Continental Oil Co. v. United States

Citation184 F.2d 802
Decision Date16 October 1950
Docket NumberNo. 11774.,11774.
PartiesCONTINENTAL OIL CO. et al. v. UNITED STATES. UNITED STATES v. CONTINENTAL OIL CO. et al.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

L. R. Martineau, Jr., Richard C. Heaton, Joseph P. Rinnert, Glenn B. Martineau, all of Los Angeles, Cal., for appellant Continental Oil Co.

D. W. Woods, Martin J. Weil, Olive E. Boswell, all of Los Angeles, Cal. (A. L. Weil, Los Angeles, Cal., of counsel), for appellant General Petroleum Corp.

A. DeVitt Vanech, Asst. Atty. Gen., Robt. E. Mulroney, Attorney, Dept. of Justice, Washington, D. C., Francis B. Critchlow, Sp. Asst. to Atty. Gen., Marvin J. Sonosky, Attorney, Dept. of Justice, Washington, D. C., for United States of America.

Before HEALY and POPE, Circuit Judges, and LING, District Judge.

POPE, Circuit Judge.

In 1929 and 1930 the United States issued to appellants Continental Oil Company and General Petroleum Corporation, herein called, respectively, Continental and General, various oil and gas leases, covering lands in the Kettleman Hills field in California. The leases were made pursuant to section 14 of the Mineral Leasing Act of February 25, 1920, 41 Stat. 442, 30 U.S.C.A. § 223.

The Secretary of the Interior, asserting that the posted prices for crude oil in the field, and the prices at which these companies sold and disposed of natural dry gas and natural-gas gasoline,1 and upon which they calculated and paid royalty under the leases, were unreasonably low, and not in accord with true values, in 1931 made certain orders establishing minimum limitations upon valuations of oil and gas for royalty purposes. The companies affected by the orders declined to conform to them or to pay in accordance therewith, and this suit was instituted against Continental, General, and 14 other lessees, to secure a judicial determination of the Secretary's authority to make the minimum limitation orders, to recover additional royalties asserted to be due under such orders, and to obtain cancellation of leases of defendants who failed to comply with the court's orders in respect to such matters.

Concerning the Government's claim for additional royalty on account of crude oil, the trial court held that under the terms of the leases the Secretary of the Interior was not empowered to make a binding determination of the value of the crude oil and that the companies were not obligated to calculate or pay royalty on the minimum price basis prescribed by the Secretary's order. The court held, however, that during the period July 1, 1929 to August 29, 1935, the crude oil market at Kettleman Hills was not an open market and that the posted prices for crude oil there during that period did not reflect the market value thereof. The court found that the lessees were required by the leases to pay a royalty based upon market value of the oil produced, which value the court found to be in excess of the posted prices on which the Companies had made settlement, and required them to account and pay for the difference. The unpaid balance determined by the trial court to be owing by Continental on account of crude oil royalties was $128,261.50; the balance charged to General was $162,395.98, exclusive of interest. With respect to the Secretary's orders determining minimum valuations of dry gas and casing-head gasoline for royalty purposes, the court held that the Secretary's orders if enforced prospectively, that is to say, with respect to the production subsequent to the dates of the orders, were expressly authorized by the leases and were valid and enforcible, and that the Companies must account for additional royalties in accordance with those orders.

Continental and General have appealed from the judgment entered upon such findings and the United States has cross-appealed contending: (1) that the court erred in holding that the Secretary lacked power to determine the value of crude oil for royalty purposes; (2) that the court erred in its determination of the market value of the crude oil at Kettleman Hills in that the value found by the court was too low; and (3) that the court erred in holding that the Secretary's minimum value order relating to natural gas dated June 7, 1937, and referred to as the "natural gas net realization order", was invalid as applied to gas produced prior to June 1, 1937. Both sides assign error in respect to the court's computation of interest upon the recoveries.

The facts of the case are very clearly stated in the able opinion of the district court which is reported in 73 F.Supp. 225. For this reason we consider it unnecessary to state the facts that give rise to the controversy here present except to the extent required to bring in mind the essential facts upon which, in our opinion, the decision must turn. And because that opinion so thoroughly discusses the issues presented in the court below, we propose here to make frequent reference to portions thereof.

The rights of the parties are determined by the provisions of the leases, read in the light of the provisions of the Mineral Leasing Act, and we shall therefore briefly allude thereto.

General is an integrated company, that is to say, one which is engaged in all branches of the petroleum industry from the production of crude oil to marketing, both wholesale and retail, of refined petroleum products; while Continental on the other hand, is so far as production in California is concerned, a non-integrated defendant, engaged solely or primarily in the production of crude oil and natural gas. We shall note that this difference in the operations of the two appellants gives rise to different problems with respect to each of them.

