Sauder v. Department of Energy, 10-25.

• Decision Date: 24 April 1981
• Docket Number: No. 10-25.,10-25.
• Citation: 648 F.2d 1341
• Parties: Earl W. SAUDER, Plaintiff-Appellant, v. DEPARTMENT OF ENERGY and Charles W. Duncan, Jr., Secretary of Energy, Defendants-Appellees, and United States of America, Counterclaimant-Appellee.
• Court: U.S. Temporary Emergency Court of Appeals Court of Appeals

648 F.2d 1341

Earl W. SAUDER, Plaintiff-Appellant, v. DEPARTMENT OF ENERGY and Charles W. Duncan, Jr., Secretary of Energy, Defendants-Appellees, and United States of America, Counterclaimant-Appellee.

No. 10-25.

Temporary Emergency Court of Appeals.

Argued November 12, 1980.

Decided April 24, 1981.

Arthur M. Meyer, Jr. and Thomas F. Holt, Jr., Washington, D. C., argued, John R. Cope and Darci L. Rock of Bracewell & Patterson, Washington, D. C., for plaintiff-appellant.

Barbara L. Ward, Washington, D. C., argued, Alice Daniel, Asst. Atty. Gen., Dennis G. Linder, C. Max Vassanelli and Stuart A. Licht, Dept. of Justice, Larry Ellsworth and Daniel Shea, Washington, D. C., Dept. of Energy, for defendants-appellees.

David J. Beck and Ronald D. Secrest of Fulbright & Jaworski, Houston, Tex., for amici curiae.

Before CHRISTENSEN, DUNIWAY and ZIRPOLI, Judges.

DUNIWAY, Judge:

Earl W. Sauder appeals from the district court's ruling that he violated the Department of Energy's mandatory pricing regulations. Affirming an order by the Department of Energy,¹ the district court concluded that Sauder was not entitled to the stripper well exemption to the ceiling price for first sales of crude oil and that Sauder was liable individually for the full amount of the overcharges. We affirm.

I. The Facts.

Sauder is the part owner and operator of three oil leases located in Lyon County, Kansas — the Babinger-Perrier, the Rossillon, and the Jones-Rathke leases. These three contiguous leases are part of the Bradfield Pool, a single crude oil reservoir that has been tapped intermittently since the 1920's. In the early 1960's, production from the Pool was once again scheduled to be stopped, and Sauder and five other working interest owners were able to purchase, between 1962 and 1966, all ten of the leases covering the Pool. Acting under the authority of the Kansas Corporation Commission, Sauder and his co-owners unitized four leases to form the Babinger-Perrier lease and another four leases to form the Jones-Rathke lease. The Rossillon lease was left unchanged, and the Rossillon, Babinger-Perrier, and Jones-Rathke leases were never unitized to form a single tract.

Unitization agreements combine "the separate tracts in the field into one tract so that the reservoir may be operated without regard to surface property lines." Williams and Myers, Oil and Gas Law, volume 6, § 901, p.4. Unitization becomes particularly necessary when a reservoir has passed the stage of primary production, as was the case with the Bradfield Pool, and can only be tapped through "secondary recovery operations, where the location of input wells, the freedom to flood out parts of the reservoir, and the sharing of costs are vital to the success of the program." Id.

Sauder and the other working interest owners never sought to unitize the three leases at issue in this litigation because of "the complexity of obtaining the signatures of all the royalty owners involved, including estates, trusts, and other fiduciaries." Appellant's Brief at page 6. Even so, the leases were operated after 1966 as if there were a single unit. The number of wells was reduced from twenty-five to twelve; two wells were converted to disposal wells while several wells were shut in. Special high volume "Reda" pumps were installed at 40 acre intervals, and several new wells were drilled, without regard to lease boundaries. Secondary recovery procedures were begun, including the use of settling tanks and skimming. Electricity was charged to the entire operation through a single meter, and all three leases were operated by one "pumper" employee. It is Sauder's position that because the three leases were operated as a single property, they were in fact unitized, even though there was no written unitization agreement.

In 1973, price controls were placed on the "first sale" of crude oil — i. e., "the first transfer for value by the producer or royalty owner" 10 C.F.R. § 212.72. However, "stripper" well leases were exempted from these controls, first by the Trans-Alaska Pipeline Authorization Act of 1973, 43 U.S.C. § 1651 et seq., and then by the Emergency Petroleum Allocation Act of 1973, Pub.L. 93-159, 87 Stat. 627, 15 U.S.C. §§ 751 et seq. Section 4(e)(2)(A) of the Allocation Act (87 Stat. 632) replaced the corresponding provision in the Pipeline Act and provided an exemption from price controls for "any lease whose average daily production of crude oil for the preceding calendar year does not exceed 10 barrels per well." This provision was briefly repealed in December, 1975, by section 401(b)(1) of the Energy Policy and Conservation Act, Pub.L. 94-163, 89 Stat. 871, 946, but was reinstated in 1976 by section 121 of the Federal Energy Administration Amendments of 1976, Pub.L. 94-385, 90 Stat. 1127, 1132-33, 15 U.S.C. § 757(i).

