F.2d 1029,

1056 (Em. App. 1978) Extraordinary circumstances ex-

49a

ist herein and Standard Oil III teaches that this Court

should not apply the rule of deference in this case.

The DOE, itself, admitted in its hearings before a

Congressional subcommittee that the property definition

was ambiguous and unclear, and that the meaning had

not been clear to the agency. 41 Fed. Reg. 36172, 36175,

August 20, 1976. Further, the DOE did not decide upon

or publicly announce its interpretation of the property

definition until the end of the relevant period; i.e., until

August, 1976. Yet, only a few months earlier, in April,

1976, DOE announced that it had concluded, albeit tenta-

tively, that reservoir-wide LOC production units could be

properly designated as properties.

The defendants’ latest memorandum and supporting

documents fail to convince the Court that there is a

genuine issue as to any material fact or that there is any

need for discovery. The Court finds that the plaintiffs’

interpretation was reasonable. Separate and distinct pro-

ducing reservoirs that qualify as separate properties un-

der the amended 1976 definition is a valid, reasonable

and enforceable interpretation of the regulatory defini-

tion of “properties” from August 19, 1973, to August 20,

1976. The Motion for Summary Judgment filed on be-

half of the plaintiffs to that extent, is GRANTED.

The defendants, Department of Energy and James B.

Edwards, Secretary of Energy, are hereby enjoined and

prohibited from proceeding administratively against

plaintiffs producing oil in Louisiana, for the period in

question on the basis of a property definition which

conflicts with the above declarations of law.

Further, it is not necessary that the Court decide

whether the Federal Energy Administration’s August 20,

1976 rulemaking and Rulings 1977-1 and 1977-2 are

invalid to any extent, as the Court finds they cannot be

enforced against plaintiffs for the period August 19,

1973, through August 20, 1976.

50a

Further, the Court need not determine whether the

judicial review provisions of the Economic Stabilization

Act limits the injunctive power of district courts to

parties before it because this Court has no intention of

enjoining enforcement action against all persons produc-

ing crude oil in Louisiana. Any units that are not recog-

nized by state authority are not at issue in this case.

The only reservoir-wide LOC units that are the subject

of this action require LOC approval prior to their estab-

lishment.

The Court also feels that the initial promulgation of

the property definition is not invalid but that fact does

not remove this case from the principle enunciated in

Standard Oil, as it offered no clue whatsoever to pro-

ducers that separate and distinct producing reservoirs,

as treated herein, would not qualify as separate prop-

erties. The DOE formulated or made its position clear

only after the relevant period in question herein.

The Court will GRANT the plaintiff’s Motion for Sum-

mary Judgment, pursuant to the reasons stated above.

5la

APPENDIX F

10 C.F.R. § 212.72 Definitions.

BASE PRODUCTION CONTROL LEVEL

“Base Production Control Level” for a particular month

for a particular property means:

(1) if crude petroleum was produced and svld from

that property in every month of 1972, the total num-

ber of barrels of domestic crude petroleum produced

and sold from that property in the same month of

1972;

(2) if domestic crude petroleum was not produced

and sold from that property in every month of 1972,

the total number of barrels of domestic crude petro-

leum produced and sold from that property in 1972

divided by 12.

89 Fed. Reg. 1924 (Jan. 15, 1974), originally codified as

6 C.F.R. § 154(b), 38 Fed. Reg. 22536, 22538 (Aug. 22,

1973). This definition was amended by substituting

“crude oil” for “crude petroleum” effective August 30,

1974. 39 Fed. Reg. 31622 (Aug. 30, 1974).

PROPERTY

“Property” is the right which arises from a lease

or from a fee interest to produce domestic crude oil.

NEW CRUDE PETROLEUM

“New crude petroleum” means the total number of

barrels of domestic crude petroleum produced and

sold from a property in a specific month less the

base production contro] level for that property.

89 Fed. Reg. 1924 (Jan. 15, 1974), originally codified at

6 C.F.R. § 154(b), 38 Fed. Reg. 22586, 22588 (Aug. 22,

1973).

52a

APPENDIX G

RULES AND REGULATIONS

Title 10—Energy

CHAPTER II—FEDERAL ENERGY

ADMINISTRATION

PART 212—MANDATORY PETROLEUM

PRICE REGULATIONS

Clarification to Mandatory Petroleum Price Regulations

Applicable to Domestic Crude Oil

On April 18, 1976, the Federal Energy Administration

(“FEA”) gave notice (41 FR 16179, April 16, 1976) of

a proposed rulemaking and public hearing to consider

clarifications to certain technical aspects of the Manda-

tory Petroleum Price Regulations applicable to domestic

crude oil (10 CFR Part 212, Subpart D).

The FEA did not propose in this rulemaking proceed-

ing to alter any of the major policy decisions already

reached, or now under consideration, in the three rule-

making stages to implement the crude oil pricing policies

of the Energy Policy and Conservation Act (“EPCA,”

Pub. L. 94-163). Rather, the purpose of the present

rulemaking proceeding has been to resolve as many as

possible of a variety of more technical subsidiary issues

that have arisen in connection with the implementation

of the EPCA. These issues include those related to the

definition of “property” and “posted price; whether a

well is properly classified as an “oil well” for purposes of

the stripper well lease rule; the partial rescission and

modification of Ruling 1975-15, including the issue

whether a property’s producing patterns have been “sig-

nificantly altered” for purposes of the enhanced recovery

rule applicable to unitized properties (10 CFR 212.75) ;

and whether the certification of domestic crude oil sales

presently required in 10 CFR 212.131 is adequate to en-

able crude oil purchasers to report on the Form FEA-

53a

P124-M-0, Domestic Crude Oil Purchaser’s Monthly Re-

port, notice of which was also issued on April 13, 1976.

In this proceeding, written comments were received

from more than 45 interested persons, and public hear-

ings were held in Denver, Colorado; Dallas, Texas; and

Washington, D.C., at which oral presentations were re-

ceived from more than 45 interested persons. After con-

sideration of all the written and oral presentations, the

FEA has determined that certain actions should be taken

at this time.

I. THE DEFINITION OF “PROPERTY”

A. Outline of Common Legal Relationships in Crude Oil

Production

Before discussing the purpose and intent of the crude

oil pricing regulations and the definition of “property,” a

brief outline of the general nature of the legal relation-

ships pursuant to which crude oil is typically produced

should prove helpful in affording a better understanding

of the issues involved.

Crude oil which can be commercially produced gen-

erally must be found in underground reservoirs—geologi-

cal formations which have trapped a sufficient quantity

of marketable crude oil to make production economically

feasible. The nature of the interests which may exist

in crude oil is extremely complex. In the simplest case,

the owner of land in fee is generally entitled to produce

and dispose of any crude oil which may be recovered by

wells on that land. This right is not unqualified, how-

ever, but is subject to laws and regulations, which have

been adopted in various states for conservation and other

purposes, and to various legal doctrines which have

evolved with respect to protection of the correllative

rights of other parties, such as adjoining landowners,

that may be affected by the landowner’s production of

crude oil.

