[00:00:00] Speaker 02:
Thank you.

[00:00:01] Speaker 02:
We'll resume with 24-6132, Devon Energy Production Company versus Department of Interior.

[00:00:10] Speaker 02:
And we'll start with Mr. Oh, all these names are difficult for me.

[00:00:15] Speaker 02:
Fledget or Leggett?

[00:00:17] Speaker 01:
Your Honor, may it please the court, Poe Leggett.

[00:00:21] Speaker 02:
Leggett, I apologize.

[00:00:23] Speaker 02:
And you look familiar, so I probably mispronounced your name in the past, too.

[00:00:26] Speaker 02:
I apologize.

[00:00:27] Speaker 04:
You can call him Judge Hertz.

[00:00:32] Speaker 01:
The district court, I would like to reserve, I'm here for Devon Energy, I hope to reserve three minutes, we'll see.

[00:00:39] Speaker 01:
The district court incorrectly upheld an interior department order demanding more royalties on natural gas.

[00:00:48] Speaker 01:
Between 2004 and 2008, Devon produced gas from two geological formations in New Mexico.

[00:00:56] Speaker 01:
One was coal bed methane containing a high amount of the pipeline contaminant, carbon dioxide.

[00:01:03] Speaker 01:
The other was conventional gas, which lacked contaminants, making it unmarketable.

[00:01:09] Speaker 01:
Two different midstream companies transported and processed Devon's gas, Williams and Enterprise.

[00:01:17] Speaker 01:
One company charged a so-called bundled rate, meaning it was one fee for all services under the contract.

[00:01:25] Speaker 01:
The other charged a partly bundled fee.

[00:01:29] Speaker 01:
Adhering to a 1997 settlement between Devon and Interior, Devon did not deduct from its royalties 7.78 cents per thousand cubic feet to remove excess CO2 from the coal bed methane.

[00:01:47] Speaker 01:
But the order assumed Devon had deducted all bundle charges anyway.

[00:01:53] Speaker 01:
It also assumed Devon's conventional gas was not in marketable condition.

[00:01:59] Speaker 01:
It also disallowed all Devon's deductions and finally it ordered Devon to separate marketability costs by unbundling the two transportation systems it had used.

[00:02:13] Speaker 01:
It gave Devon two alternatives.

[00:02:15] Speaker 01:
One was to take no allowance at all.

[00:02:18] Speaker 01:
The other was to use the department's non-binding UCAs, unbundling cost allocations for these two plants.

[00:02:27] Speaker 01:
But if Devin used those two, the government would still come back later and audit Devin to make sure that the UCAs accurately reflected Devin's actual costs for these two systems.

[00:02:40] Speaker 04:
Didn't the Department of Interior also say that you could calculate your own transportation costs through your own methodology?

[00:02:54] Speaker 01:
Your Honor, they did say that in their response brief

[00:02:57] Speaker 01:
on this appeal.

[00:02:59] Speaker 01:
And that is incorrect.

[00:03:01] Speaker 01:
The department's position is that actual costs means the cost of the system that the company is actually using.

[00:03:11] Speaker 01:
And in a moment, I will find you a citation to the appendix for that.

[00:03:20] Speaker 01:
So your review is de novo.

[00:03:22] Speaker 01:
The errors are that

[00:03:25] Speaker 01:
The order ignored the coal bed gas settlement.

[00:03:30] Speaker 01:
Second, it violated a statutory duty to identify Devin's errors and give facts and reasons for treating the conventional gas as unmarketable.

[00:03:42] Speaker 01:
If the court disagrees with me on either of those points, then our due process argument must be considered.

[00:03:49] Speaker 02:
Let me back up on the clause.

[00:03:54] Speaker 02:
If you have a bundled price from a company like Enterprise, and it charges, this covers all the things we might do to your gas, including making it in marketable condition.

[00:04:16] Speaker 02:
But it turns out that your gas is already in marketable condition when it enters their system, so they don't have to do anything.

[00:04:27] Speaker 02:
aren't you still paying some money to enterprise to have them available to take out contaminants if necessary?

[00:04:40] Speaker 02:
And even though it turned out that it wasn't necessary, we spent money on that and that should be deducted from our expenses.

[00:04:49] Speaker 01:
How does that work?

[00:04:51] Speaker 01:
I'm sorry, Ron.

