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FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT December 22, 2022
_________________________________
Christopher M. Wolpert
Clerk of Court
MERIT ENERGY COMPANY, LLC;
MERIT ENERGY OPERATIONS I, LLC,
Plaintiffs - Appellants/Cross-
Appellees,
Nos. 21-8047 and 21-8048
v. (D.C. No. 2:20-CV-00032-SWS)
(D. Wyo.)
DEBRA HAALAND, in her official
capacity as Secretary of the Interior; U.S.
OFFICE OF NATURAL RESOURCES
REVENUE,
Defendants - Appellees/Cross-
Appellants.
_________________________________
ORDER AND JUDGMENT*
_________________________________
Before TYMKOVICH, KELLY, and MATHESON, Circuit Judges.
_________________________________
Plaintiff-Appellants/Cross-Appellees Merit Energy Co., LLC and Merit
Energy Operations I, LLC (collectively “Merit”) own two oil leases on tribal land.1
Merit appeals from the district court’s finding that the Department of the Interior’s
*
This order and judgment is not binding precedent, except under the doctrines
of law of the case, res judicata, and collateral estoppel. It may be cited, however, for
its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
1
We note that one of Merit’s leases, the “Steamboat Butte” lease, is set to
expire on December 31, 2022. IV Aplt. App. 633. Merit’s other lease, the “Circle
Ridge” lease, expired on December 31, 2020, and was not renewed by Merit. III
Aplt. App. 601, 605; see Aplee. Reply Br. at 11–12.
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Indian oil major portion regulation, 30 C.F.R. § 1206.54 (2015), which contains a
formula to calculate royalties due for oil leases on tribal land, is consistent with the
royalty payment provisions in two of their oil leases. Defendant-Appellees/Cross-
Appellants Secretary of the Interior Debra Haaland and the U.S. Office of Natural
Resource Revenue (ONRR) (collectively “the Agency”) cross-appeal from the district
court’s findings that (1) the case is ripe and (2) the 10% cap on adjustments within
the Agency’s royalty payment formula in the Regulation was arbitrary and
capricious. Our jurisdiction arises under 28 U.S.C. § 1291 and we affirm.
Background
This appeal concerns two of Merit’s oil leases, the “Steamboat Butte” and “Circle
Ridge” leases, located on the Wind River Reservation in Wyoming. Merit pays royalties
on the oil it produces, saves, or sells based on a percentage of the oil’s value to the
ONRR pursuant to its lease terms and subject to governing regulations. I Aplt. App. 190.
Each lease contains a “major portion provision” which gives the Secretary discretion to
calculate a “value” for royalty purposes to ensure the Tribes receive royalties consistent
with market prices. Id. 190–91. The major portion provision, which is the same in both
of Merit’s leases, states:
“Value” may, in the discretion of the Secretary, be calculated on the
basis of the highest price paid or offered . . . at the time of production for
the major portion of the oil of the same quality and gravity, and gas, and/or
natural gasoline, and/or all other hydrocarbon substances produced, sold,
and saved from the area where the Leased Premises are situated.
III Aplt. App. 607 (Circle Ridge Lease); IV Aplt. App. 651 (Steamboat Butte Lease).
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The only term defined in the provision is “Leased Premises,” defined as specific “tracts
of land situated in the Reservation.” III Aplt. App. 603; IV Aplt. App. 647.
The ONRR acts as a trustee for the Tribes and collects oil and gas royalties from
companies operating on tribal land. II Aplt. App. 270–71. The ONRR promulgated
regulations to calculate “value,” as referred to in Merit’s lease provisions. I Aplt. App.
191. Prior to 2015, the regulations corresponded to the language in Merit’s leases. Id.
192. In 2011 and 2012, the Secretary began to reevaluate how to calculate “value” for
the major portion of oil produced from Indian leases with a rulemaking committee. Id.
192–93; see II Aplt. App. 262. One of the committee’s goals was to ensure the Tribes
received maximum revenues under the government’s trust responsibility, as well as
increase clarity and certainty under the regulations for all parties. II Aplt. App. 271. The
committee included representatives from the Tribes, the oil and gas industry, and the
Agency. E.g., id. 262.
