Opinion ID: 398884
Heading Depth: 2
Heading Rank: 3

Heading: Consistency with the Principle of Section 18(a)(3).

Text: 150 Section 18(a)(3) requires that the leasing program be prepared consistent with the principle that the Secretary shall select, to the maximum extent practicable, the timing and location of leasing ... so as to obtain a proper balance between the potential for environmental damage, potential for the discovery of oil and gas, and the potential for adverse impact on the coastal zone. 116 These three elements are, in large part, a condensation of the factors specified in section 18(a)(2). 117 151 Although section 18(a)(3) does not define the proper balance among these elements, some notion of its meaning can be derived from the policy and purposes of the Act. In passing the 1978 Amendments, Congress declared the policy of the United States to be that 152 the outer Continental Shelf is a vital national resource ... which should be made available for orderly and expeditious development, subject to environmental safeguards, in a manner which is consistent with the maintenance of competition and other national needs. 118 153 Implicit in this statement of policy is both an end and a means. The end is to develop the oil and natural gas resources of the OCS expeditiously. The means includes an administrative scheme that permits detailed planning by the federal government and concerned states to minimize the potential conflicts and adverse impacts of OCS activities. 119 154 The congressional purposes also reflect this primary emphasis on expeditious development of the OCS, qualified by the recognition of a need for measures to alleviate or minimize its adverse impacts. Those purposes are to: 155 (1) establish policies and procedures for managing the oil and natural gas resources of the Outer Continental Shelf which are intended to result in expedited exploration and development of the Outer Continental Shelf in order to achieve national economic and energy policy goals, assure national security, reduce dependence on foreign sources, and maintain a favorable balance of payments in world trade; 156 (2) preserve, protect, and develop oil and natural gas resources in the Outer Continental Shelf in a manner which is consistent with the need (A) to make such resources available to meet the Nation's energy needs as rapidly as possible, (B) to balance orderly energy resource development with protection of the human, marine, and coastal environments, (C) to insure the public a fair and equitable return on the resources of the Outer Continental Shelf, and (D) to preserve and maintain free enterprise competition; 157 (3) encourage development of new and improved technology for energy resource production which will eliminate or minimize risk of damage to the human, marine, and coastal environments; 158 (4) provide States, and through States, local governments, which are Impacted by Outer Continental Shelf oil and gas exploration, development, and production with comprehensive assistance in order to anticipate and plan for such impact, and thereby to assure adequate protection of the human environment; 159 (5) assure that State, and through States, local governments, have timely access to information regarding activities on the Outer Continental Shelf, and opportunity to review and comment on decisions relating to such activities, in order to anticipate, ameliorate, and plan for the impacts of such activities; 160 (6) assure that States, and through States, local governments, which are directly affected by exploration, development and production of oil and natural gas are provided an opportunity to participate in policy and planning decisions relating to management of the resources of the Outer Continental Shelf; 161 (7) minimize or eliminate conflicts between the exploration, development, and production of oil and natural gas, and the recovery of other resources such as fish and shellfish; 162 (8) establish an oilspill liability fund to pay for the prompt removal of any oil spilled or discharged as a result of activities on the Outer Continental Shelf and for any damages to public or private interests caused by such spills or discharges; 163 (9) insure that the extent of oil and natural gas resources of the Outer Continental Shelf is assessed at the earliest practicable time; and 164 (10) establish a fishermen's contingency fund to pay for damages to commercial fishing vessels and gear due to Outer Continental Shelf activities. 120 165 The first stated purpose of the Act, then, is to establish procedures to expedite exploration and development of the OCS. The remaining purposes primarily concern measures to eliminate or minimize the risks attendant to that exploration and development. Several of the purposes, in fact, candidly recognize that some degree of adverse impact is inevitable. 121 166 That the Act has an objective-the expeditious development of OCS resources-persuades us to reject petitioners' view that the three elements in section 18(a)(3) are equally important and that no factor is inherently more important than another. 122 The environmental and coastal zone considerations are undoubtedly important, but the Act does not require they receive a weight equal to that of potential oil and gas discovery. A balancing of factors is not the same as treating all factors equally. The obligation instead is to look at all factors and then balance the results. The Act does not mandate any particular balance, but vests the Secretary with discretion to weigh the elements so as to best meet national energy needs. The weight of these elements may well shift with changes in technology, in environment, and in the nation's energy needs, meaning that the proper balance for 1980-85 may differ from the proper balance for some subsequent five-year period. It is also relevant, when assessing potential environmental and coastal zone harm, to consider the availability of regulatory measures to alleviate that harm. 123 This does not mean that consideration of environmental damage may be postponed or foregone. But the potential for environmental harm cannot be adequately considered and weighed without a like examination of the potential to mitigate such harm. 167 The Act recognized the difficult burden the Secretary must shoulder by stating that the selection of timing and location of leasing must strike the proper balance to the maximum extent practicable. The Secretary must evaluate oil and gas potential, which can be quantified in monetary terms, in conjunction with environmental and social costs, which do not always lend themselves to direct measurement. Because of this, they must be considered in qualitative as well as quantitative terms. 