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Vol. 13, No. 1 Week of January 06, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

State wins lawsuit

Judge agrees with Alaska on 22nd Point Thomson plan; requires hearing on remedy

Kristen Nelson

Petroleum News

Superior Court Judge Sharon Gleason has ruled that the Alaska Department of Natural Resources acted properly when it rejected the 22nd plan of development for the Point Thomson Unit. The governor’s office said Dec. 27 that the judge’s decision affirming DNR’s actions reflects her agreement with the arguments made by the state’s attorneys.

The judge directed DNR to hold an additional hearing to provide the appellants with the opportunity to argue about what the appropriate remedy should be when the working interest owners have failed to fulfill their obligation to develop a unit.

“This ruling represents another significant step forward in the state’s efforts to develop the valuable oil and gas resources in the Point Thomson reservoir and to hold the lessees to the commitments they made in the unit agreement,” Gov. Sarah Palin said. “We are pleased that the court has affirmed the Department’s efforts to ensure that the oil and gas in this reservoir is responsibly produced.”

At the remand hearing, DNR will hear and consider arguments about whether or not termination of the unit is the appropriate remedy for failure to adequately develop this reservoir; or what other action the state should take.

The governor’s office said DNR will act quickly to resolve this matter.

Gleason said Oct. 5 at the end of oral arguments in the case that the likelihood of an appeal was extremely high. She said it was her goal to get a decision out as soon as possible so the case can move on to the Alaska Supreme Court.

Rejection of plan affirmed

Gleason affirmed DNR’s rejection of the lessees’ proposed modified 22nd plan of development. She also affirmed DNR’s interpretation of section 10 of the Point Thomson unit agreement. A sentence in section 10 of the unit agreement says: “The unit operator expressly covenants to develop the unit area as a reasonably prudent operator in a reasonably prudent manner.”

The appellants — unit operator Exxon Mobil Corp., BP Exploration (Alaska) Inc., Chevron U.S.A. Inc. and ConocoPhillips Alaska Inc. — asserted “that this contractual language, in conjunction with applicable statutes, ‘makes clear that DNR may not require the operator to carry out a plan that is not reasonable from the perspective of the operator, because it does not adequately protect the lessees’ interests’,” Gleason said in her decision.

The state’s position is that the unit agreement’s “reference to the reasonably prudent operator ‘acts primarily as a covenant by the lessee to act as a RPO and does not alter how DNR is to administer the PTUA. It defines the lessees’ commitment rather than limiting DNR’s authority.’”

Gleason said that while issues of contractual interpretation are generally “legal issues as to which a court is to apply its independent judgment,” in this case section 10 of the unit agreement “expressly confers” on the division the authority to require a plan from the lessees that is as complete and adequate as the director determines is necessary for timely development of resources in the unitized area. As a result, the court’s review of the determinations needs to defer to the agency.

“Adoption of the appellants’ interpretation of the contract to mandate the RPO standard would run counter to the regulatory and statutory provisions that were in effect at the time of the contract’s creation,” Gleason said. The regulation in effect at the time the Point Thomson unit agreement was signed in 1977 required the state to determine “that the agreement is necessary or advisable in the public interest … and adequately protects all parties in interest including Alaska,” she said, quoting the regulation. The regulations also required that the same standard apply to modifications of approved unit agreements.

The current regulation “is not inconsistent with Section 10 of the PTUA or the former regulations,” Gleason said. It requires the DNR commission to approve a proposed plan of development that promotes conservation of natural resources, promotes the prevention of economic and physical waste and provides “for the protection of all parties of interest, including the state.”

Evidence supports rejection

Gleason also said that there is substantial evidence in the record to support DNR’s rejection of the modified 22nd plan of development based on the department’s finding that the plan did not contain a commitment to develop the unit or to adequately delineate reservoirs.

DNR rejected the plan, which required a gas pipeline to develop Point Thomson. The department concluded the oil and the gas condensate did not require a gas pipeline. Gleason said that finding “is not directly refuted” by the appellants.

Appellants also argued that the DNR commissioner acted in bad faith in rejecting the modified plan in light of the state’s actions during the negotiations over the fiscal contract to develop a North Slope gas pipeline. The appellants said they relied on provisions of the proposed fiscal contract which relieved the lessees of submitting plans of development as long as the fiscal contract was in place.

Gleason said the state has asserted that any reliance on the fiscal contract “is unreasonable because that contract was never finalized when legislative approval was not forthcoming.” She said appellants have not pointed to any instance outside of the fiscal contract negotiations when the state said it would accept a modified plan of development that did not require unit production.

“To the extent the appellants relied upon the proposed fiscal contract when they presented the modified POD, such reliance was unreasonable,” Gleason said. DNR did not advise the appellants it would relieve them of their obligations if the fiscal contract was not approved, she said; in fact, it told them it would not delay a drilling commitment while fiscal contract negotiations were under way.

Administrative termination

The director’s 2005 amended decision rejecting the 22nd plan of development “did not purport to terminate the unit agreement,” Gleason said. The decision said the Point Thomson unit agreement was in default and listed ways to cure that default. The decision also said that failure to submit an acceptable plan was grounds for termination of the unit.

The commissioner’s 2006 decision and 2007 decision on reconsideration not only rejected the modified 22nd POD “it terminated the unit.”

The appellants have asserted that DNR “does not have the authority to administratively terminate the unit, but must instead seek to terminate the agreement through judicial proceedings,” Gleason said.

Section 10 of the unit agreement, which applies to the situation after a discovery well, “is silent on the rights of either party to terminate or cancel the contract. It does not expressly accord to the DNR a right to administratively terminate the unit — nor does it eliminate any such right,” she said.

Parties to the action recognize the state could seek to cancel based on breach of section 10. “At issue is whether that cancellation proceeding would need to be initiated in state court or if the agency could seek to cancel the contract in an administrative proceeding,” Gleason said.

“This court finds that DNR possessed the authority to administratively terminate the Point Thomson unit agreement when that agreement was adopted in 1977 under the statutory and regulatory structure as it existed at that time,” she said.

Hearing required

Current regulations also allow DNR to “seek to administratively terminate” the Point Thomson unit, Gleason said, but neither the Point Thomson unit agreement nor statutes and regulations in effect in 1977 “permitted an automatic termination” whenever a plan of development was unacceptable to the state.

However, “rejection of a proposed plan of development does not result in automatic termination” under the unit agreement. “Rather, a separate administrative determination as to the appropriate remedy is required in such instance,” Gleason said.

This is a right to due process issue, the judge said.

Nothing in the unit agreement or the 1977 regulatory framework “mandated or authorized automatic termination of the unit when DNR rejected the proposed POD. And while this court has concluded that the PTUA and then-existing regulations did not preclude DNR from pursuing termination at the administrative level, the appellants were constitutionally entitled to a clear written notice that DNR was considering this remedy when it rejected the POD, and should have been accorded the opportunity to be heard with respect to the appropriate remedy when the modified 22nd POD was rejected,” Gleason said.

“Accordingly, this matter is remanded to the DNR for the purpose of according to the appellants a hearing on the appropriate remedy to the state under DNR’s rejection of the proposed 22nd plan of development.”

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