Am. Petroleum Inst. v. United States Dep't of Interior

• Docket Number: 21-8076
• Decision Date: 25 August 2023
• Parties: AMERICAN PETROLEUM INSTITUTE, Petitioner - Appellant, v. UNITED STATES DEPARTMENT OF INTERIOR; UNITED STATES DEPARTMENT OF INTERIOR SECRETARY, in her official capacity a/k/a Debra Haaland; OFFICE OF NATURAL RESOURCES REVENUE; OFFICE OF NATURAL RESOURCES REVENUE DIRECTOR, in his official capacity a/k/a Kimbra Davis, Respondents - Appellees, and NATURAL RESOURCES DEFENSE COUNCIL; NORTHERN PLAINS RESOURCE COUNCIL, INC.; POWDER RIVER BASIN RESOURCE COUNCIL; THE WILDERNESS SOCIETY; WESTERN ORGANIZATION OF RESOURCE COUNCILS; STATE OF CALIFORNIA; STATE OF NEW MEXICO, Intervenor Respondents - Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

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AMERICAN PETROLEUM INSTITUTE, Petitioner - Appellant,
v.
UNITED STATES DEPARTMENT OF INTERIOR; UNITED STATES DEPARTMENT OF INTERIOR SECRETARY, in her official capacity a/k/a Debra Haaland; OFFICE OF NATURAL RESOURCES REVENUE; OFFICE OF NATURAL RESOURCES REVENUE DIRECTOR, in his official capacity a/k/a Kimbra Davis, Respondents - Appellees,

and NATURAL RESOURCES DEFENSE COUNCIL; NORTHERN PLAINS RESOURCE COUNCIL, INC.; POWDER RIVER BASIN RESOURCE COUNCIL; THE WILDERNESS SOCIETY; WESTERN ORGANIZATION OF RESOURCE COUNCILS; STATE OF CALIFORNIA; STATE OF NEW MEXICO, Intervenor Respondents - Appellees.

No. 21-8076

United States Court of Appeals, Tenth Circuit

August 25, 2023

Appeal from the United States District Court for the District of Wyoming (D.C. No. 2:19-CV-00121-SWS)

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Peter J. Schaumberg (James M. Auslander, with him on the briefs), of Beveridge &Diamond, P.C., Washington, D.C., for Petitioner-Appellant.

Michelle Melton, Attorney (Todd Kim, Assistant Attorney General, Paul Turcke, Attorney, with her on the brief), Environment and Natural Resources Division, Department of Justice, Washington, D.C., for Respondents-Appellees.

Thomas Zimpleman of Natural Resources Defense Counsel, Washington, D.C. (Rob Bonta, Attorney General of California, Ed Ochoa, Senior Assistant Attorney General; David Zonana, Supervising Deputy Attorney General, George Torgun and Adrianna Lobato, Deputy Attorneys General, for the State of California, Oakland, CA; and William Grantham, Assistant Attorney General, for the State of New Mexico, Santa Fe, NM, with him on the brief), for Intervenor Respondents-Appellees.

Before HARTZ, BACHARACH, and MORITZ, Circuit Judges.

MORITZ, CIRCUIT JUDGE.

This appeal involves a set of regulations that govern the calculation of royalties for oil and natural gas produced on federal lands. After the agency charged with collecting these royalties amended the regulations in 2016, the American Petroleum Institute (API) challenged several of the changes under the Administrative Procedure Act (APA), 5 U.S.C. §§ 701-706. The district court rejected these challenges at summary judgment, and API appeals. Because API does not show that the agency acted arbitrarily and capriciously in enacting the challenged provisions of the 2016 regulations, we affirm.

Background

Under federal law, the Department of the Interior issues leases to private

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companies that allow them to explore, develop, and extract oil and gas from onshore public lands and offshore submerged lands in the Outer Continental Shelf (OCS). See Mineral Leasing Act of 1920, 30 U.S.C. §§ 181-287; Outer Continental Shelf Lands Act, 43 U.S.C. §§ 1331-1356c. In exchange for receiving these mineral rights, the companies (often called lessees) pay the federal government royalties-a share of their profits based on the "value" of the oil and gas produced. 30 U.S.C. § 226(b)(1) (onshore oil and gas); 43 U.S.C. § 1337(a)(1) (offshore oil and gas).^[1] Congress assigned the task of collecting these payments to the Office of Natural Resources Revenue (ONRR)^[2] and authorized it to issue regulations setting out how to measure the value of production for royalty purposes. See Indep. Petrol. Ass'n of Am. v. DeWitt, 279 F.3d 1036, 1039-40 (D.C. Cir. 2002) (recognizing ONRR's "sweeping authority" under leasing statutes to administer federal leases, including by "collecting royalties and determining the methods by which they are calculated"). This case centers on ONRR's 2016 amendment-the Rule, for short-to the valuation regulations for oil-and-gas leases.^[3]

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Given the complexity of these valuation regulations and the various and detailed grounds on which API challenges them, we reserve substantive discussion of the Rule's provisions for later in the analysis and focus here on the Rule's procedural history-which is equally complex. In 2011, ONRR invited public comments about concerns that the then-existing valuation regulations were outdated, were costly to enforce and comply with, and produced inaccurate and incomplete royalty payments. Advance Notice of Proposed Rulemaking, 76 Fed.Reg. 30878 (May 27, 2011). More than three years later, ONRR issued a proposed rule designed to address these and other problems with the prior valuation scheme. Consolidated Federal Oil &Gas and Federal &Indian Coal Valuation Reform, 80 Fed.Reg. 608 (proposed Jan. 6, 2015) [hereinafter Proposed Rule]. After reviewing over 1,000 pages of written comments from interested parties, ONRR published its final version in July 2016. Consolidated Federal Oil &Gas and Federal &Indian Coal Valuation Reform, 81 Fed.Reg. 43338 (July 1, 2016) [hereinafter Final Rule]. To give lessees time to adjust their accounting practices to reflect the new valuation system, ONRR delayed the Rule's implementation by six months, until January 1, 2017.

