Court Opinion

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Opinions of the United
1999 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

6-24-1999

Shell Petroleum v. USA
Precedential or Non-Precedential:

Docket 97-7639

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Filed June 24, 1999

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 97-7639

SHELL PETROLEUM, INC.,
and Subsidiary Corporations,
       Appellant

v.

UNITED STATES OF AMERICA

On Appeal from the United States District Court
for the District of Delaware
D.C. Civil Action No. 93-cv-00508
(Honorable Joseph J. Farnan, Jr.)

Argued September 17, 1998

Before: SLOVITER, SCIRICA and ALITO, Circuit Judges

(Filed June 24, 1999)

       MARK L. EVANS, ESQUIRE
        (ARGUED)
       Kellogg, Huber, Hansen, Todd &
        Evans
       1301 K Street, N.W.
       Suite 1000 West
       Washington, D.C. 20005

       WILLIAM O. LaMOTTE, ESQUIRE
       Morris, Nichols, Arsht & Tunnell
       1201 North Market Street
       P.O. Box 1347
       Wilmington, Delaware 19899

        Attorneys for Appellant
       STEVEN W. PARKS, ESQUIRE
        (ARGUED)
       RICHARD FARBER, ESQUIRE
       United States Department of Justice
       Tax Division
       P.O. Box 502
       Washington, D.C. 20044

        Attorneys for Appellee

OPINION OF THE COURT

SCIRICA, Circuit Judge.

This is an appeal of the denial of a tax credit under the
Crude Oil Windfall Profit Tax Act, Pub. L. 96-223, 94 Stat.
229 (1980) (codified in scattered sections of 7, 19, 26, and
42 U.S.C.) (repealed in part 1988) ("COWPTA") which grants
oil producers an income tax credit of $3.00 for each barrel-
of-oil equivalent of "oil produced from . . . tar sands"
extracted through wells drilled between January 1, 1980
and December 31, 1992. The resolution of this case turns
on the proper definition of "oil produced from tar sands,"
which the Act does not define. Shell contends the definition
should be derived from commonly accepted usage in the
petroleum industry and asserts that when the statute was
enacted in 1980, "tar sand oil" meant "oil so viscous[1] that
it cannot be recovered economically through `primary
production methods'[2]-- i.e., methods used in ordinary oil
_________________________________________________________________

1. "Viscosity is the measure of a fluid's resistance to flow. In an oil
reservoir, viscosity is the measure of the oil's resistance to movement
through the reservoir rock to the well-bore. Given uniform pressure and
rock properties, a more viscous oil will move through the reservoir more
slowly than a less viscous oil." Shell Petroleum, Inc. v. United States,
996
F. Supp. 361, 362 n.1 (D. Del. 1997).

2. Crude oil is ordinarily extracted through wells from underground
reservoirs, which are formations of sand or rock containing tiny pore
spaces permeated with oil. There are three types of production through
wells: Primary production depends on the inherent pressure in an oil
reservoir. Secondary production involves the injection of gas or water
into a reservoir to increase pressure. Tertiary (or enhanced) production,

                                 2
fields." The government maintains the proper definition may
be found in Department of Energy Ruling 1976-4, which
defines "tar sands" as "[t]he several rock types that contain
an extremely viscous hydrocarbon which is not recoverable
in its natural state by conventional oil well production
methods including currently used enhanced recovery
techniques." Department of Energy Ruling 1976-4, 10
C.F.R. ch. II Rulings 371, 372 (1980).3 Shell concedes that
it is not entitled to a refund if we accept the DOE Ruling
definition. Following a bench trial, the District Court
adopted the definition of tar sands crafted by the DOE
Ruling and denied the refund. See Shell Petroleum, Inc. v.
United States, 996 F. Supp. 361, 372 (D. Del. 1997).
Because we substantially agree with the District Court's
well reasoned opinion, we will affirm.

I

A

Beginning in 1973, world oil prices quadrupled in less
than a year after the Organization of Petroleum Exporting
Countries embargoed oil sales to Western nations and then
fixed prices above market levels. See Gary D. Allison,
Energy Sectionalism: Economic Origins and Legal
Responses, 38 Sw. L.J. 703, 705 (1984). Congress
responded with the 1973 Emergency Petroleum Allocation
_________________________________________________________________

such as the injection of steam into the reservoir, increases its
temperature (making the oil less viscous) or alters its other
characteristics. Shell's definition classifies oil recoverable only by
means
of secondary or enhanced/tertiary production methods as tar sand oil.

In the petroleum industry, crude oil is commonly designated as "light,"
"medium," or "heavy," depending on its density; heavier oils are generally
more viscous. Primary production is effective with lighter, lower-
viscosity
oil, but more viscous oils require secondary or enhanced production
methods.

3. The Ruling was initially issued by one of DOE's predecessor agencies,
the Federal Energy Agency. By the time COWPTA was enacted, the
Ruling had been redesignated a DOE Ruling in the Code of Federal
Regulations."

                               3
Act (EPAA), Pub. L. No. 93-159, 87 Stat. 627 (1973)
(codified as amended at 15 U.S.C. SS 751-760h) (expired
1981), authorizing the President to regulate prices and
allocate supplies of crude oil and related petroleum
products.

In 1976, the Federal Energy Agency, which administered
EPAA, issued Ruling 1976-4 in response to "inquiries with
respect to the applicability of the [EPAA price and supply
controls] to the so-called synthetic fuels (or crude oil
substitutes) processed from oil shale, tar sands, coal, and
other natural deposits that must be mined[4] before the
crude oil substitute can be extracted." Department of
Energy Ruling 1976-4, 10 C.F.R. ch. II Rulings at 371.
According to FEA,

       at the time of enactment of the EPAA, domestic
       production of crude oil substitutes derived from oil
       shale, coal and tar sands was, as it is now, undertaken
       only for experimental purposes, and the synthetic
       products obtained thereby were not commercially
       available for use as refinery or petro-chemical
       feedstocks and were not expected to become
       commercially available for several years.

