Opinion
CIVIL ACTION NO. 02-3543 SECTION "N"
March 31, 2004
ORDER AND REASONS
Before the Court are the following motions: (1) a Motion for Summary Judgment filed by plaintiffs Nexen Petroleum U.S.A. Inc. and Nexen Petroleum Offshore U.S.A. Inc. (collectively "Nexen"); and (2) a Cross Motion for Summary Judgment filed by Federal Defendant, Gale A. Norton, Secretary of the Department of the Interior (the "DOI"). For the reasons that follow, plaintiffs' motion is DENIED, and defendant's motion is GRANTED.
I. FACTUAL AND PROCEDURAL BACKGROUND
In 1970 and 1971, the Secretary of the Interior through the Mineral Management Service (the "MMS"), pursuant to the Outer Continental Shelf Lands Act, 43 U.S.C. § 1331, et. seq. (the "OCSLA"), issued oil and gas lease numbers 054-001958-0, 054-001959-0 and 054-002103-0 (Eugene Island Blocks 255, 258 and 257) in the Gulf of Mexico. Nexen is the present lessee of the leases which are adjacent to the State of Lousiana.
Nexen Petroleum U.S.A. Inc. and Nexen Petroleum Offshore U.S.A. Inc. were formerly named CXY Energy Inc. and CXY Energy Offshore Inc., respectively.
Under the leases, Nexen is required to pay royalty to the MMS equal in kind or value to one-sixth of the production "saved, removed, or sold" from its OCSLA leases. See Instrument for Lease OBS-G 1958, section 3(a)(1). See also 43 U.S.C. § 1337(a)(1)(A, B). Nexen is entitled to deduct from this royalty certain transportation allowances which represent the cost of transporting the government's one-sixth royalty share of production to the shore, which is the point of sale.
At its Eugene Island leases, Nexen produces crude oil from seven platforms (Platforms "C," "D," "E," "G," "H," "J," and "J"), which lie in a roughly semi-circular pattern. The oil from these platforms is then moved by pipeline to Platform "B/A," which is located in the middle of the other seven. See MMS Diagram, AR 261. At Platform "B/A," the oil is treated, metered and then transported to the shore.
For the period July 1992 through December 1995, Nexen deducted a transportation allowance from the royalty for the government's one-sixth proportionate share of the cost of moving the production from the wellhead to the shore, including the cost of moving the production from the seven subsidiary platforms to Platform "B/A." The MMS permitted the deduction for the transportation from Platform "B/A" to the shore, but denied the deduction for the cost of moving the production from the seven subsidiary platforms to Platform "B/A," and directed Nexen to pay $611,509.71 in additional royalties. The MMS based its decision on regulations which DOI had adopted in 1988. 53 Fed. Reg. 1184 (Jan. 15, 1988); 30 C.F.R. § 206 (1988). These regulations preclude the deduction of gathering costs in determining royalty value. The MMS found that movement of production from the subsidiary platforms to the approved commingling point, Platform "B/A," constituted gathering and was part of placing the oil in marketable condition. See MMS Order to Report and Pay Additional Royalties, dated January 5, 2000, AR 301, 302. In so finding and ordering payment of the additional royalties, the MMS relied in part on the MMS Payor Handbook, Volume III, Section 6.1.5 (July 21, 1993), which provides several questions and answers to help differentiate between transportation and gathering. See AR 302.
Nexen appealed the MMS's Order first to the Director of the MMS, who denied the appeal, and then to the Interior Board of Land Appeals (the "EBLA"), which in a decision dated October 28, 2002, IBLA 2002-203 (the "EBLA Decision"), affirmed the decision of the Associate Director. See Nexen Petroleum U.S.A. Inc. and Nexen Petroleum Offshore U.S.A. Inc., 157 IBLA 286 (2002), AR 1.
Pursuant to the Administrative Procedure Act, 5 U.S.C. § 701, et seq. ("APA"), Nexen filed suit for judicial review of the DOI decision. On June 16, 2003, Nexen moved for summary judgment and for an order setting aside the IBLA Decision. DOI opposed Nexen's motion and, on July 16, 2003, filed a Cross Motion for Summary Judgment. The matters were set for hearing on September 17, 2003, and re-set for October 1, 2003, at which time the Court heard oral argument.
In their motion for summary judgment, Nexen seeks reversal of the IBLA
Decision based upon a number of grounds. First, plaintiffs assert that the 1988 regulations cannot be applied to their leases because their leases pre-date the effective date of the regulations; and that absent the application of the 1988 regulations, they would be entitled to deduct gathering costs. Plaintiffs therefore claim that application of the 1988 regulations to their leases constitutes retroactive rulemaking which is prohibited by law. Second, Nexen asserts that a "gap" existed in federal law at the time their leases were executed, and therefore, pursuant to the OCSLA, 43 U.S.C. § 1333(a)(2)(A), state law, not federal law, governs this federal leasing question. Third, plaintiffs argue that, in the event the 1988 regulations do apply, DOI has misinterpreted the regulation defining "gathering" and thereby has wrongfully denied Nexen a transportation allowance. Plaintiffs finally allege that DOI failed to provide Nexen with adequate notice and an opportunity to be heard in compliance with their leases.
