Petition for Writ of Certiorari — Department of the Interior v. Kerr-McGee Oil and Gas Corp (No. 09-54)

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oO M9-5% 451 75 2009

MEFIOE Oe Ter CLERK

Jn the Supreme Court of the Anited States

UNITED STATES DEPARTMENT OF THE INTERIOR,

ET AL., PETITIONERS

Vv.

KERR-MCGEE OIL AND GAS CORP.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

ELENA KAGAN

Solicitor General

Counsel of Record

JOHN C. CRUDEN

Acting Assistant Attorney

(seneral

EDWIN S. KNFEDLER

Deputy Solicitor General

CURTIS E. GANNON

Assistant to the Solicitor

General

MICHAEI. TT’. GRAY

Attorney

Department of Justice

Washington, D.C. 20530-0001

202) 514-2217

QUESTION PRESENTED

Under Section 303 of the Outer Continental Shelf

Deep Water Royalty Relief Act (Royalty Relief Act), 43

U.S.C. 1837(a)(1)(H), the Secretary of the Interior is

authorized to suspend royalty payments to the United

States on certain oil and gas leases. Such suspensions

are to be set on the basis of “a period, volume, or value

of production determined by the Secretary,” but they

“may vary” (such that royalty payments are reinstated)

if the price of oil or gas exceeds a certain threshold.

Section 304 of the Royalty Relief Act (43 U.S.C. 1337

note entitled “Lease Sales”) governs certain leases is-

sued between 1996 and 2000, and it requires the use of

Section 303’s bidding system “except that” it specifies

certain volumes at which “suspension of royalties shall

be set.” The question presented is:

Whether Section 304 of the Royalty Relief Act autho-

rizes the Secretary of the Interior to vary the suspen-

sion of royalties, so as to collect royalties on oil or gas

produced when the price of oil or gas exceeds thresholds

specified in the lease, notwithstanding statutorily desig-

nated suspension volumes.

(I)

PARTIES TO THE PROCEEDING

In addition to the parties identified in the caption,

Ned Farquhar, Acting Assistant Secretary for Land and

Minerals Management, United States Department of the

Interior, is the successor in office to C. Stephen Allred,

who was, in his official capacity, an appellant in the court

of appeals.

(11)

TABLE OF CONTENTS

Page

PRC eT ETE Te Lee T Pen re rere eee }

FET TPCT ST LTTE OTe ET Sry eT er ST Teer ly 1

Statutory provisions involved ............cecceceesccnees 2

ee is Os el Wea Sa Ns kp ARKO RORY Rae 2

Reasons for granting the petition ....................4.. 10

A. The court of appeals incorrectly interpreted the

Royalty Relief Act and failed to give appropriate

deference to the Department’s reasonable

NE Cass 5: ween caer wane akee bore ees it

B. There will be no meaningful opportunity for

further interpretation of the Royalty Relief Act

Suh GER UENO Or ID gon o's en eevee cddeanvecsrs 18

C. If allowed to stand, the court of appeals’ decision

will cost the United States Treasury billions of

GOS 1 TORE FIVIIID io ng ov crc h ss ccaecsbavenavecs 21

CID 3. oo dx Ween oho ce eek eee ee mins Cl 24

Appendix A - Court of appeals opinion (Jan. 12, 2009) ... la

Appendix B - District court opinion (Oct. 30, 2007) ..... 12a

Appendix C - Dep’t of Interior order (Jan. 6, 2006) ..... 23a

Appendix D - Court of appeals order (Apr. 14, 2009) .... 41a

Appendix E — Statutory provisions ................... A3a

TABLE OF AUTHORITIES

Cases:

Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984) ..... 1]

Commissioner v. Clark, 489 U.S. 726 (1989) ........... 13

Dolan v. USPS, 546 U.S. 481 (2006) .................. 14

EPA v. National Crushed Stone Ass’n, 449 U.S. 64

CODER ic bac aS eR eG SW ER Ler Cle eret aot eee 16

(IT)

Cases—Continued: Page

Fidelity Fed. Bank & Trust v. Kehoe, 547 U.S. 1051

CY foot e eeeu reyes sae awe a ae a uae Ss 21,23

INS v. Aguirre-Aguirre, 526 U.S. 415 (1999) .......... 1]

National Cable & Telecomms. Ass'nv. Brand X

Internet Servs., 545 U.S. 967 (2005) ................ 19

Santa Fe Snyder Corp. v. Norton, 385 F.3d 884

Se a uaa ys eda Gh heed ie eS 8, 9, 19

Statutes and regulations:

Administrative Procedure Act, 5 U.S.C. 706(2) ........ 19

Outer Continental Shelf Deep Water Royalty Relief

Act, Pub. L. No. 104-58, 109 Stat. 563 ............... 2

$ 302, 100 Stat. 563-566 ... 2... ccc eee passim

DP SD ec cicercsncnsvvseucee passim

§ 304, 109 Stat. 565-566 ............... passim, 63a

ee ok i bn dd eke Es 11, 63a

Outer Continental Shelf Lands Act, 48 U.S.C. 1331

faa ee Cnr ar a ee eer ene rer 2

ee I Sk dives 0k 0006 os & awe Oe 2,11, 48a

Se EE 5 fc ccakscevesssdeenes 2, 47a

4d UG, DAMAGE) once ca ceens 4, 47a-48a

43 U.S.C. TRRTMIM) . ww ee ccc eees passim, 48a

Pgs tere |.) a Printer 4, 49a

43 USC. 1AAHBMOMC) 2.00. cccvccncces yp ee

43 U.S.C. 1887(a)(8)(Cii) «1... eee 3, 6, 15, 50a

43 U.S.C. 18387(aX3)(C)(v) ............ 4, 15, 17, 52a

43 U.S.C. 1837(ay(3\(C)(v)-(vii) «oe eee. 7, 52a-53a

43 U.S.C. 1837(a3\(C)(vi) ............ 4, 15,17, 58a

Statutes and regulations—Continued: Page

Be ee AD vie eve ds nceseeavess near 2, 59a

NS og xc 5 0 65.060 04046 e468 ae 2,3

ee OED inc vec cv ancceéaccesss apie

oes bod vas Ved eee wanes owen 23

IE ss ks 60-0 dewen ebb aew wee 19

re I) oi kano sc cvaueavéusses 2, 18, 62a

ee ks karan te eh eeeen eee y ee wee 19

SP NE vc bc-Sue see cedeusetaubees ees 19

30 C.F.R.:

Section 260.110(a)(7) (1996)... ccc ccc cece ccc vees 12

EE rr ree ee ah, 5

Miscellaneous:

Be GN, PE, MEE) nn ct ccs rvectsventeceses 6

61 Fed. Reg. (1996):

MR ool ea ue ee Ver ieee 12

eo da Vino SNAG ee ee be ee Oe ee 12

oe ee he 7

62 Fed. Reg. 39,865-39,866 (1997) ......... ccc ceecacces 7

Ue te I EI kv ov os esa ewe ewccecresseees 7

Eugene Gressman et al., Supreme Court Practice

I a as ogg ta bb 5% sow 21

Letter from Richard T. Cardinale, Chief of Staff,

Land & Minerals Mgmt., U.S. Dep’t of the

Interior, to Hon. Dianne Feinstein, Chairman,

Subcomm. on Interior, Env’t & Related Agencies,

Senate Appropriations Comm. (Mar. 9, 2009) ....... 22

a eee

OO CL. TOT COI eS Mt Oe dE PER A A LRN ae IS BP ts le oe lt OR

Miscellaneous—Continued: Page

Minerals Management Service, Department of the

Interior, Deepwater Royalty Relief for New

Leases, 61 Fed. Reg. 12,023 (1996) .........-..e00. 6

Office of the Inspector Gen., U.S. Dep’t of the

Interior, /nvestigative Report On the Lack of

Price Thresholds in Gulf of Mexico Oil and Gas

Leases (2007) <http://www.doioig.gov/upload/

MMS@20ROI&20REDACTED.pdf> .............. 6

U.S. Gov't Accountability Office, GAO-08-792R, Oil

and Gas Royalties: Litigation over Royalty Relief

Cost the Federal Government Billions of Dollars

(June 5, 2008) <http://www.gao.gov/new.items/

ao Pr nag ke a Ga eee ee ON ay a 08 23

Jn the Supreme Court of the Gnited States

No.

UNITED STATES DEPARTMENT OF THE INTERIOR, ET AL.,

PETITIONERS

Vv.

KERR-MCGEE OIL AND GAS CORP.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

The Solicitor General, on behalf of the United States

Department of the Interior and its Acting Assistant Sec-

retary for Land and Minerals Management, respectfully

petitions for a writ of certiorari to review the judgment

of the United States Court of Appeals for the Fifth Cir-

cuit in this case.

OPINIONS BELOW

The opinion of the court of appeals (App., 22/fra, 1la-

lla) is reported at 554 F.3d 1082. The opinion of the

district court (App., infra, 12a-22a) is unreported.

JURISDICTION

The judgment of the court of appeals was entered on

January 12, 2009. A petition for rehearing was denied

(1)

on April 14, 2009 (App., znfra, 41a-42a). The jurisdiction

of this Court is invoked under 28 U.S.C. 1254(1).

STATUTORY PROVISIONS INVOLVED

The pertinent statutory provisions are reprinted in

an appendix to this petition. App., 2zfra, 43a-63a.

STATEMENT

1. a. The Outer Continental Shelf Lands Act

(OCSLA), 43 U.S.C. 1331 et seg., grants the Secretary of

the Interior (Secretary) the authority to issue and ad-

minister leases on the outer Continental Shelf to compa-

nies seeking to produce oil and gas from the seabed.

The Secretary is charged with administering OCSLA’s

leasing provisions and also with “prescib[ing] such rules

and regulations as may be necessary to carry out” the

statute. 43 U.S.C. 1334(a). Oil and gas leases on the

outer Continental Shelf are generally issued on the ba-

sis of competitive bidding, with leases issued to the high-

est bidder. 43 U.S.C. 1837(a)(1). Under the terms of

OCSLA and the leases, a lessee typically obtains the

right to produce and sell oi] and gas in exchange for

agreeing to pay royalties to the United States at a speci-

fied percentage of the amount or value of production

saved, removed, or sold from the lease. /bid.; 43 U.S.C.

1337(b)(3). The statute requires leasing activities “to

assure receipt of fair market value for the lands leased

and the rights conveyed by the Federal Government.”

43 U.S.C. 1344(a)(4).

b. On November 28, 1995, Congress amended

OCSLA by enacting the Outer Continental Shelf Deep

Water Royalty Relief Act (Royalty Relief Act or RRA),

Pub. L. No. 104-58, 109 Stat. 563. The Royalty Relief

Act allows the Secretary, under certain conditions, to

suspend the payment of royalties to the United States

by oil and gas lessees. As relevant here, the statute ad-

dresses royalty relief for three different circumstances:

(1) for new production of oil and gas under pre-existing

leases for deepwater tracts in certain specified parts of

the Gulf of Mexico, RRA § 302, 109 Stat. 563-565 (43

U.S.C. 1337(a)(3)(C)); (2) for production of oil and gas

under new leases for OCSLA lands generally, § 303, 109

Stat. 565 (43 U.S.C. 1337(a)(1)(H)); and (3) for produc-

tion of oil and gas under new leases issued during the

five-year period immediately following the enactment of

the Royalty Relief Act for deepwater tracts in the same

parts of the Gulf of Mexico noted above, § 304, 109 Stat.

565-566 (43 U.S.C. 1337 note entitled “Lease Sales”).

With regard to the first category of royalty relief-

for newly produced oil and gas under pre-existing leases

on deepwater tracts in specified parts of the Gulf of

Mexico—Congress provided that, if the Secretary found

that new production under a lease would not be economi-

cally viable without relief from royalties, the Secretary

could then “determine the volume of production from

the lease or unit on which no royalties would be due

in order to make such new production economically via-

ble; except that for new production * * *, in no case

will that volume be less than” one of three specified

amounts (depending on the depth of the relevant tract).

43 U.S.C. 1337(a)(8)(C)(ii).. Notwithstanding those mini-

mum production volumes (beneath which royalties would

generally not be due), Congress further provided that,

even “[dljuring the production” of those minimum vol-

umes, such oil and gas would remain “subject to royal-

ties at the lease stipulated royalty rate” in any year dur-

ing which the “arithmetic average of the closing pric-

es on the New York Mercantile Exchange” for oil or

gas exceeded certain specified price thresholds—$28.00

per barrel of oi] and $3.50 per million British thermal

units for natural gas, adjusted for inflation. 438 U.S.C.

1337(a)(8)(C)(v) and (vi). Thus, Congress established a

system for pre-existing deepwater leases that made roy-

alty relief generally available when new production re-

mained below certain volumes, but that still required

royalties to be paid on production below those volumes

in years when the price of oil or gas exceeded certain

thresholds.’

With regard to the second category of royalty re-

lief—for oil and gas produced under new OCSLA leases

generally—Section 303 of the Royalty Relief Act estab-

lished that the Secretary could opt to use a new form of

bidding system for such leases, as an alternative to one

of the seven others already available under OCSLA.*

Under that new system, bidding would be based on a

cash bonus bid with royalty at no less than 12 and 2

per centum fixed by the Secretary in amount or value

of production saved, removed, or sold, and with sus-

pension of royalties for a period, volume, or value of

production determined by the Seeretary, which sus-

pensions may vary based on the price of production

from the lease.

43 U.S.C. 13837(a)(1)(H). Thus, under thut system, even

though royalties may be suspended under a new lease

' Section 302 also authorized (but did not require) the Secretary to

reduce or eliminate the royalty or net profit share specified in leases in

roughly the same specified parts of the Gulf of Mexico in order to pro-

mote development of increased production or to encourage production

of marginal resources. See 43 U.S.C, 1337(a)(3)(B). That separate au-

thorization is not at issue here.

* See 43 U.S.C. 1337(a)(1)(A)-(G) (enumerating the other available

bidding systems).

“for a period, volume, or value of production,” the Secre-

tary may further provide that the suspension, once pre-

scribed, would then “vary based on” price thresholds de-

termined by the Secretary. The Department of the Inte-

rior (Department) has codified in regulations its author-

ity to “vary” royalty suspensions for such leases “based

on the price of production.” 30 C.F.R. 260.110(g).

This case involves the third category of royalty re-

lief—for new oi] and gas leases on deepwater tracts

in the same specified parts of the Gulf of Mexico that

were issued in the five years after November 28, 1995.

In Section 304 of the Royalty Relief Act, Congress re-

quired those leases to be sold on the basis of the new

bidding system it had created in Section 303. RRA

§ 304, 109 Stat. 565-566 (43 U.S.C. 1337 note entitled

“Lease Sales”). More specifically, Section 304 provides

as follows:

For all tracts located in water depths of 200 me-

ters or greater in [specified parts of the Gulf of Mex-

ico], any lease sale within five years of the date of

enactment of this title [November 28, 1995], shall use

the bidding system authorized in section 8(a)(1)(H)

of the Outer Continental Shelf Lands Act, as amen

ded by this title [48 U.S.C. 13837(a)(1)(H)], except

that suspension of royalties shal] be set at a volume

of not less than the following:

(1) 17.5 million barrels of oil equivalent for

leases in water depths of 200 to 400 meters;

(2) 52.5 million barrels of oil equivalent for

leases in 400 to 800 meters of water; and

(3) 87.5 million barrels of oil equivalent for

leases in water depths greater than 800 meters.

RRA § 304, 109 Stat. 565-566 (43 U.S.C. 1337 note enti-

tled “Lease Sales”).’ Although Section 304 addresses

the minimum volume at which royalty suspensions are to

be “set,” it is silent with respect to Section 303’s further

authorization for the Secretary to “vary” a suspension if

the price of oil or gas exceeds certain price thresholds.

