ished May 15, 1973 may not be inreased. However, with respect to new anks purchased at higher cost a new or higher rental than that which was harged on May 15, 1973 for lower cost anks may be charged. Firms A and Z continue however to be subject to the ›verall restriction that any instance in which the amount of the new or increased rental for new, higher cost anks is not reasonably related to the mount of the increase in the cost of storage tanks over May 15, 1973 levels would continue to be regarded as a means of obtaining a price for propane that is higher than permitted by the regulations, and would therefore constitute a violation of the regulations.

Thus, for example, the new rental rate established by Firm A can only reflect the $150.00 increment in the cost of storage tanks since May 15, 1973, and not the full amount of the current cost of new storage tanks. This is because Firm A's May 15, 1973 prices for propane included the provision of a storage tank that cost $250.00, and an attempt now by Firm A to obtain rental income for the value of storage facilities previously furnished free of charge in connection with the purchase of propane would constitute an unwarranted increase in the price of propane. In addition, Firm A's recovery of the $150.00 increased storage tank cost would have to conform to the conventional practice of #spreading the cost over the reasonable life of the tank. Firm Z would be restricted to recovering its $150.00 increase on the same annual percentage basis which it applied to the basic $250.00 cost.

Ruling 1975-4 stated generally that increased costs associated with furnishing storage facilities constitute increased non-product costs under DOE regulations, and that, as such, they could only be passed through in prices charged for product to the extent and in the manner provided for by the increased non-product cost provisions applicable to such firms. To the extent that this Ruling permits higher tank rentals to be charged for new, highercost tanks, the increased costs of such tanks obviously do not also constitute increased non-product costs for purposes of the non-product cost pass

through regulations, and this Ruling modifies Ruling 1975-4 only to this limited extent.

The principles set forth in this ruling govern the application of the DOE regulations to the described modes of furnishing storage facilities by resellers, reseller-retailers, and retailers as defined in 10 CFR 212.31. These principles are not applicable to refiners, since the type of storage facility discussed herein falls within the express terms of the container cost increase provisions of § 212.87(c)(5)(iv). [40 FR 40827, Sept. 4, 1975]

RULING 1975-12-STRIPPER WELL LEASE EXEMPTION; CALCULATION OF AVERAGE DAILY PRODUCTION WHERE CURTAILED

Section 4(e)(2) of the Emergency Petroleum Allocation Act of 1973 ("EPAA", Pub. L. 93-159, as amended, Pub. L. 93-511) reads, in pertinent part:

(A) The regulation promulgated under subsection (a) of this section [DOE price and allocation regulations] shall not apply to the first sale of crude oil produced in the United States from any lease whose average daily production of crude oil for the preceding calendar year does not exceed ten barrels per well.

(B) To qualify for the exemption under this paragraph a lease must be operating at the maximum feasible rate of production and in accord with recognized conservation practices.

The Department of Energy implemented this statutory requirement in 10 CFR 210.32 (Stripper well leases), which as originally promulgated afforded an exemption from the Mandatory Petroleum Allocation and Price Regulations for the first sale of crude oil, including condensates, produced in the United States from any property whose average daily production of crude oil, including condensates, for the preceding calendar year did not exceed 10 barrels per well. As recently amended (40 FR 22123, May 21, 1975), the stripper well lease exemption of 10 CFR 210.32 now defines a stripper well lease as a property whose average daily production of crude oil, including condensates, per well did not exceed 10 barrels per day during any preced

ing calendar year beginning after December 31, 1972.

"Average daily production" for purposes of the stripper well lease exemption is defined in § 210.32 as:

The qualified maximum total production of crude oil, including condensates, produced from a property, divided by a number equal to the number of days in the year times the number of wells that produced crude oil, including condensates, from that property in that year. To qualify as maximum total production, each well on the property must have been maintained at the maximum feasible rate of production, in accordance with recognized conservation practices, and not significantly curtailed by reason of mechanical failure or other disruption in production.