In its Cross Motion for Summary Judgment, DOI asserts that plaintiffs have failed to meet their burden of establishing that DOI's decision was arbitrary, capricious or otherwise contrary to law as required by the standard of review for this case. First, DOI contends that the Administrative Record indicates nothing in Nexen's leases or the OCSLA that prohibits the agency from applying the 1988 regulations to Nexen's previously issued leases. Second, the defendant argues that federal law, and not state law, should govern the collection of federal royalty payments. Third, DOI argues that it properly interpreted and applied its own regulations in this matter. As the agency responsible for implementing the 1988 royalty valuation regulations, DOI asks this Court to give the agency's interpretation of its own regulations controlling weight and find that the interpretation was reasonable. Furthermore, DOI contends that, even if the 1988 regulations did not apply to the Nexen leases, earlier regulations and longstanding rules of the MMS would have prohibited the cost of gathering from being deducted in determining royalty value. Finally, DOI argues that the Administrative Record shows that Nexen did receive adequate notice and an opportunity to be heard prior to the effective date of the 1988 regulations.
II. LAW AND ARGUMENT
A. Standard of Review
Under the APA, 5 U.S.C. § 701-706, "a court's review of a challenge to an agency decision is limited to scrutiny of the record for the existence of errors of law or absence of reasoned consideration of the record to support the factual considerations reached by the agency." See generally, Pennzoil Exploration and Production Co. v. Lujan, 751 F. Supp. 602, 604 (E.D.La. 1990). The APA provides, in pertinent part, that a district court may overturn a final agency decision only if the decision is "arbitrary, capricious, an abuse of discretion . . . [or] in excess of statutory jurisdiction [or] authority. . . ." 5 U.S.C. § 706(2).
Nexen's challenge of the DOI decision here involves a question of law. To the extent a court must review a legal determination of the agency, it has full powers of review. 5 U.S.C. § 706. But it is well-settled that where an agency's legal determination involves interpretation of its own regulations, the courts give substantial deference to that agency's views. See Udall v. Tallman, 380 U.S. 1, 16(1965). See also Mesa Operating Ltd. Partnership v. US Dep't of Interior, 931 F.2d 318, 322 (5th Cir. 1991), cert. denied, 502 U.S. 1058 (1992). "Specifically, `the question for the [reviewing] court is whether the agency's answer is based on a permissible construction of the [rule].'" Pennzoil, 751 F. Supp. at 604 (quoting Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837, 842-43 (1984)). Additionally, as the Supreme Court held in Udall v. Tallman, supra, an agency's interpretations of its own rules must be given "controlling weight unless it is plainly erroneous or inconsistent with the regulation." 380 U.S. at 16-17. See accord, Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994); Pennzoil, 751 F. Supp. at 604. "The agency's interpretation of its own regulation need only be reasonable, and not the only interpretation or the one the court would have reached if it were initially faced with the question." Enron Oil and Gas Co. v. Lujan, 978 F.2d 212, 215 (5th Cir. 1992) (according MMS deference in application of MMS valuation regulations).
Nexen seeks to avoid this applicable standard by relying on Transohio Savings Bank v. Office of Thrift Supervision, 967 F.2d 598, 614 (D.C. Cir. 1992), wherein the Court expressed reluctance to defer to "an agency interpretation of the statute that will effect agreements to which the agency is a party." However, as the defendant correctly points out, statements made in that decision have since been called into doubt by a later D.C. Circuit opinion which expressly statednterest alone [of DOI] gives rise to no automatic rebuttal of deference;" the court specifically rejected the same argument that Nexen asserts here. Indep. Petroleum Ass'n of America v. Dewitt, 279 F.3d 1036, 1040 (D.C. Cir. 2002), cert. denied, 537 U.S. 1105 (2003).
Nexen also seeks to avoid the deferential standard of review by attempting to employ the standard of review applicable to ordinary contracts signed between the government and private individuals. However, the issue before the Court involves the agency's interpretation of its own regulations. Accordingly, this Court must defer to the agency's interpretation as long as it is reasonable. See Indep. Petroleum Ass'n of America, 279 F.3d at 1039 (declining to apply principles of contract law where the contracts "incorporate the regulations and recognize Interior's authority to modify them" and therefore "lead us back to the agency").
B. Summary Judgment Standard
Summary judgment is appropriate where there exists no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). As both parties have stated, there are no material facts essential to the Court's resolution of this action because the basis for the Court's review is the agency's administrative record, and the Court need not and may not "find" underlying facts. See generally Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Sabine River Auth. v. US Dep't of Interior, 951 F.2d 669, 679 (5th Cir. 1992).
