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B-66927, OCT. 20, 1966

B-66927 Oct 20, 1966
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TO THE SECRETARY OF THE NAVY: REFERENCE IS MADE TO LETTER OF DECEMBER 29. STANDARD OIL AND THE NAVY ARE BOTH OWNERS OF LAND IN THE ELK HILLS NAVAL PETROLEUM RESERVE NO. 1. SECTION 5 (F) GUARANTEES THAT AS A MINIMUM STANDARD OIL WILL RECEIVE A QUANTITY OF PRODUCTION FROM THE RESERVE TO COVER CERTAIN OF ITS EXPENSES AND TAXES. STATES: "IT IS EXPRESSLY RECOGNIZED BY NAVY AND STANDARD THAT THIS CONTRACT DOES NOT AND CANNOT. AS AMENDED: AND REFERENCES HEREINAFTER TO AN AUTHORIZATION OR ELECTION BY NAVY TO ORDER THE PRODUCTION OF ANY SUCH OIL ARE INTENDED TO BE LIMITED TO ACTION BY THE NAVY WITHIN THE TERMS OF ANY SUCH JOINT RESOLUTION. IS AUTHORIZED UNDER THE PROVISION OF THE ACT OF JUNE 4. THE PRODUCTION AND RECEIPT OF SUCH PORTION BY STANDARD IS INTENDED TO.

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B-66927, OCT. 20, 1966

TO THE SECRETARY OF THE NAVY:

REFERENCE IS MADE TO LETTER OF DECEMBER 29, 1965, FROM THE ACTING SECRETARY, REQUESTING A DECISION AS TO THE INTERPRETATION OF SECTIONS 5/F) AND (G) IN UNIT PLAN CONTRACT NOD-4219 OF JUNE 19, 1944, AS AMENDED, WITH THE STANDARD OIL COMPANY OF CALIFORNIA, AND APPROVAL OF A SYSTEM OF ACCOUNTING PROPOSED FOR THE CONTRACT.

STANDARD OIL AND THE NAVY ARE BOTH OWNERS OF LAND IN THE ELK HILLS NAVAL PETROLEUM RESERVE NO. 1. THE SUBJECT CONTRACT, AS AMENDED, GOVERNS THE RIGHTS AND OBLIGATIONS OF THE PARTIES WITH RESPECT TO THE RESOURCES IN THE RESERVE. SECTION 5 (F) GUARANTEES THAT AS A MINIMUM STANDARD OIL WILL RECEIVE A QUANTITY OF PRODUCTION FROM THE RESERVE TO COVER CERTAIN OF ITS EXPENSES AND TAXES. SECTION 5 (F), INSOFAR AS PERTINENT, PROVIDES:

"IF, AT ANY TIME, NAVY SHALL ELECT (SEE PARAGRAPH (8) OF THE RECITALS) TO SUSPEND OR TO REDUCE PRODUCTION FROM THE RESERVE, STANDARD SHALL NEVERTHELESS, SUBJECT TO THE OTHER PROVISIONS OF THIS PARAGRAPH (F), BE PERMITTED TO RECEIVE A DAILY QUANTITY OF PRODUCTION FROM THE RESERVE, THE VALUE OF WHICH, AVERAGED OVER EACH QUARTERLY PERIOD, SHALL EQUAL THE SUM OF (1) STANDARD'S SHARE OF THE 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. * * *" PARAGRAPH (8) OF THE RECITALS, REFERENCED IN SECTION 5 (F), STATES:

