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,*fn* District 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 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.*fn1 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 hydrocarbon-bearing area underlying the Federal and State boundary.
43 U.S.C. § 1334(j)(2).*fn2
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 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 ...