Id. at 372. Therefore, FEA concluded that synthetic fuels
processed from tar sands were not subject to the EPAA
regulatory scheme. See id. at 373.

The Emergency Petroleum Allocation Act proved
counterproductive. Price controls reduced incentives to
produce oil domestically and increased domestic oil
consumption overall, making America more dependent on
expensive imported oil. See Atlantic Richfield Co. v. United
States Dep't of Energy, 655 F.2d 1118, 1121 (Temp. Emer.
Ct. App. 1981). Oil prices fell in real terms after 1975, but
world oil prices doubled in 1979, when the Iranian
revolution severely curtailed oil exports. See Allison, supra,
at 705-06. The Carter administration announced in 1979 it
would phase out price controls, dramatically increasing
_________________________________________________________________

4. Tar sand oil can be produced by mining the tar sand and
subsequently separating the oil from the mined rock through physical
and chemical processes.

                               4
domestic producers' short-term profits. See H.R. No. 96-
304, at 5-7 (1979), reprinted in 1980 U.S.C.C.A.N. 587,
592-94. For this reason, Congress responded to the price
decontrols with the Crude Oil Windfall Profit Tax Act. Title
I ("Windfall Profit Tax on Domestic Crude Oil") imposed an
excise tax on revenue from producer sales of crude oil,
designed to capture the windfall profit. See 26 U.S.C.
SS 4986-98 (1982) (repealed 1988). To avoid suppressing
the domestic oil supply, new production and other
production considered sensitive to price fluctuations were
taxed at lower rates or exempted. See id.SS 4987(b), 4991-
93; S. Rep. No. 96-394, at 2 (1979), reprinted in 1980
U.S.C.C.A.N. 410, 414. More importantly for our purposes,
Title II ("Energy Conservation and Production Incentives")
sought to reduce American dependence on imported oil by
various means, including a tax credit "for producing fuel
from a nonconventional source." 26 U.S.C.A. S 29 (West
Supp. 1999) (as amended 1981, 1983, 1984, 1986, 1988,
1990, 1992, and 1996) (originally designated S 44D).5
_________________________________________________________________

5. Credit for producing fuel from a nonconventional source

       (a) Allowance of credit.--There shall be allowed as a credit
against
       the tax imposed by this chapter for the taxable year an amount
       equal to--

       (1) $3, multiplied by

       (2) the barrel-of-oil equivalent of qualified fuels--

        (A) sold by the taxpayer to an unrelated person during the
       taxable year, and

        (B) the production of which is attributable to the taxpayer.

       . . . .

       (c) Definition of qualified fuels.--For purposes of this section--

       (1) In general.--The term "qualified fuels" means--

        (A) Oil produced from shale and tar sands

       . . . .

       (f) Application of section.--This section shall apply with respect
to
       qualified fuels--

       (1) which are--
       (A) produced from a well drilled after December 31, 1979, and
      before January 1, 1993

26 U.S.C.A. S 29.

                              5
Among the fuels qualified to receive the credit was "oil
produced from shale and tar sands" through wells drilled
between January 1, 1980 and December 31, 1992. Id.
SS 29(c)(1)(A), (f)(1)(A).

B

In 1983 and 1984, the tax years in question, Shell
Petroleum, Inc. and certain subsidiary corporations owned
working interests in properties in the Midway Sunset Field,
Kern County, California. Part of the Midway Sunset Field
lies over a reservoir known as "the Potter Sand formation"
or "Potter Sands." For over a decade Shell had been
extracting oil from Potter Sands through two steam
injection techniques (steam soak, begun in 1963, and
steam flood, begun in 1971). By 1980, both were well
established and widely accepted enhanced recovery
techniques in the petroleum industry.6

In its 1983 and 1984 tax returns, Shell did not seek the
nonconventional source tax credit for Potter Sands oil, but
in 1991 Shell filed amended tax returns claiming credits of
$5,351,150 for Potter Sands oil produced during 1983 and
1984 from wells drilled after December 31, 1979. The tax
credits were denied and Shell timely filed suit. Relying in
part on the "instructive" analysis of Texaco Inc. v.
Commissioner, 101 T.C. 571 (1993),7 the District Court, as
_________________________________________________________________

6. The record does not disclose whether any oil was produced from Potter
Sands during 1983 and 1984 other than through steam injection, but
Shell does not claim to have used any technology that was not well
established in 1980.

7. Texaco argued certain high-viscosity crude oil it had produced was tar
sand oil. The Tax Court accepted that when COWPTA was enacted "tar
sand oil" was "generally understood" within the petroleum industry as oil
that "could not be economically produced through a well using only
primary recovery methods," see Texaco, 101 T.C. 575-76, but rejected
that definition for two reasons. First, Congress sought to subsidize
"alternative energy sources [that] typically involve new technologies." S.
Rep. No. 96-394, at 87, reprinted in 1980 U.S.C.C.A.N. at 496. Crude oil
produced with technology widely available when the credit was enacted,
the Texaco court reasoned, was not such an energy source. See Texaco,
101 T.C. 576-77. Second, Title I defined oil produced using tertiary

                               6
noted, entered judgment for the United States. See Shell,
996 F. Supp. at 371. Shell now appeals.8

As we will discuss, Title I of COWPTA establishes that
Shell's Potter Sands oil is crude oil. But the structure of the
statute and the legislative history establish that crude oil is
not tar sand oil. Therefore, Shell's oil cannot be tar sand
oil. Furthermore, the legislative history establishes that the
nonconventional source tax credit was intended to foster
new energy technologies, whereas Shell's Potter Sands oil
was produced in 1983 and 1984 using widely available
means of production.

