Drillers call ‘NEPA shenanigans’ on Interior as it scraps leases

By Ellen M. Gilmer | 02/19/2016 07:00 AM EST

Several high-stakes battles playing out on public lands this year boil down to a surprisingly basic question: Can the government cancel an oil and gas lease when the driller has done nothing wrong?

Several high-stakes battles playing out on public lands this year boil down to a surprisingly basic question: Can the government cancel an oil and gas lease when the driller has done nothing wrong?

The issue has fueled a protracted legal squabble in Montana, where the Department of the Interior has signaled it may cancel a long-disputed lease near tribal land, citing inadequate environmental review. The driller’s response: Federal officials don’t have the power.

"It’s seller’s remorse," industry lawyer Steven Lechner said in a recent interview. "There’s nothing that says the secretary may administratively cancel a lease that may have been improperly issued or prematurely issued."


From industry’s perspective, the agency is breaching its contract with the driller. Years of planning and expenses are at stake, and the driller is entitled to use the lease. Interior lawyers counter that the secretary has the final say, and the agency must always consider environmental impacts and prioritize the public interest.

The debate moves well beyond the Montana conflict. The Bureau of Land Management just last week announced plans to cancel 25 contested oil and gas leases in Colorado’s White River National Forest, eliciting jeers from industry advocates who said the move would set a dangerous precedent and double-cross drillers who have waited more than 10 years to develop the area (Greenwire, Feb. 11).

And in Oklahoma, a federal judge recently moved to nix an Osage Nation lease for inadequate environmental review, leaving open the question of whether similar oil and gas leases are valid.

Though many courts have weighed in on the issue over the past few decades, experts in public lands law disagree about the extent of the government’s authority. John Leshy, Interior’s top lawyer during the Clinton administration, said the legal standard is somewhat muddy but ultimately favors agency authority.

"It’s slightly gray, but I think it’s pretty black and white," said Leshy, now a professor at the University of California’s Hastings College of the Law, who added that any legal ambiguity here should ultimately favor the public interest.

But to Norton Rose Fulbright attorney Bob Comer, who served in the solicitor’s office at Interior from 2002 to 2010, the law’s limits on Interior’s power are clear — and strict.

"If there’s a lease violation and the lease provides for a termination, that’s one thing," he said. "I don’t think the government has a right, on its face now, to simply undo leases."

‘NEPA shenanigans’

The federal court in the Montana case may have the first shot at bringing clarity to the recent debate. After Interior in December announced it would likely cancel a contentious lease in the Badger-Two Medicine area of the Lewis and Clark National Forest, lessee Solenex LLC kicked off a legal tirade of opposition.

The history of the case is long and complicated: Interior issued the contested lease and many others in the national forest — near Glacier National Park and the Blackfeet Indian Reservation — in the early 1980s without doing an environmental impact statement under the National Environmental Policy Act. The agency’s policy at the time, under Reagan-appointed Secretary James Watt, was to issue leases first and perform environmental analysis later when actual drilling permits were considered.

"It’s much easier to lease on the doorstep of Glacier National Park when you’re telling the public that this is just a piece of paper and it has no environmental impact," said Tim Preso, a Montana-based environmental lawyer for Earthjustice.

The leasing system eventually came under scrutiny from environmental and tribal groups, and Interior’s internal review board overturned agency decisions to grant drilling permits. In 1993, the National Wildlife Federation filed suit over the leasing system, Interior suspended leases and the case was set aside.

Solenex — which had acquired the lease from another company — in 2013 filed suit in the U.S. District Court for the District of Columbia, challenging the long suspension of the company’s lease in the Badger-Two Medicine area. A judge agreed that the suspension was an "epic" delay and ordered BLM to make a final decision (EnergyWire, July 28, 2015). The Forest Service and Advisory Council on Historic Preservation have since chimed in and said the area should have never been leased, as it is part of the Blackfeet creation story and considered sacred by many tribal members.

Interior referenced the agencies’ recommendations in its November notice that BLM would likely cancel the contested lease.

"Considering these factors, among others, the BLM has concluded that proceeding with administrative lease cancellation under its inherent authority to manage public lands is the most appropriate course of action," the legal filing said (EnergyWire, Nov. 24, 2015).

But Lechner, the industry attorney representing Solenex, said Interior’s rationale for canceling the lease now is merely a cover for assuaging environmental interest groups.

