Alabama v. United States Department of the Interior

United States Court of Appeals,

Eleventh Circuit.

No. 94-6657.

STATE OF ALABAMA, State of Alabama ex rel. James H. Evans,
Attorney General, Plaintiffs-Appellants-Cross-Appellees,

v.

UNITED STATES DEPARTMENT OF the INTERIOR, Minerals Management
Service, Defendants-Appellees-Cross-Appellants,

Manuel Lujan, Jr., Scott Sewell, Defendants,

OXY USA Inc., Defendant-Intervenor-Appellee-Cross-Appellant,

Exploration Mobil Oil Exploration & Producing Southeast, Inc.,
Conoco, Inc., Texaco Exploration and Production, Inc., Intervenors-
Appellees-Cross-Appellants,

AGIP Petroleum Company, Inc., Intervenor.

June 5, 1996.

Appeals from the United States District Court for the Southern
District of Alabama. (No. CV 91-0850 BH, William Brevard Hand,
Judge.

Before COX and BARKETT, Circuit Judges, and PROPST*, District
Judge.

BARKETT, Circuit Judge:

Both parties appeal different aspects of the summary

disposition of this cause. The material facts are not in dispute.

Under a lease agreement with the U.S. Department of the Interior

("DOI"), Mobil Oil Exploration and Production Southeast, Inc.

presently leases a tract of submerged land on the outer continental

shelf called Federal Offshore Lease Block 823. On this tract,

Mobil has four wells producing natural gas from a reservoir that

straddles the federal/Alabama border. Mobil pays royalties to the

*
Honorable Robert B. Propst, U.S. District Judge for the
Northern District of Alabama, sitting by designation.
DOI on the natural gas it produces. Though the natural gas

reservoir lies partially within Alabama, Mobil pays no royalties to

Alabama.

Under federal law, the DOI and an adjoining coastal state may

agree to share the royalties derived from reservoirs that straddle

the federal/state boundary. Federal law also requires the DOI to

give the state 27% of the royalties it receives from reservoirs

near the state border as compensation for drainage from reservoirs

lying partly within the state.1 Alabama and the DOI negotiated in

an effort to reach an agreement on the sharing of royalties from

reservoirs along the federal/Alabama border. When they could not

reach an agreement, Alabama sued the DOI seeking a declaration

that, before the DOI may authorize Mobil to produce natural gas on

Block 823 from the particular reservoir straddling the

federal/Alabama boundary, federal law required the DOI first to

enter into a formal cooperative development agreement with Alabama

that addressed compensating Alabama for any drainage that may occur

from that reservoir.

Alabama premises its claim upon section 5(j)(2) of the Outer

Continental Shelf Lands Act ("OCSLA"), 43 U.S.C. § 1334(j)(2),

which provides as follows:

(j) Cooperative development of common hydrocarbon-bearing
areas

(2) Prevention of harmful effects

The Secretary shall prevent, through the cooperative
development of an area, the harmful effects of unrestrained
competitive production of hydrocarbons from a common

1
See Section 8(g) of the OCSLA, 43 U.S.C. § 1337(g),
discussed infra.
 hydrocarbon-bearing area underlying the Federal and State
boundary.

43 U.S.C. § 1334(j)(2).2

I. Background

Coastal states own submerged lands adjoining their coasts

extending seaward three miles. See Submerged Land Act of 1953, 43

U.S.C. § 1312; see also Roger J. Marzulla, Federalism Implications

and OCSLA Section 8(g), 2 Nat. Resources & Env't 26, 26-27 (1986).

The Secretary of the DOI has the authority to issue oil, gas and

other mineral leases for the submerged lands of the outer

continental shelf, which Congress has defined as beginning where

the states' jurisdiction ends, i.e., more than three miles from the

coast. See OCSLA, 43 U.S.C. § 1331 et seq.

Though the Submerged Land Act of 1953 and the OCSLA establish

jurisdictional boundaries, they do not address the issue of oil and

gas drainage. Because oil and gas reserves can straddle the

jurisdictional boundary, it is possible for the lessee of one

government to drain the reserves located under the other

government's territory. Under the common law "rule of capture,"

the owner of land has the right to capture all oil and gas

underlying his land including oil and gas that migrates there from

beneath another's land. See 8 Howard R. Williams & Charles J.