With respect to the summary judgment procedure as it relates to review of agency decisions, the Fifth Circuit has stated as follows:
The summary judgment procedure is particularly appropriate in cases in which the court is asked to review or enforce a decision of a federal administrative agency. The explanation for this lies in the relationship between the summary judgment standard of no genuine issue as to material fact and the nature of judicial review of administrative decisions. . . . [T]he administrative agency is the fact finder. Judicial review has the function of determining whether the administrative action is consistent with the law — that and no more.Girling Health Care, Inc. v. Shalala, 85 F.3d 211, 214-15 (5th Cir. 1996) (internal footnote omitted). See also Funds for Animals v. Babbitt, 903 F. Supp. 96, 105 (D.D.C. 1995)("Summary judgment is an appropriate procedure for resolving a challenge to a federal agency's administrative decision when review is based upon the administrative record . . ., even though the court does not employ the standard of review set forth in Rule 56. . . .")
C. The OCSLA
The OCSLA authorizes the Secretary of the Interior to grant and manage leases for recovery of oil, gas and other minerals from submerged lands located on the Outer Continental Shelf (the "OCS"). 43 U.S.C. § 1331-1356 (1988). The OCSLA also vests in the Secretary the sole authority and responsibility to "prescribe such rules and regulations as may be necessary to carry out such provisions [of the Act]." 43 U.S.C. § 1334(a). See also Pennzoil, 751 F. Supp. at 603. The purposes of the leasing statutes, such as the OCSLA, "include the administration of federal leases, which involves collecting royalties and determining the methods by which they are calculated." Indep. Petroleum Ass'n of America v. Dewitt, 279 F.3d 1036, 1039-40 (D.C. Cir. 2002) (citing California Co. v. Udall, 296 F.2d 384, 387-88 (D.C. Cir. 1961)), cert. denied, 537 U.S. 1105 (2003). Since 1982, the Secretary has delegated the administrative responsibility for OCS leases to the MMS. See Secretarial Order No. 3071 (Jan. 19, 1982); 47 Fed. Reg. 4757 (Feb. 2, 1982).
The OCSLA provides that DOI obtain royalties from lessees based on the "amount or value of production saved, removed, or sold." 43 U.S.C. § 1337(a)(1)(A, B). Regulations promulgated by the MMS pursuant to the OCSLA govern the collection of royalties on federal leases on the OCS and establish the value of production on which lessees must pay royalties. The Secretary has promulgated several regulations relevant to the issues before the Court.
One such regulation concerns the long-established Marketing Condition Rule, under which Federal lessees are obligated to place oil in marketable condition at no cost to the Federal Government or Indian lessor. 30 C.F.R. § 206.102(i) (1988). "Marketable condition" means "lease products which are sufficiently free from impurities and otherwise in a condition that they will be accepted by a purchaser under a sales contract for the field or area." 30 C.F.R. § 206.101 (definitions) (1988).
In the MMS Order, the Service cited 1999 regulations, and in the IBLA Decision, the Board cited 1995 regulations. See AR 1,301. Those citations are of no moment, however, as both the 1995 and 1999 regulations relevant to this case are identical in language to the 1988 regulations quoted herein.
The regulations further establish that, in the case of an arm's length sale, the value of oil production upon which the royalty is to be calculated shall be the "gross proceeds" accruing to the lessee. 30 C.F.R. § 206.102(b)(1)(i) (1988), The definition of "gross proceeds" verifies that a lessee must pay royalties on proceeds which reimburse the lessee for treating gas, including gathering, if the lessee is obligated to perform such services at no cost to the lessor.
Gross proceeds . . . means the total monies and other consideration accruing to an oil and gas lessee for the disposition of the oil. Gross proceeds includes, but is not limited to, payments to the lessee for certain services such as dehydration, measurement and/or gathering to the extent that the lessee is obligated to perform them at no cost to the Federal Government or Indian lessor.30 C.F.R. § 206.101 (definitions) (1988) (emphasis added). The rules define "gathering" as "the movement of lease production to a central accumulation or treatment point on the lease, unit or communitized area, or to a central accumulation point or treatment point off the lease, unit or communitized area, as approved by . . . MMS OCS operations personnel for . . . offshore leases. . . ." 30 C.F.R. § 206.101 (definitions) (1988).
MMS rules expressly provide for an "allowance" or "accepted deduction" from royalty value. Id. MMS rules authorize such deductions/allowances for the "reasonable, actual costs incurred by the lessee to . . . [transport oil from an offshore lease to the point off the lease" where the sale is made or the value is determined. 30 C.F.R. § 206.104(a)(2) (1988). In defining "transportation allowances," MMS distinguishes gathering costs, which cannot be included within the transportation allowance:
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. . . .30 C.F.R. § 206.101 (definitions) (1988) (emphasis added).
