Opposition Brief — Southern Union Co. v. Jicarilla Apache Tribe

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i wMererires Vit, UL,

| FILED

Nos. 86-225 SEP 17 1066

86-219 ~ JOSEPH F. SPANIOL, JR,

86-224 - | ee

IN THE

Supreme Court of the GQnited States

OCTOBER TERM, 1986

SOUTHERN UNION COMPANY,

UNICON PRODUCING COMPANY,

SOUTHLAND ROYALTY COMPANY, and

EXXON CORPORATION,

Petitioners,

JICARILLA APACHE TRIBE,

DONALD P. HODEL, Secretary of the

United States Department of the Interior,

and STATE OF NEW MEXIco,

Respondents.

On Petition For a Writ of Certiorari To The

United States Court of Appeals For

The Tenth Circuit

BRIEF IN OPPOSITION OF RESPONDENT

JICARILLA APACHE TRIBE

ROBERT J. NORDHAUS

B. REID HALTOM

NORDHAUS, HALTOM, TAYLOR & TARADASH

507 Roma N.W.

Albuquerque, New Mexico 87102

Tel: 505-243-4275

Counsel for Respondent

Jicarilla Apache Tribe

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

QUESTIONS PRESENTED

Petitioners have presented eleven different ques-

tions in four separate Petitions for a Writ of

Certiorari. Respondents submit, however, that the real

issues are the following:

1. Whether the Secretary made an earlier admin-

istrative determination of value or had in fact merely

accepted the Petitioners’ royalty payments without

review or audit.

2. Whether the Secretary’s determination that dual

accounting was required was reasonable and in ac-

cordance with the Secretary’s fiduciary obligation.

3. Whether the Secretary’s interpretation of the

regulations and his requirement of an accounting by

the Petitioners involves an important question of fed-

eral law warranting consideration by this Court.

LIST OF PARTIES

In order to clarify the relationship of the parties

at the times pertinent to this case, Respondent sets

forth the following relationships of the parties that

have existed during the periods the leases were en-

tered into and amended and during the periods the

gas purchase contracts in suit were executed by the

parties.

The predecessor of Southern Union Company was

Southern Union Gas Company. Gas Company of New

Mexico was the operating division in New Mexico of

Southern Union Gas Company. As set forth in note

2 on page 6 of Southern Union Company’s (SUG)

brief, Southern Union sold substantially all of the as-

sets of Gas Company of New Mexico (GCNM) to Pub-

lic Service Company of New Mexico (PNM). SUG

claims that as part of that sale, SUG retained certain

liabilities including liability up to date of sale for ad-

ditional royalties which may be assessed in this liti-

gation. SUG does not state what the disposition would

be of royalties held by the District Court in escrow

or additional royalties paid to the Tribe since judg-

ment and reimbursed to the producing companies by

SUG. Counsel for SUG has advised counsel for

Respondent that the Public Service Commission of

New Mexico would determine what the disposition

would be of any proceeds heretofore paid by the tribe

and reimbursed by SUG to the other producing

Petitioners under contracts for reimbursement with

SUG, in the event the District Court decision is re-

versed.

Southern Union Production Company (SUPC), pred-

ecessor of Supron Energy Corporation (Supron), now

iil

Unicon Producing Company, was a wholly owned sub-

sidiary of Southern Union Gas Company when the

leases from the Jicarilla Apache Tribe (the Tribe) were

issued to SUG, and the gas purchase contracts at

issue herein were executed by SUG and SUPC.

The predecessor of Southland Royalty Company

(Southland), Aztec Oil and Gas Company (Aztec), was

a wholly owned subsidiary of SUG when the leases

from the Tribe were issued to SUG and the gas pur-

chase contracts at issue herein were executed by SUG

and Aztec.

The importance of the relationships of these parties

to the issues in this case is set forth below in this

brief.

TABLE OF CONTENTS

Page

COTIOOGD PUNT anc vasececd icccsdckecdeevcccicaincrerive i

I is yin he. ease cadeneanignaies ientucrios il

BA RIN wel ccusesivsusdccciapinndesndicieaveanetenion iv

ER GF FTG varenscbnsicsvsscscdesnntasiccinsesvevens vl

inks cai co vnnevacineieieecinlenaitinbeseestin 1

ASAD Raa eee EP ee SORA ER RRO oP eT 1

STATUTES AND REGULATIONS INVOLVED .............000 1

TE FE A iin evinces cneictivcnscestincgesdetes 1

Sy WE I a si esucaieraancnispccmietinnsevnns 5

REASONS FOR DENYING THE WRIT .............ccceeceeeees 11

I. THE SECRETARY’S REQUIREMENT OF

DUAL ACCOUNTING AND DETERMINA-

TION OF VALUE WAS REASONABLE

UNDER STANDARDS OF ADMINISTRA-

TIVE LAW AND REQUIRED BY HIS FI-

DRUCTARY GCULIRA BIN vcccsnsncsssscensscarcticess 11

A. The Secretary Has a Broad Fiduciary Ob-

ligation to the Tribe Which Mandates a

Determination of Value Independent of

PrOCOGGS £0 LPBSORS. ..cccscsscesssessesccssovseess 11

B. The Secretary Made No Determination of

Value or Interpretation of Law and Reg-

ulations as to Dual Accounting Prior to

TO I TG crvirctecxcesetarsoncsenssayses 14

C. The Secretary Of The Interior Cannot Be

Bound By a Prior Interpretation of

“Value,” That Did Not Exist. ............... 17

D. The Oil Companies Were Correctly Re-

uired to Employ Dual Accounting In Or-

der To Determine Value Under The

Leases And The Regulations. ................ 18

E. The Leases Require Royalties to be Paid

Ce BNE URIBE ccevcsssssesnccasancraninceces. 23

II. THE DECISION OF THE COURT OF

APPEALS IS NOT IN CONFLICT WITH

ANY COURT OF APPEALS DECISION

NOR ANY DECISION OF THE SUPREME

COTTER © <crvsasercossernsgnnssonpinnsintiimnaeatanninaasinns 23

A. The Decision Does Not Conflict With This

Court’s Decisions in Mountain States

Telephone and Telegraph Co. v. Pueblo of

Santa Ana and Nevada v. United

a aa a 24

B. The Decision is Consistent With the De-

cision of the Ninth Circuit Court of

Appeals in Marathon Oil Co. v. United

States, 794 F.2d 1461 (9th Cir. 1986) the

Only Other Court of Appeals Case De-

cided on the Same Issue. ..................0006 25

III. THE COURT SHOULD DENY THE WRIT

BECAUSE THE QUESTIONS OF FED-

ERAL LAW ARE BASED ON PECULIAR

FACTS INVOLVING ONE INDIAN RE-

SERVATION AND ARE NOT OF IMPOR-

TANCE TO THE NATION AS A

FRE kaidisteeieireereienen 26

A. There are No Special or Important Rea-

mons C0 Greet TR WE, cicncccsssercscssecsneens 26

B. Remand of This Case Would Not be Cost

Effective Because a Large Part of Ad-

ditional Royalties Assessed Were Based

on Values in Excess of New Mexico Sta-

tutory Price Ceilings and the New Mexico

Act Dee TOMI, oscisscesecessitéccsnneeenecesis 27

C. The Department of Interior is Currently

Revising Its Regulations for Determina-

tion of the Value of Gas. ...........cccseeeeeees 29

ene RT ae ec he agua aaa inmiaes 30

TABLE OF AUTHORITIES

CASES: Page

Atlantic Richfield Co. v. Hickle, 482 F.2d 587 (10th

an: MEINE > 0ibiéachasisadstbmapiaveeniniaidddeaiiiuniatanisiseeenion 5

Continental Oil Co. v. United States, 184 F.2d 802

SE PY. SIE ~ sercnecaehunesscmenetunainesummncnannsinsens 18

Hoover & Bracken Energies, Inc. v. Dept. of Inte-

rior, 723 F.2d 1488 (10th Cir. 1988) ........... 13

Immigration & Naturalization Service v. Stanisic,

395 U.S. 62 (1969), reh. denied, 395 U.S. 987

EIT | sereortcnpnette secs. caks ests chsrmocsatennsneaencs ebomeasnenddadlec 18

Jicarilla Apache Tribe v. Supron, 728 F.2d 1555

I GE Oo sslhsssacPcaceeinnnciicenanieneenieoiegabaneaedeniss 4-5

Kenai Oil & Gas, Inc. v. Dept. of Int. of U.S., 671

if © Fi. ht Ae |) Beeenenrernmmnnnennnennn zi

Lightcap v. Mobil Oil Corp., 221 Kan. 448, 562 P.2d

1, cert. dented, 434 U.S. 876 (1977) _ ............ 23

Marathon Oil Co. v. United States, 794 F.2d 1461

CR as TIE vanccssniensencaensnnecsscenst viens: 25

Mountain States Telephone & Telegraph Co.

v. Pueblo of Santa Ana, 472 U.S. __, 105

es I, I pada acctearcicenctaseskévandinwns 24, 25

Nevada v. United States, 463 U.S. 110

SIE "cacao eeiiesaealic eabshs oascadieetanmbbketiemuaiapnen 5, 24, 25

Rice v. Sioux City Cemetery, 349 U.S. 70

SO ek ikiaiai ia Luda ea eaten aidaeie us iacabbiiesanclaivass 26, 27

Rudolph v. United States, 370 U.S. 269

INNIS “ssicsat ateacuabicuics <ssapeadieanSavamekgenermamimnissuaasbek 26

Supron Energy Corp., et al., 46 I.B.L.A. 181

SI sci tabhatbicobhas cadcwvlieadexanpenididencssneuahidsienes 17, 18

Udall v. Tallman, 380 U.S. 1 (1965), reh. denied,

IY MINE ROI fe scickscacsengacuhinstnciniotexexiencss 18, 19

United States v. Mitchell (Mitchell ID), 463 U.S. 206

SENER sdaidiinastncispdcerteeacccdadiactseibcre betes 13

Waechter v. Amoco Prod. Co., 587 P.2d 228 (Kan.

1975), on rehearing, 546 P.2d 1320 (1976) .. 23

————EEeEeEeEeEeEeEeEeEeEe~TN

- me et Lat

vil

Table of Authorities Continued

Page

FEDERAL STATUTES:

Federal Oil and Gas Royalty Management Act of

1982 (30 U.S.C. §§ 188, 191, 1701, 1702, 1711-

1723, 1731-1736, 1751-1757 (1986) ................. 13-14

Indian Reorganization Act of June 18, 1934, 25

ae MINIT . vitetanatsttrsieniennvsadentivganenteoneesirs 5

Indian Mineral Leasing Act of May 11, 1938,

25 U.S.C. $§ S9Ga-B9Gg_ .............00ecce0000. §, 9, 11, 12

Mineral Lands Leasing Act, 30 U.S.C. § 181,

TE I sisnonssansacnansinciedsncessnrnsstnenincatanonetsaaciacnes 25

Natural Gas Policy Act of 1978, 15 U.S.C. §§ 3301-

RII or lineh chsdovasciasamesisapiassidantedneetaeecscadslamaaneuasans 4

STATE STATUTES:

New Mexico Natural Gas Pricing Act, N.M. Stat.

