Amicus Curiae Brief — Mobil Oil Exploration & Producing Southeast, Inc. v. United States

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Nos. 99-244 and 99-2 Supreme Court, U.S.

Supreme Court of the Ugited States

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No. 99-244

MOBIL OIL EXPLORATION &

PRODUCING SOUTHEAST, INC.,

Petitioner,

V.

UNITED STATES,

Respondent.

e

and

No. 99-253

MARATHON OIL COMPANY,

Petitioner,

v.

UNITED STATES,

Respondent.

e

On Writs Of Certiorari To The

United States Court Of Appeals

For The Federal Circuit

e

BRIEF AMICUS CURIAE OF

THE AMERICAN PETROLEUM INSTITUTE

IN SUPPORT OF PETITIONERS

°

Of Counsel: J. Berry St. JoHNn*

Craic WYMAN

Liskow & Lewis

G. WiuiAM Frick

Davip T. Dear

One Shell Square, 50th Floor

oe nie 701 Poydras Street

‘fa nes New Orleans, LA 70139-5099

1220 L Street, Northwest 04) 581-7979

Washington, D.C. Attorneys for American

20005-4070 Petroleum Institute

(202) 682-8250

“Counsel of Record

December 30, 1999

TABLE OF CONTENTS

Page

TABLE OF AUTIIORITERS .....cccccsccccccscccccce

A. The Federal Circuit Decision Destroys the OCS

1. The Decision Ignores the OCS Lease Terms

by Focusing on “Permit Denials” ........

2. The Decision Fails to Enforce Reciprocal

3. The Decision’s Misguided View of Lease

Performance Cannot Support Confiscation

4. The Decision Alters the OCSLA’s Eco-

B. The In of the OCS Leasing Program is

11

13

16

19

23

TABLE OF AUTHORITIES

Page

Cases

United States v. National Exch. Bank, 270 U.S. 527

cate hei e eek Seg cab sess bey yer Kevecdeeses 6, 19

STATUTES AND REGULATIONS

Outer Continental Shelf Lands Act, 43 U.S.C.

DF FF PTTTT TTT IETLET LTE passim

Coastal Zone Management Act, 16 U.S.C. § 1451 et

ands acdenbahbabesekaceesencessccendnecess passim

Outer Banks Protection Act, Pub. L. No. 101-380,

§ 6003, 104 Stat. 484 (1990).... 0.0... cee eee eee 5

i deel bed asintsespacevenscnes<ces 5,9

cece tei cbetnscereersncesuuenes 2, 19

GD Tn BD Bes cc cere cc cece cevcccssecccscccess passim

es oi ode Sa bkCn es 60s beNesedeeseseeeses 3

5 | ill 2G OPEPPTTTeTTTITTT TTI TITT TTT Tree passim

Se Ma EE ERs hovessvccccesvssccscnccvscccess passim

GOVERNMENT PUBLICATIONS

Mineral Revenues 1998: Report on Receipts from Fed-

eral and Indian Leases, U.S. Department of the

Interior, Minerals Management Service............ 20

MMS Offshore Stats, Third and Fourth Quarters

1998, U.S. Department of the Interior, Minerals

Management Service............----:eeeeeeeeee 19, 21

MMS Revenue Collections, January-December 1998,

U.S. Department of the Interior, Minerals Man-

MBOMMONE SOTVICE . 2... cccccccccrccsvcccccvcecs 20, 21

TABLE OF AUTHORITIES —- Continued

Pa

Mineral Revenue Collections, January-September

1999, U.S. Department of the Interior, Minerals

SEY WUE o hhnnceccncocsescesccasevcess

1998 OCS Oil and Gas Production vs. Total U.S.

Production; Safety, Leasing, Exploration, Produc-

tion & Revenue Statistics; U.S. Department of the

Interior, Minerals Management Service (June

1999), http://www.mms.gov/eod/stats.htm .......

Report to Congress on the Findings of the North Caro-

lina Environmental Sciences Review Panel (April 6,

1992), Manuel Lujan, Secretary of the Interior... ..

Statistical Highlights Fiscal Year 1997, U.S. Depart-

ment of the Interior, Minerals Management Ser-

Sn SE codec ceccoccnesecsccécconcocescocesoes

U.S. Bureau of Census, Statistical Abstract of the

United States: 1997 (117th Edition); Washington,

PN Nha odctadudeebadesovnsacsevecccesseees

OTHER AUTHORITIES

Matthew Davis, State News Service (June 28, 1990) ....

21 Environment Reporter, Current Developments, p.

rr rn oe dod. potedeuesebececosoceos

Scott Pendleton, Offshore Drilling Ban Draws Fire,

THe Curistian Science Monitor, July 6, 1990 at 8....