Meyers, Oil and Gas Law 983 (1995); State of Louisiana v. United

2
This is a case of first impression concerning the
interpretation of section 5(j) of the OCSLA. Statutory
interpretation presents a question of law that we review de novo.
Lohr v. Medtronics, Inc., 56 F.3d 1335, 1341 (11th Cir.1995). We
also review an administrative agency's statutory interpretation
de novo, but defer to an agency's interpretation if it is
reasonable. Id.
States, 832 F.2d 935, 938 (5th Cir.1987). In this regard, the law

governing oil and gas has been described as being more like that

governing wildlife than the law governing solid minerals. See Dean

Lueck, The Rule of First Possession and the Design of the Law, 38

J.L. & Econ. 393, 403 (1995).

The problem with the rule of capture is that it encourages a

tract owner to build wells near his border so as to drain not only

the reserves underlying his own tract, but also the reserves

underlying a neighboring tract. Id. The neighboring tract owner,

in order to protect his mineral rights, must then build offsetting

wells—most advantageously right across the border from his

neighbors' wells—and start production or risk losing his reserves.

Each tract owner then has an incentive virtually to race to drain

the reservoir as quickly as possible to capture as much oil or gas

as he can. The result is (1) economic waste in drilling

unnecessary wells; (2) a corresponding heightened risk of damage

to the environment; and (3) physical waste of the oil or gas

itself because the faster production occurs, the lower the

long-term recovery will be from the reservoir. Because of its

negative effects, nearly every state has abrogated the rule of

capture legislatively with well-spacing rules, production

regulations, and/or other conservation mechanisms. See id.

But the rule of capture still governs the outer continental

shelf. See State of Louisiana v. United States, 832 F.2d 935, 938

(5th Cir.1987). Within the outer continental shelf, it is not as

important to abrogate the rule of capture because reservoirs do not

straddle different tracts of land as they would within a state:
the DOI controls the entire area; it has authority to create lease

tracts that correspond to reservoirs; and it has authority to

require lessees to combine drilling and production efforts. But

all the problems of unrestrained application of the rule of capture

are present along the federal/state boundary where about 150 known

reservoirs, including the one at issue in this suit, lie partly

under federal control and partly under state control.

Congress passed Section 5(j) as part of the Oil Pollution Act
3
of 1990. See generally J.B. Ruhl & Michael J. Jewell, "Oil

3
In full, section 5(j) provides:

(j) Cooperative development of common
hydrocarbon-bearing areas

(1) Findings.—

(A) The Congress of the United States finds that the
unrestrained competitive production of hydrocarbons
from a common hydrocarbon-bearing geological area
underlying the Federal and State boundary may result in
a number of harmful national effects, including—

(i) the drilling of unnecessary wells, the installation
of unnecessary facilities and other imprudent operating
practices that result in economic waste, environmental
damage, and damage to life and property;

(ii) the physical waste of hydrocarbons and an
unnecessary reduction in the amounts of hydrocarbons
that can be produced from certain hydrocarbon-bearing
areas; and

(iii) the loss of correlative rights which can result
in the reduced value of national hydrocarbon resources
and disorders in the leasing of Federal and State
resources.

(2) Prevention of harmful effects

The Secretary shall prevent, through the cooperative
development of an area, the harmful effects of
unrestrained competitive production of hydrocarbons
from a common hydrocarbon-bearing area underlying the
Federal and State boundary.
Pollution Act of 1990: Opening a New Era in Federal and Texas

Regulation of Oil Spill Prevention Containment and Cleanup

Liability," 32 S.Tex.L.Rev. 475 (1991). Section 5(j) was the

latest Congressional pronouncement in a long-standing dispute

between states and the federal government over offshore oil and gas

reserves. See State of Louisiana v. United States, 832 F.2d 935,

941 (5th Cir.1987); State of Texas v. Secretary of Interior, 580

F.Supp. 1197, 1122 (E.D.Tex.1984); see also Roger J. Marzulla,

Federalism Implications and OCSLA Section 8(g), 2 Nat. Resources &

Env't 26 (1986); Edward A. Fitzgerald, The Seaweed Rebellion: The

Battle Over Section 8(g) Revenues, 8 J.Energy L. & Pol'y 253

(1988).

