Recent Administrative and Judicial Decisions and Pending Cases February 12, 2019 Matthew Collins, Michael Marchetti (ONRR) Peter Schaumberg, James Auslander (Beveridge & Diamond, P.C.)

Disclaimer The statements or opinions expressed in all ONRR presentations and panel discussions at the 2019 PASO-Tulsa Federal/Indian Royalty Compliance Workshop do not necessarily represent the views of ONRR or the Department of the Interior.

Overview Recent Decisions by and Notable Appeals to the ONRR Director Recent Decisions by and Notable Appeals to the IBLA Notable Appeals to Federal Court

ONRR Appeals Process 30 C.F.R. Part 1290: An appeal may be filed from an Order. An Order is a document: “that contains mandatory or ordering language that requires the recipient to . . . report, compute, or pay royalties or other obligations, report production, or provide other information.” An Order does not include: A non-binding request, information, or guidance, such as: Advice or guidance on how to report or pay (unless it contains mandatory or ordering language); Policy determination; “Dear Payor,” “Dear Operator,” or “Dear Reporter” letter (unless it explicitly includes the right to appeal in writing); Correspondence that does not include the right to appeal in writing.

ONRR Appeals Process (Cont.) Common orders: Order to report and pay additional royalties Order to perform a restructured accounting (systemic error) Order granting or denying a refund request Order to report

ONRR Appeals Process (Cont.) Time period for filing the Notice of Appeal / Statement of Reasons See 30 C.F.R. § 1290.105. ONRR cannot extend the time for filing a Notice of Appeal. ONRR can extend the time for filing the Statement of Reasons. Order to perform a restructured accounting for a federal oil and gas lease Other orders If issued by a Delegated State If issued by ONRR’s Director 60 days 60 days (IBLA) 30 days Matthew Collins

ONRR Appeals Process (Cont.) ONRR, States, and Tribes ONRR Director or BIA Director ONRR Appeals Program Appeals Coordinators (2) Appeals Analysts (5) Appeals Supervisor Program Manager Interior Board of Land Appeals (IBLA) Solicitor’s Office Federal Court Department of Justice Order Order to Perform a Restructured Accounting issued by ONRR (not a State or Tribe) for a federal oil and gas lease Note: Civil penalty notices follow a different process and are handled by ONRR’s Enforcement Program.

ONRR Appeals Process (Cont.) Time Period for Final Department of the Interior Decision Royalty Simplification and Fairness Act (RSFA): 33 months total for ONRR and IBLA ONRR and the Appellant may agree to extend the deadline 33 months applies to federal oil and gas leases (not solid minerals, geothermal, or Indian lands)

Time Limits for Orders and Refund Requests Federal oil and gas leases ONRR’s deadline to demand additional royalties: 7 years from when the royalties were due. See 30 U.S.C. § 1724. Lessee’s deadline to request a refund: Within a reasonable period of time and only during the adjustment period (the adjustment period is 6 years from when the royalties were due). See 30 U.S.C. § 1721a. ONRR and the Appellant may extend these deadlines by written tolling agreement.

Recent Director Decisions Shell Offshore Inc., ONRR-16-0054-OCS , et al. (Order Affirmed) Issues: Time period for refund requests Accrual of interest on late royalty payments Royalty Due Date (3/31/2009) Six Years (3/31/2015) Valuation Agreement (1/12/2012) Production (2/2009) Refund Request (2/29/2016)

Recent Director Decisions (Cont.) BP Exploration & Production Co., ONRR-14-0020-OCS, et al (Order Reversed in Part, Otherwise Affirmed) ONRR and BP entered into tolling agreements. BP’s Refund Requests sought refunds for new transportation costs. Issue: Did the tolling agreements extend the time for BP to request refunds for new transportation costs? 1st Refund Request 11/13/2013 2nd Refund Request 2/12/2014 Audit Start (2/2009) Audit Close 7/13/2013 Production at Issue (2004-2007)

ISSUES IN PENDING DIRECTOR APPEALS Non-arm’s-length gas processing filing requirements (Indian lease) 30 C.F.R. § 1206.180(b)(ii): “You must submit the actual cost information to support the allowance to ONRR on Form ONRR–4109, Gas Processing Allowance Summary Report, within 3 months after the end of the 12–month period for which the allowance applies. ONRR may approve a longer time period.” 3 Months (Form 4109 Deadline) 12 Month Reporting Period Late Filing

ISSUES IN PENDING DIRECTOR APPEALS (Cont.) Residue gas boosting Calculation of Indian Oil Major Portion Prices (pre‑July 1, 2015 amendments) Discrepancies between production and royalty volumes Arm’s-length dedicated contract (Indian Index Zone) Duty of a record title owner to file production reports Gas used or lost in transportation BSEE fees for offshore inspections Others