Patrick H. Martin, Outer Continental Shelf Leases

and Operating Regulations, in 2 Law or FepeRAt

Om anv Gas Leases, 25-1, 25-36 (Rocky Mtn.

i) i Me cokte sce ceusebeeededivsesocos

ge

INTEREST OF AMICUS CURIAE

Having followed quite closely this contract dispute

between the United States and two private oil companies,

Marathon Oil Company and Mobil Oil Exploration &

Producing Southeast, Inc. (“Petitioners” or “Lessees”),

the American Petroleum Institute (“API”) once again

finds it critically important to request an appearance and

voice its concerns. Initially, API joined as amicus curiae in

the Petitioners’ rehearing request before the Federal Cir-

cuit below, after the first panel decision revealed a fatal

miscomprehension of the Outer Continental Shelf Lands

Act (“OCSLA”), through which the nation’s offshore min-

eral leasing program is administered. While the Federal

Circuit panel did grant a rehearing, its second decision

contained only a superficial correction of the court’s dam-

age to ongoing Outer Continental Shelf (“OCS”) lease

activity. Believing that the law now established by the

Federal Circuit decision, if left unmodified by this Court,

would permanently harm this nation’s OCS leasing pro-

gram, API respectfully submits this amicus curiae brief in

support of the Petitioners.'

API is a petroleum industry trade organization repre-

senting approximately 400 companies engaged in oil and

gas exploration and production in the United States. The

vast majority of the oil and gas leases on the OCS are held

by API member companies, and API members have bid

! The parties have consented to the filing of this brief.

Counsel for a party did not author this brief in whole or in part.

No person or entity, other than the Amicus Curiae, its members,

or its counsel made a monetary contribution to the preparation

and submission of this brief.

tens of billions of dollars at OCS lease sales. In Amicus

Curiae’s view, the decision by the Federal Circuit has so

misconstrued basic contractual law governing OCS lease

operations that the OCS legal landscape has fundamen-

tally shifted. The import of that decision’s flawed con-

tractual analysis will alter the economic risk structure of

the OCSLA crafted by Congress after decades of experi-

ence and study. API is gravely concerned that this real-

location of economic risk will not only harm the oil and

gas exploration and producing industry, but might actu-

ally threaten the viability of the entire OCS leasing pro-

gram.? Amicus Curiae respectfully urges the Court to

reverse the decision below.

¢

STATEMENT OF THE CASE

The case is a breach of contract action brought

against the United States relating to mineral leases issued

to the Petitioners by the Minerals Management Service

(“MMS”) in an area of the Outer Continental Shelf off-

shore the State of North Carolina. While not disturbing

the finding of the Court of Federal Claims that the gov-

ernment, through Congressional interference, had mate-

rially breached its leases with the Petitioners, the Federal

Circuit decision voided the lower court’s restitution

award. The panel majority, with Judge Newman dissent-

ing, found that objections to the Petitioners’ lease

2 The Congress has declared that the OCS is a “vital national

resource reserve .. . which should be made available for

expeditious and orderly development. . . . ” 43 U.S.C. § 1332(3)

(emphasis added).

exploration plans raised by the State of North Carolina

under the Coastal Zone Management Act (“CZMA”), 16

U.S.C. § 1451, et seq., essentially annulled all other con-

cerns over the federal government's conduct. In so decid-

ing, the court inflicted critical damage to the law

governing OCS mineral leases that will have far-ranging

and harmful effects on all holders of OCS leases. If the

Federal Circuit’s decision is allowed to stand, any future

Congressional action thwarting an OCS lessee’s existing

contractual rights, if worked in tandem with state CZMA

opposition, would authorize the federal government to

confiscate the entirety of the lessee’s investment in its

lease — even if the federal government, as lessor, acknow]l-

edges that the lessee’s exploration plans comply fully

with all agency requirements. The damage to the OCS

leasing program — the source of 25% of domestic natural

gas production, and 22% of domestic oil production -

could be severe.

The OCS mineral leases that are the subject of this

dispute were issued by the MMS under the authority of

the Outer Continental Shelf Lands Act, 43 U.S.C. § 1331 et

seq. OCSLA leases require lessees to pay up-front cash

bonuses, followed by periodic lease rental payments, for

the tracts they acquire. 43 U.S.C. § 1337. Under the

OCSLA statutory scheme, an OCS lessee may thereafter

prepare a Plan of Exploration (“POE”) as part of the

“exploration” stage of lease activity.* If recoverable

3 As described in a leading treatise on federal oil and gas

law, the POE will include:

a description of the type and sequence of exploratory

activities; a description of drilling vessels, platforms,

resources are found, the lessee may then submit to the

MMS a Plan of Development and Production, or “POD,”

to continue on to the “production” stage.‘ In the course of

filing either plan, the OCSLA further stipulates that the

OCS lessee will certify that its activities will be consistent

with the coastal zone management plan of any affected

state that has an approved CZMA program. See 43 U.S.C.

