No. 08-30069IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

KERR-MCGEE OIL & GAS CORP.,Plaintiff-Appellee,

-v.-

UNITED STATES DEPARTMENT OF THE INTERIOR; C. STEPHENALLRED, Assistant Secretary, on behalf of Land & Minerals Management, on

behalf of United States Department of the InteriorDefendants-Appellants.

On Appeal from the United States District Court for the Western District ofLouisiana, Lake Charles Division, No. 2:06-CV-439, Judge Patricia Minaldi

FEDERAL DEFENDANTS-APPELLANTS’ PETITION FOR REHEARING EN BANC

JOHN C. CRUDEN Acting Assistant Attorney General

JOHN S. MOSTMICHAEL T. GRAY Attorneys, U.S. Department of Justice Envt. & Natural Resources Div. P.O. Box 23795 (L’Enfant Station) Washington, DC 20026 (202) 305-4903

08-30069

KERR-MCGEE OIL & GAS CORP.,Plaintiff-Appellee,

-v.-

UNITED STATES DEPARTMENT OF THE INTERIOR; C. STEPHENALLRED, Assistant Secretary, on behalf of Land & Minerals Management, on

behalf of United States Department of the InteriorDefendants-Appellants.

CERTIFICATE OF INTERESTED PARTIES

The undersigned counsel of record certifies that the following listed persons

and entities as described in the fourth sentence of Rule 28.2.1 have an interest in

the outcome of this case. These representations are made in order that the judges

of this court may evaluate possible disqualification or recusal. Governmental

entities and officials (other than counsel) are not listed.

Kerr-McGee Oil & Gas Corporation Plaintiff-Appellee

Kerr-McGee Worldwide Corporation Parent Corporation of Plaintiff-Appellee

Kerr-McGee Corporation Parent Corporation of Plaintiff-Appellee

Anadarko Petroleum Corporation Parent Corporation of Plaintiff-Appellee

Anadarko E&P Company LP Parent Corporation of Plaintiff-Appellee

Liskow & Lewis701 Poydras Street1 Shell SquareSuite 5000New Orleans, LA 70139

Counsel for Plaintiff-Appellee

Fulbright & Jaworski LLP801 Penn. Ave. NWWashington, DC 20004

Counsel for Plaintiff-Appellee

John C. Cruden Acting Assistant Attorney General

John S. MostMichael T. GrayAttorneys, U.S. Department of Justice Environment & Natural Res. Div.

Counsel for Defendants-Appellants

_______________________________Michael T. GrayAttorney of Record for Defendants-Appellants

RULE 35(b)(1) STATEMENT

This case involves a question of exceptional importance: Whether the Outer

Continental Shelf Deep Water Royalty Relief Act of 1995 authorizes the Secretary

of the Interior to collect royalties on production from oil and gas leases issued in

the Gulf of Mexico between 1996 and 2000 when the price of oil and gas exceeds

thresholds that are specified in the leases. If the Act does not authorize the

Secretary to collect royalties, as the panel held, then the United States treasury

stands to lose tens of billions of dollars in revenue that would otherwise be

derived from the Nation’s oil and gas reserves. The panel’s decision is inconsistent

with the plain language of the statute, inconsistent with the statutory structure, and

inconsistent with normal principles of statutory interpretation. That, and the sheer

amount of money at stake, makes this case worthy of en banc review to correct the

panel’s error.

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TABLE OF CONTENTS

STATEMENT OF THE ISSUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

STATEMENT OF THE COURSE OF PROCEEDINGS . . . . . . . . . . . . . . . . . . . . 1

STATEMENT OF THE FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

I. The Royalty Relief Act unambiguously authorizes the inclusion of price thresholds in leases issued between 1996 and 2000 . . . . . . . 4

A. The panel’s reading of the Royalty Relief Act makes the cross-reference in section 304 meaningless . . . . . . . . . . . . . . . 6

B. The panel’s decision is contrary to the rule that statutoryexceptions are to be construed narrowly . . . . . . . . . . . . . . . . . 7

C. The panel’s decision turns a direction to “set” royaltysuspension volumes at the time of the lease sale into amandatory requirement that royalties be suspended up to those volumes for the life of the lease regardless of the price of oil and gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

