Amicus Curiae Brief — Marathon Oil Co. v. United States, 120 S. Ct. 494 (1999) (No. 99-253)

Supreme Court, }

FILED

“

Nos. 99-244 and 99-253

OCT lz 1999

OF THE GLERM

In The

Supreme Court of the United

¢

No. 99-244

MOBIL OIL EXPLORATION &

PRODUCING SOUTHEAST, INC.,

Vv. Petitioner,

UNITED STATES OF AMERICA,

Respondent.

+

and

No. 99-253

MARATHON OIL COMPANY,

vy. Petitioner,

UNITED STATES OF AMERICA,

Respondent.

.

On Petitions For Writs Of Certiorari

To The United States Court Of Appeals

For The Federal Circuit

+

BRIEF AMICUS CURIAE IN SUPPORT OF

PETITIONS FOR WRITS OF CERTIORARI

¢

Of Counsel J. Berry St. JoHn*

Craic WYMAN

G. WILLIAM Frick Liskow & Lewis

enh -- ssl One Shell Square,

50th Floor

—— PETROLEUM 701 Poydras Street

1220 L Street, Northwest a -

Washington, D.C. 20005-4070 (504) 581-7979

(202) GB2-SE58 Attorneys for American

Petroleum Institute

*Counsel of Record

October 12, 1999

ak

oo RS we.

a

TABLE OF CONTENTS

Page

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INTEREST OF AMICUS CURIAE .................. 1

DRPRRTE GI SOU GU cc dccdonosccccoveccess 2

REASONS FOR GRANTING THE WRITS.......... 5

A. The Federal Circuit Decision Destroys the OCS

ORR TIE 0 0 6: 0:9:0:5.000 06 0bbnsoeresendadeces 5

1. The Decision Ignores the OCS Lease Terms

by Focusing on “Permit Denials” ........ 5

2. The Decision Fails to Enforce Reciprocal

OCS Lease Performance.................. 9

3. The Decision’s Misguided View of Lease

Performance Cannot Support Confiscation

OE Te BD TN og o's 0h 06ése0d dvace ce 11

4. The Decision Alters the OCSLA’s Eco-

nomic Risk Structure .........ccccccecces 14

B. The Integrity of the OCS Leasing Program is

. & & oF Fae.) eer ae 17

CES cnccccctkéecocededcesesdesssenedned 20

il

TABLE OF AUTHORITIES

Page

Cases

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

is GA. bi 95605400600 open eres sccoveuseess 17

STATUTES AND REGULATIONS

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

EE ME vbw. dedbens ers ctcdscccesocccece passim

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

A DePerr rere rere ere rere ree ee eee eee ee ee ee ee passim

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

ye GED CUD o coc ccc ccesccccccceccese 5

ede eb ac ented vedses 6009s caneccess 5, 8

cet ncounbhsndons ose neesrsctecees 2, 17

oop cksp eee serccescsecvccccccece passim

ccc ee eu eee séndkne sees ccecccececes 3

Eo 66s cetocscccccsesvccdscccoceus passim

TE cbse bsbb cerns dnsscoreccrccceses passim

tes obre ees sccesessancceccaces 4

i cc caved pabecesecedasesccncceccecs 4

GOVERNMENT PUBLICATIONS

Mineral Revenues 1997: Report on Receipts from Fed-

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

Interior, Minerals Management Service

Tee ee ek st eeeceecons 19

TABLE OF AUTHORITIES - Continued

Page

MMS Offshore Stats, 3d & 4th Quarter 1998, U.S.

Department of the Interior, Minerals Manage-

ns on dn ddendodieesestheheiesient 17, 18, 19

Mineral Revenue Collections, January-December 1998,

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

RUGS TIBUEED ooo ccc veccccccccsccncceccvccscecss 18

Mineral Revenue Collections, January-June 1999, U.S.