§ 1340(c)(2) (applying CZMA certification requirement to

exploration plans); 43 U.S.C. § 1351(h) (applying the

requirement to production plans).

For exploration plans, the OCSLA provides that the

Secretary of the Interior, who acts through the MMS,

“shall approve such plan . . . within thirty days of its

submission, except that the Secretary shall disapprove

and other structures to be used; the types of

geophysical equipment that will be used; the location

of each exploratory well planned; an oil spill

contingency plan; an air-quality analysis; and other

relevant geological and geophysical information. .. .

If drilling affects a state with a federally-approved

coastal zone management program, an Environ-

mental Report (Exploration) must also be

submitted. . . .

Patrick H. Martin, Outer Continental Shelf Leases and Operating

Regulations, in 2 Law or Feperat On anv Gas Leases, 25-1, 25-36

(Rocky Mtn. Min. L. Found. 1999).

* The POD “includes information similar to that in the

exploration plan: the specific work to be performed; a

description of drilling vessels, platforms, and pipelines together

with safety and pollution control features and labor, material,

and energy requirements; well locations; current interpretations

of all relevant geological and geophysical data; environmental

safeguards and safety standards; and a time schedule of the

activities to undertaken.” See Martin, supra at 25-38.

[the] plan” upon determining that (i) a proposed activity

would result in a condition under 43 U.S.C.

§ 1334(a)(2)(A)(i) (which sets forth conditions for lease

cancellation based on probable harm to life, property, or

the environment), and (ii) the proposed activity cannot be

modified to avoid such conditions. If the MMS disap-

proves an exploration plan for those specified reasons,

the OCSLA expressly provides that the Secretary may

cancel the lease and “the lessee shall be entitled to com-

pensation. .. . ” 43 U.S.C. § 1340(c)(1).

Finally, to aid this Court’s appreciation of the back-

ground of this case, under 43 U.S.C. § 1351(h)(1)(B), the

Secretary's initial approval of a POD includes a separate

requirement, not applicable at the exploration stage, that

the development and production plan either must have

already received coastal zone consistency certification

approval from any affected state, or the Secretary of

Commerce must have already overridden the state’s

objection pursuant to 16 U.S.C. § 1456. If state CZMA

approval or a Secretarial override cannot be shown in the

first instance, 43 U.S.C. § 1351(h)(2)(A) carries the unique

provision that the “lessee shall not be entitled to compen-

sation [under the OCSLA] because of such disapproval

[of the development and production plan].”

In the instant action, the Lessees prepared and filed a

Plan of Exploration for their OCS leases pursuant to the

OCSLA’s exploration provisions, 43 U.S.C. § 1340. As

expressly recognized by the Federal Circuit’s decision,

however, the MMS was prohibited from taking any action

with regard to this POE by the Outer Banks Protection

Act (“OBPA”), Pub. L. No. 101-380, § 6003, 104 Stat. 484,

555 (1990), enacted as a rider to the Oil Pollution Act of

1990, at the behest of the North Carolina delegation in

Congress some nine years after issuance of the leases at

issue.

SUMMARY OF ARGUMENT

The integrity of the leasing program established by

the OCSLA, 43 U.S.C. § 1331 et seq., is vital to this nation.

The OCS program supplies an essential share of domestic

energy production in addition to billions of dollars of

non-tax governmental revenues. The grave and funda-

mental errors of hornbook contract law committed by the

lower court in this OCS lease dispute have been soundly

documented by the Petitioners. In reaching its result, the

Federal Circuit decision has also devalued long-standing

obligations of reciprocal contractual performance that

make up the standard OCSLA lease agreement. Without

doubt, the most disturbing aspect of the court’s decision

is the blanket denial! of restitution or other compensation

to an OCS lessee in the face of unilateral federal and state

actions which thwart lease activity. Under the lower

court’s reasoning, every OCS lessee beginning lease

exploration would now risk losing its entire lease invest-

ment — even if it complies fully with every MMS require-

ment. Amicus curiae respectfully requests this Court to

correct these errors, to restore an OCS lessee’s remedies

of rescission and restitution, and to reaffirm the principle

that “the United States does business on business terms.”

United States v. National Exch. Bank, 270 U.S. 527, 534

(1926).

ARGUMENT

A. The Federal Circuit Decision Destroys the OCS

Lease Bargain.

