Petro Mex, LLC v. United States

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PETRO MEX, LLC, Plaintiff-Appellant v. UNITED STATES, Defendant-Appellee

No. 2023-1848

United States Court of Appeals, Federal Circuit

September 12, 2024

This disposition is nonprecedential.

Appeal from the United States Court of Federal Claims in No 1:14-cv-01024-MBH, Senior Judge Marian Blank Horn.

ROBERT GREENSPOON, Dunlap Bennett &Ludwig PLLC, Chicago, IL argued for plaintiff-appellant. Also represented by WILLIAM W. FLACHSBART.

KARA WESTERCAMP, Commercial Litigation Branch, Civil Division United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by BRIAN M. BOYNTON TARA K. HOGAN, PATRICIA M. MCCARTHY.

Before MOORE, Chief Judge, CUNNINGHAM, Circuit Judge, and MAZZANT, District Judge. ^[1]

MAZZANT, DISTRICT JUDGE.

Petro Mex, LLC (Petro Mex) appeals a decision of the United States Court of Federal Claims. For the following reasons, we reverse the Court of Federal Claims' determination that Petro Mex's breach of contract claim is barred by the statute of limitations. We vacate the remainder of the Court of Federal Claims' decision and remand for further proceedings consistent with this opinion.

BACKGROUND

I. Factual Background

The United States Department of the Interior executed the Garfield Lease (the Lease) with Celeste C. Grynberg in 1965. In 2004, Petro Mex assumed the Lease.

Section 1 of the Lease sets forth the "Rights of Lessee":

Rights of Lessee. - The lessee is granted the exclusive right and privilege to drill for, mine, extract, remove, and dispose of all the oil and gas deposits, . . . for a period of 10 years, and so long thereafter as oil or gas is produced in paying quantities; subject to any unit agreement heretofore or hereafter approved by the Secretary of the Interior, the provisions of said agreement to govern the lands subject thereto where inconsistent with the terms of this lease.

J.A. 3, 2133 (emphasis added). "Production in paying quantities" is defined as: "production from a lease of oil and/or gas of sufficient value to exceed direct operating costs and the costs of lease rentals, or minimum royalties." 43 C.F.R. § 3160.0-5. Upon assumption of the Lease, Petro Mex began extracting natural gas in paying quantities pursuant to Section 1.

Notably, Section 7 of the Lease sets forth the "Proceedings in case of default":

Proceedings in case of default. - If the lessee shall not comply with any of the provisions of the act or the regulations thereunder or of the lease, or make default in the performance or observance of any of the terms hereof (except that of payment of annual rental which results in the automatic termination of the lease), and such default shall continue for a period of 30 days after service of written notice thereof by the lessor, this lease may be cancelled by the Secretary of the Interior in accordance with section 31 of the act, except that if this lease covers lands known to contain valuable deposits of oil or gas, the lease may be cancelled only by judicial proceedings in the manner provided in section 31 of the act, but this provision shall not be construed to prevent the exercise by the lessor of any legal or equitable remedy which the lessor might otherwise have. Upon cancellation of this lease, any casing material, or equipment determined by the lessor to be necessary for use in plugging or preserving any well drilled on the leased land shall become the property of the lessor. A waiver of any particular cause of forfeiture shall not prevent the cancellation and forfeiture of this lease for any other cause of forfeiture, or for the same cause occurring at any other time.

J.A. 3-4, 2133 (emphasis added).

A Board of Land Management (BLM) petroleum engineer technician, Edward Fancher (Fancher), was responsible for inspecting the wells on the Lease. If Fancher identified an issue during inspection, he had authority to issue a Notice of Incident of Noncompliance (INC). Upon issuance of an INC, an abatement period would follow so that repairs could be made to bring the well back into compliance. An INC is classified by either a "major" or "minor" violation. See 43 C.F.R. § 3160.0-5 (defining "major" as "noncompliance that causes or threatens immediate, substantial, and adverse impacts on public health and safety, the environment, production accountability, or royalty income"; defining "minor" as "noncompliance that does not rise to the level of a major violation").

On April 25, 2008, Fancher inspected three wells on the Lease. He issued five INCs, one of which was for a major violation-an unsealed sales valve. On May 27, 2008, Fancher conducted a subsequent inspection and found that Petro Mex had not corrected the prior five INCs. Additionally, Fancher identified an underground gas leak. When Fancher returned on May 29, 2008, Petro Mex had not repaired the leak. At that time, Fancher issued an INC for a major violation-the gas leak-and directed Petro Mex to repair the leak by May 31, 2008. Fancher also sealed the oil sales valve to prevent further removal of oil.

