B-149809, SEP. 19, 1962

B-149809: Sep 19, 1962

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THE CONTRACT WAS NEGOTIATED ON A COST-REIMBURSABLE BASIS. WHICH AMOUNT IT IS REPORTED WAS BASED ON THE COMPANY'S ESTIMATE OF THE COST OF PLUGGING UP THE OLD GAS WELL AND DRILLING A NEW GAS WELL. ADVISED THE BUREAU OF RECLAMATION THAT IN RELOCATING THE COMPANY'S SHELTON "A" NO. 1 GAS WELL IT WAS NECESSARY FOR THE COMPANY TO INCUR CERTAIN ADDITIONAL EXPENSES OVER AND ABOVE THE CONTRACT CEILING PRICE OF $34. THE COMPANY ALSO STATED THAT ADDITIONAL EXPENSES WERE ALSO INCURRED IN PLUGGING THE OLD WELL SO THAT IT WOULD CONFORM TO THE STANDARDS PRESCRIBED BY THE TEXAS RAILROAD COMMISSION. THE ADDITIONAL EXPENSES INCURRED BY THE COMPANY WERE STATED TO BE AS FOLLOWS: TABLE PERFORATING AND FRACTURING $5.

B-149809, SEP. 19, 1962

TO MR. C. L. HARRIS, AUTHORIZED CERTIFYING OFFICER, BUREAU OF RECLAMATION, REGION 5:

YOUR LETTER OF AUGUST 27, 1962, FILE 5-360, REQUESTS OUR DECISION WHETHER YOU MAY CERTIFY FOR PAYMENT THE ENCLOSED VOUCHER IN THE AMOUNT OF $47,478.82 IN FAVOR OF THE AMARILLO OIL COMPANY REPRESENTING CERTAIN EXPENSES INCURRED BY THE COMPANY IN PERFORMING THE SERVICES REQUIRED UNDER RELOCATION CONTRACT NO. 14-06-500-597.

UNDER THE TERMS OF THE ABOVE CONTRACT THE CONTRACTOR AGREED TO RELOCATE THE COMPANY'S SHELTON ,A" NO. 1 GAS WELL AND APPURTENANCES LOCATED ON THE SANFORD RESERVOIR SITE, CANADIAN RIVER PROJECT, TEXAS. THE CONTRACT WAS NEGOTIATED ON A COST-REIMBURSABLE BASIS, SUBJECT TO THE CONDITION THAT THE TOTAL COST OF THE CONTRACT WORK SHOULD NOT EXCEED $34,500, WHICH AMOUNT IT IS REPORTED WAS BASED ON THE COMPANY'S ESTIMATE OF THE COST OF PLUGGING UP THE OLD GAS WELL AND DRILLING A NEW GAS WELL.

AFTER COMPLETING THE WORK THE AMARILLO OIL COMPANY BY LETTER DATED AUGUST 7, 1962, ADVISED THE BUREAU OF RECLAMATION THAT IN RELOCATING THE COMPANY'S SHELTON "A" NO. 1 GAS WELL IT WAS NECESSARY FOR THE COMPANY TO INCUR CERTAIN ADDITIONAL EXPENSES OVER AND ABOVE THE CONTRACT CEILING PRICE OF $34,500 IN ORDER TO RESTORE THE PRODUCTIVE CAPACITY OF THE NEW WELL TO THAT OF THE OLD WELL. THE COMPANY ALSO STATED THAT ADDITIONAL EXPENSES WERE ALSO INCURRED IN PLUGGING THE OLD WELL SO THAT IT WOULD CONFORM TO THE STANDARDS PRESCRIBED BY THE TEXAS RAILROAD COMMISSION. THE ADDITIONAL EXPENSES INCURRED BY THE COMPANY WERE STATED TO BE AS FOLLOWS:

TABLE

PERFORATING AND FRACTURING $5,821.83

SERVICE COSTS 1,154.80

PLUGGING 5,934.56

12,911.19

PLUS 2 PERCENT ADMINISTRATIVE FEE 258.22

$13,169.41

THE CONTRACT CEILING PRICE OF $34,500 WAS BASED ON THE COMPANY'S ESTIMATE OF MAY 25, 1962. THE FILE DOES NOT CONTAIN A COPY OF THE COMPANY'S ESTIMATE BUT FROM THE FIGURES AVAILABLE IT APPEARS THAT SUCH ESTIMATE WAS IN THE AMOUNT OF $34,309.41 ($47,478.82 LESS $13,169.41).

IN THE FINDINGS OF FACT OF THE CONTRACTING OFFICER IT IS STATED:

"3. AFTER COMPLETION OF THE DRILLING, THE SHELTON "A" NO. 1-X GAS WELL GAUGED 26,340 MCF PER DAY OUT OF THE OPEN HOLE AS SHOWN ON PAGE 2 OF EXHIBIT 2. THE PRODUCTION CASING WAS THEN INSTALLED AND CEMENTED.

"4. THEREUPON, THE COMPANY PERFORMED THE REGULAR ACID TREATMENT WHICH CONSTITUTES A PART OF THE NORMAL WELL COMPLETION PROCEDURE IN THE WEST PANHANDLE GAS FIELD, AFTER WHICH THE PRODUCTION OF THE RELOCATED SHELTON "A" NO. 1-X WELL WAS 9,043 MCF PER DAY AS INDICATED ON PAGE 2 OF EXHIBIT 2. THE COMPANY THEN TREATED THE WELL FURTHER WITH WASH ACID AND JELLED WATER, WITH THE RESULT THAT RATED PRODUCTION WAS INCREASED TO 16,330 MCF PER DAY AS SHOWN BY THE RAILROAD COMMISSION ONE-POINT BACK PRESSURE TEST DATED JANUARY 4, 1962, A COPY OF WHICH IS INCLUDED IN EXHIBIT NO. 2, PAGE 5.

