Application of 10 U.S.C. § 7426 to Settlement of Dispute Between United States and Standard Oil Company Regarding Land Within Naval Petroleum Reserve ( 1979 )

December 27, 1979
79-89 MEMORANDUM OPINION FOR THE DEPUTY
ASSISTANT ATTORNEY GENERAL, LAND
AND NATURAL RESOURCES DIVISION
Naval Petroleum Reserves (10 U.S.C. § 7426)—
Settlement of United States v. Standard Oil Co. o f
California (9th Cir. No. 78-1565)
This responds to your request for our opinion whether 10 U.S.C. § 7426precludes a settlement o f the above-captioned case, in which Standard Oil
Co. o f California (Standard) would be guaranteed current receipt o f more
than its percentage share o f oil from Naval Petroleum Reserve No. 1 at
Elk Hills, Kern County, California, (the Elk Hills reserve), during the
present period o f maximum production. We concluded in an earlier
memorandum that the statute would bar such a settlement. We now con­
firm our earlier conclusions.
I. Background
Your inquiry arises in the context o f settlement negotiations between the
United States and Standard over the terms for including within the Elk
Hills reserve certain land adjoining the reserve. That land had been devel­
oped independently by Standard before the United States sought, and was
granted, an injunction against independent production pending deter­
mination o f the terms and conditions for including the land within the
reserve. The Secretary o f the Navy concluded that Standard should receive
an am ount o f oil as compensation for including the land in the reserve, but
that this am ount should not be received until the expiration o f the present
period o f maximum production o f the reserve (authorized for 6 years by
Title II o f the Naval Petroleum Reserves Production Act o f 1976, Pub. L.
No. 94-258, 90 Stat. 303, 307, 10 U .S.C . § 7422(c)(1)(B)). The U.S.
district court, on November 4, 1977, ruled that Navy’s determination that
the land should be included within the reserve was binding on Standard
and that the proposed terms and conditions were fair and equitable.
Standard appealed that decision, and oral argument before the U.S. Court
o f Appeals for the Ninth Circuit was held in September, 1979.
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The present issue concerns the legality of settlement terms under con­
sideration that would, inter alia, guarantee to Standard receipt currently
of an amount o f oil that would exceed the share o f oil to which it is entitled
on the basis o f its ownership interest in the reserve. After inclusion in the
reserve o f the land o f concern here, the United States would own some
80 percent o f the oil in the producing zone, and Standard would own some
20 percent. The question presented is thus whether § 7426 bars Standard,
in circumstances of maximum production, from receiving currently more
than 20 percent of the zone’s production and, therefore, bars any settle­
ment that would surpass the 20 percent figure.
II. Discussion
The Act o f June 17, 1944, 58 Stat. 280, authorized the United States and
Standard to enter into a unit plan contract for the development o f naval
petroleum reserves, including the one at Elk Hills. To protect the interests
o f the United States, Congress provided that any unit plan contract must
require that the United States be assured of receipt currently of its share o f
the total production. The pertinent provision is as follows:
A ny contract entered into pursuant to the authority granted in
the preceding paragraph for joint, unit, or other cooperative
plan o f exploration, prospecting, conservation, development,
use, or operation shall require that the United States be assured
o f receipt currently o f its share o f the total production from each
o f the various commercially productive zones underlying all
lands covered by the contract as determined from time to time on
the basis o f estimates o f its original share o f the quantities o f re­
coverable oil, gas, natural gasoline and associated hydrocarbons
in such zones underlying such lands on the date fixed in such con­
tract: Provided, however, That any party to such a contract,
other than the United States may, pursuant to the authority
hereinabove granted to use and operate the reserves for their pro­
tection, conservation, maintenance and testing, be perm itted
under the terms o f such contract to have produced and to receive
and shall have charged to its share in the total production from
any zone or zones such quantities o f petroleum as are necessary
to compensate it—
(a) fo r its share o f the current expenses o f protecting, con­
serving, testing and maintaining in good oil-field condition
such lands and the wells and improvements thereon, and its
real and personal taxes levied o r assessed thereon; and
(b) fo r surrendering control o f the rate o f production from
its lands: Provided, That if the Secretary o f the Navy is not
then causing petroleum to be produced pursuant to a joint
resolution as referred to in the preceding paragraph, the q u an ­
tity o f petroleum determined to be produced under this sub-
paragraph (b) may, in the absolute discretion o f the Secretary,
be terminated or reduced at any time on reasonable notice.
