Shell Petroleum, Inc., and Subsidiary Corporations v. United States
Docket: 97-7639
Court: Court of Appeals for the Third Circuit; June 24, 1999; Federal Appellate Court
The case involves Shell Petroleum, Inc. appealing the denial of a tax credit under the Crude Oil Windfall Profit Tax Act (COWPTA) related to oil produced from tar sands. COWPTA offers a $3.00 tax credit per barrel for oil extracted from tar sands through wells drilled between January 1, 1980, and December 31, 1992. The central issue is the definition of "oil produced from tar sands," which the Act does not specify. Shell argues for a definition based on industry standards, asserting that "tar sand oil" refers to oil that is too viscous for economic recovery using standard production techniques. Conversely, the government relies on Department of Energy Ruling 1976-4, which defines "tar sands" as containing viscous hydrocarbons not recoverable by conventional methods. Shell acknowledges that if the DOE definition is accepted, it would not qualify for a refund. After a bench trial, the District Court adopted the DOE's definition and denied the refund, a decision the Court of Appeals affirms, agreeing with the District Court's rationale. The background context includes the significant rise in oil prices post-1973 OPEC embargo and the regulatory responses by Congress, including the Emergency Petroleum Allocation Act (EPAA), which led to the issuance of the DOE's ruling in 1976 concerning synthetic fuels from tar sands and other sources.
The Emergency Petroleum Allocation Act had counterproductive effects, diminishing domestic oil production incentives and increasing consumption, leading to greater reliance on imported oil. Despite a decline in real oil prices post-1975, world oil prices surged in 1979 due to the Iranian revolution. In response, the Carter administration planned to phase out price controls, resulting in significant short-term profit increases for domestic producers. Consequently, Congress enacted the Crude Oil Windfall Profit Tax Act (COWPTA), which imposed an excise tax on revenue from crude oil sales to capture these profits. To mitigate impacts on domestic oil supply, new or sensitive production was taxed at lower rates or exempted. Title II aimed to reduce reliance on imported oil by offering tax credits for producing fuel from nonconventional sources, including oil from shale and tar sands, for wells drilled between 1980 and 1992.
Shell Petroleum, Inc. and its subsidiaries operated in the Midway Sunset Field, extracting oil from the Potter Sand formation using established steam injection techniques. Although Shell did not claim the nonconventional source tax credit for the oil in its 1983 and 1984 tax returns, it later sought amendments for credits amounting to $5,351,150 for oil produced during those years. The IRS denied these claims, prompting Shell to file suit. The District Court ruled in favor of the United States, establishing that while Shell's oil is classified as crude oil under Title I of COWPTA, it does not qualify as tar sand oil. Legislative history indicates the tax credit was intended to support new energy technologies, not the production methods Shell employed in the early 1980s. The interpretation of federal law relies on statutory language and legislative intent, which guides the understanding of terms like "oil produced from tar sands."
Statutory terms are interpreted based on their meaning at the time the statute was enacted, as established in several Supreme Court cases. In this instance, the District Court did not consider the industry definition of "tar sand oil," noting a lack of consensus on this definition in 1980 when Section 29 was enacted. Shell disputes the court’s factual finding regarding the absence of a consensus and argues that the court should have focused on acceptable definitions from petroleum experts at that time. The court characterized Shell's definition of "tar sand oil" as encompassing certain hydrocarbonaceous materials with specific viscosity characteristics, referred to by Shell as the "viscosity standard." Although Shell acknowledged this standard was not widely accepted until 1983, it claimed that in 1980, petroleum engineers recognized "tar sand oil" as oil too viscous for primary production methods, which Shell calls the "primary production definition." Shell also introduced the idea of a "qualitative standard" based on expert identification of tar sands. Shell seeks a remand to explore whether either the qualitative or primary production definitions were accepted in 1980 and if Potter Sands oil fits these definitions. However, Shell did not properly introduce these definitions during the trial, as the pretrial order limited the issues to those relating to the viscosity standard and a prior FEA ruling. The order was not modified, and Shell's opening statement reaffirmed its focused theory of the case without addressing the additional definitions it now raises.
Shell cited passages from the pretrial order, briefs to the District Court, and trial testimony to assert that it raised alternative definitions related to its case. Pretrial orders are interpreted broadly to allow parties to present their cases, and issues can be tried by consent if relevant testimony is introduced without objection. However, parties must clearly articulate their positions to allow the court to consider them. The determination of waiver hinges on whether a party presented its argument with sufficient specificity to notify the court.
The court concluded that Shell did not unequivocally raise its definitions concerning primary production or quality. It emphasized the principle that appellate courts typically do not address issues raised for the first time on appeal, particularly when earlier presentation could have allowed for the development of a factual record. The court found no compelling circumstances to deviate from this rule and noted the unlikelihood that the District Court would adopt Shell’s factual assertions.