The Court finds guidance in the IBLA decision, wherein the Board stated as follows:
From 1954 to 1988, Department regulations governing the collection of royalty on OCS leases generally applied to both oil and gas production. In 1987, the Department engaged in a comprehensive rulemaking, with notice and comment procedures, to publish, ultimately, separate royalty valuation rules for oil and gas. See 53 FR 1184 (oil) and 53 FR 1230 (gas) (Jan. 15, 1988). The rules governing oil valuation were published at 30 C.F.R. § 206.100-206.105, and the rules governing gas valuation were published at 30 C.F.R. § 206.150-206.159. The rules described above, however, are virtually identical with respect to both products. Sec 30 C.F.R. § 206.150 (for gas royalty, definitions for "gathering," "gross proceeds," and "marketable condition"); 30 C.F.R. § 206.152(b) and 206.153(b) (gross proceeds rule for unprocessed and processed gas); 206.156 (transportation allowances for gas). They are also consistent, as shown below, with rules applicable to OCS leases prior to the 1988 rulemaking. Because of their common genesis and common terms, the cases discussing gathering of oil or of gas, and discussing prior periods, are addressed interchangeably.
157 IBLA 286, 288.
Plaintiffs attempt to distinguish a number of cases relied upon by D01. However, in light of the history of the development of the OCSLA and implementing regulations, and the consistent application of cases issued under pre-1988 Department regulations and under the Mineral Leasing Act to cases decided under the OCSLA, this Court will also consider cases addressing regulations issued before and after 1988, as well as cases involving leases issued under the Mineral Leasing Act.
D. The 1988 Regulations Apply to the Nexen Leases
1. Neither the OCSLA nor the Leases prohibit application of the 1988 regulations.
Nexen argues that the 1988 regulations were not applicable to the calculation of its royalty obligation owed to the Government for the time period of July 1992 though December 1995, and that the Secretary exceeded her authority in so applying the 1988 regulations. Nexen bases this argument on a number of grounds, primarily that the OCSLA and the lease authorize only the application of royalty valuation regulations existing at the time the Nexen leases were issued (1970 and 1971), and that the Secretary's application of 1988 regulations to pre-existing leases constitutes retroactive rulemaking. Nexen's argument fails for a number of reasons.
In analyzing the application of the 1988 regulations to the Nexen leases, the Court first notes that the rights of the parties herein are determined by the relevant provisions of the leases read in light of the provisions of the OCSLA and implementing regulations. See generally, Continental Oil Co. v. United States, 184 F.2d 802, 807 (9th Cir. 1950).
In addressing the OCSLA, Nexen contends that this Court should not look to the regulations at issue, because Congress has expressed its intent to limit application of new regulations to pre-existing leases only when those regulations relate to "conservation purposes." Pls.' Opp'n at 12. Plaintiffs place great emphasis on Section 5(a) of the OCSLA, which provides in pertinent part that:
Plaintiffs rely on Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837, 842 (1984), which sets forth a two-step inquiry for courts reviewing an agency's construction of the statute which it administers. First, the Court must ask "whether Congress has directly spoken to the precise question at issue." Id. If the intent of Congress is clear, that is the end of the matter. Id. at 843. "If, however, the court determines Congress has not directly addressed the precise question at issue," the Court reaches the second step where the court must ask "whether the agency's answer is based upon a permissible construction of the statute." Id.
[t]he Secretary may at any time prescribe and amend such rules and regulations as he determines to be necessary to provide for the prevention of waste and conservation of the natural resources of the outer Continental Shelf, and the protection of correlative rights therein [the `conservation purposes']. . . ."43 U.S.C. § 1334(a). Plaintiffs contend that because the Act does not have a similar statute governing regulations for "non-conservation purposes," Congress's intent is clear that regulations, such as the ones at issue here, cannot be proscribed and amended at any time. In response, defendants argue that Congressional intent is not clear, and that had Congress desired to create a patchwork valuation scheme, Congress would have expressed that intention. See Def.'s Reply to Pls.' Opp'n at 8-9.
The Court agrees with DOI in that Nexen has failed to provide any evidence that Congress has even discussed this issue, or as required by Chevron, directly spoken to the precise question at issue and unambiguously expressed its intent as to whether MMS may make rules and apply them to pre-existing leases to determine royalty value. Chevron, 467 U.S. at 842-43. When Congressional intent is not clear, courts defer to an agency's reasonable interpretation of the statute that it was entrusted to administer. Id. See also United States v. Mead Corp., 533 U.S. 218, 228-29 (2001) (internal citations omitted).
Nexen also offers a similar argument with respect to its leases with the Federal Government, because the leases contain a provision which essentially tracks the language found in section 5(a) of the OCSLA. Specifically, Section 1 of each lease states that "[t]his lease is subject to all the provisions of the Act and to the terms, conditions and requirements of the valid regulations promulgated by the Secretary of the Interior . . . thereunder in existence on the effective date of this lease . . ." See Instrument for Lease OBS-G 1958, AR 78. In that same section, the lease essentially tracks the language found in section 5(a) of the OCSLA as the lease provides that the lessee shall be subject to regulations issued after the date of the lease for the "conservation purposes." See id.
However, the lease further provides, in Section 3(a)(2), that
It is expressly agreed that the Secretary may establish minimum values for purposes of computing royalty on products obtained from this lease, due consideration being given to the highest price paid for a part or for a majority of production of like quality in the same field, or area, to the price received by the Lessee, to posted prices, and to other relevant matters. Each such determination shall be made only after due notice to the Lessee and a reasonable opportunity has been afforded the Lessee to be heard.See id. (emphasis added). Plaintiffs contend that DOI's and IBLA's reliance on Section 3(a)(2) is misplaced, as that section, accordingly to Nexen, runs counter to the provisions of Section 1 of the lease and only authorizes the Secretary, on a case-by-case basis and after a hearing, to establish minimum values for products obtained from the lease. Nexen further contends that the term "minimum values" in Section 3(a)(2) of the Lease refers solely to the price per barrel of oil. Nexen, however, cites no authority for these contentions.
