(except natural gas), which provides, in part, as follows:

Establishments primarily engaged in operating oil and gas field properties. Such activities include exploration for crude petroleum and natural gas; drilling, completing, and equipping wells; operation of separators, emulsion breakers, desilting equipment; and all other activities in the preparation of oil and gas up to the point of shipment from the producing property. This industry also includes the production of oil through the mining and extraction of oil from oil shale and oil sands. * * *

1321 and 2911 relate to Natural Gas Liquids and Petroleum Refining, respectively.)

In passing the EPAA, Congress expressly recognized that the CLC petroleum price regulations in Subpart L could form the basis for the price regulations to be adopted under the EPAA, unless and until such time as the purposes of the EPAA required a modification:

It is expressly contemplated * * that the price controls established by Phase IV under authority of the Economic Stablization Act would continue in effect unless and until required to be modified by the price regulation required to carry out the purposes of this Act. ** (H.R. Rep. No. 628, 93rd Cong., at 26 (1973).)

Congress' contemplation that CLC price controls "would continue in effect unless and until required to be modified" under the EPAA indicates that Congress expected the mandatory authority under the EPAA to be generally coextensive with the scope of the authority exercised by CLC under the Stabilization Act. But it also indicates that the agency assigned responsibility for implementing the EPAA would be under an obligation to take a closer look at the CLC's regulations in order to conform their scope to the specific temporary regulatory pur

poses of the EPAA.

Accordingly, FEO on April 3, 1974, determined that certain products refined from crude oil, which were specifically included under the Standard Industrial Classification 2911 and thus

were price controlled by the CLC under the Stabilization Act, were not within the intended scope of the EPAA (39 FR 12353, April 4, 1974). No action was taken at that time with respect to the crude oil substitutes which are the subject of this ruling inasmuch as they were not being commercially produced and were thought therefore not to warrant specific mention. However, now that the matter has been appropriately brought to the DOE's attention and the agency has had an opportunity to consider whether Congress intended these products to be subject to regulation under the EPAA, the DOE for the reasons outlined above, has concluded that Congress did not so intend.

[41 FR 25886, June 23, 1976]

RULING 1976-5-RETAIL SALES OUTLET OPERATOR'S ENTITLEMENT TO MOTOR GASOLINE

Facts. Firm A operates five branded retail sales outlets of motor gasoline. Each outlet has traditionally offered customers not only gasoline, but also lubricants, automobile accessories, including tires and batteries, and the services of a mechanic. As part of a change in marketing operations, Firm A is planning to remodel all of its stations and to offer self-service sales of gasoline only. Firm A will operate the stations under a different brand name than the name currently used. None of the other goods and services now offered will continue to be offered once the newly remodeled stations are put into operation. The changeover will require the closing of the stations for two months.

In addition to the five branded retail sales outlets it operates as described above, Firm A also leased one nonbranded retail sales outlet to Firm B. Firm B operated the retail sales outlet as a "full service" station until June 30, 1976. On that date, the lease expired and Firm A chose not to renew the lease. Firm B did not attempt to open another retail sales outlet. Firm A occupied the site and immediately made preparations to convert the station to "self-service" only, consistent with its overall marketing operations.

Firm C, an independent, non-branded wholesale purchaser-reseller of

motor gasoline, operated one retail sales outlet of motor gasoline until June, 1974, when Firm C went out of business and closed the station. The building and land comprising the station's site were sold to Firm D, which planned to erect an office building on the site. Firm D razed the building in preparation for the new construction. However, after experiencing delays for several months in making final arrangements with contractors, Firm D abandoned its plans to erect an office building and instead built a service station which it now wishes to operate as a non-branded independent marketer. The station will offer the same services as the station formerly operated on the site by Firm C.

Issues. (1) After remodeling its five retail sales outlets and changing marketing operations, will Firm A be considered a new wholesale purchaser-reseller at each station site?

(2) After taking over the retail sales outlet from its former tenant and changing its marketing operations, will Firm A be considered a new wholesale purchaser-reseller at that station site?