Ann. 62-7-1 et seg. (1978). Terminated effective

June 30, 1985, N.M. Session Laws 1984 c.i23,

Sn IID, sid eddie eitedshiac adh aeineasetedounaamniauensnioneseiien 4, 27

FEDERAL REGULATIONS:

25 C.F.R. Part 211 (1985) (formerly 25 C.F.R.

UNE MI i sll cine ca ai uuoubiicas Locgunmuasnbabacensunnndadaion 5, 10

30 C.F.R. Part 221 (1982) ...... 6, 10, 18, 19, 20, 21, 22

OTHER AUTHORITIES:

Report of the Commission on Fiscal Accountability

of the Nation’s Energy Resources (U.S.G.P.O

stint Del tha ona duspauidunshnuieomssnabeeniass 13, 15

Williams and Meyers, Oil and Gas Law, § 650 .. 23

2 ie RAPT PAN eR rer Berm ORI ROR SN 29

perenne neuen eee

BRIEF IN OPPOSITION OF RESPONDENT

JICARILLA APACHE TRIBE

This brief is filed in response to briefs of Southern Union

Company, Unicon Producing Company, Southland Royalty

Company, Exxon Company and amici Conoco, Inc. and

Tenneco Oil Company.

OPINIONS BELOW

Respondent adopts the statement of Opinions Below

shown on pages 1 to 3 of the Petition of Southern

Union Company. Respondent adds to the statements

of the Petitioners with respect to the Opinions Below

in Respondent’s Statement of the Case.

JURISDICTION

The Statement of Jurisdiction contained in the brief of

Petitioner Southern Union Company, pages 3 through 4,

is adopted by Respondent.

STATUTES AND REGULATIONS INVOLVED

The statement of Petitioner Southern Union Company

as to Statutes and Regulations Involved shown on page 4

of said Petition is adopted by Respondent.

STATEMEN’? OF THE CASE

Petitioners’ Joint Appendix will be designated Pet.

Jt. App. Respondent’s Appendix filed herein will be

designated Resp. App.

The Statement of the Case contained in various

petitioners’ briefs is supplemented and corrected as

follows:

The Jicarilla Apache Tribe (hereinafter called ‘‘the

Tribe’) brought this action in the United States Dis-

tric. Court for the District of New Mexico on May

7, 1975 against Southern Union Gas Company (SUG)

(subsequently Gas Company of New Mexico, (GCNM)),

Southern Union Production Company (SUPC) (later

Supron Energy Corporation, (Supron)), Aztec Oil and

Gas Company (later Southland Royalty Company

(Southland)), Exxon Company, U.S.A. (Exxon), and

Southern Union Gathering Company (SUGC).

On November 10, 1976, the Tribe settled with

GCNM and SUGC pursuant to a Stipulation of Set-

tlement approved by the Court dismissing the Tribe’s

claims with prejudice against those two Defendants

on payment of $600,000 cash to the Tribe and other

considerations.

In December, 1976, the USGS Oil and Gas Super-

visor ordered lessees to pay royalties for 1971, 1972

and 1973 based on certain minimum prices. In re-

sponse, Southland paid $16,751.86 and Supron paid

$247,374.18. Supron also paid additional royalties of

$146,842.24 on liquids in the gas stream for 1974,

1975 and 1976.

The Tribe claimed damages from the corporate

Defendants in the amount of the difference between

royalties paid from January 1970 and royalties based

on market value of gas and liquid hydrocarbons ex-

tracted from gas, and that said damages be trebled

in accordance with the provisions of the federal anti-

trust laws, or in the alternative, cancellation of the

leases. Against the Secretary of the Interior (the Sec-

retary), the Tribe sought an order that the Secretary

had breached his fiduciary obligations to the Tribe

and requested a direction that the Secretary carry

out his fiduciary obligations in the area of accounting

for oil, gas and liquid hydrocarbon substances, that

he require dual accounting, require development of

leases, and require offset wells; or in the alternative

that the Court take the action requested on behalf of

the Secretary for action unlawfully taken or unrea-

sonable delayed.

The case went to trial in May and June of 1979

before the Court without a jury. The Court entered

an Order on November 5, 1979 (Pet. Jt. App. 104a)

holding with respect to the Tribe’s anti-trust claims

that although the Tribe had proved technical viola-

tions of the Clayton Act by maintaining interlocking

directorates that the corporate defendants did not mo-

nopolize the market for liquid hydrocarbon substances

and generally held against the Tribe on the anti-trust

claims. The Court did not address directly plaintiff’s

claims that the defendant monopolized the intrastate

markets for natural gas in New Mexico. The Court

found that the Secretary failed to require dual ac-

counting for liquid hydrocarbon substances in com-

puting and paying royalties for production from lands

on the reservation and ordered the Secretary to sub-

mit an accounting setting forth the additional

amounts, if any, that the Secretary determined were

due and owing to the Tribe, pursuant to dual ac-

counting methods and determinations of value for nat-

ural gas. Following various accountings and

reaccountings to the court, on July 30, 1980 (Pet. Jt.

App. 141a), the Court ordered that, in addition to the

dual accounting requirement, the Secretary of the In-

terior could also consider a minimum value based upon

price received by Defendants in computing royalties

owed by the Defendants. The Court held that ‘‘value’”’

for royalty purposes could exceed the prices set forth

by the Natural Gas Policy Act of 1978, 15 U.S.C.

§§ 3301-3432, and by the New Mexico Natural Gas

Pricing Act, N.M. Stat. Ann. §§ 62-7-1, et seq., (1978

& Supp. 1979), and made certain findings concerning

calculations of the manufacturing allowance used in

dual accounting and concerning accounting for roy-

alties on gas lost between the wellhead and the inlet

of the liquids manufacturing plant. (Pet. Jt. App. 141a-

158a.)

On June 1, 1981 the Court pursuant to its Mem-

orandum Opinion and Order of that date, awarded

judgment in favor of the Tribe and against the lessee

Defendants in the amounts set forth in the Secretar-

y’s accounting as approved and awarded various

crossclaim judgments against Gas Company of New

Mexico as follows: (Pet. Jt. App. 165a-174a).

The Tribe was awarded $24,144.50 from Southland;

The Tribe was awarded $262,087.24 from Supron;

The Tribe was awarded $57,705.07 from Exxon;

Southland was awarded $97,352.67from GCNM;

Supron was awarded $232,528.23 from GCNM:

Exxon was awarded $28,817.94 from GCNM;

The Court denied a Motion to Intervene by the State

of New Mexico. The various defendants filed appeals from

the Final Judgment of the Court. The Tribe filed a Notice

of Appeals and Cross-Appeals on August 7, 1981.

A panel of three judges of the Tenth Circuit Court of

Appeals reversed the decision of Judge Mechem as to the

issues concerning dual acounting, applicability of the New

Mexico Gas Pricing Act (NMGPA) to the valuation of roy-

alties payable to the Tribe and breach of fiduciary duty

of the Secretary, and affirmed the judgment of the District

Court as to the antitrust issues. Jicarilla Apache Tribe v.

Supron Energy Corp. et al., 728 F.2d 1555 (10th Cir. 1984).

(Pet. Jt. App. 21a-57a).

The Tribe filed a Motion for Rehearing and Suggestion

of Rehearing En Banc on March 8, 1984. The Motion for

Rehearing was granted by the Court on March 30, 1984.

On rehearing the Court of Appeals issued an en banc

opinion on January 23, 1986 adopting the dissenting opin-

ion of Judge Seymour. See the February 23, 1984 opinion

of the Court of Appeals. 728 F.2d 1563 (Pet. Jt. App. la-

14a). On June 18, 1986 the Court supplemented its en banc

opinion, disagreeing with the Defendants’ argument that

the government should pay additional royalties owing to

the Tribe as a result of this case because their non-pay-

ment resulted from the government’s breach of fiduciary

duty, distinguishing Nevada v. United States, 463 U.S. 110,

114, n. 16 (1983). The Court stated that the failure of the

Secretary to require dual accounting resulted in the lessees

paying an insufficient amount of royalties under the con-

tract, and that the breach by the Secretary of its fiduciary

duty to enforce the leases did not excuse the lessees from

subsequently having to pay the amounts determined to be

owed under the leases, citing Atlantic Richfield Co. v. Hic-

kle, 432 F.2d 587, 592 (10th Cir. 1970). (Pet. Jt. App. 18a-

19a).

STATEMENT OF FACTS

The Jicarilla Apache Tribe is an Indian Tribe organized

and incorporated under the Indian Reorganization Act of

June 18, 1934, 25 U.S.C. §§476-477, residing on an Ex-

ecutive Order Reservation in Rio Arriba and Sandoval

Counties in northern New Mexico.

The leases which are the subject of litigation were issued

pursuant to the Indian Mineral Leasing Act of May 11,

1938, 25 U.S.C. §§ 396a-396g. (Pet. Jt. App. 200a). The

applicable regulations are contained in 25 C.F.R. Part 211

(1985) (formerly 25'C.F.R. Part 171) (Pet Jt. App. 214a)

and 30 C.F.R. Part 221 (1982). (Pet. Jt. App. 238a). The

standard lease form issued pursuant to the 1938 Act is

shown at Pet. Jt. App. 377a.-386a.

A. The History of the Gas Purchase Contracts and the

Dealings of the Parties.

It is particularly important to note, from Plaintiff’s Ex-

hibit “5” (Resp. App. A), which is a summary of lease

assignments and gas purchase contracts, that all of the

leases in suit excepting lease 47 were issued either orig-

inally to SUG or its then wholly-owned subsidiaries, South-

ern Union Production Company (Supron) or Aztec (now

Southland). Lease 47 was assigned to SUG shortly after

its issuance. SUG assigned a separate undivided one-half

interest in Leases 104 and 107 to Humble Oil Company

(later Exxon). On January 2, 1984, SUG entered into a

lease purchase option agreement to assign separate un-

divided one-half interest in Leases 100, 103, 105, 106, 145

and 153 to Aztec (later Southland), at that time a wholly-

owned subsidiary of SUG. SUG contracted to buy gas from

these leases on December 12, 1953 before Aztec acquired

any interest in the leases involved. The other half interest

in Leases 10, 47, 100, 101, 108, 104, 105, 106, 107 145,

150 and 153, was assigned on January 1, 1961 to SUG’s

other wholly-owned subsidiary SUPC (later Supron). On

the same date purchase contracts to purchase gas for the

life of these leases were entered into between SUG and

SUPC. See District Court Opinion, Pet. Jt. App. 106a-107a.

Leases 397 and 416 were acquired by Aztec in 1966 and

1969, respectively, while Aztec was a wholly-owned sub-

sidiary of SUG. Gas from these leases was contracted to

SUG pursuant to amendment of the December 12, 1953

gas purchase contract with Aztec. SUPC acquired Leases

417 and 418 on May 18, 1969. Purchase of gas from these

leases was contracted to SUG by contracts dated Decem-

ber 12, 1953. These lease dates and assignments are shown

on the chart, Pl-Exh-5, Resp. App. A. These contracts

between SUG and it subsidiaries fixed price schedules for

ee ee ee

intrastate gas purchases by SUG in the San Juan Basin,

which was still used by SUG for gas sold on the reser-

vation for royalty payments to the Tribe until 1976, when

the Supervisor U.S.G.S. wrote to certain producers setting

minimum prices for royalties to be paid tu the Tribe. Pet.

Jt. App. 179a.

It is clear, as a result of the corporate interrelationship

of the oil companies, that these lease assignments, gas

purchase contracts, and the later gas processing agree-

ments between SUG, SUPC and Southern Union Refining

Company, were not arms-length agreements.

As stated by Judge Seymour, the interpretation by the

majority panel of the Tenth Circuit Court of Appeals of

the royalty accounting obligation would permit the parties

to fix royalties at a low figure without recourse for the

Tribe or the Secretary. (Pet. Jt. App. 48a).

Whether the relationship and actions of these affiliated

companies constituted violations of the antitrust laws or

not as found by the District Court, it is abundantly clear

that SUG by reason of its control of the market and af-

filiation with major producers was able to fix prices and

enter into arrangements for processing which enabled SUG,

Supron and Aztec to profit directly or indirectly from ex-

traction and sale of liquids without paying commensurate

royalties to the Tribe.

