Oklahoma Oil and Gas Business Braces for Change in Wake of Supreme Court Decision

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Oklahoma Oil and Gas Business Braces for Change in Wake of Supreme Court Decision 

On July 9, 2020, the Supreme Court issued its opinion in McGirt v. Oklahoma,[1] ruling that most of the eastern half of Oklahoma is an Indian reservation.[2] While the decision ostensibly resolves a jurisdictional challenge to a criminal conviction, the labeling of over 19 million acres in Oklahoma (including most of the city of Tulsa) as reservation could significantly impact area businesses, including oil and gas development. Chief Justice Roberts’ dissent forecasts as much, stating, “The decision today creates significant uncertainty for the State’s continuing authority over any area that touches Indian affairs, ranging from zoning and taxation to family and environmental law.”[3]

As described below, the extent to which McGirt will impact oil and gas business in Oklahoma will hinge on a new regime of overlapping federal, state, and tribal regulation, accompanied by what will likely be years of litigation to determine the practical effects of this new regime.

The McGirt Decision

The issue in McGirt centers on whether petitioner, who was convicted by an Oklahoma state court of three serious sexual offenses, should have been tried in federal court under the Major Crimes Act as offenses committed by an Indian within the limits of an Indian reservation.[4] Although Oklahoma has exercised criminal jurisdiction in the disputed area for well over a century, the Supreme Court reiterated that this is irrelevant. The general propositions remain that states do not have jurisdiction over crimes committed by Indians on Indian land and that there must be clear evidence of disestablishment for land to cease being considered “Indian Country” under 18 U.S.C. § 1151. Because McGirt is a member of the Seminole nation and his crimes took place within the Muscogee (Creek) Nation’s original reservation boundaries (a reservation that was never legally disestablished), the court held that Oklahoma lacked jurisdiction to prosecute McGirt and reversed his convictions.[5]

In reaching this decision, the court analyzed a series of 19th-century treaties and concluded that the eastern half of Oklahoma never ceased to be land reserved as “Indian Country”—land that was granted by the United States to the Creek Nation in fee simple for “so long as they shall exist a nation, and continue to occupy the country hereby assigned to them.”[6] In the absence of any congressional intent to the contrary, the agreement must stand and the referenced land cannot be included within or annexed to any state.[7] Oklahoma’s historical exercise of authority and jurisdiction was of no moment because there was a continued tribal interest in the reserved lands and “States have no authority to reduce federal reservations lying within their borders.”[8]

The Supreme Court recognized that the reservation land described in the treaties, once undivided and held by the Tribe, is now fractured into pieces: “While these pieces where initially distributed to Tribe members, many were sold and now belong to persons unaffiliated with the Nation.”[9] But, as the court explained, federal law expressly contemplates private land ownership within reservation boundaries: “Congress does not disestablish a reservation simply by allowing the transfer of individual plots, whether to Native Americans or others.”[10] Importantly, although the Major Crimes Act is a criminal statute, whether a particular territory is designated as “Indian Country” under the Act will “generally appl[y] as well to questions of civil jurisdiction.”[11]

In the dissent, Chief Justice Roberts offers several potential consequences that could result from the majority’s decision (ranging far beyond matters of criminal jurisdiction). These include the ominous statement that the ruling “may destabilize the governance of vast swathes of Oklahoma.”[12] The reasoning is that many laws spring into effect when land is declared a reservation and reservation status “confer[s] on tribal government power over numerous areas of life—including powers over non-Indian citizens and business.”

Under Supreme Court precedent, “tribes may regulate non-Indian conduct on reservation land, so long as the conduct stems from a ‘consensual relationship[ ] with the tribe or its members’ or directly affects the ‘political integrity, the economic security, or the health or welfare of the tribe.’”[13] The latter is particularly relevant here. Because the eastern half of Oklahoma must be treated as reservation under McGirt, tribes will have the power to regulate commercial conduct in this area where the conduct impacts the health or welfare of the tribe. Oil and gas business in Oklahoma must consider the impact this may have in the months and years to come.

