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Geo-Energy Partners-1983 Ltd. v. Salazar

July 27, 2010

GEO-ENERGY PARTNERS-1983 LTD., PLAINTIFF-APPELLANT,
v.
KEN SALAZAR, IN HIS CAPACITY AS SECRETARY OF THE THE INTERIOR, UNITED STATES DEPARTMENT OF THE INTERIOR; RONALD WENKER, IN HIS CAPACITY AS DIRECTOR OF THE NEVADA STATE OFFICE, BUREAU OF LAND MANAGEMENT, UNITED STATES DEPARTMENT OF THE INTERIOR; INTERIOR BOARD OF LAND APPEALS, DEFENDANTS-APPELLEES.



Appeal from the United States District Court for the District of Nevada Brian E. Sandoval, District Judge, Presiding, D.C. No. 3:06-cv-00612-BES-RAM.

The opinion of the court was delivered by: Thomas, Circuit Judge

FOR PUBLICATION

Argued and Submitted March 8, 2010 -- San Francisco, California

Before: Cynthia Holcomb Hall, John T. Noonan and Sidney R. Thomas, Circuit Judges.

OPINION

This appeal presents the question of whether the procedures for periodic revision of units in the 1988 Amendments to the Geothermal Steam Act apply to pre-amendment contract provisions. Under the circumstances presented by this case, we conclude that they do not, and we affirm the judgment of the district court.

I.

In 1970, Congress enacted the Geothermal Steam Act, 30 U.S.C. §§ 1001 et seq., to promote the development of geo-thermal leases on federal lands. Wagner v. Chevron Oil Co., 321 F. Supp. 2d 1195, 1198 (D. Nev. 2004). The Geothermal Steam Act authorizes the United States Bureau of Land Management ("BLM") to issue geothermal leases that provide for the right to explore and develop geothermal resources on federal property. The term "geothermal resources" refers to the heat or energy found in steam, hot water, or geothermal formations. 30 U.S.C. § 1001(c) (2000)*fn1.

A.

Multiple geothermal leases held by one or more lessees in the same geographic area are typically combined into a single unit through a unit agreement. 30 U.S.C. § 1017. The unit agreement provides for several tracts of land to be explored and developed as if all the tracts were one parcel. The purpose of the unit agreement is to provide for more efficient development and production of geothermal resources.

The terms of a unit agreement determine how a unit will be administered, including when the agreement is effective, when it will contract or expire, how it will be configured, what the diligent drilling requirements will be, and when a participating area will be established. Once a unit is formed, a unit operator is designated to manage the unit and represent the lessees in developing the geothermal resources. Unit agreements become effective only upon BLM approval.

The primary term of a federal geothermal lease is ten years. 30 U.S.C. § 1005(a). Under the statute and regulations as they existed at the time of the BLM decision at issue in this case, if a lessee developed a well capable of commercial production during the primary term, the lease could continue for an additional term up to forty years. Id.; 43 C.F.R. § 3200.1 (2002). The additional term would continue so long as geothermal resources were produced or utilized in commercial quantities.

43 C.F.R. § 3207.10(b) (2002).

BLM may extend a non-producing lease for two successive five-year periods if lessees meet certain conditions. First, a lease could be extended if the lessee made a bona fide effort to produce or utilize geothermal resources in commercial quantities. This was called a "diligent efforts" extension. 43 C.F.R. § 3208.10(a)(2) (2002). Second, a lease could be extended to match the term of its unit so long as the lease was committed to the unit and its term would expire before the unit term would expire. This was called a "unit commitment" extension. 43 C.F.R. § 3208.10(a)(4) (2002). Third, a lease could be extended if a well capable of producing geothermal resources was drilled. 43 C.F.R. § 3208.10(b) (2002). Extensions authorized by these provisions did not become effective without BLM approval. 43 C.F.R. § 3208.11(b) (2002). BLM could also grant extensions under its discretionary authority.

This appeal involves geothermal leases in the Fish Lake II Unit ("Fish Lake Unit"). The unit agreement in this case ("Fish Lake Unit Agreement") was based on the model unit agreement set out at 43 C.F.R. § 3286.1 (2002). Under both the Fish Lake Unit Agreement and the model agreement, BLM was authorized to postpone obligations established under the unit agreement.*fn2 Id..

