LEGAL DEVELOPMENTS IN 2011 AFFECTING THE OIL AND GAS EXPLORATION AND PRODUCTION INDUSTRY
| Jurisdiction | United States |
Crowe & Dunlevy
Oklahoma City, Oklahoma
[Page 125]
I. Alabama
A. Legislative Developments
Effective January 1, 2012, Alabama moves from the common law Rule Against Perpetuities to the Alabama Uniform Statutory Rule Against Perpetuities.2 The Alabama Uniform Rule provides, in part: a "non-vested property interest is invalid unless: (1) when the interest is created, it is certain to vest or terminate no later than 21 years after the death of an individual then alive; or (2) the interest either vests or terminates within 100 years after its creation."3 The new Alabama Uniform Statutory Rule Against Perpetuities may avoid the disastrous effects of the common law Rule Against Perpetuities on the validity of various types of grants of future interests, including many types of top leases.
[Page 126]
B. Judicial Developments
The court partially denied motions to dismiss and allowed an environmental challenge to Gulf of Mexico Lease Sale 213 to proceed in the case of Defenders of Wildlife v. Bureau of Ocean Energy Mgmt., Regulation, & Enforcement.4 In that case, the plaintiff contends that the Bureau of Ocean Energy Management ("BOEM") accepted bids for new deepwater off shore leases after the Deepwater Horizon incident, without preparing a Supplemental Environmental Impact Statement, without reinitiating consultation under the Endangered Species Act,5 and without insuring that its actions will not jeopardize the survival of endangered and threatened species.
II. ALASKA
A. Legislative Developments
On December 16 and 17, 2011 Congress passed an omnibus appropriations bill that included a provision transferring air permitting authority for Alaska's offshore activities from the Environmental Protection Agency ("EPA") to the Department of the Interior ("DOI"), where similar authority rests with regard to the Gulf of Mexico. The bill is awaiting the President's signature as of this writing.
In January, the Governor introduced a bill that would have, among other things, reduced the production tax on oil and gas that was increased under the Palin Administration's "Alaska's Clear and Equitable Share" initiative. The House passed a version of the bill as HB 110.6 The issue is likely to be prominent in the upcoming 2012 legislative session.
In a development that could have a variety of impacts on oil and gas production in Alaska, the legislature allowed the Alaska Coastal Management Program (ACMP) to expire, which resulted in the dissolution of the Alaska Department of Natural Resources' ("DNR") Division of Coastal & Ocean Management. After the regular legislative session, the legislature considered the matter during a special session but failed to pass a restorative act. In October 2011, Juneau Mayor Bruce Botelho and others submitted to the lieutenant governor's office a ballot initiative that would revive the ACMP.7 The lieutenant governor's office has certified the form and subject of the initiative, and the sponsors have until January 17, 2012, to collect the signatures required to place the issue on the ballot for voter consideration.
[Page 127]
B. Judicial Developments
In Oenga v. United States,8 after ruling in 2008 and 2010 that the United States government had breached its trust duties to the owners of an Alaska Native allotment by allowing BP Exploration (Alaska) to conduct oil and gas production activities that exceeded the scope of the company's lease on the allotment, the court ordered the government to pay the allotment owners $4,924,000 in damages.
As reported in last year's update, the court in Native Village of Point Hope v. Salazar9 issued an order enjoining all activity under Lease Sale 193 in the Chukchi Sea, having found the environmental impact statement for the project to be inadequate. The court remanded the matter to the Minerals Management Service for further proceedings. The BOEM, a successor to the Minerals Management Service, provided the court with a supplemental environmental impact statement which again found the Chukchi Sea lease sale to be in the best interests of the nation. In response, the court, in an unpublished order issued October 26, 2011, lifted the injunction, thereby allowing the federal defendants to proceed with their review of proposed Chukchi Sea exploration plans.10
In in re Polar Bear Endangered Species Act Listing and § 4(d) Litigation,11 the court upheld the U.S. Fish and Wildlife Service's ("USFWS") Special Rule for the Polar Bear, which the agency had promulgated to, among other things, address the threat of direct impacts to individual bears and their habitat from oil and gas exploration and development activities within the polar bear's current range. Several environmental groups had challenged the rule based on the fact that it does not address greenhouse gas emissions. The court rejected that claim, explaining that climate change poses unprecedented challenges of science and policy on a global scale, and that the court must be at its most deferential where the agency is operating at the frontiers of science. However, the court also held that the agency had violated the NEPA by failing to analyze the potential environmental impacts of the polar bear rule. The court vacated the rule and remanded it to the Fish and Wildlife Service for further proceedings.