54a

In the typical case, however, the landowner does not

exercise the right to produce crude oil which is inherent

in the fee interest; rather, the various rights, powers,

privileges, and immunities associated with the ownership

of land in fee (and the crude oil which may be recovered

therefrom) are transferred or otherwise divided among

several parties. Although the nature of the interests

which may be created by such transactions is virtually

limitless, certain principal rights have been grouped to-

gether with sufficient frequency that they may be gen-

erally described as follows:

(a) Mineral interests,

(b) Royalty interests, and

(c) Leasehold interests.

Thus, the owner of the land may grant to others (or

reserve to himself) the right to go upon the land and

remove therefrom the crude oil (or other minerals) which

may be found beneath the surface, thus separating this

right (the “mineral interest”) from the balance of rights

otherwise appurtenant to the ownership of land.

The owner of the mineral interest may, in turn, exe-

cute what is generally known as an oil and gas lease,

which typically conveys ‘he right to go upon the land for

the purpose of prospecting for and producing crude oil

(the “leasehold interest”). Such leases are typically for

a term of years, subject to extension in the event crude

oil is produced from the land during the term described

in the lease. In consideration for receiving such a “lease-

hold interest,” the lessee usually agrees to deliver to the

lessor free of cost a share of the crude oil produced from

the land (said to be taken by the lessor “in kind”), or a

share of the proceeds of such crude oil produced and sold

from the land. This right, typically retained by the

holder of the mineral interest, to a share of production

or proceeds is described as a “royalty interest.” (See gen-

erally 1 H. Williams and C. Meyers, Oil and Gas Law

$§ 101, 201-202 (1975 Supp.), hereinafter cited as “Wil-

55a

liams and Meyers.”) An oil and gas lease may be de-

scribed as follows:

The basic document of the oil and gas industry is

the lease which authorizes an operator, the lessee or

his assignee, to enter upon described premises for the

purpose of exploring for and developing the mineral

resources in the premises. .. .

The modern oil and gas lease is the product of con-

fiicts between the landowner and the operator of the

oil and gas interest. The operator has been desirous

of securing a lease with a small capital investment,

keeping the lease as long as it was productive or was

valuable for speculative purposes, and at the same

time, being able to terminate an unprofitable lease

without liability to the lessor. The landowner has

been interested primarily in obtaining royalties from

the lease and therefore has pressed for immediate

exploration and development operations. In lieu of

exploration and development operations, the lessor

has tried to secure a periodic return for the holding

of the leasehold interest. However, he has also

wanted to limit the time the lessee can postpone drill-

ing by periodic payments, in order to prevent the

lessee from holding the lease merely for speculation,

and to assure the exploration and development of the

lease within a short time. (3 Williams and Meyers

§ 601, at 1-2.)

B. Regulatory Background

In the April 13 Notice, FEA traced briefly the history

of the two tier crude oil pricing system and the funda-

mental role played by the property concept under that

system. To delineate further the issues addressed in this

proceeding with respect to the definition of the term

“property,” and in order to place the comments received

and the actions being taken by FEA in more adequate

56a

perspective, a more detailed review of that history is

appropriate.

The two tier pricing system was proposed on July 19,

1973 (38 FR 19464, July 20, 1973), by the Cost of Liv-

ing Council (“CLC”) under authority of the Economic

Stabilization Act of 1970, as amended. In proposing the

two tier system, CLC stated:

The Council recognizes a need to stimulate in-

creased production and is proposing a system which

allows increased production (new crude petroleum)

from each producing property and an equal amount

of the current production (old crude petroleum) to

be sold without respect to the ceiling price rule.

Adoption of this incentive plan creates a two-tier

pricing system for crude oil, which requirer posting

of two sets of prices, one for “old oil” and one for

“new oil.” Postings for “old oil” can be no higher

than the ceiling price and postings for “new oil’ is

(sic) at the buyer’s discretion.

A crude oil producer is required to prorate among

all his “old oil” buyers the amount of “old oil” freed

from ceiling limitations by the production of a like

amount of “new oil.” (38 FR 19467.)

The regulations proposed on July 19 did not include a

definition of the term “property,” but defined “base pro-

duction control level” (i.e., the level above which a prop-

erty’s current production and sale wou!d qualify as “new

oil”) as follows:

“Base production control level” for a particular month

means—

(i) For a particular property on which the pro-

ducer has leased production rights, the total number

of barrels of domestic crude petroleum produced in

the same month of 1972 from that property.

(ii) For a particular property on which the pro-

ducer owns production rights, the total number of

57a

barrels of domestic crude petroleum produced in the

same month of 1972 from that property. (88 FR

19482.)

In adopting the two tier pricing system on August 17,

1973 (effective August 19, 1978,) (88 FR 22536, Au-

gust 22, 1973), CLC indicated:

A 2-tier price system has been adopted, providing

for a ceiling on domestic crude petroleum prices but

allowing new crude and an equivalent amount of old

crude to be sold at prices above the ceiling. ...

(38 FR 22636.)

CLC also stated:

.. » The substantive policy changes (between the

July 19, 1973 proposal and the August 17, 1973 final

regulations) were publicly announced on August 10.

These regulations implement those policy decisions

and, in addition, incorporate numerous changes to

better implement the program. (38 FR 22536.)

The August 10 public announcement referred to above

was in the form of a press release issued by CLC, stat-

ing that with respect to the two tier pricing system

The Council has been very concerned that the final

regulations strike a balance between constraining

prices while at the same time encouraging the nec-

essary increase in supplies which the country must

have. ...

The press release explained the two tier priciag system

as follows:

Rule: A two-tier pricing system is provided. Pro-

ducers will have the opportunity to sell “new oil”—

that above 1972 production levels—at free market

prices.

Reason: The two-tier pricing system which allows

new oil to be sold at higher prices than “old oil” is

expected to stimulate domestic crude oil production

58a

while maintaining price controls on oil presently

being produced. The two-tier system will encourage

increased investment in domestic exploration and will

provide an economic incentive to allow the recovery

of a larger percentage of oil in existing reservoirs.

(2 Historical Working Papers on the Economic Sta-

bilization Program August 15, 1971 to April 30,

1974, at 1259-60.)

There was no discussion of the term property in the

preamble to the final regulations, but a definition of prop-

erty was included in 6 CFR 150.354 of the August 17,

1973 final regulations, as follows:

“Property” is the right which arises from a lease or

from a fee interest to produce domestic crude petro-

leum. (88 FR 22538.)

Thus, from the very inception of the two tier pricing

system, producers were required to measure current

monthly production and sale of crude oil from a “prop-

erty” against the amount of crude oil produced and sold

from that same “property” in the same month of 1972, in

order to determine the amount of current crude oil pro-

duction which would be subject to the ceiling price rule.

