Devon Energy Prod. Co. L.P. v. United States Dep't of the Interior

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DEVON ENERGY PRODUCTION COMPANY, L.P., et al., Plaintiffs, v. UNITED STATES DEPARTMENT OF THE INTERIOR, Defendant.

No. CIV-20-053-D

United States District Court, W.D. Oklahoma

May 9, 2024

MEMORANDUM OF DECISION

TIMOTHY D. DeGIUSTI Chief United States District Judge.

This matter comes before the Court for the disposition of Plaintiffs' action to review a final decision of the Department of the Interior under the Administrative Procedures Act (“APA”), 5 U.S.C. § 706. For reasons that follow, the Court finds that Plaintiffs have not shown reversible error and that the Department's decision should be affirmed.

Factual and Procedural Background

Plaintiffs seek judicial review of a final determination by the Department regarding royalties due on gas production from federal lands in New Mexico. Specifically, Plaintiffs challenge the Order to Perform Restructured Accounting and Pay Additional Royalties (the “Order”) issued April 15, 2016, by the Department's Office of Natural Resources Revenue (“ONRR”) under the Federal Oil and Gas Lease Royalty Simplification and Fairness Act of 1996, 30 U.S.C. § 1724, and applicable regulations.^[1]The Order includes an explanation schedules, and other attachments, and appears in the administrative record (“AR”) at pages AR_0161 through AR_0270. The Order obliges Plaintiffs 1) to pay $2,841,264.58 owed following the disallowance of transportation and processing costs calculated in Plaintiffs' royalty reporting records, and 2) to perform a restructured accounting for a five-year sales period from January 1, 2004, through December 31, 2008, and pay any additional royalties. The Order became a final agency action under a separate order issued September 27, 2019, by the Interior Board of Land Appeals.^[2] Plaintiffs timely initiated this action. See 30 U.S.C. § 1724(j).

The Complaint for Judicial Review [Doc. No. 1] states the following claims: the Order violates the statutory requirements of 30 U.S.C. § 1724(d)(4)(B)(i) for issuance of a restructured accounting order where the Department demonstrates “repeated, systemic reporting errors” for a significant number of leases or reports (¶¶ 2-3, 35-40); the Order exceeds the Department's authority and is arbitrary and capricious (¶¶ 42, 44, 46); and the Department violated the Due Process Clause by denying Plaintiffs access to the information they needed to take authorized deductions and to challenge the finding of underpayments (¶¶ 4 49-50). Under an agreed schedule, the Department has submitted the voluminous administrative record, and Plaintiff Devon Energy Production Company, L.P. has provided a supplement. See Order Granting Unopposed Mot. Suppl Admin. R. [Doc. No. 28]. The parties have fully briefed the issues presented. See Pls.' Am. Opening Br. [Doc. No. 32]; Def.'s Resp. Br. [Doc. No. 33]; Pls.' Reply Br. [Doc. No. 34].^[3]Upon consideration of the record, the parties' arguments, and the governing law, the Court issues its ruling.

Standard of Review

“Under the APA, [a court] cannot set aside an agency decision unless it fails to meet statutory, procedural or constitutional requirements, or unless it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Sac & Fox Nation v. Norton, 240 F.3d 1250, 1260 (10th Cir. 2001); see 5 U.S.C. § 706(2)(A)-(D).

The scope of review under the “arbitrary and capricious” standard [of § 706(2)(A)] is narrow and a court is not to substitute its judgment for that of the agency. Nevertheless, the agency must examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made. In reviewing that explanation, we must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment.

Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (internal quotations and citations omitted). As summarized by the Tenth Circuit:

An agency's decision is arbitrary and capricious if the agency (1) entirely failed to consider an important aspect of the problem, (2) offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise, (3) failed to base its decision on consideration of the relevant factors, or (4) made a clear error of judgment.

OXY USA, Inc. v. U.S. Dep't of Interior, 32 F.4th 1032, 1043-44 (10th Cir. 2022) (internal quotations omitted). The arbitrary and capricious standard also requires an agency's decision to be “supported by ‘substantial evidence' in the administrative record.” Pennaco Energy, Inc. v. U.S. Dep't of Interior, 377 F.3d 1147, 1156 (10th Cir. 2004). “Substantial evidence is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” Id. (quoting Doyal v Barnhart, 331 F.3d 758, 760 (10th Cir. 2003)).

