LEGAL DEVELOPMENTS IN 2005 AFFECTING THE OIL AND GAS EXPLORATION AND PRODUCTION INDUSTRY
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Editor
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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 2005 (and the latter part of 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.
I. ALABAMA
A. Judicial Developments
The case of Ex parte Exxon Mobil Corp.,2 involved an attempt by Baldwin County, Alabama to assess and to collect local county use taxes on Exxon's Mobile Bay and Gulf of Mexico offshore drilling and
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production facilities located in Baldwin County. Exxon claimed the benefit of the statewide Alabama severance tax statute, which prohibits counties that receive a share of the severance tax collected by the State of Alabama from taxing production, transportation and related property.3 There was no dispute that Baldwin County received ten percent of all severance taxes collected by the State for production attributable to Baldwin County. As a matter of first impression, the Alabama Supreme Court held in that Exxon was entitled to an exemption from the Baldwin County use tax under the facts of the case. In so holding, the court reversed and remanded a $949,045.79 judgment in favor of Baldwin County and against Exxon.
B. Administrative Developments
The State Oil and Gas Board of Alabama approved amendments to the State Oil and Gas Board Administrative Code on April 22, 2005, in Order No. 2005-44, reducing the filing requirements for logs, directional surveys, drill stem tests and core analyses.
II. ALASKA
A. Legislative Developments
Despite repeated efforts in both the House and the Senate, and despite the support of President Bush, neither the Energy Policy Act of 20054 nor any other federal legislation enacted in 2005 opened the Coastal Plain5 of the Arctic National Wildlife Refuge (ANWR)6 to oil and gas leasing. The Coastal Plain of ANWR thus remains closed to oil and gas leasing.7
However, in the Energy Policy Act of 2005, Congress did enact several key provisions affecting or relating to oil and gas exploration, development, and production in Alaska:
(a) In section 346,8 Congress amended section 8(a)(3)(B) of the Outer Continental Shelf Lands Act9 to provide for suspension of royalties on OCS leases in the Planning Areas offshore Alaska.
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(b) In section 347,10 Congress revised and clarified the authority of the Secretary of the Interior respecting oil and gas leasing and unitization within the National Petroleum Reserve in Alaska.11
(c) In section 353,12 Congress authorized the Secretary of the Interior to grant royalty relief for natural gas produced from gas hydrate resources13 situated under federal leases issued prior to January 1, 2016, either
(1) for lands on the Outer Continental Shelf or
(2) for onshore federal lands in Alaska,
if production under the lease of natural gas from gas hydrate resources commences prior to January 1, 2018.
(d) In section 968,14 Congress revised and reauthorized the Methane Hydrate Research and Development Act of 2000.15
(e) In section 1810,16 Congress required the Federal Energy Regulatory Commission to report to Congress not later than February 4, 2006, and not later than every 180 days thereafter, on the progress being made in licensing and constructing the Alaska natural gas pipeline provided for in the Alaska Natural Gas Pipeline Act (ANGPA).17
Other provisions of the Energy Policy Act of 2005 that may benefit oil and gas development on federal lands in Alaska include section 34818 (requiring the Secretary of the Interior to establish the "North Slope Science Initiative"), section 99719 (providing for the establishment in Fairbanks, Alaska of an "Arctic Engineering Research Center"), and section 99820 (providing for the establishment in Barrow, Alaska of a joint research facility known as the "Barrow Geophysical Research Facility").
In 2005 SLA ch. 32, the Alaska Legislature amended AS 31.05.030(h) to authorize the Alaska Oil and Gas Conservation Commission to take all necessary action to acquire primary enforcement responsibility under the Safe Drinking Water Act, as amended,21 not only for the control of underground injection related to the recovery and production of oil and
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natural gas, but also for the control of underground injection in "Class I wells" as defined in 40 C.F.R. Section 144.6, as amended.
