Devon Energy Prod. Co. v. Gould, Case No: 16-CV-000161-ABJ

Citation421 F.Supp.3d 1213
Decision Date11 September 2019
Docket NumberCase No: 16-CV-000161-ABJ,C/w : Case No: 16-CV-00026-ABJ, Case No: 16-CV-00274-ABJ,Case No: 16-CV-00027-ABJ
Parties DEVON ENERGY PRODUCTION COMPANY, L.P., Petitioner, v. Gregory J. GOULD, in his official capacity as Director of the Office of National Resources Revenue, Office of Natural Resources Revenue, David Bernhardt, in his official capacity as Secretary of the Interior, and Department of the Interior, Respondents.
CourtUnited States District Courts. 10th Circuit. District of Wyoming

421 F.Supp.3d 1213

DEVON ENERGY PRODUCTION COMPANY, L.P., Petitioner,
v.
Gregory J. GOULD, in his official capacity as Director of the Office of National Resources Revenue, Office of Natural Resources Revenue, David Bernhardt,1 in his official capacity as Secretary of the Interior, and Department of the Interior, Respondents.

Case No: 16-CV-000161-ABJ
C/w : Case No: 16-CV-00026-ABJ
Case No: 16-CV-00027-ABJ
Case No: 16-CV-00274-ABJ

United States District Court, D. Wyoming.

Signed September 11, 2019


421 F.Supp.3d 1217

Lyle Poe Leggette, Alexander Karl Obrecht, Rosario C. Doriott Dominguez, Pro Hac Vice, Baker & Hostetler LLP, Denver, CO, for Petitioner.

Nicholas Vassallo, Mark A. Klaassen, United States Attorneys Office, Cheyenne, WY, for Respondents.

ORDER VACATING THE DIRECTOR'S DECISIONS AND REMANDING IN PART FOR FURTHER FACT FINDING

Alan B. Johnson, United States District Judge

THIS MATTER comes before the Court on Devon Energy Production Company, L.P.'s ("Devon"), Petition for Review of Final Agency Action , ECF No. 1. Devon sought review of a May 7, 2015 Order (ONRR-11-0007-O&G) from Director Gregory G. Gould ("Director") of the Office of Natural Resources Revenue ("ONRR"), which dealt with an audit of Devon's royalty payments from 2002–2004. Devon, along with the Director and the ONRR (collectively, "Respondents"), then filed an Unopposed Joint Motion to Consolidate Devon's petition with other related petitions Devon had brought to this Court. ECF No. 7. The Court granted the motion, ECF No. 8, thereby situating for review another opinion (ONRR-12-0083-O&G) by the Director dealing with a similar audit of Devon's royalty payments for the time period of 2005–2007.

On January 28, 2019, Devon filed its opening brief. ECF No. 78. Respondents then responded with an Answer Brief on March 14, 2019. ECF No. 82. Four days later, Respondents filed a Corrected Answer Brief to rectify various drafting errors. ECF No. 83 at 1 n.1. Devon then completed the briefing with a Reply Brief , ECF No. 87. Having considered all the filings, the applicable law, the administrative record, and being otherwise fully advised, the Court FINDS and ORDERS as follows:

FACTUAL AND PROCEDURAL BACKGROUND

Devon produced natural gas from the Barrel Springs Unit in Carbon County,

421 F.Supp.3d 1218

Wyoming. The State of Wyoming audited Devon's royalty payments from the Barrel Springs Unit for three separate periods: 1) 2002–2004; 2) 2005–2007; and 3) 2008–2010. Although Devon seeks to introduce evidence from the 2008–2010 audit, it admits that "this case concerns the years 2002-2004 and 2005-2007 ...." ECF No. 86 at 2. Upon completing the 2002–2004 and 2005–2007 audits, the ONRR and the State of Wyoming ("State") concluded that Devon owed additional royalties. Among other things, they "concluded that Devon had underreported gas volumes and improperly claimed transportation cost deductions for the Barrel Springs Unit." ECF No. 83 at 6–7.

Specifically, for 2002–2004, the ONRR issued a July 17, 2019 audit issue letter, a February 10, 2010 audit issue letter, and a July 7, 2010 second revised audit issue letter. (2002–2004 AR2 at 1081–103). While the final amount due changed from letter to letter, each one identified production reporting issues. (Id. at 1084, 1094, 1105–06). The February 10, 2010 revised audit letter also stated that Devon had taken improper transportation deductions (id. at 1095); however, the July 7, 2010 second revised audit issue letter did not discuss transportation deduction issues. (See id. at 1084).

