Placid Oil Co. v. United States Dept. of Interior

• Decision Date: 01 April 1980
• Docket Number: CA-3-79-1096-K.,Civ. A. No. CA-3-79-1095-K
• Parties: PLACID OIL COMPANY v. The UNITED STATES DEPARTMENT OF the INTERIOR. HUNT OIL COMPANY v. UNITED STATES DEPARTMENT OF the INTERIOR.
• Court: U.S. District Court — Northern District of Texas

491 F. Supp. 895

PLACID OIL COMPANY v. The UNITED STATES DEPARTMENT OF the INTERIOR.

HUNT OIL COMPANY v. UNITED STATES DEPARTMENT OF the INTERIOR.

Civ. A. Nos. CA-3-79-1095-K, CA-3-79-1096-K.

United States District Court, N. D. Texas, Dallas Division.

April 1, 1980.

A. B. Conant, Jr., Roderick G. Steakley, Shank, Irwin, Conant, Williamson & Grevelle, Dallas, Tex., for plaintiff.

Rebecca Donnellan, Dept. of Justice, Washington, D. C., for defendant.

MEMORANDUM OPINION

BELEW, District Judge.

Came on to be heard Plaintiffs in the above styled and numbered causes with their Motions for Preliminary Injunction. After giving due consideration to the briefs of counsel, and after hearing oral argument, this Court is of the opinion that said preliminary injunctions should be GRANTED.

Discussion

I. The Facts.

Both Hunt Oil Co. and Placid Oil Co. are lessees of the United States Government of property on the Outer Continental Shelf. The leases involved were executed between Plaintiffs and the Department of the Interior ("Interior") pursuant to the Outer Continental Shelf Lands Act, 43 U.S.C.A. § 1331, et seq. (as amended, Supp.1979) ("Act") which statute also governs the parties' contractual rights. Under 43 U.S.C. § 1334(a)(1), the Secretary of the Department of the Interior is charged with the administration of leases on the Outer Continental Shelf ("OCS"). The Secretary is also authorized to promulgate any rules or regulations deemed necessary to carry out the provisions of any lease entered into by the Government or to prevent waste and conserve natural resources under the shelf. The Secretary is responsible for the collection of royalties owing to the Government under any offshore lease. It is the latter departmental responsibility which is the subject of this suit.

The Act was adopted in 1953. From that time until late in 1974, Interior had based its royalties on an interpretation of the applicable leases which exempted the following categories of oil and gas from the calculation:

(a) oil or gas which is lost in spills, blowouts or fires;

(b) gas which is vented or flared; and

(c) gas or oil used as fuel for on-lease production activities.

The interpretation that lead to the exemption from royalty calculations of the three categories of oil or gas listed above was based on language both in the Act itself and in the leases between Hunt and Placid and Interior.

Section 8(b)(3) of the Act, 43 U.S.C. § 1337(b)(3) provides in part: "an oil and gas lease issued . . . pursuant to this section shall . . . (3) require the payment of a royalty of not less than 12½ per centum, in the amount or value of the production saved, removed, or sold from the lease . . .."

Leases entered into by the parties prior to 1974 provide, in part that the oil companies would be required:

to pay the lessor a royalty of 16 2/3 % in amount or value of production saved, removed or sold from the leased area. Gas of all kinds (except helium and gas used for purposes of production from and operations upon the leased area which are unavoidably lost) is subject to a royalty.

The post-1974 leases provided that the companies would be required "to pay the lessor a royalty of 16 2/3 % in amount or value of production saved, removed or sold from the leased area. Gas of all kinds (except helium) is subject to royalty." Plaintiff Placid's Memorandum In Support of its Motion for Preliminary Injunction, p. 6.

On November 1, 1974, Interior's supervisor in charge of a group of leases owned by, among others, Hunt and Placid, issued a notice to all lessees to the effect that: "effective June 1, 1974, royalty will be due on all oil and gas produced from all OCS leases. . . . The production subject to royalty . . . includes that oil and gas which is lost in spills, blowouts, and fires, gas which is vented or flared, and oil and gas used on such leases. . . ." Exhibit A to Plaintiffs' Original Complaints.

