LEGAL DEVELOPMENTS IN 2008 AFFECTING THE OIL AND GAS EXPLORATION AND PRODUCTION INDUSTRY
| Jurisdiction | United States |
Editor 1
Crowe & Dunlevy, P.C.
Oklahoma City, Oklahoma
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I. ALASKA
A. Legislative Developments
The Alaska Department of Natural Resources ("ADNR") estimates that some 174 trillion cubic feet of undiscovered, economically recoverable natural gas reserves exist in Alaska.2 Alaska passed the Alaska Gas Inducement Act ("AGIA") to encourage expedited development of Alaskas gas resources by offering incentives to companies that produce the state's gas resources and companies that can build a pipeline.3 Under AGIA, the state will partner with TransCanada Alaska Company ("TCA") to provide gas pipeline service from the North Slope to the Lower 48 over the next ten years.4 ADNR determined that the TCA plan would "sufficiently maximize the benefits to the people of Alaska"5 to merit its licensure. On August 1, 2008, the Alaska legislature passed a bill authorizing the AGIA
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licensure of TCA.6 On December 5, 2008, Governor Palin, along with Natural Resources Commissioner Tom Irwin and Revenue Commissioner Patrick Galvin, officially signed the AGIA license awarded to TCA.7
ADNR evaluated competing projects using the following criteria: (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; and (7) the applicant's ability to perform.8
The decision to adopt the TCA plan instead of a pure liquefied natural gas ("LNG") plan was due to the prospect for increased state revenue from the TCA plan. According to ADNR, a pure LNG line would be too costly and complex. The Producer Project, an alternative to TCA's plan proposed by the major North Slope producers, was rejected by the state after noting that the Producer Project "contains no commitments to a project timeline, fails (similar to TAPS) to ensure tariff and expansion terms that will maximize North Slope exploration and development, suffers from potential antitrust problems, and in order to result in a pipeline will likely (similar to the failed Stranded Gas Development Act contract) require the state to provide the Producers with massive additional fiscal concessions."9
The TCA plan commits TCA to file for a Federal Energy Regulation Commission certificate of public convenience and necessity to operate the pipeline by December 2011. If approval is given, TCA proposes to build a 48-inch diameter, high-pressure pipeline capable of carrying between 3.5 and 5.9 billion cubic feet of natural gas per day. The project would run 1,715 miles from a natural gas treatment plant at Prudhoe Bay on the North Slope to interconnect with the Alberta Hub in Canada.10 There are multiple options for LNG spur lines to transport natural gas within Alaska and to tap other resource areas outside the North Slope.11
On April 8, 2008, BP and ConocoPhillips announced the formation of "Denali - The Alaska Gas Pipeline," a pipeline project proposal to construct and operate an Alaska natural gas transportation system as defined by section 103 of the Alaska Natural Gas Pipeline Act of 2004.12 On June 16, 2008, Denali filed a request in Docket No. PF08-26-000 for
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the FERC staff to start the pre-filing process for Denali's project.13 On June 25, 2008, FERC's Director of the Office of Energy Projects (OEP) granted Denali's request and instructed the staff to begin pre-filing activities with Denali.14 This approval has enabled Denali and the FERC staff to immediately begin exchanging information and coordinating activities to ensure a timely and efficient application development and review process.
