Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 1 FILED United States Court of Appeals PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS April 27, 2026
Christopher M. Wolpert FOR THE TENTH CIRCUIT Clerk of Court __________________________________________
DEVON ENERGY PRODUCTION COMPANY, L.P.; DEVON ENERGY CORPORATION,
Plaintiffs - Appellants,
v. No. 24-6132
UNITED STATES DEPARTMENT OF THE INTERIOR,
Defendant - Appellee. ___________________________________________
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF OKLAHOMA (D.C. No. 5:20-CV-00053-D) ______________________________________
L. Poe Leggette, Baker & Hostetler LLP, Houston, Texas (Bailey A. Bridges, Baker & Hostetler, Houston, Texas; Alexander K. Obrecht, Baker & Hostetler LLP, Denver, Colorado; and Mark B. McDaniel, Devon Energy Production Company, L.P., Oklahoma City, Oklahoma, with him on the briefs), for Appellants.
John K. Adams (Adam R.F. Gustafson, Acting Assistant Attorney General, and Michelle Melton, Attorney, Environment & Natural Resources Division, on the brief), United States Department of Justice, Washington, D.C., for Appellee. ______________________________________________
Before HARTZ, TYMKOVICH, and BACHARACH, Circuit Judges. ______________________________________________
BACHARACH, Circuit Judge. Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 2
______________________________________________
This appeal grew out of a dispute about royalties owed to the federal
government for gas production.
The dispute itself had arisen from the federal government’s lease of
land to Devon Energy Production Co., L.P. The lease allowed Devon
Energy to produce gas in exchange for royalties, which were subject to
certain deductions. To ensure proper payment of the royalties, the federal
government authorized state officials to audit Devon Energy’s production
of gas and related deductions. With that authority, state officials conducted
an audit in 2009 and disallowed some of the deductions taken over a four-
year period (2004–2008). Devon Energy objected to the state officials’
conclusions, but a federal agency (the Office of Natural Resources
Revenue) overruled those objections and ordered Devon Energy to either
pay the amount in dispute ($2,841,264.58) or to supply greater support for
the deductions.
Devon Energy sought judicial review, claiming in part that the
agency had acted arbitrarily and capriciously. The district court affirmed
the agency’s decision. In our view, however, the agency acted arbitrarily
and capriciously by failing to consider the effect of a prior settlement
agreement. 1
1 Devon Energy also denied making repeated or systematic errors, argued that further proof was unnecessary to support the deductions, and 2 Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 3
1. Calculation of royalties on federal leases for gas
Royalties are calculated based on the value of the minerals extracted.
See 30 U.S.C. § 223. The value is generally the amount that the lessee
obtains when selling the gas in an arm’s-length transaction. 2 30 C.F.R.
§ 206.152–53. But the value can be reduced through the deduction of
certain costs incurred in the production of gas. 30 C.F.R. § 206.151. Those
deductions can include the costs of treating and transporting natural gas for
resale. 30 C.F.R. §§ 206.151, 206.156–58. But a lessee can’t deduct the
cost of gathering or putting the gas in “marketable condition.” 30 C.F.R.
§§ 206.151 (gathering), 206.152(i) (putting the gas in marketable
condition).
2. Devon Energy’s leases
This case involves Devon Energy’s production of natural gas from
two units in New Mexico: (1) the Northeast Blanco Unit and (2) the San
Juan 32-9 Unit. Beneath those units lie two formations of natural gas:
the Fruitland Coal and the Mesa Verde.
alleged a denial of due process from the agency’s failure to provide a factual basis for the order. We need not consider these claims given our view that the agency acted arbitrarily and capriciously by failing to consider the settlement agreement. 2 The Secretary of the Interior enacts rules on how to calculate a mineral’s value. See 30 U.S.C. § 189.
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The Fruitland Coal formation lies under both units, and the Mesa
Verde lies under the Northeast Blanco Unit. The Fruitland Coal formation
includes coalbed methane, which ordinarily contains a high concentration
of carbon dioxide. The excess carbon dioxide must ordinarily be removed
to make the natural gas marketable. When the excess prevents sale, the
lessee can’t deduct the cost of removing the carbon dioxide. 30 C.F.R.
§§ 206.151, 206.152(i). In contrast, the Mesa Verde formation generally
includes conventional gas, which contains only a small fraction of carbon
dioxide. But other impurities may require treatment before the natural gas
can be sold.
