Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-95-01221/USCOURTS-ca10-95-01221-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 

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UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

SANTA FE ENERGY PRODUCTS COMPANY, ) 

) 

Plaintiff-Appellant, ) 

) 

v. ) 

) 

TODD R. MCCUTCHEON, Acting Area ) 

Manager, State and Indian Program ) 

Audit Office for the Minerals ) 

Management Service of the United ) 

States Department of the Interior; ) 

BRUCE BABBITT, Secretary of the ) 

United States Department of the ) 

Interior, ) 

) 

Defendants-Appellees. ) 

ORDER 

No. 95-1221 

Entered July 16, 1996 

Before SEYMOUR, Chief Judge, ALARCON* and LUCERO, Circuit Judges. 

* Honorable Arthur L. Alarcon, Senior United States Circuit Judge 

for the Ninth Circuit, sitting by designation. 

The petition for rehearing is denied. However, the Court 

amends its opinion filed April 10, 1996, as follows: 

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 1 
Starting on page 11, delete the last paragraph in its 

entirety. The accompanying opinion is substituted. 

Entered for the Court 

PATRICK FISHER, Clerk 

By~~/:vd Deputy Cl 

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 2 
PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

SANTA FE ENERGY PRODUCTS COMPANY, ) 

) 

Plaintiff-Appellant, ) 

) 

v. ) 

) 

TODD R. MCCUTCHEON, Acting Area ) 

Manager, State and Indian Program ) 

Audit Office for the Minerals ) 

Management Service of the United ) 

States Department of the Interior; ) 

BRUCE BABBITT, Secretary of the ) 

United States Department of the ) 

Interior, ) 

) 

Defendants-Appellees. ) 

No. 95-1221 

FILED 

United States Court of Appeals 

Tenth Circuit 

APR 1 0 1996 

PATRICK FISHER 

Clerk 

Appeal from the United States District Court 

for the District of Colorado 

(D.C. No. 94-C-535) 

John F. Shepherd (JaneL. Montgomery with him on the brief), of 

Holland & Hart, Denver, Colorado, for Plaintiff-Appellant. 

William B. Lazarus (Lois J. Schiffer, Assistant Attorney General, 

David w. Gehlert, Robert L. Klarquist, with him on the brief), 

Department of Justice, (Peter J. Schaumberg and Geoffrey R. Heath, 

office of the Solicitor, Department of the Interior), Washington, 

D.C., for Defendants-Appellees. 

Before SEYMOUR, Chief Judge, ALARC6N* and LUCERO, Circuit Judges. 

ALARC6N, Circuit Judge. 

* Honorable Arthur L. Alarcon, Senior United States circuit 

Judge for the Ninth Circuit, sitting by designation. 

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 3 
This appeal presents the narrow question whether the district 

court erred by holding that the Appellee Mineral Management Service 

("MMS" or the "Government") has authority under section 103(a) of 

the Federal Oil and Gas Royalty Management Act ("FOGRMA") to 

require the production of documents for an audit relating to the 

first arm's length sale of oil by a wholly owned affiliate of a 

federal lessee. We have jurisdiction to review the merits of this 

issue pursuant to 28 u.s.c. § 1291. We affirm because we conclude 

that section 103(a) requires the production of the documents sought 

by the MMS. 

I 

The Congress has authorized the Department of Interior to 

enter into and to administer leases providing for the development 

of federal oil and gas resources. These leases are generally 

granted to "the highest responsible qualified bidder" after a 

public, competitive bidding process, and provide for payment of 

royalties calculated as a percentage of the "amount or value of the 

production saved, removed, or sold from the lease." 30 u.s.c. 

§ 226 (b) (1). 

The FOGRMA authorized the Secretary of the Department of 

Interior ("Secretary") to develop a comprehensive system of royalty 

management. 30 u.s.c. §§ 1701-1705. The FOGRMA directs the 

Secretary to establish "a comprehensive inspection, collection and 

fiscal and production accounting and auditing system to provide the 

capability to accurately determine oil and gas royalties, interest, 

fines, penalties, fees, deposits, and other payments owed, and to 

collect and account for such amounts in a timely manner." 30 

-2-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 4 
u.s.c. § 17ll(a). The FOGRMA further provides that the Secretary 

