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Devon Energy Corp. v. Kempthorne

ELR Citation: 38 ELR 20307
Nos. No. 07-5299, (D.C. Cir., 12/23/2008)

The D.C. Circuit upheld a final order issued by the Department of the Interior (DOI) requiring an energy company to retroactively recalculate royalties owed to the U.S. government under its lease to extract coalbed methane from federal land in Wyoming. In its disputed order, DOI held that the marketable condition rule precluded the company from deducting certain costs associated with compression and dehydration when calculating the “gross proceeds” upon which royalties are owed. 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. DOI's interpretation of the marketable condition rule reflects a reasonable construction of the rule. Nor does the order conflict with a prior interpretation of the marketable condition rule.