B-66927, JUL. 30, 1962

B-66927, JUL. 30, 1962

TO THE SECRETARY OF THE NAVY:

REFERENCE IS MADE TO LETTER DATED MARCH 27, 1962, FROM THE ACTING SECRETARY OF THE NAVY REQUESTING A DECISION AS TO THE PROPER INTERPRETATION OF CERTAIN PROVISIONS OF CONTRACT NO. NOD-4219 DATED JUNE 19, 1944, AND THE AMENDATORY AND SUPPLEMENTAL AGREEMENT THERETO, CONTRACT NOD-8477 DATED DECEMBER 22, 1948, BETWEEN THE UNITED STATES AND THE STANDARD OIL COMPANY OF CALIFORNIA RELATING TO THE UNIT OPERATION OF NAVAL PETROLEUM RESERVE NO. 1 (ELK HILLS), CALIFORNIA.

IN THE ACTING SECRETARY'S LETTER IT IS POINTED OUT BY WAY OF BACKGROUND THAT THE NAVAL PETROLEUM RESERVE NO. 1 CONSISTS OF 46,095 ACRES OF WHICH 37,554 ACRES ARE OWNED BY THE UNITED STATES AND 8,541 ACRES BY STANDARD. STANDARD'S LAND IS CHECKERBOARDED THROUGHOUT A PORTION OF THE AREA. THERE ARE NOW 950 PRODUCTIVE OIL WELLS AND 10 GAS WELLS IN THE FIELD. STANDARD HAS OWNERSHIP IN TWO OF THE THREE KNOWN PRODUCTIVE OIL ZONES AND IN THE GAS ZONE. THE OWNERSHIP OF EACH PARTY IN THESE ZONES IS: SHALLOW OIL ZONE, UNITED STATES 70 PERCENT AND STANDARD 30 PERCENT; STEVENS ZONE, UNITED STATES 83.5 PERCENT AND STANDARD 16.5 PERCENT; DRY GAS ZONE, UNITED STATES 77 PERCENT AND STANDARD 23 PERCENT. THE RESERVE IS NORMALLY SHUT IN EXCEPT FOR REMEDIAL AND TEST PRODUCTION FROM THE SHALLOW OIL ZONE. THIS PRODUCTION IS NECESSARY PRIMARILY DUE TO WATER ENCROACHMENT ON THE NORTH FLANK OF THE RESERVE AND OIL MIGRATION FROM THE FIELD ON THE SOUTH FLANK.

ON JUNE 19, 1944, THE SECRETARY OF THE NAVY ENTERED INTO A UNIT PLAN CONTRACT WITH STANDARD UNDER AUTHORITY OF TITLE 10, UNITED STATES CODE, CHAPTER 641. SECTION 7426 OF THAT TITLE SPECIFICALLY SETS FORTH THE NATURE OF THE UNIT PLAN CONTRACT AND ITS LIMITATIONS. IT IS REPORTED BY THE ACTING SECRETARY THAT THE PURPOSE AND POLICY OF THE GOVERNMENT WITH RESPECT TO THE NAVAL PETROLEUM RESERVES IS TO CONSERVE OIL IN THE GROUND FOR USE IN AN EMERGENCY; THAT THE UNIT PLAN CONTRACT CONTAINS RESTRICTIONS ON THE OPERATION OF THE FIELD TO ACHIEVE THIS PURPOSE; AND THAT THE CONTRACT ALSO PROVIDES FOR RATHER COMPLICATED METHODS OF ALLOCATING COSTS, BALANCING RECEIPTS OF PRODUCTION, AND SHARING COSTS CURRENTLY AND ULTIMATELY. SECTION 6 OF THE CONTRACT IS DEVOTED TO THE SUBJECT OF COSTS, PAYMENTS CURRENTLY, AND ULTIMATE SETTLEMENT. IN EFFECT, IT PROVIDES THAT THE COSTS OF EXPLORING, PROSPECTING, DEVELOPING AND OPERATING THE RESERVE SHALL BE BORNE ULTIMATELY BY NAVY AND STANDARD IN ACCORDANCE WITH THEIR RESPECTIVE PERCENTAGE PARTICIPATIONS OF OWNERSHIP IN EACH PRODUCTIVE ZONE. THE CONTRACT PROVIDES FOR THE FOLLOWING COST CLASSIFICATIONS:

