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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0329%3A11

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2000
- **Citation:** 530 U.S. 604

## Text

wae wv) @

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

Supreme Court of the Ugited States
R at
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

New Orleans, LA
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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0329%3A11. Public record. Not legal advice.