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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 12, 2003 Decided June 27, 2003
No. 02-5241
FINA OIL AND CHEMICAL COMPANY AND
PETROFINA DELAWARE, INC.,
APPELLANTS
v.
GALE A. NORTON, SECRETARY OF THE INTERIOR,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 99cv02392)
Charles D. Tetrault argued the cause for appellants. With
him on the briefs was Daniel A. Petalas.
L. Poe Leggette and Nancy L. Pell were on the brief for
amicus curiae Independent Petroleum Association of Amer-
ica in support of appellants.
Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.
2
John P. Wagner, Joshua B. Frank, and Thomas J. East-
ment were on the brief for amicus curiae American Petrole-
um Institute in support of appellants. David T. Deal entered
an appearance.
Todd S. Aagaard, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief were
Edward S. Geldermann and Ronald M. Spritzer, Attorneys.
Before: GINSBURG, Chief Judge, and ROGERS and TATEL,
Circuit Judges.
Opinion for the Court filed by Circuit Judge TATEL.
TATEL, Circuit Judge: Under federal law, firms that ex-
tract natural gas from leased federal, tribal, or offshore lands
pay the government royalties calculated as a percentage of
the value of the production they extract. This case involves a
valuation dispute concerning gas that is sold twice: first by
the producer to a gas marketing firm it controls, and then by
the controlled marketing firm to end-users. The Secretary of
the Interior valued the gas production based on the contract
price of the resale. Challenging that decision, the producer
argues that the Secretary should have valued the production
based on the lower contract price of the initial sale. Because
the applicable regulation unambiguously requires valuation
based on the initial sale, we reject the Secretary’s contrary
interpretation. Though we express no opinion on whether
the Secretary might have statutory authority to value produc-
tion based on the resale price, the Secretary may not do so by
interpreting a regulation to mean the opposite of its plain
language.
I.
Through its Minerals Management Service (MMS), the
Department of the Interior issues and administers gas leases
for federal lands, Indian tribal and allotted lands, and the
Outer Continental Shelf. See Mineral Leasing Act, 30 U.S.C.
§ 181 et seq. (federal lands); Mineral Leasing Act for Ac-
quired Lands, 30 U.S.C. § 351 et seq. (acquired federal lands);
25 U.S.C. §§ 396, 396a–396g (Indian tribal and allotted
3
lands); Outer Continental Shelf Lands Act, 43 U.S.C. § 1331
et seq. (Outer Continental Shelf). See generally Indep. Petro-
leum Ass’n v. Babbitt, 92 F.3d 1248, 1251–52 (D.C. Cir. 1996).
Under such leases, private companies sell gas production
directly and then compensate the government with royalties
calculated as a percentage of the ‘‘value of the production’’
removed or sold from the leased lands. 30 U.S.C. § 226(b)
(federal lands); 43 U.S.C. § 1337(a)(1) (Outer Continental
Shelf); 25 C.F.R. §§ 211.41(b) & 212.41(b) (Indian tribal and
allotted lands). Concerned that ‘‘the system of accounting
with respect to royalties and other payments due and owing
on TTT gas produced from [federal, tribal, and offshore] lease
sites is archaic and inadequate,’’ 30 U.S.C. § 1701(a)(2), Con-
gress enacted the Federal Oil and Gas Royalty Management
Act (FOGRMA), 30 U.S.C. § 1701 et seq. (1982), which direct-
ed the Secretary to ‘‘establish a comprehensive inspection,
collection and fiscal and production accounting and auditing
system to provide the capability to accurately determine TTT
gas royalties TTT owed, and to collect and account for such
amounts in a timely manner,’’ 30 U.S.C. § 1711(a).
