Cotton Petroleum Corp. v. U.S. Dept. of Interior, Bureau of Indian Affairs, 87-1191

CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)
Citation870 F.2d 1515
Docket NumberNo. 87-1191,87-1191
PartiesCOTTON PETROLEUM CORPORATION and Shell Oil Company, Plaintiff-Appellants, v. UNITED STATES DEPARTMENT OF the INTERIOR, BUREAU OF INDIAN AFFAIRS; Kenneth L. Smith, Assistant Secretary, Indian Affairs; Rupert Thompson, Superintendent, Anadarko Agency; Newton Rose, Winston Rose, Wesley Rose, Nelson Rose, Theodosia Harris, and John Rose, Defendant-Appellees.
Decision Date20 March 1989

Page 1515

870 F.2d 1515
AFFAIRS; Kenneth L. Smith, Assistant Secretary, Indian
Affairs; Rupert Thompson, Superintendent, Anadarko Agency;
Newton Rose, Winston Rose, Wesley Rose, Nelson Rose,
Theodosia Harris, and John Rose, Defendant-Appellees.
No. 87-1191.
United States Court of Appeals,
Tenth Circuit.
March 20, 1989.

Page 1516

Kent L. Jones (Orval E. Jones, with him on the brief) of Hall, Estill, Hardwick, Gable, Collingsworth & Nelson, Inc., Tulsa, Okl., for plaintiff-appellants.

Dirk D. Snel (F. Henry Habicht, II, Asst. Atty. Gen., and Laura E. Frossard, Department of Justice, with him on the brief; J. McLane Layton, Office of the Sol., Dept. of the Interior, of counsel, with him on the brief), Dept. of Justice, Washington, D.C., for federal defendant-appellees.

Patricia L. Brown (Jap W. Blankenship of Fellers, Snider, Blankenship, Bailey & Tippens, Oklahoma City, Okl., of counsel, with her on the brief) of Wilkinson, Barker, Knauer & Quinn, Washington, D.C., for Rose defendants-appellees.

Before McKAY, BARRETT and EBEL, Circuit Judges.

BARRETT, Senior Circuit Judge.

Cotton Petroleum Corporation and Shell Oil Company, hereinafter jointly referred to as Cotton or lessee, appeal from the district court's order denying their motion to amend the court's order granting summary judgment unto the defendants, United States Department of the Interior, et al., and Newton Rose, et al. All parties filed motions for summary judgment. The parties agree that the material facts are uncontroverted. Our jurisdiction vests under 28 U.S.C. Sec. 1291.


The dispute in this case involves an 80-acre tract of restricted Indian allotment land owned by Newton Rose, et al., which was leased for oil and gas to Shell Oil Company, on January 17, 1979, for a primary term of three years pursuant to terms approved by the Superintendent of the Anadarko Agency, Bureau of Indian Affairs (BIA), Department of the Interior. The lease was thereafter assigned by Shell to Cotton. The Rose tract is located within a 640-acre drilling and spacing unit for the production of gas, pursuant to a spacing order entered by the Oklahoma Corporation Commission in June of 1975. The Rose lease, issued following bids, involved a bonus payment of $11,021.00 or some $135.00 per acre. It contained, inter alia, the following express covenants:

Par. 1: ...

[I]f the lessee shall commence to drill a well within the terms of this lease, the lessee shall have the right to drill such well to completion with reasonable diligence and if oil or gas, or either of them, be found in paying quantities, this lease shall continue and be in force with like effect as if such well had been completed within the term of years herein first mentioned.

Par. 11:

Unit operation.--The parties hereto agree to subscribe to and abide by any agreement for the cooperative or unit development of the field or area, affecting the leased lands, or any pool thereof, if and when collectively adopted by a majority operating interest therein and approved by the Secretary of the Interior, during the period of supervision.

(R., Vol. II, Tab 57, Exhibit D).

All of the lands in Section 6, wherein the Rose 80-acre tract is situated, are restricted Indian allottment lands with the exception of one 40-acre non-Indian ownership tract.