3. De novo review under the arbitrary-and-capricious standard
We conduct de novo review, applying the same standard that
governed in district court. N.M. Cattle Growers Ass’n v. U.S. Fish &
Wildlife Serv., 248 F.3d 1277, 1281 (10th Cir. 2001). In district court, the
issue was whether the agency had acted arbitrarily and capriciously in
ordering further payments or additional support for the deductions.
5 U.S.C. § 706(2)(A). An order is arbitrary and capricious if it “fail[s] to
consider an important aspect of the problem.” Ctr. for Biological Diversity
v. United States Env’t Prot. Agency, 149 F.4th 1142, 1148 (10th Cir. 2025).
4. Error in the agency’s failure to consider the settlement agreement
The disagreement includes the amounts that Devon Energy paid to
two companies (Enterprise Field Services and Williams Field Services) to
4 Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 5
treat natural gas from the Fruitland Coal formation. Each company
combined its charges, bundling some charges that were deductible (such as
transportation of natural gas for sale) with some that weren’t (such as
removal of excessive carbon dioxide to make the gas marketable). Because
each company bundled its charges, Devon Energy wouldn’t ordinarily know
how its costs were allocated.
But another Devon entity had encountered a similar problem when
audited for royalties paid over a 2½ year period (May 1990 to December
1993). That Devon entity and the government disagreed on which costs
were deductible, but resolved the disagreement by entering a settlement
agreement.
When state officials raised a similar issue in the 2009 audit, Devon
Energy responded that it was simply using the same formula set out in the
settlement agreement. The agency said nothing about the settlement
agreement and ordered Devon Energy to separate the charges or use
another way to identify the deductible costs.
The district court excused the agency’s failure to mention the
settlement agreement, reasoning that it wouldn’t have covered all of the
disputed royalties. But the issue was whether the settlement agreement
constituted an important part of the problem—not whether the agreement
had covered all of the gas. See Part 3, above. In our view, the settlement
5 Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 6
agreement constituted an important legal and factual part of the problem in
calculating the deductible costs.
Legally, the settlement agreement controlled over regulations that
would otherwise conflict. 30 C.F.R. § 206.150(b). And factually, the
settlement agreement could affect a substantial part of the disputed
royalties. For example, over 80% of the disputed royalties involved the
coalbed methane in the Fruitland Coal formation. Appellants’ App’x at 176.
So if Devon Energy had properly relied on the settlement agreement to
calculate treatment costs, the agency would apparently have miscalculated
the amount due for over 80% of the gas production.
The district court appeared to assume that Devon Energy still needed
to separate what it had paid for treatment. Devon Energy contends that it
separated this cost by using the rate stated in the settlement agreement.
The agency didn’t address this contention when rejecting Devon Energy’s
objection to the audit. That omission involved a significant part of the
calculation of deductible costs. The agency thus acted arbitrarily and
capriciously in failing to consider an important aspect of Devon Energy’s
objection to the audit.
5. Harmlessness of the alleged error
The government contends that this omission was harmless because
the settlement agreement had involved a different Devon entity and had
expired before the audit period. The district court didn’t rely on
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harmlessness, but we can consider alternative grounds to affirm 3 under
certain circumstances. So we consider whether those circumstances exist
here. 4
a. Involvement of a different Devon entity The government’s first argument involves identification of the Devon
entity that participated in the settlement agreement. Here the disputed
royalties were owed by an entity named Devon Energy Production Co., L.P.
But the settlement agreement involved a Devon entity named Devon Energy
Corporation (Nevada). Given the different names, the government argues
that the party in this case (Devon Energy Production Co., L.P.) couldn’t
rely on the settlement agreement. In response, Devon Energy Production
Co., L.P. insists that it is the same entity that had entered the settlement
agreement, attributing the name change to a merger. 5
3 Because the district court didn’t rely on harmlessness, this argument involves an alternative basis to affirm. See Proctor & Gamble Co. v. Haugen, 222 F.3d 1262, 1273 (10th Cir. 2000). 4 “The Supreme Court’s decision in SEC v. Chenery Corporation stands for the proposition that a reviewing court may not affirm an agency decision based on reasoning that the agency itself never considered in its administrative proceedings.” Forest Guardians v. U.S. Forest Serv., 641 F.3d 423, 435 (10th Cir. 2011) (citing SEC v. Chenery Corporation, 318 U.S. 80, 87 (1943)). We need not address the effect of Chenery Corporation because we’re reversing on other grounds. 5 Devon Energy also argues that the agency didn’t present this argument in district court. We need not address this argument.
