LEGAL DEVELOPMENTS IN 2004 AFFECTING THE OIL AND GAS EXPLORATION AND PRODUCTION INDUSTRY
| Jurisdiction | United States |
Editor
[Page 67]
Each year, a variety of legal developments occur in the major oil and gas-producing states that affect those involved in the business of exploring for and producing oil and natural gas. This paper will summarize the key legal developments that occurred during 2004 in the states indicated below. In an effort to use the limited amount of space available for this article in a way that will maximize the number of developments covered in this report, the case and development summaries below minimize the use of footnotes and citations to quotes from the applicable cases and other legal authorities.
Alabama
A. Legislative Developments
No significant developments.
[Page 68]
B. Judicial Developments
In the case of Hunt Petroleum Corp. v. State,2 the Alabama Supreme Court reversed and remanded a twenty million dollar punitive damage jury verdict in favor of the State of Alabama and against Hunt Petroleum Corporation. The case involved royalty payments to the State of Alabama on a state lease form covering submerged gas- producing lands in Mobile Bay. The Hunt case has some similar issues with the case between Exxon-Mobil and the State of Alabama, where most recently an Alabama jury awarded the State $11.8 billion in punitive damages. Although many facts in the two cases are different, the Hunt decision could be a harbinger of what is to come in the Exxon-Mobil case, which is now proceeding through its second post-judgment review.
C. Administrative Developments
No significant developments.
Alaska
A. Legislative Developments
The authorization and construction of a natural gas pipeline from the North Slope of Alaska not only would allow for the production of the known but currently stranded natural gas reserves on the North Slope3 but also would spur significant onshore and offshore exploration for additional natural gas on the North Slope.4 In October 2004, Congress enacted two significant public laws to facilitate and to encourage the development of such a pipeline.
The first of these public laws is the Alaska Natural Gas Pipeline Act (ANGPA).5 Pursuant to section 103(a) of ANGPA,6 Congress--notwithstanding its prior enactment of the Alaska Natural Gas Transportation Act of 1976 (ANGTA)7 --has empowered the Federal
[Page 69]
Energy Regulatory Commission (FERC) to consider and act, in accordance with section 7(c) of the Natural Gas Act,8 on an application for the issuance of a certificate of public convenience and necessity (CPCN) authorizing the construction and operation of an Alaska natural gas transportation project other than the Alaska Natural Gas Transportation System (ANGTS).9 Under section 103(b) of ANGPA,10 FERC must issue a CPCN for such a project if the applicant satisfies the requirements11 of section 7(e) of the Natural Gas Act.12 Section 103(c) of ANGPA13 requires that FERC issue its decision on any such application for a CPCN within 60 days after FERC issues its14 final environmental impact statement prepared in connection with such application.
Section 103(d) of ANGPA15 effectively prohibits the construction of an "over-the-top" natural gas pipeline from Prudhoe Bay eastward through the coastal waters of Alaska and then southward up the Mackenzie River Valley of Canada. Section 103 thus effectively mandates that any natural gas pipeline from the North Slope will follow a course south across the Brooks Range into Interior Alaska and then, most likely, southeastward along the Alaska Highway into and through Canada or, less likely, southward to a tidewater location somewhere in Southcentral Alaska.
Section 103(e) of ANGPA16 requires that FERC issue rules governing the conduct of open seasons for Alaska natural gas transportation projects (including procedures for the allocation of capacity).17 Section 103(g) of ANGPA18 requires the holder of a CPCN issued, modified, or amended by
[Page 70]
FERC for an Alaska natural gas transportation project to demonstrate that the holder has conducted a study of Alaska in-state needs, including tie-in points along the Alaska natural gas transportation project for in-state access. Section 103(h) of ANGPA19 addresses the transportation of state royalty gas.
