Devon Energy Corp v. Kempthorne (Interior Secretary)

Dec 23: In the U.S. Court of Appeals, D.C. Circuit, Case No. 07-5299. The case arises from a final order issued by the United States Department of the Interior (DOI) requiring Devon Energy Corporation (Devon), retroactively to recalculate royalties owed to the Government pursuant to its lease to extract coalbed methane from Federal land in Wyoming. At issue is the agency’s interpretation of its “marketable condition rule.”

The rule was included as a part of DOI’s 1988 Revision of Gas Royalty Valuation Regulations, which establish the framework for calculating the royalty value of coalbed methane gas production. In its disputed order, DOI held that the marketable condition rule precluded Devon from deducting certain costs associated with compression and dehydration when calculating the “gross proceeds” upon which royalties are owed.

In its rationale, DOI determined that gas cannot enter a pipeline and move to a purchaser unless it meets the requirements of the pipeline, which typically requires compression to raise its pressure and dehydration to reduce its water content. Thus, DOI concluded that if gas is not sufficiently compressed and dehydrated to be deliverable to the point of purchase through the pipeline, it is not in marketable condition. Devon filed suit in the District Court to challenge Interior’s order. The District Court denied Devon’s motion for summary judgment and granted the Secretary’s cross-motion.

On appeal, Devon argues that DOI’s order is "inconsistent with the plain language of the marketable condition rule, and also inconsistent with DOI’s own prior interpretation of the rule." The Appeals Court ruled, "We affirm the judgment of the District Court. First, we find that Interior’s interpretation of the marketable condition rule reflects a perfectly reasonable construction of the rule. It is clear that the agency’s order is not at odds with the plain language of the rule, nor does it effectively 'amend,' rather than reasonably construe, the rule."

Second, the Appeals Court says, ". . . we reject Devon’s claim that DOI’s order conflicts with a prior interpretation of the marketable condition rule. Devon argues that its position finds support in guidance documents distributed by agency personnel after DOI’s promulgation of the 1988 regulations. However, as Devon concedes, these contested guidance documents were distributed by agency individuals who had no authority either to amend the marketable condition rule or to issue authoritative guidelines on behalf of the agency."

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