Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_05-cv-02335/USCOURTS-caed-2_05-cv-02335-3/pdf.json

Parties Involved:
Two Bay Petroleum
Plaintiff
United States Department of the Interior
Defendant

Document Text:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

 Because oral argument will not be of material assistance, 1

the Court orders this matter submitted on the briefs. E.D. Cal.

Local Rule 78-230(h). 

1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

TWO BAY PETROLEUM, No. 2:05-CV-2335-MCE-JFM

Plaintiff,

v. MEMORANDUM AND ORDER

UNITED STATES DEPARTMENT 

OF THE INTERIOR; GALE 

NORTON, Secretary, Bureau 

of Land Management,

Defendants.

----oo0oo----

Through the present action, Plaintiff Two Bay Petroleum,

Inc., (“Two Bay”) seeks to have the decision of the Interior

Board of Land Appeals (“IBLA”) terminating Two Bay’s CACA 25325

oil and gas lease (“Lease”) set aside. Two Bay asks this Court 1

to declare IBLA’s decision invalid because it was allegedly

arbitrary, an abuse of discretion and factually unsupported.

///

Case 2:05-cv-02335-MCE -JFM Document 25 Filed 07/10/07 Page 1 of 12
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

Plaintiff further argues that the Lease could not be terminated

due to estoppel, and that IBLA’s no-hearing decision violates due

process. For the reasons set forth below, Two Bay’s Motion is

DENIED.

BACKGROUND

The subject oil and gas lease, CACA 25325, was issued as a

ten-year non-competitive lease to a Mr. Ptasynski on December 1,

1989. On October 21, 1991, Mr. Ptasynski transferred operating

rights for a portion of the Lease to Two Bay, and in 1997, filed

an assignment of record title. Two Bay applied for a permit to

drill a well entitled Well Ptasynski 56-3 (“Well 56-3”), which

was approved by the Bureau of Land Management (“BLM”) on April 1,

1992. Well 56-3 is the only well on the subject Lease.

Well 56-3 was completed in April of 1993. According to

monthly reports of operations submitted to the Minerals

Management Service (“MMS”), 13 barrels of oil and 1,000 cubic

feet of gas were produced between April and August of 1993. No

additional production was reported from August 1993 until

November 1999.

On February 16, 1994, Two Bay submitted a temporary

abandonment request for Well 56-3, citing unfavorable economic

conditions. The BLM approved the request, but only for a period

of twelve months and with no possibility of extension. The

approval required Two Bay to return the well to production at the

end of the period, or plug and abandon the well permanently.

///

Case 2:05-cv-02335-MCE -JFM Document 25 Filed 07/10/07 Page 2 of 12
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

On June 24, 1998, Two Bay submitted a sundry notice to recomplete the well and return it to production. BLM approved the

notice two days later. Two Bay completed the requested work on

August 15, 1998, on which day Well 56-3 “made 4 swab runs ... no

oil or gas shows.” Administrative Record (“AR”) 988-89.

On November 15, 1999, Two Bay submitted another sundry

notice to do additional perforations, which the BLM’s Bakersfield

Field Office (“BFO”) approved on November 30, 1999.

On December 1, 1999, the BLM met with David Hanson, Two

Bay’s president, to discuss the Lease. The BLM informed

Mr. Hanson that the Lease had expired under its own terms on

November 30, 1999, because inspections indicated it was not

producing. Additionally, Two Bay had not paid rental fees to the

MMS. Mr. Hanson did not indicate at the meeting that Well 56-3

had been returned to production prior to the expiration of the

Lease. However, the BLM received a letter from Two Bay dated

December 15, 1999, stating that Well 56-3 was returned to

production on November 29, 1999, one day prior to Lease

expiration. Delinquent rental fees were also paid to the MMS.

By memorandum dated February 10, 2000, the BLM recommended

that the Lease not be extended due to non-production in paying

quantities at the expiration of the original term. The BLM

issued a termination on May 11, 2000, which Two Bay appealed. 

Due to the BLM’s failure to respond to the appeal, and because

“BLM’s decision contained no finding that there was no well

capable of production on the lease,” the BLM rescinded the

termination on February 22, 2002. AR 702-03, 748-50.

