MARATHON OIL COMPANY, PETITIONER V. UNITED STATES OF AMERICA, ET
   AL.
   No. 86-1006
   In the Supreme Court of the United States
   October Term, 1986
   On Petition for a Writ of Certiorari to the United States Court of
Appeals for the Ninth Circuit
   Brief for the Federal Respondents in Opposition
            TABLE OF CONTENTS
   Opinions below
   Jurisdiction
   Question presented
   Statement
   Argument
   Conclusion
                            OPINIONS BELOW
   The opinion of the court of appeals (Pet. App. 2a-17a) is reported
at 807 F.2d 759.  The opinion of the district court (Pet. App.
22a-53a) is reported at 604 F. Supp. 1375.
                             JURISDICTION
   The judgment of the court of appeals was entered on July 24, 1986
(Pet. App. 2a).  A petition for rehearing, although not timely filed,
was ordered filed by the court of appeals (see Pet. App. 79a) and was
denied on January 22, 1987.  On October 3, 1986, Justice O'Connor
extended the time for filing a petition for a writ of certiorari to
and including December 21, 1986.  The petition was filed on December
19, 1986.  The jurisdiction of this Court is invoked under 28 U.S.C.
1254(1).
                          QUESTION PRESENTED
   Whether, under a longstanding regulation and federal mineral lease
provisions that require royalties to be paid on no less than the
"gross proceeds" accruing to a lessee from the sale of natural gas
production from federal leases, the Secretary of the Interior may
value certain gas, which the lessee produces from federal leases and
sells in Japan as liquefied natural gas, on the basis of the landed
sales price that petitioner receives in Japan, less allowable costs
and deductions for liquefaction and transportation (including return
on investment).
                               STATEMENT
   1. The Mineral Leasing Act of 1920, 30 U.S.C. 181 et seq. ("the
Act"), authorizes the Secretary of the Interior, among other things,
to lease public domain lands for oil and gas production.  Section
17(c) of the Act, 30 U.S.C. 226(c), provides that "(s)uch leases shall
be conditioned upon the payment by the lessee of a royalty of 12 1/2
per centum in amount or value of the production removed or sold from
the lease."
   The Secretary is authorized by Section 32 of the Act, 30 U.S.C.
189, "to prescribe necessary and proper rules and regulations and to
do any and all things necessary to carry out and accomplish the
purposes of" the Act.  Pursuant to this authority, the Secretary
issued the following regulation in 1942 (7 Fed. Reg. 4132, 4137
(emphasis added)):
         Section 221.47 Value basis for computing royalties.  The
      value of production, for the purpose of computing royalty shall
      be the estimated reasonable value of the product as determined
      by the supervisor, due consideration being given to the highest
      price paid for a part or for a majority of production of like
      quality in the same field, to the price received by the lessee,
      to posted prices and to other relevant matters.  Under no
      circumstances shall the value of production of any of said
      substances for the purposes of computing royalty be deemed to be
      less than the gross proceeds accruing to the lessee from the
      sale thereof or less than the value computed on such reasonable
      unit value as shall have been determined by the Secretary.  In
      the absence of good reason to the contrary, value computed on
      the basis of the highest price per barrel, thousand cubic feet,
      or gallon paid or offered at the time of production in a fair
      and open market for the major portion of like-quality oil, gas,
      or other products produced and sold from the field or area where
      the leased lands are situated will be considered to be a
      reasonable value.
   This regulation has been in force without substantive change ever
since, and is now codified at 30 C.F.R. 206.103.
   2. Since the 1950s, petitioner has owned working interests in seven
federal oil and gas leases within the Kenai Unit in Alaska.  /1/ Among
other things, the leases expressly require the lessee to pay a royalty
computed in accordance with the Oil and Gas Operating Regulations,
including what is now 30 C.F.R. 206.103.  The leases further state
that the lessee has "expressly agreed that the Secretary of the
Interior may establish reasonable minimum values for purposes of
computing royalty on * * * gas" removed or sold from the leased lands.
 The statute, regulations, and lease terms thus grant the Secretary
the authority to determine reasonable value for royalty purposes.  See
C.A. Excerpts of Record Exh. A;  California Co. v. Udall, 296 F.2d 384
(D.C. Cir. 1961).