[00:04:52] Speaker 01:
That has not been the department's position before because

[00:04:57] Speaker 01:
It is pretty easy to determine whether a processing plant has had to treat gas that had become unmarketable.

[00:05:08] Speaker 01:
It's a simple matter of taking the gas analysis report and comparing it with the pipeline physical quality specifications and seeing if our gas analysis has higher numbers than what the pipeline allows.

[00:05:25] Speaker 01:
And in those cases, there might be a need to go unbundled.

[00:05:30] Speaker 01:
But the evidence here was that throughout the period, the gas was well below standard for the only contaminant that was even mentioned in the record, and that is carbon dioxide.

[00:05:42] Speaker 02:
So there are records kept of this that, I'm sorry.

[00:05:47] Speaker 02:
So there are records kept of this that someone can look at and say that this gas was in fact

[00:05:54] Speaker 02:
not the coal bed gas, but the other gas, conventional gas, is that what it's called?

[00:06:02] Speaker 02:
That it was always in marketable condition when it got to the processors?

[00:06:09] Speaker 01:
That is correct.

[00:06:11] Speaker 01:
Do we have that in the record?

[00:06:13] Speaker 01:
We do.

[00:06:14] Speaker 01:
It should be in second or third appendix at, I believe it's 389.

[00:06:22] Speaker 01:
Try to confirm that very quickly.

[00:06:25] Speaker 04:
As you're finding that, Judge Hertz, do you mind if I follow up?

[00:06:29] Speaker 04:
Please.

[00:06:32] Speaker 04:
Let me test you, not test you, but ask you.

[00:06:35] Speaker 04:
That's not my recollection.

[00:06:38] Speaker 04:
My recollection is that Devin responded to the audit saying that the Mesa Verde formation generally satisfied the carbon dioxide limits.

[00:06:51] Speaker 04:
I don't remember the word always.

[00:06:53] Speaker 04:
It used the word generally.

[00:06:55] Speaker 04:
In fact, I think that's the word that you used in your appellate briefing.

[00:07:00] Speaker 04:
And so let me just ask, assuming that I'm right, and I might be completely wrong, if you did deduct

[00:07:11] Speaker 04:
100% of the cost of putting the Mesa Verde formation gas, the conventional gas, through the treater and said, well, that wasn't to make it in marketable condition, because it was already marketable.

[00:07:28] Speaker 04:
If 10% was unmarketable, exceeded the threshold for carbon dioxide, and 90% was marketable, and you're deducting 100%

[00:07:41] Speaker 04:
They weren't saying that you didn't have, you know, that 100% of that was not deductible.

[00:07:48] Speaker 04:
They're just saying you have made a systematic and repeated error in the way that you are reporting to, you know, to the state tax division.

[00:08:01] Speaker 04:
So why isn't that

[00:08:05] Speaker 04:
a problem if it was generally marketable under the carbon dioxide threshold, but not always.

[00:08:14] Speaker 01:
The word generally was in a letter to the government that as I recall, was covering the general span of the history of audits on these properties, which go back to 1990.

[00:08:29] Speaker 01:
During the audit period,

[00:08:31] Speaker 01:
the government had an opportunity to identify whether there were cases when we exceeded carbon dioxide specifications.

[00:08:42] Speaker 01:
And your honor, if they had, then your premise would be correct.

[00:08:46] Speaker 01:
It would have been our obligation to go in and figure out if the findings were correct.

[00:08:52] Speaker 01:
And if so, try to come up with a way to unbundle.

[00:08:57] Speaker 01:
But the record doesn't show that here.

[00:09:01] Speaker 02:
And you're saying, as I understood you to say a couple of moments ago, that in fact, the record shows that it was marketable, that all of the gas that came to the processors was marketable.

[00:09:17] Speaker 02:
That's apparent from records kept at these facilities over the years.

[00:09:23] Speaker 02:
Is that correct?

[00:09:25] Speaker 01:
That is correct, Your Honor.

[00:09:27] Speaker 01:
A lot of the records are not in the appendix.

[00:09:30] Speaker 01:
One that is that will illustrate the point is at appendix 389.

[00:09:36] Speaker 01:
I think that's volume three, but it shows carbon dioxide readings.

[00:09:44] Speaker 01:
And here the government has not stated in the record what it thinks the marketable condition level is.

