Burlington Resources Oil & Gas v. Dept. of Interior

Citations: 21 F. Supp. 2d 1; 1998 U.S. Dist. LEXIS 13517; 1998 WL 559064Docket: Civ.A. 96-1936

Court: District Court, District of Columbia; July 16, 1998; Federal District Court

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Burlington Resources Oil and Gas Company (formerly Meridian Oil, Inc.) filed a case against the United States Department of the Interior (DOI) regarding oil and gas leases on Indian tribal lands. The dispute centers on a DOI decision from May 1996 that rejected Burlington's appeal against orders from the Minerals Management Service (MMS) requiring the recomputation of royalties dating back to 1970. Burlington seeks declaratory relief under the Administrative Procedure Act (APA).

The Jicarilla Apache Tribe, a lessor with multiple leases, submitted an amicus curiae brief supporting the DOI's motion. The court noted that sufficient undisputed material facts exist to decide the case based on the record. The leases in question are governed by Standard Lease Form 157, and DOI is responsible for ensuring compliance with lease terms and determining the value of produced minerals for royalty calculations.

The case involves the calculation of the 'value' of natural gas produced, which includes heavier liquid hydrocarbons extracted from the gas stream. Burlington must determine both the value of the raw gas before processing (wet gas) and the combined value of processed dry gas and liquid hydrocarbons, paying royalties based on the higher of these values. Historically, from the 1950s to the late 1970s, DOI only required dual accounting for lessees owning processing plants. However, a 1979 ruling by the U.S. District Court for New Mexico mandated dual accounting for all lessees of Indian lands, a decision that was later affirmed by the Tenth Circuit Court.

After the Supron litigation, MMS reviewed Burlington's lease compliance and found that Burlington did not perform dual accounting for gas sales from January 1984 to December 1989, as previously required by DOI. The MMS issued orders on January 5 and amended on January 29, 1990, directing Burlington to review and adjust its royalty payments for Indian leases during that period. Burlington appealed these orders, but on May 14, 1996, the Assistant Secretary upheld them. Burlington subsequently filed a lawsuit on August 21, 1996, under the Administrative Procedure Act, challenging the requirement for dual accounting as arbitrary and capricious.

DOI argued that Burlington was collaterally estopped from contesting its obligation to recompute past royalties due to the earlier Supron II decision, which mandated dual accounting for all Indian leases. The court agreed with DOI, noting that the requirements for collateral estoppel were met: the issue was litigated, necessarily determined, involved the same parties, and only the fairness consideration remained in question. Burlington claimed that the reasoning in Supron II was undermined by subsequent Supreme Court and D.C. Circuit decisions, particularly in Cotton Petroleum Corp. v. New Mexico, which dealt with state taxation on oil and gas production on Indian lands. The Supreme Court emphasized that while Congress aimed to enhance tribal revenues through the Indian Mineral Leasing Act of 1938, this did not exempt activities from state taxation unless explicitly intended. The court recognized a general presumption favoring state taxation on private parties engaged in business with the United States or tribes, regardless of the financial burden on the tribes or the federal government.

Cotton Petroleum did not dispute the Secretary of the Interior's fiduciary duty to tribes but challenged the interpretation that the Indian Mineral Leasing Act was meant to shield tribal income from appropriate levies. The Supreme Court prioritized federalism over the Secretary's general duty towards tribes. Burlington argued that the case of Independent Petroleum Ass’n of America v. Babbitt implicitly rejected the notion of the Secretary’s fiduciary duty, noting that the IPAA court found the MMS’s interpretation of 'gross proceeds' arbitrary and capricious, aligning with prior Fifth Circuit rulings adopted by the DOI. The IPAA decision affirmed that the Secretary must choose the most beneficial interpretation for tribes when faced with multiple reasonable options. Prior to Supron litigation, DOI did not require dual accounting for producers of wet gas in arm’s-length transactions, but both Supron II and IPAA indicate that any shift in this practice must not be arbitrary or capricious. Burlington contended that the MMS orders were arbitrary for several reasons: they deviated from established policy without sufficient explanation, required unattainable computations, and imposed disproportionate costs relative to expected royalty increases. However, DOI’s rationale for requiring dual accounting was based on compliance with the Supron II ruling. The MMS provided theoretical formulas to facilitate necessary calculations, which Burlington claimed were flawed but were grounded in established regulations and lease terms. Despite Burlington’s claims of hardship, the court noted that they had previously met dual accounting requirements post-Supron II. The court emphasized that it must afford substantial deference to an agency's interpretation of its own regulations.

The doctrine of collateral estoppel prevents the Court from reexamining whether dual accounting is required for the leases in question, as Burlington has been properly mandated to dual account per Supron II since 1986. The issue of retroactive imposition of dual accounting was not litigated in the Supron case, allowing Burlington to raise this matter now. Burlington argues that it should not be subject to retroactive application of DOI's new interpretation of regulations prior to the 1990 MMS Orders, referencing cases that prohibit agencies from retroactively imposing new rules unless authorized by Congress. The distinction between an agency's retroactive application of judicial decisions and its own adjudicative decisions is emphasized, with DOI obligated to apply the Tenth Circuit's ruling on dual accounting retroactively. Burlington also contends it cannot be charged late payment interest, claiming such interest acts as a penalty. However, under 30 U.S.C. § 1721(a), the Secretary is mandated to charge interest on late or insufficient royalty payments, which compensates for the Tribe's lost time value of money. Consequently, the Court grants summary judgment in favor of the Department of the Interior and denies Burlington's motion, resulting in dismissal of the action with prejudice.

Plaintiff, previously known as Meridian Oil, Inc. and Southland Royalty Company, is referred to collectively as 'Burlington.' 'Allotted lands' pertain to lands owned by individual Indian allottees or their heirs that are restricted from alienation. Dual accounting necessitates that the lessee assess two values: the value of gas 'wet' before processing and the combined values of 'dry' methane and other separated products post-processing. The lessee can deduct reasonable processing costs, up to a specified limit, from the total to determine royalty value, paying royalties based on the higher value. Burlington argues against the court considering collateral estoppel, as it was first introduced by the Tribe as amicus curiae; however, courts can address jurisdictional questions sua sponte, even if raised by amici. The doctrine of collateral estoppel can be invoked by the court independently, similar to res judicata. Burlington claims that the MMS orders provide three dual accounting formulas, but each formula requires data available only to the ultimate gas processor, which is inaccessible to the lessee in an arm's-length transaction. Additionally, Burlington cites legislative history and various cases that interpret the interest rate in 30 U.S.C. 1721(a) as a 'penalty.'