Shell Petroleum, Inc., and Subsidiary Corporations v. United States

PAULINE NEWMAN, Circuit Judge,

concurring in part, dissenting in part.

I agree that Shell is collaterally es-topped by the decision of the Third Circuit in Shell Petroleum, Inc. v. United States, 182 F.3d 212 (3d Cir.1999), from relitigat-ing the subject matter there decided. The Third Circuit case related to tax returns for 1983 and 1984, and held that Shell was not entitled to the Section 29 tax credit for recovery from the Potter Sands reservoir. Shell accepts the definition of tar sands used by the Third Circuit, but argues that even under that definition it has established entitlement to the Section 29 tax credit, at least with respect to the two reservoirs of primary focus in this appeal. The Court of Federal Claims decided the issue on summary judgment, holding that Shell was not entitled to the Section 29 credit for any of the reservoirs. However, it cannot be decided, on either summary judgment or collateral estoppel, that the facts and procedures of 1988 and 1989 are the same as those that were before the Third Circuit for 1983 and 1984. Thus while I agree with the panel majority that Shell is estopped from disputing the applicability of the Federal Energy Agency’s 1976 definition of tar sands, I do not share *1343the conclusion that this definition precludes Shell’s argument and entitlement with respect to the technology it used in 1988 and 1989.

A

Shell states, and the record well supports, that the Coalinga-Etchegoin and the McKittrick-Tulare reservoirs meet the definition of oil from tar sands, either as defined by the Federal Energy Agency in 1976 as “extremely viscous hydrocarbon which is not recoverable in its natural state by conventional oil well production methods including currently used enhanced recovery techniques,” FEA Ruling 1976-4, 41 Fed.Reg. 25,886 (June 23, 1976), or as defined by the Department of Energy in 1980 as “a hydrocarbonaceous material with a gas-free viscosity, measured at original reservoir temperature, greater than 10,000 centipoise,”10 the definition in the Combined Hydrocarbon Leasing Act of 1981, 30 U.S.C. '209, and the Energy Policy Act of 1992, 42 U.S.C. 13554.

The viscosity of the hydrocarbons in the Coalinga tar sands is reported, as measured by the government, as ranging from 125,000 cp to 600,000 cp; and the viscosity of the hydrocarbons in the McKittrick reservoir is reported as ranging from 27,000 cp to 64,750 cp. Shell recovered hydrocarbons from these reservoirs in 1988 and 1989, using methods not in general use on April 4,1980, the date set in the Section 29 enactment. These methods are described by Shell as (1) advanced modeling tools, including the Vogel modeling method and numerical thermal simulators; (2) sophisticated surveillance methods; (3) advanced drilling and well completion methods, including advanced casing design and sand control; and (4) advanced facility design, including cogeneration and steam distribution.

The Court of Federal Claims seriously over-simplified this complex field, in denigrating these procedures as mere “advanced technology,” and not “advanced techniques” as purportedly contemplated by the statute.11 From this oversimplification the trial court concluded that if known steam procedures were adapted through new technology to recover the hydrocarbon from tar sands, the product became “crude oil” by definition, whatever its viscosity and its previous unrecoverability. This leap of logic is not in accordance with the statute and its legislative purpose, and is based on disputed findings inappropriate to summary judgment.

The statute does not state that only some brand new “technique” can qualify for the tax credit, and it is highly unlikely that Congress so contemplated, for the incentive was broad and the need was urgent. I do not here evaluate the techno-logic modifications and improvements made by Shell, but on the undisputed fact that before 1980 tar sands could not be economically harvested at these sites, it is clear that the question could not be summarily decided adversely to Shell. Nor was the question adequately explored by the trial court, who deemed it barred by *1344collateral estoppel. However, the Third Circuit did not deal with later-developed technology, and did not generate estoppel as to all steam-based extraction technology. Estoppel based on the Third Circuit decision is necessarily limited by the application of the definition of tar sands to the facts relevant to the 1983 and 1984 tax years and the Potter Sands reservoir.

Shell was not permitted to prove its proffered facts, on.the ruling by the Court of Federal Claims that because Shell used previously known steam-based procedures along with new technology, there is no way that the statutory requirement can be met. Thus the court ruled that whatever the new technology and the changes and improvements used in 1988 and 1989, any procedure using steam-assisted recovery is an “enhanced recovery technique” available in 1980. On this premise the Court of Federal Claims ruled that all hydrocarbon that is successfully extracted from tar sands with steam-based procedures is “crude oil,” and that since the Section 29 tax credit is unavailable for crude oil, it is unavailable for this tar sand extraction.

B

It is not disputed that the products of the Coalinga and- McKittrick reservoirs have viscosities starting at 27,000 cp. This is not crude oil by any definition. The record does not establish that the steam extraction techniques of tertiary recovery as generally used in 1980 were capable of economic recovery of the hydrocarbons in tar sands. Although the government argues that these hydrocarbons could have been recovered using those techniques, hindsight and speculation are not probative evidence, and are insufficient grounds of summary judgment.

The factual issues with respect to the later-developed technology used at Coalin-ga and McKittrick in 1988 and 1989 were not resolved by the Third Circuit in connection with the 1983 and 1984 Potter Sands tax years. These factual issues were not before the Third Circuit, and are not barred by collateral estoppel. See Cromwell v. Sac County, 94 U.S. 351, 356, 24 L.Ed. 195 (1876) (“a point not in litigation in one action cannot be received as conclusively settled in any subsequent action”); Del Mar Avionics, Inc. v. Quinton Instrument Co., 836 F.2d 1320 (Fed.Cir.1987) (same). These facts could not be found adversely to Shell on summary judgment. Shell is entitled to establish the differences of its 1988-89 technology from the steam-based tertiary recovery techniques in general use before April 2, 1980, as the statute contemplates, and to establish whether the hydrocarbon from these reservoirs could reasonably have been economically recovered using those techniques.