///

Case 2:05-cv-02335-MCE -JFM Document 25 Filed 07/10/07 Page 3 of 12
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

 Two Bay requested such authorization in October of 2002, 2

two years after the alleged production. AR 949.

4

From December 1, 1999, to December 30, 2000, Two Bay reported a

production of 643 barrels of oil to MMS. However, Two Bay did

not provide “run tickets” to verify and document the production

of the report oil. To further complicate the situation, oil from

Well 56-3 was commingled with oil from other Two Bay wells

without proper authorization. AR 968-69. Two Bay reported no 2

further production after December 30, 2000. AR 933.

The BLM conducted numerous site inspections prior to

July 26, 2002, showing that the well was either not operating,

insufficiently supplied with equipment to produce or disconnected

from the storage tank and not producing. Based on these

inspections and the lack of production, the BLM issued a 60-day

notice finding that Well 56-3 had been in non-producing status

for more than three years. This notice allowed Two Bay until

October 11, 2002, to return the well to production or pursue

alternative remedies, such as permanent abandonment or assignment

to another party.

BLM inspections occuring on August 7, 2002, and September 2,

2002, showed Well 56-3 was still down. The September inspection

revealed that Well 56-3 was not physically connected to a test

tank. Two Bay submitted a sundry notice seeking to explore for

oil at a different depth within the well, which the BLM approved

on October 2, 2002. This approval required Two Bay to put Well

56-3 in production no later than October 31, 2002.

///

///

Case 2:05-cv-02335-MCE -JFM Document 25 Filed 07/10/07 Page 4 of 12
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

 “Flush production” may occur when a well has been unused 3

for a lengthy period of time. The well bore is filled with

fluids to the point of pressure equalization, misrepresenting the

underground oil reservoir’s capacity of supplying fluid to the

well bore in a consistent fashion. A test of longer duration

than the 73-minute test carried out on October 31, 2002, would

yield more accurate measurements of Well 56-3’s oil producing

capacity. AR 597. 

5

Two Bay obtained permission from BLM to commingle production of

Well 56-3 with other nearby wells on November 26, 2002, subject

to the requirement that production from each well was measured

prior to commingling.

On October 31, 2002, a BLM inspector witnessed a test of

well production that yielded an extrapolated 1.38 barrels per

day. As the well had not been in production for approximately 18

months, the BLM did not consider this test accurate due to “flush

production.” Additionally, the percentage of water produced 3

(99%) and the pumper’s concern that Well 56-3 “pumps off” easily

led the BFO to allow a longer period of time to measure accurate

production. AR 676.

On November 20, 2002, the BLM inspector gauged Well 56-3’s

tank and found no measurable amount of oil. AR 691. Seals

placed on the storage tank valves had not been broken, indicating

that no oil was previously removed from the tank. Id. On two

subsequent inspections, the BLM inspector found Well 56-3 in a

non-operating state. AR 1194-95, 1191-92. A December 19, 2002,

inspection found no measurable fluids in the bottom of the tank. 

AR 1189-90.

///

///

///

Case 2:05-cv-02335-MCE -JFM Document 25 Filed 07/10/07 Page 5 of 12
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

On January 14, 2003, the BLM inspector gauged Well 56-3’s

tank with a water-sensitive paste. This inspection showed

approximately 10.5 inches of water and one inch of oil atop the

water. AR 599, 1186. The inch of oil equated to roughly five

barrels of oil for Well 56-3’s total production for the period of

October 2002, through January 2003, or 0.05 barrels of oil per

day. AR 676-677.

Visits in late January and early February of 2003, showed

that Well 56-3 was again down. AR 1179-82. On April 1, 2003,

the BLM field office recommended that the California State office

terminate the Lease for non-production. AR 947-48. On April 12,

2003, the BLM inspector witnessed the loading of roughly 150

barrels of oil into a transportation truck. AR 1174-76. 

However, Two Bay did not submit run tickets, monthly reports to

MMS or royalty fees for this alleged production.

On May 5, 2003, the BLM terminated the lease due to

cessation of production and lack of production in paying

quantities, effective October 11, 2002. Two Bay subsequently

filed a notice of appeal and requested a stay of the termination. 

The IBLA denied the stay by order, and issued a ruling on the

merits on September 2, 2005. The IBLA amended the BLM

termination order, finding the Lease to have terminated by

operation of law in December 2000. 