Pursuant to FOGRMA and the leasing statutes, the MMS
promulgated a regulation establishing methods for determin-
ing the ‘‘value of the production’’ for royalty calculation
purposes. See Revision of Gas Royalty Valuation Regula-
tions and Related Topics, 53 Fed. Reg. 1230 (Jan. 15, 1988)
(codified at 30 C.F.R. §§ 206.152 (unprocessed gas), 206.153
(processed gas)). The regulation establishes three different
valuation methodologies, depending on the particular entity
to whom producers first sell the gas. Gas sold directly to
non-affiliated purchasers under ordinary ‘‘arm’s-length con-
tract[s]’’ is valued on the basis of ‘‘gross proceeds accruing to
the lessee’’—a defined term meaning total direct and indirect
consideration under the contract. 30 C.F.R.
§§ 206.152(b)(1)(i) (unprocessed gas), 206.153(b)(1)(i) (pro-
cessed gas), 206.151 (defining ‘‘arm’s length contract’’ and
‘‘gross proceeds’’). Gas sold to so-called marketing affili-
ates—entities that purchase gas exclusively from producers
that own or control them—and subsequently resold by the
marketing affiliates pursuant to arm’s-length contracts is
4
valued on the basis of downstream resales. 30 C.F.R.
§§ 206.152(b)(1)(i) (unprocessed gas), 206.153(b)(1)(i) (pro-
cessed gas), 206.151 (defining ‘‘marketing affiliate’’). Gas
sold to owned or controlled affiliated entities that, because
they purchase at least some gas from sources other than
their owning or controlling producer, are not ‘‘marketing
affiliates’’ is valued on the basis of the first applicable of
three benchmarks. 30 C.F.R. §§ 206.152(c) (unprocessed
gas), 206.153(c) (processed gas). The first benchmark values
gas based on ‘‘gross proceeds accruing to the lessee pursuant
to a sale under its non-arm’s-length contract, TTT provided
that those gross proceeds are equivalent to the gross pro-
ceeds derived from [comparable sales in the same field or
area].’’ 30 C.F.R. §§ 206.152(c)(1) (unprocessed gas),
206.153(c)(1) (processed gas). The second benchmark values
gas based on ‘‘information relevant in valuing like-quality
gas,’’ including ‘‘other reliable public sources of price or
market information.’’ 30 C.F.R. §§ 206.152(c)(2) (unpro-
cessed gas), 206.153(c)(2) (processed gas). The third, which
values gas based on another proxy for market price under an
arm’s-length contract, is irrelevant to this case. 30 C.F.R.
§§ 206.152(c)(3) (unprocessed gas), 206.153(c)(3) (processed
gas). Finally, and central to this case, the regulation con-
tains a catch-all: ‘‘Notwithstanding any other provision of
this section, under no circumstances shall the value of pro-
duction for royalty purposes be less than the gross proceeds
accruing to the lessee for lease production.’’ 30 C.F.R.
§§ 206.152(h) (unprocessed gas), 206.153(h) (processed gas).
Appellants Fina Oil and Chemical Company and Petrofina
Delaware, Inc. are natural gas producers holding onshore and
offshore federal leases. (Like the parties, we shall call
appellants ‘‘Fina.’’) Fina Natural Gas Company (FNGC) is a
natural gas marketer that purchases gas from producers for
resale to downstream end-users. Though controlled by Fina,
FNGC is not a ‘‘marketing affiliate’’ because it purchases gas
from both Fina and other gas producers. Fina therefore paid
royalties based on its contract price with FNGC—a price
which, according to Fina, complies with the first benchmark
or, if the first benchmark is inapplicable, with the second.
5
In 1993, the MMS issued an order rejecting Fina’s use of
the benchmarks, requiring Fina instead to base its royalty
valuation on the higher prices that FNGC receives from
subsequent downstream arm’s-length sales. Fina appealed to
the Interior Board of Land Appeals, but while that appeal
was pending, the Board decided Seagull Energy Corp., 148
I.B.L.A. 300 (May 6, 1999), which reversed an MMS order
substantially similar to the order in Fina’s case and squarely
rejected the MMS’s position that gas sold to non-marketing
affiliates and later resold to end-users must be valued based
upon the resale price.
