Alan B. Johnson, United States District Judge

Lyle Poe Leggette, Alexander Karl Obrecht, Rosario C. Doriott Dominguez, Pro Hac Vice, Baker & Hostetler LLP, Denver, CO, for Petitioner.

Nicholas Vassallo, Mark A. Klaassen, United States Attorneys Office, Cheyenne, WY, for Respondents.

ORDER VACATING THE DIRECTOR'S DECISIONS AND REMANDING IN PART FOR FURTHER FACT FINDING

Alan B. Johnson, United States District Judge

THIS MATTER comes before the Court on Devon Energy Production Company, L.P.'s ("Devon"), Petition for Review of Final Agency Action , ECF No. 1. Devon sought review of a May 7, 2015 Order (ONRR-11-0007-O&G) from Director Gregory G. Gould ("Director") of the Office of Natural Resources Revenue ("ONRR"), which dealt with an audit of Devon's royalty payments from 2002–2004. Devon, along with the Director and the ONRR (collectively, "Respondents"), then filed an Unopposed Joint Motion to Consolidate Devon's petition with other related petitions Devon had brought to this Court. ECF No. 7. The Court granted the motion, ECF No. 8, thereby situating for review another opinion (ONRR-12-0083-O&G) by the Director dealing with a similar audit of Devon's royalty payments for the time period of 2005–2007.

On January 28, 2019, Devon filed its opening brief. ECF No. 78. Respondents then responded with an Answer Brief on March 14, 2019. ECF No. 82. Four days later, Respondents filed a Corrected Answer Brief to rectify various drafting errors. ECF No. 83 at 1 n.1. Devon then completed the briefing with a Reply Brief , ECF No. 87. Having considered all the filings, the applicable law, the administrative record, and being otherwise fully advised, the Court FINDS and ORDERS as follows:

FACTUAL AND PROCEDURAL BACKGROUND

Devon produced natural gas from the Barrel Springs Unit in Carbon County, Wyoming. The State of Wyoming audited Devon's royalty payments from the Barrel Springs Unit for three separate periods: 1) 2002–2004; 2) 2005–2007; and 3) 2008–2010. Although Devon seeks to introduce evidence from the 2008–2010 audit, it admits that "this case concerns the years 2002-2004 and 2005-2007 ...." ECF No. 86 at 2. Upon completing the 2002–2004 and 2005–2007 audits, the ONRR and the State of Wyoming ("State") concluded that Devon owed additional royalties. Among other things, they "concluded that Devon had underreported gas volumes and improperly claimed transportation cost deductions for the Barrel Springs Unit." ECF No. 83 at 6–7.

Specifically, for 2002–2004, the ONRR issued a July 17, 2019 audit issue letter, a February 10, 2010 audit issue letter, and a July 7, 2010 second revised audit issue letter. (2002–2004 AR at 1081–103). While the final amount due changed from letter to letter, each one identified production reporting issues. (Id. at 1084, 1094, 1105–06). The February 10, 2010 revised audit letter also stated that Devon had taken improper transportation deductions (id. at 1095); however, the July 7, 2010 second revised audit issue letter did not discuss transportation deduction issues. (See id. at 1084).

For the 2005–2007 audit, the State issued a September 1, 2011 audit letter stating that Devon had once again misreported volume of production. The letter explained that, of all the properties involved, "[t]he Barrel Springs Unit demonstrated the largest under-reported volume difference, of 4,024,397 Mcf." (2005–2007 AR at 1095). That audit letter also identified problems with Devon's transportation deductions. (Id. at 1096). A February 17, 2012 revised audit letter made some alterations, still finding that for the Barrel Springs Unit Devon "significantly under-reported by 1,051,255 Mcf." (Id. at 1079).

After the audits, the ONRR issued multiple orders to report and pay additional royalties. (2002–2004 AR at 217; 2005–2007 AR at 169). For the 2002–2004 order, a purpose was to determine if Devon took proper allowances and calculated its royalties according to federal regulations. (2002–2004 AR at 217). The 2005–2007 order indicated the initial audit was made for similar purposes. (Id. at 175). The first order identified volume misreporting and royalty reporting issues. (Id. at 218, 220). The second order identified volume misreporting and over-reported transportation allowances. (2005–2007 AR at 176–77). Ultimately, both orders directed that Devon needed to pay the State, with the first calculating the required payment at $1,094,063.77 (2002–2004 AR at 217), and the second calculating the required payment at $490,364.34 (2005–2007 AR at 169). A subsequent appeal to the Director led to two separate decisions and a surprise for Devon regarding its transportation costs.

First, the Director found that, for both the 2002–2004 and 2005–2007 periods, Devon had misreported its production volume because it "reported production ‘at lease level’ rather than ‘at agreement level.’ " (2002–2004 AR at 843; 2005–2007 AR at 567). In other words, for production that occurred subject to a unit or communitization agreement, Devon attributed 100% of the production to the leases rather than attributing the production to the agreement and then allocating back to specific leases. (2002–2004 AR at 843–44; 2005–2007 AR at 567–68). This is an important miscue, as an allocation schedule governed "agreement-to-lease allocation percentages ...." (2002–2004 AR at 844; 2005–2007 AR at 568). The volume misreporting issue is not an aspect of Devon's current petition for administrative review.

What is at issue is Devon's transportation deductions. While the Director agreed with Devon that the ONRR and the State did not apply "the proper analysis to determine Devon's allowable transportation costs," (2002–2004 AR at 934–35; 2005–2007 AR at 581), he then denied all of Devon's transportation allowances. (2002–2004 AR at 849; 2005–2007 AR at 572–73). He stated that Devon had not "unbundled" a transportation fee it paid a third-party, Williams Field Services ("Williams"), which appeared necessary to place the natural gas in marketable condition. (2002–2004 AR at 847–48; 2005–2007 AR at 571–72). The Court will supply more information about the transportation chain later in the order. For now, it is sufficient to state that there were multiple royalty measure points within the Barrel Springs Unit, and gas would enter the WYGAP Pipeline while also still in the Unit. (2002–2004 AR at 845; 2005–2007 AR at 569). From there, the gas moved into the Westrans Pipeline where it and the WYGAP pipeline connected, and then the gas flowed through the Westrans Pipeline to the Echo Springs gas processing plant at the Washakie Point 49 meter. (2002–2004 AR at 845; 2005–2007 AR at 569). Devon paid Williams "a fee to gather, dehydrate, compress, transport, and, if necessary, remove CO2 from Devon's production between the Unit's royalty measurement points and the inlet to the Echo Springs plant." (2002–2004 AR at 845; 2005–2007 AR at 569).

As a result, even though the State and Devon agreed that Devon was likely entitled to take 60% of the Williams Fee as a transportation deduction, the Director modified the Orders to Pay and denied the transportation deductions until Devon provided marketable condition information and unbundling analyzes. (2002–2004 AR at 848; 2005–2007 AR at 571). The Director gave Devon thirty days to provide relevant information supporting its transportation allowances. (2002–2004 AR at 850; 2005–2007 AR at 573).

Rather than supplying the information, Devon appealed to the Interior Board of Land Appeals ("IBLA"). While that appeal was pending, Devon submitted additional information to the IBLA regarding its marketable condition analysis. (See, e.g. , 2002–2004 AR at 1562–79; 2005–2007 AR at 1314–31, 3916–17). As for Devon's unbundling analysis, there appears to be some imprecision as to when Devon provided the relevant data and cost estimates. Without citing the administrative record, Respondents state that Devon provided "cost estimates" during the IBLA appeal and during this action, but that Devon never provided its relevant analysis "to ONRR for audit ...." ECF No. 83 at 23–24. Devon states that it provided certain cost estimates "to the ONRR after the IBLA affirmed the Decisions." ECF No. 77 at 29 n.72. And the Administrative Record indicates that, as of January 27, 2017, more than half a year after Devon filed its June 2016 Petition for Review of Final Agency Action, Devon still had "not proposed an unbundling method" to the ONRR's Audit and Compliance Management Team. (05–07 AR at 4041–42). Whatever the case, the parties agreed at oral argument that Devon did not submit the pertinent technical information until after commencement of the IBLA appeal. Unedited Realtime Translation of 7/29/2019 Oral Argument at 30–31, Devon Energy Production Company, L.P. v. Gregory J. Gould et al. , 2:16-cv-000161-ABJ

Devon also submitted a motion to stay the petitions, which the IBLA denied. (2005–07 AR at 693). Because the IBLA failed to issue a decision on the merits within thirty-three months, "the Secretary [was] deemed to have issued a final decision in favor of the Secretary, which decision shall be deemed to affirm those issues for which the agency rendered a decision prior to the end of such period." 30 U.S.C. § 1724(h)(2)(B). Under the Administrative Procedure Act ("APA"), Devon now appeals to this Court.

