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High Court Sides with MMS in Dispute over Past Royalties

The Supreme Court Monday in a 7-0 decision came down on the side of the Interior Department's Minerals Management Service in its nearly decade-long pursuit to recover royalties from BP America Production and another producer for production from federal natural gas leases in New Mexico's San Juan Basin.

BP America, as successor of interest to Amoco Production, challenged the agency's 1997 order directing Amoco to pay $4.1 million in additional royalties for a period from January 1989 through December 1996, arguing that the MMS payment order -- the agency's royalty bill to Amoco -- was barred in part by a six-year-old statute of limitations for government contracts under the federal code. Atlantic Richfield Co., which was ordered to pay past royalties as well, joined BP in the challenge. The decision opens the door for the Interior agency to demand payment of additional royalties on production that occurred more than six years ago.

The case stems from a change in Interior's royalty-calculation policy. In 1996, the MMS directed producers to calculate their federal production royalties based on the value of gas after it was treated to meet pipeline quality-specifications. BP America/Amoco and other producers had been calculating their royalties based on the value of gas at the well. In 1997, MMS ordered Amoco to pay additional royalties to cover the difference between the value of treated gas and its lesser value at the well. BP/Amoco and Arco sought court review of the agency's payment orders, claiming that they exceeded the allowed statute of limitations for such orders. However, the U.S. District Court for the District of Columbia and the D.C. Court of Appeals upheld the position of MMS that the statute of limitations did not apply to administrative orders..

There was no dispute by parties that the six-year-old statute of limitations applied to judicial proceedings in which the MMS seeks to recover underpayments of royalties on pre-Sept. 1, 1996 production. But BP and Arco were at odds with MMS over whether the statute of limitations also applied to MMS administrative payment orders for pre-Sept. 1, 1996 production.

"While we appreciate petitioners' arguments, they are insufficient to overcome the plain meaning of the statutory text. We, therefore, hold that the six-year statute of limitations in [the federal code] applies only to court actions and not to the administrative proceedings involved in this case," the high court said in a 16-page ruling.

Key terms in the federal code (S. 2415) -- such as "action" and "complaint" -- "are ordinarily used in connection with judicial, not administrative proceedings," the justices said. "Nothing in the language of S. 2415 suggests that Congress intended these terms to apply more broadly to administrative proceeds. On the contrary. S. 2415 distinguishes between judicial and administrative proceedings."

Three producers were involved when the case began -- Amoco Production, Atlantic Richfield and Vastar Resources, the Washington Post reported. However, since then, BP has merged with Amoco and it picked up Atlantic Richfield, which owned a majority interest in Vastar Resources.

The MMS last Thursday handed a $32.3 million bill to BP America for additional royalties and interest in a separate case. However, the agency may be able to recover a bit more from the company as a result of the high court's decision, a knowledgeable source said. The BP royalty bill, which covered a period from June 1991 through May 2006, included a charge of $18.9 million for additional royalties and $13.3 million in interest payments. BP is required to pay the bill by the end of the month (see Daily GPI, Dec. 8).

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