1. The Decision Ignores the OCS Lease Terms by

Focusing cn “Permit Denials”

In describing the OCS Lessor/Lessee contractual

relationship, the Federal Circuit decision on review rec-

ognized that the “[l]ease terms grant lessees the ‘exclu-

sive right and privilege to drill for, develop, and produce

oil and gas resources’ in exchange for an up-front cash

bonus and periodic lease payments.” See Mobil Petition

Appendix (“Pet. App.”), Docket No. 99-244 at 3a.5 This

statement captures the long-accepted understanding of

the bargain struck by the parties to an OCS lease. In

return for payments of up-front cash bonuses, followed

by periodic lease rental payments, the lessee obtains the

exclusive right, if its assessment of the leased property

suggests further activity is warranted, to begin planning

for the exploration and possible future development of

the lease. Indeed, it was at this very part of the lease process

- the filing of the POE - that the federal government's

critical breach in this case — the eleventh-hour enactment

of the OBPA - occurred.

The Federal Circuit’s examination of the OCS lease

relationship, however, stopped at this point. At first, the

lower court seemed to recognize that the OBPA plainly

interfered with existing contractual relationships: (“[t]o

5 Citations to the decisions below will refer to the Pet. App.

in Docket No. 99-244.

read the original contract between the parties as incor-

porating all future actions, whether by statute or regula-

tion, by one of the parties would raise serious questions

about illusory contracts, and perhaps questions of due

process and other constitutional concerns.”) Pet. App.

10a. But the panel majority then conducted a precipitous

retreat: (“[i]n any event, because the outcome of the case

does not turn on this issue, we need not further dwell

upon it.”) Id. Thereafter, avoiding any real focus on the

impact of the OBPA on the government’s contractual

conduct, the panel majority locked its attention on a

collateral issue involving an event subsequent to the POE

filing, North Carolina’s CZMA consistency objection.

The OBPA’s enactment cannot be so lightly ignored.

As correctly observed by the Court of Federal Claims, the

OBPA materially altered both the structure and framework of

the Petitioners’ leases, and the leasing process itself. As such,

the OBPA’s new terms and conditions cannot be read into

the Petitioners’ leases. Moreover, as the court noted,

common sense suggests that no sophisticated oil

and gas company with many years of experience

in drilling for oil in offshore leased tracts would

knowingly agree to pay the huge, up-front con-

siderations here involved for such tenuous and

unilaterally interruptable drilling rights.

Pet. App. 63a.® This is a precise description of the nature

of the government’s breach in this case: the OBPA’s

“material alteration” of the structure and framework of

the OCS lease bargain, and the attempted creation of

6 Conoco Inc. v. United States, 35 Fed. Cl. 309, 324 (Fed. Cl.

1996).

“tenuous and unilaterally interruptable” drilling rights.

Indeed, the crux of this dispute is the OBPA’s effect of

wholesale contractual frustration. It is not, as characterized

by the Federal Circuit, a mere sideline dispute involving

a “permit denial” or a CZMA “consistency complaint.”

Notwithstanding the Federal Circuit’s re-characterization

of this case as merely involving the filing of a single POE

and a resultant “denial of permits,” there are no actual

“denials” of either a POE, or a permit application, in the

record before this Court, because the OBPA prohibited

MMS from even acting on the Lessees’ POE.

The Federal Circuit panel’s misguided discussion of

“regulatory denials” was essentially the remainder of

certain lines of reasoning that had underpinned the Fed-

eral Circuit panel’s initial opinion, but were later

removed. As noted earlier, the initial panel decision con-

tained numerous errors in describing the interaction

between the OCSLA and the CZMA and the proper con-

struction of an OCS lessee’s “performance.” First, the

initial panel decision had misread the OCSLA to require a

lessee to receive CZMA state concurrence for its POE or

face lease cancellation without compensation. The panel

based its rejection of the restitution remedy on the Les-

sees’ alleged resultant “violation” of the OCSLA.7 But in

7 Pet. App. 36a. (Marathon Oil Co. v. U.S., 158 F.3d 1253

(Fed. Cir. 1998), superseded by Marathon Oil Co. v. United States,

177 F.3d 1331 (Fed. Cir. 1999)). The panel wrote that “[u]nder

these circumstances, a lessee’s options are to ‘submit an

amendment to such plan, or a new plan, to the Secretary of the

Interior,’ ” citing 16 U.S.C. § 1456(c)(3)(B). Pet. App. 37a. But as

amply demonstrated by Petitioners’ arguments, the OBPA’s

serial delays would only have further frustrated their attempts

to submit such an amended plan.

10

arriving at this conclusion, the court erroneously relied

on 43 U.S.C. § 1351, the provision of the CZMA that

applies to development and production plans, not plans

of exploration. On rehearing, the panel corrected this

error, by simply removing all direct references to § 1351.

In addition, the panel majority asserted that “North

Carolina’s legally valid objection to the consistency certi-

fication left unfulfilled the requirement that the lessees demon-

strate compliance with [all] applicable statutes and

regulations.” Pet. App. 12a. (Emphasis added.)® This state-

ment finds no support in the CZMA, the OCSLA, or MMS

regulations. The Lessees fully demonstrated “compliance

with [all] applicable statutes and regulations,” when

adding the consistency certification, as called for by 43

U.S.C. § 1340(c)(2), to their POE filing. North Carolina’s

disagreement with that certification in no way establishes

a failure by the Lessees to comply with the law.