Department of the Interior, Minerals Manage-

EE cadncaudesecadeeknee te deebekednces tet 18

Report to Congress on the Findings of the North Caro-

lina Environmental Sciences Review Panel (April 6,

1992), Manuel Lujan, Secretary of the Interior,

Hi, SHE Bech eds ncccncecnceessncaccecccheeneoesesces 13

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

ment of the Interior, Minerals Management Ser-

WEED GENS ccccccesoceceseccecuccsscecocesceessces 17

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

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

Be PP Pc ccecscncecpecensesdéencecoessaceeceees 18

OrnHer AUTHORITIES

21 Environment Reporter, Current Developments,

p. 314 (BNA) June 8, 1990................ 05.0005, 12

Matthew Davis, State News Service (June 28,

i inithntuentispedied eddie tested debinekabweones 14

Patrick H. Martin, Outer Continental Shelf Leases

and Operating Regulations, in 2 Law or Feperac

On anp Gas Bw 9 25-1 (Rocky Mountain Min-

— Go fj § eS 3, 4

iv

TABLE OF AUTHORITIES - Continued

Page

Scott Pendleton, Offshore Drilling Ban Draws Fire,

The Christian Science Monitor, July 6, 1990 at 8.... 13

Thomas C. Hays, Oil Concerns Criticize Offshore-

Curb Plan, The New York Times, June 28, 1990 at

BY ccunccnes nce: pesccesonasecounebassnnnnneceabel 13

1

INTEREST OF AMICUS CURIAE

For the second time in this contract dispute between

the United States and two private oil companies, Mara-

thon Oil Company and Mobil Oil Exploration & Produc-

ing Southeast, Inc. (“Petitioners” or “Lessees”), the

American Petroleum Institute (“API”) finds it vitally

important to appear in order to voice its concerns. Ini-

tially, API joined as amicus curiae in the Petitioners’

rehearing request before the Federal Circuit below, after

the first panel decision revealed a fatal miscomprehen-

sion of the Outer Continental Shelf Lands Act

(“OCSLA”), through which the nation’s offshore mineral

leasing program is administered. While the Federal Cir-

cuit panel did grant a rehearing, its second decision, from

which the petitions for writs of certiorari are now being

sought, contained only a superficial correction of the

court’s damage to ongoing Outer Continental Shelf

(“OCS”) lease activity. Believing that the law now estab-

lished by the Federal Circuit decision, if left unmodified

by this Court, will permanently harm this nation’s OCS

leasing program, API respectfully submits this amicus

curiae brief in support of the Petitioners’ writ applica-

tions.!

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

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

1 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.

2

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

misconstrues 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.2 Amicus Curiae respectfully urges the Court to

grant review to correct this decision.

STATEMENT OF THE CASE

The case presents a breach of contract claim brought

against the United States relating to mineral leases issued

to the Petitioners/Lessees by the Minerals Management

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

offshore the State of North Carolina. While not question-

ing the finding of the Court of Federal Claims that the

government, through Congressional interference, had

materially breached its leases with the Lessees, the Fed-

eral Circuit decision voided the lower court's restitution

award. The panel majority, with Judge Newman dissent-

ing, found that objections to the Lessees’ lease explora-

tion 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 concerns over

the federal government’s contractual conduct. In so

deciding, the court inflicted critical damage to the law

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).

3

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 that unlawfully thwarts OCS explo-

ration activity, if worked in tandem with state CZMA

opposition, will authorize the federal government to con-

fiscate the entirety of a lessee’s investment in its lease -

even if the federal government, as lessor, acknowledges

that the lessee’s exploration plans comply fully with all

agency requirements. The damage to the OCS leasing

program - the source of 26% of domestic natural gas

production, and 20% 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,

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 Environmental

Report (Exploration) must also be submitted. .. .

4

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

[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

Patrick H. Martin, Outer Continental Shelf Leases and Operating

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

(Rocky Mountain Mineral Law Foundation 1999). See also 30

C.F.R. § 250.203.

4 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 be undertaken.” See Martin, supra at 25-39; 30 C.F.R.

§ 250.204.

5

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 lease 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”), P.L. No. 101-380, § 6003, 104 Stat. 484, 555

(1990), which was enacted as a rider to the Oil Pollution

Act of 1990, at the behest of the North Carolina delega-

tion in Congress some nine years after issuance of the

leases at issue.

REASONS FOR GRANTING THE WRITS

A. The Federal Circuit Decision Destroys the OCS

Lease Bargain

1. The Decision Ignores the OCS Lease Terms by

Focusing on “Permit Denials”

In describing the OCS Lessor/Lessee contractual

relationship, the Federal Circuit panel decision

6

recognized that the “[l]ease terms grant lessees the

‘exclusive 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 Peti-

tioner’s Appendix (“App.”), Docket No. 99-244 at 3a.°

This statement captures the long-accepted understanding

of the obligation undertaken by the lessee of 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 develop-

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

lease process -— the filing of the initial 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, stops at this point. At first, the

lower court came close to the critical question of whether

the OBPA could interfere with an existing contractual

relationship: “[t]o read the original contract between the

“parties as incorporating all future actions, whether by

statute or regulation, by one of the parties would raise

serious questions about illusory contracts, and perhaps

questions of due process and other constitutional con-

cerns.” App. 10a. But the panel majority then conducts a

precipitous retreat: “[iJn 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

5 Marathon Oil Co. v. United States, 177 F.3d 1331 (Fed. Cir.

1999). Subsequent citations to the decisions below will continue

to refer to the Appendix to the Petitioner’s writ application in

Docket No. 99-244.

