Shell Offshore Inc. v. Babbitt

• Decision Date: 12 January 2001
• Docket Number: No. 99-30532,99-30532
• Citation: 238 F.3d 622
• Parties: (5th Cir. 2001) SHELL OFFSHORE INC.; SHELL DEEPWATER PRODUCTION INC., Plaintiffs-Appellants-Cross-Appellees, v. BRUCE BABBITT, SECRETARY OF THE DEPARTMENT OF INTERIOR; BOB ARMSTRONG, ASSISTANT SECRETARY, LAND & MINERALS MANAGEMENT, DEPARTMENT OF THE INTERIOR; WALT ROSENBUSCH, DIRECTOR, MINERALS MANAGEMENT SERVICE, DEPARTMENT OF THE INTERIOR, Defendants-Appellees-Cross-Appellants
• Court: U.S. Court of Appeals — Fifth Circuit

Page 622

238 F.3d 622 (5th Cir. 2001)

SHELL OFFSHORE INC.; SHELL DEEPWATER PRODUCTION INC., Plaintiffs-Appellants-Cross-Appellees, v. BRUCE BABBITT, SECRETARY OF THE DEPARTMENT OF INTERIOR; BOB ARMSTRONG, ASSISTANT SECRETARY, LAND & MINERALS MANAGEMENT, DEPARTMENT OF THE INTERIOR; WALT ROSENBUSCH, DIRECTOR, MINERALS MANAGEMENT SERVICE, DEPARTMENT OF THE INTERIOR, Defendants-Appellees-Cross-Appellants.

No. 99-30532

IN THE UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT

January 12, 2001

Appeals from the United States District Court for the Western District of Louisiana.

Before GARWOOD, HIGGINBOTHAM, and STEWART, Circuit Judges.

GARWOOD, Circuit Judge:

Plaintiff-appellant Shell Offshore, Inc., (Shell) sued the Department of the Interior (Interior) under the citizen suit provisions of the Outer Continental Shelf Lands Act, 43 U.S.C. §§ 1331 et seq. (§ 1349(b)) (OCSLA), the Administrative Procedure Act, 5 U.S.C. § 551 et seq. (§ 704) (APA), and the Declaratory Judgment Act, 28 U.S.C. §§ 2201, 2202, challenging Interior's denial of Shell's request to use its Federal Energy Regulatory Commission (FERC) tariff rate as the cost of transporting crude oil produced from certain of Shell's offshore oil and gas leases for purposes of calculating Shell's royalty payments due Interior. The district court granted Shell's summary judgment motion in part, holding that Interior's decision denying the use of the tariff rate was arbitrary and capricious, and was a new substantive rule that required notice and comment under the APA, 5 U.S.C. § 553. We agree with the district court that Interior's decision was in essence the application of a new substantive rule that required notice and comment before implementation. We hold that Shell was entitled to use the FERC tariff rate to calculate transportation costs for all of the oil at issue in this case which it transported through the Auger pipeline, and was therefore entitled to have its motion for summary judgment granted in full. Accordingly, we affirm in part, reverse in part, and remand for entry of appropriate judgment consistent herewith.

Facts and Proceedings Below

Shell is the lessee in numerous federal leases for the production of crude oil and gas located offshore Louisiana within the Auger Unit on the Outer Continental Shelf (OCS).¹ These leases were issued by Interior through its sub-agency, the Minerals Management Service (MMS), under the authority of the OCSLA, 43 U.S.C. §§ 1331 et seq. This dispute involves Shell's royalty payments on crude oil produced from offshore leases comprising Shell's Auger Unit. Under the OCSLA and the terms of the leases, Shell is required to pay royalties as a specified percentage of the "value of the production saved, removed, or sold" from the lease. 43 U.S.C. § 1337(a)(1)(A). Interior is responsible for administering leases on the OCS, and promulgates regulations governing royalty collection and establishing the value of production on which lessees pay royalties.

Under the regulations in effect at the time, Interior allowed lessees to deduct transportation costs from the value on which they calculated royalty payments. Those regulations distinguished between transportation costs incurred under "arms-length" agreements with common carriers and "non-arms-length" transportation costs, such as when a lessee transports the oil itself or via a pipeline owned by an affiliate of the lessee. See 30 C.F.R. § 206.105(a)-(b).

