Pauley Petroleum Inc. v. United States

• Citation: 591 F.2d 1308
• Decision Date: 24 January 1979
• Docket Number: No. 197-69.,197-69.
• Parties: PAULEY PETROLEUM INC. et al. v. The UNITED STATES.
• Court: Court of Federal Claims

591 F.2d 1308

PAULEY PETROLEUM INC. et al. v. The UNITED STATES.

No. 197-69.

United States Court of Claims.

January 24, 1979.

COPYRIGHT MATERIAL OMITTED

John P. Ohl, New York City, attorney of record, for plaintiffs. H. Richard Schumacher, Frank W. Krogh, Cahill, Gordon & Reindel, New York City, and Edward Kliewer, Jr., Dallas, Tex., of counsel.

Myles E. Flint, Washington, D.C., with whom was Asst. Atty. Gen., James W. Moorman, Washington, D.C., for defendant.

Before DAVIS, NICHOLS, KUNZIG, BENNETT, and SMITH, Judges, en banc.

OPINION

DAVIS, Judge:

Claimants are oil-company lessees of federal offshore lands in Santa Barbara Channel, California. Late in January 1969 there occurred, on another leasehold in that area, a very serious oil blowout. Plaintiffs' leaseholds were not physically affected by that incident but their contention is that their leasehold rights were frustrated, violated, and taken by the Government's conduct following the blowout.

The case was tried before Trial Judge Hogenson who has made extensive and careful findings of fact which we adopt without substantial change.¹ In Part I of this opinion, we summarize the facts pertinent to our decision. Part II deals with a preliminary jurisdictional issue. In Part III we review the arguments for recovery presented by the companies, including a late motion setting forth an additional, more restricted, theory of damages.

I The Facts

A. The leases, and initial unsuccessful drilling (March 1968-January 1969): Plaintiffs make up a consortium of oil corporations which acquired from the Government two leases, numbered OCS-P-0218 and OCS-P-0226 (covering tracts 375 and 384 respectively), of submerged lands on the outer continental shelf in Santa Barbara Channel, off California. After purchase of the leaseholds in 1968 and various assignments of interests in that year, each company retained a percentage ownership ranging from 15.3% to 2.5% in either or both tracts 375 and 384.

In the fall of 1967 notice for bids on outer continental shelf land in the Santa Barbara Channel was published. Pauley Petroleum Inc. (Pauley) and other associated companies bid and won the two leases. Before bidding Pauley and some other companies in the joint venture had conducted extensive exploration of the area. The leases were executed in March 1968. Pauley and the original lessees paid $43,503,147 and $30,351,447 in bonuses for tracts 375 and 384, respectively. In addition, they were required to pay $17,280 per annum for the basic five-year term of each lease as a minimum rent. After winning the bid, the consortium selected Pauley as the "operator" for the purposes of managing exploration and drilling, and established an operating committee to supervise all exploration and development activities.

Under the Outer Continental Shelf Lands Act, Pub.L.No.212, 83d Cong., 1st Sess., 43 U.S.C. §§ 1331-1343 (1970) (OCS Act), the legislation authorizing plaintiffs' oil leases, the Interior Department is the governmental agency with general cognizance of operations under the leases, and the Secretary has from time to time issued regulations and orders relating to drilling and operations on the outer continental shelf. The leases themselves were on a standard Interior form which granted an exclusive right to drill and extract oil and gas. Lessees were also given the right to erect drilling platforms and conduct geological explorations. Each lease was made subject to the OCS Act, and stated that all reasonable regulations were made a part of the lease "* * * when not inconsistent with any express and specific provisions herein, which are made a part hereof."

With Interior's consent, the Pauley group conducted exploration of the two tracts during the period from March 1968 through January 1969. The exploration involved drilling of eight wells, seven on tract 373 (including one redrill) and one on tract 384, and the total drilling costs came to approximately $3.8 million. All eight wells were dry holes, none producing oil in commercially usable quantities. The trial judge found, and we agree, that "the abandonment of all of the exploratory wells as not commercially producible had to be discouraging to the plaintiffs." Several of the participants reflected their disappointment by selling their investments cheaply, writing all or part of them off, or amortizing them over the lease-terms.² However, this unsuccessful drilling did indicate the presence of hydrocarbons, signifying the possibility of oil reserves. Serious differences exist among the expert witnesses as to the interpretation of the hydrocarbon deposits and the potential value of any possible reservoirs of oil.