The purpose of this ruling is to set forth the guidelines to be applied in those cases where production from a property for which the stripper well lease exemption is claimed appears not to have been maintained at the maximum feasible rate of production or to have been significantly curtailed.

I. Stripper Well Lease Production Requirements. Section 210.32 establishes two criteria that each well on a property must satisfy in order for its production during the measuring calendar year to qualify as "maximum total production." The well must have been (1) maintained at the maximum feasible rate of production, in accordance with recognized conservation practices, and (2) not significantly curtailed by reason of mechanical failure or other disruption in production.

The first requirement, that production be at the maximum feasible rate, reflects the statutory qualifying language "in accord with recognized conservation practices", in recognition of the fact that the practicalities of producing crude oil frequently limit the operation of some wells to a rate of production that is less than the maximum possible rate. For example, some state regulatory bodies establish for each property allowable production rates ("allowables"), which may not be exceeded by the operator. Although it might be possible to produce crude oil from the property at a greater rate than the allowable, the ultimate total recovery of crude oil from the property is maximized where production is held to the more efficient rate. Thus,

while a particular property might be capable of producing 1,000 barrels of crude oil per month in the short term, to produce continuously at that rate would result in a lesser total recovery of crude oil from the reservoir than the continuous production of perhaps 800 barrels per month. In this example, production—although not at the maximum possible rate-is, for purposes of the stripper well lease exemption, at the maximum feasible rate, in accordance with a recognized conservation practice, as required by § 210.32.

In some cases, the maximum feasible rate of production may be equal to the rate at which crude oil in the reservoir flows into the area of the well-bore from which it is pumped to the sur face. For example, if the rate of flow into the area of well-bore is low, perhaps one to two barrels per day, it is common operating practice to allow the crude oil in the reservoir to accumulate in the area of the well-bore for several days before it is pumped. Though the well is not pumping, however, it will be considered to be in operation, and no adjustment to the calculation of average daily production (as in Part II, below) is required if this practice comports with historical and traditional use. Wells in formations of higher flow rates are normally pumped more frequently, however, and it is to be expected that wells that average approximately 10 barrels or more per day are usually pumped every day.

Periodic shutdowns for other reasons, such as maintenance and mechanical repairs, also might result in no significant loss of production. This is so because after having been interrupted for a short period of time, production is sometimes resumed with a corresponding short period of increased rate of production due to & build-up of reservoir pressure during the period of non-operation. The result, which can normally be verified by an examination of the property's production records, is that the production lost during the time that the well was shut down is, in effect, recouped or "made up" after production is resumed. For example, assuming that total daily production from a three

well property is generally twenty-five barrels of crude oil, including condensates, but that over a two-day period during which one well is shut down for maintenance, total daily production from the property might decline to, perhaps, seventeen barrels. However, after production is again resumed from all three wells, the total production from the property might increase to twenty-nine barrels daily for four days, thus compensating for the production lost during the two days that one well was shut down. In this example, therefore, operation of the property would be considered to be "at the maximum feasible rate of production," and there would be no need for an adjustment to the calculation of average daily production (as in Part II, below) to reflect the time that one well was not operating.

As a general matter, DOE will be guided by the allowable production figures established by state regulatory bodies, where such figures exist, as well as earlier and later production figures for the property concerned in determining whether the maximum feasible rate of production, consistent with recognized conservation practices, has been maintained.

The second production requirement of § 210.32 is that production not be "significantly curtailed by reason of mechanical failure or other disruption in production." In this regard, DOE recognizes that just as the practicalities of producing crude oil sometimes limit the operation of some wells to less than the maximum possible rate of production, so too do those same practicalities prevent the actual flow of crude oil from every well on the property during every day of the year. Factors such as mechanical failures, which are normally beyond the producer's control, and periodic maintenance result in a nominal amount of "down time" for most properties each year. Accordingly, such normal periods of down time are not considered significant, and no adjustments to the calculation of average daily production need be made to reflect such down time. Where an abnormally large period of down time is experienced on a particular property and production is significantly disrupted or curtailed,

however, an adjustment to the calculation of average daily production must be made.

