Summary
deferring to the IBLA's interpretation of the Mineral Leasing Act
Summary of this case from Backes v. BernhardtOpinion
No. 2:05-CV-2335-MCE-JFM.
July 9, 2007
MEMORANDUM AND ORDER
Through the present action, Plaintiff Two Bay Petroleum, Inc., ("Two Bay") seeks to have the decision of the Interior Board of Land Appeals ("IBLA") terminating Two Bay's CACA 25325 oil and gas lease ("Lease") set aside. Two Bay asks this Court to declare IBLA's decision invalid because it was allegedly arbitrary, an abuse of discretion and factually unsupported. Plaintiff further argues that the Lease could not be terminated due to estoppel, and that IBLA's no-hearing decision violates due process. For the reasons set forth below, Two Bay's Motion is DENIED.
Because oral argument will not be of material assistance, the Court orders this matter submitted on the briefs. E.D. Cal. Local Rule 78-230(h).
BACKGROUND
The subject oil and gas lease, CACA 25325, was issued as a ten-year non-competitive lease to a Mr. Ptasynski on December 1, 1989. On October 21, 1991, Mr. Ptasynski transferred operating rights for a portion of the Lease to Two Bay, and in 1997, filed an assignment of record title. Two Bay applied for a permit to drill a well entitled Well Ptasynski 56-3 ("Well 56-3"), which was approved by the Bureau of Land Management ("BLM") on April 1, 1992. Well 56-3 is the only well on the subject Lease.
Well 56-3 was completed in April of 1993. According to monthly reports of operations submitted to the Minerals Management Service ("MMS"), 13 barrels of oil and 1,000 cubic feet of gas were produced between April and August of 1993. No additional production was reported from August 1993 until November 1999.
On February 16, 1994, Two Bay submitted a temporary abandonment request for Well 56-3, citing unfavorable economic conditions. The BLM approved the request, but only for a period of twelve months and with no possibility of extension. The approval required Two Bay to return the well to production at the end of the period, or plug and abandon the well permanently.
On June 24, 1998, Two Bay submitted a sundry notice to re-complete the well and return it to production. BLM approved the notice two days later. Two Bay completed the requested work on August 15, 1998, on which day Well 56-3 "made 4 swab runs . . . no oil or gas shows." Administrative Record ("AR") 988-89.
On November 15, 1999, Two Bay submitted another sundry notice to do additional perforations, which the BLM's Bakersfield Field Office ("BFO") approved on November 30, 1999.
On December 1, 1999, the BLM met with David Hanson, Two Bay's president, to discuss the Lease. The BLM informed Mr. Hanson that the Lease had expired under its own terms on November 30, 1999, because inspections indicated it was not producing. Additionally, Two Bay had not paid rental fees to the MMS. Mr. Hanson did not indicate at the meeting that Well 56-3 had been returned to production prior to the expiration of the Lease. However, the BLM received a letter from Two Bay dated December 15, 1999, stating that Well 56-3 was returned to production on November 29, 1999, one day prior to Lease expiration. Delinquent rental fees were also paid to the MMS.
By memorandum dated February 10, 2000, the BLM recommended that the Lease not be extended due to non-production in paying quantities at the expiration of the original term. The BLM issued a termination on May 11, 2000, which Two Bay appealed. Due to the BLM's failure to respond to the appeal, and because "BLM's decision contained no finding that there was no well capable of production on the lease," the BLM rescinded the termination on February 22, 2002. AR 702-03, 748-50.
From December 1, 1999, to December 30, 2000, Two Bay reported a production of 643 barrels of oil to MMS. However, Two Bay did not provide "run tickets" to verify and document the production of the report oil. To further complicate the situation, oil from Well 56-3 was commingled with oil from other Two Bay wells without proper authorization. AR 968-69. Two Bay reported no further production after December 30, 2000. AR 933.
Two Bay requested such authorization in October of 2002, two years after the alleged production. AR 949.
The BLM conducted numerous site inspections prior to July 26, 2002, showing that the well was either not operating, insufficiently supplied with equipment to produce or disconnected from the storage tank and not producing. Based on these inspections and the lack of production, the BLM issued a 60-day notice finding that Well 56-3 had been in non-producing status for more than three years. This notice allowed Two Bay until October 11, 2002, to return the well to production or pursue alternative remedies, such as permanent abandonment or assignment to another party.
BLM inspections occuring on August 7, 2002, and September 2, 2002, showed Well 56-3 was still down. The September inspection revealed that Well 56-3 was not physically connected to a test tank. Two Bay submitted a sundry notice seeking to explore for oil at a different depth within the well, which the BLM approved on October 2, 2002. This approval required Two Bay to put Well 56-3 in production no later than October 31, 2002.