The Federal Circuit decision under review now rests

on a more narrowly-conceived legal analysis, i.e., that

North Carolina’s CZMA consistency objection, per se,

8 The original panel decision had gone even further, and

reasoned that “under the circumstances of this case, to treat the

denial of the POE as a breach of contract by the Government

would be to eviscerate these salutary protections of the nation’s

fragile coastal lands and waters.” App. 34a. (Emphasis added.)

In other words, the panel had so misread the statute that it

believed that the MMS was entitled to deny an exploration plan

on CZMA consistency grounds. Instead, 43 U.S.C. § 1340, the

section of the OCSLA dealing with exploration activity, separates

the CZMA consistency certification approval process from the

MMS’s decision to approve or disapprove the plan of

exploration. Once again, the panel’s decision on rehearing

dropped its reference to a POE “denial.”

11

annulled all other concerns over the federal government's

contractual conduct. The CZMA objection, by itself, has

thus been elevated far beyond its tangential role in this

OCS lease dispute.? As shown below, the panel’s final

decision not only refused to address the federal govern-

ment’s own OCS lease obligation, and thereby continued

to misconstrue the law and the terms of the OCS lease,

but also continued to ignore the federal government's

own public record position on the effects of the OBPA,

and on the Lessees’ lease performance.

2. The Decision Fails to Enforce Reciprocal OCS

Lease Performance

The Federal Circuit cited Section 10 of the MMS’s

OCS lease form, r sting that it provides that lessees “shall

comply with all regulations and orders relating to explo-

ration, development, and production.” Pet. App. 10a.

Clearly, the lease carries with it attendant regulatory

requirements, but as discussed in more detail below, the

record shows that the MMS strongly endorsed the Peti-

tioners’ own lease compliance and performance in enter-

ing into the exploration stage of the leasing process.

Moreover, as noted by the Court of Federal Claims:

The lease agreements do not specifically state

the parties’ obligations regarding exploration

plans but provide that the lessees agree to ‘com-

ply with all regulations and orders relating to

° To repeat: (1) there was no “denial” of the Lessees’ POE

by the MMS; and (2) there could have been no lawful denial of

the Lessees’ POE on CZMA consistency grounds.

12

exploration.’ Under the OCSLA and its regula-

tions, exploration may only be conducted pur-

suant to approved exploration plans. Thus, in

order to explore, plaintiffs are obligated to pre-

pare and submit exploration plans. The necessary

reciprocal obligation is that the government will

timely and fairly consider — not necessarily approve,

but at least promptly consider - exploration plans

properly submitted.

Pet. App. 70a (emphasis added) (citing the MMS’s

express statutory duty under the OCSLA to approve or

otherwise act on plans within thirty days of submission,

43 U.S.C. § 1340(c)(1)). Stated differently, “the contracts at

issue provide that submission of plaintiffs’ POEs is predi-

cated on an unequivocal governmental duty to timely and

fairly consider, though not necessarily approve, them.”

Pet. App. 72a (emphasis added). More tellingly, the Court

of Federal Claims also recognized that:

It is not necessary [to the finding of a contrac-

tual breach in this case] for plaintiffs to have

actually submitted such exploration plans

because it is clear [the United States] cannot and

will not perform its end of the bargain as

required by the OCSLA.

Pet. App. 73a. Thus, under the Court of Federal Claims’

proper reading of Petitioners’ OCS leases and the law of

contracts, the Lessees are due restitution in this case even

without consideration of their actual filing of a POE. A

fortiori, the Lessees are entitled to restitution without

consideration of an attendant POE filing event, i.e., the

lodging of North Carolina’s CZMA objection.

13

3. The Decision’s Misguided View of Lease Perfor-

mance Cannot Support Confiscation of the

Lease Bonuses

Avoiding analysis of the reciprocal obligations high-

lighted by the Court of Federal Claims, the Federal

Circuit's decision instead attacked the Lessee’s “perfor-

mance.” The panel majority repeatedly referred to the

state’s CZMA consistency objection to the POE, implying

that such “environmental concerns” excuse or even vali-

date the government's contractual misconduct. For exam-

ple, the panel majority wrote that “North Carolina’s

legally valid objection to the consistency certification left

unfulfilled the requirement that the lessees demonstrate

compliance with applicable statutes and regulations,

compliance with which was a prerequisite to obtaining

the necessary permits and licenses.” Pet. App. 12a. Two

paragraphs later, the court starkly suggests that any find-

ing of federal misconduct in the role played by the OBPA

in Petitioners’ lease delays would be tantamount to “evis-

ceratl[ing] . . . salutary protections of the nation’s fragile

coastal lands and waters.” Pet. App. 13a. These observa-

tions lack foundation.

