August 18, 2011 / 3:35 PM / in 7 years

Exxon sues government over lucrative canceled Gulf leases

NEW YORK (Reuters) - Exxon Mobil Corp (XOM.N) sued the government to reverse a decision by the Department of the Interior to cancel offshore oil and gas leases estimated to yield tens of billions of dollars of oil.

A motorist fills up her car at an Exxon gas station in Arlington, Virginia, August 10, 2011. REUTERS/Jason Reed

The lawsuit, filed on August 12 in the federal court in Lake Charles, Louisiana, said the decision arbitrarily deprived it of rights under three of five leases for what is called the Julia field. It said this took away Exxon’s ability to produce a reservoir believed to hold billions of barrels of oil.

Two other leases have yet to expire. The complaint was reported earlier by The Wall Street Journal.

The lawsuit against the Interior Department and Secretary Kenneth Salazar comes after regulatory scrutiny of drilling activities grew in the wake of the April 2010 blowout of BP Plc’s (BP.L) Deepwater Horizon well in the Gulf of Mexico.

The government’s initial rejection of the lease extension came in 2009, however.

“Our priority remains the safe development of the nation’s offshore energy resources, which is why we continue to approve extensions that meet regulatory standards,” an Interior Department spokeswoman said. “We are reviewing the complaint in accordance with standard procedures.”

The agency has denied extensions when a company fails to comply with the requirements to obtain them, it said.

Exxon, the world’s largest publicly traded oil company, said the dispute arose after the government rejected its October 2008 request for a “suspension of production.”

The Irving, Texas-based company said federal law allows such suspensions for the purpose of advancing future development in a safe manner.

Following several appeals, the Interior Department concluded in its May 31 decision that Exxon lacked a “commitment” to producing oil at the time the leases expired.

Exxon and its partner Statoil ASA STL.OL spent more than $300 million drilling two “producible” wells on the Julia prospect.

As part of its development strategy, Exxon was planning to drill three to six development wells and join them to a planned production facility operated by Chevron Corp (CVX.N) located about eight miles away, according to the company’s lawsuit.

That initial phase of development was estimated to cost $1 billion, Exxon said.

Exxon also said the prospect of collecting millions of dollars in bonuses and royalties on new leases gave the government an incentive to single it out for “unprecedented adverse treatment” by canceling the leases.

The Interior decision marks the first time the agency has determined that a production facility will enable development when the lessee owns the production facility, but will not facilitate development when the lessee does not own the production facility, Exxon said in its complaint.

In midday trading, Exxon shares fell $2.90, or 4 percent, to $71.26, amid a broad stock market decline.

The case is Exxon Mobil Corp v. Salazar et al, U.S. District Court, Western District of Louisiana, No. 11-01474.

Reporting by Jonathan Stempel. Additional reporting by Ayesha Rascoe in Washington and Bruce Nichols and Anna Driver in Houston. Editing by Robert MacMillan

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