Pennzoil Co. v. United States Dept. of Energy, 3-27.

• Citation: 680 F.2d 156
• Decision Date: 06 April 1982
• Docket Number: No. 3-27.,3-27.
• Parties: PENNZOIL COMPANY, Plaintiff-Appellant, v. UNITED STATES DEPARTMENT OF ENERGY, Secretary James B. Edwards, and the United States of America, Defendants-Appellees, Exxon Corporation; Texas Independent Producers and Royalty Owners Association; Caldwell Schools, Inc., et al., Nancy Abernathy, et al., and O. B. Mobley, Jr., Amici Curiae.
• Court: U.S. Temporary Emergency Court of Appeals

680 F.2d 156

PENNZOIL COMPANY, Plaintiff-Appellant, v. UNITED STATES DEPARTMENT OF ENERGY, Secretary James B. Edwards, and the United States of America, Defendants-Appellees, Exxon Corporation; Texas Independent Producers and Royalty Owners Association; Caldwell Schools, Inc., et al., Nancy Abernathy, et al., and O. B. Mobley, Jr., Amici Curiae.

No. 3-27.

Temporary Emergency Court of Appeals.

Argued November 13, 1981.

Decided April 6, 1982.

As Corrected April 22, 1982.

Rehearing Denied May 17, 1982.

John P. Mathis, Baker & Botts, Washington, D. C., with whom Randolph O. McManus, Washington, D. C., of the same firm; Perry O. Barber, Jr., James W. Shaddix and Jay G. Martin, Pennzoil Co., Houston, Tex., and Bruce M. Stargatt and Jack B. Jacobs, Wilmington, Del., of counsel, Young, Conaway, Stargatt & Taylor, Wilmington, Del., were on the brief for appellant.

Larry P. Ellsworth, Dept. of Energy, Washington, D. C., with whom Frank W. Krogh and Daniel F. Shea, Washington, D. C., of the same agency; Joseph J. Farnam, Jr., U. S. Atty. and Peggy L. Ableman, Asst. U. S. Atty., District of Del., Wilmington, Del., and George Kielman, Dean S. Cooper and Gilbert T. Renaut, Dept. of Energy, Office of Sp. Counsel, Washington, D. C., were on the brief for appellees.

David J. Beck, David L. Tolin and Ronald D. Secrest, Fulbright & Jaworski, Houston, Tex., David R. Johnson and John M. Simpson, Fulbright & Jaworski, Washington, D. C., and Barbara Finney, Exxon Corp., Houston, Tex., were on the brief for the Amicus Curiae, Exxon Corp.

Scott Anderson, TIPRO, Austin, Tex., and Joe A. Rudberg and James B. Harris, Thompson & Knight, Dallas, Tex., were on the brief for the Amicus Curiae, Texas Independent Producers & Royalty Owners Ass'n.

Leonard E. Davis and Michael E. Jones, Potter, Guinn, Minton, Roberts & Ireland, Tyler, Tex., were on the brief for Amicus Curiae, Caldwell Schools, Inc.

A. D. Clark, Jr., Tyler, Tex., Neal Hawthorn, Longview, Tex., and F. Lee Lawrence, Lawrence & Lawrence, Tyler, Tex., were on the brief for the Amici Curiae, Nancy Abernathy, et al.

John L. Schober, Jr., and Walter F. Clawson, Schober, Clawson & Brabham, Shreveport, La., were on the brief for Amicus Curiae, O. B. Mobley, Jr.

Before CHRISTENSEN, JAMESON and MAXWELL, Judges.

CHRISTENSEN, Judge.

This action was brought in the district court by Pennzoil Company against the Department of Energy (DOE) and its Secretary¹ to attack the validity of a 1975 ruling of the Federal Energy Administration as "retroactively" applied to the crude oil production of the unitized Walker Creek Field operated by Pennzoil in the State of Arkansas. From a summary judgment adverse to it, Pennzoil has appealed.

The substantive problem presented here involves the regulatory definition of "property" in DOE's administration of the "two-tier" crude oil pricing system. Procedurally, the case presents an aspect of the "interpretation" vs. "rulemaking" problem not unfamiliar to this court. A simplified statement of the regulatory context may be helpful before we explore the labyrinth of regulations, affidavits, opinions, cases and arguments with which we are confronted.

Under federal price control regulations, ceiling prices for crude oil were determined during material times by comparison of historical and current levels of production from a given "property." "Property" was defined as "the right which arises from a lease or from a fee interest to produce crude petroleum." The quantity produced from a "property" in the designated base year was established as the "base production control level" (BPCL). Current production at or below the property's BPCL was deemed "old" oil, while production above a property's BPCL qualified as "new" oil. "Old" oil was subject to the lower-tier price and "new" oil together with a corresponding amount of "released" oil² warranted the higher price.