Southern Union Refining Company, which took over the

Lybrook Extraction Plant from Supron at the end of 1976

was initially a wholly-owned subsidiary of Supron and re-

mained a subsidiary of SUG during periods relevant to

this case. The relationship of these affiliated companies is

outlined in the testimony of Mr. Jack Hertz, Vice President

of GCNM. (See Resp. App. B).

Resp. App. C shows that not only were prices paid

producers by SUG for gas produced from Jicarilla leases

lower than the New Mexico average prices, but they were

substantially lower than Federal Power Commission ceiling

prices in the years 1971, 1972 and 1973. As the Federal

Power Commission stated in its Opinion 658, dated April

11, 1973, Resp. App. D, producer bargaining in the Rocky

Mountain area was less effective than elsewhere in the

country and that the structure of the buyer segment could

well have a regressive impact on exploration and devel-

opment. As noted by the Commission, the lack of com-

petition in gas purchasing was the primary reason for the

low prices prevailing in the San Juan Basin.

B. The Liquids Processing Contracts Benefited SUG and

Supron, but No Royalties Were Paid to The Tribe.

SUG built the Lybrook Plant in the 1960’s; Supron ac-

quired ownership of the plant in exchange for stock issued

by SUG. The original processing agreement entered into

January 1, 1971 provided for a ten percent processing fee

payable to SUG by Supron. The contract allowed process-

ing of all intrastate natural gas, with gas from the east

gathering system being processed at the Lybrook Plant

and gas from the west gathering system being processed

at the Huerfano Plant. (Resp. App. E.,) A later amend-

ment entered into on May 1, 1972 provided for a

33 1/3% processing fee. (Resp. App. F.) SUG retained the

rights to the gas and Supron to all the liquids extracted

from gas. There was no provision for payment of royalties

to the Tribe for the liquids extracted or for SUG’s proc-

essing fee, although SUG was the original lessee of most

of the leases. Originally there was no provision in SUG’s

gas purchase contracts for payment to any producers for

liquids.

When the original gas purchase contracts were entered

into, Aztec (Southland) was a whelly-owned subsidiary of

SUG. All these petitioners, except Exxon, benefited from

the earnings of SUG and Supron on liquids. Supron argued

that although it may have been obligated to account for

liquids prior to 1976, it should be relieved of that obligation

it AEN te we

Coe ere

after 1976, by the simple process of conveying the plant

to another affiliated company.

C. The Applicable Provisions of the Leases, Statutes and

Regulations.

All the leases subject to this litigation were issued pur-

suant to the Indian Mineral Leasing Act of May 11, 1938,

25 U.S.C. §§ 396a-396g. Section 4 of that Act, 25 U.S.C.

§ 396d provides:

All operations under any oil, gas, or other min-

eral lease issued pursuant to the terms of sec-

tions 396a to 396g of this title or any other Act

affecting restricted Indian lands shall be subject

to the rules and regulations promulgated by the

Secretary of the Interior. In the discretion of the

said Secretary, any lease for oil or gas issued

under the provisions of sections 396a to 396g of

this title shall be made subject to the terms of

any reasonable cooperative unit or other plan ap-

proved or prescribed by said Secretary prior or

subsequent to the issuance of any such lease

which involves the development or production of

oil or gas from land covered by such lease. (Pet.

Jt. App. 201a.)

The leases in this suit were executed in the early 1950’s,

and the regulations then in effect have not changed since

that time in any materia! respect. The lease form and the

regulations clearly vest discretion in the Secretary to de-

termine ‘‘value’’ for computation of royalty. This discre-

tion, as the trial court held and Judge Seymour’s opinion

clearly demonstrates, is circumscribed by the Secretary’s

fiduciary obligation to the Tribe.

Paragraph 3(c) of the Standard Lease (Pet. Jt. App.

377a) provides that the royalty at the applicable percentage

be computed on “‘the value or amount of all oil, gas and/

or natural gasoline, and/or all other hydrocarbon sub-

+ alia

stances produced and saved from the land leased

herein... .”’

The lease provides that the Secretary has discretion to

ascertain “‘value’’ for the computation, and provides fur-

ther (paragraph 3(c));

During the period of supervision, ‘‘value’’ for the

purposes hereof may, in the discretion of the Sec-

retary, be calculated on the basis of the highest

price paid or offered (whether calculated on the

basis of short or actual volume) at the time of

production for the major portion of the oil of the

same gravity, and gas, and/or natural gasoline,

and/or all other hydrocarbon substances produced

and sold from the field where the leased lands

are situated, and the actual volume of the mar-

ketable product less the content of foreign sub-

stances as determined by the oil and gas

supervisor. The actual amount realized by the les-

see from the sale of said products may, in the

discretion of the Secretary, be deemed mere evi-

dence of or conclusive evidence of such value.

The regulations, 25 C.F.R. § 211.18 (1985) (formerly §

171.13) (Pet. Jt. App. 214a), contain an identical provision

for determining ‘‘value.’”’ 30 C.F.R. § 221.47 and § 221.50

(Pet. Jt. App. 238a) reinforce a conclusion that the Sec-

retary has discretion to determine value based on the high-

est price paid for a part or a majority of like quality of

oil or gas in the same field, and that the Secretary has

the obligation to include the value of liquid products in

determining royalty, whether these liquid products are ex-

tracted by the lessee or by others. The analysis of the

applicable lease provisions and regulations are set forth |

below, pp. 19-23. —

Sie

REASONS FOR DENYING THE WRIT

ARGUMENT

I. THE SECRETARY’S REQUIREMENT OF DUAL

ACCOUNTING AND DETERMINATION OF VALUE

WAS REASONABLE UNDER STANDARDS OF AD-

MINISTRATIVE LAW AND REQUIRED BY HIS FI-

DUCIARY OBLIGATION.

A. The Secretary Has a Broad Fiduciary Obligation to the

Tribe Which Mandates a Determination of Value In-

dependent of Proceeds to Lessees.

Title 25 U.S.C. § 396d (Pet. Jt. App. 201a) quoted above

.‘has direct application to the case at hand. This statute

confers on the Secretary the authority to promulgate reg-

ulations governing operations pursuant to the leases and

expresses a congressional policy of establishing a fiduciary

relationship in which the particular duties of the trustee

and the rights of the beneficiary are delineated. All Ji-

carilla Apache Tribal lands are held by the United States

in trust for the Tribe.

Section 396d clearly establishes a fiduciary obligation on

the part of the Secretary, not only to promulgate rules

and regulations, but also to administer such rules and

regulations. Thus, the Tribe contends that the Secretary

has a fiduciary duty under § 396d to enforce the regulations

promulgated under that section. To claim otherwise would

be to make a mockery of the acts and the intent of Con-

gress.

In Kenai Oil & Gas, Inc. v. Dept. of Int. of U.S., 671

F.2d 383 (10th Cir. 1982), the Tenth Circuit Court re-

viewed the fiduciary role of the Secretary of the Interior

and his delegates, in the context of the Secretary’s trust

responsibility for the approval of communitization agree-

ments pursuant to 25 U.S.C. § 396d. In holding that the

Secretary or his delegate could not be compelled to ap-

prove communitization agreements which would extend

non-productive leases beyond their primary term, the Tenth

Circuit Court said: “As a fiduciary for the Indians, the

Secretary is responsible for overseeing the economic in-

terest of Indian lessors, and has a duty to maximize lease

revenues.” Jd. at 386. The Secretary’s construction of reg-

ulations and exercise of discretion is “‘limited by the fi-

duciary responsibilities vested in the United States as

trustee of Indian lands.’”’ Jd. at 386. The Court said fur-

ther:

Furthermore, limiting the Superintendent’s con-

siderations solely to matters of conservation and

production would be inconsistent with his trust

responsibilities to the Indians in leasing tribal

lands. In light of these trust responsibilities, the

Superintendent must take the Indians’ best in-

terests into account when making any decision

involving leases on tribal lands, and has broad

discretion to consider all factors affecting their

interests.

Id. at 387. Thus, just as a limitation on the discretion of

the Secretary or his delegate in approving communitization

agreements would be inconsistent with the Secretary’s

trust responsibilities, limiting the Secretary’s obligation in

determining ‘“‘value’’ would also be inconsistent with his

trust responsibilities.

The purpose of the 1938 Indian Mineral Leasing Act

and congressional policy is to obtain the maximum benefit

from oil and gas for Indian tribes. The Secretary has a

fiduciary obligation to secure this maximum benefit to the

tribes. If the Secretary has discretion in administering law

and regulations and supervising operations under Indian

leases, this discretion must be exercised in light of his

fiduciary obligation. If there is more than one ‘‘reasonable”’

choice, as that term is used in administrative law, the

Secretary must choose that which is to the best interest

of the Tribe.

In the instant case, the Secretary belatedly recognized

his fiduciary obligation, both as to determination of value

and enforcement of dual accounting, after the demands

made by the Tribe and pursuant to the order of the Dis-

trict Court. As is shown in Point B below, there was no

prior inconsistent interpretation by the Department—only

a long history of inaction in enforcing the provisions of

Indian leases and applicable regulations.

Neither the history of administration of the Indian Min-

eral Leasing Act and regulations, nor the holdings of this

Court, are inconsistent with a determination of value which

is independent of the price paid or proceeds to the lessee.

Thus, the Circuit Court of Appeals for the Tenth Circuit

in Hoover & Bracken Energies, Inc. v. Department of In-

terior, 723 F.2d 1488 (10th Cir. 1983), held that royalties

were not limited by price paid to the producer, but had

to be paid on price plus state severance taxes, even though

Indian and \federal production were not subject to these

state taxes. Petitioners would limit value for payment of

royalties to the price paid.

In United States v. Mitchell (Mitchell ID, 463 U.S. 206

(1983), this Court recognized that the timber management

statutes established comprehensive responsibilities of the

federal government in managing the harvesting of Indian

timber, and noted that the government recognized its du-

ties in managing Indian forests so as to obtain the greatest

revenues for the Indians consistent with a proper protec-

tion and improvement of the forest. Similarly, the Indian

Mineral Leasing Act established comprehensive responsi-

bilities in the federal government which give rise to a like

obligation to manage tribes’ oil and gas resources to obtain

the greatest revenue for the Indians consistent with proper

protection and improvement of their lands.

The Report of the Commission on Fiscal Accountability

of the Nation’s Energy Resources (U.S.G.P.O. 1982) led to

the enactment of the Federal Oil and Gas Royalty Man-

agement Act of 1982 (codified at 30 U.S.C. §§ 188, 191,

1701, 1702, 1711-1723, 1731-1736, 1751-1757 (1986)). In

Section 2 of the Act, Congress recognized that the system

of accounting with respect to royalties and other payments

due on oil and gas produced from federal and Indian lands

was archaic and inadequate. The Act stated that it was

essential that the Secretary initiate procedures to improve

methods of accounting for royalties and to provide for

routine inspection of activities related to the production

of oil and gas on lease sites. The Act specifically stated

that one of its purposes was to ‘“‘fulfill the trust respon-

sibility of the United States in the administration of Indian

oil and gas resources’. Section 101(bXcX1) required the

Secretary to audit and reconcile, to the extent practicable,

all current and past lease accounts for leases of oil or gas

and take appropriate actions to make additional collections

or refunds as warranted.”’ (emphasis added)

It weuld obviously subvert the purposes and objectives

of the Royalty Management Act if the Secretary were

bound by previous failures to enforce Indian lease terms

or regulations, or if his discretion were so limited that he

could not insure that tribes receive the maximum income

from the development and exploitation of their resources.

