|
Alaska Supreme Court reaffirms DNR decision denying discovery royalty
The Alaska Supreme Court has found in favor of the Alaska Department of Natural Decision in an appeal over a discovery royalty rate. The decision was appealed by ConocoPhillips Alaska Inc., Exxon Mobil Corp., ExxonMobil Alaska Production Inc. and Forest Oil Corp.
The companies applied for a reduced royalty rate based on discovery of a new geologic structure, the Midnight Sun reservoir, in the Prudhoe Bay field. The commissioner denied the application, ruling that Might Sun was part of a known geologic structure, the Kuparuk C sandstone formation.
The Supreme Court ruled in a Jan. 28 decision that the commissioner’s decision was “supported by substantial evidence and correctly construes the terms of the lease according to the law in effect when the lease was signed.” The court also ruled, however, “that the commissioner improperly barred the corporations’ counsel from participating in the administrative hearing,” but concluded “this error was harmless because the corporations have failed to show substantial prejudice.” At issue: what is a geologic structure? The Alaska Legislature established a discovery royalty rate in 1959 for the first commercial oil or gas discovery “in any geologic structure…” establishing a reduced royalty, 5 percent, for the 10 years following the discovery. Regulations adopted by the Department of Natural Resources required information with an application to allow the department to determine the geologic structure from which the oil or gas was being produced. The Alaska Legislature curtailed and then repealed the 1959 discovery royalty provisions in 1967 and 1969 and regulations implementing that legislation were repealed in 1979.
The lease in question, ADL 28299, was purchased in 1965, and the lease included a discovery royalty clause. Midnight Sun discovery well drilled in 1997 The Sambuca No. 1 was drilled in 1997, targeting Ivishak sandstone, but tapping quantities of oil in what the court described as “a geographically discrete bed of oil-bearing Kuparuk C, the Midnight Sun Reservoir.”
In 1999 the companies applied for a discovery royalty for Midnight Sun, an application denied by the department, which said Midnight Sun “was not a newly discovered geologic structure” as defined in its regulations. The companies appealed to the commissioner, who confirmed the department’s decision, and then appealed to the Alaska Superior Court, which affirmed the decision, and on to the Alaska Supreme Court.
|