"shall audit and reconcile, to the extent practicable, all current 

and past lease accounts for leases of oil or gas and take 

appropriate actions to make additional collections or refunds as 

warranted." 30 U.S.C. § 1711(c) (1). Congress enacted the FOGRMA 

to address serious deficiencies in the federal royalty management 

system which, according to the General Accounting Office, cost the 

federal government up to $500 million annually. 1982 u.s. Code 

Cong. & Admin. News 4269. The regulations implementing section 103 

of the FOGRMA appear at 30 C.P.R. §§ 212.50-52. The Secretary has 

delegated responsibility for enforcing royalty payment obligations 

to the Director of the MMS. See generally 30 C.P.R. pt. 218 

(1987); Phillips Petroleum Co. v. Lujan, 963 F.2d 1380, 1382 (lOth 

Cir. 1992) • 

Santa Fe Energy Resources, Incorporated ("Santa Fe") is the 

parent corporation of the two wholly owned subsidiary companies 

relevant to this appeal: Santa Fe Energy Resources Company 

("Energy") and Appellant Santa Fe Energy Products Company 

("Products"). Energy produces oil under federal leases located in 

the Midway-Sunset, Sespe, and North Kern fields in California for 

which it was the operator and designated payor during the relevant 

period in this matter, January 1, 1984, through June 30, 1987. 

Energy transfers most of the oil produced under these federal 

leases, in non-arm's length transactions, to its affiliate 

Products. Products then markets this oil to third party 

purchasers. 

-3-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 5 
The California state Controller's Office, acting under a 

delegation of authority from the MMS, began an audit covering 

Energy's royalty payments from the federal leases for the period of 

January 1, 1984, through June 30, 1987. Because the interaffiliate sales between Energy and Products were not arm's length 

transactions, the Government sought access to certain documents 

regarding Products' subsequent sales to independent third parties. 

The Government demanded: "(1) all pertinent sales contracts and 

exchange agreements between [Products] and outside entities 

involving crude oil originating from leases operated by [Energy] in 

the Midway-sunset, Sespe and North Kern Front fields;" and "(2) 

ledger entries and settlement statements supporting revenues 

received by [Products] for crude oil originating in the above 

fields." The Government contends that it requested these documents 

in order to establish whether Energy used proper values in 

computing royalties paid on oil sold to its affiliate. Products 

refused the Government's request. 

On September 30, 1988, the Chief of the Office of State and 

Tribal Program Support of the MMS' Royalty Compliance Division in 

Lakewood, Colorado, issued an order to Products to provide access 

to the identified documents. Products appealed the order to the 

MMS Director. Because Products was not a party to the federal 

lease, and Energy had paid royalties at posted prices, 1 Products 

contended that the MMS lacked authority over it. 

1 Posted prices are defined as the "price specified in publicly 

available posted price bulletins, offshore or onshore terminal 

postings, or other price notices net of all adjustments for 

quality (e.g., API gravity, sulfur content, etc.) and location for 

oil in marketable condition." 30 C.F.R. § 206.101 (1994). 

-4-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 6 
• The Director of the MMS rejected Products' contentions and 

upheld the order stating: 

The issue in this case is whether the [Energy/ 

Products] transfer, admittedly not at arm's 

length, represents fair market value. The 

request for information from [Products] was 

meant to ascertain that fact. The information 

concerning [Product's] arm's-length contracts 

would provide the needed comparison as to 

whether the non-arm's-length contract of 

[Energy] meets the appropriate criteria. 

Without the information requested from 

[Products], the State and MMS cannot make a 

reasonable determination as to the value of 

the crude oil for royalty purposes, since the 

lessee's gross proceeds always is the minimum 

value. 30 C.F.R. 206.103 (1987). 

The Director concluded that "[a] lessee cannot avoid [the gross 

proceeds] requirement by transferring production to an affiliate 

who then sells the production to third parties. 2 The latter sale 

by the affiliate established the proceeds accruing to the lessee." 

The Director's decision was appealed to the Interior Board of 

Land Appeals ("IBLA"). The IBLA affirmed the Director's conclusion 

"that the [gross proceeds] rule provided MMS with authority to 

obtain records from any affected 'person' involved in purchasing or 

selling oil, and that the MMS was not limited to dealing with the 

signatory lessee concerned (Decision at 6). 11 The IBLA also agreed 

"that the obligation to report 'gross proceeds accruing to the 

lessee' cannot be avoided by an inter-affiliate transfer made in 

contemplation of a later sale to third parties." 

2 The gross proceeds rule governs the MMS' valuation of oil and 

gas produced under federal lease for the purpose of ensuring that 

the Government receives proper royalty payments. The rule has 

been promulgated at 30 C.F.R. § 206.103 (1987) and is analyzed in 

Part II of this opinion. 