Under both agreements, if a unit operator determined that a unit well was capable of commercial production, it would propose establishing a participating area. A participating area is a part of the unit determined to be commercially productive based on the results of well testing. BLM approval is required for all participating areas.

Under both the Fish Lake Unit Agreement and the model agreement, the unit would "contract" to the size of the participating area unless "diligent drilling operations are in process on an exploratory well" five years after the participating area's formation. 43 C.F.R. § 3286.1 (2002); The purpose of this provision was to provide incentive for the unit operator to explore and develop portions of the unit that have not been determined to be commercial. If a unit contracts, the unit and participating area become the same. Once a unit contracts, the leases outside the participating area continue only if they are in their primary term or they qualify for extensions as independently functioning leases. Id.

Contraction in this case was governed by Article 4.3 of the Fish Lake Unit Agreement: "[U]nitized lands . . . no part of which is entitled to be within a Participating Area on the fifth anniversary of the effective date of the initial Participating Area established under this Agreement, shall be eliminated automatically from this Agreement effective as of said fifth anniversary and such lands shall no longer be part of the Unit Area and shall no longer be subject to this Agreement unless diligent drilling operations are in progress on an exploratory well on said fifth anniversary . . . ."

Pursuant to the 1988 amendments to the Geothermal Steam Act, Pub. L. 100-443, 102 Stat. 1766, and separately from the above process, BLM reviews a unit agreement every five years to determine if lands within the unit are still necessary for unit operations. Those lands that are determined to be no longer reasonably necessary for unit operations are eliminated from the unit. The elimination must be based on scientific evidence and shown to serve geothermal conservation and management purposes. 30 U.S.C. § 1017(f).

B.

The leases committed to the Fish Lake Unit were issued pursuant to the Geothermal Steam Act of 1970. The first commercial well in northern Fish Lake Valley was completed in 1984 as part of the diligent development required by the Fish Lake I Unit, which terminated in 1988 for lack of diligent development when the unit failed to meet its drilling obligations. Geo-Energy Partners-1983 LTD ("Geo-Energy") acquired the interests of one of the partners in the prior Fish Lake Unit at some point between 1982 and 1985. The leases in that defunct unit included all of the leases involved in this appeal. Those 12 leases were scheduled to expire because they were beyond their primary terms, but BLM approved extensions for all of them.

In January 1987, special legislation extended five of those leases to December 31, 1988: N-8421, N-8428, N-9647, N-10311 and N-17777. On February 10, 1989, BLM approved first diligent efforts extensions for those leases, extending them to December 31, 1993. On August 19, 1991 BLM granted a first diligent efforts extension through August 31, 1996, for leases N-31991, N-31992, and N-31993.

In 1992, Geo-Energy and Magma Power Company ("Magma") pooled their leases into a joint venture, the Magma/Geo-83 JV ("JV"), and signed a unit agreement to establish the Fish Lake II Unit. The Fish Lake Unit Agreement designated the Fish Lake Power Company ("FLPC"), a Magma subsidiary, as Unit Operator. The JV was designated the working interest owner, but all the rights and responsibilities for Unit operations and exploration, production, and utilization of the unitized resources were delegated to FLPC. The Fish Lake Unit Agreement provided for automatic contraction five years after the initial participating area was established "unless diligent drilling operations [were] in progress on an exploratory well on said fifth anniversary." Fish Lake Unit Agreement, Article IV, Section 4.3.

On October 16, 1992, BLM approved first diligent efforts extensions for four leases, extending them to September 30, 1997: N-36616, N-36617, N-36618, and N-36619. In November 1993, BLM approved second diligent efforts extensions for leases N-8421, N-8428, N-9647, N-10311, and N-17777, extending them to December 31, 1998.

On March 3, 1994, BLM determined the Fish Lake Unit had met its initial diligent development obligation by drilling a well (No. 81-13 on lease N-9647) capable of producing geo-thermal resources in paying quantities. On September 21, 1994, BLM issued a decision declaring lease N-9647 in "additional term," and under the Fish Lake Unit Agreement, no further diligent development was required until the Unit contraction date. BLM's decision advised that contraction would occur five years after December 1, 1993, unless diligent drilling occurred at that time. The decision also extended the following seven leases to November 30, 1998: N-31991, N-31992, N-31993, N-36616, N-36617, N-36618, ...


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