Copper Valley MacHine Works, Inc. v. Cecil D. Andrus, Secretary of the Department of Interior

The principal issue in this appeal is whether a restriction in a drilling permit prohibiting summer drilling in the interest of conservation worked a "suspension of operations and production" that would extend the life of an oil and gas lease under section 39 of the Mineral Leasing Act of 1920, as amended, 30 U.S.C. § 209.

Effective February 1, 1966, the Secretary of Interior issued oil and gas lease A-063937 to run for an initial "period of ten years and so long thereafter as oil or gas is produced in paying quantities." (Appellant's Exhibit (App.Ex.) A at 3.)

Near the end of the primary lease term, Copper Valley Machine Works, Inc. (Copper Valley), the designated operator of the lease,1 asked the Oil and Gas Supervisor of the United States Geological Survey about "extending the 10-year lease term by drilling across the expiration date."2 Subsequently Copper Valley filed for the Supervisor's consideration an application for a permit to drill. On January 30, 1976 the drilling permit application was approved,

subject to conditions attached to the permit and conditions and requirements described below:

10. The approved application and development plan provides for operation during the winter season only, as approved by the appropriate surface managing agency.

(App.Ex. F at 2) (emphasis added). This "winter season only" restriction was considered "necessary because the lease itself was issued without any stipulations for protection of the tundra/perma-frost environment during the months of summer thaw." (App.Ex. V at 3.)

The events that then led to this dispute are described in a memorandum from the Acting Director of the Geological Survey to the Secretary of Interior:

The well was commenced on January 31, 1976 (the expiration date of the primary term), and reached a depth of 100 feet before having to shutdown for the 1976 summer season. Following the summer shutdown from May to November 1976, operations were recommenced on February 5, 1977, and after reaching a depth of 1,070 feet on March 20, 1977, electric logs were run in the well. After evaluating the electric logs and examining the samples, the Supervisor concluded that the operator had satisfied the "diligent drilling" requirements of 43 CFR 3107.2-3,3 and recommended to BLM that the lease be extended to January 31, 1978.After the 1977 summer shutdown, the Supervisor advised the operator and the lessee that the lease would expire January 31, 1978, absent a well physically and mechanically capable of production in paying quantities by that date.

On January 20, 1978, the operator wrote the Supervisor and requested that the lease be extended for twelve (12) months to compensate for the two periods of summer shutdown in 1976 and 1977. The Supervisor considered this letter to be an application to the Secretary for an extension of lease Anchorage 063937 pursuant to 43 CFR 3103.3-84 (Emphasis added.)

Although acknowledging that Copper Valley had been "unable to conduct operations on a full-time basis since January of 1976 by the imposition of the requirement that operations would be permitted only during the winter months," (App.Ex. V at 4), the Acting Director recommended that no extension of the lease be granted or recognized.

On May 22, 1978, the Secretary of Interior followed the Acting Director's recommendation, ruling that

the lease is considered to have expired by operation of law as of midnight, January 31, 1978, absent the existence of a well on that date which had been determined by the Supervisor as capable of producing in paying quantities. The reasons for the denial (of extension) are that (1) the lessee accepted the imposed restriction that drilling could be conducted only during the winter season without complaint until 11 days preceding the lease expiration date and (2) the 2-year lease extension earned by drilling across the end of the primary term of January 31, 1976, afforded sufficient additional time, despite the restriction, in which to have completed a well that was physically capable of production in paying quantities.

Memorandum from Acting Chief, Conservation Division to Conservation Manager, Western Region (June 14, 1978), reprinted in App.Ex. V at 1.

On July 17, 1978, Copper Valley was advised of the Secretary's May 22nd action, and on August 18 sought a declaratory judgment in the United States District Court for the District of Columbia that the Secretary's refusal to permit another 12 months of operations was unlawful. Copper Valley relied on section 39 of the Mineral Leasing Act of 1920, as amended, which provides in part:

In the event the Secretary of Interior in the interest of conservation, shall direct ... the suspension of operations and production under any lease granted under the terms of this Act, any payment of acreage rental or of minimum royalty prescribed by such lease likewise shall be suspended during such period of suspension or operations and productions; and the term of such lease shall be extended by adding any such suspension ... thereto.