CLC did not elaborate on the rationale for the two tier

price system, beyond the statements quoted above con-

cerning the need to constrain prices while at the same

time encouraging increased production. Thus, CLC per-

ceived its statutory objective as primarily to control in-

flation with what was envisioned to be a short-term pro-

gram under authority of the Economic Stabilization Act

of 1970. That Act was scheduled to expire, as it did,

eight months later, on April 30, 1974. (Thus, for ex-

ample, CLC began sector-by-sector decontrol on October

25, 1973.) FEA noted in the April 13 Notice with respect

to this consideration that:

Because the Economie Stabilization Program was

always intended to be a temporary program, the

59a

regulations adopted pursuant to that program were

designed so as to achieve the price control regulatory

objectives with minimal disruption to normal busi-

ness practices. Thus, a definition of property was

adopted to serve two basic purposes. First, the en-

tity was intended to be one for which producers

would in their normal course of business maintain

production records so that new recordkeeping or data

collection by the producers would not generally be

necessary and audits for compliance purposes would

be facilitated. Second, the entity was designed to

serve as the basic building block for the incentive

system which rewarded increased or new production

from a property by classifying that production as

new crude oil. (41 FR 16180.)

It should be noted also that the concept of a “current

cumulative deficiency” was also incorporated in the two

tier pricing system from the outset. (Once new crude oil

had been produced and sold from a preperty, and current

production and sale then fell short of 1972 production

and. sale levels, new crude oil could not thereafter be sold

from the property until enough production in excess of

1972 levels had been sold at the ceiling price even though

it would otherwise have qualified as new crude oil but for

the requirement to make up the cumulative deficiency.)

However, the cumulative deficiency rule was not a sig-

nificant factor in the early months of the two tier system,

since production and sale levels in late 1973 were, in gen-

eral, not ignificantly less than 1972 levels.

C. Legislative Background

The term “property” gained further significance under

the crude oil pricing regulations with the advent of the

statutory exemption from those regulations of the first

sale of crude oil produced from stripper well leases,

which was initially provided for by the Trans-Alaska

Pipeline Authorization Act (“TAPAA,” Pub. L. 93-

158), signed by the President on November 16, 1973.

The exemption was implemented by CLC by an amend-

ment to its regulations, which was issued November 21,

1973 and made effective as of November 16, 1973 (38

FR 82494, November 26, 1973). The amendment defined

“stripper well lease” to mean a “property” (as previ-

ously defined in the two tier crude oil pricing regula-

tions) whose average daily production did not exceed the

qualifying limits set by the statute. In so doing, CLC

stated:

.. +» For purposes of this exemption, the term “prop-

erty” is described as being co-extensive with that

“property” used to determine 1972 base production

control levels, as measured by leases in existence in

1972. This narrow definition was adopted in order

to comply with the Congressional intent expressed in

the Conference Report which stated that the “Con-

gress specifically intends that the regulations shall,

among other things, prevent any ‘gerrymandering’

of leases to average down high production wells with

a number of low production stripper wells to remove

the high production wells from price ceilings” (H.R.

Rep. No. 98-624). (88 FR 32495.)

On November 27, 1978, the Emergency Petroleum Al-

location Act of 1973 (“EPAA,” Pub. L. 93-159) was

enacted, and it modified the test for stripper well lease

qualification from one based on production levels during

the preceding calendar month to one based on production

levels during the preceding calendar year. A correspond-

ing change in the crude oil pricing regulations was made

by CLC, effective November 27, 1978 (88 FR 34464, De-

cember 14, 1978), but in all other respects the definition

of stripper well lease remained as initially adopted.

Section 4(e) (2) of the EPAA provided for the stripper

well lease exemption (until its repeal, effective February

1, 1976, by the Energy Policy and Conservation Act)

and read, in part, as follows:

6la

(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 average daily production of crude oil for

the preceding calendar year does not exceed ten bar-

rels per well.

(B) To qualify for the exemption under this par-

agraph, a lease must be operating as the maximum

feasible rate of production and in accord with recog-

nized conservation practices.

Neither the EPAA nor the TAPAA included a defini-

tion of the term “lease.” The most extensive legislative

history concerning the original stripper well lease exemp-

tion is found in the Conference Report accompanying the

TAPAA.

Although the Conferees did not discuss the meaning of

the term “lease,” they did state:

The Congress intends that the provisions of this

section will be strictly enforced and regulated by the

administering agency to insure that the limited ex-

emption of this class of wells for the express pur-

poses described above is not in any way broad-

ened. . . . Congress also directs that the admin-

istering agency shall promulgate regulations to im-

plement the provisions of this section before it be-

comes operative. The Conferees expect the admin-

istering agency to utilize State data regarding pro-

duction volumes, and to provide by regulation safe-

guards against the manipulation of gerrymandering

of lease units in a manner that evades the price con-

trol and allocation programs.

These regulations shall be so designed as to pro-

vide safeguards against any abuse, over-reaching or

altering of normal patterns of operations to achieve

a benefit under this section which would not other-

wise be available. Congress specifically intends that

62a

the regulations shall, among other things, prevent

any “gerrymandering” of leases to average down

high production wells with a number of low produc-

tion stripper wells to remove the high production

wells from price ceilings. The sole purpose and ob-

jective of this Section 406 is to keep stripper wells—

those producing less than ten barrels per day—in

production and to insure that the crude oil they pro-

duce continues to be available for U.5. refineries and

U.S. consumers. It is not intended to confer any

benefit on the owners and operators of wells produc-

ing in excess of ten barrels per day.

The Congress also intends that the regulations

provide appropriate limitations and provisions in the

definition of “lease” to insure that an administra-

tively workable system is established which does not

permit abuse. (f!mphasis in original, H.R. Rep. No.

624, 98d Cong., 1st Sess. at (1978).)

The TAPAA stripper well lease exemption originated

with a floor amendment that was introduced by Senator

Bartlett of Oklahoma. The original text of the amend-

ment provided that:

Those oil leases whose average daily production

per well does not exceed that of a stripper well of

not more than ten barrels of oil per day shall be ex-

empt from any allocation or price restraints... .

(119 Cong., Rec. $13432 (daily ed. July 14, 1973).)

In explaining this amendment Senator Bartlett

stated:

So if the stripper producer had production that

did not qualify, he, of course, would not be in any

position to have that production exempted from price

controls. It is done on a lease basis, because nor-

mally all the wells on one lease go into one tank or

on a several tank basis. So if it is from a big well,

the average goes away (sic) up.

68a

Incidentally, when subsidies were put on (stripper

well production) during World War II, that went

beyond just a lease basis; that was done on a field

basis, because it is easier to do ali the accounting

that way. But in this case, it is only decided on a

lease basis. (Id. at S$13435, remarks of Senator

Bartlett.)

It should be noted also that the sponsor of the amend-

ment understood stripper wells typically to be operated

by independent producers pursuant to a lease:

Large oil companies have few stripper wells. Be-

cause of their higher operational costs, major oil

companies are forced to sell their leases to independ-

ents—who can operate these leases for a longer pe-

riod, (Id. at $13482.)

The legislation which became the Emergency Petro-

leum Allocation Act of 1973 (“EPAA”) originated in the

Ser.ste where a bill was passed on June 5, 1973, contain-

ing no stripper well provision of any kind. When the

House passed a similar version of the emergency petro-

leum allocation measure on October 17, 1973, it contained

a “stripper” exemption applicable to wells rather than

to leases. In the Conference Repcrt of November 10,

1978, a stripper well lease provision was substituted,

without comment, and this provision was subsequently

adopted by Congress in the final version of the EPAA

without debate or comment on the meaning of “leases.”

