Federal—Oil & Gas

KATHLEEN C. SCHRODER
— Reporter —

Tenth Circuit Upholds ONRR 2016 Valuation Rule
                In American Petroleum Institute v. U.S. Department of Interior, 81 F.4th 1048 (10th Cir. 2023), the U.S. Court of Appeals for the Tenth Circuit upheld the Office of Natural Resources Revenue’s (ONRR) amendments to its federal oil and gas valuation regulations, which ONRR finalized in 2016. See Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform, 81 Fed. Reg. 43,338 (July 1, 2016) (to be codified at 30 C.F.R. pts. 1202, 1206) (2016 Valuation Rule). The American Petroleum Institute (API) had previously challenged the 2016 Valuation Rule in the U.S. District Court for the District of Wyoming. The district court upheld the 2016 Valuation Rule. See Vol. XXXVI, No. 4 (2019) of this Newsletter. On API’s appeal, the Tenth Circuit affirmed the district court and, particularly, upheld the provisions of the 2016 Valuation Rule relating to a deep water transportation allowance, caps on transportation and processing allowances, index valuation for gas sold pursuant to non-arm’s-length transactions, and ONRR’s ability to value production.

Deep Water Transportation Allowance
                Prior to the 2016 Valuation Rule, a long-standing ONRR policy authorized the deduction of transportation costs for the movement of production from subsea manifolds to platforms from the gross proceeds of lessees operating in water depths of greater than 200 meters. API, 81 F.4th at 1059. The 2016 Valuation Rule rescinded this policy by defining gathering as “any movement of bulk production from the wellhead to a platform offshore.” Id. at 1060 (quoting 30 C.F.R. § 1206.20).

                API challenged this change, arguing that it disregarded the reliance interests of lessees who had invested in subsea development and could not recover these investments. Id. The court concluded that ONRR had considered lessees’ reliance interests but found that lessees were no longer relying on the transportation allowance as an incentive. Id. at 1060–61. The court also concluded that ONRR satisfied its obligation to provide a reasoned explanation for the policy change. Id. at 1061–62. Thus, the court held that ONRR’s rescission of the policy was not arbitrary or capricious. Id. at 1063.

Caps on Transportation and Processing Allowances
                Prior to the 2016 Valuation Rule, ONRR capped a lessee’s transportation allowance and processing allowance but allowed lessees to request exemptions from the caps. Id. at 1064 (citing 30 C.F.R. §§ 1206.110(d)(1), .152(e)(1), .159(c)(2)). The 2016 Valuation Rule eliminated a lessee’s ability to request exemptions. Id.

                API advanced multiple arguments as to why this change was improper. Most significant, API argued that this change prevented lessees from deducting their actual costs of transportation and processing. Id. at 1064. The court found that the prior rules did not guarantee that the lessees could deduct actual costs of transportation and processing and, further, that the statutes pertaining to royalty valuation do not guarantee such allowances. Id. at 1064–65 (citing 30 U.S.C. § 226; 43 U.S.C. § 1337). After rejecting API’s other objections to this change, see id. at 1065–67, the court upheld ONRR’s elimination of exemptions from caps on transportation and processing allowances.

Index Valuation for Gas Sold Pursuant to Non-Arm’s-Length Transactions
                Prior to the 2016 Valuation Rule, lessees valued gas sold under a non-arm’s-length transaction with a series of benchmarks. Id. at 1067. The 2016 Valuation Rule replaced the benchmarks with two options for valuation. Id. The first option is to use “the gross proceeds from the first arm’s-length sale, minus any applicable transportation and processing allowances.” Id. (citing 30 C.F.R. § 1206.141(b)). The second option is to use an “index price, minus a fixed allowance for transportation and processing.” Id. (citing 30 C.F.R. § 1206.141(c)). The index price is based on select publications and uses the “‘highest reported monthly bidweek price’—for the location where their gas can be transported that month.” Id. at 1068 (citing 30 C.F.R. § 1206.141(c)(1)(i), (ii)). The lessee “may then deduct from the relevant location’s bidweek price a fixed allowance to account for transportation and processing costs.” Id. (citing 30 C.F.R. § 1206.141(c)(1)(iv)).

