Amoco Production Co. v. Andrus

• Decision Date: 27 November 1981
• Docket Number: 78-2070,78-1087,78-1442,78-2423 and 80-1554.,Civ. A. No. 77-3351,77-3043,78-1649
• Citation: Amoco Production Co. v. Andrus, 527 F.Supp. 790 (E.D. La. 1981)
• Parties: AMOCO PRODUCTION COMPANY, et al. v. Cecil D. ANDRUS, Secretary of the Interior, et al.
• Court: U.S. District Court — Eastern District of Louisiana

527 F. Supp. 790

AMOCO PRODUCTION COMPANY, et al. v.Cecil D. ANDRUS, Secretary of the Interior, et al.

Civ. A. Nos. 77-3351, 77-3043, 78-1087, 78-1442, 78-1649, 78-2070, 78-2423 and 80-1554.

United States District Court, E. D. Louisiana.

November 27, 1981.

Gene W. Lafitte, William M. Meyers and J. Berry St. John, Jr., Liskow & Lewis, M. Hampton Carver, John McCollam, Gordon, Arata & McCollam, New Orleans, La., Joseph D. Cheavens and Ray H. Berk, Baker & Botts, Houston, Tex., for plaintiffs.

Rebecca A. Donnellan, U. S. Dept. of Justice, Washington D. C., John P. Volz, U. S. Atty., New Orleans, La., for defendants.

MEMORANDUM OPINION

ROBERT F. COLLINS, District Judge.

These consolidated actions are before the court on plaintiffs' Motion for Summary Judgment.After considering the motions and the briefs and arguments of counsel, it is hereby determined that plaintiffs' Motion for Summary Judgment should be GRANTED.

Jurisdiction of this court is invoked under Section 1333 of the Outer Continental Shelf Lands Act of 1953,43 U.S.C. §§ 1331-43(hereinafter referred to as the "OCS Lands Act" or "Act"), which grants original jurisdiction to the United States district courts over cases and controversies arising out of exploration and development operations on the outer continental shelf.

The material facts are undisputed.Most of the facts, if not all, alleged in the complaints are admitted by the defendants in their answers to the complaints.

The plaintiffs are lessees of certain federal oil and gas leases located on the outer continental shelf of the Gulf of Mexico and administered by the Department of the Interior(hereinafter sometimes referred to as the "Department").As lessees, plaintiffs pay royalties to the United States pursuant to Section 1337 of the OCS Lands Act, which requires "the payment of a royalty of not less than 12½ per centum, in the amount or value of the production saved, removed, or sold from the lease...."

Accordingly, the royalty provisions of the leases executed between the plaintiffs and the Department require the lessees

to pay the lessor a royalty of 16 2/3 % in the amount or value of production saved, removed, or sold from the leased area.Gas of all kinds (except helium and gas used for purposes or production from and operations upon the leased area or unavoidably lost) is subject to a royalty.

In 1974, acting through the United States Geological Survey who administers certain aspects of the offshore leasing program, the Department issued "Notices to Lessees and Operators of Federal Oil and Gas Leases in the Outer Continental Shelf, Gulf of Mexico"(hereinafter referred to as the "USGS Notices").USGS Notices require federal oil and gas lessees to pay a royalty on oil and gas which are vented or flared, used in leasehold operations, or unavoidably lost (hereinafter collectively referred to as "Lost and Used Hydrocarbons").

The plaintiffs, individually, pursued administrative appeals of the USGS Notices.The appeals gave rise to three separate decisions by the Department (hereinafter referred to as the "Administrative Decisions"), each of which rejected the lessee's claims and upheld the USGS Notices.¹

The plaintiffs bring this action in an attempt to set aside the Administrative Decisions upholding the USGS Notices.They contend that the Department's attempt to impose royalty payments on Lost and Used Hydrocarbons is arbitrary and capricious, since the USGS Notices are a reversal of the Department's long-standing policy to exempt from royalty payments Lost and Used Hydrocarbons.The court agrees with the plaintiffs' contention.

DISCUSSION

The OCS Lands Act requires the payment of royalty of not less than 12½% "in the amount or value of the production saved, removed, or sold from the lease."43 U.S.C. § 1337.The regulations and the leases issued under the Act contain the same royalty obligation language.

Prior to the issuance of the USGS Notices, the government, as lessor, and all of its lessees have interpreted the above royalty provision as excluding Lost and Used Hydrocarbons from royalty obligations.Accordingly, the Department has never attempted to collect royalties on Lost and Used Hydrocarbons until the issuance of the USGS Notices."Thus the question for determination is whether requiring plaintiffs ... to now pay royalties on this type of oil and gas is arbitrary and capricious."Marathon Oil Co. v. Andrus,452 F.Supp. 548, 551(D.Wyo.1978).The Administrative Procedure Act,5 U.S.C.A. §§ 701-706, provides in part: "The reviewing court shall — ....(2) hold unlawful and set aside agency action, findings, and conclusions found to be — (A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law."5 U.S.C.A. § 706.

