By an OGJ correspondent
SANTA BARBARA, CALIF., Apr. 8 -- The Bush administration's decision not to appeal to the US Supreme Court a legal dispute over 36 undeveloped oil leases in federal waters off California now begs the questions: Can they ever be developed? And, if not, will leaseholders obtain some compensation?
Any action on development now means the state has increased authority to review any plans, and the current governor is adamantly against any new oil drilling, while buying back leases is mired over a fair price.
Oil companies paid a then-record $1.25 billion for 40 leases (four were cancelled in 1999, but under litigation) acquired during 1968-84, plus at least $300 million for 39 exploratory wells and annual fees. The leases are located primarily in the Santa Maria basin, north of the Santa Barbara Channel and off the coast of Vandenberg Air Force Base.
The Minerals Management Service estimates the 36 leases hold more than 1 billion bbl of oil and 500 bcf of gas. Oil company plans, revealed in 1999, indicated up to 160,000 b/d of oil could be obtained from up to four new platforms and extended-reach drilling from existing Offshore Continental Shelf platforms.
Background
The court battle started in late 1999, when then-Interior Sec. Bruce Babbitt declared there would be no more oil exploration or development on the leases until a new environmental analysis was conducted and extended the leases for another 10 years. But the order did not allow California to review lease renewals or extensions, and a suit was filed in US District Court, which in 2001 backed the state and was affirmed in December 2002 by the appeals court.
The legal fight was dropped last week, meaning the Bush administration will no longer contest the state's right to control expansion of oil and gas drilling, in federal waters off its coast (OGJ Online, Apr. 3, 2003).
"We believe our efforts will be better spent in negotiation rather than continued litigation with the state," said Interior Sec. Gail Norton.
California Gov. Gray Davis said, "Hallelujah" when the announcement was made. "Californians are adamantly opposed to offshore oil drilling," Davis said, adding, "I will not rest . . . until we have written 'closed' to every undeveloped lease."
Davis advocates the federal government buy back the leases, "as he (President Bush) bought back those along the Florida coast," referring to federal funds of $230 million to acquire leases in the Everglades and Gulf Coast to prevent oil and gas development last year (OGJ Online, May 29, 2002).
Negotiations under way
Affected oil companies are already negotiating lease buyouts, in case they decide that some or all of the leases will be too difficult to develop, given California's antioil position, which cuts across political lines.
However, there are internal disputes on the price, with existing leaseholders hoping to get figures close to original costs vs. lower prices paid when the original leaseholders later sold the leases at discount prices. California Sen. Barbara Boxer and Mary Landrieu of Louisiana also have advocated swapping the California leases for tracts in the Gulf of Mexico.
Aera Energy LLC, Bakersfield, Calif., is the operator of 20 of the leases, followed by Houston-based firms Nuevo Energy Co. and Noble Energy Inc. subsidiary Samedan Oil Corp., with six each, and California-based independents Venoco Inc., Santa Barbara, and Arguello Inc., a unit of Plains Resources Inc., Houston, with two each.
There is also a dispute over whether or not California should contribute to a buyout, to which Gov. Davis was adamant that "the federal government should bear the full cost."
The worst case scenario for the affected oil companies would be for the leases to expire, in which case they would get nothing.