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CALIFORNIA CO. v. SEATON

October 6, 1960

CALIFORNIA COMPANY, Plaintiff,
v.
Fred A. SEATON, Secretary of The Interior, Defendant



The opinion of the court was delivered by: WALSH

This matter comes before the Court on a complaint for review, for declaratory judgment, and for injunctive relief. It arises from a decision rendered by the Secretary of the Interior with respect to oil and gas lease royalty determinations.

The land in suit here is located in the Romere Pass Field in southern Louisiana, and is covered by four oil and gas leases, effective March 1, 1949, issued by the United States to the individual lessees under authority of the Mineral Leasing Act for Acquired Lands, 30 U.S.C.A. § 351 et seq., and governed by the leasing procedures of the Mineral Leasing Act of 1920, as amended, 30 U.S.C.A. § 22 et seq. In February of 1949 each of the lessees executed and operating agreement with the plaintiff.

 On July 31, 1951, the plaintiff, The California Company (the gas seller), entered into a contract with the Southern Natural Gas Company (the gas buyer) for the sale of its gas from the Romere Pass Field and other fields in southern Louisiana. This contract is for a term of 25 years and specifies a price of 12 cents per m.c.f. (1000 cubic feet) of gas for the first five years (April 1, 1954 to March 31, 1959) after the first delivery. Thereafter the price escalates each five years until a price of 16 cents per m.c.f. of gas is reached. The contract calls for delivery by plaintiff of gas suitable for transmission in the buyer's pipeline. The contract price was based on a gas that would not contain (1) in excess of 0.007 pounds of water per m.c.f.; (2) nor in excess of 0.2 gallons liquefiable hydrocarbons per m.c.f.; and (3) that it would be delivered to the buyer's pipeline at a pressure selected by the buyer but not to exceed 800 p.s.i. (pounds per square inch).

 According to the plaintiff, the operational procedures at the Romere Pass Field necessary to handle the gas from the well to the gas buyer's pipeline consist of (a) separation, (b) compression, and (c) dehydration. It is the plaintiff's position that royalties may not be charged on costs and expenses incurred beyond the separation procedure, and plaintiff contends that it may deduct from the contract price certain charges representing the costs of gathering, compression and dehydration in order to arrive at a value for royalty computation. Plaintiff's computation is as follows:

 Contract price 12.00 per m.c.f.

 Gathering .3 per m.c.f.

 Compression at 1.5 cents per stage 4.5 per m.c.f.

 Dehydration .25 per m.c.f.

 Price on which Plaintiff computes royalty 6.95

 Thus, in determining the royalty due the Government, the plaintiff would deduct costs totaling 5.05 cents per m.c.f. from the contract price of 12 cents and pay the royalty on 6.95 cents per m.c.f.

 With the delivery of gas to the buyer in late 1953 and early 1954, the Supervisor, Gulf Coast Region, U.S. Geological Survey, sent monthly statements of royalty due the United States on the basis of 12 1/2 per cent of the 12 cents per m.c.f. The California Company did not honor the Supervisor's determination and made payments on the basis of 12 1/2 per cent of 6.95 cents.

 Correspondence was carried on between the parties with respect to the matter until May 21, 1957, at which time the Supervisor notified The California Company that failure to make royalty payments on the price of 12 cents per m.c.f. 'constitutes non-compliance with the oil and gas operating regulations and a penalty for such non-compliance is provided in 30 CFR 221.53. If this default is not rectified within 30 days from receipt of this order to make delinquent royalty payments, the authority stated in 30 CFR 221.53 will be exercised. Your attention is called to a right of appeal from this order as provided in 30 CFR 221.66'. The Supervisor's final notification was delayed until May 21, 1957, pending the outcome of an appeal filed by The Texas Company, 64 I.D. 76 (1957), involving a similar question, and which was decided adversely to the lessee.

 On June 6, 1957, the plaintiff appealed to the director, Geological Survey, and on September 27, 1957, the Director denied the appeal and affirmed the Supervisor. With respect to the deductions for gathering and compression which plaintiff claims in its computation to determine royalty due the Government, the decision of the Acting Director states:

 '1) Gathering 'charge' applies only to movement of gas from tank battery stations Nos. 2 and 3 to tank battery station No. 1. Gas flowing directly from wells to tank battery station No. 1 not subject to this deduction.

 '2) It is not necessary to compress all gas produced in the field in order to raise it to the required 1000 p.s.i. pressure. It is estimated that about 70 percent of the gas is produced at a pressure sufficiently high that compression is unnecessary.'

 On appeal to the Secretary of the Interior, the decision of the Acting Director was affirmed on February 20, 1959.

 Meanwhile, in May of 1959, the plaintiff paid under protest into a suspense account $ 50,000, the balance of the royalties the Government claimed was due. Since that date the plaintiff has paid the disputed amounts into the same suspense fund.

 The sole question presented here is whether the decision of the Secretary of the Interior is within his statutory and regulatory authority and in accordance with the terms of the contract where the Secretary finds that the royalties due the United States under the lease are to be computed on a figure of 12 cents per m.c.f., which price is also the contract price at which the plaintiff sells the gas in question to the buyer and which the plaintiff alleges includes the costs incurred by it in making the gas suitable for the buyer's pipeline.

 For the reasons hereinafter indicated, it is the Court's opinion that the decision of the Secretary must stand (1) if it comes within the standards set by Congress in section 17 of the Mineral Leasing Act, and is authorized by and in compliance with that Act; (2) if the determination is in accordance with the Secretary's regulations which he is authorized by law to make; (3) if the contract between the Government and the plaintiff expressly reserved to the Secretary the power to fix the value of production of the gas lease at 12 cents, and the ...


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