Chevron USA Production Company Case No. VEA-0010

Case No. VEA-0010

July 6, 2000

DECISION AND ORDER

OF THE DEPARTMENT OF ENERGY

Appeal

Name of Petitioner: Chevron USA Production Company

Date of Filing: October 26, 1998

Case Number: VEA-0010

In 1996, the Department of Energy (DOE) sold the federal government’s interest in the Elk Hills oil field (Naval Petroleum Reserve No. 1) (the Reserve). Prior to the sale DOE and Chevron USA Production Company (Chevron) each owned parcels of oil and gas producing properties within the Reserve, most of which were operated as a unit (the Unit) pursuant to a 1944 unit plan contract (the UPC). The UPC provided for periodic redetermination of each owner’s equity interest in the oil and gas produced from the Unit, based on the estimated production allocated to each interest owner.

With the DOE’s sale of its interest in the Elk Hills field, the DOE and Chevron agreed to a final redetermination of their equity interests for the period leading up to the sale. Under this agreement, the Assistant Secretary for Fossil Energy (the Assistant Secretary) issues a final equity determination for each of the four producing zones in the Unit. Chevron can appeal such a determination to the Office of Hearings and Appeals (OHA), which renders a decision that is final and not subject to judicial review.

The instant appeal concerns the participating percentages for the Carneros Zone. In 1976, the Carneros Zone was recognized as commercially productive and the participating percentages established as: DOE, 100 percent; Chevron, 0 percent. In May 1998, the Assistant Secretary finalized those percentages, on the ground that the Unit did not include any portion of the Carneros Zone underlying Chevron’s property. Chevron appeals that determination. As explained below, we have determined that Chevron’s appeal should be denied.

I. Background

A detailed history of the Reserve is set forth in United States v. Standard Oil of Cal., 545 F.2d 624 (9th Cir. 1976). For the purposes of this decision, a brief history will suffice.

The Reserve was established in 1912 and was comprised of parcels of land owned by the United States Government and Chevron’s predecessor, Standard Oil of California. The purpose of the Reserve was to conserve oil for the national defense. In contrast, owners of oil producing properties like Chevron are interested in maximizing the economic benefit from those properties.

In 1942, the United States Navy, which was responsible for the Reserve at the time, and Chevron agreed to a unit plan contract for the management of the Reserve. After the Attorney General expressed concerns about the legality of the agreement, the parties terminated the agreement and sought approval for a unit plan contract from Congress. Congress held hearings and, in 1944, authorized a plan. 10 U.S.C. § 7426 (1994). The UPC was executed several days later.

The UPC differed, however, from a typical unit plan contract. Because the purpose of the Reserve was to conserve oil for national defense, the UPC provided for ultimate Navy control over decisions related to the Unit.

The UPC provided a method for determining each party’s equity interest in the Unit’s production. A party’s equity interest in a given producing zone was equal to the acre feet of oil in that zone underlying the party’s property in the Unit in 1942 divided by the total acre feet of oil in that zone underlying all Unit property in 1942. The UPC provided for redetermination of equity interests as the parties gained additional knowledge of the underlying geology.

The UPC referred to three commercially productive zones. Those zones, from shallowest to deepest were: the Dry Gas Zone, the Shallow Oil Zone, and the Stevens Zone. The UPC set forth the initially established participating percentages for the three zones.

In 1948, the parties entered into a second contract, which amended and supplemented the UPC (the 1948 A&S Agreement). The parties again amended the UPC in 1966 and 1976.

In 1976, the Unit recognized a fourth zone as commercially productive. That zone - the Carneros Zone - lies below the Stevens Zone and is the zone at issue in this appeal. The Assistant Secretary determined the equity interests as: DOE, 100 percent; Chevron, 0 percent. Accordingly, the Unit allocated to the Navy 100 percent of the costs of producing from that zone, as well as 100 percent of the resulting revenues.

In 1977, Congress transferred jurisdiction over the Reserve from the Navy to the newly established DOE. The Assistant Secretary is responsible for decisions related to the Reserve.

