Standard Oil Co. of California v. United States

• Decision Date: 28 July 1982
• Docket Number: No. 208-77.,208-77.
• Citation: 685 F.2d 1337
• Parties: STANDARD OIL COMPANY OF CALIFORNIA v. The UNITED STATES.
• Court: U.S. Claims Court

685 F.2d 1337

STANDARD OIL COMPANY OF CALIFORNIA v. The UNITED STATES.

No. 208-77.

United States Court of Claims.

July 28, 1982.

Robert M. Westberg, San Francisco, Cal., attorney of record, for plaintiff. Thomas E. Haven, Pamela Phillips, and Pillsbury, Madison & Sutro, San Francisco, Cal., of counsel.

Andrew F. Walch, Washington, D. C., with whom was Asst. Atty. Gen. Carol E. Dinkins, Washington, D. C., for defendant. Larry R. Rowe, Dept. of Energy, Washington, D. C., of counsel.

Before FRIEDMAN, Chief Judge, and NICHOLS and BENNETT, Judges.^*

ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT ON COUNT III

FRIEDMAN, Chief Judge:

The petition in this suit by Standard Oil Company of California ("Standard") contains four counts. Each count alleges a breach by the United States of a different provision of a complex 1944 contract that governs the production of oil from the Elk Hills Naval Petroleum Reserve in California. The dispute relates to the amount of oil the contract entitled Standard to receive from the production of the Reserve. Standard moved for summary judgment on the first three counts, and the defendant cross-moved on count I.

On June 30, 1982, we granted summary judgment for Standard on counts I and II, ___ Ct.Cl. ___. We stated that our decision on count III would be the subject of a subsequent opinion. This opinion deals solely with count III. We hold that Standard cannot recover on that count, and we dismiss it.

I.

In our previous opinion, we described at length the background of the contract (known as the "Unit Plan Contract"), the negotiations leading to it, its principal provisions, and the legislation that authorized its execution. We shall not repeat that discussion here but merely shall summarize so much of it as is necessary to an understanding of this aspect of the case.

In 1912, the President placed a significant portion of the public lands containing oil in the Naval Petroleum Reserve No. 1, Elk Hills, California (the "Reserve"). This land was to be held for the exclusive benefit of the Navy. In the Naval Appropriations Act of 1920, Pub.L.No.66-243, 41 Stat. 812, 813 (codified as amended at 10 U.S.C. § 7426(a) (1976)), Congress directed the Secretary of the Navy (the "Secretary") to manage the Reserve and authorized him to "conserve, develop, use and operate" it "for the benefit of the United States." The United States did not own or lease all of the lands in the Reserve. By 1942, Standard was the major (if not the only) private owner and lessee in the Reserve. It owned approximately 20 percent of the underlying hydrocarbons.

A problem created by the joint ownership of the Reserve was that wells drilled by Standard might draw oil from under the Navy's land. A 1938 amendment of the 1920 act authorized the Secretary "to contract with the owners and lessees of land within or adjoining" the Reserve "for conservation in the ground of oil and gas." Pub.L.No.75-786, 52 Stat. 1252, 1253. Pursuant to this authority, the Secretary and Standard in 1943 negotiated a tentative agreement to "unitize" the Reserve — i.e., to operate the Reserve as a single unit and to allocate costs and the oil produced on the basis of the parties' respective interests in the underlying petroleum. The agreement, referred to here as the "preliminary Unit Plan Contract," gave the Navy sole control over the time and rate of production from the entire Reserve, and assured that Standard would receive a specified amount of its share of the oil there.

The Attorney General, to whom the Secretary had submitted the preliminary Unit Plan Contract for an opinion of its legality, concluded that since Congress had not considered unitization in enacting the 1938 act, the contract should not be executed without congressional approval. Congress then passed the act of June 17, 1944, Pub.L.No.78-343, 58 Stat. 280 (amending the 1920 appropriations act). The act authorized the Secretary to enter into "contracts for joint, unit, or other cooperative plans of exploration, prospecting, conservation, development, use and operation of lands owned or controlled by the United States" within the Reserve. It stated that "such use and operation is to be for the protection, conservation, maintenance, and testing" of the Reserve or "for the production of petroleum" that the Secretary "finds required for the national defense: Provided, however, That no petroleum shall be produced pursuant to such a finding unless authorized by the Congress by joint resolution."

