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Fidelity Exploration and Production Co. v. Bernhardt

United States District Court, D. Montana, Billings Division

January 24, 2019

FIDELITY EXPLORATION & PRODUCTION COMPANY, Plaintiff,
v.
DAVID BERNHARDT, Acting Secretary of the Interior of the United States of America[1]; JON K. RABY, in his official capacity as acting Montana/Dakotas State Director, Bureau Of Land Management; UNITED STAES DEPARTMENT OF THE INTERIOR, an agency of the United States Government; and BUREAU OF LAND MANAGEMENT, an agency of the United States Government, Defendants.

          FINDINGS AND RECOMMENDATIONS OF U.S. MAGISTRATE JUDGE

          TIMOTHY J. CAVAN, UNITED STATES MAGISTRATE JUDGE

         Plaintiff, Fidelity Exploration & Production Company (“Fidelity”) filed this action against the above-named Federal Defendants seeking judicial review of a decision of the Department of the Interior (“DOI”) Interior Board of Land Appeals.

         The case has been referred to the undersigned pursuant to 28 U.S.C. § 636(b)(1)(A). Presently before the Court are the parties' cross-motions for summary judgment. (Docs. 25, 28.) The motions are fully briefed and ripe for the Court's review.

         For the reasons set forth herein, and after careful consideration of the parties' arguments and submissions, the Court RECOMMENDS that Fidelity's motion for summary judgment be DENIED, and Defendants' motion for summary judgment be GRANTED.

         I. Background

         Fidelity is a corporation involved in the business of natural gas exploration and extraction. Defendant Bureau of Land Management (BLM) is an agency within the DOI that manages public lands, including oil and gas leases on federal lands within its jurisdiction. The BLM makes decisions regarding the oil and gas leases through its various field offices. Those decisions are reviewable by BLM State Directors. 43 C.F.R. § 3165.3(b). A State Director's decision may be administratively appealed to the DOI's Interior Board of Land Appeals (“IBLA”). 43 C.F.R. § 3165.4(a). The IBLA's decision becomes the final agency action. In 1999, Fidelity began a coal bed natural gas development in Big Horn County, Montana. (Doc. 30 at ¶ 1.) To obtain authority for the project, Fidelity submitted two plans of development to the BLM. Id. at ¶ 2. Both of the proposed plans of development included a mix of federal, state, and private lands, and specified how the federal lease wells would be managed. Id. at ¶ 3. One project provided for the drilling and completion of 178 wells, including 86 federal wells, 72 fee wells, and 20 state wells. (Doc. 30 at ¶ 11.c.) The second project contemplated the drilling and completion of 210 wells, consisting of 132 federal wells, 16 state wells, and 62 fee wells. (Doc. 30 at ¶ 11.d.) The BLM approved the plans in 2004 and 2005, and Fidelity drilled and began operation of the gas wells. Id. at ¶ 12.

         In 2010, the BLM Miles City Field Office (“Field Office”) began conducting inspections of Fidelity's gas wells. (Doc. 32 at ¶ 29.) On February 25, 2011, the Field Office sent a letter to Fidelity detailing potential violations in Fidelity's gas production reports. Id. First, Fidelity was advised it was improperly reporting volumes from a master sales meter, rather than from individual well meters. (Doc. 32 at ¶ 30.) The master sales meter included gas volumes which were commingled from multiple wells. Fidelity was told that the “Federal Measurement Point” is the meter for each individual well, prior to commingling with gas from other wells. Id. Fidelity was directed to either begin reporting the gas volumes for the individual well meters, or to submit an application for authorization to report the comingled volumes from the master sales meter. Id.

         Second, Fidelity was advised it was improperly reporting BTU value from the commingled gas stream, rather than conducting a gas analysis from each individual well. Id.

         Finally, Fidelity was told that it was improperly reporting gas as “used on lease.” Gas used on a lease to operate production equipment for the benefit of the federal lease (“beneficial use”) is not subject to royalty fees. But Fidelity was advised that once gas is downstream from the Federal Measurement Point and has left the lease or communitized area, it is generally not considered beneficial use and not given that royalty-free benefit. Id.

         On April 9, 2012, the Field Office sent another letter to Fidelity identifying the same concerns, and directing the same corrective actions. (Doc. 32 at ¶ 31. Fidelity responded that it was in compliance with federal requirements, and claimed that BLM had authorized its procedures when it approved Fidelity's plans of development. (Doc. 32 at ¶ 32.)

         The Field Office then issued an order to Fidelity on October 25, 2012 to address these alleged violations. (Doc. 30 at ¶ 16.) Fidelity was ordered to report gas volumes from the individual wells prior to commingling, and to submit amended production reports to the DOI Office of Natural Resources Revenue (“ONRR”) for the previous six years. Id. The ONRR is tasked with auditing lease payments to determine accurate calculation and payment of royalties. Id. at ¶ 18. See also, 30 U.S.C. § 1711(a), (c); 30 C.F.R. § 1201.100.

         Fidelity was also ordered to discontinue reporting gas used downstream of the Federal Measurement Point as “used on lease” for beneficial use purposes. (Doc. 30 at ¶ 16.) It was further directed to submit amended reports to the ONRR for the last six years, eliminating unauthorized beneficial use deductions. Id.

         Fidelity requested a State Director review of the Field Office order on November 15, 2012. (Doc. 30 at ¶ 20.) The State Director affirmed the order, and Fidelity appealed to the IBLA. Id. at ¶ 21, 22. On appeal, the BLM requested a remand of the matter back to BLM. The agency explained that, while the BLM had the authority to require Fidelity to submit corrected volumes to the Field Office, only the ONRR had the authority to order amended production reports. Id. at ¶ 22; AR 668-69.) In accordance with the request, the IBLA set aside the State Director's decision and remanded the case to the BLM. Id. at ¶ 23.

         On remand, the State Director modified the Field Office order by replacing the demand that Fidelity file amended production reports with the ONRR, with the demand that Fidelity submit corrected volumes to the Field Office for verification. Id. at ¶ 25. In all other relevant respects, the modified order mirrored the initial Field Office order. Id.; AR 674, 684. On appeal, the IBLA affirmed the State Director's modified order. Fidelity Exploration & Production Co., 188 IBLA 302 (2016.)

         Fidelity subsequently brought this action under the Administrative Procedure Act (APA), seeking judicial review of the IBLA's decision. (Doc. 1.) Fidelity alleges that the IBLA wrongfully affirmed the State Director's order modifying and upholding the Field Office's order. Fidelity requests that this Court issue a declaratory ruling finding the State Director's modified order invalid, set aside and vacate the IBLA decision, declare the Field Office order invalid, and enjoin further enforcement of the order. (Doc. 2 at 30.)

         II. Parties' Arguments

         Fidelity presents three issues for review: (1) whether the BLM may modify an order that was previously set aside and remanded by the IBLA; (2) whether the BLM enforced an order in violation of the limitations periods set forth in Federal Oil and Gas Royalty Simplification and Fairness Act (30 U.S.C. § 1724(b)); and (3) whether BLM authorized the measurement and beneficial use of commingled gas when it approved Fidelity's plans of development.

         The Defendants deny Fidelity's claims and argue the IBLA correctly found that the BLM acted within the scope of its authority. (Doc. 29.) The Defendants insist BLM never authorized Fidelity to measure gas after commingling; BLM appropriately issued findings of violation and ordered corrective actions; and ...


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