STANDARD OF REVIEW

Pursuant to the APA, district courts are statutorily empowered to review final agency actions, see 5 U.S.C. § 704 ; Utahns for Better Transp. v. U.S. Dep't of Transp. , 305 F.3d 1152, 1164 (10th Cir. 2002), as modified on reh'g , 319 F.3d 1207 (10th Cir. 2003), except where a statute "preclude[s] judicial review" or an "agency action is committed to agency discretion by law." 5 U.S.C. § 701(a)(1)–(2). The parties do not argue that either exception applies, and, in a case where the ONRR claims that Devon owes substantial financial penalties for misreporting its transportation deductions, the Court finds that Devon is entitled to a full judicial review of the agency action in this case. Garvey v. Freeman , 397 F.2d 600, 605 (10th Cir. 1968) ("No legislative language can deprive a man of a fair hearing in the adjudication of his rights, or of his right to have a court decide whether the administrative agency acted within its jurisdiction; and, whether the agency through a lay tribunal applied the correct rule of law to the facts." (citations omitted)).

Agency action can be either formal or informal. Formal actions include rulemaking or adjudication after a trial-like hearing. See Citizens to Preserve Overton Park, Inc. v. Volpe , 401 U.S. 402, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971) (explaining substantial evidence review is appropriate "when the agency action is based on a public adjudicatory hearing."); Paul Enockson, Administrative Law and Procedure , 73 DENV. U. L. REV. 619, 635 n.22 (1996) (citations omitted). Lack of a "rule making" action or "an adjudicatory hearing" renders the agency action informal. Anderson v. U.S. Dep't of Hous. & Urban Dev. , 701 F.2d 112, 113 (10th Cir. 1983) ; Matthew J. McGrath, Convergence of the Substantial Evidence and Arbitrary and Capricious Standards of Review During Informal Rulemaking , 54 GEO. WASH. L. REV. 541, 541 (1986). When reviewing either formal or informal agency actions, federal district courts

shall ... hold unlawful and set aside agency action, finding, and conclusions found to be

(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;

(B) contrary to constitutional right, power, privilege, or immunity;

(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;

(D) without observance of procedure required by law;

(E) unsupported by substantial evidence in a case subject to sections 556 and 557 of this title or otherwise reviewed on the record of an agency hearing provided by statute; or

(F) unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court.

In making the foregoing determinations, the court shall review the whole record or those parts of it cited by a party, and due account shall be taken of the rule of prejudicial error.

5 U.S.C.A. § 706(2)(A)–(F). If a court classifies an agency's action as formal, the substantial evidence standard of review applies; if a court classifies an agency's action as informal, the arbitrary and capricious standard of review applies. See Anderson , 701 F.2d at 113 (citing CF & I Steel Corp. v. Econ. Dev. Admin. , 624 F.2d 136, 139 (10th Cir. 1980) ) (listing the components for reviewing informal agency action); Enockson, supra , at 620–21 (citations omitted).

Here, Devon does not challenge a formal agency rulemaking; nor does it challenge an adjudication following a trial-like hearing. Indeed, at the time of the Director's decisions, Devon argued that there was not "a final audit report," much less a final trial-like hearing. ECF No. 21–1. Devon is thus challenging an informal agency action and, as a result, the arbitrary and capricious standard applies.

The Tenth Circuit has stated that an agency's action is "arbitrary and capricious" if it

(1) ‘entirely failed to consider an important aspect of the problem,’ (2) ‘offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise,’ (3) ‘failed to base its decision on consideration of the relevant factors,’ or (4) made ‘a clear error of judgment.’

New Mexico ex rel. Richardson v. BLM , 565 F.3d 683, 704 (10th Cir. 2009) (quoting Utah Envtl. Cong. v. Troyer , 479 F.3d 1269, 1280 (10th Cir. 2007) ). Where the agency has not stated any reasons to support a decision, its decision is arbitrary and capricious for failure to "articulate a satisfactory explanation ...." Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co. , 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983). If a decision is not rationally connected to the case's facts, it is also arbitrary and capricious. Id. (quoting Burlington Truck Lines v. United States , 371 U.S. 156, 168, 83 S.Ct. 239, 9 L.Ed.2d 207 (1962) ).

Before the Court and parties are too hasty to cast away the substantial evidence test it should be remembered in some instances that the arbitrary and capricious standard "converges" with the substantial evidence standard. McGrath, supra , at 553–62; see also Olenhouse v. Commodity Credit Corp. , 42 F.3d 1560, 1575 (10th Cir. 1994). When district courts review "the administrative record for factual support," they should set aside "informal agency action ... if it is unsupported by ‘substantial evidence.’ " Olenhouse , 42 F.3d at 1575 (citing Ass'n of Data Processing v. Bd. of Governors , 745 F.2d 677, 683 (D.C. Cir. 1984) ). Because the arbitrary and capricious standard is "a catch-all, picking up administrative conduct not covered by the more specific paragraphs," id. at 1575 n.25 (citing Data Processing , 745 F.2d at 683 ), it enlists the substantial evidence test to analyze informal agency actions that are challenged for lacking substantial evidence. The Tenth Circuit has defined "substantial evidence" as follows: "Evidence is substantial in the APA sense if it is ‘enough to justify, if the trial were to a jury, a refusal to direct a verdict when the conclusion to be drawn is one of fact.’ " Id. (quoting Data Processing , 745 F.2d at 684 ).

District courts are to treat APA reviews like appeals, and "[a] presumption of validity attaches to the agency action and the burden of proof rests with the appellants who challenge such action." Id. at 1580 (emphasis omitted); see also Citizens' Comm. to Save Our Canyons v. Krueger , 513 F.3d 1169, 1176 (10th Cir. 2008) (quoting Colo. Health Care Ass'n v. Colo. Dep't of Soc. Servs. , 842 F.2d 1158, 1164 (10th Cir. 1988) ). Though a deferential standard usually applies to reviewing an agency's action, Utahns for Better Transp. at 1164, (citation omitted), questions of law are reviewed de novo. See Slingluff v. Occupational Safety & Health Review Comm'n , 425 F.3d 861, 866 (10th Cir. 2005). Thus, "[t]he failure to apply the correct legal standard or to provide this court with a sufficient basis to determine that appropriate legal principles have been followed is grounds for reversal." Mountain Side Mobile Estates P'ship v. Sec'y of Housing & Urban Dev. , 56 F.3d 1243, 1250 (10th Cir. 1995) (internal quotation marks omitted).

PERTINENT REGULATIONS

Through the so-called marketable condition rule, 30 C.F.R. § 1206.152(i) places the onus of putting gas in marketable condition on federal lessees:

The lessee must place gas in marketable condition and market the gas for the mutual benefit of the lessee and the lessor at no cost to the Federal Government. Where the value established under this section is determined by a lessee's gross proceeds, that value will be increased to the extent that the gross proceeds have been reduced because the purchaser, or any other person, is providing certain services the cost of which ordinarily is the responsibility of the lessee to place the gas in marketable condition or to market the gas.

"Marketable condition" means "lease products which are sufficiently free from impurities and otherwise in a condition that they will be accepted by a purchaser under a sales contract typical for the field or area." Id. § 1206.151. Gas is in marketable condition when it meets interstate pipeline specifications "that serve its typical purchasers ...." Devon Energy Corp. v. Kempthorne , 551 F.3d 1030, 1037 (D.C. Cir. 2008) ; Rogers v. Westerman Farm Co., 29 P.3d 887, 905 (Colo. 2001) (en banc.), as modified on denial of reh'g (Aug. 27, 2001) ("It may be, for all intents and purposes, that gas has reached the first-marketable product status when it is in the physical condition and location to enter the pipeline." (citation omitted)); Anderson Living Tr. v. WPX Energy Prod., LLC , 306 F.R.D. 312, 324 (D.N.M. 2015) ("natural gas generally comes into marketable condition when it is of sufficient quality to be accepted into the interstate pipeline system." (collecting cases)).

Processes necessary to place gas into marketable condition include compression, dehydration, and the removal of acid gases. See Devon Energy , 551 F.3d at 1036–37 ; Amoco Prod. Co. v. Watson , 410 F.3d 722, 731 (D.C. Cir. 2005) aff'd sub nom. BP Am. Prod. Co. v. Burton , 549 U.S. 84, 127 S.Ct. 638, 166 L.Ed.2d 494 (2006). Once gas is in marketable condition, lessees may deduct "[s]upplemental costs for compression, dehydration, and treatment of gas," but "only if such services are required for transportation and exceed the services necessary to place production into marketable condition." 30 C.F.R. § 1206.157(f)(9). Whether the lessee itself or a third-party places the production into marketable condition, the lessee, not the federal government, is responsible for the ultimate costs associated with putting the gas into marketable condition. See Burlington Resources Oil & Gas Company , 183 IBLA 333, 339–40 (April 23, 2013), aff'd Burlington Resources Oil & Gas Company, LP v. U.S. Department of Interior , 2014 WL 3721210 (N.D. Okla., July 24, 2014).

