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Unlocking ANWR Law review article: Development of BP-discovered Sourdough field near refuge is key to opening the coastal plain, whether or not feds go after drainage royalties Kristen Nelson PNA Editor-in-Chief
What is the impact of proposed development at Sourdough, just west of the Arctic National Wildlife Refuge, on the congressional prohibition on oil production from the coastal plain of the refuge?
In a December article in the Duke University School of Law’s Alaska Law Review, “The Arctic National Wildlife Refuge, Correlative Rights, and Sourdough: Not Just for Bread Anymore,” Robert Corbisier asks how, absent of drilling in ANWR, can the federal government protect its royalty rights when production begins from the adjacent Sourdough field at the end of the decade?
Corbisier, formerly a staff assistant and legislative aide to U.S. Senator Frank Murkowski, graduates this year from Vermont Law School. He concludes that, in the absence of a vote by Congress to open ANWR, there are four possibilities to resolve the drainage issue: leasing by the secretary of the Interior; action by Alaska against the United States to force unitization; a suit by the state against the federal government to avoid future liability for royalties; and action by the federal government to receive royalties.
Issue not academic The impact of ANWR production restrictions on Sourdough is not academic: Sourdough, where a discovery was announced by BP Exploration (Alaska) Inc. in 1997, is part of the Point Thomson unit and as a condition of recent expansion of the unit the state of Alaska is requiring development of the Sourdough prospect by 2010.
Unit operator ExxonMobil has presented initial plans for development and the Environmental Protection Agency as lead agency is preparing an environmental impact statement. ExxonMobil’s Alaska manager, Jack Williams, said in November that if the EIS process and state permitting are completed on schedule, “then the Point Thomson owners will be in a position to make a decision to proceed with development during the first quarter of 2004.” Thomson sands production, he said, would start in early 2007.
The state’s agreement with the Point Thomson owners also includes production at Sourdough and another prospect, Lynx, by June 15, 2010.
The drainage issue Corbisier asks how the federal government can determine if drainage is occurring from acreage closed to leasing, and once the determination is made, what steps can state and federal governments take to protect their respective rights?
As owners of adjacent land, state and federal governments have correlative rights, Corbisier said, including rights against waste, against spoilage, against malicious depletion and the rights to a fair opportunity to extract and to conduct operations to enhance recovery (such as water flood).
The 1980 Alaska National Interest Lands Conservation Act prohibits production in ANWR and says that there will be no leasing or other development from the refuge until authorized by Congress.
Corbisier asks: “Does the Act’s ban on oil production apply to oil drainage from ANWR to adjacent state-owned land? Does … the Act trump Alaska’s sovereign right to develop its land when there is drainage? Does Alaska have any remedy that would allow legal production from ANWR? Does the federal government have any method that would allow it to prove drainage and claim royalties from state-produced oil or gas?”
Congress prohibited not only production but “leasing or other development leading to production of oil and gas” from ANWR, so does that prohibit Alaska from developing land which may drain ANWR? Corbisier asks.
He concludes that since Congress did not designate all of ANWR as wilderness but provided for opportunities for economic and social needs of the state with a focus on preserving the natural values of the surface, that drainage is not prohibited because it does not conflict with the ban on surface development.
Rule of capture The courts have ruled that oil and gas are subject to the rule of capture: a landowner can drill on his property and has a right to what he produces, even though it may be drained from the adjacent property.
“The owner of the drained land has no legal remedy, but may protect his rights by drilling a well of his own in order to capture the same resource,” Corbisier said, subject to “regulations such as well-spacing and boundary setbacks…”
He said courts have ruled subsurface trespass illegal: A well bore cannot reach into adjacent property, including: “the more modern technologies of directional drilling, extended reach wells, horizontal drilling and designer wells when they cross into another person’s land.”
Corbisier concludes that oil beneath state land can be legally developed, “and, under the common law rule of capture, any oil that might migrate from federal land would belong to producers on state leases.” The state would receive all of the royalties, including those “from oil that may have originated in ANWR.”
Preventing waste by unitizing Alaska could also force unitization.
Both the federal government and the state have legislation to prevent waste of oil and gas resources and require unitization of oil and gas fields. With unitization, Corbisier said, the rule of capture no longer operates because lease owners share in the costs and production of the entire resource, and are able to enhance production through practices such as water flood.
Alaska’s statute allows forced unitization if parties cannot reach agreement on their own, he said. There is also a reverse twist on the prohibition against waste.
“Theoretically,” Corbisier said, “this policy against waste could be superceded by either state or federal law explicitly sanctioning waste. If oil reserves are proven to exist in the 1002 area, a law sanctioning waste may be necessary to designate the area as wilderness.”
Executive authority to lease The federal Mineral Leasing Act of 1920 allows the Secretary of the Interior to issue leases when federal lands are being drained by adjacent leasing, Corbisier said, but that leasing provision does not apply to lands withdrawn for specific purposes, such as ANWR. He notes that one court has held states have a sovereign right to drain from closed federal lands. “If so, then it would follow that the federal government has a corresponding obligation to lease its lands for mineral development if it suspects that its resources are being drained.”
Even if this doesn’t apply to ANWR, the state “could force the federal government into a lease sale pursuant to its authority to force unitization,” Corbisier said.
Proving drainage If production begins from state lands adjacent to ANWR, could the federal government prove drainage?
At least one case uses a regulatory definition of proved reserves, but that is “in the context of contract law as opposed to determining the existence of a reservoir,” Corbisier said. Within the regulatory context, he said, “an expert must show that oil exists on the state land, and that based on the geology, that same pool of oil is economically productive on the ANWR side. If the data is sufficient the analysis ends.”
But, Corbisier said, it depends on the definition of proved reserves that the court uses: A widely accepted definition from the American Gas Association requires a consideration of “existing operation conditions, which preclude development in ANWR.” I.e. with development precluded, there are no proved reserves.
If existing data cannot be used to prove reserves in ANWR, and hence drainage onto Alaska lands, “the federal government will need to use a well to establish that drainable reserves exist in ANWR,” Corbisier said.
And in that case, if there is no drilling, the federal government may allow royalties from ANWR to slip away to the state.
Alaska, Corbisier said, “cannot afford not to proceed with Sourdough’s development if it hopes to open the door to exploring ANWR’s coastal plain. Sourdough is the key to this door.”
Even if the federal government allows its royalties to slip away: “If Sourdough is developed, Alaska wins.”
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