-5-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 7 
Products petitioned for reconsideration, arguing that the IBLA 

erred when it made "a mistaken assumption on one key fact: that 

[Products] is an affiliate that only buys and markets Energy's oil 

production." The IBLA rejected as irrelevant Products' contention 

that it was not a "marketing affiliate" as defined in 30 C.F.R. 

§ 206.151 (1992). Rather, the IBLA affirmed the MMS' finding that 

"transactions between affiliates such as took place in the instant 

case must be examined relative to arm's length transactions between 

the buyer and non-affiliated third parties." Section 206.151 was 

neither construed nor cited by the IBLA in its decision. 

Accordingly, Products' petition was denied. 

On March 7, 1994, Products filed a complaint in the United 

States District Court for the District of Colorado seeking review 

of the IBLA's decision. On January 17, 1995, Products filed a 

motion for summary judgment. On February 16, 1995, the Government 

filed a cross-motion for summary judgment. The district court, on 

March 30, 1995, issued an order granting the Government's motion 

for summary judgment and denying Products' motion. The district 

court rejected Products' contention that "there is no authority 

holding sales by an affiliate of a lessee relevant to royalty 

valuation." The district court stated that "[a]dministrative 

agencies vested with investigatory power have broad discretion to 

require disclosure of information concerning matters within their 

jurisdiction." Pursuant to the gross proceeds rule, the court 

reasoned, the MMS may compute royalties based upon a value equal to 

"the estimated reasonable value of the product • due 

consideration being given to the highest price paid • • • and to 

-6-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 8 
other relevant matters. 30 C.F.R. § 206.103. 11 The district court 

held that the IBLA did not err by concluding that "other relevant 

matters" could include the price paid on the first arm's length 

sale of oil produced under federal lease. Judgment was entered for 

the Government on April 4, 1995. 

II 

We review "de novo the district court's grant of summary 

judgment." Valley Camp of Utah, Inc. v. Babbitt, 24 F.3d 1263, 

1267 (lOth Cir. 1994). Our review of an agency's actions is 

"narrow," and "substantial deference [is] afford[ed] to the actions 

of administrative agencies in compliance with their statutory 

enforcement obligations." Phillips Petroleum Co. v. Lujan, 951 

F.2d 257, 259 (lOth Cir. 1991). We will not set aside agency 

action unless it is "arbitrary, capricious, an abuse of discretion, 

or otherwise not in accordance with law." Id. (citing 5 u.s.c. 

§ 706(2) (A)). "[I]n reviewing a district court's review of an 

agency decision, 'the identical standard of review is employed at 

both levels; and once appealed, the district court's decision is 

afforded no particular deference.'" Valley Camp of Utah, Inc., 24 

F.3d at 1267 (citation omitted). 

Products first contends that the district court's failure to 

apply the royalty regulations set forth at 30 C.F.R. § 206.102(c) 

(1988) constituted error. Products contention is without merit. 

The district court correctly held that section 206.102(c) does not 

apply to this matter. Section 206.102(c) did not become effective 

until March 1, 1988. This action concerns the period from January 

1, 1984, through June 30, 1987. The 1988 royalty regulations do 

-7-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 9 
not apply retroactively. See Exxon Co., U.S.A., 128 I.B.L.A. 22, 

24 (1993) ("the 1988 royalty regulations were specifically made to 

apply 'prospectively to gas production on or after [Mar. 1, 

1988] "') (citation omitted); 53 F.R. 1184, 1230 (Jan. 15, 1988) 

("[t]hese regulations will apply prospectively to gas production on 

or after the effective date specified in the DATES section of this 

preamble"). The MMS' construction of its own regulations should be 

afforded great deference. See Thomas Jefferson University v. 

Shalala, 114 s. ct. 2381, 2386 (1994) ("[w]e must give substantial 

deference to an agency's interpretations of its own regulations"). 

Both the district court and the IBLA correctly declined to apply 

the 1988 regulatory revisions to this matter. 

Products next asserts that the district court's decision 

should be reversed because it erroneously concluded that Products' 

oil sales are relevant to the Government's valuation of royalties. 

Products argues that the documents ordered are irrelevant because 

they relate to transactions after the proper point of royalty 

computation the sale from the lessee, Energy, to Products. 

Moreover, Products contends that there is no authority holding 

sales by an affiliate of a lessee relevant to royalty valuation. 

