Burlington Res. Oil & Gas Co. v. U.S. Dep't of the Interior

• Decision Date: 24 July 2014
• Docket Number: Case No. 13-CV-0678-CVE-TLW
• Parties: BURLINGTON RESOURCES OIL & GAS COMPANY LP, Plaintiff, v. UNITED STATES DEPARTMENT OF THE INTERIOR, Defendant.
• Court: U.S. District Court — Northern District of Oklahoma

BURLINGTON RESOURCESOIL & GAS COMPANY LP, Plaintiff, v. UNITED STATES DEPARTMENT OF THE INTERIOR, Defendant.

Case No. 13-CV-0678-CVE-TLW

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF OKLAHOMA

DATED: July 24, 2014

OPINION AND ORDER

This is an administrative appeal of a final agency action by the United States Department of the Interior.¹ See Dkt. # 2. Plaintiff Burlington Resources Oil & Gas Company LP (Burlington) has filed an opening brief (Dkt. # 31), defendant has filed a (corrected) response (Dkt. # 38-1), and Burlington has replied (Dkt. # 39). Burlington argues that defendant failed to correctly analyze when Burlington's produced gas became marketable, and requests that this matter be remanded to the agency. Dkt. # 31, at 6. Defendant argues that it has properly interpreted and applied the marketable condition rule. Dkt. # 38-1, at 6-8, 31.

I.

Burlington "is a federal lessee and operator of multiple wells drilled upon federal leases in North Dakota." Dkt. # 2, at 2. Burlington "sold unprocessed gas at the wellhead pursuant to arm's-length percentage of proceeds [POP] contracts to Bear Paw Energy, Inc. (now ONEOK RockiesMidstream, L.C.C. [collectively, ORM]), a 'midstream' purchaser, gatherer and processor of natural gas." Id. at 3; see also Dkt. # 20. ORM processed the gas, yielding residue gas and natural gas liquids (NGLs), and paid Burlington a percentage of the proceeds it received from selling the resultant residue gas and NGLs. Dkt. # 2, at 3; see also Dkt. # 20. Burlington "valued the residue gas and NGLs, for royalty purposes, using the actual proceeds payable to it by ORM, reporting certain expenses as part of transportation and processing allowances." Dkt. # 31, at 8; see also Dkt. # 19-1, at 5. Those expenses included treating and compression expenses that were later disallowed. Dkt. # 31, at 8; see also Dkt. # 19-1, at 5. Burlington has allegedly failed to pay royalties owed pursuant to its federal lease obligations. Dkt. # 2 at 1; see also Dkt. # 19-1, at 1-26.

Following audits by the State of North Dakota, defendant's Minerals Management Service (MMS)² entered two orders, styled MMS-08-0054-O&G and MMS-08-0055-O&G, determining that Burlington had "taken deductions from royalty that should be disallowed." Dkt. # 2, at 1, 6; see also Dkt. # 19-2, at 207-14; Dkt. # 19-5, at 81-88. The orders directed Burlington to pay additional royalties and to perform a restructured accounting. Dkt. # 19-2, at 207; Dkt. # 19-5, at 81. The orders stated that Burlington had sold gas to processors pursuant to POP contracts and had failed to place the gas in marketable condition at no cost to the government. Dkt. # 19-2, at 207, 209-210; Dkt. # 19-5, at 82-84. Burlington appealed each of those orders at the agency level. Dkt. # 2, at 1, 7; Dkt. # 19-2, at 204-05; Dkt. # 19-5, at 77-78.

The Office of Natural Resources Revenue (ONRR), MMS's successor for the collection and verification of natural resource revenues, granted in part and denied in part Burlington's appeals. Dkt. # 2 at 1; Dkt. # 19-2, at 133-53; Dkt. # 19-4, at 103-14; Dkt. # 19-5, at 1-13; Off. Nat. Resources Revenue, http://www.onrr.gov/ (last visited July 24, 2014). ONRR affirmed that Burlington had improperly deducted certain costs necessary to put the gas it sold to ORM into marketable condition; namely, dehydrating, compressing, and sweetening³ the gas. Dkt. # 19-2, at 142; Dkt. # 19-4, at 113.⁴ It also found that there was "no evidence of a competitive market, created by more than one purchaser, for uncompressed gas at the wellhead." Dkt. # 19-2, at 149; Dkt. # 19-5, at 8.

