Phoenix Canada Oil Co. Ltd. v. Texaco, Inc., 87-3389

Citation842 F.2d 1466
Decision Date26 April 1988
Docket NumberNo. 87-3389,Nos. 87-3375,87-3389,No. 87-3375,87-3375,s. 87-3375
PartiesPHOENIX CANADA OIL COMPANY LIMITED, Appellant in, v. TEXACO, INC., Texaco Petroleum Company, Ecuadorian Gulf Oil Company, and Gulf Oil Corporation, now, by Change of Name, Chevron, U.S.A., Inc. Appeal of TEXACO PETROLEUM COMPANY and Ecuadorian Gulf Oil Company, Appellants in
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Victor P. Muskin (argued), Sally L. Schneider, Gruen, Muskin & Thau, New York City, Hughes & Sisk, Wilmington, Del., for Phoenix Canada Oil Co. Ltd. Milton Sherman (argued), Milton J. Schubin, Myron Kirschbaum, Scott M. Berman, Kaye, Scholer, Fierman, Hays & Handler, New York City, Richard D. Allen, Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for Gulf Oil Corp., Texaco Petroleum Co., and Ecuadorian Gulf Oil Co.

Lawrence R. Jerz, White Plains, N.Y., for Texaco Petroleum Co.

Before WEIS, HIGGINBOTHAM and ROSENN, Circuit Judges.

OPINION OF THE COURT

WEIS, Circuit Judge.

As the beneficiary of a royalty arrangement, plaintiff Phoenix seeks compensation for its proportionate share of oil production rights in Ecuador which defendant oil companies allegedly conveyed to that government. The district court found that Ecuador had paid defendants only for unamortized capital assets and supplies but nothing for production rights. Consequently, plaintiff did not succeed on that claim. The district court, however, did award plaintiff damages for past-due royalties which had been earned but calculated improperly, finding only defendant subsidiaries liable, not their parent corporations. We will remand for further factual development of a possible agency relationship between parent and subsidiary corporations, but otherwise will affirm.

After a nonjury trial, the district court entered judgment against plaintiff Phoenix Canada Oil Company, Ltd. on its claim for recovery of the value of petroleum production rights, and in favor of Phoenix on its claim for payment of past-due production royalties. The automatic stay provision of the Bankruptcy Code, 11 U.S.C. Sec. 362, precluded entry of a final judgment as to defendant Texaco, Inc. However, the district court entered judgment with respect to the other three defendants, certifying there was no cause for delay.

Phoenix's predecessors obtained a concession from the Government of Ecuador to explore for oil in the eastern lowlands of that South American country. Subsequently, Phoenix and a Canadian co-venturer succeeded to these exploration rights, and they, in turn, assigned a portion of their concession territory to Gulf and Texaco in exchange for an immediate cash payment and a royalty on any oil extracted. Although Gulf and Texaco successfully produced oil in the assigned territory, a series of government actions reduced the profitability of the venture, and Gulf eventually sold its interest back to the Ecuadorian government. As a result of this sale, Phoenix's royalty base was reduced significantly. Phoenix brought this suit to recover damages for its lost royalty interests.

I.

In 1961, the Ecuadorian government granted Minas y Petroleos del Ecuador a concession to explore for oil and, if discovered, exploit the reserves found in an eleven million acre tract. In 1965, Minas entered into a contract with a consortium of Gulf and Texaco subsidiaries. Under the provisions of the agreement, the subsidiaries succeeded to Minas' exploitation rights in a portion of the original concession, a large area of land identified in the contract as the "Coca Concession". 1 In return, the subsidiaries made a cash payment to Minas' two corporate owners, Phoenix and Norsul, 2 agreeing to pay a royalty calculated at two-percent of the net value of any crude oil or natural gas produced from the area. The government formally approved the transfer, but was not informed of the two-percent royalty arrangement.

Oil was discovered in the Coca Concession in 1969, and actual production began in 1972. To transport the crude to market, the Gulf-Texaco consortium financed and constructed a 318-mile pipeline across the Andes Mountains down to the Pacific Coast. The pipeline cost the consortium $108 million.

Following the 1969 announcement that oil had been discovered, the government required renegotiation of all concession arrangements. The Coca Concession consequently was reduced in area, and the government royalties were nearly doubled from 6% to 11.5%.

