Shell Offshore, Inc. v. Babbitt

• Decision Date: 17 March 1999
• Docket Number: No. 98-0853.,98-0853.
• Citation: Shell Offshore, Inc. v. Babbitt, 61 F.Supp.2d 520 (W.D. La. 1999)
• Parties: SHELL OFFSHORE, INC. and Shell Deepwater Production, Inc. v. Bruce BABBITT, Secretary of the Interior.
• Court: U.S. District Court — Western District of Louisiana

61 F.Supp.2d 520

SHELL OFFSHORE, INC. and Shell Deepwater Production, Inc. v.Bruce BABBITT, Secretary of the Interior.

No. 98-0853.

United States District Court, W.D. Louisiana, Lake Charles Division.

March 17, 1999.

Charles B. Griffis, Liskow & Lewis, Lafayette, LA, James Berry St. John, Jr, Jonathan A. Hunter, Liskow & Lewis, New Orleans, LA, for Shell Offshore Inc. and Shell Deepwater Production Inc, plaintiffs.

Martin J. LaLonde, Geoffrey Garver, Lori Caramanian, U.S. Dept of Justice, Washington, DC, for Bruce Babbitt, Bob Armstrong and Cynthia L. Quarterman, defendants.

MEMORANDUM RULING

TRIMBLE, District Judge.

Currently before the court are cross Motions for Summary Judgment by Shell Offshore, Inc. and Shell Deepwater Production, Inc.("Shell") and the Department of the Interior("DOI")[Docs. 21 and 27 respectively].

Facts

Shell is a lessee under numerous offshore federal mineral leases that were issued by and/or administered by the Department of Interior("DOI"), through its sub-agency, the Minerals Management Service ("MMS").This dispute involves Shell's royalty payments on crude oil produced from offshore leases comprising Shell's Auger Unit.

Shell began producing from the Auger Unit offshore Louisiana in April 1994.Shell alleges that crude oil produced from the Auger Unit was transported through a common carrier pipeline in a continuous, uninterrupted movement into Louisiana and then on to Shell's refinery in Wood River, Illinois.

Under MMS' royalty valuation regulations, a lessee may deduct the cost of transporting oil from the value upon which it calculates royalty payments.See30 C.F.R. § 206.105(a), (b)(1).Shell filed a tariff with the Federal Energy Regulatory Commission("FERC") on March 2, 1994.This tariff was effective April 1, 1994.Shell alleges that FERC established the rate Shell could charge for transporting crude oil through the Auger pipeline.DOI argues that FERC's jurisdiction had not been established and if FERC did not have jurisdiction, FERC could not establish the appropriate rate.

By letter dated July 7, 1994, to the MMS, 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 cost the tariff rate approved by FERC for the Auger pipeline.In an order dated November 10, 1994, the MMS denied Shell's request.

Shell appealed the order.On August 13, 1998, DOI denied Shell's appeal.

Prior to October, 1994, MMS accepted tariffs filed with FERC in determining whether a lessee qualified for an exception under 30 C.F.R. § 206.105(b)(5).

DOI permits offshore federal lessees that transport crude oil through pipelines that are not owned by such lessees or affiliates of such lessees to deduct the actual, reasonable costs of transportation, which may or may not be the same as the FERC rate, depending on the contract between the parties.30 CFR § 206.105(a).

Procedural History

DOI issued Shell's leases under the authority of the Outer Continental Shelf Lands Act ("OCSLA"), 43 U.S.C. § 1331, et seq.Under OCSLA and the lease terms, Shell is to pay royalties on the basis of a specified percentage (usually 16 2/3) of the "value of the production saved, removed, or sold" from the lease.43 U.S.C. § 1337(a)(1)(A).MMS regulations stipulate that the value of the production for royalty purposes shall not be less than the gross proceeds accruing to the lease for lease production, less applicable allowances.30 C.F.R. § 206.102(h)(1998).The determination of the applicable allowances is determined, in part, on whether Shell has arm's length or non arms-length transportation contracts.It is not contested that Shell has a non arm's-length contract in this case.

30 C.F.R. § 206.55(b) states that:

(1) If a lessee has a non-arm's-length contract or has no contract, including those situations where the lessee performs transportation services for itself, the transportation allowance will be based upon the lessee's reasonable, actual costs as provided in this paragraph.All transportation allowances deducted under a non-arm's-length or no-contract situation are subject to monitoring, review, audit, and adjustment.....

(2) The transportation allowance for non-arms'-length or no-contract situations shall be based upon the lessee's actual costs for transportation during the reporting period, including operating and maintenance expenses....

30 C.F.R. § 206.51 defines a transportation allowance as "an allowance for the reasonable, actual costs incurred by the lessee for moving oil to a point of sale or point of delivery off the lease, unit area, or communitized area, excluding gathering, or an approved or MMS-initially accepted deduction for costs of such transportation, determined by this subpart."

