Marathon Oil Company v. United States

Marathon Oil Company (Marathon) (plaintiff) owned working interests in certain leases of federal lands. The Mineral Management Service (MMS) (defendant) was the government agency that managed the leases. The leases required Marathon to pay a 12 and one-half percent royalty to the government “computed in accordance with [federal regulations].” The regulation stated: “The value of production, for the purpose of computing royalty, shall be the estimated reasonable value of the product as determined by the [MMS].” The regulation also stated: “Under no circumstances shall the value of production of any of said substances for the purposes of computing royalty be deemed to be less than the gross proceeds accruing to the lessee from the sale thereof.” Finally, the leases stated that the Secretary of the Interior “may establish reasonable minimum values for purposes of computing royalty.” Marathon transported a portion of the gas produced from the leases to a liquefied natural gas (LNG) plant. Once liquefied, Marathon shipped the LNG to Japan where it was sold. Marathon computed royalties based on the price it was paid for the unliquefied gas. MMS issued an order changing this computation. Specifically, MMS computed the value of production by taking the sale price in Japan, subtracting liquefaction and transportation costs, and allowing for a reasonable rate of return on the LNG plant. Marathon brought suit, claiming that MMS’s order violated the regulation. Specifically, Marathon argued that the value of production should be the value of the gas when it was delivered to the LNG plant. The government moved for summary judgment.