"The jurisprudence is clear that the Secretary of the Interior has the authority to establish royalty values of production from federal oil and gas leases." Pennzoil, 751 F. Supp. at 605 (affirming decision of IBLA which upheld DOI order directing lessee, who was also a participant in the tertiary oil program, to pay royalties on actual sales price of its oil, and not the (lower) ceiling price that it would have been entitled to receive under federal law). Furthermore, the Secretary has the statutory authority to establish such values by promulgating regulations. Id. Section 3(a)(2) of the lease reiterates this statutory authority and in no way indicates any intent to limit the Secretary's authority to only the base value or "price per barrel" and only on an individual basis, as Nexen would have it. Additionally, DOI has relied on the term "other relevant matters" for decades to determine issues related to transportation allowances. See, e.g., The Superior Oil Co., 12 IB LA 212, 227 (1973) (affirming the Director's decision denying barging allowance; allowance for barging costs was within ambit of "other relevant matters").
The Court disagrees with plaintiffs and finds that DOI's construction of the OCSLA and the regulations is neither arbitrary nor capricious. Rather, the construction is reasonable and the application of 1988 regulations here does not exceed the Secretary's statutory authority. In affirming the IBLA Decision, the Court also agrees with DOI and the Board that "the lessee [Nexen] has waived the right to object to that authority. . . .," 157 IBLA 301, by its express agreement to allow the Secretary to "establish minimum values for purposes of computing royalty." See Instrument for Lease OBS-G 1958, section 3(a)(2).
Cf., United States v. Wichita Indus., Inc., 390 F. Supp. 1154, 1155 (W.D.Ok. 1974) (where the lease expressly stated "that no regulation made after the approval of this lease, affecting either the length of term of oil and gas leases, the rates of royalty or payment thereunder, or the assignment of leases, shall operate to affect the terms and conditions of the lease"). In that case, the Court recognized that the lease provisions expressly prohibited the Secretary's application of subsequent regulations affecting royalty valuation. Such language is notably absent from Nexen's leases and cannot be implied.
2. Application of the 1988 Regulations does not constitute retroactive rulemaking.
Nexen also argues that application of 1988 regulations to post-1988 production under leases issued in 1970 and 1971 constitutes retroactive rulemaking. The court first notes that retroactivity is not favored in the law. See Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (1988). The matter at hand, however, involves only the prospective application of regulations. Specifically, the regulations at issue became effective in 1988 and are being applied to royalty payments due for the time period of July 1992 through December 1995. See 53 Fed. Reg. 1184, 1185 (January 15, 1988) ("This rule applies prospectively to production on or after the effective date specified in the EFFECTIVE DATE section of this preamble. It supersedes all existing oil royalty valuation directives. . . .").
Furthermore, even the two cases cited by plaintiff are factually dissimilar to the present matter and actually weigh in favor of MMS' decision to apply the 1988 regulations to determine the royalty obligations owed by Nexen. Plaintiffs first rely upon the Supreme Court's decision in Bowen v. Georgetown University Hospital, supra, where the Court affirmed the decisions of the district and appellate courts invalidating cost-limit regulations issued in 1984 for application to Medicare reimbursements for the years 1981 and 1982. The present matter, on the other hand, involves agency application of a 1988 regulation to royalty payments due for the period July 1992 through December 1995. Notably in Bowen, in his concurring opinion, Justice Scalia stated as follows:
[W]ith respect to the present matter, there is no question that the Secretary could have applied her new wage-index formulas to respondents in the future, even though respondents may have been operating under long-term labor and supply contracts negotiated in reliance upon the pre-existing rule. But when the Secretary prescribed such a formula for costs reimbursable while the prior rule was in effect, she changed the law retroactively, a function not performable by rule under the APA.488 U.S. at 220 (Scalia, J., concurring). Presumably, had the application of 1984 Medicare regulations at issue in Bowen been prospective, i.e., to reimbursements after the effective date, and within the Secretary's authority, the Court would not have invalidated the rule on retroactivity grounds. Likewise, this Court finds no reason to invalidate the 1988 MMS regulations as applied to royalty due on production from July 1992 through December 1995.
Justice Scalia also addressed "secondary retroactivity," a form of retroactivity different from the retroactivity at issue in Bowen. 488 U.S. at 219-20. Secondary retroactivity may occur with a new rule that has exclusively future effect, but may affect past transactions. Id. Only when that disputed rule has "unreasonable secondary retroactivity — for example, altering future regulation in a manner that makes worthless substantial past investment incurred in reliance upon the prior rule — may for that reason be `arbitrary' or `capricious' . . . and thus invalid." Id. at 220 (internal citation omitted). Because this Court has determined, infra, that the rules used to value the royalty owed by Nexen were the same rules in existence at the times Nexen's leases were issued, the 1998 regulations have neither retroactive nor secondary retroactive effects as they relate to the Nexen leases.
