Court Orders US Govt. to Pay Oil Companies $1B for Lease Breach

WASHINGTON (Dow Jones Newswires), August 26, 2008

A U.S. appeals court Monday awarded nearly a dozen oil companies more than $1 billion to recover costs from breached 1980s exploration and production leases off the coast of California.

The U.S. Court of Appeals for the Federal Circuit affirmed a previous court's decision for the plaintiffs claiming the government owed them for the bonuses paid for the Outer Continental Shelf leases.

It may send a strong signal to congressional lawmakers who've been trying to force oil companies to pay royalties on offshore oil and gas leases signed in the late 1990s that omitted royalty relief provisions.

"It's very important to have reaffirmed the principle that when the government enters contracts with companies, it's held to the obligation either to fulfill those contractual obligations or pay damages if it doesn't," Steven Rosenbaum, a partner with Covington & Burling LP and counsel for the plaintiffs, told Dow Jones Newswires.

The plaintiffs include Amber Resources Co., Delta Petroleum Corp., Total SA, Plains Exploration and Production, Noble Energy, Anadarko E&P and Devon Energy Production. An official at the U.S. Department of Interior, which was responsible for the lease sales, said she couldn't immediately comment.

Between 1979 and 1984, the federal government granted around 35 leases to explore for and produce oil and natural gas off the California coast. But after a series of legal battles over the Coastal Zone Management Plan, the oil companies weren't able to use the leases, and they ultimately expired or were suspended by the government.

The court's Monday decision said nearly a dozen companies holding leases for the undeveloped tracts off Ventura, Santa Barbara and San Luis Obispo counties should be reimbursed for what they paid decades ago for the leases.

The court also confirmed a previous court ruling that denied plaintiffs' claims for damages attributable to possible income that may have come from developing the leases.

The government could appeal the decision for the case to be heard by the entire court panel - rather than the three judges who issued the current ruling - or appeal to the Supreme Court.

Asked if the case sends a message to Congress on lawmakers' attempts to force many oil companies to pay royalties on 1998-1999 leases in the Outer Continental Shelf in the Gulf of Mexico, Rosenbaum said: "This confirms that the government can't change the terms of the leases after they're issued."

The ruling comes as federal lawmakers and presidential candidates fight over energy policy, with Republicans pressing hard to open up more of the Outer Continental Shelf for exploration. Few industry analysts believe the California coast will come into play, but the case highlights one of the repercussions of the state's strong drive to block drilling off its coast.

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