No. 08-30069IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
KERR-MCGEE OIL & GAS CORP.,Plaintiff-Appellee,
-v.-
UNITED STATES DEPARTMENT OF THE INTERIOR; C. STEPHENALLRED, Assistant Secretary, on behalf of Land & Minerals Management, on
behalf of United States Department of the InteriorDefendants-Appellants.
On Appeal from the United States District Court for the Western District ofLouisiana, Lake Charles Division, No. 2:06-CV-439, Judge Patricia Minaldi
FEDERAL DEFENDANTS-APPELLANTS’ PETITION FOR REHEARING EN BANC
JOHN C. CRUDEN Acting Assistant Attorney General
JOHN S. MOSTMICHAEL T. GRAY Attorneys, U.S. Department of Justice Envt. & Natural Resources Div. P.O. Box 23795 (L’Enfant Station) Washington, DC 20026 (202) 305-4903
08-30069
KERR-MCGEE OIL & GAS CORP.,Plaintiff-Appellee,
-v.-
UNITED STATES DEPARTMENT OF THE INTERIOR; C. STEPHENALLRED, Assistant Secretary, on behalf of Land & Minerals Management, on
behalf of United States Department of the InteriorDefendants-Appellants.
CERTIFICATE OF INTERESTED PARTIES
The undersigned counsel of record certifies that the following listed persons
and entities as described in the fourth sentence of Rule 28.2.1 have an interest in
the outcome of this case. These representations are made in order that the judges
of this court may evaluate possible disqualification or recusal. Governmental
entities and officials (other than counsel) are not listed.
Kerr-McGee Oil & Gas Corporation Plaintiff-Appellee
Kerr-McGee Worldwide Corporation Parent Corporation of Plaintiff-Appellee
Kerr-McGee Corporation Parent Corporation of Plaintiff-Appellee
Anadarko Petroleum Corporation Parent Corporation of Plaintiff-Appellee
Anadarko E&P Company LP Parent Corporation of Plaintiff-Appellee
Liskow & Lewis701 Poydras Street1 Shell SquareSuite 5000New Orleans, LA 70139
Counsel for Plaintiff-Appellee
Fulbright & Jaworski LLP801 Penn. Ave. NWWashington, DC 20004
Counsel for Plaintiff-Appellee
John C. Cruden Acting Assistant Attorney General
John S. MostMichael T. GrayAttorneys, U.S. Department of Justice Environment & Natural Res. Div.
Counsel for Defendants-Appellants
_______________________________Michael T. GrayAttorney of Record for Defendants-Appellants
RULE 35(b)(1) STATEMENT
This case involves a question of exceptional importance: Whether the Outer
Continental Shelf Deep Water Royalty Relief Act of 1995 authorizes the Secretary
of the Interior to collect royalties on production from oil and gas leases issued in
the Gulf of Mexico between 1996 and 2000 when the price of oil and gas exceeds
thresholds that are specified in the leases. If the Act does not authorize the
Secretary to collect royalties, as the panel held, then the United States treasury
stands to lose tens of billions of dollars in revenue that would otherwise be
derived from the Nation’s oil and gas reserves. The panel’s decision is inconsistent
with the plain language of the statute, inconsistent with the statutory structure, and
inconsistent with normal principles of statutory interpretation. That, and the sheer
amount of money at stake, makes this case worthy of en banc review to correct the
panel’s error.