///

///

///

///

///

Case 2:05-cv-02335-MCE -JFM Document 25 Filed 07/10/07 Page 6 of 12
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

STANDARD

A. Final Decisions of the IBLA

Final Decisions of the IBLA are reviewed under the

Administrative Procedures Act, 5 U.S.C. § 706(2).

The reviewing court shall “hold unlawful and set aside agency

action, findings and conclusions found to be - ... (A) arbitrary,

capricious, an abuse of discretion, or otherwise not in

accordance with the law; (B) contrary to constitutional right

...; or (C) in excess of statutory jurisdiction, authority, or

limitations ....” Fallini v. Hodel, 963 F.2d 275, 277 (9th Cir.

1992) (quoting 5 U.S.C. § 706(2)).

The Court’s review is limited to the administrative record

already in existence. Camp v. Pitts, 411 U.S. 138, 142 (1973). 

The court cannot merely substitute its judgment for that of the

IBLA, but must instead determine from the administrative record

whether the decision of the IBLA was arbitrary, capricious, an

abuse of discretion, unsupported by substantial evidence or not

in accordance with the law. See United States v. Wharton, 514

F.2d 406, 408-409 (9th Cir. 1975).

Thus, the court must determine from the administrative

record whether the agency examined the pertinent evidence and put

forth a satisfactory explanation for its action. Motor Vehicle

Mfrs. Ass’n. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43

(1983). The explanation must include a “rational connection

between the facts found and the choice made.” Burlington Truck

Lines, Inc. v. United States, 371 U.S. 156, 168 (1962). 

Case 2:05-cv-02335-MCE -JFM Document 25 Filed 07/10/07 Page 7 of 12
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

The court will only find an arbitrary decision where there has

been a clear error of judgment in light of the relevant factors. 

Bowman Trans., Inc. v. Arkanssa-Best Freight Sys., Inc., 419 U.S.

281, 285 (1974).

The IBLA decision must also be supported by sufficient

evidence. The reviewing court must search the entire record to

determine whether it contains evidence such that a reasonable

mind would find it adequate to support the agency’s decision. 

Hjelvik v. Babbitt, 198 F.3d 1072, 1074 (9th Cir. 1999).

B. Interpretation of Statutes by Administrative Agencies

The Court shows great deference to an administrative

agency’s interpretation of the law which it is charged with

administering. Baker v. United States, 613 F.2d 224, 227 (9th

Cir. 1980) (citing Udall v. Tallman, 380 U.S. 1, 16 (1965)). The

Court must uphold the agency’s interpretation unless it is

inconsistent with the unambiguous language of Congress. Chevron,

U.S.A., Inc., v. Nat. Res. Def. Council, Inc., 467 U.S. 837,

842-43 (1984). 

ANALYSIS

A. IBLA Properly Upheld the Decision of BLM

1. Finding of Non-Producing Well

The IBLA found Well 56-3 ceased production “at some point

well before the [BLM Bakersfield Field Office’s] July 26, 2002,

notice was issued.” AR 9.

Case 2:05-cv-02335-MCE -JFM Document 25 Filed 07/10/07 Page 8 of 12
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9

The IBLA relied on Two Bay’s admission that Well 56-3 ceased

production in December of 2000, and the lack of assertion that

production was resumed at any point prior to July of 2002. The

IBLA dismisses Two Bay’s claims of production at some point

between October 2002, and March 2003, citing the lack of reports

to the MMS and other failures to comply with reporting

regulations. AR 15.

Additionally, the IBLA found Well 56-3 incapable of

producing in paying quantities due to the results of the October

2002, well test and many subsequent inspections. Two Bay argued

that incorrect measurements resulted in this finding, but Two Bay

could not produce any evidence in the form of royalty payments,

operational reports or separate flow metering required by the

authorization to commingle production of Well 56-3 with other Two

Bay wells. AR 14-15.

The IBLA findings are not clearly erroneous in light of the

administrative record. Well 56-3 last produced reported

quantities of oil in late 2000, several years before the

determination of the BLM. The record reveals multiple BLM

inspections of Well 56-3, mostly resulting in reports of nonoperation or non-production. These inspections occurred after

the BLM put Two Bay on a 60-day notice, requiring Well 56-3 to be

put back in operation, or at a minimum to diligently pursue

restoring the well to producing status. The evidence

overwhelmingly suggests the Well 56-3 has not produced any

barrels of oil since December of 2000.