On the parties' cross-motions for summary judgment, the district court ruled in favor of the Secretary. Copper Valley Machine Works, Inc. v. Andrus, 474 F.Supp. 189 (D.D.C.1979). The court reasoned that drilling permit restrictions, which the lessee had agreed to accept in signing the lease, did not amount to a "suspension of operations and production" because Congress meant to apply that phrase only to

extraordinary situations where the Secretary orders the suspension of drilling to the surprise of the lessee in order to conserve oil and gas or where the lessee requested and the Secretary assented to a suspension. See H.R.Rep. No. (1737, 72d Cong., 1st Sess. 3 (1932)) and 76 Cong.Rec. 705 (Dec. 19, 1932).

Id. at 192. The court also indicated that Copper Valley's action was untimely inasmuch as the Secretary's imposition of the "winter season only" restriction in the drilling permit of January 30, 1976 triggered the 90 day period for seeking judicial review of adverse agency action. Id. (citing 30 U.S.C. § 226-2). This appeal followed.

Copper Valley's principal contention on appeal is that the drilling permit's "winter season only" restriction, by preventing drilling operations for 6 summer months a year, worked a "suspension of operations and production" "in the interest of conservation" and therefore, under § 209, mandated an automatic extension of the lease for a period equal to the length of the suspension. The Government responds that the drilling restrictions did not create suspensions within the meaning of § 209.

A. "In the Interest of Conservation"

We note at the outset that there is no contention that the "winter season only" restriction was not ordered "in the interest of conservation." The parties agree that carrying on drilling operations during the summer months would have substantially damaged the permafrost character of the leasehold area. Preventing such damage is obviously in the interest of conservation if that term is to receive its ordinary meaning. While the prevention of environmental damage may not have been the "conservation" that Congress principally had in mind in 1933 when it passed § 209,6 suspending operations to avoid environmental harm is definitely a suspension in the interest of conservation in the ordinary sense of the word.7 And there was no indication that Congress intended that "conservation" be given any interpretation other than its ordinary meaning.8

B. "Suspension of Operations and Production"

1. The Secretary's "Surprise Theory"

The Secretary asserts that § 209 "was designed by Congress to cover only unanticipated interruptions of drilling." Appellee's Brief at 13. Under this view, whether a § 209 suspension has occurred depends on whether the "winter season only" restriction was a surprise to Copper Valley. It is in this context that the Secretary emphasizes that the lease gave "notice that drilling activities would be subject to restriction," that Copper Valley "did not protest against the restriction until two years after the permit was issued," and that Copper Valley "continued to pay rent during the thaw months without attempting to assert that the drilling permit condition was a surprise." Id. We find it unnecessary to consider whether summary judgment was appropriate on the question whether Copper Valley could foresee the suspension of drilling, for we reject as unpersuasive the Secretary's attempt to narrow the scope of the plain terms of § 209.

As indicated in note 6 supra, § 209 was enacted in a period when the Secretary was suspending the drilling operations of oil and gas lessees in order to alleviate the problem of excess petroleum production. The congressional report explained that the bill

relieve(s) lessees of coal and oil lands from the necessity of paying prescribed annual acreage rental, during periods when operations or production is suspended, in the interest of conservation, either by direction or assent of the Secretary of the Interior, and (provides) that the period of such suspension shall be added to the term of the lease.

....

The obvious fairness of such a provision would seem to render unnecessary any extended comment in its support. That which can not be productive of any returns to the lessee, by reason of the direction or assent of the lessor, should not be made a liability by requiring the lessee to pay annual acreage rental.

....

Where, by reason of the positive directions of the Secretary of Interior, or by mutual assent of the Secretary and of the lessee, production is prohibited from the leased area, the suspension period surely should not be counted as a part of the prescribed term. Hence the provision that such suspension period shall be added to the life of the lease.

H.R.Rep. No. 1737, 72d Cong., 1st Sess. 2-3 (1932).