Section 103(a) of the FOGRMA, the record production provision, 

provides that: 

A lessee, operator, or other person directly 

involved in developing, producing, 

transporting, purchasing, or selling oil or 

gas subject to this chapter through the point 

of first sale or the point of royalty 

computation, whichever is later, shall 

establish and maintain any records, make any 

reports, and provide any information that the 

Secretary may, by rule, reasonably require for 

the purposes of implementing this chapter or 

-8-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 10 
determining compliance with rules or orders 

under this chapter. Upon the request of any 

officer or employee duly designated by the 

Secretary or any State or Indian tribe 

conducting an audit or investigation pursuant 

to this act, the appropriate records, reports, 

or information which may be required by the 

section shall be made available for inspection 

and duplication, by such officer or employee, 

State, or Indian tribe. 

30 u.s.c. § 1713(a) (emphasis added). Congress defined "person" 

for purposes of the FOGRMA as "any individual, firm, corporation, 

association, partnership, consortium, or joint venture." 30 u.s.c. 

§ 1702(12). Section 1713(a) empowers the MMS to require Products 

to establish, maintain, and make available for inspection the 

documents requested in this case. Products was the first purchaser 

of oil produced by Energy under a federal lease. Accordingly, 

Products was a "person directly involved in . . . purchasing . 

oil or gas subject to this chapter through the point of first sale 

or royalty computation." Therefore, Products was required to 

"establish and maintain any records, make any reports, and provide 

any information that the Secretary may, by rule, reasonably require 

for the purposes of implementing this chapter or determining 

compliance with rules or orders under this chapter." 

The MMS has the authority to require Products to produce 

documents "relevant" to oil sales, where such documents are 

reasonably required to implement royalty valuation pursuant to the 

gross proceeds rule. The gross proceeds rule, the rule relevant to 

the period of production in this matter, provides: 

The value of production, for the purpose of 

computing royalty, shall be the estimated 

reasonable value of the product as determined 

by the Associate Director due consideration 

being given to the highest price paid for a 

-9-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 11 
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 purpos~s 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. 

30 C.F.R. § 206.103 (1987) (emphasis added). 

Products contends that the point of royalty computation is the 

sale between Resources and Products, not between Products and third 

parties, because "nothing in the pre-1988 regulations remotely 

suggested that the sale by a lessee to an affiliate could be 

disregarded for royalty purposes." Products, however, concedes in 

its opening brief that the pre-1988 regulations provide "little or 

no guidance on the point of royalty computation for oil sold to an 

affiliate." The MMS argues that nothing in the gross proceeds rule 

or any other provision limits the point of royalty computation to 

the first sale of the leased product. Rather, the MMS maintains 

that the royalty value is "the estimated reasonable value of the 

product as determined by the [MMS] Associate Director due 

consideration being given to the highest price paid . and to 

other relevant matters." Under the gross proceeds rule, the MMS 

could reasonably require information relating to Products' sales in 

order to ascertain the oil's fair market value and to determine the 

gross proceeds accruing to Energy. See Thomas Jefferson 

University, 114 s. ct. at 2386 (the court accords substantial 

deference to an agency's reasonable interpretations of its own 

regulations). 

-10-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 12 
• 

Products' resale records constituted "records necessary to 

demonstrate that payments of rentals, royalties, net profit shares, 

and other payments related to offshore and onshore Federal and 

Indian oil and gas leases are in compliance with lease terms, 

regulations and orders." 30 C.F.R. § 212.51(a) (1984). Moreover, 

an administrative agency's authority to request records and 

undertake other investigatory functions is extremely broad. See 

United States v. Morton Salt Co., 338 U.S. 632, 642-43 (1950) 

. (restating the breadth of an agency's ability to gather information 

which is analogous to a Grand Jury's power to "investigate merely 

on suspicion that the law is being violated, or even just because 

it wants assurance that it is not"). 

The MMS' determination that the first arm's length sale of 

oil produced under a federal lease was covered by the "other 

relevant matters" language of its regulations was not arbitrary, 

capricious, or contrary to law. 

The IBLA's determination that section 103(a) of FOGRMA 

requires Products to produce documents relating to its arm's length 

sales of oil received from Energy was not arbitrary, capricious, or 

contrary to law. The district court's order granting the 

Government's motion for summary judgment and denying Products' 

motion for summary judgment was proper and is AFFIRMED. 