In light of Section 304’s incorporation of Section 303,

the Department determined that the royalty suspen-

sions in new leases issued under Section 304 in the five

years after November 28, 1995 could “vary” as provided

in Section 303 and therefore would be subject to price

thresholds. New leases issued in 1996, 1997, and 2000

included such price thresholds. App., infra, 25a."

* The minimum volumes specified in Section 304—which were the

same as the ones established by Section 302 for new production under

pre-existing leases, 43 U.S.C. 1337(a)(3)(C)(ii) originated with the

Department and “were developed out of technical analyses conducted

by [the Minerals Management Service (MMS)] of the royalty suspen-

sion volumes needed for capital cost recovery in developing unproduced

oil and gas fields at various water depths in the Gulf of Mexico.” Miner-

als Management Service, Department of the Interior, Deepwater Roy-

alty Relief for New Leases, 61 Fed. Reg. 12,023 (1996); see 141 Cong.

Ree. 13,002 (1995).

* The Department did not include price thresholds in leases that

were issued in 1998 and 1999, even though they too were governed by

Section 304. When that omission came to light, it triggered congres-

sional concerns and an investigation by the Department's Inspector

General. See Office of the Inspector Gen., U.S. Dep’t of the Interior,

Investigative Report On the Lack of Price Thresholds in Gulfof Mexico

Oil and Gas Leases 5 (2007) <http://www.doioig.gov/upload/M MS%20

ROIM20REDACTED.pdf>. The Inspector General's final report con-

cluded that the omission had been inadvertent and inconsistent with the

“policy decision” that the Department made “shortly after the inception

of the Outer Continental Shelf Deep Water Royalty Relief Act in 1995

* * * toinclude price thresholds in the leases issued between 1995 and

2000.” Id. at 2; see 2bid. (“MMS field personnel initially attached ad-

2. This case involves eight leases issued in 1996,

1997, or 2000 pursuant to Section 304 of the Royalty Re-

lief Act, under which respondent is a lessee or operator.

App., izfra, 24a, 36a-37a. The notices for each of the

three sales at which the leases were purchased—which

were published in the Federal Register—provided that

the leases would include royalty suspensions up to the

statutorily designated volumes, but that the suspensions

would also be subject to price thresholds and would thus

vary based on the price of production from the lease.

See 65 Fed. Reg. 45.103 (2000); Admin. R. 189, 233-234;

62 Fed. Reg. 39,865-39,866 (1997); 61 Fed. Reg. 42,715

(1996). Consistent with those notices, each of the eight

leases that respondent bid for, signed, and accepted con-

tains a royalty-suspension provision subject to price

thresholds. App., infra, 2a-3a, 13a, 26a-27a. The price

thresholds are set at the amounts specified in 43 U.S.C.

1337(a)(3)(C)(v)-(vii) (governing new production in spec-

ified parts of the Gulf of Mexico under existing leases),

with terms allowing adjustment for inflation. App., in-

fra, 25a-28a. The leases require respondent to make

royalty payments for any year in which the average

price of oil or gas rises above the specified threshold.

lbid.

At various dates between 2002 and 2004, respondent

began to produce oil and gas under each of the eight

leases. App., infra, 30a. The price of gas exceeded the

thresholds specified in the leases in both 2003 and 2004,

and the price of oil exceeded the specified threshold in

2004. ZJ/d. at 4a, 3la-32a. Therefore, in a January 6,

denda to the leases containing price threshold language but stopped for

2 years and instead cited a regulation that they thought contained

threshold language, when, in fact, it did not. MMS’s review process

* * * simply failed to identify this discrepancy.”)

2006 decision, the Department ordered respondent to

pay royalties on the value of the oil and gas produced

under the leases in those years. /d. at 4a, 23a-40a.

3. Respondent refused to pay the royalties as or-

dered and instead brought this action, claiming that the

price-threshold provisions it accepted in its leases were

contrary to Sections 304 of the Royalty Relief Act. App.,

infra, 2a, 18a-19a. On cross-motions for summary judg-

ment, the district court granted judgment for respon-

dent. /d. at 2a, 12a.

The district court relied primarily on the Fifth Cir-

cuit’s earlier decision in Santa Fe Snyder Corp. v. Nor-

ton, 385 F.3d 884 (2004), which had invalidated part of

the Department’s regulations implementing Section

304.” The district court concluded that Congress did not

provide the Secretary with the authority to impose price

thresholds on leases issued for deepwater tracts in the

Gulf of Mexico during the five years following enactment

of the Royalty Relief Act. App., infra, 19a-2la. The

district court concluded that Congress had specified a

volume up to which royalties were to be suspended in

Section 304 of the Royalty Relief Act, and that its doing

' The Department had issued regulations that interpreted the sus

pension of royalties under Section 304 as applying only to leases issued

in fields that had not produced oi] or gas before the enactment of the

Royalty Relief Act. See Santa Fe Snyder, 385 F.3d at 889. The De-

partment’s regulations also provided that the royalty-suspension vol-

umes would be measured against the combined production from all leas-

es in a field (rather than the production under each individual lease).

[bid. inSanta Fe Snyder, the Fifth Circuit held that those two aspects

of the Department’s regulations were contrary to the statute. Accord-

ing to the court, Sections 303 and 304, unlike Section 302, did not con-

tain any “New Production Requirement,’ and Section 304 made the

royalty-suspension volumes applicable ona lease-by-lease, rather than

field-by-field, basis. Jd. at 892-893.

so had removed the Secretary’s authority under Section

303 to “vary” those suspensions on the basis of a price

threshold. /bid.

4. The court of appeals affirmed. App., infra, la-

lla. Like the district court, the court of appeals relied

heavily on its earlier decision in Santa Fe Snyder, in

which it had considered the interplay between Sections

303 and 304 of the Royalty Relief Act. Jd. at 8a-1lla.

The court of appeals began its analysis by noting that

this case “is the logical and inevitable extension of Santa

Fe Snyder” because, in the court’s view, the Department

sought to use a limitation on royalty relief present in

Section 302 (which mandates price thresholds for new

production under existing leases) to curtail the royalty

relief provided in Section 304 for new leases, just as it

had attempted to apply Section 302’s “New Production

Requirement” to Section 304 in Santa Fe Snyder. Id. at

9a. The court held that Section 304 “immediately ex-

cepts and replaces [the Secretary’s] discretion [under

Section 303 to vary the suspension on the basis of price

thresholds] with a fixed royalty suspension.” Jd. at 10a

(quoting Santa Fe Snyder, 385 F.3d at 892). The court

thus concluded that Section 304’s “statement that ‘the

suspension of royalties shall be set at a volume not less

than’ the specific production levels means just that: roy-

alty payments shall be suspended up to the production

volumes established by Congress”—without any further

conditions or exceptions. /bid. Because it found that

“Section 304 is unambiguous in this regard,” the court

did not address whether the Department’s contrary con-

struction of the statute is reasonable under “Chevron’s

second step.” Jbid.°

REASONS FOR GRANTING THE PETITION

The court of appeals’ decision will likely cost the Uni-

ted States at least $19 billion in forgone or refunded roy-

alties under several dozen leases that were issued under

Section 304 of the Royalty Relief Act, and there is no

meaningful likelihood that another court of appeals will

have a chance to interpret the same federal statutory

provisions. Notwithstanding the obvious importance of

the case to the government, the court of appeals based

its decision on a cursory examination of the statute,

without even addressing the government’s arguments

about the statutory text and context. As Sections 302

and 303 of the Royalty Relief Act establish, the suspen-

sion of royalty payments for oi] and gas at production

below certain designated volumes can easily co-exist

with a requirement that the lessee pay royalties on any

oil or gas produced at times when prices exceed certain

thresholds. The court of appeals erroneously read out

of the statute Section 304’s requirement to use the Sec-

tion 303 bidding system—which includes the express

authority to “vary” the suspension of royalties on the

basis of such price thresholds (43 U.S.C. 1337(a)(1)(H)).

The court’s decision is contrary to the statutory lan-

guage, and, at the very least, fails to give appropriate

deference to the Department’s reasonable interpreta-

tion. This Court should grant the petition for a writ of

certiorari to consider an important question about the

proper interpretation of a federal] statute on which so

many billions of dollars of federal revenue turn.

* The court of appeals denied the government’s petition for rehearing

en bane. App., ifra, 41a-42a.

A. The Court Of Appeals Incorrectly Interpreted The Roy-

alty Relief Act And Failed To Give Appropriate Defer-

ence To The Department’s Reasonable Interpretation

The court of appeals concluded (App., znfra, 10a) that

Congress’s establishment of minimum production vol-

umes for royalty suspensions in Section 304 of the Roy-

alty Relief Act is unambiguously inconsistent with any

residual discretion on the part of the Secretary to vary

those royalty suspensions on the basis of price thresh-

olds. But that understanding of the statute is flatly

wrong. The Department’s contrary interpretation is the

best reading of the statute or, at the very least, a rea-

sonable reading entitled to deference under Chevron

U.S.A. Ine. v. NRDC, 467 U.S. 837 (1984).

1. Because this case raises questions “implicating an

agency’s construction of the statute which it adminis-

ters,” principles of Chevron deference control.’ /NS v.

Aguirre-Aguirre, 526 U.S. 415, 424 (1999) (internal quo-

tation marks omitted). If Congress has “directly spoken

to the precise question at issue,” “that is the end of the

matter,” but if the statute is “silent or ambiguous with

respect to the specific issue,” the agency’s interpretation

must be upheld so long as it is “a permissible construc-

ion of the statute.” Chevron, 467 U.S. at 842-843.

In interpreting the Royalty Relief Act, the Depart-

ment understood that the proper construction of Section

304 necessarily depends on the other provision to which

it refers, Section 303 (43 U.S.C. 1337(a)(1)(H)). In regu-

lations adopted approximately two months after the

" Congress directed the Department to promulgate rules and regula

tions necessary to implement both OCSLA in general and the Royal-

ty Relief Act in particular. See 43 U.S.C. 1334(a); RRA § 305, 109 Stat.

566.

RRA was enacted, the Department implemented Section

3038 by acknowledging its discretionary authority to in-

clude price thresholds in any notices of lease sales. See

30 C.F.R. 260.110(a)(7) (1996); 61 Fed. Reg. 3804 (1996).

It explained that the new bidding system would also ap-

ply to deepwater leases issued from 1996 to 2000 pursu-

ant to Section 304. See id. at 3801. When administering

the leasing program under Sections 303 and 304, the

Department exercised its authority to specify price

thresholds in notices of lease sales (including all of the

notices concerning respondent’s leases). See p. 7, supra.

That construction was fully consistent with the best

reading of Sections 303 and 304, and is certainly entitled

to deference.

2. As outlined above (see pp. 4-5, supra), Section

303, which added a new bidding system to OCSLA, con-

tains two relevant clauses. The first authorizes the Sec-

retary to suspend the payment of royalties “for a period,

volume, or value of production determined by the Secre-

tary”; and the second states that those “suspensions

may vary based on the price of production from the

lease.” 43 U.S.C. 1337(a)(1)(H). Section 304 then pro-

vides that, with regard to the leases issued from Novem-

ber 28, 1995 to November 28, 2000, the Secretary “shall

use the bidding system authorized [by Section 303], ex-

cept that the suspension of royalties shall be set at a

volume of not less than” specified amounts. RRA § 304,

109 Stat. 565-566 (48 U.S.C. 1337 note entitled “Lease

Sales”).

Section 304’s “except” clause limits the Secretary’s

discretion under the first clause of Section 303—by re-

quiring the initial suspension to be set on the basis of a

volume specified in Section 304 itself, rather than on the

basis of a “period, volume, or value of preduction deter-

mined by the Secretary,” as in Section 303, 48 U.S.C.

1337(a)(1)(H). But the “except” clause does not apply to

the Secretary’s discretion under the second clause of

Section 303 to “vary” a suspension based on the price of

production. That discretion carries over into Section 304

by virtue of the direction in that section that the Secre-

tary “shall use the bidding system” authorized by Sec-

tion 303. Thus, when Sections 303 and 304 are read to-

gether, as they must be, they allow the price thresholds

included in respondent’s leases. In other words, al-

though Congress in Section 304 “set” minimum royalty

suspension volumes, it otherwise incorporated Section

303, including its grant of authority to “vary” during

lease administration the suspension volumes set by Con-

gress. That conclusion is reinforced by the established

principle that statutory exceptions are to be construed

narrowly. Commissioner v. Clark, 489 U.S. 726, 739

(1989). Here, Congress “excepted” from the system de-

scribed in Section 303 only the specification of volumes

at which royalty suspensions were to be set in the first

instance. Congress incorporated unchanged all the rest

of that bidding system, including its authorization of

variances based on the price of production.*

The relationship between Section 304 and the different portions of

Section 303 is evident when Section 304’s cross-reference is replaced by

the language of Section 303 and Section 304’s “except” clause then sub-

stituted for Section 303’s parallel “suspension of royalties” provision.

When thus integrated, as Congress directed, the provisions read as

follows (with the language from Section 304 in brackets):

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

the Western and Central Planning Area of the Gulf of Mexico, in-

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

Mexico encompassing whole lease blocks lying west of 87 degrees,

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

3. The court of appeals rejected that straightfor-

ward interpretation of Section 304 on the ground that

allowing royalty suspensions to “vary” based on the

prices of oil and gas would “render [Section] 304’s man-

datory language meaningless” by effectively reducing

the production volumes for which royalties are to be sus-

pended. App., infra, 9a. But the court’s objection is

misplaced, and its resulting construction of Section 304

is refuted not only by the text, but also by the context

and purpose of the Royalty Relief Act. See, e.g., Dolan

v. USPS, 546 U.S. 481, 486 (2006) (explaining that the

“({ijnterpretation of a word or phrase depends upon

reading the whole statutory text, considering the pur-

pose and context of the statute”).

a. In Sections 302 and 303—the provisions of the

Royalty Relief Act dealing with new production under

pre-existing deepwater leases in specified parts of the

Gulf of Mexico (48 U.S.C. 1887(4)(3)(C)) and with new

OCSLA leases generally (including the specified parts

of the Gulf of Mexico for leases issued after November

date of enactment of this title, shal] use the] cash bonus bid with

royalty at no less than 12 and 2 per centum fixed by the Seeretary

in amount or valuc of production saved, removed, or sold, and with

suspension of royalties [set at a volume of not less than the fol-

lowing:

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

depths of 200 to 400 meters;

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

meters of water; and

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

depths greater than 800 meters],

which suspensions may vary based on the price of production from

the lease.

That combined form gives effect to both the cross-reference to Section

303 and the “except” clause in Section 304

28, 2000) (43 U.S.C. 1337(a)(1)(H))—Congress mandated

or permitted the application of price thresholds even

when the minimum production volumes associated with

royally relief have not been reached. See pp. 3-4, supra.

