Florida: Focus of Another Bush Battle?

Florida may be at the center of another controversy between the two Bush brothers, but this time it won't involve a recount, but rather states' rights versus federal authority - federal authority that through the Clinton administration had favored and supported states' rights to ban offshore drilling. This time, the brothers could be on opposite sides.

Coastal Petroleum Corp., an Apalachicola, FL-based independent, filed a lawsuit last week seeking compensation from the State of Florida for the state's taking of the company's property rights to explore on a lease in the Gulf of Mexico. The lawsuit, filed in Florida's Leon County Circuit Court, wants the court to determine a fair market value on the company's 400,000-acre 60-year-old exclusive lease.

The newest lawsuit is part of an escalating legal battle, which also includes a lawsuit by Chevron U.S.A. and others, over the right to explore Florida's offshore oil and gas reserves, especially the Destin Dome area, deemed off limits by state officials concerned about pristine beaches and the tourism industry, but considered rich in both oil and gas reserves.

The key may lie in how President George W. Bush's opinion about the restricted area changes now that he's in office, and whether his brother, Florida Gov. Jeb Bush, who has favored restricting exploration off the coast, continues to take a hard line. The president campaigned on increasing exploration and development in now restricted territories of the United States, but said last fall that he supported the Florida ban.

With energy prices rising and oil and gas companies pushing for exploration into uncharted territories, Florida's offshore areas may be one of the first skirmishes between environmental protection advocates and the new president's promise to make the country more energy independent. Coastal Petroleum, which has held an undeveloped lease off the coast for longer than just about any other company, just wants to be compensated.

"The state wants it both ways," said Philip Ware, Coastal Petroleum president when the lawsuit was filed. "The state is refusing to allow Coastal Petroleum to exercise its legal right to explore for oil and gas under the leases the state sold to us. At the same time, the state is refusing to compensate us for taking away our property rights."

Coastal Petroleum's lawsuit seeks compensation for the state's taking of lease 224-A in the Gulf of Mexico, which extends from Apalachicola to Pasco County, including a location off St. George Island where the company has been denied a drilling permit.

Ware said the lawsuit only asks for compensation for the property rights, not the right to drill for oil and gas on the property. Coastal Petroleum had long ago sought a state permit to drill on the lease, but it said it also recognized that Florida officials are opposed to offshore drilling and are unlikely to change their minds in the near future.

In June 2000, the First District Court of Appeals affirmed a ruling that the Florida Department of Environmental Protection (DEP) could deny Coastal Petroleum a permit to drill an exploratory well off St. George Island in the Florida Panhandle. The court held that the state could deny the permit on the basis of a "compelling public purpose," but it also found that DEP's action would be unconstitutional "if just compensation is not paid for what is taken." The appeals court said the case should be resolved in circuit court.

Coastal Petroleum said that independent experts have "strong scientific evidence" that there are reserves below the ocean floor where its lease is. The evidence is supported by other companies' exploration also.

"After more than 30 years of litigation and numerous court rulings upholding the validity of the leases, it's time for the state to provide Coastal Petroleum with fair market compensation for what amount to a taking of property," said S. Cary Gaylord, of Gaylord, Merlin, Ludovici, Diaz & Bain, which is representing Coastal Petroleum, a majority-owned subsidiary of Coastal Caribbean Oil & Minerals Ltd.

The oil and gas leases extend to 1941, when Florida granted the leases to Coastal Petroleum's predecessor, Arnold Oil Exploration. Arnold Oil became Coastal Petroleum in 1947. For many years, Coastal Petroleum has explored the leases, but by 1968, Florida officials sought to regain the leaseholds, which have been tied up in litigation since.

Coastal Petroleum's lawsuit follows a similar one filed in the U.S. Court of Federal Claims last July by Chevron U.S.A., Conoco Inc. and Murphy Exploration and Production (see NGI, July 31, 2000). The three claim in their breach-of-contract lawsuit against the federal government that they had been tied into a "proverbial Gordian Knot" in their efforts to develop nine leases in the Destin Dome 56 project, about 25 miles offshore Pensacola. The three said a "regulatory Catch 22" between the U.S. Department of Commerce and the U.S. Environmental Protection Agency had stopped the review process and prevented a project from ever being approved.

The lawsuit, which has so far not been decided, 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 companies said they paid a total of $10.4 million for the leases 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.

The companies drilled three exploratory wells, finding that the leases contain as much as 2.6 Tcf of recoverable gas reserves. They were proceeding with the development process until the State of Florida blocked the project in February 1998.

In a telltale sign of what could occur if the case proceeds through the courts is a lawsuit decided last year. In June 2000, the U.S. Supreme Court 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, 2000). A contract is still a contract, even when the federal government is the one that breaks it, said the high court, which ruled that two energy giants were entitled to recover $158 million.

Carolyn Davis, Houston

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