This notice and the procedure for royalty calculation contained in it was a radical departure from practices followed since 1954 and the announcement created a great deal of controversy. Exhibit "B" to Plaintiffs' Original Complaints at p. 1. This furor among federal lessees eventually resulted in an interpretation in 1976 of the oil and gas royalty provisions of the Act and leases entered into thereunder that adopted the procedure outlined in the November, 1974 order. In the 1976 interpretation, the solicitor for Interior recognized that the old method including the three royalty exemptions listed above had been in effect since 1954 and stated that it was incorrect. Exhibit "B", supra, at p. 11. The opinion made June 28, 1976 the effective date of the new royalty calculation method for leases under the Act. This recommendation was approved by the Secretary of the Interior.

Finally, on or about July 30, 1979, Plaintiffs received a notice from Interior directing them to review all production records from OCS leases and pay any royalties owing under those leases, including royalties due under the calculation method set out in 1976. The July notice, issued a full three years after the original reinterpretation of the royalty provisions, was the first time the Plaintiffs were directed to recalculate and pay royalties including amounts for vented and flared gas and the like. The instant lawsuits were filed shortly thereafter.

Placid Oil Co. is the larger leaseholder of the two plaintiffs, operating thirteen OCS properties in the Gulf of Mexico. Approximately twenty offshore drilling platforms service about one hundred and fifty different wells on the thirteen leases. Placid is not the sole interest owner in any OCS lease. It is the operator for all of them, but it shares ownership interest with one other oil company on some properties and as many as thirteen companies on other leaseholds. Some of the wells on the Gulf of Mexico properties are dual completion wells. That is, on some wells, oil or gas from two producing horizons is pumped from the same bore hole.

As operator of the leases, it is Placid's responsibility to keep track of the production from each well and to calculate and pay government royalties for all the other interest holders. It then distributes what is due to its co-owners. The calculations required to arrive at these various figures are quite complex. There are a wide variety of pricing possibilities under the Natural Gas Policy Act and its predecessors which create the need for classification not only of different types and subtypes of natural gas produced but also of sets of producers and owners. Many steps must be taken in the process before a price figure can be arrived at from which a royalty may be derived.

The same kind of problems exist in the pricing of crude oil as well. For the purposes of these cases, however, a detailed examination of these pricing procedures is unnecessary. Suffice it to say that they are quite labyrinthine. A further complicating factor is the periodic occurrence of retroactive pricing adjustments during the period in question.

The record indicates that Placid, in accordance with government regulations, has filed 9-152 forms with Interior for each lease since the leases were entered into. The form is filed on a monthly basis and it contains a record of the total production for each lease. The form breaks down the total production into, among other things, amounts of vented and flared gas, fuel gas and sales gas.

Placid also files a monthly form 9-153 with Interior for each lease. That form verifies Placid's monthly royalty check. It shows, among other things, the amount of gas and any other products sold off of the OCS leases as well as the volumes of gas or oil involved. The long and complicated pricing calculations described earlier must be made in order to fill out these forms.

The forms mentioned above do not contain information concerning what gas or oil comes from which producing horizon or which interest owning companies are large producers and which are small operators. Further, the prices and categories of gas which are reflected on the forms are hypothetical in that there is no direct, one-to-one identification between any specific unit of gas produced and a unit of gas designated as flared, for example, on the forms. The 9-152 and 9-153's also lack any information concerning the nature or specifics of any operating contracts to which Placid may be a party that involve the leases in question. The record reflects that in order to produce the information necessary to make the royalty payments requested by Interior in this case would cost Placid approximately one thousand man hours.

Hunt Oil Company faces much the same problem with respect to Interior's royalty recalculation request, only on a smaller scale. The record reflects that ten man hours would be sufficient to bring Hunt into compliance with the Interior directive. Hunt has three OCS leases with a total of five wells. It has full joint ownership with one other entity while a third concern has an interest only in the net profits of its joint venture with Hunt.

Plaintiff Hunt makes filings with the Department of Energy ("DOE") that would be affected by Interior's royalty directive. The DOE documents are price exemption requests which are compiled based on Hunt's operating costs. The necessity of paying the additional royalties requested by Interior would serve to raise Hunt's costs and thereby raise the price Hunt would seek to obtain for its gas. The higher prices, if allowed, would eventually be passed on to consumers. The correction and refiling of the DOE documents involved would require about one and one half to two days. This process would have to be reversed if Plaintiffs prevail on the merits of their claims in these lawsuits.

The object of these suits is to test the validity of Interior's re-interpretation of its royalty calculation procedure. The record reflects that Hunt and Placid are not alone in their endeavor....