B-66927, JUL. 17, 1967

B-66927, JUL. 17, 1967

OIL RESERVES - UNIT PLAN CONTRACT DECISION REAFFIRMING DECISION B-66927, OCT. 20, 1966, REGARDING UNIT PLAN CONTRACT FOR PRODUCTION OF OIL IN ELK HILLS NAVAL PETROLEUM RESERVE.

TO THOMAS E. HAVEN, ESQUIRE, PILLSBURY, MADISON AND SUTRO:

REFERENCE IS MADE TO YOUR LETTER OF MARCH 31, 1967, REQUESTING RECONSIDERATION OF OUR DECISION B-66927 OF OCTOBER 20, 1966, REGARDING CERTAIN ASPECTS OF UNIT PLAN CONTRACT NOD-4219, WITH THE STANDARD OIL COMPANY OF CALIFORNIA, PERTAINING TO THE ELK HILLS NAVAL PETROLEUM RESERVE.

YOUR REQUEST FOR RECONSIDERATION IS DIRECTED TO THAT PORTION OF OUR DECISION WHICH DEALT WITH THE APPLICATION OF SECTION 5 (G) OF THE CONTRACT WHICH PROVIDES THAT:

"IF, DURING THE PRIMARY PERIOD, NAVY SHALL ELECT TO PERMIT PRODUCTION FROM ANY ZONE OTHER THAN THE SHALLOW OIL ZONE, OR IF, AFTER THE EXPIRATION OF THE PRIMARY PERIOD, NAVY SHALL ELECT TO PERMIT PRODUCTION FROM THE RESERVE IN EXCESS OF THE PRODUCTION WHICH STANDARD MAY THEN BE RECEIVING UNDER THE PROVISIONS OF PARAGRAPH (F) OF THIS SECTION 5, THEN AND IN EITHER SUCH EVENT NAVY AND STANDARD, RESPECTIVELY, SHALL TAKE AND SHARE IN SUCH PRODUCTION FROM THE RESPECTIVE ZONES AS FOLLOWS:"

YOU SEEK RECONSIDERATION OF OUR INTERPRETATION OF SECTION 5 (G) ON THE BASIS OF EITHER OF THE TWO ALTERNATIVES STATED BELOW.

YOU CONTEND THAT SECTION 5 (G) IS INAPPLICABLE TO THE ALLOCATION OF NONEMERGENCY PRODUCTION. IN THAT CONNECTION, YOU POINT OUT THAT SECTION 5 (G) BEGINS WITH THE PHRASE,"IF * * * NAVY SHALL ELECT TO PERMIT PRODUCTION FROM THE RESERVE * * *" AND THAT A PERTINENT PORTION OF PARAGRAPH 8 OF THE CONTRACT RECITALS STATES:

"* * * THE PRODUCTION OF THE REMAINDER OF STANDARD'S SHARE AND OF ALL OF NAVY'S SHARE MUST, EXCEPT FOR THE PURPOSE OF PROTECTING, CONSERVING, MAINTAINING, OR TESTING THE RESERVE, BE PRECEDED BY AND BASED UPON AN AUTHORIZATION BY JOINT RESOLUTION OF THE CONGRESS AS PROVIDED IN THE ACT OF JUNE 4, 1920, AS AMENDED; AND REFERENCES HEREINAFTER TO AN AUTHORIZATION OR ELECTION BY NAVY TO ORDER THE PRODUCTION OF ANY OF SUCH OIL ARE INTENDED TO BE LIMITED TO ACTION BY THE NAVY WITHIN THE TERMS OF ANY SUCH JOINT RESOLUTION. * * *" IT IS YOUR CONTENTION THAT THE PHRASE "NAVY SHALL ELECT" IN SECTION 5 (G) IS LIMITED TO ELECTIONS BY THE NAVY WITHIN THE TERMS OF A JOINT RESOLUTION OF THE CONGRESS AS PROVIDED FOR IN THE QUOTED PORTION OF PARAGRAPH 8. SINCE THERE IS NO JOINT RESOLUTION NOW IN EFFECT, YOU STATE THAT SECTION 5 (G) WOULD NOT BE FOR APPLICATION AT THIS TIME.