The government argues that if the hydrocarbon became economically extractable from tar sands using steam-based technology, it was no longer oil from tar sands but became crude oil. Shell complains that on this reasoning, after a producer develops an economic method of using steam to extract hydrocarbons from tar sands, the hydrocarbon loses its identity as tar sand product. Indeed, this reasoning denies the legislative premise that “the term ‘crude oil’ ... does not include synthetic petroleum, such as oil from shale or tar sands,” set forth in S.Rep. No. 96-394, at 56 (1979), reprinted in 1980 U.S.C.C.A.N. at 465. See also H.R. Conf. Rep. No. 96-817, at 114 (1979), reprinted in 1980 U.S.C.C.A.N. 642, 667.

Shell states that it tried and failed to economically extract tar sand oil using the “enhanced production techniques” available using steam in 1980. The Court of Federal Claims deemed it irrelevant that the tar sands could not be extracted using procedures in use in 1980, citing the Third *1345Circuit’s reference to “incremental tertiary oil” as not entitled to the credit. However, Shell correctly points out that the list of nine tertiary enhanced recovery techniques contained in the energy regulations, 10 C.F.R. '212.78, which include “steam drive injection” and “cyclic steam injection,” permits variations on steam-based techniques to qualify for the tax credit.

It is a question of material fact as to whether the changes achieved by Shell in steam-based recovery are sufficient to satisfy the statutory purpose. That factual question could not be decided adversely to Shell on summary judgment, for Shell showed on the summary judgment record that the steam drive injection and cyclic steam injection procedures in use in 1980 were inadequate to produce more than an “uneconomic trickle” of recovery from tar sands. Shell’s position required development of the evidence, and was not amenable to adverse summary judgment.

C

The government also argues that Shell’s oil from these reservoirs “poured” or “flowed,” arguing that this cannot be the product of tar sands because it “exists in a liquid phase.” Shell agrees that the product of tar sands exists in a liquid phase, for “viscosity is a physical property of all fluids. Solids do not have viscosity.” Shell’s Proposed Findings of Uncontro-verted Fact. The product of tar sands is an “extremely viscous hydrocarbon,” the words of the Federal Energy Agency Ruling 1976-4, as adopted by the Third Circuit. Shell Petroleum, 182 F.3d at 214. “Viscosity is a measure of a fluid’s resistance to flow.” Shell Petroleum, 182 F.3d at 214 n. 1. The argument concerning “flow” is not only scientifically flawed; it is irrelevant.

D

The government further states that all tax benefit statutes must be “strictly construed,” and that any doubt must be resolved adversely to the taxpayer. However, that is not an accurate generalization. For example, statutes designed to provide an incentive for private investment have been required to be “construed liberally” in order to achieve their purpose. See Xerox Corp. v. United States, 228 Ct.Cl. 406, 656 F.2d 659, 678 (Ct.Cl.1981) (investment tax credit); Panhandle Eastern Pipe Line v. United States, 228 Ct.Cl. 113, 654 F.2d 35, 42 (Ct.Cl.1981) (investment tax credit).

The government also states that Shell paid windfall profits tax on this oil, arguing that Shell viewed it as crude oil and not as tar sand oil, and cannot take a contrary position in the courts. Shell responds that the dividing fine between crude oil and tar sands oil has not been decided, and that the government had taken conflicting or unclear positions — as is apparent from this litigation. Shell cannot be faulted or subjected to adverse inferences for paying the tax to the extent that it may have done so.

Summary

The Section 29 tax credit is limited to new investment, that is, to wells and facilities placed in service after 1979. It is undisputed that the purpose of Section 29 was to provide, through tax abatement, an incentive to recovery of hydrocarbons that could not be economically recovered by the procedures then available for crude oil. Although the government insists that the tar sand hydrocarbons for which Shell seeks the Section 29 credit were in fact recoverable through tertiary recovery procedures in general use in 1980, Shell proffered contrary evidence based on its actual attempts to recover tar sand hydrocarbons.

The presence of hydrocarbons in tar sands has been known for decades, without economic procedures for their extraction. *1346The congressional purpose of encouraging the development of this large and undeveloped resource is defeated by the ploy of classifying the oil from tar sands as “crude oil” after the technology to extract it is developed. Shell is entitled to prove that the technology it used in these tar sand reservoirs was not generally available before April 2, 1980, with due attention to economic feasibility. I respectfully dissent from this court’s endorsement of the trial court’s summary disposition and its premises.

. The viscosity of water is 1 centipoise (cp). The record states that most oil produced in the United States has a viscosity below 8 cp, and 98% of crude oil deposits have a viscosity lower than 1,000 cp.

. The statute and its history use both "techniques” and "technologies.” For example, the Senate Report on the tax credit legislation states that the alternative energy sources eligible for the Section 29 tax credit would "typically involve new technologies.” S.Rep. No. 96-394, at 87 (1979), reprinted in 1990 U.S.C.C.A.N. 410, 496. This Report also stated that the purpose of the tax credit is to "encourage the development of these [shale and tar sand] resources by decreasing the cost of their production” through the tax credit. Id.