The second case relied upon by Nexen, Rosebud Sales Company, Inc. v. Andrus, 667 F.2d 949 (10th Cir. 1982), is also factually dissimilar, as that case concerned a coal lease expressly providing that the Government could readjust the royalty and terms at the end of each twenty-year period. There, the Tenth Circuit affirmed the district court's finding that DOI's attempted readjustment made nearly two and a half years after the expiration of the 20-year period was outside the statutory authority of the Secretary and contrary to the terms of the lease. While dissimilar, the facts in Rosewood lend further support for the application of the 1988 regulations here.
In Rosewood, the federal lease was issued on April 5, 1935, under the Mineral Leasing Act. 667 F.2d at 950. Both the Act and the lease provided for a twenty-year adjustment period. Id. at 951. Following an amendment to the Mineral Leasing Act in August 1976, DOI undertook to change the regulations in publication on December 29, 1976. Id. at 952. This change was directed to coal leases which were the subject of readjustment before August 4, 1976, and which had not been readjusted. Id. Pursuant to the retroactive regulation, DOI sent the lessee notice on October 4, 1977, that its lease would be readjusted. The lawsuit followed. Id. at 953. Important to the matter at hand is that, in addressing the regulations applicable to the date marking the end of the second twenty-year period of the lease (April 5, 1975), the Court referred to 43 C.F.R. § 3522.1-2 (1974). Id. at 951. In other words, the Court looked at the regulations in effect at the time it was determined that the agency should have acted, and not the regulations in effect al the time the leases were issued. This is specifically what DOI has done in this case.
The problems with retroactivity in the Bowen and Rosewood cases simply are not present in the matter now before the Court. The Court declines to invalidate DOI's order on the grounds of unlawful retroactivity. E. Even Without Application of the 1988 regulations, the Same Rules Would Apply
If this Court found that the 1988 regulations cannot apply to Nexen's leases, the proper remedy would be to remand for MMS to revalue Nexen's oil under the pre-1988 regulations. Even in that context, the outcome would be the same.
Nexen relies upon Section 1333(a)(2)(A) of Title 43, United States Code, for the assertion that, in the absence of the 1988 regulations, Louisiana law governs the rights of the parties during the relevant time periods. Section 1333(a)(2)(A) provides, in pertinent part, as follows:
[t]o the extent that they are applicable and not inconsistent with this subchapter or with other Federal laws and regulations of the Secretary now in effect or hereafter adopted, the civil and criminal laws of each adjacent State . . . are declared to be the law of the United States for that portion of the subsoil or seabed of the [OCS]. . . .
As the Supreme Court explained in Rodrigue v. Aetna Casualty and Surety Company, 395 U.S. 352, 357 (1968), this provision "supplements gaps in the federal law with state law." Still, federal law remains exclusive in its regulation of the OCS, and state law is adopted only as surrogate federal law. Id.
Plaintiffs contend that, prior to 1988, there were no regulations respecting transportation allowances; therefore, a gap existed in the federal regulatory scheme and, according to the OCSLA, the court must fill the gap with state law. In support of their argument, Plaintiffs cite a number of cases. However, not one of those cases involves the application of state law to the valuation of royalty payments due under a federal lease. Furthermore, this Court is not aware of any cases so applying state law.
See Rodrigue v. Aetna Cas. Sur. Co., 395 U.S. 352 (1968) (remedy for deaths of workers on artificial island drilling rigs located on OCS was under OCSLA and Louisiana law); Matte v. Zapata Offshore Co., 784 F.2d 628 (5th Cir. 1986), cert. denied, 479 U.S. 872 (1986) (holding that Louisiana law invalidated indemnity agreement entered into between contractor — employer of injured worker — and owners of platform and of well); Union Texas Petroleum Corp. v. PLT Eng'g. Inc., 895 F.2d 1043 (5th Cir. 1990), cert. denied, 498 U.S. 848 (1990) (holding that OCSLA required application of Louisiana law to a non-maritime contract dispute arising from the construction of a gathering line in the OCS).
The Court agrees with DOI that there was no "gap" in the regulations in effect since 1954, when the OCSLA was enacted. MMS regulations have always required oil to be placed in marketable condition at no cost to the Federal lessor. See Mesa Operating Ltd. Partnership v. US Dep't of Interior, 931 F.2d 318, 320 (5th Cir. 1991), cert. denied, 502 U.S. 1058 (1992). In addition, gathering consistently has been held to be a part of that process. See. e.g., The Texas Co., 64 ID 76, 79-80 (1957) (upholding DOI's decision that gathering is part of the lessee's duty to place production into marketable condition, which may not be deducted). The Court, therefore, declines to adopt Louisiana law as federal law in this case.