Gathering costs are nondeductible. 30 C.F.R. § 1206.151. "Gathering" is "the movement of lease production to a central accumulation and/or treatment point on the lease, unit or communitized area, or to a central accumulation or treatment point off the lease, unit or communitized area ...." Id. That said, federal lessees are entitled to deduct "the reasonable actual costs incurred by the lessee" to transport the gas to a point of sale outside the lease. Id. § 1206.156(a). Under an "arm's-length contract," the transportation allowance associated with the lessee's transportation costs "shall be the reasonable, actual costs incurred by the lessee for transporting the unprocessed gas, residue gas and/or gas plant products under that contract ...." Id. § 1206.157(a)(1)(i). Such a deduction is "subject to monitoring, review, audit and adjustment." Id.

LEGAL ANALYSIS

1) The Director's Decisions and a Proper Demand

Without considering the additional material Devon submitted to the IBLA and this Court, Devon first argues that just what was before the Director shows his decisions were arbitrary and capricious. Devon states, "the Director violated [the] law because he not only rendered a decision outside the case before him but also failed to review the record." ECF No. 77 at 15. The Court finds that the better argument, though, is that the ONRR never issued proper demand for the 2002–2004 time period.

a) Scope of the Director's Decisions

The audits required Devon to pay additional fees. In the 2002–2004 appeal to the Director, Devon argued:

Another apparent issue is the auditor's contention that forty percent (40%) of the transportation fees associated with the Barrel Springs Unit should be disallowed as gathering. Devon is entitled to deduct and take a transportation allowance. See 30 C.F.R. 206.156 and 30 C.F.R. 206.176. Devon pays one fee for third-party transportation from the royalty measurement point to the Echo Springs Plant. The royalty measurement point marks the end of non-allowable gathering and the beginning of allowable transportation. There is no functional change down the line, but the ONRR is

creating an artificial transportation segment (60%) and gathering segment (40%) at the unit boundary where none exists. This is inconsistent with the facts and applicable regulations. One hundred percent (100%) of these fees are deductible as transportation costs. Devon believes that upon completion of the audit, Devon will be entitled to a substantial refund relating to this issue.

(2002–2004 AR at 935) (emphasis added). For the 2005–2007 audit appeal, Devon argued:

WYDOA refers to a "Gas Gathering, Treating and Dehydrating Agreement," originally dated December 22, 1999, and WYDOA again states that Devon is only entitled to take 60% of the WFS charges related to transportation. It appears that WYDOA has taken an October 28, 2009 Devon preliminary response from a previous audit (2002-2004) and applied it to the current audit.

Devon agrees with the WYDOA that Devon is only entitled to take 60% of the Wyoming Gathering and Production/Williams Field Services transportation, but disputes that Devon is over-reporting its transportation allowance.

(2005–2007 AR 581) (emphasis added). As a result, the Court finds that Devon itself raised the issue of whether it was entitled to deduct all of the Williams Fee as a transportation allowance. And as a further result, the Court can hardly fault the Director for considering Devon's argument. The Director did not issue "a decision outside the case before him" because Devon put the transportation deduction issue before him.

b) Proper Demand

Although the Director did not overreach by considering Devon's arguments, the Court finds that, at least to some extent, the procedural sequence leading to his decisions was deficient. Specifically, for the 2002–2004 audit, the ONRR never issued a proper demand.

Under 30 U.S.C. § 1724, the ONRR must "demand" a royalty payment "which arises from, or relates to an obligation ... within seven years from the date on which the obligation becomes due ...." Failure to provide lessees with such demands (or to initiate a judicial proceeding) bars the agency from taking "any other or further action regarding that obligation" or pursuing "any other equitable or legal remedy ... with respect to an action on or an enforcement of said obligation." Id.

A "demand" is a written "order to pay," id. § 1702(23), that is (1) issued "by the Secretary or a delegated State," (2) "asserts a specific, definite, and quantified obligation claimed to be due," and (3) "specifically identifies the obligation by lease, production month and monetary amount of such obligation claimed to be due and ordered to be paid, as well as the reason or reasons such obligation is claimed to be due." Id. § 1702(26)(A)–(B). The statute also provides that "such term does not include any other communication or action by or on behalf of the Secretary or a delegated State." Id. § 1702(26)(B). An "obligation" is any duty of a lessee to "pay, offset, or credit monies including (but not limited to) ... the principal amount of any royalty ... which arises from or relates to any lease administered by the Secretary for, or any mineral leasing law related to, the exploration, production and development of oil or gas on Federal lands." Id. § 1702(25).

a) The 2002-2004 Order

First, the United States Department of the Interior Office of Natural Resources Revenue wrote the December 16, 2010 Order. (2002–2004 AR at 942). Paul Tyler, the Program Manager for State and Indian Coordination, signed it. (Id. at 947). Second, on the first page, the order states that Devon must "report and pay additional royalties of $1,094,063.77," (id. at 942), which is a specific, definite, and quantified obligation claimed to be due. Third, the order identifies the applicable lease and agreement numbers (id. at 943), along with the relevant production months. (Id. at 942). It states the amount due for each lease number. (Id. at 950). It includes a five-page invoice stating the total amount due ($1,094,063.77) based upon various royalties that were due on several dates. (Id. at 952–56). Finally, it states why Devon owes the $1,094,063.77: volume misreporting and royalty reporting issues. (Id. at 943–45).

Thus, the Court agrees that the 2002–2004 order is a sufficient demand for additional royalty payments on account of volume misreporting and royalty reporting issues. What is absent, though, is a declaration that Devon owed additional royalties because of improper transportation allowances. The 2002-2004 order states, "Here are the issues resulting in the determination that Devon owes additional royalties: Issues Number 1: Volume Misreporting ... Issue Number 2 : Royalty Reporting Issues ...." (2002–2004 AR at 943–45). For volume misreporting, the order simply notes that Devon misreported volumes of production. (Id. at 943–44). And though royalty reporting issues comes closer to transportation deduction issues, all the order states is that "Devon continued to report gas from the following properties as unprocessed, which contributed to the overall audit finding ...." (Id. at 945). What is more, the properties listed for royalty reporting issues are the Standard Draw, Wild Rose, and Red Desert properties. (Id. at 945). Conspicuously absent from that list is the Barrel Springs Unit—the Unit that is the subject of current administrative appeal.

In response to this problem, Respondents state, "[t]he Order refers to the calculation of transportation allowances and directs Devon to the Audit Issue Letters (included as enclosures to the Order) ‘where additional information was provided relating to several issues in the audit.’ " ECF No. 83 at 26 (quoting 2002–2004 AR at 945). That quote, however, is taken out of context. While discussing possible royalty reporting issues, ONRR noted that Devon had responded to the underlying audit—which did mention transportation deduction issues—with "additional information" about "the methodology employed in the transportation ... calculations ...." (Id. at 945). When Devon provided that additional information, "[c]hanges were made to the audit on the transportation ... deduction calculation issues based on Devon's responses to the issue letters." (Id. ). The order then noted that, having resolved the transportation deduction issues, the volume discrepancies and misreporting issues still needed to be reconciled. (Id. ).

Hence, when the 2002–2004 order pointed to "additional information" in the underlying audits, it was not somehow incorporating by reference the audits to show why Devon owed royalties for improper transportation deductions. Instead, the order mentioned those audits to show why Devon's transportation deductions were not part of the remaining "issues resulting in the determination that Devon owes additional royalties ...." (Id. at 943). Further, even if the order had attempted to incorporate the underlying audits for the purpose Respondents suggest, it is unclear whether the federal regulations would permit those audits, which are independently insufficient, to become sufficient simply because an order referred to them. See 30 C.F.R. § 1702(26)(B) ("order to pay ... does not include any other communication or action by or on behalf of the Secretary or a delegated State."); id. § 1290.102 ("Order does not include: (vi) Any correspondence that does not include the right to appeal in writing.").