B. Judicial Developments
In Alaska Wilderness League v. Kempthorne,15 several environmental groups challenged the Minerals Management Service's ("MMS") approval of Shell's plan to drill multiple offshore exploratory oil wells over a three-year period in the Alaskan Beaufort Sea, claiming (1) that MMS failed to take the requisite "hard look" at the impact of drilling on the people and wildlife of the Beaufort Sea region in violation of the standards set forth by the National Environmental Policy Act ("NEPA"), and (2) that MMS failed to prepare the requisite environmental impact statement despite what the groups claimed was the potential for significant harmful impact from Shell's plans. The court found that MMS had violated NEPA by failing to adequately assess the risk to the bowhead whale population and the resulting impact on indigenous subsistence rights.16 The court also found that MMS had violated the Outer Continental Shelf Lands Act by authorizing the drilling of three unspecified exploratory wells without reviewing the wells' location and spacing, as required in the Act.17 The court remanded the case to the MMS to prepare a formal environmental impact statement or environmental assessment.18
In Native Village of Point Hope v. Minerals Management Service,19 Plaintiffs filed a complaint for declaratory and injunctive relief challenging decisions of the National Marine Fisheries Service ("NMFS") and MMS to issue permits to oil companies to authorize seismic surveys and to take or otherwise disturb marine mammals during such surveys, claiming that NEPA required the agencies to first assess the environmental impact of such activities. The district court, in denying injunctive relief, concluded that the agencies did not violate NEPA by issuing the permits prior to completing their environmental assessments.20 The district court also held that the agency actions were not arbitrary or capricious in concluding that,
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with proper mitigation, the adverse effects on marine mammals from these seismic surveys would not be significant.21
In Exxon Shipping Co. v. Baker,22 an equally divided court held that a corporation could be liable in punitive damages for reckless acts of its managerial employees. However, a majority of the court also held that the Clean Water Act's penalties for water pollution did not preempt maritime common law on punitive damages with regard to the resulting oil spill caused by the grounding of the Exxon Valdez off the coast of Alaska.23 While the court upheld the theory of punitive damages in this case, the court concluded that due process is violated in maritime cases where the punitive damage award exceeds compensatory damages.24 The court therefore vacated the Alaska district court's punitive damage award, and remanded the case for entry of a punitive damage award that equaled the compensatory damages awarded by the district court; $507.5 million.25
The Center for Biological Diversity has recently filed a lawsuit against the U.S. Fish and Wildlife Service ("USFWS") and Dirk Kempthorne in Alaska District Court for USFWS' failure to timely respond to its petition to list the Pacific walrus for protection under the Endangered Species Act.26 The agency was required to respond to the petition by May 8, 2008, and the complaint alleges the agency has remained silent.
In City of Valdez v. Polar Tankers, Inc.,27 the Alaska Supreme Court reversed the Alaska Superior Court's determination that an ad valorem property tax on oil tankers which docked at a private facility in Valdez was unconstitutional, holding that the apportionment formula for the tax did not create a risk of duplicative taxation, and that the tax did not violate the Tonnage Clauses of the Federal Constitution. On December 12, 2008, the U.S. Supreme Court granted a writ of certiorari to review the Alaska Supreme Court's decision.28
In Regulatory Com'n of Alaska v. Tesoro Alaska Co.,29 two companies shipping on TAPS sought relief from a decision of the Regulatory Commission of Alaska ("RCA"), which had determined that the shippers' protests lodged in 2003 against the Commission's acceptance of rates established under the TAPS Settlement Methodology during the years 1986-1996 were untimely. The Alaska Supreme Court ruled that the RCA had discretion to accept pipeline rates based on the settlement, that the
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shippers' protests of the rates were untimely and that the denial of the rate protests was warranted under the rule against retroactive ratemaking.30
In Amerada Hess Pipeline Corp. v. Regulatory Com'n of Alaska,31 owners of a pipeline sought review of decision by the RCA that found the shipping rates charged by owners were unjust and unreasonable from 1997 through 2000 and ordered refunds for that period. On review, the Alaska Supreme Court found (1) RCA was entitled to employ accelerated rather than straight-line depreciation to establish year-end rate base to determine pipeline shipping rates; (2) RCA's conclusion that the hypothetical capital structure of pipeline system should be based on operating pipeline companies was supported by reasonable evidence; (3) RCA's computation of risk premium and its rate of return analysis was supported by the record; (4) RCA's decision to set a unitary rate for the jointly owned pipeline was entitled to deference; and (5) interest on rate refunds to pipeline shippers was calculated pursuant to the Pipeline Act rather than the Tort Reform Act.32
In Exxon Mobil Corp. v. Alaska, Dept. of Natural Resources,33 the Alaska Superior Court affirmed ADNR's decision to reject the 22nd Plan of Development ("POD"), but remanded the case to the agency for reconsideration of alternatives to termination after the court concluded the agency had violated the Point Thomson Unit ("PTU") owners' due process rights for failing to properly notify them that the agency would terminate the PTU if it rejected the POD. The owners subsequently proposed the...
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