                API challenged multiple elements of the index-price option, including the requirement to use the highest bidweek price, the requirement to use the highest index price based on any location to which the lessee’s gas production can be transported, and the fixed allowance for transportation and processing. Id. at 1068–69. The court rejected all challenges, finding that ONRR acted reasonably by, and offered sufficient justification for, structuring the index-price option as it did. See id.

Default Valuation
                The 2016 Valuation Rule contains a default provision that allows ONRR to determine the value of a lessee’s production in certain circumstances. Id. at 1070 (citing 30 C.F.R. §§ 1206.104, .105). API challenged this provision on multiple grounds, arguing that it provides ONRR with too much discretion, usurps the lessee’s role in valuing production, is unjustified, and allows ONRR to disregard valid contracts between lessees and buyers. Id. at 1071–74. The court rejected API’s arguments and upheld the 2016 Valuation Rule.

                Because the 2016 Valuation Rule has been in effect for several years, the decision has little practical consequence but nonetheless puts to rest lingering uncertainty over the rule.

 

BOEM’s Modifications to Offshore Lease Sale 261 Enjoined
                In Louisiana v. Haaland, No. 2:23-cv-01157, 2023 U.S. Dist. LEXIS 175998 (W.D. La. Sept. 21, 2023), the U.S. District Court for the Western District of Louisiana granted a motion for preliminary injunction that halted the Bureau of Ocean Energy Management (BOEM) from adding a new lease stipulation to, and withdrawing acres from, Lease Sale 261 in the Gulf of Mexico to benefit the endangered Rice’s whale. Id. at *3.

                Lease Sale 261 was one of several offshore lease sales scheduled as part of BOEM’s 2017–2022 Five-Year Plan, which BOEM approved in a 2017 record of decision (ROD). Id. at *9. In January 2022, the U.S. District Court for the District of Columbia vacated BOEM’s ROD approving the 2017–2022 Five-Year Plan because of a deficiency in the associated environmental impact statement (EIS). Id. at *12–13 (citing Friends of the Earth v. Haaland, 583 F. Supp. 3d 113 (D.D.C. 2022)). At that time, three lease sales were still pending under the 2017–2022 Five-Year Plan: Lease Sales 257, 259, and 261. See id. at *12–13. In August 2022, Congress passed the Inflation Reduction Act and ordered the U.S. Department of the Interior to schedule the pending lease sales by certain dates, including a direction to schedule Lease Sale 261 by September 30, 2023. Id. at *13 (citing Pub. L. No. 117-169, § 50264, 136 Stat. 1818).

                In January 2023, BOEM released a final supplemental EIS analyzing the impacts of Lease Sales 259 and 261, which did not include the challenged stipulation or acreage withdrawal. Id. Similarly, in March 2023, BOEM issued a proposed notice of sale (PNOS) for Lease Sale 261, which did not include the challenged stipulation or acreage withdrawal. Id. at *16. The PNOS, however, stated that BOEM was considering removing some areas from the lease sale and that it reserved the right to modify the lease sale area in the final notice of sale (FNOS). Id.

                On August 23, 2023, BOEM issued a FNOS for Lease Sale 261 incorporating the new lease stipulation and withdrawing six million acres from the sale. Id. at *18. BOEM explained these actions in a ROD issued after the supplemental EIS. Id. at *18–19. The State of Louisiana, the American Petroleum Institute, and two offshore oil and gas operators filed suit and filed a motion for preliminary injunction asking the district court to enjoin BOEM from implementing the changes in the FNOS for Lease Sale 261. Id. at *2.

                The court found that the plaintiffs were likely to succeed on the merits of their claims for two reasons. First, the court accepted the plaintiffs’ allegation that the Outer Continental Shelf Lands Act and its implementing regulations required BOEM to provide notice and the opportunity for comment before it could alter the lease sale terms in the FNOS. Id. at *23–24 (citing 43 U.S.C. § 1345; 30 C.F.R. §§ 556.304(c), .307(a)). Because BOEM failed to do so, the court held the modifications to the FNOS were procedurally invalid. Id. at *26.

