LEGAL DEVELOPMENTS IN 2016 AFFECTING THE OIL AND GAS EXPLORATION AND PRODUCTION INDUSTRY
| Jurisdiction | United States |
McAfee & Taft
Oklahoma City, Oklahoma
Copyright © 2017 by Rocky Mountain Mineral Law Foundation; Mark D. Christiansen
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As a preliminary caveat, the ongoing growth of legal challenges and activity in the oil and gas industry has led to a significant increase in the number of new legal developments occurring each year. In view of space limitations, the state updates included in this report are not exhaustive.
I. Alaska
A. Legislative Developments
The Alaska State Legislature approved H.B. 247, which, among other things, phased out and capped certain oil and gas exploration tax credits and increased the interest rates charged on delinquent or assessed production taxes for the first three years that the tax is delinquent. The majority of the phase-outs and caps took effect on January 1, 2017. Gov. Bill Walker signed the bill into law but vetoed the $430 million appropriation for the payment of tax credits from the FY 2017 budget.
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B. Judicial Developments
In Chevron U.S.A. Inc. v. Dep't of Revenue, oil producers challenged an Alaska Department of Revenue (Revenue) decision to treat separate oil and gas fields operated by common working interest owners as a single entity when calculating the oil production tax obligations because they were "economically interdependent oil or gas production operations" under former Alaska Statute § 43.55.013. The producers asserted that, by interpreting a statutory phrase "economically interdependent" in the decision, DOR effectively promulgated a regulation without following the procedures established in the Alaska Administrative Procedure Act and, as a result, DOR's decision was invalid. In upholding the superior court, the Alaska Supreme Court held that DOR's decision was not a regulation but instead was a "common sense" interpretation of the statute, and thus, not a regulation.2
In Alaska Oil & Gas Ass'n v. Pritzker, the United States Court of Appeals for the Ninth Circuit reversed a district court's ruling that the National Marine Fisheries Service (NMFS) use of long-term climate projections as a basis for protecting bearded seals in Alaska was arbitrary and capricious. In reinstating the NMFS decision, the Ninth Circuit held that the Endangered Species Act (ESA) does not require NMFS to base its decision on ironclad evidence when it determines that a species is likely to become endangered in the foreseeable future; it simply requires the agency to consider the best and most reliable scientific and commercial data and to identify the limits of that data when making a listing determination. Thus, "NMFS did not act arbitrarily or capriciously in concluding that the effects of global climate change on sea ice would endanger the [bearded seal population] in the foreseeable future."3
In City of Kenai v. Cook Inlet Nat. Gas Storage Alaska, LLC, Cook Inlet Natural Gas Storage Alaska, LLC (CINGSA) had leases with the holders of the mineral rights, which allowed it to use a mile-deep porous formation as a reservoir for storing injected natural gas. The City of Kenai, which owns a significant part of the surface estate above the reservoir, claimed an ownership interest in the storage rights and brought suit against CINGSA, seeking compensation. The superior court granted summary judgment in favor of CINGSA. In upholding the superior court, the Alaska Supreme Court held that under a plain reading of the state reservation statute, Alaska Statute § 38.05.125, the pore space and attendant storage rights were reserved to the State of Alaska, and therefore, the holders of the leasehold interest in the mineral estate own the storage rights.4
In City of Valdez v. State, three municipalities challenged an Alaska
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Revenue regulation that all appeals of oil and gas property tax valuation must be heard by the State Assessment Review Board (SARB), while appeals of oil and gas property taxability must be heard by Revenue. The municipalities argued that Alaska Statutes § 43.56.120 and § 43.56.130 grant SARB exclusive jurisdiction over all appeals from Revenue's "assessments" of oil and gas property. The superior court upheld the regulation as valid. In reversing the superior court, the Alaska Supreme Court held that the regulation is inconsistent with the plain text, legislative history, and purpose of the statute, and thus, the regulation was invalid and falls outside of Revenue's statutory authority.5