"IT IS EXPRESSLY RECOGNIZED BY NAVY AND STANDARD THAT THIS CONTRACT DOES NOT AND CANNOT, IN AND OF ITSELF, AUTHORIZE THE PRODUCTION OF ANY OF NAVY'S SHARE OF THE OIL, GAS, NATURAL GASOLINE AND ASSOCIATED HYDROCARBONS IN THE RESERVE, AS DISTINCT FROM THAT PORTION OF STANDARD'S SHARE HEREINAFTER PERMITTED TO BE PRODUCED AND RECEIVED BY STANDARD UNDER THE TERMS OF PARAGRAPHS (D) AND (F) OF SECTION 5. 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 SUCH OIL ARE INTENDED TO BE LIMITED TO ACTION BY THE NAVY WITHIN THE TERMS OF ANY SUCH JOINT RESOLUTION. THE PRODUCTION OF THAT PORTION OF STANDARD'S SHARE HEREINAFTER PERMITTED TO BE PRODUCED AND CHARGED TO ITS ACCOUNT UNDER PARAGRAPHS (D) AND (F) OF SECTION 5, INCLUDING THE OIL SO PRODUCED AND CHARGED FROM NOVEMBER 20, 1942 TO THE DATE OF THIS CONTRACT, IS AUTHORIZED UNDER THE PROVISION OF THE ACT OF JUNE 4, 1920, AS AMENDED, DIRECTING THE USE AND OPERATION OF THE RESERVE FOR ITS PROTECTION, CONSERVATION, MAINTENANCE AND TESTING; AND THE PRODUCTION AND RECEIPT OF SUCH PORTION BY STANDARD IS INTENDED TO, AND DOES IN FACT, REPRESENT A CONSIDERATION MOVING TO STANDARD UNDER THE CONTRACT FOR ITS AGREEMENT HEREINAFTER TO RELINQUISH TO NAVY THE CONTROL OVER THE TIME AND RATE OF PRODUCTION FROM ITS NDS.'

CONTRACT SECTION 5 (G), PROVIDING FOR THE SHARING BETWEEN NAVY AND STANDARD FROM THE RESERVE, STATES:

"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:

"STANDARD SHALL TAKE AND RECEIVE ONLY ONE-THIRD (1/3) OF WHAT ITS PERCENTAGE PARTICIPATIONS IN THE PRODUCTION FROM THE RESPECTIVE ZONE WOULD HAVE BEEN IF THE QUANTITIES OF OIL RECEIVED BY NAVY AND STANDARD, RESPECTIVELY, FROM SUCH ZONE WERE IN BALANCE WITH THE PERCENTAGE PARTICIPATIONS (THEN OBTAINING UNDER SECTION 2) IN THE TOTAL PRODUCTION FROM SUCH ZONE, AND NAVY SHALL TAKE AND RECEIVE THE REMAINDER OF THE PRODUCTION FROM SUCH ZONE UNTIL SUCH TIME AS SUCH ALLOCATIONS HAVE HAD THE EFFECT OF BRINGING THE QUANTITIES OF OIL RECEIVED BY NAVY AND STANDARD, RESPECTIVELY, FROM THE RESPECTIVE ZONES FROM AND AFTER NOVEMBER 20, 1942, (INCLUDING ANY PRODUCTION CHARGED TO NAVY'S INTEREST IN PRODUCTION FROM THE RESPECTIVE ZONES UNDER THE PROVISIONS OF PARAGRAPH (C) OF THIS SECTION 5), INTO BALANCE WITH THEIR RESPECTIVE PERCENTAGE PARTICIPATIONS (THEN OBTAINING UNDER SECTION 2) IN THE TOTAL PRODUCTION FROM SUCH RESPECTIVE ZONES. THEREAFTER, SUBJECT ALWAYS TO THE PROVISIONS OF PARAGRAPH (F) OF THIS SECTION 5, ALL PRODUCTION FROM EACH ZONE SHALL BE ALLOCATED TO AND RECEIVED BY NAVY AND STANDARD, RESPECTIVELY, IN ACCORDANCE WITH THE PERCENTAGE PARTICIPATING THEN OBTAINING UNDER SECTION 2 APPLICABLE TO SUCH ZONES. THE QUANTITIES OF PRODUCTION RECEIVED BY NAVY AND STANDARD, RESPECTIVELY, FROM THE RESPECTIVE ZONES UNDER THIS PARAGRAPH (G) SHALL BE CHARGED AGAINST THEIR RESPECTIVE INTERESTS IN THE TOTAL PRODUCTION FROM SUCH RESPECTIVE ZONES.'

