SOUTHERN U. PRODUCTION v. Federal Energy Admin., 5-26.

• Decision Date: 31 January 1978
• Docket Number: No. 5-26.,5-26.
• Citation: 569 F.2d 1147
• Court: U.S. Temporary Emergency Court of Appeals Court of Appeals
• Parties: SOUTHERN UNION PRODUCTION COMPANY and Aztec Oil & Gas Company, Plaintiffs-Appellants, v. FEDERAL ENERGY ADMINISTRATION and Frank G. Zarb, Administrator, Federal Energy Administration, Defendants-Appellees.

569 F.2d 1147

SOUTHERN UNION PRODUCTION COMPANY and Aztec Oil & Gas Company, Plaintiffs-Appellants, v. FEDERAL ENERGY ADMINISTRATION and Frank G. Zarb, Administrator, Federal Energy Administration, Defendants-Appellees.

No. 5-26.

Temporary Emergency Court of Appeals.

Argued September 22, 1977.

Decided January 31, 1978.

Robert W. Jordan, Rain, Harrell, Emery, Young & Doke, Dallas, Tex., with whom Morris Harrell, Dallas, Tex., was on the brief, for plaintiffs-appellants.

Bruce G. Forrest, Dept. of Justice, Washington, D.C., with whom Barbara Allen Babcock, Asst. Atty. Gen., and Gerald D. Freed, Washington, D.C., were on the brief, for defendants-appellees.

Before CHRISTENSEN, JAMESON and GRANT, Judges.

PER CURIAM:

In this action, seeking injunctive and declaratory relief, appellants, who are the producers of gas well condensate, challenge the regulation of condensate by the Federal Energy Administration (FEA). They contend that (1) the FEA lacks authority under the Emergency Petroleum Allocation Act of 1973, as amended (EPAA),¹ to regulate the pricing and allocation of condensate recovered from natural gas wells;² and (2) if it does have this authority, FEA has acted in excess of its authority, and arbitrarily and capriciously, in excluding gas well condensate from the stripper exemption mandated by the Allocation Act. 15 U.S.C. § 757(i) (Supp.1977).³ In particular, appellants challenge FEA ruling 1974-28, 39 Fed.Reg. 44414 (1974), in which the FEA confirmed its determination that the exemption was not applicable to liquid hydrocarbons produced from gas wells. On cross-motions for summary judgment, the district court granted the motion of appellees. We affirm.

This is the third case before this court challenging the FEA's authority to regulate the allocation and pricing of certain hydrocarbons known as "natural gas liquids" recovered from natural gas wells. In both Mobil Oil Corp. v. FEA, 566 F.2d 87 (Em.App.1977) and National Helium Corp. v. FEA, 569 F.2d 1137 (Em.App.1977) we affirmed summary judgments upholding the FEA's assertion of regulatory jurisdiction. We have addressed the question of FEA authority at length in those decisions. In Mobil we examined the statutory terms in the light of the broad objectives of the Act, the legislative history, concomitant administrative actions, and subsequent legislation. We concluded that the FEA had properly exercised its statutory authority in adopting a regulatory framework to control the price and allocate the supplies of all natural gas liquids, including condensate.

While Mobil was concerned with other natural gas liquids as well as condensate, jurisdiction over condensate produced from natural gas wells was specifically contested. Our opinion in Mobil likewise considered condensate separately. We found no sound basis for Mobil's contention that because the petroleum industry never considered condensate to be crude oil, the FEA was in error in regulating condensate as such, notwithstanding the admitted chemical similarity of condensate and the lighter fraction of hydrocarbons found in crude oil. We rejected the distinctions urged by Mobil between products explicitly covered by the Act and condensate — which rested upon the source and manner of production, rather than the chemical composition or utilization of their hydrocarbon components. We found that because condensate is commingled with light crude oil and utilized like light crude oil as a petrochemical and refinery raw material "many of the same reasons for upholding FEA's assertion of jurisdiction over gas processing plant products — as a necessary and proper means of achieving its statutory objectives — apply with equal force to uphold FEA jurisdiction over condensate". 566 F.2d at 102.⁴

The district court in the case before us concluded:

Therefore, the court again holds on the basis of its reasoning in Mobil Oil that condensate, as a natural gas liquid, is within the FEA jurisdiction over "refined petroleum products" under the Allocation Act. The court also holds that the FEA has overlapping jurisdiction over condensate by virtue of its regulation of "crude oil," also in Section 4(a) of the Allocation Act.⁵ Its authority over condensate is plenary; there is no economic or regulatory reason to distinguish associated or non-associated production of condensate in regard to the uses of condensate or the competing demands for condensate made by various sectors of the American economy.⁶

We find nothing in this case to compel a conclusion different from that reached in Mobil. Accordingly we affirm the decision of the district court that condensate produced from gas wells is subject to the FEA's regulatory jurisdiction.