IN THE ALTERNATIVE, YOU CONTEND THAT THERE IS NO AMBIGUITY IN SECTION 5 (G), BUT IF SUCH BE THE CASE, THEN IT SHOULD BE RESOLVED IN THE LIGHT OF THE RECOGNIZED POLICY OF CONSERVING NAVY'S OIL IN THE GROUND FOR USE IN A NATIONAL EMERGENCY. IN THAT REGARD, YOU QUOTE FROM A STATEMENT MADE BY THE SPECIAL COUNSEL TO THE HOUSE NAVAL AFFAIRS COMMITTEE AT HEARINGS ON SEPTEMBER 9, 1946, ON AN AMENDMENT TO THE UNIT PLANT CONTRACT, WHEREIN THE SPECIAL COUNSEL STATED THAT THE DIRECTOR OF THE NAVAL PETROLEUM RESERVES FAVORED A POLICY OF CONSERVING NAVY'S OIL IN THE GROUND AGAINST THE TIME WHEN IT MIGHT BE REQUIRED IN AN EMERGENCY. FURTHER, YOU NOTE THAT OUR DECISION OF OCTOBER 20, 1966, GAVE WEIGHT TO THE PRODUCTION BALANCING FEATURE OF SECTION 5 (G) AND THAT IT WOULD ACCELERATE THE TIME WHEN CERTAIN PAYMENT IMBALANCES WOULD BE ADJUSTED. HOWEVER, YOU STATE THAT STANDARD'S OBLIGATION TO PAY SUCH COSTS WILL NOT ARISE UNTIL THE FIELD IS BEING PRODUCED PURSUANT TO JOINT RESOLUTION OF THE CONGRESS AND THAT THE ACTUAL AMOUNT OF DELAY IN COMING INTO BALANCE WHICH WOULD RESULT FROM THE MANNER OF DISTRIBUTION SUGGESTED IN THE DECEMBER 29, 1965, NAVY SUBMISSION TO OUR OFFICE WOULD NOT BE TOO SIGNIFICANT IN THAT 30 DAYS OF NONEMERGENCY PRODUCTION COULD BE BALANCED WITH ONE DAY'S EMERGENCY PRODUCTION ONCE EMERGENCY PRODUCTION IS COMMENCED.

WE DO NOT CONCUR IN YOUR VIEW THAT SECTION 5 (G) OF THE CONTRACT IS APPLICABLE ONLY WHEN THERE HAS BEEN A JOINT RESOLUTION OF THE CONGRESS. IN OUR VIEW, THE LIMITATION UPON PRODUCTION IMPOSED BY PARAGRAPH 8 OF THE RECITALS IS CONFINED TO PRODUCTION OF THE REMAINDER OF STANDARD'S SHARE AND ALL OF THE NAVY'S SHARE. THE TERM "ANY SUCH OIL" AS USED IN THE LETTER PORTION OF PARAGRAPH 8 NECESSARILY REFERS TO "THE REMAINDER OF STANDARD'S SHARE AND ALL OF THE NAVY'S SHARE" FROM WHICH THE NONEMERGENCY PRODUCTION SPECIFICALLY IS EXCEPTED. IN OTHER WORDS, PARAGRAPH 8 MERELY PROVIDES THAT WHENEVER THERE IS A REFERENCE TO AN AUTHORIZATION OR ELECTION BY THE NAVY TO ORDER EMERGENCY PRODUCTION, SUCH PRODUCTION MUST BE PRECEDED BY A JOINT RESOLUTION OF THE CONGRESS. HOWEVER, THERE IS NOTHING IN PARAGRAPH 8 WHICH INDICATES THAT THE WORD "ELECT" IN SECTION 5 (G) IS RESTRICTED TO THAT SITUATION ALONE, NOR IS IT OTHERWISE LIMITED THEREIN. HENCE, IN OUR OPINION, AN ELECTION BY THE NAVY FOR NONEMERGENCY PRODUCTION IS NOT SUBJECT TO THE LIMITATION IN PARAGRAPH 8 OF THE RECITALS.