II. Procedural Background

In its complaint, the State of Alabama alleged that it was

unlawful, pursuant to section 5(j) of the OCSLA, 43 U.S.C. §

1334(j),4 for the DOI to authorize Mobil to produce natural gas by

wells located on Block 823 from the reservoir straddling the

federal/Alabama boundary without first entering a formal

cooperative development agreement with Alabama. Alabama argued

that Mobil would drain natural gas from the part of the reservoir

within Alabama and that Alabama would lose the royalties

corresponding to that drained natural gas. 5 However, Alabama did

not request that production be halted until a cooperative

4
See 43 U.S.C. § 1349 (providing for citizen suits for "any
person having a valid legal interest which is or may be adversely
affected ... to compel compliance with [the OCSLA] ); the
Administrative Procedure Act, 5 U.S.C. § 706.
5
Alabama charges a royalty rate of 25%, while the federal
government charges only 162/3%.
development agreement was entered. Instead, Alabama requested an

order requiring the DOI to place into an escrow account all

royalties the federal government received from Mobil's natural gas

production from Block 823 until the DOI and Alabama entered a

cooperative development agreement addressing the drainage issue.

The DOI moved for summary judgment arguing that section 5(j)

did not require the DOI to reach a formal cooperative development

agreement with Alabama before the DOI could authorize the

production of natural gas and that, even if section 5(j) required

a formal cooperative development agreement, it did not require such

an agreement to address drainage compensation. The DOI argued that

section 5(j) merely requires the DOI to make a good faith effort to

reach an agreement with Alabama, and that it had done so by

providing Alabama with all relevant information, considering

Alabama's comments and concerns, and attempting in good faith to

negotiate an agreement. The DOI further asserted that, because no

harmful effects are present in the reservoir at issue, i.e.,

because Alabama has not drilled wells necessary only to protect

itself from drainage, there are as yet no harmful effects.

The district court found that the DOI's interpretation of

section 5(j) was inconsistent with the language of section 5(j) and

held that it was unlawful under section 5(j) for the DOI to

authorize Mobil to begin natural gas production without first

entering into a cooperative development agreement with Alabama.

The court then ordered the DOI and Alabama to reach a cooperative

development agreement and required the DOI to place all royalties

paid by Mobil to the DOI for natural gas production from Block 823
into the court registry until an agreement was reached.6

Notwithstanding its decision to "hold" the royalties pending

agreement, the district court disagreed with Alabama's assertion

that section 5(j) required the DOI to address drainage compensation

through the division of royalties. The court held, instead, that

another provision of the OCSLA, Section 8(g) of the OCSLA, 43

U.S.C. § 1337(g), discussed infra, exclusively governed these

issues.

Although we agree with the district court that section 5(j)

does not affect the drainage compensation provisions found

elsewhere in the OCSLA, we reverse the district court's

determination that federal law requires the DOI to enter a formal

cooperative development agreement before authorizing production.

III. Whether section 5(j) required the DOI to address drainage
compensation through the division of royalties.

Alabama asserts that the district court erred in holding that

compensation for drainage and division of royalties is governed

exclusively by section 8(g) of the OCSLA, 43 U.S.C. § 1337(g), and,

by implication, that such compensation need not be addressed in

cooperative development under section 5(j). Alabama asserts that

the cooperative development mandated by section 5(j) by definition

addresses compensation for drainage, and that an agreement on the

division of royalties is a tool the DOI should have available to it

to negotiate a cooperative development agreement with Alabama. We

find that Alabama reads too much into section 5(j) and that section

5(j) neither adds nor takes anything away from provisions contained

6
Presently over $24 million is being held by the district
court.
in section 8(g)(2) that govern drainage compensation through the

division of royalties.

Prior to Congress's passage of section 5(j), section 8(g)(2)

already directly addressed the issue of drainage compensation. It

provided that the DOI must give the adjoining coastal state 27% of

the royalties it receives from any federal lease in an area

designated the "8(g) zone." This zone is the band of the outer

continental shelf situated between three and six miles offshore;

the state is to receive its 27% share of the royalties regardless

of whether the federal lessee is draining oil or gas from state

territory or not. Section 8(g)(2) provides that

the Secretary shall transmit to [the adjoining] coastal State
27 percent of [the] revenues [derived from any lease of any
Federal tract which lies within three nautical miles of the
seaward boundary of any coastal State], together with all
accrued interest thereon. The remaining balance of such
revenues shall be transmitted simultaneously to the
miscellaneous receipts account of the Treasury of the United
States.

