K. L. Cool
Director
Department of Natural Resources
P.O. Box 30028
Lansing, MI 48909

Dear Director Cool:

Gas Leasing Procedure Involving Great Lakes Bottomlands

Re: Proposed Revisions to Department of Natural Resources Oil and

It has come to my attention that the Department of Natural Resources (DNR) has proposed and is soliciting public comment on revisions to its Oil and Gas Leasing Procedure. The draft procedure issued June 20, 2001 provides, among other things, for leasing Great Lakes bottomlands for oil and gas exploration and development.

That aspect of the procedure is a serious mistake from a legal, policy, and fiscal perspective. For the reasons summarized below, I respectfully recommend that you neither adopt nor implement the proposed procedure as now drafted. Simply put, I urge you not to take these or any other actions to allow further oil and gas drilling beneath the Great Lakes, even by means of directional drilling from onshore sites. Second, at a minimum, the DNR should modify the draft procedure to ensure that a full and "aggressive environmental impact assessment" of exploring and developing each parcel of bottomlands proposed for leasing is conducted and publicly scrutinized before any such lease sale, consistent with the October 1997 Report of the Michigan Environmental Science Board (MESB).

As you well know, the proposed resumption of leasing Great Lakes bottomlands for hydrocarbon exploration and development has aroused grave concern among many Michigan citizens and elected officials. Rightfully so. These concerns are not, as some leasing proponents have claimed, mere political posturing or environmental fear mongering. On the contrary, further directional drilling beneath the Great Lakes poses genuine risks to vital natural resources, recreational and other uses of those resources, and the public trust that simply are not justified by the purported benefits.

To begin with, expanded directional drilling beneath the Great Lakes presents an unwarranted risk to the lakes themselves. The 1997 MESB Report, touted by drilling advocates as proof of the "safety" of this activity concluded: "[t]here is little to no risk of contamination to the Great Lakes or bottom waters through releases directly above the bottom hole portion of directionally drilled wells. . . . There is, however, a small risk of contamination at the well head." (Report, page 3, emphasis added.) Even if the MESB is correct, and the probability of a spill or other contamination incident is relatively low, one must also consider the magnitude of the harm that could result if pollution does occur, given the uniqueness and sensitivity of the resources at risk.

Moreover, the proposed drilling poses greater and more direct risks to Great Lakes shoreline areas where the well heads and related infrastructure would be located. Again, as even the MESB acknowledged, construction and operation of the wells, pipelines, and other equipment may cause both ecological harm (particularly in wetland and dune areas, for example) and social and aesthetic conflicts with coastal, residential, and recreational land use. A March 2001 Report prepared by the Lake Michigan Federation provides a more thorough review of the potential adverse environmental and economic effects of expanded shoreline drilling and also highlights other unresolved issues such as gas pipeline safety and potential harm to public health from accidental releases of hydrogen sulfide gas that is likely to be present in the "sour gas" produced from these areas.

Given the extraordinary value of the Great Lakes and their associated shoreline resources, they should not lightly be put at risk. Any policy that presents an appreciable, even if arguably low, threat to such resources must be carefully scrutinized and should only be adopted based upon a compelling justification. The proponents of expanded Great Lakes bottomlands drilling cannot meet that burden.

First, the claim that such drilling will yield significant quantities of oil and gas needed to satisfy domestic energy demand is not persuasive. Predictions of major quantities of recoverable hydrocarbons in these areas are speculative at best. More important, even according to the most optimistic projections, the total production, presumably over a period of many years, could only satisfy existing national energy demand for a matter of days or weeks. It has been estimated that the seven existing slant wells in Michigan are producing at most the equivalent of about _ of 1 percent of the natural gas consumed in this state in a given year. Assuming similar production from new wells, the prospect of this relatively insignificant additional amount of hydrocarbons simply does not justify the attendant risks. This is particularly true in view of the well-documented opportunities in both the public and private sectors to help meet energy needs through more efficient technology and other conservation measures.