The ONRR published a proposed rule in 2014 and issued a final rule in 2015 (the
“Regulation”) calculating the “value” that royalties are based on. 30 C.F.R. § 1206.54(a)
(2015). It defined “major portion price” as “the highest price paid or offered at the time
of production for the major portion of oil produced from the same designated area for the
same crude oil type.” Id. § 1206.51. Under the new Regulation, oil companies, including
Merit, are required to pay monthly royalties on the higher of their gross proceeds or the
Index-Based Major Portion (IBMP) value for their oil type and location. Id.
§ 1206.54(a).
The calculation of the IBMP value is defined in the Regulation and published on a
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monthly basis. Id. § 1206.54(c). It starts with the New York Mercantile Exchange
(“NYMEX”). Id. §§ 1206.51, 1206.54. NYMEX is a price index for sweet oil in
Cushing, Oklahoma. II Aplt. App. 310; 30 C.F.R. § 1206.51. The royalty payment
formula refers to “NYMEX CMA,” meaning NYMEX “Calendar Month Average,”
which averages daily NYMEX prices over one month. 30 C.F.R. § 1206.51. To account
for differences in oil type and location, the NYMEX CMA price is adjusted each month
using a Location and Crude Type Differential (“LCTD”). Id. § 1206.54(d)(2). The
LCTD is defined as “the difference in value between the NYMEX Calendar Monthly
Average (CMA) and the value that approximates the monthly Major Portion Price for any
given month, designated area, and crude oil type.” Id. § 1206.51.
To get to the IBMP value, the Agency first calculated an initial LCTD for each oil
type and location. The initial LCTD is based on the average of actual sales data of the
prior 12 months for the major portion of each oil type and location. Id. § 1206.54(d).
The major portion price is the price at which 25% plus one barrel of oil, by volume, is
sold beginning with the highest prices. Id. § 1206.54(d)(1)(i). The major portion price
reflects the 75th percentile of oil sold per month by volume.
Oil companies report and pay royalties on the higher of their gross proceeds or the
IBMP value each month. Id. § 1206.54(b). When the percentage of oil sales by volume
that report royalties as above the IBMP value diverges by plus or minus 3% from the 75th
percentile of sales volume, compared to royalties reported at or below the IBMP value,
the LCTD is adjusted the following month to reflect the change. Id. § 1206.54(d)(2)(iii).
This adjustment to the LCTD is capped at 10%. Id. § 1206.54(d)(2)(iii)(A)–(B). Each
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subsequent month the Agency may continue to adjust the LCTD by 10% if reported sales
volumes and prices exceed the 3% variance until it is back within the 22–28% range. Id.
§ 1206.54(d)(1)–(2).
Each month, the LCTD is applied to NYMEX to get the IBMP value, which is the
ultimate value that royalties may be based on. More specifically, the formula for the
IBMP value is:
[(NYMEX CMA) x (1 – LCTD)] = IBMP
Id. § 1206.54(c)(2). The initial LCTD is calculated as:
[(average of monthly NYMEX CMA for previous 12 months) – (average of
monthly major portion prices for previous 12 months)]
average of monthly NYMEX CMA for previous 12 months
Id. § 1206.54(d). The LCTD is different for each oil type and location, and there is
one specifically for the Wind River Reservation. II Aplt. App. 311; see 30 C.F.R.
§ 1206.51. The Agency waited to calculate the IBMP value for Wind River until it
had three payors in the area reporting prices of the same quality and type of oil,
which the ONRR determined began in April 2017. IV Aplt. App. 811. The Agency
made this determination in 2019, and published IBMP values for Wind River
retroactively back to 2017. See IV Aplt. App. 812–13; II Aplt. App. 292.
The Agency’s regulations also state that to the extent a lease and the oil and
gas regulations are inconsistent, the express lease terms control. 30 C.F.R.
§ 1206.50(c)(4). Merit produces Wyoming asphaltic sour crude oil from its two
Wind River leases, which is sold pursuant to the Western Canadian Select Index
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(WCS), not NYMEX. I Aplt. App. 241. In its April 2019 report discussing Wind
River, ONRR acknowledged a disconnect between WCS and NYMEX. IV Aplt.
App. 814. The ONRR found that generally the LCTD accounted for the difference in
price between WCS and NYMEX because the two indices moved in concert, but that
there were months in which WCS and NYMEX moved separately. Id. 815. In those
divergent months, which corresponded with the highest additional estimated royalties
owed for the past pay period in 2017 and 2018, the ONRR found the Wind River
LCTD had been adjusted by 10% as capped by the Regulation. Id.