Indeed, in Section 302, Congress included mandatory

suspension volumes that first appear to be unqualified,

but that actually operate to set an initial suspension vol-

ume subject to variance depending on the price of oil

and gas at the time of production. Section 302 provides

that “in no case will [the suspension volumes] be less

than [the same minimum volumes specified in Section

304).” 43 U.S.C. 1337(a)(3)(C)Gi) (emphasis added). But

that seemingly absolute language cannot be read in iso-

lation. Section 302 goes on to provide that—even “(dlur-

ing the production” of the volumes up to which royalties

would otherwise be suspended—the amounts of oil and

gas that are produced are neverthcless “subject to roy-

alties at the lease stipulated royalty rate” during years

in which the average price of oil or gas rises above speci-

fied levels. 43 U.S.C. 1337(a)(3)(C)(v) and (vi). In addi-

tion, Section 302 expressly provides that “{a)jny produc-

tion subject to” the price thresholds “shall be counted

toward the production volume” for the royalty suspen-

sion, even though royalties must be paid on those pro-

duction amounts. /bid. Thus, the apparently mandatory

royalty relief under Section 302 is compromised twice

over. First, the relief does not apply to any amounts

produced during periods when price thresholds are ex-

ceeded. Second, by counting against the production vol-

ume associated with the initial royalty suspension, the

amounts produced at those times also reduce the amount

of production that is subject to relief from royalties in

future years. In other words, the royalty suspension

varies as a result of the application of price thresholds.

By including in an overall scheme to determine roy-

alty relief both mandatory suspension volumes and spec-

ified price thresholds, which can be applied in tandem to

a single lease, Section 302 demonstrates that the two

concepts are not mutually exclusive. To the contrary, as

Section 303 also confirms, price thresholds—provisions

that allow a suspension of royalties to “vary” according

to the price of production—are fully compatible with the

statute’s specification of a volume at which a royalty

suspension is initially set. They are also consistent with

the very function of “variances,” which provide for

an exception from a general rule in circumstances in

which the purposes of the rule do not apply. See, e.g.,

HPA vy. National Crushed Stone Ass’n, 449 U.S. 64, 76-

77 (1980); see also pp. 17-18, infra (discussing the pur-

poses of the RRA).

Section 304 is no different from Sections 302 and 303

in this regard. In Section 304, Congress required sus-

pension of royalties at certain volumes and also required

the Secretary to use the Section 303 bidding system—

which includes the authorization to vary the congressio-

nally set suspensions based on the price of oil and gas.

That dual requirement is consistent with Congress's

decision throughout the Royalty Relief Act to combine

a system for suspending royalties with a system for

varying those suspensions based on the price of oil and

gas at the time of production. Such price thresholds

serve to ameliorate the distortions that would occur at

a time of high energy prices if royalty suspensions were

based on volume of production alone.

Thus, given Sections 302 and 303, which expressly

contemplate the applicability of both minimum volumes

for royalty suspensions and price thresholds, the court

of appeals erred in concluding (App., znfra, 9a) that the

application of price thresholds under Section 304 would

render suspension volumes “meaningless.” As a result,

the court misunderstood the import of Section 304’s lan-

guage mandating minimum volumes for royalty suspen-

sions, interpreting it to carry a negative implication that

other, linked sections of the statute expressly refute. In

sum, the court failed to appreciate that the Royalty Re-

lief Act as a whole, including Section 304, permits the

Secretary to include price thresholds in leases that also

include minimum suspension volumes.

b. The Department’s interpretation is also consis-

tent with the purposes of the Royalty Relief Act. No one

disputes that for leases issued before November 28, 1995

and after November 28, 2000, Congress acted both to

spur production and to protect the public fise by offering

suspended royalties but conditioning the suspensions

on price thresholds. Thus, the Secretary is required

to impose price thresholds for new production on exist-

ing leases that qualified for royalty relief. 43 U.S.C.

1337(a)(3)(C)(v) and (vi). And the Secretary is permit-

ted to impose such price thresholds for new leases is

sued in the same geographic areas after Section 304’s

five-year period. 43 U.S.C. 13837(a)(1)(H).

It would, to say the least, be anomalous for Congress

to have mandated price thresholds for existing leases,

and to have authorized price thresholds for new leases

in the future, and yet to have prohibited price thresh-

olds, in the selfsame piece of legislation, during the five

year interim period addressed by Section 304. The pur-

pose of the Royalty Relief Act was to create economic

incentives for new production. Price thresholds are fully

consistent with that goal, because the economic incen-

tive of a royalty suspension is no longer necessary when

the price of oil or gas rises sufficiently high. Indeed,

respondent bid on and entered into the very leases at

issue here knowing that they contained such price thres-

holds. And at the point at which special economic incen-

tives are no longer necessary, the purpose of protecting

the public fise through the collection of the standard

royalties in the lease becomes paramount. See 43 U.S.C.

1344(a)(4) (OCSLA requires leasing activities “to assure

receipt of fair market value for the lands leased and the

rights conveyed by the Federal Government”).

There is nothing in the text, structure, or purpose of

the Royalty Relief Act to suggest that Congress inten-

ded for price thresholds to apply in every circumstance

except for leases issued during the five-year period fol-

lowing enactment of the statute—and thereby to forgo

billions of dollars in revenue otherwise due to the Amer-

ican public, and to bestow billions of dollars of windfalls

on lessees when oil and gas prices are high.

B. There Will Be No Meaningful Opportunity For Further

interpretation Of The Royalty Relief Act In The Courts

Of Appeals

Although there is no conflict in the circuits about the

correct interpretation of Section 304 of the Rovalty Re

lief Act, the unusual circumstances of the statute and its

application all but guarantee that the Department’s ar-

guments will not be considered by other courts of ap-

peals. By its terms, Section 304 applies only to leases

issued for deepwater tracts on the outer Continental

Shelf in certain portions of the Gulf of Mexico “lying

west of 87 degrees, 30 minutes West longitude.” 109

Stat. 565. Those areas are generally adjacent to Texas,

Louisiana, and Mississippi, and the Department did not

issue any leases under Section 304 for tracts that are

within the territorial jurisdiction of any court of appeals

other than the Fifth Circuit. Additional litigation with

other lessees about the payment of future royalties

would be brought in the same way this case was: A les-

see could challenge an order to pay royalties as contrary

to law under the Administrative Procedure Act, 5 U.S.C.

706(2). As respondent did, other lessees could be ex-

pected to bring any future suits in the Fifth Circuit, giv-

en its holding that price thresholds are unambiguously

beyond the agency’s authority under Section 304 when

minimum suspension volumes have not been reached.”

Although there is one plausible route to another

court of appeals, it would be very unlikely to result in

a circuit split reviewable by this Court and thus does

not justify the denial of further review at this time.

The Fifth Circuit’s decision in Santa F'e Snyder noted

that a lessee seeking a refund of royalties that had al-

ready been paid to the government should file suit in

the Court of Federal Claims (for a claim involving

more than $10,000), see 385 F.3d at 893, and such a suit

could be appealed to the Federal Circuit, see 28 U.S.C.

1295(a)(3). As an initial matter, that scenario would re

quire the Department to refuse to accept the Fifth Cir-

cuit’s decision regarding payments already made under

a lease within that court’s jurisdiction, even as the De-

partment would be effectively prevented from demand

ing any additional payments from the same lessee un-

der the same lease term. Cf. National Cable & Tele

“ 10) under 28

In this case, respondent alleged venue (Comp!

U.S.C. 1392(e)(1) (which refers to the residence of the defendant) and

13 U.S.C. 1849(b)(1) (which allows a proceeding with regard to a case

arising out of the production of minerals on the outer Continental Shelf

to be “instituted in the judicial district in which any defendant resides

or may be found, or in the judicial district of the State nearest the place

the cause of action arose’”’)

20)

comms. Ass’n v. Brand X Internet Servs., 545 U.S. 967,

984-985 (2005) (explaining that an appellate opinion that

finds a statute “unambiguous” overrides an agency’s

contrary interpretation of the statute). And, in fact, if

the Fifth Circuit’s decision is allowed to stand, the De

partment does not intend under the circumstances to op-

pose refunds of royalties that were, under that court’s

reasoning, beyond its statutory authority to collect.’”

Moreover, even if such a suit were brought and appealed

to the Federal Circuit, and if the government then pre-

vailed, the Federal Circuit’s decision would apply only

to royalties that had already been collected, and the les

see could decide not to seek this Court’s review, because

the loss of royalties already paid could be more palat-

able than the possibility of having to pay royalties on all

future production. If, on the other hand, the govern-

ment were to lose in the Federal Circuit, there would

still be no circuit split.

This Court should not rely on the speculative possi

bility of another appellate ruling under such circum

stances. If the Court were to deny certiorari here, the

Fifth Circuit’s decision would likely be the final word

interpreting Section 304 of the Royalty Relief Act. This

case is therefore akin to those arising within the exclu

sive jurisdiction of the Federal Circuit, in which there is

no realistic opportunity for another court of appeals to

In March 2008, after the district court's decision in this case, the

Department advised parties making royalty payments not to adjust

their prior or ongoing royalty payments until there is a final, non

appealable judgment. It also suggested that requests for refunds of

royalties be made in the interim only when they might otherwise be

barred by a statute of limitations. The Department would be particu

larly reluctant to refuse to refund royalties it collected on the basis of

that letter

address the questions raised. In such circumstances,

the lack of a circuit split does not suffice to insulate the

court of appeals’ decision from this Court’s certiorari

jurisdiction. See Eugene Gressman et al., Supreme

Court Practice 286-288 (9th ed. 2007).

C. If Allowed To Stand, The Court Of Appeals’ Decision

Will Cost The United States Treasury Billions Of Dol-

lars In Lost Revenue

The court of appeals’ decision presents an important

question of federal statutory interpretation in part be-

cause, if allowed to stand, it will require the government

to forgo many billions of dollars of revenue.

As Justice Scalia recently explained in a case in

which a private party faced “a possible $1.4 billion judg-

ment” and also had potentially $40 billion at stake in

other pending class actions, “enormous potential habil-

ity, which turns on a question of federal statutory inter-

pretation, is a strong factor in deciding whether to grant

certiorari.” Fidelity Fed. Bank & Trust v. Kehoe, 547

U.S. 1051, 1051 (2006) (Scalia, J., joined by Alito, J., con-

curring in the denial of certiorari); accord Gressman 269

(“The fact that especially large amounts of money are

involved in litigation over the issue of statutory con-

struction may also be a persuasive factor, though not

always sufficient by itself unless the amount is enor-

mous.”).

In this case, the Department’s 2006 order required

respondent to pay approximately $36.2 million in royal-

ties for production of oil and gas from eight leases in

2003 and 2004. Moreover, the Department estimates

that another $159 million in royalties came due on pro-

duction in 2005-2007 under the terms of those eight leas-

es alone. But this is the least of the matter. Respondent

and its corporate affiliates have interests in ten other

leases on which the Department estimates an additional

$169.3 million in royalties came due on production

through 2007. The court of appeals’ decision will also

govern the disposition of billions of additional dollars of

potential federal revenue involving other lessees. There

are 21 other pending administrative appeals of similar

orders to pay royalties under Section 304 leases—ap-

peals that have generally been held in abeyance pending

resolution of this case. And some similarly situated les-

sees have continued to pay royalties during this litiga-

tion; as of June 30, 2009, the Department had collected

an estimated $1.5 billion in royalties from leases issued

in 1996, 1997, and 2000, the validity of which is called

into doubt by the court of appeals’ decision.

In addition to the royalties already due or paid, vast-

ly more is at stake. The court of appeals’ decision,

if allowed to stand, will prevent the government from

collecting royalties on oil and gas production in any fu-

ture year in which the price thresholds are exceeded. As

the Department recently informed Congress, its most

recent predictions are that 83 leases from 1996, 1997,

and 2000 will produce 2.46 to 2.7 billion barrels of oil

equivalent before reaching the royalty-suspension vol-

umes required by the court of appeals’ decision. Letter

from Richard T. Cardinale, Chief of Staff, Land & Min-

erals Mgmt., U.S. Dep’t of the Interior, to Hon. Dianne

Feinstein, Chairman, Subcomm. on Interior, Env’t &

Related Agencies, Senate Appropriations Comm., encl.

5b (Mar. 9, 2009). That would result in forgone future

royalties estimated at $17.97 to $18.98 billion. Jbid.

(The amount could, of course, be higher if either the

amounts produced or the prices of oil and gas turn out to

be higher than the estimates that the Department used

in making its forecast."’)

Whatever the precise amount of forgone future roy-

alties ultimately proves to be, the total cost will be huge,

and it will have a direct, adverse affect on the Treasury

of the United States. See 43 U.S.C. 1337(m) and 1338

(requiring royalties to be “deposited in the Treasury of

the United States and credited to miscellaneous re-

ceipts”). And, correspondingly, those same sums will

constitute huge and w justified windfalls for respondent

and other lessees that bid for, signed, and extracted fed-

eral oil and gas under leases that expressly provide for

the very price thresholds they now seek to avoid. The

“enormous” sum of federal revenue that turns on the

“question of federal statutory interpretation” presented

by this case is thus “a strong factor” counseling in favor

of certiorari. Fidelity Fed. Bank & Trust, 547 U.S. at

1051 (Sealia, J., concurring in the denial of certiorari).

"' In 2008, the Government Accountability Office conducted its own

study of the 1996, 1997, and 2000 leases, and estimated that a loss in

this case by the government would cost between $15.1 and $38.3 billion

in forgone royalties from oil and gas production under 84 leases over

the next 25 years. U.S. Gov’t Accountability Office, GAO-118-792R, Onl

and Gas Royalties: Litigation Over Royalty Relief Could Cost the

Federal Government Billions of Dollars 8 ( June 5, 2008) <: http:/Awww.

gao.gov/new.items/d(08792r.pdf>.

'? This case is not in an interlocutory posture and thus does not pre-

sent the circumstance that caused Justices Sealia and Alito to concur in

the denial of certiorariin Fidelity Federal Bank & Trust. See 547 U.S.

at 1051.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted.

ELENA KAGAN

Solicitor General

JOHN C. CRUDEN

Acting Assistant Attorney

General

EDWIN S. KNEEDLER

Deputy Solicitor General

CURTIS FE. GANNON

Assistant to the Solicitor

General

MICHAEL T. GRAY

Attorney

JULY 2009

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR WHE FIFTH CIRCUIT

No. 08-30069

KERR-MCGEE OIL AND GAS CORP..,

PLAINTIFF-APPELLEE

Vv.

UNITED STATES DEPARTMENT OF INTERIOR;

C. STEPHEN ALLRED, ASSISTANT SECRETARY, ON

BEHALF OF LAND & MINERALS MANAGEMENT, ON

BEHALF OF UNITED STATES DEPARTMENT OF

INTERIOR, DEFENDANTS-APPELLANTS

Jan. 12, 2009

Before: KING, DENNIS and ELROD, Circuit Judges.

KING, Circuit Judge:

The Outer Continental Shelf Deep Water Royalty

Relief Act authorizes the Department of the Interior to

suspend the collection of oil and gas royalties from all

new and preexisting federal, deepwater leases and to

impose price or volume thresholds in order to determine

when royalty payments should recommence. Addition-

ally, for new deepwater leases issued between 1996 and

2000 for specific areas in the Gulf of Mexico, the act ex-

plicitly waives all royalty payments until a specific vol-

ume of oil or gas is produced. Kerr-McGee Oil and Gas

(la)

Corp. obtained eight new deepwater leases that, in addi-

tion to waivers based on volume, contained price thresh-

olds set by the Department of the Interior. When oil

and gas prices moved above those price thresholds, the

Department of the Interior sought to collect royalties on

these leases, despite the fact that the congressionally set

volume thresholds had not yet been met. Kerr-McGee

challenged the Department of Interior’s order to pay

royalties in the district court, which concluded on sum-

mary judgment that the agency did not have the author-

ity to impose price thresholds requiring the payment of

royalties on volumes less than the volume thresholds set

by Congress. We agree and affirm the district court’s

decision for the following reasons.