In 1980, the Engineering Committee for the Unit was in the process of making a third equity redetermination for the Stevens Zone. As part of this process, the Engineering Committee recommended that the equity redetermination take into account oil in the Stevens Zone underlying portions of various parcels of land (Sections 9R, 14Z, 23Z, and 25Z) that were not part of the Unit. As a result, the Assistant Secretary added those areas “down to and including the Stevens Zone.” See DOE Response Brief, Ex. U (Assistant Secretary Letters dated May 20, 1980 (Section 9R); June 25, 1980 (Section 25Z); September 16, 1980 (Sections 14Z and 23Z)); Map Showing Unit Additions (DOE Response Brief, Ex. K), submitted at January 26, 2000 Hearing. One of the areas - the Section 25Z addition - is the area at issue in this appeal.

The Engineering Committee made its determination concerning Section 25Z in its May 1980 meeting. In that meeting, the Engineering Committee determined that the Stevens Zone underlying a northeast portion of Chevron’s Section 25Z should be added to the Unit. The Engineering Committee stated:

Structure maps and gross oil sand isochore maps were presented by the Geological Subcommittee for the A and for the B intervals. Portions of these intervals extend into Section 25Z which lie outside the Unit. The Engineering Committee unanimously recommended that the Stevens Zone in the N-1/2 of the NE-1/4 and the N-1/2 of the SE-1/4 of the NE-1/4 of Section 25Z (containing approximately 100 acres) be expeditiously included within the Unit for purpose of revision of percentage participation.

Minutes of the One Hundred Fortieth Meeting of the Engineering Committee at 3-4, Chevron Opening Brief, Ex. 8. In its June 4, 1980 meeting, the Engineering Committee revised this recommendation to include another 2 ½ acres. Minutes of the One Hundred Forty- First Meeting of the Engineering Committee at 3, DOE Response Brief, Ex. M.

In a June 25, 1980 letter, the Assistant Secretary adopted the Engineering Committee’s recommendation concerning Section 25Z. Pursuant to her authority under Section 15(b) of UPC, the Assistant Secretary added the northeast portion of “Section 25Z down to and including the Stevens Zone.” The Assistant Secretary directed the Director of Naval Petroleum and Oil Shale Reserves to negotiate the terms and conditions of the inclusion. The Assistant Secretary’s June 25, 1980 letter is appended to this Decision and Order and hereinafter is referred to as the June 1980 determination.

In November 1980, the Engineering Committee determined revised equity percentages for the Stevens Zone. The Engineering Committee’s report is captioned as “Stevens Zone - Estimated Recoverable Oil and Third Revision of Participating Percentages as of November 20, 1942” (hereinafter the November 1980 Stevens Zone Equity Redetermination). The November 1980 Stevens Zone Equity Redetermination increased Chevron’s equity percentage in the Stevens Zone from 16 to 20 percent, retroactive to November 20, 1942, the date of the original unit plan contract.

In 1995, Congress was considering legislation requiring the sale of the United States’ interest in the Reserve. In anticipation of the sale, the DOE and Chevron undertook to agree to a final determination of their equity interests in the Unit’s production. In a November 1995 letter to the DOE, Chevron set forth the progress of the Engineering Committee and identified, as one of the areas of agreement, equity percentages for the Carneros Zone as: DOE, 100 percent; Chevron, 0 percent.(1)

Later that year, Chevron asserted, for the first time, that it was entitled to a participating percentage of the Unit’s Carneros Zone production, based its ownership of Section 25Z. The DOE responded that the Section 25Z inclusion did not include the underlying Carneros Zone. The DOE maintained that the June 1980 determination limited the inclusion to zones above the Carneros Zone.

In 1997, the DOE and Chevron agreed to a process for determining their final equity interests in the Unit’s production. See May 1997 Agreement Regarding Equity Redetermination Process. Under that agreement, the Assistant Secretary for Fossil Energy (the Assistant Secretary) issues a final equity determination for each zone from which the Unit produced crude oil, and Chevron has the right to appeal to the OHA. Under this agreement, the OHA’s decision is final and not subject to judicial review.

In February 1998, the United States sold its interest in the Reserve. With the sale, the UPC was terminated.

In May 1998, the Assistant Secretary issued her final equity determination for the Carneros Zone. The Assistant Secretary determined that the June 1980 determination was expressly limited to zones above the Carneros Zone and, therefore, did not bring the Carneros Zone underlying Section 25Z into the Unit. Accordingly, the Assistant Secretary determined that the participating percentages for the Carneros zone as: DOE, 100 percent; Chevron 0 percent.