Section 8(g)(2) of the OCSLA, 43 U.S.C. § 1337(g)(2).

Section 8(g)(2) replaced an earlier provision that established

a scheme whereby revenues obtained from a federal lease operating

in the 8(g) zone would be shared in a "fair and equitable manner"

by the federal government and the coastal state if a determination

was made that a common field of oil or gas underlay federal and

state territory so as to create a threat of drainage by the federal

lessee. See 43 U.S.C. § 1337(g) (repealed 1986); see also State

of Louisiana v. United States, 832 F.2d 935, 941-42 (5th Cir.1987).

The earlier provision required an exchange of information between

the governor and secretary, then negotiations, and then, if no

agreement could be reached, determination by a district court of a
"fair and equitable disposition of the revenues." See 43 U.S.C. §

1337(g) (repealed 1986).

The district court that heard the first such case found this

original scheme to be unworkable and, in its order, urged Congress

to change the law. See State of Texas v. Secretary of Interior,

580 F.Supp. 1197, 1122 (E.D.Tex.1984). But see Fitzgerald, The

Seaweed Rebellion, at 275-77 (arguing that the scheme would have

been workable had the district court not misinterpreted key phrases

in the statute). Congress responded by replacing section 8(g)(2)

with the 27% compromise language presently found in section

8(g)(2). Congress made this change to section 8(g)(2) with the

intent of permanently settling disputes over drainage compensation

on the outer continental shelf. See State of Louisiana v. United

States, 832 F.2d 935, 941-42 (5th Cir.1987) (quoting legislative

history of the amendments to section 8(g) and concluding that

section 8(g)(2) represented a compromise between state and federal

interests).

In addition to the 27% state share of royalties provided for

by section 8(g)(2), when Congress passed section 5(j), section

8(g)(3)7 already provided that the secretary or the governor of a

7
Section 8(g)(3) provides that

[w]henever the Secretary or the Governor of a coastal
State determines that a common potentially
hydrocarbon-bearing area may underlie the Federal and
State boundary, the Secretary or the Governor shall
notify the other party in writing of his determination
and the Secretary shall provide to the Governor notice
of the current and projected status of the tract or
tracts containing the common potentially
hydrocarbon-bearing area. If the Secretary has leased
or intends to lease such tract or tracts, the Secretary
and the Governor of the coastal State may enter into an
coastal state must notify the other if either determines that a

reservoir may straddle the federal/state boundary, and that the

secretary must provide the governor with notice of current and

projected development in the area. Additionally, section 8(g)(3)

provided that, if the secretary had leased an area, the secretary

and the governor "may" enter into "a unitization or other royalty

sharing agreement" to combine tracts and share the revenues from

production. But if no agreement was reached, the secretary had the

authority to proceed with the leasing of the area alone and give

the state 27% of the revenue pursuant to subsection (g)(2).

In reading sections 8(g)(2) and 8(g)(3), it is reasonable to

assume that Congress intended section 8(g)(2) to strike a

compromise between coastal states and the federal government to

resolve the drainage compensation issue by giving states 27% of the

royalties derived from production in the 8(g) zone. Somewhat apart

from the issue of drainage compensation, Congress intended section

8(g)(3) to provide the DOI with tools necessary to ensure good

conservation practices on and efficient development of reservoirs

straddling the border, such as the authority to negotiate and agree

with states to combine lease tracts and divide the royalties by way

of unitization or to agree to other royalty sharing agreements with

agreement to divide the revenues from production of any
common potentially hydrocarbon-bearing area, by
unitization or other royalty sharing agreement,
pursuant to existing law. If the Secretary and the
Governor do not enter into an agreement, the Secretary
may nevertheless proceed with the leasing of the tract
or tracts. Any revenues received by the United States
under such an agreement shall be subject to the
requirements of paragraph (2).

Section 8(g)(3) of the OCSLA, 43 U.S.C. § 1337(g)(3).
states. Such other royalty sharing agreements under section

8(g)(3) might include reciprocal agreements to share with a state

royalties the federal government has realized from federal

production from a reservoir straddling the border in exchange for

the state sharing with the federal government royalties the state

has realized on a different reservoir straddling the border.