7

contractual conduct, the panel majority locks its attention

on a collateral issue involving an event subsequent to the

POE filing, the 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

their 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.

App. 63a.° This is a precise description of the nature of

the government's breach in this case: the OBPA’s “mate-

rial alteration” of the structure and framework of the

OCS lease bargain, and the attempted creation of “ten-

uous 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 acting on the Lessees’ POE.

The Federal Circuit panel’s spurious issue of “regula-

tory denials” is essentially the remainder of certain lines

of reasoning that had underpinned the Federal Circuit

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

1996).

8

panel’s initial opinion, but were later removed. As noted

earlier, the initial panel decision contained numerous

errors in describing the interaction between the OCSLA

and the CZMA and the proper construction of an OCS

lessee’s “performance.” First, the initial panel decision

had misread the OCSLA to require a lessee to receive

CZMaA state concurrence for its POE or face lease can-

cellation without compensation. The panel based its rejec-

tion of the restitution remedy on the Lessees’ alleged

resultant “violation” of the OCSLA.’” But in arriving at

this conclusion, the court erroneously relied on 43 U.S.C.

§ 1351, the provision of the CZMA that applies to devel-

opment and production plans, not Plans of Exploration.

On rehearing, the panel corrected this error, and removed

all direct references to § 1351.

In addition, the panel majority asserts that “North

Carolina's legally valid objection to the consistency certi-

fication left unfulfilled the requirement that the lessees

demonstrate compliance with [all] applicable statutes and reg-

ulations.” App. 12a (emphasis added).® This statement

7 App. 36a. Marathon Oil Co. v. United States, 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 “[ujnder

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). App. 37a. But as

demonstrated by Petitioners’ arguments, the OBPA would only

have further frustrated their attempts to submit such an

amended plan.

8 The original panel decision had gone even further, and

reasoned that “[u]nder 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

9

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

regulations. The Lessee 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 the certification in no way establishes

a failure by the Lessees to comply with the law.

The panel decision under review now rests on a more

narrowly-conceived legal analysis, i.e., that North Caro-

lina’s CZMA consistency objection, per se, 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 refuses to address the federal government’s own

OCS lease obligation, and thereby continues to mis-

construe the law and the terms of the OCS lease, but also

continues 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 panel majority cites Section 10 of the MMS’s OCS

lease form, noting that it provides that lessees “shall

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

section of the OCSLA dealing with exploration activity, separates

the CZMA consistency certification concurrence 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.”

° 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.

10

comply with all regulations and orders relating to explo-

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

the lease carries with it attendant regulatory require-

ments, but as discussed in more detail below, the record

shows that the MMS strongly endorsed the Petitioners’

own lease compliance and performance in entering 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

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.

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 predicated

on an unequivocal governmental duty to timely and fairly

consider, though not necessarily approve, them.” App.

72a (emphasis added). More tellingly, the court also rec-

ognized 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.

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

proper reading of the OCS Lease and the law of contracts,

11

the Lessees deserve 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.

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

formance Cannot Support Confiscation of the

Lease Bonuses

Avoiding analysis of the reciprocal obligations high-

lighted by the Court of Federal Claims, the Federal Cir-

cuit’s decision attacks the Lessees’ “performance.” The

panel majority repeatedly refers to the state’s CZMA

consistency objection to the POE, implying that such

“environmental concerns” excuse or can even validate the

government's contractual misconduct. For example, the

panel majority writes 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 per-

mits and licenses.” App. 12a. Two paragraphs later, the

court starkly suggests that any finding of federal miscon-

duct in the role played by the OBPA in Petitioners’ lease

delays would be tantamount to “evisceratling] . . .

salutary protections of the nation’s fragile coastal lands

and waters.” App. 13a.

These observations are without foundation.