Impact on Oil and Gas Business

While specific impacts on the state’s oil and gas industry are likely to be dictated by post-McGirt negotiations between federal and state authorities and the Native American tribes, the potential effects can generally be divided into two major categories: energy/environmental regulation and taxation.[14] Each raises the specter of added uncertainty, dueling requirements, and the prospect of increased litigation.[15]

Energy/Environmental Regulation

Following the McGirt decision, oil and gas businesses in Oklahoma may face a number of new regulatory issues concerning natural resource development, including the prospect of overlapping or conflicting regulation.[16] Prior to the Supreme Court’s decision, the Oklahoma Corporate Commission (OCC) has had “exclusive jurisdiction, power and authority” over all oil and gas development in the disputed area (and generally throughout the state).[17] But because this area must now be treated as reservation, the Commission specifically lacks regulatory jurisdiction over various “allotments of individual citizens, which include “Indian Country within the express terms of § 1151(c).”

The practical impact (barring any agreements to the contrary) is that the traditional role of the OCC as primary oil and gas regulator could be supplanted in eastern Oklahoma. Tribes in the area could assert their authority over the reservation lands by imposing their own wildlife protection clauses, land-use restrictions, and prohibitions against water contamination. Each could disrupt the uniformity and consistency oil and gas developers have become accustomed to in the state. Some tribes could also implement their own oil and gas permitting process, drilling plan requirements, and zoning restrictions—impacting everything from high-level planning to day-to-day operations. Tribes may also leverage their authority in the area to play a broader consultative role in the planning and construction of new pipelines and gathering systems. As has been well-chronicled in connection with recent disputes surrounding the Dakota Access Pipeline, the role tribal authorities play in the success or failure of projects impacting Native American interests cannot be ignored.

In addition, under the Indian Mineral Leasing Act (IMLA) and Indian Mineral Development Act (IMDA), the Secretary of the Interior will have ultimate authority to approve and disapprove mineral leases or energy development contracts involving certain Indian lands.[18] As a result, oil and gas producers operating in eastern Oklahoma should prepare to face tribal arguments that their leasehold rights are invalid because they were never approved under IMLA or IMDA.

Once an area has been designated as a reservation, this also determines which entity has the authority to impose environmental regulations. For example, in South Dakota v. Yankton Sioux Tribe¸522 U.S. 329 (1998), the Supreme Court addressed a dispute between tribal, federal, and state officials as to which set of environmental regulations applied to a proposed waste site.[19] In its holding, the Supreme Court recognized that if the land on which the landfill was located “no longer constitute[d] ‘Indian Country’ as defined by 18 U.S.C. § 1151(a),” the state rather than the federal government would have primary regulatory jurisdiction.[20] The inverse applies here. Now that eastern Oklahoma must be treated as “Indian Country” under the Major Crimes Act, the federal government (with possible delegation to the tribes) can be expected to have primary environmental regulatory authority under various statutes.

For example, environmental regimes critical to hydraulic fracking operations such as the Safe Drinking and Water Act (SDWA) that were previously overseen by Oklahoma regulators may soon be controlled by federal regulators or their tribal designees.[21] SDWA specifically authorizes the EPA to grant a tribe primary enforcement responsibility over the water in its tribal territory.[22] This could alter what oil and gas developers can or cannot do during operations in the area. Similarly, the Clean Air Act (CAA) allows the EPA to “delegate[ ] to tribes the authority to regulate air quality in areas within the exterior boundaries of a reservation.”[23] Thus, the Secretary of the Interior and the EPA could displace Oklahoma’s uniform environmental implementing regulations into a new patchwork of tribal enforcement plans. Wherever possible, oil and gas companies should advocate for uniformity and consistency to avoid the inefficiencies caused by overlapping, duplicative, and even conflicting regulatory requirements.

Taxation

Prior to its decision in McGirt, the Supreme Court held that any tribal member living in “Indian Country” under the Major Crimes Act must be considered “outside the State’s taxing jurisdiction” and that, absent explicit congressional direction to the contrary, the court will presume against a state having the jurisdiction to tax under such circumstances.[24] Because the “Indian Country” or reservation designation also empowers tribal actors to regulate much of the non-Indian activity that occurs in the area, tribes also retain the power to tax certain activities by non-members.[25] As a result, oil and gas business in eastern Oklahoma could see tribes seeking to impose their own taxes on non-Indian oil and gas lessees.

