Opinion ID: 6336934
Heading Depth: 3
Heading Rank: 1

Heading: Reasonableness of ONRR’s Valuation

Text: OXY first argues that ONRR’s valuation is unreasonable and arbitrary. While OXY does not provide any meaningful challenge to ONRR’s consideration of the Fasken Contract or the Hess Purchase Contracts, OXY repeatedly asserts that ONRR’s consideration of the Smithson formula was inappropriate because the arbitration decision did not involve federal leases and only resolved a royalty dispute between Hess and private lease owners. Aplt. Br. at 11–12, 45–47. In making this argument, OXY contends that the Smithson formula never had been used to buy or sell any CO2; the Smithson formula was not legally binding because the parties settled after arbitration and the Smithson formula was not agreed to in the settlement; arbitration awards and decisions have no precedential effect in other cases; and the Smithson formula does not qualify as relevant evidence under the Lease valuation factors or the 1988 regulatory factors. Id. at 46–49. Relatedly, OXY argues that if the agency rejected the Unit Average due to the inclusion of non-arm’s-length transactions, then it should not have considered the Smithson formula because it included non-arm’s-length transactions. 12 Id. at 43, 49. 12 OXY also argues that ONRR’s valuation is arbitrary and inconsistent because “[t]he history of this matter involves no less than four administrative decisions differently valuing [Hess’s] Audit Period CO2 production.” Aplt. Br. at 19 (emphasis in original). OXY characterizes this history as “a vacillating scattershot of substitute methodologies to re-value [Hess’s CO2 production].” Id. In actuality, OXY is referencing the aforementioned correspondence that occurred among New Mexico, ONRR, and Hess during the audit process, and as discussed, the record shows that ONRR only issued one Order to Report and Pay Additional Royalties on 29 Appellate Case: 21-2011 Document: 010110678144 Date Filed: 05/02/2022 Page: 30 We conclude that the Director considered all relevant evidence and provided sufficient reasoning for each of ONRR’s determinations regarding the valuation. Under the deferential APA standard, we ask whether the agency’s decision was based on an examination of the relevant evidence and if the agency “articulated a rational connection between the facts found and the decision made.” Payton, 337 F.3d at 1168. The Director’s methodology and detailed explanations certainly pass muster under the APA’s deferential framework. The agency considered all relevant information that was reasonably available, including the single arm’s-length Fasken Contract, the Hess Purchase Contracts, and the Smithson formula for production occurring between October 2003 and March 2008. ROA, at 233–37. The Director then articulated a rational connection between the relevant information and ONRR’s valuation under the Lease valuation factors and weighed the factors accordingly. Id. The Director then analyzed the second regulatory benchmark factors at length and explained why the result would be the same if the regulatory valuation factors applied. Echoing the district court, we cannot reweigh the evidence, which seems to be what OXY is requesting. As to the Smithson formula, the agency was clear that consideration of this formula was appropriate because the question under both Hess’s Leases and the 1988 regulations—the reasonable value of Hess’s CO2 based on all relevant and reliable December 19, 2011, which ONRR’s Director then reduced in OXY’s favor on review. See ROA, at 217–54, 270–82. 30 Appellate Case: 21-2011 Document: 010110678144 Date Filed: 05/02/2022 Page: 31 information—was fundamentally the same inquiry that the Smithson arbitration panel conducted. During the audit, the agency discovered that Hess did not have other reliable public sources of price or market information for the audit period, except for the negligible Fasken Contract. The agency realized that the Smithson formula provided an appropriate and reliable indicator of value from October 2003 through December 2008 and therefore considered the formula in its analysis of “other relevant matters” under the Lease valuation factors, as well as under “other reliable public sources of price or market information” in its alternative analysis of the 1988 regulatory factors. Id. at 227–39, 242–43. As the Director explained, the formula was the result of a neutral arbitration panel with full transparency into the basis for the formula price, whereas Hess’s other settlement agreements did not “provide any information on what was at issue, how the parties came to the formula price, or how that price pertains to Hess’s CO2 purchases or sales.” Id. at 236. Moreover, the arbitration panel set the formula price by blending two valuation methodologies based on expert testimony proffered by each of the parties, and the formula reflected “market conditions in the fall of 2003, [and] historical contracting practices.” Id. at 230–37. It was proper for the agency to rely on the Smithson formula, not for its precedential value, but rather for the relevant and reliable information it provided about Hess’s CO2 purchase contracts, pricing mechanisms, and historical contracting practices from this time. OXY also contends that the Director’s decision to consider ONRR’s valuation under the Lease valuation factors, instead of only the 1988 regulatory factors, 31 Appellate Case: 21-2011 Document: 010110678144 Date Filed: 05/02/2022 Page: 32 warrants reversal because this court’s affirmance “would inject substantial uncertainty to royalty valuation for thousands of similarly-situated federal oil and gas [standard-form] leases” and the 1988 regulations “cabin ONRR’s ability to substitute its own royalty value.” Aplt. Br. at 21–31; Aplt. Reply Br. at 4–5. But the Director’s decision was clear that it analyzed ONRR’s valuation in OXY’s case under the Lease valuation factors because the specific Bravo Dome Unit Agreement controlled: The Secretary “retained the right to establish a minimum value for federal CO2 production in the Unit in its approval of the [Bravo Dome] Unit Agreement,” which modified Hess’s underlying standard-form Leases to the extent they were inconsistent with the Unit Agreement. ROA, at 227–28, 424. The Director applied this same logic to reduce the pressure base calculation in accordance with the Unit Agreement in OXY’s favor, which OXY does not dispute. Id. at 247–48. Further, any such procedural inconsistency authorizing the Secretary to determine royalty valuation in the first instance in OXY’s case ultimately is irrelevant because (1) the Director reasonably articulated why the Unit Average is unreliable and (2) the Director independently analyzed ONRR’s valuation under the second regulatory benchmark in the alternative and came to the same conclusion. The Director also noted that while the Order had not explicitly mentioned the Lease valuation factors in its analysis of the second regulatory benchmark, the valuation factors overlapped, so the agency had thoroughly considered the Lease valuation factors in the process of analyzing the second regulatory benchmark. Id. at 228–38. 32 Appellate Case: 21-2011 Document: 010110678144 Date Filed: 05/02/2022 Page: 33 Because the Director weighed the relevant factors and evidence and adequately explained the agency’s decision, ONRR’s valuation is not arbitrary or capricious.