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

Heading: The Diamond Shamrock Cases

Text: 6 These cases, consolidated in the Eastern District, present virtually the same situation. Diamond Shamrock, Cities Service, Exxon, Mobil and Texaco (and various subsidiaries) are lessees under numerous leases 4 on the offshore Louisiana Outer Continental Shelf. 5 These lessees uniformly failed to pay royalties on take-or-pay payments unless make-up gas had been taken, in which case royalties were calculated and paid based on the price of the gas at the time the make-up gas was taken. 7 As in Mesa, the MMS ordered the lessee-producers to pay royalties on take-or-pay revenues received. It additionally assessed interest charges for late payment, asserting that the royalty payment was due at the time the take-or-pay payment was made, not the time at which the make-up gas was taken. The lessees appealed to the MMS Director, who affirmed the order. 6 8 Cities Service and Exxon had paid royalties on some, but not all, of their take-or-pay revenues. Exxon and Cities Service requested refunds for royalties paid on such take-or-pay revenues. The MMS denied the request. Cities Service and Exxon appealed the denial of their requests to the MMS Director. The Director affirmed the denial. 7 9 On cross motions for summary judgment, Judge Sear of the Eastern District treated take-or-pay payments as the equivalent of advance payments for gas, similar to an interest-free loan from the pipeline. As this raised the price of gas purchased by the pipeline, take-or-pay payments were to be taken into account in calculating the value of the production removed, and were subject to royalty. 10 Judge Sear's reasoning was based in part on the definition of production contained in OCSLA: 11 The term production means those activities which take place after the successful completion of any means for the removal of minerals, including such removal, field operations, transfer of minerals to shore, operation monitoring, maintenance and work-over drilling. 8 12 Judge Sear held that, as take-or-pay payments are intended to compensate the producer for maintenance and other activities necessary to keep wells functioning, they fall within this definition of payments for production. Consequently, Judge Sear sustained the DOI's decisions and expressly rejected the holding of the Western District in Mesa. The lessee-producers appealed. 9