The court examined the evidence Shell provided, primarily from expert Dr. Khalid Aziz, who indicated that prior to 1980, there was no consensus on the definition of tar sand oil, although a trend toward a viscosity-based definition began to emerge around that time. Dr. Aziz acknowledged a lack of precise distinction between heavy oil and tar sand oil before 1980, while also confirming that in 1980, 'oil produced from tar sands' was generally understood as crude oil more viscous than heavy oil. Additional testimony from a former DOE petroleum engineer supported the characterization of tar sand as containing very viscous oil, often too viscous for primary recovery methods.
The witness identified tar sand based on personal recognition but acknowledged a lack of consensus in the industry regarding the definitions distinguishing heavy oil from tar sand oil as of April 1980. Shell's experts confirmed this absence of a standardized definition, making it unlikely for Shell to succeed on remand, as remanding for factual issues not previously raised is inappropriate when different outcomes are improbable. Shell argues that the District Court should have chosen among existing definitions from petroleum engineers and limited its analysis to the congressional record for this purpose. While expert definitions of terms of art are generally respected, Shell has not provided authority supporting the notion that courts should only select from rival definitions when no consensus exists. In instances where technical experts disagree, courts may rely more on traditional statutory interpretation methods rather than industry definitions.
The excerpt references the Supreme Court's decision in Atlantic Mutual Insurance Co., where the Court deferred to an agency's interpretation due to the absence of an established meaning in the industry. Unlike that case, there is no agency interpretation here, leading to reliance on the Department of Energy (DOE) definition, which aligns with congressional intent. The relevant statute defines oil produced with enhanced extraction techniques as crude oil, contrary to Shell's definition, which would classify such oil as tar sand oil. Congress viewed tar sand oil as a substitute for crude oil, and since Shell's Potter Sands oil, produced through enhanced recovery methods, does not qualify as a crude oil substitute, it is ineligible for the nonconventional source tax credit. Additionally, Shell's position that tertiary oil can simultaneously be classified as both crude oil and tar sand oil is contested, as the District Court determined that Congress did not equate crude oil with tar sand oil and would not have created tax incentives for the same oil type under the same statute.
Shell's Potter Sands oil is classified as crude oil and, therefore, is subject to the windfall profit tax, but it cannot simultaneously qualify as tar sand oil eligible for the tax credit. Legislative history clarifies that "crude oil" refers only to natural crude petroleum, explicitly excluding synthetic petroleum derived from tar sands or shale. Congressional reports and committee explanations consistently differentiate crude oil from tar sands, indicating that tar sands are viewed as a substitute for crude oil. Shell's argument that tar sand oil in its natural state qualifies as crude oil contradicts the clear intent of Congress, which aimed to exempt tar sand oil from the windfall profit tax by defining it as synthetic petroleum. Furthermore, Shell's assertion that processing tar sand oil into synthetic oil is generally unnecessary in the U.S. lacks justification, as it does not explain why Congress would exempt such production if it serves no useful purpose. The Federal Energy Agency also categorized tar sand oil as a "so-called synthetic fuel," reinforcing its classification as distinct from crude oil. The District Court concluded that when the Comprehensive Oil Windfall Profit Tax Act (COWPTA) was enacted, Congress did not regard oil extracted through enhanced methods as tar sand oil. Consequently, tertiary oil, as defined by enhanced recovery methods, cannot be classified as tar sand oil. Shell's interpretation would create conflicting definitions of tar sands under different titles of the tax code, which is inconsistent with congressional intent. As Shell does not contest its classification of Potter Sands oil as tertiary oil, it ultimately cannot qualify for the tax credit related to tar sand oil. Additionally, classifying oil from enhanced recovery methods as both crude oil and tar sand oil would lead to conflicting tax obligations under the windfall profit tax and the nonconventional source tax credit.
The District Court rejected Shell's interpretation of the statute, noting a lack of evidence indicating that Congress intended for the windfall profit tax and the nonconventional fuels credit to operate in a manner that would stabilize producer prices for crude oil and tar sand oil simultaneously. Shell argued that the tax collected during high oil prices was meant to finance subsidies during price declines, suggesting a price stabilization scheme. However, the legislative record reveals that Congress aimed to utilize revenue from the windfall profit tax to fund tax incentives for alternative energy sources, not to stabilize prices for existing oil production methods. Shell acknowledged that under its interpretation, oil from Potter Sands would have been eligible for both the tax and the credit in the same years, which contradicts the idea of price stabilization.
The District Court affirmed that oil produced via enhanced recovery methods was subject to the windfall profit tax and thus not eligible for the nonconventional source tax credit, as Congress had not intended for the same oil to be classified for both tax and credit. The Court emphasized that the alternative fuel production credit was designed to encourage the development of new energy technologies, not to subsidize existing crude oil production methods. Congress sought to promote the development of crude oil substitutes rather than traditional crude oil. Shell's assertion that the Court imposed a "new technologies" requirement was disputed, as eligibility for the tax credit aligns with Congress's specified definitions in the statute.