II

" `Where . . . resolution of a question of federal law turns
on a statute and the intention of Congress, we lookfirst to
the statutory language and then to the legislative history if
the statutory language is unclear.' " Murphy v. Dalton, 81
F.3d 343, 350 (3d Cir. 1996) (quoting Blum v. Stenson, 465
U.S. 886, 896 (1984)). As noted, COWPTA does not define
"oil produced from tar sands," but "where Congress has
used technical words or terms of art, it is proper to explain
them by reference to the art or science to which they are
appropriate." Corning Glass Works v. Brennan, 417 U.S.
188, 201 (1974) (internal quotation marks and alterations
_________________________________________________________________

production methods available in 1980 as crude oil subject to the windfall
profit tax. But the discussion of Title I in the legislative record
indicated
that Congress considered "oil produced from tar sands" to be synthetic
petroleum, which Congress distinguished from crude oil. Therefore, the
Tax Court concluded that oil producible using tertiary recovery methods
could not be tar sand oil unless Congress had intended to give different
meetings to the term "oil produced from tar sands" as used in the text
of Title II and in the Title I Committee Reports, an unlikely scenario.
See
id. at 579-80.

8. The District Court had original jurisdiction under 28 U.S.C.A.
S 1346(a)(1) (West 1993). We have appellate jurisdiction under 28
U.S.C.A. S 1291 (West 1993). Questions of statutory interpretation are
reviewed de novo. See United States v. West Indies Transport, Inc., 127
F.3d 299, 307 (3d Cir. 1997). Findings of fact made following a bench
trial are reviewed for clear error. See Cooper v. Loper, 923 F.2d 1045,
1049 (3d Cir. 1991).

                               7
omitted). We ordinarily look to the meaning of a statutory
term at the time the statute was adopted. See MCI
Telecomm. Corp. v. American Tel. & Tel. Co., 512 U.S. 218,
228 (1994) (explaining that "the most relevant time for
determining a statutory term's meaning" is the time when
the statute became law); see also McDermott Int'l, Inc. v.
Wilander, 498 U.S. 337, 342 (1991) (interpreting statute as
of the date of its passage); Perrin v. United States, 444 U.S.
37, 42 (1979) (same). In this case, the District Court did
not rely on the industry understanding of "tar sand oil," in
part because "[t]he testimony offered at trial suggests that,
in fact, there was no industry consensus regarding a
definition of tar sands in 1980 when Section 29 was
enacted." Shell, 996 F. Supp. at 369. 9 Shell contests the
court's factual finding and argues that, even in the absence
of an industry consensus, the court should have limited
itself to selecting among definitions that were acceptable to
some petroleum experts in 1980.

A

Contending the District Court misunderstood its theory
of the case, Shell contests the court's finding there was no
consensus definition of "tar sand oil" in 1980. The District
Court described Shell's definition of tar sand oil as

       [a]ny consolidated or unconsolidated rock (other than
       coal, oil shale, or gilsonite) that either: (1) contains a
       hydrocarbonaceous material with a gas-free viscosity,
       at original reservoir temperature, greater than 10,000
       centipoise,[10] or (2) contains a hydrocarbonaceous
       material and is produced by mining or quarrying.

Shell, 996 F. Supp. at 369. At trial, Shell referred to this
_________________________________________________________________

9. The Texaco Court, on a different record, found that "no single
definition of tar sands was universally recognized" when COWPTA was
enacted but that the industry "generally understood" the term to refer to
oil too viscous to be produced economically using only primary
production techniques. Texaco, 101 T.C. 573.

10. Within the petroleum industry, viscosity is measured in centipoise
(cp). The viscosity of water is approximately 1 cp, while that of molasses
is 7,000 cp.

                               8
definition as the "viscosity standard" and on appeal calls it
the "quantitative standard." Shell concedes this standard
was not generally accepted until 1983 but asserts that, in
1980, petroleum engineers agreed that "tar sand oil" was oil
too viscous to be produced using primary production
methods (the "primary production definition"). Furthermore,
Shell maintains that petroleum experts in 1980 were able
to identify tar sand and tar sand oil by inspection. Shell
calls this experience-based identification of tar sand oil the
"qualitative standard." According to Shell, the viscosity
standard was a conservative quantification of the earlier
primary production and qualitative definitions. 11 Because
the trial court made no findings with respect to the other
proposed definitions or their relationships to the viscosity
standard,12 Shell seeks a remand to determine whether the
qualitative or the primary production definition was widely
accepted by the industry in 1980 and whether the Potter
Sands oil meets those definitions.

But Shell did not properly assert these additional
industry definitions at trial. In the Pretrial Order, entered
three days before trial, Shell listed only two "Issues of Law
Which Remain to Be Litigated":

       (1) Whether the consensus definition of tar sand oil as
       having a viscosity greater than 10,000 centipoise,
       measured gas-free, at original reservoir temperature,
       identifies "oil produced from . . . tar sand" under 26
       U.S.C. S 29 in 1983 and 1984?

       (2) Whether FEA ruling 1976-4 . . . has any utility in
       identifying "oil produced from . . . tar sand" under 26
       U.S.C. S 29?
_________________________________________________________________

11. The Texaco court found the quantitative viscosity definition to be
"consistent with the oil and gas industry's definition of tar sands as of
April 1980," when COWPTA was enacted. See Texaco, 101 T.C. 574.

