Arkla Exploration Co. v. Texas Oil & Gas Corp.

• Decision Date: 07 May 1984
• Docket Number: 82-2386,Nos. 82-2228,83-1586 and 83-1682,s. 82-2228
• Citation: 734 F.2d 347
• Parties: ARKLA EXPLORATION COMPANY and State of Arkansas, Appellees, v. TEXAS OIL & GAS CORP., Appellant. James G. Watt, Secretary of Interior. (Two cases). ARKLA EXPLORATION COMPANY and State of Arkansas, Appellees, v. TEXAS OIL & GAS CORP., James G. Watt, Secretary of Interior, Appellant. (Two cases).
• Court: U.S. Court of Appeals — Eighth Circuit

Page 347

734 F.2d 347

ARKLA EXPLORATION COMPANY and State of Arkansas, Appellees, v. TEXAS OIL & GAS CORP., Appellant.

James G. Watt, Secretary of Interior. (Two cases).

ARKLA EXPLORATION COMPANY and State of Arkansas, Appellees, v. TEXAS OIL & GAS CORP., James G. Watt, Secretary of Interior,

Appellant. (Two cases).

Nos. 82-2228, 82-2386, 83-1586 and 83-1682.

United States Court of Appeals Eighth Circuit.

Submitted Sept. 15, 1983.

Decided May 7, 1984.

F. Henry Habicht, II, Acting Asst. Atty. Gen., W. Asa Hutchinson, U.S. Atty., Fort Smith, Ark., Anne S. Almy, Michael W. Reed, Robert L. Klarquist, Attys., Dept. of Justice, Washington, D.C., for appellant; Mark K. Seifert, Atty., Dept. of the Interior, Washington, D.C., of counsel.

Jim Guy Tucker, Mitchell, Williams, Selig, Jackson & Tucker, Little Rock, Ark., Robert Roberts, III, Blanchard, Walker, O'Quin & Roberts, Shreveport, La., Alan S. Novins, Lee Ellen Helfrich, Paula Dinerstein, Lobel, Novins & Lamont, Washington, D.C., for appellees.

Before LAY, Chief Judge, and JOHN R. GIBSON and BOWMAN, Circuit Judges.

BOWMAN, Circuit Judge.

Under the Mineral Lands Leasing Act (MLA), 30 U.S.C. Secs. 181-287, before government lands may be leased for oil or gas exploration without competitive bidding, the Secretary of the Interior (the Secretary) must determine that the lands are not within a "known geological structure of a producing oil or gas field" (KGS). Id. at Sec. 226. At issue in this case is whether the Secretary made a proper KGS determination before granting valuable oil and gas exploration leases to Texas Oil and Gas Corporation (TXO) on a noncompetitive basis. The District Court for the Western District of Arkansas ^* held that the Secretary's determination was improper and, therefore, that these leases were not validly issued. The Secretary and TXO appeal from that decision. For the reasons stated herein, we affirm the decision of the district court.

Procedural History

The twenty noncompetitive leases in question, covering lands located on the Fort Chaffee Military Reservation in Arkansas, were issued to TXO on July 1, 1979. Having learned of these leases, Arkla Exploration Company (Arkla) filed an administrative protest against their issuance with the Department of Interior (the Department) on September 17, 1979. ¹ On September 20, 1979, the Secretary ordered the United States Geological Survey (USGS, now known as the Minerals Management Service) to re-evaluate its non-KGS classification of the subject lease land. On September 21, 1979, Arkla filed suit against the Secretary in the District Court for the District of Columbia (D.C.District Court), seeking cancellation of the leases. ²

In response to these developments TXO, on November 1, 1979, sought from the D.C. District Court an order temporarily restraining the Secretary from canceling its leases. A hearing on the TRO was scheduled for November 2, 1979. On the evening of November 1, 1979, the Secretary invalidated the leases, reasoning that they had been issued without proper authority, notwithstanding the passage of an amendment to the MLA permitting the granting of leases on acquired military lands such as Fort Chaffee, see infra note 6 and accompanying text, because the lease applications had been filed prior to the effective date of the Department's implementing regulations.

TXO subsequently converted its suit for a TRO to one for permanent relief. The D.C. District Court held in favor of the Secretary. Texas Oil & Gas Corp. v. Andrus, 498 F.Supp. 668 (D.D.C.1980). The court found that the Secretary's decision to invalidate the leases was based on his reasonable interpretation of the Department's regulations and was not the result of improper political motivation. ³

The Court of Appeals for the District of Columbia Circuit (D.C. Circuit) reversed, Texas Oil & Gas Corp. v. Watt, 683 F.2d 427 (D.C.Cir.1982), rev'g Texas Oil & Gas Corp. v. Andrus, supra, and on July 20, 1982, directed the Secretary to reinstate the leases. ⁴ The court refused to allow the Secretary to invalidate the leases based on his interpretation of Department regulations because to do so would unilaterally defer the effective date of the amendment to the MLA and thus would thwart Congressional intent to open these lands for leasing.