After the ONRR began publishing IBMP values in 2019, it retroactively
applied them to Merit back to 2017. When Merit reviewed the IBMP prices in May
2019, it determined that the IBMP value was dramatically higher than prices for
Wyoming asphaltic sour crude oil in some months between April 2017 to May 2019
and contacted ONRR to raise the issue. I Aplt. App. 231, 241–44. Merit received
notice on May 13, 2019, that it must value its oil on the higher of the IBMP or gross
proceeds, and that the notice was not appealable. Id. 230. Because Merit believed
that it should not be paying based on the IBMP value, it attempted to submit royalty
payment on its gross proceeds in the fall of 2019. III Aplt. App. 422 (Brister Decl.).
The Agency’s accounting system does not allow a payment lower than the IBMP
value to be submitted. See id.
On February 13, 2020, the ONRR issued an Order to Report and Pay requiring
Merit to pay about $3.5 million in additional royalties for the period of April 2017 to
December 2019. III Aplt. App. 572–80. The Order stated that failure to comply may
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result in substantial civil penalties. Id. 573–74. Merit filed an administrative appeal
of the Order on March 11, 2020, and posted a surety bond for about $3.9 million,
including interest exceeding $400,000. Id. 423 (Brister Decl.). This administrative
appeal remains pending.
Merit filed a petition for review of final agency action in district court on
February 24, 2020. I Aplt. App. 3. Merit did not challenge the payments from April
2017 to December 2019 because those are the subject of the pending administrative
appeal. Aplt. Br. at 10. Merit also does not facially challenge the Regulation and
conceded that the IBMP calculation may work well for oil sold pursuant to NYMEX
before the district court. See Aplt. Br. at 20; III Aplt. App. 415. Instead, Merit
brought an as-applied challenge to the ongoing requirement that it pay current and
future royalties under the Regulation, from January 2020 to present, seeking
declaratory and injunctive relief. Aplt. Br. at 10–11; I Aplt. App. 14–15.
The district court determined that the case was ripe and the IBMP calculation
was consistent with Merit’s leases, but the 10% cap on adjustments to the monthly
LCTD was arbitrary and capricious. I Aplt. App. 213. Merit filed a Rule 59(e)
motion to amend the judgment and the Agency filed a Rule 60(b) motion for relief
from judgment. Id. 7. In its Rule 59(e) motion, Merit argued that the LCTD formula
remained arbitrary because it was not based on prices at the time of production even
after removing the 10% cap on adjustments. III Aplt. App. 503–05. In its Rule 60(b)
motion, the Agency argued there was new evidence, using one of Merit’s other
contracts for the same area in Wyoming, that Merit could base its prices on NYMEX.
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Id. 529–32. The district court denied each post-judgment motion. I Aplt. App. 228.
This appeal followed.
Standard of Review
We review the district court’s opinion on agency action de novo and apply a
“deferential” standard of review to the agency’s decision. Wild Watershed v.
Hurlocker, 961 F.3d 1119, 1126 (10th Cir. 2020). Under the APA, we only overturn
agency action if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with the law.” Id. (citing 5 U.S.C. § 706(2)(A)). Agency action receives
a presumption of validity, and the challenger bears the burden of showing the action
is arbitrary and capricious. Id. The court considers the administrative record
directly. Ranchers Cattlemen Action Legal Fund United Stockgrowers of Am. v.
U.S. Dep’t of Agric., 35 F.4th 1225, 1242 (10th Cir. 2022). Review is limited to the
administrative record before the agency at the time the decision was made. N.M.
Health Connections v. U.S. Dep’t of Health & Hum. Servs., 946 F.3d 1138, 1161–62
(10th Cir. 2019).
We review the district court’s determination of ripeness de novo. Peck v.
McCann, 43 F.4th 1116, 1124 (10th Cir. 2022). Finally, we review a district court's
denial of Rule 60(b) and Rule 59(e) motions for abuse of discretion. Jackson v. Los
Lunas Cmty. Program, 880 F.3d 1176, 1191 (10th Cir. 2018) (Rule 60(b)); Hayes Fam.
Tr. v. State Farm Fire & Cas. Co., 845 F.3d 997, 1004 (10th Cir. 2017) (Rule 59(e)).
