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Producers Sue Feds over Destin Dome

Producers Sue Feds over Destin Dome

Chevron, Conoco and Murphy Exploration & Production claim the federal government has tied into a "proverbial Gordian Knot" their efforts to develop nine leases in the Destin Dome 56 project, 25 miles offshore Pensacola, FL.

The three producers have filed a breach-of-contract lawsuit in the U.S. Court of Federal Claims against the government, saying a "regulatory Catch 22" between the Commerce Department and the Environmental Protection Agency has frozen the review process and prevented the project from ever being approved. Each agency reviewing the project has said it cannot move forward without a favorable decision by the other.

The stalemate has denied the companies "timely and fair review" of their plans, permits and an appeal concerning the Destin Dome gas field in the eastern Gulf of Mexico, the producers said.

They paid a total of $10.4 million for the leases over a five-year period in 1983, 1985 and 1988 and have made annual minimum royalty payments totaling $2.2 million. Additionally they have expended "tens of millions of dollars to explore and prepare for the development of the areas covered by the leases. They drilled three exploratory wells, finding that the leases contain as much as 2.6 Tcf of recoverable gas reserves, and were proceeding with the development process until the state of Florida blocked the project in February 1998.

In March of that year, Chevron, the operator of the unit, filed an appeal of the state's ruling with the Secretary of Commerce, requesting a secretarial override. Chevron also filed environmental applications with the EPA and the National Oceanic and Atmospheric Administration.

In July of last year, the Mineral Management Services sent a letter to Chevron informing it that the EPA decided to cease work on the permits until NOAA completed its work and the appeal of the state's opposition was heard. Meanwhile, NOAA and other government agencies involved told Chevron, they could not act until the EPA granted the producers the required permits. On June 23, the general counsel of NOAA wrote Chevron, saying, "I have also decided to hold the record open [and not complete processing of the [appeal] until the EPA processes the permits requested for this project under the Clean Water and Clean Air Acts."

Michael Smith, Chevron's associate general counsel, said the lawsuit is being brought because the federal government "refused to honor its contractual commitments by creating regulatory and administrative blockages that breached the leases."

Chevron also noted that in a similar case the Supreme Court last month ruled 8-1 in favor of 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 (see NGI, July 3). A contract is still a contract, even when the federal government is the one that breaks it, said the court, which ruled that two energy giants were entitled to recover $158 million.

"The federal government's actions, which have denied us timely and fair consideration of these products are what caused us to file the suit. Certainly we feel the recent Supreme Court decision provides a favorable precedent for our case," said a spokesman for Chevron.

The partners allege this regulatory "Catch-22" constitutes breaches of lease contracts between the government and the partners and a "taking" of property rights as protected by the Fifth Amendment of the Constitution.

The suit seeks compensation for lease bonuses and rentals paid to the federal government; exploration costs; expenses incurred for the preparation of environmental studies and development plans; and opportunity costs associated with the project.

The Destin Dome project is the eastern-most field in the gas and oil development area of the Gulf of Mexico. It also is located not far from the potential path of the proposed Gulfstream and Buccaneer pipeline projects, both of which would transport about 1 Bcf/d of natural gas to the Florida peninsula in spring of 2002.

Rocco Canonica

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