Continental Oil Company v. Federal Power Commission

• Decision Date: 27 January 1967
• Docket Number: No. 22163,22867-22869.,22163
• Citation: 370 F.2d 57
• Parties: CONTINENTAL OIL COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent. TIDEWATER OIL COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent. The ATLANTIC REFINING COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent. CITIES SERVICE OIL COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

370 F.2d 57 (1966)

CONTINENTAL OIL COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

TIDEWATER OIL COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

The ATLANTIC REFINING COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

CITIES SERVICE OIL COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

Nos. 22163, 22867-22869.

United States Court of Appeals Fifth Circuit.

December 19, 1966.

Rehearing Denied January 27, 1967.

Lloyd F. Thanhouser, Thomas H. Burton, Joseph C. Johnson, Bruce R. Merrill, Houston, Tex., for Continental Oil Co.

Edmund D. Buckley, Los Angeles, Cal., Clyde E. Willbern, Lloyd Armstrong, Houston, Tex., for Tidewater Oil Co.

Bernard A. Foster, Jr., Ross, Marsh & Foster, Washington, D. C., Stuart J. Scott, Dallas, Tex., for Atlantic Refining Co.

Gentry Lee, Cecil C. Cammack, Graydon D. Luthey, R. J. Leithead, Bartlesville, Okl., for Cities Service Oil Co.

Israel Convisser, Atty., Howard E. Wahrenbrock, Sol., Richard A. Solomon, Gen. Counsel., F. P. C., Washington, D. C., for respondent.

James R. Lacey, Newark, N. J., for Public Service Electric & Gas Co., intervenor.

J. Harry Mulhern, Edward S. Kirby, Newark, N. J., for Public Service Electric & Gas Co., Intervenor.

Before WISDOM and COLEMAN, Circuit Judges, and DAWKINS, District Judge.

WISDOM, Circuit Judge.

Petitioners, the four Catco companies, seek review of Federal Power Commission orders. The basic question is whether the petitioners' transfer, in the form of lease-sale agreements, of certain lease-hold interests in the offshore Ship Shoal Field is a sale of natural gas in interstate commerce within the meaning of Section 1(b) of the Natural Gas Act.¹ United Gas Improvement Co. v. Continental Oil Co., 1965, 381 U.S. 392, 85 S.Ct. 1517, 14 L.Ed.2d 466 (Rayne Field case), upholding the Commission's ruling that it has jurisdiction over a leasehold purchase arrangement controls this case. We find that the transfer is subject to the Commission's jurisdiction. We affirm the Commission's order requiring certification under Section 7 of the Act.

* * *

Petitioners, the four Catco companies, have jointly developed leasehold interests in the Ship Shoal area offshore Louisiana obtained for $11,562,017 from the United States government in 1955 under the Outer Continental Shelf Lands Act. On May 10, 1961, by Acts of Sale and Mortgage and Pledge they conveyed these leaseholds to the Tennessee Gas Supply Company and the Tenneco Oil Company, two subsidiaries of the Tennessee Gas Transmission Company, a major interstate pipeline company.² The total consideration was $97,333,333 in cash and notes maturing over 15½ years.

The Commission first considered the Ship Shoal transfer in connection with Tennessee Gas Transmission's 1961 application for certification of an $8.5 million connecting pipeline.³ Tennessee stated during the course of the proceeding:

The sole purpose for acquiring the leasehold interests in the Ship Shoal Field was to provide additional reserves and deliverability to meet the natural gas requirements of Tennessee\'s jurisdictional customers. 30 FPC at 765.

The Catco companies were not parties to the Tennessee proceeding and made no filings with respect to Ship Shoal. The Commission concluded that it could not certify the construction of the pipeline unless it had jurisdiction over the leasehold transfer.⁴ Accordingly, the Commission issued the order here on review for petitioners to show cause why their transfer of the Ship Shoal leasehold interests should not be certified under the Act. Tennessee intervened in the resulting FPC hearings and in this appeal. Its application for the Ship Shoal connecting lines has been deferred pending final resolution of the Catco jurisdiction issue now before us.

The examiner found that Catco had drilled seventeen wells in the Ship Shoal Field between acquisition of the leaseholds in 1955 and May 3, 1960. Seven were completed as oil wells and one as a gas well. The gas well was shut-in and no gas has been produced. The evidence showed seventeen completions in the oil wells and two in the gas well. Gas was found in 46 reservoirs in 39 distinct sand zones and oil in fourteen reservoirs in eight distinct sand zones. In addition five reservoir sands that produced oil were also productive of gas. Later, drilling on five potential gas wells was commenced but completion was deferred. Production of oil began and the oil was barged inland. The gas well was not hooked up, since Tennessee's application for a pipeline certificate has been deferred.