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Discussion
A. Jurisdiction
There is a threshold jurisdictional issue on whether the district court’s order is
final. The district court, after determining the case was ripe and the IBMP value was
reasonably calculated, remanded to the ONRR to “make appropriate adjustments to the
LCTD, without limitation from any 10% cap, so that ‘value’ under these two leases more
accurately reflects a major portion price for Wind River asphaltic sour crude oil at the
time of production.” I. Aplt. App. 213–14.
A remand from a district court to an administrative agency is ordinarily not
appealable because it is not a final decision. C.W. by & through B.W. v. Denver Cnty.
Sch. Dist., 994 F.3d 1215, 1222 (10th Cir. 2021). Merit argues this administrative
remand rule does not apply in this case because we have a final order and removal of the
10% cap leaves no discretion for the ONRR to deviate from this finding or conduct
further proceedings. Aplt. Jurisdictional Br. at 6–10. To determine finality in this
context, we consider whether the agency action was essentially adjudicative, legislative,
or nonadversarial, such as granting a license. Denver Cnty., 994 F.3d at 1220. The
administrative-remand rule is most applicable if the underlying agency action is
adjudicative, rather than policymaking based on agency expertise. See New Mexico ex
rel Richardson v. Bureau of Land Mgmt., 565 F.3d 683, 698 (10th Cir. 2009). The court
also considers whether the district court order is analogous to a typical remand from a
reviewing court to a lower court, and a district court’s order is less similar to a typical
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remand when an agency appears as an adversarial party defending its own actions. Am.
Wild Horse Pres. Campaign v. Jewell, 847 F.3d 1174, 1184 (10th Cir. 2016).
The remand statement to “make appropriate adjustments” may imply an ability to
make changes to the LCTD calculation beyond only removing the 10% cap. But this
statement is an instruction, consistent with the ONRR’s ongoing obligation to adjust the
LCTD monthly under the Regulation, to adjust the LCTD “appropriately” without the
10% cap. It does not tell the ONRR to conduct further proceedings. See Aplee. Br. at
17. The underlying agency action is quasi-legislative because it arises from application
of a promulgated rule based on agency expertise, and no adjudicative process will occur
on remand. See New Mexico ex rel Richardson, 565 F.3d at 698. An additional factor
pointing to finality is the agency appears as a party and not as an entity resolving disputes
between other private parties. Thus, this order is not similar to a typical remand.
The district court order effectively ends the litigation on the merits and its findings
will not be changed on remand to the ONRR. Because the Order on Petition is final, we
have jurisdiction under 28 U.S.C § 1291.
B. Ripeness
The Agency appeals from the district court’s finding of ripeness. To determine
ripeness, the court considers “(1) the fitness of the issues for judicial decision and (2) the
hardship to the parties of withholding court consideration.” Nat’l Park Hosp. Ass’n v.
Dep’t of the Interior, 538 U.S. 803, 808 (2003). The Agency and the district court
framed the issue as about prudential ripeness, rather than Article III ripeness. See id.
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1. Fitness of the Issues
The fitness inquiry asks whether the question presented is purely legal;
whether the agency action is final; and whether “further factual development would
‘significantly advance our ability to deal with the legal issues presented.’” Id. at 812
(quoting Duke Power Co. v. Carolina Env’t Study Grp., Inc., 438 U.S. 59, 82
(1978)). We also consider if (1) “judicial intervention would inappropriately
interfere” with further agency action and (2) the court would benefit from more
factual development. Wyoming v. Zinke, 871 F.3d 1133, 1141–1142, 1141 n.2 (10th
Cir. 2017) (quoting Farrell-Cooper Mining Co. v. U.S. Dep’t of the Interior, 728 F.3d
1229, 1234–35 (10th Cir. 2013)).2 A claim is not ripe if it rests on future events that
may not occur. Id. at 1142. The Agency does not contest that the question of
whether the Regulation is consistent with Merit’s leases is purely legal, which favors
a finding of ripeness. See Aplee. Br. at 30.
a. Finality of Agency Action
An agency action is final when it represents the consummation of the agency
decisionmaking process and determines the parties’ rights or obligations or creates legal
consequences. U.S. Army Corps. of Eng’rs v. Hawkes Co., 578 U.S. 590, 597 (2016).
2
The Tenth Circuit has also stated the ripeness test as four factors: whether a
legal issue is presented, the agency action is final, the action has a direct impact on
petitioner, and resolution will assist the agency in effective enforcement. Farrell-
Cooper, 728 F.3d at 1235 n.3. Farrell-Cooper clarifies that this list “essentially
includes the same considerations” as asking whether (1) judicial intervention would
interfere with administrative action and (2) the court would benefit from further
factual development. Id.