By enacting the Federal Oil and Gas Royalty Simplification and Fairness Act of 1996, Congress "established certain prerequisites that ONRR must satisfy before ordering a lessee to revise prior period reports and payments." Jane Campbell & Sarah Dicharry, ONRR's Tools for Compliance I: Data Mining, Compliance Reviews, Audits, and Orders , 5 ROCKY MOUNTAIN MIN. L. INST. 3 (2018). One of those prerequisites is that ONRR must identify the reasons it believes a lessee owes additional payments on account of its royalty obligations. 30 U.S.C. § 1702(26). In this case, ONRR identified problems with volume and royalty reporting, and then it indicated that any outstanding transportation deductions issues had been resolved through the audit process. Therefore, transportation deductions could not have been a reason for ONRR's "demand" that Devon pay its royalty "obligations." The Court thus rejects Respondents' contention that the December 16, 2010 order is a valid demand. Because Respondents present no other argument on the issue and the Director's decisions were not issued until seven years after the 2002–2004 audit period, the Court agrees that ONRR's claims regarding the 2002–2004 audit period are time-barred. Accordingly, the ONRR Director's decision and the IBLA's deemed affirmance of him are arbitrary and capricious since they failed to consider this important aspect of the case, are not based on relevant factors, and made a clear error of judgment. See New Mexico ex rel. Richardson , 565 F.3d at 704 (citation omitted).

b) 2005–2007 Order

Unlike the 2002–2004 order, the Court finds that the 2005–2007 order was a proper demand. Once more, a "demand" is a written "order to pay," 30 U.S.C. § 1702(23), that is (1) issued "by the Secretary or a delegated State," (2) "asserts a specific, definite, and quantified obligation claimed to be due," and (3) "specifically identifies the obligation by lease, production month and monetary amount of such obligation claimed to be due and ordered to be paid, as well as the reason or reasons such obligation is claimed to be due." Id. § 1702(26).

The ONRR issued the 2005–2007 order on September 21, 2012. (2005–2007 AR at 883). It was written and Steven Dilsaver, an Administrator for the Department of Audit, signed it. (Id. ). It stated that Devon needed to pay $490,364.34 in additional royalties. (Id. ). It identified the applicable lease and agreement numbers (id. at 890), along with the relevant production months. (Id. ) It stated the amount due by lease number (id. at 896), and included detailed summary schedules indicating the royalty due by month. (Id. at 990–98). Like the 2002–2004 order, it contained a detailed invoice asking Devon to remit royalty payments to the ONRR. (Id. at 885–88). In contrast with the 2002–2004 order, the 2005–2007 order said Devon owed additional royalties in part because Devon over-stated transportation allowances. (Id. at 892). Specifically, it explained that Devon "over-reported their transportation allowance for the [Barrel Springs Unit] by $245,553.05." (Id. ).

The Director eventually stated that the ONRR erroneously reached the conclusion that Devon over-stated its transportation allowances because it employed improper methodology. Nonetheless, the Court finds that underlying order properly identified the reason the ONRR claimed Devon royalties and, as a result, the 2005–2007 order was a proper demand. In other words, that the Director corrected an error in the underlying order does not eradicate the ONRR's original demand. As Respondents argue, and as the Court agrees, "Devon identifies no statutory requirement providing that the initial ‘demand’ must be mathematically and legally correct in all regards at the time it is issued ...." ECF No. 83 at 27.

Rather than trying to address that point, in reply, Devon admits that "[t]he Second Order is closer in specificity," but Devon then claims it still fails because it was based on erroneous methodology and did not identify a marketable condition issue. ECF No. 87 at 21. Devon is correct that the 2005–2007 ONRR order was not the picture of clarity regarding the marketable condition analysis. The ONRR erroneously believed that Williams gathered Devon's gas before the Unit boundary even though the gas had been moved to "a central accumulation and/or treatment point on the lease" at the Unit's royalty measurement points. (See 2002–2004 AR at 847). Yet by making such an assertion, the ONRR necessarily suggested marketable condition problems with Devon's gas.

Gathering costs—i.e. , costs needed to move production "to a central accumulation and/or treatment point," 30 C.F.R. § 1206.157(f)(9) —are nondeductible when necessary to "put production into marketable condition." Id. § 1206.51; see also TXO Prod. Corp. v. State ex rel. Comm'rs of Land Office , 1994 OK 131, 903 P.2d 259, 263, as amended on reh'g (Oct. 5, 1995) ("compression, dehydration and gathering are not chargeable to Commissioners because such processes are necessary to make the product marketable under the implied covenant to market."); Xeno, Inc. , 134 IBLA 172, 180 (Nov. 14, 1995) ("Under the ‘marketable condition’ rule royalty is due on the gross proceeds accruing to the lessee including payments for the cost of measuring, gathering, and compressing gas where such services are necessary to place the gas in marketable condition." (citation omitted)). If, however, Devon's gas was already in marketable condition prior to the Unit boundary, the ONRR would have had no reason to deny Devon's subsequent "gathering costs" as nondeductible since they would fall outside the marketable condition rule's admonition against deducting costs incurred to place production in marketable condition. See Amerada Hess Corp. v. Dep't of Interior , 170 F.3d 1032, 1037 (10th Cir. 1999) (citing Xeno , 134 IBLA at 183–84); Sternberger v. Marathon Oil Co. , 257 Kan. 315, 894 P.2d 788, 800 (1995) (distinguishing transportation costs from gathering costs). In such an event, it might not even be proper to characterize those costs as "gathering costs" rather than simply calling them "transportation costs." See Sternberger , 894 P.2d at 800. Thus, the only logical interpretation of the ONRR's 2005–2007 order is that Devon's costs were nondeductible because its gas was not yet in marketable condition.

And it appears that the 2005–2007 ONRR order said as much. In referencing and apparently accepting the State's argument, the ONRR noted "[t]he charges incurred by Devon ... include more than just straight transportation. The charges ... include non-deductible expenses, including gathering and compression to get the gas into marketable condition. " (2005–2007 AR at 893). Further, Devon admits that at the Unit boundary Devon's gas went through a compressor (the Barrel Springs Compressor), which Devon owned and which raised the gas's pressure to approximately 600–800 psig. (2002-2004 AR at 1566; 2005-2007 AR at 1318). The 2005–2007 order discussed costs associated putting Devon's gas in marketable condition, and Devon is incorrect to assert that the order did not include the marketable condition rule (whether erroneously or not) as a basis for denying Devon's transportation deductions. Since it included improper transportation deductions as a reason for demanding increased orders, along with all the other necessary elements, the Court finds the 2005-2007 order was a proper demand.

c) The Director's Decisions and the IBLA's Response

Devon next argues that three other pieces of evidence before the Director show that his decisions were arbitrary and capricious. First, Devon and the State agreed that 60% of the Williams Fee occurred for transportation outside of the Barrel Springs Unit; thus, Devon claims that it was in error for the Director to deny all of Devon's claimed transportation deductions. Second, Devon notes that the Director found that Devon only deducted 60% of the Williams Fee, and it was at least entitled to that. Third, Devon states that a prior agency decision determined that the Unit boundary marked the location where production had reached marketable condition. If that is the case, then Devon argues it logically follows that costs incurred after the Barrel Spring Unit boundary were properly deductible. These arguments go to this case's overarching issue: whether the Director acted arbitrarily and capriciously by requiring Devon to unbundle the Williams Fee.

i) Where does the burden rest?

At the outset, the Court must clear up some ambiguity. Though it is true that the State agreed with Devon that 60% of the Williams Fee was deductible for off-unit transportation, as discussed, the Director found that the audit erroneously reached that decision. Originally, the State decided that "40% of the WYGAP Pipeline is within the Unit and the State considers any transportation within the Unit boundary to be gathering, which is a nondeductible cost of placing gas in marketable condition."(2002–2004 AR at 845). But the Director stated that "[g]athering ended at the royalty measurement points, not the Unit Boundary ...." (Id. at 847). Thus, the Director concluded that "[t]he State should not have denied deduction of 40% of the Williams fee as gathering." (Id. at 847). Further, the Director concluded that Devon had only deducted 60% of the Williams Fee. (2002–2004 AR at 848). The question now is whether the Director could require Devon to prove that the 60% deduction it took, regardless of its accuracy, was supported by "articulate criteria ...." (Id. at 848; 2005–2007 AR at 534). Put differently, the question still remains whether the burden falls on the State to show why a lessee is not entitled to a deduction, or whether the burden falls on a lessee to show why it is entitled to a deduction.

In Amerada Hess Corp , Amerada Hess Corporation ("AHC") received certain reimbursements from purchasers of its production. 170 F.3d at 1034. Following Fifth Circuit precedent, the Tenth Circuit held that these so-called Order 94 reimbursements were royalty-bearing. Id. at 1036 (citing Mesa Operating Limited Partnership v. U.S. Dep't of the Interior , 931 F.2d 318, 323–26 (5th Cir. 1991) ). In lower proceedings, however, AHC had argued that the "Order 94 reimbursements were for transportation purposes" and hence deductible from gross proceeds. Id. at 1037. Upon receiving those arguments, the "IBLA remanded for a determination of whether AHC could substantiate its claim that certain Order 94 reimbursements were for transportation purposes and hence not royalty-bearing." Id. (emphasis added). The Secretary of the Interior put the burden on AHC and "determined that the company had failed to prove that any of the Order 94 reimbursements were exempt from royalties on this basis." Id.

