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Alaska Supreme Court reverses AOGCC decision Alaska Oil and Gas Conservation Commission instructed to hear appeal of Monte Allen for forced unitization at North Cook Inlet gas field on its merits Kristen Nelson PNA News Editor
The Alaska Supreme Court has ruled in favor of Monte Allen in his appeal of a denial by the Alaska Oil and Gas Conservation Commission to hear a petition for forced unitization of two Cook Inlet oil and gas leases into the North Cook Inlet gas unit.
In a May 12 decision, the court found that Allen is entitled to a hearing on the merits of his unitization petition, reversed the judgment of the superior court and remanded the case to the commission for a hearing.
As of May 23, the commission had not yet set a hearing date.
The court said that the commission “has discretion to order unitization effective upon the date of filing of a proper petition and that its exercise of this discretion is a matter for case-specific determination rather than a matter of jurisdiction.” Because the commission did not dispute that Allen’s petition was proper when filed “or that a retroactive unitization order would operate to extend Allen’s leases, we reverse its order dismissing his petition as moot.”
Leases north of North Cook Inlet unit In 1986, the Alaska Department of Natural Resources granted two 10-year Cook Inlet oil and gas leases to Danco Inc. Danco transferred its working interest in the leases to Amoco Production Co. in 1988; working interest in the two leases was eventually acquired by ARCO Alaska Inc. and Phillips Petroleum Co. Danco retained a 4.5 percent overriding royalty interest in the leases and in 1989 Monte Allen acquired a share of that interest.
The leases adjoin the North Cook Inlet unit. In April 1996, approximately five months before the leases expired, the Department of Natural Resources issued a report “estimating previously undetected reserves of 1 trillion cubic feet of gas in the North Cook Inlet pool.”
Because the leases adjoined the North Cook Inlet unit, the court said, Allen and Danco “believed that they were ‘likely beneficiaries of the same gas formation’” and requested that Phillips and ARCO agree to unitize their interests, a request which the companies denied.
On Aug. 30, 1996, one day before the leases were due to expire, Allen and Danco petitioned the Alaska Oil and Gas Conservation Commission for compulsory unitization.
Commission denies request The commission first declined to accept the petition because Allen and Danco had only a royalty interest in the leases. Allen and Danco appealed and the commission “provisionally accepted” the petition, but noted two new “potential grounds for dismissal.”
The commission said that since the petition was received on Aug. 30 and the leases expired Aug. 31 it would have been impossible for it to render a decision before the leases expired, making it a futile act to proceed to a hearing.
The commission also said that compulsory unitization could only be requested when the parties had not agreed to voluntarily unitize interests.
Allen and Danco responded that they had made unsuccessful attempts at voluntary unitization and that the petition was timely because it was filed before the leases expired.
The commission held a hearing to determine whether it should consider the “petition in light of the expiration date of the leases” and after that hearing the commission dismissed the petition, reasoning that a hearing on the merits would be “a futile and wasteful act.”
Allen appealed to the superior court, which upheld the commission’s decision, finding the petition moot because the expiration of Allen’s leases left him with no interest that he could properly assert before the commission.
Supreme Court addresses statutory interpretation The Alaska Supreme Court said Allen’s appeal “presents questions of statutory interpretation that do not involve the special expertise of the commission” and therefore “this court applies its independent judgment.” The court said it would independently review the commission’s determination, “giving no deference to the superior court decision as an intermediate court of appeal.”
The commission conceded, the court notes, that an overriding royalty owner has sufficient property interest to have standing to petition for unitization. Because Allen was requesting unitization with a producing unit, the leases would have automatically been extended by a unitization order entered before the leases expired. Therefore, the court said, Allen’s petition was a proper petition and raised a matter under the jurisdiction of the commission when it was filed.
The commission argued that if the leases in which Allen held an overriding royalty interest expired “almost as soon as the petition was filed” that Allen lost his standing at that time.
The question then became, the court said, “whether the Commission must hear and decide a case after the petitioner no longer has a personal stake in the outcome and cannot benefit from the requested Commission action.”
The “commission itself assumed that it had the power to issue a unitization order that would be effective as of the date of the filing of the petition for unitization. Our own analysis of applicable law reveals no sound reason why the commission does not have this power.”
Would retroactive order be inappropriate in this case “The remaining question, then, is whether the commission could properly decline to take jurisdiction over Allen’s petition by summarily finding that a retroactive order would be inappropriate in his case.”
The court notes language in the commission’s decision on rehearing suggesting “that various considerations of policy led it to regard Allen’s status as an overriding royalty owner to be unworthy of protection by a retroactive unitization order.” The commission wrote that an overriding royalty interest holder “would have no right directly to apply for an extension of a lease” so “it would be incongruous to recognize an overriding royalty holder’s right to extend a lease through petitioning for compulsory unitization.” The commission also noted, the court said, that overriding royalty interest owners do not have correlative rights.
The commission concluded that while it had the power to order retroactive unitization in appropriate circumstances, those circumstances did not appear in this case. The commission concluded that statutory goals for unitization, “preventing waste, protecting correlative rights and ensuring a greater ultimate recovery of oil and gas — do not require or favor retroactive effect in this case.”
Commission conclusion problematic The court said it found the commission’s conclusion problematic because, while statutory provisions focus on protecting the rights of owners of production, “they by no means ignore the rights of persons holding lesser interests.”
On rehearing the commission said “the issue of retroactive application involves different and much more limited considerations than those involved in the underlying merits of a compulsory unitization petition.”
The commission said it had not prejudged the issue of compulsory unitization, but “has simply noted that, assuming that the merits were to be decided in favor of compulsory unitization, no basis has been shown for such a decision to be made retroactive.”
The court said that because Allen’s petition was properly filed and within the commission’s jurisdiction, it “could not be deemed moot as long as retroactivity was within the commission’s discretion to order.
“And since the apparent lack of circumstances justifying retroactivity reflected on the merits of Allen’s petition, not on the commission’s power to hear it, the possibility of retroactivity could not properly be eliminated without determining the merits of the petition for unitization.”
The court ruled that the commission erred in treating retroactivity as a jurisdictional issue and ordering dismissal without hearing evidence on the merits of unitization. The court reversed the judgment of the superior court and remanded the case for a hearing.
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