THE AUTHORITY TO OPERATE THE NAVAL PETROLEUM RESERVE AND TO ENTER INTO A UNIT PLAN CONTRACT FOR ITS OPERATION CAN PRESENTLY BE FOUND IN 10 U.S.C. 7422 AND 7426. PARAGRAPH (B) OF SECTION 7422 PROVIDES THAT THE NAVAL PETROLEUM RESERVE SHALL BE USED AND OPERATED FOR EITHER OF TWO PURPOSES:

"/1) THE PROTECTION, CONSERVATION, MAINTENANCE, AND TESTING OF THOSE RESERVES; OR

"/2) THE PRODUCTION OF PETROLEUM, GAS, OIL SHALE AND PRODUCTS THEREOF WHENEVER AND TO THE EXTENT THAT THE SECRETARY, WITH THE APPROVAL OF THE PRESIDENT, FINDS THAT IT IS NEEDED FOR NATIONAL DEFENSE AND THE PRODUCTION IS AUTHORIZED BY A JOINT RESOLUTION OF CONGRESS.' PARAGRAPH (A) OF SECTION 7426 PERMITS THE SECRETARY OF THE NAVY TO CONTRACT FOR A UNIT PLAN FOR THE USE AND OPERATION OF LANDS OWNED BY THE UNITED STATES AND PRIVATE PARTIES INSIDE THE NAVAL PETROLEUM RESERVE. PARAGRAPH (B) PROVIDES THAT EACH CONTRACT SHALL REQUIRE THAT THE UNITED STATES RECEIVE CURRENTLY ITS SHARE OF THE TOTAL PRODUCTION FROM THE PRODUCTIVE ZONES UNDERLYING THE LANDS. PARAGRAPH (C) STATES:

"ANY PARTY TO SUCH A CONTRACT, OTHER THAN THE UNITED STATES, MAY BE PERMITTED BY THE CONTRACT TO PRODUCE AND TO RECEIVE, AND SHALL HAVE CHARGED TO ITS SHARE IN THE TOTAL PRODUCTION FROM ANY ZONE, PETROLEUM IN SUCH QUANTITIES AS ARE NECESSARY TO COMPENSATE THAT PARTY---

"/1) FOR ITS SHARE OF THE CURRENT EXPENSES OF PROTECTING, CONSERVING, TESTING, AND MAINTAINING IN GOOD OIL-FIELD CONDITION THE LANDS, WELLS, AND IMPROVEMENTS THEREON, AND ITS REAL AND PERSONAL TAXES LEVIED OR ASSESSED THEREON; AND

"/2) FOR SURRENDERING CONTROL OF THE RATE OF PRODUCTION FROM ITS LANDS.' THE BALANCE OF SECTION 7426 PROVIDES THAT THE SECRETARY IN HIS DISCRETION MAY REDUCE OR ELIMINATE AT ANY TIME THE QUANTITY OF PETROLEUM PERMITTED TO BE PRODUCED AS COMPENSATION FOR SURRENDERING CONTROL OF THE RATE OF PRODUCTION; THAT THE AMOUNT OF PETROLEUM PRODUCED FROM ANY ZONE FOR ANY PRIVATE PARTY UNDER PARAGRAPH (C) IS NOT TO EXCEED ONE-THIRD OF ITS SHARE ESTIMATED TO BE RECOVERABLE FROM THAT ZONE; AND THAT NO CONTRACT MAY BE MADE UNDER THE SECTION WITHOUT CONSULTATION WITH THE SENATE AND HOUSE COMMITTEES ON ARMED SERVICES.

IN THE SUBMISSION TO OUR OFFICE IT IS STATED THAT THE PRIMARY PERIOD OF THE CONTRACT HAS BEEN COMPLETED, BUT THAT TWO QUESTIONS HAVE ARISEN AS TO HOW SECTIONS 5 (F) AND (G) SHOULD BE INTERPRETED AFTER OCTOBER 1, 1964. THE FIRST QUESTION IS WHETHER PRODUCTION COSTS SHOULD BE EXCLUDED FROM "THE CURRENT EXPENSES OF PROTECTING, CONSERVING, TESTING, AND MAINTAINING THE RESERVE IN GOOD OIL-FIELD CONDITION" IN COMPUTING THE QUANTITY OF OIL TO BE ALLOCATED TO STANDARD OIL UNDER SECTION 5 (F). THE SECOND QUESTION IS WHETHER THE 5 (F) QUANTITY IS TO BE ALLOCATED TO STANDARD OIL PRIOR TO AND INDEPENDENT OF THE SHARING PROVIDED BY SECTION 5 (G). IT IS STATED THAT BOTH NAVY AND STANDARD OIL RECOMMEND AN AFFIRMATIVE ANSWER TO BOTH QUESTIONS. IT IS INDICATED THAT ACCORDING TO THE INTERPRETATION WHICH IS PROPOSED STANDARD OIL SHOULD HAVE BEEN RECEIVING GREATER ALLOCATIONS OF PRODUCTION THAN IT HAS ACTUALLY RECEIVED; HOWEVER, THE PARTIES HAVE REACHED AN AGREEMENT THAT THE INTERPRETATION WILL ONLY BE EFFECTIVE COMMENCING OCTOBER 1, 1964.