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TABLE OF CONTENTS
STATEMENT OF THE ISSUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
STATEMENT OF THE COURSE OF PROCEEDINGS . . . . . . . . . . . . . . . . . . . . 1
STATEMENT OF THE FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
I. The Royalty Relief Act unambiguously authorizes the inclusion of price thresholds in leases issued between 1996 and 2000 . . . . . . . 4
A. The panel’s reading of the Royalty Relief Act makes the cross-reference in section 304 meaningless . . . . . . . . . . . . . . . 6
B. The panel’s decision is contrary to the rule that statutoryexceptions are to be construed narrowly . . . . . . . . . . . . . . . . . 7
C. The panel’s decision turns a direction to “set” royaltysuspension volumes at the time of the lease sale into amandatory requirement that royalties be suspended up to those volumes for the life of the lease regardless of the price of oil and gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
D. The panel’s holding that Santa Fe Snyder is controlling ignores the express price-threshold authority in section 303 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
E. Interior’s reading of the plain language of the Royalty Relief Act is confirmed by the Act’s overall structure . . . . . 12
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
CERTIFICATE OF SERVICE
ii
TABLE OF AUTHORITIES
CASES :
Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 15
Commissioner v. Clark, 489 U.S. 726 (1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Ringling Bros.-Barnum & Bailey Combined Shows v. Sheppard, 123 F.2d 773 (5th Cir. 1941) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Santa Fe Snyder v. Norton, 385 F.3d 884 (5th Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,10-12
United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
STATUTES, RULES AND REGULATIONS:
Outer Continental Shelf Deep Water Royalty Relief Act of 1995, Section 302
43 U.S.C. § 1337(a)(3)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 U.S.C. § 1337(a)(3)(C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 U.S.C. § 1337(a)(3)(C)(ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1343 U.S.C. § 1337(a)(3)(C)(v) . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,1543 U.S.C. § 1337(a)(3)(C)(vi) . . . . . . . . . . . . . . . . . . . . . . . . . . 13,15
Section 30343 U.S.C. § 1337(a)(1)(H) . . . . . . . . . . . . . . . . . . . . . . 1,2,4-12,14,15
Section 30443 U.S.C. § 1337, Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,5-15
Outer Continental Shelf Lands Act43 U.S.C. § 1337(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
61 Fed. Reg. 12,022, 12,023 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
141 Cong. Rec. 13,002 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1
STATEMENT OF THE ISSUE
Whether the Outer Continental Shelf Deep Water Royalty Relief Act of 1995
authorizes the Secretary of the Interior to collect royalties on production from oil and
gas leases issued between 1996 and 2000 when the price of oil and gas rises above
thresholds specified in the leases.
STATEMENT OF THE COURSE OF PROCEEDINGS
The Secretary of the Interior ordered Kerr-McGee to pay royalties due on
production from its leases in 2003 and 2004 because the price of oil and gas had
exceeded the thresholds specified in the leases in those years. Kerr-McGee refused
and filed this lawsuit claiming that under the Outer Continental Shelf Deep Water
Royalty Relief Act of 1995 it did not owe royalty payments. The district court agreed
and entered summary judgment in favor of Kerr-McGee. The Secretary appealed and
the panel affirmed in a published opinion.
STATEMENT OF THE FACTS
When oil prices were relatively low in the mid 1990s and many of the
shallow-water reserves on the Outer Continental Shelf had been largely depleted,
Congress passed legislation to encourage drilling in deep water areas, where the costs
of exploration and development are significantly higher. Outer Continental Shelf
Deep Water Royalty Relief Act of 1995, 109 Stat. 563-66, codified at 43
U.S.C.§ 1337(a)(1)(H), (a)(3)(B), (a)(3)(C), and Note.
In section 303 of the Royalty Relief Act, Congress added a new lease-sale
bidding system to the Outer Continental Shelf Lands Act. It provided for:
2
cash bonus bid with royalty at no less than 12 and ½ per centum fixedby the Secretary in amount or value of production saved, removed, orsold, and with suspension of royalties for a period, volume, or value ofproduction determined by the Secretary, which suspensions may varybased on the price of production from the lease . . . .
43 U.S.C. § 1337(a)(1)(H). Thus, for new leases, the Royalty Relief Act allows the
Secretary to issue leases with suspended royalties. If the Secretary chooses to use that
bidding system (there are eight bidding systems from which the Secretary may
choose), the Act provides him with further discretionary authority related to the
suspension of royalties in two ways. First, the Secretary may determine the “period,
volume, or value of production” to which the suspension of royalties applies. Second,
the Secretary may “vary” the suspension of royalties “based on the price of
production from the lease”—impose a price threshold on the suspension of royalties.
In section 304 of the Royalty Relief Act, Congress took more specific measures
with respect to new lease sales during the five-year period after its enactment (which
is from November 28, 1995 to November 28, 2000, but for shorthand we use 1996 to
2000 in this petition). First, for that time period, Congress required the Secretary to
use the new bidding system created in section 303 for lease sales on tracts in the
Western, Central, and a portion of the Eastern Planning Areas of the Gulf of Mexico.
