Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-3_05-cv-02211/USCOURTS-azd-3_05-cv-02211-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 28:1331 Fed. Question: Review Agency Decision

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Under Rule 25(d) of the Federal Rules of Civil Procedure, Dirk Kempthorne, as the

new Secretary of the Interior, is automatically substituted for Gale A. Norton. 

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Premco Western Inc., 

Plaintiff, 

vs.

Dirk Kempthorne, Secretary of the

Interior, 

Defendant. 

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No. 05-2211-PCT-JAT

ORDER

Pending before the Court is Plaintiff Premco Western, Inc.'s Motion for Summary

Judgment (Doc. # 29). Also pending is Defendant Dirk Kempthorne's Cross-Motion for

Summary Judgement (Doc. # 39).1

I. Background

This is an administrative review involving the termination of a unit agreement. A unit

agreement is a contract between the United States and other parties for joint development and

operation of an oil and gas field where substantial amounts of public lands are involved.

Chesapeake Operating, Inc., et al., 149 IBLA 188, 202 (1999). The unit agreement at issue

herein is identified as the Dutchman Unit, No. AZ1X, Mohave County, Arizona (the "Unit

Agreement"), and was entered into by the United States and Premco Western Inc.

("Plaintiff"). [Administrative Record (AR) # 66.] 

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On December 20, 2001, the Unit Agreement was approved by the United States

Department of the Interior, Bureau of Land Management, Arizona State Office (the "BLM").

[AR # 66.] Section 9 of the Unit Agreement contained a public interest clause requiring

Plaintiff to diligently drill the initial unit obligation well. [Id., p. 321.] Specifically, Section

9 required that Plaintiff:

commence to drill an adequate test well . . . and thereafter

continue such drilling diligently until the 700 feet below the top

of the redwall formation has been tested or until at a lesser depth

unitized substances shall be discovered which can be produced

in paying quantities . . . provided, however, that Unit Operator

shall not in any event be required to drill said well to a depth in

excess of 5,000 feet. 

[Id.] This requirement was to be satisfied within six months of the December 20, 2001,

effective date of the Unit Agreement. [Id.] Also, the BLM's approval of the Unit Agreement

made clear that the "approval shall be void ab initio, if the public interest requirement under

Sec. 3183.4(b) . . . is not met." [Id., p. 315.] Similar to Section 9 of the Unit Agreement, 43

C.F.R. § 3183.4(b) provides, in part, that "[t]he public interest requirement of an approved

unit agreement for unproven areas shall be satisfied only if the unit operator commences

actual drilling operations and thereafter diligently prosecutes such operations in accordance

with the terms of said agreement."

Drilling operations began in July 2000, prior to the approval of the Unit Agreement.

[AR # 39.] When the Unit Agreement was approved, the well was approximately 3,200 feet

deep. [AR # 77, p. 368.] Between December 2001 and June 2003, the administrative record

shows that BLM's Arizona Strip Field Office (the "Arizona Field Office") conducted

numerous periodic drilling inspections of Plaintiff's drilling operations. [AR ## 55, 75, 77,

82, 83, 90, 91, 97, 99, 101, 104, 110, 116, 124, 127, 135, 146, 147, 151, 158, 161, and 163.]

The inspection summary indicates several periods of extended non-operation during the

December 2001 to June 2003 time period. See Attachment B, Defendant Dirk Kempthorne's

Cross-Motion for Summary Judgement. 

On October 21, 2002, the Arizona Field Office sent a letter to Plaintiff concerning the

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December 29, 2002, was the last day drilling occurred before the termination of the

Unit Agreement on June 13, 2003.

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recent inspections of the unit obligation exploration well showing an extended period of nonoperation. [AR ## 112, 113.] The letter detailed the actions necessary to meet the diligent

drilling requirements under the Unit Agreement and 43 C.F.R. § 3183.4(b):

The Bureau of Land Management has determined that in order

for Premco Western Inc. to meet the public interest requirement

of the cited regulations, Premco Western Inc. is required to

resume drilling within 30 days of receipt of this letter, complete

the exploratory well to the target depth of 6000 feet as approved

in the APD regarding this well or a hydrocarbon producible

horizon, and must be conducting drilling operations and have an

employee capable of operating the approved drilling equipment

on site for at least 8 hours in every 24 hour day, seven days a

week, for the duration of the time that it takes to complete this

well. Thanksgiving Day, November 28, 2002, Christmas Day,

December 25, 2002, and New Year's Day, January 1, 2003, are

exempt from the requirement for having an employee capable of

operating the drilling equipment on site for 8 hours out of a 24

hour day. 