The general legislative silence on the meaning of strip-

per well “leases” in connection with the drafting and

passage of the EPAA can therefore be explained only by

the fact that this matter was decided largely in connec-

tion with the TAPAA companion measure. These two

statutory stripper well lease provisions, although identi-

cal insofar as the concept of “leases” is concerned, con-

tained certain technical differences. Because of the use

of the same language in both enactments concerning

64a

“leases,” however, the legislative history of the TAPAA

is relevant and applicable to the meaning of stripper well

“leases” under the EPAA and the implementing CLC,

FEO, and FEA regulations.

D. Changes Since Adoption of the Two Tier

Crude Oil Pricing System

Several important changes in circumstances have oc-

curred since the initial definitions of “property” and

“stripper well lease” were adopted. First, with the pas-

sage of time, the natural decline in the rate of produc-

tion has operated to make the cumulative deficiency pro-

vision of the two tier pricing system increasingly more

significant. Second, the initial emphasis of CLC on re-

straining prices and controlling inflation has tended to

be of lesser significance compared with the need to pro-

vide effective incentives for increased domestic produc-

tion of crude oil. Third, the price differential between

“old crude oil” and crude oil not subject to the ceiling

price limitation has increased dramatically, from modest

initial levels of $.50 per barrel or less, to amounts of

$7.00 per barrel or more. The “old crude oil allocation”

or “entitlements” program was instituted in response to

this increased price disparity, and since November, 1974,

refiners have been required to have an “entitlement” to

refine a barrel of old crude oil, with those refiners hav-

ing more than the national average of old crude oil gen-

erally require to purchase such entitlements from refiners

having less than the national average of old crude oil.

Finally, enactment of the EPCA on December 22, 1975,

effectively changed the crude oil pricing program from

one which was expected only to be temporary to one

which would be mandatory for at least 40 months.

The amendments to the crude oil pricing regulations

adopted to implement the crude oil pricing policies of

the EPCA are intended to reflect these changed circum-

stances. Under the two tier pricing system as revised

effective February 1, 1976, existing cumulative deficien-

65a

cies were eliminated for all properties. Also, provisions

were subsequently added to take into account the natural

rate of production decline in future months, so that the

level of production which must be exceeded before crude

oil produced from a property may be sold at upper tier

prices (the “base production control level”) may be ad-

justed downward at six month intervals. These provi-

sions were added to help keep the incentive of higher,

upper tier prices within the reach of producers of most

properties, -o that measures taken to increase rates of

production could realistically be expected to result in

upper tier prices without regard to the time that has

elapsed since the initial base production control levels

were first established. Also, the “released crude oil” pro-

visions which were included in the initial two tier pric-

ing system as a special incentive for increased production

in the short term were eliminated on a prospective basis,

and base production control levels are now determined

with reference to the average monthly volume of “old

crude oil” produced and sold from each property in 1975.

E. General Considerations

Because the considerations involved with respect to

past applications of the term “property” are significantly

different from the considerations involved in prospective

applications of the term, FEA has concluded that the

clarifications that are appropriate with respect to past

applications of the term are likewise different from those

which are to be applied on a prospective basis. With

respect to past interpretations FEA is, of course, bound

to formulate those clarifications which are most consist-

ent with the purpose and intent of the regulations in

effect during that time, whereas with respect to future

applications of the term, FEA enjoys greater latitude to

make such prospective adjustments in the meaning of the

term as will best suit the current objectives of the two

tier pricing system.

66a

In seeking at this time to clarify the meaning of a

term that has been so widely applied for almost three

years, FEA has sought, first, to determine the legal

significance of the words used to define the term and,

second, to identify and evaluate the extent to which other

factors (extrinsic to the language of the definition itself)

may have made it inequitable or impracticable to apply

the literal meaning of that definition in certain circum-

stances. With this intention, and based upon the com-

ments received in this proceeding, therefore, FEA has

concluded that the literal meaning of the term “prop-

erty,” as defined by FEA, is generally to be understood

as synonymous with the physival “tract” or “premises”

as to which a working interest is established by an oil

and gas lease, or by a fee interest. It has also concluded

that in certain instances it is permissible to segregate

the interest so described for purposes of delineating an

FEA “property,” while in other instances the aggrega-

tion of such interests to form a single FEA “property”

is appropriate.

The conclusion that the term “property” (i.e., “the

right which arises from a lease or from a fee interest to

produce domestic crude petroleum’) is, in the strictest

sense, generally synonomous with the tract or premises

as to which a right to produce exists pursuant to an oil

and gas lease or a fee interest, is based in large measure

on the foregoing review of the history of these concepts.

Although the evidence is not unambiguous, FEA has

concluded that CLC by its definition of the term “prop-

erty” intended to refer to the premises described in the

oil and gas lease pursuant to which crude oil was being

produced. It also appears that this is the reasonable

meaning of the definition that CLC used and that the

definition should have been so understood. Thus, when

CLC first proposed the two tier concept, it described

the productive entity with respect to which production

was to be measured as “a particularly property on which

67a

the producer has leased production rights.” Use of the

phrase “property on which” suggests that CLC contem-

plated that crude oil production would be measured ac-

cording to the surface acreage, or “tract,” as to which

a producer had obtained production rights through an

oil and gas lease. (Such leases typically describe the

premises by surface boundaries, although they may also

delineate particular underground strata as to which

rights are conferred. (See e.g., 3 Williams and Meyers,

§ 665).)

When the two tier pricing system was adopted, prop-

erty was defined, as noted above, as “the right which

arises from a lease or a fee interest to produce domestic

crude petroleum.” The term “lease” has been generally

defined, for purposes of oil and gas law, as “[t]he in-

strument by which a leasehold or working interest is

created in minerals. ...” Williams and Meyers, Manual

of Oil and Gas Terms at 240-241 (3d ed. 1971). ‘“Work-

ing interest” has been defined, in turn, as “[t]he operat-

ing interest under an oil and gas lease. The owner of

the working interest has the exclusive right to exploit

the minerals on the land... .” (Id. at 511.)

Inasmuch as the lease is the basic document of the oil

and gas industry, there should have been no doubt but

that CLC intended by its definition of property to signify

the premises described by an oil and gas lease (or by a

deed, in those comparatively few instances in which

the operator was also the owner of the mineral interest).

FEA believes that this term, which has generally uni-

form historic meaning throughout the crude oil produc-

tion industry, was used initially with the intention and

expectation that it would provide a uniform basis for ap-

plication of price controls throughout the industry and

would avoid the need for taking into account the varying

state regulatory concepts and internal systems of ac-

counting.

68a

Also relevant to the intent with which CLC used the

term is that the concept of released crude oil was specifi-

cally designed as an incentive to increased production

over a relatively short time. The fastest means of in-

creasing production was through maximum exploitation

by producers of tracts subject to their working interests

—whether by application of enhanced recovery tech-

niques, re-working of wells, or by re-completion of wells

in new producing formations. The treatment, for exam-

ple, of separate reservoirs subject to the same oil and

gas lease as separate properties would have been incon-

sistent with the objective of the released crude oil con-

cept to provide producers with maximum incentives to

exploit to the fullest extent the tracts which were sub-

ject to their existing rights to produce crude oil.

