Mesa Operating Ltd. Partnership v. U.S. Dept. of Interior
| Decision Date | 15 May 1991 |
| Docket Number | No. 89-4775,89-4775 |
| Parties | MESA OPERATING LIMITED PARTNERSHIP, Plaintiff-Appellant, v. U.S. DEPARTMENT OF the INTERIOR, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Jerry E. Rothrock, Daniel M. Joseph, Susan Brooks, Catherine Fairley Spillman, Akin, Gump, Strauss, Hauer & Feld, Washington, D.C., James R. Nieset, Christopher Thompson, Plauche, Smith & Nieset, Amarillo, Tex., for plaintiff-appellant.
George J. Domas, Deborah Bahn Price, New Orleans, La., for amici, Amoco, et al.
Arthur M. (Russ) Meyer, Jr., Sifford, Edson, Meyer & Jones, Dallas, Tex., T.L. Cubbage, II, Jennifer S. Goering, Bartlesville, Okl., for amici Phillips Petroleum Co.
Lisa K. Hemmer, Atty., Dept. of Justice, William B. Lazarus, J. Carol Williams, U.S. Dept. of Interior, Land Div., Appellate Sec., Washington, D.C., for defendant-aqppellee.
Liskow & Lewis, New Orleans, La., for Amoco, et al.
Appeal from the United States District Court for the Western District of Louisiana.
Before BROWN, POLITZ, and JOHNSON, Circuit Judges.
The Director of the Minerals Management Service (MMS) division of the U.S. Department of the Interior (DOI) ordered Mesa Operating Limited Partnership (Mesa), which extracts natural gas from offshore leases, to pay royalties on reimbursement payments made to Mesa by pipeline company purchasers pursuant to the Natural Gas Policy Act (NGPA) Sec. 110. 1 The DOI affirmed the MMS demand order. Mesa appealed the DOI's decision to federal district court, contending that the DOI misinterpreted regulations governing assessment of royalties. After referring the case to a magistrate, the district court rejected Mesa's arguments and entered summary judgment in favor of the DOI. Mesa now appeals to this court.
We hold that the DOI, in affirming the MMS order, made a permissible interpretation of the federal regulations which govern royalties owing from federal natural gas leases. We therefore affirm the district court.
The Outer Continental Shelf Lands Act of 1953 (OCSLA) 2 authorizes the Secretary of the DOI to grant and manage leases for recovery of oil, gas, and other minerals from submerged lands located on the Outer Continental Shelf. OCSLA also vests in the Secretary the sole authority and responsibility to "prescribe such rules and regulations as may be necessary to carry out such [leasing] provisions [of OCSLA]." 3 Since 1982, the Secretary has delegated the administrative responsibility for OCS leases to the MMS. 4
OCSLA provides that the DOI obtains royalties from lessees based on the "amount or value of the production saved, removed, or sold." 5 The Secretary has promulgated several regulations relevant to a definition of this phrase. The first such provision, issued in 1954, provided that the "value of production" shall never "be less than the gross proceeds accruing to the lessee from the disposition of the produced substances." 6
The Secretary promulgated a second regulation in 1954 which requires lessees to put extracted gas into "marketable condition" and to pay royalty on the marketable gas without first deducting for the costs of treatment. 7 The so-called "marketable condition rule" states:
The lessee shall put into marketable condition, if commercially feasible, all products produced from the leased land. In calculating the royalty payment, the lessee may not deduct the costs of treatment. 8
With the NGPA, 9 Congress set price ceilings for defined categories of natural gas, representing the maximum lawful consideration due the producer-seller. Congress created the Federal Energy Regulatory Commission (FERC) to administer the new act. NGPA Sec. 110 excepts from the ceiling price regulation certain post-production costs, allowing producers to recover these costs in addition to the unit price for delivered gas from purchasers. That section provides, in relevant part:
... [A] price for the first sale of natural gas shall not be considered to exceed the maximum lawful price applicable to the first sale of such natural gas under this part if such first sale price exceeds the maximum lawful price to the extent necessary to recover--
(1) State severance taxes ...; and
(2) any costs of compressing, gathering, processing, treating, liquefying, or transporting such natural gas, or other similar costs, borne by the seller and allowed for, by rule or order, by the [FERC]. 10
FERC implemented Sec. 110 through its Order No. 94 and supplemental orders 11 which provided that a first seller of natural gas may receive payment for "production-related costs" over and above the otherwise applicable ceiling price within the "first sale price." 12 "Production-related costs" is defined to include "costs, other than production costs, that are incurred: (1) To deliver, compress, treat, liquefy, or condition natural gas...." 13 The amount of the reimbursements to which producer-sellers are entitled is based upon factors including the age of the pipeline gas delivery system and the difficulty of the treatment process, which often depends upon the quality of the gas. 14 The seller may also recoup other costs which the purchaser has expressly agreed to bear. 15
Soon after they were promulgated, various natural gas pipeline purchasers and distributors challenged the reimbursement rules in several actions which reached this Court on appeal, contending that the rules were irrational and not supported by the evidence. In a consolidated decision, Texas Eastern Transmission Corp. v. Federal Energy Regulatory Comm'n, 16 we expressly rejected these challenges, affirming FERC's authority pursuant to NGPA Sec. 110 to promulgate regulations which entitle natural gas producers to reimbursement for certain production-related costs.