12. The District Court discussed the viscosity standard at length but did
not mention the qualitative or primary production definitions. The court
supported its finding that there was no consensus definition in 1980
with citations to testimony by a Shell expert and to a Shell Proposed
Finding of Fact, see Shell, 996 F. Supp. at 369, which discussed the lack
of agreement on a quantitative distinction between tar sand oil and
heavy oil.

                               9
Shell Petroleum, Inc. v. United States, No. 93-508, slip op. at
15 (D. Del. Aug. 24, 1995) (Pretrial Order) (first and third
ellipsis in original). The pretrial order controls the
subsequent course of the trial unless modified to prevent
manifest injustice. See Fed. R. Civ. P. 16(e); Hassan v.
Stafford, 472 F.2d 88, 95 (3d Cir. 1973). This order was
never modified, nor did Shell request a modification.
Indeed, Shell's opening statement confirmed to the court its
theory of the case:

       [W]e will provide testimony that will show that the
       10,000 centipoise definition of tar sand oil was the
       subject of considerable discussion, considerable
       thought among industry experts and knowledgeable
       Government officials prior to 1980 and in the--
       throughout the year, the early 1980's.

        And the point is here that, although tar sand experts
       knew what tar sands were, there was no precise and
       generally acceptable demarcation between tar sand oil
       and other heavy oils.

The statement does not advance the theories Shell now
proposes.

Shell has directed our attention to passages in the
pretrial order, to passages in briefs submitted to the
District Court, and to certain testimony elicited without
objection at trial13 in which it claims it raised its other
definitions. Generally, pretrial orders are liberally construed
to permit the parties to advance their cases, see United
States Gypsum Co. v. Schiavo Bros., 668 F.2d 172, 181
n.12 (3d Cir. 1981), and an issue can be tried by consent
when testimony relevant to the issue is introduced without
objection, see Douglas v. Owens, 50 F.3d 1226, 1236 (3d
_________________________________________________________________

13. Many of these passages are themselves not properly before us,
because Shell has not included them in the appellate record. The
appellant is required to provide a record to support the claims it makes
on appeal. See Fed. R. App. P. 10(b), 11(a); Scarfo v. Cabletron Sys.,
Inc.,
54 F.3d 931, 963 (1st Cir. 1995); Schmid v. United Bhd. of Carpenters,
827 F.2d 384, 386 (8th Cir. 1987); United States v. Hart, 729 F.2d 662,
671 (10th Cir. 1984). Based on the excerpts Shell has quoted to us, the
passages outside the appellate record on which Shell relies are no
stronger than those in the record.

                               10
Cir. 1995). But a party still must unequivocally put its
position before the trial court at a point and in a manner
that permits the court to consider its merits. See Keenan v.
City of Philadelphia, 983 F.2d 459, 471 (3d Cir. 1992)
("[T]he crucial question regarding waiver is whether
defendants presented the argument with sufficient
specificity to alert the district court"); Portis v. First Nat'l
Bank, 34 F.3d 325, 331 (5th Cir. 1994) ("The raising party
must present the issue so that it places the opposing party
and the court on notice that a new issue is being raised.").
We believe that Shell did not raise its primary production or
qualitative definitions in an unequivocal manner. 14
_________________________________________________________________

14. For instance, Shell noted in the section of the pretrial order
entitled
"Statement of What Plaintiffs Expects [sic] to Prove,"

         During 1980, the Viscosity Standard became DOE's standard for
         distinguishing between tar sand oil and other heavy oils. Prior to
         adoption of the Viscosity Standard in 1980, Defendant's agency
         DOE, and its predecessor the Bureau of Mines, relied on physical
         inspection of core and oil samples to identify tar sand. Shell's
Potter
         Sands and the oil produced therefrom are tar sands and tar sand
         oils under the 1980 DOE practices.

In this passage, Shell asserted that DOE, but not the petroleum industry
as a whole, identified tar sand using Shell's qualitative standard. Shell
did not claim its Potter Sands oil satisfied the qualitative standard: it
stated that its oil was tar sand oil according to"the 1980 DOE
practices," an ambiguous phrase which could have referred either to the
qualitative standard or to the quantitative viscosity standard, allegedly
adopted in 1980. But statements made in the same section of the
pretrial order suggest that Shell was advancing the quantitative standard
at trial:

         Tar sand is rock containing crude oil with a viscosity exceeding
         10,000 cp measured gas-free at original reservoir temperature. . .
.

          The consensus of industry and the United States government in
         1980 was that an agreed terminology for tar sands oil to adequately
         distinguish it from other heavy oils was needed. . ..

Here, Shell explicitly urges the quantitative standard on the court and
acknowledges that the standards in use in 1980 were unacceptable to
the consensus of petroleum experts. Even a liberal interpretation of this
language will not embrace the position Shell takes on appeal.

Shell was more explicit in its post-trial proposedfindings of fact and
conclusions of law, stating, e.g., "The degree of viscosity of tar sand
oil

                               11
We have frequently noted "the well-established rule that
absent compelling circumstances an appellate court will not
consider issues that are raised for the first time on appeal."
Patterson v. Cuyler, 729 F.2d 925, 929 (3d Cir. 1984).15
"This general rule applies with added force where the timely
raising of the issue would have permitted the parties to
develop a factual record," because we cannot know on
appeal what evidence the adverse party would have
presented or brought out through cross-examination.
Harris v. City of Philadelphia, 35 F.3d 840, 845 (3d Cir.
1994) (internal quotation marks omitted). Finding no
"compelling circumstances" requiring consideration of
_________________________________________________________________

was commonly expressed as oil that could not be commercially produced
through a well using primary recovery methods." Post-trial briefs are not
generally appropriate places to raise one's theory of the case. In any
event, this brief also fails to assert Shell's position clearly. The
sentence
just quoted was followed by an assertion that the industry shared "[a]
common understanding that the line of demarcation at which tar sand
oil became more viscous than heavy oil needed to be established
quantitatively" and was contained in a section entitled, "The Court may
consider the industry and government expert development of the 10,000
cp viscosity distinction between tar sand and other heavy oils in applying
the earlier enacted 26 U.S.C. S 29 for `oil produced from . . . tar
sands'."
Considering the post-trial findings of fact and conclusions of law in its
entirety, we conclude Shell continued to assert the viscosity standard
after trial.

