Kerr-McGee Oil & Gas Corp. v. United States Department of Interior

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

January 12, 2009

No. 08-30069 Charles R. Fulbruge III

Clerk

KERR-MCGEE OIL AND GAS CORP

Plaintiff - Appellee

v.

UNITED STATES DEPARTMENT OF INTERIOR; C STEPHEN ALLRED,

Assistant Secretary, on behalf of Land & Minerals Management,

on behalf of United States Department of Interior

Defendants - Appellants

Appeal from the United States District Court

for the Western District of Louisiana, Lake Charles

Before KING, DENNIS, and ELROD, Circuit Judges.

KING, Circuit Judge:

The Outer Continental Shelf Deep Water Royalty Relief Act authorizes the

Department of the Interior to suspend the collection of oil and gas royalties from

all new and preexisting federal, deepwater leases and to impose price or volume

thresholds in order to determine when royalty payments should recommence.

Additionally, for new deepwater leases issued between 1996 and 2000 for specific

areas in the Gulf of Mexico, the act explicitly waives all royalty payments until

a specific volume of oil or gas is produced. Kerr-McGee Oil and Gas Corp.

obtained eight new deepwater leases that, in addition to waivers based on

volume, contained price thresholds set by the Department of the Interior. When

No. 08-30069

oil and gas prices moved above those price thresholds, the Department of the

Interior sought to collect royalties on these leases, despite the fact that the

congressionally set volume thresholds had not yet been met. Kerr-McGee

challenged the Department of Interior’s order to pay royalties in the district

court, which concluded on summary judgment that the agency did not have the

authority to impose price thresholds requiring the payment of royalties on

volumes less than the volume thresholds set by Congress. We agree and affirm

the district court’s decision for the following reasons.

I. FACTUAL AND PROCEDURAL BACKGROUND

The facts of this case are undisputed. Between 1996 and 2000, Kerr-

McGee Oil and Gas Corp. (“Kerr-McGee”) obtained eight deepwater, Gulf of

Mexico mineral leases subject to royalty relief. These leases stipulated, however,

that royalties would commence when certain price thresholds were met. Six of

these leases employ the following language to impose such price thresholds:

In any year during which the arithmetic average of the closing

prices on the New York Mercantile Exchange for light sweet crude

oil exceeds $28.00 per barrel, royalties on the production of oil must

be paid . . . and production during such years counts toward the

royalty suspension volume. In any year during which the

arithmetic average of the closing prices on the New York Mercantile

Exchange for natural gas exceeds $3.50 per million British thermal

units, royalties on the production of natural gas must be paid . . .

and production during such years counts toward the royalty

suspension volume.

The remaining two leases contain substantially similar language:

In any year during which the arithmetic average of the closing

prices on the New York Mercantile Exchange (NYMEX) for light

sweet crude oil exceeds $28.00 per barrel (threshold oil price),

royalties on the production of oil must be paid . . . and production

during such years counts toward the royalty suspension volume.

In any year during which the arithmetic average of the closing

prices on the NYMEX for natural gas exceeds $3.50 per million

British thermal units (threshold gas price), royalties on the

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production of natural gas must be paid . . . and production during

such years counts toward the royalty suspension volume.1

All eight leases are additionally subject to the volume thresholds

established by § 304 of the Outer Continental Shelf Deep Water Royalty Relief

Act (the “DWRRA”), which states:

For all tracts located in water depths of 200 meters or greater in the

Western and Central Planning Area of the Gulf of Mexico, including

that portion of the Eastern Planning Area of the Gulf of Mexico

encompassing whole lease blocks lying west of 87 degrees, 30

minutes West longitude, any lease sale within five years of the date

of enactment of this title, shall use the bidding system authorized

in section 8(a)(1)(H) of the Outer Continental Shelf Lands Act, as

amended by this title, except that the suspension of royalties shall

be set at a volume of not less than the following:

(1) 17.5 million barrels of oil equivalent for leases in water depths

of 200 to 400 meters;

(2) 52.5 million barrels of oil equivalent for leases in 400 to 800

meters of water; and

(3) 87.5 million barrels of oil equivalent for leases in water depths

greater than 800 meters.

Pub. L. No. 104-58, 109 Stat. 557 (uncodified, but present in a note to 43 U.S.C.

§ 1337).

In 2003, the average annual price of natural gas exceeded the leases’

inflation-adjusted price threshold. In 2004, the average annual prices of both oil

and gas exceeded the respective price thresholds for those commodities. Not one

of the leases, however, had enjoyed production that triggered the volume

thresholds imposed by § 304.

Based on the triggered price thresholds, the United States Department of

the Interior (“Interior”) issued a final agency order (the “Burton Decision”). The

Burton Decision informed Kerr-McGee that the oil and gas price thresholds had

1

Both leases adjust the triggering prices for inflation.

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been exceeded, concluded that Interior had authority to suspend royalty relief

based on price thresholds triggered before production exceeded § 304’s volume

thresholds, and directed Kerr-McGee to pay royalties.