“When courts consider [APA] challenges, an agency's decision is entitled to a presumption of regularity, and the challenger bears the burden of persuasion.” Biodiversity Conservation All. v. Jiron, 762 F.3d 1036, 1060 (10th Cir. 2014) (internal quotation omitted); see N.M. Health Connections v. U.S. Dep't of Health & Hum. Servs., 946 F.3d 1138, 1162 (10th Cir. 2019). “Where challenged agency decisions ‘involve technical or scientific matters within the agency's area of expertise,' [judicial] deference to the agency is ‘especially strong'.” Wild Watershed v. Hurlocker, 961 F.3d 1119, 1132 (10th Cir. 2020) (quoting Biodiversity, 762 F.3d 1036 at 1060); accord Dine Citizens Against Ruining Our Env't v. Haaland, 59 F.4th 1016, 1029-30 (10th Cir. 2023).

Facts Shown by the Record ^[4]

Plaintiffs hold lease rights to extract and sell natural gas from federal lands and, in exchange, must pay royalties to the federal government on the value of the gas produced and sold. As lessees, Plaintiffs are statutorily required to report and pay the royalties due.^[5] This dispute arises from ONRR's disallowance of deductions that Plaintiff reported over a five-year period, which reduced their royalty payments. In the Order, ONRR found that Plaintiffs calculated deductions for transportation and processing costs using a “bundled” rate paid to third-party providers for multiple services, without segregating allowable costs from costs that cannot be deducted under federal law. See AR0163. The crux of the dispute is Plaintiffs' position that they were not legally required, or should not be required, to separate or “unbundle” the fees for royalty reporting. Id. Plaintiffs base their position on federal regulations, a 1998 settlement agreement that resolved a prior underpayment dispute, and due process arguments.

The genesis of the Order was an audit conducted by the State of New Mexico Taxation and Revenue Department (the “State”) under its federally delegated authority.^[6]The State audited royalties due on Plaintiffs' gas production from January 1, 2004, through December 31, 2008, under leases committed to three unitization agreements: No. 8920009290 (Mesa Verde); No. 892000929B (Fruitland Coal); and No. 891000569C (San Juan). The Mesa Verde agreement concerned conventional gas, and the other two agreements concerned coalbed methane gas.

The Order followed a series of audit letters issued by the State, to which Plaintiffs responded. Ultimately, the State and Plaintiffs agreed on the amount of royalties due prior to deducting transportation and processing allowances. AR_0163. The sole disputed issue, involving bundled fees, is described in the Order as follows:

Devon is a party to agreements with Enterprise Field Services (EFS) and Williams Field Services (WFS). In the agreement, EFS and WFS provide gas gathering, dehydration, treating, and processing services for a single (bundled) fee stated as an amount per MCF. The services provided include functions required to place gas in marketable condition, which are not allowable deductions when computing Federal royalties due. The fees attributable to disallowed functions must be separated (unbundled) and excluded from the transportation and processing cost to correctly calculate allowed deductions from Federal royalties to be paid.

AR_0163. After identifying the applicable regulations that allegedly support a requirement to unbundle a third-party rate claimed as transportation and processing allowances, ONRR stated its position as follows:

When submitting and paying royalties on Form ONRR CMP-2014, you may not take 100 percent of “bundled” gas transportation and processing fees as an allowance if that fee includes non-allowable costs to place gas into marketable condition. You must show that any costs that you deduct were incurred only to transport and process gas and were not necessary to place your gas in marketable condition.

AR_0169 (citing Burlington Res. Oil & Gas Co. v. U.S. Dep't of Interior, No. 13-CV-0678-CVE-TLW, 2014 U.S. Dist. LEXIS 100900, *20 (N.D. Okla. July 24, 2014)). The Order stated the following corrective action:

When you pay a bundled rate under an arm's-length contract for transportation and processing costs, you must unbundle the transportation system and processing plant costs to separate allowable transportation and processing costs from non-allowable costs of placing gas in marketable condition. You may then deduct the allowable transportation and processing costs, but not the non-allowable costs of placing gas in marketable condition.

You must document the method and sources of information that you use to unbundle and submit your unbundling methodology and supporting documentation to the Unbundling Mailbox at onrrunbundling@onrr

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