I. FACTUAL AND PROCEDURAL BACKGROUND

The facts of this case are undisputed. Between 1996

and 2000, Kerr-McGee Oil and Gas Corp. (“Kerr-

McGee”) obtained eight deepwater, Gulf of Mexico min-

eral leases subject to royalty relief. These leases stipu-

lated, however, that royalties would commence when

certain price thresholds were met. Six of these leases

employ the following language to impose such price

thresholds:

In any year during which the arithmetic average of

the closing prices on the New York Mercantile Ex-

change for light sweet crude oil exceeds $28.00 per

barrel, royalties on the production of oil must be paid

. and production during such years counts to-

ward the royalty suspension volume. In any year

during which the arithmetic average of the closing

prices on the New York Mercantile Exchange for

natural gas exceeds $3.50 per million British thermal

units, royalties on the production of natural gas must

be paid . . . and production during such years

counts toward the royalty suspension volume.

The remaining two leases contain substantially similar

language:

In any year during which the arithmetic average of

the closing prices on the New York Mercantile Ex-

change (NYMEX) for light sweet crude oil exceeds

$28.00 per barrel (threshold oil price), royalties on

the production of oil must be paid . . . and produc-

tion during such years counts toward the royalty sus-

pension volume.

In any year during which the arithmetic average of

the closing prices on the NYMEX for natural gas

exceed $3.50 per million British thermal! units (thres-

hold gas price), royalties on the production of natural

gas must be paid . . . and production during such

years counts toward the royalty suspension volume. '

All eight leases are additionally subject to the volume

thresholds established by § 304 of the Outer Continental

Shelf Deep Water Royalty Relief Act (the “DWRRA”),

which states:

For all tracts located in water depths of 200 meters

or greater in the Western and Central Planning Area

of the Gulf of Mexico, including that portion of the

Eastern Planning Area of the Gulf of Mexico encom-

passing whole lease blocks lying west of 87 degrees,

30 minutes West longitude, any lease sale within five

years of the date of enactment of this title, shall use

the bidding system authorized in section &(a)(1)(H)

' Both leases adjust the triggering prices for inflation.

of the Outer Continental Sheli Lands Act, as amen-

ded by this title, except that the suspension of royal-

ties shall be set at a volume of not less than the fol-

lowing:

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

water depths of 200 to 400 meters;

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

400 to 800 meters of water; and

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

water depths greater than 800 meters.

Pub. L. No. 104-58, 109 Stat. 557 (uncodified, but pres-

ent in a note to 43 U.S.C. § 1337).

In 2003, the average annual price of natural gas ex-

ceeded the leases’ inflation-adjusted price threshold. In

2004, the average annual prices of both oil and gas ex-

ceeded the respective price thresholds for those com-

modities. Not one of the leases, however, had enjoyed

production that triggered the volume thresholds im-

posed by § 304.

Based on the triggered price thresholds, the United

States Department of the Interior (“Interior”) issued a

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

Decision informed Kerr-McGee that the oil and gas price

thresholds had been exceeded, concluded that Interior

had authority to suspend royalty relief based on price

thresholds triggered before production exceeded § 304’s

volume thresholds, and directed Kerr-McGee to pay roy-

alties.

Kerr-McGee challenged the Burton Decision in fed-

eral district court, and, on summary judgment, the court

ruled that Interior did not have the authority to suspend

royalty relief for production at volumes less than those

established by Congress. Interior brought this timely

appeal, arguing that the DWRRA does not alter the

agency’s discretionary authority to vary royalty relief by

imposing price thresholds that suspend royalty relief be-

fore § 304’s volume thresholds are exceeded.

Il. STANDARD OF REVIEW

We review de novo a grant of summary judgment,

applying the same legal standards that the direct court

applied. Kornman & Assocs., Inc. v. United States, 527

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

proper when the evidence reflects “no genuine issue as

to any material fact and that the movant is entitled to

judgment as a matter of law.” FED. R. CIv. P. 56(c).

An agency’s interpretation of its statutory authority

is reviewed according to the two-step inquiry estab-

lished in Chevron U.S.A., Inc. v. Natural Resources De-

fense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778, 81 L.

Ed. 2d 694 (1984). Med. Ctr. Pharmacy v. Mukasey, 536

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

to the unambiguously expressed intent of Congress” if

Congress has, indeed, “directly spoken to the precise

question atissue.” /d. (internal quotation marks omit-

ted). If we determine that the statute is ambiguous,

then we proceed to Chevron’s second step and “‘reverse

[an] agency’s decision only if it [is] arbitrary, capricious,

or manifestly contrary to the statute.” Jd. (quoting

Tex. Coal. of Cities for Util. Issues v. FCC, 324 F.3d 802,

807 (5th Cir. 2003)) (alterations in origina!}).

Itt. DISCUSSION

Under Chevron’s first step, we must consider whe-

ther Congress unambiguously granted Interior the au-

thority to suspend royalty relief at production volumes

less than those established by § 304. To interpret the

statute, we begin by looking at its plain text. Wheeler v.

Pilgrim’s Pride Corp., 536 F.3d 455, 458 (5th Cir. 2008).

The DWRRA contains three operative sections, and,

because “it is a cardinal rule that a statute is to be read

as a whole,” [n re Supreme Beef Processors, Inc., 468

F.3d 248, 253 (5th Cir. 2006) (en banc), we describe each

section in turn. The first section applies only to leases

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

(i) [NJo royalty payments shall be due on new pro-

duction . . . from any lease or unit located in water

depths of 200 meters or greater in the [same geo-

graphic region of the Gulf of Mexico specified in

§ 304] until such volume of production as determined

pursuant to clause (ii) has been produced by the les-

see.

(ii) Upon submission of a complete application by

the lessee, the Secretary [of Interior] shall deter-

mine . . . whether new production from such lease

or unit would be economic in the absence of the relief

from [royalties]. . . . If the Secretary determines

that such new production would be economic in the

absence of the relief from [royalties] . . . the Secre-

tary must determine the volume of production from

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

production economically viable; except that for new

production . . . in no case will that volume be less

than 17.5 million barrels of oil equivalent in water

land

depths of 200 to 400 meters, 52.5 million barrels of oil

equivalent in 400-800 meters of water, and 87.5 mil-

lion barrels of oil equivalent in water depths greater

than 800 meters... .

* * a

(v) During the production of volumes determined

pursuant to clause[ |] (ii) . . . in any year during

which the arithmetic average of the closing prices on

the New York Mercantile Exchange for light sweet

crude oil exceeds $28.00 per barrel, any production

of oil will be subject to royalties. .. .

(vi) During the production of volumes determined

pursuant to clause[ ] (ii) . . . in any year during

which the arithmetic average of the closing prices

on the New York Mercantile Exchange for natural

gas exceeds $3.50 per million British thermal units,

any production of natural gas will be subject to roy-

alties. .

DWRRA § 302, 43 U.S.C. § 1387(a)(3)(C). The

DWRRA’s next section authorizes a new bidding method

that Interior may use in leasing any of the submerged

lands of the Outer Continental Shelf. It provides that

bidding may be on the basis of a:

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

per centum fixed by the Secretary in amount or value

of production saved, removed, or sold, and with sus-

pension of royalties for a period, volume, or value of

production determined by the Secretary, which sus-

pensions may vary based on the price of production

from the lease. . .

}

Id. § 303, 43 U.S.C. § 1837(a)(1)(H). The DWRRA’s fi.

nal section, set forth in full above, specifically addresses

new, deepwater leases sold in a specific region of the

Gulf of Mexico between 1996 and 2000. The pertinent

language of that section states that “the suspension of

royalties shall be set at a volume of not less than the fol-

lowing” specifically established volume thresholds. /d.

§ 304, Pub. L. No. 104-58, 109 Stat. 557 (unecodified, but

present in a note to 43 U.S.C. § 1387).

Looking to Santa Fe Snyder Corp. v. Norton, 385

F.3d 884 (5th Cir. 2004), the district court concluded

that Interior did not have the authority to suspend roy-

alty relief for new leases at production volumes less than

those set by Congress in § 304. In Santa Fe Snyder, we

considered whether Congress granted Interior the au-

thority to limit the application of § 304’s royalty relief to

only those new leases that resulted in new production

from a field. Jd. at 889-90." Under Chevron’s first step,

we stated that the question was “whether Section 304 of

the [DW]RRA unambiguously provides that royalty sus-

pensions apply in full to each [nJew [llease qualifying un

der its terms,” which we answered affirmatively. Jd. at

890, 892. In doing so, we juxtaposed the economic justi-

fication required for existing leases to obtain royalty

relief under § 302—the new production requirement—

with the limited, objective requirements to obtain roy-

alty relief for new leases under § 304—water-depth and

' A“field” is “an area consisting of a single reservoir or multiple res-

ervoirs all grouped on, or related to, the same general geological struc

tural feature and/or stratigraphic trapping condition.” /d. at. 889 (inter

nal quotation marks omitted). The new production prerequisite requi-

red a lessee to show that no oil or gas had yet been produced from any-

where in the field before obtaining royalty relief. See id. at 889-90.

location. See id. at 892-93 (“Congress clearly imposed

a New Production Requirement on [e]xisting []]eases.

It did not do so for [n]Jew [lleases.”).

The current case is the logical and inevitable exten

sion of Santa Fe Snyder, as the district court correctly

reasoned. Here, as in that case, Interior seeks to em-

ploy a royalty-relief limitation present in § 302 (which

applies to leases existing prior to the DWRRA’s enact-

ment) in order to limit the royalty relief granted to new

leases by § 304. Interior asserts that § 304’s reference

to § 303’s bidding process nonetheless grants Interior

the discretion to “vary” the suspension of § 304’s royalty

relief based on the prices of oil and gas.* But the plain

language of the statute does not bear [nterior’s inter-

pretation. Section 304 states that “the suspension of

royalties shall be set a volume not less than” the stated

production volumes. Interior’s reading would render

§ 304’s mandatory language meaningless: if price thres-

holds trigger royalty payments before § 304’s produc-

tion volumes are exceeded, then the royalty payment

suspension 7s being set at a volume less than § 304’s

specified production levels. While § 303 grants Interior

discretion to “vary” royalty relief for all new leases of

submerged lands on the Outer Continental Shelf based

* We note that, below, Interior raised the affirmative defense that

Kerr-McGee should be estopped from challenging the legality of the

price thresholds because the company bid on and signed leases contai-

ning these provisions. The district court ruled that this defense was un

available because government officials cannot enforce by estoppel a

contract that they were not legally authorized to make. See LaBarge

Prods., Inc. v. West, 46 F.3d 1647, 1552 (Fed. Cir. 1995). In its briefs to

this court, Interior does not contend that any such affirmative defense

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

Eng’rs & Constructors, Ltd., 332 F.3d 301, 302 (5th Cir. 20038).

LOa

on the price of production, § 304 “immediately excepts

and replaces Interior’s discretion with a fixed royalty

suspension for [nJew [leases on a volume basis” where

those new leases are located in the geographic region

specified by § 304. /d. at 892. Had Congress intended

to impose price thresholds on the royalty relief for these

new leases, it certainly knew how to do so. See, e.g.,

DWRRA § 302 (specifically setting price thresholds on

royalty relief for existing leases that qualify for royalty

relief); see also Royalty Relief for American Consumers

Act of 2006, H.R. 4749, 109th Cong. § 2(a) (2006) (pro-

posed legislation seeking to suspend all royalty relief if

specified price thresholds are met). However, Congress

refrained from specifically establishing such price thres-

holds, and we refuse [nterior’s invitation to read this

royalty-relief limitation into the statute.

Thus, the plain language of § 304 dictates our conclu-

sion in this case just as it did in Santa Fe Snyder. The

statement that “the suspension of royalties shall be set

at a volume not less than” the specific production levels

means just that: royalty payments shall be suspended up

to the production volumes established by Congress.

Section 304 is unambiguous in this regard, and it does

not grant Interior the authority to impose price thresh-

olds that suspend royalty relief at production volumes

less than those established by Congress in § 304. There-

fore, we need not extend our analysis to Chevron’s sec-

ond step.

Finally, Interior makes the same argument that it

made in Santa Fe Snyder regarding the DWRRA’s leg-

islative history. See Federal Defendants-Appellants’

Opening Brief at 27-29, Sante Fe Snyder, 385 F.3d 884

(No. 03-30648); Federal Defendants-Appellants’ Reply

lla

Brief at 14-16, Sante Fe Snyder, 385 F.3d 884 (No. 08-

30648). Kerr-McGee points to competing passages in

the legislative history in support of its position. But as

we stated in Santa Fe Snyder, “|blased on our conclu-

sion that the statutory language is unambiguous, we

need not follow the Interior’s suggestion to look to legis-

lative history as a guide in interpreting the [statute].”

385 F.3d at 893.

IV. CONCLUSION

For the foregoing reasons, we AFFIRM the judg-

ment of the district court.

12a

APPENDIX B

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF LOUISIANA

LAKE CHARLES DIVISION

No. 2:06 CV 0489

KERR-MCGEE OIL & GAS CORP.

Vv).

C. STEPHEN ALLRED, ASSISTANT SECRETARY FOR

LAND & MINERALS MGT., AND THE

DEPT. OF THE INTERIOR

[Filed: Oct. 30, 2007]

MEMORANDUM RULING

PATRICIA MINALDI, United States District Judge.

Before the court is plaintiff Kerr-McGee Oil & Cas

Corp.’s (“Kerr-McGee”) Motion for Summary Judgment

and C. Stephen Allred and the Department of the Inte-

rior’s (“the Interior”) Cross-Motion for Summary Judg-

ment.’

' Pl.’s Mot. for Summary Judgment [doc. 28); Def.’s Cross-Mot. for

Summary Judgment [doc. 39].

l3a

FACTS

Congress enacted the Outer Continenta] Shelf Deep-

water Royalty Relief Act of 1995 (“DWRRA”), codified

at 43 U.S.C. § 1337, to encourage the exploration of oil

and gas in the Gulf of Mexico’s deepwater, where the

risks and costs of operation were high.” Kerr-McGee

has invested over $3.5 billion to develop deepwater leas-

es in the Gulf.’ The eight deepwater leases for which

Ke r-McGee was ordered to pay royalties contain lan-

guage that makes mandatory royalty relief* subject to

specified price thresholds.”

On January 6, 2006, Acting Assistant Secretary Bur-

ton signed an Order directing Kerr-McGee to pay royal-

ties on natural gas it produced in 2003, and on both oil

and natural gas produced in 2004, for eight leases Kerr-

McGee operated under the DWRRA-+* The Burton Deci-

sion found that the average annual price of natural gas

* S. Rep. No. 103-248, at 3-4 (1994).

* Pl.’s Compl. 9 2.

* The DWRRA of 1995 eliminates the Sceretary’s diseretion to set

the volume of royalty suspension for leases enacted between November

28, 1995 and November 28, 2000. 43 U.S.C. § 1337(a)(3)CXi).

’ Under the terms of the lease between Kerr-McGee and the Inter-

ior, Kerr-McGee makes royalty payments to the Interior if the com-

modity price of oil or case [sic] exceeds a prescribed threshold level (a

“price threshold”), even when the lease has not yet produced the vol-

ume of oil and gas that was to be royalty-free under the DWRRA. Un-

ited States Department of Interior, Order to Report. and Pay Royalties

and Interest Due Under Identified Offshore Federal Oil and Gas Leas-

es (Jan. 6, 2006) (“The Burton Decision”), at 2-4. The Burton Decision

is so named because it was signed by Acting Assistant Seeretary Bur

ton. /d. at 11.

® Td. at 10.

l4a

was in excess of the price threshold for 2003 and 2004,

and the average annual price of oil was in excess of the

price threshold in 2004.’ The Burton Decision is a final

agency action subject to judicial review.” On March 17,

2006, Kerr-McGee filed for declaratory judgment and

injunctive relief against the Department, challenging

the Burton Decision.”