///

///

Case 2:05-cv-02335-MCE -JFM Document 25 Filed 07/10/07 Page 9 of 12
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

10

2. Interpretation of Mineral Leasing Act

Having found Well 56-3 to be non-producing, the IBLA

determined that the well did not fall under the exceptions to

termination by operation of law under the Mineral Leasing Act,

30 U.S.C. § 226 (“MLA”). AR 17-19. These exceptions are set

forth in the MLA as follows:

No lease issued under this section which is subject to

termination because of cessation of production shall be

terminated for this cause so long as reworking or

drilling operations which were commenced on the land

prior to or within sixty days after cessation of

production are conducted thereon with reasonable

diligence, or so long as oil or gas is produced in

paying quantities as a result of such operations. No

lease issued under this section shall expire because

operations or production is suspended under any order,

or with the consent, of the Secretary. No lease issued

under this section covering lands on which there is a

well capable of producing oil or gas in paying

quantities shall expire because the lessee fails to

produce the same unless the lessee is allowed a

reasonable time, which shall be not less than sixty

days after notice by registered or certified mail,

within which to place such well in producing status or

unless, after such status is established, production is

discontinued on the leased premises without permission

granted by the Secretary under the provisions of this

Act.

30 U.S.C. § 226(i).

Because Two Bay did not engage in reworking or drilling

operations within 60 days of December 2000, the IBLA found the

first exception not applicable. Similarly, Two Bay did not

suspend production on order from or with consent of the Secretary

of the Department of the Interior, ruling out the second

exception.

///

///

Case 2:05-cv-02335-MCE -JFM Document 25 Filed 07/10/07 Page 10 of 12
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

11

The IBLA interpreted the third exception to apply to “...only a

situation where, at the time production ceases, there is on the

lease a well capable of production.” (citing Steelco Drilling

Corp., 64 I.D. 314, 219 (1957)). Having found Well 56-3

incapable of production, the IBLA determined that the third

exception did not apply. This led to a conclusion that the Lease

terminated by operation of law as of the last date of production,

or December 2000.

As explained above, the Court defers to interpretations by

administrative agencies of the laws they enforce, and must uphold

the interpretation unless it is against the unambiguous language

of Congress. Chevron, 467 U.S. at 837. The IBLA’s

interpretation is consistent with 30 U.S.C. § 226 (i), and

comports with a substantial body of administrative law cited in

the decision. AR 9.

This Court finds the IBLA decision is not arbitrary,

capricious or an abuse of discretion. The decision is supported

by a substantial amount of evidence in the administrative record. 

Thus, the IBLA decision terminating the Lease by operation of law

as of December 2000, is found to be valid.

B. Estoppel

Given the termination of the Lease in December 2000, Two

Bay’s argument that the government is estopped due to approving

sundry notices in 2002 is unavailing. Additionally, Two Bay has

not alleged any of the elements required for estoppel. 

Consequently, Two Bay’s estoppel argument fails. 

Case 2:05-cv-02335-MCE -JFM Document 25 Filed 07/10/07 Page 11 of 12
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

12

C. Due Process

“[N]otice of the ability to request a hearing is only

required where the operator or lessee offers credible evidence to

suggest that the well is capable of immediate production.” 

Coronado Oil Co. v. U.S. Dept. of Interior, 415 F.Supp.2d 1339,

1352 (2006). A review of the administrative record demonstrates

little, if any, credible evidence to suggest Well 56-3 is capable

of immediate production. As cited in the IBLA decision, Two Bay

did not submit information to the BLM or MMS regarding

production. AR 15. The IBLA was not arbitrary, capricious or

otherwise not in accordance with the law and correctly concluded

there was no issue of material fact regarding the production of

Well 56-3.

CONCLUSION

For the reasons set forth above, Two Bay’s Motion for Review

of IBLA’s ruling is denied.

IT IS SO ORDERED.

Dated: July 9, 2007

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

Case 2:05-cv-02335-MCE -JFM Document 25 Filed 07/10/07 Page 12 of 12