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Shell Oil Co. v. Babbitt

Citation: 28 ELR 20134
No. 97-7035, 125 F.3d 172/(3d Cir., 09/19/1997)

The court holds that an oil company must turn over to the U.S. Department of the Interior (DOI) documents that pertain to the arm's-length sales of oil it purchased from its subsidiary in non-arm's-length transactions. The subsidiary primarily produces oil from land within 32 federal leases, and the parent oil company primarily markets the oil. The court first holds that Federal Oil and Gas Royalty Management Act (FOGRMA) § 103(a) gives the DOI the authority to seek documents relating to the oil company's disposition of oil that it bought from its subsidiary. The court agrees with the Tenth Circuit's reasoning that § 103(a) covers the first purchaser of oil produced under a federal lease, because such a purchaser is a person directly involved in purchasing oil or gas subject to the FOGRMA through the point of first sale or royalty computation. Further, this interpretation is the most natural reading of the statute and, thus, the intent of Congress is clear without resorting to the legislative history. Next, the court holds that FOGRMA's implementing regulation for § 103(a) applies to the oil company. The plain language of the implementing regulation makes clear that it applies to "other persons" in addition to operators and payors. And the oil company failed to demonstrate that the agency's interpretation of the implementing regulation is plainly erroneous or inconsistent with the regulation. Last, the court holds that the DOI has the authority to seek the requested documents pertaining to oil produced both before and after the 1988 amendments to the royalty valuation regulations became effective. Under the amended regulations, the marketing affiliate distinction is not relevant to this case, because the gross proceeds rule supersedes all other royalty calculation methods. The gross proceeds rule requires that the federal royalties be based, at a minimum, on what the lessee receives for the oil, not the market price of the oil. Therefore, the DOI is entitled under the new regulations to documents that will allow it to determine whether the oil company's subsidiary is undervaluing oil for royalty purposes by first transferring it to the parent oil company.

Counsel for Appellant
L. Poe Leggette
Jackson & Kelly
2401 Pennsylvania Ave. NW, Ste. 400, Washington DC 20037
(202) 973-0200

Counsel for Appellee
Robert L. Klarquist
Environment and Natural Resources Division
U.S. Department of Justice, Washington DC 20530
(202) 514-2000

Before Stapleton and Cowen, JJ.