(3) Is Firm D considered a new wholesale purchaser-reseller at the site formerly occupied by Firm C? Ruling-Issue (1). The Mandatory Petroleum Allocation Regulations state that

[e]ach firm or part of a firm which operates an ongoing business at a retail sales outlet shall be considered a separate firm with respect to each such outlet for purposes of [the motor gasoline allocation regulations] and, therefore, shall be a separate wholesale purchaser-reseller. 10 CFR 211.106(b)(1). The regulations further provide that [a] wholesale purchaser-reseller which operates a retail sales outlet shall be deemed to have gone out of business with respect to that outlet *** if it vacates the site on which it conducts such business. 10 CFR 211.106(c)(1).

Whether a particular retail sales outlet has gone out of business depends upon the facts in each case. However, in those instances where as part of an overall plan to alter marketing techniques, a marketer changes its retail outlets from traditional service stations to high volume sales outlets only, the remodeled stations would not

be considered "new" retail sales outlets. It is true that a self-service station may very well appeal to a different type of customer than one who frequents the traditional outlet. However, the fact that different customers will be attracted to the remodeled, high-volume station does not lead to the conclusion that a new business has been established at the site of the old station. Retail sales of motor gasoline were conducted prior to and after the change in marketing.

Therefore, the operator of such a retail sales outlet, such as Firm A, is deemed to be conducting an on-going business and is not a new wholesale purchaser-reseller at the site of the old station.

Because Firm A is not a new wholesale purchaser-reseller, it may not apply for assignment of a supplier and base period volume as provided by 10 CFR 211.12(e). Each remodeled outlet which Firm A operates is entitled to the same quantities of motor gasoline it had a right to purchase under the Mandatory Petroleum Allocation Regulations prior to the changeover to gasoline sales only method of operations.

If Firm A wishes to obtain greater quantities of motor gasoline to be offered for sale to the public, it may take two steps. It may purchase surplus motor gasoline under 10 CFR 211.10(g). Firm A should bear in mind that § 211.10(g)(5) restricts a supplier from distributing surplus product through its owned and operated outlets until the supplier's purchasers who are independent marketers have been afforded the opportunity to purchase surplus product in an amount determined in accordance with 10 CFR 211.10(g)(5).

Firm A may also under 10 CFR 211.13(e) seek an exception to DOE's regulations to provide an adjustment to base period use for each retail sales outlet. Requests for exception should be prepared in accordance with Subpart D of Part 205 (Administrative Procedures and Sanctions, 10 CFR 205.50 et seq.).

Issue (2). The Mandatory Petroleum Allocation Regulations provide that

[w]henever a wholesale purchaser-reseller of motor gasoline] is deemed to have gone out of business *** the right to an allocation with respect to the retail sales outlet shall be deemed to have been transferred to its successor on the site, provided such successor established the same ongoing business on the site within a reasonable period of time, as determined by DOE, after its predecessor vacates the premises. 10 CFR 211.106(e).

Thus, when Firm B's lease expired and Firm A succeeded Firm B on the site, Firm B's entitlement was transferred to Firm A. The transferee on the site may be engaged in a new business, but it is not a new wholesale purchaser-reseller for purposes of the Mandatory Petroleum Allocation Regulations, since it is considered to be the continuation of an already existing entity. The amount of the entitlement at the site does not increase upon transfer. Hence, the amount of Firm A's entitlement will be the same as what it would have been if Firm B were still operating the retail sales outlet. Firm A would not have a right to an increased entitlement simply because it plans to modify the marketing operation at the site. Modifying the mode of marketing does not change the nature of the business, which is the retail sale of motor gasoline. As previously discussed, Firm A could supplement its entitlement by purchasing surplus motor gasoline pursuant to 10 CFR 211.10(g) or by seeking an adjustment to its base period use in accordance with 10 CFR 205.50 et seq.

Issue (3). The situation presented by Firm D is significantly different from that presented by Firm A. The intent of the parties was clearly to cease operations of a retail gasoline sales outlet on the site. Firm C went out of business; Firm D razed the building and initially intended to erect a new building for purposes completely unrelated to the retail sale of motor gasoline. A relatively long period of time passed before Firm D changed its intention and built a new station. Under these circumstances Firm D may apply for assignment of a supplier and base period use pursuant to 10 CFR 211.12(e). Assignment of a base period supplier and determination of the station's base period use will be made by DOE in accordance with the "Guide

lines for Evaluation of Applications for Assignment of Supplier and Base Period Use to New Gasoline Retail Sales Outlets" (40 FR 20342; May 9, 1975).