[00:09:51] Speaker 01:
Historically in this area, they've said somewhere between two and 3%.

[00:09:56] Speaker 01:
But they've taken no position on that here.

[00:10:00] Speaker 01:
So there is no way for me to argue or for the court to determine from the record whether Devin was in violation of the marketable condition cap on CO2.

[00:10:14] Speaker 02:
You may proceed.

[00:10:15] Speaker 01:
OK.

[00:10:17] Speaker 01:
I'll go back to the settlement agreement.

[00:10:20] Speaker 01:
The decision clearly ignored it.

[00:10:22] Speaker 01:
And the rule that the court should apply is the important aspects test that was illustrated this summer in American wild horse campaign 144 F fourth at 1190.

[00:10:36] Speaker 01:
There BLM had considered many aspects of wild horse management, but it had failed to consider maintaining a thriving natural balance.

[00:10:48] Speaker 01:
What made the natural balance issue important was that the statute required it.

[00:10:53] Speaker 01:
BLM ignored it, this court overturned it, even though it had properly considered some other issues.

[00:10:59] Speaker 01:
Now the district court here felt that the rule did not apply because the settlement only covered coal bed methane, not also conventional gas.

[00:11:12] Speaker 01:
But the test is an important aspect, not all aspects.

[00:11:16] Speaker 01:
And by legislative rule, the royalty settlements outranked

[00:11:23] Speaker 01:
the actual text of the royalty rules that the government is trying to apply here.

[00:11:29] Speaker 01:
So by binding interior department regulation, they have made the 1997 settlement an important aspect, meaning they at least had to consider it.

[00:11:40] Speaker 01:
And they didn't do that here.

[00:11:42] Speaker 03:
Didn't the district court say that the 98 settlement had expired?

[00:11:47] Speaker 01:
No, it didn't.

[00:11:48] Speaker 01:
It didn't reject the settlement.

[00:11:51] Speaker 01:
But the reason for your question is that I think it's fair to say the court may have besmirched without finding because it's at footnote 14 in its opinion.

[00:12:04] Speaker 01:
The issue there was that there are two parts to the settlement, a transportation rate and a treatment rate.

[00:12:13] Speaker 01:
At the time of the settlement, the transportation rate was set by three contracts with specific cents per cent, I'm sorry, cents per MCF values.

[00:12:24] Speaker 01:
And so that's what the parties used in the deal.

[00:12:27] Speaker 01:
Those were set to expire in 2000, but just the transportation rate was set to expire.

[00:12:33] Speaker 01:
The treatment rate did not contain similar language.

[00:12:37] Speaker 01:
We explained to the district court, and this was the only thing he took issue with,

[00:12:41] Speaker 01:
was that when those transportation rates expired with the contracts, we would be required to use the next round of contracts.

[00:12:51] Speaker 01:
He said he didn't see the support for that.

[00:12:53] Speaker 01:
The support for that is because the regulation would require us to use the new contract.

[00:12:59] Speaker 01:
Those would be our arm's length rates.

[00:13:02] Speaker 01:
So that was his question, but he never said the settlement had expired.

[00:13:06] Speaker 02:
So the contracts setting the transportation rate

[00:13:11] Speaker 02:
had expired, but the contract setting the treatment rate had not.

[00:13:18] Speaker 01:
Well, the treatment rate was not a contract number, Your Honor.

[00:13:23] Speaker 01:
It was agreed to by the department and by Devin.

[00:13:28] Speaker 01:
And because figuring out treatment is a cumbersome issue, they agreed on a fixed number to go forward.

[00:13:36] Speaker 02:
And why would they

[00:13:39] Speaker 02:
Why would they continue that rate, but not the transportation rate?

[00:13:44] Speaker 02:
What's the purpose of distinguishing them?

[00:13:47] Speaker 01:
Well, I do not know and the record does not reflect why the parties drew that distinction.

[00:13:55] Speaker 01:
And the only reason would be was, I guess, would be to make clear that there were two rates and they wanted to set them all in cents per MCF.

[00:14:05] Speaker 01:
rather than existing contracts, future contracts for transportation.

[00:14:10] Speaker 01:
That's just the language they decided to use.

[00:14:16] Speaker 02:
So if this were remanded for the agency to review whether the settlement agreement affected the arrangement,

[00:14:29] Speaker 02:
That's the sort of thing would have to be pursued on remand is figuring out whether the contract really does terminate the treatment rate agreement or not, depending on what the purpose of treating the treatment rate differently from the transportation rate, whatever.

