ENERGY CONSUMERS, ETC. v. Dept. of Energy, 10-21.

Citation632 F.2d 129
Decision Date04 April 1980
Docket NumberNo. 10-21.,10-21.
PartiesENERGY CONSUMERS AND PRODUCERS ASSOCIATION, INC., formerly Oklahoma Association of Energy Consumers and Producers, Inc., Plaintiff-Appellee, v. DEPARTMENT OF ENERGY, Defendant-Appellant.
CourtU.S. Temporary Emergency Court of Appeals

Dina R. Lassow, Dept. of Justice, Washington, D. C., with whom Alice Daniel, Acting Asst. Atty. Gen. of the Civ. Div., Dept. of Justice, C. Max Vassanelli of the Dept. of Justice, Washington, D. C., John P. McKenna, Arthur E. Gowran and Frank W. Krogh, Dept. of Energy, Washington, D. C., were on the brief for defendant-appellant Department of Energy.

Fred A. Gipson, Seminole, Okl., with whom Richard L. Bohanon and Lynn A. Pringle of Bohanon & Barth, Oklahoma City, Okl., and Richard S. Roberts, Wewoka, Okl., were on the brief for plaintiff-appellee, Energy Consumers and Producers Ass'n, Inc., formerly Oklahoma Ass'n of Energy Consumers and Producers, Inc.

Before CHRISTENSEN, JOHNSON and BECKER, Judges.

WILLIAM H. BECKER, Judge.

On this appeal the appellant Department of Energy (DOE) assigns error in the ruling of the district court adjudging invalid Part III of Ruling 1975-12, which was issued on August 29, 1975 by the General Counsel of the Federal Energy Administration (FEA), predecessor of DOE, as an interpretative ruling, without prior public notice and opportunity to comment required by paragraphs (b) and (c) of § 553, Title 5 U.S.C., a part of the Administrative Procedure Act (APA), codified as Subchapter II, § 551 to § 559 inclusive, Title 5 U.S.C. Ruling 1975-12 was first published on September 4, 1975. (40 F.R. 40828.)

Part III of Ruling 1975-12 purported to interpret the exemption from price control of crude oil produced from "stripper wells," provided in successive statutes and regulations of DOE and its predecessors FEA, Federal Energy Office (FEO) and Cost of Living Council (CLC). The statutory and regulatory history of the "stripper well" exemption, material to this appeal, is fully and accurately set forth in the original majority and dissenting opinions in Energy Reserves Group, Inc. v. Department of Energy (Em.App.1978) 589 F.2d 1082, explained in Duncan v. Theis (Em.App.1979) 613 F.2d 305.

The successive statutes and regulations described in the opinions in Energy Reserves Group, Inc. v. Department of Energy, supra, imposed an emergency mandatory system of allocation and control of prices of petroleum products from which crude oil produced from "stripper wells" was exempt. In § 4(e)(2)(A) of the Emergency Petroleum Allocation Act (EPAA), P.L. 93-159, 87 Stat. 627, effective in 1973, the statutory "stripper well" exemption was as follows:

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.

Regulations defining the stripper well exemption were promulgated successively by CLC and FEA. § 150.54(s), 6 C.F.R. (page 146) (1974) and § 210.32, 10 C.F.R. (page 98) (1976). The formula for determining "average daily production" as used in the statutes was consistently defined in the regulations of CLC and FEA as follows:

(b) Definitions: "Average daily production" means the qualified maximum total production of crude oil, including condensates, produced from a property, divided by a number equal to the number of days in the year times the number of wells that produced crude oil, including condensates, from that property in that year. To qualify as 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. (Emphasis added.) Energy Reserves Group, Inc. v. Department of Energy, supra, (Em.App.1978) 589 F.2d at 1091.

