Opinion ID: 510046
Heading Depth: 2
Heading Rank: 1

Heading: The Mesa Case

Text: 2 In 1973, Mesa leased submerged, offshore lands from the United States pursuant to OCSLA. 2 Under the standard government oil and gas lease, Mesa was required to pay a royalty of 16 2/3% in amount or value of production saved, removed or sold from the leased area. Mesa thereafter sold all of the gas produced from these federal leases to Tennessee Gas Pipeline Company under an exclusive long-term contract by which all of Mesa's production was committed to the contract. The contract with the pipeline included a take-or-pay provision requiring Tennessee to take a specified amount of gas during each contract year or pay for that quantity even if not taken in full. A seven-year make-up period was provided during which Tennessee was able to credit the price of gas later taken in excess of the required minimum (referred to as make-up gas) against earlier take-or-pay payment obligations. 3 Mesa periodically paid royalties to the United States through the Minerals Management Service (MMS) of the Department of the Interior (DOI) on all gas currently delivered to the pipeline. Mesa did not pay royalties on take-or-pay payments received from Tennessee. Royalties were calculated and paid only if, and only to the extent, make-up gas was taken. 4 After an audit, MMS ordered Mesa to pay royalties on the take-or-pay payments Mesa had received from Tennessee. Prior to this audit, Mesa had not paid royalties on take-or-pay payments. Mesa calculated and paid its royalty obligation based on payments for gas actually taken, as gas was actually taken, based on the price of gas at the time it was taken. Based on this audit, MMS also notified Mesa that interest charges would be assessed for royalties paid on make-up gas from the time the take-or-pay payment for that quantity of gas was received. This order assessing payments and interest penalties was appealed to the Director of MMS who ultimately affirmed MMS' authority to collect royalties on take-or-pay receipts. 3 The Department of the Interior, through the Assistant Secretary for Land and Minerals Management, adopted the Director's decision as the final decision of the DOI. 5 Mesa appealed this order in the Western District of Louisiana. Judge Veron of the Western District found that the purpose of the take-or-pay provision was to ensure Mesa a steady flow of revenue to meet operation and maintenance costs. The lease agreement between the United States and Mesa entitled the government to receive 16 2/3 percent of production saved, removed or sold from the leased areas. To the extent take-or-pay payments were made in lieu of taking gas, there was no production, and Mesa had no obligation to make royalty payments thereon. MMS was therefore without authority to collect royalties on such take-or-pay receipts. Judge Veron set aside the order which required Mesa to pay royalties on take-or-pay receipts, 647 F.Supp. 1350. The government appeals.