[00:14:49] Speaker 02:
Is that fair to say?

[00:14:51] Speaker 01:
It is.

[00:14:51] Speaker 01:
They would also have to consider the arguments they declined to consider and the district court declined to consider.

[00:14:58] Speaker 01:
on the actual text of the agreement about how no language limited the treatment rate to a time period, and the department's acceptance of the treatment rate after the settlement.

[00:15:11] Speaker 01:
A whole long line of cases on that.

[00:15:13] Speaker 01:
Yes, but that's, yes, your honor.

[00:15:18] Speaker 02:
We've got a few seconds left.

[00:15:20] Speaker 01:
All right, well, on due process, you've already, I think, put your finger on it with,

[00:15:27] Speaker 01:
one of the first questions about the availability of other rates.

[00:15:31] Speaker 01:
No, they won't accept those rates and it's a post-hoc argument.

[00:15:35] Speaker 01:
My time is up.

[00:15:37] Speaker 02:
Thank you, counsel.

[00:15:40] Speaker 02:
Mr. Adams, you may proceed.

[00:15:44] Speaker 00:
Good morning and may it please the court.

[00:15:46] Speaker 00:
John Adams on behalf of United States Department of Interior.

[00:15:50] Speaker 00:
Plaintiff's appellants have put forth many arguments for the court to consider

[00:15:54] Speaker 00:
But the overarching issue is whether under section 1724, D4B honor properly ordered Devon to perform a restructured accounting when Devon unilaterally reduced its royalty payments to our public fisc for public resources it had extracted from our public lands.

[00:16:13] Speaker 00:
Already we have discussed at length the settlement agreement processes and CO2.

[00:16:18] Speaker 00:
So I'm just gonna jump right there.

[00:16:20] Speaker 00:
Devon argues that the 2016 order

[00:16:23] Speaker 00:
requiring it to perform a restructured accounting is arbitrary and capricious because Honor did not consider the settlement agreement.

[00:16:33] Speaker 00:
For a few reasons, Devin is wrong.

[00:16:35] Speaker 00:
To begin with, I'm just going to take a step back and I'm going to contextualize a little bit more the 2016 order.

[00:16:42] Speaker 00:
The agency issued an order for Devin to perform restructured accounting.

[00:16:47] Speaker 00:
In plain terms, this requires Devin to perform a reevaluation of its financial records

[00:16:53] Speaker 00:
including unbundling costs to disaggregate improper allowances.

[00:16:58] Speaker 00:
Importantly, this is just one step in a comprehensive process to allow the agency to review the correct royalty rate that Devon owes the United States for extracting natural gas on public land.

[00:17:11] Speaker 00:
During this process, Honor will still consider the settlement agreement.

[00:17:15] Speaker 00:
It'll still consider the CO2 that we heard from counsel, whether this court affirms or remands

[00:17:20] Speaker 00:
The agency is just requiring Devin to show its work for its claimed allowances.

[00:17:26] Speaker 00:
And let me describe just a little bit more detail what will happen, whether this court affirms or remands.

[00:17:31] Speaker 00:
And this leads to my second point and why the district court got it right.

[00:17:36] Speaker 00:
As the district court found, plaintiffs did not contend that the settlement agreement pertained to all production.

[00:17:42] Speaker 00:
or that a methodology established by the settlement agreement encompassed all transportation and processing allowances.

[00:17:49] Speaker 04:
Why wasn't it a significant part of the problem when there was no dispute that it's 82% of the disputed royalties?

[00:17:58] Speaker 00:
Your honor, that is a disputed fact, and Devin is asking this court to engage in fact finding when the agency is still going through the process right now.

[00:18:07] Speaker 04:
We don't know.

[00:18:09] Speaker 04:
Let me, I didn't mean to talk over you, but let me just kind of reframe the question.

[00:18:15] Speaker 04:
As I understand it, tell me if I'm wrong, that one of the issues is did the government,

[00:18:26] Speaker 04:
the Department of Interior failed to consider a significant part of the problem when they decided that there was a systematic and repeated irregularity in Devin's reporting.

[00:18:41] Speaker 04:
So they say, well, when they get the audit letter from the state, they say, well, we have this settlement agreement.

