Amoco Production Co. v. Baca

• Decision Date: 14 November 2003
• Docket Number: No. CIV.A. 00-01480(WBB).,No. CIV.A. 00-02933(WBB).,CIV.A. 00-02933(WBB).,CIV.A. 00-01480(WBB).
• Citation: 300 F.Supp.2d 1
• Parties: AMOCO PRODUCTION COMPANY, Plaintiff, v. Sylvia V. BACA, et. al., Defendants. Vastar Resources, Inc. and Atlantic Richfield Company, Plaintiffs, v. Sylvia V. Baca, et. al., Defendants.
• Court: U.S. District Court — District of Columbia

Page 1

300 F.Supp.2d 1

AMOCO PRODUCTION COMPANY, Plaintiff, v. Sylvia V. BACA, et. al., Defendants.

Vastar Resources, Inc. and Atlantic Richfield Company, Plaintiffs, v. Sylvia V. Baca, et. al., Defendants.

No. CIV.A. 00-02933(WBB).

No. CIV.A. 00-01480(WBB).

United States District Court, District of Columbia.

November 14, 2003.

Steven R. Hunsicker, Melissa Elaine Maxwell, Baker Botts, LLP, Washington, DC, for Plaintiffs.

Martin J. Lalonde, United States Department of Justice, Environment and Natural Resources, Washington, DC, for Defendants.

Harry Rubenstein Sachse, Sonosky, Chambers, Sachse, Endreson & Perry, Washington, DC, for Movant.

MEMORANDUM

BRYANT, Senior District Judge.

Plaintiffs, Amoco Production Company ("Amoco") and Atlantic Richfield Company and Vastar Resources ("ARCO/Vastar"), individually filed complaints seeking a declaratory judgment and injunction against Defendants, the United States Department of the Interior ("DOI"), its Secretary Bruce Babbit, and its Assistant Secretary Sylvia Baca.¹ Plaintiffs seek to enjoin DOI decisions relating to the determination of royalties due on the production of coalbed methane gas produced by Plaintiffs from certain federal leases.

Currently before the Court are the parties' Motions for Summary Judgment. Plaintiffs ask the Court to declare the DOI decisions invalid and unlawful and to enjoin the DOI from implementing or enforcing its decisions. Defendants oppose Plaintiffs' motions and argue that they are entitled to judgment as a matter of law. Also before the Court is an amicus brief filed by the Southern Ute Indian Tribe ("Tribe") in support of Defendants.

BACKGROUND

Plaintiffs, Amoco and ARCO/Vastar produce coalbed methane gas as lessees under federal oil and gas mineral leases in the San Juan Basin of northwestern New Mexico. The Minerals Leasing Act ("MLA") governs the terms of federal oil and gas leases, including the leases involved in this case. 30 U.S.C. §§ 181-287 (2003). The MLA was intended by Congress to "promote wise development of [ ] natural resources and to obtain for the public a reasonable financial return on assets that `belong' to the public." California Co. v. Udall, 296 F.2d 384, 388 (D.C.Cir.1961). In return for the privilege of producing coalbed methane gas on federal land, the MLA requires lessees to pay royalties based on the value of the production.

Coalbed methane gas, such as that produced by Plaintiffs, differs from conventional natural gas in that it contains significantly higher levels of carbon dioxide (CO₂). CO₂ reduces the value per unit of volume of natural gas because it has no energy value. As a result, CO₂ is generally removed from the gas after it is extracted and gas transportation pipelines typically have quality specifications limiting the amount of CO₂ allowed in the gas stream. In some instances, CO₂ is recovered after removal and sold as a separate product, however that is not the case here.

On April 22, 1996, the Associate Director for Royalty Management, MMS, issued a letter to producers of coalbed methane gas ("Dear Operator Letter") containing guidelines for calculating the proper payment of royalties and correct reporting of production. The letter responded to questions received by MMS from producers operating in the vicinity of New Mexico's San Juan Basin, a group of producers that includes Plaintiffs. The guidelines contained in the Dear Operator Letter apply specifically to circumstances in which CO₂ is removed from coalbed methane gas and vented into the air rather than being processed and sold as a separate product.

The Dear Operator Letter echoed internal guidelines contained in a December 7, 1995 MMS memorandum ("December Memorandum") that also addressed the valuation of coalbed methane gas production. The December Memorandum in turn was issued following a November 2, 1995 meeting of the MMS Royalty Policy Board during which interested parties, including producers, offered alternative valuation and reporting methods for coalbed methane. The valuation policy set forth in the December Memorandum was a modified version of that presented by the MMS and the State of New Mexico during the November meeting.

