Shell Oil Co. v. Babbitt, Civil Action No. 95-492 MMS.

CourtUnited States District Courts. 3th Circuit. United States District Court (Delaware)
Writing for the CourtMurray M. Schwartz
Citation945 F.Supp. 792
PartiesSHELL OIL COMPANY, Plaintiff, v. Bruce BABBITT and The U.S. Department of the Interior, Defendants.
Docket NumberCivil Action No. 95-492 MMS.
Decision Date14 November 1996
945 F.Supp. 792
SHELL OIL COMPANY, Plaintiff,
v.
Bruce BABBITT and The U.S. Department of the Interior, Defendants.
Civil Action No. 95-492 MMS.
United States District Court, D. Delaware.
November 14, 1996.

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COPYRIGHT MATERIAL OMITTED

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Frederick L. Cottrell, III, of Richards, Layton & Finger, Wilmington, DE (L. Joe Leggette, and Jackson & Kelly, Washington, DC, of counsel), for plaintiff.

Gregory M. Sleet, United States Attorney, and Patricia Hannigan, Assistant United States Attorney, Department of Justice, Wilmington, DE; Richard M. Hall, United States Department of Natural Resources Division, Washington, DC (Sarah L. Inderbitzin, Esq., United States Department of the Interior, Washington, DC, of counsel), for defendant.

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Gregg E. Wilson, Deputy Attorney General, Department of Justice, Wilmington, DE (Lee Ellen Helfrich, and Dina R. Lassow, of Lobel, Novins & Lamont, Washington, DC, of counsel), for Controller of the State of California (amicus); Richard P. Ieyoub, Attorney General, and Emory A. Belton, Jr., Assistant Attorney General, State of Louisiana (amicus).

OPINION

MURRAY M. SCHWARTZ, Senior District Judge.


I. INTRODUCTION

Plaintiff Shell Oil Company ("Shell" or "Shell Oil") has filed suit against defendants Bruce Babbitt, as Secretary of the Department of the Interior ("DOI"), and the Department of the Interior (collectively "the Government" or "defendants"), seeking review of a decision issued by the Department of the Interior's Minerals Management Service ("MMS") dated April 3, 1990. Docket Item ("D.I.") 1 at ¶ 1. The MMS order requires Shell to disclose documents pertaining to Shell's purchase and resale of certain crude oil. D.I. 8 at Exhibit ("Exh.") 1. The oil in question was produced on federal land leased by Shell Western Exploration & Production Inc., ("Shell Ex"), a wholly owned subsidiary of Shell Oil. D.I. 8 at Exh. 2. Shell asserts the defendants are not entitled to the documents at issue, that the MMS order should be vacated, and that it is entitled to relief on the merits of its dispute with the Government. D.I. 1 at ¶ 9.

Both parties filed motions for summary judgment. Judicial review of this matter is undertaken pursuant to the Administrative Procedure Act, 5 U.S.C. § 702. Jurisdiction is founded upon 28 U.S.C. § 1331. For the reasons stated below, the Government's motion for summary judgment will be granted, and Shell Oil's motion for summary judgment will be denied.

II. LEGAL AND FACTUAL BACKGROUND

This Court's March 13, 1996 opinion denying the Government's motion to transfer provides a clear and brief statement of the factual background. D.I. 21. Nevertheless, the Court will again summarize the facts, virtually undisputed, and provide the legal background for the pending summary judgment motions. During the period January 1, 1985, through December 31, 1988, Shell Ex, which is not a party to this action, produced crude oil from land leased from the United States. D.I. 8 at Exh. 2. As lessee, Shell Ex was the designated payor of royalties on the oil to the United States under the Mineral Lands Act, 30 U.S.C. § 226(c).

The royalties paid to the federal government by Shell Ex were based on a specific percentage of the "value of the production" of the crude oil removed from the land and sold under the leases. D.I. 1 at ¶ 8(b). The rate of "value of production" is established in regulations promulgated by the Secretary of the Interior for royalty valuations on oil produced under federal leases. See 30 U.S.C. § 189.

After producing the crude oil, Shell Ex sold it to Shell Oil pursuant to a purchase and sales agreement dated January 1, 1985. D.I. 8 at Exh. 2. The purchase and sales agreement between Shell Ex and its parent, Shell Oil, established a price for the crude oil based upon the average prices posted by its competitors ("third party" or "posted" prices) for the purchase of like-kind oil from producers. D.I. 1 at ¶ 8b; D.I. 7 at 6-7. Shell Oil subsequently sold the oil it had purchased from Shell Ex to third parties. D.I. 8 at Exh. 2.

