Originally Published on Law360 - March 10, 2014.
On Jan. 22, 2014, the Ninth Circuit held that the final environmental impact statement ("FEIS") and supplemental environmental impact statement ("SEIS") regarding the effects of proposed leases for oil and gas development in the Chukchi Sea off the northwest coast of Alaska and prepared by the Bureau of Ocean Energy Management violated the National Environmental Policy Act, although the agency had properly taken account of incomplete or unavailable information. As such, the Ninth Circuit's ruling in Native Village of Point Hope v. Jewell (Jan. 22, 2014) upheld, for a second time, a challenge to the federal government's environmental analyses for the proposed action.
In Native Village of Point Hope v. Jewell, BOEM proposed to lease parcels, known as Lease Sale 193, for oil and gas development in the Chukchi Sea, which contains a variety of wildlife, including a number of species listed under the Endangered Species Act. BOEM completed a five-year leasing plan for the Chukchi Sea, and it decided to offer a large portion for oil and gas leasing. It prepared the FEIS for the "lease sale" stage that analyzed four alternatives, ultimately electing to proceed with an alternative under which development would occur close to the coast of Alaska.
Plaintiffs filed suit under NEPA, asserting seven deficiencies in the FEIS. While the district court found that much of the FEIS complied with NEPA, including the assumption that there would be 1 billion barrels of economically recoverable oil, it concluded that the analysis was flawed in three significant respects.
Accordingly, the district court issued a limited injunction and remanded the matter to BOEM for additional analyses. BOEM completed the additional analyses and prepared the SEIS. Plaintiffs subsequently challenged the adequacy of the SEIS, and the district court granted BOEM's motion for summary judgment, finding that the SEIS identified missing or incomplete information and adequately evaluated such information in a manner sufficient in light of the current stage of the development process.
On appeal to the Ninth Circuit, plaintiffs argued that the SEIS was inadequate because BOEM had abused its discretion. Plaintiffs argued that the FEIS and SEIS were missing "essential" information. The Ninth Circuit disagreed, holding that BOEM reasonably concluded that the missing information was not essential at the lease sale stage, and that compliance with statutes, such as the Marine Mammal Protection Act and ESA, will provide adequate protection for animals covered by those statutes.
With respect to BOEM's analyses, much of the information missing from the SEIS concerned animal populations that could be affected by oil exploration and production under the leases, including information regarding population levels, the location of various animal populations during the year, the feeding and breeding habits of various populations and the vulnerability of various populations to drilling and other exploration and production-related activities.
The Ninth Circuit explained that when a project proponent actually submits a plan for oil and gas exploration, development or production activities it is at that stage that BOEM is required to perform a site-specific environmental analysis, and any missing or incomplete information that was not essential at the lease sale stage of the process may become "essential".
A majority of the Ninth Circuit panel did, however, agree with plaintiffs that the environmental analyses relied on an unrealistically low estimate of the economically recoverable oil for the lease area, and that, as a result, the FEIS and SEIS underestimated the adverse environmental impact of the lease sales as the " billion barrel estimate was the basis for the entire FEIS, including its analysis of the risk of a large oil spill."
The estimate of the amount of recoverable oil for lease sale 193 was based on the projected production from the "first offshore oil field" that would be developed within the area of the leases, as opposed to the entire area covered by the lease sale. Notably, during the comment period, both the U.S. Environmental Protection Agency and the U.S. Fish and Wildlife Service challenged the 1 billion barrel estimate as inaccurate.
The majority, applying the "arbitrary and capricious" standard of review under the Administrative Procedure Act, held that BOEM's use of this estimate was arbitrary for three reasons: (1) once BOEM made the determination that production of oil is reasonably foreseeable, it was required to consider the full cumulative impact of that production if such production does occur; (2) it ignored the fact that the amount of economically recoverable oil varies considerably based on oil prices, with the amount increasing as oil prices increase; and (3) it did not provide an adequate explanation for its decision to use the 1 billion barrel estimate, and how that estimate was derived.
This last reason was punctuated by a statement by the government's own expert that the agency's position is "entirely speculative." The majority further held that these deficiencies could not be remedied in subsequent site-specific EISs because they would consider only the particular project's environmental effects, and not the cumulative effects of the lease sale on the environment.
Judge Johnnie B. Rawlison dissented from the majority's conclusion that the selection of the 1 billion barrel estimate was arbitrary and capricious, noting that while "[i]t is beyond dispute that the Chukchi Sea contains oil deposits well in excess of  billion barrels," the "potential size of commercially extractable oil deposits in the Chukchi Sea is a quintessential example of a predictive judgment uniquely within BOEM's area of expertise."
Judge Rawlison then noted, citing the range of commercially extractable oil deposits contained in the record — which ranged from 0.96 billion to 2.42 billion, and 1 billion to 6.1 billion — that the 1 billion barrel estimate was within that range. As such, Judge Rawlison stated that while there was clearly a disagreement in the scientific community concerning the available deposits, as a result of the substantial deference owed to BOEM, the district court's order of dismissal should have been affirmed.
As a result of the Ninth Circuit's decision, Royal Dutch Shell PLC announced that it was scrapping its plans of drilling in the Chukchi Sea in 2014. Shell had acquired parcels in lease sale 193, spending approximately $2 billion. However, because the Ninth Circuit's decision has cast doubt over drilling in the region, its exploration and drilling activities are on hold for the foreseeable future. This decision could also halt operations for ConocoPhillips Inc. and StatOil Natural Gas LLC, which had acquired parcels for oil exploration and drilling activities in the Chukchi Sea.
Without discounting Judge Rawlison's dissent, the Ninth Circuit's decision is a strong reminder that the extent of the deference courts will grant to government agencies is not without a limit. Courts will generally defer to an agency's decision, even where they may not deem the agency's decision the "wisest," so long as they can reasonably discern how the agency arrived at its determination. Thus, the Ninth Circuit's decision should serve to remind agencies that the record underlying their environmental determinations must contain sufficient evidence to support their ultimate conclusions.
As the U.S. Supreme Court noted over 30 years ago in Motor Vehicle Manufacturers Association of the United States v. State Farm Mutual Insurance Company, in applying the APA's "arbitrary and capricious" standard of review, the court "ha[s] frequently reiterated that an agency must cogently explain why it has exercised its discretion in a given manner." Agencies that fail to adequately document their decision-making process subject their determinations to substantial vulnerability should an opponent challenge the project. This is especially true where, as in Native Village of Point Hope v. Jewell, there is contrary expert evidence.