LEGAL DEVELOPMENTS IN 2010 AFFECTING THE OIL AND GAS EXPLORATION AND PRODUCTION INDUSTRY
| Jurisdiction | United States |
Crowe & Dunlevy, P.C.
Oklahoma City, Oklahoma
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I. Alabama
A. Judicial Developments
On April 20, 2010, the deepwater oil well being drilled by the rig Deepwater Horizon blew out and exploded in the Mississippi Sound southeast of New Orleans, Louisiana. Oil was reported to have washed ashore in Alabama and other Gulf Coast states. Twenty three separate actions were commenced in the United States District Court for the Southern District of Alabama seeking damages from the oil spill.2 The United States Judicial Panel on Multidistrict Litigation centralized all the Alabama cases and other oil spill cases in the Eastern District of Louisiana and appointed Judge Carl J. Barbier to serve as transferee judge. In the case of Defenders of Wildlife v. Bureau of Ocean Energy Mgmt,3 Defenders of Wildlife filed suit against the Bureau of Ocean Energy
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Management, Regulation and Enforcement, the United States Department of the Interior, and Ken Salazar concerning their authorization of oil and gas leases and related drilling operations in the Gulf of Mexico after the Deepwater Horizon blowout. Defenders of Wildlife asserted that the defendants violated the National Environmental Policy Act, the Administrative Procedure Act, and the Endangered Species Act by proceeding with sales of oil and gas leases covering federal submerged lands in the Gulf of Mexico without preparing a supplemental environmental impact statements and environmental assessments and without consulting the U.S. Fish and Wildlife Service. The case is proceeding before Judge William Steele in Mobile, Alabama.
II. ALASKA
A. Legislative Developments
Several bills were introduced in 2010 prescribing revenue sharing with states from outer continental shelf ("OCS") areas in certain coastal states, including Alaska. Several of the bills also include a requirement that anything produced from the Alaska OCS be transported through the Trans Alaska Pipeline. See Maximize Offshore Resource Exploration act of 2009, H.R. 797; Domestic Energy Security Act of 2009, S. 1517; Adjacent Zone Revenue Sharing Act, S. 1560; Oil Spill Compensation Act of 2010, S. 3542; Oil Spill Response Improvement Act of 2010, S. 3643. All of these bills remain in committee.
At least two bills to authorize exploration and drilling in the Arctic National Wildlife Refuge remain in committee. While no significant action occurred on these bills in 2010, this legislation may reemerge in the next Congress. See The American Energy Independence and Price Reduction Act, H.R. 49; Energy Independence Now Act of 2009, H.R. 2250.
Section 17 of the bill proposes adding a new section 60139 to Title 49 of the United States Code authorizing the federal government to provide technical assistance to Alaska for the purpose of achieving coordinated and effective oversight of the construction, expansion or operations of pipeline systems in Alaska. The bill was referred to the Committee on Commerce, Science and Transportation.
Representative Don Young introduced H.R. 6395 on September 29, 2010 to strike subsection (b) of Section 113 of the Alaska Natural Gas Pipeline Act, 15 U.S.C. § 720k. The amendment affects the provisions concerning the Alaska pipeline construction training program, and specifically eliminates the requirements for grants. The amendment remains in committee.
Senator Kay Bailey Hutchison introduced a resolution on August 5, 2010, to express the sense of the Senate that the Secretary of the Interior
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should take immediate action to expedite the review and approval of applications for shallow water drilling permits in the Gulf of Mexico, the Chuckchi Sea, and the Beaufort Sea. The resolution is in the Committee on Energy and Natural Resources.