Two Bay obtained permission from BLM to commingle production of Well 56-3 with other nearby wells on November 26, 2002, subject to the requirement that production from each well was measured prior to commingling.
On October 31, 2002, a BLM inspector witnessed a test of well production that yielded an extrapolated 1.38 barrels per day. As the well had not been in production for approximately 18 months, the BLM did not consider this test accurate due to "flush production." Additionally, the percentage of water produced (99%) and the pumper's concern that Well 56-3 "pumps off" easily led the BFO to allow a longer period of time to measure accurate production. AR 676.
"Flush production" may occur when a well has been unused for a lengthy period of time. The well bore is filled with fluids to the point of pressure equalization, misrepresenting the underground oil reservoir's capacity of supplying fluid to the well bore in a consistent fashion. A test of longer duration than the 73-minute test carried out on October 31, 2002, would yield more accurate measurements of Well 56-3's oil producing capacity. AR 597.
On November 20, 2002, the BLM inspector gauged Well 56-3's tank and found no measurable amount of oil. AR 691. Seals placed on the storage tank valves had not been broken, indicating that no oil was previously removed from the tank. Id. On two subsequent inspections, the BLM inspector found Well 56-3 in a non-operating state. AR 1194-95, 1191-92. A December 19, 2002, inspection found no measurable fluids in the bottom of the tank. AR 1189-90.
On January 14, 2003, the BLM inspector gauged Well 56-3's tank with a water-sensitive paste. This inspection showed approximately 10.5 inches of water and one inch of oil atop the water. AR 599, 1186. The inch of oil equated to roughly five barrels of oil for Well 56-3's total production for the period of October 2002, through January 2003, or 0.05 barrels of oil per day. AR 676-677.
Visits in late January and early February of 2003, showed that Well 56-3 was again down. AR 1179-82. On April 1, 2003, the BLM field office recommended that the California State office terminate the Lease for non-production. AR 947-48. On April 12, 2003, the BLM inspector witnessed the loading of roughly 150 barrels of oil into a transportation truck. AR 1174-76. However, Two Bay did not submit run tickets, monthly reports to MMS or royalty fees for this alleged production.
On May 5, 2003, the BLM terminated the lease due to cessation of production and lack of production in paying quantities, effective October 11, 2002. Two Bay subsequently filed a notice of appeal and requested a stay of the termination. The IBLA denied the stay by order, and issued a ruling on the merits on September 2, 2005. The IBLA amended the BLM termination order, finding the Lease to have terminated by operation of law in December 2000.
STANDARD
A. Final Decisions of the IBLAFinal Decisions of the IBLA are reviewed under the Administrative Procedures Act, 5 U.S.C. § 706(2). The reviewing court shall "hold unlawful and set aside agency action, findings and conclusions found to be — . . . (A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law; (B) contrary to constitutional right . . .; or (C) in excess of statutory jurisdiction, authority, or limitations. . . ." Fallini v. Hodel, 963 F.2d 275, 277 (9th Cir. 1992) (quoting 5 U.S.C. § 706(2)).
The Court's review is limited to the administrative record already in existence. Camp v. Pitts, 411 U.S. 138, 142 (1973). The court cannot merely substitute its judgment for that of the IBLA, but must instead determine from the administrative record whether the decision of the IBLA was arbitrary, capricious, an abuse of discretion, unsupported by substantial evidence or not in accordance with the law. See United States v. Wharton, 514 F.2d 406, 408-409 (9th Cir. 1975).
Thus, the court must determine from the administrative record whether the agency examined the pertinent evidence and put forth a satisfactory explanation for its action. Motor Vehicle Mfrs. Ass'n. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). The explanation must include a "rational connection between the facts found and the choice made." Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168 (1962).
The court will only find an arbitrary decision where there has been a clear error of judgment in light of the relevant factors. Bowman Trans., Inc. v. Arkanssa-Best Freight Sys., Inc., 419 U.S. 281, 285 (1974).
The IBLA decision must also be supported by sufficient evidence. The reviewing court must search the entire record to determine whether it contains evidence such that a reasonable mind would find it adequate to support the agency's decision. Hjelvik v. Babbitt, 198 F.3d 1072, 1074 (9th Cir. 1999).
B. Interpretation of Statutes by Administrative Agencies
The Court shows great deference to an administrative agency's interpretation of the law which it is charged with administering. Baker v. United States, 613 F.2d 224, 227 (9th Cir. 1980) (citing Udall v. Tallman, 380 U.S. 1, 16 (1965)). The Court must uphold the agency's interpretation unless it is inconsistent with the unambiguous language of Congress. Chevron, U.S.A., Inc., v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984).
