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Mobil, Marathon May Recover $158 Million for OCS Deal

Mobil, Marathon May Recover $158 Million for OCS Deal

A contract is still a contract, even when the federal government is the one that breaks it, said the U.S. Supreme Court last week, which ruled that two energy giants are entitled to recover $158 million in an offshore oil and gas deal that never happened. The high court ruled 8-1 in a breach of contract lawsuit brought by Mobil Corp. and Marathon Oil Corp. that followed their expensive attempt to explore and develop leases off of North Carolina's Outer Banks.

While the ruling does not allow the companies to continue with the project, the justices did say that the feds have to return the money.

In 1981, both companies paid more than $78 million each for Outer Continental Shelf (OCS) oil and gas leases for submerged property located about 40 miles off the coast of Cape Hatteras, NC. However, in 1990, Congress enacted the Outer Banks Protection Act, which put a moratorium on any drilling in the OCS. The Act requires the Department of the Interior to conduct periodic environmental analysis before allowing drilling in the OCS, and both the Bush and Clinton administrations have maintained the ban over the past 10 years.

In the lawsuit, Marathon Oil said that the Act had "expressly prohibited the United States from fulfilling its contractual obligations" when it imposed the moratorium on exploration and development in the OCS, and specifically, the Outer Banks of North Carolina.

When the case first went to court, a federal court had ruled for Mobil and Marathon, and said then that the companies were entitled to get their money back. However, the Justice Department appealed, and in 1999, a federal appeals court threw out the judgment and said the lease agreements had not been breached.

In its ruling, the appellate court said the companies had not been able to obtain all of the necessary state government approvals for exploration in the nine years before the law had been adopted, and therefore, they were in no position to drill on the leases or ask for their money back. The companies appealed again, and the Supreme Court agreed to listen to their argument last November (see NGI, Nov. 22, 1999).

In its ruling, Justice Stephen G. Breyer, writing for the court, said "The oil companies gave the United States $158 million in return for a contractual promise to follow the terms of pre-existing statutes and regulations.The new statute prevented the government from keeping that promise.And therefore, the government must give the companies their money back."

The lone dissenter, Justice John Paul Stevens, said he did not agree that the appropriate remedy would be for the companies to recover their initial investment. "I would hold that (the companies) are entitled at best to damages from the delay caused by the government's failure to approve the plan within the requisite time," he wrote.

The court's ruling may help other government contractors, especially mining, timber and telecommunications companies that pay fees up front for licenses or leases. According to the Supreme Court ruling, the contractors only have to prove that the federal government reneged on its promises, and they do not have to prove they have jumped through all of the regulatory hurdles.

Though Mobil (now ExxonMobil) and Marathon will get their money back, the moratorium on exploration and drilling of the OCS still carries support, both within the Clinton administration and in Congress. The Act covers nearly all of the coasts of the North Atlantic, California, Washington, Oregon, southwest Florida, New England, southern Alaska and the Mid-Atlantic states. President Clinton extended it for 10 years in 1998 (see NGI, June 22, 1998).

However, in May, Sen. Frank Murkowski (R-AK), chair of the Senate Energy and Natural Resources Committee, introduced a comprehensive energy bill that uses tax incentives to spur the production of crude oil, natural gas and alternative energy in the Lower 48 states and Alaska (see NGI, May 17). Among other things, it would provide royalty relief for producers in remote OCS areas, and encourages development in new areas. Language to end the moratorium, though, is not in the bill.

"The bill encourages development in frontier areas like the Outer Continental Shelf, but leaves lifting the ban to individual states," said Tina Kriesher, a staff member with Murkowski's committee. "If a state wanted to push to lift the moratorium, that would be left to that state's discretion."

Carolyn Davis, Houston

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