Who Goes First? What Happens When Two Federal Mineral Lessees Clash Over The Same Acreage

Posted on February 7, 2018 by Tom Sansonetti

In January, the Wyoming Supreme Court declined to play umpire in a dispute between two federal mineral lessees. The decision merely defers an issue of first impression: what rules apply when competing mineral lessees occupy the same leasehold?

The Berenergy Corporation produces oil from several sites in Wyoming’s mineral rich northeast corner. Berenergy obtained its oil leases from the Department of the Interior’s Bureau of Land Management in the 1960s. Berenergy’s nine wells are spaced laterally on an east-west axis.

Peabody Powder River Mining extracts coal from several mines in the same area. Peabody also obtained its coal leases from the BLM, but in the 1970s. Peabody plans to mine the coal in a south to north direction for the next forty years.

Peabody’s mine is now within a mile of Berenergy’s wells. Peabody offered to pay Berenergy the fair market value of its wells. In response, Berenergy demanded a sizeable multiple of the appraisal value of the wells in order to get out of Peabody’s way. Not surprisingly, the parties could not reach an agreement and litigation ensued.

First, Berenergy sued Peabody in Wyoming state court claiming that its earlier-issued leases gave it priority on a “first in time is first in right” theory. Berenergy sought to require Peabody to mine around its wells if Peabody was unwilling to pay up.

Next, Peabody sued Berenergy in Wyoming federal court claiming that since both parties were federal mineral lessees with a common BLM lessor, the decision on priority should be made by a federal judge based on a doctrine of accommodation. Peabody argued that factors such as the number of jobs at stake, the amount of royalties paid to the government, the value of the respective minerals, and the ability to maximize production of both minerals should be used to decide if Peabody could mine through Berenergy’s wells or be made to mine around the wells. The latter decision would require Peabody to leave the bypassed coal in place forever as the mine proceeds in its northerly direction.

The Obama-era BLM declined to take a stance as to which lessee should prevail. Even though the BLM was a common lessor, the federal government declined to intervene or be impleaded as an indispensable party in either lawsuit.

In June 2014, the federal district judge remanded the case to the state district court for resolution under state law while dismissing the federal action for lack of federal question jurisdiction.

Following a weeklong bench trial, the state district judge, while acknowledging that the case was without precedent and one of first impression, issued an order in October 2016 rejecting Berenergy’s “first in time” argument and utilizing the doctrine of accommodation. The court’s ruling would allow Peabody to mine through if it paid Berenergy the full appraised value of its wells. Berenergy appealed the order to the Wyoming Supreme Court.

On January 4, 2018 the Wyoming Supreme Court vacated the state district judge’s order, declaring that there was no state law that applied to two federal mineral lessees in conflict with one another. Berenergy Corp. v. BTU Western Resources, Inc., 2018 WY 2, 408 P.3d 396 (Wyo. 2018).

The Court noted that the Berenergy wells had been valued at less than a million dollars while Peabody’s mining of the coal in question would create many jobs and generate tax revenues that dwarfed the revenues produced from Berenergy’s aged and nearly depleted wells.

But the Court stated that it was the BLM’s duty to resolve the conflicts between its two lessees.  Thus, the Court remanded the case to the state district court judge with instructions to dismiss the case unless the BLM agreed to be joined as a party.

By the end of 2018, the coal pit wall will contact the first of Berenergy’s oil wells. Peabody plans to pull the drilling pipe and store it for future use along with all of the associated oil field equipment. The well hole would be plugged as Peabody’s huge drag lines mine through the area.

No doubt temporary restraining orders will then abound. But where will they be filed? The federal district court has already decreed that the conflict is not a federal issue. As of January 4th, the Wyoming state district courts have been instructed to stay out of the conflict since state law does not apply.

So who does get to go first? Will the Trump-era BLM decide to get involved? And if so, under what rules? Stay tuned.