D. The panel’s holding that Santa Fe Snyder is controlling ignores the express price-threshold authority in section 303 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

E. Interior’s reading of the plain language of the Royalty Relief Act is confirmed by the Act’s overall structure . . . . . 12

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

CERTIFICATE OF SERVICE

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TABLE OF AUTHORITIES

CASES :

Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 15

Commissioner v. Clark, 489 U.S. 726 (1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Ringling Bros.-Barnum & Bailey Combined Shows v. Sheppard, 123 F.2d 773 (5th Cir. 1941) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Santa Fe Snyder v. Norton, 385 F.3d 884 (5th Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,10-12

United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

STATUTES, RULES AND REGULATIONS:

Outer Continental Shelf Deep Water Royalty Relief Act of 1995, Section 302

43 U.S.C. § 1337(a)(3)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 U.S.C. § 1337(a)(3)(C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 U.S.C. § 1337(a)(3)(C)(ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1343 U.S.C. § 1337(a)(3)(C)(v) . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,1543 U.S.C. § 1337(a)(3)(C)(vi) . . . . . . . . . . . . . . . . . . . . . . . . . . 13,15

Section 30343 U.S.C. § 1337(a)(1)(H) . . . . . . . . . . . . . . . . . . . . . . 1,2,4-12,14,15

Section 30443 U.S.C. § 1337, Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,5-15

Outer Continental Shelf Lands Act43 U.S.C. § 1337(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

61 Fed. Reg. 12,022, 12,023 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

141 Cong. Rec. 13,002 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

1

STATEMENT OF THE ISSUE

Whether the Outer Continental Shelf Deep Water Royalty Relief Act of 1995

authorizes the Secretary of the Interior to collect royalties on production from oil and

gas leases issued between 1996 and 2000 when the price of oil and gas rises above

thresholds specified in the leases.

STATEMENT OF THE COURSE OF PROCEEDINGS

The Secretary of the Interior ordered Kerr-McGee to pay royalties due on

production from its leases in 2003 and 2004 because the price of oil and gas had

exceeded the thresholds specified in the leases in those years. Kerr-McGee refused

and filed this lawsuit claiming that under the Outer Continental Shelf Deep Water

Royalty Relief Act of 1995 it did not owe royalty payments. The district court agreed

and entered summary judgment in favor of Kerr-McGee. The Secretary appealed and

the panel affirmed in a published opinion.

STATEMENT OF THE FACTS

When oil prices were relatively low in the mid 1990s and many of the

shallow-water reserves on the Outer Continental Shelf had been largely depleted,

Congress passed legislation to encourage drilling in deep water areas, where the costs

of exploration and development are significantly higher. Outer Continental Shelf

Deep Water Royalty Relief Act of 1995, 109 Stat. 563-66, codified at 43

U.S.C.§ 1337(a)(1)(H), (a)(3)(B), (a)(3)(C), and Note.

In section 303 of the Royalty Relief Act, Congress added a new lease-sale

bidding system to the Outer Continental Shelf Lands Act. It provided for:

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cash bonus bid with royalty at no less than 12 and ½ per centum fixedby the Secretary in amount or value of production saved, removed, orsold, and with suspension of royalties for a period, volume, or value ofproduction determined by the Secretary, which suspensions may varybased on the price of production from the lease . . . .

43 U.S.C. § 1337(a)(1)(H). Thus, for new leases, the Royalty Relief Act allows the

Secretary to issue leases with suspended royalties. If the Secretary chooses to use that

bidding system (there are eight bidding systems from which the Secretary may

choose), the Act provides him with further discretionary authority related to the

suspension of royalties in two ways. First, the Secretary may determine the “period,

volume, or value of production” to which the suspension of royalties applies. Second,

the Secretary may “vary” the suspension of royalties “based on the price of

production from the lease”—impose a price threshold on the suspension of royalties.

In section 304 of the Royalty Relief Act, Congress took more specific measures

with respect to new lease sales during the five-year period after its enactment (which

is from November 28, 1995 to November 28, 2000, but for shorthand we use 1996 to

2000 in this petition). First, for that time period, Congress required the Secretary to

use the new bidding system created in section 303 for lease sales on tracts in the

Western, Central, and a portion of the Eastern Planning Areas of the Gulf of Mexico.