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Such quantities permitted to be produced pursuant to the forego­
ing subparagraphs (a) and (b) shall in no event, however, exceed
one-third o f its share o f the estimated recoverable petroleum on
such date fixed in such contract shall be entered into without
prior consultation in regard to all its details with the Naval Af­
fairs Committees o f the Congress.1 [Emphasis added.]
The statutory requirement that the United States shall “ be assured of
receipt currently o f its share o f the total production from each o f the
various commercially productive zones underlying all lands covered by the
contract” on its face would preclude a settlement in a period o f maximum
production that would permit Standard to receive currently more than its
share o f total production in the zone. For if Standard were guaranteed
such receipt, then the United States could not be assured of receipt cur­
rently o f its full share o f the total maximum production.
In response, Standard argues that the current receipt principle does not
govern absolutely because the statute includes the proviso that any party
other than the United States may be permitted to receive oil as necessary to
compensate it for its share o f current expenses and taxes, and for sur­
rendering control o f the rate o f production. Standard contends that the
proviso carves out two broad exceptions to the current receipt principle.
Thus, if, in a hypothetical case, 100 barrels per day are produced from
zone X in a period o f maximum production, and if 10 barrels would com­
pensate Standard for current expenses and taxes and 10 additional barrels
would compensate Standard for surrendering control over the rate o f pro­
duction, then, Standard contends, only 80 barrels must be divided cur­
rently between Standard and the United States in accordance with their
respective ownership shares.
The first problem with this interpretation is that the current receipt prin­
ciple is stated in unam biguous language providing that each contract must
guarantee “ that the United States be assured o f receipt currently o f its
share o f the total production from each o f the various commercially pro­
ductive zones underlying all lands covered by the contract * * * .” [Em­
phasis added.] Standard seeks to add a gloss to the statute that in effect
would nullify Congress’ use o f the word “ to tal.”
'58 Stat. 280, 281. This provision was codified in 1956 at 10 U .S.C . § 7426(b), (c) and (d).
The legislative history o f the 1956 codification makes it plain that no substantive change in
the 1944 statute was intended. See Report o f the House Judiciary Com mittee on the revision
o f title 10, U.S. C ode, Arm ed Forces, and title 32, U .S. Code, National G uard, H. Rept.
970, 84th C ong., 2d sess. 19, reprinted at 1956 U.S. Code Cong. & Admin. News 4613, 4620
( “ [tjhe object o f the new titles has been to restate existing law, not to m ake new law. C on­
sistently with the general plan o f the U nited States Code, the pertinent provisions o f law have
been freely reworded and rearranged, subject to every precaution against disturbing existing
rights, privileges, duties, or functions” ); see also the Senate Judiciary Com mittee Report, S.
Rept. 2484, 84th C ong., 2d sess., reprinted at id. 4632, 4640. See generally, Muniz v. H off­
man, 422 U .S. 454 472-74 (1975); Tidewater Oil Co. v. United States, 409 U.S. 151, 162
(1972); Fourco Glass Co. v. Transmirra Products Corp., 353 U .S. 222, 227 (1957).
484
Also, in a period o f maximum production, to allow Standard to receive
currently, in addition to its percentage share am ounts o f oil, both for costs
and taxes and for surrendering control over the rate o f production would
be most unusual. Ordinarily, it is expected that an oil producer will meet
its operating expenses by selling what it owns, and that it will not receive
an increment in addition to what it owns in order to pay such expenses.