The evidence with respect to the legislative treatment

of the term “lease” is not inconsistent with this conclu-

sion, FEA’s review of the legislative history of the strip-

per well lease exemption indicates that the sponsor of

the stripper well lease exemption used the “lease” as

the unit of measurement simply because the production

of several wells subject to a single lease is commonly

commingled in one or more storage tanks. He proposed

that the stripper well exemption be “decided on a lease

basis,” rather than on some other basis, solely because

of the practical necessity inherent in the common collec-

tion and storage systems in use. Thus, a well-by-well

measurement would not normally be possible on the one

hand and, on the other hand, averaging per well produc-

tion across an entire field, to the extent a field “went

beyond” or was broader in scope than a lease, was pre-

sumably not desirable because it would in some cases

have unnecessarily expanded the scope of the exemption

to leases that were not marginal and in other cases

would have unnecessarily prevented marginal leases from

benefiting from the exemption. The term “lease” there-

fore appears to have been regarded as the most appro-

priate term available to describe an interest that would

69a

typically encompass more than a “well” but less than a

“field.” It also appears that the term was regarded to

be commonly understood as no definition was included

in the Act.

However, notwithstanding the strong support, both in

the legislative history and elsewhere, for a literal inter-

pretation of the definition of property, FEA has deter-

mined that the clarification of past applications of the

property concept should recognize more flexibility be-

cause of a variety of circumstances under which an in-

terpretation of the term property that was limited to

the literal meaning of the language of the definition

would be inequitable. Several considerations led to this

conclusion.

As noted in the foregoing review of the concept of

property and its significance under the two tier price

system, the term “property” was first defined in regula-

tions which were issued on August 17, 1973, and became

effective on August 19, 1973. Thus, producers were re-

quired immediately (7.e., by the end of August) to apply

the new definition to their particular circumstances to

determine whether any “new” or “released” crude oil

had been produced from a property in that month.

While the definition of the term appears to have been

premised on the assumption that it would provide a

common and easily-understood basis for delineating ap-

propriate productive entities, comments received in this

and other proceedings indicate that there have, in fact,

been many Ciffering interpretations of the meaning of

the term among producers.

With respect to the extent to which differing and pos-

sibly conflicting interpretations of the term should be

recognized by FEA as consistent with the regulations,

it must be recognized that producers had no detailed

guidance initially from CLC, FEO, or FEA with respect

to the numerous questions that arose with respect to the

property definition. The first ruling on the definition of

70a

property was not issued until August 29, 1975 (FEA

Ruling 1975-15, 40 FR 40832, September 4, 1975). Fur-

ther, when the CLC definition of property had to be

adapted by producers to their particular circumstances

in August, 1973, the benefits or detriments of alternative

approaches, to the extent they may have been considered,

would have been perceived much differently than at a

later time.

It should be recognized, for example, that the two tier

pricing system initially operated generally to provide an

economic incentive for the aggregation of productive

entities if one such entity was capable of producing sig-

nificantly higher volumes of crude oil than it produced

in 1972. This is because there had not yet been time for

significant current deficiencies to accumulate as to most

productive entities, and the increased production from

one entity, if sufficient, would serve under the special

release rule to release from the ceiling price rule crude

oil from other productive entities only if they were

treated as part of the same property. Of course, to the

extent that any cumulative deficiency had accrued at

that date, selective segregation of entities would have

served immediately to result in all “new crude oil” from

any separate entity with respect to which production was

just being initiated. As a general matter, however, it

seems unjust, with the benefit of hindsight, to ascribe

now improper motivations to applications of the prop-

erty concept which were made under considerably differ-

ent circumstances nearly three years ago.

Also favoring a more flexible interpretation of past

applications of the term property is the reality of sev-

eral significant consequences attached to the determina-

tions that have been made with respect to the meaning

of the term “property.” Volumes of “old,” “new,” “re-

leased,” and “stripper well lease” crude oil are a func-

tion of the scope of the “property” as determined by the

producer. “Old” crude oil volumes, thus determined, have

Tla

been certified, and entitlements have been purchased by

refiners with respect to such volumes. The costs of the

crude oil and entitlements to refiners have, in turn,

generally been passed through in prices charged for re-

fined products. Revenues paid to producers have, in

like manner, generally been used to pay operating costs

or to initiate enhanced recovery or new exploration and

development, and remitted to royalty owners, or other-

wise disposed of. In addition, since February 1, 1976,

the “base production control level” of each property has

been defined by reference to the volume of “old crude

oil” produced and sold from the property concerned dur-

ing 1975.

FEA recognizes the substantial reliance that has been

placed on these determinations by numerous parties,

that there is no basis for concluding in general that

such determinations were other than good faith attempts

to comply with the regulations, and that there is a sub-

stantial need for a measure of administrative finality to

attach to as many of these determinations as possible,

so as to avoid substantially disruptive retroactive adjust-

ments.

The legislative history of congressional intent with re-

spect to the meaning of “lease” in the context of the

stripper well lease exemption is not inconsistent with

the need to afford some measure of flexibility in the defi-

nition of the term “property.” The Conference Report

accompanying the TAPAA states that “Congress .. .

intends that the regulations provide appropriate limita-

tions and provisions in the definition of ‘lease’ to insure

that an administratively workable system is established

which does not permit abuse.” This statement clearly

indicates that rigid adherance to a “lease” system was

not expected and that the necessity for some degree of

flexibility in defining the term was acknowledged. Con-

sistent with this intent, the regulatory definition of a

stripper well lease provided for, among other understand-

72a

able exercises in flexibility, inclusion of “fee interests”

within the meaning of the statutory term “lease.”

The strictures in the Conference Report on the subject

of stripper well “gerrymandering” do not contradict this

view. The only express qualification on administrative

flexibility in defining “lease” would seem to be one which

would be present by implication in any event (i.e., that

the administrative treatment of the term “lease’’—as in

any other phase of administering the stripper well

exemption—must not be such as to permit abuse of the

exemption).

On the other hand, FEA does not regard its ability

retroactively to provide for a more flexible interpreta-

tion of the term property to be unqualified. Principles

of equity generally favor that those who are similarly

situated receive comparable treatment. In this regard, it

would be particularly inappropriate for those producers

which closely adhered to the regulatory definition of the

term “property” to be treated much less favorably than

those producers which interpreted the term in a less

formal manner. Moreover, FEA is also concerned that

unwarranted departures from its regulations not be per-

mitted and that the interests of consumers in full and

fair enforcement of the price controls on crude oil be

adequately protected.

Accordingly, the detailed discussion setting forth the

proper clarification of past applications of the property

concept in the following Section I. F. represents FEA’s

attempt to strike an appropriate balance between the

foregoing considerations as to a literal interpretation

of the term property vis-a-vis a more flexible interpreta-

tion which takes into account factors extrinsic to the

language of the definition itself.

