Woods Petroleum Corp. v. U.S. Dept. of Interior, 92-6053

• Decision Date: 07 March 1994
• Docket Number: No. 92-6053,92-6053
• Parties: WOODS PETROLEUM CORPORATION, Ratex Resources Incorporated, Midcon Central Exploration Company, Mustang Production Company, Plaintiffs-Appellants, v. UNITED STATES DEPARTMENT OF the INTERIOR; Bureau of Indian Affairs; Timothy Nibs; Wisdom A. Nibs, Jr.; Reginald R. Nibs; Ronald Leroy Nibs; Elaine Shirley Nibs Mayes; D'Ann Nibs; Lowell Nibs; Theodore Raymond Nibs; Wisdom Nibs, Sr.; Brenda Tonips Nibs; Michael Nibs; Leroy Stoneroad; Vitro Stoneroad; Solomon Stoneroad; Eleanor Joy Stoneroad; Joe Hicks, Anna B. Twins Spottedwolf; Patrick B. Spottedwolf; Lucian M. Twins; Joyce M. Twins; Minita Twins Runningwater; Wesley Robert Twins; Lucinda Amelia Sweetwater; Mariam Mann Twins; Wesley Robert Twins; McClain H. Twins, Jr.; Marion M. Twins, Michael Wayne Twins; Tomlinson Properties, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 854

18 F.3d 854

WOODS PETROLEUM CORPORATION, Ratex Resources Incorporated Midcon Central Exploration Company, Mustang Production Company, Plaintiffs-Appellants, v. UNITED STATES DEPARTMENT OF the INTERIOR; Bureau of Indian Affairs; Timothy Nibs; Wisdom A. Nibs, Jr.; Reginald R Nibs; Ronald Leroy Nibs; Elaine Shirley Nibs Mayes; D'Ann Nibs; Lowell Nibs; Theodore Raymond Nibs; Wisdom Nibs Sr.; Brenda Tonips Nibs; Michael Nibs; Leroy Stoneroad Vitro Stoneroad; Solomon Stoneroad; Eleanor Joy Stoneroad; Joe Hicks, Anna B. Twins Spottedwolf; Patrick B. Spottedwolf; Lucian M. Twins; Joyce M. Twins; Minita Twins Runningwater; Wesley Robert Twins; Lucinda Amelia Sweetwater; Mariam Mann Twins; Wesley Robert Twins; McClain H. Twins, Jr.; Marion M. Twins, Michael Wayne Twins; Tomlinson Properties, Inc., Defendants-Appellees.

No. 92-6053.

United States Court of Appeals, Tenth Circuit.

March 7, 1994.

Donald L. Kahl (Orval E. Jones, with him on the brief), Hall Estill, Hardwick, Gable, Golden & Nelson, P.C., Tulsa, OK, for plaintiffs-appellants.

Dirk D. Snel (Roger Clegg, Acting Asst. Atty. Gen., Gerald S. Fish and David C. Shilton, U.S. Dept. of Justice, Washington, DC and Timothy D. Leonard, U.S. Atty., and M. Kent Anderson, Asst. U.S. Atty., Oklahoma City, OK, with him on the brief), U.S. Dept. of Justice, Washington, DC, for defendants-appellees U.S. Dept. of the Interior and Bureau of Indian Affairs.

Steven L. Barghols (Jay C. Jimerson, with him on the brief), Mock, Schwabe, Waldo, Elder, Reeves & Bryant, Oklahoma City, OK, for defendant-appellee Tomlinson Properties, Inc.

Amos E. Black, III, Anadarko, OK, for defendants-appellees Anna Twins Spottedwolf, Eleanor Stoneroad, Victor Stoneroad, and Leroy Stoneroad.

Before EBEL and McWILLIAMS, Circuit Judges, and OWEN, District Judge. ^*

OWEN, District Judge.

On this appeal, we are again called upon to address and resolve the tensions arising from the confluence of a number of legitimate interests: 1) the right of a state to establish drilling units to control the development of its oil resources; 2) the duty of the United States Department of the Interior to protect and maximize the return to Indians from their allotted lands; 3) the contractual rights of oil-producing companies such as plaintiffs, which commit millions of dollars in drilling costs in reliance on provisions in leases executed with both Indian and non-Indian landowners with full knowledge of the Department of the Interior, and 4) the expectations of all lessees of a state-mandated drilling unit to receive approval from the Secretary of the Interior as to Indian leases of a duly-executed communitization agreement allocating proportional revenues from oil production to each tract in the drilling unit regardless of whether or not a producing well is drilled on a particular tract within the unit or not.

Woods Petroleum Corporation and other oil companies (hereafter variously "plaintiffs" and/or "appellants") commenced this action on July 28, 1986 challenging the validity of an administrative order issued by the Assistant Secretary for Indian Affairs in the Department of the Interior (the "Secretary"). The Secretary's order had rejected an agreement to communitize Indian and non-Indian mineral interests for oil and gas drilling and production in a concededly-proper Oklahoma 640-acre drilling and spacing unit. The Woods plaintiffs sought a judgment vacating the Secretary's administrative order and a decree quieting their title in Indian leases that had ostensibly expired for lack of development. Jurisdiction of the District Court was based on 28 U.S.C. Secs. 1331 and 1361. Appellate jurisdiction is conferred by 28 U.S.C. Sec. 1291.

