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

Heading: The Bravo Dome Unit and Unit Agreement

Text: Hess produced CO2 from numerous federal leases (“Leases”) in Harding, Quay, and Union Counties in northern New Mexico. 6 Under the Leases’ terms, Hess agreed to pay the United States, as lessor, “12 ½ percent royalty on the production removed or sold from the leased lands computed in accordance with the Oil and Gas Operating Regulations (30 C.F.R. Pt. 221).” ROA, at 442b, 446b, 450b, 454b [Sec. 2(d)(l)]. The Leases further state: It is expressly agreed that the Secretary of the Interior may establish reasonable minimum values for purposes of computing royalty on any or all oil, gas, natural gasoline, and other products obtained from gas, due consideration being given [1] to the highest price paid for a part or for a majority of production of like quality in the same field, [2] to the price received by the lessee, [3] to posted prices, and [4] to other relevant matters and, whenever appropriate, after notice and opportunity to be heard. 6 The record contains a total of four Leases, and their relevant terms are identical. See ROA, at 442, 446, 450, 454. 7 Appellate Case: 21-2011 Document: 010110678144 Date Filed: 05/02/2022 Page: 8 Id. [Sec. 2(d)(2)] (“Lease valuation factors”). The Leases clarified that Hess was “subject to any unit agreement heretofore or hereafter approved by the Secretary of the Interior, the provisions of said agreement to govern the lands subject thereto where inconsistent with the terms of this lease.” Id. at 442a, 446a, 450a, 454a [Sec. 1]. Bravo Dome is a natural carbon source field located in northeastern New Mexico. In 1979, the Bravo Dome Unit was formed under the Bravo Dome Carbon Dioxide Unit Agreement (“Unit Agreement”) to consolidate and coordinate CO2 production from a number of both federal and non-federal leases in the Bravo Dome area, including Hess’s Leases. Id. at 415–40. Under the terms of the Unit Agreement, once the Unit Operator allocated CO2 to each tract in the Unit, each working-interest owner 7 remitted payment to its royalty-interest owners. Id. at 429 [§ 6.3]. The original Unit Operator was Amoco Production Company (“Amoco”), but Amoco’s successor-in-interest OXY was the Unit Operator during the relevant audit period. The Unit Agreement modified the underlying Leases to the extent of any inconsistencies, and it incorporated the federal oil and gas operating regulations “provided such regulations are not inconsistent with the terms of this Agreement.” Id. at 417, 424 [§ 3.3], 438 [§ 15.1]. The Unit Agreement also attempted to modify A working-interest owner is someone who owns the right to search, develop, 7 and produce oil and gas on the leased property as well as pay all costs. ROA, at 219. 8 Appellate Case: 21-2011 Document: 010110678144 Date Filed: 05/02/2022 Page: 9 the royalty clauses in the Leases committed to the Unit in two ways. First, royalty was due on CO2 at “the standard conditions of measurement for natural gases which are at 60° Fahrenheit and 15.025 pounds per square inch absolute [‘psia’] pressure base.” Id. at 429 [§ 6.2]. Second, the Unit Agreement attempted to amend the royalty clauses to base royalty payments on the higher of “(a) the net proceeds derived from the sale of Carbon Dioxide Gas at the well whether such sale is to one or more of the parties to this agreement or to any other party or parties; or (b) a minimum value at the well of twelve cents per thousand cubic feet ($0.12/mcf).” Id. [§ 6.3]. For the Unit Agreement to be effective, Amoco was required to submit it to the United States Geological Survey (“USGS”) for approval. 8 On August 29, 1980, USGS approved the Unit Agreement, with a few exceptions. Id. at 465. In the Determination approving the Unit Agreement, USGS certified that the Unit Agreement modified the Leases’ terms to the extent of any inconsistencies. Id. But USGS excluded some provisions of the Unit Agreement from its approval, the relevant exclusion being § 6.3(b)—the twelve cents per thousand cubic feet minimum value. Id. The Determination stated that “the provisions of Article 6.3(b) shall not apply to the Federal lands and the United States reserves the right to establish higher 8 In 1980, when the Unit was formed, the applicable regulations required a supervisor of the USGS to approve unit agreements. The supervisor was required to make a determination that the unit was necessary or advisable in the public interest and was for the purpose of conserving the natural resource. See 30 U.S.C. § 226.8 (1980); ROA, at 220. 9 Appellate Case: 21-2011 Document: 010110678144 Date Filed: 05/02/2022 Page: 10 minimum values for Federal substances.” Id. Therefore, the approved Unit Agreement required federal lessees to pay royalties on the higher of either (1) the net proceeds derived from the sale of CO2 gas at the well, or (2) a minimum value established by the United States. Id. at 429 [§ 6.3], 465.