Mobil Oil Co. v. Albuquerque Area Director, 18 IBIA 315 (1990)

• Court: Interior Board of Indian Appeals

Appeal from a determination that two tribal oil and gas leases had expired by their own terms because of failure to produce oil and/or gas in paying quantities.

Affirmed. 1. Indians: Leases and Permits: Cancellation or Revocation--Indians: Leases and Permits: Generally-- Indians: Mineral Resources: Oil and Gas: Generally A Bureau of Indian Affairs determination that an Indian oil and gas lease has expired by its own terms is not a cancellation of the lease within the meaning of 25 CFR 211.27.

2. Indians: Leases and Permits: Generally--Indians: Mineral

   Resources: Oil and Gas: Generally--Indians: Trust Responsibility The administration of Indian oil and gas leases under the Indian Mineral Leasing Act of 1938, 25 U.S.C. §§ 396a-396f (1982), is a trust responsibility of the United States.

3. Indians: Leases and Permits: Generally--Indians: Mineral

   Resources: Oil and Gas: Generally An oil and gas lease issued under the Indian Mineral Leasing Act of 1938, 25 U.S.C. §§ 396a-396f (1982), for a primary term and "as long thereafter as oil and/or gas is produced in paying quantities" expires by operation of law when, after the primary term, production ceases.

   IBIA 89-102-A

4. Constitutional Law: Due Process--Indians: Leases and Permits: Generally--Indians: Mineral Resources: Oil and Gas: Generally No prior notice to the lessee is required where an oil and gas lease issued under the Indian Mineral Leasing Act of 1938, 25 U.S.C. §§ 396a-396f (1982), expires by operation of law. The lessee's right to due process is protected by the administrative appeals process at 25 CPR Part 2 arid 43 CFR Part 4, Subpart D.

   APPEARANCES: R. Dennis Ickes, Esq., Salt Lake City, Utah, for appellant; Barry K. Berkson, Esq., Office of the Field Solicitor, U.S. Department of the Interior, Santa Fe, New Mexico, for appellee; Thomas H. Shipps, Esq., Durango, Colorado, for the Southern Ute Indian Tribe.

   OPINION BY ADMINISTRATIVE JUDGE VOGT

   Appellant Mobil Oil Corporation seeks review of an August 11, 1989, decision of the Albuquerque Area Director, Bureau of Indian Affairs (Area Director; BIA), finding that Southern Ute Tribal Oil and Gas Leases Nos. MOO-C-1420-1660 (Lease No. 1660) and MOO-C-1420-1661 (Lease No. 1661) had expired by their own terms because of failure to produce in paying quantities. For the reasons discussed below, the Board affirms the Area Director's decision.

   Background

   On August 22, 1974, the Southern Ute Indian Tribe (Tribe) and TransOcean Oil, Inc., entered into Lease No. 1660, covering 1,282 acres of tribal land, and Lease No. 1661, covering 1,245.56 acres of tribal land.

   IBIA 89-102-A

   The lease term for both was "10 years from and after the approval hereof by the Secretary of the Interior and as much longer thereafter as oil and/or gas is produced in paying quantities from said land." The leases were approved by the Acting Superintendent, Southern Ute Agency, BIA, on September 10, 1974.

   Both leases were placed into production during their primary terms. In September 1979, TransOcean entered into a gas purchase contract with Northwest Pipeline Corporation, under which Northwest was to purchase all the gas produced from the two leases. In 1981, the leases were assigned to appellant; appellant also succeeded to TransOcean's gas purchase contract with Northwest.

   In August 1987, appellant entered into a farmout agreement covering both leases with Vince Allen and Associates. On August 11, 1988, Allen assigned its interest in the agreement to Meridian Oil Inc. (70%) and San Juan Basin Drilling Associates (30%). Meridian and San Juan completed two wells, the Ute 200 and Ute 201 wells, on the leases in November and December 1988. Another well, the Ute 1-2 well, had been recompleted by their predecessors-in-interest. The parties agree that all three wells received the necessary authorizations and approvals from the Tribe and the Department.

   Beginning in 1984, the Federal Energy Regulatory Commission (FERC) issued a number of orders affecting the transportation of natural gas

   IBIA 89-102-A through pipelines. 1/ These orders, inter alia, encouraged pipeline companies to convert from purchaser/sellers of natural gas to open access transporters of gas. On June 10, 1988, Northwest accepted a permanent open access transportation certificate under FERC Order No. 500.

   Northwest shut in Leases Nos. 1660 and 1661 on July 18, 1988. 2/ By letter dated September 30, 1988, Northwest notified the producers with which it had gas purchase contracts that it would terminate the contracts on November 1, 1988, pursuant to their "noneconomical purchases" provisions, unless the contracts were either revised to provide for "best effort" takes or assigned to Northwest's sister company, the Williams Gas Supply Company, an unregulated entity.