ANALYSIS
A. IBLA Properly Upheld the Decision of BLM
1. Finding of Non-Producing Well
The IBLA found Well 56-3 ceased production "at some point well before the [BLM Bakersfield Field Office's] July 26, 2002, notice was issued." AR 9.
The IBLA relied on Two Bay's admission that Well 56-3 ceased production in December of 2000, and the lack of assertion that production was resumed at any point prior to July of 2002. The IBLA dismisses Two Bay's claims of production at some point between October 2002, and March 2003, citing the lack of reports to the MMS and other failures to comply with reporting regulations. AR 15.
Additionally, the IBLA found Well 56-3 incapable of producing in paying quantities due to the results of the October 2002, well test and many subsequent inspections. Two Bay argued that incorrect measurements resulted in this finding, but Two Bay could not produce any evidence in the form of royalty payments, operational reports or separate flow metering required by the authorization to commingle production of Well 56-3 with other Two Bay wells. AR 14-15.
The IBLA findings are not clearly erroneous in light of the administrative record. Well 56-3 last produced reported quantities of oil in late 2000, several years before the determination of the BLM. The record reveals multiple BLM inspections of Well 56-3, mostly resulting in reports of non-operation or non-production. These inspections occurred after the BLM put Two Bay on a 60-day notice, requiring Well 56-3 to be put back in operation, or at a minimum to diligently pursue restoring the well to producing status. The evidence overwhelmingly suggests the Well 56-3 has not produced any barrels of oil since December of 2000.
2. Interpretation of Mineral Leasing Act
Having found Well 56-3 to be non-producing, the IBLA determined that the well did not fall under the exceptions to termination by operation of law under the Mineral Leasing Act, 30 U.S.C. § 226 ("MLA"). AR 17-19. These exceptions are set forth in the MLA as follows:
No lease issued under this section which is subject to termination because of cessation of production shall be terminated for this cause so long as reworking or drilling operations which were commenced on the land prior to or within sixty days after cessation of production are conducted thereon with reasonable diligence, or so long as oil or gas is produced in paying quantities as a result of such operations. No lease issued under this section shall expire because operations or production is suspended under any order, or with the consent, of the Secretary. No lease issued under this section covering lands on which there is a well capable of producing oil or gas in paying quantities shall expire because the lessee fails to produce the same unless the lessee is allowed a reasonable time, which shall be not less than sixty days after notice by registered or certified mail, within which to place such well in producing status or unless, after such status is established, production is discontinued on the leased premises without permission granted by the Secretary under the provisions of this Act.30 U.S.C. § 226(i).
Because Two Bay did not engage in reworking or drilling operations within 60 days of December 2000, the IBLA found the first exception not applicable. Similarly, Two Bay did not suspend production on order from or with consent of the Secretary of the Department of the Interior, ruling out the second exception.
The IBLA interpreted the third exception to apply to ". . . only a situation where, at the time production ceases, there is on the lease a well capable of production." (citing Steelco Drilling Corp., 64 I.D. 314, 219 (1957)). Having found Well 56-3 incapable of production, the IBLA determined that the third exception did not apply. This led to a conclusion that the Lease terminated by operation of law as of the last date of production, or December 2000.
As explained above, the Court defers to interpretations by administrative agencies of the laws they enforce, and must uphold the interpretation unless it is against the unambiguous language of Congress. Chevron, 467 U.S. at 837. The IBLA's interpretation is consistent with 30 U.S.C. § 226(i), and comports with a substantial body of administrative law cited in the decision. AR 9.
This Court finds the IBLA decision is not arbitrary, capricious or an abuse of discretion. The decision is supported by a substantial amount of evidence in the administrative record. Thus, the IBLA decision terminating the Lease by operation of law as of December 2000, is found to be valid.
B. Estoppel
Given the termination of the Lease in December 2000, Two Bay's argument that the government is estopped due to approving sundry notices in 2002 is unavailing. Additionally, Two Bay has not alleged any of the elements required for estoppel. Consequently, Two Bay's estoppel argument fails.
C. Due Process
"[N]otice of the ability to request a hearing is only required where the operator or lessee offers credible evidence to suggest that the well is capable of immediate production." Coronado Oil Co. v. U.S. Dept. of Interior, 415 F.Supp.2d 1339, 1352 (2006). A review of the administrative record demonstrates little, if any, credible evidence to suggest Well 56-3 is capable of immediate production. As cited in the IBLA decision, Two Bay did not submit information to the BLM or MMS regarding production. AR 15. The IBLA was not arbitrary, capricious or otherwise not in accordance with the law and correctly concluded there was no issue of material fact regarding the production of Well 56-3.
CONCLUSION
For the reasons set forth above, Two Bay's Motion for Review of IBLA's ruling is denied.
IT IS SO ORDERED.