As discussed infra, the testimony on which Shell relies could not
support the factual findings Shell proposes to seek on remand.
Furthermore, Shell explained to the District Court that the viscosity
standard emerged in 1983 out of ongoing industry discussion. The
evidence introduced regarding the pre-1983 standards was consistent
with this background information regarding the development of the
quantitative viscosity standard. Hence, neither the government nor the
court had reason to believe Shell was raising a new theory of the case.
See Douglas, 50 F.3d at 1236 ("[A]n issue has not been tried by implied
consent if evidence relevant to the new claim is also relevant to the
claim
originally pled, because the defendant does not have any notice that the
implied claim was being tried.").

15. Furthermore, to promote orderly trial procedures, appellate courts
are sensitive to the importance of respecting the pretrial order on
appeal.
See Correa v. Hospital San Francisco, 69 F.3d 1184, 1195 (1st Cir.
1995).

                               12
Shell's theories, we decline to exercise our discretion to do
so. See American Bearing Co. v. Litton Indus., 729 F.2d 943,
949-50 (3d Cir. 1984).

Furthermore, our review of those portions of the record
Shell has brought to our attention leads us to conclude
that the possibility the District Court would find the facts
as Shell describes them is remote. The strongest evidence
Shell has cited comes from a report by its expert, Dr.
Khalid Aziz, who wrote,

       Typically described [prior to 1980] as `extremely
       viscous,' the tar sand oil was further depicted as oil
       that could not be produced commercially on primary
       production. The literature most commonly describes
       `tar sand' as a naturally occurring rock formation
       containing a hydrocarbon so viscous that it cannot be
       economically produced through wells using only
       primary recovery methods.

But Dr. Aziz testified at trial,

       [P]rior to 1980, I did not see that there was a
       consensus in the industry as far as a precise definition
       of tar sand was concerned . . . .

        But by 1980 a consensus did start to build--did not
       reach a consensus point, but did start to build around
       the use of 10,000 centipoise. . . .

        In 1983, the definition of tar sands oil was well-
       established as the viscosity base definition that we
       have been talking about, viscosity of greater than
       10,000 centipoise at reservoir conditions on a gas-free
       basis. . . .

        . . . .

        [Before 1980, e]veryone knew that oils from tar sands
       were highly viscous. And I think people simply looked
       at the extreme and--looked at them as highly viscous,
       but they didn't know where to draw the line between
       tar sand oils and heavy oils. . . .

Dr. Aziz also confirmed at trial the accuracy of a statement
he had written in his report: "In 1980 the phrase`oil
produced from tar sands' was commonly understood to

                               13
mean all crude oil more viscous than heavy oil. However,
there was no universally-accepted precise distinction
between heavy oil and tar sand oil."

Similarly, Shell has called our attention to this testimony
of a former DOE petroleum engineer:

       The general description that [DOE] used of tar sand [in
       1979/1980] . . . was any rock containing a very
       viscous oil. And you could expand on that. In many
       cases we said it was too viscous to flow through the
       reservoir or to the well bore, or too viscous to be
       produced by primary recovery methods, for instance.

The witness was also asked how he identified tar sand
when he first began working with it in 1970 and replied, "I
looked at it and I knew it was tar sand." But on cross-
examination, the witness agreed that "in the industry, as of
April of 1980, there was no consensus definition of [sic]
distinguishing heavy oil from tar sand oil." Because Shell's
own experts testified there was no consensus definition of
tar sand oil in 1980, it is unlikely Shell could prevail on
remand. Where the possibility of a different outcome is
remote, remand for consideration of factual issues not
raised at trial is inappropriate. See Hormel v. Helvering, 312
U.S. 552, 558 (1941).

B

Assuming no definition was universally accepted in the
petroleum industry in 1980, Shell insists the District Court
should have limited itself to selecting one of the definitions
used by petroleum engineers at that time. In that regard,
Shell argues the congressional record should have been
consulted only for that limited purpose.

Reliance on expert definitions of terms of art is a sound
"general rule of construction," Massachusetts v. Blackstone
Valley Elec. Co., 67 F.3d 981, 986 (1st Cir. 1995), but Shell
has cited no authority supporting the proposition that,
where no definition of a term of art is broadly accepted in
the relevant technical field, a court is permitted only to
choose among rival expert definitions. Where technical
experts differ in their use of a term, the presumption that

                               14
Congress has adopted an industry definition grows weaker
and the courts will rely more heavily on other tools to
ascertain Congress's meaning. Thus, in Atlantic Mutual
Insurance Co. v. Commissioner, 523 U.S. 382, ___, 118 S. Ct.
1413 (1998), aff'g 111 F.3d 1056 (3d Cir. 1997), the
Supreme Court considered a property and casualty
insurer's challenge to the IRS's administrative
interpretation of "reserve strengthening" as used in the Tax
Reform Act of 1986 S 1023(e)(3)(B), reprinted in note
following 26 U.S.C.A. S 846 (West 1988). After concluding,
based on a review of the expert testimony at trial, that the
term had no established meaning in the field of property
and casualty insurance, the Court accorded Chevron
deference to the agency regulation without further reference
to insurance industry usage. See Atlantic Mutual, 118 S.Ct
at 1417 18. Here, there is no agency interpretation to defer
to, but we rely on traditional tools of statutory
interpretation in adopting the DOE definition. 16