The Federal Circuit’s complaint of Petitioners’ “non-

performance” completely ignored the fact that the MMS

has repeatedly described the “lease performance” on the

record in superlative terms. For example, the MMS Dep-

uty Director characterized the 2,000 page Environmental

Report prepared for the Lessees’ Manteo project as “the

most comprehensive body of environmental information

14

ever assembled on a proposed well in the history of the

U.S. offshore drilling program.”?°

Moreover, at the time of its filing the MMS announced

that the Petitioners’ POE was the most comprehensive explo-

ration plan ever submitted to the agency."' Finally, Interior

Secretary Lujan publicly acknowledged that the Lessees’

POE, as submitted, was “approvable in all respects” under

all MMS requirements, and that the agency’s hands were

tied by the provisions of the OBPA — not by agency con-

cerns over the “salutary protections of the Nation’s fragile

coastal lands and waters.”!? In other words, the govern-

ment, as lessor, never asserted that the Lessees’ project

10 21 Environment Reporter, Current Developments, (BNA)

June 8, 1990, p. 314; see also Fed. Cir. J.A. 949-50.

1! September 29, 1990 MMS News Release. The MMS even

submitted public comments strongly supporting the Lessees’

request to the Secretary of Commerce to override North

Carolina’s CZMA objections. In these public comments, the

MMS observed that:

An unbiased consideration of the analyses and

conclusions contained within the Final

{Environmental Report] and the [Environmental

Assessment] will result in a determination that no

significant effects are expected in the area of the

Manteo Prospect, or to the State’s coastal zone

resources, as a result of Mobil drilling a single

exploration well nearly 39 miles from shore.

MMS Comments, June 4, 1991 at p. 9 (emphasis in original).

12 Pet. App. 13a; Fed. Cir. J.A. 963. Moreover, Amicus

Curiae would note that, as the legislative history of the OBPA

cited by Petitioners clearly reveals, North Carolina’s CZMA

“consistency objection” was merely a single weapon in a

formidable political arsenal to oppose drilling off its coastline

without regard to particular environmental impacts. Indeed,

months before the State’s consistency objection based on

15

raised serious “environmental concerns,” and the Federal

Circuit inappropriately introduced this issue into the lease

dispute.

Moreover, the Federal Circuit found that the effect of

the OBPA on Petitioners’ leases was of no moment,

because “appellees’ failure to overcome North Carolina’s

objections resulted in a delay that preceded and extended

throughout the period in which the OBPA was effective.”

Pet. App. 13a. This assertion is directly undercut by the

federal government’s own actions. The MMS, recognizing

the dictates of the OBPA, issued sua sponte in 1990 a

unilateral suspension of ongoing operations for the Peti-

tioners’ North Carolina leases based solely on the OBPA.

Moreover, Interior Secretary Lujan stated publicly that

the OBPA would require additional delays, and the prep-

aration of additional studies, far into the development

“insufficient information” was even issued, the public record

confirms that North Carolina Governor James G. Martin had

already announced, in correspondence to President Bush, that

North Carolina was opposed to offshore drilling before the year

2000, regardless of the completion of any “new studies,” or, for

that matter, any showing of the absence of adverse impacts of

Petitioners’ exploratory drilling activity. See Scott Pendleton,

Offshore Drilling Ban Draws Fire, THe Curistian Science Monrror,

July 6, 1990 at 8, available in LEXIS, News Library, Arcnews File

(reporting Governor Martin’s correspondence to the President,

and his corresponding entreaty for help from the State’s

congressional delegation); Matthew Davis, Stare News Service,

June 28, 1990 available in LEXIS, News Library, Arcnews File

(describing the “solid front” formed by Governor Martin and

the North Carolina congressional delegation to oppose offshore

drilling).

16

and production stage of Lessee’s OCS leases: “The objec-

tives of any future . . . recommended studies will be

reviewed at each phase of development.”!°

4. The Decision Alters the OCSLA’s Economic

Risk Structure

Even while acknowledging that the OBPA and subse-

quent events may have affected the Petitioners’ rights to

explore and develop their OCS tracts, the Federal Circuit

nevertheless authorized the confiscation of Petitioners’

up-front “bonuses,” asserting that it could find

no principled distinction between a lessee

whose hopes for large rewards from such a lease

are frustrated by a failure to obtain the neces-

sary permits for exploration, and those of a

lessee whose hopes are drowned by impossible

weather, equipment failures, financial setbacks,

or any number of other circumstances beyond

the lessee’s control. In either case, the lessee

contracted for the exclusive opportunity to

explore in a certain area; the inability of a lessee

to explore, if not attributable to the Govern-

ment, does not create an entitlement to any

refund of the consideration paid to obtain the

lease.