43 U.S.C. § 1337, Note. Second, Congress specified the minimum “volume” of
production at which the Secretary must “set” royalty suspensions at lease sales. Id.
Kerr-McGee signed or obtained the eight leases at issue in this case, which
were issued under sections 303 and 304. At the lease sale stage, the Secretary set the
volume up to which Kerr-McGee’s royalty payments on oil and gas produced from
United States Government Accountability Office, Oil and Gas Royalties:1
Litigation Over Royalty Relief Could Cost the Federal Government Billions ofDollars, available at http://www.gao.gov/new.items/d08792r.pdf (June 5, 2008)
3
the leases are to be suspended as directed by section 304. The leases also “vary” the
suspension based on the “price of production” from the lease by providing that if the
annual average price of oil or gas exceeds a specified price (a “price threshold”), the
royalties would no longer be suspended. Kerr-McGee agreed to pay royalties on the
production from the leases once the price threshold in its leases had been exceeded.
Starting in 2003 for gas, and 2004 for oil, the annual average price exceeded
the price thresholds specified in the leases. The Secretary therefore ordered Kerr-
McGee to pay royalties on the production from leases in years where the price of oil
and gas exceeded the thresholds set forth in the leases. Kerr-McGee refused and filed
this lawsuit claiming the price threshold provisions in the leases were contrary to the
Royalty Relief Act. Kerr-McGee contends that it does not have to pay the over $350
million in royalties due on these eight leases from 2003-2007, or any royalties until
it produces the suspension volumes in its leases. Overall, the GAO estimated on June
5, 2008 that removing the price threshold authority for similarly situated leases could
cost the United States $38.3 billion over the next 25 years. 1
ARGUMENT
The panel’s decision will allow Kerr-McGee and similarly situated lessees to
keep billions of dollars in royalties that more properly belong to taxpayers of the
United States. Kerr-McGee leased lands owned by the American public to produce
oil and gas. For the privilege of producing and selling that oil and gas, it signed lease
4
contracts that required the payment of a royalty to the United States if prices rose
above specified thresholds. It presumably bid on the leases taking into account that
it would owe royalties if the price of oil and gas were to rise.
But the panel held that the Royalty Relief Act unambiguously prohibits the
collection of royalties no matter how high the price of oil and gas rises. The panel
makes five critical and interrelated mistakes. First, it reads section 304’s requirement
to use the section 303 bidding system—which includes the authority to “vary” the
suspension of royalties—out of the statute. Second, it eviscerates a statutory rule (the
Secretary “shall use the bidding system” in section 303) by adopting a broad
construction of a statutory exception to that rule (“except that suspension of royalties
shall be set”) when a more narrow interpretation of the statute is available,
reasonable, and provided by the agency expert in leasing. Third, those errors led the
panel to transform Congress’s direction to conduct lease sales with royalty
suspensions “set” at not less than specified volumes into a requirement that royalties
be suspended up to the eligible volumes for the life of the lease. Fourth, it equates this
case to this Court’s earlier decision in Santa Fe Snyder v. Norton, 385 F.3d 884 (5th
Cir. 2004), without considering the significant differences between the two cases.
Fifth, it misunderstands the import of section 302’s price-threshold provision.
I. The Royalty Relief Act unambiguously authorizes the inclusion of pricethresholds in leases issued between 1996 and 2000.
In section 303 of the Royalty Relief Act Congress unambiguously gave the
Secretary the authority and discretion to do two things that it could not have done
without that section: First, the Secretary may offer leases “with suspension of
5
royalties for a period, volume or value of production determined by the Secretary.”
43 U.S.C. § 1337(a)(1)(H). Second, the Secretary may “vary” those suspensions
“based on the price of production from the lease.” Id. The parties agree that the
authority to vary suspensions of royalties includes the authority to impose a price
threshold above which royalties must be paid.
In section 304 of the Royalty Relief Act Congress required the Secretary to use
the section 303 bidding system, and no other bidding system, for new leases issued
during the five-year period following the date of enactment of the Royalty Relief Act.