   Petitioner transports a portion of its share of the gas produced
from the federal leases to a liquefied natural gas (LNG) plant at
Nikiski, Alaska.  The gas is then cooled to a liquid state, loaded on
petitioner's tanker vessels, and shipped to Japan, where it is
delivered and sold to Japanese public utility customers.  Thus, the
first sale of the gas does not occur until it is delivered in Japan.
Pet. App. 3a.
   Since the mid-1970s, petitioner and the government have been
involved in a dispute concerning the royalty value of the Kenai Unit
gas that petitioner sells in Japan.  First the United States
Geological Survey (USGS), and now its successor agency the Minerals
Management Service (MMS), Department of the Interior, have maintained
that, under 30 C.F.R. 206.103, the royalty value cannot be less than
petitioner's "gross proceeds," i.e., the sale price that petitioner
receives on the initial sale of the gas in Japan, less allowances for
liquefaction and transportation (including a return on investment).
Petitioner, however, has asserted that the sale price that it obtains
in Japan has no relevance to royalty value and claims that the royalty
value of the LNG volumes must be determined by reference to the prices
paid by local Alaskan gas customers for other gas produced from the
federal leases.  Pet. App. 24a.
   In an effort to resolve this dispute, petitioner and the USGS
agreed in 1981 to a method of determining royalty value based on
petitioner's sale price for LNG in Japan, reduced by a fixed
percentage (and subject to various adjustments).  This agreement,
however, was subject to termination in the event of changed market
conditions or other factors.  Pet. App. 4a.
   In fact, market conditions changed shortly after the agreement was
entered.  In 1983, MMS notified petitioner that it intended to
redetermine prospectively the reasonable royalty value for the Kenai
Unit gas sold in Japan (Pet. App. 71a).  Under that revision,
petitioner would be required to compute its gross proceeds, for
royalty calculation purposes, based on the sales price in Japan less
its actual costs for liquefaction and transportation, including a
return on its investment (id. at 64a-70a).  /2/ Following a public
hearing, MMS determined that the royalty value should be computed in
the manner previously proposed to petitioner.  Accordingly, on July 8,
1983, MMS directed petitioner to calculate royalty values according to
the gross proceeds methodology set forth in its prior letter to
petitioner (id. at 61a-63a).  That methodology, which takes as its
starting point the actual sales price received by petitioner in Japan
and then "works backwards" by allowing various deductions to arrive at
the value of the gas at the leasehold, has been referred to in this
proceeding as a "net-back" formula.
   3. Petitioner did not comply with the order of July 8, 1983, or
supplementary MMS orders.  /3/ Rather, in 1983, petitioner initiated
this action against the United States and other federal parties, the
State of Alaska and a state officer, /4/ and CIRI.  Petitioner sought
judicial review of MMS's orders concerning petitioner's royalty
obligations and requested a judgment declaring that it "may compute
royalties on the natural gas produced from the Leases which is
supplied to the LNG Plant on the basis of the highest field market
price paid under arms-length sales of natural gas in the Kenai Field
to Alaska purchasers." Section Amended Complaint at 23.
   The district court entered an opinion and order in favor of the
defendants (Pet. App. 22a-53a).  The district court, stating that its
primary task in this case was to ascertain whether MMS's orders
constituted a reasonable interpretation of the Mineral Leasing Act and
the implementing regulations (id. at 30a), held, among other things,
that "the MMS orders directing Marathon to use the net back method
fall within the agency's authority under the statutes and regulations"
and are also consistent with the terms of the leases (id. at 45a).  In
particular, the court "agree(d) with (petitioner's) basic premise"
that royalties should be based on the value of production at the
lease, but held that the net-back method was an appropriate method for
determining that value (id. at 43a).  Accordingly, the court granted
summary judgment to the United States and dismissed petitioner's
claims against the United States (id. at 18a-21a).  The court directed
petitioner to pay royalties in accordance with MMS's orders and
retained jurisdiction to conduct accounting proceedings (ibid.).