Thus, the real issue in this case is whether given two

reasonable interpretations, the Secretary’s trust respon-

sibilities require him to apply whichever accounting method

(Btu or net realization) yields the Tribe the greatest roy-

alty.

B. The Secretary Made No Determination of Value or

Interpretation of Law and Regulations as to Dual Ac-

counting Prior to the Tribe’s Demand.

Petitioners mistake inaction and failure of the Secretary

to enforce existing regulations under the mineral leasing

laws for a positive administrative interpretation of the reg-

ulations and leases. The record is devoid of any evidence

of an administrative interpretation to the effect that

‘“‘value’”’ equals ‘‘proceeds’’, or that liquids accounting was

required only of lessees who operated extraction plants.

It is true that lessees who did not operate liquids extrac-

tion plants had not previously been required to account

for liquids. However, it is also true that no lessees on the

Jicarilla Apache Reservation, including those operating ex-

traction plants, had ever been required to account for liq-

uids by action of the Secretary.

The failure of the Department of the Interior to monitor

and audit royalties, either for value or for liquids account-

ing, was made clear by the Report oj the Commission on

Fiscal Accountability of the Nation’s Energy Resources,

supra, transmitted January 21, 1982 to Secretary of the

Interior Watt. This report underscored the vital impor-

tance to the Nation of full and correct payment of royalties

and the long-standing failure of the Department of Interior

to monitor or audit roya!ty payments on federal or Indian

lands.

Prior to 1973, when the Tribe made demands on the

Secretary to enforce lease provisions on the reservation,

there had essentially been no monitoring or auditing of

royalty payments to the Tribe. In a letter of President

Hubert Velarde of the Tribe dated June 29, 1973 to the

Secretary, the Tribe pointed out that royalties were being

paid on artificially maintained low prices; that no royalties

were being paid on liquids; and that the Department was

failing to enforce other provisions of the leases. (Resp.

App. G). On July 29, 1974, a letter was written by the

Commissioner of Indian Affairs to th Secretary, asking

the U.S.G.S. to provide the Tribe with information as to

the true value of oil and gas produced on the reservation

from 1953 to the present which should be used in royalty

computations, the by-products and amounts thereof derived

from the subject production, the cost of manu‘acture of

the above-named by-products and the value of the above

by-products. (Resp. App. H). The Department established

a “Jicarilla Response Committee” in August, 1974, to re-

spond to the Tribe’s demands. The Jicarilla Response Com-

mittee obtained cost data on the manufacture on the

extraction of liquids and compared the Btu adjustment

prices against net realization prices (net realization value

equals the value of liquids extracted less cost of manu-

facture, plus the value of residue gas at the tailgate of

the extraction plant). The Response Committee, in its var-

ious bi-weekly reports of activities to the Chief of the

Conservation Division, U.S.G.S., continued to maintain that

the net realization value of natural gas liquids was not as

advantageous to the Tribe as the Btu adjustment method.

In 1975, because of the increased market price of ex-

tracted liquids, it became apparent that the net realization

method would yield a higher value than the Btu adjustment

method if actual cost of manufacture were used. Accord-

ingly, at various times on or after December 9, 1976 the

Area Oil and Gas Supervisor, U.S.G.S., issued letters to

SUPC requiring SUPC to file corrected monthly reports

of sale and royalty for 1974, 1975 and 1976 to date to

show both Btu and net realization methods of reporting

royalty. The corrected reports indicated substantial un-

derpayments and SUPC paid substantial sums to the Tribe

in additional royalties based on liquids accounting. See

I.B.L.A. Opinion (Pet. Jt. App. 179a-180a).

At about the same time, a letter was sent to the De-

partment of the Interior by the Albuquerque Area Office,

asking for a determination as to whether producers whose

gas was processed though plants which they did not own,

would be required to account for liquids. As of the date

of trial in the District Court, no decision had been received

from the Secretary. See Opinion of the District Court (Pet.

Jt. App. 13a).

The District Court found that until 1974, producers sell-

ing natural gas to SUG were paid a base contract price,

plus a penny per Mcf, which they claimed presumably sat-

isfied any obligation that producers had to account for

liquids in the gas stream. From 1974 on, producers re-

ceived a Btu adjusted price for gas sold to SUG without

any additional amount paid for liquids. The Court con-

cluded that the Secretary was required to have producers

account to the Tribe by the dual accounting method if gas

produced from the lease is processed into component prod-

ucts, whether or not the particular producer owned and

operated an extraction plant. (Pet. Jt. App. 132a).

It is thus clear from the record that there was no po-

sitive administrative construction or interpretation of the

Secretary’s obligation to determine value or to require

producers to account by the dual accounting method until

the Tribe’s complaints were received.

C. The Secretary Of The Interior Cannot Be Bound By a

Prior Interpretation of ‘“‘Value’’ That Did Not Exist.

In Supron Energy Corp., et al., 46 I.B.L.A. 181 (1980)

(Pet. Jt. App. 176a-199a), the Interior Board of Land

Appeals considered the contention of the oil companies

that the Department of Interior, by accepting the com-

panies’ monthly reports, had exercised its discretion in

determining ‘‘value’’ for royalty purposes. In deciding

against the oil companies, the Board found that the De-

partment did not accept the actual sales price as repre-

sentative of ‘‘true value’, and that the Department’s first

action to determine ‘‘value’’ was made by the Area Su-

pervisor as a result of this case. The Board explained the

practice of billing lessees for royalty on the basis of

monthly statements which stated value as sales price, sub-

ject to post audit. There was no verification by GS per-

sonnel as to value.

Likewise, the Oil and Gas Supervisor has now exercised

his discretion to determine that ‘‘value’’ on royalties will

be calculated by submitting his final accounting to the

Court. To successfully override the Secretary’s determi-

nation of value, Petitioners must submit evidence that he

acted in an arbitrary and capricious manner. No such evi-

dence has yet been presented. In fact, the majority opinion

of the three-judge panel of the Circuit Court found there

was no arbitrary or capricious action, yet overturned the

determinations of the Secretary. Such an administrative

interpretation by the Department of its own regulations

should be given controlling weight unless plainly erroneous

or unless it is inconsistent with the regulations. Udall v.

Tallman, 380 U.S. 1 (1965), reh. denied, 380 U.S. 989

(1965); Immigration & Naturalization Service v. Stanisic,

395 U.S. 62 (1969), reh. denied, 395 U.S. 987 (1969).

Petitioners cite Continental Oil Company v. United States,

184 F.2d 802, (9th Cir. 1950) for the proposition that the

Department cannot reassess royalty value in excess of a

previously determined value billed by the Department. Con-

tinental does not support Petitioners’ position, as held by

the Indian Board of Land Appeals. In Continental the

Department had previously issued an order determining

value. In this case there had been no such earlier inter-

pretation.

D. The Oil Companies Were Correctly Required to Em-

ploy Dual Accounting In Order To Determine Value Un-

der The Leases And The Regulations.

The District Court, in its Memorandum Opinion of No-

vember 5, 1979, 479 F. Supp. 536 (1979), concluded ‘‘that

where, as here, gas produced from the lease is processed

into component products, dual accounting is required by

the terms of the lease.” 479 F. Supp. at 551. (Pet. Jt.

App. 131a). This conclusion was consistent with the sub-

sequent independent conclusion of the Interior Board of

Land Appeals in Supron Energy Corp., et al., supra. with

respect to Supron. In that case, the Department held that

paragraph 3(c) of the lease clearly requires that the lessees

employ dual accounting to determine the value for royalty

accounting purposes. The board also determined that the

Btu adjustment method was justified by 30 C.F.R. § 221.47,

and that the net realization method was justified by 30

C.F.R. § 221.50. (Pet. Jt. App. 261a-264a). Given the in-

dependent, though parallel, conclusions of the District

Court and the Interior Board of Land Appeals, the weight

of that authority clearly indicates that dual accounting by

lessees is required under the terms of the lease and the

regulations. Further, the Department of Interior’s inter-

pretation of its own regulations and lease forms should be

given controlling weight. Udall v. Tallman, supra.

The oil companies cite the last sentence in 30 C.F.R.

§ 221.47 for the proposition that the “highest price paid

or offered’’ must be accepted as value for royalty purposes,

but they ignore the language of the first sentence, which

reads as follows:

The value of production, for the purpose of

computing royalty shall be the estimated reason-

able value of the product as determined by the

supervisor, 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, to

the price received by the lessee, to posted prices

and to other relevant matters.

More importantly, they ignore the second sentence of

§ 221.47, which reads as follows:

Under no circumstances shall the value of pro-

duction of any of said substances for the purposes

of computing royalty be deemed to be less than

the gross proceeds accruing to the lessee from

the sale thereof or less than the value computed

on such reasonable unit value as shall have been

determined by the Secretary. (emphasis added)

The ‘‘substances’”’ referred to above are those listed in

§ 221.46: “‘Casinghead or natural gasoline, butane, pro-

pane, or other liquid hydrocarbon substances extracted

from gas....’’ Thus, the computation of liquids royalty

employing the ‘‘value basis” in § 221.47, includes the value

of ‘liquid hydrocarbon substances’’ whose value is no less

than the “‘gross proceeds’, i.e. sales price, accruing to the

lessee, or no less than the ‘‘reasonable unit value’’, i.e.

price per gallon or Mcf, as determined by the Secretary.

Of course, Supron did extract liquids when it owned the

Lybrook Plant, but never accounted for any royalties from

plant profits until ordered to do so by the Oil and Gas

Supervisor and finally the Court. The facts reveal that

when all of the gas purchase contracts were executed,

without reserving processing rights, that the sales con-

tracts were made with the companies’ parent company,

SUG, (except for Exxon) which owned the Lybrook Plant,

and that the oil companies’ leases were originally held by

SUG. Even the majority opinion in the original Tenth Cir-

cuit decision apparently requires dual accounting of Supron

as a plant operator.

In order for the value of liquids to be computed on such

reasonable unit value the quantity of liquids must be de-

termined under 30 C.F.R. § 221.46 (Pet. Jt. App. 260a).

This section vests broad discretionary authority in the Su-

pervisor to make such determination, and provides for the

use of two basic methods. The first method involved the

allocation of the ‘‘net output”’ (i.e., “the quantity of each

substance that the plant produces for sale’’) of the prod-

ucts produced from each leasehold by taking into account

the ‘‘gasoline content’’ (§ 221.46(b) & (c)) or individual hy-

drocarbon content (§ 221.46(d)) and the number of leases

involved. The second method (§ 221.46(e)) involves the es-

timation of liquid hydrocarbon production when the first

method is not “practicable”, in the judgment of the Su-

pervisor, by taking into account the “‘quantity of gas pro-

duced from the leasehold and transmitted to the extraction

plant’, a test for individual hydrocarbon content, and the

efficiency of the plant. Further, the Supervisor’s estima-

tion of ‘‘quantity”’ under the second method is ‘‘determined

as to insure full protection of the royalty interest of the

lessor’ (emphasis added), which clearly indicates that this

method must be employed where in the judgment of the

Supervisor, the proper and accurate valuation of liquids

royalty cannot be otherwise determined or where the roy-

alty interest of the federal or Indian lessor would in effect

be diminished or circumvented. Reading § 221.46 in the

context of § 221.47, the royalty value for liquid hydrocar-

bons is calculated by either (1) computing the quantity and

unit value of those liquids as determined by the Supervisor

and the Secretary or (2) taking the gross proceeds or

actual amount realized by a lessee who sold the liquids for

extraction.