Again stated only conceptually to lend point to what follows, the two-tier oil pricing system required producers to report, on a property-by-property basis, the portion of their crude oil production that had to be sold at the lower-tier controlled price and the portion eligible for sale at the upper-tier or market price. These determinations were to be made by comparing each property's current monthly production with the property's historic 1972 production. When property was unitized³ before 1972, the BPCL of this single "property" was the aggregate production of the constituent leases in 1972 to be compared to the total production of the leases within the unit in the current year. This application of the "property" concept is not questioned here.

The catch comes in this case when for the base year the properties were separate leases yet thereafter those leases were unitized so that the single unitized "right to produce" then became the "property." Absent unitization, if a lease which had production of a given amount in 1972, the base year, produced in a subsequent year an increased amount of oil, such increase would be counted as new oil free from old oil price constraints. However, if later it became, together with other leases, a part of a unit producing less oil than did the total of the constituent leases in 1972, the example lease may have produced more oil than in 1972, but no increased production of the unit as a whole would have occurred because of the reduced production of other leases constituting the unit.

If DOE is right, as the district court held, the 1972 base production control levels of the leases later designated a unit must be aggregated for comparison with the total production from the unit during the critical periods in determining the quantity to be priced as new oil, if any; whereas if Pennzoil's contentions are accepted, any increased current production from one lease resulting from a reduction or elimination of production from another lease in the unit could have been properly sold at the higher price even though aggregate production from all of the leases forming the unit had been reduced from its 1972 level.

The district court in granting summary judgment in favor of DOE held⁴ that Grigsby v. Department of Energy, 585 F.2d 1069 (Em.App.1978), cert. denied, 440 U.S. 908, 99 S.Ct. 1216, 59 L.Ed.2d 456 (1979), was controlling against Pennzoil's position. This Pennzoil disputes as it presents these issues on appeal:

1. Whether Grigsby v. DOE, 585 F.2d 1069 (Em.App.1978), precluded the district court's examination of the record in determining whether the "property" and BPCL rules of 10 C.F.R. § 212.72 required aggregation of the 1972 BPCL's of individual "properties" included within a multiple-property, enhanced recovery unit formed after 1972, for purposes of calculating "new" and "released" oil.

2. Whether Section II-B of Ruling 1975-15 was validly promulgated insofar as it purported to require abandonment of 1972 "properties" and aggregation of their BPCL's upon formation of a post-1972 multiple-property, enhanced recovery unit?

Implicit in the latter issue is Pennzoil's contention that Ruling 1975-15 announced a new rule not previously inherent in or justified by the regulations which it purported to interpret. The briefs of amici curiae generally track appellant's contentions with variations which we shall address to the extent deemed significant on this appeal.⁵

I. Proceedings and Decision in the District Court

In its amended complaint Pennzoil alleged that prior to field-wide unitization its Walker Creek Field consisted of wells drilled on each of 39 320-acre tracts, each tract being certified as a separate "property" and assigned a separate BPCL based on 1972 production, with the specific quantities of "old," "new," and "released" oil determined by measuring the current monthly production and sales against the BPCL of each tract for the corresponding month of 1972; that following creation of the Walker Creek Field Unit on May 1, 1974, and designation of Pennzoil as operator, production was reduced in the Unit to conserve reservoir energy and to lower gas production, and that injection operation began March 18, 1975; that "from May 1, 1974 through August 31, 1975, Pennzoil continued to calculate production from the Unit on a tract-by-tract basis, which had the effect of assigning BPCL's to each lease, for purposes of documenting and certifying volumes of `old' and `new oil'"; and that such treatment "was in keeping with the ... definition of `property' as adopted by the FEA, and was concurred in by FEA officials in conversations during the summer of 1974."

Pennzoil further alleged:

23. After the FEA issued Ruling 1975-15, Pennzoil, on September 1, 1975, adopted the "single property" approach to certifying production from the Unit, and a BPCL for the Unit based on 1972 production was established. As a consequence, from September 1, 1975 through January 31, 1976, no new oil was claimed from the Unit. Since Pennzoil concluded that Ruling 1975-15 was not applicable retroactively to the pre-September 1975 period, Pennzoil did not alter its prior certification of "old," "new," and "released" crude oil for the period May 1, 1974 through August 31, 1975. Had Pennzoil applied Ruling 1975-15, as originally issued, retroactively, no "new" or "released" crude oil would have been produced from the Unit from May 1, 1974 through August 31, 1975.

After several interlocutory rulings, extensive discovery, and briefing, the district court denied Pennzoil's motion for summary judgment and granted DOE's motion for summary judgment on plaintiff's amended complaint, expressly determining that there was no just reason for delay and ordering "that the clerk enter final judgment for defendants pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, on all claims raised by plaintiff in its amended complaint." The case is here on a timely appeal from this judgment.

The district court held, 514 F.Supp. at 517, that Ruling 1975-15 "effected no change in the pre-existing...