Alabama v. United States Department of the Interior

United States Court of Appeals,
Eleventh Circuit.
No. 94-6657.
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.
June 5, 1996.
Appeals from the United States District Court for the Southern
District of Alabama. (No. CV 91-0850 BH, William Brevard Hand,
Judge.
Before COX and BARKETT, Circuit Judges, and PROPST*, District
Judge.
BARKETT, Circuit 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
*
Honorable Robert B. Propst, U.S. District Judge for the
Northern District of Alabama, sitting by designation.
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
1
See Section 8(g) of the OCSLA, 43 U.S.C. § 1337(g),
discussed infra.
hydrocarbon-bearing area underlying the Federal and State
boundary.
43 U.S.C. § 1334(j)(2).2
I. Background
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
2
This is a case of first impression concerning the
interpretation of section 5(j) of the OCSLA. Statutory
interpretation presents a question of law that we review de novo.
Lohr v. Medtronics, Inc., 56 F.3d 1335, 1341 (11th Cir.1995). We
also review an administrative agency's statutory interpretation
de novo, but defer to an agency's interpretation if it is
reasonable. Id.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
3
of 1990. See generally J.B. Ruhl & Michael J. Jewell, "Oil
3
In full, section 5(j) provides:
(j) Cooperative development of common
hydrocarbon-bearing areas
(1) Findings.—
(A) The Congress of the United States finds that the
unrestrained competitive production of hydrocarbons
from a common hydrocarbon-bearing geological area
underlying the Federal and State boundary may result in
a number of harmful national effects, including—
(i) the drilling of unnecessary wells, the installation
of unnecessary facilities and other imprudent operating
practices that result in economic waste, environmental
damage, and damage to life and property;
(ii) the physical waste of hydrocarbons and an
unnecessary reduction in the amounts of hydrocarbons
that can be produced from certain hydrocarbon-bearing
areas; and
(iii) the loss of correlative rights which can result
in the reduced value of national hydrocarbon resources
and disorders in the leasing of Federal and State
resources.
(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.
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 v. United States, 832 F.2d 935,
941 (5th Cir.1987); State of Texas v. Secretary of Interior, 580
F.Supp. 1197, 1122 (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).
II. Procedural Background
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
4
See 43 U.S.C. § 1349 (providing for citizen suits for "any
person having a valid legal interest which is or may be adversely
affected ... to compel compliance with [the OCSLA] ); the
Administrative Procedure Act, 5 U.S.C. § 706.
5
Alabama charges a royalty rate of 25%, while the federal
government charges only 162/3%.
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 production without first
entering into a cooperative development agreement with Alabama.
The court then ordered the DOI and Alabama to reach a cooperative
development agreement and required the DOI to place all royalties
paid by Mobil to the DOI for natural gas production from Block 823
into the court registry until an agreement was reached.6
Notwithstanding its decision to "hold" the royalties pending
agreement, the district court disagreed with Alabama's assertion
that section 5(j) required the DOI to address drainage compensation
through the division of royalties. The court held, instead, that
another provision of the OCSLA, Section 8(g) of the OCSLA, 43
U.S.C. § 1337(g), discussed infra, exclusively governed these
issues.
Although we agree with the district court that section 5(j)
does not affect the drainage compensation provisions found
elsewhere in the OCSLA, we reverse the district court's
determination that federal law requires the DOI to enter a formal
cooperative development agreement before authorizing production.
III. Whether section 5(j) required the DOI to address drainage
compensation through the division of royalties.
Alabama asserts that the district court erred in holding that
compensation for drainage and division of royalties is governed
exclusively by section 8(g) of the OCSLA, 43 U.S.C. § 1337(g), and,
by implication, that such compensation need not be addressed in
cooperative development under section 5(j). Alabama asserts that
the cooperative development mandated by section 5(j) by definition
addresses compensation for drainage, and that an agreement on the
division of royalties is a tool the DOI should have available to it
to negotiate a cooperative development agreement with Alabama. We
find that Alabama reads too much into section 5(j) and that section
5(j) neither adds nor takes anything away from provisions contained
6
Presently over $24 million is being held by the district
court.
in section 8(g)(2) that govern drainage compensation through the
division of royalties.