Under the Alaska Land Act, the Alaska Department of Natural Resources (DNR) is required to collect a royalty of at least 12.5% of the value of all oil and gas produced on state land. Historically, the DNR has not used actual sales prices to determine the value of the oil and gas produced by a lessee. Instead, it has required lessees to pay 12.5% of the highest of several values designed to approximate the market price of oil
[Page 128]
and gas, the goal being to ensure that the state's royalty is not based on a below-market sales price. In 1986, the state legislature enacted AS 38.05.180(aa), which allows the use of gas contract prices instead of the traditional "highest of" method as long as certain conditions are satisfied.
Marathon began producing gas under a state lease on the Kenai Peninsula in 2003. In 2008, Marathon requested contract pricing from the DNR. The DNR granted Marathon's request from 2008 onward but refused to retroactively apply the contract pricing method in its audit of Marathon's royalty payments for 2003-2008. Marathon appealed. In Marathon Oil Co. v. State, Dep't of Natural Resources,12 the court held that AS 38.05.180(aa) is ambiguous with regard to the permissibility of retroactive application of the contract pricing method and deferred to the DNR's interpretation because the issue was within the agency expertise of the DNR and the DNR's interpretation was longstanding. The court also held that the DNR was not required to promulgate its interpretation of the statute as a formal regulation. Finally, the court ruled that Marathon's due process rights had not been violated because, in part, the ambiguous language of the statute put Marathon on constructive notice that the DNR might interpret the statute the way that it did.
In 2006, the Alaska Division of Oil and Gas (DOG) approved the formation of the Arctic Fortitude Unit, an oil and gas unit made up of three individual leases on Alaska's North Slope. The plan of exploration provided that the unit would terminate automatically if the unit operator, Alaskan Crude, failed to re-drill a pre-existing well by October 1, 2007. However, the unit agreement provided that a failure to comply with the terms of the plan of exploration would not constitute a default if it resulted from a "force majeure," defined by a DNR regulation as war, riots, acts of God, unusually severe weather, or any other cause beyond the unit operator's reasonable ability to foresee or control and includes operational failure to existing transportation facilities and delays caused by judicial decisions or lack of them. The individual leases included force majeure clauses with identical language.
Prior to the drilling deadline, Alaskan Crude asked the Alaska Oil and Gas Conservation Commission (AOGCC) to declare the well a gas-only well, for which no oil spill contingency plan would be needed. The AOGCC declined to do so, but Alaskan Crude and the DOG then agreed to a new set of working deadlines. Notwithstanding the extension, Alaskan Crude appealed the AOGCC's decision to the superior court. A few months later, Alaskan Crude again asked DOG to extend the working deadlines, arguing that the AOGCC's determination as to the need for an oil spill contingency plan and the pending appeal to the superior court amounted to a force majeure. Alaskan Crude contended that it would not be prudent to
[Page 129]
execute the work obligations" until there was a final decision as to the need for an oil spill contingency plan. The DOG denied the request to declare a force majeure, and the DNR upheld the denial. Alaskan Crude then filed a separate appeal to the superior court on this issue.
The superior court affirmed, and Alaskan Crude appealed. In Alaskan Crude Corp. v. State, Dep't of Natural Resources, Division of Oil and Gas,13 the court, applying the deferential standard of review, affirmed the DNR's ruling that the AOGCC's decision that the well was not gas-only and Alaskan Crude's pending appeal of that decision to the superior court did not constitute a force majeure. The force majeure language required the alleged force majeure to be beyond the unit operator's reasonable ability to foresee or control, but Alaskan Crude had agreed to new working deadlines after the AOGCC's decision. As such, the court held that the DNR had a reasonable basis for concluding that the AOGCC's decision and Alaskan Crude's...
To continue reading
Request your trial