Chevron appeals from the Assistant Secretary’s May 1998 determination. Chevron contends that the June 1980 determination did include the Carneros Zone and, therefore, that Chevron is entitled to a portion of the Unit’s Carneros revenues.

In a February 1999 letter, the OHA addressed the scope of the appeal. The OHA stated that the appeal was limited to the legal issue of whether the Assistant Secretary included the Carneros Zone underlying a portion of Section 25Z in the Unit.

II. Standard of Review

Under the May 1997 agreement with the parties, the issue whether the Carneros Zone underlying Section 25Z was part of the Unit is a legal issue that OHA considers de novo. See May 1997 Agreement § B.11.(2) Accordingly, the OHA does not give any deference to the Assistant Secretary’s position on that issue.

III. Analysis

It is undisputed that, prior to the June 1980 determination, Section 25Z was not part of the Unit. It is also undisputed that the June 1980 determination added a northeast portion of Section 25Z to the Unit. The only dispute is whether the Section 25Z inclusion had a zonal limitation. The Assistant Secretary argues that the Section 25Z inclusion was limited to zones “down to and including the Stevens Zone” and, therefore, did not include the lower Carneros Zone; Chevron argues that the Section 25Z inclusion had no zonal limitation and, therefore, did include the Carneros Zone.

A. Section 15(b) of the UPC

The Assistant Secretary issued the June 1980 determination pursuant to Section 15(b) of the UPC. Section 15(b) of the UPC gives the Assistant Secretary unilateral authority to include additional lands in the Unit. Under the UPC, the Assistant Secretary can add lands to the Unit by finding that the lands lie on the same geologic structure as the 1944 limits of the Reserve and that it is desirable to include the lands. The Assistant Secretary then directs the negotiation of the terms and conditions of the inclusion; if negotiations fail, the Assistant Secretary decides the terms and conditions upon a fair and equitable basis.

B. The June 1980 Determination

On its face, the June 1980 determination added Section 25Z subject to a zonal limitation. As discussed below, the determination uses the phrase “Section 25Z down to and including the Stevens Zone” twice in the relevant letter, both in the paragraph concerning the Assistant Secretary’s finding that the property to be included lies on the same geologic structure as the 1944 limits of the Reserve and in the paragraph concerning the Assistant Secretary’s finding that the inclusion of the property is desirable.

The June 1980 determination consists of three paragraphs. In the first paragraph, the Assistant Secretary makes her finding concerning geologic structure. The first paragraph provides in full:

Geologic and engineering data have been obtained which show that the following portion of Chevron’s Section 25Z down to and including the Stevens Zone is on the same geologic structure underlying the present (1944) limits of Naval Petroleum Reserve No. 1. The specific area is the N ½ of the NE 1/4, the N ½ of the SE 1/4 of the NE 1/4 and the NE 1/4 of the SE 1/4 of the SE 1/4 of the NE 1/4 of Section 25, T.30 S., R.22 E., M.D.B.&M, consisting of approximately 102.5 acres. I have examined the geologic and engineering data and have determined that the above portions of Section 25Z are, in fact, on the same geologic structure underlying the 1944 limits of the Reserve.

June 1980 determination, 1st ¶ (emphasis added). In the second paragraph, the Assistant Secretary makes her finding that it is desirable to include “Section 25Z down to and including the Stevens Zone” in the Unit. The second paragraph provides in full:

Section 15(b) of the Unit Plan Contract provides that if the Secretary finds that lands outside the Unit are on the same geologic structure underlying the present limits of the Reserve, the Secretary has the unilateral right to determine whether it is desirable to include such lands under the terms of the Unit Plan Contract. In accordance with this section and pursuant to the delegation of authority to me from the Secretary of Energy, I find that, in order to secure the benefits of unit operations of separately-owned lands overlying a common pool or reservoir, it is desirable to include the above-noted portion of the northeast quarter of Section 25Z down to and including the Stevens Zone, as defined in Section 2(c) of the Unit Plan Contract, under the terms and conditions of that contract. This determination is effective as of this date.

Id., 2nd ¶ (emphasis added). Finally, in the third paragraph, the Assistant Secretary directs the relevant official to enter into negotiations to arrive at terms and conditions for “this inclusion.” The third paragraph provides in full:

I am requesting that the Director, Naval Petroleum and Oil Shale Reserves, enter into negotiations with Chevron to arrive at terms and conditions for this inclusion.