Kerr-McGee challenged the Burton Decision in federal district court, and,

on summary judgment, the court ruled that Interior did not have the authority

to suspend royalty relief for production at volumes less than those established

by Congress. Interior brought this timely appeal, arguing that the DWRRA does

not alter the agency’s discretionary authority to vary royalty relief by imposing

price thresholds that suspend royalty relief before § 304’s volume thresholds are

exceeded.

II. STANDARD OF REVIEW

We review de novo a grant of summary judgment, applying the same legal

standards that the district court applied. Kornman & Assocs., Inc. v. United

States, 527 F.3d 443, 450 (5th Cir. 2008). Summary judgment is proper when

the evidence reflects “no genuine issue as to any material fact and that the

movant is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(c).

An agency’s interpretation of its statutory authority is reviewed according

to the two-step inquiry established in Chevron U.S.A., Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837 (1984). Med. Ctr. Pharmacy v. Mukasey, 536

F.3d 383, 393 (5th Cir. 2008). First, we “must give effect to the unambiguously

expressed intent of Congress” if Congress has, indeed, “directly spoken to the

precise question at issue.” Id. (internal quotation marks omitted). If we

determine that the statute is ambiguous, then we proceed to Chevron’s second

step and “‘reverse [an] agency’s decision only if it [is] arbitrary, capricious, or

manifestly contrary to the statute.’” Id. (quoting Tex. Coal. of Cities for Util.

Issues v. FCC, 324 F.3d 802, 807 (5th Cir. 2003)) (alterations in original).

III. DISCUSSION

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Under Chevron’s first step, we must consider whether Congress

unambiguously granted Interior the authority to suspend royalty relief at

production volumes less than those established by § 304. To interpret the

statute, we begin by looking at its plain text. Wheeler v. Pilgrim’s Pride Corp.,

536 F.3d 455, 458 (5th Cir. 2008). The DWRRA contains three operative

sections, and, because “it is a cardinal rule that a statute is to be read as a

whole,” In re Supreme Beef Processors, Inc., 468 F.3d 248, 253 (5th Cir. 2006) (en

banc), we describe each section in turn. The first section applies only to leases

in existence prior to the act’s effective date and states:

(i) [N]o royalty payments shall be due on new production . . .

from any lease or unit located in water depths of 200 meters or

greater in the [same geographic region of the Gulf of Mexico

specified in § 304] until such volume of production as determined

pursuant to clause (ii) has been produced by the lessee.

(ii) Upon submission of a complete application by the lessee, the

Secretary [of Interior] shall determine . . . whether new production

from such lease or unit would be economic in the absence of the

relief from [royalties] . . . . If the Secretary determines that such

new production would be economic in the absence of the relief from

[royalties] . . . the Secretary must determine the volume of

production from the lease or unit . . . in order to make such new

production economically viable; except that for new production . . .

in no case will that volume be less than 17.5 million barrels of oil

equivalent in water depths of 200 to 400 meters, 52.5 million barrels

of oil equivalent in 400–800 meters of water, and 87.5 million

barrels of oil equivalent in water depths greater than 800

meters. . . .

* * *

(v) During the production of volumes determined pursuant to

clause[] (ii) . . . in any year during which the arithmetic average of

the closing prices on the New York Mercantile Exchange for light

sweet crude oil exceeds $28.00 per barrel, any production of oil will

be subject to royalties . . . .

(vi) During the production of volumes determined pursuant to

clause[] (ii) . . . in any year during which the arithmetic average of

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No. 08-30069

the closing prices on the New York Mercantile Exchange for natural

gas exceeds $3.50 per million British thermal units, any production

of natural gas will be subject to royalties . . . .

DWRRA § 302, 43 U.S.C. § 1337(a)(3)(C). The DWRRA’s next section authorizes

a new bidding method that Interior may use in leasing any of the submerged

lands of the Outer Continental Shelf. It provides that bidding may be on the

basis of a:

cash bonus bid with royalty at no less than 12 and 1/2 per centum

fixed by the Secretary in amount or value of production saved,

removed, or sold, and with suspension of royalties for a period,

volume, or value of production determined by the Secretary, which

suspensions may vary based on the price of production from the

lease . . . .

Id. § 303, 43 U.S.C. § 1337(a)(1)(H). The DWRRA’s final section, set forth in full

above, specifically addresses new, deepwater leases sold in a specific region of

the Gulf of Mexico between 1996 and 2000. The pertinent language of that

section states that “the suspension of royalties shall be set at a volume of not

less than the following” specifically established volume thresholds. Id. § 304,

Pub. L. No. 104-58, 109 Stat. 557 (uncodified, but present in a note to 43 U.S.C.

§ 1337).