III

We believe the definition of "tar sand oil" in DOE Ruling
1976-4 is the one most compatible with congressional
intent. As noted, Title I of COWPTA defines oil produced
using enhanced extraction techniques as crude oil. Shell's
definition, on the other hand, would categorize oil produced
using enhanced extraction techniques as tar sand oil.
Congress clearly distinguished tar sand oil from crude oil
and considered tar sand oil a crude oil substitute. Because
oil produced using enhanced extraction techniques, such
as Shell's Potter Sands oil, is not a crude oil substitute, it
could not qualify for the nonconventional source tax credit.
Furthermore, Shell's definition would categorize crude oil
produced with technologies widely available when COWPTA
was enacted as tar sand oil. But Congress enacted the
_________________________________________________________________

16. We note that in appropriate cases the Supreme Court has looked to
the legislative record to confirm that Congress intended to adopt the
technical definition of a term of art, see Louisiana Publ. Serv. Comm'n v.
FCC, 476 U.S. 355, 371-73 (1986); Corning Glass Works, 417 U.S. at
198-201, or has declined to accept a trade definition that conflicted with
the legislative history, see Idaho Metal Works v. Wirtz, 383 U.S. 190,
199-205 (1966).

                               15
nonconventional source credit to encourage the
development of new technologies that would produce crude
oil alternatives.

A

As noted, Shell's Potter Sands oil was produced through
steam injection, an enhanced (or tertiary) recovery method.
As the District Court's reading of the statute demonstrated,
oil produced using tertiary recovery methods (which the
statute calls "tertiary oil"), is crude oil subject to the
windfall profit tax imposed in Title I. See Shell, 996 F.
Supp. at 370.17 Shell does not dispute this conclusion. But
Shell contends that tertiary oil can be classified as both
crude oil and tar sand oil, arguing that its Potter Sands oil,
extracted through enhanced (tertiary) recovery methods, is
also tar sand oil eligible for the Title II tax credit. Relying on
_________________________________________________________________

17. For tax purposes, Congress divided crude oil into three tiers. See 26
U.S.C. S 4991(c)-(e). Tier 1 oil was taxed at the highest rate, tier 3 at
the
lowest. See id. SS 4987(b)(1), (3). Tier 3 oil included "incremental
tertiary
oil," id. S 4991(e)(4), defined (with qualifications and adjustments not
relevant here) as the difference between the amount of oil produced in a
month from a property using a "tertiary recovery project" and the
average monthly oil production from that property prior to passage of the
Act, id. S 4993(a)-(b). As we understand this provision, all oil produced
from a tertiary recovery project is tertiary oil, and any increase in
production after the Act was passed is incremental tertiary oil. Cf. 10
C.F.R. S 212.78(c) (1980) (defining "incremental crude oil"). Tertiary
recovery projects are those employing "tertiary recovery methods," see 26
U.S.C. SS 4993(c)(1)(B), (c)(2)(A), which include "steam drive injection"
and "cyclic steam injection," id. S 4993(d)(1), 10 CFR S 212.78(c) (1979).
The District Court found, and Shell does not contest, that these are the
procedures Shell used at Potter Sands. See Shell, 996 F. Supp. at 370
& n.4.

It is clear that all tertiary oil, and not just incremental tertiary oil,
is
taxable crude oil. There is no chemical distinction between incremental
and non-incremental tertiary oil and the statute specifies no way to
identify the incremental or non-incremental "part" of a month's
production. Furthermore, if non-incremental tertiary oil were not crude
oil, it would not be subject to the windfall tax, see 26 U.S.C. SS
4986(a),
4991(a), in which case only increases in production of tertiary oil would
be taxed, contrary to Congress's intent to stimulate new oil production,
see S. Rep. No. 96-394 at 27, reprinted in 1980 U.S.C.C.A.N. at 437.

                                16
the legislative history, the District Court found that
Congress did not consider crude oil to be tar sand oil, nor
would Congress have imposed an excise tax and granted a
tax credit to the same type of oil in the same statute.
Because Shell's Potter Sands oil was indisputably crude oil
subject to the windfall profit tax, we hold, like the District
Court, it cannot also be tar sand oil eligible for the tax
credit.

1

On this point, the legislative history is instructive. In its
report on Title I (imposing the windfall profit tax), the
Senate Finance Committee specified, "The term `crude oil'
. . . applies only to natural crude petroleum and does not
include synthetic petroleum, such as oil from shale or tar
sands." S. Rep. No. 96-394, at 56, reprinted in 1980
U.S.C.C.A.N. at 465. The Conference Committee similarly
explained, "The term `crude oil' . . . does not apply to
synthetic petroleum such as oil production from shale or
tar sands." H.R. Conf. Rep. No. 96-817, at 114 (1980),
reprinted in 1980 U.S.C.C.A.N. 642, 667. Based on this
legislative history, the District Court concluded,"Congress
explicitly distinguished crude oil from tar sands, and
understood tar sands to be a crude oil substitute." Shell,
996 F. Supp. at 370; accord Texaco, 101 T.C. 579.
Because Congress specified that oil extracted using
enhanced production techniques is crude oil, oil extracted
using enhanced production techniques cannot be tar sand
oil, a crude oil substitute.

