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Allen v. Alaska Oil & Gas Conservation Commission (5/12/00) sp-5272
Allen v. Alaska Oil & Gas Conservation Commission (5/12/00) sp-5272
Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the attention of the
Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone (907)
264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
MONTE ALLEN, )
) Supreme Court No. S-8690
Appellant, )
) Superior Court No.
v. ) 3AN-97-5471 CI
)
ALASKA OIL AND GAS ) O P I N I O N
CONSERVATION COMMISSION, )
and PHILLIPS PETROLEUM ) [No. 5272 - May 12, 2000]
COMPANY, )
)
Appellees. )
______________________________)
Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Anchorage,
Sigurd E. Murphy, Judge pro tem.
Appearances: Paul D. Kelly, Kelly &
Patterson, Anchorage, for Appellant. Robert E. Mintz, Assistant
Attorney General, Anchorage, and Bruce M. Botelho, Attorney
General, Juneau, for Appellee Alaska Oil and Gas Conservation
Commission.
Before: Matthews, Chief Justice, Fabe,
Bryner, and Carpeneti, Justices. [Eastaugh, J., not
participating.]
BRYNER, Justice.
I. INTRODUCTION
Monte Allen appeals a decision of the Alaska Oil and Gas
Conservation Commission dismissing as moot his petition for
compulsory unitization of two oil and gas leases that expired the
day after Allen petitioned. We hold that the commission has
discretion to order unitization effective upon the date of filing
of a proper petition and that its exercise of this discretion is a
matter for case-specific determination rather than a matter of
jurisdiction. Because the commission does not dispute that Allen's
petition was proper when filed or that a retroactive unitization
order would operate to extend Allen's leases, we reverse its order
dismissing his petition as moot.
II. FACTS AND PROCEEDINGS
This case concerns two ten-year Cook Inlet oil and gas
leases that the Alaska Department of Natural Resources granted to
Danco, Inc., in September 1986. In 1988 Danco transferred its
working interest in the leases to Amoco Production Company,
reserving a four and one-half percent overriding royalty interest.
[Fn. 1] Monte Allen acquired a share of that interest in 1989.
Arco Alaska and Phillips Petroleum Company eventually acquired the
working interest in the leases, which adjoined Arco's and
Phillips's unit operations in the North Cook Inlet Unit -- a unit
already under production.
In April 1996, approximately five months before the
leases expired, the Department of Natural Resources issued a report
estimating previously undetected reserves of one trillion cubic
feet of gas in the North Cook Inlet Pool. Because their leases
adjoined the North Cook Inlet unit, Allen and Danco believed that
they were "likely beneficiaries of the same gas formation." In the
months leading up to the expiration of their leases, they requested
that Phillips and Arco agree to a plan that would unitize their
interests. The companies denied their requests. On August 30,
1996, one day before the expiration date of the leases, Allen and
Danco attempted to extend their leases by petitioning the Alaska
Oil and Gas Conservation Commission for compulsory unitization.
The commission at first declined to accept the petition
on the ground that Allen and Danco had only a royalty interest in
the leases. Allen and Danco appealed to the commission, which
provisionally accepted the petition for filing but notified Allen
and Danco of two new potential grounds for dismissal:
First, the Commission understands the leases
in which you claimed overriding royalty interests expired on August
31, 1996. Since your petition was received on August 30, 1996, it
would have been impossible for the Commission to render a decision
on the petition before your interests terminated. It would
therefore be a futile act to proceed to a hearing on the petition.
Second, AS 31.05.110 allows for the
Commission's exercise of compulsory unitization powers only when
those owning interests in the tracts of land affected have not
agreed to integrate their interests. AS 31.05.110(a). The
Commission requires that a person seeking to invoke compulsory
unitization demonstrate that good faith efforts at voluntary
integration have been made and have failed. No reference to any
such efforts appears in your petition.
The commission requested Allen and Danco to respond.
They did, asserting that they had made unsuccessful efforts at
voluntary unitization and stating that their filing was timely
because it preceded the expiration of the leases. In support of
this latter position, they cited Burglin v. State of Alaska, [Fn.