43 U.S.C. § 1337, Note. In addition to specifying the bidding system the Secretary
must use for that time period, Congress directed the Secretary to “set” at the lease sale
stage the suspension of royalties at not less than certain volumes:
[A]ny lease sale within five years of the date of enactment of thistitle [Nov. 28, 1995], shall use the bidding system authorized in [section303], except that the suspension of royalties shall be set at a volume ofnot less than the following:
(1) 17.5 million barrels of oil equivalent for leases in waterdepths of 200 to 400 meters;
(2) 52.5 million barrels of oil equivalent for leases in 400 to 800meters of water; and
(3) 87.5 million barrels of oil equivalent for leases in waterdepths greater than 800 meters.
43 U.S.C. § 1337, Note (emphasis added). Section 304 therefore partially removes the
first new feature section 303 enacted by replacing the Secretary’s discretionary
authority to “determine” the “period, volume, or value of production” at which
royalties will be suspended with a direction that, at the lease sale stage, suspension
of royalties “shall be set” at a volume of not less than specified amounts. But section
The third feature of section 303 is bidding at a “cash bonus bid with royalty at2
no less than 12 and ½ per centum.” That feature is not unique to section 303; theOuter Continental Shelf Lands Act has long contained a provision allowing theSecretary to offer leases on those terms. 43 U.S.C. § 1337(a)(1)(A). If Congresshad intended the cross reference in section 304 to pertain to only that feature ofsection 303, it could have achieved the same result by referencing the OuterContinental Shelf Lands Act’s already well-established bidding system.
6
304 does not mention or otherwise affect section 303’s second new feature, contained
in a separate clause, which allowed the Secretary to “vary” the suspension of royalties
based on the price of production. Instead, section 304 requires the Secretary to use
the bidding system in section 303, which expressly authorizes price thresholds—price
levels above which royalty payments would no longer be suspended.
A. The panel’s reading of the Royalty Relief Act makes the cross-referencein section 304 meaningless.
The panel rejected the Secretary’s reading of the statute because, according to
the panel, the phrase “except that the suspension of royalties shall be set at a volume
not less than” the stated production volumes replaces both the Secretary’s authority
to “determine” the volumes eligible for suspension of royalties and the Secretary’s
authority to “vary” the suspensions based on the price of production from the leases.
If so, then section 304’s requirement to use section 303’s bidding system is entirely
devoid of meaning. Congress could have simply said in section 304 that royalties2
will be suspended on all leases issued for five years in the covered geographic area
up to the volumes specified, without reference to section 303 at all. Every word in the
statute should be interpreted to give it its full meaning. See, e.g., Ringling
Bros.-Barnum & Bailey Combined Shows v. Sheppard, 123 F.2d 773, 775 (5th Cir.
7
1941). Here, the words “shall use the bidding system” in section 303 mean nothing
if they do not preserve any unique aspect of that bidding system.
Kerr-McGee, but not the panel, argued that there would still be something left
of section 303 because the Secretary could suspend royalties above and beyond the
amounts set by Congress and impose price thresholds on those suspensions. Reading
the cross-reference in section 304 as limited to that purpose would be more than
passing strange. There is no support for the proposition that by requiring the
Secretary to use the section 303 bidding system the only thing Congress intended to
give the Secretary was the discretion to further suspend royalties above and beyond
the amounts Congress had already set, especially when at the time of enactment there
was considerable uncertainty about whether any particular lease would produce in
excess of the volumetric limits set by Congress. Instead, the language and structure
of the Royalty Relief Act all indicate that Congress intended section 304’s cross-
reference to section 303 to preserve the discretionary authority to impose price
thresholds granted in section 303.
B. The panel’s decision is contrary to the rule that statutory exceptions areto be construed narrowly.
In addition to being contrary to the Royalty Relief Act’s plain language, the
panel’s holding that section 304 entirely replaces the Secretary’s discretion in section
303 despite the cross-reference requiring Interior to use the section 303 bidding
system also runs afoul of the rule that statutory exceptions are to be construed
narrowly. Commissioner v. Clark, 489 U.S. 726, 739 (1989). To repeat, section 304
8
requires the Secretary to use the section 303 bidding system “except that suspension
of royalties shall be set at a volume of not less than” the specified amounts.
Section 303 has two unique features not otherwise present in the Outer
Continental Shelf Lands Act bidding systems: the authority to suspend royalties for
a period, volume, or value of production and the authority to “vary” those
suspensions based on the price of production from the lease. The most narrow reading
of the exception to the requirement to use section 303’s bidding system is that it
replaces the first unique feature of section 303 with the “except that” clause and
preserves section 303’s second unique feature: the price-threshold authority.