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Parties do not need to wait for enforcement proceedings before challenging final agency
action if such proceedings risk serious civil or criminal penalties. Id. at 600. Courts take
a “pragmatic” approach to finality. Id. at 599. Here, the Agency concedes that the
Regulation itself is final, but argues this only supports a facial rather than as-applied
challenge because Merit does not otherwise show the Agency has applied the Regulation
against it. Aplee. Reply Br. at 3–5.
The Agency argues that under Mobil Exploration & Producing U.S., Inc. v.
Department of the Interior, 180 F.3d 1192, 1199 (10th Cir. 1999), finality requires that
royalties are owed after an audit, and that because no audit occurred here there is no final
decision with respect to ongoing and future payments. Aplee. Reply Br. at 6. The
Agency notes companies might circumvent the administrative process if a mere
requirement to pay royalties is a final decision. Id. To be sure, the May 2019 notice
indicates that ONRR may conduct a future audit, similar to the letter at issue in Mobil,
180 F.3d at 1198. I Aplt. App. 50. However, the May 2019 notice is unappealable and
states Merit “must” comply with the Regulation. This is unlike Mobil, where an agency’s
letter postponed the determination of legal obligations until after an audit was conducted.
See 180 F.3d at 1195, 1198. Merit’s obligations were determined, the decision is
unappealable, and noncompliance risks civil penalties.
Even if final, an agency action is reviewable only if there are no adequate
alternatives to APA review in court. Hawkes Co., 578 U.S. at 600. Merit argues that the
pending administrative appeal is an inadequate alternative and futile because the
Secretary’s position is clear. Aplt. Reply Br. at 20–22. Once that appeal is decided, it is
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followed by two more levels of appeal to the ONRR Director and the Interior Board of
Land Appeals (“IBLA”). Id. at 20–21. Decisions of the ONRR Director and the IBLA
may be subject to the Secretary’s review, whose position is definitive that this Regulation
applies to Merit and who retains discretion to alter an IBLA decision even if the IBLA
found for Merit. Id. at 16–17, 20 (citing 43 C.F.R. § 4.5). The Agency’s position is
definitive such that seeking separate administrative review of payments from 2020 to the
present is futile. Therefore, this is a final agency action.
b. Pending Administrative Appeal
Next, deciding the legal question of whether the Regulation is consistent with
Merit’s leases may determine the outcome of the pending administrative appeal. But the
outcome of the administrative appeal only affects royalties through December 2019.
Even if Merit prevails in the administrative action, it may not alter Merit’s continuing
obligation to comply with the Regulation. See Aplee. Br. at 25. Merit cannot obtain
review for ongoing payments without complete nonpayment so that the Agency will issue
an Order to Pay, which would then be appealable, because the ONRR system does not
accept payments less than the IBMP value. III Aplt. App. 422 (Brister Decl.); see II Aplt.
App. 327. Merit’s choice to comply rather than risk penalties does not permit review of
any payments made after January 2020 since no appealable Order has been or will be
issued. See 30 C.F.R. § 1241.70–71 (2016) (calculating possible civil penalties,
including interest on any underlying underpayment). These countervailing considerations
weigh slightly in favor of the Agency.
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c. Abstract Harm and Benefit of Further Factual Development
Lastly, the Agency argues that harm to Merit is contingent on events that may
not happen and an opinion from this court would be merely advisory. Aplee. Br. at
30–32. Without going outside the administrative record, Merit has a Hobson’s choice
because ONRR’s system will not accept payments less than the higher of the IBMP
value or gross proceeds, meaning Merit cannot trigger review or suspend its
obligation to pay without complete nonpayment and risk of civil fines. Aplt. Br. at
11; Aplt. Reply. Br. at 19. This shows the harm to Merit is not speculative. See
Frozen Food Express v. United States, 351 U.S. 40, 44 (1956) (finding agency order
warning carriers who do not have Commission authority to transport commodities
that they risk civil and criminal penalties is not abstract).3
Therefore, all considerations except for possible interference with the ongoing
administrative process weigh in favor of judicial review. Despite the pending
administrative appeal, given that the instant case involves only payments made
beginning in January 2020 and Merit has no other ability to trigger judicial review of
3
The Agency also argues that new evidence shows one of Merit’s other
contracts uses NYMEX prices, not WCS, indicating the case would benefit from
further factual development by the administrative agency. Aplee. Br. at 26–28. The
Agency raised this claim in its Rule 60(b) motion, and we review the district court’s
denial of that motion for abuse of discretion. III Aplt. App. 529. The district court
did not abuse its discretion by determining there was no need for further factual
development because its finding of ripeness was not based on differences between
NYMEX and WCS prices. I Aplt. App. 227. Moreover, the Agency’s speculation on
what might be found in the administrative process has no impact on the legal
question of whether the Regulation is consistent with the lease terms. See Aplt.
