United States v. General Petroleum Corporation

• Decision Date: 10 January 1947
• Docket Number: No. 467-B-Civ.,467-B-Civ.
• Parties: UNITED STATES v. GENERAL PETROLEUM CORPORATION OF CALIFORNIA et al.
• Court: U.S. District Court — Southern District of California

73 F. Supp. 225

UNITED STATES v. GENERAL PETROLEUM CORPORATION OF CALIFORNIA et al.

No. 467-B-Civ.

District Court, S. D. California, Central Division.

March 30, 1946.

Supplemental Opinion January 10, 1947.

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F. B. Critchlow, Eugene D. Williams, Joseph C. Gill, James A. Murray, Richard H. Hill and Marvin J. Sonosky, Sp. Assts. to Atty. Gen., for plaintiffs.

A. L. Weil and Martin J. Weil, both of Los Angeles, Cal., for defendant General Petroleum Corporation of California.

John M. Hall, Max Felix, H. G. Hayes, Marcus Mattson and Lawler, Felix & Hall, all of Los Angeles, Cal., for defendants Standard Oil Co. of California and Standard Oil Co. of Texas.

George Harnagel, Jr., William E. Wright, F. F. Thomas, Jr., and McCutchen, Olney, Mannon & Greene, all of Los Angeles, Cal., for defendant Shell Oil Co., Inc.

Harrison Guio, W. F. Kiessig, of San Francisco, Cal., and Paul Broxon, of Los Angeles, Cal., for defendant Tide Water Associated Oil Co.

Jerry H. Powell and Paul M. Gregg, both of Los Angeles, Cal., for defendant Union Oil Co. of California.

L. R. Martineau, Jr., P. C. Black and Warren Stratton, all of Los Angeles, Cal., for defendant Continental Oil Co.

Frederick D. Anderson and Bertram L. Linz, both of Los Angeles, Cal., for defendant Seaboard Oil Co. of Delaware.

Herbert W. Clark, Emory L. Morris and Morrison, Hohfeld, Foerster, Shuman & Clark, all of San Francisco, Cal., for defendant Honolulu Oil Corporation.

Thomas A. J. Dockweiler and Dockweiler & Dockweiler, all of Los Angeles, Cal., for defendants Pacific Western Oil Corporation and George F. Getty, Inc.

Martin J. Weil, of Los Angeles, Cal., for defendant Pioneer Kettleman Co.

George W. Nilsson, of Los Angeles, Cal., for Kettleman North Dome Ass'n.

Glen Behymer, of Los Angeles, Cal., for defendant Ervin S. Armstrong.

R. K. Barrows, J. A. Tucker and Charles C. Stanley, all of Los Angeles, Cal., for defendant Texas Co.

Chester Dolley, Edward W. Lloyd, John H. Blake and Hanna & Morton all of Los Angeles, Cal., for defendants Silas L. Gillan and Etta Helm as executrix of Estate of Lesrey G. Helm, deceased.

Neil S. McCarthy, Earl L. Banta, Howard P. Hall and Franklin W. Peck, all of Los Angeles, Cal., for defendants Belmont Inv. Co., Cynthia Beal, Neil S. McCarthy and A. Calder Mackay as trustees of said Belmont Inv. Co., a corporation in process of dissolution.

Karl B. Rodi, Olin Wellborn III, Vernon Barrett and Frank C. Hubbard, all of Los Angeles, Cal., for defendants Carrie Estelle Doheny, Lucy Smith Battson and Los Nietos Co.

BEAUMONT, District Judge.

This action was brought by the United States to obtain a judicial determination of the extent of authority of the Secretary of the Interior to place minimum limitations upon valuations for royalty purposes of the interests of the United States in oil and gas produced from public lands in the Kettleman Hills field of California held by defendants under oil and gas leases issued pursuant to the provisions of Section 14 of the Act of Congress approved February 25, 1920, known as the Mineral Lands Leasing Act, 30 U.S.C.A. § 181 et seq.; to recover from defendants certain unpaid and delinquent royalties which have become due on the basis of limitations on valuations as determined by the Secretary of the Interior; and to obtain cancellation of leases of such defendants as fail to comply with the court's orders herein sought. The prayer of the amended complaint seeks, in the event the orders of the Secretary are held invalid, a decree prescribing the proper basis upon which determination of the value of the government royalty interest shall be made, and an order that the lessees be required to account accordingly.¹

