Field partners sue to develop Destin Dome

Encouraged by a favorable Supreme Court decision in a similar case last month, three producers are suing the US government for blocking development of the Destin Dome gas field 25 miles off Pensacola, Fla., in the eastern Gulf of Mexico.


Sam Fletcher
OGJ Online

Encouraged by a favorable Supreme Court decision in a similar case last month, three producers are suing the US government for blocking development of the Destin Dome gas field 25 miles off Pensacola, Fla., in the eastern Gulf of Mexico.

Chevron USA Inc., Conoco Inc., and Murphy Exploration & Production Co. filed suit Monday in a federal claims court, challenging a "Catch-22" arrangement between two US regulatory agencies that has effectively blocked "politically unpopular" plans to develop Destin Dome some 13 years after the first discovery well was drilled on that prospect. The three companies are equal partners in the project, with Chevron serving as operator.

According to the US Department of Energy, the field contains potential reserves of up to 2.6 tcf of dry gas that could help fuel Florida's growing gas market. Yet, years after the nine federal leases comprising Destin Dome were sold and drilled, Florida officials now want to ban all offshore drilling within 100 miles of the state's coasts.

With the fourth largest population in the nation, Florida is a key state in presidential elections.

Case details
In March 1998, Chevron filed an appeal with the US Secretary of Commerce seeking to override Florida officials' attempts to block development of the Destin Dome field. That appeal has since been tied up in a review by Commerce officials.

The suit alleges that the US Environmental Protection Agency last year stopped processing necessary environmental permits for that project, pending a decision by the Department of Commerce on Chevron's application.

Last month, Commerce officials reported they would not render a decision on the project until the EPA completes the environmental permits.

The resulting gridlock is "simply another way of breaching" any "timely and fair" consideration of the companies' contractual rights while avoiding financial liabilities that could result in the refund of millions of dollars in bonuses and fees already collected by the federal government, said corporate attorneys. They cite a US Supreme Court decision last month that the federal government is bound by the same principles of contract law as private parties in regards to federal oil and gas leases.

In that 8-1 opinion, the Supreme Court overturned an earlier appeals court ruling and awarded $156 million to ExxonMobil Corp. and Marathon Oil Co. after federal officials voided their leases to drill off North Carolina (OGJ Online, June 27, 2000).

The three Destin Dome partners and other offshore operators have successfully mounted other legal challenges to recoup bonuses and rental payments after the government voided other offshore leases off southwest Florida, Alaska, and North Carolina.

Plaintiff claims
The three partners paid bonuses totaling almost $10.5 million for the nine leases in three lease eastern gulf sales since 1984. The companies claim Florida officials made no objection to the proposed leases during the review periods prior to those sales.

Since receiving those leases, the partners have paid nearly $2.2 million to the federal government in annual rental or minimum royalty fees. They also have spent tens of millions of dollars to explore and prepare a program for developing that prospect.

Conoco drilled the first successful exploration well on that prospect in 1987. Two more successful exploratory wells were drilled in 1989 and 1995.

A development plan submitted to the US Minerals Management Service in November 1996 contemplates drilling a maximum of 20 additional wells and producing from as many as 21 wells, including one of the three exploration wells.

The partners are seeking unspecified amounts in "expectation" or "reliance" damages from the US government for breach of contract on those offshore leases.

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