Seagull proved short-lived. Two weeks after it was issued,
the Acting Assistant Secretary for Land and Minerals Man-
agement, with the Secretary of the Interior’s concurrence,
expressly overruled Seagull in a decision called Texaco Ex-
ploration & Production, Inc., Docket No. MMS–92–0306–
O&G (May 18, 1999). Though Texaco involved the valuation
of oil, not gas, it presented the same legal issue we face here
because the MMS’s oil valuation and gas valuation regulations
are identical for all relevant purposes, see Revision of Oil
Product Valuation Regulations and Related Topics, 53 Fed.
Reg. 1184 (Jan. 15, 1988) (codified at 30 C.F.R. §§ 202.101–
.102), and because the oil was sold by a producer (like Fina)
to a non-marketing affiliate (like FNGC). Holding the bench-
marks inapplicable in valuing oil production resold at a profit
by a non-marketing affiliate, Texaco expressly rejected Sea-
gull’s reasoning on two grounds. First, Texaco noted that
the gross proceeds provision requires all valuations to equal
at a minimum the ‘‘gross proceeds accruing to the lessee,’’ a
term the decision interpreted as referring to the total consid-
eration received by the corporate family to which the produc-
er and non-marketing affiliate belong. Because the bench-
marks measure only what the producer receives through
intra-corporate transfers, not the total consideration the cor-
porate family receives from resale, Texaco reasoned that the
benchmarks yield valuations less than ‘‘gross proceeds accru-
ing to the lessee’’ whenever a non-marketing affiliate resells
gas for more than it originally paid its controlling producer.
Thus, Texaco found that in such instances the gross proceeds
6
provision supersedes the benchmarks, requiring the producer
to calculate value based on its non-marketing affiliate’s resale
proceeds. Second, finding that oil and gas lessees have an
implied duty to include in production valuations any increase
in value resulting from marketing activities, Texaco conclud-
ed, alternatively, that a lessee may not base valuations on
sales to a non-marketing affiliate that later turns around and
performs marketing activities. Texaco at 12–22.
Because the Assistant Secretary issued Texaco under her
discretionary authority to step into the MMS director’s shoes
and directly hear appeals from MMS orders, Texaco binds
the Board. See Texaco at 27; Blue Star, Inc., 41 I.B.L.A. 333
(1979) (finding Board bound by decision made by Assistant
Secretary standing in the shoes of a subdepartment of the
Department of the Interior); Marathon Oil Co., 108 I.B.L.A.
177 (1989) (same). Accordingly, the Board summarily denied
Fina’s appeal, concluding that ‘‘[t]he arguments raised by
appellants with respect to the value of production for royalty
purposes have all been addressed in TexacoTTTT We there-
fore TTT adopt the analysis and rational [sic] contained there-
in to affirm MMS.’’ Fina Oil & Chem. Co., 149 I.B.L.A. 168,
186 (June 11, 1999).
Fina filed suit in the United States District Court for the
District of Columbia challenging the Board’s decision under
the Administrative Procedure Act, 5 U.S.C. § 551 et seq. On
cross motions for summary judgment, the district court ruled
for the Secretary. Reaching only Texaco’s second rationale,
the district court found it ‘‘neither arbitrary nor capricious for
the [Secretary] to conclude that Fina has some implied duty
to market the gas it produces.’’ Fina Oil & Chem. Co. v.
Norton, 209 F. Supp. 2d 246, 253 (D.D.C. 2002). Fina now
appeals.
II.
Although Fina’s challenge to the Secretary’s interpretation
of her own regulation comes to us on appeal from the district
court, because we face a purely legal question, ‘‘our task [is]
precisely the same as the district court’s,’’ Occidental Petrole-
7
um Corp. v. SEC, 873 F.2d 325, 340 (D.C. Cir. 1989), and ‘‘the
[d]istrict [c]ourt’s decision is not entitled to any particular
deference,’’ Hennepin County v. Sullivan, 883 F.2d 85, 91
(D.C. Cir. 1989). ‘‘[N]otwithstanding the intervening step,’’
we thus ‘‘proceed as if the [Board’s] decision had been
appealed to this court directly.’’ Dr. Pepper/Seven–Up Cos.
v. FTC, 991 F.2d 859, 862 (D.C. Cir. 1993).