The act further provided that a party to such a contract could be permitted to receive an amount of oil necessary to compensate it

(a) for its share of the current expenses of protecting, conserving, testing and maintaining in good oil-field condition such lands and the wells and improvements thereon, and its real and personal taxes levied or assessed thereon; and

(b) for surrendering control of the rate of production from its lands * * *.

Two days after the 1944 amendment was passed, Standard and the Navy executed the Unit Plan Contract. Section 2 of the contract provides that Standard and Navy should share in the production from the Reserve according to their respective shares of the petroleum in the Reserve, "subject to the further provisions of this contract."

For the period ending August 1950 (called the "primary period" in the contract), section 5(d) of the contract entitled Standard to receive initially 25 million barrels (later increased to approximately 28 million barrels) of its share of oil in one of three zones in the Reserve, or one-third of its share of recoverable oil in the zone, whichever was less. After the primary period, section 5(f) of the contract entitles Standard to receive a daily quantity of oil, the value of which is equal to Standard's share of "the current expenses of protecting, conserving, testing, and maintaining the Reserve in good oil-field condition" plus the taxes assessed against Standard's land and equipment in the Reserve.

The oil Standard receives under section 5(f), like that it received under section 5(d), is to be counted against Standard's percentage participation. In other words, sections 5(d) and 5(f) of the Unit Plan Contract do not entitle Standard to receive any of the Navy's oil but only to receive its own oil in the Reserve sooner than it otherwise would under the other provisions of the contract.

II.

Count III of the petition involves section 5(g) of the Unit Plan Contract. That section provides that if, after the primary period (i.e., beginning in 1950), Navy permits production of oil from a zone of the Reserve in an amount that exceeds the amount to which Standard is entitled under section 5(f) (i.e., an amount equalling Standard's share of the current expenses of protecting, conserving, testing and maintaining the Reserve plus Standard's taxes on the Reserve) and if Standard has received a percentage of the total production (up to that time) from that zone of the Reserve greater than its percentage of ownership of the total estimated oil in that zone, Standard will receive only one-third of what it otherwise would receive if Reserve production were allocated according to the respective percentage ownership of oil in that zone of the Reserve by Standard and Navy (i.e., their "percentage participation"). The reduced allotment continues until the total respective amounts of oil Standard and Navy have received are in balance, i.e., each has received a percentage of total production from the zone equal to its percentage participation in that zone. After that point, section 5(g) provides that current production will be allocated according to their respective percentage participations.

Between the effective date of the contract in 1944 and the end of the primary period in 1950, Standard, which owned approximately one-third of the known, exploitable crude oil in the Shallow Oil Zone, had received 28 million barrels of oil from that zone (hereafter referred to as "the Reserve" for convenience) while the Navy had received only about 13 million.

Since Standard had received approximately 68 percent of the total production from the Reserve, which was more than twice the amount it would have received based upon its one-third interest in the Reserve, Standard and Navy were out of balance. As a result, beginning in 1950, the Navy determined Standard's allotment of oil in accordance with section 5(g), so that Standard received only one-third of what it would have received had its allotment been based upon its percentage participation.

Standard acquiesced in this practice until 1967. In that year, its counsel developed a "new idea which questioned whether 5(g) was applicable at all in the * * * circumstances" then prevailing. Standard then, for the first time, disputed the correctness of applying section 5(g) to determine Standard's oil allotment. Standard has continued to challenge the applicability of section 5(g) since that time.

Standard's position is that section 5(g) applies only to production that the Secretary finds necessary for national defense and that has been authorized by a joint resolution of Congress. After 1950, there was no relevant joint resolution until 1976. All oil was produced until 1976 solely to protect, conserve, maintain and test the Reserve. Standard asserts that section 5(g) therefore was used improperly to allocate that production.

Despite Standard's objection to the use of section 5(g) to allocate the oil, the Navy has continued to use the section since 1967. In count III Standard seeks as damages the difference between the value of (1) the oil it would have received had its allotment not been determined under section 5(g), and (2) the oil it actually received under that section.

III.

Standard's principal argument on this part of the case is that the government is collaterally estopped from litigating this issue because of a district court finding in prior litigation the United States brought against...