ConocoPhillips Alaska, Inc. v. State, Department of Natural Resources

109 P.3d 914, 2005 Alas. LEXIS 10
CourtAlaska Supreme Court
DecidedJanuary 28, 2005
DocketNo. S-11131
StatusPublished
Cited by6 cases

This text of 109 P.3d 914 (ConocoPhillips Alaska, Inc. v. State, Department of Natural Resources) is published on Counsel Stack Legal Research, covering Alaska Supreme Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
ConocoPhillips Alaska, Inc. v. State, Department of Natural Resources, 109 P.3d 914, 2005 Alas. LEXIS 10 (Ala. 2005).

Opinion

OPINION

BRYNER, Chief Justice.

I. INTRODUCTION

ConocoPhillips Alaska, Inc., Exxon Mobil Corporation, ExxonMobil Alaska Production Inc., and Forest Oil Corporation (the corporations) applied to reduce the rate of lease royalties they owed the State of Alaska under a state lease initially executed in 1965. They claimed that they were entitled to a “discovery royalty” rate because they were the first producers to discover oil in a new geologic structure, the Midnight Sun Reservoir. The Commissioner of Natural Resources denied the application, finding that the Midnight Sun Reservoir belonged to a known geologic structure, the Kuparuk C sandstone formation. We affirm the commissioner’s decision, holding that it is supported by substantial evidence and correctly construes the terms of the lease according to the law in effect when the lease was signed. We also hold that the commissioner improperly barred the corporations’ counsel from participating in the administrative hearing, but we conclude that this error was harmless because the corporations have failed to show substantial prejudice.

II. FACTS AND PROCEEDINGS

A. Background

1. The discovery royalty program

In 1959 the legislature enacted the Alaska Land Act.1 A provision of the Act formerly codified as AS 38.05.180(a) established a reduced royalty rate for state leaseholders making the first commercial discovery of oil in a geologic structure:

the holder of a lease who shall drill and make the first discovery of oil or gas in commercial quantities in any geologic structure shall pay a royalty on all production under the lease of 5 per centum for ten years following the date of such discovery and thereafter the royalty rate shall be not less than 12½ per centum.[2]

This discovery royalty encouraged the exploration and rapid development of Alaska’s oil resources. Between 1959 and 1964, the Department of Natural Resources adopted regulations implementing the discovery royalty statute.3 Among these regulations was the DL-1 competitive oil and gas lease form.4 The DL-1 lease included a discovery royalty [916]*916clause nearly identical to the provisions of subsection .180(a), and also provided that its terms would be interpreted according to regulations in force at the time the lease was entered.5

The regulations established a process allowing lessees to apply for discovery royalties and set the guidelines for the department to determine whether an award was warranted.6 The new regulations required applicants to provide the department with data “to determine the geologic structure from which the oil and/or gas is being produced”7 — a requirement echoing subsection .180(a)’s language authorizing the department to award discovery royalties only for “the first discovery of oil ... in a geologic structure....”8

As then defined in 11 AAC 505.741(b), “geologic structure” meant “any structural and/or stratigraphic entrapping mechanism containing one or more intervals, zones, strata, formations, or fault blocks which has the necessary physical characteristics to accumulate and prevent the escape of oil and/or gas.” The regulation further stated: “It is intended that the meaning shall be similar to that as used by the United States Geological Survey in the administration of the Federal Mineral Leasing Act of February 25, 1920.”9

The Federal Mineral Leasing Act10 uses the “geologic structure” concept to differentiate types of oil and gas leases before leasing occurs. If the Secretary of the Interior determines that government lands are not within a “known geologic structure of a producing oil or gas field”11 they may be leased without competitive bidding.12 As of 1959, the United States Geological Survey (USGS) defined the Act’s term “known geologic structure” as “the trap, whether structural or stratigraphic, in which an accumulation of oil or gas has taken place. The limits of such structure include all acreage that is presumptively productive.” 13

In 1967 and 1969 the Alaska legislature curtailed and then repealed the Alaska Land Act’s discovery royalty provisions.14 The department’s regulations implementing the discovery royalty program were repealed in 1979.

2. History of the lease before the discovery well

The corporations’ predecessors-in-interest purchased ADL 28299, a DL-1 form lease, in 1965. Like others of its kind, the lease includes a discovery royalty clause that is nearly identical to former AS 38.05.180(a) (1965).15 Moreover, according to paragraph 43 of the lease, “As used in this lease words which are defined in the regulations have the meaning assigned by such definition except where the context clearly requires a different meaning.” And paragraph 42 provides that “in this lease ‘regulations’ mean the applicable and valid oil and gas leasing regulations of the Commissioner of the Department of Natural Resources in effect on the effective date of this lease unless otherwise specified.”

[917]*917The corporations’ lease contains approximately four square miles, divided into four sections. The North Prudhoe Bay bounding fault transects the leased land. Three of the lease sections, those south of the fault, overlay the Prudhoe Bay reservoir. The northeast section, section 30, lies north of the fault and outside the Prudhoe Bay reservoir. In 1977 the sections south of the fault were committed to the Prudhoe Bay Unit Agreement.16

While oil development was concentrated south of the fault in the Prudhoe Bay reservoir — the largest accumulation of oil in North America — discoveries at Niakuk and Pt. McIntyre in 1985 and 1988 proved that the Kuparuk C sandstone north of the fault was also a source of commercial quantities of oil. These discoveries were not within section 30 of the lease. The Kuparuk sands do not form a continuous layer north of the fault, but rather a series of depositions in nonconti-guous geographic depressions.

In 1997 the corporations drilled the Sam-buca No. 1 well, which aimed at land north of the fault in section 30. The target of Sambu-ca 1 was Ivishak sandstone, but it tapped quantities of oil in an intervening layer, a geographically discrete bed of oil-bearing Kuparuk C, the Midnight Sun Reservoir.

B. Proceedings

Based on this find, the corporations began the application process for a discovery royalty, applying formally for certification of the Midnight Sun Reservoir discovery royalty in 1999. The Department of Natural Resources Director denied the application, finding that the Reservoir was not a newly discovered geologic structure as- defined by former 11 AAC 505.741(b) (1965).

The corporations appealed the director’s decision to the commissioner under 11 AAC 02.030.17

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Bluebook (online)
109 P.3d 914, 2005 Alas. LEXIS 10, Counsel Stack Legal Research, https://law.counselstack.com/opinion/conocophillips-alaska-inc-v-state-department-of-natural-resources-alaska-2005.