Reply Br. at 26–27. This court will not be in a better position later to address this
legal issue. See Duke Power Co., 438 U.S. at 82.
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those payments, the issues are properly before us.
2. Hardship
Courts consider whether withholding review would create strictly legal adverse
effects which would be suffered by the party if the case is not decided. Zinke, 871 F.3d
at 1142. The court looks for a “direct and immediate dilemma.” Id. at 1143 (quoting
Awad v. Ziriax, 670 F.3d 1111, 1125 (10th Cir. 2012)). Adverse effects exist if “absent
judicial review and while the appeal is pending, [the party] would need to comply with
the challenged agency regulation.” Id. Cases have recognized two instances where
hardship is significant: (1) significant financial or other costs and (2) when the defendant
took concrete action that threatened to or already did impair the plaintiff’s interests. Id.
A claim may be ripe where administrative action directly produces a harmful
change in a party’s business conduct. Rocky Mountain Oil & Gas Ass’n v. Watt, 696
F.2d 734, 742–43 (10th Cir. 1982) (citing Frozen Food Express, 351 U.S. 40). The
Agency argues that an increase in monetary payments to comply with a facially valid
Regulation, without other impact on Merit’s business practices and when Merit can
later recoup overpayment, is not sufficient hardship. Aplee. Br. at 34; Aplee. Reply
Br. at 10. Merit contends that possible recoupment does not ameliorate the hardship
and still would not allow it to recover lost interest. Aplt. Reply Br. at 24.
In Rocky Mountain, the court discredited the argument that harm does not
occur until the denial of an administrative appeal. 696 F.2d at 741. There, the court
described the harm as “investment decisions forced” by the Department of the
Interior’s policy and irreparable financial harm through the implementation of
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regulations causing loss of previously invested money. Id. at 742. The Rocky
Mountain court contemplated that if withholding judicial review requires a party to
risk hundreds of thousands of nonrecoverable dollars to gain judicial review, then the
case is ripe. Id. at 743 n.11. Moreover, Merit has no procedural mechanism to
obtain a stay of enforcement because there is not an order relating to the payments
made after January 2020. See Farrell-Cooper, 728 F.3d at 1237; 30 C.F.R.
§ 1243.4(a). Merit’s administrative appeal of the Agency’s 2020 Order to Report and
Pay and post of a bond to suspend its enforcement is limited to payments made prior
to January 2020. Delay in review leads to hardship because Merit is subject to
financial harm by overpayment or the risk of civil penalties in order to otherwise
obtain review. Thus, Merit has suffered hardship. We conclude the case is ripe.
C. Whether the Regulation is Consistent with Merit’s Leases
Turning to the next issue, 30 C.F.R. § 1206.50(c)(4) states that if the regulations
are inconsistent with an express provision of an oil and gas lease, then the lease provision
governs to the extent of the inconsistency. Merit argues that there is a conflict between
lease terms and the Regulation, so the lease terms control and the Secretary’s
determination otherwise is arbitrary and capricious. Aplt. Br. at 23–24 (citing 30 C.F.R.
§ 1206.50(c)(4)). The Agency agrees that if there is inconsistency then the lease controls,
but contends there is no inconsistency. Aplee. Br. at 35.
An agency decision is arbitrary and capricious when it (1) relies on factors which
Congress did not intend it to consider, (2) entirely fails to consider an important aspect of
the problem, (3) offers an explanation that runs counter to the evidence, or (4) is so
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implausible that it could not be ascribed to a difference in view or the product of agency
expertise. Wild Watershed, 961 F.3d at 1126. An agency’s trade-off of negative short-
term consequences for long-term benefits is not arbitrary or capricious when supported
by detailed analysis. Id. at 1135. Merit’s leases each give the Secretary discretion to
calculate ‘value’ based on the highest price paid or offered “at the time of production for
the major portion of the oil of the same quality and gravity . . . from the area where the
Leased Premises are situated.” III Aplt. App. 607 (Circle Ridge Lease); IV Aplt. App.