7 Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 8
The agency never addressed the relationship of the Devon entities in
the settlement agreement and this case. So Devon Energy had no reason to
include the merger documents in the administrative record. But their
absence from the administrative record prevents a meaningful evaluation of
the parties’ arguments about the alleged merger. Absent an adequate record
for meaningful consideration of this issue, we can’t rely on it as a basis to
affirm. See Ashby v. McKenna, 331 F.3d 1148, 1151 (10th Cir. 2003)
(stating that we can affirm on an alternative ground only when the record
is sufficient to permit us to decide the legal issue).
b. Assumption of the settlement agreement
The government also argues that even if the name change had arisen
from a merger, the surviving entity (Devon Energy Production Co., L.P.)
might not have assumed the settlement agreement. Again, however, the
record doesn’t indicate whether the surviving entity obtained the rights and
liabilities of Devon Energy Corporation (Nevada). Given the incomplete
record as to those rights and liabilities, we can’t affirm based on
uncertainty about the right to rely on the settlement agreement. See id.
c. Expiration of the settlement agreement
The government adds that even if Devon Energy Production Co., L.P.
were the same entity that had entered the settlement agreement and
assumed its provisions, the agency’s error would have been harmless
because the provisions governing the treatment rate had expired before the
8 Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 9
audit period. We can affirm on this basis only if the outcome were clear
and indisputable. See Roberts v. Barreras, 484 F.3d 1236, 1244 (10th Cir.
2007) (stating that we can affirm on alternative grounds only when these
grounds are “‘indisputable’ . . . and appear clearly in the record” (quoting
Colorado Property Acquisitions, Inc. v. United States, 894 F.2d 1173, 1175
n.5 (10th Cir. 1990))).
But the duration of the treatment rate is debatable under the
settlement agreement, which contains two provisions bearing on the
deductibility of costs. The first provision appears in Exhibit B; there the
parties set out rates for transportation and removal of carbon dioxide. See
p. 5, above; p. 16, below. The second provision appears in the body of the
settlement agreement, stating that some of the rates in Exhibit B would
expire no later than 2000. (The period in dispute began four years later.)
But the settlement agreement doesn’t clearly say whether the treatment
rates were subject to the expiration date.
Given the lack of clarity, Devon Energy insists that
• the agreed treatment rates never expired and
• Devon Energy has been applying those rates for many years.
The government and the dissent disagree with Devon Energy, though their
explanations differ: The government argues that the rate for treatment
would have expired no later than 2000, and the dissent suggests that the
9 Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 10
settlement agreement might have covered only the cost of transportation
without setting any rate for treatment.
The government’s argument is plausible, but rests on ambiguous
language in the settlement agreement: “The Department and Devon agree
further that the rates identified in Exhibit ‘B’ hereto for transporting
coalbed gas from the [Northeast Blanco Unit] and any other property that
is subject to the agreements between [the Devon entity] and Burlington
Resources Gathering, Inc., for the transportation and treatment of coalbed
gas as of April 1, 1997, will continue until the original expiration date of
the agreement between [the Devon entity] and Burlington, or until such
earlier date if the rate charged under that agreement is modified, altered, or
changed.” Appellants’ App’x at 273. This sentence contains four parts:
In one part, the sentence says that some of the Devon entity’s agreed
rates would end at a certain point.
In the second part, the sentence specifies which of those rates would
end: the rates for transporting coalbed gas from the Northeast Blanco Unit
and certain other “property.”
The third part defines the property containing the coalbed gas: the
property “that is subject to the agreements between [the Devon entity] and
Burlington Resources Gathering, Inc., for the transportation and treatment
of coalbed gas as of April 1, 1997.” Id.
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The fourth part ties the duration of the pertinent rate to the
expiration of the Devon entity’s agreement with Burlington Resources
Gathering, Inc. and recognizes that the parties could modify the
termination date.
But what was the pertinent rate subject to an expiration date? To
answer, Devon Energy focuses on the third part of the sentence: “that is
subject to the agreement between [the Devon entity] and Burlington
Resources Gathering, Inc., for the transportation and treatment of coalbed
gas as of April 1, 1997.” Devon Energy interprets this clause as a
clarification of the property that is subject to the settlement agreement.