On May 22, 1996, ARCO/Vastar appealed the guidelines contained in the Dear Operator Letter, but the appeal was returned because the letter itself was not a final decision of the MMS Director. MMS advised ARCO/Vastar that an appeal would be appropriate in the event lessees were ordered to take action to correct any noncompliance with the letter's guidelines. Subsequently, the State of New Mexico audited both Plaintiffs' production and royalty reporting and determined that, in fact, ARCO/Vastar and Amoco were not in compliance with the guidelines contained in the Dear Operator Letter. Based on the results of the New Mexico audit, the MMS issued the decision and orders that form the basis of Plaintiffs' Complaints.

ARCO/Vastar's Complaint

ARCO/Vastar appeals the consolidated decision of Assistant Secretary Sylvia V. Baca issued on March 24, 2000 ("ARCO/Vastar Decision"), which largely affirmed two decisions of the MMS relating to the calculation of royalties due on the sale of coalbed methane gas produced from federal leases held by ARCO/Vastar. The first decision was an MMS order issued on January 22, 1997 ("January Order") finding that ARCO/Vastar incorrectly calculated the royalties due on sales between 1989 and 1996. Upon review of deductions allowable under applicable regulations and the guidelines contained in the December Memorandum, the MMS determined that ARCO/Vastar erroneously took deductions for certain transportation and processing costs related to the transportation and removal of CO₂. As a result, the January Order directed ARCO/Vastar to pay past due royalties of $782,373, to recalculate the royalties due on certain leases in the San Juan Basin during the audit period, and to pay any additional royalties found to be due. The January Order further stated that late payment interest would be calculated and assessed pursuant to 30 C.F.R. § 218.102 (1996) upon receipt of any additional royalties due.

The second decision addressed by the ARCO/Vastar Decision was a decision by the MMS Royalty Valuation Board ("RVD Decision") issued on July 14, 1997 which denied a request for an extraordinary processing cost allowance. ARCO/Vastar had requested approval for an extraordinary processing cost allowance for the costs of removing CO₂ from coalbed methane gas produced from a federal lease and treated at a particular treatment facility. Based on applicable regulations, the December Memorandum and the Dear Operator Letter, the Royalty Valuation Board rejected ARCO/Vastar's argument that the composition of the gas stream, plant design and associated costs justified the requested allowance.

Because the January Order and the RVD Decision raised overlapping issues related to the definition of marketable condition and extraordinary processing costs, the Assistant Secretary consolidated ARCO/Vastar's appeals of the two decisions. The ARCO/Vastar Decision largely upheld both the January Order and the RVD Decision and addressed four issues: (1) whether the cost of CO₂ removal is necessary to place the gas in marketable condition or allowable as an extraordinary processing cost allowance; (2) whether costs incurred to transport the coalbed methane gas are deductible; (3) whether the April 22, 1996 Dear Operator Letter violates the Administrative Procedure Act; and, (4) whether late payment interest is applicable to royalties deemed deficient for prior periods.

Amoco's Complaint

Amoco appeals the Assistant Secretary's decision of September 12, 2000 ("Amoco Decision"), which denied (with slight modifications) Amoco's appeal of a May 27, 2000 MMS Order ("May Order") directing Amoco to pay additional royalties of $4,117,607, to conduct a restructured accounting of certain federal and Indian leases, and to pay any additional royalties found to be due. The Assistant Secretary addressed four issues in the Amoco Decision: (1) whether CO₂ removal is necessary to place the gas at issue in marketable condition; (2) whether the costs of transporting excess CO₂ is deductible when coalbed gas is treated away from the lease; (3) whether the April 22, 1996 Dear Operator Letter violates the Administrative Procedure Act; and, (4) whether MMS can collect royalties that become due more than six years before the date of the order to pay.

Since ARCO/Vastar and Amoco's appeals raise common issues their Motions for Summary Judgment were consolidated for briefing purposes. Plaintiffs argue that the guidelines contained in the Dear Operator Letter are invalid because the letter violates the Administrative Procedure Act. They further argue that CO₂ removal is not necessary to place coalbed methane gas in marketable condition and that they are entitled to transportation allowances for transporting CO₂ from the wellhead to treatment facilities where CO₂ is removed. Plaintiffs additionally assert separate claims. ARCO/Vastar argues that it is entitled to an allowance for extraordinary processing costs and that DOI improperly assessed late payment interest on overdue royalties. Amoco argues that the statute of limitations prohibits the collection of royalties after six years. The Court will first address Plaintiffs' common claims and then move to the individual claims.

APPLICABLE LAW

Summary Judgment Standard and Standard of Review

Summary judgment is appropriate when the record shows that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. Pro. 56(c) (2003). The Court must set aside the Assistant Secretary's decisions under the Administrative Procedure Act ("APA") if they are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law." 5 U.S.C. 706(2)(A) (1996). When Congress has not spoken to the...