Energy companies score massive refund checks

If forced to retract wilderness leases, the BLM could owe billions

  • Oil and gas companies have leased potential wilderness areas such as Desolation Canyon in northeastern Utah. Now they're preparing to drill.

    Ray Bloxham, SUWA

On Nov. 17, a federal judge ordered the U.S. government to pay $1.1 billion to buy back oil and gas leases off the coast of California, after energy companies claimed that changing environmental regulations prevented them from developing the leases (HCN, 6/23/03: Will offshore be off-limits?). The ruling is a major step forward in the effort to keep drill rigs away from the Pacific Coast. But it also raises questions about the ultimate costs of the Bureau of Land Management’s three-year-old efforts to lease potential wilderness areas for oil and gas drilling in the Rocky Mountain states.

In the California case, the companies argued that changes in federal and state law prevented them from drilling the leases and amounted to a breach of contract. U.S. Federal Claims Court Judge Eric Bruggink agreed, ordering the government to buy back 36 oil and gas leases from a dozen energy companies.

Some observers fiercely criticized the ruling: Peter Douglas, the executive director of the California Coastal Commission, blasted it as "a giveaway of public funds. Why do they get paid to comply with the law?" But the decision is not quite the bonanza it seems: The judge simply ruled that the government must refund the purchase price of the leases.

Regardless of whether leases are offshore or on, if a parcel has never been drilled, companies are limited in the costs they can claim. "Usually, the only thing you can get compensated for is things you can show receipts for," says Peter Aengst, The Wilderness Society’s energy campaign coordinator. That includes the original purchase price of a lease — but it also includes any environmental assessment work, and any road building or exploratory drilling.

In the California case, the companies are still seeking several hundred million dollars in compensation for exploratory drilling costs. If companies seek compensation for the potential mineral value of a lease — something they can’t show receipts for — payouts could be much, much larger. But they’re also harder to win.

"If you’ve already got your drill in the ground and it came up a dry hole, you’re out of luck," says Tom Sansonetti, a former assistant U.S. attorney general for environment and natural resources who now works at the Holland & Hart law firm. But, he adds, "If you’ve got a gusher, then you’ve got a pretty good claim that you should’ve been able to take that out of the ground."

The federal government may soon find itself sorting out such legal details in the Intermountain West. In April 2003, Interior Secretary Gale Norton settled a lawsuit brought by then-Utah Gov. Mike Leavitt, and stripped protection from millions of acres of federal land that had been identified by the BLM and citizens’ groups as eligible for wilderness designation (HCN, 1/19/04: Two decades of hard work, plowed under). Environmental groups, represented by the nonprofit public-interest law firm Earthjustice, have been seeking to overturn the settlement since it was signed. Meanwhile, the BLM has been steadily auctioning off potential wilderness areas for oil and gas drilling. So far, according to Earthjustice’s Sara Watterson, the agency has leased some 290,000 acres in Utah, Colorado, Wyoming and New Mexico.

Earthjustice attorney Jim Angell says that if the settlement is ruled illegal, it’s likely that "we would immediately sue on every single one" of the oil and gas leases sold after the settlement was signed, which could force the Bureau of Land Management to buy back those leases.

Even if the agreement holds up in court, a future administration could easily reverse it. The Bush administration had tried to prevent that with a consent decree from federal District Judge Dee Benson, who had initially approved the settlement. But Benson pulled his signature from the decree in August, saying future administrations should not be bound by the settlement. BLM will auction off another round of oil and gas leases in February, and a number of energy companies are preparing to drill wilderness leases in northeast Utah. Environmentalists say that if the wilderness settlement is ultimately knocked back — either by the courts or by a future administration — the feds will find themselves writing a few more massive refund checks. Says Angell, "They’re barging down a path they may have to retreat from."

The author is HCN’s associate editor.

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