As in the case of Firm A, Firm D may operate its new station using surplus product. Of course, Firm D would not establish any supplier/purchaser relationship with the supplier of surplus product, nor would Firm D establish a base period use if it relied on the purchase of surplus gasoline to operate its retail sales outlet without requesting the assignment of a base period supplier.

[41 FR 36647, Aug. 31, 1976]

RULING 1977-1-CLARIFICATIONS TO MANDATORY PETROLEUM PRICE REGULATIONS APPLICABLE TO DOMESTIC CRUDE OIL

I. BACKGROUND

On April 13, 1976, the Department of Energy ("DOE") gave notice (41 FR 16179, April 16, 1976) of a proposed rulemaking and public hearing to consider clarifications to certain technical aspects of the Mandatory Petroleum Price Regulations applicable to domestic crude oil (10 CFR Part 212, Subpart D).

The DOE did not propose in that rulemaking proceeding to alter any of the major policy decisions already reached or under consideration, in the three rulemaking stages to implement the crude oil pricing policies of the Energy Policy and Conservation Act ("EPCA," Pub. L. 94-163). Rather, the purpose of the rulemaking proceeding was to resolve as many as possible of a variety of more technical subsidiary issues that had arisen in connection with the implementation of the EPCA. These issues included those related to the definition of "property" and "posted price"; whether a well is properly classified as an "oil well" for purposes of the stripper well property rule; the partial rescission and modification of Ruling 1975-15, including the issue whether a property's producing patterns have been "significantly altered" for purposes of the enhanced recovery rule applicable to unitized properties (10 CFR 212.75); and whether the certification of domestic

crude oil sales required in 10 CFR 212.131 was adequate to enable crude oil purchasers to report on the Form DOE-P124-M-O, Domestic Crude Oil Purchaser's Monthly Report, notice of which was also issued on April 13, 1976.

In the April 13 Notice, DOE set forth tentative conclusions with respect to these issues and solicited comments to aid DOE in resolving these issues in a way that would best comport with the statutory objectives of the EPCA. DOE indicated that primary consideration would be given to interpretive rulings and clarifying amendments (if needed) that would be both administratively feasible and consistent with obtaining optimum production of crude oil in the United States. After receiving written comments and oral statements, DOE issued on August 20, 1976 a Notice entitled "Clarifications to Mandatory Petroleum Price Regulations Applicable to Domestic Crude Oil" (41 FR 36172, August 26, 1976), setting forth DOE'S determinations with respect to those issues, and adopting certain regulatory amendments designed to improve the incentives offered under the two tier pricing system. The purpose of this Ruling is simply to set forth in the format of a Ruling the DOE interpretations, which were initially set forth in the August 20 Notice, of certain regulatory definitions as they existed since first adopted by the Cost of Living Council. This action is being taken to eliminate possible questions concerning the legal significance of the August 20 clarifications.

II. THE DEFINITION OF "PROPERTY."1

A. Outline of Common Legal Relationship in Crude Oil Production. Before discussing the purpose and intent of the crude oil pricing regulations and the definition of "property," a brief outline of the general nature of

'This Ruling sets forth verbatim only the interpretive portions of the August 20 Notice, and the section headings have been revised accordingly. Differences between this Ruling and the interpretive portions of the August 20 Notice, other than obvious changes in the references to the rulemaking proceeding initiated by the April 13 Notice, are referenced in subsequent notes.

the legal relationships pursuant to which crude oil is typically produced should prove helpful in affording a better understanding of the issues involved.

Crude oil which can be commercially produced generally must be found in underground reservoirs 2 which have trapped a sufficient quantity of marketable crude oil to make production economically feasible. The nature of the interests which may exist in crude oil is extremely complex. In the simplest case, the owner of land in fee is generally entitled to produce and dispose of any crude oil which may be recovered by wells on that land. This right is not unqualified, however, but is subject to laws and regulations, which have been adopted in various states for conservation and other purposes, and to various legal doctrines which have evolved with respect to protection of the correlative rights of other parties, such as adjoining landowners, that may be affected by the landowner's production of crude oil.