   The court of appeals affirmed (Pet. App. 2a-17a).  The court of
appeals upheld the district court's ruling concerning the validity of
MMS's net-back valuation formula for the reasons stated in the
district court's opinion (id. at 10a-11a).  The court also rejected
various other arguments that had not been explicitly addressed in the
district court's opinion (id. at 11a-17a).
                               ARGUMENT
   The decision of the court of appeals is correct, conflicts with no
decision of this Court or any other court of appeals, and presents no
issue of general importance warranting review by this Court.
Accordingly, the petition should be denied.
   1. Petitioner's primary argument (Pet. 7-13) is that the Mineral
Leasing Act itself somehow precludes use of the net-back methodology,
and that the courts below therefore erred in accepting the agency's
interpretation of the Act even if it was otherwise reasonable.
Petitioner's argument proceeds, in its entirety, from Congress's use
of the word "royalty" in Section 17(c) of the Act, which petitioner
says means a percentage of the actual production or its value at the
lease (Pet. 10).  The simple answer is that, as the district court
noted (Pet. App. 43a), the net-back methodology is a means of
determining value at the lease.  There is no evidence whatsoever that
Congress considered the question presented in this case -- how to
value production at the lease when the first sale takes place
elsewhere after further processing and transportation -- and
determined that a net-back methodology was inappropriate.  In these
circumstances, and in light of the broad delegation of authority in
Section 32 of the Act, the courts below appropriately deferred to the
agency's reasonable interpretation.  /5/
   Petitioner asserts, in substance, that the Mineral Leasing Act
states that the government may collect a "royalty" on gas production
from federal lands leased under the Act, that here the Secretary has
attempted to assess a "net-profits interest" instead of a "royalty,"
and that the courts below erred by deferring to the Secretary's
interpretation of the Act as allowing him to impose a "net-profits
interest" instead of a "royalty." Pet. 11-12.  Petitioner's position
is without merit.
   As we have shown (page 3, supra), the leases in question expressly
provide that they are subject to MMS's regulations and that petitioner
agrees that the Secretary of the Interior "may establish reasonable
minimum values for the purposes of computing royalty on * * * gas"
removed or sold from the leases.  The applicable regulation, which has
been in force for 45 years and at all times since the leases were
entered, provides that "(u)nder no circumstances shall the value of
production of any of said substances for the purposes of computing
royalty be deemed to be less than the gross proceeds accruing to the
lessee from the sale thereof." 7 Fed. Reg. 4137 (1942).  Hence, under
the terms of the regulation and leases, the royalty value may be no
less than the lessee's gross proceeds, regardless of what may be the
generally prevailing market price in that area.  A provision
obligating the lessee to pay a share of gross proceeds is a "royalty"
interest.  R. Hemingway, The Law of Oil and Gas Section 7.4, at 316,
320-321 (1971 & Supp. 1979).
   If petitioner sold its production at the leasehold, its "gross
proceeds" would be simply the amount that it received from the
purchaser.  Petitioner, however, sells its production for the first
time on delivery in Japan rather than at the leasehold.  Accordingly,
as the district court correctly observed (Pet. App. 40a-41a, 45a), it
was necessary for MMS to devise a method for calculating the gross
proceeds value of the production at the leasehold.  The methodology
that MMS has adopted to make this calculation starts with the actual
sale price that petitioner receives in Japan and then makes allowances
for costs of transportation and liquefaction (including a return on
investment) to arrive at the gross proceeds value of the gas at the
leasehold.
   As the courts below noted (Pet. App. 11a, 40a), such a "net-back"
method of ascertaining royalty value is well established and accepted
in the industry.  "Royalty payable upon the 'proceeds' of the sale of
gas, will be computed on the basis of aggregate gross receipts from
all products, less the costs of marketing and transportation.  The
presence of actual sales in the field is immaterial." R. Hemingway,
supra, Section 7.4, at 316.  As the Tenth Circuit has observed:
         The work-back valuation is well recognized in the production
      and early processing of natural gas.  It is commonly used,
      according to this record, in placing a value on feed stock for
      gasoline plants and related processing.  There is nothing
      unusual about the method, it is subject to proof, and can be
      just as accurate as any other method, but it is more difficult
      to apply.
