Kirkpatrick Oil & Gas Company, Plaintiff-appellant, v. United States of America and Thomas S. Kleppe, Secretary Ofthe Interior, Defendants-appellees, 675 F.2d 1122 (10th Cir. 1982)

Kirkpatrick Oil & Gas Company (Kirkpatrick) appeals from the district court's judgment affirming the Secretary of Interior's determination that Kirkpatrick's oil and gas leases on federally owned land had expired for failure to produce oil or gas in paying quantities. The controlling issue on appeal is whether, without the Secretary of Interior's approval, state-compelled communitization binds the federal government as landowner, so that production from other property in the "unit" is attributed to the federal property, thereby extending the terms of the federal leases.¹ 

On April 1, 1969, Kirkpatrick acquired by assignment oil and gas leases on federally owned land in Oklahoma. By statute and their own provisions, the leases were to remain in effect beyond their initial ten-year terms only so long as they produced oil or gas in paying quantities. See 30 U.S.C. § 226(e). The initial terms had all expired by December 31, 1975. On November 26, 1976, the United States informed Kirkpatrick that its oil and gas leases were terminated for lack of paying production. Kirkpatrick appealed this decision to the Secretary of Interior, which through the Interior Board of Land Appeals upheld the termination. Kirkpatrick then filed the instant action in federal district court seeking a declaration that its leases remain in effect and seeking to quiet title to them. The district court, hearing the case based on stipulated facts, held the leases had expired. Kirkpatrick appeals that decision. On appeal we must determine whether substantial evidence supports the Secretary's decision and whether the Secretary applied the proper legal standards. See Pan American Petroleum Corp. v. Udall, 352 F.2d 32, 35 (10th Cir. 1965).

Although within the ten-year terms Kirkpatrick drilled no well on the federal property, it contends that because an Oklahoma drilling and spacing order places in a single unit the federal lands and nearby nonfederal lands, oil and gas produced from Kirkpatrick's well on the nonfederal lands constitute production from the federal lands, and thereby extend the leases. The Secretary contends that federal leases are not subject to communitization unless approved by the Secretary and observes that the Secretary never approved the Oklahoma order. In response to the Secretary, Kirkpatrick reasons that Oklahoma oil and gas conservation laws apply to federal lands within Oklahoma unless and until superseded by Congress; on this issue Congress has not superseded those laws; therefore, the Oklahoma drilling and spacing order applies to the federal lands within the unit. The crucial question in this case is whether Congress intended to subject federal lands to state communitization orders only when approved by the Secretary of Interior. If so, then the federal requirement prevails. U.S.Const. art. VI, cl. 2.

Although the Constitution empowers Congress to regulate federal lands, U.S.Const. art. IV, § 3, cl. 2, Congress determines whether or not to exercise this power. Texas Oil & Gas Corp. v. Phillips Petroleum Co., 277 F. Supp. 366, 368 (W.D. Okla. 1967), aff'd per curiam, 406 F.2d 1303 (10th Cir.), cert. denied, 396 U.S. 829, 90 S. Ct. 80, 24 L. Ed. 2d 80 (1969). Through the Mineral Lands Leasing Act of 1920, codified at 30 U.S.C. §§ 181-263, Congress has prescribed limited, but not exclusive, controls over the leasing of federal lands for oil and gas production. Wallis v. Pan American Petroleum Corp., 384 U.S. 63, 86 S. Ct. 1301, 16 L. Ed. 2d 369 (1966); Texas Oil & Gas, 277 F. Supp. at 369.