In reviewing the Board’s application of its gas valuation
regulations to Fina’s operations and the Secretary’s reasoning
in Texaco that the Board adopted by reference, ‘‘[w]e must
give substantial deference to an agency’s interpretation of its
own regulations.’’ Thomas Jefferson Univ. v. Shalala, 512
U.S. 504, 512 (1994). Courts, the Supreme Court has ex-
plained, lack authority to ‘‘decide which among several com-
peting interpretations [of an agency’s own regulation] best
serves the regulatory purpose,’’ id., and instead must ‘‘give
effect to the agency’s interpretation so long as it TTT sensibly
conforms to the purpose and wording of the regulations,’’
Martin v. Occupational Safety & Health Review Comm’n,
499 U.S. 144, 150–151 (1991) (internal quotation marks and
citations omitted). But to prevent agencies from circumvent-
ing the notice-and-comment process by rewriting regulations
under the guise of interpreting them, we will reject an agency
interpretation that is ‘‘plainly erroneous or inconsistent with
the regulation.’’ Bowles v. Seminole Rock & Sand Co., 325
U.S. 410, 414 (1945); cf. Darrell Andrews Trucking, Inc. v.
Fed. Motor Carrier Safety Admin., 296 F.3d 1120, 1125 (D.C.
Cir. 2002) (holding that agencies may not abandon ‘‘prior,
definitive’’ interpretations of their own regulations without
first engaging in notice-and-comment rulemaking).
Fina argues that the benchmarks should control this case
because (1) the Secretary’s position—that valuation must
equal or exceed the total consideration accruing to the corpo-
rate family as a whole—misinterprets the gross proceeds rule
and (2) Fina fully discharged its duty to market its production
at no cost to the government by selling to FNGC. Defending
both of Texaco’s rationales, the Secretary argues that the
benchmarks are inapplicable because (1) the catch-all gross
8
proceeds provision requires valuation based on total consider-
ation accruing to the corporate family as a whole and (2)
Fina’s implied duty to market its production at no cost to the
government requires valuation based on FNGC’s sales, not
Fina’s.
Beginning with the gross proceeds provision, we of course
agree with the Secretary that because the provision applies
‘‘[n]otwithstanding any other provision of this section,’’ it
trumps any methodology, including the benchmarks, that
yields valuations ‘‘less than the gross proceeds accruing to the
lessee for lease production.’’ 30 C.F.R. §§ 206.152(h) (unpro-
cessed gas), 206.153(h) (processed gas), 206.102(h) (1999) (oil).
At this point, however, our agreement with the Secretary
ends. As we shall show, the underlying statute’s definition of
‘‘lessee,’’ the regulation’s language and structure, and the
agency’s own pronouncements at the time of the regulation’s
promulgation all demonstrate that ‘‘gross proceeds accruing
to the lessee’’ refers only to proceeds accruing to Fina, not to
the entire corporate family of which Fina is a member.
Reading the Board’s decision and the Texaco decision that
it incorporates by reference, one would never know that the
term ‘‘lessee’’—whose meaning is critical to this case—is
defined in both the underlying statute and the MMS’s own
regulations. FOGRMA section 3(7) defines ‘‘lessee’’ as ‘‘any
person to whom the United States, an Indian tribe, or an
Indian allottee, issues a lease, or any person who has been
assigned an obligation to make royalty or other payments
required by the lease.’’ Pub. L. No. 97–451 § 3(7), 96 Stat.
2447, 2449 (amended in 1996, after the events at issue in this
case, to read ‘‘any person to whom the United States issues
an oil and gas lease or any person to whom operating rights
in a lease have been assigned’’ and codified at 30 U.S.C.
§ 1702(7)). The MMS incorporated this definition word for
word in both its oil and gas valuation regulations. 30 C.F.R.
§§ 206.101 (1988) (oil), 206.151 (1988) (gas). The definition
could hardly be clearer. It defines ‘‘lessees’’ not as ‘‘per-
son[s] TTT issue[d] TTT leases and their affiliates,’’ but rather
restricts the definition to ‘‘person[s] TTT issue[d] TTT leases.’’