                Second, the court found that BOEM likely acted arbitrarily and capriciously by modifying the FNOS. Id. at *26–28. The court observed that the new lease sale terms conflicted with the findings in the supplemental EIS issued in January 2023. See id. at *27. Although the terms were consistent with a finding in the ROD, the court found that this finding lacked support in the associated supplemental EIS. Id. at *27–28. The court reasoned that, “[e]ven when an agency’s decision is based on political considerations, it is not excused from justifying the position” and the “[f]ailure to do so leads to ‘surprise switcheroo’ by an agency against regulated entities.’” Id. at *29.

                The court then found the plaintiffs satisfied the remaining elements of a preliminary injunction. Id. at *30–36. The court also rejected the federal defendants’ assertion that the motion for preliminary injunction was “per se a motion for permanent injunction because it [was] indistinguishable from the final relief sought under the complaint.” Id. at *36. The court pointed to the statutory deadline for the lease sale as a reason that a preliminary injunction was necessary to preserve the plaintiffs’ right to relief. Id. at *36–37. Similarly, the court held that, to the extent that its grant of a preliminary injunction amounted to a mandatory injunction under the Administrative Procedure Act, such relief was warranted. See id. at *37–38 (citing 5 U.S.C. § 706(2)). The court ordered BOEM to proceed with Lease Sale 261 by September 30, 2023.

                Both BOEM and a coalition of environmental nongovernmental organizations (ENGOs) that had intervened in the case appealed the district court’s decision to the U.S. Court of Appeals to the Fifth Circuit. The Fifth Circuit dismissed the ENGOs’ appeal after finding the appellant ENGOs lacked standing. Louisiana v. Haaland, No. 23-30666, 2023 U.S. App. LEXIS 30316, at *8 (5th Cir. Nov. 14, 2023). BOEM did not challenge the injunction but requested an additional 37 days to comply with the district court’s order to allow for publication of the notice of sale in the Federal Register. Id. at *5. The court of appeals amended the injunction consistent with this request. Id. at *8.

                At the time of this report, BOEM is scheduled to hold Lease Sale 261 on December 20, 2023. See 88 Fed. Reg. 80,750 (Nov. 20, 2023).

 

Willow Oil and Gas Project in the National Petroleum Reserve–Alaska Upheld
                In Sovereign Iñupiat for a Living Arctic v. BLM, Nos. 3:23-cv-00058, 3:23-cv-00061, 2023 U.S. Dist. LEXIS 201981 (D. Alaska Nov. 9, 2023), the U.S. District Court for the District of Alaska upheld the Bureau of Land Management’s (BLM) issuance of a record of decision (ROD) for the Willow Master Development Plan (Willow Project), which authorizes oil production in the National Petroleum Reserve in Alaska (NPR–A). In an opinion focused on agencies’ obligations to consider climate change when authorizing fossil fuel development projects, the court rejected the plaintiffs’ arguments that BLM’s approval of the ROD violated the Endangered Species Act (ESA) and National Environmental Policy Act (NEPA).

                The plaintiffs primarily argued that approval of the Willow Project violated the ESA in two ways. First, the plaintiffs argued that a biological opinion prepared by the U.S. Fish and Wildlife Service (FWS) and relied on by BLM erroneously found that the Willow Project would not result in harassment of non-denning polar bears and thus would not result in incidental take. Id. at *70–72. FWS set forth two bases for its conclusion that harassment would not occur: (1) the Willow Project would not create a “likelihood of injury” to non-denning polar bears and (2) any incidental disturbances to non-denning polar bears “would not occur intentionally or negligently.” Id. at *71.

                The court rejected FWS’s second basis for concluding that harassment to non-denning polar bears would not occur. See id. at *72–76. The court determined that FWS’s conclusion that harassment would not occur because oil would be developed “without any intent to annoy, disturb, or harass polar bears,” id. at *72, is inconsistent with FWS’s regulatory definition of “harass,” which does not account for whether harassment is intentional or not, see id. at *75 (citing 50 C.F.R. § 17.3). The court, however, accepted FWS’s conclusion that the Willow Project would not create a “likelihood of injury” to non-denning polar bears. Id. at *76–80. Because FWS articulated an independent basis to conclude that harassment would not occur, the court declined to invalidate the biological opinion. See id. at *75–76.