The claimed benefits to the Natural Resources Trust Fund are equally unpersuasive. Proponents of expanded bottomlands leasing and drilling argue that state royalties on anticipated oil and gas production from these areas may yield tens of millions of dollars of additional revenue for the Natural Resources Trust Fund established under Const 1963, art 9, § 35. It is then suggested that the DNR somehow has a duty to lease in order to pursue this projected revenue. These claims are doubly wrong.

To begin with, it is far from clear that further bottomlands leasing will actually produce these anticipated millions. The only lease revenue that the state would definitely receive is initial bonus and rental payments. As you well know, those are likely, in the aggregate, to amount to mere thousands of dollars, not millions. Projections of actual oil and gas production and thus royalty revenue are, as noted above, uncertain at best.

Furthermore, the suggestion that the DNR somehow has a duty to promote oil and gas development in order to maximize Natural Resources Trust Fund revenue is a pernicious myth that distorts the nature and purpose of the Fund. In 1984, as a result of a grass-roots movement spearheaded by the Michigan United Conservations Clubs, the People of Michigan amended their Constitution to require that bonus, rental, and royalty revenue derived from leases of state-owned lands be placed in the Natural Resources Trust Fund, which would then be used to acquire and preserve lands for recreational and conservation purposes. The intent was to assure that if nonrenewable oil and gas resources were extracted from public lands, the specified lease revenue for the state would be committed to projects with a permanent natural resource conservation value. Neither Const 1963, art 9, § 35, nor its implementing legislation is a mandate to the DNR to promote hydrocarbon leasing and development.

Finally, the goal of increasing Natural Resources Trust Fund revenue certainly cannot outweigh the DNR’s primary and overriding duty to "protect and conserve the natural resources of this state," MCL 324.503, and the public trust in those resources. Indeed, the Minerals Management Policy adopted by the Natural Resources Commission in 1999 must be understood and applied in this context:

"It shall be the policy of the Natural Resources Commission to manage State-owned minerals in a manner that protects and enhances the public trust. Surface and mineral ownership may be consolidated when it is in the best interests of the State. Minerals shall be developed in an orderly manner to optimize revenue consistent with other public interest and natural resource values." [Emphasis added.]

In sum, the constitution and laws of Michigan require the DNR to protect the natural resources of this state and the public trust. The perceived benefits of further hydrocarbon leasing and development of Great Lakes bottomlands, including energy production and Natural Resources Trust Fund revenue, are uncertain and ephemeral. However, the resulting risks of harm to our Great Lakes and shoreline resources, even if supposedly relatively low, are still real and lasting. Under these circumstances, I respectfully suggest that the DNR’s proposed policy of further bottomlands leasing is unwise and inconsistent with the prudent exercise of your public trust responsibilities.

If, for whatever reason, the DNR nevertheless proceeds with the policy of leasing Great Lakes bottomlands, the current draft procedure is flawed and should be changed. It presents serious policy and legal problems.

As you well know, the 1997 MESB Report on this subject recommended various changes to DNR leasing and Department of Environmental Quality permitting procedures relating to directional drilling in these areas. The DNR proposed Oil and Gas Leasing Procedure apparently
was intended to incorporate some, but not all, of the Board’s recommendations. For example, the draft procedure indicates that the DNR intends to create a geologic information system data base for each area where directional drilling is likely to occur, to consult with local government officials, and then, through some unspecified process, "eliminate upland sites not suitable for oil and gas well site purposes."

Although these processes are a potentially useful, albeit ill defined and incomplete, attempt to address the Board’s suggestions, they fall far short of the key Board recommendation on this subject, viz, that the DNR lease procedure should require "an aggressive environmental impact assessment and stakeholder participation prior to the lease sale." (Report, page 5, emphasis added.) Such a complete, upfront evaluation of potential environmental impacts is needed for at least two reasons. First, as a matter of sound policy and common sense, the potential environmental consequences of the proposed activity should be fully assessed and publicly reviewed before any particular area is leased. There is no point in moving the process forward through the leasing stage and into the drilling permit application phase unless environmental impacts have been aggressively examined and it has been determined, through a process open to the public, there is at least some reasonable possibility that drilling could be permitted into a particular bottomland area.