On appeal to the Tenth Circuit, like Devon, AHC cited Xeno, Inc. , 134 IBLA 172 (Nov. 14, 1995). Id. In Xeno , the IBLA refused to apply the marketable condition rule to deny the producer's costs related to moving gas from a wellhead to a nearby delivery point. Id. at 183. While such costs are typically nondeductible by virtue of the marketable condition rule, "there [was] evidence of a market for the gas at the wellhead," thus rendering those costs unassociated with placing the gas in marketable condition. Id.

The Tenth Circuit, however, found that AHC's situation was distinguishable from that in Xeno. Amerada , 170 F.3d at 1038. In Amerada , AHC made no showing, at any stage of the proceedings, that its Order 94 reimbursements fell outside the marketable condition rule. See id. Accordingly, the Tenth Circuit found that AHC could not deduct the Order 94 reimbursements. Id.

But in Amerada , before the Tenth Circuit ruled the IBLA had remanded the case to the Secretary so that AHC could show why the Order 94 reimbursements were deductible. Id. Amerada thus proves that, whether originally or after remand, the burden is on the producer to ultimately prove that transportation costs are post-marketable condition and deductible. Id. ; see also Citation Oil & Gas Corp. v. DOI , 448 Fed. Appx. 441, 447 (5th Cir. 2011) (unpublished) ("[the agency is] not required to comb a lessee's records to determine if that lessee is entitled to a transportation allowance."); Shoshone Indian Tribe v. Hodel , 903 F.2d 784, 788 (10th Cir. 1990) (stating that it was proper for the agency to require verification of the propriety of claimed deductions); Mittelstaedt v. Santa Fe Minerals, Inc. , 954 P.2d 1203, 1209 (Okla. 1998) ("It is the lessee's burden to show that the excess dehydration costs charged against the royalty interest occurred to a marketable product, i.e., that the cost is a post-production cost."); XTO Energy, Inc. , 185 IBLA 219, 225 (Feb. 4, 2015) ("While XTO faults ONRR for failing to show the costs of compressing the gas were not a transportation cost, the burden is on the lessee to demonstrate error in ONRR's decision by showing the costs were not incurred to place the gas in marketable condition." (citing Burlington Resources Oil & Gas Co. , 183 IBLA at 352)).

Devon attempts to distinguish these cases because of procedural sequence. ECF No. 87 at 23. For example, in XTO Energy, Inc. , a state audit identified compression costs as nondeductible under the marketable condition rule. 185 IBLA at 233. At that point, and because the auditors made specific findings, Devon claims the burden fell on XTO to substantiate its transportation deductions. Although the agency appeared to have gone above and beyond in XTO , the Court does not read the decision to imply such an odd rule whereby the party in control of relevant information has no obligation to produce or show how that information supports a deduction during an audit, instead putting the burden on the agency. Indeed, XTO expressly stated that lessees should not complain if the ONRR's findings fell short since "the burden is on the lessee to demonstrate error in ONRR's decision ...." Id. at 225. Whether during the audit or after the ONRR Director pointed out the marketable condition snag, the Court finds that the burden eventually fell on Devon to substantiate its transportation deductions.

Though Devon may have needed to substantiate its transportation deductions, Amerada also exemplifies another point: past agency action indicates that the IBLA ought to remand to the ONRR when there are evidentiary questions about whether a producer's transportation costs are deductible. Here, the IBLA did not remand the decisions to the Director on the unbundling or marketable condition issues—indeed, the IBLA did not even issue a decision analyzing these questions within thirty-three months. Principles from Amerada hence guide this Court to find that this case should be remanded. That is what the agency has done in the past in similar situations, and that is what it should have done here. See Amerada , 170 F.3d at 1037 ; Fiml Nat. Res., LLC , 2011 WL 9977341, at *3 (2011) ("it is necessary to remand this matter ... to supplement the record and determine whether the compression costs at issue are necessary to put production into marketable condition or are deductible costs of transportation ...."). And if the IBLA had done so, this Court would not be in the awkward position of analyzing things like water vapor pounds per million cubic feet when neither the Director nor the IBLA have done so.

Beyond that, the Court struggles with the notion that it could affirm the Director's decision as being supported by "substantial evidence" when the Director himself indicated that Devon was likely entitled to some transportation allowance, as he stated that Devon should "separate the allowable from nonallowable components of the Williams fee ...." (2005–2007 AR at 572). If some of the Williams Fee could be properly deducted because it was "allowable," then ultimately it would be improper to not permit any deduction at all. Because the state auditors agreed that some of the Williams Fee was properly deductible and Devon has since presented evidence on the issue, the ONRR should now consider Devon's evidence to determine whether "substantial evidence" supports a finding that Devon is not entitled to any deduction.

Although in the inverse, the Court finds the IBLA's decision in Burlington Resources Oil & Gas Company proves as worthy guidance for how the agency has treated similar issues. In Burlington the ONRR found that Burlington had underpaid royalties on gas it produced in North Dakota. 183 IBLA at 336. Burlington would sell its gas at the wellheads to third-parties who would then take the gas and transport, compress, dehydrate, and sweeten it. Id. Afterwards, these third-parties transported the gas away from the lease through a pipeline to sell to other purchasers. See id. at 336–37. Burlington sold its gas to these third-parties "under an arm's-length contract," using a percentage of the ultimate proceeds from the later sales "as the contract price ...." Id. at 337.

When computing royalties, the ONRR determined that Burlington undervalued its gas. Id. at 341. Specifically, the ONRR found that Burlington "improperly deducted the costs to compress, dehydrate, and sweeten the gas, to place the gas in a marketable condition." Id. The Director affirmed the ONRR with only some inconsequential adjustments. Id. at 342.

On appeal to the IBLA, Burlington claimed that its gas was already in marketable condition when it was sold and that none the compression, dehydration, and sweeting costs were incurred to place its gas in marketable condition. Id. at 351. But apparently Burlington was just asking the IBLA to take Burlington's word for it: "[Burlington] fails to offer any affirmative evidence in support of its assertion that costs of compression, dehydration, and sweetening were not necessary to place the gas in marketable condition or that the gas was already marketable prior [to those processes]." Id. at 352. Because the burden rested on Burlington to show that its gas was in marketable condition prior to its enhancement and Burlington offered no affirmative evidence on the matter, the IBLA affirmed the ONRR Director. Id. at 352, 358. In doing so, the IBLA rejected Burlington's argument that the case should be remanded for further fact-finding on the marketable condition issue. See id. at 352–57.

But unlike here, further fact-finding was not needed. At the IBLA, Burlington had failed "to offer any affirmative evidence" to show its gas was in marketable deduction and its costs were properly deductible. Id. at 352. That was likely because no such evidence existed—the ONRR had already analyzed marketable condition issue through a "thorough State audit." Id. To show that was true, the IBLA noted that Burlington argued that since dehydration and sweetening occurred beyond the lease but "after the point of sale," those processes were unnecessary to put its gas in marketable condition, just to make it suitable for processing. Id. at 354. Burlington pointed out that, for processing purposes, H₂ S and water needed to be removed from the gas. Id. The ONRR, however, had considered all those facts in the underlying audit and orders, and it determined that those processes put the gas in marketable condition to make it acceptable for sale. Id. The ONRR had also analyzed at length Burlington's compression costs. Id. at 355–56.

Comparing Burlington to this case shows that the ONRR never treated Devon like Burlington. No in-depth analysis has occurred regarding all of the processes Williams undertook concerning Devon's gas, but it needs to before this Court can say there is substantial evidence in the record to affirm the informal agency action denying all of Devon's transportation deductions. That is because, unlike Burlington, Devon submitted evidence to the IBLA regarding its marketable condition analysis. Further fact finding is necessary to determine when, or if, Devon's gas reached marketable condition.

ii) 30 C.F.R. § 1206.157

For all this, Devon argues that another federal regulation has the broad effect of altering the courts' and agency's understanding of the marketable condition rule. 30 C.F.R. § 1206.157(a)(i) (emphasis added) states:

For transportation costs incurred by a lessee under an arm's-length contract, the transportation allowance shall be the reasonable, actual costs incurred by the lessee for transporting the unprocessed gas, residue gas and/or gas plant products under that contract ... subject to monitoring, review, audit, and adjustment. The lessee shall have the burden of demonstrating that its contract is arm's-length. ONRR's prior approval is not required before a lessee may deduct costs incurred under an arm's-length contract .