Because some of the oil and gas lessees who benefitted from the lease extensions and rent moratoriums of § 209 might have been surprised by the petroleum glut and the Secretary's ensuing suspensions, the Government contends that the section, which by its terms applies to any Secretary-imposed "suspension of operations and production," actually applies only to those suspensions that are the product of unanticipated events. To state this contention is to suggest its refutation. The plain meaning of a statute cannot be overcome by speculation as to some unstated purpose. Nothing in the legislative history of § 209 suggests, much less establishes, the narrow interpretation the Secretary would have us adopt. Rather, the history is consistent with the statute's use of the word "suspension" in its unqualified sense: "The very purpose of the bill is to give some equitable consideration to the many leases where the Department of the Interior, by its order, has prohibited production of oil from the leases." 76 Cong.Rec. 705 (1932) (remarks of Representative Eaton). It was further explained: "It seems unfair for the Government to order lessees to refrain from production and then collect rent for the non-production period." Id. at 1881 (1932) (remarks of Representative Eaton). Precisely the same rationale underlay the decision to extend leases for the period of the suspension. H.R.Rep. No. 1737, 72d Cong., 1st Sess. 3 (1932). There is no indication that Congress thought it desirable or possible to distinguish between lessees who were surprised by suspensions and those who anticipated them. The Secretary's speculation, suspect on its own terms, has no support in the legislative history and cannot modify the statute's plain terms.

We thus find it irrelevant, insofar as extension of the lease is concerned, that Copper Valley paid rent without protest during the two year extension of the ten year primary term. By paying rent Copper Valley protected its rights by eliminating the basis for any contention by the Secretary that it was in default. Whether the lease was extended or not, rent would eventually be due for the full two year period. Now Copper Valley has fully satisfied its rent obligation through the extension period it will receive by virtue of the suspension.

The Secretary also contends that Copper Valley's interpretation of § 209 could double the term of all leases on Alaskan tundra, contrary to the congressional intent that the term of a non-producing non-competitive lease be limited to 10 years, with the possibility of a single 2-year extension. 30 U.S.C. § 226(e). Contrary to the Secretary, we perceive no conflict between Copper Valley's reading of § 209 and a sensible reading of § 226(e). Without undertaking to decide that issue, which is not before us, we note that § 226(e) gives the lessee a minimum number of years in which to develop the resources subject to his lease. Section 209, consistent with this policy, extends the life of the lease to the extent that the lessee is deprived of his full term by the Secretary's suspension of drilling operations in the interest of conservation. Far from undermining § 226(e), § 209 effectuates the policy it reflects. The law was intended to apply uniformly throughout the United States and give lessees in Alaska the same full term of enjoyment as lessees in the lower 48 states. If climatic conditions in Alaska cause the Secretary to order a suspension in the interest of conservation it is not to be considered as being any the less a suspension because the reason that prompted its imposition was foreseeable.

2. The Secretary's discretion not to invoke a suspension

The Secretary argues in the alternative that notwithstanding the terms of § 209, "that section gives the Secretary discretion not to invoke a suspension." Appellee's Brief at 16. It is in this context that the Secretary emphasizes the second reason given for the denial of extension: Copper Valley had had sufficient time to drill several wells in the area under lease.

This position rests upon a misconception of Copper Valley's request for an extension. The Secretary treated the January 20, 1978 letter as an "application by (a lessee) for relief from the producing requirements or from all operating and producing requirements of (its lease)." 43 C.F.R. § 3103.3-8(a), note 4 supra. However, Copper Valley has never applied for relief from any producing requirements within the meaning of the regulation. Although some language in the regulation might be construed to favor the Secretary's construction, it is clear that the regulation, when read in its entirety, aims at situations where lessees make

applications for suspension of operations or production or both ... pursuant to this section and to terminate suspensions of this kind which have been or may be granted. As to oil and gas leases, no suspension of operations and production will be granted on any lease in the absence of a well capable of production on the leasehold, except where the Secretary directs a suspension in the interest of conservation. Complete information must be furnished showing the necessity of such relief.

43 C.F.R. § 3103.3-8(a). Here, by contrast, the suspension was not applied for and obtained by the lessee but was ordered by the Secretary. This is not a case where the Secretary was asked to invoke a retroactive suspension, but one where he was asked to recognize that a suspension has been invoked by his action. Whatever relevance dilatory drilling may have when the lessee asks for a suspension, it is not a relevant consideration where the suspension has already been directed by the Secretary.

3. The Secretary's Prior Decision in Texaco, Inc.

Additional support for the conclusion that § 209 required an extension in this case appears in Texaco, Inc., 68 I.D. 195 (1961), a case neither referred to by the Secretary in his decision nor, it appears, brought to the attention of the district court. In Texaco, the lessee was denied an oil drilling permit in order to preserve potash deposits. The Secretary held:

Inasmuch as the record in this case indicates that the refusal to permit drilling on these leases amounted to an order prohibiting all operations thereon and that the order was in the interest of conservation, the appellant's application for suspension under § 39 (30 U.S.C. § 209) may be allowed.