The phrase “shall be set” in section 304 corresponds directly with and replaces
the phrase “determined by the Secretary” in section 303:
• Section 303 provides for bidding “with suspension of royalties for aperiod, volume, or value of production determined by the Secretary” andthen provides “which suspensions may vary based on the price ofproduction from the lease”
• Section 304 requires the Secretary to use section 303 “except that thesuspension of royalties shall be set at a volume of not less than thefollowing”
The “except that” clause of section 304 mirrors the three operative phrases of the first
clause of section 303, removing the Secretary’s ability to “determine” the “volume”
of the “suspension of royalties” by specifying the minimum “volumes” at which the
“suspension of royalties” “shall be set.” The clauses are designed in exactly the same
way and employ the same language; the “suspension of royalties” clause in section
303 can simply be replaced with the “except that” clause from section 304 and the
rest of section 303 is unaffected. But section 304 contains no language that
9
corresponds to the final clause of section 303, which provides that suspensions set
“may vary based on the price of production from the lease.” The authority to include
price thresholds in the leases is therefore left undisturbed by section 304.
The express reference in section 304 requiring Interior to use the section 303
bidding process, coupled with the unambiguous discretionary authority conferred by
section 303 to include price thresholds in leases, certainly do not foreclose the
Secretary’s reading of the Act. At the very least they creates an ambiguity as to
whether that discretionary authority is somehow abrogated by the inclusion of
specific volumes in section 304. Interior is charged with administering oil and gas
leasing generally, and specifically under this Act. It has significant expertise in this
complicated area and helped to develop and draft section 304. 61 Fed. Reg. 12,022,
12,023 (1996); see also 141 Cong. Rec. 13,002 (1995). Its regulations interpret
sections 303 and 304 as allowing price thresholds. 30 C.F.R. § 260.110(g) (2007).
The Notice of Lease Sales and the leases themselves contain price thresholds. This
is therefore a classic case for deference under Chevron U.S.A., Inc. v. Natural Res.
Def. Council, Inc., 467 U.S. 837, 842-43 (1984), and Interior’s reasonable
interpretation of the Royalty Relief Act must prevail.
C. The panel’s decision turns a direction to “set” royalty suspensionvolumes at the time of the lease sale into a mandatory requirement thatroyalties be suspended up to those volumes for the life of the leaseregardless of the price of oil and gas.
Not only does the panel opinion read section 304’s cross-reference out of the
statute, it does so with the faulty reasoning that any other reading would “render §
304’s mandatory language meaningless.” Slip Op. 7. The opinion both overstates the
10
impact of section 304’s language and understates what is left of section 304 if the
Secretary may include price thresholds in these leases. The panel holds that “the
statement that ‘the suspension of royalties shall be set as a volume not less than’ the
specific production levels means just that: royalty payments shall be suspended up
to the production volumes established by Congress.” Slip Op. 8 (emphasis added).
But “shall be set” does not mean the same thing as “shall be suspended.” To “set” the
suspension of royalties volume means to establish in the lease, at the lease sale, how
much production is eligible for the suspension of royalties. It does not mean that
royalties must be suspended up to those volumes no matter the price of oil and gas.
Under the Secretary’s reading of the statute, section 304 functions just as
Congress intended: It replaces the Secretary’s discretion to initially set the royalty
suspension volumes with minimum fixed volumes. It is not rendered meaningless.
But it does not affect the separate price-threshold authority in section 303. Section
304 therefore does not mandate that royalties be suspended up to the volumes
specified regardless of the price of oil and gas, as the panel held that it does.
D. The panel’s holding that Santa Fe Snyder is controlling ignores theexpress price-threshold authority in section 303.
The panel misconstrues both Santa Fe Snyder’s holding and the Secretary’s
argument in this case to find Santa Fe Snyder controlling. According to the panel,
“Interior seeks to employ a royalty-relief limitation present in § 302 (which applies
to leases existing prior to the [Royalty Relief Act’s] enactment) in order to limit the
royalty relief granted to new leases by § 304.” Slip Op. 7. That is impermissible, the
panel concludes, because this Court’s earlier decision in Santa Fe Snyder held that
11
the so-called “new production” requirement in section 302 is not present in section
304 and therefore section 304 controls. But the Secretary is not trying to import a
feature of section 302 into section 304. He relies on the express price threshold
language in section 303 and section 304’s requirement to use that bidding system.