43 U.S.C. § 1337, Note. Second, Congress specified the minimum “volume” of

production at which the Secretary must “set” royalty suspensions at lease sales. Id.

Kerr-McGee signed or obtained the eight leases at issue in this case, which

were issued under sections 303 and 304. At the lease sale stage, the Secretary set the

volume up to which Kerr-McGee’s royalty payments on oil and gas produced from

United States Government Accountability Office, Oil and Gas Royalties:1

Litigation Over Royalty Relief Could Cost the Federal Government Billions ofDollars, available at http://www.gao.gov/new.items/d08792r.pdf (June 5, 2008)

3

the leases are to be suspended as directed by section 304. The leases also “vary” the

suspension based on the “price of production” from the lease by providing that if the

annual average price of oil or gas exceeds a specified price (a “price threshold”), the

royalties would no longer be suspended. Kerr-McGee agreed to pay royalties on the

production from the leases once the price threshold in its leases had been exceeded.

Starting in 2003 for gas, and 2004 for oil, the annual average price exceeded

the price thresholds specified in the leases. The Secretary therefore ordered Kerr-

McGee to pay royalties on the production from leases in years where the price of oil

and gas exceeded the thresholds set forth in the leases. Kerr-McGee refused and filed

this lawsuit claiming the price threshold provisions in the leases were contrary to the

Royalty Relief Act. Kerr-McGee contends that it does not have to pay the over $350

million in royalties due on these eight leases from 2003-2007, or any royalties until

it produces the suspension volumes in its leases. Overall, the GAO estimated on June

5, 2008 that removing the price threshold authority for similarly situated leases could

cost the United States $38.3 billion over the next 25 years. 1

ARGUMENT

The panel’s decision will allow Kerr-McGee and similarly situated lessees to

keep billions of dollars in royalties that more properly belong to taxpayers of the

United States. Kerr-McGee leased lands owned by the American public to produce

oil and gas. For the privilege of producing and selling that oil and gas, it signed lease

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contracts that required the payment of a royalty to the United States if prices rose

above specified thresholds. It presumably bid on the leases taking into account that

it would owe royalties if the price of oil and gas were to rise.

But the panel held that the Royalty Relief Act unambiguously prohibits the

collection of royalties no matter how high the price of oil and gas rises. The panel

makes five critical and interrelated mistakes. First, it reads section 304’s requirement

to use the section 303 bidding system—which includes the authority to “vary” the

suspension of royalties—out of the statute. Second, it eviscerates a statutory rule (the

Secretary “shall use the bidding system” in section 303) by adopting a broad

construction of a statutory exception to that rule (“except that suspension of royalties

shall be set”) when a more narrow interpretation of the statute is available,

reasonable, and provided by the agency expert in leasing. Third, those errors led the

panel to transform Congress’s direction to conduct lease sales with royalty

suspensions “set” at not less than specified volumes into a requirement that royalties

be suspended up to the eligible volumes for the life of the lease. Fourth, it equates this

case to this Court’s earlier decision in Santa Fe Snyder v. Norton, 385 F.3d 884 (5th

Cir. 2004), without considering the significant differences between the two cases.

Fifth, it misunderstands the import of section 302’s price-threshold provision.

I. The Royalty Relief Act unambiguously authorizes the inclusion of pricethresholds in leases issued between 1996 and 2000.

In section 303 of the Royalty Relief Act Congress unambiguously gave the

Secretary the authority and discretion to do two things that it could not have done

without that section: First, the Secretary may offer leases “with suspension of

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royalties for a period, volume or value of production determined by the Secretary.”

43 U.S.C. § 1337(a)(1)(H). Second, the Secretary may “vary” those suspensions

“based on the price of production from the lease.” Id. The parties agree that the

authority to vary suspensions of royalties includes the authority to impose a price

threshold above which royalties must be paid.

In section 304 of the Royalty Relief Act Congress required the Secretary to use

the section 303 bidding system, and no other bidding system, for new leases issued

during the five-year period following the date of enactment of the Royalty Relief Act.