In 1975 FEA found it desirable to issue Ruling 1975-12, Part III, purporting to interpret the application of the regulations and underlying statute defining the stripper well exemption to multiple completion wells. Part III of Ruling 1975-12 is as follows:

III. Multiple Completion Wells.— Where a property encompasses the right to produce crude oil from two or more producing formations or reservoirs, producers sometimes utilize a production technique involving "multiple completion wells." This technique, which makes use of an existing well that produces from one formation, involves drilling from the existing casing separate well-bores or elongating existing well-bores in order to reach other formations. By the installation of additional tubing strings, crude oil may in this manner be produced concurrently from two or more formations. A multiple completion well is to be distinguished from a "recompleted well", which involves the technique of drilling a separate well-bore from an existing casing in order to reach the same reservoir, or redrilling the same well-bore to reach a new reservoir after production from the original reservoir has been abandoned. While a multiple completion well involves the simultaneous production from two or more reservoirs, a recompleted well involves production from only one formation.
Thus, a multiple completion well is designed to accomplish the same task as two or more separate and distinct producing wells, although conserving initial capital outlay, it functions in many ways as two or more separate producing wells: Crude oil from each formation remains isolated in distinct tubing strings until reaching the surface, where it may either be commingled with crude oil from other formations, or may continue to be diverted separately through alternative chokes and valves in the wellhead "Christmas tree" fitting. In this way, differences in API gravity, sulphur content and mineral impurities that might be characteristic of different formations, can be maintained.
Although a multiple completion well is a somewhat less costly alternative to drilling an entirely separate well in order to reach another producing formation in the field, it nevertheless represents a significant capital investment and poses certain additional problems beyond those encountered with single or separate wells. For example, the artificial lift in a multiple completion well is more complicated and, correspondingly more costly to install. Furthermore, repairs to any of the intervals are more costly than in separate wells and can result in a temporary shutdown of production from all reservoirs.
Therefore, the FEA has determined that multiple completion wells may be considered as two (or more) wells for the purpose of calculating "average daily production" pursuant to the stripper well lease exemption of 10 CFR 210.32 if,
(a) The well consists of two (or more) separate tubing strings run inside the casing, each of which carries crude oil from a separate and distinct producing formation, and
(b) the production capabilities of each formation are unaffected by any change in the production level of any other formation producing through the same well.
This result is consistent with the congressional policy of increasing the incentive and economic feasibility of maintaining production of crude oil from stripper well leases through advanced production techniques.

Application of Part III of Ruling 1975-12 To "Commingled Wells"

The district court properly described the administrative application of Part III of Ruling 1975 12 to the problem created by claims of the plaintiff-appellee (appellee) on behalf of its members in the following parts of its Memorandum Opinion (Transcript Tr. 876 at pages 878-879):

OAECP alleges that Ruling 1975-12 as applied to commingled wells is arbitrary and capricious. Further, OAECP alleges that the rule was improperly adopted by the FEA and is void. FEA contends that Ruling 1975-12 is an interpretive rule and, as such, is not subject to the rulemaking requirements of the Administrative Procedure Act, 5 U.S.C. § 553.
A multiple completion well produces crude oil from several oil bearing formations by utilizing a common well casing while segregating the oil produced from each formation into a separate tubing string. A commingled well is similar to a multiple completion well in that it also produces crude oil from two or more oil bearing formations through a common well casing. However, a commingled well does not segregate the oil from each formation but produces the oil from the several formations through a single tubing string. Thus the crude oil from any single oil producing formation is mixed with the crude oil from all other oil-producing formations which have been tapped through the common well casing.
Several of the members of OAECP are engaged in the production of crude oil through the utilization of commingled wells in which one or more of the oil producing formations produced less than ten barrels per day at the time the well was completed as a commingled well. However, now that the well is being operated as a commingled well, the amount of crude oil produced through the well from all of the oil producing formations which have been tapped through the common well casing totals in excess of ten barrels per day. These members have previously sold the oil produced, or portions of it, at the unregulated market price in the belief that if one of the oil producing formations in the commingled well was producing a certain amount of oil at the time the formations were commingled, and the amount of oil produced from that formation would qualify a single completion well as a stripper well, the amount of oil produced from that formation in a commingled well would also qualify for stripper well status. FEA disagreed. FEA adopted the position that it is not possible to accurately determine in a commingled well how much oil
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