Norfolk Energy, Inc. v. Hodel, 88-4392

• Decision Date: 04 December 1989
• Docket Number: No. 88-4392,88-4392
• Citation: 898 F.2d 1435
• Parties: NORFOLK ENERGY, INC., Plaintiff-Appellant, v. Donald HODEL, Secretary of the Interior of the United States, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1435

898 F.2d 1435

NORFOLK ENERGY, INC., Plaintiff-Appellant, v. Donald HODEL, Secretary of the Interior of the United

States, et al., Defendants-Appellees.

No. 88-4392.

United States Court of Appeals, Ninth Circuit.

Argued and Submission Deferred Dec. 4, 1989.

Re-Submitted Dec. 13, 1989.

Decided March 28, 1990.

Mary Scrim, Crowley, Haughey, Hanson, Toole & Dietrich, Billings, Mont., for plaintiff-appellant.

Angus E. Crane, Dept. of Justice, Washington, D.C., for defendants-appellees.

Appeal from the United States District Court for the District of Montana.

Before WALLACE, PREGERSON and NELSON, Circuit Judges.

PREGERSON, Circuit Judge:

The Bureau of Land Management ("BLM") imposed a $250 fine on Norfolk Energy, Inc. ("Norfolk") after the company refused to supply schematic drawings of its natural gas facilities located on nonfederal and non-Indian land within two federally approved gas production units. The Interior Board of Land Appeals ("the IBLA") upheld the fine, ruling that BLM had authority under federal statute and regulations to request the schematic drawings and to impose the fine. The district court held that Norfolk failed to establish that the IBLA decision was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, and granted summary judgment for the government. On appeal, Norfolk contends that the IBLA decision conflicts with controlling statutory authority and erroneously interprets federal regulations, and that regulation of the Tiger Ridge and Bullhook facilities violates the company's constitutional rights. We have jurisdiction over the district court's final order under 28 U.S.C. Sec. 1291. We affirm.

BACKGROUND

I. Facts and Procedural History

Norfolk ¹ is a Montana corporation that produces natural gas and operates several natural gas production "units." Two of these units--the Tiger Ridge Unit and the Bullhook Unit--contain federal and/or Indian land. ² These two units were formed under Montana law in 1971, and were approved by the federal government and adopted by the Montana Board of Oil and Gas Conservation in 1972. The agreements that established these units contain the following language:

1. ENABLING ACT AND REGULATIONS. The Mineral Leasing Act of February 25, 1920, as amended, supra, and all valid, pertinent regulations, including operating and unit plan regulations, heretofore issued there-under or valid, pertinent regulations issued thereunder are accepted and made a part of this Agreement as to Federal [and Indian] lands, provided such regulations are not inconsistent with the terms of this Agreement.

Tricentrol United States, Inc., 97 I.B.L.A. 387, 388-89 (emphasis added by the IBLA) (footnote omitted). ³

In 1985, BLM requested by letter that Norfolk supply schematic drawings of natural gas facilities operated by Norfolk within six units containing federal and/or Indian lands, including the Tiger Ridge and Bullhook units. Tricentrol, 97 I.B.L.A. at 388. Norfolk supplied drawings of its facilities in all units except the Tiger Ridge and Bullhook units. On September 25, 1985, BLM fined Norfolk $250 for failing to provide schematic drawings of its Tiger Ridge and Bullhook facilities. ⁴

Norfolk appealed to the IBLA. It argued that the unit agreements, which state that federal regulations are "accepted and made a part of [the] Agreement as to Federal [and Indian Lands]," implicitly deny BLM authority to request the drawings. "By clear implication," Norfolk argued, "non-federal and non-Indian Lands [in the Tiger Ridge and Bullhook units] would not be subject to ... regulation" under the unit agreements. See Tricentrol, 97 I.B.L.A. at 389. The IBLA rejected that argument and upheld the fine. It ruled that "BLM's jurisdiction under the regulations ... extend[s] to private lands included in a unit with Federal and/or Indian lands, and that BLM properly exercised its authority in requesting the schematic diagrams of facilities located on such private lands." Id. at 395. The IBLA also held that BLM's assessment of the $250 fine was proper under the applicable regulations. Id.

Norfolk then filed a complaint in the district court on August 25, 1987, requesting that the district court declare that the onshore oil and gas regulations do not apply to facilities "located on private leases which participate with federal and/or Indian leases under a Unit Agreement such as the Unit Agreements involved in this action," and that retroactive application of the regulations was unconstitutional. The district court was also asked to reverse the IBLA's decision upholding the $250 fine and requiring site facility diagrams for the Tiger Ridge and Bullhook facilities. The district court granted the government's motion for summary judgment and denied Norfolk's cross-motion for summary judgment on September 26, 1988, holding that Norfolk had "failed to establish that the IBLA's decision ... that the regulations found in 43 C.F.R. Sec. 3160 were applicable to the Bullhook and Tiger Ridge Units, was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." Order and Memorandum of the District Court, Sept. 26, 1988, at 6.