Santa Fe Snyder is not to the contrary. The panel characterizes Santa Fe Snyder
as holding the “new production requirement” unlawful because it deprived lessees of
their royalty suspension volumes. Slip Op. 7-8. From there, the panel holds that any
measure that reduces the royalty suspension volumes also must be unlawful. Id. But
in Santa Fe Snyder the problem with the “new production requirement” was not that
it reduced royalty suspension volumes; the problem was that the requirement reduced
royalty suspension volumes without any statutory authority to do so. 385 F.3d at 892
(Interior’s regulation “has no statutory support”). Nowhere in section 303 or section
304 is a “new production requirement” mentioned, and the Secretary relied only on
the general discretionary language in section 303 giving it the authority to set royalty
suspensions at a volume, period, or value of production as support for its ability to
impose the “new production requirement” on existing leases. Id. This Court
concluded that section 304 “immediately excepts and replaces Interior’s discretion”
granted by that clause of section 303, the only source of authority Interior had
identified in the case. Id. Therefore the Secretary could not rely on that general
discretionary authority to suspend royalties to impose a condition—the “new
production requirement”—on the suspension of royalties when that condition was not
otherwise and explicitly present in the statute itself. Id.
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Here, by contrast, the Secretary does not rely on the general grant of
discretionary authority to set royalty suspensions at a volume, period, or value of
production for the authority to include price thresholds in leases. Instead, he relies on
the express grant of the price-threshold authority in the final clause of section 303,
as Interior is expressly required by section 304 to use the section 303 bidding process.
Unlike in Santa Fe Snyder, where the regulation at issue had “no statutory support,”
Interior’s interpretation in this case finds ample support in the express grant of
authority to include price thresholds in section 303 and the requirement in section 304
to use the section 303 process. Santa Fe Snyder does not control here.
E. Interior’s reading of the plain language of the Royalty Relief Act isconfirmed by the Act’s overall structure.
This case can be resolved entirely on the basis of sections 303 and 304. The
panel held, however, that had “Congress intended to impose price thresholds on the
royalty relief for these new leases, it certainly knew how to do so” and cited the
express price-threshold provisions in section 302 of the statute, which applies to
leases existing when the Royalty Relief Act was passed. Contrary to the panel’s
holding, section 302 of the Act confirms, rather than calls into question, Interior’s
authority to impose price thresholds on leases covered by section 304.
It is undisputed that for new leases issued after 2000 section 303 gives the
Secretary the discretionary authority to impose price thresholds. Congress, in section
302 of the Royalty Relief Act, dealt with new production from existing leases in a
similar fashion, but specified the applicable price thresholds in the Royalty Relief Act
instead of giving the Secretary discretion to impose price thresholds. In Section 302
13
Congress required that, if the Secretary suspends royalties based on its economic
determination, that suspension must remain in effect until certain volumes are
reached, unless the price threshold is crossed. Section 302 provides that “in no case
will [the volume of royalty suspensions] be less than” the same volumetric amounts
specified in section 304. 43 U.S.C. § 1337(a)(3)(C)(ii). But that language cannot be
read in isolation because the Royalty Relief Act later provides that during the
production of the volumes up to which it had just mandated royalty suspensions the
production would be “subject to royalties at the lease stipulated royalty rate” if the
price of oil or gas rose above specified levels. 43 U.S.C. §§ 1337(a)(3)(C)(v) & (vi).
Thus, in section 302 Congress treated suspension volumes and price thresholds as
different matters, mandating the Secretary set suspension of royalties at not less than
certain volumes in unequivocal language but later applying a price threshold to those
suspensions. Section 302 thus demonstrates that price thresholds are not incompatible
with Congress’s specifying the volume at which royalties must be suspended.
