OIL AND GAS UPDATE: LEGAL DEVELOPMENTS IN 2018 AFFECTING THE OIL AND GAS EXPLORATION AND PRODUCTION INDUSTRY
| Jurisdiction | United States |
Editor 1
Edinger Leonard & Blakley PLLC
Oklahoma City, Oklahoma
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The state reports presented below include key legal issues and developments in most of the more-active states in the areas of oil and gas exploration, development and production.
I. ALASKA
A. Legislative Developments
In June 2018, the Governor of Alaska signed into law HB 331, codified at Alaska Stat. §§ 37.18.010 et seq., which establishes the public Alaska Tax Credit Bond Corporation (ATCBC). The legislatively expressed purposes of the ATCBC are to, among other things, finance the purchase of over $800 Million in transferable tax credits for certain losses and expenditures and of alternative tax credits for oil and gas exploration, and pay claimed refunds for gas storage facility tax credit certificates, liquefied natural gas storage facility tax credits, and qualified in-state oil refinery infrastructure expenditures tax credits. The legislation allows the State of Alaska to issue nearly $1 Billion in bonds to pay off tax credits it owes to oil producers.
HB 331 has been challenged on constitutional grounds in the Superior Court for the State of Alaska.2 The lawsuit alleges that such bond sales would cause the State of Alaska to legislatively incur debt above an amount permitted by the Alaska Constitution. First oral arguments were heard October 1, 2018.
B. Judicial Developments
In State of Alaska, Dep't of Natural Res. v. Alaskan Crude Corp.,3 an oil and
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gas lessee conducted drilling activity on the last day of a lease term. The subject lease provided that such activity extended its term. Nevertheless, two days later, the State of Alaska, Department of Natural Resources (DNR), notified the lessee that the lease had expired. The lessee halted drilling activity and requested reconsideration and reinstatement. Several weeks later, the DNR granted reinstatement. However, the lessee insisted that the reinstatement terms added new and unacceptable conditions, and administratively appealed to the DNR. Six months later, the DNR terminated the lease, finding that the lessee failed to diligently pursue drilling after reinstatement.
The Superior Court for the State of Alaska reversed the DNR's termination and held that it materially breached the lease by reinstating it with new conditions. However, on appeal, the Alaska Supreme Court concluded that, although the DNR breached the lease, it cured the breach through reinstatement. The court also held that the DNR's later decision to terminate due to the lessee's failure to diligently pursue drilling activities following reinstatement was supported by substantial evidence. The Alaska Supreme Court reversed the superior court's reinstatement of the lease and affirmed the DNR's termination decision.
In the consolidated Alaska Supreme Court case All American Oilfield, LLC v. Cook Inlet Energy, LLC,4 several questions were certified by the U.S. District Court for the District of Alaska and the U.S. Bankruptcy Court for the District of Alaska regarding Alaska's "dump lien" statute. Alaska Stat. § 34.35.140 creates a lien in favor of one who, at the instance of another in possession of an oil or gas well, performs such tasks as sinking, drilling, drifting, stopping, mucking, etc. in or about the well, or performs any other work necessary or convenient to the development, operation, or working of a well. The resulting lien encumbers the "dump or mass," or other minerals contained in or extracted from the well. Of crucial importance, these so-called dump liens are prior and preferred over a deed, mortgage or other claim, whether given before or after the work for which the lien is claimed is started.
In early 2018, the Alaska Supreme Court accepted the certified questions from the federal courts which ask, among other things: (1) whether a dump lien can apply to natural gas stored in its natural reservoir and, if so, whether a mineral "dump" was created when All American Oilfield, LLC drilled three natural gas wells at the request of Cook Inlet Energy, LLC (CIE); (2) whether a mineral "dump" was created each time CIE released gas from the natural reservoir in which the gas was formed, and then transported that gas via pipeline to a point of sale; and (3) whether a dump lien claimant must prove, in order to have a valid lien, that the gas produced was, in whole or in part, the product of the lien claimant's labor. At the time of this writing, oral argument was scheduled for March 20, 2019.
