Marathon Oil Co. v. Kleppe

• Decision Date: 07 June 1977
• Docket Number: No. 76-1230,76-1230
• Citation: 556 F.2d 982
• Parties: MARATHON OIL COMPANY, a corporation, Plaintiff-Appellee, v. Thomas S. KLEPPE, Secretary of the Interior, Vincent E. McKelvey, Director of United States Geological Survey, Department of the Interior, and C. J. Curtis, Area Oil and Gas Supervisor, United States Geological Survey, Department of the Interior, Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 982

556 F.2d 982

MARATHON OIL COMPANY, a corporation, Plaintiff-Appellee, v. Thomas S. KLEPPE, Secretary of the Interior, Vincent E McKelvey, Director of United States Geological Survey Department of the Interior, and C. J. Curtis, Area Oil and Gas Supervisor, United States Geological Survey, Department of the Interior, Defendants-Appellants.

No. 76-1230.

United States Court of Appeals Tenth Circuit.

Argued and Submitted March 15, 1977.

Decided June 7, 1977.

William H. Brown, Casper, Wyo. (Claude W. Martin, Brown, Drew, Apostolos, Barton & Massey and Morris G. Gray and David O. Cordell, Casper, Wyo., of Marathon Oil Co., on the brief), for plaintiff-appellee.

John J. Zimmerman, Dept. of Justice, Washington, D. C. (Peter R. Taft, Asst. Atty. Gen., and Edmund B. Clark and John E. Lindskold, Dept. of Justice, Washington, D. C., on the brief), for defendants-appellants.

Before McWILLIAMS, BREITENSTEIN and DOYLE, Circuit Judges.

McWILLIAMS, Circuit Judge.

Marathon Oil Company brought an action to set aside two decisions of the Secretary of the Interior, each of which precluded the counting, for royalty rate determination purposes, of water injection wells located outside the "participating areas." The trial court held that the decision in the Oregon Basin case was manifestly contrary to the applicable provisions of the unit agreement, and similarly that the decision in the Elk Basin case was manifestly contrary to the plain meaning of the language contained in 30 C.F.R. § 221.49, to the end that each decision was plainly erroneous and, under the standard of review in the Administrative Procedure Act, was "arbitrary, capricious, an abuse of discretion, or otherwise not in accord with the law." 5 U.S.C. § 706(2)(A). Accordingly, the trial court entered judgment setting aside each of the two decisions. The trial court's memorandum opinion appears at 407 F.Supp. 1301 (D.Wyo.1975). The Secretary now appeals. We affirm.

For a detailed statement of the background facts the reader is referred to the memorandum opinion of the trial court, and we shall proceed here on the premise that the reader of this opinion is thoroughly conversant with the trial court's memorandum opinion. For our purposes we would only note that, as relates to both the Oregon Basin and the Elk Basin, the royalty owed the United States is tied into the average daily production per well. Under this formula, assuming a given volume of production from a given participating area, it is apparent that the greater the number of wells which may be counted, the lower the average daily production per well. In turn, then, the royalty rate decreases, as specified in the royalty schedule, and the total royalty due the United States is accordingly less.

As concerns the Oregon Basin, twenty-nine water injection wells were drilled for the purpose of increasing the oil production from the oil wells situate within the participating areas. The selection of the specific site for each of these wells was made on the basis of maximizing the oil production from the producing wells in the participating areas. Thirteen of these water injection wells were located outside the outer boundaries of the participating areas.

As concerns the Elk Basin, eight water injection wells were drilled in order to increase oil production from the wells within the participating area, the site in each instance being determined by where the water injection well would do the most good in increasing oil production. Seven of these were located outside the participating area.

The question as to both the Oregon and Elk basins is whether the water injection wells located outside the participating areas are to be counted as wells in determining the average daily production per well. If such are to be included, then Marathon owes a lesser royalty to the United States. If these wells are not to be included, then Marathon owes the United States a much greater royalty. Resolution of the Oregon Basin case turns on the interpretation to be given section 13 of the unit agreement. Resolution of the Elk Basin case turns on the interpretation to be given 30 C.F.R. § 221.49, which was incorporated by reference into the Elk Basin unit agreement. The critical language in section 13 of the Oregon Basin unit agreement is in some respects similar to, though not identical with, the critical language in 30 C.F.R. § 221.49.

Section 13 of the Oregon Basin Unit Agreement reads as follows:

13. ROYALTIES: Royalties shall be paid at the rates specified in the respective leases upon that portion of the unitized substances produced and sold from any participating area which is allocated to each tract; provided that royalty due the United States on account of unitized Federal land shall be computed as provided in the operating regulations and paid in value or delivered in kind as to all unitized substances on the basis of the amounts thereof allocated to such land as provided herein at the rates specified in the respective Federal leases, or at such lower rate or rates as may be authorized by law or regulation; provided that, for leases in which the royalty rate on oil depends on the average daily oil production per well, the royalty rate in each participating area shall be determined for each such lease by the average daily production of all oil wells subject to this agreement producing from that participating area. Subject to approval of the Supervisor, in accordance with the operating regulations, all oil wells shut in for conservation purposes in each participating area, including productive oil wells with excess gas-oil ratios and any and all wells of any character actually used for repressuring or recycling, shall be counted as producing oil wells; and for leases in which the royalty rate on gas depends on the average daily gas production per well, the royalty rate in each participating area shall be determined for each such lease by the average daily production of gas per well subject to this agreement producing from that participating area. (Emphasis added.)

As indicated, 30 C.F.R. § 221.49 is incorporated by reference into the Elk Basin unit agreement, and that regulation provides, in pertinent part, as follows:

§ 221.49. Royalty rates on oil; sliding- and step-scale leases (public land only).

Sliding- and step-scale royalties are based on the average daily production per well. The supervisor shall specify which wells on a leasehold are commercially productive, including in that category all wells, whether produced or not, for which the annual value of permissible production would be greater than the estimated reasonable annual lifting cost, but only wells, which yield a commercial volume of production during at least part of the month shall be considered in ascertaining the average daily production per well. The average daily production per well for a lease is computed on the basis of a 28-, 29-, 30-, or 31-day month (as the case may be), the number of wells on the leasehold counted as producing and the gross production from the leasehold. (Tables for computing royalty on the sliding-scale and on the step-scale basis may be obtained upon application to the supervisor.) The supervisor will determine which commercially productive wells shall be considered each month as producing wells for the purpose of computing royalty in accordance with the following rules, and in his discretion may count as producing any commercially productive well shut-in for conservation purposes:

(b) Wells approved by the supervisor as input wells shall be counted as producing wells for the entire month if so used 15 days or more during the month and shall be disregarded if so used less than 15 days during the month. (Emphasis added.)

Both section 13 and the regulation authorize approved...