II. Statutory and Regulatory Framework

A. Unitization of Gas and Oil Operations.

The Mineral Leasing Act, 30 U.S.C. Secs. 181-194, 221-237 (1987), and Montana law, Mont.Code Ann. Secs. 82-11-201-216 (1988), provide for "unitization" of oil and gas production operations that draw on common reservoirs. Unitization "permit[s] the entire [oil and gas] field (or a substantial portion of it) to be operated as a single entity, without regard to surface boundary issues." 6 H. Williams & C. Meyers, Oil & Gas Law Sec. 901, at 3-4 (Supp.1988). The Bullhook and Tiger Ridge Units are " 'entire reservoir' units, wherein all leases and wells on an entire reservoir are consolidated for the purpose of operating the reservoir as a single producing mechanism." Order and Memorandum of the District Court, Sept. 26, 1988, at 3 (citing Armstrong v. High Crest Oils, Inc., 164 Mont. 187, 520 P.2d 1081, 1085 (1974)).

Under the Mineral Leasing Act, lessees on federal or Indian lands may "unite with each other, or jointly or separately with others, in collectively adopting and operating under a cooperative or unit plan of development or operation ... whenever determined and certified by the Secretary of the Interior to be necessary or advisable in the public interest." 30 U.S.C. Sec. 226(j). The regulations set forth procedures under which the Secretary of the Interior approves unit participation by lessees on federal and Indian lands. See 43 C.F.R. Sec. 3180-86 (1988). The Montana Board of Oil and Gas Conservation, on its own motion or on the motion of an interested person, establishes "unit areas." If after holding hearings the Board considers formation of a unit on a particular reservoir necessary, the Board sets forth a "unit operation plan" detailing the nature, purpose, and operations of the unit, and selects a "unit operator." See Mont.Code Ann. Secs. 82-11-201-216. The plan takes effect upon approval by 80 percent of the interests in the unit area. Id. at Sec. 82-11-207.

Unit operation makes possible "greater recovery at less cost ... [because] the field is treated as an entity and wells so located that they can maximize the use of reservoir energy." 6 H. Williams & C. Meyers, Oil & Gas Law Sec. 901, at 3-4; see generally R. Hemingway, The Law of Oil & Gas Sec. 7.13 (discussing the benefits of unitization). Congress authorized participation by lessees of federal and Indian lands in unitization agreements to conserve the natural resources of oil or gas pools, fields, and similar areas. See 30 U.S.C. Sec. 226(j). Similarly, the Montana legislature established the state's unit formation process to "prevent or to assist in preventing waste of oil or gas." Mont.Stat.Ann. Sec. 82-11-201.

B. Management of Federal Oil and Gas Royalties.

The Federal Oil and Gas Royalty Management Act, 30 U.S.C. Secs. 1701-1757 (1983) ("the FOGRMA") authorized the Secretary of the Interior to develop a comprehensive system of royalty management. A principal purpose of the FOGRMA is "to clarify, reaffirm and expand the ... responsibilities The Department of the Interior has promulgated extensive regulations pursuant to the FOGRMA, under which BLM monitors oil and gas production on federal and Indian lands to ensure adequate royalty payment. See 43 C.F.R. Sec. 3160-3165 (1988). These regulations "govern operations associated with the exploration, development and production of oil and gas deposits from leases issued or approved by the United States, restricted Indian land leases and those under the jurisdiction of the Secretary of the Interior by law or administrative arrangement," 43 C.F.R. Sec. 3160.0-1 (1988). The regulations make up a comprehensive inspection, collection, and accounting system.

                of the Secretary of the Interior in the management of the Federal oil and gas royalty accounting system."    H.R.Rep. No. 859, 97th Cong., 2d Sess. at 15, reprinted in 1982 U.S.Code Cong. & Admin.News 4268.  Congress enacted the FOGRMA to address serious deficiencies in the federal royalty management system which, according to the General Accounting Office, at that time cost the federal government up to $500 million annually.  Id. at 4269;  see generally Commission on Fiscal Accountability of the Nation's Energy Resources, Fiscal Accountability of the Nation's Energy Resources at 13-33 (1982) (discussing flaws in federal royalty accounting system)
                

STANDARD OF REVIEW

We review the district court's grant of summary judgment de novo. Kruso v. International Tel. & Tel. Corp., 872 F.2d 1416, 1421 (9th Cir.1989). We will affirm if, viewing the record in the light most favorable to Norfolk, there is no genuine issue of material fact and the government is entitled to judgment as a matter of law. Tzung v. State Farm Fire and Casualty Co., 873 F.2d 1338, 1339-40 (...