Shell Petroleum Inc. v. U.S., 97-7639

Decision Date24 June 1999
Docket NumberNo. 97-7639,97-7639
Citation182 F.3d 212
CourtU.S. Court of Appeals — Third Circuit

Before: Sloviter, Scirica and Alito, Circuit Judges


Scirica, Circuit Judge.

This is an appeal of the denial of a tax credit under the Crude Oil Windfall Profit Tax Act, Pub. L. 96-223, 94 Stat. 229 (1980) (codified in scattered sections of 7, 19, 26, and 42 U.S.C.) (repealed in part 1988) ("COWPTA") which grants oil producers an income tax credit of $3.00 for each barrel-of-oil equivalent of "oil produced from . . . tar sands" extracted through wells drilled between January 1, 1980 and December 31, 1992. The resolution of this case turns on the proper definition of "oil produced from tar sands," which the Act does not define. Shell contends the definition should be derived from commonly accepted usage in the petroleum industry and asserts that when the statute was enacted in 1980, "tar sand oil" meant "oil so viscous1 that it cannot be recovered economically through `primary production methods'2-- i.e., methods used in ordinary oil fields." The government maintains the proper definition may be found in Department of Energy Ruling 1976-4, which defines "tar sands" as "[t]he several rock types that contain an extremely viscous hydrocarbon which is not recoverable in its natural state by conventional oil well production methods including currently used enhanced recovery techniques." Department of Energy Ruling 1976-4, 10 C.F.R. ch. II Rulings 371, 372 (1980).3 Shell concedes that it is not entitled to a refund if we accept the DOE Ruling definition. Following a bench trial, the District Court adopted the definition of tar sands crafted by the DOE Ruling and denied the refund. See Shell Petroleum, Inc. v. United States, 996 F. Supp. 361, 372 (D. Del. 1997). Because we substantially agree with the District Court's well reasoned opinion, we will affirm.


Beginning in 1973, world oil prices quadrupled in less than a year after the Organization of Petroleum Exporting Countries embargoed oil sales to Western nations and then fixed prices above market levels. See Gary D. Allison, Energy Sectionalism: Economic Origins and Legal Responses, 38 Sw. L.J. 703, 705 (1984). Congress responded with the 1973 Emergency Petroleum Allocation Act (EPAA), Pub. L. No. 93-159, 87 Stat. 627 (1973) (codified as amended at 15 U.S.C. §§ 751-760h) (expired 1981), authorizing the President to regulate prices and allocate supplies of crude oil and related petroleum products.

In 1976, the Federal Energy Agency, which administered EPAA, issued Ruling 1976-4 in response to "inquiries with respect to the applicability of the [EPAA price and supply controls] to the so-called synthetic fuels (or crude oil substitutes) processed from oil shale, tar sands, coal, and other natural deposits that must be mined4 before the crude oil substitute can be extracted." Department of Energy Ruling 1976-4, 10 C.F.R. ch. II Rulings at 371. According to FEA,

at the time of enactment of the EPAA, domestic production of crude oil substitutes derived from oil shale, coal and tar sands was, as it is now, undertaken only for experimental purposes, and the synthetic products obtained thereby were not commercially available for use as refinery or petro-chemical feedstocks and were not expected to become commercially available for several years.

Id. at 372. Therefore, FEA concluded that synthetic fuels processed from tar sands were not subject to the EPAA regulatory scheme. See id. at 373.

The Emergency Petroleum Allocation Act proved counterproductive. Price controls reduced incentives to produce oil domestically and increased domestic oil consumption overall, making America more dependent on expensive imported oil. See Atlantic Richfield Co. v. United States Dep't of Energy, 655 F.2d 1118, 1121 (Temp. Emer. Ct. App. 1981). Oil prices fell in real terms after 1975, but world oil prices doubled in 1979, when the Iranian revolution severely curtailed oil exports. See Allison, supra, at 705-06. The Carter administration announced in 1979 it would phase out price controls, dramatically increasing domestic producers' short-term profits. See H.R. No. 96-304, at 5-7 (1979), reprinted in 1980 U.S.C.C.A.N. 587, 592-94. For this reason, Congress responded to the price decontrols with the Crude Oil Windfall Profit Tax Act. Title I ("Windfall Profit Tax on Domestic Crude Oil") imposed an excise tax on revenue from producer sales of crude oil, designed to capture the windfall profit. See 26 U.S.C. §§ 4986-98 (1982) (repealed 1988). To avoid suppressing the domestic oil supply, new production and other production considered sensitive to price fluctuations were taxed at lower rates or exempted. See id.§§ 4987(b), 4991-93; S. Rep. No. 96-394, at 2 (1979), reprinted in 1980 U.S.C.C.A.N. 410, 414. More importantly for our purposes, Title II ("Energy Conservation and Production Incentives") sought to reduce American dependence on imported oil by various means, including a tax credit "for producing fuel from a nonconventional source." 26 U.S.C.A. § 29 (West Supp. 1999) (as amended 1981, 1983, 1984, 1986, 1988, 1990, 1992, and 1996) (originally designated § 44D).5 Among the fuels qualified to receive the credit was "oil produced from shale and tar sands" through wells drilled between January 1, 1980 and December 31, 1992. Id. §§ 29(c)(1)(A), (f)(1)(A).


