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Alaska Supreme Court affirms lower court decision for DNR, against Exxon Case stems from development of Point McIntyre field and dispute over whether or not state should pay field costs for royalty oil Kristen Nelson PNA Editor-in-Chief
In an Oct. 12 decision, the Alaska Supreme Court affirmed a Superior Court decision denying an appeal by Exxon Corp. of a decision by the Department of Natural Resources denying the expansion of the Prudhoe Bay unit to include Point McIntyre.
“We conclude,” the court said, “that the state has the discretion under the terms of the agreement to consider the public interest according to state law and to deny the expansion...”
In fact, the Prudhoe Bay unit was expanded and Point McIntyre produces as a participating area within the unit. It was the terms of unit expansion that were the issue.
At Prudhoe Bay the state agreed to allow field costs to be charged against its royalty oil. The field cost allowance was initially set at 42 cents a barrel, but adjusted annually based on inflation. By 1993, the court said, the cost had risen to 79 cents per barrel, the total for field costs at Point McIntyre totalling $24 million.
After Prudhoe Bay development, the Legislature amended the law “to make it clear that the lessees could not deduct field costs from the state’s royalty share under the existing, standard-form state oil and gas leases.” Subsequent leases “expressly disallowed” field cost deductions.
Before Point McIntyre production began, the director of DNR’s Division of Oil and Gas denied an expansion request for the Prudhoe Bay unit to include Point McIntyre. The lessees appealed to the DNR commissioner.
BP, ARCO reached agreement with state In an amended application, BP and ARCO withdrew their appeals and waived their rights to field cost deductions at Point McIntyre except for a small portion of the reservoir that underlay the original boundary of the Prudhoe Bay unit.
Exxon did not waive rights to the field cost deduction, but agreed to forego the deduction pending final resolution of the issue.
The commissioner later affirmed the director’s denial of Prudhoe Bay unit expansion, concluding that Exxon did not have an absolute right to expansion because no part of the Point McIntyre reservoir was within the Prudhoe Bay unit when the lessees requested expansion and because state statute and the Prudhoe Bay unit agreement give DNR the discretion to deny expansion of the unit in the public interest.
The commissioner “specifically noted that the field cost allowance under the 1980 settlement exceeded Exxon’s likely actual field costs and concluded that allowing Exxon to make a profit at the state’s expense was not in the public interest.” The commissioner also said that public interest favored treating Exxon like the other lessees at Point McIntyre, who were not permitted to deduct field costs.
One critical contention The commissioner’s decision was affirmed in Superior Court and Exxon appealed.
The Supreme Court said Exxon’s appeal was “based on one critical contention” — that the unit agreement abrogated DNR’s “discretion to deny expansion and to order contraction” of the unit. The argument hung around a sentence which says the unit “may be” enlarged, which Exxon argued meant the lessees could enlarge the unit. The state argued the language was ambiguous. Elsewhere in the agreement, the state said, “may” refers to things DNR may do, while language creating a right of the lessees uses “shall have the right” or “shall be entitled to.”
The Supreme Court said it found the state’s interpretation “the most logical.”
The court concluded that DNR “had the discretion to deny expansion of the PBU in the public interest…” and affirmed the lower court decision in all respects.
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