Shell contends this legislative history should be
interpreted in light of expert testimony that tar sand oil in
its natural state is not synthetic oil but rather crude oil
that can be processed into synthetic oil. But the clear
import of the Committees' Reports is that all oil produced
from tar sands is synthetic petroleum, not crude oil.
Furthermore, because only crude oil is subject to the
windfall profit tax, see 26 U.S.C. SS 4986(a), 4991(a), the
intent behind the Committee Reports is to exempt tar sand
oil from the tax by specifying that it is not crude oil. But
according to Shell, the processing of tar sand oil into
synthetic oil is generally unnecessary in the continental

                               17
United States.18 Shell has proposed no reason why
Congress would exempt from the windfall profit tax the
production of tar sand oil that is later processed into
synthetic oil if the processing serves no useful purpose in
important oil-producing parts of the country. Finally, it is
worth noting that the Federal Energy Agency, in Ruling
1976-4, spoke of tar sand oil as a "so-called synthetic fuel[ ]
(or crude oil substitute)." 10 C.F.R. ch. II Rulings at 371.
This language supports the view that, when COWPTA was
enacted, tar sand oil was not generally considered to be
crude oil, subject to the windfall profit tax.

The District Court concluded that Congress did not
regard oil capable of extraction through enhanced
production methods as tar sand oil when COWPTA was
enacted. We agree. The statute establishes that tertiary oil
(oil extracted with enhanced production methods) is a type
of crude oil, but Congress, like the FEA, did not consider
tar sand oil to be crude oil. Therefore, tertiary oil cannot be
tar sand oil. As the District Court explained, under Shell's
interpretation, tertiary oil (oil produced by enhanced
recovery methods)

       would be taxed as crude oil and, therefore, excluded
       from the category of tar sands. That same oil, however,
       would be defined as tar sands under Section 29
       according to Shell's definition. This would result in two
       different definitions of tar sands under Title I and Title
       II. Clearly, this was not the intent of Congress.

Shell, 996 F. Supp. at 370-71 (footnote omitted).19 Because
_________________________________________________________________

18. Shell has represented, citing the testimony of its experts, that tar
sand oil is refined into synthetic crude oil primarily to permit it to
flow
through pipelines in cold weather, and that such refining is rare in the
continental United States because of our warmer climate.

19. Similarly, the Texaco court explained that, under the definition Shell
now advances,

        [h]igh viscosity crude oil produced using secondary and enhanced
       oil recovery methods would be characterized as crude oil (which
       does not include oil from tar sands) for purposes of title I, while
the
       same high viscosity crude oil would be characterized as oil
produced
       from tar sands for purposes of title II. While the reference to tar

                               18
Shell does not contest the District Court's finding that its
Potter Sands oil is tertiary oil, Shell's oil cannot be tar sand
oil eligible for the tax credit.

2

The logic and structure of the act also demonstrate that
crude oil is not tar sand oil. If oil producible using
enhanced recovery methods, including the oil produced at
Potter Sands, were classified both as crude oil and as tar
sand oil, it would be subject to the windfall profit tax and
also eligible for the nonconventional source tax credit. The
District Court declined to interpret the statute this way
"[a]bsent some evidence that Congress intended such an
anomalous result." Shell, 996 F. Supp. at 371. We agree.
See United States v. McKie, 112 F.3d 626, 631 (3d Cir.
1997) (discussing courts' "obligation to construe statutes
sensibly and avoid constructions which yield absurd or
unjust results").

Shell defends its interpretation by pointing out that
under COWPTA the windfall profit tax was phased out as
the price of oil fell whereas the nonconventional fuels credit
was phased in under the same conditions. Shell suggests
that the tax collected in years when oil prices were high
was to be used to finance the subsidy when oil prices fell.
Essentially, Shell suggests that the tax and credit together
functioned as a rough-and-ready producer price
stabilization scheme. But the legislative record is devoid of
any suggestion that Congress intended such a result.
Instead, the Senate Finance Committee explained that the
Act "uses a large part of the revenue from the windfall profit
tax to finance tax incentives for a wide range of alternate
sources of energy." S. Rep. No. 96-394, at 8, reprinted in
1980 U.S.C.C.A.N. at 419. It appears Congress wanted to
_________________________________________________________________

       sands in defining crude oil for purposes of title I is not
determinative
       in defining tar sands for purposes of title II, we do not think
that
       Congress would have used the term "tar sands" in fundamentally
       different ways within the same legislative enactment without
clearly
       expressing an intent to do so.

101 T.C. 580.

                               19
transfer windfall crude oil profits to producers of a distinct,
"alternate," class of energy sources. Furthermore, Shell
concedes that, on its reading of the statute, oil produced
from Potter Sands would have received both a tax and a
credit in 1981 and 1982. If Congress had sought to
stabilize producer prices for tar sand oil, we do not see why
Congress would have imposed a tax and provided a subsidy
in the same year.20 Therefore, we believe the District Court
correctly found that Congress did not intend to classify the
same oil as both taxable crude oil and tar sand oil eligible
for the tax credit. Since oil produced using enhanced
recovery methods, such as Shell's, was subject to the
windfall profit tax, it cannot have been eligible for the
nonconventional source tax credit.

3

In summary, Shell's proposed definition, unlike DOE's,
would classify oil producible through enhanced recovery
techniques as tar sand oil. Because this classification
would be contrary to the statutory scheme and to
congressional intent, the District Court properly adopted
the definition from DOE Ruling 1976-4.