THE MEMORANDUM OF LAW ACCOMPANYING THE SUBMISSION STATES THAT THE FOREGOING INTERPRETATION IS BASED UPON CONSTRUING THE CONTRACT " "FROM ITS FOUR CORNERS" " AND GIVING EFFECT TO ITS BASIC PURPOSE. IN THAT CONNECTION, IT IS STATED THAT UNLIKE THE USUAL COMMERCIAL ARRANGEMENT, WHICH PROVIDES FOR IMMEDIATE PRODUCTION, THE BASIC PURPOSE OF THE INSTANT CONTRACT IS TO RETAIN OIL IN THE GROUND. MOREOVER, IT IS OBSERVED THAT THE CONTRACT RECITES THAT SECTIONS 5 (D), WHICH PROVIDED THE ALLOCATION OF OIL FOR THE "PRIMARY PERIOD," AND 5 (F) ARE A "CONSIDERATION" TO STANDARD OIL FOR RELINQUISHING TO THE NAVY THE CONTROL OVER THE TIME AND RATE OF PRODUCTION. THEREFORE, THE RIGHT OF STANDARD OIL UNDER SECTION 5 (F) IS INTERPRETED AS A CONDITION WHICH MUST BE SATISFIED BEFORE NAVY'S RIGHT OF CONTROL OVER RATE OF PRODUCTION ATTACHES. IN THAT REGARD, IT IS POINTED OUT THAT THE STATUTE QUOTED ABOVE SPECIFICALLY AUTHORIZES THE SECRETARY OF THE NAVY TO PERMIT PRODUCTION TO COMPENSATE A PARTY FOR RELINQUISHING CONTROL OVER THE RATE OF PRODUCTION FROM ITS LANDS.

THE MEMORANDUM OF LAW FURTHER TAKES THE POSITION THAT CONSISTENCY IN ACCOUNTING PRACTICE REQUIRES REFERENCE TO THE EXPENSE CATEGORIES ACCORDING TO THE ACCOUNTING SYSTEM ESTABLISHED AND MAINTAINED UNDER THE CONTRACT IN DETERMINING WHAT ARE "THE CURRENT EXPENSES OF PROTECTING, CONSERVING, TESTING, AND MAINTAINING THE RESERVE IN GOOD OIL-FIELD CONDITION.' OBSERVES THAT UNDER THE ACCOUNTING SYSTEM AND PROCEDURES ESTABLISHED FOR THE OPERATION OF THE RESERVE UNDER THE CONTRACT, EXPENSES OF PROTECTING, CONSERVING, TESTING AND MAINTAINING THE RESERVES ARE POSTED TO THE "READINESS MAINTENANCE" CATEGORY, AS SEPARATE AND DISTINCT FROM THE "ORDINARY PRODUCTION COSTS" CATEGORY, FOR PURPOSES OF CONTRACT SECTION 6,"COSTS OF EXPLORATION, PROSPECTING, DEVELOPMENT AND OPERATION.' FURTHER, IT STATES THAT THE RIGHT OF STANDARD OIL TO ALLOCATION OF A QUANTITY OF OIL TO SATISFY SECTION 5 (F) IS IN NO PART OF THE CONTRACT MADE DEPENDENT UPON THE PURPOSE FOR WHICH THE OIL MAY HAVE BEEN ORIGINALLY PRODUCED. THEREFORE, IT REASONS THAT THE SAME ACCOUNTING TREATMENT OF EXPENSES SHOULD BE USED WHETHER THE ALLOCATION IS TO BE TAKEN FROM OIL IN TANKS OR FROM PRODUCTION SOLELY TO SATISFY SECTION 5 (F).