-11-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 13 
UDifedt I LED 

T::. CC!'" f!l Appeab APPEALS •rcwt 

PUBLISH 

UNITED STATES COURT OF 

TENTH CIRCUIT APR 1 0 1996 

------........... PATJUCKFJSHER 

Clerk 

SANTA FE ENERGY PRODUCTS COMPANY, } 

} 

Plaintiff-Appellant, } 

} 

v. ) 

} 

TODD R. MCCUTCHEON, Acting Area ) 

Manager, State and Indian Program ) 

Audit Office for the Minerals } 

Management Service of the United } 

States Department of the Interior; ) 

BRUCE BABBITT, Secretary of the ) 

United States Department of the ) 

Interior, ) 

) 

Defendants-Appellees. ) 

No. 95-1221 

Appeal from the United States District Court 

for the District of Colorado 

(D.C. No. 94-C-535} 

John F. Shepherd (JaneL. Montgomery with him on the brief}, of 

Holland & Hart, Denver, Colorado, for Plaintiff-Appellant. 

William B. Lazarus (Lois J. Schiffer, Assistant Attorney General, 

David W. Gehlert, Robert L. Klarquist, with him on the brief}, 

Department of Justice, (Peter J. Schaumberg and Geoffrey R. Heath, 

Office of the Solicitor, Department of the Interior), Washington, 

D.C., for Defendants-Appellees. 

Before SEYMOUR, Chief Judge, ALARCON* and LUCERO, Circuit Judges. 

ALARCON, Circuit Judge. 

* Honorable Arthur L. Alarcon, Senior United States Circuit 

Judge for the Ninth Circuit, sitting by designation. 

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 14 
This appeal presents the narrow question whether the district 

court erred by holding that the Appellee Mineral Management Service 

("MMS" or the "Government") has authorityunder section 103(a) of 

the Federal Oil and Gas Royalty Management Act ("FOGRMA") to 

require the production of documents for an audit relating to the 

first arm's length sale of oil by a wholly owned affiliate of a 

federal lessee. We have jurisdiction to review the merits of this 

issue pursuant to 28 u.s.c. § 1291. We affirm because we conclude 

that section 103(a) requires the production of the documents sought 

by the MMS. 

I 

The Congress has authorized the Department of Interior to 

enter into and to administer leases providing for the development 

of federal oil and gas resources. These leases are generally 

granted to "the highest responsible qualified bidder" after a 

public, competitive bidding process, and provide for payment of 

royalties calculated as a percentage of the "amount or value of the 

production saved, removed, or sold from the lease." 30 u.s.c. 

§ 226 (b) (1). 

The FOGRMA authorized the Secretary of the Department of 

Interior ("Secretary") to develop a comprehensive system of royalty 

management. 30 u.s.c. §§ 1701-1705. The FOGRMA directs the 

Secretary to establish "a comprehensive inspection, collection and 

fiscal and production accounting and auditing system to provide the 

capability to accurately determine oil and gas royalties, interest, 

fines, penalties, fees, deposits, and other payments owed, and to 

collect and account for such amounts in a timely manner." 30 

-2-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 15 
u.s.c. § 1711(a). The FOGRMA further provides that the Secretary 

"shall audit and reconcile, to the extent practicable, all current 

and past lease accounts for leases of oil or gas and take 

appropriate actions to make additional collections or refunds as 

warranted." 30 u.s.c. § 1711(c) (1). Congress enacted the FOGRMA 

to address serious deficiencies in the federal royalty management 

system which, according to the General Accounting Office, cost the 

federal government up to $500 million annually. 1982 u.s. Code 

Cong. & Admin. News 4269. The regulations implementing section 103 

of the FOGRMA appear at 30 C.F.R. §§ 212.50-52. The Secretary has 

delegated responsibility for enforcing royalty payment obligations 

to the Director of the MMS. See generally 30 C.F.R. pt. 218 

(1987); Phillips Petroleum Co. v. Lujan, 963 F.2d 1380, 1382 (lOth 

Cir. 1992). 

Santa Fe Energy Resources, Incorporated ("Santa Fe") is the 

parent corporation of the two wholly owned subsidiary companies 

relevant to this appeal: Santa Fe Energy Resources Company 

("Energy") and Appellant Santa Fe Energy Products Company 

("Products"). Energy produces oil under federal leases located in 

the Midway-Sunset, Sespe, and North Kern fields in California for 

which it was the operator and designated payor during the relevant 

period in this matter, January 1, 1984, through June 30, 1987. 