For the 2005–2007 audit, the State issued a September 1, 2011 audit letter stating that Devon had once again misreported volume of production. The letter explained that, of all the properties involved, "[t]he Barrel Springs Unit demonstrated the largest under-reported volume difference, of 4,024,397 Mcf." (2005–2007 AR at 1095).3 That audit letter also identified problems with Devon's transportation deductions. (Id. at 1096). A February 17, 2012 revised audit letter made some alterations, still finding that for the Barrel Springs Unit Devon "significantly under-reported by 1,051,255 Mcf." (Id. at 1079).4

After the audits, the ONRR issued multiple orders to report and pay additional royalties. (2002–2004 AR at 217; 2005–2007 AR at 169). For the 2002–2004 order, a purpose was to determine if Devon took proper allowances and calculated its royalties according to federal regulations. (2002–2004 AR at 217). The 2005–2007 order indicated the initial audit was made for similar purposes. (Id. at 175). The first order identified volume misreporting and royalty reporting issues. (Id. at 218, 220). The second order identified volume misreporting and over-reported transportation allowances. (2005–2007 AR at 176–77). Ultimately, both orders directed that Devon needed to pay the State, with the first calculating the required payment at $1,094,063.77 (2002–2004 AR at 217), and the second calculating the required payment at $490,364.34 (2005–2007 AR at 169).5 A subsequent appeal to the Director led to two separate decisions and a surprise for Devon regarding its transportation costs.

First, the Director found that, for both the 2002–2004 and 2005–2007 periods, Devon had misreported its production volume

421 F.Supp.3d 1219

because it "reported production ‘at lease level’ rather than ‘at agreement level.’ " (2002–2004 AR at 843; 2005–2007 AR at 567). In other words, for production that occurred subject to a unit or communitization agreement,6 Devon attributed 100% of the production to the leases rather than attributing the production to the agreement and then allocating back to specific leases. (2002–2004 AR at 843–44; 2005–2007 AR at 567–68). This is an important miscue, as an allocation schedule governed "agreement-to-lease allocation percentages ...." (2002–2004 AR at 844; 2005–2007 AR at 568). The volume misreporting issue is not an aspect of Devon's current petition for administrative review.

What is at issue is Devon's transportation deductions. While the Director agreed with Devon that the ONRR and the State did not apply "the proper analysis to determine Devon's allowable transportation costs," (2002–2004 AR at 934–35; 2005–2007 AR at 581), he then denied all of Devon's transportation allowances. (2002–2004 AR at 849; 2005–2007 AR at 572–73). He stated that Devon had not "unbundled" a transportation fee it paid a third-party, Williams Field Services ("Williams"), which appeared necessary to place the natural gas in marketable condition. (2002–2004 AR at 847–48; 2005–2007 AR at 571–72). The Court will supply more information about the transportation chain later in the order. For now, it is sufficient to state that there were multiple royalty measure points within the Barrel Springs Unit, and gas would enter the WYGAP Pipeline while also still in the Unit. (2002–2004 AR at 845; 2005–2007 AR at 569). From there, the gas moved into the Westrans Pipeline where it and the WYGAP pipeline connected, and then the gas flowed through the Westrans Pipeline to the Echo Springs gas processing plant at the Washakie Point 49 meter. (2002–2004 AR at 845; 2005–2007 AR at 569). Devon paid Williams "a fee to gather, dehydrate, compress, transport, and, if necessary, remove CO2 from Devon's production between the Unit's royalty measurement points and the inlet to the Echo Springs plant." (2002–2004 AR at 845; 2005–2007 AR at 569).

As a result, even though the State and Devon agreed that Devon was likely entitled to take 60% of the Williams Fee as a transportation deduction, the Director modified the Orders to Pay and denied the transportation deductions until Devon provided marketable condition information and unbundling analyzes. (2002–2004 AR at 848; 2005–2007 AR at 571). The Director gave Devon thirty days to provide relevant information supporting its transportation allowances. (2002–2004 AR at 850; 2005–2007 AR at 573).

Rather than supplying the information, Devon appealed to the Interior Board of Land Appeals ("IBLA"). While that appeal was pending, Devon submitted additional information to the IBLA regarding its marketable condition analysis. (See, e.g. , 2002–2004 AR at 1562–79; 2005–2007 AR at 1314–31, 3916–17). As for Devon's unbundling analysis, there appears to be some imprecision as to when Devon provided the relevant data and cost estimates.

421 F.Supp.3d 1220

Without citing the administrative record, Respondents state that Devon provided "cost estimates" during the IBLA appeal and during this action, but that Devon never provided its relevant analysis "to ONRR for audit ...." ECF No. 83 at 23–24. Devon states that it provided certain cost estimates "to the ONRR after the IBLA affirmed the Decisions." ECF No. 77 at 29 n.72. And the Administrative Record indicates that, as of January 27, 2017, more than half a year after Devon filed its June 2016 Petition for Review of Final Agency Action, Devon still had "not proposed an unbundling method" to the ONRR's Audit and Compliance Management Team. (05–07 AR at 4041–42). Whatever the case, the parties agreed at oral argument that Devon did not submit the pertinent technical information until after commencement of the IBLA...

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