For example, in Kerr-McGee Corp. v. Navajo Tribe of Indians, 471 U.S. 195 (1985), the Supreme Court upheld the authority of the Navajo to “tax business activities conducted on its land,” even when those activities were conducted by non-Indian mineral producers. As the court explained, “The power to tax members and non-Indians alike is surely an essential attribute of such [tribal] self-government.”[26] Similarly, in Merrion v. Jicarilla Apache Tribe¸455 U.S. 130 (1982), the Supreme Court upheld the authority of the Jicarilla Apache Tribe to “impos[e] a severance tax on ‘any oil and natural gas severed, saved and removed from Tribal lands.’”[27]

Finally, because states generally do not have authority to tax Indian reservation lands or Indian income from activities carried on within the boundaries of the reservation, the state will likely be unable to tax the sale of oil and gas by and of the affected tribes or their members within the area identified as reservation.[28] As a result, oil and gas companies owned by a tribe or tribal members could have a distinct advantage in the post-McGirt landscape, potentially incentivizing the sale of oil and gas operations to tribes for tax advantages.[29]

Conclusion

Although McGirt addressed a matter of criminal jurisdiction, its conclusion that most of eastern Oklahoma is reservation under the Major Crimes Act could have wide-ranging effects on the state’s oil and gas industry. The areas of energy/environmental regulation and taxation are the most likely to experience change. As oil and gas businesses operating in the affected area brace for the months and years to come, they should prepare for the prospect of a new regulatory regime, new taxes, and short-term uncertainty until the practical consequences of these changes are fully addressed by the courts.

[1] McGirt v. Oklahoma, No. 18-9526, 591 U.S. ___ (July 9, 2020).

[2] The ruling has already been described by some as one of the most important decisions in the history of the state. Tribal Law Expert Calls Supreme Court’s McGirt Ruling ‘Most Important’ in State History, Tulsa World, https://tulsaworld.com/news/local/crime-and-courts/tribal-law-expert-calls-supreme-courts-mcgirt-ruling-most-important-in-state-history/article_1900078e-1bcf-5f45-9a37-fd82e0c9febd.html.

[3] McGirt v. Oklahoma, No. 18-9526, slip. op. at 2, 591 U.S. ___ (July 9, 2020) (Roberts, C.J., dissenting), https://www.supremecourt.gov/opinions/19pdf/18-9526_9okb.pdf.

[4] McGirt v. Oklahoma, No. 18-9526, slip. op. at 3-8, 591 U.S. ___ (July 9, 2020) (5-4 decision) (Gorsuch, J.), https://www.supremecourt.gov/opinions/19pdf/18-9526_9okb.pdf; see 18 U.S.C. § 1153(a) (Major Crimes Act) (providing for federal subject-matter jurisdiction under such circumstances).

[5] Id. at 42.

[6] Id. at 3-8.

[7] Id. (citing Solem, 465 U.S. at 470 (“[O]nly Congress can divest a reservation of its land and diminish its boundaries.”).

[8] Id. at 7.

[9] Id. at 6.

[10] Id. at 10.

[11] See Decoteau v.Dist. Cty. Court for Tenth Judicial Dist., 420 U.S. 425, 428 n.2 (1975); see also Yankton Sioux Tribe v. Podhradsky, 606 F.3d 994, 1006 (8th Cir. 2010) (“Reservation land is by definition ‘Indian Country,’ and as a general rule Indian Country falls under the primary civil, criminal, and regulatory jurisdiction of the federal government and the resident Tribe rather than the states.”) (citing Venetie, 522 U.S. at 527 n.1).

[12] McGirt v. Oklahoma, No. 18-9526, slip. op. at 35, 591 U.S. ___ (July 9, 2020) (Roberts, C.J., dissenting), https://www.supremecourt.gov/opinions/19pdf/18-9526_9okb.pdf.

[13] Id. (emphasis added) (citations omitted); see generally, Montana v. United States, 450 U.S. 544, (1981) (a tribe can assert jurisdiction within its reservation area over non-Indians where an action may have significant impact on tribal health, safety, or political integrity).