Id., 3d ¶. As the foregoing indicates, the first two paragraphs contain the requisite findings for making the inclusion, and the third paragraph contains a directive to negotiate the terms and conditions of the inclusion.

C. The Plain Meaning of the June 1980 Determination

The plain meaning of the June 1980 determination is that the inclusion did not encompass the Carneros Zone.

The June 1980 determination describes the area to be included as a portion of “Section 25Z down to and including the Stevens Zone.” The first two paragraphs - making the requisite findings for the inclusion - both use that phrase.

The plain meaning of the phrase “Section 25Z down to and including the Stevens Zone” is that any lower zone is not included. The words “down to and including ?X’” do not encompass anything lower than ?X.’” Thus, the words “down to and including the Stevens Zone” do not include the lower Carneros Zone.

As the foregoing indicates, the June 1980 determination limits the Section 25Z inclusion to “down to and including the Stevens Zone,” and the plain meaning of that phrase excludes the lower Carneros Zone. Accordingly, Chevron’s assertion that the June 1980 determination included the Carneros Zone is simply inconsistent with the clear language of that determination.

Despite the clear language of the determination, Chevron argues that the June 1980 determination included the Carneros Zone. As explained below, we have considered and rejected these various arguments.

D. Chevron’s Arguments

Chevron argues that the plain meaning of the June 1980 determination is that the Carneros Zone was included in the Unit. In the alternative, Chevron argues that the June 1980 determination should be interpreted to include the Carneros Zone because an exclusion of the Carneros Zone would violate Section 15(b) of the UPC.

1. The Sentence in the Determination Referring to the Coordinates of the Northeast Portion of Section 25Z

First, Chevron notes that the second sentence of the first paragraph - which defines the coordinates of the northeast portion of Section 25Z - does not contain a zonal limitation. Chevron argues that the lack of a zonal limitation in that sentence is significant.

Chevron’s reliance on the sentence containing the coordinates is unwarranted. The coordinates merely define the specific portion of Section 25Z at issue, i.e., the northeast portion. The two sentences in question provide:

Geologic and engineering data have been obtained which show that the following portion of Chevron’s Section 25Z down to and including the Stevens Zone is on the same geologic structure underlying the present (1944) limits of Naval Petroleum Reserve No. 1. The specific area is the N ½ of the NE 1/4, the N ½ of the SE 1/4 of the NE 1/4 and the NE 1/4 of the SE 1/4 of the SE 1/4 of the NE 1/4 of Section 25, T.30 S., R.22 E., M.D.B.&M, consisting of approximately 102.5 acres.

June 1980 determination, 1st ¶ (emphasis added). The first sentence refers to the “following portion” of Section 25Z; the second sentence provides the coordinates for that “portion” of Section 25Z. Thus, the coordinates in the second sentence do not modify, let alone negate, the phrase “down to and including the Stevens Zone.”

Aside from the fact that the reference to the coordinates does not modify or negate the zonal limitation in the Assistant Secretary’s finding concerning the geologic structure, Chevron’s reliance on the reference to coordinates ignores the fact that the Assistant Secretary’s desirability finding contained the language “down to and including the Stevens Zone.” The operative sentence - the third sentence in the second paragraph - states:

In accordance with [section 15(b) of the UPC] and pursuant to the delegation of authority to me from the Secretary of Energy, I find that, in order to secure the benefits of unit operations of separately-owned lands overlying a common pool or reservoir, it is desirable to include the above-noted portion of the northeast quarter of Section 25Z down to and including the Stevens Zone, as defined in Section 2(c) of the Unit Plan Contract, under the terms and conditions of that contract.

Id. 2d ¶ (emphasis added). Accordingly, when the June 1980 determination is viewed in its entirety, there is no basis for Chevron’s argument that the sentence specifying the coordinates for the included portion of Section 25Z evidences an intent to include that area without zonal limitations.

2. The Absence of the Words “Excluding the Carneros Zone”

Second, Chevron appears to argue that the plain meaning of the phrase “Section 25Z down to and including the Stevens Zone” does not exclude the lower Carneros Zone. Chevron reasons that the phrase “down to and including the Stevens Zone” is merely “inclusive” and does not purport to exclude the Carneros Zone.