At oral argument, Devon argued that this regulation, in conjunction with a recent United States Supreme Court case, Kisor v. Wilkie , ––– U.S. ––––, 139 S. Ct. 2400, 204 L.Ed.2d 841 (2019), must be interpreted to place the burden on the ONRR to decide if a lessee's claimed deduction is valid during an audit.

In Kisor , the Court decided whether to dispose of Auer deference—that is, the doctrine that courts should defer "to agencies' reasonable readings of genuinely ambiguous regulations." Id. at 2408–2410. The Court chose to restrict the Auer doctrine rather than abolish it. See id. at 2415–2418. The Kisor Court articulated that Auer deference is only appropriate if a "regulation is genuinely ambiguous." Id. at 2416 (citing Christensen v. Harris County , 529 U.S. 576, 588, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000) ; Bowles v. Seminole Rock & Sand Co. , 325 U.S. 410, 414, 65 S.Ct. 1215, 89 L.Ed. 1700 (1945) ). Further, an agency's interpretation of the regulation must be reasonable, which means, as Justice Kagan put it, "it must come within the zone of ambiguity the court has identified after employing all its interpretive tools." Id. Finally, courts should analyze whether the situation must be one in which deference to agency interpretation is appropriate, which means "whether the character and context of the agency interpretation entitles it to controlling weight." Id. at 2416 (citing Christopher v. SmithKline Beecham Corp. , 567 U.S. 142, 155, 132 S.Ct. 2156, 183 L.Ed.2d 153 (2012) ).

Devon claimed at oral argument that the case law and agency decisions putting the burden on the lessee were incorrect and unreasonable because 30 C.F.R. § 1206.157(a)(i) conflicts with their interpretation of the marketable condition rule, creating for this Court some kind of Kisor mandate to disregard the agency's interpretation of the marketable condition rule. This argument is somewhat inconsistent with Devon's other argument that those cases and agency decisions are procedurally distinguishable. If they are distinguishable, then they are not inconsistent—ergo, no unreasonable interpretation. Nonetheless, the thrust of Devon's argument is that this Court should not defer to the agency and hold that the marketable condition rule requires lessees to produce evidence about why they deserve transportation deductions during an audit on account of 30 C.F.R. § 1206.157(a)(i).

The Court finds this argument untenable because 30 C.F.R. § 1206.157(a)(i) does not have the reach that Devon gives it. 30 C.F.R. § 1206.157 simply allows lessees to claim transportation deductions in arm's-length transactions without the ONNR's approval. In such situations, a lessee's claimed transportation deduction is still subject to audit. See id. §§ 1206.157(a)(1)(ii), 1217.50. And where a lessee's royalty payments and claimed deductions are subject to audit—in fact, at all times—it must be able to substantiate its royalty payments and associated allowances: "Each lessee ... shall make and retain accurate and complete records necessary to demonstrate that payments of ... royalties ... related to offshore and onshore Federal and Indian oil and gas leases are in compliance with lease terms, regulations , and orders." Id. § 1212.51 (emphasis added). Similar to the tax context, see, e.g., United States v. Brown , 548 F.2d 1194, 1197 n.7 (5th Cir. 1977), Rosenberg v. Comm'r , 450 F.2d 529, 533 (10th Cir. 1971), these sections indicate that federal lessees must "demonstrate" why their claimed deductions comply with the law during an audit, even if it requires them to "make" detailed records. Devon cites no authority interpreting 30 C.F.R. § 1206.157(a)(i) to the contrary.

Hence, Devon did not need ONRR's prior approval before it took a transportation deduction. But when ONRR audited Devon for improper royalty payments because it misreported the volume of its production and (possibly) took impermissible deductions, Devon then had an obligation to substantiate those deductions through complete and accurate records. Cf. BP Am. Prod. Co. v. Burton , 549 U.S. 84, 88, 127 S.Ct. 638, 166 L.Ed.2d 494 (2006) ("Lessees are responsible in the first instance for the accurate calculation and payment of royalties."). Those records are necessary because, even for an arms'-length transaction, lessees are only entitled to deduct "reasonable, actual costs incurred ... for transporting the unprocessed gas, residue gas and/or gas plant products under that contract ...." 30 C.F.R. § 1206.157(a)(1)(i). What actual costs Devon incurred are unknowable unless Devon produces records when audited. Without even deferring to the agency's interpretation, the Court thus holds that the regulations are unambiguous and the burden was on Devon to demonstrate why its transportation deductions were proper during the audit.

iii) Snyder Oil Corp. , 1996 WL 34565999 (July 12, 1996)

Devon next argues that the case of Snyder Oil proved that its production had reached marketable condition by the time it crossed the Barrel Springs Unit boundary. In Snyder Oil , the Minerals Management Service ("MMS"), the ONRR's predecessor, was faced with deciding whether Snyder Oil Corporation ("Snyder") owed "additional royalties on unprocessed gas produced from the Barrel Springs II Unit (Unit) in Wyoming." 1996 WL 34565999, at *1. Devon asserts that the Barrel Springs II Unit is the same as the Barrel Spring Unit where it produces natural gas. ECF No. 77 at 21. Like Devon, Snyder Oil's production went through a transportation chain within, and then outside, the Unit's boundaries:

The record made available in this proceeding indicates that the Unit wells are connected to the Northwest Pipeline Corporation's 8 inch WYGAP pipeline by numerous 2 inch and 4 inch lateral or feeder lines within the Unit boundaries ... The WYGAP line is operated by

Snyder and runs through the Unit continuing for 8 miles off the Unit and connecting to the Westrans system, a 12 inch pipeline owned by an affiliate of Snyder.

A compressor and a dehydration unit are located at the edge of the Unit on the WYGAP line. No wells are connected to the WYGAP system once it leaves the Unit. The Westrans line moves the Unit production along with gas from several other fields to the interstate pipeline operated by Colorado Interstate Gas Company (CIG).

Snyder Oil , 1996 WL 34565999, at *1.

To resolve whether Snyder Oil needed to pay additional royalties, the MMS Director had to determine if "the WYGAP line constitutes ‘gathering’ for which no deduction from gross proceeds is permitted or ‘transportation’ for which an allowance may be recognized." Id. at *4. The MMS Director found that some portions of the WYGAP Pipeline represented gathering, while other portions represented transportation. Id. at *6. Because segments of the WYGAP line lied off the Unit "upstream of the initial central delivery or accumulation points," and because "the line extend[ed] beyond the compression and dehydration facilities at the edge of the Unit," the MMS Director held that "the off-Unit segment does appear to be a link in the continuous flow of marketable production to the point of redelivery. " Id. (emphasis added). As a result, the MMS Director remanded the case "to determine the degree to which the segments of the WYGAP line are gathering or transportation ...." Id.

Hence, Devon argues that since its production also flowed through the WYGAP and Westrans Pipelines and was compressed and dehydrated at the edge of the Unit's boundary, its production had also reached "marketable condition" by the boundary. And, as a result, there was in fact evidence related to unbundling gathering costs from transportation costs before the Director. In response, Respondents assert that Snyder Oil 's statements about the Unit's boundaries and the marketable condition finalization point were dicta and that the ultimate holding was limited to the narrow conclusion that the entire WYGAP line did not constitute gathering. ECF No. 83 at 19.

The Tenth Circuit has stated that "[t]he arbitrary-and-capricious standard requires an agency to ‘provide an adequate explanation to justify treating similarly situated parties differently.’ " In re FCC 11-161, 753 F.3d 1015, 1142 (10th Cir. 2014) (quoting Comcast Corp. v. FCC , 526 F.3d 763, 769 (D.C. Cir. 2008) ). As the D.C. Circuit has stated, "an agency may not treat like cases differently" and "an unexplained departure from precedent must be overturned as arbitrary and capricious." Eagle Broad. Grp., Ltd. v. F.C.C. , 563 F.3d 543, 551 (D.C. Cir. 2009) (quoting Freeman Eng'g Assocs., Inc. v. FCC , 103 F.3d 169, 178 (D.C.Cir.1997) ; Comcast Corp. v. FCC , 526 F.3d 763, 769 (D.C.Cir. 2008) ).

Initially, the Court notes that the overarching question was "whether the costs of the WYGAP line are for ‘gathering’ or for ‘transportation’ ...." Snyder Oil , 1996 WL 34565999, at *2. The MMS Director's conclusion that the "off-Unit segment [of the WYGAP line] would qualify as a transportation function," id. at *6, directly answers that overarching question. That conclusion is therefore not "[a] judicial comment made during the course of delivering a judicial opinion, but one that is unnecessary to the decision in the case and therefore not precedential." Obiter Dictum , BLACK'S LAW DICTIONARY 1100 (7th ed. 1999).