The method of computation of value for ‘wet gas’ (gas

and entrained liquids) under § 221.50(c) (Pet. Jt. App. 265a)

is identical with that used for the computation of liquids

value under § 221.47, which indicates the comprehensive

and compatible scheme of valuation in royalty accounting

embodied in the regulations. Section 221.50, in the context

of the comprehensive regulatory scheme in Part 221, re-

veals that it addresses the two basic situations encountered

by a lessee producer: subsections (a) and (b) apply where

a lessee-producer sells the gas and liquids as components

directly to a gas purchaser and a component product pur-

chaser or where the lessee-producer processes the gas and

components himself; and, subsection (c) applies where, as

is the usual case, a lessee-producer sells the gas and liquids

as ‘‘wet gas’. A lessee-producer who sells ‘‘wet gas” under

§ 221.50(c) is expressly required to perform dual accounting

in order to determine ‘‘whichever is greater’. Under both

regulations and the provisions of paragraph 3(c) of the

lease, dual accounting is required, and the value of liquid

hydrocarbons must be included in such accounting. Thus,

the District Court, the Interior Board of Land Appeals

and Judge Seymour were consistent in their interpreta-

tions of that section.

The majority of the panel of the Tenth Circuit Court

also mistakenly construed the words ‘produced and sold

from the field’’ as meaning produced and sold from the

leased lands, thus concluding that royalties need be paid

only on liquids processed on the leased lands by the lessee.

This latter construction of “‘field’’ is contrary to the

common sense construction of the word used by industry

and by the Supervisor. Thus, the Area Oil and Gas Su-

pervisor in Albuquerque, in determining whether additional

royalties should be assessed against these oil companies

to determine the highest price paid for the majority of

gas produced and sold from the field for the years 1971

through 1973, assembled complete gas sales data on all

Jicarilla Apache tribal leases, including those selling to

interstate purchasers. He determined the median price for

all gas from these leases and adopted these median prices

as the floor values for each year. The Interior Board of

Land Appeals held that this was in the discretionary lat-

itude granted to the Supervisor by the regulations. (Pet.

Jt. App. 185a).

The Petitioners erroneously contend that dual account-

ing should not be required and royalty should not be paid

for liquids on their production either because they did not

receive any benefit from the liquids or because the liquids

processing plant owner has no legal obligation to provide

the data they need for dual accounting. The lessee-pro-

ducers’ claims that they received no benefit or proceeds

from the liquids ignores the fact that they agreed to the

gas purchase contract which allowed SUG to take the liq-

uids without compensation. They could have sought relief

from the restrictive contract provisions either through ne-

gotiation or through the courts. Nevertheless, their con-

tracts with SUG or GCNM relieve the lessee-producers of

the incidence of liability for payment of additional royalties

resulting from dual accounting by providing that ‘‘excess

royalty payments” be reimbursed by SUG or GCNM. If

the lessee-producers could not, for any reason, obtain from

the processing plant the data required for dual accounting,

then the supervisor’s estimation pursuant to 30 C.F.R.

§ 221.46(e) would be additionally justified and would be

Bee

substituted for the unobtainable data for the purpose of

dual accounting. The claims of the producing companies

of actua] injury to them as innocent parties is belied by

the reimbursement provisions of their contracts with SUG,

the party which profited substantially form the additional

values secured by extraction of liquids.'

E. The Leases Require Royalties to be Paid on Market

**Value’’.

The royalty clause of the standard BIA lease is a typical

‘market value’’ clause. Nonetheless, Petitioners construe

the royalty clause to require that royalties be paid on the

“net proceeds’ to the lessee. The courts throughout the

United States have long recognized the difference between

‘market value’, “‘market price’ and “‘net proceeds” roy-

alty clauses. Proceeds and market value are distinguished

in Waechter v. Amoco Prod. Co., 537 P.2d 228, 249 (Kan.

1975), on rehearing, 546 P.2d 1320 (1976); and in Lightcap

v. Mobil Oil Corp., 221 Kan. 448, 562 P. 2d 1, cert. denied,

434 U.S. 876 (1977). See generally, Williams and Meyers,

Oil and Gas Law, § 650.2.

This Court should continue to recognize these distinc-

tions and not substitute judicial interpretations for the plain

meaning of the lease clause.

ARGUMENT

II. THE DECISION OF THE COURT OF APPEALS IS

NOT IN CONFLICT WITH ANY COURT OF

APPEALS DECISION NOR ANY DECISION OF

THE SUPREME COURT

‘The Reimbursement provisions of the contracts between the Gas

Company of New Mexico and Petitioners are the basis for judgments

by Petitioners against Gas Company of New Mexico and are quoted in

the District Court’s Memorandum Opinion of June 1, 1981. Pet. Jt.

App. 165a-172a.

A. The Decision Does Not Conflict With This Court’s De-

cisions in Mountain States Telephone and Telegraph

Company v. Pueblo of Santa Ana and Nevada vy. United

States.

Petitioners cite Mountain States Telephone and Tele-

graph Company v. Pueblo of Santa Ana, 105 S. Ct. 2587

(1985) and Nevada v. United States, 463 U.S. 110 (1983)

as decisions that conflict with the Tenth Circuit decisions

in this case. In the Mountain States decision, this Court’s

reversal of the Tenth Circuit’s affirmance of a District

Court decision setting aside a BIA administrative inter-

pretation was based on the reasoning that the executive

officials implementing the Pueblo Lands Act of 1924 were

more likely to have an understanding of the actual intent

of Congress than judges who must consider the legal im-

plications of the transaction over half a century after it

occurred. Petitioners equate this reasoning to Judge Sey-

mour’s reasoning and the reasoning of the District Court

but fail to recognize that in this case there was no long-

standing administrative interpretation. Mountain States has

no application to a case such as this where the courts as

well as the Congress have recognized long-time inaction

and failure to enforce lease provisions that have acted to

the detriment not only of Indian tribes but of the federal

government and of states.

In Nevada v. United States relied upon by Petitioners,

the tribe’s claims against third parties was held barred

because the tribe’s water rights had been previously ad-

judicated in a 1913 Federal District Court decree. The

third parties in Nevada were “thousands of small farmers

in northwestern Nevada” who had “‘specific promises made

to their forebearers two or three generations ago.’”’ 463

U.S. at 145. (Brennan concurring). Those small farmers

had no relationship to the tribe in that case. In contrast,

the third parties in this litigation are energy companies

who had agreed to lease provisions reasonably susceptible

to the interpretation that royalties be based on the highest

a 20

value reasonably obtainable under their lessees. In this

case the Petitioners merely misinterpreted lease provisions

and the Secretary failed to act to enforce these provisions.

B. The Decision is Consistent with the Decision of the

Ninth Circuit Court of Appeals in Marathon Oil Com-

pany v. United States, the Only Other Court of Appeals

Case Decided on the Same Issue.

In the recent decision of the Court of Appeals for the

Ninth Circuit, Marathon Oil Company v. United States,

794 F.2d 1461 (9th Cir. 1986), the Ninth Circuit Court of

Appeals concurred with the Court of Appeals for the Tenth

Circuit in affirming the Secretary’s authority to interpret

the royalty provisions of natural gas leases derived from

the Mineral Lands Leasing Act, 30 U.S.C. § 181 et seq.,

That Act and the Act in question grant broad powers to

the Secretary. The Mineral Land Leasing Act authorized

the Secretary to “prescribe necessary and proper rules and

regulations and to do any and all things necessary to carry

out and accomplish the purposes of (the Act).’’ 30 U.S.C.

§ 189. Years after the leases were executed in Marathon,

the Secretary determined the royalties should be computed

on a net back formula rather than the price paid for gas

at the wellhead. In the instant case, the Secretary similarly

determined that royalties should be computed on a net-

realization formula rather than on the price paid for gas

at the wellhead, provided that the net-realization formula

resulted in the highest payment to the Tribe. The Sec-

retary’s interpretation in Marathon was also applied ret-

roactively, as in this case.

The decision of the Court of Appeals in this case is in

accord with principles of federal trust responsibility that

have long been articulated by this Court. There is no real

conflict between the decisions of the Court of Appeals in

this case and this Court’s decisions in Mountain States and

Nevada. The Tenth Circuit decision in this case is sup-

ported by the decision of the Ninth Circuit in Marathon.

There is thus no important question of federal law which

has not but should be settled by this Court, nor has a

federal question been decided in this case in a way that

conflicts with any decisions of this Court.

ARGUMENT

Iil. THE COURT SHOULD DENY THE WRIT BE-

CAUSE THE QUESTIONS OF FEDERAL LAW

ARE BASED ON PECULIAR FACTS INVOLVING

ONE INDIAN RESERVATION AND ARE NOT OF

IMPORTANCE TO THE NATION AS A WHOLE.

A. There are No Special or Important Reasons to Grant

the Writ.

This court has noted that the “‘special and important

reasons” referred to in Supreme Court Rule 17 must be

of importance to the nation as a whole to invoke the dis-

cretionary review of this Court. Rudolph v. U.S., 370 U.S.

269, 270, (1962) (Writ of Certiorari dismissed as improv-

idently granted because “‘review would be of no importance

save to the litigants themselves.”’) In Rice v. Sioux City

Cemetery, 349 U.S. 70 (1955), the Court originally granted

certiorari to consider a contract prohibiting burial of non-

Caucasians in an Iowa cemetery. After the dispute arose,

the Iowa legislature passed corrective legislation that pre-

vented a similar situation from occurring again. 349 U.S.

at 73. The legislation did not apply to parties in litigation

at the time of the enactment; therefore, the issue was still

of importance to the parties who had petitioned for

certiorari. 349 U.S. at 76. Nevertheless, the court dis-

missed the writ as improvidently granted, stating that “‘It

is very important that we be consistent in not granting

the writ of certiorari except in cases involving principles

the settlement of which is of importance to the public as

distinguished from that of the parties...” 349 U.S. at 79

quoting Layne & Bowler Corp. v. Western Well Works,

Inc., 261 U.S. 387, 393 (1923). There are no special and

important reasons to grant the Writ in this case, for the

reasons stated below.

B. Remand of This Case Would Not be Cost Effective Be-

cause a Large Part of Additional Royalties Assessed

Were Based on Values in Excess of New Mexico Sta-

tutory Price Ceiling and the New Mexico Act has Ter-

minated.

The situation in this case is similar to that in Rice v.

Sioux City Cemetery, supra. A substantial amount of ad-

ditional royalties assessed against Petitioners were based

on the difference between the ceiling price of natural gas

established by the New Mexico Natural Gas Pricing Act

of 1978, N.M. Stat. §§ 62-7-1, et seg. (NMGPA) and the

prices upon which Petitioners based their royalty pay-

ments. The prices paid to producers for natural gas for

intrastate natural gas in New Mexico were lower than

prices prevailing on interstate gas. The District Court held

that the New Mexico Legislature had not intended the Act

to apply to royalties paid the Tribe and that the Secretary

in determining ‘‘value’”’ should have established value for

royalties paid to the Tribe not limited by the NMGPA.

The NMGPA terminated effective June 30, 1985. Chapter

123 N.M. Session Laws 1984 §15. Petitioners have not

requested review as to this portion of the District Court’s

decision. In the event this case is remanded to the District

Court for reaccounting, both the Secretary and the

Petitioners would be confronted with an expensive reac-

counting, to determine whether the additional royalties paid

pursuant to the District Court’s judgment were based on

dual accounting or on the limits imposed by the NMGPA.

Moreover, this reaccounting, in the event that it resulted

in partial repayment by the Tribe of additional royalties

heretofore paid by the companies (see Attachment A to

Appellant’s Motion to Require Appellees to File Additional

Bond or Other Security), (Resp. App. I) would result in

payment to Public Service Company of New Mexico and

would presumably require proceedings before the Public

Service Commission of New Mexico to determine whether

reimbursement to customers of PNM would be required.

The cost of these proceedings would in all probability ex-

ceed any possible benefits obtained by PNM or Southern

Union Company as a result of a remand of this case.