Congress structured section 304 in exactly the same way. Section 304 provides
that suspensions of royalties “shall be set” at “not less than” specified volumes. But
section 304 also refers explicitly to section 303 and requires the Secretary to use that
bidding system, which contains the authority to “vary” royalty suspensions based on
the price of oil and gas. As Kerr-McGee admits, when both unequivocal volumetric
suspensions and price threshold provisions are present, the price threshold provisions
control. Resp. Br. 21. Thus, in the Royalty Relief Act what might appear at first blush
to be unequivocal commands to suspend royalties are revealed to be instructions to
14
set an initial volume for which the leases will be eligible for royalty suspensions at
the lease sale stage. Those statements are qualified in other sections with price
thresholds that could render the leases ineligible for the royalty suspension when the
thresholds are met. Only when both sections are read together does the price threshold
become apparent. See, e.g., United Sav. Ass’n of Tex. v. Timbers of Inwood Forest
Assocs., 484 U.S. 365, 371 (1988). In the Royalty Relief Act, the direction to initially
set suspension volumes at certain levels gives way to the price threshold.
The panel holds that Congress explicitly included price thresholds in section
302 because it intended them to apply to new production from existing leases, but did
not explicitly include a price threshold provision in section 304 because it did not
intend for price thresholds to apply to leases issued from 1996 to 2000. That is
erroneous for two reasons. First, it presumes that there is only one possible
explanation for Congress’s decision to structure sections 303 and 304 differently from
section 302, and ignores the possibility that the difference in structure may be
attributed to Congress’s intent to address royalty relief on new leases in two different
time periods: during the first five years, and indefinitely during the period which
follows. Second, Congress did include express authority for the Secretary to vary
royalty suspensions based on the price of production from the leases in section 303,
and required the Secretary to use that bidding system. Congress did not need to
explicitly include the authorization for price thresholds in section 304 because it had
already done so through the cross-reference to section 303. Because section 304 does
not expressly remove the discretionary price-threshold authority given by section 303,
15
the Secretary retains that discretionary authority. Congress did not need to make more
explicit what it had already clearly stated: the Secretary may impose price thresholds.
There can be no doubt that for all other leases Congress determined that it
could both spur production and protect the public fisc by offering suspended royalties
with the suspensions conditioned on price thresholds. The parties agree that the
Secretary is required to impose price thresholds for new production on existing leases
that have qualified for royalty relief, even after the Secretary has determined that the
production would not be economically viable absent the royalty relief. 43 U.S.C. §
1337(a)(3)(C)(v), (vi). And the parties agree that for new leases issued after section
304’s five-year period the Secretary is permitted to impose price thresholds in its
discretion. Id. § 1337(a)(1)(H). It would be anomalous if, as the panel holds,
Congress altogether prohibited price thresholds for a five-year period, making royalty
suspensions automatic up to a certain volume but entirely free from any limitation
based on the price of oil and gas. There is nothing in the language, structure, or
purpose of the Royalty Relief Act to indicate that Congress intended for price
thresholds to apply in every circumstance except for leases issued during the five-year
period following enactment of the statute, giving away billions of dollars in revenue
due to the American public when oil and gas prices are high. The Secretary does not
read the Act to do so, and his reading is entitled to deference under Chevron.
CONCLUSION
The petition for rehearing en banc should be granted.
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Respectfully submitted,
JOHN C. CRUDEN Acting Assistant Attorney General
JOHN S. MOSTMICHAEL T. GRAY Attorneys, U.S. Department of Justice Envt. & Natural Resources Div. P.O. Box 23795 (L’Enfant Station) Washington, DC 20026 (202) 305-4903
March 30, 200990-1-18-11857
CERTIFICATE OF SERVICE
I certify that two copies of the foregoing Federal Defendants-Appellees’
Petition Rehearing En Banc have been served upon each of the following counsel
on this 30th day of March, 2009 by dispatching same by Federal Express:
Jonathan A. HunterJason R. JohansonLiskow & Lewis601 Poydras St., Suite 5000New Orleans, LA 70139
L. Poe LeggetteNancy L. PellFulbright & Jaworski801 Pennsylvania Ave NWWashington, DC 20036
Lawrence P. Simon, Jr.Liskow & LewisP.O. Box 52008 O.C.S.Lafayette, LA 70505
Michael T. GrayU.S. Department of JusticeEnvironment and Natural Resources Div.P.O. Box 23795 (L’Enfant Plaza Station)Washington, D.C. 20026(202) 305-4903
ADDENDUM