BACKGROUND OF THE CONTROLLING

STATUTES AND THE BURTON DECISION

This action arises under the Administrative Proce-

dure Act (“APA”), 5 U.S.C. § 701 et seg., the Outer Con-

tinental Shelf Lands Act (““OCSLA”), 43 U.S.C. § 1331 et

seq., and the DWRRA, 43 U.S.C. § 1337.

A.) The OCSLA

The OCSLA gives the Secretary of the Interior the

authority to issue and administer oil and gas leases on

the outer continental shelf and to promulgate imple-

menting regulations. 43 U.S.C. § 1334(a). The Minerals

Management Service (“MMS”) administers the OCS

Jeasing program by conducting lease sales. Pursuant to

the OCSLA, the typical royalty for offshore deepwater

leases is one-sixth. /d.

B.) The DWRRA

The DWRRA amended the OCSLA and gave the Sec-

retary the authority to suspend royalties on certain vol-

umes of initial production from the deepest areas of the

Gulf. 43 U.S.C. § 1337(a)(3)(C)G) & Gi). The DWRRA

ue” s

* Id. at 11.

* Pl’s Compl.

15a

established three specific schemes for royalties from

deepwater leases. /d. § 1337(a)(3)(C)(v)-(vil).

First, companies with leases existing on November

28, 1995 were not exempt from paying on new produc-

tion until the volume exceeded the prescribed price

threshold level. Jd. Section 302 permits existing lessees

to apply for royalty relief, which the Secretary would

award if the lease would otherwise not be economic. /d.

§ 13837(a)(3)(C)(ii). Additionally, Section 302 expressly

provides that no royalty relief is allowed if the price of

oil or gas meets a price threshold, as statutorily defined

by Congress. Id. § 13837(a)(3)(C)(v)-(vi). MMS imple-

mented price threshold provisions for these leases. 30

C.F.R. § 203.78.

Second, Congress required the Interior to provide

royalty relief to leases enacted between November 28,

1995 and November 28, 2000 (“Mandatory Royalty Re-

lief Leases”). 43 U.S.C. § 1837 (Note); see also Sante F'e

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

Mandatory Royalty Relief Leases are governed by

the bidding system authorized in Subparagraph H of

§ 13837. Jd. § 13887(a)(1)(H). In Section 304, however,

Congress “immediately excepts and replaces Interior’s

discretion [under Section 303] with a fixed royalty sus-

pension. .. .” Santa Fe Snyder, 385 F.3d at 892 (not-

ing that under Pub. L. 104-58, § 394, royalties are sus-

pended for specific volumes and water depths). Eight of

Kerr-McGee’s Mandatory Royalty Relief Leases are at

issue in this suit.

Third, leases issued after the five-year period ended

on November 28, 2000 are governed by Section 303, and

the Secretary is authorized to provide royalty relief and

to impose price thresholds. 43 U.S.C. § 1337(a)(3)(C).

16a

C.) The Burton Decision

The Burton Decision interpreted Section 304 of the

DWRRA as it applied to Kerr-McGee’s eight deepwater

leases, and found that Kerr-McGee owed the Interior

royalties from these leases because price thresholds

were Satisfied. The Burton Decision at 4. The Burton

Decision found that the royalty relief available to the

eight Kerr-McGee leases was limited by price thresholds

contained in the terms of the leases, imposed pursuant

to Congressional] authority. Jd. The Burton Decision

rejected Kerr-McGee’s argument that Mandatory Relief

Leases are not subject to price thresholds below the

minimum volume of royalty-free production. /d.

The Burton Decision first rejected Kerr-McGee’s

interpretation of Santa Fe Snyder, stating that Santa

Fe Snyder did not discuss price thresholds and is there-

fore not a basis for Kerr-McGee to avoid enforcement of

the price threshold provisions in its leases. 7d. Thus,

the Burton Decision found that the price threshold pro-

visions promulgated in 1337(a)(1)(H) apply to leases exe-

cuted between November 28, 1995 and November 28,

2000, and therefore apply to Kerr-McGee’s leases, re-

gardless of whether minimum volume of royalty-free

production was first produced. The Burton Decision

also applied the price thresholds to assess how much

money Kerr-McGee owes the Department. Jd. at 4-8.

STANDARD OF RELIEF

Courts review agency action under the APA by first

determining whether the agency decision was “arbi-

trary, capricious, an abuse of discretion, or otherwise

not in accorance with law;for] .. . in excess of statu-

tory jurisdiction, authority, or limitations, or short of

17a

statutory right.” 5 U.S.C. § 706(2)(A). When reviewing

an agency action, a court first determines:

[w]hether Congress has directly spoken to the pre-

cise question at issue. If the intent of Congress is

clear, that is the end of the matter; for the court, as

well as the agency, must give effect to the unambigu-

ously expressed intent of Congress. If, however, the

court determines that Congress has not addressed

the precise question atissue . . . the question for

the court is whether the agency’s answer is based

upon a permissible construction of the statute.

Chevron U.S.A., Inc. v. Natural Res. Def. Counsel, 467

U.S. 837, 842-48 (1984). “In reaching a determination

whether Congress has spoken directly on an issue,

courts are free to consider both the plain language and

meaning of the statute and any pertinent legislative his-

tory.” Ghigliert v. Sun World Nat'l Ass’n, 117 F.3d 309,

313 (Sth Cir. 1997).

Under Chevron’s second prong, if a court finds the

statute ambiguous, the court examines whether “the

agency’s answer is based upon a permissible construc-

tion of the statute.” Chevron, 467 U.S. at 843. An agen-

cy is entitled to “substantial deference” when interpret-

ing its own regulations, and, accordingly, the agency in-

terpretation must be followed unless it is plainly wrong

or inconsistent with the regulation. Thomas Jefferson

Univ. v. Shalala, 512 U.S. 504, 512 (1994). “It is elemen-

tary administrative law that an agency must operate

within the confines of its own regulations.” Am. Petro-

leum Inst. v. E.P.A., 787 F.2d 965, 975 (5th Cir. 1986).

A court should grant a motion for summary judg-

ment when the file demonstrates that “there is no genu-

18a

ine issue of material fact and that the moving party is

entitled to a judgment as a matter of law.” FED. R. CIv.

P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 323-24

(1986). The party moving for summary judgment is ini-

tially responsibl for demonstrating the reasons justify-

ing the motion for summary judgment by identifying

portions of pleadings and discovery that demonstrate

the lack of a genuine issue of material fact for trial.

Tubacex, Inc. v. M/V Risan, 45 F.3d 951, 954 (5th Cir.

1995). The court must deny the moving party’s motion

for summary judgment if the movant fails to meet this

burden. /d. If the movant satisfies this burden, how-

ever, the nonmoving party must “designate specific facts

showing that there is a genuine issue for trial. /d.

ANALYSIS

The crux of this case is whether Section 304, which

requires mandatory royalty relief for specified volumes,

also stripped the Interior of its discretion to set price

thresholds that would apply before a Mandatory Relief

Lease produced the minimum volume of royalty-free

production. Kerr-McGee contends that Mandatory Re-

lief Leases are not subject to price thresholds below the

minimum volume of royalty-free production, whereas

the Department argues it retained the discretion to set

price thresholds below the minimum volume of royalty-

free production.

A.) Chevron Review of the Burton Decision

Kerr-McGee contends that the Burton Decision is

unlawful under the first step of Chevron, because Con-

gress clearly articulated its intent to establish manda-

tory royalty relief for specified volumes in the DWRRA.

19a

Kerr-McGee argues that the DWRRA’s mandatory roy-

alty relief provision, Section 304, also prevents the Inte-

rior from enacting price thresholds for volumes below

the minimum volume articulated in the DWRRA. Ac-

cordingly, Kerr-McGee maintains that the Burton Deci-

sion was contrary to law because the defendants condi-

tioned royalty relief in Kerr-McGee’s Mandatory Relief

Leases upon commodity prices for oil and gas remaining

below price thresholds.”

The Interior argues that the DWRRA clearly estab-

lished the authority of the Interior to establish price

thresholds on new leases. The Interior argues that Sec-

tion 304 did not deprive the agency of its ability to estab-

lish price thresholds because Section 304 specifies the

use of the Section 303 bidding system, which permits

price thresholds, and nothing in Section 304 removes the

authority for price thresholds. Thus, the Interior ar-

gues that price thresholds are permissible. Moreover,

the Interior argues that Santa Fe Synder should be lim-

ited to its holding that leases enacted between 1996-2000

contained mandatory royalty relief for minimum vol-

umes of production. The Interior argues that Santa Fe

Snyder does not preclude the imposition of price thresh-

olds below the minimum volumes for which royalty relief

was to be mandatory.

The Fifth Circuit interpreted Sections 303 and 304 of

the DWRRaA as they pertain to new production require-

ments for Mandatory Royalty Relief leases. Santa Fe

Snyder, 385 F.3d at 883-84. Section 303 added a new

bidding system that gave the Interior the authority to

lease any water depth in any location with royalty relief

'° Pl.’s Compl. 13-14.

20a

fashioned according to the Interior’s discretion. 43

U.S.C. § 13837(a)(1)(H). The Santa Fe Snyder court

found that this power, however, was tempered by the

next section, where Congress replaced the Interior’s

discretion to fashion royalty relief with a fixed royalty

suspension scheme based on volume and water depth.

385 F.3d at 892; see also 43 U.S.C. § 1337 (Note). Thus,

the royalty relief for Mandatory Royalty Relief leases is

automatic and unconditional.

The Santa Fe Snyder court found that Section 304

clearly articulated Congress’s unambiguous intent that

a suspension of royalties shall be set at the volume levels

provided for in the statute. 385 F.3d at 892-93 (Section

304 dictates that “the suspension of royalties shall be set

at a volume of not less than (states differing amounts

varying on water depth]’”). In interpreting Section 304,

the Santa Fe Snyder court held that:

Section 304 mandates that, without exception, based

only on the objective factors of water depth, location

of the lease block and date of the lease sale, all leases

meeting these objective criteria are entitled to re-

ceive the suspensions of royalties benefit, which the

Secretary may not set at a volume less than the par-

ticular volume assigned for each water depth. The

statute is unambiguous on this point.

Id. at 891. The Santa Fe Snyder court found that the

Interior’s addition of a new production requirement was

contrary te law and thus the Fifth Circuit did not pro-

ceed beyond Chevron’s first step. Jd. at 892-93.

The price threshold requirement found in Kerr-

McGee’s Mandatory Royalty Relief leases is similarly

unlawful under the plan text of the DWRRA because

2la

DWRRA’s Section 304, applying to new leases, clear-

ly requires minimum royalty relief. The Interior has

no discretion to enact a price threshold requirement

that applies to volumes below the minimum volume

of royalty-free production. Because the Interior im-

posed price threshold requirements on Kerr-McGee’s

eight deepwater leases that would require Kerr-McGee

to pay millions of dollars in royalties before it had even

produced the minimum volume of royalty-free produc-

tion, the Interior exceeded its Congressional authority.

Thus, under Chevron’s first step, the Interior’s action is

unlawful because it contradicts the plain, unambiguous

text of the statute.

B.) The Interior’s Affirmative Defenses

The Interior argues that even if the agency action

was contrary to law, several affirmative contractual de-

fenses apply that nonetheless require Kerr-McGee to

pay royalties in accordance with the price threshold lan-

guage in its contract. Both parties now agree that the

first two defenses are moot. The remaining three de-

fenses that the Interior proffers are: 1.) estoppel, 2.)

waiver, and 3.) mutual mistake. The Interior is not mov-

ing for summary judgment on the remaining three de-

fenses, and contends that there are outstanding issues

of material fact that preclude summary judgment on

these defenses. Kerr-McGee does, however, move for

summary judgment as a matter of law on these defenses.

It is well settled that “if government officials make

a contract they are not authorized to make, in violation

of a law enacted for the contractor’s protection, the con-

tractor is not bound by estoppel, acquiescence, or failure

to protest.” LaBarge Products Inc. v. West, 46 F.3d

22a

1547, 1552 (Fed. Cir. 1995); see also Tesoro Hawaii

Corp. v. United States, 405 F.3d 1339 (Fed. Cir. 2005)

(holding that the Government’s defenses of estoppel and

waiver did not apply because such remedies are not

available when the government makes illegal contracts).

The Interior also argued contractual defenses applied in

Santa Fe Snyder, but the Santa Fe court rejected these

arguments, noting that the issue of mandatory relief

levels was based on statutory interpretation, not con-

tractual interpretation. /d.

Because contractual defenses are not available when

the Government makes a contract contrary to Jaw, the

Interior’s affirmative defenses are unavailing. Accord-

ingly, Interior’s affirmative defenses will be dismissed

as a matter of law.

/s/ PMINALDI

PATRICIA MINALDI

United States District Judge

23a

APPENDIX C

United States Department

of the Interior

OFFICE OF THE SECRETARY

Washington, DC 20240

JAN 6 2006

CERTIFIED MAIL—

RETURN RECEIPT REQUESTED

Dennis Bardin

Supervisor of Regulatory Accounting

Kerr-McGee Oil and Gas Corporation

16666 Northchase

Houston, TX 77060-6001

Re: Order to Report and Pay Royalties and Interest

Due under Identified Offshore Federal Oil and Gas

Leases

Dear Mr. Bardin:

The Department of the Interior hereby orders Kerr

McGee Oil and Gas Corporation (“Kerr-McGee’”) to cal-

culate, report, and pay royalties on production from the

following Federal offshore leases located on the Gulf of

Mexico outer Continental Shelf, as explained more fully

below:

Lease Number Block

0540222950 East Breaks Block 689

0540222960 East Breaks Block 690

0540190840 Garden Banks Block 197

0540190280 East Breaks Block 599

0540174060 Garden Banks Block 667

0540174070 Garden Banks Block 668

0540174080 Garden Banks Block 669

0540173070 Garden Banks Block 201

The eight leases listed above will be referred to collec-

tively as the “Kerr-McGee Leases.”

Background

A. Section 304 of the Deep Water Royalty Relief Act of

1995 and the Decision of the Fifth Circuit in Santa Fe

Snyder Corp., et al. v. Norton

On six separate dates (February 14, 2003; March 19,

20038; January 20, 2004; February 26, 2004; March 12,

2004; and December 14, 2004), the Minerals Manage-

ment (MMS), Gulf of Mexico Region, notified you that

the Kerr-MeGee Leases qualified for royalty relief un-

der section 304 of the Deep Water Royalty Relief Act of

1995 (DWRRA), Pub. L. No. 104-58, 109 Stat. 568, 565,

43 U.S.C. § 1337 note, and implementing regulations in

30 C.F.R. §§ 260.118 - 260.117 (2001-present).’

' Predecessor rules implementing DWRRA section 304 were codified

to the former 30 C.F .R. § 260.110(d) (1996-2000).

25a

Section 304 required the Secretary of the Interior to

use the bidding system of section &8{a)(1)(H) of the Out-

er Continental Shelf Lands Act of 1953, 43 U.S.C.

§ 1837(a)(1)(H) (added by DWRRA section 303, 109 Stat.

565), in all sales of deep water leases conducted within

the first 5 years after the date of the DWRRA’s enact-

ment (2.e., during the period between November 28,

1995, and November 28, 2000). The Kerr-McGee Leases

were issued under section 304. Section 304 was dis-

cussed in the decision of the United States Court of Ap-

peals for the Fifth Circuit in Santa Fe Snyder Corp., et

al. v. Norton, 385 F.3d 884 (5th Cir. 2004). That case

involved a challenge to certain of the Department’s reg-

ulations implementing section 304 that affected the cal-

culation of royalty suspension volumes if a section 304

lease was assigned to a field that was producing before

the DWRRA was enacted or if a field included more than

one section 304 lease.