The Federal Circuit’s complaint of the Lessees’ “non-

performance” completely ignores the fact that the MMS

has repeatedly described the Lessees’ “lease perfor-

mance” on the record in superlative terms. For example,

the MMS Deputy Director described the Environmental

Report prepared for the Lessees’ Manteo project as “the

most comprehensive body of environmental information

ever assembled on a proposed well in the history of the

12

U.S. offshore drilling program.”!° Moreover, at the time

of its filing the MMS announced that the Lessees’ POE

was the most comprehensive exploration 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 concerns over the “salutary

protections of the Nation’s fragile coastal lands and

waters.”!? In other words, the federal government, as

lessor, itself never asserted that the Lessees’ project

raised serious “environmental concerns,” and the panel

majority inappropriately introduced this issue into the

lease dispute.

Moreover, the panel majority states that the effect of

the OBPA on Petitioners’ leases is irrelevant, because

“appellees’ failure to overcome North Carolina’s objec-

tions resulted in a delay that preceded and extended

10 21 Environment Reporter, Current Developments, (BNA)

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

| 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 [Environ-

mental 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 App. 13a; A. 963.

13

throughout the period in which the OBPA was effective.”

App. 13a. This assertion is directly undercut by the fed-

eral 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 support additional delays, and the prep-

aration of additional studies, far into the development

and production stage of Lessee’s OCS leases: “(t]he objec-

tives of any future . . . recommended studies will be

reviewed at each phase of development.”'*

In addition, and as the legislative history of the

OBPA cited by Petitioners clearly reveals, North Caro-

lina’s “consistency objection” was merely a single

weapon in a formidable political arsenal to oppose any

and all drilling off its coastline without regard to particu-

lar environmental impacts. Indeed, long before the State’s

CZMA consistency objection, which was based on

allegedly “insufficient information”, was even issued, the

public record confirms that North Carolina Governor

James G. Martin had already announced, in correspon-

dence to President Bush, that North Carolina was

opposed per se to any 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 Lessees’ exploratory drilling activity.'*

13 Report to Congress on the Findings of the North Carolina

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

Lujan, Secretary of the Interior, A. 414.

4 Scott Pendleton, Offshore Drilling Ban Draws Fire, The

Christian Science Monitor, July 6, 1990 at 8, available in LEXIS,

News Library, Arcnews File (reporting Governor Martin's

request to the President, and his corresponding entreaty for

help from the State’s congressional delegation); Thomas C.

14

In comments later to the MMS on the Lessees’ POE,

the Governor reiterated his complaint that North Caro-

lina should have been included in those portions of the

OCS for which a 10-year drilling moratorium had been

granted, and again announced that “only if the present

policy changes [i.e., the ten-year drilling moratorium] or a

critical domestic energy crisis develops will I re-evaluate my

opposition to Mobil's drilling proposal.” (Emphasis added.)

Accordingly, it is critically important to understand

North Carolina’s opposition to all offshore drilling, as

well as its overriding concern with later stages of OCS

development, in approaching the Lessees’ “failure” to

obtain the State’s CZMA consistency concurrence for the

drilling of a single exploratory well.

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,

Hays, Oil Concerns Criticize Offshore-Curb Plan, The New York

Times, June 28, 1990 at D-7, available in LEXIS, News Library,

Arcnews File. See also Matthew Davis, State 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 all

offshore drilling).

a a een - -

15

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.

App. 15a. Thus, the court saw no “principled distinction”

between force majeure or other accidental events, and the

Congress’s imposition, at the request of the North Caro-

lina delegation, of the political gauntlet of the OBPA.

In its ruling, the Federal Circuit's majority decision

has overturned a long-standing and vital principle under-

lying 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. In turn, 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 to not only the loss of its up-front bonus pay-

ments, but often to the loss of additional substantial

investments involving many millions of dollars - devoted

to the initial lease exploration and development activity.

The panel majority’s expansion of the lessee’s risk even

further, by finding a facile analogy between a lessee’s risk

of dilatory force majeure events or other contingencies,

and the OBPA’s serial array of governmental obstacles

that completely stifled Petitioners’ lease activities, destroys

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

16

outstanding OCS leases, but also an untold number of

other highly valuable government contracts.

Judge Newman’s dissent captures the essence of the

panel’s error. When encountering the same passage from

the majority opinion quoted above, Judge Newman rec-

ognized that:

[such an] analysis is not supportable by any

legal or equitable theory. What Marathon paid

for was the right of exploration. Marathon bore

the risk that the exploration might fail to find oil

or gas, but Marathon did not bear the risk that

exploration would be entirely barred, especially

by the same party from whom it bought the

right.