In 1960 petitioners sought and received several offers for Ship Shoal in the form of both conventional gas purchases and purchases of leasehold interests. Tennessee made offers in both forms. The petitioners chose Tennessee's leasehold purchase offer largely because it produced the greatest discounted net cash flow. Under the Lease Sale Agreement, the four Catco companies each received one-fourth of the total $97 1/3 million consideration, $3.1 million in cash and the remainder in notes. The notes are in two series designated "O" and "G", both of them the obligation of Tennessee Gas Supply. One series (the "O" series) is also the obligation of Tenneco, which owns and operates all of Tennessee's domestic oil producing properties. Thus Tenneco's total payment was $12 million ($387,500 cash and remainder in "O" series notes); Gas Supply's was $85 1/3 million ($2,712,500 cash and remainder in "G" series notes). The buyers and sellers agreed for purposes of establishing the rights of the parties, that the total quantity of recoverable reserves of gas attributable to the leasehold interests was 533,333,333 Mcf and the total quantity of recoverable oil 12,244,898 barrels. This stipulation was partly for the purpose of establishing security. These figures were also used to arrive at comparison levels and unit prices for the redetermination provisions of the agreements. The redetermination provisions, common in leasehold sales, provide for recomputation of the total price, at the request of any party, during the seventh year following the signing of the agreements. In such event, the recoverable quantities of oil and gas would be redetermined by arbitration proceedings. And the amounts by which the estimates of recoverable reserves were changed above or below 533,333,333 Mcf of gas and 12,244,898 barrels of oil would result in an adjustment in the total purchase price of 16 cents per Mcf ($85 1/3 million/533,333,333) and 98 cents per barrel ($12 million/12,244,898) above or below those base quantities. The examiner credited testimony that the base quantities represented only an arbitrary present determination of reserves arrived at by negotiation. They are not the average of actual engineering estimates obtained by parties to the transaction. Indeed the figure agreed upon is lower than any actual estimate mentioned in the hearings.

The Ship Shoal lease sale transferred to Tennessee's subsidiaries all mineral rights down to the base of the MI sand, including rights to produce and sell oil, casinghead gas, gas, condensate, and natural gas liquids, as well as related equipment. The Catco companies retained no responsibility for the management or operation of the interests. However, Tennessee was given the option to require petitioners to purchase all the crude oil to be produced from the properties at the average price posted in nine South Louisiana fields. Tennessee insisted on the oil purchase provision to assure a market for the oil since Tennessee itself is not in the oil business. This option has been continuously exercised since 1962. The note installments are being paid on schedule.

The examiner found that the Ship Shoal transaction, therefore, was a "sale of natural gas for ultimate public consumption within the meaning of the Natural Gas Act.": "This record shows the transfer of a vast reserve of natural gas, located outside the boundaries of any State, into the hands of a pipeline company whose business is the transportation and sale of natural gas within the United States. * * *" But the examiner concluded that the Commission lacked jurisdiction because of this court's opinion in the Rayne Field case⁵ that leasehold transactions generally were exempt under Section 1(b) exempting "the production and gathering of natural gas." The Commission adopted the examiner's findings except for his conclusion, which it reversed pending review of the Rayne Field case in the Supreme Court. The Supreme Court's Rayne decision in favor of jurisdiction came six months later. Thus, the Commission findings before us in Ship Shoal do not reflect the Court's Rayne opinion. However, they do provide a sufficient basis for our application of the standards the Court announced in that case.

The Commission order under review directs the petitioners to file, within six months, appropriate rate schedules and applications for certificates and to take other steps necessary to bring the Ship Shoal transfer within the requirements of the Act.⁶ However, it should be noted that no questions are before us relating to the propriety of the Commission's disposition of the case following its assertion of jurisdiction. Before us is only the jurisdictional question. Compare Rayne, supra, 381 U.S. at 399, 85 S.Ct. 1517.

The petitioners concede that there is no dispute regarding the relevant facts. However, they contend that the Commission made a number of ultimate findings not supported by substantial evidence.

I.

The Rayne Field case is the most recent link in the chain of Supreme Court decisions defining the Commission's jurisdiction over wellhead sales by independent producers. The chain began, of course, with Phillips Petroleum Co. v. State of Wisconsin, 1954, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035. Since the Catco case (Atlantic Refining Co. v. Public Service Commission of State of New York, 1959, 360 U.S. 378, 79 S.Ct. 1246, 3 L.Ed.2d 1312),...