F. DOI's Interpretation of the Regulation Defining Gathering is Reasonable
Plaintiffs allege that, even under the 1988 regulations, the movement at issue, from Platforms "C" though "J" to Platform "B/A," does not constitute gathering and should be not be included in the value of its production. It is undisputed that the 1988 regulations permit a transportation allowance, which excludes gathering. 30 C.F.R. § 206.101 (definitions) (1988). It is further undisputed that the 1988 regulations define "gathering" as "the movement of lease production to a central accumulation or treatment point on the lease, unit or communitized area, or to a central accumulation point or treatment point off the lease, unit or communitized area, as approved by . . . MMS OCS operations personnel for . . . offshore leases . . ." 30 C.F.R. § 206.101 (definitions) (1988). Moreover, the Secretary of the Interior is afforded "considerable discretion" in "establishing] for royalty purposes the value of production from Federal oil and gas leases." Mesa, 931 F.3d at 322.
Here, MMS determined that the central accumulation point lies at Platform "B/A," and that the movement of the production prior to Platform "B/A" is to be included in the value of production for royalty purposes. Nexen, on the other hand, now contends that seven central accumulation points exist, i.e. 9 at each of the seven "subsidiary platforms", and that the movement from these seven platforms to Platform "B/A" is transportation.
Throughout its Memoranda, Nexen consistently refers to the seven platforms as the "subsidiary platforms." See, e.g., Pls.' Mem. at 2.
In support of its assertion that its seven subsidiary platforms are "central accumulation points" for the several respective wells served by that platform, Nexen argues that the agency and the reviewing entities have erred in overlooking the disjunctive "or" found in the definition of gathering. See 30 C.F.R. § 206.101 (definitions) (1988) (movement to a "central accumulation or treatment point") (emphasis added). Nexen contends that, to avoid having to ignore the term "or", the LBLA relied on comments which preceded the 1988 regulations in stating that the "point" referred to in the definition of gathering may be either for "the purpose of treating the production or accumulating production for delivery to a purchaser." See 157 IBLA 297 (quoting 53 Fed. Reg. 1184, 1193 (Jan. 15, 1988)). Nexen argues that the IBLA, in so relying, improperly revised the regulations defining "gathering" as the "accumulation point for delivery to purchaser" or treatment point.
In addition, Nexen asks this Court to find that, where a point of central accumulation is before the treatment point, gathering ends at the former not the latter. Nexen also suggests that because the regulation defining gathering refers to "a" point, and not "the" point, MMS has implicity recognized that there can be more than one central accumulation point.
Nexen cites no authority for any of these propositions. Instead, Nexen continues to rely upon the MMS May 20, 1999 Guidance for Determining Transportation Allowances for Production From Leases in Water Depths Greater than 200 Meters ("Guidance Document"), which Nexen states is the Associate Director for Royalty Management's explanation of the proper application of 30 C.F.R. § 206.101 ("gathering"). As support for their assertion that the subsidiary platforms are central accumulation points from which transportation flows, Nexen places great emphasis on the following statements of the Associate Director:
Movement to a central accumulation point is considered gathering. A central accumulation point may be a single well, a subsea manifold, the last well in a group of wells connected in a series, or a platform extending above the surface of the water. Movement beyond this point is considered transportation.See AR 85. Nexen contends that this explanation is a recognition by MMS that the point of central accumulation may occur prior to the initial treatment point. That document, however, serves as guidance only for Deepwater Leases, and is inapplicable to the Nexen leases, which lie in water approximately 45 meters deep. Furthermore, even if this guidance was applicable, the Court agrees with the IBLA's finding that a complete reading of the document weighs against Nexen's construction of it.
The two-page Guidance Document states, in pertinent part, that:
• Production from a lease . . . may qualify for a transportation allowance. The following guidelines apply:
• The transportation allowance must be determined in accordance with the current regulations.
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• Movement prior to a central accumulation point is considered gathering. A central accumulating point may be a single well, a subsea manifold, the last well in a group of wells connected in a series, or a platform extending above the surface of the water. Movement beyond this point is considered transportation.
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• To qualify for a transportation allowance, the movement must be to a facility that is not located on a lease adjacent to the lease on which the production originates.
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• Apply this guidance prospectively.
AR 85-86. The Court agrees with the IBLA in that "[t]his memorandum does not support [Nexen]'s construction of it." 157 IBLA 298. "Rather, this document makes clear that MMS did not believe the central accumulation point was the `first' such accumulation point." Id. Platform "B/A" "could easily be . . . the `last well' in a series." Id. "Moreover, transportation allowances relate to the movement to a facility "not located" on an adjacent lease." Id. "Thus, even were we to interpret this memorandum as centrally placed to receive the oil from the separately scattered wellheads. It is only from that point, Platform "B/A," that MMS has determined that "the continuous flow of marketable product" begins. See MMS Order to Report and Pay Additional Royalties, AR 304. DOI controlling or correcting MMS' construction of its `gathering' definition, it would not lead to CXY's outcome." Id.