Pet. App. 15a. Thus, the court saw no “principled distinc-

tion” between force majeure or other accidental events,

and the Congress’s imposition, at the instance of the

13 Report to Congress on the Findings of the North Carolina

Environmental Sciences Review Panel (April 6, 1992), Manuel

Lujan, Secretary of the Interior, Fed. Cir. J.A. 414.

17

North Carolina delegation, of the political gauntlet of the

OBPA.

In its ruling, the Federal Circuit’s majority decision

overturned a long-standing and vital principle underly-

ing the essential OCS lease bargain: the OCS lessee’s

“huge, up-front considerations” are payment for the

essential right to explore for oil and gas which may or may

not be found. Restated, the reward of successfully finding

and profitably producing oil and gas is balanced against

the overarching risk, borne by the OCS lessee, that the oil

and gas will not be found, or cannot be produced in

profitable quantities. That risk includes the OCS lessee’s

exposure of not only the loss of its upfront bonus pay-

ments, but often the loss of additional substantial invest-

ments, involving many millions of dollars, devoted to

initial lease exploration and development activity. Now,

the Federal Circuit would expand the lessee’s risk even

further — finding a facile analogy between the risk of

dilatory force majeure events or other contingencies, and

the OBPA’s serial array of governmental obstacles that

completely stifled Petitioners’ lease activities - and

thereby toppling the bargain between OCS lessees and

the government. In fact, as duly noted by the Petitioners,

the Federal Circuit’s decision casts into doubt a basic

contractual balance underlying not only the thousands of

currently outstanding OCS leases, but also an untold

number of other highly valuable government contracts.

Judge Newman’s dissent captures the essence of the

Federal Circuit's error. When encountering the same pas-

sage from the majority opinion quoted above, Judge

Newman recognized that

18

[such an] analysis is not supportable by any

legal or equitable theory. What [Petitioners]

paid for was the right of exploration. [Peti-

tioners] bore the risk that the exploration might

fail to find oil or gas, but [Petitioners] did not

bear the risk that exploration would be entirely

barred, especially by the same party from whom

it bought the right.

Pet. App. 21a. In Judge Newman's view, this case posed

this fundamental question: “whether the government

shall deal fairly and legally with its contracting partners.”

Pet. App. 18a. Casting the answer in the affirmative,

Judge Newman recognized that the effect of OBPA,

enacted in the midst of the CZMA consistency process for

the drilling of an initial exploratory well, “does not justify

the federal government's confiscation of [Petitioners’] pay-

ment[s] for a contract entered into before any such objection[s]

arose.” Id. (Emphasis added.)

This Court should correct the Federal Circuit’s grave

error in order to preserve the integrity of the OCS leasing

program. If the panel's ruling is left in place, OCS lessees

will be subject to a rule that allows the government to

confiscate their entire lease consideration if a newly-

enacted federal statute arbitrarily upsets both ongoing

and future lease operations, which the CZMA consistency

certification process also frustrates. If allowed to stand,

this erroneous ruling would rearrange the entire eco-

nomic structure of the OCSLA, thereby shifting enormous

and unintended economic risks to lessees. And, as ably

observed by the Petitioners, the Federal Circuit’s decision

creates an even larger uncertainty as to when the

remedies of rescission and restitution are ever available

against the federal government - effectively vitiating the

19

fundamental presumption underlying government con-

tractine that “(t]he United States does business on busi-

ness terms.” United States v. National Exch. Bank, 270 U.S.

527, 534 (1926).

B. The Integrity of the OCS Leasing Program is Vital

to This Nation

The widespread effects of the Federal Circuit deci-

sion on other OCS lessees and on the future of the OCS

leasing program should lead the Court to reverse the

Federal Circuit decision. The OCS leasing program is

vital to the nation.'4 By the end of 1998, over eleven

billion barrels of oil and 130 trillion cubic feet of natural

gas have been produced under the OCS leasing pro-

gram.'5 In 1998, the OCS accounted for fully 25% of

domestic natural gas production and 22% of domestic oil

production. '¢

At the end of 1998, nearly 8,300 oil and gas leases

issued under the OCSLA existed on the nation’s Outer

4 The Congress has declared that the OCS is a “vital

national resource reserve ... which should be made available for

expeditious and orderly development... .” 43 U.S.C. § 1332(3)

(emphasis added).

15 Statistical Highlights Fiscal Year 1997, U.S. Department of

‘the Interior, Minerals Management Service (1998); MMS Offshore

Stats, Third and Fourth Quarters 1998, U.S. Department of the

Interior, Minerals Management Service.

16 1998 OCS Oil and Gas Production v. Total U.S. Production;

Safety, Leasing, Exploration, Production & Revenue Statistics; U.S.

Department of the Interior, Minerals Management Service (June

1999), http:/ /www.mms.gov/eod/stats.htm.