In implementing the stripper well exemption, the Federal Energy Administration (FEA) and its successor agency, the Department of Energy (DOE), defined a stripper well lease as "a `property' whose average daily production of crude petroleum and petroleum condensates ... per well did not exceed 10 barrels per day...." 10 C.F.R. § 210.32(b) (emphasis added). "Property," in turn, is defined in the regulations as "The right to produce domestic crude oil, which arises from a lease or from a fee interest," 10 C.F.R. § 212.72, and the scope of the stripper well exemption thus hinges on this some what enigmatic definition. For a more detailed discussion of the exemption and its history, see Energy Reserves Group, Inc. v. DOE, Em.App., 1978, 589 F.2d 1082, 1087-91.

In an effort to dispel some of the confusion which arose as to the definition of property, not only in relation to the stripper well exemption but also as to other aspects of the price controls, the FEA issued several interpretations of the term. Ruling 1975-15, 40 Fed.Reg. 40832 (Sept. 4, 1975), emphasized that "the right to produce" is the key attribute of a property — "the property concept is one that identifies the right to produce crude oil." Because a unitized property constitutes a single right to produce, the Ruling found that the unitization of several leases creates a single "property" for purposes of the stripper well exemption:

Often, where two or more leases have reached the declining stages of production, they are unitized (i. e. the operations of the several leases are combined, more efficiently to undertake enhanced recovery techniques). Such techniques usually involve the conversion of some previously producing wells to injection wells and/or the shutting-in of other wells in a coordinated overall-production effort, and for this reason some leases are left after unitization with fewer producing wells within their geographical boundaries than before. Unitization sometimes results in one or more leases being left only with injection wells, or with no operating wells at all. Because this realignment of producing patterns, then, may result in the distorted actual production from any one lease comprising the unit, production from the unit is allocated to each lease based upon imputed production percentages. Accordingly, the agreement under which the several leases are unitized typically combines the several rights to produce crude oil that, prior to unitization, existed in the previous producers into a single right to produce crude oil now existing in the unit. Generally, therefore, since the unit agreement signifies one right to produce crude oil arising from several leases or fee interests, the unit defines the property. Id.

From 1973 through 1975, Sauder claimed the stripper well exemption for oil produced from the Rossillon, Jones-Rathke, and Babinger-Perrier leases. Sauder certified to the purchaser of the oil, Mobil Oil Company, that the oil was stripper well oil and thus not subject to the ceiling price for crude oil. Sauder's position was that, because the leases were operated as a unit and because production from the field considered as a unit did not exceed 10 barrels per well per day, the exemption was available to him and his fellow working interest owners.

The DOE disagreed. The agency found that because the three leases had not been formally unitized, they must be considered as three properties. When so considered, production at the Rossillon and Babinger-Perrier leases exceeded 10 barrels per well per day, placing these leases outside the stripper well exemption. The result of secondary recovery operations had been to virtually halt production from the Jones-Rathke lease while increasing the per well production from the other two leases to quantities exceeding the 10 barrel limit.

The agency issued a Notice of Probable Violation to Sauder on July 9, 1976, stating that he had overcharged Mobil Oil in the amount of $342,589 plus interest. Following a written response by Sauder, FEA issued a Remedial Order on November 4, 1976, holding Sauder to have violated the price controls and ordering him to repay the overcharges to Mobil Oil. On April 22, 1977, the FEA Office of Exceptions and Appeals denied Sauder's appeal of the Remedial Order, and the district court affirmed the agency.² Sauder appeals.

II. The Merits.

Sauder's appeal falls into two parts. First, he argues that he is entitled to the benefit of the stripper well exemption. Second, he argues that even if the agency properly found him in violation of the price regulations, it could not impose on him alone the obligation to refund the total amount of the overcharge when he owned only a share of the oil produced and sold at the field.

A. The Question of Unitization.

In its Decision and Order, the agency ruled that Sauder's production methods did not amount to a unitization, and thus a "property," for the purposes of the stripper well exemption:

... the leases were neither formally unitized as a single property nor were they ever formally recognized by the Kansas Corporation Commission as a consolidated crude oil

...