   On May 3, 1989, the Tribe informed the Superintendent, Southern Ute Agency, that no commercial production from the leases had been reported from August 1, 1988, through March 31, 1989. After reviewing production reports, royalty payment reports, and tribal severance tax returns, and ascertaining that appellant had not requested approval for the shut-in; the Superintendent notified appellant by letter dated May 5, 1989, that the leases had expired. The Superintendent stated:

   It has come to the attention of this office that there has been no commercial production from the leases during the ____________________________ 1/ See, e.g., Order No. 380, 49 FR 22778 (June 1, 1984); Order No. 436, 50 ER 42408 (Oct. 18, 1985); Order No. 451, 51 FR 22168 (June 18, 1986); and Order No. 500, 52 FR 30334 (Aug. 14, 1987). 2/ Affidavit of Ed Barber, Exhibit D to Appellant's Opening Brief, at 2. The same affidavit states at page 3 that Lease No. 1660 was not shut in until August. 18 IBIA 318

   IBIA 89-102-A period of August 1988 through March 31, 1989, the last reported period. * * * * * *

   The absence of production on the * * * leases requires this office to conclude that the leases have terminated and expired by their own terms. Accordingly, you are hereby notified that said leases have expired, and that operations conducted by you, your agents or employees on said premises should cease.

   Past the primary term, the production in paying quantities is judged on a monthly cycle, therefore, production is considered to have ceased prior to the August 1988 monthly cycle. These leases expired of their own terms, due to lack of production.

   (Superintendent's May 5, 1989, letter at 1-2).

   Appellant appealed this notification to the Area Director. On June 28, 1989, pursuant to a request from the Tribe, the Area Director ordered appellant to post an appeal bond in the amount of $1.5 million and imposed certain conditions under which appellant was to be permitted to manage the leases during the pendency of the appeal. Appellant appealed this order to the Board. Before the appeal to the Board was briefed, the Area Director decided the underlying appeal. Accordingly, the Board dismissed the appeal pending before it as moot. Mobil Oil Corp. v. Albuquerque Area Director, 17 IBIA 269 (1989).

   On August 11, 1989, the Area Director affirmed the Superintendent's May 5 decision, stating in part:

   The statute pursuant to which the * * * leases were issued, 25 U.S.C. 396a, further states that the duration of such leases shall be "for terms not to exceed ten years and as long thereafter as minerals are produced in paying quantities." The * * * leases are 18 IBIA 319

   IBIA 89-102-A in their extended terms. Past the primary term, the production in paying quantities is judged on a monthly cycle. The facts of this case clearly indicate that there was absolutely no commercial production from the * * * leases during the period of August 1, 1988, through March 31, 1989. The appellants do not dispute this fact of nonproduction. In this case the statutory requirements of 25 U.S.C. 396a control and only Congress can change the clear provisions of the statute. Therefore, production is considered to have ceased prior to the August 1988 monthly cycle.

   (Area Director's Aug. 11, 1989, Letter at 1-2).

   Appellant's appeal from this decision was received by the Board on September 8, 1989. Another appeal from the same decision was filed by Meridian and San Juan; it was docketed as No. IBIA 90-3-A. The appeals were consolidated on October 12, 1989.

   On November 27, 1989, the Board approved an interim agreement and stipulation between all appellants and the Tribe. The agreement, which had been approved by the Superintendent, provided: (1) Meridian and San Juan would conduct oil and gas operations on lands embraced by the leases prior to final resolution of this dispute; (2) the Tribe would be paid royalties pursuant to the terms of the leases in dispute; (3) an additional payment, constituting a 4-percent overriding royalty interest before payout and a 12-1/2-percent overriding royalty interest thereafter, would be paid into an escrow account; (4) the escrowed funds would be disbursed to the Tribe if the decision at issue in this appeal is ultimately affirmed and to appellant if it is ultimately reversed; (5) in the event appellant prevails, operations may continue under the leases; and (6) in the event the Area Director's decision is affirmed, the Tribe, Meridian, and San Juan will

   IBIA 89-102-A execute a Minerals Agreement that has been negotiated and agreed to by the Tribe, Meridian and San Juan. The Superintendent indicated by letter dated November 13, 1989, that be intends to approve the Minerals Agreement if the Area Director's decision is affirmed.

   On December 18, 1989, the Board received from Meridian and San Juan a motion for leave to withdraw from this appeal. The Board granted the motion and dismissed Docket No. IBIA 90-3-A on December 20, 1989. Meridian Oil Inc. & San Juan Basin Drilling Associates v. Area Director, 18 IBIA 86 (1989).

   Appellant, the Area Director, and the Tribe filed briefs in Docket No. IBIA 89-102-A.

   Discussion and Conclusions

   Appellant's leases...