(A) ORDINARY PRODUCTION COSTS, SECTION 6 (B) (1), WHICH ARE PAID CURRENTLY BY NAVY AND STANDARD IN PROPORTION TO THE PERCENTAGE OF PRODUCTION RECEIVED CURRENTLY BY EACH FROM EACH ZONE.

(B) READINESS MAINTENANCE COSTS, SECTION 6 (B) (1) (VI), WHICH ARE PAID CURRENTLY IN PROPORTION TO PERCENTAGE PARTICIPATIONS, OR OWNERSHIPS OF OIL IN EACH ZONE.

(C) READINESS DEVELOPMENT COSTS, SECTION 6 (B) (1) (IV) WHICH ARE PAID 100 PERCENT CURRENTLY BY NAVY IN ALL ZONES SUBJECT TO ULTIMATE SHARING WITH STANDARD IN PROPORTION TO PERCENTAGE PARTICIPATION, OF OWNERSHIP OF OIL IN EACH ZONE.

(D) EXPLORATORY COSTS, SECTION 6 (B) (1) (II) (III), MAY BE SHARED CURRENTLY, OR MAY BE BORNE BY THE PARTY WHICH SPONSORS THE EXPLORATION, SUBJECT TO SHARING ULTIMATELY IN THE EVENT THE WELL PROVES TO BE PRODUCTIVE.

SECTION 2 (A) (3) OF THE CONTRACT PROVIDES FOR AN ENGINEERING COMMITTEE AND SECTION 3 (B) PROVIDES FOR AN OPERATING COMMITTEE. THE ENGINEERING COMMITTEE WHICH IS COMPOSED OF SIX MEMBERS, THREE EACH REPRESENTING NAVY AND STANDARD, IS CHARGED WITH CERTAIN SPECIFIC ENGINEERING AND GEOLOGICAL DUTIES RELATING TO THE FIELD. ALL EXPLORATION, PROSPECTING, DEVELOPMENT, AND PRODUCING OPERATIONS ON THE RESERVE ARE CARRIED ON UNDER THE SUPERVISION AND DIRECTION OF THE OPERATING COMMITTEE, WHICH IS COMPOSED OF TWO MEMBERS, ONE EACH REPRESENTING NAVY AND STANDARD, WHO ARE ALSO MEMBERS OF THE ENGINEERING COMMITTEE.

RECITAL (6) OF THE UNIT PLAN CONTRACT PROVIDES THAT:

"/6) THE FOLLOWING CONSIDERATIONS HAVE LED NAVY AND STANDARD TO CONCLUDE THAT THE MOST DESIRABLE AND EFFECTIVE MEANS OF PROTECTING THE RESERVE AND OF ASSURING THE MAXIMUM ULTIMATE RECOVERY OF OIL, GAS, NATURAL GASOLINE AND ASSOCIATED HYDROCARBONS FROM THE RESERVE IS TO DEVELOP AND OPERATE ALL LANDS IN THE RESERVE AS A UNIT: "

THEN FOLLOW SUBPARAGRAPHS (A), (B), (C) AND (D). SUBPARAGRAPH (D) PROVIDES:

"/D) THE UNIT PLAN OF DEVELOPMENT AND OPERATION AS SET OUT HERE WILL:

"/VI) RESULT IN SECURING THE MAXIMUM ULTIMATE RECOVERY OF OIL, GAS, NATURAL GASOLINE AND ASSOCIATED HYDROCARBONS FROM THE RESERVE.'