"They issue leases, and then they start getting it from the other side, and they don’t want them anymore," he said. "The proper way to do that is to pony up and not just cancel them and do some NEPA shenanigans."

Lechner is an attorney for the Mountain States Legal Foundation, a nonprofit law firm that often represents energy companies in litigation over environmental laws and property rights. Watt, the former Interior secretary, was the foundation’s first president.

Inherent authority?

Interior lawyers say the agency’s authority to cancel leases is spelled out by both statutes and legal precedent.

The Mineral Leasing Act gives the secretary broad authority to manage public lands, and current regulations stipulate that "leases shall be subject to cancellation if improperly issued." Federal courts have ruled in the agency’s favor in several cases dealing with questions of lease cancellation — with the Supreme Court ruling in 1963’s Boesche v. Udall that Interior could nix a lease that was issued through an administrative error.

Even more applicable is a 1980s and ’90s legal battle over Montana leases that were issued alongside the Badger-Two Medicine land. In the Bob Marshall Alliance cases, the U.S. District Court in Montana and the 9th U.S. Circuit Court of Appeals ruled that the leases violated NEPA, and the district court concluded they should be canceled.

"The Badger-Two Medicine leases are mirror images of those leases," Preso said.

Department of Justice Assistant Attorney General John Cruden relied on that same logic in arguments before federal judges last year, arguing that the Solenex lease is "voidable" due to major defects in environmental and cultural review.

But according to Lechner, environmentalists and the government are reading too much into those cases. The courts’ judgments in those cases were narrow, applying to the specific circumstances at hand, he said.

Industry supporters say the Mineral Leasing Act puts clear conditions on when Interior can cancel leases, restricting cancellation to situations when the lessee violated certain provisions. And where other statutes include specific provisions for lease cancellation in light of environmental harm, the MLA is silent on the issue.

"The secretary does not have inherent authority," said BakerHostetler attorney Mark Barron, who frequently represents oil and gas companies. "There needs to be statutory guidance. [The Outer Continental Shelf Lands Act] has an express grant for the secretary to withdraw leases whenever environmental sensitivities require it. Congress must affirmatively act."

To Lechner, it comes down to a question of contract, supported by the Supreme Court’s 2000 decision in Mobil Oil Exploration Producing Southeast Inc. v. United States that an oil and gas lease constituted a contract, conveying valuable property interests.

"The federal government has tried to expand and expand and expand its authority," Lechner said. "But we have a contract, and we have property rights. Those are certainly valid existing rights."

‘Work out something’

The contract argument is an important aspect of industry’s case against lease cancellation.

Solenex argues that, as part of the contract, it is entitled to "bona fide purchaser protection" under a provision in the MLA designed to protect lessees who acquire a lease in good faith, with no notice of any deficiencies. Based on federal government representations, Lechner said, the company believed the lease would be "good to go." The change in course is unfair to industry, said Comer, the Norton Rose Fulbright lawyer.

"Good government matters," he said. "The federal government really ought to hold itself to a higher standard than it holds private parties in carrying out public law. They’re quick to condemn private action that they deem unacceptable; they should use a more stringent lens on themselves."

But Preso, the environmental attorney, says Solenex is trying to create a "cloud of confusion" and isn’t entitled to bona fide purchaser protection because questions about the validity of the lease were well established by the time the company acquired it in 2004.

Going a step further, he disputes the idea that Solenex’s interests should take priority at all.

"Most of it is bluster. A lease is not some kind of sacred instrument from the hand of God," Preso said. "The lease is between a private party and the public, for whom there’s a strong public interest in making sure these areas are not sacrificed based on the error of a BLM official back in 1981 or 1982."

Leshy, the former Interior solicitor, agreed, noting that he sympathized with industry’s concerns about lost investments but that it would be unprecedented to rule against the government here.

BLM "probably should have canceled them 30 years ago and saved everybody some anguish," he said. "But it would be totally extraordinary and unprecedented for the court to say you can’t cancel the leases and you must let them drill."

So, how should the government address the environmental and cultural concerns? Pay up. If Interior is going to reverse course on an earlier lease issuance, it should compensate the lessee, industry says.

Leshy says it’s not a bad idea, even though he believes the government ultimately has discretion on the issue.

"If I were advising the government," he said, "I would say, ‘Sit down with these people and see if you can work out something.’"