FEA believes that the clarifications adopted today are

consistent with the practices that have been followed by

78a

the substantial majority of producers. However, to the

extent that these clarifications would permit any pro-

ducer to calculate larger volumes of “new,” “released,”

or “stripper well lease” crude oil than were calculated

and certified in prior months, no recertifications of addi-

tional volumes will be permitted. Such recertifications

will be considered, if at all, only on a case-by-case basis

on normal grounds of inequity or hardship through the

FEA exceptions process. FEA is aware that in so af-

fording significance to differing good faith definitions

of property that have been adopted by producers, simi-

larly situated persons will in some instances be treated

differently under the regulations. This fact is, however,

counterbalanced in FEA’s view by the need for the great-

est possible measure of administrative finality to be af-

forded the determinations already made as to volumes of

old crude oil. Appropriate compliance actions will, of

course, be taken with respect to applications of the term

property which are not consistent with the clarifications

set forth herein, to the extent that they have resulted in

the certification of greater volumes of new or upper tier

crude oil than is permitted. FEA reserves the right in

such compliance actions to determine whether any mis-

application of the “property” concept, which resulted

in improper classification of lower tier crude oil as upper

tier crude oil to a particular purchaser, also resulted in

that purchaser receiving at lower tier prices other

volumes of crude oil that could properly have been certi-

fied as upper tier crude oil. In such cases, and in the

context of formal compliance action (i.e, by remedial

order ur consent order), FEA may permit the producer

to recertify such amounts of crude oil mistakenly in-

voiced as lower tier crude oil, but only to the extent that

additional funds due the producer because of such recer-

tification do not exceed refunds due to the purchaser

because of sales of crude oil by the producer at prices

in excess of the appropriate ceiling prices.

74a

F. Past Applications of the Term “Property”

The issues with respect to past applications of the

term property may, for purposes of convenience, be gen-

erally divided into three categories: (1) Those involv-

ing the delineation of the premises which are subject to

a single “right to produce” pursuant to a lease or fee

interest, (2) those involving the aggregation of two or

more such premises, and (3) those involving the segrega-

tion of such premises subject to a single “right to pro-

duce.”

(1) The right to produce. Ruling 1975-15 made it

clear that the property concept is one that begins with

“the right to produce crude oil.” Consistent with the

discussion above of the common meaning of that term

as being generally synonomous with the concept of

“working interest,” the analysis of property will gen-

erally begin with identifying the one or more “premises”

or “tracts” described in the instrument that confers the

right to produce. Generally speaking, except in those

cases where the right to produce is conveyed separately

with respect to separate horizontal strata, the “premises”

as to which the right to produce exists will generally be

described in terms of surface acreage—commonly re-

ferred to as a “tract.” In those instances in which pro-

duction is undertaken by the owner of the mineral inter-

est in fee, rather than by a lessee, the instrument convey-

ing the fee interest will similarly describe the premises

typically in terms of surface acreage, also referred to

as a “tract.” The terms “premises” and “tract” are both

used here to refer to the physical limits as to which a

right to produce exists. Since “tract” implies surface

acreage, whereas “premises” is not so limited (but also

signifies use of three dimensional boundaries), the latter

term is preferred.

Difficult issues can arise with respect to construing a

lease or deed to delineate the one or more premises as

to which « “right to produce” exists under that in-

75a

strument. This can occur, for example, where a lease

conveys a right to produce with respect to described

premises, but imposes differing or special rights or obli-

gations with respect to the development of and produc-

tion from particular portions of the described premises.

Generally speaking, where the rights or duties created

under a single instrument are significantly different

with respect to particular identified portions of a de-

scribed premises, where a producer has in good faith

relied upon such differences in its exploration and de-

velopment activities, and where the producer has con-

sistently and historically accounted for such portions

separately, FEA will permit the lease concerned to be

considered as having established more than a single

“right to produce” and, consequently, more than a sin-

gle property. Thus, for example, where the time within

which a lessee is obligated to begin production activities

varies as to specified portions of a particular tract, those

portions of the tract would be subject to differing “rights

to produce,” and hence, could constitute separate “prop-

erties.”

(2) Segregation of premises subject to a single right

to produce. More complex issues are posed with respect

to the extent to which the premises subject to a single

right to produce may appropriately be subdivided to

form separate “properties.” As noted above, there are

instances in which a single lease may create several dis-

tinct “rights to produce” with respect to specified por-

tions of the premises described therein. And as discussed

below, the aggregation (with premises subject to other

rights to produce) of less than all of the premises cov-

ered by a single right to produce may result in the sub-

division of the premises formerly subject to a single

right to produce into at least two properties—the por-

tion which has been aggregated and the portion which

remains. There are, however, still further instances in

which segregation into one or more properties of a prem-

ises subject to a single right to produce appears to have

been appropriate under the existing regulations.

76a

a. Non-contiguous tracts. One such instance is in the

case of non-contiguous tracts. Particularly in the case of

fee interests, but also in the case of certain large leases

(typically old leases), a single instrument may convey a

single undifferentiated right to produce with respect to

multiple, non-contiguous tracts, which may be located at

great distances from one another. In all cases in which

it can be shown that such non-contiguous tracts were de-

veloped and produced separately, and where they have

historically and consistently been accounted for as sepa-

rate properties, FEA will continue to permit them to be

so regarded. The basis for this determination is princi-

pally that FEA understands this to have been a consist-

ent and historic practice and one which was followed

to conform the treatment of the atypical situation of

multiple tracts subject to a single instrument to that

afforded in the more typical situation of a single tract

subject to a single lease.

b. Very large tracts. Another such instance is in the

case of very large tracts which are subject to a single

right to produce. Although this problem appears to exist

mainly with respect to large fee interests, it also obtains

with respect to certain large leases, particularly those

granted many years ago by Federal and state govern-

ments. As noted above, the modern oil and gas lease

typically conveys a right to produce which must be exer-

cised within a specified period in order for production

rights to be retained by the lessee. The objective of the

lessor is to obtain production in a specified area within

a specified time. Accordingly, most oil and gas leases

confer a right to produce as to an area within which

exploration and development by the lessee can reason-

ably be expected within a reasonable time—five years

is typical.

Owners of mineral interests in fee which undertake

their own exploration and development activities are not,

of course, bound by any lease obligations with respect to

the time within which such activities must take place.

77a

Accordingly, exploration and development of a large fee

interest may take place over an extended period of time,

in much the same manner as if several leases had been

conveyed with respect to particular areas and time peri-

ods. Similarly, with respect to large leases, a compar-

able form of phased development may have taken place.

Indeed, as to certain large government-granted leases,

a “selection” process has been employed, whereby only

with respect to those portions of the lease that are de-

veloped does the lessee retain production rights. In such

cases, the right conveyed by the initial “lease” is more

in the nature of a right to explore, which ripened into

a right to produce those areas that the lessee has devel-

oped in a timely fashion.