The question also arises as to the effect of the Stipu-

lation for Settlement between Gas Company of New Mex-

ico and the Tribe entered into October 21, 1976. Paragraph

one of this Stipulation recites as follows:

1. The Tribe and GCNM have entered into a

Settlement Agreement, a Royalty Gas Gathering

Agreement and a Royalty Gas Purchase Con-

tract, all of even date herewith settling other

matters in dispute between the Tribe and GCNM,

which Agreements are incorporated herein by

reference.

Paragraph 8 of the Stipulation provides as follows:

8. All matters in controversy in this case between

the Tribe and Defendants GCNM and Southern

Union Gathering Company having been settled,

the parties hereto request the Court to enter this

Stipulation as its final judgment in this case, and

the case shall be dismissed with prejudice in its

entirety as to GCNM and Southern Union Gath-

ering Company, each party to bear its own costs.

(Resp. App. J)

The District Court stated in its November 5, 1979 Opinion

in footnote 2, Pet. Jt. App. 118a, that while evidence

revealed that SUG tended to negotiate gas purchase con-

tracts on a “‘take it or leave it’”’ basis with regard to prices

dictated by it, “this at best tends to reveal monopolistic

activities attributable not to defendant-lessees, but to SUG,

who has bought its peace in this lawsuit. This apparently

illegal activity on the part of SUG cannot be imputed to

eo es ae

the defendants remaining in this action.’”’ (Pet. Jt. App.

113a, fn.2).

SUG after settling with the Tribe then rejoined the case

and is attempting to reach the Tribe through the back

door by recovering the monies it has agreed to pay the

other Petitioners pursuant to the excess royalty reim-

bursement contracts with these Petitioners.

C. The Department of Interior is Currently Revising Its

Regulations for Determination of the Value of Gas.

On July 25, 1986 the Department of Interior, Minerals

Management Service (MMS) published a Notice of Modi-

fication to Notice To Lessees Number 5 (NTL-5) entitled

‘Procedures for Determining Natural Gas Value for Roy-

alty Purposes’. The stated purpose of the changes was

“to permit MMS to value most natural gas by using the

full range of its authority under the royalty valuation reg-

ulations in 30 C.F.R. rather than the more restrictive pro-

visions of NTL-5.” 51 F.R. 26759. On August 9, 1977

because of questions raised by the Tribe as to the super-

vision of royalty accounting on Tribal production, and the

failure of the U.S.G.S. independently to determine value,

the U.S.G.S. caused to be published an Order suspending

the operation of NTL-5 to oil and gas leases on the Jicarilla

Apache Reservation for an indefinite period as of June 1,

1977. 42 F.R. 40268, August 9, 1977. (Resp. App. K).

On February 5, 1986 the MMS published proposed rules

entitled Product Evaluation For Royalty Purposes. (Pet.

Jt. App. 341a-376a). In the background section of the No-

tice, it was stated that the Secretary had appointed a

Royalty Management Advisory Committee comprised of

thirty-one representatives from industry, the states and

Indian tribes, which will have as one of its first tasks to

advise the Secretary on the new product value regulations.

The Advisory Committee held its first meeting in Lake-

wood, Colorado on January 9 and 10, 1986. It was stated

in the Notice that the MMS had decided to make drafts

of the proposed regulations available for public review and

comment before issuing formal notices of proposed rule-

making. It was made clear that the draft regulations set

forth in the Notice were not final and would be subject

to change after consideration of the recommendations of

the Advisory Committee. (Pet. Jt. App. 341a-343a). —

In view of the pending issuance of new regulations, the

Court should not pre-empt the Department of Interior by

interpreting existing regulations. The questions raised by

Petitioners with respect to interpretation of the present

regulations will be of no national importance in the future.

CONCLUSION

Respondent submits that the true purpose of Petitioners’

and Amici’s efforts to overturn the decision of the Court

of Appeals for the Tenth Circuit on Rehearing is a thinly

disguised attempt to prevent the Secretary in the future

from auditing royalty payments made by these companies

to Tribes and states, and to perpetuate past practices of

accepting ‘‘net proceeds’ as reported by producers as

‘value’. The issues raised here pertain only to the Jicarilla

Apache Reservation and are not of importance to the na-

tion as a whole. There are, in reality, no issues raised

which have not already been decided against the Petitioners

in the Circuit Courts and in this Court.

Respectfully submitted.

RoBERT J. NORDHAUS

B. Reip HALTOM

NORDHAUS, HALTOM, TAYLOR &

TARADASH

507 Roma N.W.

Albuquerque, New Mexico 87102

Tel: 505-243-4275

Counel for Respondent

Jicarilla Apache Tribe

APPENDIX

a ee ee

RESPONDENT’S APPENDIX

TABLE OF CONTENTS

Page

APPENDIX A—Summary—Lease Assignments and

Gas Purchase Contracts (Plaintiff's

REIN > ccapiidutentciatadseaneniiadetunes la

APPENDIX B—Testimony of Mr. Jack Hertz, Vice

President of Gas Company of New

Mexico. (10 C.A. App. Vol.IV, A-

SEL nisswisctcidcvutaniteniniinasiiaisiens 2a

APPENDIX C—Natural Gas Prices—Summary.

(Plaintiff's Exhibit 64).* ............ 5a

APPENDIX D—Opinion No. 658, Federal Power

Commission, p. 28 (10 C.A. App.

VOR. Vek, BTR)... crevcnssecssrssseceess 6a

APPENDIX E—Amendment of Gas Processing

Agreement. (10 C.A. App. Vol.

Wie PPR. pecavesncxensMbecrasessess 8a

APPENDIX F—Gas Processing Agreement dated

May 1, 1972 between Southern

Union Gas Company and Southern

Union Production Company. (10

C.A. App. Vol. VII, A-1221). ..... 10a

APPENDIX G—Letter from Hubert Velarde, Pres-

ident, Jicarilla Apache Tribal Coun-

cil to Honorable Rogers C.B.

Morton dated June 29, 1973. (10

C.A. App. Vol. I, A-20-22). ......... 13a

* Plaintiff's trial exhibits are exhibits of Respondent herein.

APPENDIX H—Memorandum to Secretary of the

Interior from Commissioner of In-

dian Affairs dated July 29, 1974.

(Plaintiff’s Exhibit 29, No. 10).* 17a

APPENDIX I—Attachment A to Appellant’s Motion

to Require Appellees to File Addi-

tional Bond or Other Security. (Filed

July 10, 1986 in 10th Circuit Court

of Appeals, by Respondent

FOUGTED, sccevssscecsedeoeeeiin. Abies 19a

APPENDIX J—Stipulation for Settlement. (10 C.A.

App. Vo:. VII, A-1297-1301). ....... 20a

APPENDIX K—42 Federal Register 40263, August

9, 2907. ocnccicckcareeeee 25a

SOUTHERN UNION GAS CO.*

SOUTHERN UNION CO. *

GAS CO. NEW MEXICO *

DELHI OIL & GAS CO.*

HONOLULU OIL

APPENDIX

Summary—Lease Assignments and Ga

(Plaintiff's Exhibit

AZTEC OIL* (SOUTHLAND OIL)

—T-1-55 ASSIGNED 100(/,), 101('/,), 103('/,), 105('/,), 106('/,)

145('/,), 150('/,), 153(/,), 12-17-66 ACQ. 397, 3-24-69 ACQ. .

12-12-53

1950-72

SOUTHERN UNION PRODUCTION CO.* (SUPRON)* 1972-76 71%, 1

1-1-61 ASSIGNED 10, 47, 100(‘/,), 103(/,), 104('/,), 105(*/,)

106('/,), 107('/,), 145(/,), 150('/,), 153('/,), 5-18-69 ACQ. 417 AND 41

1-1-61

HUMBLE OIL (EXXON)

5-20-52 ASSIGNED 104('/,) AND 107('/,)

CONSOLIDATED

8-12-64 ASSIGNED 106('/,)

11-15-63, 12-4-63

TENNECO

9-1-64 ASSIGNED 108'/,), 109('/,), 110(*/,)

10-21-64

ATLANTIC (ARCO)

3-7-52 ASSIGNED 108('/,), 110('/,), 12-9-52 ASSIGNED 106

10-21-64

CONTINENTAL

9-1-64 ASSIGNED 108('/,), 109('/,), 110(*/,)

10-21-64

PANAM (AMOCO) 10-3-61 ASSIGNED 102

10-25-56

SKELLY = 198('/,)

11-2-60

SINCLAIR 198('/,)

11-23-60

is Purchase Contracts

116

_____. GAS PURCHASE CONTRACT SUG* (GCNM)*

100% GAS PURCHASE

976-PRESENT 28'/,% O&G 100% GAS PROCESSING CONTRACT SUG*

(GAS PURCHASE CONTRACT SUG* (GCNM)*

3 _(3AS PURCHASE CONTRACT EL PASO NATL. GAS

GAS PURCHASE CONTRACT SUGC*

9-27-54

_____ -. GAS PURCHASE CONTRACT SUG*(GCNM)*

GAS PURCHASE

CONTRACT SUG*

_______ GAS PURCHASE CONTRACT SUG*(GCNM)* GAS PURCHASE

CONTRACT EL PASO

____.__GAS PURCHASE CONTRACT SUG*(GCNM)’*

______. GAS PURCHASE CONTRACT SUG*(GCNM)*

___... GAS PURCHASE CONTRACT SUG*(GCNM)*

______. GAS PURCHASE CONTRACT SUG*(GCNM)*

__._ GAS PURCHASE CONTRACT SUG*(GCNM)*

__... _—: GAS PURCHASE CONTRACT SUG*(GCNM)’*

i ee an ee eee -

“tes =

APPENDIX B

TESTIMONY OF MR. JACK HERTZ, VICE

PRESIDENT OF GAS COMPANY OF NEW MEXICO

(10 C.A. App. Vol. IV, A-639-642)

* * * * *

Q Now, Mr. Hertz, I’m still a little bit unclear about all

these corporate relations. As I understand it, Southern

Union Company is a Delaware corporation, is that right?

A Southern Union Corporation is a Delaware corporation.

Q And it operates a public utility business through two

separate divisions?

A Yes. If I may, the company previously was Southern

Gas Company. The Southern Gas Company owned util-

ity operations in four states: Texas, Oklahoma, New

Mexico and Arizona and April of 1976, the Board

changed the name of Southern Union Gas Company to

Southern Union Company, a Delaware corporation. Two

public utility divisions were created; one, Gas Company

of New Mexico, a Division of Southern Union Company,

operating, owning and operating properties in New

Mexico; and Southern Union Gas Company, a Division

of Southern Union Company, owning and operating the

natural gas public utility properties and in fact, a few

water properties in Texas, Oklahoma and Arizona.

The two divisions were then of about equal size. The

division concept of operation is certainly not unusual. The

reason for creating divisions rather than subsidiary cor-

porations is very basic. It’s to avoid the complications of

further requirements of the Public Utility Holding Com-

pany Act of 1975, which basically requires that any cor-

poration that owns more than ten percent of the stock of

a corporation engaged in the public utility business is sub-

ject to the Holding Company Act.

Q Now, as we're talking as of today, Gas Company of

New Mexico is a Division of Southern Union Company

and what was, and the name of Southern Union Gas

Company belongs to another Division of Southern Union

Company?

A That’s correct.

Q There’s no corporate relationship between Southern

Union Company and Southland Royalty Company, is

there?

A There is not now nor has there ever been.

Q And the only relationship between those two companies

is the contractural relationship by virtue of the Natural

Gas Purchase Contract that Southland succeeded to

when it purchased Aztec?

A That’s correct.

