Falls Creek rebound
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Supreme Court finds PLC LLC has standing as ORRI owner, remands to DNR
The Alaska Supreme Court has ruled that the holder of an overriding royalty interest in a state lease has standing. The ruling came in a case brought by PLC LLC and MH2 LLC, owned by Paul Craig and family, against the Alaska Department of Natural Resources over a decision DNR made in 2017 excluding a state lease in which PLC holds an overriding royalty interest, ORRI, from inclusion in the Falls Creek participating area at the Ninilchik unit on the Kenai Peninsula.
Hilcorp Alaska, operator at Ninilchik, had included the area in which PLC holds an ORRI in its application to the division, but the area was not included in the approved Falls Creek participating area.
When PLC appealed the decision to the DNR commissioner, the appeal was dismissed on the grounds that as an ORRI owner, PLC lacked standing, a decision affirmed in Superior Court.
The Supreme Court disagreed.
In an April 9 ruling the court said PLC has a financial stake in DNR’s decision and reversed the lower court’s decision and remanded the decision to DNR “for further consideration consistent with this opinion.”
Expansion requestIn its 2017 decision on expansion of the Falls Creek Participating Area, or FCPA, DNR’s Division of Oil and Gas said Hilcorp had proposed an expansion of the FCPA from 988.7 acres to 1,512.87 acres but said the company “proposed to expand the FCPA to areas where presence of hydrocarbons is unlikely.”
The division said it used a different method than Hilcorp in determining areas which were contributing to production and said Hilcorp concurred with the division’s expansion area and its methodology.
The division said it received four comments in a public comment period, including one from “Paul Craig, manager of PLC, LLC and advocate for MH2, LLC,” limited liability companies with ORRIs in state oil and gas lease ADL 384314.
The most recent well at Falls Creek, Falls Creek 6, completed in late 2014, was completed in the Beluga and Tyonek formations. The division said the Tyonek completions were not productive and the overall production rates in the well were the lowest in the Falls Creek field but said the well did “confirm the Falls Creek gas accumulation, within the Beluga Formation, extends into the northern portion of the existing FCPA.”
Alaska Oil and Gas Conservation Commission data show total 2020 production from the Ninilchik unit was 12,073,628 thousand cubic feet, mcf, of natural gas. The FCPA accounted for 778,011 mcf, 6.3% of Ninilchik unit production, with Falls Creek 6 accounting for 72,546 mcf, 9.3% of FCPA production.
MethodologyThe division said Hilcorp used the lowest known gas, LKG, method for determining the boundary it proposed for the FCPA and chose to use only existing wells to generate depth maps, and not to use seismic data.
The division said it had issues with Hilcorp’s results as the proposed boundary included the two dry holes in the area “as well as the steep structural rollover in the northwest portion of the unit.” The division said it agreed with Hilcorp’s decision not to use seismic “but disagreed with the inclusion of these areas which are very likely unproductive” and said it “felt it was necessary to further simplify the approach to address these issues and the circle and tangent method was chosen.”
Issues in suitIn its decision the Supreme Court said that in the public comment period, PLC submitted a letter to DNR, requesting that DNR expand the FCPA beyond the 80 acres of PLC’s lease which Hilcorp had proposed for inclusion in the FCPA, and “attached various reports and geological information to its comments.”
The court noted that DNR applied a different method than that used by Hilcorp to determine the likelihood of hydrocarbon presence, and proposed modifications to the area proposed by Hilcorp, modifications to which Hilcorp agreed. The company submitted a revised application which DNR approved in May 2017.
“The approved application did not include the 80 acres from PLC’s lease,” the court said.
PLC appealed the decision to the DNR commissioner in June 2017, “arguing the methodology first used by Hilcorp to determine the participating area was more accurate than that used by DNR, and DNR was therefore wrong to not approve the original application.”
“The Commissioner denied PLC’s appeal in July 2017, reasoning an ORRI holder like PLC held a ‘nonpossessory interest in a percent of a production at the surface, free of costs,’ and thus lacked standing to appeal a decision regarding unit expansion. The Commissioner did not address PLC’s substantive arguments,” the court said.
PLC appealed in Alaska Superior Court, which agreed with DNR’s ruling that the company lacked standing to appeal to the commissioner, reasoning, the Supreme Court said, “that PLC was not ‘aggrieved by’ DNR’s actions but that PLC would be ‘if the participating area was being contracted. The superior court concluded that ORRI holders lack standing to appeal an expansion of the participating area.”
The Supreme Court noted that the Superior Court struck a document submitted by PLC, Appendix A, from the appeal record. The document contained publicly available information from AOGCC. “PLC suggested the Appendix A data contradicted DNR’s conclusion that hydrocarbons were not being extracted from the area under its lease.”
DNR had moved to strike Appendix A.
Previous ORRI decisions“Whether PLC has standing hinges on the definition of the words ‘aggrieved by’ in AS 44.37.01(b),” the court said, with standards of review being reasonable basis or independent judgment. The state argued for reasonable basis “because an ORRI holder’s standing to challenge a unitization decision is intertwined with the management of Alaska’s oil and gas resources,” but the court said it disagreed.
