Shell Oil Co. v. Babbitt

• Decision Date: 19 September 1997
• Docket Number: No. 97-7035,97-7035
• Citation: 125 F.3d 172
• Parties: 138 Oil & Gas Rep. 41, 28 Envtl. L. Rep. 20,134 SHELL OIL COMPANY, Appellant, v. Bruce BABBITT; The United States Department of the Interior.
• Court: U.S. Court of Appeals — Third Circuit

Page 172

125 F.3d 172

138 Oil & Gas Rep. 41, 28 Envtl. L. Rep. 20,134

SHELL OIL COMPANY, Appellant, v. Bruce BABBITT; The United States Department of the Interior.

No. 97-7035.

United States Court of Appeals Third Circuit.

Argued Aug. 14, 1997.

Decided Sept. 19, 1997.

L. Poe Leggette (argued), Jackson & Kelly, Washinton, DC, for Appellant.

Lois J. Schiffer, Assistant Attorney General, Gregory M. Sleet, U.S. Atty, Patricia C. Hannigan, Asst. U.S. Atty., Wilmington, DE, J. Carol Williams, Michael J. Robinson, Robert L. Klarquist (argued), Attorneys, Department of Justice, Environment & Natural Resources Division, Geoffrey Heath, Lisa K. Hemmer, Sarah L. Inderbitzin, Office of the Solicitor, Department of the Interior, Washington, DC, for Appellee.

Before: STAPLETON, GREENBERG and COWEN, Circuit Judges.

OPINION OF THE COURT

GREENBERG, Circuit Judge.

This case is before this court on an appeal by Shell Oil Co. ("Shell") from an order of the district court which sustained an order of the Department of the Interior Minerals Management Service ("MMS") requiring Shell to produce certain documents. The district court had jurisdiction under 28 U.S.C. § 1331, and we have jurisdiction under 28 U.S.C. § 1291. This appeal turns on issues of statutory and regulatory interpretation.

I. FACTUAL AND PROCEDURAL HISTORY

Congress has empowered the Department of the Interior to enter into and administer leases to develop oil and gas resources on federal lands. Congress enacted the Federal Oil and Gas Royalty Management Act ("FOGRMA") in 1983 to strengthen the ability of the Secretary of the Interior ("Secretary") to collect oil and gas royalties by developing a comprehensive system of royalty management in order properly to collect and account for all royalties. 30 U.S.C. §§ 1701 et seq. FOGRMA authorizes the Secretary to "audit and reconcile, to the extent practicable, all current and past lease accounts for leases of oil and gas and take appropriate actions to make additional collection or refunds as warranted." Section 101(c)(1), 30 U.S.C. § 1711(c)(1). Section 103(a) of FOGRMA, 30 U.S.C. § 1713(a), deals with maintenance of information and production of records:

A lessee, operator, or other person directly involved in developing, producing, transporting, purchasing, or selling oil or gas subject to this chapter through the point of first sale or the point of royalty computation, whichever is later, shall establish and maintain any records, make any reports, and provide any information that the Secretary may, by rule, reasonably require for the purposes of implementing this chapter or determining compliance with rules or orders under this chapter. Upon the request of any officer or employee duly designated by the Secretary or any State or Indian tribe conducting an audit or investigation pursuant to this act, the appropriate records, reports, or information which may be required by this section shall be made available for inspection and duplication by such officer or employee, State, or Indian tribe.

Section 3(12) of FOGRMA defines "person" as "any individual, firm, corporation, association, partnership consortium, or joint venture." 30 U.S.C. § 1702(12). Thus, Shell as a corporation can be a person within section 103(a) and its implementing regulations.

The Secretary has delegated royalty enforcement responsibilities to the Director of the MMS. MMS regulations require "each lessee, operator, revenue payor or other person [to] make and retain accurate and complete records necessary to demonstrate that payments of rentals, royalties ... and other payments ... are in compliance with lease terms, regulations, and orders." 30 C.F.R. 212.51(a). The "lessee, operator, revenue payor, or other person required to keep records" must maintain them for six years and make them available for inspection. 30 C.F.R. § 212.51(b)-(c).

Shell Western E & P, Inc. ("Shell Ex") is primarily a producer of oil and is a wholly owned subsidiary of Shell, which primarily markets oil. App. at 175, 181. Shell Ex produces oil from land within 32 federal leases in California issued under the Mineral Lands Leasing Act, 30 U.S.C. § 181, and pays royalties to the federal government on the oil produced. ¹ App. at 181. Shell Ex sells much of this oil to Shell pursuant to an agreement dated January 1, 1985, under which Shell pays its posted prices for that geographical area or uses third-party price postings, as was done here because Shell does not post prices for California. App. at 175-76, 290.