Standard implicitly suggests that Congress did not accept that normal
understanding. In view o f the statute’s plain language, we are necessarily
reluctant to reach such a result.
Standard relies primarily on a passage in the report o f the House Com ­
mittee on Naval Affairs, H. Rept. 1529, 78th Cong., 2d sess. 11-12 (1944),
which speaks o f “ two permissible exceptions” to the current receipt prin­
ciple in the following terms:
The basic principles sought to be embodied in the foregoing new
second paragraph are that any joint, unit, or cooperative con­
tract with respect to reserve No. 1 must provide, first, that the
question o f drainage be solved by means o f the ultimate receipt
by the United States o f its proper share o f the oil underlying the
lands covered by the contract on the date fixed in the contract,
and, second, that the United States receive currently its proper
share o f the oil as it is produced from the lands covered by the
contract. To this second principle, however, there are two per­
missible exceptions: One is that a private party to the contract
may produce, receive, and have charged to its share in the total
oil in the field sufficient oil to reimburse it for its share o f the
field-maintenance expenses and the real and personal property
taxes levied against it in respect o f its lands and the im­
provements thereon; the other is that a private party to the con­
tract may have a right to have produced and to receive and have
charged to its share in the total oil in the field an agreed am ount
o f oil representing one o f the considerations moving to it for its
agreement under the contract to surrender to Navy control over
the rate o f production from its lands.
It is to be particularly noted that the oil which the contract
may call fo r to be produced and allotted in accordance with the
two exceptions is expressly referred to in the new second
paragraph as produced under the authority, contained in the first
paragraph and discussed above, fo r the use and operation o f the
reserves fo r their protection, conservation, maintenance, and
testing. The theory behind this approach is that the contract is
entered into for the main purpose o f securing protection by the
elimination o f drainage and the enhancement o f conservation by
the acquisition o f control over the time and rate o f production
from the private lands. Accordingly, the production provided for
under paragraphs (d) and (0 o f section 5 o f the proposed unit
plan contract with Standard does not depend upon any finding
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o f need for national defense purposes nor any joint resolution o f the C on­
gress. Rather, it is produced under the authority o f the protecting pow er
and represents an allowance o f a part o f Standard’s share o f the oil to
Standard within the terms o f the exceptions denominated (a) and (b) in the
new second paragraph o f the act. [Emphasis added.]
To understand the foregoing passage, it must be recognized that the
statute contem plated two different situations concerning production of
the Reserves: “ shut-in” periods during which only enough oil to maintain
the Reserves would be produced, and “ open-up” periods during which
fuller production would be required to meet needs o f national defense2 In
the former situation, there would be a need to protect the interests o f an
entity in S tandard’s position by guaranteeing it sufficient production to
meet its current expenses and taxes and compensate it for surrendering
control over the rate o f production. As noted in the foregoing passage
from the House Committee report, oil produced “ in accordance with the
two exceptions is * * * produced under the authority * * * for the use
and operation o f the reserves for their protection, conservation,
maintenance, and testing” —that is under the authority o f a shut-in
period. The fact that the current receipt principle has “ two permissible
exceptions” in such a period does not determine the result in the pres­
ent case, for the reserve is in a period o f “ open-up,” or maximum,
production.
In our view, the “ two permissible exceptions” language in the House
Committee report merely confirms that, in a shut-in period in which pro­
duction otherwise would likely be so low as to make it impossible to com­
pensate Standard for current costs and taxes and for surrendering control
over the rate o f production, Standard is protected by an authorization of
!As stated in the Report o f the House Com m ittee on Naval Affairs, H. Rept. 1529, 78th
C ong., 2d sess. 6-7 (1944):
It is to be noted that the clause as so am ended contem plates two separate situations when
oil may be produced from the reserves. The first is for a protective purpose, the existing
power being continued but with the clarifying words ‘conservation, m aintenance, and
testing’ added in order to m ake it clear that this power to produce includes production
which will contribute to over-all conservation in the ground and also production for
proper field m aintenance * * * . It is the intention o f the bill that the Secretary in his
discretion and w ithout the necessity o f further congressional authorization than is pro­
vided by this provision o f the act itself, may produce oil or cause oil to be produced—
for the protection, conservation, m aintenance, and testing o f the aforesaid
reserves * * * .
