Getty Oil Co. v. Department of Energy, Civ. A. No. 77-434.

• Decision Date: 07 July 1983
• Docket Number: Civ. A. No. 77-434.
• Citation: 569 F. Supp. 1204
• Parties: GETTY OIL COMPANY, Plaintiff, v. DEPARTMENT OF ENERGY, et al., Defendants, and United States of America, Counterclaimant.
• Court: U.S. District Court — District of Delaware

569 F. Supp. 1204

GETTY OIL COMPANY, Plaintiff, v. DEPARTMENT OF ENERGY, et al., Defendants and United States of America, Counterclaimant.

Civ. A. No. 77-434.

United States District Court, D. Delaware.

July 7, 1983.

COPYRIGHT MATERIAL OMITTED

Charles F. Richards, Jr., Richards, Layton & Finger, Wilmington, Del., William Simon, William E. Wickens, Frederick S. Frei, Joanne Parsons Underhill, Howrey & Simon, Washington, D.C., C. Lansing Hays, Jr., David A. Ross, Dechert, Price & Rhoads, New York City, R. David Copley, Jr., Robert Hafey, Getty Oil Company, Los Angeles, Cal., for plaintiff.

Joseph J. Farnan, Jr., U.S. Atty., Wilmington, Del., Nancy C. Crisman, Larry P. Ellsworth, David A. Engels, Mark Kreitman, O. Ann Horn, Barry Sheingold, Dept. of Energy, Washington, D.C., for Federal defendants.

OPINION

STAPLETON, District Judge:

Plaintiff Getty Oil Company ("Getty") seeks this Court's review of a decision of the Department of Energy ("DOE") Office of Hearings and Appeals ("OHA") issued October 7, 1977 ("the October 7th Decision"), which found Getty had overcharged Standard Oil Company of Ohio ("Sohio") more than $84 million for price-controlled domestic crude oil. The United States counterclaims for that amount, plus approximately $27 million in additional overcharges stemming from the transactions addressed in the October 7th Decision. The case is currently before this Court on cross-motions for summary judgment.

I. BACKGROUND.

A. The Transactions

In July 1971, Getty and Sohio entered into an agreement in which Getty agreed to sell Sohio 25 thousand barrels per day of domestic crude, which at Getty's request was expressly contingent on sale of an equal volume of foreign crude to Getty by British Petroleum Company, Ltd. ("BP"). A.R. 589. Getty's contract for sale of domestic crude to Sohio was for the period January 1972 through December 1973, and from year to year thereafter unless terminated by either party. A.R. 53. BP's agreement to sell foreign crude to Getty, through its European subsidiary, BP Trading, Ltd., was for the identical term. A.R. 60. The domestic and foreign volumes to be exchanged pursuant to these agreements were to be equivalent:

Should either agreement be terminated as to all or a portion of the crude oil covered by the respective agreements, then the other agreement shall be terminated as to a similar quantity of oil.

A.R. 589. Pursuant to these agreements, Getty in fact transferred approximately 25 thousand barrels per day of domestic crude to Sohio and BP transferred to Getty approximately 25 thousand barrels per day of foreign crude. A.R. 298, 783, 784. Reciprocal cancellations of the 1971 agreements were to take effect on January 1, 1974. A.R. 591, 595.

During 1973, Getty and Sohio negotiated an extension of the existing 1971 reciprocal domestic and foreign agreements, with Sohio proposing to assume BP's rights and responsibilities under the foreign agreement. On May 2, 1973, three Getty representatives and three Sohio officials met in Houston to discuss the details of a three-year extension of both 1971 agreements. A.R. 131. At that meeting the parties reached tentative agreement on the principles of extension of both the foreign and domestic transactions. A.R. 131-134. It was decided to execute two new contracts to reflect the terms agreed upon. Id. A Getty memorandum of the May 2nd meeting refers to the "crude oil exchange agreements" and to the "tentative agreement" reached. Id. Immediately after the May 2nd meeting, Jack Brandon of Getty prepared a single outline covering the terms of "the tentative agreement." A.R. 132. This "Outline of Basic Principles of Proposed Agreement" covered both the foreign and domestic transactions as if they were one agreement. Id. Only after this agreement was reached did the parties draft two separate contracts. The contracts were drafted on the basis of this outline. A.R. 131.

Both contracts were dated and executed May 16, 1973. A.R. 119, 612, 629. The contract for sale of foreign crude by Sohio to Getty ("the foreign agreement") specifies a term from January 1, 1974 to January 1, 1977, and year-to-year thereafter unless twelve months' notice of termination is given. A.R. 612. The contract for sale of domestic crude by Getty to Sohio ("the domestic agreement") identically provides for a three-year extension of the existing 1971 domestic agreement, from January 1, 1974 to January 1, 1977 and year-to-year thereafter, with twelve months' notice of termination. A.R. 629, 632.