SB 309 increased the state income tax credit for non-North Slope gas exploration and development from 10% to 25%.4 The bill also changed Alaska's oil and gas production tax scheme by waiving interest on the underpayment of taxes caused by the retroactive application of a regulation adopted by the Department of Revenue5 and by loosening the requirements for small producers to sell tax credits back to the state.6 Finally, SB 309 created a new incentive for the use of jack-up rigs for offshore oil and gas exploration in the Cook Inlet. Under the bill, the first person to use a jackup rig to drill an exploratory well in the pre-Tertiary zone is entitled to a credit against the production tax in the amount of 100% of its exploration expenditures or $25 million, whichever is less; the second person to do so is entitled to a credit in the amount of 90% or $22.5 million, whichever is less; and the third person to do so is entitled to a credit in the amount of 80% or $20 million, whichever is less. No single person or affiliate of that person can claim more than one of those credits.7
HB 280, like SB 309, provides incentives for non-North Slope gas exploration. The bill, known as the Cook Inlet Recovery Act, increases from 20% to 40% the production tax credit for non-North Slope well lease expenditures incurred after June 30, 2010, and allows for that credit to be applied to a single calendar year instead of being spread over two years.8 HB 280 also provides tax incentives for the development of large natural gas storage facilities throughout the state. The bill created a "gas storage facility" credit against the state income tax for facilities that commence commercial operation by the end of 2015, in the amount of $1.50 per 1,000 cubic feet of capacity, up to $15 million or 25% of the cost to create the facility, whichever is less.9
B. Judicial Developments.
The case of Oenga v. United States10 is the second reported decision in this lawsuit brought by the heirs of Andrew Oenga against the United States for breach of its trust obligations with regard to the lease of Oenga's Native allotment to BP Exploration (Alaska) Inc. ("BPXA"). Oenga's heirs
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alleged that the federal government breached its trust obligations by not adequately monitoring or managing the lease. BPXA, ConocoPhillips Alaska, Inc., ExxonMobil Alaska Production, Inc., Chevron U.S.A. Inc., and Forest Oil Corporation intervened as defendants. The court held that the federal government did have a duty to monitor and ensures compliance with leases of Native allotments after new regulations became effective in 2001. The court further held that damages were available to the Oenga heirs against the United States, and that the present fair annual rental was the appropriate measure of breach of trust damages under the circumstances.
In Oenga v. United States,11 the court issued its decision under seal on November 22, 2010 and made the decision public on December 21, 2010. First, the court determined that the lease did not authorize oil development from certain oil accumulations outside the lease. The court then turned to damages. The court held that the Oenga heirs are "entitled to damages based on the fair annual market rent reflected in the cost savings provided by the allotment as compared to construction and use of a bypass road with a drill pad adjacent to the Oenga allotment."12 The court determined that the cost of the alternative road and pad would be $5.3 million in 1988 dollars. Because the court accepted some but not all of the Oenga heirs' expert's damage assumptions, and accepted some but not all of the defendant's damage assumptions, the court gave the parties time to provide additional briefing on the damages calculations.
In Native Village of Point Hope v. Salazar,13 several environmental groups and an Alaska Native village sued the Secretary of the Department of the Interior, the Minerals Management Service, and other federal officials seeking declaratory and injunctive relief halting the Department of Interior's decision to offer approximately 29.4 million acres of public lands on the outer continental shelf of the Chuckchi Sea for oil and gas leasing. Specifically, the plaintiffs challenged the adequacy of the final environmental impact statement ("FEIS") issued by the Department of the Interior under the National Environmental Policy Act ("NEPA"). The court found that the FEIS did not adequately address several issues and remanded the decision to the agency to comply with NEPA.
In Flint Hills Resources Alaska, LLC v. Federal Energy Regulatory Commission,14 the State of Alaska and various oil shippers petitioned for review from orders of the Federal Energy Regulatory Commission ("FERC") that found the shippers' proposed interstate rates for the Trans
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Alaska Pipeline System ("TAPS") to be unjust and unreasonable, but not discriminatory or unduly preferential. FERC also determined components for establishing rates, ordered limited refunds, and ordered modification of the governing operating agreement. At the outset, the court noted that the case arises primarily out of the stresses involved in a shift from one system of regulatory ratemaking to another. In the end, the appellate court held that FERC did not act arbitrarily or capriciously in its analysis of just and reasonable rates, Alaska did not suffer any competitive injury through disparate intra- and interstate rates, and the issue of refundability was not ripe for judicial review.
While not directly involving oil and gas issues, it is worth nothing that the District Court for the District of Columbia held that the Fish and Wildlife Service ("FWS") improperly determined that the polar bear must have been facing imminent extinction in order to be listed as endangered, rather than threatened, under the Endangered Species Act. The court remanded the decision to the FWS.
The FWS subsequently designated polar...
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