Prior to Congress's passage of section 5(j), section 8(g)(2)
already directly addressed the issue of drainage compensation. It
provided that the DOI must give the adjoining coastal state 27% of
the royalties it receives from any federal lease in an area
designated the "8(g) zone." This zone is the band of the outer
continental shelf situated between three and six miles offshore;
the state is to receive its 27% share of the royalties regardless
of whether the federal lessee is draining oil or gas from state
territory or not. Section 8(g)(2) provides that
the Secretary shall transmit to [the adjoining] coastal State
27 percent of [the] revenues [derived from any lease of any
Federal tract which lies within three nautical miles of the
seaward boundary of any coastal State], together with all
accrued interest thereon. The remaining balance of such
revenues shall be transmitted simultaneously to the
miscellaneous receipts account of the Treasury of the United
States.
Section 8(g)(2) of the OCSLA, 43 U.S.C. § 1337(g)(2).
Section 8(g)(2) replaced an earlier provision that established
a scheme whereby revenues obtained from a federal lease operating
in the 8(g) zone would be shared in a "fair and equitable manner"
by the federal government and the coastal state if a determination
was made that a common field of oil or gas underlay federal and
state territory so as to create a threat of drainage by the federal
lessee. See 43 U.S.C. § 1337(g) (repealed 1986); see also State
of Louisiana v. United States, 832 F.2d 935, 941-42 (5th Cir.1987).
The earlier provision required an exchange of information between
the governor and secretary, then negotiations, and then, if no
agreement could be reached, determination by a district court of a
"fair and equitable disposition of the revenues." See 43 U.S.C. §
1337(g) (repealed 1986).
The district court that heard the first such case found this
original scheme to be unworkable and, in its order, urged Congress
to change the law. See State of Texas v. Secretary of Interior,
580 F.Supp. 1197, 1122 (E.D.Tex.1984). But see Fitzgerald, The
Seaweed Rebellion, at 275-77 (arguing that the scheme would have
been workable had the district court not misinterpreted key phrases
in the statute). Congress responded by replacing section 8(g)(2)
with the 27% compromise language presently found in section
8(g)(2). Congress made this change to section 8(g)(2) with the
intent of permanently settling disputes over drainage compensation
on the outer continental shelf. See State of Louisiana v. United
States, 832 F.2d 935, 941-42 (5th Cir.1987) (quoting legislative
history of the amendments to section 8(g) and concluding that
section 8(g)(2) represented a compromise between state and federal
interests).
In addition to the 27% state share of royalties provided for
by section 8(g)(2), when Congress passed section 5(j), section
8(g)(3)7 already provided that the secretary or the governor of a
7
Section 8(g)(3) provides that
[w]henever the Secretary or the Governor of a coastal
State determines that a common potentially
hydrocarbon-bearing area may underlie the Federal and
State boundary, the Secretary or the Governor shall
notify the other party in writing of his determination
and the Secretary shall provide to the Governor notice
of the current and projected status of the tract or
tracts containing the common potentially
hydrocarbon-bearing area. If the Secretary has leased
or intends to lease such tract or tracts, the Secretary
and the Governor of the coastal State may enter into an
coastal state must notify the other if either determines that a
reservoir may straddle the federal/state boundary, and that the
secretary must provide the governor with notice of current and
projected development in the area. Additionally, section 8(g)(3)
provided that, if the secretary had leased an area, the secretary
and the governor "may" enter into "a unitization or other royalty
sharing agreement" to combine tracts and share the revenues from
production. But if no agreement was reached, the secretary had the
authority to proceed with the leasing of the area alone and give
the state 27% of the revenue pursuant to subsection (g)(2).
In reading sections 8(g)(2) and 8(g)(3), it is reasonable to
assume that Congress intended section 8(g)(2) to strike a
compromise between coastal states and the federal government to
resolve the drainage compensation issue by giving states 27% of the
royalties derived from production in the 8(g) zone. Somewhat apart
from the issue of drainage compensation, Congress intended section
8(g)(3) to provide the DOI with tools necessary to ensure good
conservation practices on and efficient development of reservoirs
straddling the border, such as the authority to negotiate and agree
with states to combine lease tracts and divide the royalties by way
of unitization or to agree to other royalty sharing agreements with
agreement to divide the revenues from production of any
common potentially hydrocarbon-bearing area, by
unitization or other royalty sharing agreement,
pursuant to existing law. If the Secretary and the
Governor do not enter into an agreement, the Secretary
may nevertheless proceed with the leasing of the tract
or tracts. Any revenues received by the United States
under such an agreement shall be subject to the
requirements of paragraph (2).
