Gregory A. Napier, “Got Gas? A Comment on Shell Petroleum, Inc. v. United States.” JNREL Vol. 19, No.2

Comment By: Gregory A. Napier, Former Staff Member; Comment originally appeared in JNREL Vol. 19, No. 2.

Abstract by: Stephanie Wurdock, Staff Member

In 2004 the United States of America faced skyrocketing prices at the gasoline pumps for the second time in decades. The country first dealt with such monolithic price hikes during the 1973 oil embargo which placed stringent restrictions on gasoline distribution and usage. President Carter's administration began to phase such controls out in 1979 which led to Congress's enactment of the "Crude Oil Windfall Profit Tax Act of 1980" (COWPTA or Act). One of the Act's main tools was a tax credit for the use of shale and tar sand oils as alternatives sources of energy. However, the definition of those substances eluded documentation and resulted in a trilogy of cases involving Shell Petroleum, Inc. ("Shell") and the United States. The most recent of which being Shell Petroleum, Inc. v. United States, 319 F.3d 1334 (Fed. Cir. 2003).

When Shell was denied tax credit for oil it produced in California during 1983 and 1984, it filed suit against the United States and was defeated both in trial and on appeal. Strike one. The company made a second attempt in 1989 and was again denied the credit. In its opinion, the Shell II court mandated that in order to qualify for the credit, a company must physically inject new technology into the oil well or otherwise use that technology to remove the highly viscous hydrocarbons from the well. Strike two. Unfazed by the court's ruling, Shell moved forward with its third suit, unsuccessfully arguing that the court's previous definitions of shale oil and tar sand oil were erroneous. Strike three. And Shell is out.

So who is right? The main question of these ground-breaking cases is whether or not Congress intended to exclude from tax credit eligibility technologies that already existed in 1980 at the time of the Act. The courts in the Shell series relied upon public policy and congressional intent to support their rulings that it did. However, a closer look at those same sources reveals that Congress may have intended to do no such thing. In fact, the Shell definitions not only seem to sacrifice any semblance of a scientific basis, but also undermine the overarching intent of Congress in creating tax incentives – to encourage domestic oil.

The impact of the Shell decisions is not a gentle one. It has numerous negative implications for the industry and the state of Alaska – the new target for large-scale drilling. The credit also creates opportunities for abuse in both direct and indirect ways. Finally, in setting such a high standard to receive the tax credit, these decisions fail to encourage or achieve domestic tar sand oil productions.

Perhaps, though the court set a couple things right by getting a lot of things wrong. Realizing that the tax credit offered potential for abuse and little else, the court preened its applicability to avoid its ineffectiveness thereby preventing such abuses.