Offshore Legal Limbo

Jane Van Ryan
Posted July 24, 2009

Put yourself in this situation. You decide to build your Dream Home. You buy the perfect lot, hire a general contractor and receive your first shipment of lumber. Then, just as the cement truck is preparing to pour the foundation, you learn that there's been a legal glitch--you might not own the lot after all. What would you do? You've already spent a sizable amount of money, and you don't know whether you'll ever be able to build your house.

Several oil and natural gas companies have found themselves in similar situations. In recent months, they've attended lease sales held by the federal government, submitted sealed bids to lease certain parcels of land in the Gulf of Mexico, and the companies that won leases gave the government billions of dollars to start exploring for oil and natural gas. Then, the U.S. Court of Appeals for the District of Columbia Circuit vacated and remanded the government's leasing plan for 2007-2010, saying the Interior Department failed to "properly consider" the environmental sensitivity and marine productivity of the areas included in the plan.

The court's ruling was quite a blow for companies that purchased leases and paid their money, only to find themselves in legal limbo. As an API court filing explains, these leases were purchased for more than $9.9 billion. Already, 47 wells have been drilled at a cost of more than $3 billion, resulting in 14 commercially viable discoveries with four wells already in production.

API has petitioned for rehearing, asking the court to change its ruling from "vacate and remand" to simply "remand" the leasing plan, and to get confirmation from the court that the ruling does not affect existing leases. Now several weeks later, the court has not replied to API's motion, but another lease sale is scheduled for August 19.

This week, API filed a notice with the court because API members and other companies need to "make their individual, multi-million-dollar decisions whether and in what manner to participate in the sale." According to the Minerals Management Service, the August sale will offer blocks in the Gulf of Mexico that could produce 242-423 million barrels of oil and 1.64-2.64 trillion cubic feet of natural gas. These leases not only offer investment opportunities for the companies, but also they could help America's energy security, generate revenues for states, local and the federal government, and create jobs.

Let's hope that the court acts swiftly to clarify its ruling to avoid possible disruptions in the production of U.S. oil and natural gas.

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Update on July 29, 2009: The D.C. Circuit Court has stayed its earlier order vacating the 2007-2012 leasing program pending the Interior Department's completion of an environmental sensitivity analysis. At this time, past and future lease sales in the Gulf of Mexico are deemed "safe" and activities can continue as originally planned. However, a recent lease sale held in Alaska is on hold.