Section 8(g)(3) of the OCSLA, 43 U.S.C. § 1337(g)(3).
states. Such other royalty sharing agreements under section
8(g)(3) might include reciprocal agreements to share with a state
royalties the federal government has realized from federal
production from a reservoir straddling the border in exchange for
the state sharing with the federal government royalties the state
has realized on a different reservoir straddling the border.
In light of sections 8(g)(2) and 8(g)(3), we find section 5(j)
to be more akin to section 8(g)(3), than to section 8(g)(2) as
Alabama asserts. We find unpersuasive Alabama's argument that, in
enacting section 5(j), Congress intended to indirectly rekindle the
drainage compensation issue it had four years earlier permanently
settled by amending section 8(g)(2)—particularly where, as here,
Congress did not explicitly mention drainage compensation in the
text of section 5(j), but merely referred to cooperative
development. Given the long dispute both in Congress and the
courts between coastal states and the DOI over drainage
compensation along the federal/state boundary, one would expect
substantial legislative history and debate over section 5(j) had
Congress intended to address this issue. Yet there are no
committee reports, virtually no record of floor debates and little
other legislative history regarding section 5(j). Accordingly, we
hold that Congress did not intend to address drainage compensation
in section 5(j).
We find further support for our holding by comparing the
version of section 5(j) that Congress passed with the version that
was first introduced. As originally offered in the Senate, section
5(j) required the Secretary to "prevent the harmful effects of
unrestrained competitive production of hydrocarbons from a common
hydrocarbon-bearing area underlying the Federal and State boundary
by protecting against drainage through the cooperative development
of such area." See 135 Cong.Rec. S8488-03, S8500-S8501 (1990)
(emphasis added). Section 5(j) further provided both the federal
government and the affected coastal state with the authority to
seek an injunction in district court "in order to prevent the
drainage of federal oil and gas resources " until the parties could
agree on a "fair and equitable apportionment of the oil and gas
resources involved," or until the district court entered final
judgment in favor of one party or the other. Id.Comparing the version of section 5(j) originally offered with
that eventually passed, it is apparent that the breadth of section
5(j) was drastically reduced over the course of legislative debate
and negotiation. At passage, gone was any mention of drainage and
all of the language that would have provided for the "fair and
equitable apportionment of oil and gas resources" and injunctive
relief. Although section 5(j) may have been introduced with the
intent of addressing the drainage compensation issue, it is
significant that all the language related to drainage compensation
had been eliminated by section 5(j)'s passage. It is reasonable to
assume that Congress would not have deleted this language had it
intended section 5(j) to address this issue. Cf. Russello v.
United States, 464 U.S. 16, 23-24, 104 S.Ct. 296, 300-01, 78
L.Ed.2d 17 (1983) ("Where Congress includes limiting language in an
earlier version of a bill but deletes it prior to enactment, it may
be presumed that the limitation was not intended."); see also
Southern Pacific Transportation Company v. Usery, 539 F.2d 386, 391
(5th Cir.1976).
Alabama's interpretation of section 5(j) asks us to read back
into section 5(j) provisions pertaining to drainage compensation
that Congress—for whatever reason—specifically eliminated prior to
passage. In light of the specific provisions addressing drainage
compensation in section 8(g)(2) that remained in effect following
the passage of section 5(j), we cannot accept Alabama's argument
that we should construe section 5(j)'s broad "cooperative
development" language as indirectly abrogating the 27% compromise
struck in section 8(g)(2). For all of the foregoing reasons, we
agree with the district court that drainage compensation is
governed by section 8(g)(2), and is not altered by section 5(j).
IV. Whether Section 5(j) requires a formal agreement in other
respects.
We turn now to the DOI's arguments that section 5(j)(2) does
not require it to enter into a formal cooperative development
agreement with Alabama. Section 5(j)(2) provides that
[t]he 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) (emphasis added). We find that reading the
plain language of section 5(j), it is clear that the word "prevent"
means prevent before something occurs, particularly in the context
of the cooperative development envisioned under this section.