In order to treat holders of large tracts subject to a

single right to produce—whether by a lease or by fee in-

terest—in a manner that is comparable to the treatment

of those who hold a right to produce under the more

limited typical modern oil and gas lease which covers a

lesser area, FEA has concluded that separate geological

formations subject to the same right to produce which

have been developed and produced separately, and which

have historically and consistently been accounted for

separately may continue to be so regarded.

ce. Partial unitization or other aggregation of inter-

ests, It is not uncommon for less than the total premises

subject to a right to produce to be unitized or otherwise

aggregated with all or portions of premises subject to

other rights to produce, to form a single “property,”

leaving the balance of the premises formerly subject to a

single right to produce not aggregated with any other

such rights. The portion of the premises which is not ag-

gregated is appropriately recognized as a property sep-

arate and apart from the portion of the premises which

has been aggregated with other rights to produce.

In some cases, FEA understands that the inclusion of

the so-called “Pugh” clause in a lease would operate

78a

to create a separate and distinct right to produce with

respect to the non-unitized portion of the premises sub-

ject to that lease, by stating that production from the

unitized portion of a lease will not serve to fulfill the

lessee’s production obligations with respect to the non-

unitized portion. Thus, the two portions of the lease in-

cluding such a clause would become separate properties

by the terms of the lease itself. However, even where

such a clause is not included, FEA has concluded that

treatment of the non-unitized portion of the premises

as a separate property is appropriate.

d. Severance tax or royalty owner accountability. An-

other instance in which segregation of a premises sub-

ject to a single right to produce is appropriate is where

the production from identifiable portions of the premises

is required to be measured and accounted for separately

for purposes of determining severance tax liability or for

purposes of accounting to royalty owners. FEA has con-

cluded that where the payment of revenues to slate tax

authorities or to royalty owners requires separate ac-

counting for production from identified portions of a

premises subject to a single right to produce, and where

such a portions of the premises have consistently and

historically been treated as separate properties, such

separate treatment may appropriately be continued.

e. Other segregation not permitted. The most complex

and apparently controversial issue with respect to segre-

gation of a premises subject to a single right to produce

has to do with production from separate “reservoirs.”

FEA has studied this issue at considerable length but

has been unable to find a solution which is likely to be

satisfactory to all parties concerned. FEA has concluded

on the basis of the review of the legislative and regula-

tory history and the general considerations outlined

above that a premises which contains multiple reservoirs

79a

but which is subject to a single right to produce may not,

simply by virtue of the existence of separate reservoirs,

be treated as comprising multiple “properties.”

FEA does not believe that the language of the defini-

tion of the existing term “property” can be construed to

mean that production from separate reservoirs subject

to the same working interest would, simply by virtue of

the fact that the several reservoirs have been developed

and produced separately, be regarded as production from

separate properties. (Producers have been on express

notice of this at least since the issuance of FEA Ruling

1975-15 on August 29, 1975.) Moreover, any producer

which adopted a reservoir-by-reservoir approach to the

definition of property (and, hence, to the computation of

amounts of “new” and “released” crude oil) would

typically have been in a position to achieve greater

benefits under the price regulations over the past three

years than those producers who took the approach of

aggregating production from all reservoirs subject to

the same right to produce, as required under the regula-

tions. At least until February 1, 1976, any producer

that treated each reservoir as a separate property auto-

matically would have obtained “new” crude oil whenever

production was obtained from a new reservoir. Pro-

ducers using the lease approach, on the other hand, were

required first to exceed 1972 levels of production from

the lease concerned before any production from a new

reservoir would be regarded as “new” crude oil. FEA

has unfortunately not been able to obtain any approxi-

mation of the extent to which producers have actually

adopted a reservoir-by-reservoir definition of property.

Under these circumstances, FEA has concluded that

it would be inequitable to permit producers who took

an expansive—and, in FEA’s view, unwarranted—view

of the meaning of the term property to obtain benefits

that were not afforded to producers who adhered closely

to the regulations. Thus, FEA has concluded that sep-

80a

arate reservoirs which are subject to the same right to

produce will generally not be treated as separate prop-

erties under existing regulations.

There are, however, instances in which for a variety

of reasons, it would have been impracticable or inequita-

ble for producers not to have treated separately produc-

tion from a separate reservoir or reservoirs. Those in-

stances of which FEA is aware have been noted above. —

There may well be other instances of which FEA is not

aware, but which may be appropriately addressed in sub-

sequent rulings, as they become known. The mere exis-

tence of separate reservoirs and the requirement to re-

port separately the production from such reservoirs in

itself will, however, only suffice to permit separate prop-

erty treatment if the producer has applied for exceptions

relief and has been permitted to use such a definition

in order to avoid serious hardship or gross equity.

(3) Aggregation of “rights to produce.” The aggre-

gation of separate “rights to produce” pursuant to a

unitization agreement was discussed in FEA Ruling

1975-15. There are, however, other circumstances under

which separate rights to produce may appropriately be

aggregated, pursuant to either voluntary or involuntary

arrangements.

Thus, for example, various parties may hold partial

undivided interests in the right to produce crude oil

from a particular tract. Whether voluntarily through

a joint operating agreement or other type of agreement,

or pursuant to compulsory state regulations, such un-

divided interests in the right to produce from a tract

must typically be aggregated before production can be-

gin. Under such circumstances, no apparent purpose

would be served by requiring property delineations to be

carried back to the individual partial undivided interests

which have been aggregated in order to perfect the right

to produce.

8la

Another instance in which rights to produce may be

aggregated occurs where the premises subject to such

rights are required to be combined by a state regulatory

agency as a condition to the operation of production

activities. Thus, for example, in Louisiana the state

regulatory agency will compel a “unit” to be formed by

the owners of the tracts with respect to the surface area

which overlies the portion of a reservoir that may be

efficiently drained by a single well, provided the owners

of at least 75 percent of the surface area agree to the

formation of a unit.

Similarly, in states that maintain spacing require-

ments for oil wells, individual rights to produce may

need to be combined, whether voluntarily or involuntar-

ily, before a single well may be drilled and the right

to produce made effective. Such aggregations of rights

to produce, sometimes known as “drilling units”) are

also appropriately recognized as single “properties.”

Generally speaking, FEA will follow a liberal policy

with respect to the aggregation of rights to produce

which will be permitted to be treated as a single “prop-

erty,” as long as a bona fide reason for the aggregation

can be demonstrated by the producer.

G. Prospective amendments to the term “property.”

The issuance by FEA of Ruling 1975-15 engendered sig-

nificant comment, primarily from crude oil producers

urging FEA to adopt a property concept that would rec-

ognize as separate properties each producing reservoir

underlying a lease. Since that time, FEA has under-

taken an analysis of the property concept as conceived

and first implemented by the Cost of Living Council

(and set forth in some detail in Part A above), and

concluded preliminarily that the incentives offered under

the tract-by-tract concept were better suited to the tem-

porary program envisioned by CLC, but that in the more

than two years since the two tier system was first im-

plemented those incentives had decreased in impact or

82a

effectiveness. Accordingly, on January 6, 1976, in con-

nection with the first stage of rulemaking proceedings

to implement the crude oil pricing policy of the EPCA,

FEA proposed for comment an amended definition of

property (to have been applied prospectively, effective

February 1, 1976) that would have recognized the exis-

tence of separate properties under the same tract, where

the tract encompassed separate and distinct producing

reservoirs. When final regulations were adopted on Feb-

ruary 1, 1976, FEA rejected the proposal and generally

indicated

(1) the uncertainty over the effect of such an

amendment on the relative proportions of old, new,

and stripper well lease crude oil; and

(2) the likelihood of enormous administrative

problems associated with determining the limits of

thousands of different reservoirs.