By authority delegated under 30 U.S.C. § 1735, the Controller's Office of the State of California audited Shell Ex's royalty payments under the federal leases for the period January 1, 1985 through December 31, 1988. D.I. 8 at 2. The Controller's office reported its findings to MMS. That report concluded that the initial sale of oil from the producer, Shell Ex, to the marketer, Shell Oil, was a non-arm's length transfer between two corporate affiliates. D.I. 7 at Exh. 4. Shell Oil does not dispute that conclusion for purposes of the cross motions for summary judgment presented here.

On April 3, 1990, MMS issued an order stating that because the inter-affiliate sale

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was not viewed as an arm's-length transactions, the "value of production" should be based on the subsequent sale of that oil by Shell Oil to third parties. D.I. 8 at Exh. 1. The order mandated the third party arm's-length purchase price be compared with the non-arm's-length contract prices to ensure proper valuation and thus proper payment of royalties to the United States. Id. MMS explained: "[i]n situations where crude oil or other mineral products are sold between affiliate companies in non-arm's-length transactions, it is MMS's policy to look beyond the affiliate sales to arm's-length sales and to compare the involved values when determining royalties due." D.I. 29 at Exh. 23. Thus, Shell Oil was directed to provide access to documents evidencing its arm's-length sales of the oil produced under the federal leases. Id.

MMS based its order upon its interpretation of the Federal Oil and Gas Royalty Management Act ("FOGRMA"), section 103(a), 30 U.S.C. § 1713(a) (1986), and its accompanying regulations, 30 C.F.R. § 212.51(a) (1989). FOGRMA was enacted "to require the development of enforcement practices that ensure the prompt and proper collection and disbursement of oil and gas revenues owed to the United States and Indian lessors and those inuring to the benefit of the States...." 30 U.S.C. § 1701(b)(3). FOGRMA was not the child of idle curiosity by Congress; Congress was distressed by "gross repeated underpayments of royalties[,]" H.R.Rep. No. 97-859, 97th Cong., 2d Sess. 18 (1982); D.I. 34 at Exh. 1, a condition exacerbated by the extreme limits on MMS's authority that allowed the oil and gas industry to "operate essentially on an honor system." H.R.Rep. No. 97-859, at 15. A 1982 estimate by Congress indicated that the "honor system" resulted in $500 million in royalties uncollected per year. Id. at 16.

Shell appealed the Order to the Director of MMS. D.I. 29 at Exh. 24. The appeal was denied on March 1, 1991. D.I. 29 at Exh. 30. Shell then sought review of the Director's decision before the Interior Board of Land Appeals ("IBLA"), which on August 11, 1994, reversed the Director's Decision and held MMS could not seek production of the records in question. Shell Oil Co., 130 IBLA 93 (1994). The IBLA based its reversal on the "marketing affiliate" provision of the FOGRMA regulations. Under the regulations, if an affiliate buys oil only from its affiliated producer, see 30 C.F.R. § 206.101, then it is considered a "marketing affiliate" and royalties to the lessee are based upon the affiliate's arm's length sale to third parties. 30 C.F.R. § 206.102(b)(1)(i). But because Shell Oil buys oil from sources other than Shell Ex, it is not a "marketing affiliate."1 Following this reasoning, the IBLA initially held Shell Ex's production should be valued using the proceeds received from its contract with Shell Oil based on third party prices, because they "reflect a price that independent buyers in arm's-length transactions are willing to pay for production." Shell Oil, 130 IBLA at 97.

MMS petitioned for reconsideration, asserting the IBLA neglected the "gross proceeds rule" of regulation 206.102(h). The gross proceeds rule states that "under no circumstances shall the value of the production, for royalty purposes, be less than the gross proceeds accruing to the lessee." 30 C.F.R. § 206.102(h). On reconsideration, the IBLA reversed itself and affirmed the Director's decision. Shell Oil Co. (On Reconsideration), 132 IBLA 354 (1995). The IBLA first noted that the term "lessee" in the gross proceeds rule "is specific and cannot be expanded to include an affiliate of the lessee." Id. at 356. Nevertheless, reasoned the IBLA, the purpose of the gross proceeds rule is to make clear "that no matter what valuation method is used, the value for royalty purposes cannot be less than the lessee's gross proceeds...." Id. at 356. The marketing affiliate provision, in other words, had "no relevance to the question whether the gross proceeds rule must first be applied ... no matter what regulatory benchmark is used to determine royalty, MMS must compare the result obtained thereby against a gross proceeds analysis in any case." Id.