Moreover, we cannot agree with the DOI's interpretation that the
word "prevent" can be reasonably read to apply to something after
it has occurred. The DOI concedes that it interprets "cooperative
development" under section 5(j) as requiring it to (1) provide the
adjoining state with all relevant information, (2) consider the
state's comments and concerns, and (3) attempt in good faith to
negotiate an agreement. It would make little sense to undertake
such activities only after a finding is made that the state is
likely to build offsetting wells. The "cooperative development"
Congress mandated in section 5(j) itself would help to identify
when the drilling of such wells is likely to occur. Put another
way, the harmful effects Congress directed the DOI to prevent in
section 5(j), i.e., the drilling of wells necessary only to prevent
drainage and other measures that do not comport with conservation
practices and that are connected with two sovereigns developing and
producing natural gas from the same reservoir without cooperating
with each other, are likely to occur whenever it is discovered that
there is a reservoir straddling the federal/state boundary. The
DOI may not wait until the state has already built an offsetting
well or is about to begin building an offsetting well to engage in
cooperative development. Therefore, "prevent" as the term is used
in section 5(j) must be read in the context of long-term
prevention.
The definition of "development" in the OCSLA provides further
support for our reading. Development refers to activity after
discovery of reserves, but before production of oil or gas,
including drilling, construction of platforms, and operation of
onshore support facilities. See 43 U.S.C. § 1331(l ). For these
reasons, we hold that the DOI's interpretation of section 5(j) as
requiring a showing that harmful effects have occurred or are
likely to occur before the DOI is under an obligation to undertake
cooperative development is inconsistent with the language of
section 5(j).
The DOI next argues that "cooperative development" under
section 5(j)(2) does not require a formal agreement. We need not
address the issue of whether the term "cooperative development"
implies that an agreement must be reached, because, assuming
arguendo that it does, we nevertheless find that section 5(j)(2)'s
cooperative development language "is not susceptible to a literal
reading because it is simply not possible to order two parties to
enter into an agreement if they do not agree." See Ponca Tribe of
Oklahoma v. State of Oklahoma, 37 F.3d 1422, 1435 (10th Cir.1994)
(holding that language in the Indian Gaming Regulatory Act
("IGRA"), 25 U.S.C. § 2701, et seq., requiring a court to order a
state and an Indian tribe to agree to a compact within 60 days is
not subject to a literal reading); see also Seminole Tribe of
Florida v. State of Florida, 11 F.3d 1016, 1020 (11th Cir.1994).
Thus, although Congress could impose rules governing drainage
compensation as it did in section 8(g)(2), see section 8(g) of the
OCSLA, 43 U.S.C. § 1337(g) (requiring the DOI to transfer 27% of
the royalties derived from production by federal lessees from
reservoirs on the outer continental shelf within three miles of the
state boundary to states), or could require that royalties obtained
from a federal lease be shared in a "fair and equitable manner" by
the federal government and the coastal state as determined by a
district court, see 43 U.S.C. § 1337(g)(2) (repealed 1986); see
also State of Louisiana v. United States, 832 F.2d 935, 939 (5th
Cir.1987); Edward A. Fitzgerald, The Seaweed Rebellion: The
Battle Over Section 8(g) Revenues, 8 J.Energy L. & Pol'y 253
(1988), Congress lacks the power to force the DOI and a state to
agree to a cooperative development agreement. See Ponca Tribe, 37
F.3d at 1435. It does have the power to require the DOI to attempt
to reach an agreement in good faith. However, we are left with the
question of what happens if the DOI and the affected state fail to
reach a cooperative development agreement. Cf. Section 11(d)(7)(B)
of the IGRA, 25 U.S.C. § 2710(d)(7)(B) (requiring a state and tribe
to agree to a compact, but providing that, if they fail to agree to
a compact, then the state and tribe must submit to a mediator and
then, if an agreement still cannot be reached, the Secretary of the
DOI decides the dispute).
Although section 5(j) as it was originally introduced
authorized both the state and the federal government to file suit
in district court and seek an injunction "or other appropriate
remedy" when the parties failed to reach a cooperative development
agreement, these provisions had been deleted by section 5(j)'s
passage. See 135 Cong.Rec. S8488-03, S8500-S8501 (1990). Thus,
when Congress deleted these provisions, it left a gap in section
5(j) regarding what happens if the parties cannot reach an
agreement. In this case, the DOI informally filled this gap by
proceeding unilaterally.
