In the latest stage of a dispute that started back in 1996, the Alaska Supreme Court has heard oral argument in the case of Allen and Danco Inc. vs. the Alaska Oil and Gas Commission and ConocoPhillips. The case revolves around two state oil and gas leases on the northern margin of the North Cook Inlet unit. Allen and Danco claim that the leases should be part of the unit.
Danco President Dan Donkel is an active investor in Alaska leases and Monte Allen is a veteran Alaska leaseholder.
The North Cook Inlet unit contains ConocoPhillips’ North Cook Inlet gas field. When the estimated gas reserves more than doubled in the 1990s, Allen and Danco asserted that a revised boundary for the productive gas pool should pass through two leases in which they owned overriding royalty interests.
AOGCC rejection
One day before the disputed leases expired in 1996, Allen and Donkel applied to AOGCC to enforce inclusion of the leases in the North Cook Inlet unit. The petitioners claimed drainage of gas from the leases as a reason to expand the unit. The petitioners have also cited the proven existence of a deeper, non-producing oil pool, variously known as the Sunfish or Tyonek Deep pool, as a reason for unit expansion. This oil pool, Danco and Allen have claimed, likely extends under the disputed leases.
AOGCC rejected the petition initially on the grounds that the leases had expired immediately after the petition was filed and that the Alaska Department of Natural Resources could not re-instate the leases. However, the Alaska Supreme Court overruled that position.
Then, after hearings in 2001, AOGCC issued another denial decision in 2002.
In this final decision, AOGCC cited legal and technical reasons for the denial. The commission said that unitization is intended to prevent waste, ensure greater ultimate recovery and protect correlative rights, rather than to deal with issues of hydrocarbon drainage from adjacent tracts.
“The traditional remedy for drainage,” the commission said, “is the much more direct self-help expedient of drilling a well on one’s own land...”
And the commission questioned the quality of the technical evidence that the petitioners presented regarding the drainage question. The commission also commented that compulsory unitization typically addresses the question of forcing into a unit “minority tract owners who do not want to join, rather than to force majority tract owners to accept minority tract owners who do want to join.”
Allen and Danco appealed to the Alaska Superior Court and when that court affirmed the commission’s decision the petitioners appealed to the Alaska Supreme Court.
The AOGCC role
In presenting oral argument to the Supreme Court, Allen and Danco’s attorney Jim Gottstein questioned AOGCC’s role in adjudicating disputes relating to oil and gas leases.
To ensure what they see as a fair hearing, Allen and Danco want what is known as a trial de novo — a completely new trial in appeals court that takes a fresh look at the case. A trial de novo is often used in review of administrative proceedings or judgments of a small claims court. Trial de novo admits new evidence, whereas a regular “on the record” appeal only considers evidence presented at an earlier hearing.
The pre-statehood 1955 Alaska statute concerning the Alaska Oil and Gas Commission grants the right to a de novo trial in appeal of an AOGCC decision. But the later enacted procedures for administrative appeals in Alaska specify that the Superior Court can “in its discretion” grant a trial de novo, “in whole or in part.”
In fact in 2002 the Superior Court denied an Allen and Danco petition to hear the case in a trial de novo.
“We live or die on this question of de novo trial,” Gottstein told the Supreme Court justices.
Affirming the right to trial de novo would, in effect, provide a route for moving final decision making from AOGCC into a court of law. Robert Mintz, the Alaska assistant attorney general representing AOGCC, said that the Alaska Legislature established the commission with the technical expertise to make decisions regarding complex oil and gas issues. William Rozell, attorney for ConocoPhillips, supported Mintz’s concern.
“The question is whether it makes sense to construe the 1955 de novo provision as prevailing over later enactments that express a clear legislative preference for review on the record,” Mintz said. “The Legislature has not only declined to re-enact the de novo provision but has affirmatively constituted the commission as a body with unique fact-finding expertise, whose value would essentially be ignored under de novo review.”
Disputed facts
At the heart of the question of trial de novo are disputed facts and opinions relating to whether or not the North Cook Inlet field has drained gas from the disputed leases.
The question of whether there has been uncompensated gas drainage revolves around issues such as the depths of the gas/water contacts in the field reservoirs and, hence, the location of the perimeter line marking the outer edge of the productive gas pool. Allen and Donkel have also raised a question regarding an extension of the North Cook Inlet participating area beyond what they say is Phillips’ perimeter line for the pool.
AOGCC and ConocoPhillips have consistently maintained that there’s no drainage from the disputed leases, despite vehement objections from Allen and Donkel.
“The productive gas reservoir in the North Cook Inlet unit does not extend under the two oil and gas leases subject to the appellants overriding royalty interest,” Mintz said. “That’s what the commission found after an exhaustive analysis of geological, geophysical and engineering data.
“… So all the appellants’ talk about uncompensated drainage is simply beside the point — there is no drainage in this case.”
Rozell asserted that the commission’s findings rendered questions about compensation for drainage from the disputed leases mute and irrelevant. The findings show that there’s no portion of any productive reservoir, nor any evidence for any oil reservoir, under the leases, Rozell said.
“The factual evidence in this case is simply overwhelming and it’s entirely one sided,” he said.
AOGCC’s duty
Allen and Danco also maintain that AOGCC has a duty to protect royalty or leaseholders rights, rather than simply ensure conservation of Alaska oil and gas.
“There’s a real question about whether there’s drainage, of course, and that’s why we want (trial) de novo,” Gottstein said. “But the commission has steadfastly refused to accept any obligation except for the conservation one.”
Gottstein went on to assert that Alaska statute 31.05, which specifies the authority and functions of AOGCC, spells out roles that include protecting owner rights as well as conserving oil and gas.
“So it’s our position that AS 31.05.110 requires the commission to ensure equality, ensure that DNR follows its own regulations,” Gottstein said.
Gottstein went on to say that the AOGCC role of ensuring fairness should cause the commission to recognize the existence of the Tyonek Deep oil pool as a reason, in itself, to expand the North Cook Inlet unit to include the disputed leases. He showed the justices a map that depicted potential Tyonek Deep oil accumulations extending under the leases. Gottstein said that under Alaska administrative codes for natural resources a unit must encompass the minimum area required to include “all or part of one or more potential hydrocarbon accumulations.”
“Must means must,” Gottstein said. “… There’s no dispute about this. I think it’s totally appropriate for an order from this court to just order it in the unit based on this regulation and that’s what we’re asking”
However, Mintz said that this line of reasoning didn’t make sense and was deeply flawed — the statutes say that compulsory unitization only applies to productive oil and gas pools, he said. Furthermore AOGCC does not have a role in applying “DNR’s unitization authorities,” he said.
And the AOGCC brief states that Alaska statute 31.05.110(b) spells out specific circumstances that need to be in place for compulsory unitization to be possible. The brief also says that the “potential hydrocarbon accumulations” clause in the administrative codes relates to exploratory units approved by DNR.
As of Oct. 31 the Supreme Court had not published an opinion on this case. The opinion, when it does come out, will have important ramifications on the future role of AOGCC.