In light of sections 8(g)(2) and 8(g)(3), we find section 5(j)

to be more akin to section 8(g)(3), than to section 8(g)(2) as

Alabama asserts. We find unpersuasive Alabama's argument that, in

enacting section 5(j), Congress intended to indirectly rekindle the

drainage compensation issue it had four years earlier permanently

settled by amending section 8(g)(2)—particularly where, as here,

Congress did not explicitly mention drainage compensation in the

text of section 5(j), but merely referred to cooperative

development. Given the long dispute both in Congress and the

courts between coastal states and the DOI over drainage

compensation along the federal/state boundary, one would expect

substantial legislative history and debate over section 5(j) had

Congress intended to address this issue. Yet there are no

committee reports, virtually no record of floor debates and little

other legislative history regarding section 5(j). Accordingly, we

hold that Congress did not intend to address drainage compensation

in section 5(j).

We find further support for our holding by comparing the

version of section 5(j) that Congress passed with the version that

was first introduced. As originally offered in the Senate, section

5(j) required the Secretary to "prevent the harmful effects of
unrestrained competitive production of hydrocarbons from a common

hydrocarbon-bearing area underlying the Federal and State boundary

by protecting against drainage through the cooperative development

of such area." See 135 Cong.Rec. S8488-03, S8500-S8501 (1990)

(emphasis added). Section 5(j) further provided both the federal

government and the affected coastal state with the authority to

seek an injunction in district court "in order to prevent the

drainage of federal oil and gas resources " until the parties could

agree on a "fair and equitable apportionment of the oil and gas

resources involved," or until the district court entered final

judgment in favor of one party or the other. Id.

Comparing the version of section 5(j) originally offered with

that eventually passed, it is apparent that the breadth of section

5(j) was drastically reduced over the course of legislative debate

and negotiation. At passage, gone was any mention of drainage and

all of the language that would have provided for the "fair and

equitable apportionment of oil and gas resources" and injunctive

relief. Although section 5(j) may have been introduced with the

intent of addressing the drainage compensation issue, it is

significant that all the language related to drainage compensation

had been eliminated by section 5(j)'s passage. It is reasonable to

assume that Congress would not have deleted this language had it

intended section 5(j) to address this issue. Cf. Russello v.

United States, 464 U.S. 16, 23-24, 104 S.Ct. 296, 300-01, 78

L.Ed.2d 17 (1983) ("Where Congress includes limiting language in an

earlier version of a bill but deletes it prior to enactment, it may

be presumed that the limitation was not intended."); see also
Southern Pacific Transportation Company v. Usery, 539 F.2d 386, 391

(5th Cir.1976).

Alabama's interpretation of section 5(j) asks us to read back

into section 5(j) provisions pertaining to drainage compensation

that Congress—for whatever reason—specifically eliminated prior to

passage. In light of the specific provisions addressing drainage

compensation in section 8(g)(2) that remained in effect following

the passage of section 5(j), we cannot accept Alabama's argument

that we should construe section 5(j)'s broad "cooperative

development" language as indirectly abrogating the 27% compromise

struck in section 8(g)(2). For all of the foregoing reasons, we

agree with the district court that drainage compensation is

governed by section 8(g)(2), and is not altered by section 5(j).

IV. Whether Section 5(j) requires a formal agreement in other
respects.

We turn now to the DOI's arguments that section 5(j)(2) does

not require it to enter into a formal cooperative development

agreement with Alabama. Section 5(j)(2) provides that

[t]he Secretary shall prevent, through the cooperative
development of an area, the harmful effects of unrestrained
competitive production of hydrocarbons from a common
hydrocarbon-bearing area underlying the Federal and State
boundary.

43 U.S.C. § 1334(j) (emphasis added). We find that reading the

plain language of section 5(j), it is clear that the word "prevent"

means prevent before something occurs, particularly in the context

of the cooperative development envisioned under this section.