2] an earlier case in which the superior court had ruled that a
lessee's petition for involuntary unitization filed before the
expiration of the petitioner's oil and gas leases "in effect
extended the State's jurisdiction over the subject leases so that
the State must fully consider the petitions and rule on the merits
of Plaintiffs' petitions for involuntary unitization and protection
of correlative rights." [Fn. 3]
The commission subsequently notified Allen and Danco that
it would hold a public hearing to address "whether [it] . . .
should consider the petitioners' petition on the merits in light of
the expiration date of the leases . . . [;] the Commission intends
to recess the hearing before determining whether to proceed to hear
the petition on the merits." After the hearing, the commission
issued a formal order dismissing the petition. In this order, the
commission reasoned that it had no jurisdiction over the petition
because a hearing on the merits would be "a futile and wasteful
act." For purposes of the order, the commission assumed that "it
may issue orders with retroactive effective dates in appropriate
circumstances," but noted that "[n]o such circumstances appear
here."
Reaffirming the dismissal on its rehearing, the
commission expressly rejected the Burglin court's analysis, noting
reasons of public policy for disallowing lease extensions through
compulsory unitization. The commission also questioned Danco's
standing to seek compulsory unitization after the expiration of its
royalty interest, observing: "when a petitioner can no longer be
granted any relief, due to the petitioner's loss of a real stake in
the outcome, the matter should be dismissed."
Allen appealed to the superior court, which affirmed,
finding that the commission had properly dismissed the petition as
moot because the expiration of Allen's leases left him with no
interest that he could properly assert before the commission.
Allen appeals.
III. DISCUSSION
A. Standard of Review
Because Allen's appeal presents questions of statutory
interpretation that do not involve the special expertise of the
commission, this court applies its independent judgment. [Fn. 4]
We will independently review the Commission's determination, giving
no deference to the superior court decision as an intermediate
court of appeal. [Fn. 5]
B. Allen Was an "Interested Person" and Had Standing to
Petition for Unitization.
Under AS 31.05.060, the Alaska Oil and Gas Conservation
Commission has the power to "act upon its own motion, or upon the
petition of an interested person." This provision requires that
"[o]n the filing of a petition concerning a matter within the
jurisdiction of the commission under this chapter, the commission
shall promptly fix a date for a hearing, and shall cause notice of
the hearing to be given." Alaska Statute 31.05.110(a) expressly
gives the commission jurisdiction over petitions for unitization,
providing that when persons owning interests of affected tracts of
land fail to agree on unitization, "the commission, upon proper
petition, after notice and hearing, has jurisdiction, power and
authority, and it is its duty to make and enforce orders and do the
things necessary or proper to carry out the purposes of this
section [governing unitization]."
Citing these provisions, Allen maintains that as an
overriding royalty interest holder, he was an "interested person"
with standing to petition for compulsory unitization. He contends
that because his leases were in effect when he filed his petition,
it was a "proper petition" under AS 31.05.110(a), and the committee
had a duty, under AS 31.05.060, to "promptly fix a date for a
hearing" on the merits of his petition. Allen insists that the
commission erred in determining that his leases expired after he
filed the petition and that their expiration deprived him of
standing to pursue compulsory unitization.
The commission concedes that an overriding royalty holder
has standing to petition for unitization under AS 31.05.110 and
that Allen was therefore an "interested person" under AS 31.05.060
at the time he filed his petition. "Although Allen seems confused
about the Commission's position, the Commission does not dispute
that an overriding royalty interest is a sufficient property
interest to render someone an 'interested person.'" Indeed, the
commission emphasizes that "[t]he Commission's decision from which
Allen appeal[s] assumed that an overriding royalty owner has
standing."
Nor does the commission question that Allen's leases
would have been automatically extended by a unitization order
entered before the leases expired. Under AS 38.05.180(m), "[a]n
oil and gas lease shall be automatically extended if and for so
long thereafter as oil or gas is produced in paying quantities."