This argument is unpersuasive. Chevron’s argument would make the phrase “down to and including the Stevens Zone” superfluous, an interpretation to be avoided. See Restatement (Second) of Contracts § 203 (1981); Corbin on Contracts, § 549 (interpretation of a contract as a whole) & § 549 n.26 (every word and phrase should be given some effect if reasonably possible) (rev. ed. 1960). The simple fact is that both of the requisite findings - that the inclusion lie on the same geologic structure and that it be desirable - were limited to a portion of “Section 25Z down to and including the Stevens Zone.” The Assistant Secretary’s failure to add “and excluding the Carneros Zone” did not bring the Carneros Zone within the language “down to and including the Stevens Zone,” nor did the Assistant Secretary make any supplementary findings concerning the geology of, or desirability of including, the Carneros Zone. Accordingly, the lack of the words “excluding the Carneros Zone” did not bootstrap the Carneros Zone, or any lower zone for that matter, into the requisite geological and desirability findings.

3. The June 1980 Determination Must be Interpreted to Include the Carneros Zone in Order to Comply with the UPC

Third, Chevron argues that, regardless of what the June 1980 determination states or the parties’ subsequent conduct indicates, the June 1980 determination should be interpreted as adding a portion of Section 25Z without zonal limitations. Chevron contends that under the UPC the exclusion of a zone is a “term or condition” and thus must be (i) agreed to by the parties or (ii) the subject of a separate determination by the Assistant Secretary that the exclusion is fair and equitable. Both parties agree that the Carneros Zone was not excluded through the terms and conditions process.

In support of its position that a zone cannot be excluded from the inclusion determination, Chevron notes that UPC Section 15(b) authorizes the Assistant Secretary to add “lands.” Chevron argues that under the UPC “lands” are two dimensional, and Chevron cites various portions of the UPC, particularly Sections 2(b) and 2(e) which state that the parties share in the production from each commercially productive zone underlying the Reserve. Accordingly, Chevron argues that once the Assistant Secretary adds lands, all commercially productive underlying zones are brought into the Unit pursuant to Sections 2(b) and 2(e) of the UPC. Based on that premise, Chevron reasons that the exclusion of a zone can occur only through the terms and conditions process.

The UPC unquestionably bound the Secretary of Energy and Assistant Secretary. Were Chevron’s reading of the UPC correct, this would be a telling argument.(3) However, the Chevron reading is not correct. Chevron’s argument is inconsistent with Section 15(b)’s distinction between the process for including lands and the process for determining the terms and conditions of such inclusion.

Section 15(b) of the UPC provides for a two-step process: the first, consisting of the inclusion or addition of lands; the second, consisting of the determination of the terms and conditions of such addition. Section 15(b) provides in full:

It is contemplated that it may hereafter be desirable to include under the terms of this contract other lands located outside of the present limits of the Reserve but which lie on the same geologic structure underlying the present limits of the Reserve. If and when any such situation shall arise, Navy and Standard will endeavor to agree upon the terms and conditions on which such additional lands may be included under this contract upon the basis of the estimated acre-feet of commercially productive formations in each commercially productive zone underlying such additional lands. If Navy and Standard shall be unable to agree upon the terms and conditions on which such additional lands may be included, the Secretary of the Navy shall decide such terms and conditions upon a fair and equitable basis, and such decision in each such instance shall be final and shall be binding upon Navy and Standard. In determining the estimated acre-feet of commercially productive formation underlying such additional lands, the Secretary shall, at Standard’s request or on his own initiative, secure and consider an advisory report from an independent petroleum engineer in the manner provided in paragraph (b) of Section 9.

UPC § 15(b) (emphasis added). Thus, the first sentence concerns the inclusion of lands and the next three sentences concern the terms and conditions of such inclusion.

The Ninth Circuit has recognized that the inclusion determination and the terms and conditions determination are two independent determinations. In United States v. Standard Oil Co. of Cal., 618 F.2d 511 (9th Cir. 1980) (Chevron), the Acting Secretary of the Navy determined that it was desirable to add Section 7R. The parties then entered into negotiations for the terms and conditions of compensation to Chevron. They could not agree, and the Acting Secretary made a unilateral decision regarding “fair and equitable” terms of compensation. The court described Chevron’s challenge as follows:

[T]he issues of material fact tendered by Standard implicated both the “inclusion” and the “fair and equitable” terms and conditions issues, although the government’s motion for summary judgment sought summary judgment only as to “inclusion.” Standard sought to link the two issues. It claimed that the district court could not, as the government’s motion requested, grant partial summary judgment on the inclusion issue and then later decide, at trial, whether the Acting Secretary’s terms and conditions determination was “fair and equitable.” Standard argued that the “desirability” of including section 7R in the Unit could not be determined without also deciding the cost - i.e., the terms and conditions - of such inclusion.