B. Price Threshold Lease Terms for Leases Issued in

1996, 1997, and 2000

Leases issued under section 304 in the lease sales held

in 1996, 1997, and 2000, including the Kerr-McGee Leas-

es, make the royalty relief discussed above subject to

specified price thresholds. The price thresholds apply

regardless of whether a lease is part of a field that pro-

duced before November 28, 1995 (the DWRRA’s enact

ment) or is part of a larger field with more than one sec-

tion 304 lease. The price thresholds are incorporated in

the express terms of the lease and in the terms of the

notices of sale under which the leases were issued.

The lease terms provide that if the arithmetic average of

the closing prices on the New York Mercantile Ex-

26a

change (“NYMEX”) for crude oil or natural gas exceeds

a specified level in any year, the lessee must pay royal-

ties at the rate stipulated in the lease on all oil or gas

produced during the year. (The year refers to any cal-

endar year, and the threshold prices are adjusted in sub-

sequent years for inflation by the GDP implicit price de-

flator.) That production also counts against the section

304 royalty suspension volume.

Specifically, for the Kerr-McGee Leases issued in

Lease Sale 161 (Lease nos. 0540174060, 0540174070,

0540174080, and 0540173070) and in Lease Sale 168

(Lease nos. 0540190840 and 0540190280), the lease

terms at Lease Addendum paragraph k provide:

In any given year during which the arithmetic aver-

age of the closing prices on the New York Mercantile

Exchange for light sweet crude oil exceeds $28.00

per barrel, royalties on the production of oil must be

paid at the lease stipulated royalty rate, and produc-

tion during such years counts toward the royalty sus-

pension volume. In any year during which the arith-

metic average of the closing prices on the New York

Mercantile Exchange for natural gas exceeds $3.50

per million British thermal unit, royalties on the pro-

duction of natural gas must be paid at the lease stip-

ulated royalty rate, and production during such

years counts toward the royalty suspension volume.

These prices for oil and natural gas are as of the end

of 1994 and must be adjusted for subsequent years

by the percentage by which the implicit price defla-

tor for the gross domestic product changed during .

the preceding calendar year.

27a

For the Kerr-McGee Leases issued in Lease Sale 177

(Lease nos. 0540222950 and 0540222960), lease terms at

Lease Addendum section 6 provide:

In any year during which the arithmetic average of

the closing prices on the New York Mercantile Ex-

change (NYMEX) for light sweet crude oil exceeds

$28.00 per barrel (threshold oil price), royalties on

the production of oil must be paid at the lease stipu-

lated royalty rate, and production during such years

counts toward the royalty suspension volume.

In any year during which the arithmetic average of

the closing prices on the NYMEX for natural gas ex-

ceeds $3.50 per million British thermal units (thresh-

old gas price), royalties on the production of natural

gas must be paid at the lease stipulated royalty rate,

and production during such years counts toward the

royalty suspension volume.

These prices for oil and natural gas are as of 1994

and must be adjusted for subsequent years by the

percentage by which the implicit price deflator

for the gross domestic product changed during

the preceding calendar year. For 1999, the threshold

oil price was $30.40, compared to a $19.26 average

NYMEX oil price in 1999. For 1999, the thres-

hold gas price was $3.80, compared to $2.31 average

NYMEX gas price in 1999.

The substantive meaning of both of the quoted lease

terms is identical.

Under these lease terms, MMS’ Offshore Minerals Man-

agement (“OMM”) computes the price threshold in any

particular year for the Kerr-McGee Leases using the

28a

year over year (7.e., current year/previous year) GDP

Implicit Price Deflator to calculate the applicable infla-

tion rate. The inflation rate is multiplied by the price

threshold for the previous year. For example, to calcu-

late the 2004 oil price threshold of $33.55, divide the Im-

plicit Price Deflator for 2004 (108.22) by the Implicit

Price Deflator for 2003 (106.00) and multiply that result

by the price threshold for 2003 ($32.86).

The price thresholds derive from specific authority

granted in 43 U.S.C. § 1337(a)(1)(H). As mentioned

above, section 304 requires the Secretary to use the bid-

ding system of section 1337(a)(1)(H) in all lease sales of

deep water leases conducted between November 28,

1995, and November 28, 2000. Section 1337(a)(1)(H)

provides for a bidding system of a cash bonus payment

and royalty, “and with suspension of royalties for a pe-

riod, volume, or value of production determined by the

Secretary, which suspension may vary based on the

price of production from the lease. ” (Emphasis

added.)

The price threshold terms of the leases were not at issue

and were not involved in the Santa Fe Snyder case.

Santa Fe Snyder involved a challenge to implementing

regulations regarding section 304 leases assigned to a

field producing before the DWRRA’s enactment and

fields with more than one section 304 lease. With regard

to those issues, the court said that section 304 imposed

an “unambiguous” requirement that all leases issued

under that section were entitled to the royalty relief

volumes specified in that section without regard to

whether the field of which the lease was a part was pro-

ducing before the DWRRA was ena-ted, and that the

royalty suspension volumes specified in that section

29a

must be applied to each individual lease and not on a

“field” basis. 385 F.3d at 891-892. The Fifth Circuit fur-

ther explained:

Section 304 requires the Interior [s2c] to use the bid-

ding system in Section 808 [43 U.S.C.

§ 1337(a)(1)CH)] which includes discretionary royalty

suspension “for a period, volume, or value of produc-

tion determined by the Secretary.” That section,

however, immediately excepts and replaces Inte-

rior’s discretion with a fixed royalty suspension for

New Leases on a volume basis by providing, “except

that the suspension of royalties shall be set at a vol-

ume of not less than the following” (followed by

amounts which vary based on water depth).

385 F.3d at 892. There was no mention of the price

threshold provision of section 1337(a)(1)(H) or of the

price threshold terms of the leases. In fact, the price

thresholds are not included in the regulations at issue in

Santa Fe Snyder. These lease provisions, included pur-

suant to the Secretary’s specific authority in section

1337(a)(1)(H), reme2in in full force and effect. Kerr-

McGee therefore may not avoid enforcement of the price

threshold lease provisions on the basis of Santa Fe

Snyder.

Application of Price Thresholds

In applying the price thresholds, it is necessary to know

when production began. Production from the respective

Kerr-McGee Leases began in the month indicated be-

low:

30a

Lease Number Beginning Production Month

0540222950 May 2003

0540222960 May 2002

0540190840 February 2904

0540190280 October 2004

0540174060 December 2008

0540174070 December 2008

0540174080 December 2003

0540173070 November 2002

Therefore, 2002 is the earhest year for which price

thresholds are relevant for any of the Kerr-McGee Leas-

es.

Using the formula in the lease terms discussed above,

the price thresholds for gas for each Calendar Year (CY)

from 2002 through 2004 are:

2002 | 2003 | 2004

$4.03 | $4.11 | $4.19

For CYs 2002 through 2004, MMS/OMM calculated the

arithmetic average of the NYMEX closing prices for gas

from data published on the Oilnergy.com website. Each

day this source reports the closing price for the nearest

delivery month (¢.g., for most of March the price is for

deliveries in April, before changing to May deliveries for

about the last 5 trading days in March), as well as an

average of these values over the previous 2 months.

Monthly averages are calculated based on all days in the

month, repeating the value from the last previous trad-

ing day for non-trading days, such as weekends and holi-

days. OMM collects these monuhly figures for gas and

averages each series over the 12 months in the calendar

3la

year to calculate the average of the gas closing prices on

the NYMEX for the year. This information is posted on

MMW’ website http://www.mms.gov/econ/DWRRA

Pricel.htm.

The arithmetic averages of the NYMEX gas closing

prices for CYs 2002 through 2004 are:

2002 2003 2004

$3.36 | $5.49 | $6.18

It is readily apparent from this information that the gas

price threshold for the Kerr-McGee Leases was ex-

ceeded in CYs 2003 and 2004, but not in CY 2002.

Therefore, Kerr-McGee owes royalties on gas produced

from the identified leases during CYs 2008 and 2004.

Further, using the formula in the lease terms, the oil

price thresholds for each CY from 2002 through 2004 are

as follows:

| 2002 2003 2004

| $32.27 | $32.86 | $33.55

The arithmetic average of the NYMEX oil closing prices

is calculated in the same manner as the arithmetic aver-

age of the NYMEX gas closing prices explained above.

The arithmetic averages of the NYMEX oil closing

prices for CYs 2002 through 2004 are:

2002 2003 2004

$26.10 | $31.08 | $41.38

32a

This information shows that the oil price threshold for

the Kerr-McGee Leases was exceeded in CY 2004.

Kerr-McGee therefore owes royalties on oil produced

from the Kerr-McGee Leases during CY 2004.

Late Payment Interest

Section 111(a) of the Federal Oil and Gas Royalty Man-

agement Act of 1982 (“FOGRMA”), 30 U.S.C. § 1721(a),

provides:

In the case of oil and gas leases where royalty pay-

ments are not received by the Secretary on the date

that such payments are due, or are less than the

amount due, the Secretary shal! charge interest on

such late payments or underpayments at the rate

applicable under section 6621 of Title 26. In the case

of an underpayment or partial payment, interest

shall be computed and charged only on the amount of

the deficiency and not on the total amount due.

Subsection (f) of section 1721 further provides:

Interest shall be charged under this section only for

the number of days a payment is late.

Implementing MMS regulations at 30 C.F.R. § 218.54

provide, in relevant part:

(a) An interest charge shall be assessed on unpaid

and underpaid amounts from the date the amounts

are due.

(b) The interest charge on late payments shall be at

the underpayment rate established by the Internal

Revenue Code, 26 U.S.C. 6621(a)(2) (Supp. 1987).

the payment not received. Interest will be charged

only for the number of days the payment is late.

* * *

In the ordinary situation, royalty is due at the end of

the month following the month of production. (See

30 C.F.R. § 218.50(a) (2005) and relevant lease terms.)

Therefore, in the usual case, late payment interest ac-

ecrues on unpaid amounts after that date. Under

DWRRA section 304 leases, however, royalties were not

paid on the usual monthly basis because of the royalty

suspension provisions. Kerr-McGee now owed royalties

because the price thresholds were exceeded.

The question then becomes when a royalty payment

is “late” under these circumstances. The stauvitory pro-

visions (DWRRA section 3804 and 438 U.S.C.

§ 1337(a)(1)(H) and the lease terms are silent on the

specific question of when royalty is due if the price

thresholds are exceeded. (There are no MMS regula-

tions that address the price thresholds for section 304

leases.) The royalty suspension provisions apply unless

and until the average of the NYMEX closing prices has

exceeded the price threshold for the year. That calcula-

tion cannot be made until after the calendar year ends.

The lessee does not owe royalty under the price thresh-

olds until after the year closes. A payment therefore

cannot be “late” until sometime after the calendar year

ends. Under section 304 leases, the fact that royalty be-

comes due as a result of the price threshold having been

exceeded does not make the due date of a royalty pay-

ment retroactive to the end of the month following the

month of production.

34a

Once the objective fact that the average of the NYMEX

closing prices for the calendar year has exceeded the

price threshold occurs, royalty is owed on production

during that year as a matter of law under the lease

terms. Royalty necessarily becomes due, and late pay-

ment interest begins to accrue, no later than a reason-

able time after the end of the calendar year, because

lessees must be able to calculate the average NYMEX

closing prices.

In determining what constitutes a reasonable time, we

note that the MMS regulations applicable to the price

thresholds for discretionary royalty relief for pre-No-

vember 1995 leases and post- November 2000 leases (7.e.,

leases to which DWRRA section 304 does not apply) pre-

scribe such a time. Specifically, these paragraphs re-

quire payment of royalty in the event price thresholds

are exceeded by March 31 of the year after the year in

which that contingency occurs. 30 C.F.R. § 203.78(a)(1)

and (b)(1).°

* Title 30 C.F.R. § 203.78(a)(1) and (b)(1) also provide that lessees

who owe royalty as a result of price thresholds having been exceeded

must pay interest beginning with the month after the month of pro-

duction. On the surface, that appears to be opposed to the principle

stated above, 7.e., the fact that royalty becomes due as a result of

the price threshold having been exceeded does not make the due date

of a royalty payment retroactive to the end of the month following

the month of production. However, section 203.78(a) and (b) reflect a

unique statutory provision included in section 302 of the DWRRA, 43

U.S.C. § 1337(a)(3)(C). DWRRA section 302 provides for discretionary

royalty relief for leases already in existence in November 1995 if “new

production” (as defined in the statute) from such leases would not be

economic without royalty relief. Section 1337(a)(3)(C)(v) and (vi) re-

quire that if the price thresholds prescribed in those clauses for oil and

gas, respectively, are exceeded, “any production of [cil or gas] will be

subject to royalties at the lease stipulated royalty rate.’ These clauses

apa

If three months after the close of the calendar year is a

reasonable period in which to calculate the average

NYMEX closing prices and to calculate and report any

royalties due in the context of price thresholds for dis-

cretionary royalty relief for leases not subject to

DWRRA section 304, it would also be a reasonable time

to perform the same functions under section 304 leases.”

then further provide that “(e)]stimated royalty payments will be made

if such average of the closing prices for the previous year exceeds

$28.00. After the end of the calendar year, when the new average price

can be calculated, lessees will pay any royalty due, with interest but

without penalty, or can apply for a refund, with interest, of any over-

payment.” Section 203.78(a) and (b) in the regulations implement this

requirement (and also extend it by rule to post-November 2000 leas-

es under the general royalty relief authority granted in 43 U.S.C.

§ 1337(a)(3)(B)). DWRRA section 304 contains no analogous provisions

requiring estimated payments if the price thresholds were exceeded in

the preceding year with a subsequent “true up” after the end of the cal-

endar year. Thus, similar interest requirements beginning with the

month after the month of production would not apply to the Kerr

McGee Leases.

* It may be argued that because royalty is due at the end of the

month following the month of production unless royalty suspension pro

visions apply, royalty becomes due immediately once the suspension

provisions no longer apply as a result of the price threshold contingency

having occurred. Under such a view, royalty would be due at the end

of the first month of production following the year in which the price

thresholds were exceeded (7.¢., the end of January of the following year,

which also would be the due date for royalties owed on production in

December). Nor would it appear unreasonable to expect that lessees

could calculate average NYMEX closing prices and calculate royalties

due for the year within a month after the year closes. Under that ap

proach, late payment interest would begin to accrue after January 31

However, the regulations discussed above applicable to royalty relief

for leases not subject to section 304 did not take that position, and this

decision is consistent with the approach taken in those rules—a result

favorable to the lessee.

aba

Therefore, Kerr-McGee must calculate and pay late pay

ment interest beginning on April 1 of the year after the

year in which a price threshold was exceeded.

Ownership Interest in the Kerr-McGee Leases

Section 6(g¢) of the Federal Oil and Gas Royalty Simplifi-

‘ation and Fairness Act of 1996, Pub. L. No. 104-185,

110 Stat. 1700, 1715, amended FOGRMA section 102(a),

30 U.S.C. § 1712(a), to provide in relevant part:

. . Alessee may designate a person to make all or

part of the payments due under a lease on the les-

see’s behalf and shall notify the Secretary or the ap-

plicable delegated State in writing of such designa-

tion, in which event said designated person may, in

its own name, pay, offset or credit monies, make ad-

justments, request and receive refunds and submit

reports with respect to payments required by the

lessee. Notwithstanding any other provision of this

Act to the contrary, a designee shall not be liable for

any payment obligation under the lease. The person

owning operating rights in a lease shall be primar-

ily liable for its pro rata share of payment obliga-

tions under the lease. If the person owning the legal

record title in a lease is other than the operating

rights owner, the person owning the legal record title

shall be secondarily liable for its pro rata share of

such payment obligations under the lease. (Empha-

sis added.)