                Second, the plaintiffs argued that BLM failed to consult with FWS and the National Marine Fisheries Service regarding carbon emissions from the Willow Project. Id. at *55, *86. The plaintiffs objected to BLM’s decision not to assess these emissions in its biological assessment based on BLM’s determination that project greenhouse gas emissions were not an “effect” of the action. See id. at *85 (citing 50 C.F.R. § 402.12(a)), *86, *91. The court, however, accepted BLM’s explanation that it could not predict with reasonable certainty or precision the impact of greenhouse gas emissions from the Willow Project on listed species or their habitat (sea ice) within the action area. See id. at *89–92. For similar reasons, the court also accepted FWS’s decision not to specifically address project greenhouse gas emissions in its biological opinion. See id. at *92–95.

                After rejecting various other allegations of error, see id. at *81–83, *95–98, the court found that BLM and FWS complied with the ESA when approving the Willow Project.

                The court similarly disposed of the plaintiffs’ NEPA claims. The plaintiffs argued that BLM failed to consider a reasonable range of alternatives because it did not consider an alternative of leaving “considerable quantities” of recoverable oil in the ground. Id. at *12. The court concluded that BLM’s alternatives were consistent with both the oil and gas lessee’s existing lease rights and Congress’s “policy objective of resource extraction in the NPR–A.” Id. at *19–20.

                The court also concluded that BLM adequately considered the impacts of exploratory development that BLM considered to be a reasonably foreseeable future action that would be induced by the Willow Project. See id. at *32–38. Accordingly, the court declined to find that BLM violated NEPA when approving the Willow Project.

                In addition to rejecting the plaintiffs’ allegations that approval of the Willow Project violated the ESA and NEPA, the court found that BLM’s decision to approve the project did not violate the Naval Petroleum Reserves Production Act or the Alaska National Interest Lands Conservation Act. See id. at *39–51.

                In November 2023 the plaintiffs appealed the district court’s decision to the U.S. Court of Appeals for the Ninth Circuit. See Sovereign Iñupiat for a Living Arctic v. BLM, No. 23-3627 (9th Cir. filed Nov. 20, 2023). The plaintiffs also filed with the district court a motion for preliminary injunction pending appeal. At the time of this report, the court had not ruled on this motion.

 

District of Wyoming Upholds BLM’s Authority to Require an APD for a Traversing Well
                In True Oil LLC v. BLM, No. 2:22-cv-00188 (D. Wyo. Oct. 30, 2023), the U.S. District Court for the District of Wyoming upheld the Bureau of Land Management’s (BLM) position that it may require an application for permit to drill (APD) for a well that will traverse, but not produce from, federally owned minerals beneath nonfederal surface.

                True Oil LLC (True Oil) intended to drill at least one horizontal well that would penetrate and traverse a 160-acre tract with federally owned minerals. Id. slip op. at 2. True Ranches LLC (True Ranches) owned the surface estate of this tract. Id. BLM had leased this tract, id., but the lease had been challenged in litigation in the U.S. District Court for the District of Montana and was subject to a court order “prohibit[ing] any work to develop the lease[] or to obtain production.” Id. at 3–4.

                Once BLM learned of True Oil’s intention to develop the spacing unit, BLM instructed True Oil that BLM must approve an APD in order for True Oil to traverse the tract with its well, even if the well did not produce from the federal tract. Id. BLM further stated that True Oil would be subject to civil or criminal penalties if it traversed the federal tract without an APD. Id. at 4. True Oil and True Ranches initiated the litigation to challenge BLM’s instruction.

                As an initial matter, the court determined that the question of whether True Oil’s rights to the nonfederal surface estate include the right to traverse the federal mineral estate is governed by federal law rather than Wyoming law. See id. at 8, 19 n.15 (noting that Wyoming law would have resulted in a different outcome). Then, the court examined the rights granted and reserved when the surface and mineral estates were severed pursuant to the Stock-Raising Homestead Act. See id. at 8–13. The court concluded that this act “reserve[d] only extractable minerals to the United States, not the entirety of the soil beneath the surface.” Id. at 13.