651 (Steamboat Butte Lease).
The first lease provision at issue is that the Secretary has discretion to calculate
value on the basis of “the highest price paid or offered.” Merit argues that the
administrative record does not show that the Agency considered the difference between
WCS and NYMEX prices or that Wyoming asphaltic crude oil was sold pursuant to WCS
when promulgating the Regulation, and that failure to do so was an arbitrary exercise of
discretion. Aplt. Br. at 29. Merit argues that the Secretary first considered WCS in April
2019, four years after adopting the Regulation, revealing nine months of disconnect
between NYMEX and WCS prices. Id. at 30–31; cf. IV Aplt. App. 815. The
administrative record shows that the rulemaking committee considered various indices
and challenges in a May 2012 meeting, but not WCS specifically. E.g., II Aplt. App.
264–65, 270 (“Need to determine whether NYMEX is the correct starting point, and how
much you would discount. Other options could be Brent (world market) or Louisiana
Sweet.”).
The rulemaking committee later considered Wind River directly to determine
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methodology related to the major portion price. Id. 295–97. This discussion, from an
April 2013 meeting, shows the committee knew Wind River produced predominantly
asphaltic sour oil and a location adjustment was likely needed. Id. 297. The April 2013
meeting also discussed using NYMEX as the starting point for an index-based major
portion price. Id. 297. The Agency in June 2013 considered different indices (again,
though not WCS), oil types, and locations such that it was not arbitrary to use NYMEX
after concluding that most Indian oil is sold pursuant to NYMEX. Id. 300 (“In the future,
if another benchmark (e.g., Brent) is used more frequently, the Index Price for the
formula could be changed.”). Therefore, the Agency did not entirely fail to consider
important aspects of the problem.
The second lease provision is “at the time of production.” Aplt. Br. at 26. Merit
argues that this means the month of production. Id. at 33–34. Further, Merit argues that
historically the Secretary published major portion prices after the month the royalty was
paid and then adjusted retroactively, which the Secretary continues to do for Indian gas
leases and also should do for Wind River. Aplt. Reply Br. at 8. Lastly, Merit argues that
because the Secretary requires the reporting of either the higher of the IBMP value or
gross proceeds, Merit cannot report actual sales prices so that the LCTD is adjusted
without consideration of actual prices. Id. at 8–9. The Agency argues that time of
production, with the 10% cap on LCTD adjustments, relies on a reasonable three-month
period of past data because the Agency does not have real-time data. Aplee. Br. at 37–
38; see 30 C.F.R. § 1206.54(d)(2).
The rulemaking committee considered a similar model to the Indian gas system. II
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Aplt. App. 269. The committee found that a retroactive adjustment approach was not
preferable because the government wanted to distribute proper revenues to the Tribes
sooner to fulfill its trust responsibilities to the Tribes. Id. 271. The rulemaking
committee also considered the consequences of not reporting gross proceeds and lacking
that information to serve as a safety net to judge other values. Id. 301. Basing the LCTD
formula on the prior three months of data, but still publishing the IBMP monthly, reflects
the time delay in reporting because significant volumes of oil sales are not reported by
the end of the month. See 80 Fed. Reg. 24794, 24801 (May 1, 2015). The Agency did
not entirely fail to consider important aspects of the issue. The use of past, but recent,
data is a reasonable exercise of the Secretary’s discretion and not inconsistent with “time
of production,” particularly when that term is not defined in the lease.
The third and fourth lease provisions are highest price for the “major portion of the
oil of the same quality and gravity” from “the same area where the Leased Premises are
situated.” Aplt. Br. at 26. As noted, “Leased Premises” are defined in the leases as
specific “tracts of land situated in the Reservation.” III Aplt. App. 603; IV Aplt. App.
647. These terms are facially inconsistent with part of the royalty payment formula:
NYMEX does not reflect the actual price of asphaltic sour crude oil from the Wind River
Reservation. However, NYMEX is adjusted by location and type using the monthly
LCTD because the rulemaking committee acknowledged differences in oil type and
location. II Aplt. App. 310–12. The initial LCTD calculation is based on 12 months of
actual pricing data specific to Wind River and then adjusted monthly to continue to
reflect that area and type. The Agency waited to calculate the IBMP value for Wind
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River until it had three payors of the same quality and type of oil, which is why the IBMP
value for Wind River was not published until 2019. See IV Aplt. App. 812–13. The
royalty payment formula, viewed as a whole and looking at the end result IBMP value, is
not inconsistent with Merit’s lease provisions.