Shell began producing from the Auger Unit in April 1994. The Auger pipeline transports crude oil from the Auger Unit to a series of other pipelines that begins on the OCS, crosses onshore into Louisiana, and eventually reaches other states. The district court found, and Interior does not dispute, that some portion apparently a substantial majority of the oil produced in the Auger Unit travels in a continuous stream to Illinois for refining. The oil that reaches Illinois travels first through the Auger pipeline and then, via several pipeline systems, to St. James, Louisiana, and from there through the Capline/Capwood pipeline system to the Wood River refinery in Illinois. The Auger pipeline is owned by a Shell affiliate. The parties agree that the transport of Shell's oil through the Auger pipeline was a non-arms-length transaction, and that therefore the calculation of Auger pipeline transport costs Shell could permissibly deduct from its royalty payments was governed by 30 C.F.R. § 206.105(b). Under section 206.105(b)(2), lessees must demonstrate their actual costs of transport for deduction from their royalty payments due Interior, and the regulation provides detailed instructions for such calculations. Under section 206.105(b)(5), however, lessees are granted an exception from the requirement of showing actual costs of transport if the lessee has "a tariff for the transportation system approved by the [FERC]." Id. Under this exception, the lessee can use the FERC tariff rate to calculate their transportation cost deductions from royalty payments if that tariff has been "approved by the [FERC]." Id.²

Interior points to several recent FERC opinions, commencing in 1992, that, it argues, cast FERC jurisdiction over pipelines on the OCS into some doubt.³ It is and was FERC's practice to automatically accept all filed tariffs unless a timely protest is filed. Prior to 1993, MMS (the sub-agency of Interior responsible for administering the OCS leases) accepted tariffs that were filed with FERC in determining whether a lessee qualified for an exception under 30 C.F.R. § 206.105(b)(5). From 1988 until some point in 1993 or 1994,⁴ MMS accepted as "approved by FERC" most tariffs that were simply filed with FERC, and did not require producers to petition FERC for a determination of jurisdiction. By 1994, however, Interior was disallowing use of the tariff exception for OCS lessees that it felt might no longer be within FERC jurisdiction.

Shell filed a tariff with FERC on March 2, 1994, which was unprotested, and was accepted and published by FERC on April 1, 1994. In a letter dated July 7, 1994, Shell requested that the MMS confirm that, in valuing Shell's Auger Unit crude oil production for royalty purposes, Shell was entitled to deduct as transportation costs the tariff rate accepted by FERC for the Auger pipeline. In an order dated November 10, 1994, the MMS denied Shell's request, and Shell appealed the order. Several administrative appeals followed, but in its final decision on August 13, 1998, Interior stated that Shell's request was being denied because Shell had failed to petition FERC and receive from FERC a determination affirmatively stating that FERC possessed jurisdiction over the Auger pipeline.

Shell then filed the instant lawsuit. Thereafter, on December 18, 1998, MMS sent a "Dear Payor" letter to Shell stating that due to uncertainty concerning FERC's jurisdiction over pipelines on the OCS, lessees must "petition FERC" and receive from FERC "a determination affirmatively stating that it has jurisdiction" before MMS will allow the lessee to use the FERC tariff to calculate transportation costs for the purposes of royalty calculations. Similar letters were sent to other OCS lessees.

In the district court, Shell claimed that its FERC tariff established the rate Shell could permissibly deduct from its royalty payments for transporting oil through the Auger pipeline. Interior argued that FERC's jurisdiction had not been clearly established and that if FERC did not have jurisdiction, then FERC could not establish the appropriate rate and "approve" the tariff within the meaning of § 206.105(b)(5).

Both Shell and Interior moved for summary judgment in the district court. The district court denied Interior's motion and partially granted Shell's motion. The district court found that there was no rational connection between the FERC's decisions in Ultramar and Oxy and Interior's decision to wholly deny Shell's request. See Shell Offshore, Inc., v. Babbit, 61 F.Supp.2d 520, 528 (W.D. La. 1999). The court held that Interior had failed to adequately consider the evidence of interstate transportation of the oil submitted by Shell, and that Interior's decision was therefore arbitrary and capricious. Id.

The district court also held that the notice and comment provisions of the APA were applicable to Interior's change in policy. The district court applied the test set out by this Court in Phillips Petroleum Co. v. Johnson, 22 F.3d 616 (5th Cir. 1994) that dictates when exemption from APA notice and comment is proper for rules that govern "rules of agency organization, procedure, or practice." Id. at 616. See also 5 U.S.C. § 553(b)(A). Despite its holding that Interior's new policy required notice and comment under the APA, the district court only partially granted Shell's summary judgment motion. The court reasoned that "[t]ransporting the crude [oil] to a refinery in Louisiana is not interstate and the holding in Ultramar is applicable to crude transported from the OCS to Louisiana," and held that Shell's tariff was not applicable to the portion of the Auger crude oil that did not leave Louisiana unrefined. Shell Offshore, 61 F.Supp.2d at 529. Both Shell and Interior timely appealed.

Discussion

This case involves two basic issues. The first is whether Interior's policy change requiring OCS lessees to petition FERC for an affirmation of jurisdiction is a new "rule" that triggers the notice and comment provisions of the APA. If Interior had, from the beginning, interpreted their regulation as requiring an affirmation of FERC jurisdiction, their interpretation of their own regulation would be entitled to substantial deference. However, Interior changed their policy they began to require lessees (and required Shell in this case) to petition FERC for an affirmation of jurisdiction whereas from 1988 to 1993 their established procedure was to treat tariffs that were simply filed with the FERC as "approved" under § 206.105(b...