State of Ala. v. U.S. Dept. of Interior, 94-6657
| Decision Date | 05 June 1996 |
| Docket Number | No. 94-6657,94-6657 |
| Citation | 84 F.3d 410 |
| Parties | , 133 Oil & Gas Rep. 437 STATE OF ALABAMA, State of Alabama ex rel. James H. Evans, Attorney General, Plaintiffs-Appellants-Cross-Appellees, v. UNITED STATES DEPARTMENT OF the INTERIOR, Minerals Management Service, Defendants-Appellees-Cross-Appellants, Manuel Lujan, Jr., Scott Sewell, Defendants, OXY USA Inc., Defendant-Intervenor-Appellee-Cross-Appellant, Exploration Mobil Oil Exploration & Producing Southeast, Inc., Conoco, Inc., Texaco Exploration and Production, Inc., Intervenors-Appellees-Cross-Appellants, AGIP Petroleum Company, Inc., Intervenor. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
William R. Sawyer, Asst. U.S. Atty., Mobile, AL, Charles W. Findlay, III, Lisa K. Hemmer, Brian L. Ferrell, U.S. Dept. of Justice, Environment and Natural Resources Division, General Litigation Section, Washington, DC, Andrew F. Walch, U.S. Dept. of Justice, Environment and Natural Resources Division, Denver, CO, Robert L. Klarquist, J. Carol Williams, U.S. Dept. of Justice, Environment and Natural Resources Division, Appellate Section, Washington, DC, for defendants-appellees-cross-appellants.
R. Craig Kneisel, Otis J. Goodwyn, William D. Little, Office of the Attorney General, Montgomery, AL, Louis Linton Morgan, Morgan & Williams, Ltd., Metairie, LA, for Alabama.
Conrad Armbrecht, T.A., Armbrecht, Jackson, DeMouy, Crowe, Holmes & Reeves, Mobile, AL, J. Berry St. John, Jr., Craig Wyman, Liskow & Lewis, New Orleans, LA, for Intervenors.
Appeals from the United States District Court for the Southern District of Alabama.
Before COX and BARKETT, Circuit Judges, and PROPST *, District Judge.
Both parties appeal different aspects of the summary disposition of this cause. The material facts are not in dispute. Under a lease agreement with the U.S. Department of the Interior ("DOI"), Mobil Oil Exploration and Production Southeast, Inc. presently leases a tract of submerged land on the outer continental shelf called Federal Offshore Lease Block 823. On this tract, Mobil has four wells producing natural gas from a reservoir that straddles the federal/Alabama border. Mobil pays royalties to the DOI on the natural gas it produces. Though the natural gas reservoir lies partially within Alabama, Mobil pays no royalties to Alabama.
Under federal law, the DOI and an adjoining coastal state may agree to share the royalties derived from reservoirs that straddle the federal/state boundary. Federal law also requires the DOI to give the state 27% of the royalties it receives from reservoirs near the state border as compensation for drainage from reservoirs lying partly within the state. 1 Alabama and the DOI negotiated in an effort to reach an agreement on the sharing of royalties from reservoirs along the federal/Alabama border. When they could not reach an agreement, Alabama sued the DOI seeking a declaration that, before the DOI may authorize Mobil to produce natural gas on Block 823 from the particular reservoir straddling the federal/Alabama boundary, federal law required the DOI first to enter into a formal cooperative development agreement with Alabama that addressed compensating Alabama for any drainage that may occur from that reservoir.
Alabama premises its claim upon section 5(j)(2) of the Outer Continental Shelf Lands Act ("OCSLA"), 43 U.S.C. § 1334(j)(2), which provides as follows:
(j) Cooperative development of common hydrocarbon-bearing areas
(2) Prevention of harmful effects
The Secretary shall prevent, through the cooperative development of an area, the harmful effects of unrestrained competitive production of hydrocarbons from a common hydrocarbon-bearing area underlying the Federal and State boundary.
43 U.S.C. § 1334(j)(2). 2
Coastal states own submerged lands adjoining their coasts extending seaward three miles. See Submerged Land Act of 1953, 43 U.S.C. § 1312; see also Roger J. Marzulla, Federalism Implications and OCSLA Section 8(g), 2 Nat. Resources & Env't 26, 26-27 (1986). The Secretary of the DOI has the authority to issue oil, gas and other mineral leases for the submerged lands of the outer continental shelf, which Congress has defined as beginning where the states' jurisdiction ends, i.e., more than three miles from the coast. See OCSLA, 43 U.S.C. § 1331 et seq.