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,”

App. 18a. As Judge Newman succinctly noted:

While it was the objection of North Carolina that

led to the prohibition of exploration of the Outer

Banks, first by state refusal to certify the explo-

ration, then by [Congress’s] enactment of the

Outer Banks Protection Act, and then by the

refusal of the Secretary of Commerce to override

the state’s objection, this does not justify the fed-

eral government's confiscation of Marathon’s pay-

ment for a contract entered into before any such

objection arose.

Id. (emphasis added).

This Court should correct this drastic 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 of law that allows the government to

confiscate their entire lease consideration if, while begin-

ning the initial CZMA consistency certification process, a

newly-enacted federal statute arbitrarily upsets both

a A eS ~ eee ee - -

17

ongoing and future lease operations. 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

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

fundamental presumption underlying government con-

tracting 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 grant the Peti-

tions. The OCS leasing program is vital to the nation.'5 By

the end of 1998, over eleven billion barrels of oil and 130

trillion cubic feet of natural gas have been produced.’® In

1997, the OCS accounted for fully 26% of domestic natu-

ral gas production, and 20% of domestic oil production.’”

At the end of 1998, nearly 8400 oil and gas leases

issued under the OCSLA existed on the nation’s Outer

1S 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).

© 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.

7 Id.

18

Continental Shelf.’ Additional leases have been issued

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

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

OCS lessees have paid the federal government over $6

billion in lease bonuses,'? and the MMS collected over

$1.4 billion in lease bonuses in 1997, and another $1.3

billion in 1998.29 As of June of this year, over 85% of all

oil royalties paid on Federal and Indian leased lands

came from the OCS, and over 77% of gas royalties.?!

In light of the Federal Circuit’s ruling, all OCS les-

sees, as well as bidders at future OCS lease sales, will be

faced with stark uncertainties regarding the OCSLA stat-

utory scheme. The most disturbing aspect of the panel

majority’s decision is the denial of restitution or other

compensation to a lessee in the face of unilateral federal

and state decisions which thwart lease activity. This will

mean that every OCS lessee beginning lease exploration

will 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

18 MMS Offshore Stats, Third and Fourth Quarters 1998, supra

n.16.

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

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

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

the Interior, Minerals Management Service; Mineral Revenue

Collections, January-June 1999, U.S. Department of the Interior,

Minerals Management Service.

20 Mineral Revenue Collections, January-December 1998, supra

n.19. Bonuses received in the first and second quarters of 1999

totaled over $100 million. Mineral Revenue Collections, January-

June 1999, supra n.19.

21 Mineral Revenue Collections, January-June 1999, supra n.19.

ees oe =

19

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

considerations . . . for such tenuous and unilaterally

interruptable drilling rights.” 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

are producing oil or natural gas. Thus, the vast majority

of existing leases issued under the OCSLA are in, or are

still (or again) undergoing, the “exploration” stage of

lease activity.2> Considering chat 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 CZMA consistency certification process as

part of its OCS drilling plans.2* Therefore, the Federal

Circuit's decision in this case, which has shattered protec-

tions afforded to lessees that must use that process, has

potential impacts on countless present, and future, lease

planning efforts.

22 MMS Offshore Stats, supra n.16.

23 Between 1987 and 1998, nearly 4200 exploratory wells

were drilled on the over 38 million acres under lease on the

OCS. Mineral Revenues 1997: Report on Receipts from Federal and

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

Management Service (November 1998); MMS Offshore Stats, 3d

& 4th Quarter 1998, supra n.16. 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.

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

certification requirements to exploration plans.)

20

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 al! offshore development to mis-

use the CZMA and OCSLA processes. In addition, the

panel majority’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 evidently 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.

CONCLUSION

For the reasons stated above, the Court should grant

the petitions.

Respectfully submitted,

Of Counsel: J. Berry St. JoHN*

Craic WYMAN

Liskow & Lewis

One Shell Square,

50th Floor

701 Poydras Street

New Orleans, LA

70139-5099

(504) 581-7979

Attorneys for American

Petroleum Institute

G. WiLuiaM Frick

Davip T. DEAL

Douctas Morris

AMERICAN PETROLEUM

INSTITUTE

1220 L Street, Northwest

Washington, D.C.

20005-4070

(202) 682-8250

*Counsel of Record

)