SECTION 3 (B) (4) OF THE UNIT PLAN CONTRACT PROVIDES THAT SUBJECT TO THE OTHER PROVISIONS OF THE CONTRACT, THE OPERATING COMMITTEE "SHALL PERFORM THE FOLLOWING FUNCTIONS:

"/4) REQUIRE THE USE OF SOUND OIL FIELD ENGINEERING PRACTICES DESIGNED TO ACHIEVE THE MAXIMUM ECONOMIC RECOVERY OF OIL FROM THE RESERVE.'

THE OPERATING COMMITTEE DIRECTS AND SUPERVISES THE UNIT OPERATIONS THROUGH "MINUTES" JOINTLY ISSUED. GENERALLY, THESE MINUTES STATE THE PURPOSE OF THE WORK TO BE ACCOMPLISHED AND THE TYPE OF COST INVOLVED IN ACCORDANCE WITH THE UNIT PLAN CONTRACT.

JUST WHAT CONSTITUTES "MAXIMUM ECONOMIC RECOVERY" UNDER THE TERMS OF THE UNIT PLAN CONTRACT IS NOT DEFINED THEREIN. IN NAVY'S VIEW, THIS EXPRESSION RELATES TO THE MANNER WITH WHICH THE OPERATOR PERFORMS ITS FUNCTIONS, IN THAT IT SHALL CONDUCT ALL OPERATIONS ON THE RESERVE WITHOUT WASTE OF OIL OR GAS, AND NOT AT EXCESSIVE COST. STANDARD HAS TENDERED THE OPINION THAT MAXIMUM ECONOMIC RECOVERY MEANS "PAY OUT," OF RETURN OF INVESTMENT WITH PROFIT. IN THIS RESPECT, THE ACTING SECRETARY POINTS OUT THAT BOTH THE STATUTE (10 U.S.C. 7426 (C) ( AND THE UNIT PLAN CONTRACT WOULD APPEAR NOT TO GUARANTEE TO STANDARD A CURRENT PROFIT AT ALL TIMES FROM OPERATION OF THE RESERVE. SECTION 5 (F) OF THAT CONTRACT GUARANTEES ONLY A SUFFICIENT QUANTITY OF CURRENT PRODUCTION TO STANDARD TO COVER "/1) STANDARD'S SHARE OF CURRENT EXPENSES OF PROTECTING, CONSERVING, TESTING, AND MAINTAINING THE RESERVE IN GOOD OIL-FIELD CONDITION, AND (2) THE REAL AND PERSONAL TAXES LEVIED OR ASSESSED AGAINST STANDARD'S LANDS AND EQUIPMENT AND/OR ITS RIGHTS AND INTERESTS UNDER THIS CONTRACT.' THE ACTING SECRETARY STATES THAT THE QUESTIONS AT ISSUE DO NOT INCLUDE WHETHER STANDARD IS RECEIVING THIS AMOUNT OF GUARANTEED PRODUCTION, BUT WHETHER, IN EFFECT, STANDARD MAY DECLINE TO PARTICIPATE IN AN OPERATION FOR THE REASON THAT IT MAY NOT BE PROFITABLE.

SECTION 4 OF THE UNIT PLAN CONTRACT PROVIDES FOR CONTROL BY NAVY OVER THE RATE OF EXPLORATION, PROSPECTING AND DEVELOPMENT ON AND THE QUANTITY AND RATE OF PRODUCTION FROM THE RESERVE. SECTION 5 (D) PROVIDED THAT STANDARD BE PERMITTED TO RECEIVE FROM PRODUCTION UP TO 15,000 BARRELS OF OIL PER DAY UNTIL IT HAD RECEIVED A TOTAL OF 25,000,000 BARRELS FROM THE SHALLOW OIL ZONE. BY SECTION 6 OF THE AMENDATORY AND SUPPLEMENTAL AGREEMENT, STANDARD WAS PERMITTED TO CONTINUE RECEIVING PRODUCTION FROM THE SHALLOW OIL ZONE FOR A LITTLE OVER 18 MONTHS AFTER ITS RECEIPTS REACHED THE 25,000,000 BARREL LIMIT. BY THE END OF THE EXTENDED TIME, STANDARD HAD RECEIVED A TOTAL OF OVER 28,200,000 BARRELS, ALL OF WHICH WAS CHARGED AGAINST STANDARD'S SHARE OF RESERVES. IT IS REPORTED THAT THIS PRIVILEGE OF STANDARD'S TO RECEIVE PRODUCTION IN EXCESS OF ITS NORMAL SHARE DURING THE ,PRIMARY PERIOD" WAS A CONSIDERATION TO STANDARD FOR ENTERING INTO THE UNIT PLAN CONTRACT AND FOR GIVING NAVY CONTROL OVER EXPLORATION, PROSPECTING, AND DEVELOPMENT ON AND THE QUANTITY AND RATE OF PRODUCTION FROM ALL LANDS COMMITTED TO THE UNIT OPERATION.

