Ovintiv U.S. Inc. v. Haaland
| Decision Date | 30 March 2023 |
| Docket Number | 1:21-cv-2552-RCL |
| Parties | OVINTIV USA, INC., Plaintiff, v. DEBRA A. HAALAND, in her official capacity as Secretary of the United States Department of the Interior, et. al., Defendants. |
| Court | U.S. District Court — District of Columbia |
Plaintiff Ovintiv USA (“Ovintiv”) challenges what is, in essence, the government's failure to issue a refund. Ovintiv leased land from the federal government and extracted natural gas products from that land. In exchange, Ovintiv paid a royalty to the government set at a proportion of the value of what it produced. The firm was, however, permitted to deduct certain costs of production from the royalties owed. One of those deductions, and the subject of the challenge here, was for the reasonable actual costs incurred to transport the gas produced.
Under a contract with its gas processor, Ovintiv committed to selling certain minimum barrels of gas product each day and transporting them via pipeline. If Ovintiv failed to deliver it agreed to pay the processor a fee equal to a set price multiplied by the number of missing barrels. It then failed to meet its volume commitment and the processor assessed the fee. Ovintiv requested that it be allowed to deduct from its government royalty obligations the part of the incurred cost associated with “transportation shortfall.” Ovintiv contended that the amount was a reasonable, actual transportation cost. The government denied the request. Ovintiv administratively appealed and, after the denial was affirmed, sued in this Court challenging the denial.
Upon consideration of the filings, applicable law, and the record the Court agrees with Ovintiv and concludes that the denial was arbitrary and capricious.
From time to time, the federal government leases government-owned land to companies interested in extracting natural gas and natural gas liquids (“NGLs”) from that land. See Cont'l Res., Inc. v. Gould (“Cont'l Res. I”), 410 F.Supp.3d 30, 32 (D.D.C. 2019). The leasing firm (known as a lessee) must then pay royalties back to the government. 30 U.S.C. § 226. The Secretary of the Interior is responsible for leasing land that contains gas deposits, id., and is otherwise charged with administering the leasing and royalty system. Cont'l Res. I, 410 F.Supp.3d at 32; 30 U.S.C. § 189 (); id. § 1711(a) (same); id. § 1751(a) (same). Inside the Department of the Interior, the Office of Natural Resources Revenue (“ONRR”)[2] is responsible for managing reporting and payment of royalties by lessees, as well as resolving objections or conflicts between a lessee and the government. Cont'l Res. I, 410 F.Supp.3d at 31.
The royalty to be paid by a lessee is based “on the ‘value of the production removed or sold from the lease.'” Indep. Petroleum Ass'n of Am. v. DeWitt, 279 F.3d 1036, 1037 (D.C. Cir. 2002) (quoting 30 U.S.C. § 226(b)(1)(A)). The Secretary has “establish[ed] the value of production for royalty purposes” through regulation. 30 C.F.R. § 1206.150 et seq. The government also sets a proportion, such as one-sixth or one-eighth, which is applied to that value to determine the royalty amount. DeWitt, 279 F.3d at 1037. Lessees self-report royalties to ONRR. See 30 C.F.R. § 1206.153(b)(1)(i).
Many of the finer details for how to calculate value of the production and royalties are unimportant for the present lawsuit. What is key is the concept of a “[t]ransportation allowance[].” Id. § 1206.156. A transportation allowance “allow[s] a deduction for the reasonable actual costs incurred by the lessee to transport [gas or gas products] from a lease to a point off the lease.” Id. § 1206.156(a). In plainer English: a lessee may reduce the royalties that it owes the government by deducting certain transportation costs.
When the transportation allowance does “not exceed 50 percent of the value” produced, the lessee need not ask ONRR for permission to deduct the transportation allowance. Id. § 1206.156(c). If the proposed allowance does exceed that amount, the lessee must request that ONRR approve the deduction by providing “all relevant and supporting documentation necessary for ONRR to make a determination” that the “transportation costs incurred in excess of the limitations . . . were reasonable, actual, and necessary.” Id. § 1206.156(c)(3). Ovintiv made just such a request here.
Within the scheme of royalty calculations for federal gas and gas products, the transportation allowance is significant. Indeed, Section 1206.157, governing “[d]etermination of transportation allowances,” takes up approximately six full pages in the Code of Federal Regulations. See id. For this case, two subparts are particularly relevant.
