LEGAL DEVELOPMENTS IN 2014 AFFECTING THE OIL AND GAS EXPLORATION AND PRODUCTION INDUSTRY
| Jurisdiction | United States |
Editor 1
McAfee & Taft
Oklahoma City, Oklahoma
Copyright © 2015 by Rocky Mountain Mineral Law Foundation; Mark D. Christiansen
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As a preliminary qualification, the ongoing growth in the oil and gas industry has led to a significant increase in both the number of active oil and gas states and the number of new developments in the traditionally-active states. In view of space limitations, only certain of the more-significant developments are covered in this report.
I. Alaska
A. Legislative Developments
A referendum to repeal SB 212 did not pass in the August 2014 statewide primary election. Unlike the prior tax scheme under ACES (Alaska's Clear and Equitable Share law), SB 21 eliminates the progressivity formula in production taxes and increases the base tax rate from 25 percent to 35 percent with a $5 per barrel credit in new oil fields. SB 21 is titled the "More Alaska Production Act" (MAPA) reflecting lawmakers' hope that the tax scheme will encourage oil and gas production and development in the state of Alaska.
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At the very end of the 2014 legislative session the Alaska State Legislature passed HB 2873 which provides incentives for the in-state refining of crude oil. The bill, which was largely passed in response to the February announcement by Flint Hills of the closure of its refinery at the North Pole, allows refineries to get tax credits for certain types of infrastructure expenditures. The bill also creates a procedure for a state oil lessee to use the price of the oil it sells to a refinery to set the value of the royalty oil that it owes to the State. This is meant to encourage the sale of Alaska oil to in-state refiners.
In May 2014 the governor signed SB 1384 into law. The bill permits the administration to move forward on work on the Alaska liquefied natural gas project. As part of the agreement set out in the memorandum of agreement between the state, the Alaska Gasline Development Corp. (AGDC), ExxonMobil, BP, ConocoPhillips, and TransCanada, the state will take its royalty share and its production tax on gas in kind, and an equity position of twenty-five percent in the project. The passage of SB 138 expanded the role of the AGDC. The agency is now tasked with managing the state's equity interest in the project infrastructure, including the liquefaction and marine facilities. The AGDC is also pursuing a parallel project: the Alaska Stand Alone Pipeline (ASAP).
B. Judicial Developments
In Alaska Oil & Gas Ass'n v. Pritzker5 the court overturned the National Marine Fisheries Service (NMFS) listing of the Beringia and Okhotsk distinct population segments of bearded seals (the Erignathus barbatus nauticus subspecies) as threatened under the Endangered Species Act. In overturning the listing, the court said that NMFS had failed to identify threats to the seal that were immediate enough. The court held that the listing was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. The listing could have significantly impacted permits and authorizations for oil and gas development (including seismic exploration) in the Bering, Beaufort, and Chukchi seas.
In Kunaknana v. U.S. Army Corps of Engineers,6 the court granted summary judgment in favor of environmentalists and residents of a small town near the National Petroleum Reserve--Alaska (NPRA) who brought action against the Army Corps of Engineers (USACE) under the National Environmental Policy Act and Clean Water Act challenging its decision to issue a permit to ConocoPhillips Alaska, Inc. to fill certain wetlands in the NPRA in order to develop a drill site. The court held that USACE's
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determination was arbitrary and capricious because it failed to provide a reasoned explanation for why a Supplemental Environmental Impact Statement was unnecessary where there were significant design changes to the project and where there was new information about the impacts of climate change on the project. In its holding, the court expressed no opinion whether USACE is required to prepare a Supplemental Environmental Impact Statement. The court did not issue an injunction to prevent ConocoPhillips from continuing work.
In Native Village of Point Hope v. Jewell,7 the court partly sided with environmental advocacy organizations that brought action against the Secretary of the Interior and the Bureau of Ocean Energy Management (BOEM) challenging the Environmental Impact Statement (EIS) of a proposed lease of federal land for offshore oil and gas development in the Chukchi Sea. Previously, the district court found that the EIS and a Supplemental EIS satisfied the requirements of NEPA. The Ninth Circuit disagreed, holding BOEM's estimate that one billion barrels of oil would be economical to produce was arbitrary and capricious and underestimated the adverse environmental impact of the lease sale.