The instant action attacking the KGS determination was commenced by Arkla on August 4, 1982. The State of Arkansas petitioned the court for leave to intervene on August 18, 1982. ⁵ The district court has issued two opinions in the case. In the first opinion, the court permitted the State of Arkansas to intervene, and overruled various jurisdictional objections raised by the defendants. Arkla Exploration Co. v. Watt, 548 F.Supp. 466 (W.D.Ark.1982). In the second opinion, the court ruled on the merits. Arkla Exploration Co. v. Watt, 562 F.Supp. 1214 (W.D.Ark.1983). The court reviewed the administrative record, admitted supplementary and explanatory evidence, made findings of fact, and ruled that the Secretary's determination that the lands in question fell outside a KGS was arbitrary and contrary to Congressional intent, federal statutes, and the Department's regulations. The court enjoined the Secretary from reinstating the leases and ordered the Secretary to make a proper KGS determination on the lands in question prior to the issuance of any further leases.

Background

In 1975, Congress passed an amendment to the MLA authorizing for the first time minerals leasing (other than for drainage purposes) on government lands acquired as military reservations, as distinguished from lands that always have been in the public domain. ⁶ Fort Chaffee is among the lands opened for leasing under this statute. Geologically, Fort Chaffee is located in the Arkoma Basin, which has been a very productive natural gas area for many years. The area surrounding Fort Chaffee contains numerous producing wells. A study of maps included in the administrative record reveals that no part of Fort Chaffee was more than five miles from a producing well at the time the leases in question were granted. Designated Record (D.R.) at 1115. The maps also show that much of Fort Chaffee is within the Biswell Hill, Game Hill, or Washburn Anticlines, ⁷ each of which contained producing wells at the time these leases were granted.

In May 1977, TXO applied to the Bureau of Land Management (BLM) for thirty eight noncompetitive oil and gas leases on 78,000 acres located in the Fort Chaffee Military Reservation. Departmental procedures assigned to the Area Geologist of the USGS the responsibility for determining whether the lands in question were located within a KGS. For Fort Chaffee, the Area Geologist at that time was Edward L. Johnson in the Tulsa, Oklahoma USGS office. Johnson went to work for USGS in 1956, and had worked in the Tulsa area since at least 1961.

Johnson took the TXO applications and compared them to a map of the Fort Chaffee area. This map displayed the wells drilled in the Fort Chaffee area as reported by the Petroleum Information Co., a petroleum reporting service. Each well, both producing and dry wells, was entered on the map by a draftsperson in Johnson's office. Johnson then would indicate the location of each KGS on the map, including in the KGS, for each well producing in commercial quantities, the section (a section is one square mile) in which the well is located plus the surrounding eight sections. This practice, referred to in the district court as the "one mile stepout," had its roots in Ark.Stat.Ann. Sec. 53-114 (1971 & Supp.1983), which gives the Arkansas Oil and Gas Commission the authority to set spacing units for oil and gas wells in Arkansas, i.e., no wells can be drilled closer than the minimum spacing unit set by the Commission. ⁸ Occasionally, if the well was a noncommercial well, i.e., a well that produced but which did not produce enough to cover the costs of production, Johnson would include only the single section in which the well was located. It was his practice not to extend any KGS more than one section beyond the section in which the well was located. In fact, Johnson had been "criticized" on occasions when he had attempted to extend a KGS farther than one section, and had stopped even attempting to do so.

NOTE: OPINION CONTAINS TABLE OR OTHER DATA THAT IS NOT VIEWABLE

The process followed by Johnson in approving the TXO leases is called clearlisting. Theoretically, prior KGS determinations already were represented on the map in his office. In dealing with the TXO applications, he identified the areas sought to be leased on the map and determined if any of them were within an area previously identified through the one-mile stepout procedure as a KGS. This process took Johnson approximately three and one-half hours. It resulted in the deletion of about 45,000 acres from TXO's application and left about 33,000 acres available for noncompetitive leasing. Twenty noncompetitive leases encompassing those 33,000 acres were approved in this manner by Johnson and forwarded to the BLM, where they were approved and issued to TXO on July 1, 1979.

In reviewing the Secretary's decision to issue the leases without competitive bidding, Judge Waters was faced with an administrative record of approximately 1580 pages. The record consisted primarily of TXO's lease applications, the leases, and a number of articles and reports describing the geology of the Fort Chaffee area, several of which had been written by experts who testified at trial. The record also included some prior KGS determinations on which the clearlisting decision for the TXO leases had been based. In only one of these prior KGS determinations had the Tulsa office extended a KGS farther than the ordinary one-mile maximum from a producing well--the Washburn Anticline KGS determination, made on October 29, 1963. D.R. at 235-39. None of the KGS determinations made after that date extend more than one section beyond a producing...