THE 18 MONTHS' EXTENSION OF THE "PRIMARY PERIOD" WAS A FURTHER CONSIDERATION TO STANDARD FOR COMMITTING ADDITIONAL OF ITS LANDS TO THE UNIT AND ALSO FOR ITS AGREEING TO PAY ITS FULL PERCENTAGE SHARES OF ALL COSTS OF PROTECTING, CONSERVING, TESTING AND MAINTAINING THE SHALLOW OIL ZONE AFTER SUCH COSTS ARE BROUGHT INTO BALANCE AFTER THE END OF THE "PRIMARY PERIOD" AS EXTENDED.

THE ACTING SECRETARY STATES THAT ON ADVICE OF THE ENGINEERING COMMITTEE, IN 1957 THE OPERATING COMMITTEE CAUSED TO BE DRILLED AND EQUIPPED TWO WATER-INJECTION WELLS ON LANDS OWNED BY STANDARD IN AN EFFORT TO CURB THE MIGRATION OF OIL FROM THE SOUTH FLANK OF THE RESERVE, IN ORDER TO PROTECT THE RESERVE AND TO CONSERVE IN THE GROUND OIL, GAS, NATURAL GASOLINE AND ASSOCIATED HYDROCARBONS FOR THE MAXIMUM ULTIMATE RECOVERY.

BASED ON DATA GAINED FROM THE WATER-INJECTION PROGRAM, IN APRIL, 1961 THE ENGINEERING COMMITTEE UNANIMOUSLY RECOMMENDED, FOR THE SAME PURPOSES SET OUT ABOVE, THE DRILLING OF A THIRD WATER-INJECTION WELL ON THE SOUTH FLANK ON LANDS INSIDE THE RESERVE. WHILE, AS MEMBERS OF THE ENGINEERING COMMITTEE, BOTH MEMBERS OF THE OPERATING COMMITTEE VOTED FOR THIS WELL, THEY HAVE BEEN UNABLE TO AGREE REGARDING THE COST ALLOCATION FOR THIS WORK IN THEIR CAPACITY AS MEMBERS OF THE OPERATING COMMITTEE. IT IS THE POSITION OF THE NAVY THAT THE WELL PROPERLY SHOULD BE DRILLED UNDER THE PROVISIONS OF THE UNIT PLAN CONTRACT, AND HENCE THAT IT IS AN APPROPRIATE FUNCTION OF THE OPERATING COMMITTEE AND THAT THE COSTS SHOULD BE CHARGED AS READINESS MAINTENANCE IN ACCORDANCE WITH SECTION 6 (B) (1) (VI) OF THE UNIT PLAN CONTRACT. IN A LETTER DATED NOVEMBER 3, 1961, STANDARD ALLEGED THAT THE DRILLING OF THE WELL DOES NOT COME UNDER THE UNIT PLAN CONTRACT AND THAT SUCH A WELL IS NOT WITHIN THE FUNCTIONS OF THE OPERATING COMMITTEE AND HENCE IS NOT THE APPROPRIATE SUBJECT OF A MINUTE OR OF A DISPUTE TO BE DETERMINED BY THE SECRETARY. STANDARD STATED FURTHER THAT IT IS WILLING TO PERFORM THE WORK OF DRILLING THE WELL UNDER A SEPARATE AGREEMENT WHEREBY NAVY WOULD AGREE TO PAY ALL THE COSTS THEREOF CURRENTLY AND ULTIMATELY UNTIL THE PARTIES AGREE ON THEIR RIGHTS AND OBLIGATIONS IN CONNECTION THEREWITH OR, IF THE PARTIES CANNOT AGREE, THEY ARE DETERMINED BY A COURT OF COMPETENT JURISDICTION. AS A COMPROMISE, NAVY HAS EXPRESSED WILLINGNESS TO BEAR THE COSTS CURRENTLY AS A READINESS DEVELOPMENT PROJECT UNDER SECTION 6 (B) (1) (IV) OF THE CONTRACT. STANDARD HAS EXPRESSED WILLINGNESS ALSO AS A COMPROMISE, TO HAVE THE WELL DRILLED WITH THE UNDERSTANDING THAT STANDARD SHALL NOT BE LIABLE FOR ANY OF THE COSTS OF THE WELL UNLESS THE DATA GAINED THEREFROM PROVES, IN STANDARD'S OPINION, THAT THE WELL WAS ,DESIGNED TO ACHIEVE MAXIMUM ECONOMIC RECOVERY.'