Energy transfers most of the oil produced under these federal 

leases, in non-arm's length transactions, to its affiliate 

Products. Products.then markets this oil to third party 

purchasers. 

-3-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 16 
The California State Controller's Office, acting under a 

delegation of authority from the MMS, began an audit covering 

Energy's royalty payments from the federal leases for the period of 

January 1, 1984, through June 30, 1987. Because the interaffiliate sales between Energy and Products were not arm's length 

transactions, the Government sought access to certain documents 

regarding Products' subsequent sales to independent third parties. 

The Government demanded: "(1) all pertinent sales contracts and 

exchange agreements between [Products] and outside entities 

involving crude oil originating from leases operated by [Energy] in 

the Midway-Sunset, Sespe and North Kern Front fields;" and 11 (2) 

ledger entries and settlement statements supporting revenues 

received by [Products] for crude oil originating in the above 

fields." The Government contends that it requested these documents 

in order to establish whether Energy used proper values in 

computing royalties paid on oil sold to its affiliate. Products 

refused the Government's request. 

On September 30, 1988, the Chief of the Office of state and 

Tribal Program Support of the MMS' Royalty Compliance Division in 

Lakewood, Colorado, issued an order to Products to provide access 

to the identified documents. Products appealed the order to the 

MMS Director. Because Products was not a party to the federal 

lease, and Energy had paid royalties at posted prices, 1 Products 

contended that the MMS lacked authority over it. 

1 Posted prices are defined as the "price specified in publicly 

available posted price bulletins, offshore or onshore terminal 

postings, or other price notices net of all adjustments for 

quality (e.g., API gravity, sulfur content, etc.) and location for 

oil in marketable condition." 30 C.F.R. § 206.101 (1994). 

-4-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 17 
• ' I t 

The Director of the MMS rejected Products' contentions and 

upheld the order stating: 

The issue in this case is whether the [Energy/ 

Products] transfer, admittedly not at arm's 

length, represents fair market value. The 

request for information from [Products] was 

meant to ascertain that fact. The information 

concerning [Product's] arm's-length contracts 

would provide the needed comparison as to 

whether the non-arm's-length contract of 

[Energy] meets the appropriate criteria. 

Without the information requested from 

[Products], the state and MMS cannot make a 

reasonable determination as to the value of 

the crude oil for royalty purposes, since the 

lessee's gross proceeds always is the minimum 

value. 30 C.F.R. 206.103 (1987). 

The Director concluded that "[a] lessee cannot avoid [the gross 

proceeds] requirement by transferring production to an affiliate 

who then sells the production to third parties. 2 The latter sale 

by the affiliate established the proceeds accruing to the lessee." 

The Director's decision was appealed to the Interior Board of 

Land Appeals ("IBLA"). The IBLA affirmed the Director's conclusion 

"that the [gross proceeds] rule provided MMS with authority to 

obtain records from any affected 'person' involved in purchasing or 

selling oil, and that the MMS was not limited to dealing with the 

signatory lessee concerned (Decision at 6)." The IBLA also agreed 

"that the obligation to report 'gross proceeds accruing to the 

lessee' cannot be avoided by an inter-affiliate transfer made in 

contemplation of a later sale to third parties." 

2 The gross proceeds rule governs the MMS' valuation of oil and 

gas produced under federal lease for the purpose of ensuring that 

the Government receives proper royalty payments. The rule has 

been promulgated at 30 C.F.R. § 206.103 (1987) and is analyzed in 

Part II of this opinion. 

-5-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 18 
. ' , 

Products petitioned for reconsideration, arguing that the IBLA 

erred when it made "a mistaken assumption on one key fact: that 

[Products] is an affiliate that only buys and markets Energy's oil 

production." The IBLA rejected as irrelevant Products' contention 

that it was not a "marketing affiliate" as defined in 30 C.F.R. 

§ 206.151 (1992). Rather, the IBLA affirmed the MMS' finding that 

"transactions between affiliates such as took place in the instant 

case must be examined relative to arm's length transactions between 

the buyer and non-affiliated third parties." Section 206.151 was 

neither construed nor cited by the IBLA in its decision. 

Accordingly, Products' petition was denied. 

