Energy Reserves Group v. Federal Energy Admin., Civ. A. No. 77-1146

• Decision Date: 26 January 1978
• Docket Number: 77-1087,76-429-C6.,Civ. A. No. 77-1146
• Citation: 447 F. Supp. 1135
• Parties: ENERGY RESERVES GROUP, INC., and Suburban Propane Gas Corporation, Plaintiffs, Marathon Oil Company and Sklar & Phillips Oil Company, Intervening Plaintiffs, v. FEDERAL ENERGY ADMINISTRATION and John F. O'Leary, Administrator, Federal Energy Administration, Defendants. SIERRA PETROLEUM CO., INC., Plaintiff, Maurice L. Brown Company, Intervening Plaintiff, v. FEDERAL ENERGY ADMINISTRATION and John F. O'Leary, Administrator, Federal Energy Administration, defendants. BRADEN-ZENITH, INC., Plaintiff, v. FEDERAL ENERGY ADMINISTRATION and John F. O'Leary, Administrator, Federal Energy Administration, Defendants.
• Court: U.S. District Court — District of Kansas

447 F. Supp. 1135

ENERGY RESERVES GROUP, INC., and Suburban Propane Gas Corporation, Plaintiffs, Marathon Oil Company and Sklar & Phillips Oil Company, Intervening Plaintiffs, v. FEDERAL ENERGY ADMINISTRATION and John F. O'Leary, Administrator, Federal Energy Administration, Defendants.

SIERRA PETROLEUM CO., INC., Plaintiff, Maurice L. Brown Company, Intervening Plaintiff, v. FEDERAL ENERGY ADMINISTRATION and John F. O'Leary, Administrator, Federal Energy Administration, defendants.

BRADEN-ZENITH, INC., Plaintiff, v. FEDERAL ENERGY ADMINISTRATION and John F. O'Leary, Administrator, Federal Energy Administration, Defendants.

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

United States District Court, D. Kansas.

January 26, 1978.

COPYRIGHT MATERIAL OMITTED

Joseph W. Kennedy of Morris, Laing, Evans, Brock & Kennedy, Wichita, Kan., for Energy Reserves Group, Inc., Suburban Propane Gas Corp., and Sklar & Phillips Oil.

Martin, Pringle, Schell & Fair, Paul B. Swartz, Wichita, Kan., for Energy Reserves Group, Inc.

Arthur M. Meyer, Jr., John R. Cope of Bracewell & Patterson, Washington, D. C., for Sklar & Phillips Oil Co.

John M. Shuey, Shuey, Smith & Carlton, Shreveport, La., Warren E. Connelly of Marathon Oil, Akin, Gump, Strauss, Hauer & Feld, Washington, D. C., for Marathon Oil.

Robert F. Ochs, The Gulf Companies, Law Dept., Houston, Tex., for Gulf Co.

Richard D. Greene, Robert I. Guenthner of Morris, Laing, Evans, Brock & Kennedy, Wichita, Kan., for Sierra Petroleum Co.

Robert I. Guenthner of Morris, Laing, Evans, Brock & Kennedy, Wichita, Kan., for Braden-Zenith, Inc.

Robert G. Hiess, Federal Energy Administration, Barbara Allen Babcock, Asst. Atty. Gen., C. Max Vassanelli, Economic Litigation Section, Rex E. Lee, Linda L. Pence, Stanley D. Rose, Gwynn T. Swinson, Civ. Div., U. S. Dept. of Justice, Washington, D. C., Jon K. Sargent, Asst. U. S. Atty., Topeka, Kan., for defendants.

OPINION OF THE COURT

THEIS, District Judge.

The plaintiffs and intervenors in this action are operators and owners of interests in properties capable of producing crude oil economically only by means of waterflood operations. Defendant Federal Energy Administration (FEA) is an agency of the United States, organized and existing under the provisions of the Federal Energy Administration Act of 1974, 15 U.S.C. § 761, et seq., and Executive Order No. 11790 (39 Fed.Reg. 2385, June 25, 1974). Defendant John O'Leary is named herein in his official capacity as Administrator of the FEA and references henceforth to FEA are intended to include both the FEA and its Administrator. Plaintiffs filed this action requesting declaratory judgment and injunctive relief invalidating a certain Ruling and Regulations of the FEA under which the FEA forbids counting of injection wells as wells for purposes of determining stripper lease status.

On May 26, 1977, a hearing on Motion for Preliminary Injunction in Civil Action No. 77-1146 was conducted before the Court and a preliminary injunction issued. These three cases were thereafter consolidated for the purpose of deciding three common issues:

1. Whether Ruling 1974-29 issued by the FEA on December 24, 1974, 39 Fed. Reg. 44414 is arbitrary, unreasonable or in conflict with its statutory authority.

2. Whether Rule 1974-29 was issued by the FEA in compliance with the Administrative Procedure Act, 5 U.S.C. § 553.

3. If Ruling 1974-29 is valid, whether the ruling may be applied to the plaintiffs' sales of crude oil prior to December 24, 1974, the date on which the ruling was issued.

