Helping Clients With Their Energy and Environmental Needs


Devon Loses Appeal

By Vorys

In Devon Energy Corp. v. Kempthorne, Devon challenged an order of the Department of the Interior requiring it to retroactively recalculate royalties owed to the United States under a coalbed methane lease in Wyoming's Powder River Basin.  At issue were certain deductions taken by Devon for compression and dehydration-related costs when calculating royalties under the agency's marketable condition rule, which requires a federal lessee to put production into a marketable condition at no cost to the United States.  Interior had found that the marketable condition rule precluded those deductions where compression and dehydration were necessary to meet the transporting pipeline's gas quality specifications (and thus make the gas deliverable to the purchaser).

Devon argued that Interior's order was inconsistent with the rule's plain meaning, as well as the agency's own prior interpretations of its rule.  The court disagreed:  First, it held that Interior's interpretation of the rule was reasonable and not at odds with its plain language.  The court was therefore required to defer to the agency's interpretation (even while acknowledging that Devon's interpretation was "not unreasonable").  Second, the court found that the guidance documents previously distributed by agency personnel could not be used to support Devon's claim that the agency's order was inconsistent with its prior interpretations of the marketable condition rule.  The agency personnel issuing those documents had no authority to amend the marketable condition rule or to issue authoritative guidelines on the agency's behalf.

Tags: Energy, Royalty

Helping clients with their energy and environmental needs

You can expect to find news and breaking legal developments involving the crude oil and natural gas industries, alternative and renewable energy resources, and the latest environmental issues.