Devon Energy Production Company v. DOI

── Devon Energy Production Company v. DOI ── Court: Court of Appeals for the Tenth Circuit Date: April 27, 2026 Category: General Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 1 FILED United States Court of Appeals PUBLISH Tenth Circuit UNITED STATES COURT OF APPEALS April 27, 2026 Christopher M. Wolpert FOR THE TENTH CIRCUIT Clerk of Court __________________________________________ DEVON ENERGY PRODUCTION COMPANY, L.P.; DEVON ENERGY CORPORATION, Plaintiffs - Appellants, v. No. 24-6132 UNITED STATES DEPARTMENT OF THE INTERIOR, Defendant - Appellee. ___________________________________________ APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF OKLAHOMA (D.C. No. 5:20-CV-00053-D) ______________________________________ L. Poe Leggette, Baker & Hostetler LLP, Houston, Texas (Bailey A. Bridges, Baker & Hostetler, Houston, Texas; Alexander K. Obrecht, Baker & Hostetler LLP, Denver, Colorado; and Mark B. McDaniel, Devon Energy Production Company, L.P., Oklahoma City, Oklahoma, with him on the briefs), for Appellants. John K. Adams (Adam R.F. Gustafson, Acting Assistant Attorney General, and Michelle Melton, Attorney, Environment & Natural Resources Division, on the brief), United States Department of Justice, Washington, D.C., for Appellee. ______________________________________________ Before HARTZ, TYMKOVICH, and BACHARACH, Circuit Judges. ______________________________________________ BACHARACH, Circuit Judge.  Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 2 ______________________________________________ This appeal grew out of a dispute about royalties owed to the federal government for gas production. The dispute itself had arisen from the federal government’s lease of land to Devon Energy Production Co., L.P. The lease allowed Devon Energy to produce gas in exchange for royalties, which were subject to certain deductions. To ensure proper payment of the royalties, the federal government authorized state officials to audit Devon Energy’s production of gas and related deductions. With that authority, state officials conducted an audit in 2009 and disallowed some of the deductions taken over a four- year period (2004–2008). Devon Energy objected to the state officials’ conclusions, but a federal agency (the Office of Natural Resources Revenue) overruled those objections and ordered Devon Energy to either pay the amount in dispute ($2,841,264.58) or to supply greater support for the deductions. Devon Energy sought judicial review, claiming in part that the agency had acted arbitrarily and capriciously. The district court affirmed the agency’s decision. In our view, however, the agency acted arbitrarily and capriciously by failing to consider the effect of a prior settlement agreement. 1 1 Devon Energy also denied making repeated or systematic errors, argued that further proof was unnecessary to support the deductions, and 2  Appellate Case: 24-6132 Document: 58-1 Date Filed: 04/27/2026 Page: 3 1. Calculation of royalties on federal leases for gas Royalties are calculated based on the value of the minerals extracted. See 30 U.S.C. § 223. The value is generally the amount that the lessee obtains when selling the gas in an arm’s-length transaction. 2 30 C.F.R. § 206.152–53. But the value can be reduced through the deduction of certain costs incurred in the production of gas. 30 C.F.R. § 206.