## Facts

- Mesa Operating Limited Partnership held federal offshore natural gas leases on the Outer Continental Shelf and sold gas to pipeline purchasers under contracts subject to federal price regulation.
- Federal royalty obligations were governed by the Outer Continental Shelf Lands Act (OCSLA) and DOI/MMS valuation regulations tying royalties to the “amount or value” of production saved, removed, or sold.
- Under FERC’s Order No. 94 series and NGPA § 110, pipeline purchasers paid Mesa “reimbursement” amounts for specified services and costs (e.g., gathering, compression, treating/dehydration) related to delivering gas in acceptable condition and location.
- MMS treated the § 110 reimbursements as part of Mesa’s “gross proceeds” from the gas sales and issued a demand order for additional royalties on those reimbursements.
- DOI affirmed MMS’s demand order.
- Mesa sued in federal district court, challenging DOI’s interpretation of its royalty/valuation regulations; the court granted summary judgment for DOI.
- Mesa appealed.

## Issues

1. Whether DOI/MMS permissibly interpreted its royalty valuation regulations to treat NGPA § 110 reimbursement payments as “gross proceeds” included in the royalty base for federal offshore gas.
2. Whether DOI properly applied its marketable condition rule to require Mesa to bear costs of making gas marketable and to pay royalties on amounts received to recover those costs, even when authorized under FERC rate regulation.

## Decision

- The Fifth Circuit affirmed summary judgment for DOI.
- The court held DOI’s interpretation of its own royalty regulations was permissible and entitled to deference.
- The court upheld MMS’s inclusion of NGPA § 110 reimbursements in Mesa’s “gross proceeds,” making them royalty-bearing.
- The court sustained DOI’s application of the marketable condition rule to require royalties on the value realized from sale of marketable gas, including cost-recovery components paid by purchasers.

## Legal Principles

- Under OCSLA, DOI has broad authority to administer offshore leasing and to issue and interpret royalty and valuation regulations.
- A court generally defers to an agency’s reasonable interpretation of its own regulations in technical royalty valuation disputes, absent inconsistency with the regulatory text or purpose.
- “Gross proceeds” for royalty valuation may include all amounts paid by the buyer in connection with the gas sale, including amounts characterized as reimbursements for delivering gas in required condition.
- The marketable condition rule permits DOI to require lessees to place production in marketable condition at the lessee’s expense and to calculate royalties on the value of production in that condition, without deducting those costs.
- Regulatory authorization under FERC/NGPA to recover certain costs above price ceilings does not control DOI’s royalty valuation or exclude those recovered amounts from the federal royalty base.

## Conclusion

The Fifth Circuit upheld DOI/MMS’s determination that NGPA § 110 reimbursement payments made by pipeline purchasers were part of Mesa’s gross proceeds from federal offshore gas sales and therefore subject to OCSLA royalties under DOI’s marketable condition rule.


Mesa Operating Ltd. P’ship v. U.S. Dep’t of the Interior, 931 F.2d 318 (5th Cir. 1991)