LEGAL DEVELOPMENTS IN 2007 AFFECTING THE OIL AND GAS EXPLORATION AND PRODUCTION INDUSTRY
| Jurisdiction | United States |
Editor
Crowe & Dunlevy, P.C.
Oklahoma City, Oklahoma
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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 2007 (and the latter part of 2006) 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 include a reduced number of footnotes and citations to quotes from the applicable cases and other authorities.
I. Alabama
A. Judicial Developments
In the case of Exxon Mobil Corp. v. Ala. Dept. of Conservation and Natural Resources2 the Alabama Supreme Court set aside a $3.6 billion judgment entered by the Circuit Court of Montgomery County against Exxon Mobil Corporation following an $11.9 billion jury verdict in favor of the State of Alabama in a royalty dispute case involving royalty payments under a State of Alabama offshore lease covering lands in Mobile Bay. In an eight-one decision, the court struck all punitive damages, which were associated with the State's fraud claim. On the fraud claim, the court followed its earlier
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royalty payment decision in the case of Hunt Petroleum Corp. v. Alabama,3 where the court found that the State failed to show any detrimental reliance on the royalty payment checks. The court also reversed the trial court's judgment with respect to the State's claims for lost gas, for royalties on gross sulfur sales, and for royalties on slop-oil, but affirmed the trial court's judgment for using the wrong royalty payment rate for after pay-out production, for improperly cost-netting, and for failing to pay royalties on co-generated electricity sales. The court remanded the case with instructions to enter judgment against Exxon Mobil in the principal amount of $51,907,634 plus interest.
In the case of Poffenbarger v Merit Energy Co.,4 the Alabama Supreme Court addressed the measure of damages in temporary injury to property cases where the cost of remediation exceeds the diminution in value of the property caused by the injury. Poffenbarger involved a Citronelle Oil Field pipeline leak that contaminated a thirty-two acre tract. The evidence showed that the remediation cost was $2,608,740, but that the diminution in value of the property was only $6,000. The Alabama Supreme Court held that the recoverable damages could not exceed the diminution in value to the property caused by the injury.
II. ALASKA
A. Legislative Developments.
The voters rejected a citizen initiative to tax the large North Slope gas reserves every year until a pipeline is built to carry the gas to the Lower 48.
Alaska passed the Alaska Gasline Inducement Act ("AGIA") to encourage expedited development of Alaska's gas resources by offering incentives to companies that produce the state's gas resources and companies that can build a pipeline.5 The state offers to match up to $500 million of the costs that the licensee will incur to obtain a certificate from the Federal Energy Regulatory Commission ("FERC") or Regulatory Commission of Alaska ("RCA").6 The state will further appoint a state pipeline coordinator who will coordinate the state regulatory agencies with permitting responsibilities.7 To induce gas commitment, the state will adopt regulations to provide predictability in the determination of royalty value.8 The state also offers a production tax exemption for gas committed to the pipeline equal to the difference between the taxpayer's tax obligation on the first solicitation of gas commitment and any higher obligation that becomes effective for ten years after pipeline start-up.9
In order to receive a license for the pipeline, the bidder must commit to sixteen requirements of the AGIA. Those requirements include:
1. a commitment to solicit firm commitments to ship gas on the pipeline within 3 years of getting the license
2. a firm date by which the applicant will apply to FERC or RCA for a certificate authorizing the pipeline
3. a commitment to certain financial provisions that will keep tariff rates low
4. a commitment to solicit demand for pipeline expansion at least every two years, to expand when there is sufficient need, and to collect the cost of any expansions through "rolled-in" rates that pass expansion costs onto all
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shippers so long as rates do not increase more than a fixed amount above initial rates
5. a description of how cost overrun risks will be managed
6. a commitment to have at least five delivery points in Alaska
7. a commitment to hire qualified Alaskans for construction and operation of the gas pipeline 10
The state will evaluate the application under seven criteria in the AGIA:
1. proposed project timeline
2. proposed method to manage cost overruns
