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May 14, 1981

DEPARTMENT OF ENERGY et al., Defendants

The opinion of the court was delivered by: FLANNERY


This matter comes, before the court on plaintiff-Gulf Oil Company's motion for a preliminary injunction. A hearing on this motion was held April 29, and the court took the matter under advisement. For the reasons stated below, Gulf's motion will be denied.


 In this action for declaratory and injunctive relief, Gulf challenges a Supplemental Order issued on March 6, 1981 (the "March 6 Order") by the defendant *fn1" Department of Energy (DOE). This March 6 Order modifies an earlier Interim Decision and Order, issued on December 31, 1980 (the "December 31 Decision"). Gulf claims that the March 6 Order is arbitrary and capricious, was based on assumptions which are unsupported in the record, deprives Gulf of property without due process of law and without prior notice and opportunity to be heard, and was issued without statutory or regulatory authority. Because the potential harm of which Gulf complains will apparently become effective with the publication of an Entitlements Notice, originally due to be published in March, 1981 (the "March Entitlements Notice"), Gulf seeks a preliminary injunction enjoining DOE from issuing the March Entitlements Notice, or any other Entitlements Notice, or enjoining DOE from including the 341 Tract Unit of the Citronelle Field, Mobile County, Alabama (the "341 Unit"), as a buyer of entitlements on the March Entitlements Notice, or on any Entitlements Notice.

 Statutory and Regulatory Background

 DOE administers several price control programs. One of these, the Old Oil Entitlements Program, was created to equalize access by all refiners to price-controlled old domestic crude oil. 39 Fed.Reg. 42246 (Dec. 4, 1974). Currently the program equalizes cost differences between price-controlled lower-tier (old) crude oil, and upper-tier (new) crude oil, and uncontrolled crude oil by requiring cash transfers between refiners. Refiners with greater access than the national average to price-controlled crude oil make cash payments, termed "entitlement purchases," to those refiners with relatively less access to price-controlled crude oil. This latter group of refiners is said to "sell entitlements."

 Each month all refiners are required to report their crude oil receipts, by tier category, to the Economic Regulatory Administration (ERA), which computes the entitlements obligations for all refiners. These obligations appear on an "Entitlements Notice," published monthly, usually about 2 months after the month in which receipts are reported to ERA. Hence, refiners' receipts reported for January, 1981 (the last month prior to decontrol of crude oil) will be used by ERA to calculate the entitlements obligations appearing in the Entitlements Notice originally due to be published in March, 1981, but postponed.

 DOE also administers the Tertiary Incentive Pricing Program (TIPP) under which a producer which has initiated a qualified enhanced recovery project on a property can sell, at free market prices, production that otherwise would be price controlled, and can recover "recoupable allowed expenses" incurred in the tertiary project.

 Gulf buys about 98.1% of crude oil production from the "341 Unit" (the operator of a producing oil field in the Citronelle Field, Mobile County, Alabama). Gulf buys the 341 Unit's oil from Douglas Oil Producing Co., Inc., a crude oil reseller which purchases production directly from the 341 Unit.

 The 341 Unit initiated a qualified tertiary enhanced recovery project at the Citronelle Field, after July 7, 1980, allowing the 341 Unit, under TIPP, to sell at free market prices production which would otherwise have been price controlled. The 341 Unit recertified prior production and invoiced Douglas for tertiary incentive revenue (the difference between the controlled price and the uncontrolled, free market price). Douglas then invoiced Gulf for these amounts, and, in November and December, 1980, Gulf paid Douglas, which then paid to the 341 Unit, $ 599,768.29 in "tertiary incentive revenues," representing the difference between the upper tier controlled price, and the free market price charged pursuant to TIPP for 25,885.55 barrels of recertified crude oil produced by the 341 Unit in September, 1980. In August, 1979, the 341 Unit filed an Application for Exception with the Office of Hearings and Appeals (OHA), seeking exception relief from DOE's pricing provisions to provide the 341 Unit with money to fund the tertiary recovery project. The OHA's December 31, 1980 Decision granted exception relief, under a plan by which the Unit would receive over $ 60 million for the tertiary recovery project. This December 31 Decision required Gulf to sell entitlements to participants in the Old Oil Entitlements Program, in an amount equal to the monetary relief the December 31 Decision awarded to the 341 Unit. Gulf then paid the proceeds of the entitlements sale to the 341 Unit.

