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Producers Sue Feds over Destin Dome
Chevron, Conoco and Murphy Exploration & Production claimthe 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 abreach-of-contract lawsuit against the government, saying a”regulatory Catch 22” between the Commerce Department and theEnvironmental Protection Agency has frozen the review process andprevented the project from ever being approved.
Their U.S. Court of Federal Claims complaint charges thegovernment with creating a regulatory stalemate, in which eachagency says it cannot move forward without a favorable decision bythe other. It has denied the companies “timely and fair review” oftheir plans, permits and an appeal concerning the Destin Dome gasfield in the eastern Gulf of Mexico, they said.
The companies paid a total of $10.4 million for the leases in1983, 1985 and 1988 and have made annual minimum royalty paymentstotaling $2.2 million. Additionally they have expended “tens ofmillions of dollars to explore and prepare for the development ofthe areas covered by the leases. They drilled three exploratorywells, finding that the leases contain as much as 2.6 Tcf ofrecoverable gas reserves, and were proceeding with the developmentprocess until the state of Florida blocked the project in February1998.
In March of that year, Chevron, the operator of the unit, filed anappeal of the state’s ruling with the Secretary of Commerce,requesting a secretarial override (see Daily GPI, March 12, 1998). Chevron also filedenvironmental applications with the EPA and the National Oceanic andAtmospheric Administration.
In July of last year, the Mineral Management Services sent aletter to Chevron informing it that the EPA decided to cease workon the permits until NOAA completed its work and the appeal of thestate’s opposition was heard. Meanwhile, NOAA and other governmentagencies involved told Chevron, they could not act until the EPAgranted the producers the required permits. On June 23, the generalcounsel of NOAA wrote Chevron, saying, “I have also decided to holdthe record open [and not complete processing of the [appeal] untilthe EPA processes the permits requested for this project under theClean Water and Clean Air Acts.”
Michael Smith, Chevron’s associate general counsel, said thelawsuit is being brought because the federal government “refused tohonor its contractual commitments by creating regulatory andadministrative blockages that breached the leases.”
Chevron also noted that in a similar case the Supreme Court lastmonth ruled 8-1 in favor of a breach of contract lawsuit brought byMobil Corp. and Marathon Oil Corp. that followed their expensiveattempt to explore and develop leases off of North Carolina’s OuterBanks (see Daily GPI, June 27). Acontract is still a contract, even when the federal government is theone that breaks it, said the court, which ruled that two energy giantswere entitled to recover $158 million.
“The federal government’s actions, which have denied us timelyand fair consideration of these products are what caused us to filethe suit. Certainly we feel the recent Supreme Court decisionprovides a favorable precedent for our case,” said a spokesman forChevron.
The partners allege this regulatory “Catch-22” constitutesbreaches of lease contracts between the government and the partnersand a “taking” of property rights as protected by the FifthAmendment of the Constitution.
The suit seeks compensation for lease bonuses and rentals paidto the federal government; exploration costs; expenses incurred forthe preparation of environmental studies and development plans; andopportunity costs associated with the project.
The Destin Dome project is the eastern-most field in the gas andoil development area of the Gulf of Mexico. It also is located notfar from the potential path of the proposed Gulfstream andBuccaneer pipeline projects, both of which would transport about 1Bcf/d of natural gas to the Florida peninsula in spring of 2002.
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