Q Now, would you explain what the business of Gas Com-

pany of New Mexico is?

A Gas Company of New Mexico is engaged in the natural

gas public utility operation, purchasing gas at various

points throughout the State, through wellhead pur-

chases and transportation of gas through its own gath-

ering systems.

Purchases of gas from Southern Union Gas Company,

a wholly-owned gas company of Southern Union Company,

operating in Northwest New Mexico and performing a

swing function of being able to take gas production from

the San Juan Basin, from the so-called jurisdictional or

FPC-regulated gathering system and making those sales

to the Gas Company of New Mexico when the market will

not absorb those quantities of gas, namely in the sum-

mertime.

They sell those to El] Paso, executed in 1973.

The Gathering Company assumed this function in 1958.

At times when the Gas Company of New Mexico requires

this gas supply for its New Mexico market to meet its

winter peaks and higher load demands, that gas swings

to Gas Company of New Mexico from the interstate mar-

ket.

Q The Gathering Company is a separate corporation,

though?

A Gathering Company is a separate Delaware corporation,

authorized to do business in New Mexico.

Q And it’s a wholly-owned subsidiary of Southern Union

Company?

A Yes.

Q What is Southern Union Refining Company?

A Southern Union Refining Company is now a wholly-

owned subsidiary of Southern Union Company and is

also a Delaware corporation.

* * kK * *

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APPENDIX D

OPINION NO. 658

FEDERAL POWER COMMISSION

(10 C.A. App. Vol. VII, A-1250)

Before Commissioners: John N. Nassikas, Chairman

Albert B. Brooke, Jr., and Rush

Moody, Jr.

Docket No. R-425

Area Rate for the Rocky )

Mountain Area

OPINION NO. 658

OPINION AND ORDER ESTABLISHING

JUST AND REASONABLE RATES AND INITIAL

RATES IN THE ROCKY MOUNTAIN AREA

(Issued April 11, 1973)

* * *

[page 28]

We must take note also that producer bargaining in

Rocky Mountain is less effective than elsewhere in the

country and that the structure of the buyer segment could

well have had a regressive impact upon exploration and

development. El Paso is the sole interstate purchaser in

the San Juan area, the Aneth subarea and in Apache

County, Arizona; Montana-Dakota Utilities and Northern

Natural are the sole purchasers in the Montana-Dakota

subarea; only three transmission companies purchase in the

Uinta-Green River subarea; and only two interstate pipe-

lines purchase in the Colorado-Julesburg subarea.

Pin Sty See a eT ©

We are not persuaded that time will correct the problem

of the low rate levels prevalent in Rocky Mountain. From

1959 to 1969, average revenue for all deliveries of Rocky

Mountain gas to interstate pipelines increased by only 1.2

cents from a level of 13.5 cents/Mcf to 14.7 cents. In

contrast, since 1959, gas-well drilling costs have increased

by 55 percent, wage levels in the oil and gas industry by

56 percent, and the general price level in the economy by

40 percent.

We note also that in the early 1950’s, the contract prices

in the San Juan area were roughly the same as for the

Permian Basin. For the composite Rocky Mountain Area,

the contract prices differed but little from the average

prices for the Southwest market as a whole. The differ-

ential between prices in the Rocky Mountain Area and in

other parts of the market widened thereafter. In the

Southwest, gas prices increased through 1960 as the mar-

ket became more competitive on the buying side. In the

Rocky Mountain region, however, new contract prices have

been virtually unchanged for a period of 20 years. Over

this period, there have been sharp increases in price levels

in the economy, in the value of gas as a commodity, in

the costs of alternate fuels, and in the costs of doing

business. ...

APPENDIX E

AMENDMENT OF GAS PROCESSING AGREEMENT

(10 C.A. App. Vol. VII, A-1219)

THIS AGREEMENT made and entered into this lst

day of December, 1971 by and between SOUTHERN

UNION GAS COMPANY, a Delaware corporation (herein

referred to as ““Gas Company’), and SOUTHERN UNION

PRODUCTION COMPANY, a Delaware corporaticn (herein

referred to as “Production Company’’)

WITNESSETH THAT:

WHEREAS, Gas Company and Production Company en-

tered into a Gas Processing Agreement dated so as to be

effective as of. January 1, 1971 respecting the processing

of natural gas through the Lybrook Plant and the Huer-

fano Plant of Production Company (such agreement being

herein called the ‘Processing Agreement’’),

NOW, THEREFORE, Gas Company and Production

Company do hereby mutually agree as follows:

1. Section 6 of Article I entitled ‘‘Definitions’” of the

Processing Agreement shall be and the same is hereby

modified and amended so as to hereafter read and provide

as follows:

“Section 6. “Residue Volume” as used herein

shall mean the Gathered Volumes of natural gas

remaining after shrinkage arising out of (a) use

of gas for processing plant fuel, (b) the plant

processing of the gas for extraction of gasoline

and other hydrocarbon constituents other than

methane.”

2. Section 2 of Article II entitled ‘“‘Processing of Gas”’

of the Processing Agreement shall be and the same is

hereby modified and amended so as to hereafter read and

provide as follows:

“Section 2. The Gathered Volumes of gas that

are gathered by Gas Company in the East Gath-

ering System shall be processed by Production

Company through the Lybrook Plant for extrac-

tion of gasoline and other hydrocarbon constit-

uents other than methane; and likewise the

Gathered Volumes of gas that are gathered by

Gas Company in the West Gathering System shall

be processed by Production Company through the

Huerfano Plant for extraction therefrom of gas-

oline and such other hydrocarbon constituents

other than methane as Production Company may

elect from time to time. ...”

}

‘

10a

APPENDIX F

GAS PROCESSING AGREEMENT DATED MAY 1,

1972 BETWEEN

SOUTHERN UNION GAS COMPANY AND

SOUTHERN UNION PRODUCTION

COMPANY.

(10 C.A. App. Vol. VII, A-1221)

GAS PROCESSING AGREEMENT

THIS AGREEMENT made and entered into so as to

be effective as of the 1st day of May, 1972, by and between

SOUTHERN UNION GAS COMPANY, a Delaware cor-

poration (herein referred to as “Gas Company’’), and

SOUTHERN UNION PRODUCTION COMPANY, a Del-

aware Corporation (herein referred to as “production Com-

pany’):

IV.

PAYMENT

Section 1. As consideration in addition to the benefits

accruing to Gas Company from processing of gas delivered

into its pipelines and as payment in full for all Plant Prod-

ucts removed from the Gathered Volumes and for gas used

as fuel for plant operations and flared in connection with

plant operations, Production Company shall pay to Gas

Company the following amounts:

(a) Thirty-three and one-third percent (33-1/3% of

the gross proceeds of sale of all Plant Prod-

ucts extracted from the Gathered Volumes

and sold by Production Company that remain

after deduction of any taxes based on the sale

and any trucking or transportation charges

lla

incurred by Production Company in the de-

livery of such products from the plants to the

point of sale; plus

(b) An amount equal to that by which (i) the ag-

gregate quantity of gas used by Production

Company as fuel for operation of the Lybrook

Plant and the Huerfano Plant, respectively,

plus the quantity of gas that is flared by Pro-

duction Company in operation of such plants

determined in accordance with Section 1 of

Article III hereof, plus the shrinkage in the

Gathered Volumes of gas that is attributable

to extraction of Plant Products therefrom de-

termined in accordance with Section 2 of Ar-

ticle III hereof shall exceed (ii) 55 cubic feet

of gas per gallon of Plant Products removed

by Production Company from the Gathered

Volumes, priced at the applicable General Ser-

vice Rate Schedule of Gas Company on file

and in effect from time to time with the New

Mexico Public Service Commission covering

sales of gas to industrial consumers on an

interruptible basis.

Section 2. On or before the 15th day of each calendar

month Production Company shall deliver to Gas Company

a statement showing:

(a) The number of gallons of Plant Products ex-

tracted from the Gathered Volumes during

the preceding month and the gross proceeds

of sale therefrom after deduction of any taxes

based on the sale and any trucking or trans-

portation charges;

(b) The quantities of gas (i) that were used during

the preceding month by Production Company

as fuel for operation of the Lybrook Plant

and the Huerfano Plant, respectively; (ii) that

OD in HAA Maile Sa se BRB

na Mane ca Yel SRG ei AN Shh he

12a

were flared by Production Company in op-

eration of such plants during the preceding

month; (iii) that constitute shrinkage in Gath-

ered Volumes attributable to extraction of

Plant Products during the preceding month,

and |

of plant processing during the preceding

month.

Amounts due and owing to Gas Company because of proc-

essing during each calendar month shall be paid by Pro-

duction Company to Gas Company on or before the 25th

day of the next succeeding calendar month.

13a

APPENDIX G

LETTER FROM HUBERT VELARDE, PRESIDENT,

JICARILLA

APACHE TRIBAL COUNCIL TO HONORABLE

ROGERS C.B. MORTON DATED

JUNE 29, 1973.

(10 C.A. App. Vol. I, A-20-22)

THE JICARILLA APACHE TRIBE

June 29, 1973

Honorable Rogers C.B. Morton

Secretary of the Interior

United States Department of Interior

Interior Building

18th and C Street Northwest

Washington, D. C. 20240

Re: Oil and Gas Leases, Jicarilla Apache Tribe

Sir:

Referring to our letter of March 23, 1973, with respect

to royalty payments by the various lessees of the Jicarilla

Apache Tribe under oil and gas mining leases, please be

advised that our attorneys have been engaged in investi-

gation of royalty payments made by various lessees for

the past three months.

Our attorneys find a number of apparent violations of

the provisions of these leases. Please address any corre-

spondence with respect to these matters to Robert J. Nor-

dhaus, attorney, 610 Simms Building, Albuquerque, New

Mexico 87101, with a copy to the Jicarilla Apache Tribe.

1. Under provisions of paragraph 2(c), ““Rental and Roy-

alty’’ the lease provides that the ‘‘value”’ for the purpose

of computing royalties shall be calculated on the basis of

the highest price paid or offered—at the time of production

Ce ae a

wt VO aes 1m hs. owe eee *

l4a

for the major portion of oil of the same gravity and gas

and/or natural gasoline and/or all other hydrocarbon sub-

stances produced and sold from the fields where the leased

lands are situated and the actual volume of the marketable

product less content of foreign substances as determined

by the Oil and Gas Supervisor. The actual amount realized

by the lessee from the sale of said products may, at the

discretion of the Secretary, be deemed evidence of or con-

clusive evidence of such value.

Royalties currently being paid for gas production on

tribal lands are based on prices ranging from approxi-

mately 13¢ to over 30¢ for the same quality of gas pro-

duced. Further, the ‘‘value’’ for the purposes of the lease,

should be based on the commodity value of gas, not a

price artificially maintained at a low level by one or two

purchasers of gas in a non-competitive market.

The Tribe demands that the Secretary take immediate

action to determine the proper price basis for royalties

paid to the Tribe and to secure an accounting from the

companies for past royalties based on prices which do not

reflect the ‘‘value’”’ of the gas, as defined in the leases.

2. With respect to production under the majority of

leases, no royalty is currently being paid on the value of

natural gasoline and other hydrocarbon substances pro-

duced and saved from the leased land, contrary to the

provisions of the leases.

3. As of March 31, 1973, Lessees owed past due amounts

of over $400,000.00 for royalties, according to the audit

reports of the accounting division of the U.S.G.S. in Ros-

well, New Mexico. In some cases these past due balances

have been owing in lesser or greater amounts for 12

months or more. The attorneys for the Tribe are presently

determining the status of past due balances. Demand is

made that you require that these companies pay interest

on past due balances, or that the penalty provisions of

15a

Section 171.22 of the Regulations pertaining to leasing of

tribal lands be invoked (25 CFR Sec. 171.22).