THE MEMORANDUM OF LAW INDICATES THAT IT WAS NOT ALWAYS THE POSITION OF STANDARD OIL THAT SECTION 5 (F) SHOULD BE INTERPRETED AS EXCLUDING PRODUCTION COSTS FROM THE 5 (F) FORMULA. APPARENTLY, UNTIL THE NAVY DECIDED TO INTERPRET SECTION 5 (G) IN A MANNER MORE FAVORABLE THAN THE ONE THE PARTIES WERE ACTING UNDER, EVEN IF THE PRODUCTION COSTS WERE INCLUDED IN THE 5 (F) FORMULA, STANDARD OIL WAS CONTENDING THAT SECTION 5 (F) SHOULD BE INTERPRETED AS INCLUDING THE PRODUCTION COSTS IN THE 5 (F) FORMULA. PART OF THE STANDARD OIL RATIONALIZATION WAS THAT THE RESERVE COULD ONLY BE OPERATED FOR ONE OF TWO PURPOSES: (1) NATIONAL DEFENSE UNDER JOINT RESOLUTION OF CONGRESS OR (2) FOR PROTECTING, CONSERVING, TESTING AND MAINTAINING THE RESERVE, AND THAT AS IT WAS NOT OPERATING FOR THE FIRST PURPOSE, IT WAS THEN OPERATING FOR THE SECOND WITH THE RESULT THAT COSTS OF PRODUCTION WOULD BE EXPENSES FOR PROTECTING, CONSERVING, TESTING AND MAINTAINING THE RESERVE AND THEREFORE PART OF THE 5 (F) FORMULA. MOREOVER, STANDARD OIL CONTENDED THAT REFERENCE TO "OTHER COSTS" OF MAINTENANCE AFTER REFERENCE TO PRODUCTION COSTS IN PART OF THE ORIGINAL CONTRACT AND STATEMENTS IN AMENDATORY LANGUAGE TO THE CONTRACT REFERRING TO THE COSTS OF PROTECTING, CONSERVING, TESTING AND MAINTAINING "EXCLUDING ORDINARY PRODUCTION COSTS" INDICATE THAT ORDINARY PRODUCTION COSTS ARE INCLUDED IN THE QUARTET EXCEPT WHERE EXPRESSLY EXCLUDED. IT ALSO URGED THAT THE GENERAL PURPOSE OF SECTION 5 (F) IS TO ASSURE THAT STANDARD OIL WILL NOT BE ,OUT OF POCKET" ON ACCOUNT OF HAVING SURRENDERED CONTROL OF PRODUCTION TO NAVY.