 Under Ordering Paragraph 9 of the December 31 Decision's award of exception relief, the 341 Unit was required to waive access to any of the upper-tier certification provisions of TIPP; any revenues received by the 341 Unit through the tertiary incentive program were to be returned to crude oil purchasers within 60 days, with interest. Thus, the December 31 Decision required the 341 Unit to repay to Gulf $ 599,768.29 in tertiary incentive revenues previously received from Gulf, with interest, by March 2, 1981. The December 31 Decision further required that, upon receipt of repayment, Gulf was to recertify as upper-tier receipts in its reports to ERA, any barrels previously reported as tertiary free market receipts in conjunction with the tertiary free market payments made to the 341 Unit. According to Gulf, the effect of this last requirement of the December 31 Decision was to put Gulf in the same position it would have been in had the 341 Unit never recertified price-controlled production as tertiary incentive (price uncontrolled) production.

 On March 2, 1981, the 341 Unit sought a brief extension of time for making repayment required by the December 31 Decision. Gulf did not object, and on March 5, 1981, DOE by letter granted an extension to March 9, 1981, for the 341 Unit to comply with Ordering Paragraph 9 of the December 31 Decision.

 DOE subsequently issued the March 6 Order, which is the subject of this suit, which Gulf says was a reversal of DOE's position. The March 6 Order rescinded the provisions of Ordering Paragraph 9 of the December 31 Decision, and required the 341 Unit to use the $ 599,768.29 received from Gulf to purchase entitlements directly as a one-time participant in the Old Oil Entitlements Program. According to Gulf, the effect of the March 6 Order is to raise by several dollars per barrel Gulf's cost for the 25,885 barrels of oil recertified to Gulf by the 341 Unit as tertiary incentive crude oil.

 This increase in cost will arise from the following analysis: The barrels against which the $ 599,768.29 tertiary incentive differential payment was matched were produced and sold in September 1980. Gulf received and paid for those barrels in October 1980, paying the upper-tier ceiling price of $ 14.83/barrel, or a total pre-entitlement purchase price of $ 383,437.80. Gulf reported these to the Economic Regulatory Administration (ERA), incurring entitlements purchase obligations of.$ 471,736.65, for a total post-entitlement cost of the barrels, before tertiary recertification, of $ 855,174.45, or $ 33.04/barrel.

 In November and December, 1980, Gulf paid Douglas Oil Co. $ 599,768.55 for the difference between the controlled price previously paid and the free market price for the barrels, raising the pre-entitlement price of the barrels to $ 56.21/barrel, for a total pre-entitlement cost of $ 1,454,943.00 ($ 855,174.45 $ 599,768.55). Because of internal accounting difficulties, Gulf did not recertify the barrels as tertiary incentive production until March 5, 1981. Thus Gulf has not yet received entitlements credits reflecting the fact that Gulf paid free market price for the oil, and Gulf has thus not been cost equalized through the entitlements program for the tertiary prices paid for the 341 Unit's oil.

 Under the December 31 Order, Gulf would receive repayment of the full $ 599,768.55 paid as tertiary incentive prices, and Gulf would not recertify the barrels to ERA for purposes of entitlements credits. Gulf's post-entitlement cost for the 25,885 barrels of September 1980 production would continue to be the $ 33.04/barrel that existed before the 341 Unit was eligible for tertiary incentive pricing, which the 341 Unit subsequently waived in connection with the before mentioned exception proceeding. Under the March 6 Order, the 341 Unit will use the $ 599,768.55 to purchase entitlements directly as a participant in the entitlements program. Because Gulf recertified the 25,885.55 barrels of crude oil as tertiary incentive production in its March 5 report to ERA, Gulf will receive a credit for the recertified barrels. The amount of the credit will depend on the value of an entitlement for the last month of the entitlements program, January 1981, because that is the month covered by the March 5 report. Gulf has estimated the value of the entitlements, and calculates that the credit it will receive for the 25,885.55 barrels will be $ 526,007.19. Gulf's post-entitlement crude cost for the 25,885.55 barrels will therefore be $ 35.89/barrel under the March 6 Order. This is derived as follows: ($ 1,454,943.00 [present total cost] -- $ 526,007.19 [estimated entitlements]) 25,855.55 barrels


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