DOE has determined that the use of an absolute rule to establish whether a particular case of curtailed or disrupted production is significant is neither feasible nor equitable. Factors such as the ages of wells, their depths, the types of crude oil being produced, etc., all serve to influence what is properly regarded as a "normal" amount of down time for a particular well. As a guideline, however, DOE will presume that if, for any reason, a well has not operated for a period of more than 24 consecutive hours, production has been significantly curtailed or disrupted and, unless that presumption is overcome, appropriate adjustments must be made in the calculation of average daily production.

The 24 hour presumption is rebuttable in either of two ways. First, the presumption may be overcome upon the showing, by production records or otherwise, that the down time for mechanical failure or maintenance has not been in excess of the historical pattern for a well operating on that particular property, or (if the information is available) for similar wells operating in the same or nearby fields. Therefore, if due to mechanical failure a well was not operated for 17 days during the measuring calendar year, but the historical pattern for that property has been that the average per-well down time for mechanical failure or maintenance is normally 20 days per year, there has not been a significant curtailment or disruption in production. Overcoming the presumption with respect to curtailment for miscellaneous reasons other than mechanical failure or maintenance will be handled by DOE on a case-bycase basis, since there may be a variety of causes for such curtailments that cannot now be foreseen.

There will undoubtedly be some cases where the production from one or more wells has been curtailed or disrupted for periods longer than the historical pattern would indicate is normal for mechanical failure and maintenance. In this regard (as stated above), DOE recognizes that the mere curtailment or disruption for a short

period of time in the actual flow of crude oil from a producing well does not per se effect in significant measure a decrease in the average daily production calculated over the period of a calendar year. Accordingly, where the period of time during which production from the well was curtailed or disrupted has been in excess of the normal historical average for mechanical failure and maintenance, the presumption may secondly be overcome upon the showing, by production records or otherwise, that production lost during the abnormally long period of curtailment or disruption was subsequently recouped.

Where the presumption is still not fully overcome, however, failure of one or more wells to satisfy both of the production requirements set forth above means that the stripper well lease exemption cannot be extended to that particular property based on its unadjusted average daily production for the year. This is so because had the property met both production requirements, its average daily production might well have been in excess of the statutory maximum of 10 barrels per well per day.

It could therefore be argued from a literal reading of the statutory and regulatory language that the DOE should require the total disqualification of any property that has not met both production requirements because it has not operated "at the maximum feasible rate of production and in accord with recognized conservation practices" during the measuring calendar year. The statutory requirement that a property be operated "at the maximum feasible rate of production and in accord with recognized conservation practices" first appeared in section 406(b) of the Trans-Alaska Pipeline Authorization Act of 1973 (Pub. L. 93-153, enacted eleven days prior to the EPAA), which contained an exemption for stripper well leases similar to the one adopted in the EPAA. The Conference Committee included the restrictive provisions "to insure that the exemption is narrowly defined and prudently administered, and to insure that the incentive being granted is properly limited in accord with congressional intent." Moreover, Congress

intended that the limiting provision of the exemption be "strictly enforce and regulated by the administering agency to insure that the limited ex emption of this class of wells for the express purposes [e.g., preventing the premature shutdown of stripper wells for economic reasons] is not in any way broadened." The Conferees specifically directed that implementing reg ulations be "so designed as to provide safeguards against any abuse, overreaching or altering of normal patterns of operations to achieve a benefit under [the exemption] which would not otherwise be available."