Chevron at 514-15. The lower court rejected Chevron’s contention that the inclusion and terms and conditions determinations were linked, and Chevron did not appeal that ruling. Id. at 515 n.6. On appeal, Chevron separately challenged the inclusion and terms and conditions determinations. The Ninth Circuit upheld the lower court on the inclusion determination, but remanded the terms and conditions determination. The Ninth Circuit noted the different standards of review for the two determinations - de novo review for inclusion determinations, Wunderlich Act review for terms and conditions determinations. Id. at 518-19. Finally, the Ninth Circuit decision discussed the terms and conditions determination as relating to the compensation resulting from an inclusion, not the inclusion itself. Id. at 514, 515.

Chevron’s argument that a zonal limitation is a term or condition does not comport with the plain meaning of Section 15(b). A zonal limitation concerns what is included in the Unit and, therefore, is part of an “inclusion” determination. A zonal limitation does not relate to the compensation for an inclusion and, therefore, is not a term or condition of an inclusion.

Moreover, Chevron’s argument that a zonal limitation is a term or condition is inconsistent with Section 15(b)’s different treatment of inclusion determinations and terms and conditions determinations. First, Chevron’s argument is inconsistent with the different standards of review applicable to inclusion determinations and terms and conditions determinations: inclusion determinatons are reviewed de novo, terms and conditions determinations are reviewed under the Wunderlich Act. Chevron, 618 F.2d at 518-19. If Chevron’s argument were correct, a court would review the surface area of an inclusion under the de novo standard but the zonal limitation under the Wunderlich Act standard. There is nothing in the UPC to indicate that such a problematic review was intended, and such a review is inconsistent with Chevron’s agreement that we review this case under the de novo standard. Second, Chevron’s argument is inconsistent with the Assistant Secretary’s unilateral authority under Section 15(b) to determine what is included in the Unit. If Chevron’s argument were correct, the Assistant Secretary’s inclusion of lands could be partially reversed through the negotiation process in which lower level government employees and Chevron could agree to exclude certain zones. This is a novel idea and has never occurred historically. There is nothing in the UPC to indicate that the Assistant Secretary’s unilateral authority was subject to such reversal. Finally, Chevron’s argument that the UPC required that zonal limitations be made through the terms and conditions process is inconsistent with the Section 15(b) requirement that the Assistant Secretary find that the land in question is on the “same geologic structure” as the 1944 limits of the Reserve. The phrase “same geologic structure” refers to oil pools and reservoirs, see UPC §2(a)(5), extending within the 1944 limits of the Reserve, and it is possible that some, but not all, of the pools and reservoirs underlying a specific area of land, extend within the 1944 limits of the Reserve. See, e.g., A&S § 5(b) (recognizing that newly discovered formation underlying a Section 15(b) addition could be added if it “extends within the [1944] boundaries of the Reserve”). Nonetheless, under Chevron’s view, an underlying formation would automatically be included regardless of whether it extended within the 1944 boundaries of the Unit, a result clearly contrary to the requirement in Section 15(b) that the formation be on the same geologic structure.

As the foregoing indicates, Chevron’s contention that zonal limitations could be made only through the terms and conditions process is inconsistent with Section 15(b). For that reason, we reject Chevron’s contention that, to be consistent with the UPC, the June 1980 determination should be interpreted as adding a portion of Section 25Z without zonal limitations.

4. The Parties’ Post June 1980 Conduct

Fourth, Chevron argues that the parties’ post June 1980 conduct is consistent with its interpretation of the June 1980 determination. Chevron cites various documents and conduct.