[AR ## 112, 113] The letter further warned that the "[f]ailure to comply with the

requirements of this Order, without prior written approval from the Arizona Strip Field

Office Manager, will result in the termination of the Dutchman Unit. Leases in the unit,

which terms were extended by the unit obligation well, will be terminated ab initio." [Id.]

Between October 2002 and June 2003, Plaintiff alleges it experienced financial and

operational difficulties that prevented compliance with the diligent drilling requirements. For

example, in December 2002, when Plaintiff was preparing to commence drilling, Plaintiff's

water truck was stolen. [AR # 166, pp. 663-64.] After the truck was recovered, it was

discovered that the engine was ruined. [Id., p. 664.] On December 28 and 29, 2002, after

Plaintiff was able to rent two water trucks, Plaintiff drilled 54 feet and 142 feet, respectively,

to a total depth of 3,617 feet.2

 [Id.] On December 30, 2002, it was discovered that the pipe

was stuck. [Id.] Plaintiff spent January and February 2003 attempting to remove the stuck

pipe from the well, ultimately removing the pipe in late February. [Id.] Plaintiff also spent

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March 2003 remedying a fracture zone at 2,900 feet that prevented access the bottom of the

well. [AR # 154.] As for fund raising, Plaintiff spent January and February 2003 attempting

to raise additional funds to finance drilling operations and continued such efforts until May

2003. [Id.] Despite the financial and operational difficulties, in early June 2003, Plaintiff

informed the BLM that it anticipated being able to resume drilling on June 9th or 10th. [AR

# 162.] However, Plaintiff did not commence drilling on either of those dates.

On June 13, 2003, the Arizona State Office Renewable and Mineral Resources Group

Administrator (the "ASO Group Administrator") sent a letter to Plaintiff advising it of the

automatic termination of the Unit Agreement, pursuant Section 9 of the Unit Agreement and

43 C.F.R. § 3183.4(b). [AR # 164.] The letter referenced the diligent drilling requirements

set forth in the October 21, 2002, letter, and further advised that "[i]nspection and

conversation records submitted by the Arizona Strip Field Office indicate that Premco

Western did not meet the requirement that 'it have an employee capable of operating the

approved drilling equipment on site for at least eight hours in every 24 hour day, seven days

a week, for the duration of the time that it takes to complete the well.'" [Id.]

Plaintiff appealed the ASO Group Administrator's decision to the BLM's Arizona

State Director. Plaintiff's argument on appeal was that "many operational and financial

difficulties" caused the failure to comply with the diligent drilling requirement of the Unit

Agreement. [AR # 180.] Despite Plaintiff's arguments, the State Director found that "[n]o

information was supplied indicating that Premco Western had met the requirements of the

October 21, 2002, letter regarding diligent drilling." [Id.] Further, the State Director found

"no indications that Premco Western ever requested or received written approval from the

Arizona Strip Field Manager to deviate from the diligent drilling requirements." Upholding

the ASO Group Administrator's decision, the State Director stated:

The Bureau of Land Management is required to uphold the

public interest when it manages the public resources of the

citizens of the United States. The regulations regarding oil and

gas development on federal leases require a unit to be diligently

explored. The inspection record indicates that Premco Western

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has failed to meet the diligent drilling requirements of the public

interest requirements of Section 9 of the unit agreement.

[Id.] 

 Thereafter, Plaintiff appealed the State Director's decision to the Interior Board of

Land Appeals (the "IBLA"). On May 5, 2005, the IBLA issued a 14-page opinion affirming

the State Director's decision. [AR # 206.] In its opinion, the IBLA stated, in part:

Premco Western's reasons for appealing the [State Director

Review] detail the financial and technical reasons why diligent

development has not occurred. Premco Western does not,

however, dispute that there were numerous periods of nonoperation as contended by the BLM.

* * *

The long periods of non-operation, coupled with such little

progress toward achieving the target depth, or alternatively, in

establishing production in paying quantities at a shallower

depth, is not consistent with the prosecution of diligent drilling,

and does not satisfy the public interest requirement. BLM

properly noted that "since the approval of the unit agreement

more than a year ago, the depth of the Dutchman 18-1c well drill

hole had advanced from 3,230 ft. (Sundry Notice dated

2/6/2002) to 3,394 ft. (Sundry Notice dated 12/10/02) a total of

164 ft." Between the time of the Sundry Notice dated December

10, 2002, and BLM's decision terminating the unit, depth of the

well advanced only another 306 feet (3,394 to 3,617 feet

(approximately 3,700 feet)), notwithstanding Premco Western's

repeated claim that drilling operations would resume. The

reasonableness of BLM's action herein is founded on the fact

that BLM issued its decision terminating the unit only after

Premco Western failed to resume drilling operations as promised

on June 9 or 10, this date having been previously extended by

[the President of Premco Western] as he attempted to finance

continued drilling operations on behalf of Premco Western. The

foregoing, coupled with Premco Western's lack of diligence in

submitting to BLM relevant logging data and expert geological

reports establishing that commercial production at a lesser depth

had been achieved, even as late as urged by Premco Western in

its Reply, simply cannot be squared with Premco Western's

obligation under Section 9 of the unit agreement.