[00:18:50] Speaker 04:
They make the argument that council made today that the

[00:18:55] Speaker 04:
that the treatment costs for 7.78 continues in perpetuity.

[00:19:04] Speaker 04:
They make that argument.

[00:19:07] Speaker 04:
The agency doesn't address it at all.

[00:19:10] Speaker 04:
And now, true, if there's a restructured accounting, maybe they'll decide it now.

[00:19:21] Speaker 04:
But before we can affirm, don't we have to decide that OSMRE did not

[00:19:28] Speaker 04:
or I'm maybe getting my agencies wrong, failed to consider, the Department of Interior failed to consider a significant part of the problem.

[00:19:39] Speaker 04:
I mean, they've said it's 80% of the disputed royalties.

[00:19:42] Speaker 04:
I don't remember seeing anything in your brief saying, well, it's not 82%, it's 68%.

[00:19:48] Speaker 04:
It's a lot.

[00:19:49] Speaker 04:
Why isn't that a problem since the government didn't clearly, I mean, the word settlement agreement don't appear in the order?

[00:19:59] Speaker 00:
I understood your honor.

[00:20:01] Speaker 00:
The summit agreement was attached and it is the Office of Natural Resources revenue or honor.

[00:20:05] Speaker 00:
That's what I mean by.

[00:20:06] Speaker 00:
Okay, let me just point to the court to the record about an important factual finding that's undisputed that honor made here.

[00:20:16] Speaker 00:
Honor on appendix 176 found that in the agreement.

[00:20:22] Speaker 00:
Enterprise and Williams, I'm paraphrasing it's EFS and WFS, but it's enterprise and Williams.

[00:20:27] Speaker 00:
Those are third party vendors.

[00:20:28] Speaker 00:
that Devon contracted with, quote, provide gas gathering, dehydration, treating and processing services for a single bundled fee.

[00:20:38] Speaker 00:
Then the factual finding goes on, the services provided include functions required to place gas in a marketable condition, end quote.

[00:20:46] Speaker 00:
So your honor, to answer your question, we just don't know what costs Devon has paid for those services.

[00:20:53] Speaker 00:
Devon says right now that the settlement agreement covers CO2, but as the agency found, the contracts with the third-party vendors cover way more than CO2.

[00:21:06] Speaker 00:
It covers gathering services, which this court found in API against DOI just two years ago are not allowances that LSE can take

[00:21:15] Speaker 00:
from a royalty rate that it owes the federal government.

[00:21:18] Speaker 00:
And the restructured accounting order is just asking Devon for more information to prove up its allowances.

[00:21:25] Speaker 00:
It may very well be the case that the settlement agreement eventually may touch upon some of the costs that Devon pays

[00:21:33] Speaker 00:
these third-party vendors, we just don't know.

[00:21:35] Speaker 00:
The agency is just asking Devin to show its work, and that's what the order is doing right now.

[00:21:41] Speaker 00:
And so to answer your question more pointedly, if the court affirms, the agency will continue to consider the settlement agreement, even whether it expires, which it does.

[00:21:51] Speaker 02:
So doesn't the agency have to make some supportable finding

[00:21:58] Speaker 02:
of underpayment before it starts the process that it initiated nine years ago, eight years ago.

[00:22:06] Speaker 02:
Does it not have to do that?

[00:22:09] Speaker 00:
In 2016?

[00:22:10] Speaker 00:
Well, it did.

[00:22:11] Speaker 00:
It made a preliminary finding that Devon had been underpaying its royalty rate and then issued this order.

[00:22:20] Speaker 02:
Well, it made that finding.

[00:22:22] Speaker 02:
And what Devon is saying is there was no basis for the finding.

[00:22:27] Speaker 02:
Is that a correct statement of what's an issue here?

[00:22:35] Speaker 00:
I think Devin argues a few bases that it contends, renders the

[00:22:41] Speaker 00:
Order arbitrary and previous and to your point, your honor, I think this goes into counsel's argument where Devin asserts that the twenty sixteen order was arbitrary and capricious because honor did not prove that the gas was in a marketable condition.

[00:22:54] Speaker 00:
So making a factual predicate finding, but the district court got it right when it concluded that honors reasons for the twenty sixteen order did not depend on quality specifications for marketable gas.

