Judge Seems Open to Louisiana Stance in Lease Sale Suit

NEW ORLEANS Aug 08, 2006 (Dow Jones Commodities News via Comtex)

As he peppered a federal lawyer on U.S. responsiveness to Louisiana coastal concerns, U.S. District Judge Kurt Engelhardt on Tuesday signaled sympathy for the Louisiana argument that last year's treacherous storms fundamentally altered the dynamics surrounding offshore energy development in the region.

"Is the general feeling that it'll just get a little worse?" Engelhardt asked the U.S. government attorney Brian McLachlan, attempting to glean the government's view of the potential coastal harm from an upcoming Gulf of Mexico lease sale.

Asserting that the sale would harm Louisiana's already-vulnerable coast, Louisiana Gov. Kathleen Blanco asked the federal court to block the sale, scheduled for Aug. 16.

"We're not saying there's going to be no impact, or not a significant impact," replied McLachlan, who is representing the Minerals Management Service. "What we're saying is, the impact for this specific lease sale would be minor."

The hearing Tuesday centered on Louisiana's petition for an emergency order to block the sale, because of the state's contention that it would cause "irreparable harm" to the coast. The outcome will have little immediate impact on global energy markets because federal leasing of tracts is only the earliest stage of development. And instead of a debate on new activity in virgin land, the sale concerns incremental additional activity in a region already lined with offshore rigs and platforms.

But a ruling by a federal judge to block the sale would send a powerful message about the changing attitude toward future energy development from a hurricane-ravaged region that has historically served as the backbone for U.S. domestic oil and gas. Louisiana has balked at the MMS environmental analysis for the August sale, which is based heavily on a 2002 U.S. development program that the agency acknowledges has not been fundamentally reevaluated since Hurricane Katrina.

A ruling could come Friday, but Engelhardt said a decision was "most likely" to be released Monday. After the hearing, Sam Kalen, a Washington attorney with Van Ness Feldman, who is representing Louisiana, predicted the losing side would appeal to the U.S. Court of Appeals.

Implications Of August Sale

In the course of nearly two hours of testimony, Engelhardt, a long-time Louisiana attorney appointed to the federal bench by President George W. Bush, at times pressed Kalen. But Engelhardt's aggressive questioning of McLachlan and of the American Petroleum Institute seemed to indicate openness to the state's argument.

Much of the hearing centered on the implications of the August sale, given that Louisiana hasn't signaled interest in removing existing platforms, or blocking new developments that are being installed. In organizing the lease sale, the MMS must probe the environmental implications of more development, because it is "the last time the U.S. can look at the cumulative impacts of this activity," Kalen argued. The MMS's failure to more seriously study the implications post-Katrina "arbitrarily and capriciously" violates federal standards, according to Louisiana.

"Whatever might have happened in the past, it's a changed environment now," Kalen said. "Unfortunately, things can't be done the same way as they have in the past."

The MMS has argued that a delay in the sale will deprive the Treasury of hundreds of millions of dollars of lease payments and will delay additional energy production vital to the nation. The agency has said the sale can't cause "irreparable injury" because it is simply an occasion for the government to open bids and any operational activity such as drilling requires additional regulatory approval.

In addition, McLachlan pointed to some planning modifications post-Katrina and reminded Engelhardt that the emergency order sought by Louisiana requires an "exceedingly high burden" legal standard. API, which also opposes the Louisiana motion, said a delay would cause uncertainty and undermine investment enthusiasm in the Gulf.

Unease In New Orleans

The hearing, held just weeks before the Aug. 29 anniversary of Katrina, comes amid a lingering sense of unease and uncertainty in New Orleans, not only about the region's ability to withstand another assault from Mother Nature this year, but also over a federal response to the tragedy that many locals continue to view as woefully inadequate.

Louisiana's role as an energy hub is at the center of that frustration. As congressional debate focuses on possible new drilling areas throughout the U.S., many Louisiana officials feel the state's plight has been taken for granted. The Louisiana congressional delegation is pushing legislation to direct more federal offshore royalty funds to coastal restoration, but the Bush administration and lawmakers from both parties have balked at the fiscal implications of some of the efforts.

Given the simultaneousness of the lease sale litigation and the royalty efforts in Congress, some commentators have questioned whether Louisiana would drop the case if federal funds come through. But Blanco on Tuesday insisted the state intended to pursue the litigation regardless of what Congress does.

"This case is about state's rights," said Blanco, who noted that Florida, California and other states have barred most offshore development near their coasts with little opposition from the federal government. "We have been treated as if we have no voice in our own destiny," she said.

Blanco said Louisiana still supports offshore development, but that it can't shoulder more activity at this time.

"We need some time," Blanco said. "Right now, we are crippled. We cannot take on any more obligations at this time."

Copyright (c) 2006 Dow Jones & Company, Inc.

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