Following this decision, the MMS reevaluated its requirement that Sec. 110 reimbursements be included in the "gross proceeds" amount for calculating royalties due the DOI. 17 The result, a comprehensive report entitled "Policy for Production-Related Cost Payments Under Section 110 of the [NGPA] of 1978," 18 established that the MMS considered such payments part of the value of production and the lessees' "gross proceeds" and reminded lessees that Sec. 110 reimbursements are subject to royalty.
Mesa owns interests in several mineral leases off the coasts of Louisiana and Texas which the DOI administers pursuant to OCSLA. Mesa produces natural gas from various wells located on the leased lands and sells the gas to pipeline company purchasers under long-term sales contracts. Under the leases, which incorporate all applicable federal statutes and regulations, Mesa must calculate royalty payments due the DOI equal to 16 2/3 percent of the value of "production saved, removed or sold" from the leased property, which it periodically pays through the MMS. 19
After an early 1987 audit, the MMS demanded by letter dated February 27, 1987, that Mesa pay royalties on Sec. 110 cost reimbursements Mesa had received to date. After forwarding a letter of credit to the MMS for $1,509,529.88, the amount of "disputed" unpaid royalties as of February 1987, 20 Mesa appealed the MMS's audit demand to the DOI.
On October 7, 1987, the DOI issued a final ruling affirming the MMS's position that Sec. 110 reimbursement payments which Mesa had received were royalty-bearing payments. The DOI ruling stated that the MMS policy of subjecting Sec. 110 payments to royalty valuation was well within the "considerable discretion" accorded the Secretary "to establish for royalty purposes the value of production from Federal oil and gas leases." 21 In its opinion, the DOI based its analysis on the Marketable Condition Rule, 22 stating that the justification for treating Sec. 110 reimbursements as royalty-bearing payments is firmly grounded in that rule's requirement that "the lessee must bear the costs of marketing the production." It declined to distinguish for royalty purposes between proceeds from the sale of produced gas and Sec. 110 reimbursements made by pipeline company purchasers. The opinion concluded:
The lessee has the duty to market the production from a Federal lease. Therefore, the marketing costs, like the production costs, do not qualify as a deduction from the lessee's gross proceeds received.
Mesa appealed the DOI's decision to federal district court, where Mesa and the DOI each filed cross-motions for summary judgment. The district court referred the motions to the magistrate, 23 who recommended that the DOI decision and the MMS order be upheld. Mesa argued that this Court's recent decision in Diamond Shamrock Exploration Corp. v. Hodel, 24 in which we defined "production" as "the actual physical severance of minerals from the formation" 25 required a holding that royalty could not be levied on Sec. 110 reimbursements for "production-related costs" incurred well after "actual production," that is, "physical severance." In an oral ruling, the district court confined the Diamond Shamrock definition of production to the royalty dispute over "take-or-pay" contracts at issue in that case. The court then adopted the magistrate's report and recommendation and entered judgment for the DOI. Mesa brings this appeal.
We review the district court's grant of summary judgment de novo. Under the Administrative Procedure Act, however, we must not set aside the DOI's findings unless its decision was "arbitrary, capricious, or otherwise not in accordance with law." 26 In addition, because the determination at issue here involved the interpretation of a statute, the question for this Court is "whether the agency's interpretation is based on a permissible construction of the statute." 27 This standard is especially applicable where, as here, relevant statutes and regulations do not address the precise question, specifically...
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