Id. at 200 (emphasis added). The "winter season only" restriction involved here was not a total refusal to permit drilling but did amount to a refusal to permit drilling for a six month period each year. Under the rationale of Texaco this restriction must be interpreted as having caused a six month suspension in each year of Copper Valley's "operations and production."

In this case the district court relied upon a conclusion that all provisions of the drilling permit issued during the primary term of the lease were incorporated into the lease. Assuming this is so, the statute nonetheless mandates that the lease "shall be extended" for the length of the period in which operations and production are suspended in the interest of conservation. The Secretary's decision in Texaco, Inc., which involved a similar lease, states that no distinction is to be made between those cases where the lease expressly provides for the possibility that operations might be curtailed or prohibited and those cases where the lease does not contain such a provision.

(N)o valid reason suggests itself for distinguishing ... between leases which do and those which do not contain stipulations or provisions restricting or limiting operations and production under designated conditions.

Id. at 199. The source of the Secretary's authority to impose the drilling restrictions, then, is irrelevant for purposes of deciding whether a lease extension is required under § 209. All that matters is whether these restrictions, admittedly imposed in the interest of conservation, were sufficient under the statute to constitute a "suspension of operations and production." If they did, the lease must be extended. And Texaco, Inc. holds that withholding permission to drill is a § 209 "suspension of operations and production."9 Thus, under the Secretary's own precedent, as well as under our independent evaluation of § 209, the controlling question is answered contrary to the district court decision and under the statute the lease is extended for a period of time equal to the total period of suspension, i. e., 12 months.10

After ruling against Copper Valley on the merits, the district court indicated that Copper Valley's action was also time-barred because it

never sought administrative review of this ("winter-season only") restriction pursuant to the prescribed procedure in 30 C.F.R. § 290. Such a review procedure has been set up to lead to a final secretarial decision and trigger the ninety-day statutory judicial review procedure set forth in 30 U.S.C. § 226-2.

474 F.Supp. at 192. Copper Valley, however, was under no obligation to contest the restriction. It does not contest the authority of the Secretary to impose the drilling restriction and is not obligated to contest restrictions it admits are legally authorized. As 30 U.S.C. § 209 recognizes, the Secretary had authority to impose such restrictions and the statute provided that in such event "the term of such lease shall be extended by adding any such suspension period thereto." Id. (emphasis added). Accordingly, since Copper Valley did not (and does not) contest the authority of the Secretary to impose such drilling restrictions, it was not in the position when the restriction was imposed of "contesting a decision of the Secretary involving an oil or gas lease." 30 U.S.C. § 226-2.11 Thus, when the permit was granted with the restrictions, Copper Valley was not required to appeal and obtain an agency decision as to the ultimate consequences of the Secretary's action, if any, on the term of the lease. It could assume that the agency would abide by the provisions of the Act and recognize that the suspension of operations extended the lease at the end of the term thereof. Copper Valley is now seeking review of the refusal to grant the automatic extension of the lease which is called for under the statute. It is not appealing the decision of the Secretary to impose the six months drilling restriction but merely seeks recognition of the extension of the lease that such suspension mandates under the statute.

The Secretary diverges from the district court's opinion to suggest that Copper Valley's action is time-barred for another reason: Copper Valley should have sought review of the Oil and Gas Supervisor's letter of September 2, 1977, which informed Copper Valley "that the lease would expire on January 31, 1978, unless production in paying quantities was developed." App. Ex. R. Whatever may have been the merit of this position had the Secretary relied upon it below, he in fact did not. Instead, the Secretary decided Copper Valley's administrative request on the merits. Thus, assuming without deciding that the Supervisor's September 2 letter was a "final order or decision" that "adversely affected" Copper Valley, 30 C.F.R. § 290.2 (1979), the Secretary failed to treat it as such and cannot do so now. An agency that does not raise the issue in an administrative proceeding waives the applicability of a limitation period prescribed by its regulations. Montship Lines, Ltd. v. FMC, 295 F.2d 147, 151 (D.C.Cir.1961).