43 U.S.C. § 1337, Note. In addition to specifying the bidding system the Secretary

must use for that time period, Congress directed the Secretary to “set” at the lease sale

stage the suspension of royalties at not less than certain volumes:

[A]ny lease sale within five years of the date of enactment of thistitle [Nov. 28, 1995], shall use the bidding system authorized in [section303], except that the suspension of royalties shall be set at a volume ofnot less than the following:

(1) 17.5 million barrels of oil equivalent for leases in waterdepths of 200 to 400 meters;

(2) 52.5 million barrels of oil equivalent for leases in 400 to 800meters of water; and

(3) 87.5 million barrels of oil equivalent for leases in waterdepths greater than 800 meters.

43 U.S.C. § 1337, Note (emphasis added). Section 304 therefore partially removes the

first new feature section 303 enacted by replacing the Secretary’s discretionary

authority to “determine” the “period, volume, or value of production” at which

royalties will be suspended with a direction that, at the lease sale stage, suspension

of royalties “shall be set” at a volume of not less than specified amounts. But section

The third feature of section 303 is bidding at a “cash bonus bid with royalty at2

no less than 12 and ½ per centum.” That feature is not unique to section 303; theOuter Continental Shelf Lands Act has long contained a provision allowing theSecretary to offer leases on those terms. 43 U.S.C. § 1337(a)(1)(A). If Congresshad intended the cross reference in section 304 to pertain to only that feature ofsection 303, it could have achieved the same result by referencing the OuterContinental Shelf Lands Act’s already well-established bidding system.

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304 does not mention or otherwise affect section 303’s second new feature, contained

in a separate clause, which allowed the Secretary to “vary” the suspension of royalties

based on the price of production. Instead, section 304 requires the Secretary to use

the bidding system in section 303, which expressly authorizes price thresholds—price

levels above which royalty payments would no longer be suspended.

A. The panel’s reading of the Royalty Relief Act makes the cross-referencein section 304 meaningless.

The panel rejected the Secretary’s reading of the statute because, according to

the panel, the phrase “except that the suspension of royalties shall be set at a volume

not less than” the stated production volumes replaces both the Secretary’s authority

to “determine” the volumes eligible for suspension of royalties and the Secretary’s

authority to “vary” the suspensions based on the price of production from the leases.

If so, then section 304’s requirement to use section 303’s bidding system is entirely

devoid of meaning. Congress could have simply said in section 304 that royalties2

will be suspended on all leases issued for five years in the covered geographic area

up to the volumes specified, without reference to section 303 at all. Every word in the

statute should be interpreted to give it its full meaning. See, e.g., Ringling

Bros.-Barnum & Bailey Combined Shows v. Sheppard, 123 F.2d 773, 775 (5th Cir.

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1941). Here, the words “shall use the bidding system” in section 303 mean nothing

if they do not preserve any unique aspect of that bidding system.

Kerr-McGee, but not the panel, argued that there would still be something left

of section 303 because the Secretary could suspend royalties above and beyond the

amounts set by Congress and impose price thresholds on those suspensions. Reading

the cross-reference in section 304 as limited to that purpose would be more than

passing strange. There is no support for the proposition that by requiring the

Secretary to use the section 303 bidding system the only thing Congress intended to

give the Secretary was the discretion to further suspend royalties above and beyond

the amounts Congress had already set, especially when at the time of enactment there

was considerable uncertainty about whether any particular lease would produce in

excess of the volumetric limits set by Congress. Instead, the language and structure

of the Royalty Relief Act all indicate that Congress intended section 304’s cross-

reference to section 303 to preserve the discretionary authority to impose price

thresholds granted in section 303.

B. The panel’s decision is contrary to the rule that statutory exceptions areto be construed narrowly.

In addition to being contrary to the Royalty Relief Act’s plain language, the

panel’s holding that section 304 entirely replaces the Secretary’s discretion in section

303 despite the cross-reference requiring Interior to use the section 303 bidding

system also runs afoul of the rule that statutory exceptions are to be construed

narrowly. Commissioner v. Clark, 489 U.S. 726, 739 (1989). To repeat, section 304

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requires the Secretary to use the section 303 bidding system “except that suspension

of royalties shall be set at a volume of not less than” the specified amounts.

Section 303 has two unique features not otherwise present in the Outer

Continental Shelf Lands Act bidding systems: the authority to suspend royalties for

a period, volume, or value of production and the authority to “vary” those

suspensions based on the price of production from the lease. The most narrow reading

of the exception to the requirement to use section 303’s bidding system is that it

replaces the first unique feature of section 303 with the “except that” clause and

preserves section 303’s second unique feature: the price-threshold authority.

