Florida may be at the center of another controversy between thetwo Bush brothers, but this time it won’t involve a recount, butrather states’ rights versus federal authority — federalauthority that through the Clinton administration had favored andsupported states’ rights to ban offshore drilling. This time, thebrothers could be on opposite sides.

Coastal Petroleum Corp., an Apalachicola, FL-based independent,filed a lawsuit yesterday seeking compensation from the State ofFlorida for the state’s taking of the company’s property rights toexplore on a lease in the Gulf of Mexico. The lawsuit, filed inFlorida’s Leon County Circuit Court, wants the court to determine afair market value on the company’s 400,000-acre 60-year-oldexclusive lease.

The newest lawsuit is part of an escalating legal battle, whichalso includes a lawsuit by Chevron U.S.A. and others, over theright to explore Florida’s offshore oil and gas reserves,especially the Destin Dome area, deemed off limits by stateofficials concerned about pristine beaches and the tourismindustry, but considered rich in both oil and gas reserves.

The key may lie in how President-elect George W. Bush’s opinionabout the restricted area changes once he takes office, and whetherhis brother, Florida Gov. Jeb Bush, who has favored restrictingexploration off the coast, continues to take a hard line. Thepresident-elect campaigned on increasing exploration anddevelopment in now restricted territories of the United States, butsaid last fall that he supported the Florida ban.

With energy prices rising and oil and gas companies pushing forexploration into uncharted territories, Florida’s offshore areasmay be one of the first skirmishes between environmental protectionadvocates and the new president’s promise to make the country moreenergy independent. Coastal Petroleum, which has held anundeveloped lease off the coast for longer than just about anyother company, just wants to be compensated.

“The state wants it both ways,” said Philip Ware, CoastalPetroleum president when the lawsuit was filed. “The state isrefusing to allow Coastal Petroleum to exercise its legal right toexplore for oil and gas under the leases the state sold to us. Atthe same time, the state is refusing to compensate us for takingaway our property rights.”

Coastal Petroleum’s lawsuit seeks compensation for the state’staking of lease 224-A in the Gulf of Mexico, which extends fromApalachicola to Pasco County, including a location off St. GeorgeIsland where the company has been denied a drilling permit.

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

In June 2000, the First District Court of Appeals affirmed aruling that the Florida Department of Environmental Protection(DEP) could deny Coastal Petroleum a permit to drill an exploratorywell off St. George Island in the Florida Panhandle. The court heldthat the state could deny the permit on the basis of a “compellingpublic purpose,” but it also found that DEP’s action would beunconstitutional “if just compensation is not paid for what istaken.” The appeals court said the case should be resolved incircuit court.

Coastal Petroleum said that independent experts have “strongscientific evidence” that there are reserves below the ocean floorwhere its lease is. The evidence is supported by other companies’exploration also.

“After more than 30 years of litigation and numerous courtrulings upholding the validity of the leases, it’s time for thestate to provide Coastal Petroleum with fair market compensationfor what amount to a taking of property,” said S. Cary Gaylord, ofGaylord, Merlin, Ludovici, Diaz & Bain, which is representingCoastal Petroleum, a majority-owned subsidiary of Coastal CaribbeanOil & Minerals Ltd.

The oil and gas leases extend to 1941, when Florida granted theleases 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, Floridaofficials sought to regain the leaseholds, which have been tied upin litigation since.

Coastal Petroleum’s lawsuit follows a similar one filed in theU.S. Court of Federal Claims last July by Chevron U.S.A., ConocoInc. and Murphy Exploration and Production (see Daily GPI, July 25, 2000). The three claim in theirbreach-of-contract lawsuit against the federal government that theyhad been tied into a “proverbial Gordian Knot” in their efforts todevelop nine leases in the Destin Dome 56 project, about 25 milesoffshore Pensacola. The three said a “regulatory Catch 22” between theU.S. Department of Commerce and the U.S. Environmental ProtectionAgency had stopped the review process and prevented a project fromever being approved.

The lawsuit, which has so far not been decided, seekscompensation for lease bonuses and rentals paid to the federalgovernment; exploration costs; expenses incurred for thepreparation of environmental studies and development plans; andopportunity costs associated with the project. The companies saidthey paid a total of $10.4 million for the leases in 1983, 1985 and1988 and have made annual minimum royalty payments totaling $2.2million. Additionally they have expended “tens of millions ofdollars to explore and prepare for the development of the areascovered by the leases.

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

In a telltale sign of what could occur if the case proceeds throughthe courts is a lawsuit decided last year. In June 2000, theU.S. Supreme Court ruled 8-1 in favor of a breach of contract lawsuitbrought by Mobil Corp. and Marathon Oil Corp. that followed theirexpensive attempt to explore and develop leases off of NorthCarolina’s Outer Banks (see Daily GPI, June27, 2000). A contract is still a contract, even when the federalgovernment is the one that breaks it, said the high court, which ruledthat two energy giants were entitled to recover $158 million.

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