The terms of the two contracts are interdependent. The price of foreign crude to be delivered to Getty under the foreign agreement is equal to the price set in the domestic agreement less a per barrel differential:

Buyer Getty shall pay to Seller Sohio for the quantities of each shipment a price per barrel f.o.b. loading terminal equal to the price per barrel paid by Seller to Buyer for oil purchased by Seller during the month in which said shipment commences loading, under that certain crude oil purchase agreement of July 30, 1971, as revised, amended and extended by an agreement executed as of May 16, 1973 (said "May 16, 1973 agreement") executed by the parties hereto concurrently herewith, less a differential of $1.770 per barrel for Iranian Light Export Oil and less a differential of $1.562 per barrel for Abu Dhabi (Land) Export-Murban crude petroleum.¹

A.R. 614. The price for foreign oil can not be determined independently under the foreign agreement, but only by specific reference to the domestic agreement.

Paragraph 6 of the foreign agreement provides for price adjustments, also linked to the domestic agreement. Should either party allege that the price of foreign crude was "more or less than its value relative to the price under the domestic agreement," it could seek a price adjustment. A.R. 617.

Should Sohio seek such adjustment and Getty refuse, the foreign agreement allows Sohio the option to cancel the foreign agreement, but concurrently provides Getty the option to cancel the domestic agreement. A.R. 616, 617 ¶ 6. If Getty should seek such an adjustment and Sohio refuse, Getty was entitled to cancel the foreign agreement, but the domestic agreement would remain intact. The domestic agreement provides that it may be terminated on less than 12 months' notice only as permitted under the provisions of the foreign agreement:

The domestic agreement shall be subject to termination as provided in that certain crude Petroleum Sale Agreement dated May 16, 1973, between the parties hereto, executed concurrently herewith, relating to the purcase by Getty Oil from Sohio of Iranian Light Export and Abu Dhabi (Land) Export-Murban crude oil.

A.R. 630.

The foreign agreement requires that "balancing quantities" be delivered under both the foreign and domestic agreements. The foreign agreement states: "It is the intent of each party to receive the volumes of crude petroleum specified hereunder and under said May 16, 1973, domestic agreement." A.R. 615 ¶ 5. The agreements provide that, should deliveries by Sohio be short because of force majeure, Getty may require Sohio to make up the shortfall after expiration of the foreign agreement by delivery of domestic crude of the same grades delivered by Getty under the domestic agreement, and priced pursuant to the provisions of the domestic agreement. A.R. 615, 616 ¶ 5.

Beginning in September 1973, the petroleum price control regulations, initially adopted by the Cost of Living Council in August 1973 (6 C.F.R. § 150 Subpart L), and subsequently adopted in January 1974 by DOE's predecessor agency, the Federal Energy Office ("the FEA") (10 C.F.R. Part 212, Subpart D), established a maximum ceiling price for domestic crude oil equal to applicable May 15, 1973 posted price levels, plus certain allowable increases.² In October 1973, OPEC increased its crude prices by approximately 70%. By January 1974, the world market price for foreign crude was generally four times greater than it had been one year earlier. A.R. 1331. As a result, the value of foreign crude Getty received from Sohio increased dramatically.

When the bargain was struck by Getty and Sohio in 1973, each firm had contemplated receiving crude oil at generally prevailing market prices. A.R. 1199. When the price of foreign crude spiralled upward, Sohio sought no adjustment, apparently being willing to accept price controlled domestic crude for its market priced foreign crude because the price regulations permitted a refiner to account for the cost of its crude oil as a product cost, and pass on that cost to purchasers of its refined products. 6 C.F.R. §§ 150.355(g), 150.356(b); 10 C.F.R. §§ 212.82(f), 212.83(b). OHA found that Sohio measured the cost of the domestic crude it received from Getty by the market value of the foreign crude which it delivered to Getty and passed through to its customers as product cost an amount equal to the difference between the value of the foreign crude Sohio gave up and the domestic crude Sohio received. Getty claims it was wrongfully deprived of discovery regarding Sohio's treatment of its dealings with Getty and does not concede that Sohio treated the difference between the value of the oils delivered as a part of its cost. With this exception, however, the facts thus far recited are undisputed.

B. The Administrative Proceedings

DOE initially took the position, in a Notice of Probable Violation ("NOPV") issued to Sohio in 1974, that Sohio's pass-through of the value of the foreign crude it transferred to Getty was unlawful because, it was thought, Sohio's cost was solely the cash amount Sohio paid to Getty for Getty's domestic crude. A.R. 1-3. Following the issuance of that NOPV, the agency reconsidered its position and determined that Sohio's true product cost included the value of the foreign oil which Sohio gave up. Three weeks after its issuance, the NOPV to Sohio was withdrawn. A.R. 6.

In August 1975, DOE issued an...