The phrase “shall be set” in section 304 corresponds directly with and replaces

the phrase “determined by the Secretary” in section 303:

• Section 303 provides for bidding “with suspension of royalties for aperiod, volume, or value of production determined by the Secretary” andthen provides “which suspensions may vary based on the price ofproduction from the lease”

• Section 304 requires the Secretary to use section 303 “except that thesuspension of royalties shall be set at a volume of not less than thefollowing”

The “except that” clause of section 304 mirrors the three operative phrases of the first

clause of section 303, removing the Secretary’s ability to “determine” the “volume”

of the “suspension of royalties” by specifying the minimum “volumes” at which the

“suspension of royalties” “shall be set.” The clauses are designed in exactly the same

way and employ the same language; the “suspension of royalties” clause in section

303 can simply be replaced with the “except that” clause from section 304 and the

rest of section 303 is unaffected. But section 304 contains no language that

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corresponds to the final clause of section 303, which provides that suspensions set

“may vary based on the price of production from the lease.” The authority to include

price thresholds in the leases is therefore left undisturbed by section 304.

The express reference in section 304 requiring Interior to use the section 303

bidding process, coupled with the unambiguous discretionary authority conferred by

section 303 to include price thresholds in leases, certainly do not foreclose the

Secretary’s reading of the Act. At the very least they creates an ambiguity as to

whether that discretionary authority is somehow abrogated by the inclusion of

specific volumes in section 304. Interior is charged with administering oil and gas

leasing generally, and specifically under this Act. It has significant expertise in this

complicated area and helped to develop and draft section 304. 61 Fed. Reg. 12,022,

12,023 (1996); see also 141 Cong. Rec. 13,002 (1995). Its regulations interpret

sections 303 and 304 as allowing price thresholds. 30 C.F.R. § 260.110(g) (2007).

The Notice of Lease Sales and the leases themselves contain price thresholds. This

is therefore a classic case for deference under Chevron U.S.A., Inc. v. Natural Res.

Def. Council, Inc., 467 U.S. 837, 842-43 (1984), and Interior’s reasonable

interpretation of the Royalty Relief Act must prevail.

C. The panel’s decision turns a direction to “set” royalty suspensionvolumes at the time of the lease sale into a mandatory requirement thatroyalties be suspended up to those volumes for the life of the leaseregardless of the price of oil and gas.

Not only does the panel opinion read section 304’s cross-reference out of the

statute, it does so with the faulty reasoning that any other reading would “render §

304’s mandatory language meaningless.” Slip Op. 7. The opinion both overstates the

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impact of section 304’s language and understates what is left of section 304 if the

Secretary may include price thresholds in these leases. The panel holds that “the

statement that ‘the suspension of royalties shall be set as a volume not less than’ the

specific production levels means just that: royalty payments shall be suspended up

to the production volumes established by Congress.” Slip Op. 8 (emphasis added).

But “shall be set” does not mean the same thing as “shall be suspended.” To “set” the

suspension of royalties volume means to establish in the lease, at the lease sale, how

much production is eligible for the suspension of royalties. It does not mean that

royalties must be suspended up to those volumes no matter the price of oil and gas.

Under the Secretary’s reading of the statute, section 304 functions just as

Congress intended: It replaces the Secretary’s discretion to initially set the royalty

suspension volumes with minimum fixed volumes. It is not rendered meaningless.

But it does not affect the separate price-threshold authority in section 303. Section

304 therefore does not mandate that royalties be suspended up to the volumes

specified regardless of the price of oil and gas, as the panel held that it does.

D. The panel’s holding that Santa Fe Snyder is controlling ignores theexpress price-threshold authority in section 303.

The panel misconstrues both Santa Fe Snyder’s holding and the Secretary’s

argument in this case to find Santa Fe Snyder controlling. According to the panel,

“Interior seeks to employ a royalty-relief limitation present in § 302 (which applies

to leases existing prior to the [Royalty Relief Act’s] enactment) in order to limit the

royalty relief granted to new leases by § 304.” Slip Op. 7. That is impermissible, the

panel concludes, because this Court’s earlier decision in Santa Fe Snyder held that

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the so-called “new production” requirement in section 302 is not present in section

304 and therefore section 304 controls. But the Secretary is not trying to import a

feature of section 302 into section 304. He relies on the express price threshold

language in section 303 and section 304’s requirement to use that bidding system.