In the typical case, however, the landowner does not exercise the right to produce crude oil which is inherent in the fee interest; rather, the various rights, powers, privileges, and immunities associated with the ownership of land in fee (and the crude oil which may be recovered therefrom) are transferred or otherwise divided among several parties. Although the nature of the interests which may be created by such transaction is virtually limitless, certain principal rights have been grouped together with sufficient frequency that they may be generally described as follows: (a) Mineral interests,

(b) Royalty interests, and (c) Leasehold interests.

Thus, the owner of the land may grant to others (or reserve to himself) the right to go upon the land and remove therefrom the crude oil (or other minerals) which may be found beneath the surface, thus separating this right (the "mineral interest") from the bal

2The reference to "geological formations" has been deleted as possibly confusing because a similar term is subsequently used to refer to more than a single reservoir.

80-028 0-81——36

ance of rights otherwise appurtenant to the ownership of land.

The owner of the mineral interest may, in turn, execute what is generally known as an oil and gas lease, which typically conveys the right to go upon the land for the purpose of prospecting for and producing crude oil (the "leasehold interest"). Such leases are typically for a term of years, subject to extension in the event crude oil is produced from the land during the term described in the lease. In consideration for receiving such a "leasehold interest," the lessee usually agrees to deliver to the lessor free of cost a share of the crude oil produced from the land (said to be taken by the lessor "in kind"), or a share of the proceeds of such crude oil produced and sold from the land. This right typically retained by the holder of the mineral interest to a share of production or proceeds is described as a "royalty interest." (See generally 1 H. Williams and C. Meyers, Oil and Gas Law sections 101, 201-202 (1975 Supp.), hereinafter cited as "Williams and Meyers.") An oil and gas lease may be described as follows:

The basic document of the oil and gas industry is the lease which authorizes an operator, the lessee or his assignee to enter upon described premises for the purpose of exploring for and developing the mineral resources in the premises.

The modern oil and gas lease is the product of conflicts between the landowner and the operator of the oil and gas interest. The operator has been desirous of securing a lease with a small capital investment, keeping the lease as long as it was productive or was valuable for speculative purposes, and at the same time, being able to terminate an unprofitable lease without liablity to the lessor. The landowner has been interested primarily in obtaining royalties from the lease and therefore has pressed for immediate exploration and development operations. In lieu of exploration and development operations, the lessor has tried to secure a periodic return for the holding of the leasehold interest. However, he has also wanted to limit the time the lessee can postpone drilling by periodic payments, in order to prevent the lessee from holding the lease merely for speculation, and to assure the exploration and development of the lease within a short time, (3 Williams and Meyers section 601, at 1-2.)

B. Regulatory Background. The two tier pricing system was proposed on

July 19, 1973 (38 FR 19464, July 20, 1973), by the Cost of Living Council ("CLC") under authority of the Economic Stabilization Act of 1970, as amended. In proposing the two tier system, CLC stated:

The Council recognizes a need to stimulate increased production and is proposing a system which allows increased production (new crude petroleum) from each producing property and an equal amount of the current production (old crude petroleum) to be sold without respect to the ceiling price rule. Adoption of this incentive plan creates a two-tier pricing system for crude oil, which requires posting of two sets of prices, one for "old oil" and one for "new oil." Postings for "old oil" can be no higher than the ceiling price and postings for "new oil" is [sic] at the buyer's discretion.

A crude oil producer is required to probate among all his "old oil" buyers the amount of "old oil" freed from ceiling limitations by the production of a like amount of "new oil." (38 FR 19467.)

The regulations proposed on July 19 did not include a definition of the term "property," but defined "base the production control level" (i.e., level above which a property's current production and sale would qualify as "new oil") as follows:

"Base production control level" for a particular month means

(i) For a particular property on which the producer has leased production rights, the total number of barrels of domestic crude petroleum produced in the same month of 1972 from that property.

(ii) For a particular property on which the producer owns production rights, the total number of barrels of domestic crude petroleum produced in the same month of 1972 from that property. (38 FR 19482.)

In adopting the two tier pricing system on August 17, 1973 (effective August 19, 1973 (38 FR 22536, August 22, 1973)), CLC indicated:

A 2-tier price system has been adopted, providing for a ceiling on domestic crude petroleum prices but allowing new crude and an equivalent amount of old crude to be sold at prices above the ceiling ** (38 FR 22536.)

CLC also stated:

*** The substantive policy changes [between the July 19, 1973 proposal and the August 17, 1973 final regulations] were publicly announced on August 10. These regula