OXY USA Inc. v. United States Department of the Interior

Summary

OXY USA v. DOI, 10th Cir. 2022, addresses royalty valuation for carbon dioxide (CO2) produced from federal oil and gas leases under the Mineral Leasing Act. The court upheld the Department of the Interior’s Office of Natural Resources Revenue (ONRR) determination that the lessee’s use of a “Unit Average” valuation method was properly rejected because it was unverifiable and included non-arm’s-length transactions. The court also affirmed ONRR’s denial of compression and dehydration costs as a transportation allowance, holding those costs were necessary to place CO2 in marketable condition for enhanced oil recovery and thus not deductible under 30 C.F.R. § 206.157(f)(9). The decision confirms ONRR’s authority to establish minimum royalty values using alternative benchmarks, including the Smithson formula from a private arbitration, when arm’s-length sales are lacking.

Holdings

1. ONRR's valuation was reasonable and not arbitrary or capricious.
2. ONRR's rejection of the Unit Average was not arbitrary or capricious.
3. The Director's interpretation and application of the marketable-condition rule was not plainly erroneous or inconsistent with the regulations.

Questions Presented

1. Whether ONRR's valuation of CO2 royalties was arbitrary and capricious under the APA
2. Whether ONRR properly rejected the Unit Average valuation method
3. Whether ONRR properly applied the second regulatory benchmark
4. Whether ONRR correctly determined that compression and dehydration costs were not deductible as a transportation allowance

Disposition

affirmed