[00:23:07] Speaker 00:
but on the regulations that state categorical rules regarding deductible allowances.

[00:23:11] Speaker 02:
And those categorical rules- I understand Devin's position.

[00:23:15] Speaker 02:
It's two parts.

[00:23:20] Speaker 02:
Combining to show that there's no reason, no sound reason for the agency to have ordered this process to start with respect to coal gas,

[00:23:33] Speaker 02:
saying there's a settlement agreement that covered that and that supersedes any regulations.

[00:23:40] Speaker 02:
So for all the fruit and coal gas and I think it was coal gas from another area, that's resolved by the settlement agreement.

[00:23:50] Speaker 02:
And for conventional gas, there's no evidence that it wasn't marketable before it went to the processor.

[00:23:58] Speaker 02:
So there's no evidence of any processing required to make the gas marketable that should not have been deducted.

[00:24:07] Speaker 02:
And if Devin is correct about that,

[00:24:15] Speaker 02:
Didn't the agency have to explain why it rejected those contentions, either explain that it addressed the settlement agreement and explain why it thought it had expired, maybe not prove it, but at least address it, and also address why it thinks that Devon was paying to have conventional gas brought to marketable condition.

[00:24:43] Speaker 02:
What's wrong, if I'm doing their position correctly, and you can correct me on that, but what's wrong with that argument?

[00:24:54] Speaker 02:
Go ahead.

[00:24:55] Speaker 00:
The evidence shows, Your Honor, that Devin had a contract with third-party vendors, specifically Enterprise and William, to provide functions that require it to get its natural gas into a marketable condition.

[00:25:09] Speaker 00:
And we just don't know the extent to which those costs, how much Devin was paying for those costs.

[00:25:15] Speaker 00:
But the contract itself that the agency cites in its 2016 order at appendix 176 is the evidence.

[00:25:23] Speaker 00:
And Judge Baccarat, to answer your question that you asked counsel earlier about whether with respect to the conventional gas, it was an unmarketable condition, you're exactly right that Devin had stated in the record, and I'll quote it, Devin's conventional gas generally

[00:25:38] Speaker 00:
does not require treatment to be in a marketable condition.

[00:25:42] Speaker 00:
That's from its opening brief on pages 38 and 39 in its citing appendix 267.

[00:25:47] Speaker 00:
And so there are a lot of facts out here that we just don't know.

[00:25:50] Speaker 00:
And what the 2016 order does is require Devon to just show its work, to show its unbundled costs for the cost that it's paying

[00:26:01] Speaker 00:
Williams and Enterprise to put its gas into a marketable condition.

[00:26:05] Speaker 02:
Why wouldn't it be satisfactory for Devon to say the settlement agreement applies and the agency is compelled to accept the whatever sense it is per MCF

[00:26:26] Speaker 02:
has the cost of making the coal gas marketable and then supplement that with showing that there's no indication.

[00:26:40] Speaker 02:
In fact, the record is to the contrary.

[00:26:43] Speaker 02:
The record shows that the conventional gas was in marketable condition when it got to the processor.

[00:26:51] Speaker 02:
Would you agree that that would be sufficient response by Devin

[00:26:58] Speaker 00:
No, Your Honor.

[00:26:59] Speaker 00:
Why not?

[00:27:00] Speaker 00:
Because Devon's paying for services to put its gas into a marketable condition.

[00:27:06] Speaker 00:
And the agency is just asking for an unbundling of those costs.

[00:27:09] Speaker 00:
I'm not aware of why Devon is paying for these costs if it contends that its gas is already in a marketable condition.

[00:27:16] Speaker 00:
And all the agency is asking for Devon is just to show its worth and to prove that its gas is in a marketable condition or it's not paying for costs or functions or services.

[00:27:26] Speaker 00:
related to putting its gas in a marketable condition, that this court's decision in API against DOI, or even the federal regulations, 30 CFR section 206.152i, does not allow any lessee to deduct those costs from the royalty payments it owes to the United States.

[00:27:48] Speaker 02:
Let me pursue this a little bit.

[00:27:49] Speaker 02:
We'll give everybody some time to ask questions.

[00:27:55] Speaker 02:
I thought Devin brief was saying that these particular services you say are used to make the gas marketable are services that are used for other purposes.

[00:28:08] Speaker 02:
There's no evidence that these services were used to make the gas marketable.

