Marathon Oil Company v. Kleppe, C74-179

• Court: United States District Courts. 10th Circuit. District of Wyoming
• Writing for the Court: John Lindskold, U. S. Dept. of Justice, Washington, D. C., for defendants
• Citation: 407 F. Supp. 1301
• Parties: MARATHON OIL COMPANY, a corporation, Plaintiff, v. Thomas S. KLEPPE, Secretary of the Interior, et al., Defendants (two cases).
• Docket Number: No. C74-179,C74-180.,C74-179
• Decision Date: 11 December 1975

407 F. Supp. 1301

MARATHON OIL COMPANY, a corporation, Plaintiff,
v.
Thomas S. KLEPPE, Secretary of the Interior, et al., Defendants (two cases).

Nos. C74-179, C74-180.

United States District Court, D. Wyoming.

December 11, 1975.

407 F. Supp. 1302

Wm. H. Brown and Claude W. Martin of Brown, Drew, Apostolos, Barton & Massey and Morris G. Gray, Casper, Wyo., for plaintiff.

John Lindskold, U. S. Dept. of Justice, Washington, D. C., for defendants.

MEMORANDUM OPINION

KERR, District Judge.

In these actions the plaintiff seeks to have this Court review, reverse, and set aside decisions of the Interior Board of Land Appeals, Office of Hearings and Appeals, U. S. Department of the Interior. The material facts are not in dispute. Most of the facts alleged in the Complaint in each case are admitted in the Answers or in admissions at the pretrial conference.

Both actions concern the construction of provisions relating to the counting of approved injection wells as if they were producing wells in connection with the computation of royalties under certain variable royalty rate oil and gas leases issued by the United States whereunder the royalty rate from month to month is determined by the daily average production of oil per well per day.

The applicable provisions of the unit agreement and the regulations authorize approved injection wells used for repressuring to be counted as if they were producing wells for the purpose of determining the daily average production per well per day. As the well count of producing or equivalent wells increases for a given volume of production, the daily average production per well decreases, and the variable royalty rate decreases accordingly as specified in the royalty schedule.

The locations of all repressuring wells including the 13 "outside" wells in dispute in the Oregon Basin case were duly approved by the Supervisor of the USGS in accordance with the applicable regulations. The locations, uses and functions of such repressuring wells were disclosed to and discussed with authorized representatives of the United States Geological Survey and were reported in monthly and annual reports to said agency. In the Elk Basin case all of the injection wells, including their locations, were included in plans of development filed with the USGS and approved by it. The locations of the wells in dispute were also disclosed to and discussed with authorized representatives of the USGS and were reported in monthly and annual reports to said agency.

In each case, the Interior Board of Land Appeals held that the disputed injection wells could not be included in the producing well count solely because they are located outside the boundaries of the participating areas for which they are being used as input or repressuring wells.

The injection wells in controversy serve the same functions as their counterpart injection wells located inside the participating areas involved, namely, to repressure and increase the production of oil from the participating areas being served and to reduce waste.

The parties agree that the water flooding program in the Oregon Basin field increased production from 8,700 barrels of oil per day to 32,000 barrels per day and that the 13 disputed wells significantly contributed to the increased production and increased royalty and will continue to do so. Such wells are used solely to repressure the two participating areas in that field. The parties also agree that the water flooding program in the Elk Basin field has greatly increased the production of oil, that the accelerated producing rates have resulted in higher royalty rates under the variable royalty leases and that the major part of the benefits of that program is attributable to the seven injection wells in dispute with respect to that producing field.

The parties agree that a purpose for authorizing the counting of injection wells as if they were producing wells is to encourage lessees to drill and operate as many such wells as will efficiently contribute to the increased recovery of unitized substances.

407 F. Supp. 1303

The amount in controversy in each of the two cases exceeds the sum of $10,000, exclusive of interest and costs.

Civil No. 74-179

The Oregon Basin Unit

Plaintiff is the operator of the Oregon Basin Unit, and is the owner of major interests and leases therein, including the following eleven Federal step scale and sliding scale leases in which the rate of royalty on oil allocated to such leases under the terms of the Unit Agreement depends upon the average daily production of oil per well: ("NETPA" designates North Embar-Tensleep Participating Area, and "SETPA" designates South Embar-Tensleep Participating Area).

Federal Lease No. Participating Area Type of Royalty
                 CH044024B NETPA Sliding Scale
                 CH051689 NETPA Sliding Scale
                 CH044036D NETPA Sliding Scale
                 CH051690 NETPA Sliding Scale
                 CH051916 SETPA Sliding Scale
                 CH066527 SETPA Step Scale
                 CH044006B SETPA Sliding Scale
                 CH068353A SETPA Sliding Scale
                 CH044005B SETPA Sliding Scale
                 CH068353 SETPA Sliding Scale
                 CH073138 SETPA Step Scale
                

The North and South Embar-Tensleep Participating Areas (NETPA and SETPA, respectively) were initially established with the formation of the unit effective March 1, 1948. Each participating area encompasses lands proved to be commercially productive from the producing formations. Production from the participating areas is allocated to the separate tracts therein, and to the owners of royalty, working interest, and other interests in such tracts on an acreage basis. All costs of operations, including the costs of all injection wells, are paid by the working interest owners on the same acreage basis.

In 1960, a peripheral water flooding project was commenced to repressure the producing formations of the North and South Embar-Tensleep Participating Areas in order to increase the production of oil therefrom.

As admitted herein, it was necessary to locate the water injection wells used in the water flooding operations near the water/oil contact in the producing reservoir, and thus close to the boundary of the participating area in order to realize maximum benefits from the program.

Twenty-nine water injection wells were drilled after commencement of the water flooding operations and were being used when this controversy arose in late 1969. Thirteen of these wells were located outside the boundaries of the participating areas involved. (One of the wells, the Herzog No. 1, is located immediately east of the common boundary of the Oregon Basin Unit and South Embar-Tensleep Participating Area. The undisputed evidence shows that this well was purchased by the working interest owners for use as a participating area water injection well pursuant to prior express approval of the then Regional Supervisor of the United States Geological Survey). These locations were selected to maximize production by repressuring the greatest possible reservoir areas. All of the 13 wells were drilled or procured and have been used exclusively to repressure the NETPA and SETPA.

As a result of the water flooding operations, production from the North and South Embar-Tensleep Participating Areas was increased from 8,700 barrels of oil per day in 1960 to approximately 32,000 barrels of oil per day in 1970.

The wells in dispute were fully approved as input wells in accordance with the operating regulations. Information as to the locations and operations of the wells (including the number of days operated each month, which is a factor governing countability of injection wells) was included in monthly and annual reports filed with the USGS.

Except for a delay in reporting one well, as the disputed wells were completed, they were included in the monthly well count report required to be furnished by plaintiff to the USGS in connection with the computation and payment of royalty.

407 F. Supp. 1304

The locations and operations of the disputed wells were reported to the USGS and were known by its personnel charged with the supervision of plaintiff's operations under the operating regulations. The USGS contends that its accounting personnel did not become consciously aware that injection wells outside of the participating area boundaries were actually being included in the producing well count until the practice was discovered in a post-audit procedure conducted in 1969.

In November 1969, the USGS Regional Accountant advised the plaintiff that the disputed wells could not be included in the plaintiff's producing well count. The Regional Supervisor confirmed this advice by decision of December 29, 1969, and directed the plaintiff to submit a revised well count and to pay back royalties retroactive to 1961. The plaintiff appealed to the Director of the USGS who affirmed the Supervisor's decision on September 20, 1971. Thereafter an appeal was perfected to the Interior Board of Land Appeals which affirmed the...