   Ashland Oil, Inc. v. Phillips Petroleum Company, 554 F.2d 381, 387
(1975), cert. denied, 434 U.S. 921 (1977);  see also Continental Oil
Co. v. United States, 184 F.2d 802, 820-821 (9th Cir. 1950).
   Petitioner inaccurately represents (Pet. 5) that the Secretary
conceded in the court of appeals that the government was attempting to
levy a "profit-sharing interest" rather than a "royalty." At no point
did the government ever state or imply that it was seeking to collect
other than, or more than, a "royalty" interest.  Of course, whenever a
lessee sells its production at a price greater than the commonly
prevailing local market price, the lessor, under a "gross proceeds
minimum" lease (as contrasted to a pure market value lease), will
"share" in such "entrepreneurial profits" in the sense that the lessor
has a stake in the lessee's receipts.  That result, however, does not
transform a gross proceeds provision from a royalty interest into a
net profit share interest.  /6/
   2. Petitioner lists a number of factors that courts consider in
determining the amount of deference owed to an agency's interpretation
of a statute it is charged with administering (Pet. 14-17).  For the
most part, we agree with petitioner that the factors it lists are
appropriate.  /7/ Those factors support the deference given to MMS in
this case.
   Certainly the amount of deference given an agency is greatest when
the delegation of authority is broad (Pet. 14-15).  In this case,
Section 32 of the Act constitutes a very broad delegation of authority
to do that which is "necessary and proper."
   The agency's expertise is also an important factor (Pet. 15).
Although petitioner suggests otherwise, we do not think that it can be
seriously disputed that MMS and the Department of the Interior have
expertise in matters of oil and gas law in general and interpretation
of the Mineral Leasing Act and leases thereunder in particular.  See
Udall v. Tallman, 380 U.S. 1, 16 (1965) (deferring to interpretation
of Mineral Leasing Act by Secretary of the Interior).  /8/
   Finally, the "timing and consistency" (Pet. 15) of MMS's
interpretation of the statute, and other factors petitioner lists
(Pet. 15-17), are also consistent with the deference granted by the
courts below.  The "gross proceeds" provision of 30 C.F.R. 206.103,
which virtually requires use of the net-back methodology in this case,
has been part of the agency's consistent interpretation of the Act for
45 years.  In addition, the court of appeals, referring to its
35-year-old decision upholding a closely analogous ruling by the
Secretary of the Interior in a Mineral Leasing Act royalty dispute,
stated that "(t)his is not the first time we have concluded that it is
not unreasonable for the Secretary to use a net back or net
realization formula to compute the value of production for royalty
purposes" (Pet. App. 11a (citing Continental Oil Co. v. United States,
supra)).  Similarly, the district court, whose reasoning was adopted
by the court of appeals (Pet. App. 11a), rejected petitioner's
contentions that the net-back formula at issue was inconsistent with
previous Interior practices (id. at 36a-39a, 44a), found the agency's
methodology to be "a reasonable method for establishing a basis for
computing royalties" (id. at 44a), and concluded that "the MMS orders
directing Marathon to use the net back method fall within the agency's
authority under the statutes and regulations" (id. at 45a).
   In short, the courts below did not simply "rubber stamp" the
Secretary's position but, after examination of the statute, the
applicable regulation, and the leases themselves, determined that the
agency had reached a reasonable interpretation entitled to deference
in the circumstances of this case.  That conclusion was correct.
                              CONCLUSION
   The petition for a writ of certiorari should be denied.
   Respectfully submitted.
   CHARLES FRIED
      Solicitor General
   F. HENRY HABICHT II
      Assistant Attorney General
   JACQUES B. GELIN
   ROBERT L. KLARQUIST
      Attorneys
   FEBRUARY 1987
   /1/ Because of conveyances of certain lands to Cook Inlet Region,
Inc. (CIRI), an Alaska Native Regional Corporation established
pursuant to the Alaska Native Claims Settlement Act (ANCSA), 43 U.S.C.
1601 et seq., CIRI is entitled to approximately 65 percent of the
royalties from oil and gas produced on the leases, with the remaining
35 percent going to the United States.  The federal government has
retained administration of the leases pursuant to Section 14(g) of
ANCSA, 43 U.S.C. 1613(g).