IBLA Appeals Process Notice of Appeal/Statement of Reasons/Administrative Record/Answer Record/Answer Deadline to file notice of appeal with ONRR or BIA Director and Office of the Solicitor 43 C.F.R. §§ 4.411(a)(2), 4.413 No extensions Deadline to appeal federal oil and gas restructured accounting orders 30 C.F.R. § 1290.105(a)(2) Deadline to file Statement of Reasons after Notice of Appeal filed 43 C.F.R. § 4.412(a) Can be extended Deadline for ONRR to file Administrative Record 43 C.F.R. § 4.411(d) Deadline for ONRR to file Answer after Statement of Reasons filed 30 C.F.R. § 1290.108(b) 30 days 60 days “promptly” Peter Schaumberg

Pending Before the IBLA 29 total ONRR cases 12 of 29 - royalty-in-kind cash out appeals 5 of 29 - non-oil/gas minerals 12 pending ONRR oil/gas cases

Pending Oil/Gas IBLA Cases 7 “unbundling” cases similar to ConocoPhillips (D. N.M.) and Devon (D. Wyo.) 2 NARMs cases similar to Continental (D.D.C.) 1 “Takes vs. Entitlements” case 1 Data Mining case (volume differences between OGORs and 2014s) 1 Production Reporting Verification case

Recent IBLA Decisions Energy Resources Technology GOM, Inc. (2015) Priority Energy, LLC (2015) Chevron U.S.A., Inc. (2017)    XTO Energy, Inc. (2017)

Recent IBLA Decisions (Cont.) Energy Resources Offshore lease required an exploratory well “within the first 5 years of the term to avoid lease cancellation” No automatic cancellation of lease when no exploratory well Rent still owed after year 5

Recent IBLA Decisions (Cont.) Priority Condition of approval (COA) to measure off-lease expired Properly valued production using higher of two reasonable volume estimates

Recent IBLA Decisions (Cont.) Chevron Royalties in lieu of severance tax case Lessee did not show error of law or material error in ONRR’s factual analysis Lessee did not show ONRR failed to give “due consideration to all relevant factors and based its decision on a rational connection between the facts found and the choice made” Michael Marchetti Chevron U.S.A., Inc., 191 IBLA 95 (2017) “In challenging ONRR's requirement to report and pay royalties in lieu of State severance tax owed on production from Federal Outer Continental Shelf leases, an appellant must show error in ONRR's decision. An appellant may show error by demonstrating that ONRR committed an error of law or a material error in its factual analysis, or that ONRR's decision is not supported by a record showing that ONRR gave due consideration to all relevant factors and based its decision on a rational connection between the facts found and the choice made. This burden is not carried by merely expressing disagreement; instead, the appellant must show an error of law or demonstrable error of fact.”

Recent IBLA Decisions (Cont.) XTO Buyback volumes for fuel and gas-lift Heating value wet-to-dry conversion Restructured Accounting under 30 U.S.C. 1724(d)(4)

Pending in Federal Courts California v. DOI (N.D. Cal.) Repeal of Valuation Rule

Statoil USA E&P Inc. v. DOI (S.D. Tex.) Federal Courts (Cont.) Statoil USA E&P Inc. v. DOI (S.D. Tex.) Knowing or willful civil penalty assessment for “maintenance” of inaccurate information Appeal pending (5th Cir.)

Quinex Energy Corporation v. Zinke (D. Utah) Federal Courts (Cont.) Quinex Energy Corporation v. Zinke (D. Utah) Index and Major Portion prices Factors in setting civil penalty amount Penalties assessed at $25 per line per day

Federal Courts (Cont.) U.S. v. Somont (D. Mont.) False Claims Act case How to avoid being in OIG/DOJ’s cross-hairs

BP America Prod. Co. v. U.S. (Fed. Cl.) Federal Courts (Cont.) BP America Prod. Co. v. U.S. (Fed. Cl.) Denial of overpayment interest under Fixing America’s Surface Transportation Act (FAST Act) Does the U.S. Court of Federal Claims have jurisdiction?

W&T Offshore, Inc. v. Zinke (E.D. La.) Federal Courts (Cont.) W&T Offshore, Inc. v. Zinke (E.D. La.) Refund request case Cost to remediate paraffin plug in offshore transportation line Reasonableness of transportation allowances

Continental Resources, Inc. v. Jewell (D.D.C) Federal Courts (Cont.) Continental Resources, Inc. v. Jewell (D.D.C) NARMs gas valuation Gas sold prior to processing - 30 C.F.R. § 1206.152 or § 1206.153

Questions? Michael Marchetti Regulations Supervisor ONRR (303) 231-3125 michael.marchetti@onrr.gov Peter J. Schaumberg Principal Beveridge & Diamond, P.C. (202) 789-6043 pschaumberg@bdlaw.com Matthew Collins Appeals Supervisor (303) 231-3602 matthew.collins@onrr.gov James M. Auslander (202) 789-6009 jauslander@bdlaw.com