"5. THE COST OF INCREASING PRODUCTION OF THE SHELTON "A" NO. 1-X WELL FROM 9,043 MCF PER DAY TO 16,330 MCF PER DAY, AS OUTLINED IN THE PRECEDING PARAGRAPH, EXCEEDED THE ESTIMATED COST FOR ACIDIZING SHOWN IN THE COMPANY'S APRIL 17, 1961, DETAIL WELL ESTIMATE, WHICH IS SHOWN ON PAGE 7 OF EXHIBIT 2, BY $6,976.63, AND THIS INCREASE IN COST FOR THIS ITEM WAS NOT OFFSET BY CORRESPONDING DECREASES IN THE ESTIMATED COST FOR THE OTHER ITEMS OF DRILLING COSTS SHOWN IN THE DETAIL WELL ESTIMATE.

"6. DUE TO THE FRACTURED CONDITION OF THE SHELTON "A" NO. 1 GAS WELL, IT WAS NECESSARY TO EXPEND $8,134.56 FOR THE PLUGGING OPERATION, WHEREAS THE COMPANY'S ESTIMATE, AS SHOWN IN ITS AUGUST 7, 1962, LETTER, ATTACHED AS EXHIBIT 2, WAS $2,200.00. COMPETENT EXPERT OPINION SUPPORTS THE COMPANY'S CONCLUSION THAT THIS FRACTURED CONDITION WAS UNFORESEEABLE AT THE TIME OF THE CONTRACT'S EXECUTION, AND NO EVIDENCE HAS BEEN FOUND THAT WOULD INDICATE THAT SUCH KNOWLEDGE SHOULD HAVE COME TO THE COMPANY IN THE PROCESS OF ITS PREVIOUS OPERATION OF THE SHELTON "A" NO. 1 WELL. THIS EXCESS COST WAS NOT OFFSET BY CORRESPONDING SAVINGS AND OTHER COST ITEMS INCLUDED WITHIN THE COMPANY'S DETAIL WELL ESTIMATE.

"9. AMARILLO OIL COMPANY HAS INTERPRETED THE INTENT OF THE SUBJECT CONTRACT TO BE THAT THE GOVERNMENT WILL REIMBURSE THE COMPANY FOR ACTUAL COSTS INCURRED IN RELOCATING AND REDRILLING ITS SHELTON "A" NO. 1 AS SHOWN ON PAGE 4 OF THE COMPANY'S AUGUST 7 LETTER, MENTIONED ABOVE.

"10. A COMPARISON OF DRILLING COSTS AND CONTRACT ESTIMATES RELATING TO OTHER WELLS DRILLED IN CONNECTION WITH THE GOVERNMENT'S RELOCATION PROGRAM ESTABLISHES THE FACT THAT AMARILLO OIL COMPANY'S ORIGINAL ESTIMATE INCLUDED AN INSUFFICIENT ALLOWANCE FOR UNFORESEEN CONTINGENCIES:

TABLE

"OWNER CONTRACT NUMBER ESTIMATED COST

W/O APPURTENANCES

J. M. HUBER CORPORATION 14-06-500-603 $44,350.00

COLORADO INTERSTATE GAS 14-06-500-601 $43,273.00

PHILLIPS PETROLEUM 14-06-500-611 $47,000.00

AMARILLO OIL COMPANY 14-06-500-597 $44,400.00

"11. ALL WORK PERFORMED BY AMARILLO OIL COMPANY IN CONNECTION WITH THIS CONTRACT WAS IN ACCORDANCE WITH THE STANDARD OF A REASONABLY PRUDENT OPERATOR ACTING UNDER THE SAME OR SIMILAR CIRCUMSTANCES. NO COST INCURRED BY THE COMPANY AS EVIDENCED BY ITS AUGUST 7 CLAIM IS CONSIDERED UNREASONABLE FOR THE PURPOSE OF ACHIEVING PRODUCTION COMPARABLE TO THAT WHICH WAS PREVIOUSLY OBTAINED FROM THE SHELTON "A" NO. 1 WELL.'

IT APPEARS OBVIOUS FROM THE FACTS AND CIRCUMSTANCES OF THE MATTER, AS WELL AS FROM SPECIFIC STATEMENTS OF REPRESENTATIVES OF THE COMPANY AND THE GOVERNMENT, THAT THE UNDERSTANDING AND INTENTION OF ALL PARTIES TO THE CONTRACT AT ALL TIMES WAS THAT THE RELOCATION OF THE SHELTON "A" NO. 1 GAS WELL, EXCLUDING BETTERMENTS, SHOULD BE ACCOMPLISHED WITHOUT COST TO THE COMPANY. IT APPEARS THAT THERE LOCATION OF THE GAS WELL WAS PRIMARILY FOR THE BENEFIT OF THE GOVERNMENT AND WAS UNDERTAKEN BY THE COMPANY SOLELY FOR THE ACCOMMODATION OF THE GOVERNMENT; THAT THERE IS NO ELEMENT OF PROFIT ACCRUING TO THE COMPANY; AND THAT IT WAS THE UNDERSTANDING THAT THE CONTRACT CEILING PRICE WOULD COVER ALL LEGITIMATE COSTS ARISING OUT OF THE RELOCATION.

FOR THE REASONS ABOVE SET FORTH, WE OFFER NO OBJECTION TO THE CERTIFICATION OF THE VOUCHER IN THE AMOUNT OF $47,478.82. A REFERENCE TO THIS DECISION SHOULD BE MADE ON THE VOUCHER WHICH, TOGETHER WITH RELATED PAPERS, IS RETURNED.