Appellant's alternative contention is, in essence, that if the FEA is correct in classifying condensate as crude oil and thereby imposing upon condensate production and marketing the crude oil regulatory framework, then it is inconsistent, arbitrary, and capricious to deny condensate producers the benefits of the stripper well exemption. Appellants argue that crude oil cannot properly be deemed to mean one thing for some purposes under the EPAA and another thing for other purposes. We agree with the district court, however, that Congress intended the stripper well exemption for distinct economic purposes and did not contemplate the inclusion of liquid hydrocarbons of gas wells.

As enacted on November 23, 1973, the EPAA exempted from price controls the first sale of crude oil from leases whose daily average production did not exceed 10 barrels per well.⁷ On December 24, 1974, the FEA issued Ruling 1974-28, 39 Fed.Reg. 44414 (1974), confirming its determination that gas well condensate was ineligible for the stripper well exemption. This regulation is specifically challenged by appellants.

Section 401 of the Energy Policy and Conservation Act of 1975, enacted on December 22, 1975, repealed the stripper well exemption of the EPAA.⁸ It is clear from the Conference Report, however, that Congress contemplated that stripper well production would be placed in the upper tier of the two-tier pricing program then in effect.⁹ The FEA amended its regulation to place stripper well crude oil under the upper tier, 10 C.F.R. § 212.71 et seq. Appellants also attack the exclusion of gas well condensate from the upper price tier.

Section 121 of the Energy Conservation and Production Act of 1976, enacted on August 14, 1976, reinstated the stripper well exemption by amending the EPAA. 15 U.S.C. § 757(i) (Supp.1977). The FEA then implemented the exemption of "stripper well crude oil", but continued to deny its application to condensate produced from gas wells. 10 C.F.R. 212.54, 41 Fed.Reg. 48319, 48323 (1976).

Since the enactment of the EPAA in November, 1973, the FEA has consistently defined crude oil to include gas well condensate for jurisdictional purposes under section 4(a) of the Act, but has excluded gas well condensate from the stripper well exemption. Yet, when Congress reinstated the stripper well exemption in August, 1976, by adding section 8(i) to the EPAA, there was no attempt to change the FEA's interpretation. Rather Congress added as subsection 8(i)(4) the provision that, "The President may define terms used in this subsection consistent with the purposes thereof."

The district court recognized that the purposes and goals of the EPAA require a "broad reading of the grant of statutory authority conferred on the FEA by the jurisdictional terms `refined petroleum product' and `crude oil' in section 4(a) of the Allocation Act". On the other hand, the "purpose of the stripper well exemption . . . requires a more limited interpretation of the term `crude oil'. This exemption encourages production from a specific source of petroleum (rather than dealing generally with the allocation of petroleum and petroleum products)." Congress intended the exemption as an economic incentive to encourage production from otherwise marginally profitable low yield oil wells.¹⁰ The court concluded that because the economics of oil wells and gas wells are significantly different, the denial of that economic incentive to gas well products was reasonable. "While a distinction between gas well condensate and oil well condensate makes little sense in regard to allocation, such differentiation is compelled in regard to economic incentives for production". We agree.

The legislative history of the stripper well exemption provides evidence of the intent of Congress in enacting the exemption. The exemption first appeared in the Trans-Alaska Pipeline Authorization Act,¹¹ which was adopted by Congress nearly simultaneously with the EPAA. The Conference Report made it clear that when the Pipeline Act referred to stripper wells it was Congress' understanding that it meant oil wells: "Stripper wells account for 71 percent of all of the oil wells in this country, but produce an average of only 3.6 barrels per day, or only 13 percent of total U. S. domestic crude production." H.R. Conf.Rep. No. 93-624, 93d Cong., 1st Sess. (1973); 1973 U.S.Code Cong. & Admin. News, pp. 2523, 2532. (Emphasis added).

The Conference Report explained the economic reasons for the exemption as follows:

Many stripper wells are of only marginal economic value. When the costs of their operation exceed the value of their production they are shut in, and a known and developed crude oil reserve is lost to U.S. production. Removing Phase IV price restraints from these marginal stripper wells has the effect of increasing the value of crude oil they produce . This price incentive will encourage owners and operators of stripper wells to maintain production and to keep those wells in operation for longer periods of time . Id.

The report went on to emphasize that agency administration of the exemption should insure that the "limited" exemption was strictly enforced "for the express purposes described above" and "not in any way broadened". Id. "The sole...