But here, there is an important element in dispute that distinguishes this case from Snyder Oil. Starting with the similarities, like in Snyder Oil , Devon's appeal deals with the Barrel Springs Unit, the WYGAP and Westrans Pipelines, compressors and dehydration units within the Barrel Springs Unit Boundary, on site royalty measurement points, and an "off-Unit segment not appearing to be upstream of the initial central delivery or accumulation points." What is different, though, is that in Snyder Oil the off-Unit segment appeared to "be a link in the continuous flow of marketable production to the point of redelivery ." Compare id. at *6 (emphasis added), with AR 02–04 at 2498. Hence, there was no dispute in Snyder Oil that the production was already in marketable condition when it entered the WYGAP Pipeline and left the Unit boundary—that is why the costs were not deemed to be nondeductible gathering costs. See, e.g., Chieftain Royalty Co. v. XTO Energy, Inc. , 528 F. App'x 938, 940 (10th Cir. 2013) (unpublished) (citing Mittelstaedt v. Santa Fe Minerals , 954 P.2d at 1208 ) (listing gathering costs as one of the costs necessary to put gas in marketable condition); Xeno , 134 I.B.L.A. at 180 (holding that "gathering" costs are deductible after gas is in marketable condition).

Here, however, the entire thrust of the Director's orders is that Devon failed to show that its gas was in marketable condition when it paid Williams to transport, dehydrate, compress, and remove carbon dioxide. ECF No. 21-2 at 7. These issues were non-existent in Snyder Oil. In other words, although the Director might have treated Devon differently from Snyder Oil, there was a reason: in Snyder Oil it was undisputed that the off-Unit transportation of production occurred after it reached marketable condition. But in this case, the Director noted that Devon never explained why the dehydration, compression, and carbon dioxide removal process were not necessary to place its gas in marketable condition; nor did Devon explain what would even constitute marketable condition based on the relevant pipeline specification. (2002–2004 AR at 847–848 & n.9; 2005–2007 at 571–572 & n.9). Thus, marketable condition was undetermined in Devon's case.

Accordingly, based on Snyder Oil , the Court does not find that the Director acted arbitrarily and capriciously by requiring Devon to submit more information about when its product reached marketable condition.

2) New Evidence Devon Submitted to the IBLA

The Court has already concluded that this case must be remanded. Because Devon's evidence before the IBLA raises additional issues that will appear before the Director on remand, however, this Court finds that it must briefly discuss this evidence.

As discussed, although Devon did not take the Director up on his offer to submit additional evidence, on appeal to the IBLA Devon did submit some relevant additional evidence. The Respondents claim, in response, that the Director never considered this evidence and neither should the Court. ECF No. 83 at 20.

Since the IBLA did not issue a decision within thirty-three months, by operation of law, the IBLA is "deemed to have issued a final decision in favor of the Secretary ...." 30 U.S.C. § 1724(h)(2)(B). In an earlier order, Chief Magistrate Judge Rankin analyzed the Tenth Circuit's "five possible exceptions wherein a party is allowed to introduce evidence outside the record ...." ECF No. 19 at 3–5. He also considered 43 C.F.R. § 4.908(d) – (e), which "states that if an appeal is deemed decided, the record" includes, among other things, "(d) Any pleadings or submissions to the IBLA; and (e) Any IBLA orders and decisions. " Id. at 6. Thus, Chief Magistrate Judge Rankin held that Devon's pleadings and submissions to the IBLA were part of the administrative record. Id.

USDCWY Local Rule 74.1(a) states that "[a] party may seek reconsideration of a Magistrate Judge's order determining a non-dispositive matter within fourteen (14) days after service of the Magistrate Judge's order." Despite the opportunity to do so, Respondents never asked this Court to reconsider Chief Magistrate Judge Rankin's ruling. Accordingly, the Court finds that Respondents waived any argument that Devon's submission to the IBLA are not part of the administrative record.

Devon's later submission shows that Williams received Devon's gas at various royalty measurement points and transported the gas to the delivery points near the Echo Springs Gas Processing Plant. ECF No. 77 at 24. Before those royalty measurement points, the gas went through dehydration units. Id. Thus, at the time Williams received the gas for further transportation, Devon states the quality of gas was as follows:

Receipt Gas Quality ¹² Carbon Dioxide Contained on average 2.97%-3.06% by volume Water Vapor Contained less than 7 pounds per million cubic feet Pressure Approximately 50-100 points per square inch gauge

"[Editor's Note: The preceding image contains the reference for footnote ]."

When Devon sold its gas to various third-party purchasers, the gas passed through the CIG Washakie interstate pipeline or the Southern Star Pipeline. Id. According to Devon, those pipelines required the following production quality:

Marketable Condition Requirements Carbon Dioxide No more than 1.0 to 3.0% by volume Water Vapor No more than 5 pounds per million cubic feet Pressure Approximately 650-820 points per square inch gauge

Id.

At the outset, Devon has failed to come forward with support for the notion that such ranges are permissible. Devon cites two administrative decisions: Phillips Petroleum Company , 2015 WL 7628322, at *7 (July 28, 2015) and ConocoPhillips Company , 2013 WL 5842162, at *4 (June 20, 2013). ECF No. 87 at 13. Neither are helpful.

In Phillips Petroleum Company , four interstate pipelines were at issue, and their pressure requirements ranged from 900–1,200 psig. 2015 WL 7628322, at *7. At one of its compression locations, Phillips' gas was compressed "from approximately 200 psig to between 600 psig to 750 psig." Id. Since even the top of this range (750 psig) was below the bottom of the range for the interstate pipelines (900 psig), those compression costs were nondeductible. Id.

At a different compression location, Phillips' gas was raised from 550–700 psig to 1,100 psig. Id. Because 1,100 psig "may" have satisfied the interstate pipelines' requirements, the Director found that some of the costs associated with causing the gas to reach that level were deductible, but that some of it was necessarily nondeductible—the gas started below the 900 psig threshold, so some costs must have been expended to reach that threshold. See id. at *7–8. The Director ordered "Phillips to perform a restructured accounting" to determine which "part of the fee ... is exclusively for transportation and not for placing the gas in marketable condition." Id. at *8.

Thus, Phillips Petroleum Company does not support Devon's contention that as long as some of its gas fell within a permissible range an across-the-board deduction is appropriate. Instead, where the gas's range never met the pipelines' ranges, the Director denied all compression costs. Where some of the gas's pressure was within the acceptable range, however, the Director required Phillips to unbundle the relevant fee to determine which portion of it was deductible.

ConocoPhillips Company is not to the contrary. There, the pipeline requirements ranged "from 800 to 1,200 pounds per square inch (psi)." ConocoPhillips Company , 2013 WL 5842162, at *4 (June 20, 2013). Conoco's gas, however, was only at 250 pounds psi. Id. Hence, the ONRR Director found that Conoco's deductions were impermissible because the compression costs were incurred to put its gas within the permissible range. Id.

Neither Phillips Petroleum Company nor ConocoPhillips Company support Devon's contention that there is no need to be precise with its gas's quality and that broad ranges will do. In fact, Phillips Petroleum Company highlights the opposite, requiring lessees to unbundle costs needed to put its product within acceptable ranges. But even assuming such ranges are permissible, and also assuming (because there has been no substantial audit) Devon's charts are accurate, comparing Devon's proposed charts creates marketable condition problems.

Starting with carbon dioxide by volume, a large section of the 2.97–3.06% percentage falls outside the marketable condition requirement range of 1.00–3.00%. If Devon's water vapor was "less than 7 pounds per million cubic feet," that does not necessary mean that it was "[n]o more than 5 pounds per million cubic feet"—it could have been 6 pounds per million cubic feet. Finally, if Devon's gas needed to be 650–820 points per square inch gauge but was actually anywhere from 50–100 points per square inch gauge, then large segments of Devon's gas was inadequately pressurized.

Thus, for carbon dioxide, water vapor, and pressure, Devon's gas appears to have been at least partially unmarketable. By using such broad ranges, the Court is unable to say that Devon's gas was marketable at all times for each month, thereby upholding each and every deduction Devon took for 2005–2007 period. Devon's argument is like a law student applying to two law schools, with one requiring a 3.68 GPA and the other a 3.70 GPA, and saying that he should be admitted because he received a 3.40, 3.50, 3.70, and 4.00 GPA for his four undergraduate years, respectively. True, the student's yearly GPA range (3.40–4.00) falls within those law schools' acceptance ranges (3.68–3.70); however, his average overall GPA turns out to be 3.65. That would mean he should not be admitted to either law school.

Take Devon's carbon dioxide range for example. When Williams received the gas, its average carbon dioxide by volume was 3.015% ((2.97%+3.06%)/2)). Hence, by averaging out the range for Devon's gas it fails to fall within the permissible range for the interstate pipeline requirements (1.0–3.0% by volume). Put plainly, on average Devon's gas was unmarketable.