30 C.F.R. § 206.105(1998) governs how lessees determine transportation allowances.§ 206.105(c)(2)(iv) provides that, in a non-arm's-length transaction, if the lessee is approved to use its FERC-approved tariff as its transportation cost in accordance with paragraph (b)(5) of that section, it should follow the reporting requirements of paragraph (c)(1) of that same section.

30 C.F.R. § 206.105(b)(5) states:

A lessee may apply to the MMS for an exception from the requirement that it compute actual costs in accordance with paragraphs (b)(1) through (b)(4) of this section.The MMS will grant the exception only if the lessee has a tariff for the transportation system approved by the Federal Energy Regulatory Commission(FERC)....The MMS shall deny the exception request if it determines that the tariff is excessive as compared to arm's-length transportation charges by pipelines, owned by the lessee or others, providing similar transportation services in that area.If there are no arm's-length transportation charges, MMS shall deny the request if: (1) No FERC or State regulatory agency cost analysis exists and FERC .... has declined to investigate pursuant to MMS timely objections upon filing; and (ii) the tariff significantly exceeds the lessee's actual costs or transportation as determined under this section.

This is known as the "FERC exception."

The preamble to 30 C.F.R. § 206.105(b)(5) explained, "where a lessee has a tariff approved by FERC or a State regulatory agency, it is unnecessarily burdensome and duplicative to recompute costs."53 F.Reg.at 1261(January 15, 1988).Shell has a "value determination letter" issued by MMS dated December 1, 1988.From the promulgation of the 1988 regulation until September of 1994, the MMS routinely allowed federal OCS lessees to deduct the FERC tariff rate as the cost of non-arm's-length transportation.

Under FERC practice, when a tariff is filed, FERC automatically accepts it unless a protest is filed, but DOI argues that this does not equal approval of the tariff.DOI argues that FERC must first issue an affirmative declaration that it has jurisdiction over a pipeline to have the authority to "approve" a tariff.18 C.F.R. § 385.207(a)(2).

Shell argues that, effective April 1, 1994, FERC approved a tariff published by Shell for the Auger pipeline.By a letter to the MMS dated July 7, 1994, Shell requested that MMS confirm that Shell was entitled to deduct as a transportation cost the tariff rate approved by FERC.In an order dated November 10, 1994, MMS denied Shell's request.MMS stated in that order that FERC's decision in Oxy PipelineInc., 61 FERC 61,051(1992) demonstrated that FERC "renounced jurisdiction over oil pipelines transporting oil solely on or across OCS," and therefore Shell's FERC tariff could not be used in lieu if an "actual cost" transportation calculation.In Oxy Pipeline, FERC disclaimed jurisdiction over a pipeline segment that moved crude oil from one location on the OCS to another location on the OCS, because FERC concluded that this did not constitute "interstate commerce" under the Interstate Commerce Act.¹

Shell appealed the order to the Director of the MMS.Shell argued that Oxy Pipeline did not apply because Shell's Auger Unit production did not remain on the OCS, but rather moved in a continuous stream from the federal OCS to onshore locations.²

On January 18, 1997, the Associate Director of the MMS issued a decision granting the appeals filed by Shell and other OCS lessees.³The Associate Director found that: (1) the jurisdictional determination in Oxy Pipeline could not be used as a blanket determination for all OCS pipelines, and that MMS must petition the FERC for an individual jurisdictional determination regarding each pipeline.The Associate Director further found that MMS had not, as required by DOI's royalty valuation rules in 30 C.F.R. § 206.105(b)(5), analyzed whether the tariffs were excessive as compared to arm's-length transportation charges, nor had MMS filed with FERC timely objections to the tariffs.The MMS decision remanded several appeals, including Shell's, to MMS's Royalty Valuation Division("RVD") and ordered RVD to petition FERC for individual jurisdictional determinations for each pipeline.

RVD did not conduct such a valuation study.Instead, on February 4, 1998, Shell received a final decision issued sua sponte by Interior Assistant Secretary Armstrong⁴ denying Shell's appeal based upon Ultramar, Inc. v. Gaviota Terminal Company,80 FERC 61,201(1997).In Ultramar, FERC ruled that it did not have jurisdiction over the movement of crude oil from federal lands offshore of the State of California to a refinery located within the State of California.DOI reasoned that because the oil was transported from offshore to the State of California and remained within California, the transportation was intrastate, therefore there was no jurisdiction.DOI found that Shell had not proven that its oil moved beyond the adjacent state, therefore this was not interstate transportation and FERC was without jurisdiction.

Shell argued then, as it does now, that it had provided uncontroverted...