IN VIEW OF THE FACTS RELATED ABOVE DECISION IS REQUESTED ON THE FOLLOWING QUESTIONS:

1. IS NAVY'S INTERPRETATION OF THE UNIT PLAN CONTRACT CORRECT THAT THE THIRD WATER-INJECTION WELL CAN AND PROPERLY SHOULD BE DRILLED, EQUIPPED AND OPERATED UNDER THE PROVISIONS THEREOF, AND AS DETERMINED BY THE OPERATING COMMITTEE IN THE EXERCISE OF ITS FUNCTION UNDER THE UNIT PLAN CONTRACT, INCLUDING DETERMINATION AND ALLOCATION OF COST INVOLVED?

2. MAY NAVY, UNDER THE TERMS OF APPLICABLE STATUTES AND THE UNIT PLAN CONTRACT, ENTER INTO AN ADMINISTRATIVE AGREEMENT WITH RESPECT TO COST ALLOCATION, SUCH AS THAT SET FORTH IN THE FEBRUARY 26, 1962, LETTER, WHEREBY STANDARD COULD BE RELIEVED FROM ANY CURRENT OR ULTIMATE SHARING OF COSTS IN CONNECTION WITH THE THIRD WATER-INJECTION WELL?

3. MAY NAVY, UNDER THE TERMS OF APPLICABLE STATUTES AND THE UNIT PLAN CONTRACT, ENTER INTO AN ADMINISTRATIVE AGREEMENT WITH RESPECT TO COST ALLOCATION, SUCH AS THAT SET FORTH IN THE MARCH 15, 1962, DRAFT LETTER, THAT IS BASED UPON STANDARD'S CRITERION OF "MAXIMUM ECONOMIC RECOVERY," WHEREBY STANDARD WOULD BE RELIEVED FROM ANY CURRENT OR ULTIMATE SHARING OF COSTS IN CONNECTION WITH THE THIRD WATER-INJECTION WELL IF, IN STANDARD'S OPINION, THAT CRITERION WERE NOT MET?

4. IN VIEW OF THE OBLIGATION OF THE SECRETARY OF THE NAVY UNDER THE STATUTES AND THE UNIT PLAN CONTRACT, TO PROTECT THE RESERVE, CONSERVE IN THE GROUND OIL, GAS, NATURAL GASOLINE AND ASSOCIATED HYDROCARBONS, AND SECURE THE MAXIMUM ULTIMATE RECOVERY THEREOF, IS NAVY'S OPINION CORRECT THAT, FAILING ACTION BY THE OPERATING COMMITTEE OR AGREEMENT OF THE PARTIES, THE SECRETARY MAY, UNDER THE UNIT PLAN CONTRACT, LEGALLY REQUIRE THE OPERATING COMMITTEE TO DRILL, EQUIP AND OPERATE THE THIRD WATER- INJECTION WELL?

