WHO WINS WHEN FEDERAL MINERAL LESSEES COLLIDE WITHIN THE SAME ACREAGE?

Posted on June 14, 2019 by Tom Sansonetti

Berenergy Inc. has been operating seven oil and gas wells on three federal leases in the Powder River Basin area of Wyoming since the 1960s.  Peabody Energy has been strip mining coal on multiple federal leases in the same area since the 1970’s. Further background of this conflict is found in my previous post.

Peabody’s North Antelope Rochelle Mine is the largest coal mine in the United States with a mine plan that requires it to move in a south-to-north direction over several decades.  The mine has advanced to within a quarter mile of the Berenergy wells.  The wells are spaced as to form a picket-fence like barrier to the mine’s progress.

Berenergy’s well bores extend several thousand feet below the surface.  Peabody’s coal reserves are only 850 feet under the surface.  In order to mine through, Peabody would have to pull the piping and plug each of the well holes.

After passing through the well sites, Peabody could re-drill and replace the piping to allow the oil and gas production to continue. The cost to Peabody would be approximately $500,000. Mining through the well sites would take approximately four years. The cost to Peabody of moving the mining machinery around the seven wells would be approximately $180 million. 

The value of the 91 million tons of coal under or near the wells at current prices is $1 billion. Because of the mine plan’s northerly direction and the mammoth size of the operations, the cost of returning to the bypassed coal years later would be prohibitive. Thus, the coal would remain in place if bypassed.

Peabody offered to purchase the Berenergy wells for their appraised price of $477,000. Berenergy rejected the offer, instead requesting a much larger sum in order to “get out of the way.” Peabody refused to pay the requested amount and both Peabody and Berenergy approached the BLM, as the common lessor, to seek a resolution of the standoff.

As a valid lessee in good standing, Berenergy argued that its leases were “first in time” giving them the “first in right” to continue producing until the wells run dry. Berenergy pointed out that Peabody leased its coal with full knowledge of the existence of the wells and should have to wait to mine unless willing to meet Berenergy’s monetary demands. Berenergy petitioned the BLM to suspend Peabody’s leases.

As a valid lessee in good standing, Peabody argued that the “first in time” theory was not embodied in either statutes or regulations and without statutory guidance or legal precedent the BLM should adopt a “doctrine of accommodation” that would permit maximum recovery of both the oil and the coal. Peabody petitioned the BLM to suspend Berenergy’s leases so it could mine through.

On August 17, 2018, the BLM Wyoming State Director issued a decision allowing Peabody to mine through the well areas based on the provisions of Section 209 of the Mineral Leasing Act. This provision allows the Secretary of the Interior to suspend mineral leases in order to conserve natural resources.

Peabody immediately began pulling and plugging the well closest to its operations. Berenergy obtained a temporary restraining order in Wyoming federal district court and appealed the BLM decision to the Interior Board of Land Appeals. The IBLA ruled against Berenergy’s motion for stay of the BLM order and Peabody demanded that Berenergy post a multi-million-dollar bond in order to continue the litigation before the IBLA. Berenergy was not able to post the bond and dismissed its IBLA appeal, opting to return to the Wyoming federal district court for resolution of its “first in time” claim naming the BLM as the defendant. Peabody intervened in the case to support the BLM decision.

After lengthy briefing and an oral argument, Wyoming District Judge Scott Skavdahl ruled on May 13, 2019 in favor of the BLM and Peabody. The court ruled that the MLA’s Section 209 permitted the BLM to suspend leases in the name of the conservation of natural resources when two valid federal leases developed a conflict over acreage where the minerals in question could not be simultaneously produced. Given the vast disparity between the value of the remaining oil and gas reserves versus the coal reserves to be bypassed, the court found that the BLM’s use of a comparative valuation standard to aid in its decision-making was reasonable. The court noted that it could not find regulatory authority on “first in time” that contradicted the language in Section 209.

On June 11, Berenergy filed its appeal in the Tenth Circuit Court of Appeals. Stay tuned.

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.