[00:28:13] Speaker 02:
In fact, the marketability processing is done upstream of, well, you know the point I'm making.

[00:28:23] Speaker 02:
How do you respond to that?

[00:28:25] Speaker 00:
It is true that there are regulations that do allow for these types of costs.

[00:28:31] Speaker 00:
The point that the agency wants to make is that we just don't know where those costs fall in.

[00:28:37] Speaker 00:
It could be the case that Devin is performing, or the third-party vendors are performing services for Devin that fall within another regulation.

[00:28:46] Speaker 00:
And it could also be the case that they're performing services for Devin that fall within a prohibition of Devin taking allowance from the royalty that it owes.

[00:28:55] Speaker 00:
We just don't know.

[00:28:56] Speaker 00:
And that's why it's important for Devon to unbundle its costs to show its work so that the agency can make that assessment.

[00:29:02] Speaker 00:
And that's part of the process point I tried to make earlier.

[00:29:04] Speaker 03:
Go ahead.

[00:29:06] Speaker 03:
Doesn't the Royalty Fairness Act, though, require a factual basis for that determination?

[00:29:12] Speaker 03:
And you're just really speculating that there might be a problem.

[00:29:19] Speaker 03:
But don't you have to do more than that?

[00:29:20] Speaker 03:
Basically, what you've done

[00:29:22] Speaker 03:
with the order is shift the burden of proof to Devin, i.e.

[00:29:26] Speaker 03:
to show its work to prove its costs, rather than you making a factual determination that there's a problem with the submitted deductions that they're taking.

[00:29:38] Speaker 03:
Doesn't that invert the statute?

[00:29:42] Speaker 00:
No, I don't think so, Your Honor.

[00:29:43] Speaker 00:
You're right about the statute and the factual finding that we point to in our brief is the contract that Devin entered into with its third parties.

[00:29:52] Speaker 00:
We contend that it is still Devon's burden to prove those costs.

[00:29:55] Speaker 00:
The agency just doesn't have that information and it's asking Devon for it.

[00:30:01] Speaker 03:
Can the agency get that information from the transport company or the processor?

[00:30:07] Speaker 00:
Not that I'm familiar with, Your Honor.

[00:30:13] Speaker 02:
Well, here's what troubles me, and maybe this is something that's to be handled in the future, but it seems to me that if in fact

[00:30:24] Speaker 02:
the settlement agreement was still in force.

[00:30:28] Speaker 02:
So marketability costs for the coal gas is taken care of through what Devon has paid consistently through by applying this settlement agreement figure.

[00:30:43] Speaker 02:
And it's also true

[00:30:45] Speaker 02:
that Devin is sending to the processors is already marketable, then Devin shouldn't have to do anything more.

[00:31:00] Speaker 02:
There's no need to unbundle any cost.

[00:31:03] Speaker 02:
But you're imposing on Devin a burden to do something that it shouldn't have to do if it's two, I'll say, fundamental assumptions

[00:31:14] Speaker 02:
assertions are correct.

[00:31:17] Speaker 02:
And that seems unfair.

[00:31:19] Speaker 02:
If all you're saying the agency has done is said, you know, we've got some questions, you need to answer it.

[00:31:26] Speaker 02:
then Devin should be allowed to answer the question by showing that the settlement agreement is still in effect and that the gas it's submitting to the processors is marketable.

[00:31:39] Speaker 02:
But your order doesn't seem to allow that.

[00:31:41] Speaker 02:
You say you have to unbundle the cost, which is a major undertaking, particularly when they don't have access to the data from the processors.

[00:31:52] Speaker 02:
it would comfort me if you said they could do all this downstream from this proceeding, but they ought to have a chance to make that their case to the agency at some point.

[00:32:08] Speaker 02:
What am I missing?

[00:32:11] Speaker 00:
Well, I would just revisit, I see that I'm out of time, so I'll just simply say that I would just revisit my arguments earlier about

[00:32:18] Speaker 00:
if this court affirms, the settlement agreement is still in play.

[00:32:22] Speaker 00:
It just applies to CO2, but the contracts that Devin has with the third-party vendors cover way more than that.

[00:32:28] Speaker 00:
So the settlement agreement, as the district court found, will not resolve the unbundling issue, nor will it resolve this case.

[00:32:35] Speaker 00:
Devin still has to contend with other services that it's paying for these third-party vendors.

