Merit Energy Company v. Haaland

• Court: Court of Appeals for the Tenth Circuit
• Decided: December 22, 2022
• Docket: 21-8047
• Status: Unpublished

Opinion

Appellate Case: 21-8047 Document: 010110788111 Date Filed: 12/22/2022 Page: 1 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* This order and judgment is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel.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. Appellate Case: 21-8047 Document: 010110788111 Date Filed: 12/22/2022 Page: 2

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). 2 Appellate Case: 21-8047 Document: 010110788111 Date Filed: 12/22/2022 Page: 3

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. 11 Appellate Case: 21-8047 Document: 010110788111 Date Filed: 12/22/2022 Page: 12

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. 14 Appellate Case: 21-8047 Document: 010110788111 Date Filed: 12/22/2022 Page: 15

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 16 Appellate Case: 21-8047 Document: 010110788111 Date Filed: 12/22/2022 Page: 17

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.