Opinion ID: 615903
Heading Depth: 3
Heading Rank: 2

Heading: Marketable Condition

Text: As discussed above, a “lessee must place gas in marketable condition and market the gas for the mutual benefit of the lessee and the lessor at no cost to the Federal Government.” 30 C.F.R. § 1206.152(i). This court has stated that, under the marketable condition rule, “marketing costs cannot be deducted from the gross proceeds, equal to the value of production, before royalty is calculated.” Mesa Operating Ltd. P’ship v. U.S. Dep’t of Interior, 931 F.2d 318, 325 (5th Cir. 1991) (emphasis omitted). Citation argues that it sold unprocessed gas to Koch and that this gas was already in marketable condition. Thus, according to 5 Case: 10-20729 Document: 00511641536 Page: 6 Date Filed: 10/21/2011 No. 10-20729 Citation, the price Koch paid to Citation was the appropriate amount upon which to base its royalty payments to Interior. Interior, on the other hand, maintains that the costs of treatment and compression were incurred to put the gas in marketable condition and therefore should not have been deducted from Citation’s gross proceeds when calculating royalties. Interior stresses that the agreements between Citation and Koch were processing contracts under which Citation was paid a percentage of the proceeds of Koch’s sales of the dry gas and gas byproducts. Citation was paid only when Koch sold the gas and gas byproducts, and the amount Citation was paid could not be determined until such sale was made. Further, the amount paid to Citation was reduced by a share of the costs for treatment, compression, and electricity. As a consequence, Interior concluded that Citation’s royalty payments should have been based on the amount Citation received from Koch plus Citation’s share of the fees incurred for treatment and compression, which Interior determined were required to put the gas in marketable condition. Citation argues that a 1991 amendment to the Interior’s regulations made the marketable condition rule inapplicable to unprocessed gas sold as feedstock under percentage-of-proceeds contracts. Interior contends that Citation waived this argument by failing to raise during proceedings at the administrative level. We agree that, on the record in front of us, it appears Citation did waive this argument by failing to raise it until its appeal to the district court. However, regardless of whether a waiver occurred, we find that the amendment on which Citation relies does not render Interior’s application of its valuation standards arbitrary or contrary to law. See Revision of Valuation Regulations Governing Gas Sales Under Percentage-of-Proceeds Contracts, 56 Fed. Reg. 46,527, 46,529 (Sept. 13, 1991) (stating that the revision was not expected to “result in a change in royalty collections” and that “gross proceeds may not be the measure of value for royalty purposes when the gas is not sold in marketable condition”). We 6 Case: 10-20729 Document: 00511641536 Page: 7 Date Filed: 10/21/2011 No. 10-20729 defer to Interior’s interpretation of its valuation standards on this point. See Rodriguez-Barajas v. Holder, 624 F.3d 678, 679–80 (5th Cir. 2010) (“We defer to an agency’s interpretation of its own regulation unless an alternative reading is compelled by the regulation’s plain language or by other indications of the Secretary’s intent at the time of the regulation’s promulgation.”) (citation and internal quotation marks omitted). We find that Interior’s conclusion that compression and treatment costs should not have been deducted from Citation’s proceeds was not arbitrary and should not be set aside. As the district court observed, the price paid to Citation for its casinghead gas was “not based on some index price for casinghead gas. Thus, Citation’s contention that the gas clearly was ‘marketable,’ because someone bought the gas is based on the faulty premise that the casinghead gas was actually purchased for its value as casinghead gas.” Citation Oil & Gas Corp. v. U.S. Dep’t of Interior, 4:08-CV-01977, at 6 (S.D. Tex. Sept. 13, 2010). In light of the fact that Citation’s gas was transferred to Koch under processing agreements, as well as the fact that Citation was paid based on Koch’s sales of Citation’s dry gas and gas byproducts, it reasonably follows that the compression and treatment costs (which were borne, at least in part, by Citation by virtue of the adjustments for costs made by Koch) were incurred to place the gas in marketable condition. Thus, the district court properly granted summary judgment in favor of Interior regarding Citation’s improper deduction of costs incurred to place its gas in marketable condition. Citation also argues that it should have been given processing allowances for the recovery of sulfur and that removal was not necessary to put its gas in marketable condition. However, as the district court noted, this issue is moot because Interior granted Citation a processing allowance for sulfur. Citation, 4:08-CV-01977, at 6. The court also correctly noted that Citation waived this argument by failing to raise the issue prior to the appeal to the district court. 7 Case: 10-20729 Document: 00511641536 Page: 8 Date Filed: 10/21/2011 No. 10-20729 Id. at 6 n.2 (citing Dep’t of Transp. v. Public Citizen, 541 U.S. 752, 764–65 (2004)).