THE MEMORANDUM OF LAW DISCOUNTS STANDARD OIL'S CONTENTIONS. IT NOTES THAT, WHILE 10 U.S.C. 7422 SETS FORTH TWO PURPOSES FOR WHICH THE SECRETARY OF THE NAVY IS AUTHORIZED TO OPERATE THE RESERVE, 10 U.S.C. 7426 PERMITS A CONTRACT TO PROVIDE FOR PRODUCTION TO PROVIDE CERTAIN COMPENSATION FOR THE CONTRACTOR. FURTHER, IT STATES THAT STANDARD OIL PRESENTS AN INTERESTING EXERCISE IN SEMANTICS, BUT IT IS NOT PERSUASIVE THAT A SPECIAL ACCOUNTING TREATMENT OF COSTS IS REQUIRED FOR 5 (F) COMPUTATION THAT IS REQUIRED FOR THE REST OF THE CONTRACT. WITH REGARD TO THE "OUT OF POCKET" THEORY, THE MEMORANDUM STATES THAT STANDARD OIL IS ONLY ENTITLED TO "OUT OF POCKET" RECOVERY TO THE EXTENT THAT THE CONTRACT MAKES IT WHOLE. WITH RESPECT TO THE QUESTION WHETHER THE 5 (F) QUANTITY ISTO BE ALLOCATED TO STANDARD OIL PRIOR TO AND INDEPENDENT OF THE SHARING PROVIDED BY 5 (G), THE MEMORANDUM STATES THAT 5 (G) CAN BE CONSTRUED AS REQUIRING NO 5 (F) COMPUTATION UNTIL IT IS SUSPECTED THAT THE 5 (G) ALLOCATION IS LESS THAN THE 5 (F) GUARANTEED MINIMUM OR AS REQUIRING THE 5 (F) GUARANTEED QUANTITY TO BE CHARGED AGAINST THE QUANTITY ALLOCABLE TO STANDARD OIL UNDER 5 (G) WHEN THE 5 (F) QUANTITY IS DETERMINED. IT STATES FURTHER THAT EITHER CONSTRUCTION WOULD PRODUCE A RESULT CONSISTENT WITH THE ACTUAL DISTRIBUTION OF OIL DURING THE PAST ACCOUNTING PERIODS. HOWEVER, IT IS STATED THAT THE CORRECT INTERPRETATION WOULD RECOGNIZE THE RIGHT OF STANDARD OIL TO SATISFACTION OF THE 5 (F) GUARANTEED MINIMUM BEFORE APPLICATION OF THE 5 (G) ALLOCATION PROVISIONS AND WITHOUT CHARGE OF THE GUARANTEED MINIMUM QUANTITY AS A PART OF THE 5 (G) ALLOCATION. IT IS STATED THAT THIS IS SUPPORTED BY THE FACT THAT, GRAMMATICALLY, THE PHRASE IN 5 (G) BEGINNING "IN EXCESS OF THE PRODUCTION" MODIFIES OR EXCEPTS FROM THE TOTAL PRODUCTION FROM THE RESERVE THE 5 (F) PRODUCTION ALLOCATED TO STANDARD OIL. FURTHERMORE, IT IS NOTED THAT THE WORDS "PRODUCTION FROM THE RESERVE" ARE PRECEDED BY THE WORDS "NAVY SHALL ELECT TO PERMIT" AND IT IS STATED THAT SINCE NAVY HAS NO ELECTION WITH RESPECT TO 5 (F) BECAUSE IT IS RECITED AS "CONSIDERATION" IN PARAGRAPH (8) OF THE RECITALS, IT IS SUGGESTED THAT THE "PRODUCTION" REFERRED TO MUST BE THE PRODUCTION IN EXCESS OF 5 (F) PRODUCTION. ADDITIONALLY, IT IS INDICATED THAT IN THE SITUATION THAT HAS EXISTED IN THE RESERVE DURING THE PAST YEAR AND WILL EXIST FOR THE FORESEEABLE FUTURE, IT WOULD BE IMPOSSIBLE FOR STANDARD TO RECEIVE ONLY ONE-THIRD OF ITS PERCENTAGE SHARE OF THE TOTAL PRODUCTION AND STILL RECEIVE THE AMOUNT IT IS GUARANTEED UNDER 5 (F). THE MEMORANDUM STATES FURTHER THAT AN INTERPRETATION REQUIRING THE SHARING PROVISIONS OF 5 (G) TO APPLY ONLY TO PRODUCTION IN EXCESS OF 5 (F) PRODUCTION RESULTS IN THE MAXIMUM AMOUNT OF NAVY'S OIL BEING CONSERVED IN THE GROUND AND THAT ANY OTHER INTERPRETATION WOULD FORCE NAVY TO PRODUCE ITS OWN OIL UNNECESSARILY.

