appellate jurisdiction, 9 DCOR sought judicial review of the ONRR’s decision alleging that its decision was arbitrary and capricious. The District Court began its review of the ONRR’s decision by noting that federal lessees are required to pay royalties on “gross proceeds,” being “the total monies and other consideration accruing for the disposition of oil produced.” 10 Gross proceeds can be measured only on marketable products, and it is incumbent on the lessee to place production in marketable condition at no cost to the government – including the cost of gathering. As noted above, “gathering” is the movement of production from the lease or unit to a CAP off the lease or unit. 11 A “transportation allowance” is deductible from gross proceeds, and is defined as the reasonable, actual costs of moving oil or gas to a point of sale or delivery but specifically excludes gathering costs. 12 The court agreed with the ONRR that “central accumulation” did not occur until production reached the final onshore treatment facility and the approved royalty measurement point. Thus, the ONRR’s distinction between initial treatment on the offshore platforms and final treatment on the onshore facility was not arbitrary or capricious. 13 The court next explained that there is no general rule that the ONRR must permit transportation allowances for the movement of production from platforms to shore. 14 [4] 30 CFR § 1206.20. [5] 2023 U.S. Dist. LEXIS 127814 (N.D. Texas). [6] Id. at 4. [7] To the tune of $19,396,135.38 in allegedly underpaid royalties. Id. at 5. [8] Id. at 5-6. [9] DCOR apparently missed the 33-month deadline to appeal under the Federal Oil and Gas Royalty Management Act (“FOGRMA”). [10] 30 CFR § 1206.101.
area, or to a central accumulation or treatment point off of the lease, unit, or communitized area that [the Bureau of Land Management] approves for onshore and offshore leases, respectively, including any movement of bulk production from the wellhead to a platform offshore.” 4 If an activity falls within this broad definition of gathering, a transportation allowance will not be available. In the recent case of DCOR, LLC v. United States DOI , 5 the U.S. District Court for the Northern District of Texas examined certain offshore activities related to the gathering and transportation of oil and gas. Although the DCOR decision involves offshore activities, it provides guidance on the occult practice of deducting post-production costs – and specifically unbundling transportation costs – under federal onshore leases. DCOR, LLC (“DCOR”) owns and operates oil and gas platforms associated with federal leases off the coast of Southern California. DCOR’s oil and gas production is initially accumulated and treated on several offshore platforms. The production from these platforms is then transmitted to an onshore facility where it reaches “marketable condition” and moves through an approved royalty measurement point. 6 At issue is whether the movement of production from these offshore platforms to the onshore treatment facility is “transportation” (which is deductible) or “gathering” (which is non- deductible). The controversy arose when DCOR solicited the ONRR for guidance on how to calculate its transportation allowances. 7 This prompted a federal audit under which the ONRR found that DCOR had improperly deducted various transportation allowances. The ONRR contended that “gathering does not end until production is measured for royalty purposes,” and that DCOR was thus “precluded from claiming transportation allowances upstream of its onshore royalty measurement points, regardless of where its production achieves marketable condition.” 8 In other words, as a general rule transportation costs can only be deducted downstream from the royalty measurement point. After the Interior Board of Land Appeals (“IBLA”) determined that it lacked
[11] Id . [12] Id . [13] 2023 U.S. Dist. LEXIS 127814 at 10-11. [14] Id. at 12.
G rowth T hrough E ducat i on - O c tober / N ov ember / D e c ember 2023 19
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