[Id., pp. 1203-04.] The IBLA, addressing Plaintiff's financial problems, stated:

The principal difficulty which cannot be addressed through a

suspension of operations or repeated extensions of time, which

appears to have consistently plagued Premco Western's

operations, is the persistent lack of adequate funding to support

drilling operations. Virtually every time any progress was made

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on the drilling front, rather than continuing to prosecute the

drilling operations, Premco Western was compelled to launch

yet another campaign to fund the next step in drilling. A lack of

finances cannot excuse appellant's failure to prosecute diligent

drilling under the terms of the unit agreement. 

 [Id., p. 1205.] Finally, the IBLA did recognize that operational or technical problems can

operate as a defense to a lack of diligent drilling, but found against Plaintiff on this issue

because Plaintiff failed to seek appropriate relief:

This is not to say that the Department does not recognize that

drilling in a wildcat area has its attendant risks and technical

challenges. Unanticipated technical challenges can be addressed

by BLM through the grant of a request for extension, as quoted

above from the unit agreement, or a suspension of operations, if

necessary to resolve technical issues. Premco Western sought

neither. 

 [Id., n. 4.]

II. Standard of Review 

"For purposes of judicial review of decisions originally made by the BLM, the IBLA

is the final decision maker for the Department of the Interior so it is the IBLA decision that

is subject to review by the Court." Coronado Oil Company v. United States Department of

the Interior, 415 F.Supp.2d 1339, 1346 (D.Wyo. 2006) (citing IMC Kalium Carlsbad, Inc.

v. Interior Bd. of Land Appeals, 206 F.3d 1003, 1009-10 (10th Cir. 2000). "In reviewing

decisions of the IBLA, this court exercises a limited standard of review." Baker v. United

States, 613 F.2d 224, 226 (9th Cir. 1980) (citations omitted). The standard of review is

limited to an examination of whether the IBLA decision was arbitrary or capricious,

unsupported by substantial evidence, or not in accordance with the law. Id. (citations

omitted). As explained by Coronado Oil, the arbitrary or capricious requirement subsumes

and includes the substantial evidence requirement:

Although the substantial evidence requirement for IBLA

decisions is expressed as if it were independent from the

arbitrary or capricious standard, it is not: an agency action that

is not supported by substantial evidence is also not supported by

facts in the record, which means it is arbitrary and capricious. 

Coronado Oil, 415 F.Supp.2d at 1346 (citing Olenhouse v. Commodity Credit Corp., 42 F.3d

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1560, 1574-75 (10th Cir. 1994). Thus, "an IBLA decision must be affirmed if it is not

arbitrary or capricious and is otherwise in accordance with law." Id.

The decision of the IBLA "is not arbitrary or capricious if it has a reasoned basis and

is supported by facts in the record." Id. The IBLA decision "has a reasoned basis if the

agency considered all relevant factors and there has been no clear error of judgment." Id.

The IBLA decision "is supported by the facts in the record where there is substantial

evidence to support the decision. Id. A decision is supported by substantial evidence if the

evidence is "more than a mere scintilla. It means such relevant evidence as a reasonable

mind might accept as adequate to support a conclusion." Richardson v. Perales, 402 U.S.

389, 401 (1971) (quoting Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229 (1938)).

III. Discussion

In its opinion affirming the decision to terminate the Unit Agreement, the IBLA

determined that "[t]he long periods of non-operation, coupled with such little progress toward

achieving the target depth, or alternatively, in establishing production in paying quantities

at a shallower depth, is not consistent with the prosecution of diligent drilling, and does not

satisfy the public interest requirement." [AR # 206, p. 1203.] In its appeal to this Court,

Plaintiff argues that the reports showing extended periods of non-operation are unrealistic

in their conclusions about the lack of diligent drilling and concludes that the IBLA decision:

is oblivious to the realities of the sort of fund raising that is

necessary for entrepreneurial oil and gas exploration; is

mindlessly punitive toward an operator who has actually done

a great favor to his country by discovering oil in a place where

it had been thought not to exist; and ignores a very adequate

level of diligence that Premco exercised during the months just

prior to termination. For those reasons it is submitted that the

decision is arbitrary, capricious, and an abuse of discretion; that

it is contrary to the express statutory and regulatory goals that

the government was obliged to promote; and is unsupported by

substantial evidence and unwarranted by the facts.