II. ARKANSAS
A. Judicial Developments
In Arkansas Oil & Gas Commission v. Hurd,5 the Arkansas Supreme Court
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reversed a trial court's ruling holding that an appeal from an order of the Arkansas Oil and Gas Commission was barred by the doctrine of sovereign immunity. Article 5, Section 20 of Arkansas' Constitution provides: "The State of Arkansas shall never be made defendant in any of her courts." In Board of Trustees of University of Arkansas v. Andrews,6 the court held that, contrary to some of its previous decisions, the Arkansas Legislature was powerless to waive that sovereign immunity by statute. A section of the Arkansas Administrative Procedure Act7 provides a procedure for an appeal from an administrative agency in the form of an action in circuit court naming the agency as defendant. Relying upon Andrews, the trial court in Hurd ruled that provision of the Act unconstitutional as a legislative waiver of sovereign immunity. The trial court then proceeded to declare most of the remainder of the Administrative Procedure Act to also be unconstitutional because it allowed administrative orders from which, applying Andrews, there was no remedy through appeal. The Arkansas Supreme Court reversed, holding that Andrews only applied to actions where the state was the real party in interest. The state agency has no stake in the outcome of an appeal from its order, regardless of the literal reading of the constitutional provision. The state was not made a defendant in an appeal under the Administrative Procedure Act.
In JS Interests, Inc. v. Hafner,8 a case discussed in the 2017 Year in Review report of this Committee, the U.S. District Court for the Eastern District of Arkansas had interpreted the parties' 1982 A.A.P.L. Form 610 Operating Agreement to require a unit's operator to pay overriding royalties to parties burdening a non-operating owner who was non-consent in the wells in question, ruling that such overriding royalty interests were not subsequently created interests because they were created by instruments recorded prior to the execution of the Operating Agreement. As part of a settlement of the case, the court vacated that ruling.9
In Hicks v. Southwestern Energy Inc.10 the plaintiff's unleased mineral interest was subject to an Arkansas Oil and Gas Commission integration order binding him to a commission-approved form of oil and gas lease. That lease contains an "affiliate sale" provision requiring a lessee who sold to an affiliate11 to pay proceeds royalty based upon a price no lower than that received from any other purchaser within the governmental township and range in which the lease is situated. Southwestern obtained the commission integration order and thus was the "lessee" under the integration lease. Southwestern paid royalties based upon the weighted average price of its sales (WASP) during the production month from all its Arkansas wells, which Hicks alleged was less than amount received by at least some other producers within the same township and range and thus violated the lease provision.
Hicks sought certification of a class of all unleased owners whose interests were integrated into Arkansas drilling units operated by Southwestern during the
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relevant time period. The district court denied class certification, noting that the integration order to which the Hicks' interest was subject listed approximately 50 separate unleased mineral owners and purported to also bind any unknown spouse, heir, devisee, personal representative, successor or assigns thereof.12 Moreover, during the relevant time period, Southwestern had obtained nearly 700 such integration orders in Arkansas, covering approximately 47 township and range combinations, each containing 36 separate drilling units. The court concluded that the identity of class members was not readily ascertainable. It also held the plaintiff's claims did not satisfy the typicality requirement of FRCP Rule 23(a) and that the proposed class failed to satisfy the requirements of FRCP rule 23(b)(3) since individual questions, rather than common questions predominated. Those individual questions went to both liability and damages, since both determinations would require ascertaining multiple third-party producers' prices, each month, in every township-range combination and comparing each "highest" price to Southwestern's WASP. Such an exercise, even if it were feasible, would likely produce different results for multiple different groups of class members.
In Roberts v. Unimin Corp.,13 the Eighth Circuit affirmed a district court ruling granting summary judgment that upheld a mining lease which provided for a term of years and then so long thereafter as siliceous materials were shipped from the lessee's mill or at least as long as mining, mining operations, or transporting siliceous materials was taking place. The lessors advanced a number of theories why that language was either ambiguous or created a prohibited perpetuity. They contended that the lease became terminable at will at the end of its primary term, citing an Alabama decision which so held.14 The district court held otherwise.15 That ruling was later affirmed.
III. CALIFORNIA
A. Legislative Developments
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