According to The Hill, Speaker Nancy Pelosi fired-up the crowd in Denver yesterday with lines like, “If folks say we need to drill offshore, don’t come around California.” Ironically, at roughly the same time, a federal appeals court was awarding damages to oil companies for contract violations stemming from government actions consistent with Pelosi’s “no new energy, whatever the cost” mantra. As the Wall Street Journal reports below, U.S. taxpayers will foot a nearly $1.1 billion bill in this breach-of-contract case without getting so much as a single barrel’s worth of new domestic production in return. Taxpayers should keep this price tag in mind when they hear the Speaker assert that government contracts with oil companies should be “renegotiated” or that certain royalties should be “repaid.”

U.S. Loses Oil-Lease Appeal

By Ian Talley
August 25, 2008

A U.S. appeals court Monday awarded nearly a dozen oil companies more than $1 billion to recover costs from breached 1980s exploration and production leases off the coast of California.

The U.S. Court of Appeals for the Federal Circuit affirmed a previous court’s decision for the plaintiffs claiming the government owed them for the bonuses paid for the Outer Continental Shelf leases.

“It’s very important to have reaffirmed the principle that when the government enters contracts with companies, it’s held to the obligation either to fulfill those contractual obligations or pay damages if it doesn’t,” said Steven Rosenbaum, a partner with Covington & Burling LP and counsel for the plaintiffs.

The plaintiffs include Amber Resources Co., Delta Petroleum Corp., Total SA, Plains Exploration and Production, Noble Energy, Anadarko E&P and Devon Energy Production.

Between 1979 and 1984, the federal government granted around 35 leases to explore for and produce oil and natural gas off the California coast. But after a series of legal battles over the Coastal Zone Management Plan, the oil companies weren’t able to use the leases, and they ultimately expired or were suspended by the government.

Separately, the court reversed two federal court rulings against Star Scientific Inc. in its patent dispute with cigarette maker R.J. Reynolds Tobacco Co.

The appeals court said U.S. Court of Federal Claims was correct in deciding that holders of oil-and-gas leases off California were entitled to the award after the government took action that had the effect of preventing the lessees from continuing exploratory activities on the leased properties, at least temporarily.

The decision said nearly a dozen companies holding leases for the 36 undeveloped tracts off Ventura, Santa Barbara and San Luis Obispo counties should be reimbursed for what they paid decades ago for the leases.

The plaintiffs in the case include Total SA, Devon Energy Corp. and Anadarko Petroleum Corp.

In the cigarette case, the appeals court reversed rulings against Star Scientific, which sued R.J. Reynolds regarding two patents related to a process that allegedly reduces cancer-causing toxins known as tobacco-specific nitrosaminess. Soon after Star sold its “StarCured” tobacco to British American Tobacco’s Brown & Williamson in 1999. Soon thereafter, R.J. Reynolds announced its own system to reduce nitrosamines.

But a federal judge last year ruled against Star Scientific in an “inequitable conduct” bench trial, which had delayed the implementation of a prior patent ruling that said the Reynolds American Inc. unit didn’t infringe on Star’s patents. In patent law, “inequitable conduct” suggests the patentholder knowingly misrepresented itself or withheld relevant information in applying for its patent, allowing the court to deem its patent unenforceable.

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