Looking to Santa Fe Snyder Corp. v. Norton, 385 F.3d 884 (5th Cir. 2004),

the district court concluded that Interior did not have the authority to suspend

royalty relief for new leases at production volumes less than those set by

Congress in § 304. In Santa Fe Snyder, we considered whether Congress

granted Interior the authority to limit the application of § 304’s royalty relief to

only those new leases that resulted in new production from a field. Id. at

889–90.2 Under Chevron’s first step, we stated that the question was “whether

2

A “field” is “an area consisting of a single reservoir or multiple reservoirs all grouped

on, or related to, the same general geological structural feature and/or stratigraphic trapping

condition.” Id. at 889 (internal quotation marks omitted). The new production prerequisite

required a lessee to show that no oil or gas had yet been produced from anywhere in the field

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Section 304 of the [DW]RRA unambiguously provides that royalty suspensions

apply in full to each [n]ew [l]ease qualifying under its terms,” which we

answered affirmatively. Id. at 890, 892. In doing so, we juxtaposed the economic

justification required for existing leases to obtain royalty relief under § 302—the

new production requirement—with the limited, objective requirements to obtain

royalty relief for new leases under § 304—water-depth and location. See id. at

892–93 (“Congress clearly imposed a New Production Requirement on [e]xisting

[l]eases. It did not do so for [n]ew [l]eases.”).

The current case is the logical and inevitable extension of Santa Fe

Snyder, as the district court correctly reasoned. Here, as in that case, Interior

seeks to employ a royalty-relief limitation present in § 302 (which applies to

leases existing prior to the DWRRA’s enactment) in order to limit the royalty

relief granted to new leases by § 304. Interior asserts that § 304’s reference to

§ 303’s bidding process nonetheless grants Interior the discretion to “vary” the

suspension of § 304’s royalty relief based on the prices of oil and gas.3 But the

plain language of the statute does not bear Interior’s interpretation. Section 304

states that “the suspension of royalties shall be set at a volume not less than”

the stated production volumes. Interior’s reading would render § 304’s

mandatory language meaningless: if price thresholds trigger royalty payments

before § 304’s production volumes are exceeded, then the royalty payment

suspension is being set at a volume less than § 304’s specified production levels.

before obtaining royalty relief. See id. at 889–90.

3

We note that, below, Interior raised the affirmative defense that Kerr-McGee should

be estopped from challenging the legality of the price thresholds because the company bid on

and signed leases containing these provisions. The district court ruled that this defense was

unavailable because government officials cannot enforce by estoppel a contract that they were

not legally authorized to make. See LaBarge Prods., Inc. v. West, 46 F.3d 1547, 1552 (Fed. Cir.

1995). In its briefs to this court, Interior does not contend that any such affirmative defense

applies; therefore, it has abandoned this argument. See Fuzy v. S&B Eng’rs & Constructors,

Ltd., 332 F.3d 301, 302 (5th Cir. 2003).

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While § 303 grants Interior discretion to “vary” royalty relief for all new leases

of submerged lands on the Outer Continental Shelf based on the price of

production, § 304 “immediately excepts and replaces Interior’s discretion with

a fixed royalty suspension for [n]ew [l]eases on a volume basis” where those new

leases are located in the geographic region specified by § 304. Id. at 892. Had

Congress intended to impose price thresholds on the royalty relief for these new

leases, it certainly knew how to do so. See, e.g., DWRRA § 302 (specifically

setting price thresholds on royalty relief for existing leases that qualify for

royalty relief); see also Royalty Relief for American Consumers Act of 2006, H.R.

4749, 109th Cong. § 2(a) (2006) (proposed legislation seeking to suspend all

royalty relief if specified price thresholds are met). However, Congress

refrained from specifically establishing such price thresholds, and we refuse

Interior’s invitation to read this royalty-relief limitation into the statute.

Thus, the plain language of § 304 dictates our conclusion in this case just

as it did in Santa Fe Snyder. The statement that “the suspension of royalties

shall be set at a volume not less than” the specific production levels means just

that: royalty payments shall be suspended up to the production volumes

established by Congress. Section 304 is unambiguous in this regard, and it does

not grant Interior the authority to impose price thresholds that suspend royalty

relief at production volumes less than those established by Congress in § 304.

Therefore, we need not extend our analysis to Chevron’s second step.

Finally, Interior makes the same argument that it made in Santa Fe

Snyder regarding the DWRRA’s legislative history. See Federal Defendants-

Appellants’ Opening Brief at 27–29, Santa Fe Snyder, 385 F.3d 884 (No. 03-

30648); Federal Defendants-Appellants’ Reply Brief at 14–16, Santa Fe Snyder,

385 F.3d 884 (No. 03-30648). Kerr-McGee points to competing passages in the

legislative history in support of its position. But as we stated in Santa Fe

Snyder, “[b]ased on our conclusion that the statutory language is unambiguous,

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we need not follow the Interior’s suggestion to look to legislative history as a

guide in interpreting the [statute].” 385 F.3d at 893.

IV. CONCLUSION

For the foregoing reasons, we AFFIRM the judgment of the district court.

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