In Reese v. Malone,8 shareholders of BP challenged the district court's dismissal of their class action against BP for failure to operate its Prudhoe Bay oil field pursuant to the "Prudent Operator Standard." The shareholders alleged that BP made false and misleading statements about the condition of its pipelines and its pipeline maintenance and leak detection practices prior to and in the wake of a 2006 oil spill. The Ninth Circuit reversed the district court dismissal, holding that the allegations against BP should be tested on their merits. The court remanded the case back to the district court.
In Shell Gulf of Mexico Inc. v. Ctr. for Biological Diversity, Inc.,9 the Ninth Circuit threw out Shell's pre-emptive lawsuit against numerous environmental groups in an attempt to protect Shell's oil spill plans from a challenge by the environmental groups. Shell sought to preempt any environmental challenges by getting the court to validate the Bureau of Environmental Safety and Enforcements approval of Shell's oil spill plans. The court held that because there were not yet any adverse legal interests between the environmental groups and Shell, the case is not justiciable.
In December 2014, the U.S Department of Justice announced that Noble Drilling LLC, the drilling operator of Shell's drill rig that ran aground south of Kodiak Island, Alaska, will plead guilty to eight felony offenses, and pay $12.2 million in fines and community service payments, stemming from environmental and safety violations aboard its vessels.
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Under the terms of the plea agreement, Noble admits that it knowingly made false entries and failed to record its collection, transfer, storage and disposal of oil in its drill ship Noble Discoverer and drill rig Kulluk's Oil Record Books.
In BP Pipelines (Alaska) Inc. v. State, Dep't of Revenue,10 pipeline owners and municipalities sought review of the State Assessment Review Board's (SARB) 2006 property tax value of $4.6 billion for the Trans-Alaska Pipeline System (TAPS). On review, the superior court agreed with the municipalities' calculation methodology and arrived at a valuation of $9.98 billion for TAPS, more than double the SARB's value. The court ruled that the interest owed on the taxes began to run when the taxes would have been due. The pipeline owners thereafter appealed to the Alaska Supreme Court which held that the superior court did not err in arriving at the final valuation and upheld the court's ruling on the interest owed.
In Denali Citizens Council v. State, Dep't of Natural Res.11 the court affirmed the superior court's upholding of a Department of Natural Resources (DNR) decision to grant Usibelli Coal Mine a gas exploration license in the Healy Basin. The court disagreed with a community-based public interest group (Denali Citizens) who alleged that DNR failed to take a "hard look" at the economic feasibility of excluding certain residential areas and wildlife habitat from the license and DNR's treatment of environmental mitigation measures in the best interest finding was arbitrary and capricious.
C. Administrative Developments
The Alaska Oil and Gas Conservation Commission adopted new regulations12 governing hydraulic fracturing that include a requirement to conduct tests for contamination within a half-mile radius of a well to be fractured. The regulations also mandate testing of the water wells for contamination after the fracture job is completed and give the commission the discretion to require testing of water wells prior to the fracturing.
II. Arkansas
A. Judicial Developments
The case of Lewis v. EnerQuest Oil and Gas, LLC13 was a lease cancellation suit based upon alleged failure of a unit operator to develop geological horizons outside of existing production. The lessors contended
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that the operator breached the implied covenant to develop when it failed to develop the Lower Smackover (Brown Dense) Formation, which has been the target of a recent lease play and some exploration in the area. The court granted summary judgment to the operator because it found that the lessors had not given notice of any alleged breach, together with an opportunity to cure the breach, prior to bringing suit. This case is currently on appeal.
In Hiser v. XTO Energy Inc.,14 the plaintiff sued XTO claiming that structural damage to her house was caused by vibrations from the drilling of XTO's nearby well. Neither side presented any trial evidence concerning a causative link between hydraulic fracturing or induced earthquakes. However, during its deliberations, the jury submitted this question to the district court: Were they drilling only or were they also fracking? XTO's Motion for New Trial was supported by an affidavit from one juror that, during those deliberations, the jury had discussed common knowledge as to whether fracking causes vibrations or earthquakes. XTO...
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