Comments submitted in connection with the first stage

proceeding either did not address these concerns, or

tended to confirm FEA’s belief that data sufficient to

make such determinations were generally unavailable.

However, after issuance of the February 1 amend-

ments, FEA again received a significant number of in-

quiries and comments, urging reconsideration of the

proposal to establish a property concept based upon sep-

arate reservoirs. Accordingly, as part of the continuing

analysis of the property issue, FEA again reviewed this

matter so as to formulate for public comment a proposed

revision of the property concept. In this regard, FEA

sought a concept that would optimize the incentives

under the two tier system in a manner that is adminis-

tratively feasible for FEA and that would facilitate

compliance by crude oil producers.

The resulting proposal, as set forth in the April 13

Notice, was to afford under FEA regulations the maxi-

mum practical significance to pre-existing state regula-

83a

tory concepts and historical accounting systems that have

been developed within the framework of the various

state regulatory concepts. With this goal in mind, FEA

solicited comments in the April 12 Notice and indicated

its intention to consider the adoption of retroactive

amendments and the issuance of rulings, as well as the

adoption of prospective amendments, to the extent that

such actions were determined to be appropriate in re-

solving the issues under consideration. The discussion in

Part F above represents the formal interpretation of

FEA of the definition of property as promulgated by

CLC and carried forward by FEO and FEA, and will

be applied until the amendment discussed below becomes

effective on September 1, 1976.

Although a number of different property concepts were

discussed in the comments received in connection with

this proceeding, most commenters still seem to favor

reservoir-by-reservoir determinations. Under such an ap-

proach, each non-unitized reservoir or portion of a

reservoir underlying each tract would constitute a sepa-

rate property. Some producers have argued that this

is the best approach because it would provide the great-

est incentive to develop new reserves and maintain pro-

duction of existing reserves. The incentive would argu-

ably be maximized under the reservoir approach because

decisions regarding the exploration for and development

of crude oil reserves could be made on an individual

reservoir basis without regard to the happenstance of

production characteristics of other reservoirs underlying

the same tract. It follows that a producer would more

likely search for and develop new reserves (or increase

the development of certain existing reserves) if the pro-

ducer could be assured that resulting increased produc-

tion would qualify as upper tier crude oil.

A property concept that follows tract boundaries, on

the other hand, without regard to the separate reser-

voirs which may underlie the tract, may not provide

84a

appropriate incentives under the two tier pricing sys-

tem. This is because increased production from one

reservoir may fail to qualify as upper tier crude oil be-

cause of the requirement that tract production must ex-

ceed the BPCL and cumulative deficiency determined

from all reservoirs that underlie the tract.

For example, a producer holds the right to produce

crude oi] from tract X under which are situated four

separate and distinct reservoirs, with production figures

as set forth in Table 1 below:

TABLE 1

Reservoirs 1972 1973 1974 1975 1976

TE tnisicstaencimnn 11,000 8,000 5,000 3,000 1,000

B 7,500 5,000 4,000 3,000 2,000

| (one 0 0 11,000 10,000 9,000

D : 0 0 0

Totals .............. 18,500 13,000 20,000 16,000 12,000

As Table 1 indicates, the incentive intended to be pro-

vided by the CLC has diminished over time. While the

producer was able to respond to the short term incentive

by developing production from reservoir C and thereby

exceeding the property’s BPCL in 1974, the continued

decline in production from reservoirs A and B makes

remote any incentive in 1976 or later to develop produc-

tion from reservoir D. Under a reservoir-by-reservoir

determination of upper and lower tier crude oil, however,

production from reservoir C would continue to qualify

as upper tier crude oil, as would any production from

reservoir D.

The merit in a property concept that recognizes sepa-

rate reservoirs (to some extent at least) is undeniable.

However, an unqualified reservoir-by-reservoir concept is

largely administratively infeasible. First, unitizations

aside, crude oil accounting has consistently and histori-

85a

cally had some relation to the lease because it is the lease

that in the first instance describes ownership interests.

Accordingly, a true reservoir-by-reservoir concept would

require the establishment of reservoir BPCL’s without

regard to producing interests, and would force producers

to determine production on a reservoir basis in the same

manner as is done for unitizations, but where there is

no agreement among various interest holders for that

purpose. Moreover, additional problems would be en-

countered due to differences among various lease opera-

tors of the same reservoir.

Accordingly, the reservoir concept that FEA proposed

in the January 8 Notice was one which would have rec-

ognized separate reservoirs underlying the same tract.

In this way, it was thought that a system would result

that benefited from the best aspects of a reservoir con-

cept but which remained subject to the legal requirements

entailed by the tract concepts.

As noted above, the January 8 proposal was not

adopted primarily because FEA concluded that it would

be infeasible to attempt to administer a program under

which FEA could not require easily understandable rec-

ords from which could be determined the limits of each

producing property. FEA has neither the expertise nor

the resources required to monitor reservoir-by-reservoir

production, and FEA auditors would not have at their

disposal adequate means to confirm or deny that produc-

tion had in fact resulted from two or more separate and

distinct producing reservoirs.

This problem would be minimized if FEA could defer

to other expert agencies to make reservoir-by-reservoir

determinations. For this reason, FEA proposed in this

proceeding to recognize the existence, as separate prop-

erties, of each separate and distinct producing reservoir

underlying the tract, to the extent that such reservoirs

have been recognized by the appropriate state regula-

tory body, and production is separately reported as such.

86a

While many comments evidence a continued preference

for a property definition that would recognize each reser-

voir regardless of state recognition, vel non, most com-

ments indicated approval of the tentative conclusions set

forth by FEA in the April 13 Notice. Therefore, effec-

tive September 1, 1976, the definition of property is

amended to recognize as separate entities, each reservoir

underlying a tract, to the extent that the reservoir is

recognized by the appropriate state regulatory body, and

production has been consistently and historically reported

as such. The following guidelines are set forth to aid

producers in making property determinations effective

September 1, 1976.

(1) Unitizations. Where two or more tracts, or parts

of two or more tracts, are unitized so that production is

undertaken from the reservoir as a single unit, the reser-

voir, as unitized, constitutes the property. In most cases,

the unitization of several tracts is accomplished by a

unitization agreement, which describes the unitized reser-

voir and is submitted to the state regulatory body for

prior approval. The method of determining upper tier

crude oil volumes from unitized properties was addressed

in Ruling 1975-15. The ruling did not, however, address

an important aspect of unitization that has given rise

to several questions from producers.

A unitization, as stated in Ruling 1975-15, constitutes

a single property, but nonunitized production, if any,

from each of the participating tracts continues to be

accounted for on a tract-by-tract basis. This should miti-

gate some of what producers have perceived as the harsh-

ness of the requirement that unitization requires the

accumulation of BPCL’s from all participating tracts.

The ruling is, therefore, amended by this Notice to make

it clear t

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