AS TO THE FIRST QUESTION PRESENTED, SECTION 5 (F) DOES NOT DEFINE WHAT ARE THE EXPENSES OF PROTECTING, CONSERVING, TESTING AND MAINTAINING THE RESERVE IN GOOD OIL-FIELD CONDITION AND IT IS NOT APPARENT FROM 5 (F) THAT THE ACCOUNTING SYSTEM AND PROCEDURES ESTABLISHED FOR THE OPERATION OF THE RESERVE IN WHICH "ORDINARY PRODUCTION COSTS" ARE CARRIED AS A SEPARATE CATEGORY FROM ,READINESS MAINTENANCE" ARE TO CONTROL THE OPERATION OF 5 (F). PARAGRAPH (8) OF THE RECITALS RECOGNIZES THAT APART FROM THAT PORTION OF STANDARD OIL'S SHARE PERMITTED TO BE PRODUCED AND RECEIVED UNDER SECTIONS 5 (D) AND (F), PRODUCTION UNDER THE CONTRACT MUST BE BASED UPON A JOINT RESOLUTION OF CONGRESS OR ELSE FOR THE PURPOSE OF PROTECTING, CONSERVING, MAINTAINING OR TESTING THE RESERVE. IN THE ABSENCE OF THE RESOLUTION, ORDINARY PRODUCTION WOULD THEREFORE BE FOR THE SECOND PURPOSE AND WOULD BE AN EXPENSE WHICH STANDARD OIL WOULD BE ENTITLED TO RECOVER THROUGH THE APPLICATION OF 5 (F). HOWEVER, THE EXPENSE OF PRODUCING OIL TO PROVIDE FOR THE RECOVERY OF 5 (F) EXPENSES, WHILE IT WOULD RELATE BACK TO THE BASIC AUTHORITY, WOULD NOT BE FOR THAT SPECIFIC PURPOSE, BUT WOULD BE FOR THE PURPOSE OF COMPENSATING STANDARD OIL FOR ITS EXPENSE. THE ACT PERMITS THE RECOVERY OF EXPENSES AS AN EXCEPTION TO THE GENERAL PURPOSE. IT DOES NOT CONVERT THE RECOVERY OF EXPENSE INTO A RECOVERY FOR THE PROTECTION, CONSERVATION, MAINTENANCE OR TESTING OF THE RESERVE. ALTHOUGH UNDER THE NAVY OUR INTERPRETATION, SECTION 5 (F) DOES NOT APPEAR TO BE A PROVISION ESTABLISHED FOR THAT GENERAL PURPOSE, BUT RATHER FOR THE PURPOSE OF PROVIDING RECOVERY OF EXPENSES TO STANDARD OIL. IN THAT SITUATION, THE SPECIFIC PURPOSE OF THE CLAUSE HAS GREATER SIGNIFICANCE THAN THE GENERAL PURPOSE OF THE CONTRACT. IN ANY EVENT, THE GENERAL PURPOSE OF THE CONTRACT IS ACCOMPLISHED THROUGH THE CONTROL WHICH STANDARD OIL SURRENDERED TO THE NAVY OVER THE TIME AND RATE OF PRODUCTION FROM THE RESERVE. INTERPRETATION MORE OIL WOULD REMAIN IN THE GROUND THAN UNDER

AS TO THE SECOND QUESTION, WHETHER THE 5 (F) ALLOCATION IS TO BE MADE BEFORE AND INDEPENDENT OF THE 5 (G) ALLOCATION, WHILE IT MAY BE THAT PRODUCTION TO SATISFY 5 (F) IS RECITED AS PART OF THE CONSIDERATION FOR SURRENDERING CONTROL OF THE TIME AND RATE OF PRODUCTION, IT IS ACKNOWLEDGED THAT THERE IS OTHER CONSIDERATION TO SUPPORT THE CONTRACT AS WELL, AND IT IS NOT CLEAR THAT THE 5 (F) REQUIREMENT IS TO ATTACH BEFORE ANY RIGHT ATTACHES TO THE NAVY TO RECEIVE OIL FROM THE RESERVE, ESPECIALLY SINCE IT IS INDICATED THAT DURING THE LIFE OF THE CONTRACT THE PARTIES HAVE ACTED UNDER A DIFFERENT UNDERSTANDING WHICH DOES NOT COINCIDE WITH THE PRESENT RECOMMENDED INTERPRETATION.