Kirkpatrick relies upon 30 U.S.C. §§ 187 and 189 as indicating that Congress intended to submit federal oil and gas lands to state-forced communitization. Section 187 lists certain provisions that must appear in federal mineral leases and declares, "None of such provisions shall be in conflict with the laws of the State in which the leased property is situated." But this section primarily focuses on various safeguards for workers on federal oil and gas lands and does not relate to land use controls. See Ventura County v. Gulf Oil Corp., 601 F.2d 1080, 1085 (9th Cir. 1979), aff'd mem., 445 U.S. 947, 100 S. Ct. 1593, 63 L. Ed. 2d 782 (1980). Section 189 states, in pertinent part, "Nothing in this chapter shall be construed or held to affect the rights of the States or other local authority to exercise any rights which they may have, including the right to levy and collect taxes upon improvements, output of mines, or other rights, property, or assets of any lessee of the United States." This proviso gives the states no power they do not already possess. Ventura County, 601 F.2d at 1086. It does not answer the question whether the states can communitize federal lands without federal consent. This Court relied upon sections 187 and 189 in affirming enforcement of an Oklahoma communitization order entered over the objection of lessees of federal lands. Texas Oil & Gas, 406 F.2d 1303. But, as both the trial and circuit court opinions stressed, there the Secretary had approved the state order. The decision does not control the instant case, in which the federal lessee approved the state order but the Secretary did not.

Section 226(j) specifically treats communitization of federal leases. In its most pertinent paragraph it provides:

"When separate tracts cannot be independently developed and operated in conformity with an established well-spacing or development program, any lease, or a portion thereof, may be pooled with other lands, whether or not owned by the United States, under a communitization or drilling agreement providing for an apportionment of production or royalties among the separate tracts of land comprising the drilling or spacing unit when determined by the Secretary of the Interior to be in the public interest, and operations or production pursuant to such an agreement shall be deemed to be operations or production as to each such lease committed thereto."

30 U.S.C. § 226(j) (emphasis added).

Kirkpatrick emphasizes the word "agreement" and argues that the Secretary's consent is required only for voluntary agreements, not for state-ordered communitization. The government argues for a broader construction. We agree with the government.

In a number of paragraphs section 226(j) delegates to the Secretary's discretion the power to approve, in order to promote conservation, modifications to federal mineral leases, unit or cooperative plans, and operating, drilling, or development contracts.²  To be consistent with the rest of section 226(j), Congress must have intended that the Secretary have approval authority over any communitization of federal lands, and that no state-ordered forced pooling would bind the government without the Secretary's consent.³ 

This construction is supported by the Supreme Court's analytical approach that focuses on whether applying state law to an issue affecting a federal mineral lease poses a "significant threat to any identifiable federal policy or interest." Wallis v. Pan American Petroleum Corp., 384 U.S. 63, 68, 86 S. Ct. 1301, 1304, 16 L. Ed. 2d 369 (1966). If compulsory state pooling orders were applied to federally owned lands over the Secretary's objection, a state could impose acreage requirements and unit boundaries that conflict with the Secretary's judgment of the best standards for conservation purposes.⁴  If federal lessees are unable to secure the Secretary's approval for a voluntary communitization agreement, they should not be able to circumvent that requirement by obtaining a compulsory state pooling order. Cf. Samedan Oil Corp. v. Cotton Petrol. Corp., 466 F. Supp. 521 (W.D. Okla. 1978) (communitization of Indian lands ineffective without Secretary's approval); Assiniboine and Sioux Tribes v. Calvert Exploration Co., 223 F. Supp. 909, 913 (D. Mont. 1963) (same), rev'd on other grounds sub nom. Yoder v. Assiniboine and Sioux Tribes, 339 F.2d 360 (9th Cir. 1964). Also, because production extending a federal lease in a communitized unit may come from a well drilled on nonfederal land, if state orders were to apply to federal lands without the Secretary's approval, it would interfere with the Secretary's control over its own lessees and lease provisions requiring, for example, the lessee to drill in different production zones or to produce at particular rates.⁵ 

We conclude that a fair interpretation of the Mineral Lands Leasing Act of 1920 requires us to hold that a state communitization order may not bind federally owned land, or extend leases of such land within the unit, without the consent of the Secretary of the Interior.

AFFIRMED.