                Nonetheless, the court concluded the Property Clause of the U.S. Constitution provided BLM with the authority to “regulate and protect” its mineral interest. Id. (citing U.S. Const. art. IV, § 3, cl. 2). The court found that, when the surface and minerals were severed pursuant to the Stock-Raising Homestead Act, “it is quite reasonable to assume Congress retained a robust ability to protect its mineral interests through various means,” including the authority to restrict subsurface activities. Id. at 15. Alternatively, the court concluded that the Property Clause “permits Congress to infringe on private property rights to protect federal property interests.” Id. (citing Camfield v. United States, 167 U.S. 518 (1897)); accord id. at 17.

                Finally, the court concluded that the Mineral Leasing Act also granted the Secretary of the Interior broad authority to protect the United States’ mineral interests. See id. at 16–17. Citing this authority, as well as BLM’s authority to prosecute trespass, the court concluded “it is well within the BLM’s authority to regulate subsurface activity that could hinder or threaten its mineral interest.” Id. at 18. For these reasons, the court upheld BLM’s requirement of an APD for a well to traverse federal minerals beneath nonfederal surface.

                At the time of this report, no appeal had been filed.

 

Settlement Ends Long-Running Dispute over Oil and Gas Leases in Badger-Two Medicine Area
                Solenex LLC (Solenex) has agreed to relinquish its oil and gas lease in the Badger-Two Medicine area of the Lewis and Clark National Forest in Montana. The oil and gas lease was issued in 1982 but was never developed. The lease was the subject of multiple lawsuits and judicial decisions, including litigation over the U.S. Department of the Interior’s 2016 decision to administratively cancel the lease. The history of the lease and ensuing litigation is detailed in this Newsletter, most notably in Vol. 40, No. 1 (2023), and Vol. 39, No. 4 (2022).

                On September 1, 2023, the Department announced that it had entered into a settlement with Solenex in which Solenex agreed to relinquish the lease. See Press Release, U.S. Dep’t of the Interior, “Final Oil and Gas Lease to Be Relinquished in Montana’s Badger-Two Medicine Area” (Sept. 1, 2023). The settlement ends this long-running dispute.

 

JOHN H. BERNETICHDALE RATLIFF & NICOLE LEÓN
— Guest Reporters —

Tenth Circuit Upholds BLM’s Approval of Jonah Energy’s WY Project
                On August 7, 2023, the U.S. Court of Appeals for the Tenth Circuit affirmed a district court order dismissing a challenge to the Bureau of Land Management’s (BLM) record of decision (ROD) approving Jonah Energy, LLC’s (Jonah Energy) plan to drill up to 3,500 new wells in Wyoming’s Upper Green River Valley. W. Watersheds Project v. BLM, 76 F.4th 1286 (10th Cir. 2023), aff’g Upper Green River All. v. BLM, 598 F. Supp. 3d 1303 (D. Wyo. 2022); see Vol. 39, No. 2 (2022) of this Newsletter.

                In its August 2018 ROD, BLM approved a development plan for Jonah Energy’s 40-year project to develop natural gas and condensate resources in a roughly 140,000-acre area in Sublette County, Wyoming. See Record of Decision, BLM, “Normally Pressured Lance Natural Gas Development Project” (Aug. 2018). The project is known as the Normally Pressured Lance (NPL) Natural Gas Development Project (NPL Project). BLM evaluated the NPL Project for eight years and ultimately analyzed four alternative development plans. BLM’s ROD allows Jonah Energy to submit site-specific applications for permits to drill (APDs) for up to 3,500 wells over 10 years.

                Three conservation groups asserted four claims challenging the ROD. The plaintiffs asserted that BLM (1) violated the Federal Land Policy and Management Act (FLPMA) by failing to demand that Jonah Energy comply with a “phased development” design feature required by the applicable land use plan, W. Watersheds, 76 F.4th at 1293; (2) violated the National Environmental Policy Act (NEPA) by failing to collect and analyze essential information about impacts to greater sage-grouse habitat, id. at 1295; (3) failed to sufficiently evaluate the NPL Project’s impact on pronghorn herds, id. at 1299; and (4) failed to consider the NPL Project’s indirect effects on Grand Teton National Park, id. at 1293.

                The court rejected each of the plaintiffs’ claims. The court rejected claims one and four, concerning phased development and analysis of impacts to Grand Teton National Park, because the conservation groups failed to exhaust those claims before the agency. Id. at 1293, 1303. As to claims two and three, the court concluded “that BLM adequately collected and considered information” concerning impacts to pronghorn and sage-grouse and chose “a development plan that meets the statutory requirements.” Id. at 1290.