Although the administrative record in this case does not
9
include the actual leases, the ‘‘person to whom the United
States TTT issue[d] a lease’’ is clearly Fina. Not only does
the Secretary allege no formal relationship between the Unit-
ed States and FNGC, but in its very first paragraph, the
Board’s decision identifies Fina as the ‘‘lessee[ ]/appellant[ ]’’
and FNGC simply as Fina’s ‘‘affiliate.’’ Fina, 149 I.B.L.A. at
169.
The regulation’s overall structure and statements of agency
intent at the time of promulgation provide additional reasons
why the Secretary’s interpretation of the gross proceeds
provision is quite wrong. The marketing affiliate provision,
which states that ‘‘gas which is sold or otherwise transferred
to the lessee’s marketing affiliate and then sold by the
marketing affiliate pursuant to an arm’s-length contract shall
be valued TTT based upon the sale by the marketing affiliate,’’
30 C.F.R. §§ 206.152(b)(1)(i) (unprocessed gas),
206.153(b)(1)(i) (processed gas), shows that the regulation’s
authors knew just how to require valuations based on down-
stream resales when they intended such methodology. More-
over, not only did they limit this methodology to marketing
affiliates—which FNGC is not—but the regulation contains
provisions that expressly deal with valuation of production
sold to non-marketing affiliates, i.e., the benchmarks, which
provide for valuation based on non-arm’s-length transactions,
such as intra-corporate transfers.
Removing any doubt about the treatment of sales to non-
marketing affiliates, the regulation’s preamble makes plain
that the decision to restrict valuation based on downstream
sales to marketing affiliates was intentional. In response to
commenters who proposed expanding the marketing affiliate
rule to encompass affiliates who acquire any gas from their
owners or controllers, rather than affiliates who acquire gas
only from their owners or controllers, the agency stated that:
‘‘The MMS is retaining the term ‘only.’ If the affiliate of the
lessee also purchases gas from other sources, then that
affiliate presumably will have comparable arm’s-length con-
tracts with the other parties which should demonstrate the
acceptability of the gross proceeds accruing to the lessee
10
from its affiliate.’’ Revision of Gas Royalty Valuation Regula-
tions, 53 Fed. Reg. at 1243.
In sum, the overall import of the regulation’s tripartite
structure and ‘‘other indications of the [agency’s] intent at the
time of the regulation’s promulgation,’’ Gardebring v. Jen-
kins, 485 U.S. 415, 430 (1988), is crystal clear. Gas sold
directly to unaffiliated entities is valued at the contract price,
since that price reliably indicates objective value. In con-
trast, gas sold to marketing affiliates is valued not on the
basis of the initial sale—obviously an unreliable indicator of
objective value—but rather on the basis of the price at which
it ultimately leaves the corporate family. But the agency
expressly restricted non-recognition of intra-corporate sales
to situations where no directly comparable arm’s-length sales
exist. Accordingly, gas sold to non-marketing affiliates—
where objective value can be reliably approximated through
comparable arm’s-length sales—is valued through the bench-
marks at the initial sales price and not the subsequent resale
price.
As against this clear policy choice enshrined in the regula-
tion, the Secretary takes the exact opposite position. Declin-
ing to recognize intra-corporate transfers of gas from Fina to
FNGC, even though benchmark comparisons exist, the Secre-
tary argues that Fina should calculate value as if FNGC were
a marketing affiliate, i.e., on the basis of downstream resales.
At oral argument, we asked counsel for the Secretary to
explain why this interpretation did not read the benchmarks
out of the statute—that is, if non-marketing affiliates are
treated just like marketing affiliates, what purpose do the
benchmarks serve? Although it is true, as counsel respond-
ed, that the benchmarks would still apply to non-marketing
affiliates selling gas downstream for less than the price at
which they bought it, Oral Arg. Tr. 15:6–16, nothing in either
the regulation or its preamble suggests that the benchmarks
cover only the limited subset of non-marketing affiliates who
fail to turn a profit.