Though the Submerged Land Act of 1953 and the OCSLA establish jurisdictional boundaries, they do not address the issue of oil and gas drainage. Because oil and gas reserves can straddle the jurisdictional boundary, it is possible for the lessee of one government to drain the reserves located under the other government's territory. Under the common law "rule of capture," the owner of land has the right to capture all oil and gas underlying his land including oil and gas that migrates there from beneath another's land. See 8 Howard R. Williams & Charles J. Meyers, Oil and Gas Law 983 (1995); State of Louisiana v. United States, 832 F.2d 935, 938 (5th Cir.1987). In this regard, the law governing oil and gas has been described as being more like that governing wildlife than the law governing solid minerals. See Dean Lueck, The Rule of First Possession and the Design of the Law, 38 J.L. & Econ. 393, 403 (1995).
The problem with the rule of capture is that it encourages a tract owner to build wells near his border so as to drain not only the reserves underlying his own tract, but also the reserves underlying a neighboring tract. Id. The neighboring tract owner, in order to protect his mineral rights, must then build offsetting wells--most advantageously right across the border from his neighbors' wells--and start production or risk losing his reserves. Each tract owner then has an incentive virtually to race to drain the reservoir as quickly as possible to capture as much oil or gas as he can. The result is (1) economic waste in drilling unnecessary wells; (2) a corresponding heightened risk of damage to the environment; and (3) physical waste of the oil or gas itself because the faster production occurs, the lower the long-term recovery will be from the reservoir. Because of its negative effects, nearly every state has abrogated the rule of capture legislatively with well-spacing rules, production regulations, and/or other conservation mechanisms. See id.
But the rule of capture still governs the outer continental shelf. See State of Louisiana v. United States, 832 F.2d 935, 938 (5th Cir.1987). Within the outer continental shelf, it is not as important to abrogate the rule of capture because reservoirs do not straddle different tracts of land as they would within a state: the DOI controls the entire area; it has authority to create lease tracts that correspond to reservoirs; and it has authority to require lessees to combine drilling and production efforts. But all the problems of unrestrained application of the rule of capture are present along the federal/state boundary where about 150 known reservoirs, including the one at issue in this suit, lie partly under federal control and partly under state control.
Congress passed section 5(j) as part of the Oil Pollution Act of 1990. 3 See generally J.B. Ruhl & Michael J. Jewell, Oil Pollution Act of 1990: Opening a New Era in Federal and Texas Regulation of Oil Spill Prevention Containment and Cleanup Liability, 32 S.Tex.L.Rev. 475 (1991). Section 5(j) was the latest Congressional pronouncement in a long-standing dispute between states and the federal government over offshore oil and gas reserves. See State of Louisiana, 832 F.2d at 941; State of Texas v. Secretary of Interior, 580 F.Supp. 1197, 1203 (E.D.Tex.1984); see also Roger J. Marzulla, Federalism Implications and OCSLA Section 8(g), 2 Nat. Resources & Env't 26 (1986); Edward A. Fitzgerald, The Seaweed Rebellion: The Battle Over Section 8(g) Revenues, 8 J.Energy L. & Pol'y 253 (1988).
In its complaint, the State of Alabama alleged that it was unlawful, pursuant to section 5(j) of the OCSLA, 43 U.S.C. § 1334(j), 4 for the DOI to authorize Mobil to produce natural gas by wells located on Block 823 from the reservoir straddling the federal/Alabama boundary without first entering a formal cooperative development agreement with Alabama. Alabama argued that Mobil would drain natural gas from the part of the reservoir within Alabama and that Alabama would lose the royalties corresponding to that drained natural gas. 5 However, Alabama did not request that production be halted until a cooperative development agreement was entered. Instead, Alabama requested an order requiring the DOI to place into an escrow account all royalties the federal government received from Mobil's natural gas production from Block 823 until the DOI and Alabama entered a cooperative development agreement addressing the drainage issue.
The DOI moved for summary judgment arguing that section 5(j) did not require the DOI to reach a formal cooperative development agreement with Alabama before the DOI could authorize the production of natural gas and that, even if section 5(j) required a formal cooperative development agreement, it did not require such an agreement to address drainage compensation. The DOI argued that section 5(j) merely requires the DOI to make a good faith effort to reach an agreement with Alabama, and that it had done so by providing Alabama with all relevant information, considering Alabama's comments and concerns, and attempting in good faith to negotiate an agreement. The DOI further asserted that, because no harmful effects are present in the reservoir at issue, i.e., because Alabama has not drilled wells necessary only to protect itself from drainage, there are as yet no harmful effects.
The district court found that the DOI's interpretation of section 5(j) was inconsistent with the language of section 5(j) and held that it was unlawful under section 5(j) for the DOI to authorize Mobil to begin natural gas...
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