[14] For years, the Oklahoma oil and gas industry has relied on a stable and predictable regulatory environment. Oklahoma is the third highest natural gas producing state in the country and the fifth highest producer of crude oil. U.S. Energy Information Administration, Oklahoma, U.S. Rankings, https://tinyurl.com/yc7a5vly.

[15] While the regulatory and tax implications could be significant, the decision is not expected to affect property ownership within the affected area. The amicus brief filed by the Oklahoma Independent Petroleum Association (filed in the related case of Warden v. Murphy, No. 17-1107) addresses many of the potential consequences of the majority’s ruling addressed herein in greater detail.

[16] See Mike McBride III, “Has the Earth Shattered Under Oklahoma,” The Federal Lawyer at 71 (March/April 2020).

[17] 52 O.S. § 139(B)(1); See Sierra Club v. Chesapeake Operating, LLC, 248 F. Supp. 3d 1194, 1200 (W.D. Okla. 2017) (“The OCC exercises its exclusive jurisdiction over [oil and gas] wells through a comprehensive system of permit 4 adjudication.”); id. at 1209 (the OCC also regulates the waste and pollution generated by energy development and has sole jurisdiction to resolve complaints by private citizens alleging that an oil or gas project violates environmental law).

[18] See Indian Mineral Leasing Act of 1938, ch. 198, 52 Stat. 347 (codified at 25 U.S.C. §§ 396a-396g); Indian Mineral Development Act of 1982, Pub. L. No. 97-382, 96 Stat. 1938 (codified at 25 U.S.C. §§ 2101-08).

[19] South Dakota v. Yankton Sioux Tribe¸522 U.S. 329, 340 (1998).

[20] Id. at 333.

[21] Previously, Oklahoma has used its primary authority to implement a state-wide regulatory regime for underground injection necessary for hydraulic fracking. See Phillips Petroleum¸8p03 F.2d at 549.

[22] See 42 U.S.C. § 300h-1(e).

[23] Arizona Pub. Serv. Co. v. EPA, 211 F.3d 1280, 1285, 1288 (D.C. Cir. 2000) (citing Tribal Authority Rule, 59 Fed. Reg. 43, 956 (1994)); cf. Pub. L. No. 109-59, 119 Stat. 1144, § 10211(a) (providing that under certain circumstances, the EPA may approve a request by Oklahoma to apply its State Implementation Plan under the CAA to “areas of the State that are in Indian country”).

[24] Oklahoma Tax Commission v. Sac & Fox Nation, 508 U.S. 114, 123, 128 (1993).

[25] See, e.g., Plains Commerce Bank v. Long Family Land & Cattle Co.¸554 U.S. 316, 327 (2008).

[26] Kerr-McGee Corp. v. Navajo Tribe of Indians¸471 U.S. 195, 196, 201 (1985 (reaffirming that “the ‘power to tax is an essential attribute of Indian sovereignty because it is a necessary instrument of self-government and territorial management.’”) (quoting Merrion v. Jicarilla Apache Tribe¸455 U.S. 130, 137 (1982)).

[27] Merrion v. Jicarilla Apache Tribe¸455 U.S. 130, 133 (1982); see South Dakota v. Bourland¸508 U.S. 679, 689 (1993); Montana, 450 U.S. at 566 (discussing tribes’ “inherent power to exercise civil authority” over reservation land held in fee by non-Indians when the fee-holder’s conduct threatens or has some direct effect on the political integrity, the economic security, or the health or welfare of the tribe”).

[28] Mescalero¸411 U.S. at 148, see Oklahoma Tax Comm’n v. Chickasaw Nation¸515 U.S. 450, 458 (1995); White Mountain Apache Tribe v. Bracker¸448 U.S. 136, 144-52 (1980).

[29] Whereas a tribe-owned oil and gas company would be exempt from state laws, non-Indian “oil and gas lessees operating on Indian reservations [a]re subject to nondiscriminatory state taxation as long as Congress did not act affirmatively to pre-empt the state taxes.” Cotton Petroleum Corp. v. New Mexico¸490 U.S. 163, 175 (1989) (citing Oklahoma Tax Comm’n v. Texas Co., 336 U.S. 342 (1949). This means that a non-Indian operating a well in the reservation area would likely owe taxes to Oklahoma while a tribal member would not.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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