Moreover, the Secretary’s interpretation would ripple
through other parts of the regulation that use the term
11
‘‘lessee,’’ creating several linguistic absurdities. For instance,
the first benchmark for valuing gas sold to non-marketing
affiliates is defined as ‘‘gross proceeds accruing to the lessee
pursuant to a sale under its non-arm’s-length contract.’’ 30
C.F.R. §§ 206.152(c)(1) (unprocessed gas), 206.153(c)(1) (pro-
cessed gas). Under the Secretary’s interpretation of ‘‘lessee,’’
this phrase would make no sense. If ‘‘gross proceeds accru-
ing to the lessee’’ refers to total proceeds accruing to corpo-
rate families, then as a logical matter no gross proceeds can
accrue to lessees pursuant to purely intra-corporate ‘‘non-
arm’s-length contract[s].’’
The regulation’s definition of ‘‘marketing affiliate’’—‘‘an
affiliate of the lessee whose function is to acquire only the
lessee’s production and to market that production,’’ 30 C.F.R.
§ 206.151—illustrates the same point. If affiliates are lessees
then it makes no sense to talk about an ‘‘affiliate of the
lessee’’ nor of affiliates acquiring lessees’ production.
In still a third example, the preamble’s explanation of the
marketing affiliate rule refers to the ‘‘gross proceeds accruing
to the lessee from its affiliate.’’ Revision of Gas Royalty
Valuation Regulations, 53 Fed. Reg. at 1243 (emphasis add-
ed). In addition to implying that lessees and affiliates are
distinct entities, this phrase completely contradicts the Secre-
tary’s position that producers like Fina cannot accrue gross
proceeds from their affiliates, such as FNGC.
In Texaco, the Secretary warned that valuing production
based on intra-corporate sales ‘‘allows any lessee to avoid the
gross proceeds requirement by the simple and facile device of
creating a wholly-owned subsidiary and then first transfer-
ring the production to the affiliate, for a price the lessee
determines unilaterally, before selling the production at arm’s
length at a higher price.’’ Texaco at 7. We disagree. Even
Fina’s position would not allow it to set prices ‘‘unilaterally,’’
for the benchmarks require Fina to base value on the prices
that its affiliate, FNGC, pays other producers. In other
words, Fina must pay royalties based on the actual market
value of the gas at the time Fina transfers the gas to its
affiliate.
12
Although the Secretary does not expressly say so, her
primary concern seems to be that valuing the gas based on
the initial sale would allow Fina and other lessees to pay
royalties on gas before its value increases through the trans-
portation and marketing services provided by affiliates like
FNGC. But this is precisely what the regulation permits. If
the Secretary now believes—as Texaco and her position here
indicate—that recognizing intra-corporate transfers is too
favorable to producers, she should amend the regulations
through notice-and-comment rulemaking, not under the guise
of interpretation.
The Secretary’s second ground for rejecting application of
the benchmarks requires little discussion. The regulation
states that ‘‘lessee[s] [are] required to place gas in market-
able condition at no cost to the Federal Government TTT
unless otherwise provided in the lease agreement,’’ 30 C.F.R.
§§ 206.152(i) (1996) (unprocessed gas), 206.153(i) (1996) (pro-
cessed gas), with ‘‘marketable condition’’ meaning fit for
‘‘accept[ance] by a purchaser under a sales contract typical
for the field or area,’’ id. § 206.151. Acknowledging that we
have previously interpreted this provision to mean that only
producers who market gas downstream, not producers who
‘‘opt to sell at the leasehold,’’ must pay royalties based on the
increase in gas value associated with marketing expenditures,
Indep. Petroleum Ass’n v. DeWitt, 279 F.3d 1036, 1041 (D.C.
Cir. 2002), the Secretary argues that ‘‘Fina did market its
production downstream, through its affiliate FNGC,’’ Appel-
lee’s Br. at 46. This argument, however, differs not at all
from the Secretary’s basic position against recognizing intra-
corporate sales for valuation purposes—a position that, as we
have just explained, conflicts with the regulation’s plain lan-
guage.
The judgment of the district court is reversed.
So ordered.