Moreover, we cannot agree with the DOI's interpretation that the

word "prevent" can be reasonably read to apply to something after

it has occurred. The DOI concedes that it interprets "cooperative
development" under section 5(j) as requiring it to (1) provide the

adjoining state with all relevant information, (2) consider the

state's comments and concerns, and (3) attempt in good faith to

negotiate an agreement. It would make little sense to undertake

such activities only after a finding is made that the state is

likely to build offsetting wells. The "cooperative development"

Congress mandated in section 5(j) itself would help to identify

when the drilling of such wells is likely to occur. Put another

way, the harmful effects Congress directed the DOI to prevent in

section 5(j), i.e., the drilling of wells necessary only to prevent

drainage and other measures that do not comport with conservation

practices and that are connected with two sovereigns developing and

producing natural gas from the same reservoir without cooperating

with each other, are likely to occur whenever it is discovered that

there is a reservoir straddling the federal/state boundary. The

DOI may not wait until the state has already built an offsetting

well or is about to begin building an offsetting well to engage in

cooperative development. Therefore, "prevent" as the term is used

in section 5(j) must be read in the context of long-term

prevention.

The definition of "development" in the OCSLA provides further

support for our reading. Development refers to activity after

discovery of reserves, but before production of oil or gas,

including drilling, construction of platforms, and operation of

onshore support facilities. See 43 U.S.C. § 1331(l ). For these

reasons, we hold that the DOI's interpretation of section 5(j) as

requiring a showing that harmful effects have occurred or are
likely to occur before the DOI is under an obligation to undertake

cooperative development is inconsistent with the language of

section 5(j).

The DOI next argues that "cooperative development" under

section 5(j)(2) does not require a formal agreement. We need not

address the issue of whether the term "cooperative development"

implies that an agreement must be reached, because, assuming

arguendo that it does, we nevertheless find that section 5(j)(2)'s

cooperative development language "is not susceptible to a literal

reading because it is simply not possible to order two parties to

enter into an agreement if they do not agree." See Ponca Tribe of

Oklahoma v. State of Oklahoma, 37 F.3d 1422, 1435 (10th Cir.1994)

(holding that language in the Indian Gaming Regulatory Act

("IGRA"), 25 U.S.C. § 2701, et seq., requiring a court to order a

state and an Indian tribe to agree to a compact within 60 days is

not subject to a literal reading); see also Seminole Tribe of

Florida v. State of Florida, 11 F.3d 1016, 1020 (11th Cir.1994).

Thus, although Congress could impose rules governing drainage

compensation as it did in section 8(g)(2), see section 8(g) of the

OCSLA, 43 U.S.C. § 1337(g) (requiring the DOI to transfer 27% of

the royalties derived from production by federal lessees from

reservoirs on the outer continental shelf within three miles of the

state boundary to states), or could require that royalties obtained

from a federal lease be shared in a "fair and equitable manner" by

the federal government and the coastal state as determined by a

district court, see 43 U.S.C. § 1337(g)(2) (repealed 1986); see

also State of Louisiana v. United States, 832 F.2d 935, 939 (5th
Cir.1987); Edward A. Fitzgerald, The Seaweed Rebellion: The

Battle Over Section 8(g) Revenues, 8 J.Energy L. & Pol'y 253

(1988), Congress lacks the power to force the DOI and a state to

agree to a cooperative development agreement. See Ponca Tribe, 37

F.3d at 1435. It does have the power to require the DOI to attempt

to reach an agreement in good faith. However, we are left with the

question of what happens if the DOI and the affected state fail to

reach a cooperative development agreement. Cf. Section 11(d)(7)(B)

of the IGRA, 25 U.S.C. § 2710(d)(7)(B) (requiring a state and tribe

to agree to a compact, but providing that, if they fail to agree to

a compact, then the state and tribe must submit to a mediator and

then, if an agreement still cannot be reached, the Secretary of the

DOI decides the dispute).

Although section 5(j) as it was originally introduced

authorized both the state and the federal government to file suit

in district court and seek an injunction "or other appropriate

remedy" when the parties failed to reach a cooperative development

agreement, these provisions had been deleted by section 5(j)'s

passage. See 135 Cong.Rec. S8488-03, S8500-S8501 (1990). Thus,

when Congress deleted these provisions, it left a gap in section

5(j) regarding what happens if the parties cannot reach an

agreement. In this case, the DOI informally filled this gap by

proceeding unilaterally.