On March 7, 1994, Products filed a complaint in the United 

States District Court for the District of Colorado seeking review 

of the IBLA's decision. On January 17, 1995, Products filed a 

motion for summary judgment. On February 16, 1995, the Government 

filed a cross-motion for summary judgment. The district court, on 

March 30, 1995, issued an order granting the Government's motion 

for summary judgment and denying Products' motion. The district 

court rejected Products' contention that "there is no authority 

holding sales by an affiliate of a lessee relevant to royalty 

valuation." The district court stated that "(a]dministrative 

agencies vested with investigatory power have broad discretion to 

require disclosure of information concerning matters within their 

jurisdiction." Pursuant to the gross proceeds rule, the court 

reasoned, the MMS may compute royalties based upon a value equal to 

"the estimated reasonable value of the product • due 

consideration being given to the highest price paid • • • and to 

-6-

Appellate Case: 95-1221 Document: 01019279270 Date Filed: 04/10/1996 Page: 19 
. ' 

other relevant matters. 30 C.F.R. § 206.103." The district court 

held that the IBLA did not err by concluding that "other relevant 

matters" could include the price paid on the first arm's length 

sale of oil produced under federal lease. Judgment was entered for 

the Government on April 4, 1995. 

II 

We review "de .nQYQ the district court's grant of summary 

judgment." Valiey Camp of Utah, Inc. v. Babbitt, 24 F.3d 1263, 

1267 (lOth Cir. 1994). Our review of an agency's actions is 

"narrow," and "substantial deference [is] afford[ed] to the actions 

of administrative agencies in compliance with their statutory 

enforcement obligations." Phillips Petroleum Co. v. Lujan, 951 

F.2d 257, 259 (lOth Cir. 1991). We will not set aside agency 

action unless it is "arbitrary, capricious, an abuse of discretion, 

or otherwise not in accordance with law." Id. (citing 5 u.s.c. 

§ 706(2) (A)). "[I]n reviewing a district court's review of an 

agency decision, 'the identical standard of review is employed at 

both levels; and once appealed, the district court's decision is 

afforded no particular deference."' Valley Camp of Utah. Inc., 24 

F.3d at 1267 (citation omitted). 

Products first contends that the district court's failure to 

apply the royalty regulations set forth at 30 C.F.R. § 206.102(c) 

(1988) constituted error. Products contention is without merit. 

The district court correctly_held that section 206.102(c) does not 

apply to this matter. Section 206.102(c) did not become effective 

until March l, 1988. This action concerns the period from January 

1, 1984, through June 30, 1987. The 1988 royalty regulations do 

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• I 1 -Jo 

not apply retroactively. See Exxon Co., u.s.A., 128 I.B.L.A. 22, 

24 (1993) {"the 1988 royalty regulations were specifically made to 

apply 'prospectively to gas production on or after [Mar. 1, 

1988] "') (citation omitted); 53 F.R. 1184, 1230 (Jan. 15, 1988) 

("(t]hese regulations will apply prospectively to gas production on 

or after the effective date specified in the DATES section of this 

preamble"). The MMS' construction of its own regulations should be 

afforded great deference. See Thomas Jefferson University v. 

Shalala, 114 s. Ct. 2381, 2386 {1994) ("[w]e must give substantial 

deference to an agency's interpretations of its own regulations"). 

Both the district court and the IBLA correctly declined to apply 

the 1988 regulatory revisions to this matter. 

Products next asserts that the district court's decision 

should be reversed because it erroneously concluded that Products' 

oil sales are relevant to the Government's valuation of royalties. 

Products argues that the documents ordered are irrelevant because 

they relate to transactions after the proper point of royalty 

computation the sale from the lessee, Energy, to Products. 

Moreover, Products contends that there is no authority holding 

sales by an affiliate of a lessee relevant to royalty valuation. 

Section 103(a) of the FOGRMA, the record production provision, 

provides that: 

A lessee, operator, or other person directly 

involved in developing, producing, 

transporting, purchasing, or selling oil or 

gas subject to this chapter through the point 

of first sale or the point of royalty 

computation, whichever is later, shall 

establish and maintain any records, make any 

reports, and provide any information that the 

Secretary may, by rule, reasonably require for 

the purposes of implementing this chapter or 

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determining compliance with rules or orders 

under this chapter. Upon the request of any 

officer or employee duly designated by the 

Secretary or any State or Indian tribe 

conducting an audit or investigation pursuant 

to this act, the appropriate records, reports, 

or information which may be required by the 

section shall be made available for inspection 

and duplication, by such officer or employee, 

State, or Indian tribe. 

30 u.s.c. § 1713(a) (emphasis added). Congress defined "person" 

for purposes of the FOGRMA as "any individual, firm, corporation, 

association, partnership, consortium, or joint venture." 30 u.s.c. 