5. IF THE ANSWER TO THE ABOVE QUESTION NUMBERED 4 IS IN THE AFFIRMATIVE, IS NAVY'S VIEW CORRECT THAT THE SECRETARY, IN CONNECTION WITH THE REQUIREMENT OF DRILLING AND EQUIPPING THE THIRD WATER INJECTION WELL, MAY ALSO MAKE THE FINAL COST ALLOCATION, AND A DETERMINATION OF HOW THE COSTS SHALL BE SHARED?

RECITAL 6 OF THE UNIT PLAN CONTRACT CLEARLY SHOWS THAT THE NAVY ENTERED INTO THE CONTRACT IN ORDER TO PROTECT THE RESERVE AND CONSERVE OIL IN THE GROUND FOR USE IN EMERGENCIES. INASMUCH AS THE ENGINEERING COMMITTEE, EXPERTS IN OIL FIELD ENGINEERING PRACTICES, UNANIMOUSLY RECOMMENDED, FOR PROTECTION AGAINST MIGRATION OF THE UNDERGROUND OIL FROM THE SOUTH FLANK OF THE RESERVE, THAT A THIRD WATER-INJECTION WELL BE DRILLED, EQUIPPED AND OPERATED ON THE RESERVE, WE AGREE WITH THE NAVY THAT THE WELL CAN PROPERLY BE DRILLED UNDER THE PROVISIONS OF THE UNIT PLAN CONTRACT. FURTHERMORE, WE THINK THAT THE CONSIDERATION OF THIS MATTER IS A FUNCTION OF THE OPERATING COMMITTEE PURSUANT TO SECTION 3 (B) AND SECTION 6 OF THE UNIT PLAN CONTRACT. SECTION 3 (B) (3) PROVIDES THAT THE OPERATING COMMITTEE SHALL "INSPECT AND SUPERVISE ALL EXPLORATION, PROSPECTING, DEVELOPMENT AND PRODUCING OPERATIONS ON THE RESERVE.' SECTION 6 (B) (1) (VI) (A) OF THE UNIT PLAN CONTRACT CHARGES THE OPERATING COMMITTEE WITH THE RESPONSIBILITY OF DETERMINING QUARTERLY THE PROPORTION OF COSTS THAT SHOULD BE PAID CURRENTLY BY NAVY AND BY STANDARD UNDER THAT SUBPARAGRAPH.

THE BASES FOR INITIAL FINANCING AND CURRENT AND ULTIMATE SHARING OF COSTS BY NAVY AND STANDARD ARE CONTAINED IN SECTION 6 OF THE UNIT PLAN CONTRACT. SECTION 6 IS ENTITLED "COSTS OF EXPLORATION, PROSPECTING, DEVELOPMENT AND OPERATION" WHICH ARE THE SAME ACTIVITIES AS THOSE ENUMERATED AS A FUNCTION OF THE OPERATING COMMITTEE IN SECTION 3 (B) (3) OF THE UNIT PLAN CONTRACT. THEREFORE, WE BELIEVE THAT THE FUNCTIONS OF THE OPERATING COMMITTEE AS CONTAINED IN SECTION 3 (B) (3) AND THE COST SHARING PROVISIONS OF SECTION 6, PARTICULARLY SECTION 6 (B) (1) (VI) (A) ARE ASSOCIATED.

SECTION 6 CONTAINS SEVERAL SUBSECTIONS COVERING DIFFERENT METHODS OF FINANCING AND COST SHARING FOR DIFFERENT TYPES OF ACTIVITIES. PARTICULAR NOTE CONCERNING THE COST SHARING OF THE WORK CONNECTED WITH THE THIRD WATER-INJECTION WELL IS SUBSECTION 6 (B) (1) (VI) ENTITLED "COST OF MAINTAINING RESERVE IN A CONDITION OF READINESS.' THIS SUBSECTION SPECIFICALLY PROVIDES THE BASIS FOR SHARING THE COSTS OF PROTECTING, CONSERVING, TESTING AND MAINTAINING THE PRODUCING ZONES WITHIN THE RESERVE IN GOOD OIL FIELD CONDITION AND IN A CONDITION OF READINESS.