Eligibility for the tax credit is determined by the type of energy produced, regardless of whether new technology is used. However, when defining energy sources, Congress intended to prioritize new technologies, aligning with the Department of Energy (DOE) definition that excludes sources widely utilized at the time the Act was enacted. The District Court found that the DOE's definition of "tar sands" aligns with Congress's goal of promoting new technologies while restricting the Section 29 credit to crude oil substitutes that cannot be produced via conventional methods. The DOE Ruling, which arose from inquiries regarding the regulation of synthetic fuels from tar sands, was interpreted by Shell as narrowly defining "tar sands" to exclude certain oils from regulation. The court expressed skepticism about this interpretation, asserting that the DOE would not provide an inaccurate definition and that the Ruling does not limit tar sands oil to only those extracted post-mining. Consequently, the court upheld the DOE's definition of tar sands for the nonconventional fuels tax credit, affirming the District Court's judgment.
The document outlines the criteria for determining the tax credit for qualified fuels, specifically focusing on oil from shale and tar sands. The credit is calculated as $3 multiplied by the barrel-of-oil equivalent of qualified fuels sold by the taxpayer to an unrelated party during the taxable year, with the production linked to the taxpayer. Qualified fuels must be produced from wells drilled between January 1, 1980, and December 31, 1992. The Tax Court's interpretation of "tar sand oil" is significant, emphasizing that it refers to oil that cannot be economically produced through primary recovery methods. The court rejected Texaco's argument that certain high-viscosity crude oil constituted tar sand oil based on two main reasons: first, the intention of Congress was to support alternative energy sources requiring new technologies, rather than using established methods available in 1980; second, the legislative history indicated a distinction between synthetic petroleum from tar sands and crude oil subject to windfall profit tax. The document also mentions the court's jurisdiction and the standards for reviewing statutory interpretation and factual findings. Additionally, it notes that while there was no universally accepted definition of tar sands at the time COWPTA was enacted, the industry commonly recognized it as oil with high viscosity, which aligns with the definitions considered by the Texaco court.
The court found no consensus definition of tar sand oil versus heavy oil in 1980, referencing testimony from a Shell expert and a Shell Proposed Finding of Fact. These references were not fully admissible since Shell did not include them in the appellate record, as required under Federal Rule of Appellate Procedure 10(b). The court noted that the excerpts provided by Shell were not stronger than those in the record. Shell claimed that in 1980, the Department of Energy (DOE) established a Viscosity Standard for distinguishing tar sand oil, but it did not assert that its Potter Sands oil met this qualitative standard, only that it was categorized as tar sand oil under DOE practices. The language used by Shell was ambiguous, potentially referring to either the qualitative or quantitative viscosity standards adopted in 1980. Additionally, Shell acknowledged that the standards used in 1980 were insufficient according to industry consensus. Shell’s post-trial findings reiterated the need for a quantitative demarcation between tar sand oil and heavy oil, but the court noted that post-trial briefs are not suitable for introducing new theories. The distinction of 10,000 centipoise (cp) viscosity was highlighted as significant in the context of applying 26 U.S.C. § 29 regarding oil produced from tar sands, reflecting a common understanding within the industry.
Shell maintained its position regarding the viscosity standard post-trial, asserting that the standard originated from industry discussions in 1983. Evidence concerning pre-1983 standards supported this context, indicating neither the government nor the court believed Shell was introducing a new theory. An implied consent issue arises when evidence relevant to a new claim is also pertinent to the originally pled claim, as defendants must be notified of any implied claims being tried. Appellate courts emphasize adherence to pretrial orders to promote orderly trial procedures.
The Supreme Court has previously referenced legislative records to affirm Congress's adoption of technical definitions or to reject trade definitions conflicting with legislative history. For tax classification, crude oil is divided into three tiers under 26 U.S.C., with tier 1 taxed at the highest rate and tier 3 at the lowest, which includes "incremental tertiary oil." Incremental tertiary oil is defined as the production difference from a tertiary recovery project compared to average monthly production prior to a specific legislative act. All oil produced from such projects is classified as tertiary oil, with no chemical distinction between incremental and non-incremental types, meaning both are taxable crude oil. If non-incremental tertiary oil were exempt, it would contradict Congress's intention to incentivize new oil production. Shell further noted that tar sand oil is refined into synthetic crude oil mainly for pipeline flow in colder conditions, highlighting its infrequent refinement in the warmer continental U.S.
High viscosity crude oil produced through secondary and enhanced oil recovery methods is classified as crude oil under Title I, excluding oil from tar sands, while under Title II, the same oil is classified as oil from tar sands. The term "tar sands" is not intended to be interpreted differently within the same legislative framework without explicit congressional intent. Congress has provided specific subsidies for tertiary oil in Title I, including lower tax rates for increased production and exemptions for oil sold to finance independent tertiary extraction projects. Shell contends that Ruling 1976-4 is too ambiguous to define "oil produced from tar sands." However, the statute incorporates certain definitions from EPAA regulations, such as various types of oil and recovery methods, and mandates that the "base level" for defining incremental tertiary oil aligns with EPAA regulations. The Senate Finance Committee's report emphasizes the importance of referencing energy regulations for determinations related to these subsidies, and the report supports administrative interpretations of these regulations. Ruling 1976-4, a DOE interpretation of EPAA regulations, is considered in the application of the relevant statute.