§ 1702(12). Section 1713(a) empowers the MMS to require Products 

to establish, maintain, and make available for inspection the 

documents requested in this case. Products was the first purchaser 

of oil produced by Energy under a federal lease. Accordingly, 

Products was a "person directly involved in • • • purchasing • 

oil or gas subject to this chapter through the point of first sale 

or royalty computation." Therefore, Products was required to 

"establish and maintain any records, make any reports, and provide 

any information that the Secretary may, by rule, reasonably require 

for the purposes of implementing this chapter or determining 

compliance with rules or orders under this-chapter." 

The MMS has the authority to require Products to produce 

documents "relevant" to oil sales, where such documents are 

reasonably required to implement royalty valuation pursuant to the 

gross proceeds rule. The gross proceeds rule, the rule relevant to 

the period of production in this matter, provides: 

The value of production, for the purpose of 

computing royalty, shall be the estimated 

reasonable value of the product as determined 

by the Associate Director due consideration 

being given to the highest price paid for a 

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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. 

30 C.F.R. S 206.103 (1987) (emphasis added). 

Products contends that the point of royalty computation is the 

sale between Resources and Products, not between Products and third 

parties, because "nothing in the pre-1988 regulations remotely 

suggested that the sale by a lessee to an affiliate could be 

disregarded for royalty purposes." Products, however, concedes in 

its opening brief that the pre-1988 regulations provide "little or 

no guidance on the point of royalty computation for oil sold to an 

affiliate." The MMS argues that nothing in the gross proceeds rule 

or any other provision limits the point of royalty computation to 

the first sale of the leased product. Rather, the MMS maintains 

that the royalty value is "the estimated reasonable value of the 

product as determined by the (MMS) Associate Director due 

consideration being given to the highest price paid • and to 

other relevant matters." Under the gross proceeds rule, the MMS 

could reasonably require information relating to Products' sales in 

order to ascertain the oil's fair market value and to determine the 

gross proceeds accruing to Energy. See Thomas Jefferson 

University, 114 s. Ct. at 2386 (the court accords substantial 

deference to an agency's reasonable interpretations of its own 

regulations). 

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Products' resale records constituted "records necessary to 

demonstrate that payments of rentals, royalties, net profit shares, 

and other payments related to offshore and onshore Federal and 

Indian oil and gas leases are in compliance with lease terms, 

regulations and orders." 30 C.F.R. § 212.51(a) (1984). Moreover, 

an administrative agency's authority to request records and 

undertake other investigatory functions is extremely broad. See 

United States v. Morton Salt Co., 338 u.s. 632, 642-43 (1950) 

(restating the breadth of an agency's ability to gather information 

which is analogous to a Grand Jury's power to "investigate merely 

on suspicion that the law is being violated, or even just because 

it wants assurance that it is not"). 

The MMS' determination that the first arm's length sale of 

oil produced under a federal lease was covered by the "other 

relevant matters" language of its regulations was not arbitrary, 

capricious, or contrary to law. 

In the alternative, Products contends that the district court 

erred in applying the gross proceeds rule because the rule applies 

to lessees, and Products is not a lessee. The gross proceeds rule, 

however, provides that "(u]nder no circumstances shall the value of 

production of any said substances for the purposes of computing 

royalties be deemed to be less than the gross proceeds accruing to 

the lessee." Products is a wholly owned affiliate of Energy. 

Accordingly, Products sales wer~ relevant to determining gross 

proceeds accruing to Energy. The IBLA reaffirmed this principle by 

finding that "the obligation to report gross proceeds accruing to 

the lessee cannot be avoided by an inter-affiliate transfer made in 

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• contemplation of later sale to third parties." Shell Oil Con 

reconsideration), 132 I.B.L.A. 354, 356 (1996). The IBLA reasoned: 

there is an obligation and an expectation that 

MMS will look beyond any inter-affiliate 

transfer to determine whether other factors 

affect production value. As suggested in 

Santa Fe, supra, affiliates participating in 

a transfer of a Federal lease production in 

contemplation of sales to a third party should 

expect MMS to scrutinize any inter-affiliate 

transfer and all subsequent affiliate sales. 

Id. at 357. 

The IBLA's determination that section 103(a) of FOGRMA 

requires Products to produce documents relating to its arm's length 

sales of oil received from Energy was not arbitrary, capricious, or 

contrary to law. The district court's order granting the 

Government's motion for summary judgment and denying Products' 

motion for summary judgment was proper and is AFFIRMED. 

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