Santa Fe Snyder is not to the contrary. The panel characterizes Santa Fe Snyder

as holding the “new production requirement” unlawful because it deprived lessees of

their royalty suspension volumes. Slip Op. 7-8. From there, the panel holds that any

measure that reduces the royalty suspension volumes also must be unlawful. Id. But

in Santa Fe Snyder the problem with the “new production requirement” was not that

it reduced royalty suspension volumes; the problem was that the requirement reduced

royalty suspension volumes without any statutory authority to do so. 385 F.3d at 892

(Interior’s regulation “has no statutory support”). Nowhere in section 303 or section

304 is a “new production requirement” mentioned, and the Secretary relied only on

the general discretionary language in section 303 giving it the authority to set royalty

suspensions at a volume, period, or value of production as support for its ability to

impose the “new production requirement” on existing leases. Id. This Court

concluded that section 304 “immediately excepts and replaces Interior’s discretion”

granted by that clause of section 303, the only source of authority Interior had

identified in the case. Id. Therefore the Secretary could not rely on that general

discretionary authority to suspend royalties to impose a condition—the “new

production requirement”—on the suspension of royalties when that condition was not

otherwise and explicitly present in the statute itself. Id.

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Here, by contrast, the Secretary does not rely on the general grant of

discretionary authority to set royalty suspensions at a volume, period, or value of

production for the authority to include price thresholds in leases. Instead, he relies on

the express grant of the price-threshold authority in the final clause of section 303,

as Interior is expressly required by section 304 to use the section 303 bidding process.

Unlike in Santa Fe Snyder, where the regulation at issue had “no statutory support,”

Interior’s interpretation in this case finds ample support in the express grant of

authority to include price thresholds in section 303 and the requirement in section 304

to use the section 303 process. Santa Fe Snyder does not control here.

E. Interior’s reading of the plain language of the Royalty Relief Act isconfirmed by the Act’s overall structure.

This case can be resolved entirely on the basis of sections 303 and 304. The

panel held, however, that had “Congress intended to impose price thresholds on the

royalty relief for these new leases, it certainly knew how to do so” and cited the

express price-threshold provisions in section 302 of the statute, which applies to

leases existing when the Royalty Relief Act was passed. Contrary to the panel’s

holding, section 302 of the Act confirms, rather than calls into question, Interior’s

authority to impose price thresholds on leases covered by section 304.

It is undisputed that for new leases issued after 2000 section 303 gives the

Secretary the discretionary authority to impose price thresholds. Congress, in section

302 of the Royalty Relief Act, dealt with new production from existing leases in a

similar fashion, but specified the applicable price thresholds in the Royalty Relief Act

instead of giving the Secretary discretion to impose price thresholds. In Section 302

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Congress required that, if the Secretary suspends royalties based on its economic

determination, that suspension must remain in effect until certain volumes are

reached, unless the price threshold is crossed. Section 302 provides that “in no case

will [the volume of royalty suspensions] be less than” the same volumetric amounts

specified in section 304. 43 U.S.C. § 1337(a)(3)(C)(ii). But that language cannot be

read in isolation because the Royalty Relief Act later provides that during the

production of the volumes up to which it had just mandated royalty suspensions the

production would be “subject to royalties at the lease stipulated royalty rate” if the

price of oil or gas rose above specified levels. 43 U.S.C. §§ 1337(a)(3)(C)(v) & (vi).

Thus, in section 302 Congress treated suspension volumes and price thresholds as

different matters, mandating the Secretary set suspension of royalties at not less than

certain volumes in unequivocal language but later applying a price threshold to those

suspensions. Section 302 thus demonstrates that price thresholds are not incompatible

with Congress’s specifying the volume at which royalties must be suspended.