168 Although the secretarial discretion we have described is broad, as a result of both the general wording of the statute and the nature of the task Secretary is asked to perform, 124 the Secretary's discretion is not unreviewable. The policies and purposes of the Act provide standards by which we may determine whether the Secretary's decision was arbitrary, irrational, or contrary to the requirements of the Act. 125 To do so, we consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment. 126 169 The Secretary here recognized, in the enclosure accompanying his Final Program, that both the selection of the areas to be leased (location) and the priority in the schedule given to leasing those areas (timing), must strike a proper balance between the three elements of section 18(a)(3). As to location, the Secretary determined that 170 (i)f the anticipated benefits outweigh the anticipated costs for an area, then the proper balance between the potential for environmental damage, the potential for the discovery of oil and gas, and the potential for adverse impact on the coastal zone ... is to schedule the area for leasing consideration. The costs as well as the benefits involved will, of course, be much better known at sale time, but the lesser availability of information at this point is not a basis for declining to proceed with planning activities in an area unless the best estimate which can be made now is that the costs in that area outweigh the benefits. 127 171 As to timing, the Secretary determined that 172 (t)he timing of sales which best meets national energy needs is one which moves into the most valuable areas first, where value is calculated taking into account potential economic social and environmental costs of oil and gas activity as described above. 128 173 We endorse this interpretation of section 18(a)(3). It is reasonable to conclude that within the section's proper balance there is some notion of costs and benefits, recognizing that costs in this context must be a term of uncertain content to the extent it is meant to stand for environmental and social costs. 174 We also agree with the Secretary's view that an area should be included within the program for further consideration when its potential benefits exceed its potential costs. This is the view the Secretary urged upon Congress in his objections to those provisions in the bills preceding the 1978 Amendments which would have required that environmentally sensitive areas be leased last. 129 These provisions were subsequently modified to the present language of section 18(a)(3), which is clearly consistent with the Secretary's view. 175 Petitioners' objection to this view is essentially that it allows even significant environmental costs and coastal zone impacts to be overriden. Yet this is precisely what the Act intends, provided that the potential oil and gas benefits exceed those potential costs. If the Secretary makes that determination for a particular area, and is not arbitrary or capricious in doing so, the Act contemplates that it may be placed on the schedule and that the leasing process proceed, subject to the Secretary's power to regulate OCS activities to protect the environment at subsequent stages in that process. 130 It is not obvious either in theory or in practice that the Secretary's interpretation of the Act will invariably weigh benefits more heavily than costs, with the result that every area of the OCS is placed on the leasing program. 131 176 However reasonable we think the Secretary's interpretation of section 18(a)(3) is as a general matter, the record compels the conclusion that it was not completely implemented. First and foremost, of course, is the Secretary's failure to consider and factor in all aspects of section 18(a)(2). This omission precluded him from meeting the requirement of section 18(a)(3) to obtain a proper balance to the maximum extent practicable. That fact is evident in the Secretary's explanation of how he timed the areas for leasing, which we have quoted above. 132 In relying solely upon industry interest, resource potential, and administrative convenience, the Secretary did not fully comply with all the statutory standards. 177 A further difficulty with the Secretary's actual approach-as opposed to his general interpretation-is that no substantial evidence appears in the record to support his assertion that he performed an area-by-area cost-benefit analysis. The only comparison of costs and benefits made available to him is the SID, which the Secretary states is a reflection of an area by area assessment. 133 But actually the SID compares twelve leasing program alternatives. 134 Costs and benefits are shown only in the aggregate, for each leasing schedule; there is no area-by-area breakdown. We therefore have no basis on which to test the Secretary's program for fidelity to his interpretation of the statute, which is that locating an area within the program was based on a comparison of cost and benefit, and that timing of an area within the program was some function of its relative value, potential costs and benefits considered. 135 178 Petitioners not only complain that the Secretary understated environmental costs in striking his section 18(a)(3) balance, but also argue that he overstated potential economic benefits. The only report of expected economic benefit appears in the SID. The SID assigned to each of the twelve leasing program alternatives a net economic value. The values ranged from $112 billion to $0 (for the alternative of no future OCS leasing). 