[Fn. 6] And under AS 31.05.110(m), "[w]ells drilled or operated on
any part of [a] unit area no matter where located shall for all
purposes be regarded as wells drilled on each separately owned
tract within the unit area." Since the drilling unit with which
Allen sought unitization was already under production, a
unitization order predating the expiration date of Allen's leases
would have resulted in an extension.
Under these circumstances, and given the commission's
concession that an overriding royalty interest holder has
sufficient interest to petition for forced unitization, we conclude
that at the time of its filing Allen's petition for unitization was
a "proper petition" under AS 31.05.110(a) and raised "a matter
within the jurisdiction of the commission" under AS 31.05.060. [Fn.
7]
C. The Expiration of the Leases Did Not Deprive Allen of
Standing or Deprive the Commission of Jurisdiction.
While acknowledging that Allen initially had standing to
petition for mandatory unitization, the commission insists that his
petition was properly dismissed as moot after his leases expired:
The Commission's point was that, if the
leases in which Allen owned overriding royalty interests expired
"almost as soon as the petition was filed," Allen lost his standing
at that time. The question presented to the Commission, and now to
this Court, is whether the Commission must hear and decide a case
after the petitioner no longer has a personal stake in the outcome
and cannot benefit from the requested Commission action.
But this reasoning necessarily assumes either that the
commission has no authority to issue a retroactive unitization
order that would have the effect of reviving the leases or that the
question of whether to issue a retroactive order is capable of
being decided as a jurisdictional matter -- in other words, without
a hearing on the merits of Allen's petition for unitization.
As to the first assumption, we note that in dismissing
Allen's petition the commission itself assumed that it had the
power to issue a unitization order that would be effective as of
the date of filing of the petition for unitization. Our own
analysis of applicable law reveals no sound reason why the
commission does not have this power.
Alaska's Administrative Procedure Act generally allows an
administrative adjudication to have retroactive effect: "A
decision in a primarily judicial proceeding has retroactive effect
in the same manner as a decision of a state court." [Fn. 8]
Moreover, with respect to unitization orders, AS 31.05.110(a)
specifically empowers the commission "to make and enforce orders
and do the things necessary or proper to carry out the purposes of
this section." And AS 31.05.110(i) provides that "[p]roperty
rights, leases, contracts and all other rights and obligations
shall be regarded as amended and modified to the extent necessary
to conform to the provisions and requirements of . . . any valid
and applicable plan of unitization or order of the commission made
and adopted under this chapter."
Although we are aware of no published decisions, and the
parties point to none, discussing when unitization should become
effective, courts in several states have recognized that agencies
have power to backdate pooling orders when appropriate to protect
the interests of a petitioning party. [Fn. 9] As the commission
recognized in its initial order dismissing Allen's petition, these
cases are not directly on point, since they tend to focus on an
issue that does not arise in the context of unitization -- the need
to avoid an unconstitutional taking of property from a petitioner
who has been precluded from drilling by a previously issued spacing
order. [Fn. 10]
But while pooling and unitization orders may differ in
certain respects, they bear an underlying similarity. The same
interests -- conservation, efficiency, and fairness -- are present
in both processes. As one treatise states, "usually questions
arising in connection with pooling also arise in connection with
unitization, and the significant differences relate to whether
pooling or unitization is accomplished by voluntary agreement or
compulsory process." [Fn. 11]
Moreover, in explaining the legal rationale that
justifies making a pooling order effective on the date of the
application, another treatise states:
The jurisdiction of the agency has been
brought into play, and the agency possesses the power to preserve
the status quo pending the disposition of the application or
proceeding. Since the action on the entire matter is part of one
agency proceeding, the issuance of an order effective the date that
the proceeding began is not, in fact, retroactive any more than a
judicial decree effective as of the date judicial demand was made
for relief is retroactive.[ [Fn. 12]]
This rationale seems to apply with equal force in the context of
unitization.
In short, we find no persuasive basis for concluding that
the commission erred in assuming that it had discretion to direct
that a unitization order take effect on the date of filing of the
petition for unitization. The remaining question, then, is whether
the commission could properly decline to take jurisdiction over
Allen's petition by summarily finding that a retroactive order
would be inappropriate in his case.