   /2/ The procedure proposed by MMS described the deductible element
"Return on Investment" as follows (Pet. App. 70a):
         The lessee shall present to MMS a proposed reasonable rate of
      return for this type of operation in the Alaska region at the
      time covered by this project.  This proposal shall identify all
      components such as risk, cost of capital, etc., that are
      incorporated in this rate.  If the lessee is unable to provide
      convincing evidence that their proposed rate of return is
      reasonable, MMS will fix a value and advise Marathon of the rate
      of return to be used.
   /3/ Even before MMS issued its order of July 8, 1983, petitioner
had stopped calculating royalties on the basis of the compromise
methodology that had been in effect since 1981.  Instead, petitioner
began to compute and pay royalties on the gas sold in Japan based on a
value of production equal to the prevailing sales price under a 1975
gas sales agreement amendment with a local Alaskan customer, thereby
unilaterally rolling back its royalty payments by almost two-thirds.
In October 1983 and June 1984, MMS issued further orders directing
petitioner to pay certain amounts of underpaid royalties and to comply
with MMS's previous orders.  Petitioner did not comply with any of the
orders.  Pet. App. 54a-60a.
   /4/ Under Section 35 of the Mineral Leasing Act, 30 U.S.C. 191, the
State of Alaska is entitled to 90 percent of the royalties received by
the United States from the federal leases.
   /5/ There is no substance to petitioner's contention that the
courts below erred by not "explicitly find(ing), as a matter of law,
that the statute and legislative history are ambiguous on the disputed
issue" (Pet. 9 (emphasis added)).  Petitioner does not point to
anything in the statute or legislative history that unambiguously
resolves the question presented in this case.  In the absence of any
colorable claim along those lines, petitioner's argument amounts to
nothing more than a suggestion that courts err when they draw correct
conclusions about statutory language and legislative history
implicitly rather than explicitly.  This Court's decisions do not
mandate the formalistic approach for which petitioner contends.
   /6/ As petitioner points out (Pet. 11), in the mining industry a
"royalty" is a cost-free share of production whereas a "net-profits
interest" is a share of profits from production after costs have been
deducted.  Here, the leases at issue require that production be valued
for royalty purposes at no less than the gross proceeds accruing to
the lessee.  Under these leases, the lessee's costs of production at
the leasehold are irrelevant and the amounts that the lessee must pay
the government are not tied to the lessee's profits.  Indeed, the
lessee would remain obligated to pay a 12 1/2 percent royalty on its
gross proceeds even if it were making no net profit whatsoever.  And,
as we have pointed out (pages 4-5, supra), the royalty valuation
methodology at issue specifically entitles the petitioner to deduct
such rate of return on its investment in its liquefaction and
transportation facilities (including risk) as it may show to be
reasonable.
   /7/ Petitioner, however, incorrectly claims (Pet. 17) that MMS's
interpretation of the Mineral Leasing Act is entitled to less
deference in this case because thg government has a "pecuniary
interest" in the amount of royalties to be collected.  The cases on
which petitioner relies are due process cases indicating that a
decisionmaker should not have a personal financial stake in the
outcome of the proceeding and are obviously inapposite.  Indeed, if
petitioner's argument were correct, the Internal Revenue Service,
which is always "a collection agency for the Treasury" (ibid.), would
not be entitled to deference in its interpretation of the Internal
Revenue Code, yet this Court has not hesitated to give "considerable
deference" to the IRS's interpretation of the Code.  United States v.
National Bank of Commerce, 472 U.S. 713, 730 (1985).
   /8/ Petitioner remarkably suggests that Chevron U.S.A. Inc. v.
NRDC, 467 U.S. 837 (1984), "implicitly rejected the approach taken in
some earlier cases" (Pet. 8) including Udall v. Tallman.  Just the
opposite is true.  Chevron reiterated well-settled principles" (467
U.S. at 845) culled from such cases as Udall v. Tallman, which was
cited in 467 U.S. at 843 n.11.  See, e.g., United States v. Riverside
Bayview Homes, No. 84-701 (Dec. 4, 1985), slip op. 9-10.