In 2005 SLA ch. 79, the Legislature amended AS 46.04.050 to exempt each natural gas exploration facility, natural gas production facility, and natural gas terminal facility from the requirements of AS 46.04.030 (relating to oil discharge prevention and contingency plans) and AS 46.04.040 (relating to proof of financial ability to respond to damages from oil spills) if such facility does not store more than 10,000 barrels of refined petroleum products and--in the case of a natural gas exploration facility--such facility is used solely for exploration for natural gas, and the Alaska Oil and Gas Conservation Commission has determined with reasonable certainty under AS 31.05.030(l) that all of the wells at such facility will not penetrate a formation capable of flowing oil to the ground surface.
B. Judicial Developments
In ConocoPhillips Alaska, Inc. v. State,22 the Supreme Court of Alaska rejected the oil company lessees' request, based on Contract Clause23 principles, to adopt a "no-deference" standard of review when reviewing an administrative decision of the Commissioner of the Alaska Department of Natural Resources construing and applying certain provisions of a state oil and gas lease.24 But the Court, citing Mathews v. Eldridge,25 did agree with lessees that the Commissioner had violated the procedural due process rights of lessees when he barred counsel from participating in the administrative hearing.26 In this case, however, the Court found the due process violation to be harmless error.27
C. Administrative Developments
On January 12, 2005, the Governor of Alaska announced during his "State of the State" address28 that his administration had decided, effective February 1, 2005, to aggregate the giant Prudhoe Bay Reservoir and most of its associated producing satellite reservoirs under AS 43.55.013(j) for purposes of determining the Economic Limit Factors (ELF) under state oil and gas tax laws. On the same day the Director of the Tax Division of the
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Alaska Department of Revenue delivered to the Prudhoe Bay Working Interest Owners a formal decision to this effect.
III. ARKANSAS
A. Legislative Developments
The 2005 Arkansas General Assembly enacted three companion statutes29 amending Arkansas Code Annotated Section 15-71-110 and creating new Sections 15-71-115 and 15-71-116 . These statutes create the Abandoned and Orphan Well Plugging Fund. They authorize the Arkansas Oil and Gas Commission to levy annual assessments upon operators of wells producing liquid hydrocarbons, deposit those funds and any forfeited plugging and restoration bonds into the Well Plugging Fund and utilize the fund for the plugging of abandoned and orphan wells.
B. Administrative Developments
The Arkansas Oil and Gas Commission approved an assessment upon oil operators for the newly established Abandoned and Orphan Well Plugging Fund as follows: 1-5 wells, $100 per well; 6-15 wells, $750; 16-50 wells, $1,250; 51-150 wells, $2,000; 151-300 wells, $3,000; 301 or more wells, $4,000.
The Commission significantly amended General Rule B-3 governing well spacing for wildcat and exploratory wells. The revised rule removes all requirements that such wells be located minimum distances from property lines. Instead, under the revised rule, wildcat wells must be located a minimum of 280 feet from all quarter-quarter section lines. If an exploratory drilling unit is formed, wells in the unit must be located at least 280 feet from all unit boundaries. The revised rule also contains a new definition of "well location" in cases where a directional or horizontal well is proposed. For purposes of the rule, the location of a directional well is the surveyed average midpoint between perforations within each perforated common source of supply. In the case of a horizontal well, "location" means all points between first and last perforation.
The Commission also proposed two new rules for adoption. Proposed Rule D-18 will establish a formal administrative process for the commingling of separate common sources of supply within wells. Proposed Rule D-19 will establish an administrative process for obtaining authority to produce additional (increased density) wells within established drilling units when the existing wells' productive capability drops below certain criteria. The most important criteria appears to be a demonstrated inability to produce gas at a rate exceeding 75 mcfd over the preceding 12
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month period. The public comment period for each of these proposed new rules will end January 10. It is likely that the proposed rules will then be adopted at the Commission's January 24 public hearing. The proposed new rules, as well as all existing rules, are available for review and download on the Commission's internet web site.30
The Commission made an important procedural change as well. Effective immediately, applicants for Commission orders are required to give notice by mail to all...
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