Congress, by the aforesaid Mineral Leasing Act of 1920, authorized the Secretary of the Interior to enter into leases of the public mineral lands with permittees who had previously established to his satisfaction that valuable oil or gas had been discovered within the limits embraced in their permits.² The Act specified the amount of acreage which the Secretary was authorized to lease, the term of the lease and the royalty which must be obtained, required insertion in the leases of provisions against waste and provisions to insure the exercise of reasonable diligence, skill and care in the operation of the property, and authorized the Secretary to include such other provisions as he deemed necessary to insure the sale of the production of such leased lands to the United States and to the public at reasonable prices, "for the protection of the interests of the United States, for the prevention of monopoly, and for the safeguarding of the public welfare." 30 U.S.C.A. § 187. Congress further authorized the Secretary to prescribe necessary rules and regulations under the Act and to do all things necessary to carry out and accomplish the purposes of the Act. By section 31 of the Act it was provided that any lease issued by the Secretary under the Act might be forfeited and canceled by an appropriate proceeding in the proper United States district court in the event that the lessee failed to comply with the provisions of the Act, or of the lease thereunder issued, or of the general regulations which the Secretary promulgated under the Act, and which were in force at the date of the lease.

Specifically as to royalties due the government under the leases, the Act provided that "such leases shall be * * * upon a royalty of 5 per centum³ in amount or value of the production." 30 U.S.C.A. § 223.

There were two general sets of regulations which the Secretary promulgated under the Act and which were in force at the date of the leases now before the court. The first were the regulations of 1920, containing a proposed standard form of lease. Thereafter followed the regulations of July 1, 1926. Insofar as here pertinent, the regulations of 1926 set up the administrative machinery for supervision of the leased areas and provided by section 1(h) thereof that the supervisor therein designated to be appointed by the Secretary should compile records of production of oil, gas, and natural-gas gasoline from the leases and compute and report the amount and value of accrued royalties. By section 2(s)⁴ the regulations provided that the lessee should file with the Secretary copies of all contracts for the disposition of oil, natural gas and natural-gas gasoline produced, except such portions as were used for production purposes, and in the event the United States elected to take its royalties in money instead of in oil, gas or gasoline, the lessee was not to sell or otherwise dispose of the products of the land leased except in accordance with the sales contract or other method first approved by the Secretary. By section 4 of the regulations the method of computation and payment of royalties on natural gas and natural-gas gasoline was specified. These latter provisions will be considered later under the heading "The Net Realization Problem". By section 6 the lessees were given the right to appeal to the Secretary from all orders issued by the supervisor.

The discovery well of the Kettleman Hills public mineral lands was "brought in" October 5, 1928. The leases now before the court were executed in the period from 1929 to 1931. In general, these leases followed the precise directions of the statute,⁵ and called for a government royalty of 5% on all oil and gas produced. In particular they contained two general provisions which have given rise to the present controversy. These were the provisions of section 2(c) (3) and 2(d) of the leases.

Section 2(c) (3) provides that "the value in the field where produced, of gas and casing-head gasoline, for royalty purposes, unless such gas or casing-head gasoline is disposed of under an approved sales contract or other method as provided in subdivision (d) of this section, shall be as fixed by the Secretary of the Interior." By Section 2(d) the lessees agreed "to file with the Secretary of the Interior copies of all sales contracts for the disposition of oil and gas produced hereunder except for production purposes on the land leased, and in the event the United States shall elect to take its royalties in money instead of in oil or gas, not to sell or otherwise dispose of the products of the land leased except in accordance with a sales contract or other method first approved by the Secretary of the Interior." Section 2(d), it may readily be seen, was identical with section 2(s) of the regulations of 1926.

On or about July 25, 1929, in order to forestall a wasteful campaign of competitive drilling at Kettleman Hills, a so-called "shut-in" agreement was entered into between the United States and its permittees and the owners and lessees of most of the privately-owned land in the field, whereunder production at Kettleman Hills was limited for a certain period pending arrangement for development and operation of the field's productive acreage as a unit. After Congress amended the Mineral Leasing Act of 1920 on July 3, 1930, 30 U.S.C.A. § 184, in order to authorize such unit plan, the Secretary of the Interior and the lessees herein entered into the contemplated agreement. By its terms a corporation, known as Kettleman North Dome Association (hereinafter referred to as "Kenda"), was formed, of which the lessees herein became members, and to which they transferred their operating rights to the leases and their productive facilities in the field. It was agreed that the association should develop and operate the lands and dispose of the products in conformity with the operating regulations then in effect, and production from the leased lands was to be distributed by Kenda to the members according to their respective interests. Each member agreed to pay its own royalties to the government.

In the years 1929-1931, the Secretary became convinced that the prices at which the defendant...