Section 105 of ANGPA20 establishes procedures by which FERC may order the expansion of an Alaska natural gas project if FERC determines that such an expansion is required by the present and future public convenience and necessity. Other sections of ANGPA provide for, among other things, a Federal Coordinator for Alaska Natural Gas Transportation Projects,21 for expedited judicial review by the United States Court of Appeals for the District of Columbia Circuit,22 and for up to U.S. $18,000,000,000 in federal loan guarantees in connection with loans made to finance the design, engineering, finance, construction, and completion of pipelines and related transportation and production systems (including gas treatment plants) that are to be used to transport natural gas from the Alaska North Slope to the contiguous United States.23
The second significant public law enacted late in 2004 to encourage the development of a natural gas pipeline from the North Slope of Alaska to the contiguous United States was the American Jobs Creation Act of 2004 (AJCA).24 Two sections are noteworthy here: Section 706 of the AJCA25 provides for accelerated depreciation of a qualifying natural gas pipeline from the North Slope and section 70726 extends the enhanced oil recovery credit to a gas treatment plant constructed on the North Slope to prepare natural gas for transportation through a qualifying natural gas pipeline from the North Slope.
In the area of state legislation, pursuant to 2004 S.L.A. ch. 49, the Legislature of the State of Alaska amended certain state oil and gas conservation statutes27 and certain state oil and gas leasing statutes28 to replace the term "shallow natural gas" with the broader term "nonconventional gas",29 to clarify the statutory authority respecting nonconventional gas, and to provide for the issuance of gas-only leases.
[Page 71]
B. Judicial Developments
No significant developments.
C. Administrative Developments
No significant developments.
Arkansas
A. Legislative Developments
No significant developments.
B. Judicial Developments
In AJ&K Operating Company v. Smith,30 the Arkansas Supreme Court dissolved a trial court's temporary restraining order which had prohibited an operator from restoring the surface of a location pending litigation over alleged unreasonable surface use and surface contamination. The trial court's stated reason for the restraining order was to prevent the destruction of evidence in the damage litigation. Implicit in the Supreme Court's opinion dissolving the restraining order is that the landowner's first entitlement is to restoration of the subject land, not damages in a lawsuit. That interest is best served by permitting remediation during the pendency of the action.
In Chevron U.S.A., Inc. v. Murphy Exploration and Production Company,31 the Arkansas Supreme Court held that the general rule that a contract of indemnification should be strictly construed and presumed not to cover the indemnified party's own acts or omissions does not apply to a contract to indemnify for surface damages under an oil and gas lease. Chevron had assigned an oil and gas lease containing the subject well to Murphy in a contract where Murphy agreed to indemnify Chevron from "all liability, loss, damage, injury, and claims, demands and causes of action ... in any way arising from operations or activities related to the assigned premises ..." Murphy contended, however, that since the above language did not specifically require indemnification for damages caused by Chevron's own acts or omissions, Murphy could not be held liable for well site contamination allegedly caused by Chevron. The court rejected Murphy's argument, citing its previous ruling in Bonds v. Sanchez-O'Brien
[Page 72]
Oil and Gas Co.,32 that Arkansas law recognizes a covenant to restore the surface of the land in an oil and gas lease and, as a consequence, Murphy knew or should have known that surface restoration and surface damages were liabilities which it assumed under the indemnification language in the contract.
C. Administrative Developments
No significant developments.
California
A. Legislative Developments
The thousands of deserted wells in California remain among the biggest problems facing the California Division of Oil, Gas and Geothermal Resources (DOGGR). Public Resources Code § 3237 was amended by the California Legislature to allow the DOGGR to determine that a well that has been idle for 25 or more years and fails to meet specified requirements is conclusive evidence of desertion of the well. The DOGGR can then order the well to be abandoned, subject to warning and appeal procedures.33 The same bill extended the current $1,000,000 funding level for the Orphan Idle Well Trust Fund, which is used by DOGGR to plug and abandon orphan wells, for another five years.
The Legislature amended California's Permit Streamlining Act,34 which requires California public agencies to act fairly and promptly on applications for development permits, to expedite natural gas exploration projects by authorizing public agencies to temporarily contract with private entities to perform those services or functions necessary to meet the time limits and otherwise comply with the requirements of the Act.35
The Legislature also amended the Public Utilities Code to facilitate qualification of oilfield power generation projects for funding under the California Public Utilities Commission (PUC)...
To continue reading
Request your trial