SECTION 5 (F) IS A GUARANTEE TO STANDARD OIL OF A MINIMUM AMOUNT OF PRODUCTION FROM THE RESERVE IN THE EVENT NAVY SUSPENDS OR REDUCES PRODUCTION IN THE RESERVE. WHILE 5 (F) IS RECITED AS PART OF THE CONSIDERATION IN RECITAL (8), IT IS NOT CLEAR THAT IT WAS TO ATTACH BEFORE ANY OTHER ALLOCATIONS WERE TO BE MADE UNDER THE CONTRACT. IT COULD BE INTENDED AS AN ALLOCATION TO BE MADE IF PRODUCTION WAS NOT SUFFICIENT TO COVER THE COSTS NAMED IN 5 (F). IN OTHER WORDS, IT COULD BE INTENDED TO OPERATE ONLY IN MITIGATION OF EXPENSES WHERE PRODUCTION IS NOT ADEQUATE TO OFFSET THEM. WITH THAT IN MIND, LOOKING TO WHAT MAY BE THE PURPOSE OF 5 (F), IT SEEMS THAT IT WOULD ONLY BE INTENDED FOR OPERATION WHERE THE PRODUCTION PERMITTED BY THE NAVY FOR THE PURPOSE OF THE ACT IS NOT SUFFICIENT TO COVER THE COSTS NAMED IN 5 (F). IT WOULD THEREFORE FOLLOW THAT WHAT THE PARTIES HAD IN MIND IN 5 (G) WAS THAT IF NAVY WERE TO PERMIT GREATER PRODUCTION FROM THE RESERVE THAN STANDARD OIL WAS RECEIVING UNDER THE MINIMUM GUARANTEE IN 5 (F), THEN THE PARTIES WOULD SHARE ALL OF THE PRODUCTION ACCORDING TO THE PERCENTAGE PARTICIPATION FORMULA PROVIDED IN 5 (G). IN OTHER WORDS,"SUCH PRODUCTION" IN THE OPENING PART OF 5 (G) COULD HAVE REFERENCE TO ALL THE PRODUCTION AND NOT JUST TO THE PRODUCTION IN EXCESS OF WHAT STANDARD MIGHT THEN BE RECEIVING UNDER 5 (F). OF COURSE, IF THE PRODUCTION SO GENERATED IS INSUFFICIENT TO MEET THE 5 (F) COSTS. THE UNSATISFIED PORTION WOULD BE FOR RECOVERY UNDER 5 (F). IN THESE CIRCUMSTANCES, AND SINCE THE CONTRACTING PARTIES HAVE SO INTERPRETED THE CONTRACT OVER THE YEARS, OUR OFFICE IS INCLINED TO DISAGREE THAT THE INTERPRETATION NOW OFFERED SHOULD BE SUBSTITUTED FOR THE ONE THAT HAS PREVAILED FOR SO LONG. SEE OLD COLONY TRUST COMPANY V. CITY OF OMAHA, 230 U.S. 100, HOLDING THAT THE INTERPRETATION PLACED UPON A CONTRACT BY THE PARTIES IS ENTITLED TO GREAT, IF NOT CONTROLLING, INFLUENCE IN ASCERTAINING THE INTENT AND UNDERSTANDING OF THE PARTIES. WHILE IT IS INDICATED THAT ANY INTERPRETATION OTHER THAN THAT RECOMMENDED WOULD REQUIRE NAVY TO PRODUCE MORE OIL, IT APPEARS THAT SUCH OTHER INTERPRETATIONS WOULD PERMIT THE PARTIES TO COME INTO EQUILIBRIUM AT AN EARLIER TIME AND WOULD RESULT IN AN EARLIER BALANCING OF ACCOUNTS THAN WOULD RESULT FROM THE RECOMMENDED INTERPRETATION. IT IS OUR UNDERSTANDING THAT WHEN THE ACCOUNTS ARE BALANCED AFTER EQUILIBRIUM IS REACHED, STANDARD WILL BEGIN PAYING SEVERAL MILLION DOLLARS IN PAST COSTS WHICH NAVY HAS PAID. IT THEN MAY VERY WELL BE THAT IN INTERPRETING 5 (G), THE SPECIFIC PURPOSE OF 5 (G) TO ASSIST THE PARTIES TO COME INTO EQUILIBRIUM SHOULD PREVAIL OVER THE GENERAL PURPOSE OF THE CONTRACT WHICH IS TO KEEP AS MUCH NAVY OIL IN THE GROUND AS POSSIBLE.

REGARDING THE MATTER OF THE SYSTEM OF ACCOUNTING PROPOSED FOR THE CONTRACT, OUR OFFICE APPROVES IN PRINCIPLE THE STATED OBJECTIVES OF THE PROPOSED FORMULA FOR THE SEPARATION OF ORDINARY PRODUCTION AND READINESS MAINTENANCE COSTS. HOWEVER, APPROVAL OF THE ACCOUNTING SYSTEM WILL BE HELD IN ABEYANCE UNTIL SUCH TIME AS NAVY AND STANDARD CAN CLEARLY OUTLINE THE ACCOUNTING SYSTEM IN A MANUAL OR IN WRITTEN INSTRUCTIONS FOR THE GUIDANCE OF THEIR PERSONNEL AND THIS OFFICE CAN MAKE A REVIEW OF THE ACCOUNTING SYSTEM IN OPERATION.

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