The MMS records indicate t' .at during the relevant peri-

ods covered by this decision, Kerr-MceGee owned (and

presently owns):

ory

ota

50 percent of the working interest in Lease nos.

0540174060, 0540174070, 0540174080, 0540222950,

and 0540222960. Other co-lessees own the other

50 percent of the working interest. According to

MMS records, operating rights have not been

severed from the record title interest.

66.67 percent of the operating rights (and essen-

tially the same proportion (66.66663 percent) of

the record title interest) in Lease no. 0540190840.

Other interest holders own the remaining 33.33

percent of both the operating rights and the re-

cord title interest.

33.3333 percent of the working interest in Lease

no. 0540190280. Other interest holders own the

est. According to MMS records, operating rights

have not been severed from the record title inter-

est.

25 percent of the operating rights from the sur-

face of the earth down through 15,000 feet and

16.6667 percent of the operating rights from

15,000 feet through 50,000 feet (but none of the

record title interest) in Lease no. 0540173070.

Other interest holders own the remaining 75 per

cent and 88.33 percent, respectively, of the oper-

ating rights in the identified depth zones. Yet

another interest holder owns 100 percent of the

record title interest.

Requirement to Calculate and Pay Royalties and Interest

Gas

For the reasons explained above, Kerr-McGee is hereby

ordered to calculate, report, and pay royalties on the

percentage of all volumes of gas removed or sold from

each of the Kerr-McGee Leases during CYs 2003 and

2004 that corresponds to its respective working interest

or operating rights ownership percentage in each lease.’

Kerr-McGee is also ordered to calculate, report, and pay

late payment interest under 30 U.S.C. § 1721(a) and 30

C.F.R. § 218.54 beginning on:

CY 2003 and continuing until payment is made to

MMS; and

April 1, 2005, for royalties due on production in

CY 2004 and continuing until payment is made to

MMS.

Oil

Kerr-McGee is further ordered to calculate, report, and

pay royalties on the percentage of all volumes of oil re-

moved or sold from each of the Kerr-McGee Leases dur-

ing CY 2004 that corresponds to Kerr-McGee’s respec-

tive operating rights ownership percentage in each

lease, together with late payment interest under 30

U.S.C. § 1721(a) and 30 C.F.R. § 218.54 beginning on

April 1, 2005, until payment is made to MMS.

* The requirement to pay royalties does not apply to production that

is not royalty bearing in the absence of royalty relief, such as gas that

is unavoidably lost or gas used on or for the benefit of the lease.

39a

Kerr-McGee is further ordered to submit its reports and

payments within 45 days after receipt of this Order.

How to Report and Pay

Under 30 C.F.R. § 210.20, you must report electronically

unless you are exempted under 30 C.F.R. § 210.22. Un-

der 30 C.F.R. § 218.51, you must pay electronically un-

less it is not cost-effective or practical to do so. When

reporting and paying:

electronic reporting of Form MMS-2014. Complete

reporting instructions are found in chapter 9 of the

Minerals Revenue Reporter Handbook—Oil, Gas,

and Geothermal Resources. This information is also

on the MMS website at www.mrm.mms.gov.

electronic payments and the Automated Clearing

House/FE DWIRE instructions on the MMS website

at www.mrm.mms.gov/KeportingServices/

ElecRepting. Be sure to reference the Form MMS-

2014 block 4 number in the electronic payment docu-

ment. Use adjustment reason code 17 on your Form

MMS-2014. Place the number 82029718 in block 4.

If you need assistance in reporting and paying, please

call (800) 525-0309.

Consequences of Noncompliance

If you fail to comply with this decision, MMS may assess

civil penalties under FOGRMA section 109, 30 U.S.C. §

1719, and implementing regulations at 30 C.F.R. Part

241. The Department of the Interior may also seek judi-

40a

cial enforcement of this decision and pursue any other

available remedies.

Final Departmental Decision

Because this decision is issued by an Assistant Secretary

of the Department of the Interior, it constitutes the final

action of the Department and is not appealable to the

Interior Board of Land Appeals. Blue Star, Inc., 41

IBLA 3233 (1979); Marathon Oil Co., 102 IBLA 177

(1989).

Sincerely,

JOHNNIE BURTON

R.M. “Johnnie” Burton

Acting Assistant Secretary

Land and Minerals Management

Ala

APPENDIX D

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 08-30069

KERR-MCGEE OIL AND GAS CORP.,

PLAINTIFF-APPELLEE

UNITED STATES DEPARTMENT OF INTERIOR;

C. STEPHEN ALLRED, ASSISTANT SECRETARY, ON

BEHALF OF LAND & MINERALS MANAGEMENT, ON

BEHALF OF UNITED STATES DEPARTMENT OF

INTERIOR, DEFENDANTS-APPELLANTS

[Filed: Apr. 14, 2009]

Appeal from the United States District Court for the

Western District of Louisiana at Lake Charles

ON PETITION FOR REHEARING EN BANC

(Opinion , & Cir., F.3d

42a

Before: KING, DENNIS, and ELROD, Circuit Judges.

PER CURIAM:

Treating the Petition for Rehearing En Banc as a Pe-

tition for Panel Rehearing, the Petition for Panel Re-

hearing is DENIED. No member of the panel nor judge

in regular active service of the court having requested

that the court be polled on Rehearing En Banc (FED. R.

APP. P. and 5TH CIR. R. 35), the Petition for Rehearing

En Banc is DENIED.

ENTERED FOR THE COURT:

/s/ CAROLYN DINEEN KING

United States Circuit Judge

Asa

APPENDIX E

1. 43 U.S.C. 1334 provides in pertinent part:

Administration of leasing

(a) Rules and regulations; amendment; cooperation with

State agencies; subject matter and scope of regula-

tions

The Secretary shall administer the provisions of this

subchapter relating to the leasing of the onter Continen-

tal Shelf, and shall prescribe such rules and regulations

as may be necessary to carry out such provisions. The

Secretary may at any time prescribe and amend such

rules and regulations as he determines to be necessary

and proper in order to provide for the prevention of

waste and conservation of the natural resources of the

outer Continental Shelf, and the protection of correla-

tive rights therein, and, notwithstanding any other pro-

visions herein, such rules and regulations shall, as of

their effective date, apply to all operations conducted

under a lease issued or maintained under the provisions

of this subchapter. In the enforcement of safety, envi-

ronmental, and conservation laws and regulations, the

Secretary shall cooperate with the relevant departments

and agencies of the Federal Government and of the af-

fected States. In the formulation and promulgation of

regulations, the Secretary shall request and give due

consideration to the views of the Attorney General with

respect to matters which may affect competition. In

considering any regulations and in preparing any such

views, the Attorney General shall consult with the Fed-

eral Trade Commission. The regulations prescribed by

44a

the Secretary under this subsection shall include, but

not be limited to, provisions—

(1) for the suspension or temporary prohibition

of any operation or activity, including production,

pursuant to any lease or permit (A) at the request of

a lessee, in the national interest, to facilitate proper

development of a lease or to allow for the construc-

tion or negotiation for use of transportation facilities,

or (B) if there is a threat of serious, irreparable, or

immediate harm or damage to life (including fish and

other aquatic life), to property, to any mineral depos-

its (in areas leased or not leased), or to the marine,

eoastal, or human environment, and for the extension

of any permit or lease affected by suspension or pro-

hibition under clause (A) or (B) by a period equiva-

lent to the period of such suspension or prohibition,

except that no permit or lease shall be so extended

when such suspension or prohibition is the result of

gross negligence or willful violation of such lease or

permit, or of regulations issued with respect to such

lease or permit;

(2) with respect to cancellation of any lease or

permit—

(A) that such cancellation. may occur at any

time, if the Secretary determines, after a hearing,

that—

(i) continued activity pursuant to such lease

or permit would probably cause serious harm

or damage to life (including fish and other

aquatic life), to property, to any mineral (in ar-

eas leased or not leased), to the national secu-

45a

rity or defense, or to the marine, coastal, or hu-

man environment;

Gi) the threat of harm or damage will not dis-

appear or decrease to an acceptable extent

within a reasonable period of time; and

(ii1) the advantages of cancellation outweigh

the advantages of continuing such lease ur per-

mit force;

(B) that such cancellation shall not occur unless

and until operations under such lease or permit

shall have been under suspension, or temporary

prohibition, by the Secretary, with due extension

of any lease or permit term continuously for a

period of five years, or for a lesser period upon

request of the lessee;

see to receive such compensation as he shows to

the Secretary as being equal to the lesser of (i)

the fair value of the canceled rights as of the date

of cancellation, taking account of both anticipated

revenues from the lease and anticipated costs,

including costs of compliance with all applicable

regulations and operating orders, liability for

cleanup.costs or damages, or both, in the case of

an oilsp?’l, and all other costs reasonably antici-

pated on the lease, or (ii) the excess, if any, over

the lessee’s revenues, from the lease (plus inter-

est thereon from the date of receipt to date of

reimbursement) of all consideration paid for the

lease and all direct expenditures made by the les-

see after the date of issuance of such lease and in

connection with exploration or development, or

46a

bot.t, pursuant to the lease (plus interest on such

consideration and such expenditures from date of

payment to date of reimbursement), except that

(1) with respect to leases issued before Septem-

ber 18, 1978, such compensation shall be equal to

the amount specified in clause (i) of this subpara-

graph; and (II) in the case of joint leases which

are canceled due to the failure of one or more

partners to exercise due diligence, the innocent

parties shall have the right to seek damages for

such loss from the responsible party or parties

and the right to acquire the interests of the negli-

gent party or parties and be issued the lease in

question;

(3) for the assignment or relinquishment of a

lease;

(4) for unitization, pooling, and drilling agree-

ments;

(5) for the subsurface storage of oil and gas from

any source other than by the Federal Government;

(6) for drilling or easements necessary for explo-

ration, development, and production;

(7) for the prompt and efficient.exploration and

development of a lease area; and

(8) for compliance with the national ambient air

quality standards pursuant to the Clean Air Act (42

U.S.C. 7401 et seq.), to the extent that activities au-

thorized under this subchapter significantly affect

the air quality of any State.

a a ee ee

A4Va

2. 43 U.S.C. 1337 provides in pertinent part:

Leases, easements, and rights-of-way on the outer Conti-

nental Shelf

(a) Oil and gas leases; award to highest responsible qual-

ified bidder; method of bidding; royalty relief; Con-

gressional consideration of bidding system; notice

(1) The Secretary is authorized to grant to the high-

est responsible qualified bidder or bidders by competi-

tive bidding, under regulations promulgated in advance,

any oil and gas lease on submerged lands of the outer

Continental Shelf which are not covered by leases meet-

ing the requirements of subsection (a) of section 1335 of

this title. Such regulations may provide for the deposit

of cash bids in an interest-bearing account until the Sec-

retary announces his decision on whether to accept the

bids, with the interest earned thereon to be paid to the

Treasury as to bids that are accepted and to the unsuc-

cessful bidders as to bids that are rejected. The bidding

shall be by sealed bid and, at the discretion of the Secre-

tary, on the basis of—

(A) cash bonus bid with a royalty at not less than

12% per centum fixed by the Secretary in amount or

value of the production saved, removed, or sold;

(B) variable royalty bid based on a per centum in

amount or value of the production saved, removed, or

sold, with either a fixed work commitment based on

dollar amount for exploration or a fixed cash bonus

as determined by the Secretary, or both;

based on a dollar amount for exploration with a fixed

eash bonus, and a diminishing or sliding royalty

48a

based on such formulae as the Secretary shall deter-

mine as equitable to encourage continued production

from the lease area as resources diminish, but not

less than 12% per centum at the beginning of the

lease period in amount or value of the production

saved, removed, or sold;

(D) cash bonus bid ‘vith a fixed share of the net

profits of no less than 30 per centum to be derived

from the production of oil and gas from the lease

area;

(KE) fixed cash bonus with the net profit share

reserved as the bid variable;

(F) cash bonus bid with a royalty at no less than

12% per centum fixed by the Secretary in amount or

value of the production saved, removed, or sold and

a fixed per centum share of net profits of no less than

30 per centum to be derived from the production of

oil and gas from the lease area;

(G) work commitment bid based on a dollar

amount for exploration with a fixed cash bonus and

a fixed royalty in amount or value of the production

saved, removed, or sold;

(H) cash bonus bid with royalty at no less than 12

and % per centum fixed by the Secretary in amount

or value of production saved, removed, or sold, and

with suspension of royalties for a period, volume, or

value of production determined by the Secretary,

which suspensions may vary based on the price of

production from the lease; or

(1) subject to the requirements of paragraph (4)

of this subsection, any modification of bidding sys-

4Va

tems authorized in suparagraphs (A) through (G), or

any other systems of bid variables, terms, and condi-

tions which the Secretary determines to be useful to

accomplish the purposes and policies of this subchap-

ter, except that no such bidding system or modifica-

tion shall have more than one bid variable.

(2) The Secretary may, in his discretion, defer any

part of the payment of the cash bonus, as authorized in

paragraph (1) of this subsection, according to a schedule

announced at the time of the announcement of the lease

sale, but such payment shall be made in total no later

than five years after the date of the lease sale.

(3)(A) The Secretary may, in order to promote in-

creased production on the lease area, through direct,

secondary, or tertiary recovery means, reduce or elimi-

nate any royalty or net profit share set forth in the lease

for such area.

(B) In the Western and Central Planning Areas of

the Gulf of Mexico and the portion of the Eastern Plan-

ning Area of the Gulf of Mexico encompassing whole

lease blocks lying west of 87 degrees, 30 minutes West

longitude and in the Planning Areas offshore Alaska, the

Secretary may, in order to—

(i) promote development or increased produc

tion on producing or non-producing leases; or

(ii) encourage production of marginal resources

on producing or non-producing leases;

through primary, secondary, or tertiary recovery means,

reduce or eliminate any royalty or net profit share set

forth in the lease(s). With the Jessee’s consent, the Sec

retary may make other modifications to the royalty or

50a

net profit share terms of the lease in order to achieve

these purposes.