                The conservation groups argued that the plan authorized in the ROD violated FLPMA by not complying with a “phased development” design feature required by the applicable land use plan. See 43 C.F.R. § 1610.5-3(a) (requiring BLM resource management actions to conform to the applicable BLM land use plan). Although the court rejected this argument on exhaustion grounds, the court determined that BLM adequately considered a phased-development approach and decided to delay its decision until it had better, site-specific information. The court determined that this approach was permitted under the land use plan, which noted that some “required design features” may be inapplicable to some projects due to “site-specific circumstances.” W. Watersheds, 76 F.4th at 1295 n.1. The court ruled that BLM’s decision to conduct studies concurrent with Jonah Energy’s development to improve its understanding of the impact and assess phasing on a site-by-site basis was permissible.

                The conservation groups argued that BLM’s NEPA analysis was inadequate because it failed to compile essential information regarding the NPL Project’s impacts to sage-grouse winter concentration areas (WCAs). Id. at 1295. When information is relevant—but not essential—to “evaluating reasonably foreseeable significant adverse effects,” the agency need only explain that the information is lacking. 40 C.F.R. § 1502.21(a). However, where the agency lacks information that is “essential to a reasoned choice among alternatives” and gathering that information would not be cost prohibitive, the agency must compile and analyze the information in the environmental impact statement (EIS). Id. § 1502.21(b). The court rejected the plaintiffs’ claim because, according to the court, the agency considered sufficient relevant information and the information that the plaintiffs cited was not “essential” to the agency’s reasoned decision making. W. Watersheds, 76 F.4th at 1296. The court ruled that the plaintiffs “conflate information that would be ‘nice to have’ with information that is ‘essential to a reasoned choice among alternatives.’” Id. at 1298 (emphasis omitted) (citing 40 C.F.R. § 1502.22(a) (recodified as 40 C.F.R. § 1502.21(a)).

                The court noted that BLM properly acknowledged that research on sage-grouse use of WCAs in the NPL Project area is limited, and the agency satisfied its duty to gather and analyze essential information on the subject. BLM conducted sufficient analysis of impacts to sage-grouse WCAs, including by: mapping WCAs in the project area, reviewing studies of sage-grouse winter use from both within and outside WCAs, and analyzing data concerning approximately 2,000 sage-grouse. Id. at 1297. The court noted that a plaintiff asserting a NEPA challenge based on the agency’s alleged failure to compile essential information must show not only that the agency would benefit from the data, but that the information “is central to choosing between the proposals.” Id. at 1298. The court ruled that the plaintiffs had not met this standard.

                The conservation groups next claimed that NEPA required BLM to “pay special attention to the Path of the Pronghorn and the Grand Teton [Pronghorn] Herd,” and that the EIS impermissibly ignored them both. Id. at 1299. The plaintiffs relied on 42 U.S.C. § 4332(C), which requires agencies to provide a “detailed statement” on “major Federal actions significantly affecting the quality of the human environment,” to support their claim. W. Watersheds, 76 F.4th at 1299. The plaintiffs pointed out that “significantly as used in NEPA requires considerations of both context and intensity,” and, consequently, “special care” must be given to analyze a proposed action’s impacts to “significant scientific, cultural, or historic resources” such as Grand Teton National Park. Id. (quoting 40 C.F.R. § 1508.27 (2018)). (40 C.F.R. § 1508.27 has been repealed. 85 Fed Reg. 43,304 (July 16, 2020).) The court rejected the plaintiffs’ reading of NEPA and its regulations, and determined that the “significance” assessment “goes to whether a detailed statement is necessary at all, not to the statement’s content.” Id. at 1299–1300. The court found that BLM adequately considered the project’s impacts to pronghorn. The agency considered pronghorn’s seasonal habits and migration routes, and scrutinized the action’s potential adverse impacts. The court deferred to the agency’s methodologies and found that BLM’s analysis has “a rational basis and [takes] into consideration the relevant factors.” Id. at 1301 (quoting Diné Citizens Against Ruining Our Env’t v. Haaland, 59 F.4th 1016, 1034 (10th Cir. 2023)).