In Alaska Oil & Gas Ass'n v. Nat'l Marine Fisheries Serv., the Alaska Oil and Gas Association (AOGA) challenged the NMFS and National Oceanic and Atmospheric Administration decision listing the Arctic subspecies of ringed seal as threatened under the ESA. AOGA argued that it was unreasonable for NMFS to list the Arctic ringed seals as a "threatened species," while the population is strong and healthy, based on projected decreases in sea ice and snow cover in the arctic 80 to 100 years in the future. In vacating the listing, the court held that the listing was arbitrary and capricious because of the lack of any articulated discernable, quantified threat of extinction within the reasonably foreseeable future and the express finding by NMFS that the listing was not necessary for the conservation of the seal at this time, and that it was unlikely that it would provide appreciable conservation benefits.6
In Alaska Oil & Gas Ass'n v. Jewell, the Ninth Circuit reversed a district court order vacating a United States Fish & Wildlife Service (FWS) designation of critical habitat in Alaska for the endangered polar bear. In reversing the district court, the Ninth Circuit held that FWS's designation of polar bear habitat was not arbitrary, capricious or otherwise in contravention of applicable law-even in areas where polar bears were not actually present—because FWS drew rational conclusions from the best available scientific data.7
In Alaska Crude Corp. v. State, Dep't of Natural Resources,8 the court decided a long and complex administrative appeal, holding that the DNR materially breached an oil and gas lease when it terminated the lease and unilaterally imposed conditions upon its extension that were not provided for in the lease and that were not possible for the lessee to comply with, because of an order prohibiting production issued by the Alaska Oil and Gas Conservation Commission. The court construed Alaska oil and gas leases as contracts to be interpreted by the courts, and not by DNR, and
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held that a material breach by DNR excused further performance by the lessee. The court also held that DNR's decisions were not entitled to deference, but even if they were, those actions lacked a "reasonable basis." At the time this report was submitted for publication, the parties were in the process of proceeding toward an appeal.
C. Administrative Developments
Citing authority under section 12(a) of the Outer Continental Shelf Lands Act, 43 U.S.C. 1341(a) (OCSLA), President Obama issued a Presidential Memorandum withdrawing 125 million acres of the Arctic Ocean and its estimated 27 billion barrels of oil from disposition by leasing, effective for an indefinite period. The withdrawal does not affect rights under existing leases in the withdrawn area and excludes a nearshore area of the Beaufort Sea, which is adjacent to existing state oil and gas activity and infrastructure.
Also citing authority under section 12(a) of the OCSLA, President Obama signed an Executive Order creating the Northern Bering Sea Climate Resilience Area and withdrawing 112,300 square miles in Norton Sound and near St. Lawrence Island from future oil and gas leasing. The withdrawal does not affect rights under existing leases in the withdrawn area and is effective for a period without specific expiration.
II. Arkansas
A. Judicial Developments
In Union Pacific Railroad Co. v. Tyus,9 the court dealt with issues of adverse possession, as well as the standard of proof required to establish a missing deed. The tract in question was originally patented to the railroad predecessor of Union Pacific. It later came into possession of the Tyus family. Tyus family members have lived there since at least 1941. However, no deed out of the original patentee could be found. Recent natural gas production triggered this dispute over the tract's mineral ownership. Union Pacific claimed mineral ownership via a reservation in a lost deed. Indeed, it produced a document purporting to be an unexecuted file copy of such a deed, containing a reservation of all minerals, but offered no proof that the original of that document was ever executed. The trial court, affirmed by the Arkansas Court of Appeals, held that the file copy, standing alone, did not satisfy Arkansas's requirement of clear satisfactory and convincing proof. Thus, the minerals beneath the tract were never effectively severed from the surface, and the Tyus family's adverse possession of the surface caused it to also become owner of the minerals.
Ark. Code Ann. § 15-72-305 requires each working interest owner who
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sells gas produced from a dry-gas well to remit one-eighth of the net proceeds thereof to the well's operator. The operator then distributes the blended one-eighth share to all unit royalty owners, proportionate to their respective net acreage within the unit. Any royalty in excess of one-eighth remains the responsibility of the working interest owner burdened by the excess royalty. In Whisenhunt Investments, LLC v. ExxonMobil Corp.,10 the court, applying Arkansas Law, considered whether the plaintiff, whose lease provided for royalty based upon gross sale proceeds, was entitled to be paid the difference between net and gross proceeds by its lessee. The district court held that the statutory language displaced the plaintiff's inconsistent...
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