(C)G) Notwithstanding the provisions of this sub-

chapter other than this subparagraph, with respect to

any lease or unit in existence on November 28, 1995,

meeting the requirements of this subparagraph, no roy-

alty payments shall be due on new production, as de

fined in clause (iv) of this subparagraph, from any lease

or unit located in water depths of 200 meters or greater

in the Western and Central Planning Areas of the Gulf

of Mexico, including that portion of the Eastern Plan-

ning Area of the Gulf of Mexico encompussing whole

lease blocks lying west of 87 degrees, 30 minutes West

longitude, until such volume of production as determined

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

(ii) Upon submission of a complete application by

the lessee, the Secretary shall determine within 180

days of such application whether new production from

such lease or unit would be economic in the absence of

the relief from the requirement to pay royalties pro-

vided for by clause (i) of this subparagraph. In making

such determination, the Secretary shall consider the

increased technological and financial risk of deep water

development and all costs associated with exploring,

developing, and producing from the lease. The lessee

shall provide information required for a complete appli-

cation to the Secretary prior to such determination. The

Secretary shall clearly define the information required

for a complete application under this section. Such ap-

plication may be made on the basis of an individual lease

or unit. If the Secretary determines that such new pro

duction would be economic in the absence of the relief

from the requirement to pay royalties provided for by

Hla

clause (i) of this subparagraph, the provisions of clause

(i) shall not apply to such production. If the Secretary

determines that such new production would not be eco

nomic in the absence of the relief from the requirement

to pay royalties provided for by clause (i), the Secretary

must determine the volume of production from the lease

or unit on which no royalties would be due in order to

make such new production economically viable; except

that for new production as defined in clause (iv)(1I), in no

case will that volume be less than 17.5 million barrels of

oil equivalent in water depths of 200 to 400 meters, 52.5

million barrels of oil equivalent in 400-800 meters of wa-

ter, and 87.5 million barrels of oil equivalent in water

depths greater than 800 meters. Redetermination of the

applicability of clause (i) shall be undertaken by the Sec-

retary when requested by the lessee prior to the com-

mencement of the new production and upon significant

change in the factors upon which the original determina-

tion was made. The Secretary shall make such redeter-

mination within 120 days of submission of a complete

application. The Secretary may extend the time period

for making any determination or redetermination under

this clause for 30 days, or longer if agreed to by the ap-

plicant, if circumstances so warrant. The lessee shall be

notified in writing of any determination or redetermin

ation and the reasons for and assumptions used for such

determination. Any determination or redetermination

under this clause shall be a final agency action. The Sec

retary’s determination or redetermination shall be judi-

cially reviewable under section 702 of title 5, only for

actions filed within 30 days of the Secretary’s determi

nation or redetermination

(iii) In the event that the Secretary fails to make the

determination or redetermination called for in clause (ii)

dbZa

upon application by the lessee within the time period,

together with any extension thereof, provided for by

clause (ii), no royalty payments shall be due on new pro-

duction as follows:

(1) For new production, as defined in clause

(iv)(1) of this subparagraph, no royalty shall be due

on such production according to the schedule of mini-

mum volumes specified in clause (ii) of this subpara

graph.

(iv)

(Il) For new production, as defined in clause

(II) of this subparagraph, no royalty shall be due

on such production for one year following the start of

such production.

(iv) For purposes of this subparagraph, the term

“new production” is—

(Vv)

(I) any production from a lease from which no

royalties are due on production, other than test

production, prior to November 28, 1995; or

(II) any production resulting from lease devel-

opment activities pursuant to a Development Op

erations Coordination Document, or supplement

thereto that would expand production signifi-

cantly beyond the level anticipated in the Devel-

opment Operations Coordination Document, ap-

proved by the Secretary after November 28,

L9OQD5.

During the production of volumes determined

pursuant to clauses’ (ii) or (iii) of this subparagraph, in

any year during which the arithmetic average of the

So in orginal, Probably should be “clause”

53a

closing prices on the New York Mercantile Exchange for

light sweet crude oil exceeds $28.00 per barrel, any pro-

duction of oil will be subject to royalties at the lease

stipulated royalty rate. Any production subject to this

clause shall be counted toward the production volume

determined pursuant to clause (li) or (111). Estimated

royalty payments will be made if such average of the

closing prices for the previous year exceeds $28.00. Af-

ter the end of the calendar year, when the new average

price can be calculated, lessees will pay any royalties

due, with interest but without penalty, or can apply for

a refund, with interest, of any overpayment.

(vi) During the production of volumes determined

pursuant to clause (ii) or (iii) of this subparagraph, in

any year during which the arithmetic average of the

closing prices on the New York Mercantile Exchange for

natural gas exceeds $3.50 per million British thermal

units, any production of natural gas will be subject to

royalties at the lease stipulated royalty rate. Any pro-

duction subject to this clause shall be counted toward

the production volume determined pursuant to clauses’

(ii) or (iii). Estimated royalty payments will be made if

such average of the closing prices for the previous year

exceeds $3.50. After the end of the calendar year, when

the new average price can be calculated, lessees will pay

any royalties due, with interest but without penalty, or

can apply for a refund, with interest, of any overpay-

ment.

(vii) The prices referred to in clauses (v) and (vi) of

this subparagraph shall be changed during any calendar

year after 1994 by the percentage, if any, by which the

' So in original. Probably should be “clause”.

54a

implicit price deflator for the gross domestic product

changed during the preceding calendar year.

(4)(A) The Secretary of Energy shall submit any bid-

ding. system authorized in subparagraph (H) of para-

graph (1) to the Senate and House of Representatives.

The Secretary may institute such bidding system unless

either the Senate or the House of Representatives pass-

es a resolution of disapproval within thirty days after re-

ceipt of the bidding system.

(B) Subparagraphs (C) through (J) of this paragraph

are enacted by Congress—

(i) . as an exercise of the rulemaking power of the

Senate and the House of Representatives, respec-

tively, and as such they are deemed a part of the

rules of each House, respectively, but they are appli-

cable only with respect to the procedures to be fol-

lowed in that House in the case of resolutions de-

scribed by this paragraph, and they supersede other

rules only to the extent that they are inconsistent

therewith; and

(ii) with full recognition of the constitutional

right of either House to change the rules (so far as

relating to the procedure of that House) at any time,

in the same manner, and to the same extent as in the

case of any other rule of that House.

mitted pursuant to this paragraph shall immediately be

referred to a committee (and all resolutions with respect

to the same request shall be referred to the same com-

mittee) by the President of the Senate or the Speaker of

the House of Representatives, as the case may be.

5ba

(D) If the committee to which has been referred any

resolution disapproving the bidding system of the Secre-

tary has not reported the resolution at the end of ten

calendar days after its referral, it shall be in order to

move either to discharge the committee from further

consideration of the resolution or to discharge the com-

mittee from further consideration of any other resolu-

tion with respect to the same bidding system which has

been referred to the committee.

(EK) A motion to discharge may be made only by an

individual favoring the resolution, shall be highly privi-

leged (except that it may not be made after the commit-

tee has reported a resolution with respect to the same

recommendation), and debate thereon shall be limited to

not more than one hour, to be divided equally between

those favoring and those opposing the resolution. An

amendment to the motion shall not be in order, and it

shall not be in order to move to reconsider the vote by

which the motion is agreed to or disagreed to.

(F) If the motion to discharge is agreed to or dis-

agreed to, the motion may not be renewed, nor may an-

other motion to discharge the committee be made with

respect to any other resolution with respect to the same

bidding system.

(G) When the committee has reported, or has been

discharged from further consideration of, a resolution as

provided in this paragraph, it shall be at any time there-

after in order (even though a previous motion to the

same effect has heen disagreed to) to move to proceed to

the consideration of the resolution. The motion shall be

highly privileged and shall not be debatable. An amend-

ment to the motion shall not be in order, and it shall] not

56a

be in order to move to reconsider the vote by which the

motion is agreed to or disagreed to.

(H) Debate on the resolution is limited to not more

than two hours, to be divided equally between those fa-

voring and those opposing the resolution. A motion fur-

ther to limit debate is not debatable. An amendment to,

or motion to recommit, the resolution is not in order, and

it is not in order to move to reconsider the vote by which

the resolution is agreed to or disagreed to.

(I) Motions to postpone, made with respect to the

discharge from the committee, or the consideration of a

resolution with respect to a bidding system, and motions

to proceed to the consideration of other business, shall

be decided without debate.

(J) Appeals from the decisions of the Chair relating

to the application of the rules of the Senate or the House

of Representatives, as the case may be, to the procedure

relating to a resolution with respect to a bidding system

shall be decided without debate.

(5)(A) During the five-year period commencing on

September 18, 1978, the Secretary may, in order to ob-

tain statistical information to determine which bidding

alternatives will best accomplish the purposes and poli-

cies of this subchapter, require, as to no more than 10

per centum of the tracts offered each year, each bidder

to submit bids for any area of the outer Continental

Shelf in accordance with more than one of the bidding

systems set forth in paragraph (1) of this subsection.

For such statistical purposes, leases may be awarded

using a bidding alternative selected at random for the

acquisition of valid statistical data if such bidding alter-

native is otherwise consistent with the provisions of this

subchapter.

57a

(B) The bidding systems authorized by paragraph

(1) of this subsection, other than the system authorized

by subparagraph (A), shall be applied to not less than 20

per centum and not more than 60 per centum of the total

area offered for leasing each year during the five-year

period beginning on September 18, 1978, unless the Sec-

retary determines that the requirements set forth in this

subparagraph are inconsistent with the purposes and

policies of this subchapter.

(6) At least ninety days prior to notice of any lease

sale under subparagraph (D), (E), (F), or, if appropriate,

(H) of paragraph (1), the Secretary shall by regulation

establish rules to govern the calculation of net profits.

In the event of any dispute between the United States

and a lessee concerning the calculation of the net profits

under the regulation issued pursuant to this paragraph,

the burden of proof shall be on the lessee.

(7) After an oil and gas lease is granted pursuant to

any of the work commitment options of paragraph (1) of

this subsection—

(A) the lessee, at its option, shall deliver to the

Secretary upon issuance of the lease either (i) a cash

deposit for the full amount of the exploration work

commitment, or (il) a performance bond in form and

substance and with a surety satisfactory to the Sec-

retary, in the principal amount of such exploration

work commitment assuring the Secretary that such

commitment shall be faithfully discharged in accor-

dance with this section, regulations, and the lease;

and for purposes of this subparagraph, the principal

amount of such cash deposit or bond may, in accor-

dance with regulations, be pericdically reduced upon

58a

proot, satisfactory to the Secretary, that a portion of

the exploration work commitment has been satisfied;

(B) 50 per centum of all exploration expenditures

on, or directiy related to, the lease, including, but not

limited to (i) geological investigations and related ac-

tivities, (ii) geophysical investigations including seis-

mic, geomagnetic, and gravity surveys, data process-

ing umd interpretation, and (iii) exploratory drilling,

core drilling, rearilling, and well completion or aban-

donment, including the drilling of wells sufficient to

determine the size and a real extent of any newly

discovered field, and ineluding the cost of mobiliza-

tion and demobilization of drilling equipment, shall

be included in satisfaction of the commitment, except

that the lessee’s general overhead cost shall not be

so included against the work commitment, but its

cost (including employee benefits) of employees di-

rectly assigned to such exploration work shall be so

included; and

including any extension thereof, the full dollar

amount of the exploration work commitment has not

been satisfied, the balance shall then be paid in cash

to the Secretary.

(8} Not later than thirty days before any lease sale,

the Secretary shall submit to the Congress and publish

in the Federal Register a notice-—

(A) identifying any bidding system which will be

utilized for such lease sale and the reasons for the

utilization of such bidding system; and

(B) designating the lease tracts selected which

are to be offered in such sale under the bidding sys-

59a

tem authorized by subparagraph (A) of paragraph

(1) and the lease tracts selected which are to be of-

fered under any one or more of the bidding systems

authorized by subparagraphs (B) through (H) of

paragraph (1), and the reasons such lease tracts are

to be offered under a particular bidding system.

(b) Terms and provisions of oil and gas leases

An oil and gas lease issued pursuant to this section

shall—

(1) be for a tract consisting of a compact area not

exceeding five thousand seven hundred and sixty

acres, as the Secretary may determine, unless the

Secretary finds that a larger area is necessary to

comprise a reasonable economic production unit;

(2) be for an initial period of—

(A) five years; or

(B) not to exceed ten years where the Secretary

finds that such longer period is necessary to en-

courage exploration and development in areas

because of unusually deep water or other unusu-

ally adverse conditions,

and as long after such initial period as oil or gas is

produced from the area in paying quantities, or drill-

ing or well reworking operations as approved by the

Secretary are conducted thereon;

(3) require the payment of amount or value as

determined by one of the bidding systems set forth

in subsection (a) of this section;

60a

(4) entitle the lessee to explore, develop, and

produce the oil and gas contained within the lease

area, conditioned upon due diligence requirements

and the approval of the development and production

plan required by this subchapter;

(5) provide for suspension or cancellation of the

lease during the initial lease term or thereafter pur-

suant to section 1334 of this title;

(6) contain such rental and other provisions as

the Secretary may prescribe at the time of offering

the area for lease; and

(7) provide a requirement that the lessee offer 20

per centum of the crude oil, condensate, and natural

gas liquids produced on such lease, at the market

value and point of delivery applicable to Federal] roy-

alty oil, to small or independent refiners as defined

in the Emergency Petroleum Allocation Act of 1973

[15 U.S.C. 751 et seq. }.

s+ * ©

3. 43 U.S.C. 1344 provides in pertinent part:

Outer Continental Shelf leasing program

(a) Schedule of proposed oil and gas lease sales

The Secretary, pursuant to procedures set forth in

subsections (c) and (d) of this section, shall prepare and

periodically revise, and maintain an oil and gas leasing

program to implement the policies of this subchapter.

The leasing program shall consist of a schedule of pro-

posed lease sales indicating, as precisely as possible, the

size, timing, and location of leasing activity which he

bla

determines will best meet national energy needs for the

five-year period following its approval or reapproval.

Such leasing program shali be prepared and maintained

in a manner consistent with the following principles:

(1) Management of the outer Continental Shelf

shall be conducted in a manner which considers eco-

nomic, social, and environmental values of the renew-

able and nonrenewable resources contained in the

outer Continental Shelf, and the potential impact of

oil and gas exploration on other resource values of

the outer Continental Shelf and the marine, coastal,

and human environments.

(2) Timing and location of exploration, develop-

ment, and production of oil and gas among the oil-

and gas-bearing physiographic regions of the outer

Continental Shelf shall be based on a consideration

of—

(A) existing information concerning the geo-

graphical, geological, and ecological characteris-

tics of such regions;

(B) an equitable sharing of developmental ben-

efits and environmental risks among the various

regions;

and the relative needs of, regional and national

energy markets;

(D) the location of such regions with respect to

other uses of the sea and seabed, including fisher-

ies, navigation, existing or proposed sealanes,

potential sites of deepwater ports, and other an-

62a

ticipated uses of the resources and space of the

outer Continental Shelf;

(E) the interest of potential oil and gas produc-

ers in the development of oil and gas resources as

indicated by exploration or nomination;

(F) laws, goals, and policies of affected States

which have been specifically identified by the

Governors of such States as relevant matters for

the Secretary’s consideration;

(G) the relative environmental sensitivity and

marine productivity of different areas of the

outer Continental Shelf; and

(H) relevant environmental and predictive in-

formation for different areas of the outer Conti-

nental Shelf.

(3) The Secretary shall select the timing and lo-

cation of leasing, to the maximum extent practicable,

so as to obtain a proper balance between the poten-

tial for environmental damage, the potential for the

discovery of oil and gas, and the potential for ad-

verse impact on the coastal zone.

(4) Leasing activities shall be conducted to as-

sure receipt of fair market value for the lands leased

and the rights conveyed by the Federal Government.

.’ 6 2. 6 es

4. Quter Continental Shelf Deep Water Royalty Relief

Act, Pub. L. No. 104-58, §§ 304 and 305, 109 Stat. 565-

566 (1995), provide:

63a

SEC. 304. LEASE SALES.

For al) tracts located in water depths of 200 meters

or greater in the Western and Central Planning Area of

the Gulf of Mexico, including that portion of the Eastern

Planning Area of the Gulf of Mexico encompassing whole

lease blocks lying west of 87 degrees, 30 minutes West

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

enactment of this title, shall use the bidding system au-

thorized in section 8(a)(1)(H) of the Outer Continental

Shelf Lands Act, as amended by this title, except that

the suspension of royalties shall be set at a volume of not

less than the following:

(1) 17.5 million barrels of oil equivalent for leas-

es in water depths of 200 to 400 meters;

(2) 52.5 million barrels of oil equivalent for leas-

es in 400 to 800 meters of water; and

(3) 87.5 million barrels of oil equivalent for leas-

es in water depths greater than 800 meters.

SEC. 305. REGULATIONS.

The Secretary shall promulgate such rules and regu-

lations as are necessary to implement the provisions of

this title within 180 days after the enactment of this Act.

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.