“Drill Here, Drill Now”

“Drill here, drill now” has become a political hot topic as gas prices have been soaring. One argument against drilling: The oil companies are not even drilling with existing leases. A decision from a federal appeals court finds that the government reneged on off-shore leases off the California coast and kept the companies from exploring and tapping off-shore resources. The government has been ordered to pay more than $1.1 billion to the leaseholders.

The Federal Circuit Court of Appeals has just affirmed a $1.1 billion judgment against the federal government for reneging on off-shore oil and gas leases off the California coast. (Amber Resources, et al. v. United States, C.A.F.C. Nos. 2007-5047 and 5082, 8/25/08)

Various leases were granted by the United States government to private companies over a period of years—between 1968 and 1984—to explore for and develop oil and gas resources in the coast off of California. Congress passed a law in 1990, after all the leases were in place, that led to numerous lawsuits by the State of California and other interested parties that kept the private companies from doing their explorations and tapping the off-shore resources.

After being held up for several years, the private companies filed suit in the U.S. Court of Federal Claims arguing the federal government had breached the leases and seeking reimbursement of the lease costs as well as the costs they incurred in equipment and other expenses in attempting to gain the benefits of those leases. The claims court agreed that the government had breached the leases and ordered repayment of more than $1.1 billion in lease costs paid by the companies. However, it did not award the additional development costs sought by the plaintiffs. (Opinion pp. 1-2)

Both parties appealed. The Federal Circuit has now affirmed the judgment of the Court of Federal Claims "in all respects." (p. 2)

The Outer Continental Shelf Lands Act (OCSLA) put the area between 3 and 200 nautical miles off the coast within the limits of federal jurisdiction. The law permits the Secretary of the Interior to grant leases for development of natural resources within this area. (p. 2)

In 1972 the Coastal Zone Management Act (CZMA) directed conservation within the same coastal zone. (p. 4) This law, and amendments to it in 1990, provided bases for the State of California to file multiple suits aimed at holding up the development of oil and gas resources off of its coast. (p. 6)

Without getting into the fine details of the back and forth challenges and legal arguments (see the full court’s decision for background), suffice it to say that by 2002 the leaseholders had had enough. They sued to recoup their lease costs arguing that the government had breached its lease agreements. (p. 10)

The claims court ruled that Congress’s 1990 amendments to the CZMA added up to an "anticipatory repudiation" of the lease contracts with these private companies, and ordered the government to pay the companies a total of more than $1.1 billion. (pp. 11-12), holding that "the 1990 CZMA amendments thus made it more difficult for the lessees to continue the exploration and development of their leases." (p. 26)

In short, the appeals court sustains the award of more than $1.1 billion to the aggrieved leaseholders.

About the Author

Susan McGuire Smith spent most of her federal legal career with NASA, serving as Chief Counsel at Marshall Space Flight Center for 14 years. Her expertise is in government contracts, ethics, and personnel law.