Under this interpretation, the settlement agreement could be rewritten this
way, referring to the property as defined:
The Department and Devon agree further that the rates identified in Exhibit “B” hereto for transporting coalbed gas from the [Northeast Blanco Unit] and other [defined] property that is subject to the agreements between Devon and Burlington Resources Gathering, Inc., for the transportation and treatment of coalbed gas as of April 1, 1997, will continue until the original expiration date of the agreement between Devon and Burlington, or until such earlier date if the rate charged under that agreement is modified, altered, or changed.
By defining the property involved, the settlement agreement could mean
that the agreed rate for transportation would terminate without mentioning
a termination date for the rate governing treatment. Without an expiration
date for the treatment rate, it would continue indefinitely.
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Granted, this isn’t the only plausible interpretation. The parties could
plausibly interpret the sentence to provide the termination date for all of
the rates in Exhibit B (including the treatment rate). For this interpretation,
the government points to two parts of Exhibit B in the settlement
First, this exhibit gives an example of how the Devon entity was to
calculate deductions. That example provides a “Total Transportation Rate,”
which is the sum of the rates for transportation (which Devon Energy
concedes expired) and treatment (which Devon Energy argues did not
expire). Given this example, the parties might have intended to set the
expiration for both rates (transportation and treatment) by referring to the
combination of rates as Transportation:
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Second, Exhibit B refers to “termination dates”:
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The government interprets these entries as proof that all of the rates
terminated. But these entries could be indicating the termination dates for
the contracts with Burlington Resources. 6 And if the termination dates
referred to the contracts themselves, the treatment rate would not
necessarily have terminated.
6 In a footnote, the government asserts that there’s evidence suggesting a modification of the contract in 2000. Even if the contract had been modified in 2000, however, the government doesn’t explain why this modification would affect expiration of the treatment rate.
14 Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 15
In both respects, Exhibit B is ambiguous. Given the ambiguities, we
can’t discount the possibility of a different outcome if the agency had
considered the settlement agreement. That possibility prevents us from
characterizing termination of the treatment rate as a clear and indisputable
basis to affirm on alternative grounds. Roberts v. Barreras, 484 F.3d 1236,
1244 (10th Cir. 2007); see p. 9, above. 7
The dissent takes a different approach, arguing that the parties either
failed to set a treatment rate or included it as the transportation rate that
would end at a defined time period. This argument involves two steps:
1. The settlement agreement says that the transportation rate will “continue” until the year 2000 or earlier.
2. If the treatment rate isn’t included in the transportation rate, the settlement must not have even set a treatment rate.
The settlement agreement says in an exhibit that the treatment cost is
7.78 cents per thousand cubic feet.
7 Devon Energy also argues that
• it shouldn’t have needed to identify the gas that was already marketable without treatment and
• the agency violated due process by failing to provide a factual basis for the order.
But we have already determined that the agency acted arbitrarily and capriciously by failing to consider the settlement agreement. So we don’t need to address Devon Energy’s other arguments for reversal.
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The dissent argues that this column just repeats the rate established in
Devon’s contract with Burlington rather than recognize a new agreement on
the rate. Dissent at 2. But this argument conflicts with the government’s
own argument in district court. There the government argued that .0778
(7.78 cents per thousand cubic feet) was “the agreed cost of CO 2 removal
under the . . . Settlement Agreement.” Defendant United States Department
of the Interior ’s Resp. to Plaintiff ’s Opening Br. at 25, Devon Energy
Production Co. v. U.S. Dep’t of Interior, No. CIV-20-53-D (W.D. Okla.
16 Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 17
Aug. 17, 2020). Given the government’s interpretation, all of the parties
have interpreted the settlement agreement to establish an agreed rate for
treatment (7.78 cents per thousand cubic feet) as well as for transportation.
Given the parties’ mutual interpretation, we don’t regard the dissent’s
contrary interpretation as “clear and indisputable.” Roberts v. Barreras,
484 F.3d 1236, 1244 (10th Cir. 2007); see p. 9, above.
Because the parties agree that the settlement agreement established a
rate for treatment, the main question is when that rate ended. The
settlement agreement doesn’t address the termination of that rate unless it
had been part of the transportation rate. And the dissent itself recognizes
that the settlement agreement’s reference to the transportation rate is
ambiguous because it
• might have referred solely to transportation and
• might have referred to both transportation and treatment.
Dissent at 2 (“The majority concludes that what the rate ‘for transporting
coalbed gas’ encompasses is ambiguous—and it is.”).
We thus conclude that the agreed rate for treatment could have
continued into the audit period. So the government’s argument on
harmlessness is not clear and indisputable.
