Chapter 5 OIL AND GAS UPDATE: LEGAL DEVELOPMENTS IN 2020 AFFECTING THE OIL AND GAS EXPLORATION AND PRODUCTION INDUSTRY
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OIL AND GAS UPDATE: LEGAL DEVELOPMENTS IN 2020 AFFECTING THE OIL AND GAS EXPLORATION AND PRODUCTION INDUSTRY
The state reports presented below include key legal developments in most of the more-active states in the areas of oil and gas exploration, development, and production.
A. Legislative Developments
Given the Alaska State Legislature's adjournment due to the COVID-19 pandemic, no substantive oil and gas legislation was passed.
B. Judicial Developments
In Forrer v. State,2 the Alaska Supreme Court rejected as unconstitutional the proposal to use bonding to pay Alaska's oil and gas tax credit obligations. The court found the plan, which was approved by the legislature in 2018, to be "unconstitutional in its entirety,"3 as the Alaska Constitution forbids the state from taking on debt for those credits. The bill approved the creation of a state corporation that would be empowered to
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sell up to $1 billion in bonds to pay off remaining tax credit obligations. The legislature previously voted to end the tax credit program geared toward small producers and developers, saying that the program had become unaffordable.
The court ruled that subject-to-appropriation bonds are "contrary to the plain text of the Alaska Constitution and the framers' intent."4 In a unanimous decision, the court held, "this financing scheme--even if unforeseeable in the mid-twentieth century--is the kind of constitutional 'debt' that the framers sought to prohibit under article IX, section 8 of the Alaska Constitution."5 The court further held, "[i]f the State intends to utilize financing schemes similar to [the bonding bill] in the future, it must first seek approval from the people--if not through a bond referendum then through a constitutional amendment."6 The ruling means that the State must come up with another way to pay $743 million, the bill left unpaid from now-defunct subsidy programs for oil and gas drilling and exploration. The Governor's office has advised that the Departments of Revenue and Law have begun a review to understand the impacts of the decision.
ConocoPhillips Alaska, Inc. v. State of Alaska, Department of Natural Resources7 involved the appeal of a final administrative order issued by the Commissioner of the DNR. ConocoPhillips and Anadarko (Appellants or Lessees) appealed a DNR decision applying DNR regulation 11 AAC 83.235 to redetermine volume allocations for Appellants' Net Profit Share Leases and to reopen decades-old reports in order to apply a higher interest rate to the redeterminations and set the interest accrual date as the date of the original reports, rather than the redetermination date. Appellants argued that the application of the DNR regulation was impermissibly retroactive and violated the parties' leases, as well as the contracts clauses of the Alaska and United States Constitutions.8 The superior court agreed.
The court applied Alaska's presumption against retroactive legislation, as established in Alaska case law and Alaska's version of the Administrative Procedure Act (APA),9 and ruled that, by seeking to ignore the six-year limitation period established by 11 AAC 83.245(e)-(f), the parties' 27-year-long relationship, and the effect that DNR's interpretation would have on the Lessees, the decision advocating the application of the
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2014 regulation was impermissibly retroactive as applied to the 1984 Leases.10 The court also held that DNR's application of 11 AAC 83.235 and AS 38.05.135(d) violated the Contracts Clauses of the federal and state Constitutions. Given the impermissible nature of DNR's proposed application, the court reversed the DNR decision.11 The DNR chose to not appeal the court's ruling.