First, Plaintiff's claim that the IBLA's decision improperly ignored the financial

realities of entrepreneurial oil and gas exploration is without merit. Under controlling law,

"insufficient funds will not excuse a lessee's failure to timely perform drilling operations."

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Ruby Drilling Co., 119 IBLA 210, 214 (1991); Champlin Petroleum Co. v. Mingo Oil

Producers, 628 F.Supp. 557 (D.Wyo. 1986). Therefore, the IBLA was not required to

consider Plaintiff's difficulties in raising funds when affirming the decision to terminate the

Unit Agreement.

Second, Plaintiff's claim that the IBLA's decision was "mindlessly punitive toward an

operator who has actually done a great favor to his country by discovering oil in a place

where it had been thought not to exist" is unsupported by the record. While the record

indicates Plaintiff drilled through oil for approximately 20 minutes and 20 feet on December

29, 2002, there is no evidence that Plaintiff discovered oil which could be produced in paying

quantities or that Plaintiff completed the well to a hydrocarbon producible horizon, as

required under the diligent drilling requirements. [AR # 166, p. 664.] Further, on April 8,

2003, Plaintiff provided logs and reports to the Arizona Strip Field Office showing only that

the well had the potential to produce gas or oil on a commercial basis. [AR # 157.] Thus,

in light of the ample opportunity provided to Plaintiff to diligently drill the well, and

Plaintiff's failure to do so, the IBLA's decision cannot be found "mindlessly punitive." 

Finally, Plaintiff's claim that the IBLA's decision "ignores a very adequate level of

diligence that Premco exercised during the months just prior to termination" also is

unsupported by the record. As discussed above, Section 9 of the Unit Agreement required

Plaintiff to drill the initial unit obligation well until the 700 feet below the top of the redwall

formation had been tested or until at a lesser depth if unitized substances were discovered

which could be produced in paying quantities. [AR # 66, p. 321.] Plaintiff also was required

to comply with the public interest requirement in 43 C.F.R. § 3183.4(b), which provides, in

part, that "[t]he public interest requirement of an approved unit agreement for unproven areas

shall be satisfied only if the unit operator commences actual drilling operations and thereafter

diligently prosecutes such operations in accordance with the terms of said agreement." The

diligent drilling requirements were to be satisfied within six months of the December 20,

2001, effective date of the Unit Agreement. [Id.] 

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While Plaintiff complains that operational problems rendered compliance more

difficult, the Court acknowledges that "technical challenges can be addressed by BLM

through the grant of a request for extension . . . or a suspension of operations, if necessary

to resolve technical issues." [AR # 206, n. 4.] However, the Court agrees with the IBLA in

finding that Plaintiff sought no such relief and cannot now be heard to complain. 

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On October 21, 2002, after extended periods of non-operation, the Arizona Field

Office sent a letter to Plaintiff detailing the actions necessary to meet the diligent drilling

requirements. [AR ## 112, 113.] Among other things, Plaintiff was required to resume

drilling within 30 days of receipt of the letter and to complete the well to the target depth of

6,000 feet or to a hydrocarbon producible horizon. [Id.] Despite the October 21, 2002, letter,

and the diligent drilling requirements, Plaintiff only drilled the well to a total depth of 3,617

feet, which depth was reached on December 29, 2002, and did not otherwise complete the

well to a hydrocarbon producible horizon. At the time the Unit Agreement was terminated,

Plaintiff had not conducted any drilling in approximately five months. Thus, the record

supports the IBLA's finding that Plaintiff's actions were not consistent with the prosecution

of diligent drilling and the corresponding public interest requirement.3

 

In conclusion, contrary to Plaintiff's arguments and upon review of the entire

administrative record, the Court finds that the IBLA's opinion affirming the termination of

the Unit Agreement is supported by substantial evidence in the record, is not arbitrary or

capricious and otherwise is in accordance with law. 

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Accordingly, 

IT IS ORDERED that Plaintiff's Motion for Summary Judgment is DENIED (Doc.

# 29);

IT IS FURTHER ORDERED that Defendant's Cross-Motion for Summary Judgment

(Doc. # 39) is GRANTED and the Clerk of Court shall enter judgment accordingly.

DATED this 27th day of March, 2007.

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