Finally, Nexen argues that the only factor distinguishing B/A from the other platforms is the fact that it is also the treatment point. DOI's response to Nexen's argument is that what, in fact, distinguishes Platform "B/A" from the other platforms is that it marks the only platform where all of the oil accumulates and is placed into a single pipe for delivery to a purchaser or some other disposition of the oil. Moreover, even Nexen admits that "[i]n most instances, the point of central accumulation will . . . also be the treatment point." Pls. Mem. at 15. DOI does agree that, in certain circumstances, there may be transportation costs incurred prior to treatment that may be deducted from royalty. However, according to DOI, such is not the case here.
In its Cross Motion for Summary Judgment and Opposition to plaintiffs' motion, DOI relies extensively on the word "central" as found in MMS's definition of gathering. DOI argues that "[t]he fact that the wellhead of several wells are located on one platform does not transform that platform into the "central accumulation point"= as plaintiffs allege." See Def.'s Mem. at 20. Rather, "the word `central' shows that MMS did not intend to refer to just `any' accumulation point, but rather the accumulation point where all production accumulates." See id. According to DOI, all the oil does not accumulate until it reaches Platform "B/A," which is centrally placed to receive the oil from the separately scattered wellheads. It is only from that point, Platform "B/A," that MMS has determined that "the continuous flow of marketable product" begins. See MMS Order to Report and Pay Additional Royalties, AR 304. DOI submits that "[t]o interpret the definition of `gathering' to mean the first point of any accumulation of any part of the oil, as advocated by Nexen, would delete the word "central" from the regulation. . . ." Def's Mem. at 20 (emphasis added).
It is undisputed that, at Platform "B/A," the oil is treated and measured for royalty purposes and ultimately placed in a single pipeline for transportation to shore. Also, once treated at Platform "B/A," the product is undisputedly in marketable condition. It is further undisputed that Platform "B/A" lies approximately in the middle of the seven subsidiary platforms.
MMS' consistent and ordinary interpretation of its regulation is entitled to substantial deference by this Court. Caselaw also supports DOI's conclusion. See Mesa, 931 F.2d at 320 (lessee required to pay royalties on reimbursements received from purchasers for certain post-production costs, including payments for the costs of gathering, where such services were necessary to place the product in marketable condition); Kerr McGee, 147 IBLA 277 (1999) (where movement of production was to adjacent leases for treatment required to place the production in marketable condition, the costs of facilitating that movement fell within the definition of gathering-related costs and was therefore not deductible).
DOI accurately concluded that the movement of oil from the platforms on the same or adjacent leases to Platform "B/A" constitutes gathering and that Nexen is not entitled to a deduction for such costs. While Nexen's reading of the regulations may be plausible, this Court may reject DOI's Order "only if the agency's interpretation is impermissible or unreasonable" Mesa, 931 F.2d at 323. Granting this deference, the Court concludes that DOI's construction does not rise to this level.
G. Nexen Received Adequate Notice and an Opportunity to Be Heard
Section 3(a)(2) of the Leases states, in pertinent part, "the Secretary may establish minimum values for purposes of computing royalty on products obtained from this lease. . . . Each such determination shall be made only after due notice to the Lessee and a reasonable opportunity has been afforded the Lessee to be heard."
Plaintiffs argue that they have received neither "due notice" nor the reasonable opportunity to be heard regarding the subject regulations. However, the Administrative Record shows that Nexen has been afforded ample notice of the regulations, its application to its leases, and has been provided reasonable opportunities to be heard. Nexen was officially notified of the existence of the 1998 regulations in 1987 when the DOI published a notice of proposed rule in the Federal Register. See 52 Fed. Reg. 1858 (Jan. 15, 1987). The proposed rule was subject to two rounds of public comments and public hearings, one in New Orleans, Louisiana, on March 17, 1987, before the final rule was published on January 15, 1988, in the Federal Register. See 53 Fed. Reg. 1184 (Jan. 15, 1988). During this rulemaking process, Nexen and the public-at-large were duly notified of the DOI's intent to amend and clarify the royalty valuation ruled and were provided an opportunity to submit comments to influence the agency's decision. Id.
When the Secretary determined that Nexen had improperly reduced its royalty payments below minimum value, MMS ordered Nexen to pay the additional royalties. At that time, the DOI provided Nexen the opportunity to appeal the order to the Director of the MMS. Nexen availed itself of this opportunity and appealed the order to the Director. By a decision dated December 14, 2001, the Director of MMS denied Nexen's appeal. See AR 179-194.
Following the Director's decision, Nexen was afforded a second opportunity to appeal the order, this time to the 1BLA. Again, Nexen availed itself of this administrative review process and appealed the order to the IBLA. By a decision dated October 28, 2002, the IBLA also denied Nexen's appeal. See AR 1-16. These administrative hearings provide the requisite opportunity to be heard. Phillips Petroleum Co., 117 EBLA 237-238 (1990).
III. CONCLUSION
Accordingly, for the foregoing reasons, IT IS ORDERED that:
(1) Plaintiffs' Motion for Summary Judgment is DENIED;
(2) Federal Defendant's (DOI's) Cross Motion for Summary Judgment is GRANTED, affirming the IBLA decision and dismissing plaintiffs claims.