We agree with the DOI's action—that it may proceed
unilaterally—provided the DOI first has negotiated in good faith to
reach a cooperative development agreement with the affected coastal
state. In this regard, we find section 5(j)(2) to be closely akin
to section 8(g)(3), which gives the DOI the authority to enter into
"unitization or other royalty sharing agreement[s]" with states
regarding reservoirs straddling the federal/state border. We read
section 5(j)(2) as going one step further to require the DOI to
negotiate in good faith with states to enter into one or more
royalty sharing agreements regarding reservoirs straddling the
federal/state border with the goal of promoting good conservation
practices.
Were we to hold, as the district court did, that the DOI may
not unilaterally authorize production without first reaching a
cooperative development agreement with Alabama under section 5(j),
we would be interpreting section 5(j) as requiring the DOI to
negotiate until an agreement is reached, thereby allowing Alabama
to refuse to agree until its demands are met. Such an
interpretation would hardly place the parties on an equal footing
for negotiating an agreement because the consequence of the DOI and
Alabama failing to reach an agreement would be to delay federal
production until an agreement was reached, but there would be no
corresponding consequence for Alabama. State production would not
be affected by such an interpretation of section 5(j). Section
5(j) only requires the DOI to reach a cooperative development
agreement with states; it does not require the states to enter a
cooperative development agreement with the DOI. Therefore, Alabama
could always threaten to leave the negotiating table unless its
demands are met, while the DOI would have to stay until an
agreement is reached because, under the district court's
interpretation, the DOI could only lawfully authorize production
under section 5(j) after it has entered a cooperative development
agreement. This consequence would give Alabama effective veto
power over the DOI's lawful authorization of natural gas and oil
production; in other words, Alabama could hold the production of
natural gas from federal territory "hostage" until the DOI had
agreed to Alabama's terms. We find that Congress could not have
intended section 5(j) to give coastal states such veto power over
federal territory when the DOI and a state are unable to reach a
cooperative development agreement.
Nonetheless, in negotiating to reach agreement, neither the
DOI nor the state may rely on patently unreasonable conditions.
States may legitimately assert noncompliance with section 5(j) by
alleging that the DOI failed to negotiate in good faith. Likewise,
the DOI can defend such an allegation or its unilateral
authorization of production, by asserting that the state
conditioned formal agreement on unreasonable demands.
Difficult cases may arise in which the parties, despite good
faith negotiations by both sides, simply cannot reach an agreement.
In such cases—when it cannot be said that either side is being
unreasonable—in the absence of Congressional direction, we conclude
that the DOI may proceed alone to authorize production on its lease
tracts without violating section 5(j).
In this case, the DOI proposed a royalty sharing agreement
that would share with Alabama the royalties it received from
Mobil's production on federal Block 823 in exchange for Alabama
sharing with the federal government the royalties derived from
Alabama Lease Block 132 in the Fairways area, which is a second
natural gas reservoir straddling the federal/Alabama border located
near the reservoir underlying Block 823. Federal Block 823 and
Alabama Lease Block 132 thus each drew natural gas from two
separate reservoirs straddling the federal/Alabama border. On
Block 823, Mobil had the potential to drain natural gas from
Alabama, while on Block 132, Alabama's lessee had the potential to
drain natural gas from federal territory. Neither party had
lessees drilling offset wells to prevent drainage.
The DOI's proposal would have compensated Alabama for any
drainage occurring from wells on Block 823 and correspondingly
would have compensated the federal government for any drainage
occurring from wells on Block 132 without the need for either
sovereign to build offset wells to protect itself from drainage.
Alabama rejected this proposal, insisting on negotiating for a
share of the royalties from Mobil's production on federal Block
823, while refusing to broaden the negotiations to include sharing
of royalties from Alabama Block 132. Alabama's actions call into
question its interest in promoting conservation and preventing
harmful effects through section 5(j), as opposed to seeking
financial gain. While we note that the DOI's responsibility to
prevent harmful effects is a continuing one, we do not find, under
the circumstances as they have developed to this point in this
case, that the DOI has failed to negotiate in good faith.
For the foregoing reasons, we AFFIRM the district court's
holding that section 5(j) does not affect the drainage compensation
provisions found in section 8(g)(2) and we REVERSE the district
court's holding that section 5(j) requires the DOI to enter a
formal cooperative development agreement before authorizing natural
gas production from federal territory.
AFFIRMED in part, REVERSED in part and REMANDED for further
disposition consistent with this opinion.