The U.S. Supreme Court agreed last Monday to hear appeals byUSX-Marathon and Mobil regarding the drilling ban on leasesoffshore North Carolina. The two producers want to be refunded the$156 million they spent in 1981 on leases that became subject to adrilling ban in 1990 when Congress adopted the Outer BanksProtection Act.

The act required the Department of the Interior to conductperiodic environmental analysis before allowing drilling near theOuter Banks and the Bush and Clinton administrations havemaintained the ban over the past nine years.

Mobil, Marathon and a number of other producers with offshoreleases charged, however, that the law prohibited the governmentfrom fulfilling its contractual obligations under the leases. As aresult they filed a breach-of-contract lawsuit.

A federal trial court ruled for the oil companies, awarding themrestitution of their initial lease payments, and most of the oilcompanies with leases offshore North Carolina settled with thegovernment. Their settlements allowed them to receive partialrefunds while retaining their leases.

But in a 2-1 vote, a U.S. appellate court later reversed thelower court judgment, saying the companies had been unable toobtain all the necessary state government approvals for explorationbefore the law had been adopted and therefore were never in anyposition to drill on the leases.

According to the Coastal Zone Management Act, a producer mustfile a statement with the Minerals Management Service saying itsexploration plan is consistent with the state’s Coastal ZoneManagement plan and the state has to agree with that statement. Oilcompanies have the right to appeal the state’s decision to theSecretary of Commerce.

But according to Mobil, Congress passed the Outer BanksProtection Act while its exploration plan was being evaluated bythe state, and eventually it would have been permitted to moveforward with exploration had it not been for the congressionalaction.

If Mobil and Marathon are successful, they will get their moneyback and the government will get its leases back. Some observersbelieve it would eliminate the threat of drilling offshore NorthCarolina because of all the leases Mobil’s Manteo unit was viewedas the most promising. However, a number of other producers,including Chevron, still have leases outside of the Manteo unit andmany in the industry believe that the only way to meet the 30 Tcfof gas demand expected in 2015 will be to tap these untouchedresources.

The Supreme Court will hear arguments in the case in March orApril, with a decision due by the end of June.

Rocco Canonica

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