THEREFORE, SINCE THE PURPOSE OF THE WATER-INJECTION WELL IS TO CONSERVE OIL IT IS OUR VIEW THAT THE OPERATING COMMITTEE OF THE RESERVE HAS AUTHORITY AND RESPONSIBILITY IN CONNECTION WITH DETERMINING THE COST OF SHARING OF THE THIRD WATER-INJECTION WELL ON RESERVE LAND AND SECTION 6 (B) (1) (VI) (A) OF THE UNIT PLAN CONTRACT PROVIDES THE BASIS FOR SUCH COST SHARING. WE ARE ALSO OF THE OPINION, THAT IN THE EVENT THE OPERATING COMMITTEE IS UNABLE TO AGREE ON THIS MATTER, THE DISAGREEMENT SHOULD BE DECIDED BY THE SECRETARY OF THE NAVY PURSUANT TO SECTION 9 (A) OF THE UNIT PLAN CONTRACT.

REGARDING STANDARD'S CONTENTION THAT COST SHARING BY STANDARD SHOULD BE CONDITIONED UPON MAXIMUM ECONOMIC RECOVERY, WE NOTE THAT NO MENTION IS MADE IN THE UNIT PLAN CONTRACT THAT THE INITIAL FINANCING AND CURRENT AND ULTIMATE SHARING OF COSTS ARE CONDITIONED ON THE CONTINGENCY OF ULTIMATE PROFITABLE SALE BY STANDARD OF ITS SHARE OF EXTRACTED PRODUCTS AT AN INDEFINITE FUTURE DATE. NEITHER ARE THE WORDS "MAXIMUM ECONOMIC RECOVERY OF OIL FROM THE RESERVE," AS CONTAINED IN SECTION 3 (B) (4), DEFINED IN THE UNIT PLAN CONTRACT. IN VIEW THEREOF AND SINCE THE UNDERGROUND RESOURCES THAT WOULD BE LOST BY MIGRATION FROM THE RESERVE ARE HOMOGENEOUS PROPERTY OWNED BY NAVY AND STANDARD IN CERTAIN AGREED UPON PERCENTAGES, THE COST OF PROTECTING THE COMMON PROPERTY AGAINST SUCH LOSS SHOULD BE SHARED BY NAVY AND STANDARD IN THE RATIOS OF THEIR RESPECTIVE OWNERSHIP INTEREST. WE CAN FIND NO JUSTIFICATION FOR STANDARD'S CONTENTION THAT NAVY SHOULD BEAR ALL THE COSTS OF DRILLING, EQUIPPING AND MAINTAINING THE THIRD WATER-INJECTION WELL UNTIL A UNILATERAL DETERMINATION HAS BEEN MADE BY STANDARD THAT ITS CRITERION OF "MAXIMUM ECONOMIC RECOVERY" HAS BEEN MET. IN THE EVENT STANDARD DECIDED THAT ITS CRITERION WAS NOT MET THE RESULT WOULD BE THAT NAVY WOULD PAY ALL COSTS OF THE PROTECTIVE OPERATIONS ON THE RESERVE THAT WOULD RESULT IN A BENEFIT TO STANDARD, WHEN THE OIL SO PROTECTED IS PRODUCED. THIS WOULD RELIEVE STANDARD OF ITS OBLIGATIONS UNDER SECTION 6 (B) (1) (VI) OF THE UNIT PLAN CONTRACT AND WOULD EFFECTIVELY GIVE STANDARD A VETO OVER FUTURE OPERATIONS IN THE RESERVE CONTRARY TO THE AUTHORITY VESTED IN THE SECRETARY OF THE NAVY BY SECTION 3 (A) OF THE UNIT PLAN CONTRACT.

IN VIEW OF THE FOREGOING, QUESTIONS NOS. 2 AND 3 ARE ANSWERED IN THE NEGATIVE AND QUESTIONS NOS. 1, 4 AND 5 IN THE AFFIRMATIVE.