For 33 years prior to the adoption of the OCS Lands Act, royalties were collected under federal offshore oil and gas leases pursuant to the Mineral Lands Leasing Act of 1920, as amended, 41 Stat. 437,30 U.S.C. § 181 et seq.Prior to 1946, Section 17 of the Mineral Lands Leasing Act provided in part:

such leases to be conditioned upon the payment by the lessee ... of such royalty as may be fixed in the lease, which shall not be less than 12½ per centum in amount or value of the production....

The above royalty provision was uniformly interpreted by the Department as excluding Lost and Used Hydrocarbons from royalty obligations.On August 8, 1946, the above provision was amended to read:

such royalty as may be fixed in the lease, which shall not be less than 12½ per centum in amount or value of the production removed or sold from the lease....

Act of August 8, 1946, 30 U.S.C. § 181 et seq.The Department interpreted the amended royalty provision as excluding Lost and Used Hydrocarbons from royalty payments.

In 1953, Congress adopted the OCS Lands Act which required lessees of federal offshore leases to pay a royalty "in the amount or value of the production saved, removed or sold from the lease...."43 U.S.C. § 1337.The Department adopted the same interpretation of the OCS Act's royalty provision as it had employed for the previous 33 years under the Mineral Lands Leasing Act.Consequently, the Department made no attempt to collect royalties on Lost and Used Hydrocarbons under federal offshore leases.

In 1974, however, the Department reversed its consistent and long-standing policy and practice of not collecting royalties on Lost and Used Hydrocarbons under federal onshore and offshore leases.Such change was predicated on an Opinion issued by the Solicitor of the Department on October 4, 1976(hereinafter referred to as the "Solicitor's Opinion") which provided: "Production, as used in all federal oil and gas leases includes all oil and gas withdrawn from a reservoir."Solicitor's Opinionat p. 2.

In reaching the above conclusion, the Solicitor examined the legislative history of the "removed or sold" language found in the royalty provisions of both the OCS Lands ActandMineral Lands Leasing Act.He concluded that the restrictive language was purposeless and meaningless since he could "find no explanation for the addition of the phrase."This court disagrees with the Solicitor's conclusion.

The legislative history of the Mineral Lands Leasing Act specifically shows that the language "removed or sold" was added to the Act to clarify that royalty could not be collected on Lost and Used Hydrocarbons.Two courts have so held.

In Gulf Oil Corp. v. Andrus,460 F.Supp. 15(D.Cal.)andMarathon Oil Company v. Andrus,452 F.Supp. 548(D.Wyo.1978)the courts held that the government could not collect royalty on Lost and Used Hydrocarbons under onshore leases issued pursuant to the Mineral Lands Leasing Act.In so doing, the courts struck down notices to federal offshore lessees issued by the Department — similar to the notices issued to OCS Lands Act Lessees — and reversed administrative decisions upholding the notices.

In both cases, the plaintiffs questioned the validity of the notices.They contended that the notices were a reversal of the interpretation by the Secretary of the Interior that had been uniformly and consistently understood and applied by all for more than fifty years.In granting plaintiffs' motion for summary judgment, the courts reviewed the legislative history of the Mineral Lands Leasing Act and concluded that the 1946amendment introducing the "removed and sold" language was intended to guarantee the exclusion of Lost and Used Hydrocarbons from the payment of royalties.This was aptly noted by the court in Gulf:

The court must first decide what Congress intended by the 1946amendment to Section 17.Although legislative history on the amendment is scanty, plaintiff has uncovered the following remarks made by C. P. Watson, Vice-President of Seaboard Oil Corporation, on August 30, 1945, during Senate Subcommittee hearings on the bill that amended the Mineral Leasing Act(S. 1236):

For years the Government, under regulations of the Interior Department, has been computing royalty on the basis of sales, or, as we in the industry say, on the "run tickets."Recently, I have been advised that the Interior Department is going to change that practice; that from now on Government lessees must account for and pay royalty not on the basis of the oil and gas removed from the lease, but on the basis of the production at the well.

Hearings on S. 1236 Before the Subcommittee of the Senate Committee on Public Lands and Surveys. 79th Cong. 1st Sess., at 160.Mr. Watson then proposed an amendment to prevent the contemplated change in assessing royalty payments:

I would suggest for your consideration, therefore, the addition of the words "removed or sold from said lease" after the word "production" ...

Id.Watson's suggested language was adopted by Congress verbatim.This is persuasive evidence that in enacting the 1946amendment to Section 17Congress intended to ensure that royalty would be due only on oil and

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