4. Section 3(c) of the leases in question provide that

royalties shall be due and payable monthly on the last day

of the calendar month following the calendar month in

which produced. Uniformly over the period of production

royalties have been paid sixty to ninety days after the end

of the calendar month in which produced. Lessees should

be required to pay estimated royalties in advance, or to

pay interest on amounts past due under the provisions of

the lease.

5. The monthly statements provided by the lessees under

many leases currently do not show the value of by-products

produced and saved, and no royalties are paid on such by-

products. Reports currently show only gas and the price

received from the producer.

Under paragraph 2(f) the lessees are required to exercise

reasonable diligence in drilling and operating wells for oil

and gas on the lands covered hereby while such products

can be secured in paying quantities. It is believed that

your department has failed to require diligence in drilling

and developing the properties of the Tribe.

6. Under paragraph 4(b) the Tribe has the right to use

sufficient gas free of charge for any buildings belonging

to the Tribe by making connection at its own expense with

well or wells thereon. Under this provision, your depart-

ment should secure gas for school and other buildings be-

longing to the Tribe, at a cost that reflects only the cost

of transporting the gas from the well head to tribal build-

ings.

7. It is the opinion of the Tribal Council of the Jicarilla

Apache Tribe that as a result of various factors and in-

fluences, including price ceilings maintained by the Federal

Power Commission, in which you have acquiesed, that roy-

alties which have been paid to the Tribe over a period of

ET eT EC RS To Tee ee

Pv asin

16a

years have not been based upon the “‘value’’ of gas within

the meaning of the above leases and that you have failed

to protect the rights of the Tribe by securing for the Tribe

royalties based on such “value’’. Your acquiescence in ac-

ceptance of royalties based on the prices maintained at an

artificially low level as above stated has constituted a con-

demnation of the Tribe’s property for public use without

due process of law, with complete disregard for your ob-

ligation as guardian and trustee for the Tribe.

Demand is therefore made upon you for immediate ac-

tion to correct the above mentioned discrepancies, or the

Tribe will take action on its own behalf.

Yours very truly,

/s/ HUBERT VELARDE,

HUBERT VELARDE, President

Jicarilla Apache Tribal Council

17a

APPENDIX H

MEMORANDUM TO SECRETARY OF THE

INTERIOR FROM

COMMISSIONER OF INDIAN AFFAIRS

DATED JULY 29, 1974.

(Plaintiff's Exhibit 29, No. 10)

United States Department of the Interior

BUREAU OF INDIAN AFFAIRS

WASHINGTON, D.C. 20245

Trust Services

Minerals

Memorandum

To: Secretary of the Interior Acting Deputy

From: Commissioner of Indian Affairs

Subject: Jicarilla Apache Tribe—Oil and Gas Royalty Issue

In letters dated March 23, 1973, and June 29, 1973, copies

of which are enclosed, the Jicarilla Apache Tribe requested

the Secretary to determine the true value of oil and gas

produced on the Jicarilla Reservation since 1953 and take

steps for collection of any delinquent royalties not paid,

and further stated that if satisfaction of the request were

not forthcoming the tribe would institute whatever legal

action was deemed advisable. By letter dated June 25,

1973, from the Deputy Assistant Secretary to the Presi-

dent of the Jicarilla Apache Tribe, the Tribe’s March 23

letter was acknowledged and by copy thereof, the Director,

USGS, was requested to prepare a report on the matter.

At this time, no report as requested has been received.

In a meeting in the Commissioner’s office on June 25, the

tribal representatives made a further request that the

USGS, through the Secretary’s Office, be asked to provide

the tribe with the data previously requested, which would

include the determination of:

18a

1. The true value of the oil and gas produced on

the Jicarilla Reservation from 1953 to present,

which should be used in royalty computations.

2. The by-products and amounts thereof derived

from the subject production. (These should be

accounted for in the future.)

3. The cost of the manufacture of the above

named by-products.

4. The value of the above by-products.

In compliance with the Tribe’s wishes, we respectfully ask

that you again request the Director, USGS, to provide the

data previously indicated.

ce: Albuquerque Area Director, USGS

19a

APPENDIX I

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APPENDIX J

(10 C.A. App. Vol. VII, A-1297-1301)

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW MEXICO

THE JICARILLA APACHE TRIBE,

Plaintiff,

V. No. —— Civil

SOUTHERN UNION GAS COMPANY,

a Delaware corporation, et al.,

Defendants.

STIPULATION FOR SETTLEMENT

Come now the Plaintiff, The Jicarilla Apache Tribe, an

Indian Tribe organized and incorporated under the laws

of the United States of America, (the ‘‘Tribe’’), Defendant

Gas Company of New Mexico, a division of Southern Union

Gas Company, a Delaware corporation, (formerly Southern

Union Gas Company), (““GCNM”’’), and Defendant Southern

Union Gathering Company and hereby stipulate and agree

as follows:

1. The Tribe and GCNM have entered into a Settlement

Agreement, a Royalty Gas Gathering Agreement and a

Royalty Gas Purchase Contract, all of even date herewith

settling other matters in dispute between the Tribe and

GCNM, which Agreements are incorporated herein by ref-

erence.

2. The Jicarilla Apache Tribal oil and gas leases covering

Tribal lands in Rio Arriba County, New Mexico, give the

2la

Tribe the right to take its royalty gas in kind upon the

giving of notice as provided for therein. It is agreed with

respect to all of the tribal oil and gas leases on Tribal

lands that if and to the extent the Tribe takes its royalty

gas in kind, and if and to the extent GCNM may at such

time have gathering systems connected to such wells, then

subject to the payment of reasonable transportation

charges therefor, GCNM agrees to gather and deliver, anc

to permit the Tribe to take its share of the royalty gas

from wells from which GCNM purchases gas at a point

on the Tribal reservation lands from the GCNM gathering

pipeline system, upon reasonable written notice, which shall

be not less than ninety (90) days, from the Tribe to GCNM,

any necessary tap, connections and other facilities neces-

sary to effect such delivery shall be installed by GCNM

at GCNM’s expense, and the Tribe shall provide rights-of-

way and other surface rights therefor free of cost to

GCNM. The point of delivery to the Tribe shall be at a

point on GCNM’s existing gathering system having the

pipeline capacity to deliver such royalty gas without con-

struction of any additional pipeline or compression facili-

ties.

3. GCNM’s performance under the Royalty Gas Gath-

ering Agreement with the Tribe is excused until it is es-

tablished by a court of competent jurisdiction or by

agreement of the parties hereto and the parties claiming

otherwise that GCNM has the right to gather and deliver

the Tribe’s royalty gas taken in kind. Until such deter-

mination has been made, GCNM’s performance under said

agreement is subject to the claims of Southern Union Pro-

duction Company and other parties having contractual

rights to process said gas or to the liquid products derived

therefrom. In the event GCNM, Southern Union Company,

or any other subsidiary or division of Southern Union Com-

pany does not acquire ownership of the Lybrook Process-

ing Plant, and/or successfully negotiate contractual

arrangements to permit GCNM to gather and deliver the

22a

Tribe’s royalty gas taken in kind and to permit the Tribe

to process such gas at the point of such delivery, by March

1, 1977, the parties hereto agree to resume negotiations

to arrange an alternate method of delivery of the’ Tribe’s

royalty gas. GCNM further agrees to purchase, and the

Tribe agrees to sell to GCNM, under the terms of the Gas

Purchase Contract of even date herewith, any portion of

the Tribe’s royalty gas taken in kind which is in excess

of the Tribe’s daily requirements.

4. If the Tribe does not elect to take its natural gas in

kind, but a producer selling under a contract to GCNM is

ordered by the Court or voluntarily agrees to make ac-

counting to the Tribe for its royalty interest on the basis

of a net realization method, other liquids method or BTU

adjustment method of accounting, then GCNM agrees to

cooperate with said producer in furnishing information for

such accounting to the Tribe.

5. GCNM shall pay the Tribe within ten (10) days after

the approval of this stipulation by the Court and entry of

the same as its judgment, the sum of Six Hundred Thou-

sand Dollars ($600,000.00) for settlement of all claims made

by the Tribe against GCNM and Southern Union Gathering

Company in this case and for execution concurrently here-

with of an agreement concerning pipeline rights-of-way,

facility sites and other surface leases or easements and

for agreement that all claims and causes of action of the

Tribe against GCNM and Southern Union Gathering Com-

pany set forth and alleged in the First Amended Complaint

on file herewith are released and discharged and all such

claims and causes of action are dismissed with prejudice

as to the defendants GCNM and Southern Union Gathering

Company.

6. GCNM’s agreement to gather and deliver the Tribe’s

royalty gas may be subject to regulations by State or

Federal authorities having jurisdiction. To the extent that

such State or Federal authorities have jurisdiction, the

parties agree that this agreement is subject to such rules

23a

and regulations as may be imposed by such authorities.

The parties agree to cooperate in seeking. any approvals

which may be required by such authorities, if any, and to

secure the agreement provided for in Paragraph 3 above,

to effectuate the intent of this agreement.

7. This Stipulation shall be construed to pertain to all

claims of the Tribe against GCNM and Southern Union

Gathering Company relating to oil and gas, including

rights-of-way matters, accruing to the date of this Stipu-

lation. All of said claims merge into this Stipulation and

are governed by its terms.

8. All matters in controversy in this case between the

Tribe and the Defendants GCNM and Southern Union

Gathering Company having been settled, the parties hereto

request the Court to enter this Stipulation as its Final

Judgment in this case, and the case shall be dismissed

with prejudice in its entirety as to GCNM and Southern

Union Gathering Company, each party to bear its own

costs.

Executed this 21st day of October, 1976, in several coun-

terparts, each of which shall be considered an original.

THE JICARILLA APACHE

TRIBE

ATTEST:

/s/ Barbara Gonzales By /s/ Dale Vigil

Secretary Acting President

NORDHAUS, MOSES & DUNN

By /s/ RoBERT J. NORDHAUS

Robert J. Nordhaus

Attorneys for

The Jicarilla Apache Tribe

GAS COMPANY OF

NEW MEXICO

ATTEST:

/s/ Tllegible

Secretary

/s/ JACK HERTZ

Jack Hertz

Vice President and General

24a

By /s/ W. T. Baumhouse

President

MONTGOMERY, FEDERICI,

ANDREWS & HANNAHS

By /s/ William Federici

Counsel for Gas Company of

New Mexico

Attorney for Gas Company of

New Mexico

ATTEST:

/s/ Illegible

Secretary

SOUTHERN UNION

GATHERING COMPANY

By /s/_Illegible

Vice President

MONTGOMERY, FEDERICI,

ANDREWS & HANNAHS

By /s/ William Federici

Counsel for Southern Union

Gathering Company

25a

APPENDIX K

42 FEDERAL REGISTER 40263,

AUGUST 9, 1977

Geological Survey

[NTL-5]

VALUE OF NATURAL GAS FOR ROYALTY

PURPOSES

On May 4, 1977, the Geological Survey published in the

FEDERAL REGISTER (Vol. 42, No. 86, pp. 22610-22611)

its final notice to Lessees and Operators, NTL-5. This

Notice sets forth the procedures to be utilized for royalty

computation purposes in determining the value of natural

gas produced from Federal and Indian oil and gas leases

under the jurisdiction of the Geological Survey.

Pursuant to a request by the Acting Deputy Commis-

sioner of Indian Affairs, the application of NTL-5 to oil

and gas leases on the Jicarilla Apache Indian Reservation

in New Mexico is hereby suspended for an indefinite pe-

riod, effective as of 7 a.m., June 1, 1977.

V.E. McKELVEY,

Director.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.