20

Continental Shelf.!7 Additional leases have been issued

by the MMS in 1999, and tease sales will continue into the

foreseeable future. Over the last ten and one-half years

alone, OCS lessees have paid the federal government

over $6 billion in lease bonuses.'* Indeed, the MMS col-

lected over $1.4 billion in lease bonuses in 1997, and

another $1.3 billion in 1998.19 As of September of this

year, over 84% of all oil royalties paid on Federal and

Indian leased lands, and over 77% of gas royalties, came

from the OCS.°

If the Federal Circuit’s ruling is allowed to stand, all

OCS lessees, as well as bidders at future OCS lease sales,

will be faced with stark uncertainties regarding the

OCSLA statutory scheme. The most disturbing aspect of

the court’s decision is the denial of restitution or other

compensation to a lessee in the face cf unilateral federal

17 Mineral Revenues 1998, Report on Receipts From Federal and

Indian Leases, U.S. Department of the Interior, Minerals

Management Service. The number of offshore leases rose 12.5%

in 1998, from 7,359 leases in 1997. Id.

18 U.S. Bureau of Census, Statistical Abstract of the United

States: 1997 (117th Edition); Washington, D.C. (1997); MMS

Revenue Collections, January-December 1998, U.S. Department of

the Interior, Minerals Management Service; MMS Revenue

Collections, January-September 1999, U.S. Department of the

Interior, Minerals Management Service.

19 Mineral Revenue Collections, January-December 1998, supra

n.18. Bonuses received in the first three quarters of 1999 totaled

$159 million. MMS Revenue Collections, January-September 1999,

supra n.18.

20 Mineral Revenue Collections, January-September 1999, supra

n.18.

21

and state actions thwarting lease activity. Under this rea-

soning, every OCS lessee beginning lease exploration

would now risk losing its entire lease investment - even

if it complies fully with every MMS requirement. As

observed by the Court of Federal Claims, “common sense

suggests that no sophisticated oil and gas company with

many years of experience in drilling for oil in offshore

leased tracts would knowingly agree to pay the huge, up-

front considerations . . . for such tenuous and unilaterally

interruptable drilling rights.” Pet. App. 63a.

MMS lease records lend perspective to that court’s

observation: As of the end of 1998, only about 20% of

existing OCS leases were in the “production” stage,

meaning that wells had been drilled on those leases that

were producing oil or natural gas.?! Thus, the vast major-

ity of existing leases issued under the OCSLA are still in

(or again facing) the “exploration” stage of lease activ-

ity.22 Considering that virtually all of these active leases

are located offshore of states with approved coastal zone

management programs, each and every one of these OCS

lessees which pursues exploration will undergo the

CZMaA consistency certification process as part of its OCS

21 Mineral Revenues 1998, supra n.17.

22 Between 1988 and 1998, nearly 4,100 exploratory wells

were drilled on over 43,000,000 acres under lease on the OCS.

Mineral Revenues 1998, supra n.17; MMS Offshore Stats, Third &

Fourth Quarters 1998, supra n.15. Some OCS leases that are not

currently “producing” could contain now-depleted wells, thus

rendering those leases also subject to a return to the exploration

stage of activity.

22

drilling plans. Therefore, the import of the Federal Cir-

cuit’s decision, which has shattered protections afforded

to lessees that must use that process, has potential

impacts on countless present, and future, lease planning

efforts.

API is also concerned that the Federal Circuit's

implicit endorsement of North Carolina’s objection to the

POE consistency certification due to the “inadequacy of

information” will only embolden other coastal states that

philosophically oppose offshore development to misuse

the CZMA and OCSLA processes. In addition, the reason-

ing of the court’s decision can only encourage other Con-

gressional interference with OCS mineral exploration and

development activity for overtly political reasons. Under

the lower court’s ultimate ruling, if such future Congres-

sional action is accompanied by contemporaneous state

CZMA objections, the government may breach its leases

with impunity. Accordingly, the industry’s incentive to

bid for OCS leases, especially in new, frontier OCS areas,

will be drastically undercut.

¢

23 See 43 U.S.C. § 1340(c)(2) (applying CZMA consistency

certification requirements to exploration plans); cf. 43 U.S.C.

§ 1351.

23

CONCLUSION

For the reasons stated above, the Court should

reverse the Federal Circuit decision.

Respectfully submitted,

Of Counsel: J. Berry St. JoHN*

Craic WYMAN

G. WituiaM Frick Liskow & Lewis

Davip T. DEAL

One Shell Square,

Douc tas —— 50th Floor

AMERICAN PETROLEUM 701 Poydras Street

INSTITUTE

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70139-5099

(504) 581-7979

Attorneys for American

Petroleum Institute

“Counsel of Record

1220 L Street, Northwest

Washington, D.C.

20005-4070

(202) 682-8250