Certain language in the commission's decision on
rehearing suggests that various considerations of policy led it to
regard Allen's status as an overriding royalty owner to be unworthy
of protection by a retroactive unitization order. For example, in
finding Allen's status as overriding royalty holder to be an
"independent reason" against granting automatic retroactivity, the
commission observed, "[s]ince an overriding royalty holder would
have no right directly to apply for an extension of a lease, it
would be incongruous to recognize an overriding royalty holder's
right to extend a lease through petitioning for compulsory
unitization." The commission also emphasized that overriding
royalty holders do not have "correlative rights"; it thereby
implied that protecting Allen's interests fell outside the primary
goals of unitization that the commission had mentioned in its
original order of dismissal.
Having expressed these doubts about the appropriateness
of using unitization to protect royalty interests, the commission
proceeded to consider the merits of Allen's petition. Although the
commission assumed that it had the power to order retroactive
unitization in "appropriate circumstances," it found that "[n]o
such circumstances appear here." Accordingly, the commission
dismissed Allen's petition, concluding that "[t]he statutory goals
of AS 31.05 -- preventing waste, protecting correlative rights, and
ensuring a greater ultimate recovery of oil and gas -- do not
require or favor retroactive effect in this case."
But this conclusion is problematic. While the statutory
provisions governing unitization certainly concentrate on
protecting the owners of rights of production -- owners of
correlative rights [Fn. 13] -- they by no means ignore the rights
of persons holding lesser interests. Indeed, AS 31.05.110(b)
expressly directs the commission to provide for such ownership
interests in its unitization orders:
If upon the filing of a petition . . .
and after notice and hearing, . . . the commission finds [grounds
for unitization], . . . it shall make a finding to that effect and
make an order . . . providing for the unitization . . . upon the
terms and conditions, as may be shown by the evidence to be fair,
reasonable, equitable, and which are necessary or proper to
protect, safeguard and adjust the respective rights and obligations
of the several persons affected, including royalty owner, owners of
overriding royalties, oil and gas payments, carried interests,
mortgages, lien claimants and others, as well as the lessees.[ [Fn.
14]]
On rehearing, the commission clarified its position,
noting that
the issue of retroactive application involves
different and much more limited considerations than those involved
in the underlying merits of a compulsory unitization petition. The
Commission has not prejudged the latter at all; it has simply noted
that, assuming that the merits were to be decided in favor of
compulsory unitization, no basis has been shown for such a decision
to be made retroactive.
Yet under AS 31.05.060 and AS 31.05.110(a), the
commission was required to hear and decide properly filed petitions
concerning unitization. And notably, in expressly providing
protection for the rights of owners of overriding royalty
interests, AS 31.05.110(b) contemplates that the commission will
make provision for these interests based on the evidence produced
at a hearing on the merits of unitization; it requires that upon
finding grounds for unitization "after notice and hearing," the
commission must "protect, safeguard, and adjust" these interests
insofar "as may be shown by the evidence to be fair, reasonable,
equitable, and . . . necessary." [Fn. 15]
As the commission's findings make clear, the commission,
considering the information at hand before it conducted a hearing
on the merits of unitization, deemed retroactivity "inappropriate"
because the particular "circumstances appear[ing]" in Allen's case
failed to show any "basis for such a decision." But the absence of
any apparent basis to issue a retroactive unitization order did not
place Allen's petition beyond the commission's jurisdiction; it
simply indicated a potential lack of merit -- a possibility that he
would not prevail on one aspect of his petition for unitization.
Allen's petition was properly filed, was within the
commission's jurisdiction, and could not be deemed moot as long as
retroactivity was within the commission's discretion to order. And
since the apparent lack of circumstances justifying retroactivity
reflected on the merits of Allen's petition, not on the
commission's power to hear it, the possibility of retroactivity
could not properly be eliminated without determining the merits of
the petition for unitization. Yet the commission treated
retroactivity as a jurisdictional issue, ordering dismissal without
hearing evidence on the merits of unitization. It erred in so
doing.