6. Vacatur or remand
When an agency’s decision is arbitrary and capricious, we must
determine the appropriate remedy. The parties disagree on that remedy: 17 Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 18
Devon Energy urges us to vacate the agency’s decision; the government
urges a remand to the agency rather than vacatur.
To determine whether vacatur is the proper remedy, we consider two
factors:
1. [T]he seriousness of the agency action’s deficiencies (and thus the extent of doubt whether the agency chose correctly) and
2. [t]he disruptive consequences of an interim change that may itself be changed. W. Watersheds Project v. Haaland, 69 F.4th 689, 722 (10th Cir. 2023)
(quoting Dine Citizens Against Ruining Our Env’t v. Haaland, 59 F.4th
1016, 1049 (10th Cir. 2023)).
Application of these “factors requires a fact-intensive inquiry that is
typically left to the discretion of the district court.” Dine Citizens Against
Ruining Our Env’t, 59 F.4th at 1049. So we reverse and remand to the
district court with instructions to determine the appropriate remedy. Id.
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24-6132, Devon Energy v. DOI
TYMKOVICH, Circuit Judge, dissenting
The majority rejects an alternative basis to uphold the agency’s decision: that
the agency’s failure to address the settlement agreement was harmless error because
the agreement did not apply during the audit period. Because the settlement
agreement, even if ambiguous, did not set treatment rates that continued through the
relevant audit period, I would affirm the district court and uphold the agency’s
decision.
The settlement agreement did not govern the treatment rate for the period of
the agency’s audit. That is because the language of the agreement contemplates two
options, neither of which sets the treatment rate in perpetuity: either the agreement
did not set the treatment rates in the first place, or it set them and they expired
alongside all other agreed-upon rates before the audit period.
The settlement agreement fixed certain rates—and fixed an expiration date for
those rates that it set. No rate was set that would not expire. After setting the
methodology for calculating the transportation allowance, the agreement set a
transportation rate alongside the expiration of that rate:
The [agency] and Devon agree further that the rates identified in Exhibit “B” hereto for transporting coalbed gas . . . will continue until the original expiration date of the agreement between Devon and Burlington, or until such earlier date if the rate charged under that agreement is modified, altered, or changed.
Appellants’ App’x at 273 (emphasis added). The rate “for transporting coalbed gas,”
whatever it entails, is set because it “will continue until”— and that same rate expires Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 20
because it “will continue until” one of two triggers. Id. (emphasis added). The
agreement’s language intertwines the fixed rate and its expiration.
The majority asserts that in addition to this provision, the agreement set rates
in another “provision” in Exhibit B—but Exhibit B contains no such provision, only
an image of the contractual rates between Devon and Burlington. Ante, at 9, 14. The
agreement set rates only through its explicit provision that the “rates identified in
Exhibit ‘B’ hereto for transporting coalbed gas . . . will continue until” the earlier of
two triggers. Appellants’ App’x at 273. And whatever rates that provision set have
indisputably expired under the triggers.
The majority concludes that what the rate “for transporting coalbed gas”
encompasses is ambiguous—and it is. But that ambiguity is not relevant to the
outcome of this case. Whatever that rate encompasses, it expired by one of the
agreement’s triggers before the audit period. The fixed rates “for transporting
coalbed gas” could have referred to either the “Total Transportation Rate” described
in Exhibit B as the sum of the transportation rate and the treatment rate, or it could
have meant the transportation rate alone. Id. at 277. Regardless, when the settlement
agreement set rates “for transporting coalbed gas,” either (1) the transportation and
treatment rate were both set, “continue[d] until expiration,” and expired, or (2) the
transportation rate alone was set. 1 See id. at 273. In other words, the treatment rates
1 The majority argues that the government excluded the second possible interpretation by conceding that the agreement set treatment rates. If the government did forgo the second interpretation, the only permissible remaining interpretation is
2 Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 21
listed in Exhibit B were either (1) settled and since expired, or (2) never agreed to.
Any way you slice it, the treatment rates in Exhibit B did not apply during the audit
period. The majority insists that there’s a third option: the transportation and
treatment rates were both set but only the transportation rate expired. But the rate-
setting provision does not permit that interpretation—whatever rates it set have since
expired by the provision’s triggers. Because the treatment rates in the agreement did
not apply at the time of the audit, the agency did not act arbitrarily by failing to
discuss the agreement. I would affirm on this ground.
the first—that both treatment and transportation rates were set and expired at the agreement’s triggers.