The second situation in which oil may be produced under the am ended clause is—
whenever and to the extent the Secretary, with the approval o f the President, finds re­
quired for the national defense * * * .
In this case, however, the bill provides that there shall be no production pursuant to such
a finding unless and until the Congress shall first have authorized it by joint resolution.
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production sufficient for those needs.3 As Chairman Vinson, the A ct’s
principal draftsman, stated:
When the war needs cease to exist, then the fields will be shut
down, except for the protection o f the field and to enable Stand­
ard to produce enough to earn its taxes out o f the reserve, and to
pay for giving up control over all o f its lands.4
However, a different situation is presented when the reserve is in a period
of maximum production. In such a circumstance, the legislative history
confirms the conclusion, based on the statute’s language, that Congress
expected that the United States would receive currently its percentage
share o f oil from the reserve. Assistant Secretary o f the Navy Bard
testified to this effect before the Senate Committee on Naval Affairs
shortly before the Congress passed the 1944 Act:
I think I can explain so that you get the whole picture perhaps.
The Navy will produce oil for war purposes, it never will produce
except for an emergency. It wants to keep its oil in the ground.
When it is producing f o r war purposes, the scheme is to divide
the oil between Navy and Standard in the ratios o f their interests
in the oil in the ground, that is, 64 percent and 36 percent. W hen
it is not producing for war purposes, the Navy produces nothing.
All production then is to cover the costs o f Standard and their
taxes plus a certain am ount o f oil, subject to the discretion o f the
Secretary, to compensate them for turning over all control o f
their property to the Navy.s [Emphasis added.]
Accordingly, Congress understood that, in an open-up situation, the cur­
rent receipt principle governs. However, in a shut-in period, Standard
could receive more oil than the United States on a current basis for ex­
penses, taxes, and surrendering control over the rate o f production; the
United States would simply conserve its current share in the ground.6
’There are two statutory qualifications on S tandard’s receipt o f oil for costs and taxes and
for compensation in a shut-in situation. First, in order to protect the G overnm ent’s interest
o f preserving oil in the ground, the Secretary was provided ultimate discretion in such a
period to reduce or even to term inate the flow o f oil to Standard as com pensation for sur­
rendering control over the rate o f production. Second, Standard could not receive over time
more than one-third o f its total recoverable oil in a zone for current costs and taxes and for
compensation in order that the bulk o f S tandard’s oil and Navy’s oil would be preserved in
the ground.
‘Naval Petroleum Reserves, Hearing before the Com mittee on Naval Affairs, United
States Senate, on S. 1773, 78th Cong., 2d sess. 13 (1944); see also S. Rept. 948, 78th C ong.,
2d sess. 4 (1944).
’Naval Petroleum Reserves, Hearing before the Committee on Naval Affairs, United
States Senate, on S. 1773, 78th C ong., 2d sess. 19 (1944).
‘The United States would still be assured o f receiving currently its percentage share should
that become necessary.
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In sum, on the basis o f the statute’s plain language and its legislative
history, we cannot accept S tandard’s interpretation. Section 7426 does bar
a settlement under which, in a period o f maximum production, Standard
would be guaranteed receipt o f more than its percentage share o f oil from
Naval Petroleum Reserve No. 1.’
L a r r y L. S imms
D eputy Assistant A ttorney General
Office o f Legal Counsel
’In response to S tandard's suggestion that it is unfair to limit it to its percentage share o f
oil in the present open-up period, we note that such a contention is underm ined by the district
court’s finding in this case that “ the term s offered by the Navy were ‘fair and equitable.’ ”
Mem orandum Opinion o f Novem ber 4, 1977, 4.
488