Congress structured section 304 in exactly the same way. Section 304 provides

that suspensions of royalties “shall be set” at “not less than” specified volumes. But

section 304 also refers explicitly to section 303 and requires the Secretary to use that

bidding system, which contains the authority to “vary” royalty suspensions based on

the price of oil and gas. As Kerr-McGee admits, when both unequivocal volumetric

suspensions and price threshold provisions are present, the price threshold provisions

control. Resp. Br. 21. Thus, in the Royalty Relief Act what might appear at first blush

to be unequivocal commands to suspend royalties are revealed to be instructions to

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set an initial volume for which the leases will be eligible for royalty suspensions at

the lease sale stage. Those statements are qualified in other sections with price

thresholds that could render the leases ineligible for the royalty suspension when the

thresholds are met. Only when both sections are read together does the price threshold

become apparent. See, e.g., United Sav. Ass’n of Tex. v. Timbers of Inwood Forest

Assocs., 484 U.S. 365, 371 (1988). In the Royalty Relief Act, the direction to initially

set suspension volumes at certain levels gives way to the price threshold.

The panel holds that Congress explicitly included price thresholds in section

302 because it intended them to apply to new production from existing leases, but did

not explicitly include a price threshold provision in section 304 because it did not

intend for price thresholds to apply to leases issued from 1996 to 2000. That is

erroneous for two reasons. First, it presumes that there is only one possible

explanation for Congress’s decision to structure sections 303 and 304 differently from

section 302, and ignores the possibility that the difference in structure may be

attributed to Congress’s intent to address royalty relief on new leases in two different

time periods: during the first five years, and indefinitely during the period which

follows. Second, Congress did include express authority for the Secretary to vary

royalty suspensions based on the price of production from the leases in section 303,

and required the Secretary to use that bidding system. Congress did not need to

explicitly include the authorization for price thresholds in section 304 because it had

already done so through the cross-reference to section 303. Because section 304 does

not expressly remove the discretionary price-threshold authority given by section 303,

15

the Secretary retains that discretionary authority. Congress did not need to make more

explicit what it had already clearly stated: the Secretary may impose price thresholds.

There can be no doubt that for all other leases Congress determined that it

could both spur production and protect the public fisc by offering suspended royalties

with the suspensions conditioned on price thresholds. The parties agree that the

Secretary is required to impose price thresholds for new production on existing leases

that have qualified for royalty relief, even after the Secretary has determined that the

production would not be economically viable absent the royalty relief. 43 U.S.C. §

1337(a)(3)(C)(v), (vi). And the parties agree that for new leases issued after section

304’s five-year period the Secretary is permitted to impose price thresholds in its

discretion. Id. § 1337(a)(1)(H). It would be anomalous if, as the panel holds,

Congress altogether prohibited price thresholds for a five-year period, making royalty

suspensions automatic up to a certain volume but entirely free from any limitation

based on the price of oil and gas. There is nothing in the language, structure, or

purpose of the Royalty Relief Act to indicate that Congress intended for price

thresholds to apply in every circumstance except for leases issued during the five-year

period following enactment of the statute, giving away billions of dollars in revenue

due to the American public when oil and gas prices are high. The Secretary does not

read the Act to do so, and his reading is entitled to deference under Chevron.

CONCLUSION

The petition for rehearing en banc should be granted.

16

Respectfully submitted,

JOHN C. CRUDEN Acting Assistant Attorney General

JOHN S. MOSTMICHAEL T. GRAY Attorneys, U.S. Department of Justice Envt. & Natural Resources Div. P.O. Box 23795 (L’Enfant Station) Washington, DC 20026 (202) 305-4903

March 30, 200990-1-18-11857

CERTIFICATE OF SERVICE

I certify that two copies of the foregoing Federal Defendants-Appellees’

Petition Rehearing En Banc have been served upon each of the following counsel

on this 30th day of March, 2009 by dispatching same by Federal Express:

Jonathan A. HunterJason R. JohansonLiskow & Lewis601 Poydras St., Suite 5000New Orleans, LA 70139

L. Poe LeggetteNancy L. PellFulbright & Jaworski801 Pennsylvania Ave NWWashington, DC 20036

Lawrence P. Simon, Jr.Liskow & LewisP.O. Box 52008 O.C.S.Lafayette, LA 70505

Michael T. GrayU.S. Department of JusticeEnvironment and Natural Resources Div.P.O. Box 23795 (L’Enfant Plaza Station)Washington, D.C. 20026(202) 305-4903

ADDENDUM