It remains only to note that the final secretarial decision occurred May 22, 1978, and that Copper Valley received notice of it in mid-July. The declaratory judgment action of August 18 was within the allotted time.

In this case the Secretary, far from adequately explaining his departure from the precedent of Texaco, has completely ignored it. Affording different treatment to similar situations is the essence of arbitrary action. The Secretary also has arbitrarily ignored the language of § 209. Ordinarily this agency conduct would call for a remand for proper application of the appropriate legal standards, if the agency under the law could reasonably adhere to the result its challenged decision has reached. See, e. g. Public Service Commission v. FPC, 511 F.2d 338, 355 (D.C.Cir.1975). On the undisputed facts here, however, we conclude that no reasonable interpretation of § 209 can deny Copper Valley the extension it claims. Accordingly, the judgment of the district court granting summary judgment for the Secretary should be vacated and the district court in accordance with the foregoing opinion should grant the motion of Copper Valley for summary judgment in its favor.12

Judgment accordingly.

JOHN H. PRATT, District Judge, concurring in the remand:

I concur in the remand, but for reasons different than the majority's.

Congress intended the term "conservation" in § 209 to refer to the conservation of mineral resources, and not to more general environmental protection measures which may restrict production. The history of the 1933 statute shows that the concept of mineral conservation was advanced repeatedly by the bill's sponsors and managers, and was agreed to by opponents.1 The Committee Reports on this and closely related suspension legislation reinforce this understanding.2 This was also Congress's intention when it amended § 209 in 1946, an intent shown both by the statutory language and by the legislative history.3 Where, as here, Congress incorporates words with a special meaning in the regulated field, and does so to overcome industry objections to the regulatory program, that congressional choice is entitled to special weight. Corning Glass Works v. Brennan, 417 U.S. 188, 201-02, 94 S.Ct. 2223, 2231, 47 L.Ed.2d 1 (1974). The majority reads "conservation" in its modern sense, and inadequately weighs the special meaning of the term "conservation" intended by Congress.

The Interior Department, which had authored and advocated the 1933 and 1946 statutes, interpreted § 209 to apply only to mineral conservation.4 This example of contemporaneous construction by the responsible cabinet officer is strong evidence of the original meaning, especially where Congress reenacts the statute consistently with that construction. E. g., United States v. Sheffield Board of Commissioners, 435 U.S. 110, 131, 98 S.Ct. 965, 979, 55 L.Ed. 148 (1978). The Department acted consistently with this interpretation in subsequent administrative adjudication and rulemaking. The decision in Texaco, Inc., 68 I.D. 194 (1961), relies strongly on this mineral conservation rationale.5 Later rulemaking sharply restricted the grant of lease extensions based on drilling permit restrictions imposed for reasons other than mineral conservation.6 That is precisely the sort of argument Copper Valley advances here, since it contends that the Department's imposition of winter-only drilling restrictions in the drilling permit operated automatically to extend the lease by the same amount of time drilling was forbidden. The Department's adherence to the mineral conservation rationale is entitled to respect.7 E. g., California v. United States, 438 U.S. 645, 675-76 n. 30, 98 S.Ct. 2985, 3001 n. 30, 57 L.Ed.2d 1018 (1978).

I think a remand appropriate however, for the Secretary and his subordinates relied on legally irrelevant grounds to deny the extension.8 The District Court should return the case to the Secretary and require him to decide explicitly whether winter-only drilling restrictions are "suspensions" under § 209, and to state the policy and legal reasons for his choice among plausible interpretations of § 209.

There are sound practical and legal reasons for this approach. We know little more about Alaskan drilling than the fact that it is expensive and difficult. By pronouncing a rule at sharp variance with present practice in Alaska, we may create significant new land title difficulties in areas which have been subject to leasing, make new investment in oil exploration substantially more risky and expensive, and shortchange the United States as lessor, by conferring an unbargained-for windfall on the holders of existing leases. These are cogent reasons for seeking a careful exercise of the Secretary's expert judgment before deciding the interpretive issue presented here. Udall v. Tallman, 380 U.S. 1, 16-18, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965); McLaren v. Fleischer, 256 U.S. 477, 481, 41 S.Ct. 577, 578, 65 L.Ed. 1052 (1921). By pronouncing a flat rule before the Secretary has acted, we may significantly impede Alaskan oil development vital to meeting the Nation's current and future energy needs. I doubt Congress intended that result.