All parties have filed Motions for Summary Judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, and hearing upon such motions was held to the Court. The parties agree there are no issues of material fact before the Court as to the questions outlined above, although defendant correctly asserts the Court cannot at this time determine any issue of good or bad faith on the part of plaintiffs as related to the issue of retroactive enforcement. The statutory and regulatory history and other relevant undisputed facts as presented by the parties in briefs and argument before the Court are set out below.

FACTUAL BACKGROUND AND FINDINGS

Prior to November 16, 1973, a regulation issued by the Cost of Living Council (CLC) pursuant to the Economic Stabilization Act of 1970, placed a ceiling price on the first sale of domestic crude petroleum.

On November 16, 1973, Congress enacted the Trans-Alaska Pipeline Authorization Act (TAPAA) which, inter alia, exempted from price controls the first sale of "crude oil . . . produced from any lease whose average daily production of such substances for the preceding calendar month does not exceed ten barrels per well . .." P.L. 93-153, § 406(a), 87 Stat. 584, 590.

The Conference Report which accompanied TAPAA reads in part:

Section 406, relating to stripper oil wells, as a Senate floor amendment to S.1081. The Conferees have adopted the general concept of the floor amendment, but have added new provisions to insure that the exemption is narrowly defined and prudently administered, and to insure that the incentive being granted is properly limited in accord with congressional intent.

The purpose of exempting small stripper wells — wells whose average daily production does not exceed ten barrels per well — from the price restraints of the Economic Stabilization Act . . . and from any system of mandatory fuel allocation is to insure that direct or indirect price ceilings do not have the effect of resulting in any loss of domestic crude oil production from the premature shutdown of stripper wells for economic reasons.

As of January 1, 1973, there were 350,000 stripper wells producing ten barrels a day or less. Stripper wells account for 71 percent of all of the oil wells in this country, but produce an average of only 3.6 barrels per day, or only 13 percent of total U.S. domestic crude production.

Many stripper wells are of only marginal economic value. When the costs of their operation exceed the value of their production, they are shut in, and a known and developed crude oil reserve is lost to U.S. production. Removing Phase IV price restraints from these marginal stripper wells has the effect of increasing the value of the crude oil they produce by about $1.30 per barrel. . . . This price incentive will encourage owners and operators of stripper wells to maintain production and to keep these wells in operation for longer periods of time than would be possible if the value of their crude oil production were determined under Phase IV price ceilings. This increased incentive will, it is anticipated, permit stripper well operators to make new investments in the eligible wells and improve the gathering and other facilities for moving this oil to market. 2 U.S. Cong. & Admin.News, pp. 2531-32 (1973).

The provisions added by the Conference Committee to insure the exemption is narrowly defined include on-site inspections and use of State data to prevent "gerrymandering" of leases. The Committee added:

The sole purpose and objective 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 produce continues to be available for U.S. refineries and U.S. consumers. (Id. at 2532.)

On November 26, 1973, the CLC published regulations exempting from price controls the first sale of domestic crude petroleum and petroleum condensates produced from any "stripper well." 6 C.F.R. § 150.54(s). The CLC also issued regulations defining "stripper well lease," 6 C.F.R. § 150.54(s)(2), and the statutory term "average daily production." 6 C.F.R. § 150.54(s)(2).

On November 27, 1973, Congress enacted the Emergency Petroleum Allocation Act (EPAA) requiring the President to promulgate regulations providing for, inter alia, pricing of crude oil not later than fifteen days after the date of enactment. Section 4(e)(2)(A) of the EPAA preempted the counterpart provision in the TAPAA, and provided:

The regulation promulgated under subsection (a) of this section shall not apply to the first sale of crude oil produced in the United States from any lease whose average daily production of crude oil for the preceding calendar year does not exceed ten barrels per well. 15 U.S.C. § 753(e)(2)(A) (1973).

On December 6, 1973, by Executive Order 11748 (38 Fed.Reg. 33575), the President created the Federal Energy Office (FEO) and delegated to it his authority under the EPAA.

On December 14, 1973, the CLC published a stripper well lease exemption amended to conform to the EPAA statutory terms. The new definition of stripper well lease was set out as follows:

A "property" whose average daily production of crude petroleum and petroleum condensates, including natural gas liquids, per well did not exceed 10 barrels per day during the preceding calendar year. 6 C.F.R. § 150.54(s)(2).

The amended regulatory definition of the statutory term "average daily production" was set out as follows:

The qualified maximum total production of domestic crude petroleum and petroleum condensates, including natural gas liquids, produced from a property during the preceding calendar year, divided by a number equal to the number of calendar days in that year times the number of wells which produced crude petroleum and petroleum condensates, including natural gas liquids, from that property in that year.

To qualify as a maximum total production each well on the property must have been maintained at the maximum feasible rate of production, in accordance with recognized conservation practices, and not significantly curtailed by reason of mechanical failure or other disruption in production. 6 C.F.R. § 150.54(s)(2).

On December 26, 1973, the CLC delegated its petroleum pricing authority to the FEO and on January 14, 1974, FEO adopted and reissued the CLC definitions of "stripper well lease" and "average daily production." 10 C.F.R. § 210.32(b).

On June 27,...