As indicated above, the language in the June 1980 determination is clear, and none of the parties’ post June 1980 conduct can change that meaning. See, e.g., Chevron, 618 F.2d at 518 (citing Corbin on Contracts § 1294, at 1065 (one volume ed. 1952); see also John D. Calamari & Joseph M. Perillo, Contracts § 167 (3d ed. 1987) (plain meaning rule “still employed frequently or on occasion by the great majority of the jurisdictions in this country”). In any event, if we were to consider the parties’ post June 1980 conduct, Chevron’s examples are unpersuasive. Although Chevron cites geological maps and discussions, geological information does not define the Unit. Moreover, the Assistant Secretary has offered her own documents which support a contrary position - her nearly contemporaneous July 1980 letter to the California Division of Oil and Gas describing the Section 25Z addition to the Unit with the zonal limitation, DOE Answer, Ex. P, and Chevron’s 1995 letter to the DOE noting agreement among the Engineering Committee that Chevron did not have an equity interest in the Carneros Zone, DOE Answer, Ex. W. Accordingly, post June 1980 documents support the Assistant Secretary’s position, rather than Chevron’s position.(4) Finally, although Chevron cites its failure to drill offset wells in the Section 25Z area as indicative of its belief that the Unit included the Section 25Z Carneros Zone, the DOE cites, inter alia, the Unit’s failure to drill wells into the Section 25Z Carneros Zone as indicative of the parties’ belief that the zone was not part of the Unit. We simply do not believe that there is adequate evidence of the geology of the zone and the movement of oil within to rely on either argument. In this regard, we note that May and June 1980 meetings of the Engineering Committee - which prompted the June 1980 determination - did not discuss the geology of the Carneros Zone or movement of oil within, let alone make any recommendations concerning it. Accordingly, we decline to accord any significance to either party’s argument about its well drilling activity.

5. Equity

Chevron contends that equity requires that it receive a portion of the Unit’s production from the Carneros Zone. As the parties are aware, this appeal is limited to the issue whether the Assistant Secretary’s June 1980 determination included the Carneros Zone underlying Section 25Z in the Unit. Arguments concerning equity are relevant only insofar as they are used to assess and interpret the June 1980 determination.

Chevron does not contend that the Unit was operated to produce crude oil from the Carneros Zone underlying Section 25Z. Although Chevron intimated that the Unit drained oil from Chevron’s lands, Chevron did not pursue that argument and preliminary engineering studies undertaken by the parties do not support such an argument.

In essence, Chevron’s equity argument is based on its position that the June 1980 determination had to include the Carneros Zone in order to be consistent with the UPC. As explained above, we have rejected the argument that the June 1980 determination had to include the Carneros Zone in order to be consistent with the UPC. Accordingly, Chevron has not presented any equity argument bearing on the effect or interpretation of the June 1980 determination.

III. Conclusion

As the foregoing indicates, we have determined that the Assistant Secretary did not include the Carneros Zone underlying Section 25Z in the Unit. Accordingly, the Assistant Secretary correctly determined that the participating percentages for the Carneros Zone as: DOE, 100 percent; Chevron 0 percent.(5)

It Is Therefore Ordered That:

(1) The Appeal filed by Chevron USA Production Co. on October 26, 1998 be and hereby is denied.

(2) This is a final agency Order that is not subject to judicial review.

George B. Breznay

Director

Office of Hearings and Appeals

Date: July 6, 2000

(1)The letter identified, as the second area of agreement, equity percentages for the Dry Gas Zone, and as the third area of agreement, a procedure for finalizing the equity percentages for the Shallow Oil Zone. The letter then identified, as the two areas of disagreement - the equity finalization for the Stevens Zone, and the methodology for final settlement, once the final zone equities were established.

(2)Section B.ll of the May 1997 agreement provides that “Chevron and DOE agree that any challenge by Chevron to the [Assistant Secretary’s] decision regarding the ?25Z area’ legal issue (which affects only the Carneros Zone) shall be reviewed ?de novo’ by OHA and that any OHA determination of the matter shall be final and binding on the parties.”

(3)If Chevron’s argument were correct, (i) we would have to interpret the June 1980 determination as not intending a zonal limitation or, if the express zonal limitation did not permit such an interpretation, (ii) we would have to consider the legal effect of a determination with a zonal limitation, i.e., whether the determination operated to include all the zones or whether the zonal limitation rendered the determination void.

(4)We have also considered and rejected Chevron’s argument that the 1948 A&S Agreement supports its position that Section 15(b) does not permit zonal limitations in the inclusion process. A provision in that agreement - later eliminated - provided for the inclusion of all commercially productive zones underlying an area. The presence of that language - and its absence in Section 15(b) - indicates, if anything, that Section 15(b) did not have such a requirement.

(5)Given this conclusion, we need not consider the Assistant Secretary’s argument that Chevron’s claim in this appeal is barred by the statute of limitations.