1. Provisions of Leases Relating to Royalties.

The leases provided for royalty at varying percentages of production depending upon whether the leases were so-called "(a)" leases issued in consequence of the lessee having become entitled thereto as a permittee under a prospecting permit under sections 13 and 14 of the Mineral Leasing Act, 41 Stat. 441, 442, cf. Title 30 U.S.C.A. § 223, or whether they were the so-called "(b)" leases calling for a higher royalty rate or percentage. The percentage under the "(a)" leases was 5%; the percentage under the "(b)" leases, ranged from 12½% to 33 1/3%. But, aside from this variation in percentage, the language of the leases with respect to the payment of royalty, was the same.2 Under section 2(c) the lessee under the (a) lease was required "To pay the lessor in advance, beginning with the date of the execution of this lease, a rental of one dollar per acre per annum during the continuance hereof, the rental so paid for any one year to be credited on the royalty for that year, together with a royalty on all oil and gas produced from the land leased herein (except oil or gas used for production purposes on said land or unavoidably lost), as follows: Five per centum (5%)."

The corresponding section of the (b) lease was identical except that instead of the five per centum mentioned in the (a) lease, a scale of varying percentages depending upon the character and quantity of the production was specified. In § 2(c) (3) appearing in all leases, the royalty on the gas and casing-head gasoline was fixed at a designated percentage of its value, and provided: "The value thereof in the field where produced, of gas and casing-head gasoline, for royalty purposes, unless such gas or casing-head gasoline is disposed of under an approved sales contract or other method as provided in subdivision (d) of this section, shall be as fixed by the Secretary of the Interior". (Italics added).

The leases further provided that "When paid in value, such royalties shall be due and payable monthly on the 15th of each calendar month following the calendar month in which produced, to the Receiver of Public Moneys of the land district in which the land is situated; when paid in kind, such royalty oil shall be delivered in tanks provided by the lessee on the premises where produced, unless otherwise agreed to by the parties hereto, at such times as may be required by the lessor * * *."

Under § 2(d) of the lease, an additional obligation of the lessee was stated as follows: "(d) Sales contracts. — To file with the Secretary of the Interior copies of all sales contracts for the disposition of oil and gas produced hereunder except for production purposes on the land leased, and in the event the United States shall elect to take its royalties in money instead of in oil or gas, not to sell or otherwise dispose of the products of the land leased except in accordance with a sales contract or other method first approved by the Secretary of the Interior".

It is noted that although the percentages are listed with great detail, as, for instance, the requirement that the royalty shall be "Five percentum (5%)" or "12½ per cent", as the case may be, yet § 2(c) quoted above omits to state whether royalty is calculated at 5% or 12½% of the value of the production or of the price at which the production is sold, in cases where royalty is taken in money instead of in kind. It should be observed, however, that the Mineral Leasing Act, whose terms and provisions are made a part of the lease, in providing for royalties of varying percentages, recites that the royalty shall be a certain percent "in amount or value of the production". Act of February 25, 1920, c. 85, sec. 14, 41 Stat. 442. It is also to be noted that the language in italics in the above quotation from section 2(c) (3) authorizes the Secretary of the Interior in certain cases to fix the values of gas and casing-head gasoline for royalty purposes, but there is no similar provision authorizing the Secretary to fix the values of crude oil.

2. The Secretary's Minimum Value Order Respecting Crude Oil Royalties.

About April 18, 1931, the Secretary of the Interior had arrived at the conclusion that...

To continue reading

Request your trial
29 cases
  • Cactus Corner, LLC v. U.S. Dept. of Agriculture, CIV-F-02-6270 OWW SM.
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Eastern District of California
    • March 11, 2004
    ...91 S.Ct. 814). Reasonableness is judged by taking the administrative record as a whole. Id. at 766 (citing Continental Oil Co. v. United States, 184 F.2d 802, 820-21 (9th Cir.1950) and Ashland Oil, Inc. v. Phillips Petroleum Co., 554 F.2d 381, 387-88 (10th "[T]he court is not empowered to s......
  • Independent Petroleum Ass'n of Amer. v. Armstrong, Civ. 98-00531 RCL.
    • United States
    • United States District Courts. United States District Court (Columbia)
    • March 28, 2000
    ...federal gas leases were typically "calculated at values at the wells, not at the pipe line destination...." Continental Oil Co. v. United States, 184 F.2d 802, 820 (9th Cir. 1950). The basic rule on royalties, known as the "gross proceeds rule," provides that "under no circumstances shall t......
  • Marathon Oil Co. v. U.S., 85-3800
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • July 24, 1986
    ...to use a net back or net realization formula to compute the value of production for royalty purposes. See Continental Oil Co. v. United States, 184 F.2d 802, 820-21 (9th Cir.1950); see also Ashland Oil, Inc. v. Phillips Petroleum Co., 554 F.2d 381, 387-88 (10th Cir.1977) (en banc) (governme......
  • Shearn v. Ward Petroleum Corp., CIV-91-622-A.
    • United States
    • United States District Courts. 10th Circuit. Western District of Oklahoma
    • December 10, 1992
    ...544 F.2d 436, 441 (10th Cir.1976), cert. den. 429 U.S. 1094, 97 S.Ct. 1109, 51 L.Ed.2d 541 (1977). 6 Citing Continental Oil Co. v. United States, 184 F.2d 802 (9th Cir.1950) and Amoco Production Co. v. United States, 663 F.Supp. 998 (D.Utah 7 Citing 43 C.F.R. § 9239.0-8 and .5-2; United Sta......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT