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Setting litigation limits Alaska Legislature gives permitted Cook Inlet projects the go ahead Kristen Nelson Petroleum News Editor-in-Chief
In addition to streamlining the Alaska Coastal Management Program, the Alaska Legislature has acted to free existing state-approved projects — and the state departments which approved them — from continuing litigation. It has also voted to limit appeals of future state decisions on such projects.
House Bill 86, as amended in the Senate, gives legislative approval to Cook Inlet basin oil and gas projects with final authorization, permit or approval from the Alaska Department of Environmental Conservation, the Department of Fish and Game, the Department of Natural Resources or the division of governmental coordination.
Oil and gas projects are legislatively authorized and approved within the Cook Inlet basin if they have, as of the effective date of the legislation, “a final authorization, permit, or other form of approval.”
In the future, projects receiving a consistency determination are “not subject to review, stay, or injunction by any court” unless an appeal is brought by the applicant or by an affected coastal district, excepting claims based on the U.S. or Alaska constitutions. That portion of the bill has a statewide impact. (See related story on ACMP legislation on page 2.)
The bill coincides “with an executive branch reorganization directly affecting” the named resource agencies, and is, the bill's findings state, “intended to help facilitate the reorganization and the transition to a new administrative structure by removing from those agencies the burden of possible or on-going litigation over past administrative decisions.”
The original bill, as it passed the House, provides civil liability for malicious claims against state-permitted project, and that provision remains in the bill.
Senate amendments from Therriault House Bill 86 was sponsored by Hugh Fate, R-Fairbanks, and amended in Senate Judiciary by Senate President Gene Therriault, R-North Pole. Therriault said he was concerned about the decline in Cook Inlet oil and gas production and the fact that Forest Oil, just bringing new production on in the inlet at the Redoubt Shoal field after “wading through our very lengthy permitting process” is being “dogged by litigation.”
“What I'm asking for in this amendment,” Therriault said in Senate Judiciary May 16, “is having gone through that process — our state permitting process — jumped through all the hoops, that the Legislature once and for all say that the project has been issued its permits, we expect them to live under their permits, up to the performance of their permits, but we'd like the project to go forward.”
Committee vice-chair Ogan said he encountered permitting issues with a mine project in his first year in the Legislature. The company doing that project said they didn't mind jumping through the state's permitting hoops, but, he said, they needed a “linear process” — they needed to know that when they had jumped through hoops A through Z, they weren't going to have to go back and start all over again at hoop A.
Without a linear process, when companies have to go back through the hoops, “it costs time; it costs money; and it discourages investment.
“And I can't tell you how many people we have run out of this state with a big 'we're not open for business sign' by not having that linear process.” With this bill, Ogan said, “everybody knows what the rules are going to be and at the end of the process… they have some certainty that they can invest” in the state. Litigation costs plus uncertainty While the provision approving Cook Inlet oil and gas projects with existing permits is not specific to any company, Forest Oil testified in favor of the amendment.
Gary Carlson, Forest Oil senior vice president, told the committee the bill “as amended is critical to Forest Oil and its Alaska operations.” The company now has oil production from the Osprey platform at Redoubt Shoal, he said, after investing more than $200 million in the project, and is just now starting to see return on its investment.
Carlson said the Osprey is the first platform in Cook Inlet to grind and inject all drill cuttings, the first to re-inject all produced fluids on location, the first to electrify the drilling rig.
“As an investor in the state's resource development, we have done what the state has asked — plus,” he said.
But in spite of that, and in spite of “voluntary efforts to minimize conflicts and to provide enhanced environmental protection,” Redoubt Shoal development “has been the subject of continuing litigation quite literally since before the leases were issued by the state of Alaska,” Carlson said.
Litigation costs and the cost of shutting down a rig following a court injunction have totaled $2 million, he said.
And it isn't just the cost, it's the continuing uncertainty, he said: Forest Oil is doing development drilling “under the very real threat that the Alaska Supreme Court could issue an injunction at any time.”
If another injunction were issued, he said, “the fiscal impacts for both Forest Oil and the state of Alaska would be dramatic.”
Looking at direct costs only, Forest estimates a $28 million annual cost including loss of property taxes, royalties and associated costs and production taxes to the state, loss of 150 jobs at an estimated $15 million. If you add the trickle down effect of another 900 jobs, that's an additional payroll loss of $45 million, Carlson said. Encourage exploration and development “In our view,” Carlson said, “there are few things that the Legislature could do to encourage continued and expanded exploration and development in the Cook Inlet and elsewhere in the state that would rival passage of this bill. We believe that it makes sense in the light of the Legislature's recent passage of House Bill 191, streamlining the state's administration of the coastal zone management process.”
And, he said, the legislative ratification of Cook Inlet projects which already have their permits and coastal zone consistency approvals “would eliminate the continued uncertainty, avoid unnecessary litigation costs for all the parties and assure the state's continued receipts of royalties, severance tax, property tax… “
Trey Wilson, Forest Oil senior vice president, general counsel and secretary, told the committee that the litigation costs alone over the past several years — excluding the rig shutdown — were $360,000 for Forest's share of defending the litigation.
The Department of Law told the committee that the state's costs for the ongoing litigation have been some $300,000 “in legal fees either internally or paid to Trustees of Alaska in connection with this one series of litigation involving this project.” Impact on Forest's stock price Wilson said the uncertainty of outcome is the most significant impact of the litigation. The Redoubt Shoal project is very important to Forest Oil, he said, and the company's board of directors and senior management “have been quite concerned” about the continuing litigation and the challenge to the company's permits. More important to the company than the cost, he said, is the uncertainty — and the impact on the company's stock.
Because Redoubt Shoal is important for the company and “because this litigation hangs over our heads, we are required and have been disclosing this litigation in our filings with the Securities Exchange and Commission.
“The public is aware of the uncertainty associated with this litigation because we tell them at great length in our SEC filings and we believe that it has had a negative effect on the valuation of our stock,” Wilson said.
The company has nine prospects in Alaska right now, he said, with “potential unrisked reserves of over 2 trillion cubic feet” and the company has to consider whether or not it should invest in more Alaska projects.
If it did invest, how long would project approval take? Will the project “be attacked”? Once money is invested, will the project be shut down, “even though we've complied with state requirements”?
Wilson said the company would like to make Alaska “one of the cornerstones of Forest Oil — but honestly, the continuing litigation and the uncertainty has caused grave concern for us.”
Concern over throwing case out of court Democratic members of the Senate Judiciary Committee, Hollis French and Johnny Ellis, the Senate minority leader, both of Anchorage, were concerned about the existing Forest Oil court case, whether there were other active cases, and what Cook Inlet projects the Legislature would be approving.
Both voted against moving the bill.
Republican committee members, Chair Ralph Seekins, Fairbanks, Scott Ogan, Palmer, and Therriault, voted in favor.
The bill passed the Senate by a vote of 12-8. The House concurred with the Senate's amendments 25-11.
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