On December 30, 1981, Cotton, as operator, commenced drilling a well in the unit area and the well had been drilled to a depth of some 5200 feet when, in January, 1982, Cotton submitted a communitization agreement, which had been adopted by a majority of the Unit area working interest owners, to the Department of Interior for its approval as to the Rose tract and other Indian allotment tracts in the unit. On January 12, 1982, prior to the expiration of the primary term of the Rose lease (January 17, 1982), the United States Geological Survey, Minerals Management Service (MMS), the first of a three-step Department of the Interior agency process of review for approval, recommended that the

Page 1517

communitization agreement be approved by the Anadarko Area Director in that it "[o]ffers adequate protection to the restricted Indian interests." (R., Vol. II, Tab 69). The Superintendent of the Anadarko Agency concurred, completing the second step in the process, and forwarded the communitization agreement to the Area Director for his review and approval on January 15, 1982. Newton Rose contacted the Area Director prior to January 17, 1982, and requested that he not approve the communitization agreement and permit the Rose lease to expire so that it would be open for new leasing at a substantially greater bonus sum than that paid by Shell Oil Company. The Area Director requested additional information from the MMS which he received on January 22, 1982. The Area Director approved the communitization agreement on February 11, 1982, completing the three-stage process.

The Area Director observed that: the primary purpose for leasing constitutes an agreement between lessor and lessee whereby the ultimate goal is production through a joint effort; refusal to approve a communitization agreement defeats the primary purpose of the lease; the agreement had been timely submitted before any affected lease had expired and the drilling operations on the unit had been diligent; and, it is not feasible to release an isolated 80-acre tract because it is not likely that an oil company would be interested in drilling the second well, when it has been determined that the common source of supply may be drained by one well. The Area Director further observed that the Indian lessors had no objection to the communitization agreement but simply wanted an opportunity to renegotiate lease terms and obtain a large bonus payment.

On January 13, 1984, the Assistant Secretary for Indian Affairs (Operations), pursuant to personal jurisdiction over the Rose appeal authorized by the Secretary of the Interior under 43 C.F.R. Sec. 4.5(a)(1), issued the Department's final decision, holding that: (1) the communitization agreement, to the extent that it included the Rose 80-acre tract as leased lands, was not in the best interests of the Rose lessors when approved by the Area Director, (2) it is not now in the best interests of the Rose lessors to have their tract of land included in the communitization agreement as leased lands, (3) as to the Rose 80-acre tract, approval of the communitization agreement is reversed, (4) therefore, the Shell lease (on the Rose 80-acre tract) has expired, and (5) as unleased restricted Indian land within the unit, the Rose lessors are entitled to an 8/8th royalty under the terms of the Communitization Agreement. (R., Vol. II, Tab 12, pp. 1-2). The decision-order further directed that the Rose Indian owners were entitled, under the terms of the communitization agreement, to receive 12.65 percent of the value of any production already taken from the unit area plus proper interest and to receive payment for future production at the same rate until such time as the tract is leased or other arrangements are made. Id. at p. 5.

Cotton completed the drilling operations on the unit well prior to December 31, 1983. Total drilling and completion costs amounted to $7,765,462.63, while production revenues to that date, after payment of severance taxes, amounted to $407,317.91.

Factual Analysis-Discussion

On May 2, 1983, Mr. John W. Fritz, Deputy Assistant Secretary-Indian Affairs (Operations), declined to decide the Rose appeal from the Anadarko Area Director's decision of February 11, 1982, approving the communitization agreement submitted by Cotton. Rather, Fritz remanded the matter to the Anadarko Area Director with instructions to prepare and forward a written determination on whether approval of the unit agreement was in the best interests of the Rose allottees under this court's Kenai Oil and Gas, Inc. v. Department of the Interior, 671 F.2d 383 (10th Cir.1982) opinion and in accordance with the Deputy Assistant's Memorandum of April 23, 1982.

The Memorandum, which was sent to all BIA Superintendents and Area Directors, set forth the guidelines for the approval of communitization agreements. The memorandum provided in part:

[The] recent decision of the 10th Circuit Court of Appeals in Kenai * * *provides

Page 1518

us with some guidance on the scope of * * * [BIA's] authority [to approve communitization agreements of Indian oil and gas leases]. Therefore, the following guidelines have been developed to assist Area Directors and Superintendents in exercising this authority.

* * *

* * *

2. The Secretary has the discretion to approve or disapprove Communitization or Unit Agreements based on a determination of whether approval would be in the best interests of the Indian lessor. Area Directors and Superintendents must prepare such a determination in writing, based on logical engineering and economic facts, whether the agreement is approved or disapproved, and that document should be given to the applicant and the Indian lessor. In determining whether the agreement is or is not in the best interest of the Indian lessor, the following should be considered:

a) The long term economic effects of the agreement must be in the best interest of the Indian lessor and we must be able to document these effects.

b) The Minerals Management Service is required to recommend approval or disapproval based upon the engineering and technical aspects of the agreement to assure protection of the interests of the Indian lessor, and BIA officials should rely on that recommendation.

c) The lessee in question must have complied with the terms of the lease in all respects, including the commencement of drilling operations, or actual drilling, or actual production in paying quantities (depending on the terms of the lease), within the unit area prior...

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