Second, the lease procedure, as presently drafted, would unnecessarily create risks of litigation, distorting the Department of Environmental Quality’s drilling permit application decisions and/or subjecting the state treasury to claims by lessees seeking compensation for alleged regulatory "takings" of private property rights. Unless the environmental impacts of the proposed hydrocarbon development in a particular bottomlands area are thoroughly and publicly evaluated before leasing decisions are made, years of expensive but potentially unnecessary litigation involving the state are likely to occur. That risk is well illustrated by the protracted litigation in the 1970s involving oil and gas drilling in the environmentally sensitive Pigeon County State Forest, where much of the mineral leasing of state lands preceded complete environmental assessments.

Moreover, under the current draft procedure, the DNR is unnecessarily increasing the risk of another "regulatory takings" debacle like the Miller Brothers v Dep’t of Natural Resources litigation of the 1980s and 1990s. There, the DNR performed environmental assessments after oil and gas leases had already been issued for privately owned mineral rights in the Nordhouse Dunes area near Lake Michigan. When the DNR denied drilling permits on environmental grounds, the private parties sued the state claiming that the drilling restrictions took their property without just compensation. That litigation ultimately cost the state almost $100 million, despite grave factual and legal flaws in the plaintiffs’ claims.

Against this background, it is probably no coincidence that the public advocates of the DNR’s proposed "lease first/assess later" policy include at least one oil and gas industry person associated with the plaintiffs in Miller Brothers, whose attorneys openly boasted of "drilling for oil in the courts," at public expense. Presumably, such persons see another potential bonanza in the making here.

Indeed, if the DNR issues further oil and gas leases for Great Lakes bottomlands before the complete environmental assessments recommended by the MESB are performed for each proposed lease, it may unnecessarily create a legal, policy, and fiscal dilemma for the state. Once such leases are issued, the lessees may well use the perceived threat of a regulatory takings claim to coerce the state officials responsible for deciding whether to issue drilling permits to grant such permits, even in the face of potential adverse environmental effects. On the other hand, if the permits are denied, the state may then face potentially expensive, even if baseless, litigation.

Simply put, there is no compelling reason to expose the state to such risks. Accordingly, I recommend that, at an absolute minimum, the DNR revise its draft Oil and Gas Leasing Procedure as follows:

1. Require the person proposing the leasing of any particular Great Lakes bottomlands parcel to fund, at its own expense, a comprehensive "aggressive environmental impact assessment" of oil/gas exploration and development of that parcel to be performed by independent, qualified experts.
   
   
2. Require public notice and opportunity for review and comment of the proposed leasing, including the environmental assessment, before the DNR issues a Great Lakes bottomlands lease for the area in question.
   
   
3. Review and, as necessary, modify the DNR lease language to ensure that it expressly provides that issuance of the lease, even after an environmental assessment, does not necessarily represent a final decision by the state that drilling in that area is environmentally or legally permissible and that the issuance of drilling permits is subject to a separate and independent review.

In conclusion, I again wish to emphasize that these recommended changes are simply intended to mitigate some of the risk associated with what I strongly believe is a mistaken policy. The best course, by far, would be refrain from taking any steps toward leasing Great Lakes bottomlands altogether.

Thank you for your consideration.

Sincerely yours,

JENNIFER M. GRANHOLM
Attorney General
c: Natural Resources Commission
Teresa Gloden

See also the Statement by K.L. Cool, DNR Director, on Great Lakes Drilling-->Statement by K.L. Cool, DNR Director, on Great Lakes Drilling