D.C. Circuit rules against Interior Department

Michael P. Tremoglie Mar. 7, 2012, 8:00am

WASHINGTON (Legal Newsline) -- The U.S. Court of Appeals for the District of Columbia Circuit has ruled against the Department of the Interior in an oil well case.

In the case of Noble Energy INC. v. Kenneth Lee Salazar, Secretary, United States Department of Interior and United States Department of the Interior, the Court on March 2 ruled regarding an issue requiring lessees to plug permanently and abandon their oil wells.

Noble Energy acquired a lease to drill, develop, and produce oil and natural gas in September 1979, off the coast of California. Pursuant to the lease, the company and discovered oil and gas in commercially viable quantities in 1985.

Noble temporarily plugged and abandoned the well before production. This is a technique that seals the well but allows for re-entry after additional testing or exploration. Twenty-seven years later, Well 320-2 remains temporarily plugged and abandoned.

During the intervening years, Noble's lease was suspended several times. The suspensions extend the life of the lease and defer the production of oil. These suspensions are made because a lessee may need additional time to develop the lease.

Noble requested and received its last suspension in 1999. But a federal district court in California set aside the suspension two years later. It ruled that suspensions had to comply with the 1990 amendments to the Coastal Zone Management Act.

This new policy made production more difficult. Noble and other lessees sued in the Court of Federal Claims, alleging a material breach of their lease agreements. The Court of Federal Claims ruled in their favor. The court said the government had effectively "repudiated the lease agreements by putting into practice the new [court-mandated] rules applicable to the availability of requested suspensions."

The lessees (including Noble) received $1.1 billion in restitution damages and were discharged from all obligations arising from their lease agreements. A year after the court's decision in the breach-of-contract litigation, the Minerals Management Service (MMS), part of the Interior Department at the time, sent a letter to Noble ordering it to plug and abandon a well permanently.

Noble responded by claiming, "... that the Government's material breach" discharged them from any obligation to conduct, arrange or pay for the plugging and abandonment.

The district court said Noble was obligated to permanently plug the well.

Noble's replied that the lease agreement was materially breached and any remaining contractual obligations were null and void.

The Appeals Court wrote, "We cannot find any definitive interpretation of the plug and abandon regulations in the government's brief. This may be attributable to the fact that MMS was abolished in May 2010 - more than a year before the government filed its brief in this proceeding.

"What we are left with is a brief written by the Department of Justice, defending the actions of a disbanded Interior Department office, without - as far as we can tell - any consideration of the regulations by MMS's successor. ... It is up to MMS's successor to interpret its regulations in the first instance and to determine whether they apply in situations like Noble's. If they do, the agency must explain why."

The Appeals Court vacated the judgment and sent the case back to the district court. They instructed that Interior's order be vacated and "to remand to the Secretary for further proceedings consistent with this opinion."

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