We agree with the DOI's action—that it may proceed

unilaterally—provided the DOI first has negotiated in good faith to

reach a cooperative development agreement with the affected coastal

state. In this regard, we find section 5(j)(2) to be closely akin
to section 8(g)(3), which gives the DOI the authority to enter into

"unitization or other royalty sharing agreement[s]" with states

regarding reservoirs straddling the federal/state border. We read

section 5(j)(2) as going one step further to require the DOI to

negotiate in good faith with states to enter into one or more

royalty sharing agreements regarding reservoirs straddling the

federal/state border with the goal of promoting good conservation

practices.

Were we to hold, as the district court did, that the DOI may

not unilaterally authorize production without first reaching a

cooperative development agreement with Alabama under section 5(j),

we would be interpreting section 5(j) as requiring the DOI to

negotiate until an agreement is reached, thereby allowing Alabama

to refuse to agree until its demands are met. Such an

interpretation would hardly place the parties on an equal footing

for negotiating an agreement because the consequence of the DOI and

Alabama failing to reach an agreement would be to delay federal

production until an agreement was reached, but there would be no

corresponding consequence for Alabama. State production would not

be affected by such an interpretation of section 5(j). Section

5(j) only requires the DOI to reach a cooperative development

agreement with states; it does not require the states to enter a

cooperative development agreement with the DOI. Therefore, Alabama

could always threaten to leave the negotiating table unless its

demands are met, while the DOI would have to stay until an

agreement is reached because, under the district court's

interpretation, the DOI could only lawfully authorize production
under section 5(j) after it has entered a cooperative development

agreement. This consequence would give Alabama effective veto

power over the DOI's lawful authorization of natural gas and oil

production; in other words, Alabama could hold the production of

natural gas from federal territory "hostage" until the DOI had

agreed to Alabama's terms. We find that Congress could not have

intended section 5(j) to give coastal states such veto power over

federal territory when the DOI and a state are unable to reach a

cooperative development agreement.

Nonetheless, in negotiating to reach agreement, neither the

DOI nor the state may rely on patently unreasonable conditions.

States may legitimately assert noncompliance with section 5(j) by

alleging that the DOI failed to negotiate in good faith. Likewise,

the DOI can defend such an allegation or its unilateral

authorization of production, by asserting that the state

conditioned formal agreement on unreasonable demands.

Difficult cases may arise in which the parties, despite good

faith negotiations by both sides, simply cannot reach an agreement.

In such cases—when it cannot be said that either side is being

unreasonable—in the absence of Congressional direction, we conclude

that the DOI may proceed alone to authorize production on its lease

tracts without violating section 5(j).

In this case, the DOI proposed a royalty sharing agreement

that would share with Alabama the royalties it received from

Mobil's production on federal Block 823 in exchange for Alabama

sharing with the federal government the royalties derived from

Alabama Lease Block 132 in the Fairways area, which is a second
natural gas reservoir straddling the federal/Alabama border located

near the reservoir underlying Block 823. Federal Block 823 and

Alabama Lease Block 132 thus each drew natural gas from two

separate reservoirs straddling the federal/Alabama border. On

Block 823, Mobil had the potential to drain natural gas from

Alabama, while on Block 132, Alabama's lessee had the potential to

drain natural gas from federal territory. Neither party had

lessees drilling offset wells to prevent drainage.

The DOI's proposal would have compensated Alabama for any

drainage occurring from wells on Block 823 and correspondingly

would have compensated the federal government for any drainage

occurring from wells on Block 132 without the need for either

sovereign to build offset wells to protect itself from drainage.

Alabama rejected this proposal, insisting on negotiating for a

share of the royalties from Mobil's production on federal Block

823, while refusing to broaden the negotiations to include sharing

of royalties from Alabama Block 132. Alabama's actions call into

question its interest in promoting conservation and preventing

harmful effects through section 5(j), as opposed to seeking

financial gain. While we note that the DOI's responsibility to

prevent harmful effects is a continuing one, we do not find, under

the circumstances as they have developed to this point in this

case, that the DOI has failed to negotiate in good faith.

For the foregoing reasons, we AFFIRM the district court's

holding that section 5(j) does not affect the drainage compensation

provisions found in section 8(g)(2) and we REVERSE the district

court's holding that section 5(j) requires the DOI to enter a
formal cooperative development agreement before authorizing natural

gas production from federal territory.

AFFIRMED in part, REVERSED in part and REMANDED for further

disposition consistent with this opinion.