Because of this legislative intent, the DOE will not allow curtailments or disruptions in operations beyond normal levels, for whatever reasons, to make the stripper well exemption operative when it would not have applied if operations had been normal. At the same time, however, the DOE believes that it would only defeat the congressional purpose of the stripper well exemption if it also disqualified those properties whose wells would not have exceeded an average of 10 barrels per day even if operations had been normal. Such a harsh application of the exemption would for no rational reason penalize those producers to whom Congress intended to provide the incentives of the exemption and who would have qualified for the exemption but for operational problems beyond their control.

Accordingly, rather than require the complete disqualification of properties that do not satisfy the production criteria outlined in this Part I, DOE will instead require appropriate adjustments to the computation of average daily production whenever there has been significantly curtailed or disrupted production, so that the calculation more accurately reflects the average daily production of the property when operated at the maximum feasible rate of production.

A = Average daily production of crude oil, including condensates. Q-Qualified maximum total production of crude oil, including condensates, from the property during the measuring calendar year. D=Number of days in the measuring calendar year. (Always either 365 or 366.) W=Number of wells that produced crude oil, including condensates, from the property during the measuring calendar year.

Thus, assuming that Firm X operated property A on which there were four producing wells, which, in the measuring calendar year, produced a total of 14,000 barrels of crude oil, including condensates, and assuming further that all four wells satisfied both production criteria set forth in Part I above, the property's average daily production for that calendar year is properly computed as follows: A=Q/D X W

A = 14,000 barrels/365 days x4 wells A = 9.59 barrels per day per well Therefore, on the basis of its average daily production per well during that calendar year, property A qualifies as a stripper well lease.

Assume, however, that Firm X operated a second property B, which also produced a total of 14,000 barrels of crude oil, including condensates, from four wells during the measuring calendar year, but that of those four wells, two produced crude oil for the entire year, but two were new wells that did not begin producing crude oil until July 1 of the measuring year. Without any adjustment to the formula to reflect the fact that two of the wells were not producing crude oil for the entire measuring calendar year, the computation of average daily production for property B would yield exactly the same result as the calculation for property A. Yet as discussed in Part I above, an adjustment must be made in calculating property B's average daily production, to reflect the significant "curtailment" or "disruption" in production, i.e., non-production from two wells for six months each. Accordingly, for purposes of the calculation, the two wells that did not produce crude oil until July 1 can be considered only as partial producing wells. Therefore, instead of four producing wells, property B counts two

"whole" producing wells and two partial producing wells that must count as one-half well each. Accordingly, the property calculation for property B is as follows:

A=Q/D X W

A=(14,000 barrels/365 days)(2 wells + 1⁄2 well+ 1⁄2 well)

A=14,000 barrels/365 days x 3 wells
A=12.79 barrels per day per well

On the basis of its average daily production during the measuring calendar year, therefore, property B does not qualify as a stripper well lease.

Adjustments to the calculation of average daily production for the period of time during which production from a particular well was significantly curtailed or disrupted are reflected, then, in the denominator of the formula by expressing that well as a fraction equal to the number of days for that well in which production was not significantly curtailed or otherwise disrupted (production days), divided by the number of days in the measuring calendar year. To illustrate:

Property A produced 14,000 barrels of crude oil, including condensates, from 4 wells during the measuring calendar year. While production from two of the wells was not significantly curtailed, production from one well was curtailed for 35 days, and from the other well for 55 days beyond the number of days normally attributed to mechanical failure and maintenance for those wells, and the production normally associated with those wells was not recouped when they resumed operations. In such a case of the calculation of the property's average daily production during the measuring calendar year must be adjusted to reflect the significantly curtailed production from two wells as follows:

One well is counted as:

(365-35/365)well=(330/365)well

and the other well is counted as:

(365-55/365)well (310/365)well

Accordingly, average daily production is computed as follows:

A=Q/DXW

A=14,000 barrels/[365 days 2 wells +(330/ 365) well+(310/365) well]

A 10.22 barrels per day per well.

On the basis of its average daily production during the measuring calendar year, there