Furthermore, the Administrative Record shows that Devon has and can be more specific. That is necessary, as past agency guidance appears to indicate that lessees must make their marketable condition analyzes in frequent time intervals. See Phillips Petroleum Company , 2015 WL 7628322, at *7 (discussing that the lessee was unable to take deductions "for those months" where costs were incurred to put its gas in marketable condition). There is evidence that Kim Whyburn, Devon's Senior Revenue Supervisor, Audit and Litigation, attempted to make these calculations based on monthly ranges. (2005–2007 AR at 2314). While her declaration supports Devon's claim that the average carbon dioxide percentage by volume for the 2005–2007 period was 3.06%, in a footnote she explains that she made that calculation by averaging out six separate monthly carbon dioxide measurements. (Id. at 2316 & n.2). In doing so, she found that the carbon dioxide content was 3.05% in April 2005, 3.11% in October 2005, 2.76% in March 2006, 3.09% in July 2006, 3.20% in February 2007, and 3.19% in June 2007. (Id. at 2316 n.2). She also agrees that the CIG Washakie interstate pipeline required gas to be no more than 3.0% by volume of carbon dioxide, and the Southern Star interstate pipeline requires gas to be no more than 1.0% by volume of carbon dioxide.

According to that data, the only time Devon's gas would be marketable was when its gas went through the CIG Washakie interstate pipeline in March 2006. All the other findings were above 3.00% and, therefore, not within the requirements for either interstate pipeline. On remand, Devon must respond to these problems and substantiate to the ONRR why its gas was marketable for each time period within the 2005–2007 range, which gas went through which pipeline for those months, how large of a deduction it was entitled to for each separate month, and what effect, if any, commingling of gas with non-unit gas might have impacted these calculations. Devon should also explain its calculations for all the processes needed to put its gas in marketable condition. Once all this is developed, the ONRR will be able to ascertain what costs were supplemental, and thereby deductible, and what costs were primary, and thereby nondeductible.

Additionally, before the Director, Devon never unbundled the Williams Fee to explain what portion related to bettering the quality of its gas to reach marketable condition and what portion was simply for transportation or supplement. Throughout this APA process, Devon has developed some of this information. On remand to the ONRR, Devon will need to unbundle the Williams Fee before the agency to satisfy its burden and receive the deduction.

3) Constitutional Violation

As a final matter, Devon argues that it cannot unbundle the Williams Fee because it does not know how Williams apportioned the fee. It is undisputed that the Williams Fee is confidential, and, despite receiving subpoenas from Devon, the ONRR has not turned over the Williams data. Thus, Devon argues that it would be a due process violation to order it to unbundle the Williams Fee without providing this data.

Respondents explain, however, that

ONRR routinely approves methodologies developed by lessees without access to third-party financial information. Some ONRR-approved methodologies are based on engineering reports specific to the system in question. Others use modeling systems or cost-estimating software to estimate the cost of each piece of equipment and service within the bundled fee. Some rely upon installation quotes, published papers, studies and other educational resources to approximate the cost of equipment and separate the bundled fee into allowable and non-allowable costs. Others develop an unbundling methodology based exclusively on the terms of the contract and publicly available marketable condition information.

ECF No. 83 at n.14. Agency precedent supports requiring producers to follow similar procedures when third-party fees are unknown: "Once Conoco ... determines what is necessary to place the gas into marketable condition, it can reasonably segregate or unbundle the third party service fee and calculate an appropriate transportation allowance. Of course, Conoco's unbundling would still be subject to audit." Conocophillips Co. , 2013 WL 6631455, at *4 (July 31, 2014). Devon does not claim it is impossible to unbundle the Williams Fee through such methods, and the administrative record contains guidance on how lessees can unbundle their costs without having cost data. (2002–2004 AR at 114–29; 2005–2007 AR at 106–16).

Since this case will be remanded, the Court finds that Devon should attempt one of these options to unbundle the Williams Fee. The burden is on Devon, and, in conjunction with its marketable condition analysis, Devon should show the ONRR precisely which estimated costs related to putting the gas into marketable condition and which costs were solely for transportation. If after doing so the ONRR still rejects Devon's attempt, the Court will consider Devon's constitutional arguments on a subsequent appeal to this Court. See Olenhouse , 42 F.3d at 1580 (stating that courts should not reach constitutional claims unless necessary (citation omitted)).

4) Second Motion to Supplement the Administrative Record

To show that the Director's decisions were an "about-face," Devon filed a motion seeking to introduce evidence regarding an audit of Devon's royalties for the years 2008–2010. ECF No. 86 at 2. Devon claims it is proper to supplement the record because this new evidence, which came into existence after the Director issued his decisions, show his decisions were wrong. ECF No. 89 at 2. At first, Devon claimed that "[t]he properties audited are the same," but later Devon admits that actually the 2008–2010 involve additional properties. Compare ECF No. 86 at 2, with ECF No. 89 at 3–4.

Devon seeks to supplement the record with a September 28, 2016 Order to Report and Pay Additional Royalties, which spent considerable time analyzing Devon's unbundling analysis, but still held that "no transportation allowance could be calculated" based on that data. ECF No. 86-1 at 38. In response, Devon provided a detailed argument explaining why its data indicated that the transportation allowance could indeed be calculated. ECF No. 86-1 at 37–44. Agreeing with Devon, the Director noted that State had withdrawn its Order to Report and Pay Additional Royalties. ECF No. 86-3 at 2.

The Court finds that Devon's motion is moot. First, based on the evidence already in the administrative record, the Court has found that the Director's decision was incorrect for the 2002–2004 period and that the decision should be vacated. As for the 2005–2007 period, the Court has found that the matter must be remanded for further factfinding. When a remand is proper, the Tenth Circuit has held that, if necessary, courts may direct parties to submit additional information. See, e.g., Xlear, Inc. v. Focus Nutrition, LLC , 893 F.3d 1227, 1242 (10th Cir. 2018) ; United States v. Howard , 784 F.3d 745, 752 (10th Cir. 2015) ; Dobbs v. Wyeth Pharm. , 606 F.3d 1269, 1270 (10th Cir. 2010). Hence, on remand to the agency, Devon may submit this additional material, making Devon's current motion now moot.

CONCLUSION

Many of this case's challenges were born from internal inconsistency within the ONRR and Devon's unwillingness to provide transparency. The Director believed the auditors missed this case's central issue, a mistake that led to a decision unmoored from meaningful evidence generated by an audit. Before the Director, Devon did not provide that evidence, either, leaving the Director guided by the law but not many pertinent facts.

For the 2002–2004 period, however, the Court finds that the Director misapplied the law. Federal lessees are entitled to a proper demand when the ONRR says they owe additional money for improper royalty payments. Those demands must explain why the lessee's payments were improper. Here, Devon never received a timely, proper demand for additional royalties on account of unallowable transportation deductions. This deficiency bars the ONRR from now seeking additional royalties on that basis.

For the 2005–2007 period, the Court agrees with Respondents: "Devon's requests appear to invite the Court to improperly engage in de novo fact finding." ECF No. 83 at 30. Part of the fault rests on Devon—it did not provide a marketable condition analysis or unbundle the Williams Fee before the ONRR, instead waiting until appeal. Part of the fault also rests on the IBLA—it failed to remand the case to the Director despite evidentiary questions. The Court finds that this case should be remanded, and the ONRR should consider Devon's evidence regarding the gas's marketable condition. It should determine at what point Devon's gas was in marketable condition. It should then consider how Devon unbundled the costs needed to put its gas in marketable condition and the costs that were supplemental or used solely for transportation. Because the burden rests on Devon, to unbundle its fees Devon should consider the ONRR's suggested methodologies. In the event that the agency still rejects Devon's unbundling analysis, the Court will then address Devon's constitutional claim. It is therefore

ORDERED that the Order (ONRR-11-0007-O&G) of Director Gregory G. Gould of the Office of Natural Resources Revenue for the time period of 2002–2004 is hereby VACATED to the extent it seeks additional royalties from Devon on account of improper transportation deductions;

IT IS FURTHER ORDERED that the Order (ONRR-12-0083-O&G) of Director Gregory G. Gould of the Office of Natural Resources Revenue for the time period of 2005–2007 is hereby VACATED to the extent it seeks additional royalties from Devon on account of improper transportation deductions, and that this matter is REMANDED so that the ONRR can consider Devon's marketable condition and unbundling analysis to determine the propriety of Devon's claimed transportation deductions for that time period;

IT IS FURTHER ORDERED that Devon's Second Motion to Supplement the Administrative Record , ECF No. 86, is hereby DENIED AS MOOT.