Devon Energy Corporation v. Kempthorne

Devon Energy Corporation (Devon) (plaintiff) leased land from the federal government for purposes of coalbed methane (CBM) production. After it is extracted, CBM must be compressed and dehydrated in order to be transported to its point of sale. The employees of the U.S. Department of the Interior (DOI) (defendant) issued certain guidance documents, including a “Dear Operator” letter purporting to allow for deduction of certain compression and dehydration costs in calculating a lessee’s gross proceeds for purposes of calculating royalties. Devon relied on these guidance documents to deduct these compression and dehydration costs in its royalty calculations for a period of seven years. Devon then requested DOI confirmation that it was calculating royalties correctly. The DOI issued a determination rejecting Devon’s interpretation of the rule. In a final order, the DOI rejected Devon’s request for reconsideration. The DOI ordered Devon to retroactively pay royalties to the government based on gross proceeds that included compression and dehydration costs. Devon brought suit seeking to overturn the order. Devon argued that because compression and dehydration were required to be able to transport CBM, such costs are allowable transportation costs. Devon also argued that its reliance on the guidance documents made any retroactive royalty payments improper. The district court granted the government’s motion for summary judgment. Devon appealed.