In 1983 and 1984, the tax years in question, Shell Petroleum, Inc. and certain subsidiary corporations owned working interests in properties in the Midway Sunset Field, Kern County, California. Part of the Midway Sunset Field lies over a reservoir known as "the Potter Sand formation" or "Potter Sands." For over a decade Shell had been extracting oil from Potter Sands through two steam injection techniques (steam soak, begun in 1963, and steam flood, begun in 1971). By 1980, both were well established and widely accepted enhanced recovery techniques in the petroleum industry.6

In its 1983 and 1984 tax returns, Shell did not seek the nonconventional source tax credit for Potter Sands oil, but in 1991 Shell filed amended tax returns claiming credits of $5,351,150 for Potter Sands oil produced during 1983 and 1984 from wells drilled after December 31, 1979. The tax credits were denied and Shell timely filed suit. Relying in part on the "instructive" analysis of Texaco Inc. v. Commissioner, 101 T.C. 571 (1993),7 the District Court, as noted, entered judgment for the United States. See Shell, 996 F. Supp. at 371. Shell now appeals.8

As we will discuss, Title I of COWPTA establishes that Shell's Potter Sands oil is crude oil. But the structure of the statute and the legislative history establish that crude oil is not tar sand oil. Therefore, Shell's oil cannot be tar sand oil. Furthermore, the legislative history establishes that the nonconventional source tax credit was intended to foster new energy technologies, whereas Shell's Potter Sands oil was produced in 1983 and 1984 using widely available means of production.


" `Where . . . resolution of a question of federal law turns on a statute and the intention of Congress, we look first to the statutory language and then to the legislative history if the statutory language is unclear.' " Murphy v. Dalton, 81 F.3d 343, 350 (3d Cir. 1996) (quoting Blum v. Stenson, 465 U.S. 886, 896 (1984)). As noted COWPTA does not define "oil produced from tar sands," but "where Congress has used technical words or terms of art, it is proper to explain them by reference to the art or science to which they are appropriate." Corning Glass Works v. Brennan, 417 U.S. 188, 201 (1974) (internal quotation marks and alterations omitted). We ordinarily look to the meaning of a statutory term at the time the statute was adopted. See MCI Telecomm. Corp. v. American Tel. & Tel. Co., 512 U.S. 218, 228 (1994) (explaining that "the most relevant time for determining a statutory term's meaning" is the time when the statute became law); see also McDermott Int'l, Inc. v. Wilander, 498 U.S. 337, 342 (1991) (interpreting statute as of the date of its passage); Perrin v. United States, 444 U.S. 37, 42 (1979) (same). In this case, the District Court did not rely on the industry understanding of "tar sand oil," in part because "[t]he testimony offered at trial suggests that, in fact, there was no industry consensus regarding a definition of tar sands in 1980 when Section 29 was enacted." Shell, 996 F. Supp. at 369. 9 Shell contests the court's factual finding and argues that, even in the absence of an industry consensus, the court should have limited itself to selecting among definitions that were acceptable to some petroleum experts in 1980.


Contending the District Court misunderstood its theory of the case, Shell contests the court's finding there was no consensus definition of "tar sand oil" in 1980. The District Court described Shell's definition of tar sand oil as

[a]ny consolidated or unconsolidated rock (other than coal, oil shale, or gilsonite) that either: (1) contains a hydrocarbonaceous material with a gas-free viscosity, at original reservoir temperature, greater than 10,000 centipoise,10 or (2) contains a hydrocarbonaceous material and is produced by mining or quarrying....

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