In 1971, Ecuador enacted the new Hydrocarbons Law which declared that "[t]he deposits of hydrocarbons and accompanying substances ... located in the national territory ... belong to the inalienable and imprescriptible patrimony of the State." Although originally enacted to be prospective in effect, the new law was made retroactive when a military government took power in 1972.

The 1971 Hydrocarbons Law further reduced the size of concessions and again raised the government's royalty. In addition, the statute provided that the government's royalty and income taxes would henceforth be computed for all producers on the basis of a uniform "reference price", which could be set either by agreement with the producers or unilaterally by the government. The law also mandated governmental participation in oil production through "association contracts" to which the national oil agency, Corporacion Estatal Petrolera Ecuatoriana (CEPE), would be made a party.

The consortium requested indemnification from the government for the area that had been returned in compliance with the Hydrocarbons Law. The government refused, explaining that the payment of compensation for the return of "the inalienable interests of the Nation" was inconsistent with the petroleum policy of the "Nationalistic and Revolutionary Government of the Armed Forces."

Citing the increasing costs of doing business under the new military government, the consortium insisted that the original provisions of the 1965 contract had been frustrated and demanded renegotiation of the two-percent royalty proviso with Phoenix. In early 1973, the parties reached an "Interim Agreement" to govern the calculation of the royalty payments due for the last two quarters of 1972 and the first quarter of 1973. This document, however, stipulated that the signatories were not waiving their rights under the original 1965 contract.

Although the Interim Agreement expired after the first quarter of 1973, its terms were followed through the third quarter of 1973. A dispute between the parties arose when the consortium continued to calculate the two-percent royalty under the Interim Agreement for the final quarter of 1973 and the first and second quarters of 1974. The district court's ruling on that point is one of the issues in this appeal.

The Interim Agreement renegotiation drew the government's attention to the previously unknown two-percent royalty arrangement. The Ecuadorian Natural Resources Minister reacted with hostility to the news of the discovery, declaring it an "illegal" and "immoral" attempt to partition a national resource belonging inalienably to the people of Ecuador. Rather than voiding the royalty outright, as the Resources Minister urged, the government instead imposed an 86% retroactive tax on the payment of the two-percent royalties.

In 1973 the government issued a decree establishing the terms of a new model contract, which the consortium and other oil producers were bound to accept in lieu of existing agreements. The model contract granted CEPE the right to acquire up to a 25% participation in the "rights and actions conferred in this contract and in the assets acquired by the contractors for purposes of this agreement." Also included were a tax reference price unilaterally set by the government, a provision shortening the Coca Concession exploitation period, and an expansion of state-imposed discounts for oil purchased for domestic use in Ecuador.

Consortium efforts to negotiate a mutually advantageous purchase price for the 25% interest proved unavailing. Instead, the government stated flatly that CEPE would begin its 25% participation on June 6, 1974 and that compensation would be computed on the basis of net book value, or the unrecovered actual investment in producing and pipeline assets. An independent auditor was engaged to establish the exact value of the unrecovered investment. The government rejected the consortium's request to be paid for future production rights lost as a consequence of the transfer.

The following year, a resolution announced that CEPE would not pay for its proportionate share of the cost of the pipeline. In conducting its 1976 audit, Peat, Marwick, Mitchell & Company excluded the pipeline expenditures and calculated the net book value of the consortium's investment at $182 million. Over a nearly five-year period, Ecuador paid the consortium one-fourth of this sum, or a total of $45,033,671. No interest was paid for the delay.

While the CEPE acquisition proceeded, other significant events were taking place as well. In June 1974, the government issued Resolution 11927 to clarify the two-percent royalty due Phoenix and Norsul from the consortium. The expressed purposes of this resolution were to "terminate the disagreements arising out of the assessment and payment of two-percent of the net production" and to "establish with certainty the taxable base which generates the [86%] income tax."

The Resolution imposed an additional requirement that Phoenix and Norsul invest at least half of their remaining 14% after-tax royalty payments in Ecuador. The Resolution also provided that CEPE's newly acquired 25% interest "be excluded, in order to carry out the assessment of the 2%." When challenged by Texaco, the Resolution was affirmed by a Ministerial Sentencia in October 1974.

In the years that followed, the government of Ecuador took other drastic steps which...

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