Concurrently, Fancher issued a "Notice to Shut Down Operation" under 43 C.F.R § 3163.1(a)(3)^[2] (the Shut-In Order). J.A. 2202. The Shut-In Order stated that Petro Mex must immediately "shut in all well[s] on this [L]ease until all leaks are corrected and all compliance issues are resolved." J.A. 2202. It warned that "[o]perations are not to be resumed until permitted by the authorized officer." J.A. 2202.

Around the same time in May of 2008, BLM increased Petro Mex's existing $25,000 reclamation bond to $100,000. Petro Mex did not immediately pay the increased bond.

On June 16, 2008, Fancher visited the wells on the Lease for another inspection. Fancher observed that the underground gas leak had been repaired and the wells had been shut in so that they were inoperable. The Shut-In Order remained in effect despite the repaired gas leak.

In October of 2008, the Department of the Interior issued a notice of civil penalty to Petro Mex for unpaid royalty payments on the gas it had produced from wells on the Lease in 2007 and 2008. Petro Mex did not immediately pay the civil penalty.

On March 30, 2009, Fancher conducted another inspection of the wells on the Lease. He determined that the wells were now not capable of producing in paying quantities because a field compressor had been removed. Fancher also noted that Petro Mex had produced oil and gas from August through October 2008, though the Shut-In Order remained in effect.

On April 1, 2009, Robert Hartman (Hartman), a BLM petroleum engineer, issued a written notice to Petro Mex that BLM would "terminate" the Lease by operation of law pursuant to 43 C.F.R. § 3107.2-2^[3] "[i]f justification that the [L]ease is capable of production in paying quantities is not submitted within 60 days." J.A. 2244. The notice indicated that the removal of the field compressor "eliminates the possibility of production from the wells." J.A. 2244. Appellants argue that Jesus Villalobos, owner and president of Petro Mex, and Hartman communicated repeatedly concerning the production of the wells, the unpaid civil penalty, and the unpaid bond, but they did not reach a resolution.

On July 21, 2009, Hartman sent a memorandum to the BLM State Director recommending termination of the Lease because Petro Mex's wells were allegedly not capable of production in paying quantities. On August 26, 2009, after determining that the wells were not capable of producing in paying quantities, BLM's Colorado State Office determined that the Lease terminated by operation of law. Importantly, BLM did not file a judicial action to cancel the Lease.

II. Proceedings before the Interior Board of Land Management

Petro Mex filed a timely administrative appeal with the Interior Board of Land Management (IBLA) challenging BLM's termination of the Lease as violative of Petro Mex's rights under the Mineral Leasing Act (MLA). J.A. 514, 520. On September 27, 2010, the IBLA issued its decision reversing BLM's termination and remanding to BLM. J.A. 513.

Under the MLA, "a lease in its extended term terminates automatically when production ceases." J.A. 517 (citing 30 U.S.C. § 226(e) (2006)). However, there are three exceptions to lease termination: "(1) where the lessee begins reworking or drilling a well within 60 days after production ceased; (2) where BLM has ordered a suspension of lease operations or production; and (3) where the lessee places a well capable of producing in paying quantities in producing status within a reasonable time after receiving notice from BLM." J.A. 517-18 (citing 30 U.S.C. § 226(i)). The IBLA explained that

[b]oth [30 U.S.C. § 226(i)] and the case law differentiate between a lease without a well capable of production in paying quantities and one containing a well capable of production in paying quantities. When the term of an oil and gas lease has been extended by production and there is no well capable of production in paying quantities when production ceases, the lessee has 60 days to commence reworking or drilling operations and must continue the reworking or drilling operations with reasonable diligence to avoid lease termination; if such operations are not timely initiated and diligently pursued, the lease terminates automatically upon cessation of production.... Notice is not required in this situation.... When the term of an oil and gas lease has been extended by production and the lease does contain a well capable of production in paying quantities, however, BLM must notify the lessee and allow a reasonable time of at least 60 days from receipt of the notice to place the well into production to avoid having BLM declare the lease expired by operation of law for lack of production.

J.A. 518-19 (citi...