The history of this proceeding is as follows. In 1977, the Concho Agency Superintendent ("Superintendent") of the Bureau of Indian Affairs ("BIA") approved three oil and gas leases from Indian lessors to lessee National Cooperative Refinery Association, covering certain restricted Indian allotments (the Indian leases) totalling 117.5 net mineral acres in Custer County, Oklahoma. Plaintiffs, by assignment, succeeded to National's interest in the said tracts, which are located in Section 17, Township 12 North, Range 17 West, Custer County. On May 18, 1979, the Oklahoma Corporation Commission ¹ (the "Commission") established the 640-acre section constituting Section 17 as a state-ordered drilling and spacing unit.

The said 1977 Indian leases to plaintiffs' assignor granted an exclusive right, for a primary term of five years, to drill for, extract and dispose of all oil and gas underlying the leased tracts. Assuming drilling commenced within the primary term, these leases also granted an exclusive right to a second term continuing for "as much longer thereafter as oil and/or gas is produced in paying quantities" from a well so drilled. The leases also contained a unit operations clause providing that the parties shall abide by "any agreement for the cooperative or unit development of the ... area, affecting the leased lands, ... if and when collectively adopted by a majority operating interest therein and approved by the Secretary of the Interior...."

On December 1, 1981, plaintiff Woods Petroleum executed and circulated among all the working interest owners in Section 17 an agreement voluntarily pooling the Indian interests with the non-Indian interests in the 640-acre communitized area, to become effective as of January 2, 1982. All working interest owners in the unit area executed the agreement. Under a communitization agreement, "drilling operations conducted anywhere within the unit area are deemed to occur on each lease within the communitized area and production anywhere within the unit is considered to be produced from each tract within the unit." Cheyenne-Arapaho Tribes of Oklahoma v. United States, 966 F.2d 583, 585 (10th Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 1642, 123 L.Ed.2d 265 (1993), citing Kenai Oil & Gas, Inc. v. Department of Interior, 671 F.2d 383 (10th Cir.1982).

On January 5, 1982, nearly two months prior to the end of the primary term of any Indian lease within the unit, Woods commenced drilling a unit well on a non-Indian tract within the unit. On February 17, 1982, also before the primary terms of the 1977 leases were due to expire, plaintiffs submitted to the Department of the Interior (the "Department") a fully-executed communitization agreement for approval in order to communitize all interests within the unit. The Communitization Agreement was approved by the Anadarko Area Director ("Area Director") on April 12, 1982. ²

On September 6, 1983, the Indian defendants administratively appealed the Area Director's approval of the agreement, arguing that the approval of the Agreement was a breach of the BIA's trust responsibility because the power of the Area Director to approve the agreement expired at the end of the primary lease term. In December, 1985, the Secretary instructed the BIA to prepare a "best interest assessment" in accordance with this Court's decision in Kenai, supra. The BIA found that, under the market and economic conditions of that time, separate development of the Indian interests might not be feasible, and that the prospect of the Indians receiving future royalties from production was not guaranteed.

The Secretary neither considered nor addressed the BIA's concerns in the study he had instituted. He also failed to determine that any part of the Communitization Agreement was economically unsatisfactory or contrary to the contractual expectations of the parties to the 1977 leases. However, the Secretary reversed the Area Director's approval of the Communitization agreement, holding that it would be in the best interest of the Indian defendants to receive both a new lease bonus and a royalty.

In so holding, the Secretary did not address Woods' contention that excluding the Indian interests from the communitized area should also then preclude them from sharing in any unit revenue. Rather, he attempted to justify his order by observing that there was a potential lessee in the wings which would pay $400,000 to acquire the Indian mineral interest if the 1977 leases were not communitized, and thereby expired.

Consequently, on May 15, 1986, the Secretary issued an order declaring that the Indian leases had expired and ordering the issuance of new leases. The Area Director accordingly approved the new lease between the Indian lessors and the new lessee, Tomlinson Properties, Inc. ("Tomlinson"), with an additional $400,000 in lease bonuses. Under the approval, the Indian interests were reinserted into the unit the Secretary had earlier rejected, and were to share unit revenues retroactive to the time of first unit production four years earlier. Tomlinson, it should be noted, has never attempted to obtain permission to separately develop the Indian leases by drilling a well on any tract having an Indian interest.

Plaintiffs' complaint in the District Court alleged three claims for relief: that the administrative order rejecting the Communitization Agreement was arbitrary and capricious and an abuse of discretion and should therefore be vacated; that plaintiffs' interests under the 1977 leases should be declared superior to the new leases granted by the Indian defendants to Tomlinson; and that in the event the rejection of the Communitization Agreement should be upheld, plaintiffs should be entitled to a refund of all proceeds of unit production tendered and paid as unit royalties to the Indians under the 1977 leases.

On February 28, 1988, the District Court ruled that the administrative order rejecting the Communitization Agreement was valid, and that plaintiffs' 1977 leases had expired because the Indian tracts had been excluded from the drilling unit by the order of the Secretary. On September 29, 1988, the Court further ruled that the Indian defendants and Tomlinson were entitled to receive a share of unit...