The Secretary can delegate audit authority for federal leases to the state in which they are located. 30 U.S.C. § 1735(a). Pursuant to this delegation of authority, the California State Controller's Office ("State") reviewed Shell Ex's onshore leases in California for the period from January 1, 1985, to December 31, 1988. The State requested that Shell provide records relating to its disposition of federally derived oil purchased from Shell Ex, but Shell declined to comply with this request on the basis that the transactions between Shell Ex and Shell constituted the point of royalty computation. App. at 181-82.

On April 3, 1990, the Denver office of the Royalty Compliance Division of MMS ordered Shell to turn over the documents requested by the State, which included all documents regarding the disposition of federally derived oil, the sales contracts and verification of all revenue from sales of this oil to third parties, and a detailed schematic showing the pipeline system used to transport this oil. App. at 168-69. MMS stated in the order that data regarding Shell's arm's-length sales of the oil were necessary to determine whether the non-arm's length price Shell paid Shell Ex was acceptable for royalty valuation purposes.

Shell appealed this order to the Director of MMS, who sustained the order of the Denver office. The Director ruled that the gross proceeds rule ² required that Shell be considered the "lessee" whenever it resold oil purchased from Shell Ex, and thus the requested documents were necessary to determine the proper royalty valuation. App. at 183-84.

Shell then appealed from the Director's decision to the Interior Board of Land Appeals ("IBLA") which originally ruled in its favor. Shell Oil Co., 130 IBLA 93 (1994). In its opinion, the IBLA ruled that under the March 1, 1988 revisions to the MMS regulations, Shell's proceeds are only relevant if Shell is a "marketing affiliate" for Shell Ex. See 30 C.F.R. § 206.102(b)(1)(i) (when oil sold to marketing affiliate, lessee's "gross proceeds" is value obtained by marketing affiliate in arm's-length sale of oil). The IBLA found that Shell was not a marketing affiliate of Shell Ex, as defined in 30 C.F.R. § 206.101, and thus information relating to Shell's proceeds was not relevant. 130 IBLA at 96-97.

The IBLA reversed itself after MMS petitioned for reconsideration. Shell Oil Co. (On reconsideration), 132 IBLA 354 (1995). The IBLA ruled that the marketing affiliate issue was irrelevant to whether the gross proceeds rule applied and information regarding Shell's proceeds from the oil was necessary to determine the value of production. Id. at 356-58. The IBLA later denied Shell's petition to reconsider this decision.

Shell then filed this suit in the district court in Delaware seeking a declaration that MMS could not order it to produce the documents in question. Thus, Shell requested an order vacating the MMS's order. The Secretary of the Interior unsuccessfully sought to have the suit dismissed or transferred on venue grounds. Shell Oil Co. v. Babbitt, 920 F.Supp. 559 (D.Del.1996). The government then filed a counterclaim seeking enforcement of the MMS order. After both parties moved for summary judgment, the court ruled in favor of the government and upheld the IBLA's decision on November 14, 1996. Shell Oil Co. v. Babbitt, 945 F.Supp. 792 (D.Del.1996). The district court held that FOGRMA section 103(a), 30 U.S.C. § 1713(a), defined only the class of persons from which the Secretary can obtain documents and did not limit, as Shell argued, the type of documents to be maintained. The court also found that Shell was covered by 30 C.F.R. § 212.51 as an "other person" despite the fact that Shell did not have paying or operating responsibility on the lease.

Shell then filed a timely notice of appeal. Shell now argues that neither section 103(a) of FOGRMA nor 30 C.F.R. § 212.51 gives the Secretary authority to seek documents relating to events after the first sale of oil from a federal lessee, regardless of whether the sale is to an affiliated company. We review the district court's interpretation of both statutes and regulations on a de novo basis. United States v. Brace, 41 F.3d 117, 122 (3d Cir.1994); Sheet Metal Workers, Local 19 v. 2300 Group, Inc., 949 F.2d 1274, 1279 (3d Cir.1991). Nevertheless, if Congress has not spoken directly to the question in issue, we will defer to a reasonable construction of a statute by the agency which administers it. Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43, 104 S.Ct. 2778, 2781-82, 81 L.Ed.2d 694 (1984). Moreover, we will uphold an agency's interpretation of its own regulations "unless it is plainly erroneous or inconsistent with the regulation." Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512, 114 S.Ct. 2381, 2386, 129 L.Ed.2d 405 (1994). ³

II. DISCUSSION

A. Section 103(a) of FOGRMA

Shell argues that section 103(a) does not give the Secretary the authority to seek the requested documents relating to Shell's disposition of the oil it bought from Shell Ex. It contends that the Secretary and the district court erred in determining that the underlined portion of section 103(a)--"A lessee, operator, or other person directly involved in developing, producing, transporting, purchasing, or selling oil or gas subject to this chapter through the point of first sale or the point of royalty computation, whichever is...