“Standing is a fundamental legal concept that determines who can and cannot pursue legal claims. Even in the complicated administrative arena of oil and gas law, we apply our independent judgment to interpret a statutory standing requirement.”
The court said while two types of standing are generally recognized - citizen-taxpayer and interest-injury - the Legislature has limited standing by statute “in some highly regulated areas, like land use and resource management.”
“PLC has a sufficient personal stake because had DNR approved the unit operator’s original proposed expansion, PLC’s lease would have been included, resulting in a direct financial benefit,” the court said.
The state argued that PLC should sue the operator to recoup any missing payments.
“But the availability of a remedy in an alternative proceeding does not negate standing in this proceeding,” the court said.
No conflictThe court said its decision, that PLC has a stake because DNR’s decision affects PLC’s interest, “does not conflict with our prior cases considering the rights of ORRI holders.”
In Allen v AOGCC, “ORRI holders unsuccessfully petitioned for forced unitization the day before their leases expired,” the court said, and while AOGCC had dismissed the appeal as moot, the court said it disagreed “because a retroactive unitization order would operate to extend the ORRI holders’ leases,” and noted that “AOGCC had conceded standing.”
In Gottstein v. DNR, the court said it “affirmed dismissal of a lease’s ORRI holders’ due process claims in relation to DNR’s approval of a unit operator’s proposed development plan excluding the lease from development.” That lease, the court said, was set to expire if not explored and did expire after DNR approved the plan.
The Superior Court upheld DNR’s decision in Gottstein and the Supreme Court affirmed that decision, citing Allen on the issue of standing and stated again that the court expressed no view on how the issue of standing would be decided had that issue been raised. “In response to the ORRI holders’ due process claim, we determined ‘approval of the [plan] neither deprived nor infringed on [the] overriding royalty interest’ in the lease, describing the ORRI holders’ property interests as unchanged by the decision and noting the working interest holders had the same right to develop the lease as before the plan was approved.”
The court said Gottstein addressed due process rights of ORRI holders, not standing.
“A party need not prove an agency has infringed upon or deprived it of its fundamental rights just to establish it has an appreciable personal stake in an administrative action,” the court said.
But even if the legal questions were identical, the court said the facts in Gottstein “are fundamentally different,” with ORRI holders in Gottstein pressing to have the unit operator develop the lease, while “here, PLC claims the unit operator already has.” In Gottstein the operator excluded the lease, but in this case, the court said, the operator initially included the lease, and “DNR was the entity that excluded the lease from the expansion.”
Appendix AIn arguing that it has been injured by the decision, PLC relied primarily, the court said, on Appendix A, a document not in the agency record and not submitted to or considered by the agency, “so the superior court did not abuse its discretion in refusing to consider Appendix A.”
The state said the court argues nothing in the record shows hydrocarbon production from beneath the lease in which PLC holds an ORRI, but the court noted that Hilcorp originally included 80 acres of the lease in its application to expand the FCPA “and described that acreage as ‘proven to contribute’ to the production of natural gas,” and PLC told DNR in a letter that the FCPA should include even more of the lease and “included geological data that PLC claims justifies its position.”
The court said “PLC is not specifically required to prove hydrocarbons are being removed from beneath its lease to show an adverse affect on its interest. We express no opinion on whether PLC’s ultimate position, that the expansion should include PLC’s lease, is correct. That is a question on the merits the Commissioner is much better situated to resolve. But by showing first that the unit operator applied to expand the unit to include PLC’s lease as ‘proven to contribute’ to hydrocarbon production and second that DNR excluded PLC’s lease from the expansion, PLC has made a plausible allegation of injury sufficient to establish standing here.”
The court said the alleged injury “is sufficient to satisfy the statutory requirement that PLC be ‘aggrieved by’ DNR’s decision. We thus conclude PLC had standing to appeal DNR’s decision to the Commissioner.”
The court said the Superior Court did not abuse its discretion in striking Appendix A from the record, since the record on appeal from an administrative agency consists of original papers and exhibits filed with the agency, along with information considered by the agency in making its decision.
The court said PLC could have presented the material in Appendix A in its original appeal to the commissioner but did not do so, and “did not seek to supplement, modify, or correct the record with the unit operator’s geological report actually submitted to DNR but missing from the record on appeal.”
Hilcorp submitted a confidential geological report to DNR as part of its original application to expand the FCPA, and only the cover page appears in the appellate record. But the court said that “does not give PLC authority to bring new, different evidence before an appellate body.”
The materials contained in Appendix A were not submitted to DNR and were not relied on by the commissioner in the decision nor by the Superior Court.
“We thus conclude the superior court did not abuse its discretion by striking Appendix A from the record,” the court said.
The court reversed the Superior Court decision and remanded the matter to DNR “for further proceedings consistent with this opinion.”