Therefore, using NYMEX adjusted by specific location and type is consistent with
Merit’s leases and within the Secretary’s discretion, as explicitly provided in the leases,
to calculate “‘value’ . . . on the basis of” the highest price paid or offered at the time of
production for the “major portion” of the same type of oil from the area where Wind
River is located.
D. Whether the 10% Cap is Consistent with Merit’s Leases
Reviewing the district court’s decision de novo, we apply the arbitrary and
capricious standard to the part of the royalty payment formula which provides a 10%
cap on adjustments to the monthly LCTD. The Agency argues that including a 10%
cap is not inconsistent with “at the time of production” in Merit’s leases because
Interior receives a complete set of prices two months after production and then
calculates the prices for the upcoming month, with no way to use real-time data.
Aplee. Br. at 37.
The administrative record shows that the royalty payment formula is designed
so that the IBMP value reflects market prices for each oil type and location. II Aplt.
App. 310–11. The only justification the Agency presents for restricting adjustments
to the monthly LCTD to 10% is avoiding volatility. The Agency’s argument that the
major portion price is intended to be captured over time is supported by the
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rulemaking committee’s Final Report, which describes steady adjustments to the
LCTD by 10% until within the acceptable range. II Aplt. App. 312.
However, and as the district court found, this means that when prices shift
from month to month, the IBMP value will not reflect Wyoming asphaltic sour crude
oil prices “at the time of production” because it by definition is incrementally
adjusted. I Aplt. App. 211–12. The administrative record does not show a reason for
why the Agency chose a 10% cap as opposed to another number, nor indicate how a
cap is consistent with the parameters of the Secretary’s discretion to calculate value
under the lease terms. Moreover, the Agency’s April 2019 report on Wind River,
before notifying Merit it was subject to the new Regulation in May 2019, showed that
the months where WCS and NYMEX moved separately resulted in the largest
additional royalties even when the LCTD was adjusted by 10%. I Aplt. App. 229; IV
Aplt. App. 814–15. Although the Agency is entitled to deference and has discretion
to calculate “value” under Merit’s leases, the decision to cap the adjustment to the
monthly LCTD at 10% was not considered in the administrative record and is
arbitrary. See 80 Fed. Reg. 24,794, 24,796–97 (May 1, 2015) (reiterating, in
response to public comment that the 10% cap is arbitrary, that the committee’s
limitation was to “prevent drastic swings in the LCTD from month to month.”). The
10% cap is inconsistent with the term “time of production” in Merit’s two leases.
Conclusion
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The Agency’s royalty payment formula itself is consistent with Merit’s leases
and within the Secretary’s discretion as explicitly provided by the lease terms.
However, the 10% cap on adjustments to the monthly LCTD within the formula is
arbitrary and capricious and inconsistent with Merit’s lease provisions.4 To the
extent of the inconsistency, Merit’s lease provisions control. 30 C.F.R.
§ 1206.50(c)(4).
AFFIRMED.
Entered for the Court
Paul J. Kelly, Jr.
Circuit Judge
4
Merit also argues the district court erroneously denied Merit’s request to
require ONRR to use prices from the current month to calculate the LCTD
adjustment. Aplt. Br. at 40. This argument is the same as the previous discussion of
the “time of production,” but Merit presents it again as an “in alternative.” Id. at 42.
Merit raised this argument in its Rule 59(e) motion to amend, and as such the district
court’s resolution of this issue is reviewed for abuse of discretion. See III Aplt. App.
503–05.
The district court denied Merit’s motion because it had already considered and
rejected Merit’s argument that “time of production” was limited to meaning the
month of production. I Aplt. App. 225–27. Thus, Merit did not satisfy the high
standard for amending judgment. The district court did not abuse its discretion by
determining it had already considered and rejected Merit’s claim. Even if this
argument was raised in Merit’s initial district court briefing and subject to de novo
review, it is not arbitrary to use older, yet recent, data to determine “time of
production” when it is not feasible to use real time prices due to reporting delay. See
supra Part C.
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