3. proposed tariff structure
4. the ability of the project design to accommodate expansion
5. how much of the state matching fund will be used and the timing of the state's payments
6. whether the project is feasible
7. the applicant's ability to perform 11
Applications have been received from TransCanada Corp., Sinopec ZPEB, Alaska Gasline Port Authority, AEnergy LLC, and Alaska Natural Gas Development Authority under AIGA. ConocoPhillips filed an application that is outside of the AIGA.12
Alaska's oil and gas production tax was amended to raise the base rate to 25 percent of "profits," up from 22.5 percent, which can then increase based on the net price of oil to a maximum of 50 percent.13 That base tax rate will increase 0.4 percentage points for each dollar the net oil price is above $30, which is a far more aggressive progressivity formula than the Petroleum Profits Tax which was adopted last year.14 For legacy fields, like Prudhoe Bay, the law caps operational costs at 2006 levels and limits growth to three percent per year.15 Only half the tax credits from qualified capital expenditures can be applied in a calendar year.16 An explorer can only take the credit if it agrees in writing that it will submit all information requested from the state (including all seismic or geophysical data, well data, etc.) and actually submits the required data.17 The DNR will hold the information gathered confidential for ten years.18 The new law also reduces taxes on gas which is sold for heating or electric generation within Alaska to 5 percent compared with a tax rate of at least 25 percent that applies to exported gas.19
B. Judicial Developments
In North Slope Bureau v. Minerals Management Service,20 the district court denied a motion for preliminary injunction to stop an exploration drilling program by Shell in the Beaufort Sea.21 The court concluded that the decision by MMS to not require a supplemental environmental impact statement was not arbitrary or capricious and that "MMS took a 'hard look' at the concerns raised by the Plaintiffs prior to the issuance of
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the Finding of No New Significant Impacts."22 That decision was appealed.23 During the appeal, the Ninth Circuit Court of Appeals issued a temporary injunction on Shell's drilling activities.24 The court heard oral arguments on December 5, 2007, on the question of whether the MMS lease sale environmental impact statement should have been supplemented due to the exploration plan.25
In Center for Biological Diversity v. Kempthorne,26 the Center for Biological Diversity sought judicial review of a final rule promulgated by the U. S. Fish and Wildlife Service ("USFWS") authorizing the "incidental take" of polar bears and Pacific walrus for five years resulting from any oil and gas industry activities in the Beaufort Sea. The court granted the defendants' motion to transfer venue to the district of Alaska.
In In re The Exxon Valdez,27 the court found that a punitive damages award of $4.5 billion dollars violated due process.28 The court vacated the award and remanded for the lower court to enter a punitive damage award of $2.5 billion dollars.29 The Supreme Court has granted certiorari on two questions: (1) whether maritime law allows punitive damages and (2) whether such damages were preempted by the Clean Water Act.30
In Exxon Mobil Corp. v. Federal Energy Regulatory Commission,31 the court upheld the promulgation of 18 C.F.R. §§ 157.36 and 157.37 as facially valid. The court found that Section 157.37 does not assert authority to condition approval of a proposal to build an Alaska Pipeline upon an increase in capacity above that proposed by the sponsor.32 The court found that Section 157.36 authorizes FERC to condition approval of a voluntarily proposed expansion upon a different allocation of the added capacity, not upon an increase in that capacity.33
BP Exploration Alaska Inc. pled guilty to violating the Clean Water Act and agreed to a fine of $20 million for leaks caused by corroded pipelines.
In Exxon Mobil Corp. v. State Ex rel Department of Natural Resources,34 Chevron filed a Motion to Stay the Commissioner's Decision on Appeal for the DNR commissioner's administrative determination which terminated the Point Thomson Unit Agreement. The Superior Court found that Chevron had made a clear showing of probable success on the merits. However, it did not grant a stay for public interest reasons.
C. Administrative Developments
The FERC has drafted two reports to Congress on the progress toward completing a natural gas pipeline in Alaska.35 Drue Pearce was appointed the Federal Coordinator of
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the Alaska Natural Gas Transportation Project.36...
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