IV. CONCLUSION
Because we find that Allen is entitled to a hearing on
the merits of his unitization petition, we REVERSE the judgment of
the superior court and REMAND the case for a hearing.
FOOTNOTES
Footnote 1:
See 38 Am. Jur. 2d Gas and Oil sec. 215 (1999) (explaining
that
an overriding royalty interest is "a percentage of the gross
production payable to some person other than the lessor or persons
claiming under the lessor").
Footnote 2:
3AN-78-2413 CI (Alaska Super., January 29, 1980).
Footnote 3:
The court in Burglin theorized that "once the unitization
petition is timely filed, assuming for the moment it's filed at a
time when the owner of the lease has an interest in the lease and
therefore qualifies, then . . . his rights accrue and the committee
should . . . hold a hearing [and] make a decision."
Footnote 4:
See State v. Alaska State Employees Ass'n/AFSCME Local 52, 923
P.2d 18, 22 (Alaska 1996).
Footnote 5:
University of Alaska v. University of Alaska Classified
Employees Ass'n, 952 P.2d 1182, 1184 n.6 (Alaska 1998).
Footnote 6:
Allen's leases included standard clauses mirroring this
provision. Danco and Allen also tendered lease payments to extend
their lease, but the DNR refunded the payments.
Footnote 7:
We need not decide whether overriding royalty owners generally
have standing to petition for unitization. Because the commission
concedes the point here, our decision assumes that Allen's
ownership of royalty rights makes him "an interested person" under
AS 31.05.060 and thus gives him standing to seek unitization. We
express no view on how the issue would be decided in the absence of
a concession by the commission.
Footnote 8:
AS 44.62.510(b).
Footnote 9:
See, e.g., Texaco, Inc. v. Industrial Comm'n, 448 N.W.2d 621
(N.D. 1989); Ward v. Corporation Comm'n, 501 P.2d 503 (Okla. 1972);
Barton v. Cleary Petroleum Corp., 566 P.2d 462 (Okla. App. 1977);
Bennion v. Utah State Bd. of Oil, Gas & Mining, 675 P.2d 1135 (Utah
1983). But see Exxon Corp. v. Thompson, 564 So. 2d 387 (La. App.
1990); Buttes Resources Co. v. Railroad Comm. of Texas, 732 S.W.2d
675, 683 (Tex. App. 1987). See generally 1 Bruce M. Kramer &
Patrick H. Martin, The Law of Pooling and Unitization sec. 13.03,
at
13-7 to 13-24.3 (3d ed. 1992).
Footnote 10:
See, e.g., Ward, 501 P.2d at 507:
To impose this denial without granting the
right to participate in production of the unit well, as of the time
the non-drilling owners were prohibited from drilling, is the
taking by the State of their property without due process in
violation of the Fourteenth Amendment to the Constitution of the
United States.
See also Kramer & Martin, supra note 9, sec. 13.03, at 13-7 to 13-
24.3.
Footnote 11:
Howard R. Williams & Charles J. Meyers, Oil and Gas Law sec.
940,
at 644 (1992).
Footnote 12:
Kramer & Martin, supra note 9, sec. 13.03, at 13-9.
Footnote 13:
See AS 31.05.110(a) (allowing unitization agreements to
"protect the correlative rights of persons owning interests in the
tracts of land affected"). AS 31.05.170(2) defines "correlative
rights" as
the opportunity afforded, so far as it is
practicable to do so, to the owner of each property in a pool to
produce without waste the owner's just and equitable share of the
oil or gas, or both, in the pool; being an amount, so far as can
be practically determined, and so far as can practicably be
obtained without waste, substantially in the proportion that the
quantity of recoverable oil or gas, or both under the property
bears to the total recoverable oil or gas or both in the pool, and
for such purposes to use the owner's just and equitable share of
the reservoir energy.
Footnote 14:
AS 31.05.110(b) (emphasis added).
Footnote 15:
Id.
