/ August 27, 2008

U.S. Must Pay Up to Big Oil for Offshore Drilling

This week, the U.S. Court of Appeals for the Federal Circuit upheld a decision in the lower court mandating that the U.S. government compensate 11 oil companies for violating their leases granted between 1979 – 1984 for offshore drilling locations. In 1990, Congress passed legislation that effectively prohibited the oil companies from developing on their leased areas, prompting them to sue for their development costs and the money paid upfront for their drilling rights.

At the time the leases were granted, each company paid the Department of Interior an upfront “bonus,” in addition to the annual royalties and rental fees stipulated by the contracts. The parties to the suit paid $1.1 billion in total to the federal government upfront. But in 1990, Congress amended the Coastal Zone Management Act of 1972 to clearly state that any activity taking place in coastal waters, including off-shore drilling, is subject to regulation and approval under the legislation’s provisions. The lease agreements, which had not been evaluated for compliance with the act when they were granted, were then subjected to numerous legal battles, and development and exploration froze to a halt. But, because the two parties developed the leases “in good faith” up until the 1990 amendments, the court ruled that the oil companies are entitled to the upfront payments only, and will not receive additional damages for the costs of the construction and exploration. Still, $1.1 billion is nothing to sneeze at.

Source: The Blog of the Legal Times

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