B. The oil spill, government suspension of operations, imposition of new regulations, orders, and filing procedures (January 28, 1969-April 9, 1969): On January 28, 1969, a Union Oil well on outer continental shelf lands in the Santa Barbara Channel blew out, creating an oil slick of about fifty square miles which caused severe property and environmental damage. There immediately developed a political climate of great concern over any future drilling on continental shelf lands in the Channel. A further consequence of the Union Oil disaster was the collapse of the insurance market covering damages caused by offshore oil spills.³

The most critical events for this case all occurred between the oil spill on January 28, 1969, and plaintiffs' filing of this suit on April 9, 1969 — a period of somewhat over two months. Without giving unnecessary details, we shall itemize the principal government actions during this period, many of which plaintiffs emphasize in this litigation.

1. From January 28 to February 3, 1969, all oil companies which had operating wells in the Santa Barbara Channel at the time of the Union Oil blowout — plaintiffs were not among them — suspended operations voluntarily at the Secretary of the Interior's request, pending a review of conditions there by the Government. After initially clearing these companies for resumption of drilling on February 3rd, Secretary Hickel, under sharp political criticism, reversed himself and on February 7th sent telegrams to the five companies then operating, ordering them to cease all drilling and production. Pauley, which was not then operating a well, did not receive a telegram.⁴ During this period, Secretary Hickel informed Dr. Pecora, Director of the Geological Survey in charge of offshore oil regulations, that Hickel wanted three programs implemented: (1) a determination of the cause of and methods to stop the oil spill; (2) review of all relevant regulations and orders; (3) review of the sufficiency of information given by lessees to the Geological Survey. Dr. Pecora began implementing Hickel's program by establishing three task forces. Two of these task forces were devoted to point 1 of Hickel's program, and the third was responsible for point 3 — reviewing the sufficiency of technical information provided by lessees. Dr. Pecora himself led a review with various Interior Department officials of existing regulations and orders.

Also on February 7, 1969, Secretary Hickel imposed further requirements for clearing future drilling in the Santa Barbara outer continental shelf. He instructed Dr. Pecora that all actions on Santa Barbara leases were to be cleared directly through the Secretary's office. Dr. Pecora by phone so informed the Geological Survey regional supervisor for the Pacific, who prior to that time had been delegated direct authority to grant drilling permits.

2. The federal action which most concerned plaintiffs was the promulgation of a new regulation relating to a lessee's liability for oil spills. This was published in the Federal Register on February 21, 1969, adding a new subparagraph (b) to 30 C.F.R. § 250.42, as follows:

If the waters of the high seas are polluted by the drilling or production operations of the lessee, and such pollution damages or threatens to damage aquatic life, wildlife, or public or private property, the control and removal of the pollutant and the reparation of any damage, to whomsoever occurring, proximately resulting therefrom shall be at the expense of the lessee * * *

34 Fed.Reg. 2503-2504 (1969).

(As indicated in Part III, A, infra, a proposal to change this regulation was announced early in May 1969 and a modification was made in August 1969.)

Pauley apparently interpreted the new regulation to impose absolute liability not only for costs of cleanup, but also for any damage to a third party's property from an oil spill (no matter how caused), and that such liability applied retroactively to existing leases.⁵ On March 12, 1969, a special meeting of the Pauley group's operating committee was held, and one of the primary items on the agenda was a discussion of problems caused by the alleged change in the standard of liability. Pauley announced that it had retained a law firm, and after a presentation by a member of the firm, it was decided that the necessary papers for filing a lawsuit would be prepared immediately. Two members of the lessee group stated that they would join the suit, and all other members were to advise Pauley as soon as possible as to their decision. The minutes of the meeting reveal that most of the members present stated they would not participate in further Santa Barbara drilling while the presumed "absolute liability" regulation remained in effect.

3. On February 11, 1969, the Pauley group filed with the Geological Survey's Los Angeles office an application for a permit to drill a second well on tract 384. One of plaintiffs' major complaints is that this application was never acted upon. During February and March 1969, it is clear, Interior was in the process of revising its orders controlling drilling for and operating oil wells on the outer continental shelf (so-called "OCS orders"); the Pauley group was aware that such a process was going on. On March 28, 1969, OCS Order No. 10 was...