B

Congress's explanation of the purpose of COWPTA
provides further reason to reject Shell's proposed definition.
As noted, Shell obtained crude oil from Potter Sands using
technologies already well established in 1980. But the
alternative fuel production credit was added by the Senate
Finance Committee "to encourage energy conservation and
production of alternate energy sources." S. Rep. No. 96-
394, at 6, reprinted in 1980 U.S.C.C.A.N. at 417. "These
alternative energy sources," the Committee explained,
_________________________________________________________________

20. We note that Congress provided targeted subsidies to tertiary oil in
Title I by taxing increases in tertiary production at the lower, tier 3
rate,
see supra n.17, and exempting altogether oil sold to finance tertiary
extraction projects by independent producers, see 26 U.S.C.
SS 4991(b)(4), 4994(c)(1), (c)(4)(A), (c)(4)(D); 10 C.F.R. S 212.78
(1980);
H.R. Conf. Rep. No. 96-817, at 93, reprinted in 1980 U.S.C.C.A.N. at
646.

                               20
"typically involve new technologies, and some subsidy is
needed to encourage these industries to develop to the
stage where they can be competitive with conventional
fuels. The information gained from the initial efforts at
producing these energy sources will be of benefit to the
entire economy." Id. at 87, reprinted in 1980 U.S.C.C.A.N.
at 496. Because continued use of a widely available means
of crude oil production is not an "initial effort[ ]" that will
stimulate the development of new energy technologies, we
agree with the District Court that oil producible with
tertiary extraction methods available in 1980, such as
steam injection, does not qualify for the nonconventional
source credit. See Shell, 996 F. Supp. at 367 ("[D]omestic
crude oil would not logically be categorized as an
alternative energy source. . . . Rather, [Congress]
endeavored to credit the production of alternative fuels or
so-called crude oil substitutes."); accord Texaco, 101 T.C.
577 ("[S]ection [29] was not intended to subsidize the
production of crude oil but, to the contrary, was intended
to encourage the development of crude oil substitutes.").

Shell maintains the District Court imposed a "new
technologies" requirement not found in the statute on those
seeking the tax credit. We disagree. The energy sources
eligible for subsidy are those specified in 26 U.S.C.A.
S 29(c)(1). Many of those sources were defined by Congress.
See id. S 29(c)(2)-(3); H.R. Conf. Rep. No. 96-817, at 138-41,
reprinted in 1980 U.S.C.C.A.N. at 689-93; S. Rep. No. 96-
394 at 87-88, reprinted in 1980 U.S.C.C.A.N. at 496-97. So
long as the energy produced is of one of the specified types,
the taxpayer is eligible for the credit, whether or not the
taxpayer used new technology. But where the definition of
an energy source is unclear, Congress's directive that the
eligible energy sources to be subsidized "typically involve
new technologies" assists us in interpreting the provision.
Congress's intent is best implemented through the DOE
definition, which excludes energy sources produced with
technologies already widely used or exploited when the Act
was passed.

                               21
IV

In this case, as the District Court noted, "[t]he definition
of `tar sands' contained in the [DOE] Ruling is completely
congruous with Congress' intent to both encourage the
development of new technologies and limit the Section 29
credit to crude oil substitutes that could not be obtained
using conventional methods." Shell, 996 F. Supp. at 367.
Shell points out that the DOE Ruling was issued in
response to "inquiries with respect to the applicability of
the [EPAA price and supply controls] to the so-called
synthetic fuels (or crude oil substitutes) processed from . . .
tar sands . . . and other natural deposits that must be
mined before the crude oil substitute can be extracted."
DOE Ruling 1976-4, 10 C.F.R. ch. II Rulings at 371. Shell
interprets this language to mean that FEA had received
inquiries involving only tar sand oil that was both extracted
from mined tar sand and processed into synthetic crude oil.
Shell argues that FEA adopted an artificially narrow
definition of "tar sands" in order to ensure that its Ruling
would exclude only such oil from EPAA regulation. We are
not convinced. It seems unlikely that FEA would have
knowingly propounded an inaccurate definition, even for a
limited purpose, rather than simply specifying that its
Ruling applied only to tar sand oil that is extracted from
mined tar sand and processed into synthetic crude oil. We
note that the Ruling's definition does not limit tar sands oil
to oil extracted from tar sands after mining. Therefore we
agree with the District Court in adopting the DOE Ruling's
definition of tar sands for purposes of the nonconventional
fuels tax credit.21
_________________________________________________________________

21. Shell also argues that Ruling 1976-4 is too obscure to be relied on
in defining "oil produced from tar sands." But the statute adopted
certain definitions contained in the EPAA regulations, such as "stripper
well," "newly discovered oil," "qualified tertiary recovery project,"
"tertiary
recovery method," "tertiary incentive revenue," "allowed expenses" (in
certain contexts), "front-end oil," "front-end tertiary project," and
"crude
oil", see 26 U.S.C. SS 4991(d)(1)(A), (e)(2), 4993(c)(1)(A), (d)(1)(A),
4994(c)(2)(C), (c)(3)(A), (c)(4)(B), (c)(4)(D), 4996(b)(1), (b)(8) and
also
specified that the "base level" used in defining incremental tertiary oil
is
to be "determined under rules similar to" EPAA regulations, see id.
S 4993(b)(1). In its report on the bill, the Senate Finance Committee
wrote, "Reference to the energy regulations also would be important
when the Secretary or producers must make determinations by analogy

                               22
V

For the foregoing reasons, we will affirm the judgment of
the District Court.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit
_________________________________________________________________

to the energy regulations, e.g., computing the base level for a tertiary
project," S. Rep. No. 96-394 at 57, reprinted in 1980 U.S.C.C.A.N. at
466-67, and endorsed administrative interpretations of the regulations,
see id., reprinted in 1980 U.S.C.C.A.N. at 467. We give due regard to
Ruling 1976-4, a DOE interpretation of the EPAA regulations, in
applying 26 U.S.C. S 29.

                               23