ALTHOUGH YOU CONTEND THAT THERE IS NO AMBIGUITY IN SECTION 5 (G), WE BELIEVE AN AMBIGUITY IS APPARENT FROM THE FACT THAT THE WORDS "IN SUCH PRODUCTION" AS USED THEREIN MAY REFER EITHER TO THE ENTIRE PRODUCTION FROM THE RESERVE OR TO THE PORTION OF THE TOTAL PRODUCTION WHICH EXCEEDS THE 5 (F) GUARANTEED PRODUCTION. WHILE THE LATTER INTERPRETATION WAS ADVANCED BY THE DEPARTMENT OF THE NAVY IN ITS DECEMBER 29, 1965, SUBMISSION TO OUR OFFICE WHICH WAS THE SUBJECT OF OUR OCTOBER 20, 1966, DECISION, WE WERE PERSUADED BY THE FACT THAT THE CONTRACT WAS INTERPRETED IN THE FORMER RESPECT OVER THE YEARS AND THAT THIS LATTER PRACTICE HAD THE EFFECT OF BRINGING THE PARTIES CLOSER TO THE EQUILIBRIUM CONTEMPLATED BY SECTION 5 (G). ALTHOUGH YOU STATE THAT EQUILIBRIUM WILL NOT BE ACCOMPLISHED UNTIL THERE IS PRODUCTION UNDER A JOINT RESOLUTION OF THE CONGRESS, AND THAT UNDER SUCH PRODUCTION ANY IMBALANCE CREATED BY THE ALLOCATION SUGGESTED IN THE DECEMBER 29 NAVY SUBMISSION WILL BE CORRECTED RELATIVELY FAST, THE MATTER REMAINS ONE OF BALANCING EVEN THOUGH IT MAY BE RELATIVELY SMALL NONEMERGENCY PRODUCTION.

FURTHER, YOU REFER TO STATEMENTS MADE IN 1946 AS "LEGISLATIVE HISTORY" OF THE INTENT OF THE NAVY TO FAVOR LARGER IMBALANCE. BUT, IT WILL BE NOTED THAT THESE STATEMENTS WERE MADE MORE THAN 2 YEARS AFTER THE CONTRACT WAS ENTERED INTO. APPARENTLY, THE ACTUAL PRACTICE WITH RESPECT TO THE INTERPRETATION OF SECTION 5 (G) BY BOTH STANDARD AND NAVY OVER THE YEARS HAS BEEN DIFFERENT. PARENTHETICALLY, IT MIGHT BE OBSERVED THAT THE HOUSE NAVAL AFFAIRS COMMITTEE SPECIAL COUNSEL, WHOSE STATEMENTS YOU RELY UPON TO SUPPORT YOUR CONTENTION, ALSO MADE STATEMENTS AT THE SAME TIME THAT, WHEN THE PRODUCTION WOULD BE ALLOCATED UNDER SECTION 5 (G), THE "NAVY WOULD BE REQUIRED TO TAKE APPROXIMATELY EIGHT-NINTHS OF A PRODUCTION AND STANDARD WOULD BE REQUIRED TO TAKE ONLY ONE-NINTH OR ITS MINIMUM GUARANTY, WHICHEVER IS LARGER;, THE LATTER STATEMENT WOULD, OF COURSE, SUPPORT THE VIEW THAT PRODUCTION IS TO BE ALLOCATED ACCORDING TO THE PERCENTAGE PARTICIPATION FORMULA PROVIDED IN SECTION 5 (G), WITH SECTION 5 (F) OPERATING AS A MINIMUM GUARANTEE IF THE ALLOCATION UNDER SECTION 5 (G) IS INSUFFICIENT TO MEET STANDARD'S SECTION 5 (F) COSTS.