[00:32:40] Speaker 00:
And if I'm wrong about that, Your Honor, and the court is inclined to remand

[00:32:46] Speaker 00:
The proper course on remand would be to remand without vacator for the agency to consider the settlement agreement and to consider whether it expires, which the agency, which we can tend to plainly does.

[00:32:59] Speaker 02:
Well, would they have an opportunity on remand?

[00:33:03] Speaker 02:
to show with the records that council referred to that the conventional gas coming to the processors is already in marketable condition.

[00:33:16] Speaker 02:
Is that something they could do to resolve this in conjunction, in combination with showing that the settlement agreement was still in force?

[00:33:28] Speaker 02:
Would that be adequate?

[00:33:30] Speaker 00:
Yes, your honor, the agency will consider arguments will consider records.

[00:33:33] Speaker 00:
Of course, I think that it's going to have to contend with the record evidence already that states that its gas was generally in a marketable condition and what that means and whether it had to do some type of function or service to put its gas in a marketable condition.

[00:33:48] Speaker 00:
But the agency will consider arguments and records.

[00:33:50] Speaker 00:
Of course.

[00:33:51] Speaker 02:
Of course.

[00:33:52] Speaker 02:
It sounded to me, the way I saw the order, they had to compute, they had to unbuckle the cost, which is a massive undertaking, perhaps an impossible undertaking.

[00:34:04] Speaker 02:
And what they're saying is it's a totally unnecessary undertaking because the gas was marketable.

[00:34:10] Speaker 02:
So I'm not sure that the agency position allows for what would seem to be fair here.

[00:34:17] Speaker 00:
Well, Your Honor, I just want to point out, I think you get into the impossibility argument that Devin has asserted in his papers and oral argument this morning.

[00:34:26] Speaker 00:
The order itself offers alternatives to Devin to comply with it.

[00:34:31] Speaker 00:
It doesn't have to unbundle its costs.

[00:34:33] Speaker 00:
It can take the unbundling cost allowances, the UCAs that the government explains to it in its response brief.

[00:34:40] Speaker 04:
Were there any, this period that we're talking about is 2004 to 2008,

[00:34:47] Speaker 04:
And these UCAs, as I understand it, didn't begin until October 2009.

[00:34:52] Speaker 04:
So how could they have used the UCAs?

[00:34:56] Speaker 00:
They can use them now, Your Honor.

[00:34:57] Speaker 00:
That's what the order is.

[00:34:58] Speaker 04:
And were retroactive?

[00:34:59] Speaker 00:
Correct.

[00:35:01] Speaker 00:
And then I just want to clarify one thing.

[00:35:04] Speaker 00:
As we stated in our brief,

[00:35:06] Speaker 00:
Devin also may do its own unbundling calculation, and the citation for that in the order is Appendix 182.

[00:35:12] Speaker 00:
That's something that dozens of other lessees do with the agency, and historically, most of the proposed unbundling methodologies proposed by the agency are accepted.

[00:35:25] Speaker 04:
Could they use then their transportation costs at their other offsite leases?

[00:35:32] Speaker 00:
Yes, Your Honor, they can submit methodologies

[00:35:34] Speaker 00:
for honor to consider and approve.

[00:35:37] Speaker 04:
They can submit anything that they want, but does the government accept those?

[00:35:47] Speaker 04:
Or are you going to say, those are dissimilar?

[00:35:51] Speaker 00:
I don't know, I would have to see what they submit, but the point is they are free other dozens of lessies have done this with interior where they submit their own proposed methodology.

[00:36:03] Speaker 00:
And there's a lot that goes into it about the specific site, the, the specifications of the gas and everything.

[00:36:09] Speaker 00:
I can't speculate.

[00:36:10] Speaker 00:
on what the future might hold, but if it's a reasonable submission.

[00:36:13] Speaker 00:
I mean, mind you too, the regulations only require reasonable actual costs.

[00:36:19] Speaker 00:
Devin reads the reasonable word out of it and just says it's only actual costs, but it's reasonable actual costs.

[00:36:25] Speaker 00:
And Devin is free to submit its own methodology to obtain the reasonable actual cost that is required by the regulations.

[00:36:33] Speaker 00:
Thank you, counsel.

[00:36:35] Speaker 02:
Cases submitted and counsel excused.