Shortly after the Rule went into effect, and after a change in presidential administrations, ONRR twice tried to undo the Rule. Initially, ONRR tried to postpone implementation of the Rule after it had gone into effect. Postponement of Effectiveness of the Consolidated Federal Oil &Gas and Federal &Indian Coal

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Valuation Reform 2017 Valuation Rule, 82 Fed.Reg. 11823 (Feb. 27, 2017). This first attempt proved unsuccessful: A California federal district court held that in so doing, ONRR violated the APA's requirements for postponement and notice-and-comment rulemaking. See Becerra v. U.S. Dep't of Interior, 276 F.Supp.3d 953, 966-67 (N.D. Cal. 2017). Having failed to postpone the Rule, ONRR next tried to repeal the Rule and replace it with a new one that restored the prior valuation regulations. See Repeal of Consolidated Federal Oil &Gas and Federal &Indian Coal Valuation Reform, 82 Fed.Reg. 36934 (Aug. 7, 2017). The California federal district court struck down this attempt under the APA, too, holding that ONRR inadequately explained the decision to abandon the Rule just after its adoption and failed to comply with notice-and-comment requirements. See California ex rel. Becerra v. U.S. Dep't of Interior, 381 F.Supp.3d 1153, 1158, 1166, 1174, 1176-79 (N.D. Cal. 2019).

With the new valuation regulations now reinstated, API brought this lawsuit in Wyoming federal district court challenging the Rule as arbitrary and capricious under the APA.^[4] See 5 U.S.C. § 706. Two states and five environmental groups intervened

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to defend the Rule alongside ONRR. The district court declined to preliminarily enjoin the Rule's oil-and-gas provisions and ultimately upheld those provisions at summary judgment, finding no APA violation. API appeals.

Analysis

As relevant here, the APA requires courts to set aside agency action that is arbitrary and capricious. See § 706(2)(A).^[5] The arbitrary-and-capricious standard is a narrow one, requiring only that the agency examine the relevant evidence and adequately explain its decision by "articulat[ing] a rational connection between the facts found and the decision made." OXY USA Inc. v. U.S. Dep't of Interior, 32 F.4th 1032, 1044 (10th Cir. 2022) (quoting Payton v. U.S. Dep't of Agric., 337 F.3d 1163, 1168 (10th Cir. 2003)). This means the agency cannot (1) "rely on factors deemed irrelevant by Congress"; (2) "fail to consider important aspects of [the] problem";

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(3) "present an explanation that is either implausible or contrary to the evidence"; or (4) reach a decision that "is not supported by substantial evidence in the [administrative] record." Blanca Tel. Co. v. FCC, 991 F.3d 1097, 1120 (10th Cir. 2021). When assessing whether such errors occurred, our inquiry "must be thorough, but the standard of review is very deferential to the agency"-we presume its action is valid, and the party challenging that action bears the burden of proving otherwise. Hillsdale Env't Loss Prevention, Inc. v. U.S. Army Corps of Eng'rs, 702 F.3d 1156, 1165 (10th Cir. 2012). We owe no deference, however, to the district court's APA decision and review that decision de novo.^[6] See OXY USA, 32 F.4th at 1044.

On appeal, as in the district court, API challenges various aspects of the Rule as arbitrary and capricious under the APA. These challenges fall into three categories, which correspond with the three valuation methods provided for in the Rule: (1) gross proceeds, (2) index pricing, and (3) default valuation.

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I. Gross Proceeds

API's first set of challenges to the Rule involve gross-proceeds valuation, the standard method for calculating royalties when lessees sell oil and gas in arm's-length transactions.^[7] This method values production based on the total payment a lessee receives for a sale, minus specified deductions-called allowances-for expenses the lessee incurs. See 30 C.F.R. §§ 1206.101(a) (describing gross-proceeds method for oil), 1206.141(b) (same, for gas). Like the prior regulations, the Rule permits lessees to claim an allowance for (and thus not pay royalty on) certain costs incurred to transport oil and gas and to process gas. See §§ 1206.101(a) (transportation allowance for oil), 1206.141(b) (same, for unprocessed gas), 1206.142(b) (transportation and processing allowances for processed gas). But lessees cannot claim an allowance for (and thus must pay royalty on) expenses related to gathering, which generally refers to the movement of production from the well to a central collection point where production from several wells is accumulated for further movement. See § 1206.20 (defining "gathering" and clarifying that gross proceeds includes gathering costs while "transportation allowance does not"); N. Nat. Gas Co. v. FERC, 929 F.2d 1261, 1265 (8th Cir. 1991) (describing "gathering" as "the process of collecting gas at the point of production (the wellhead) and moving it to a collection point for further movement through a pipeline's principal transmission system"). In this way, allowances reflect the general principle that lessees must bear

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the expense...