Burlington appealed ONRR's dispositions to the United States Department of the Interior Board of Land Appeals (IBLA).⁵ Dkt. # 2, at 2; Dkt. 19-2, at 92; Dkt. # 19-3, at 68-79. Those disputes were redesignated and then consolidated under docket number IBLA 2012-96. Dkt. # 2, at 2; Dkt. # Dkt. # 19-1, at 58-62. The IBLA issued a consolidated decision on April 23, 2013. Dkt. # 2, at 2; Dkt. # 19-1, at 1-26. That decision affirmed ONRR's decisions in full. Dkt. # 2, at 2; Dkt. # 19-1, at 26. The IBLA concluded that ORM acted as an intermediary between Burlington and thegas's ultimate third party purchaser and that compression, dehydration, and sweetening were necessary for the gas to be marketable to the ultimate third-party purchaser. Dkt. # 19-1, at 20. In reaching that conclusion, the IBLA noted that Burlington had failed to provide "any evidence that the unprocessed gas would be acceptable to a typical third-party purchaser at the well, before it has been compressed, dehydrated, sweetened, and then processed" or "any affirmative evidence in support of its assertion that the costs of compression, dehydration, and sweetening were not necessary to place the gas in marketable condition." Id. at 20-21. While acknowledging that dehydration, compression, and sweetening may have been necessary to process the gas, the IBLA determined that, since dehydration, compression, and sweetening were also necessary to render the gas marketable, Burlington was responsible for those costs. Id. at 22-23

Burlington filed this suit seeking review of the IBLA's final agency disposition, pursuant to 30 U.S.C. §1724(j) and the Administrative Procedures Act (APA), 5 U.S.C. § 703. Dkt. # 2, at 2. Burlington argues that the deductions it took were for the costs of processing and transporting the gas, not for the costs of putting it into marketable condition. Id. at 8. Burlington also argues that, contrary to MMS, ONRR, and IBLA's positions, Burlington's gas was, or, at the very least, may have been, marketable at the time it was sold to ORM. Id. at 11. The parties jointly filed the administrative record. Dkt. ## 19, 20.⁶ Burlington has filed an opening brief (Dkt. # 31), defendant has filed a (corrected) response (Dkt. # 38-1), and Burlington has replied (Dkt. # 39).

II.

An agency action must be set aside if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706. An action is arbitrary and capricious

if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.

Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (describing the circumstances under which an agency rule would be arbitrary and capricious).

If the record before the agency does not support the agency action, if the agency has not considered all relevant factors, or if the reviewing court simply cannot evaluate the challenged agency action on the basis of the record before it, the proper course, except in rare circumstances, is to remand to the agency for additional investigation or explanation.

Fla. Power & Light Co. v. Lorion, 470 U.S. 729, 744 (1985).

An agency's interpretation of its own regulations is entitled to substantial deference. Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). Broad deference is especially warranted if "the regulation concerns 'a complex and highly technical regulatory program,' in which the identification and classification of relevant 'criteria necessarily require significant expertise and entail the exercise of judgment grounded in policy concerns.'" Id. (quoting Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 697 (1991)). However, if a regulation is unambiguous, no deference is accorded. Christensen v. Harris Cnty., 529 U.S. 576, 588 (2000).

III.

Under the Mineral Leasing Act (MLA), the Secretary of the Interior may lease federal lands for oil and gas exploration. 30 U.S.C. § 226. A federal lessee must pay a royalty of at least "12.5percent in amount or value of the production removed or sold from the lease." Id. The Secretary of the Interior is authorized to prescribe rules and regulations governing leases. See id. § 189. Regulations prescribed by the Secretary of the Interior state that the value of gas that is ultimately processed but sold prior to being processed pursuant to a POP contract is "the gross proceeds accruing to the lessee." 30 C.F.R. § 1206.152(b)(1)(i).⁷ Additionally, "[t]he lessee must place gas in marketable condition and market the gas for the mutual benefit of the lessee and the lessor at no cost to the Federal Government." Id. § 1206.152(i). If the gross proceeds received by the lessee have been reduced because the purchaser is performing services that would ordinarily be required of the lessee to place the gas in marketable condition, then the value of the gas will be increased to the extent that the gross proceeds have been reduced. Id.⁸ "Marketable condition means leaseproducts which are sufficiently free from impurities and otherwise in a condition that they will be accepted by a purchaser under a sales contract typical for the field or area." Id. § 1206.151.

There is "a meaningful distinction between marketing and merely selling gas." Amoco Prod, Co. v. Watson, 410 F.3d 722, 729 (D.C. Cir. 2005), cert. granted as to a separate issue sub nom. BP Am. Prod. Co. v. Watson, 547 U.S. 1068 (2006), aff'd sub nom. BP Am. Prod. Co. v. Burton, 549 U.S. 84.

Theoretically, any gas— any 'production'— is 'marketable'. We can assume that, if the price were low enough to justify capital expenditures for conditioning equipment, someone would undertake to buy low pressure gas having a high water and hydrocarbon content. A lessee who sold unconditioned gas at such a price would, in a rhetorical sense, be fulfilling his obligation to 'market' the gas, and by thus saving on overhead he might find such business profitable. There is a clear difference between 'marketing' and merely selling. For the former there must be a market, an established demand for an identified product. We suppose almost anything

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