In Native Village of Nuiqsut v. BLM,12 the plaintiffs sought the invalidation of the Bureau of Land Management's (BLM) approval of the 2018-2019 winter exploration activity undertaken by ConocoPhillips in the National Petroleum Reserve-Alaska (NPR-A), which is located on Alaska's North Slope and consists of 23.6 million acres. The court denied plaintiffs' requested relief. The court rejected the plaintiffs' five claims centered on violations of the National Environmental Policy Act (NEPA),13 the APA,14 and the Alaska National Interest Lands Conservation Act (ANILCA),15 finding that the BLM and other relevant defendants fully considered the impacts to caribou and subsistence, the cumulative impacts of the exploration activity, and the alternatives under NEPA and ANILCA. Consequently, the court upheld the 2018 environmental assessment (EA) and record of decision (ROD) authorizing ConocoPhillips' 2018-2019 winter exploration in the NPR-A and denied plaintiffs' requests for declaratory relief and vacatur of the 2018 EA and the ROD.16 Plaintiffs appealed the ruling on March 9, 2020.17
In National Audubon Society v. Bernhardt,18 plaintiffs filed suit against defendants, alleging, in part, that the August 17, 2020, ROD for oil and gas leasing in the Arctic National Wildlife Refuge (ANWR) Coastal Plain19 and final environmental impact statement (EIS) violates NEPA, ANILCA, the APA, the Endangered Species Act, and the National Wildlife Refuge System Administration Act. Plaintiffs have asked the court to declare that defendants have violated the above laws and that defendants' actions are arbitrary, capricious, and not in accordance with relevant law and procedure. Plaintiffs have further asked the court to set aside defendants' final EIS, as well as any actions taken by the defendants in reliance on the
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final EIS.20 The matter is currently stayed until defendants issue the ROD for the National Petroleum Reserve-Alaska Integrated Activity Plan Final Environmental Impact Statement.21
In Center for Biological Diversity v. Bernhardt,22 the court overturned approval for Hilcorp's Liberty Project, an offshore drilling prospect located east of Deadhorse, Alaska. The court sided with plaintiffs,23 finding that agency review of the project was inadequate.24 Specifically, the court held that the Bureau of Ocean Energy Management (BOEM) should have quantified the well's greenhouse gas emissions, including the impact of the oil it produced and sent overseas. The court also faulted the U.S. Fish & Wildlife Service for not estimating the non-lethal impact drilling would have on polar bears. The court vacated BOEM's approval, concluding that the agency acted arbitrarily and capriciously, and remanded the matter to the agency for further proceedings.
C. Administrative Developments
On December 3, 2020, the Trump administration announced that it would auction off drilling rights in ANWR on January 6, 2021. According to documents accompanying the sale notice, BLM plans to offer ostensibly all of the available 1.6 million acres of the coastal plain in 32 separate tracts ranging from approximately 34,000 acres to nearly 60,000 acres each. The leases will come with a 10-year term, and minimum bids will start at $25 per acre.
A. Legislative Developments
There were no 2020 Arkansas legislative developments. The Arkansas General Assembly meets in general session biannually, in odd numbered years.
B. Judicial Developments
Hurd v. Arkansas Oil & Gas Commission25 was a judicial review of an integration26 order of Arkansas' oil and gas regulatory agency. Appellants, Killam and Hurd family members, owned fee mineral interests within a 640-acre drilling unit previously established by Commission rule. They had
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leased those interests27 but the leases contained Pugh clauses that caused them to expire at the end of their primary terms as to formations below the deepest production. SWN Production, the unit operator, proposed additional deeper drilling, and when it was unable to persuade the Hurd family to lease the deeper formations, it sought the integration of those interests. In its order of integration the Commission gave unleased mineral owners an array of options as to the unleased zones: (1) lease their interests for a $100 per net acre bonus and a 1/8 royalty; (2) lease their interests for no bonus and a 1/7 royalty; (3) participate as working interest owners in the drilling of the deeper wells; and (4) be carried as a non-consent owner and be paid a 1/8 royalty pending recovery of 400% of drilling and completion costs. That royalty would convert to a working interest if and when the 400% payout occurred.
During the time that the integration application was pending, the Hurd and Killam family members executed leases to family-owned entities, Hurd Enterprises and Killam Oil Co. Each such lease provided for a 25% royalty. The two family companies then elected the non-consent option and contended that the participants in the proposed wells would be obligated to pay their family member/lessors the 25% royalty.
The unit operator then obtained an amended integration order reducing the percentage that the non-consenting family companies could recover from the participants to 1/7, which was the maximum royalty contained within the Commission's earlier order.
The Hurd and Killam family members and their companies timely sought judicial review of that latter order. After an affirmance of the order by the circuit court, they appealed to the Arkansas Supreme Court, which also affirmed, in a four-to-three decision. The majority's opinion relied upon a statutory provision28 providing that integration orders "shall be upon terms and conditions that are just and reasonable," thus holding that the Commission did not abuse its discretion when it determined that the 25% royalty in the leases to family-owned entities was unreasonable under the circumstances.
Shale Royalty, LLC v. MMGJ Arkansas, LLC29 involves a legal question that...
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