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Finally, IBLA concluded that MMS has the authority to demand documents regarding Shell's sales to third parties because:

affiliates participating in a transfer of Federal lease production in contemplation of sales to a third party should expect MMS to scrutinize any interaffiliate transfer and all subsequent affiliate sales.... [Shell Ex] and Shell should have anticipated that MMS would review their handling of Federal production in order to properly determine royalty in accordance with statutory and regulatory requirements.... Accordingly, we find that Departmental regulations implementing 30 U.S.C. § 1711 (1988) [FOGRMA] anticipate that MMS will need to seek such information and provide the necessary authority that it may do so.

Id. at 357-58.

After its petition for reconsideration was denied, Shell filed its complaint in this action, alleging the IBLA's decision and its refusal to reconsider the decision are "arbitrary and capricious, violate the Department's regulations, exceed the Department's power under...

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7 practice notes
  • United Space Alliance, LLC v. Solis, Civil Action 11-746 (RCL)
    • United States
    • United States District Courts. United States District Court (Columbia)
    • November 14, 2011
    ...its investigative efforts and in a way that Congress never intended in passing" the Paperwork Reduction Act. Shell Oil Co. v. Babbitt, 945 F. Supp. 792, 807 (D. Del. 1996). Courts of Appeals have held that the Paperwork Reduction Act does not apply to document requests made during an audit ......
  • United Space Alliance, LLC v. Solis, Civil Action No. 11–746(RCL).
    • United States
    • United States District Courts. United States District Court (Columbia)
    • November 14, 2011
    ...its investigative efforts and in a way that Congress never intended in passing” the Paperwork Reduction Act. Shell Oil Co. v. Babbitt, 945 F.Supp. 792, 807 (D.Del.1996). Courts of Appeals have held that the Paperwork Reduction Act does not apply to document requests made during an audit by ......
  • Mackenzie Medical Supply, Inc. v. Leavitt, No. CIV. AMD 04-2807.
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Maryland)
    • March 14, 2006
    ...in the exception to the PRA, an audit certainly must be considered to be a subset of an "investigation." See Shell Oil Co. v. Babbitt, 945 F.Supp. 792, 807 (D.Del.1996) ("The PRA specifically exempts activities such as an [Minerals Management Service] audit from its In addition, contrary to......
  • Mackenzie Medical Supply, Inc. v. Leavitt, No. 06-1630.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (4th Circuit)
    • October 31, 2007
    ...in the exception to the PRA, an audit certainly must be considered to be a subset of an "investigation." See Shell Oil Co. v. Babbitt, 945 F.Supp. 792, 807 (D.Del. 1996) ("The PRA specifically exempts activities such as an [Minerals Management Service] audit from its In addition, contrary t......
  • Request a trial to view additional results
6 cases
  • United Space Alliance, LLC v. Solis, Civil Action 11-746 (RCL)
    • United States
    • United States District Courts. United States District Court (Columbia)
    • November 14, 2011
    ...its investigative efforts and in a way that Congress never intended in passing" the Paperwork Reduction Act. Shell Oil Co. v. Babbitt, 945 F. Supp. 792, 807 (D. Del. 1996). Courts of Appeals have held that the Paperwork Reduction Act does not apply to document requests made during an audit ......
  • United Space Alliance, LLC v. Solis, Civil Action No. 11–746(RCL).
    • United States
    • United States District Courts. United States District Court (Columbia)
    • November 14, 2011
    ...its investigative efforts and in a way that Congress never intended in passing” the Paperwork Reduction Act. Shell Oil Co. v. Babbitt, 945 F.Supp. 792, 807 (D.Del.1996). Courts of Appeals have held that the Paperwork Reduction Act does not apply to document requests made during an audit by ......
  • Mackenzie Medical Supply, Inc. v. Leavitt, No. CIV. AMD 04-2807.
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Maryland)
    • March 14, 2006
    ...in the exception to the PRA, an audit certainly must be considered to be a subset of an "investigation." See Shell Oil Co. v. Babbitt, 945 F.Supp. 792, 807 (D.Del.1996) ("The PRA specifically exempts activities such as an [Minerals Management Service] audit from its In addition, contrary to......
  • Mackenzie Medical Supply, Inc. v. Leavitt, No. 06-1630.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (4th Circuit)
    • October 31, 2007
    ...in the exception to the PRA, an audit certainly must be considered to be a subset of an "investigation." See Shell Oil Co. v. Babbitt, 945 F.Supp. 792, 807 (D.Del. 1996) ("The PRA specifically exempts activities such as an [Minerals Management Service] audit from its In addition, contrary t......
  • Request a trial to view additional results

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