One subpart, titled “[a]llowable costs in determining transportation allowances,” states: “You may include, but are not limited to (subject to the requirements of paragraph (g) of this section), the following costs in determining [the transportation allowance].” Id. § 1206.157(f) (emphasis added). The subpart goes on to list ten different allowable costs. Id. Examples of allowable costs include “commodity charge[s] allow[ing] the pipeline to recover the costs of providing service,” id. § 1206.157(f)(3), and “the costs of securing a letter of credit, or other surety, that the pipeline requires you as a shipper to maintain under an arm's-length transportation contract,” id. § 1206.157(f)(10).
The other important subpart, which subpart (f) references, is subpart (g). It serves the opposite function of subpart (f) by listing “[n]onallowable costs in determining transportation allowances.” id. § 1206.157(g). Those are costs that “[l]essees may not include in determining the . . . transportation allowance.” Id. (emphasis added). Examples include the fees and costs for “storing production in a storage facility, whether on or off the lease, for more than 30 days,” id. § 1206.157(g)(1), and “fees [] pa[id] to hub operators for administrative services (e.g., title transfer tracking) necessary to account for the sale of gas within a hub,” id. § 1206.157(g)(4).
One allowable cost and one nonallowable cost are critical to the agency's decision here as well as to Ovintiv's challenge.
That allowable cost is “[f]irm demand charges paid to pipelines.” Id. § 1206.157(f)(1). In relevant part, that allowable cost reads:
You may deduct firm demand charges or capacity reservation fees paid to a pipeline, including charges or fees for unused firm capacity that you have not sold before you report your allowance.
Id. In the underlying agency action, Ovintiv invoked (f)(1) to explain why the fee it paid was deductible as a transportation allowance.
The relevant nonallowable cost is “[p]enalties you incur as shipper.” Id. § 1206.157(g)(3). The relevant portions read:
(ii) Scheduling penalties. This includes penalties you incur for differences between daily volumes delivered into the pipeline and volumes scheduled or nominated at a receipt or delivery point; (iii) Imbalance penalties. This includes penalties you incur (generally on a monthly basis) for differences between volumes delivered into the pipeline and volumes scheduled or nominated at a receipt or delivery point.
Id. Those penalties are relevant because ONRR invoked both to deny Ovintiv's request for a transportation allowance exceeding 50%.
During the relevant time period, Ovintiv was a federal lessee extracting raw gas on land in Colorado. Denial of Appeal (“Director's Decision”) 3, JA 31-43.[3]In 2012, Ovintiv entered into a contract with gas processor Enterprise Gas Processing, LLC (“Enterprise”) called the NGL Purchase Agreement (“2012 Agreement”). 2012 Agreement, JA 392-486. Under that contract, Ovintiv agreed to deliver certain volumes of gas and gas products to Enterprise. Id. On November 1, 2014, Ovintiv and Enterprise entered an amended agreement, the First Amended and Restated NGL Purchase Agreement (“2014 Agreement”), JA 337-391. That 2014 Agreement is the contract relevant for this case.
Enterprise did not own or operate pipelines connecting its processing plants with facilities that separate NGLs into useful components. Director's Decision 4. Accordingly, Enterprise contracted with a pipeline company, Mid-America Pipeline Company (“Mid-America”), to transport NGLs from its processing plans to those facilities. Id. As part of an agreement between Enterprise and Mid-America, Enterprise was obligated “to deliver a certain volume of NGLs into the Pipeline” and Mid-America had to accept that volume. Id. This commitment to volume delivery was linked to Mid-America's choice to expand a certain pipeline, the Rocky Mountain Pipeline, which transported NGLs for Enterprise. Mid-America Rocky Mountain Pipeline Expansion Transportation Services Agreement (“Mid-America Expansion Agreement”) 1, JA 487-524. If Enterprise failed to meet its volume commitment, it would pay a specified price per barrel that it failed to ship. Mid-America Expansion Agreement ¶ 4.1.2. That volume commitment between Enterprise and Mid-America gave Mid-America the assurance necessary to expand the pipeline and ultimately provides background on the commitments made by Ovintiv to Enterprise in their 2014 Agreement. Specifically, as the Court will explain, the fee that Ovintiv paid Enterprise for failure to deliver the committed volume of barrels per day was linked to the volume commitments that Enterprise made to Mid-America.
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