136 Petitioners' problem with the SID's economic analysis is fourfold: (1) the speculative nature of the resource estimates is masked by use of a single figure rather than a range of figures; (2) environmental costs are qualified only with respect to spill damage and cleanup costs; the economic losses that tourism, fishing, and other OCS-related activities would suffer in the event of an oil spill are ignored; (3) the $100 million figure used to represent oil spill damage is too low; (4) in treating delay in leasing as a factor reducing net economic value, the Secretary ignored the price rises in crude oil that make delay a factor increasing the value of any recovered resources. We address these points in turn. 179 First, we decline to require that the Secretary prepare a range of production estimates instead of a fixed number. The Department of Interior explained that the fixed numbers were calculated from estimates of the probabilities of oil and gas discoveries over a wide range of sizes. 137 We are presented with no cogent case that the reliance on fixed numbers was irrational. 180 Remaining unexplained, though, is the failure to evaluate the quantifiable impact of an oil spill upon fishing, tourism and other OCS-related enterprises. Estimates of damage to these activities, like estimates of potential oil and gas production, are necessarily speculative to a considerable degree. But, unlike some environmental costs, damage to tourism, fishing, and the like is not inherently insusceptible of quantitative analysis. No reason appears why such estimates cannot be made, and the Secretary offers no satisfactory excuse for the failure to make them. 181 The third complaint-that $100 million is too low an estimate for the damage and cleanup cost of a major oil spill (over 1,000 barrels)-we find to be without merit. The Department of Interior explained that $100 million was 142 percent of the estimated damage and cleanup costs of the mammoth Santa Barbara spill, and few if any of the major spills predicted during the life of the leasing program can be expected to be of that magnitude-over 100,000 barrels. 138 Although we might pick another number to represent the damage and cleanup cost of a predicted oil spill, we cannot say the selection of $100 million was a clear error of judgment. 182 Finally, we are left uncertain as to whether the Secretary properly considered the economic effect of delaying lease sales. The Department explained that (f)or alternatives involving the delay of specific sales, a discount factor was used to reduce the economic value of that sale to reflect the effect of the delay .... 139 The effect of this reduction, of course, was to favor speedier leasing. The rationale for this reduction was explained in the May 1979 Draft Program in materials prepared by the Department of Interior. 140 The materials described the economic benefits of OCS oil production in terms of the difference between (1) the oil price charged by the Organization of Petroleum Exporting Countries (OPEC) and (2) the cost of finding and producing that oil from the OCS. 141 The materials then explained that, holding other factors constant, it is better to realize income as soon as possible, meaning that delaying the acquisition of an asset reduces its present value: If resources 'earn' about 10% in our economy, the social value of a resource development can be increased 1.61 times if benefits can be made to occur 5 years earlier. A delay of 5 years reduces the value of the benefit by 38%. 142 The materials also recognized, however, that postponement of the realization of an asset makes sense if the asset increases in value faster than the figure (here, 10%) chosen to represent investment opportunities and the economic preference for immediate realization: it is worth postponing the production of oil and gas for 5 years if the benefits after this wait would be at least 1.61 times the benefits of producing now. 143 The materials also considered varying rates of inflation, which would affect both the costs of extracting OCS oil and the price of OPEC oil. The materials estimated, for example, that at a 6% rate of inflation, a delay from 1979 to 1984 of extracting oil available in 1979 would require a 1984 price of $29.61 a barrel to be worthwhile (the 1979 price was $18.10 a barrel). 144 The materials also considered the annual rate of real price increases (the actual rate adjusted for inflation) for OPEC oil. 145 The report estimated that the cost of 5 years of postponed production at $6 per barrel costs and 2% real growth in OPEC prices is $3.26 a barrel. 146 It concluded: 183 it is worthwhile finding and producing any OCS oil and gas that is less costly than OPEC oil as soon as possible unless extraordinary increases in future world oil prices are expected. Otherwise banking oil in the ground will deprive the American people of present consumption and investment without sufficient future gains to offset the income they would forego. 147 184 The record thus reflects a model for attributing a cost to delay. We are reluctant to interfere with an agency's choice of methodology so long as it is not irrational. 148 Certain aspects of the Department's computation of net economic worth are nevertheless troubling, and bear further explanation. First, it is unclear whether 2% as a rate of real increase for OPEC prices was chosen merely for purposes of illustration or as an assumption upon which the agency's computation was based. If the 2% figure was relied upon, then the basis for choosing that figure, when the experience of the period since 1973 suggests a far higher figure, is not revealed. Higher estimates of future OPEC prices would increase the estimate of the benefit of exploiting OCS benefits in the near future, as the Department has suggested, but it also appears to make further delay in exploitation more worthwhile, as petitioners argue. 149 Second, petitioners contend that there is an inconsistency in approach between the May 1979 program the Department cites in its brief to this court and the DOE study the Department pointed to in its September 1980 letter to NRDC. 150 Under the May 1979 program, net economic value is basically the difference between the OPEC price and the cost of OCS production. Under the DOE study, say petitioners, net economic value is determined by calculating industry profits from OCS production and expected federal tax revenues and royalty payments. 151 The interrelationship, if any, between the two studies, and the degree to which they informed the economic analysis affecting the Secretary's decision is not plain on the record before us. On remand, the Secretary should present a coherent explanation of how net economic value is being determined. 152 185