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Exxon Corp. v State of Alaska (10/12/2001) sp-5487
Exxon Corp. v State of Alaska (10/12/2001) sp-5487
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
EXXON CORPORATION, )
) Supreme Court No. S-9164
Appellant, )
) Superior Court No.
v. ) 3AN-93-9624 CI
) 3AN-94-11482 CI (Consolidated)
)
STATE OF ALASKA, ) O P I N I O N
)
Appellee. ) [No. 5487 - October 12, 2001]
______________________________)
Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Anchorage,
John E. Reese, Judge.
Appearances: William F. Cronin and Johnathan
E. Mansfield, Corr Cronin LLP, Seattle, and Douglas J. Serdahely
and Kevin Callahan, Patton Boggs LLP, Anchorage, for Appellant.
Virginia B. Ragle, Assistant Attorney General, and Bruce M.
Botelho, Attorney General, Juneau, for Appellee.
Before: Fabe, Chief Justice, Matthews,
Eastaugh, Bryner, and Carpeneti, Justices.
CARPENETI, Justice.
I. INTRODUCTION
In 1988 Exxon discovered the Point McIntyre oil
reservoir, a bonanza with an estimated value of $4,783,800,000.
Now, Exxon and the State of Alaska dispute who will absorb $24
million in field costs associated with the reservoir based on their
opposing interpretations of a contract, the Prudhoe Bay Unit
Agreement. We conclude that the state has the discretion under the
terms of the agreement to consider the public interest according to
state law and to deny the expansion of the Prudhoe Bay Unit to
include the Pt. McIntyre reservoir. This conclusion is dispositive
of the numerous arguments raised on appeal. We therefore affirm
the commissioner's decision.
II. FACTS AND PROCEEDINGS
In the late 1960's the predecessors of Exxon and Arco
acquired several oil and gas leases on the Alaska North Slope. [Fn.
1] Each lease had a ten-year term and provided a royalty to the
state -- twelve and one-half percent of all oil and gas production.
These leases provided that the state could take its royalty in oil
or gas products (in kind) or in equivalent dollar value (in value).
If the state took its royalty in kind, the lease provided that the
lessees could deduct only their cleaning and dehydration field
costs. [Fn. 2] The leases did not mention field cost deductions
when the state took its royalty in value.
In 1977 Exxon, Arco, and the state, through the
Department of Natural Resources, entered into the Prudhoe Bay Unit
Agreement (PBUA). A unit agreement is a contract between the
department and lessees that allows for the efficient development of
a reservoir that underlies multiple leases owned by different
lessees. The various lessees join together in exploration and
drilling, and allocate costs and production. The PBUA was not
based on the state's model unit agreement; the lessees drafted the
PBUA. The state approved the PBUA effective April 1, 1977.
The PBUA unitized 111 leases, including portions of the
five previously mentioned [Fn. 3] Exxon and Arco leases. The
Prudhoe Bay Unit (PBU) includes most of the land described by these
leases. The PBUA also had expansion and contraction provisions;
these provisions allowed the selective increase and decrease of the
lands and natural resources controlled by the agreement.
Expansion of the unit would extend the terms of the PBUA
to additional lands. Expansion was generally thought to be
desirable by both the state and the lessees because it allowed
efficient administration under the existing agreement and efficient
shared production with existing facilities. Expansion under the
PBUA required that the "geologic condition"was met - that the
additional lands contained a reservoir any portion of which was
within the PBU.
Contraction excluded nonproductive lands from the unit
agreement. The threat of contraction was a stimulus for the lessee
to discover oil and develop production into paying quantities or to
lose the lease and the opportunity to discover and produce oil.
The PBUA required that all lands not included in a participating
area, [Fn. 4] or entitled to be included in a participating area,
would be contracted out of the PBUA after ten years.
The PBUA extended the original leases until April 1,
1987. Once production began, the terms of the PBUA would continue
in force for so long as oil or gas was being produced in paying
quantities.
Shortly after the PBU lessees began paying royalties
based on their interpretation of the lease terms, the state sued
the lessees. In State v. Amerada Hess, [Fn. 5] one issue was
whether the lessees could deduct field costs when the state took
its royalty in value. On motions for partial summary judgment, the
superior court ruled that the lessees could not. [Fn. 6] It held
further that the state could take its royalty in kind only if the
market value of the oil or gas exceeded the royalty in value
because only then would taking the royalty in kind be "in the best
interests of the state and for the maximum benefit of its people."
This ruling apparently pleased neither the lessees nor
the state, because soon after the ruling, the parties settled the
dispute on terms that differed significantly from the court's
partial summary judgment ruling. Under the 1980 Royalty Settlement
Agreement, the state agreed to pay a field cost allowance for its
PBU royalty whether in value or in kind. The field cost allowance
was initially set at forty-two cents per barrel but was to be
adjusted annually based on the Producer Price Index. (By 1993 the
cost had increased to seventy-nine cents per barrel.) The superior
court approved the settlement and allowed it to supersede the
court's previous ruling on the merits.
During the Amerada Hess litigation, the legislature
amended AS 38.05.180(f) to make it clear that the lessees could not
deduct field costs from the state's royalty share under the
existing, standard-form state oil and gas leases. [Fn. 7]
Subsequent leases expressly disallowed all field costs deductions.
In addition, all but one of all unit agreements approved after 1978
disallowed field cost deductions.
In early 1984 the director of the Division of Oil and
Gas, acting for the commissioner of the Department of Natural
Resources, allowed an expansion of the PBU. The director's
decision was based on geological, royalty and rental, and public
interest considerations. The director also conditioned the
expansion on two changes to one of the affected leases.
In early 1985 the director approved an expansion of the
Duck Island Unit and a corresponding contraction of the PBU. The
director's decision again noted several factors: environmental
costs and benefits of unitized development; geological
characteristics of the reservoir; prior exploration activities;
applicant's development plans; and the economic costs and benefits
to the state.
In late 1985 BP acquired the oil and gas lease to the
remaining portion of the yet-to-be-discovered Pt. McIntyre
reservoir. Following the amended AS 38.05.180(f), the BP lease
expressly disallowed all field costs deductions.
In late 1986 Exxon and Arco applied to defer contraction
of the PBU for five years. They invoked a department regulation,
11 AAC 83.356(b), [Fn. 8] as authority to defer contraction,
because the PBUA had no provisions for deferral of contraction.
The lessees argued that a delay was justified by both the public
interest criteria of 11 AAC 83.303 [Fn. 9] and geological
considerations. In early 1987 the director granted a
conditional deferral [Fn. 10] of the PBU contraction. The parties
now dispute the terms of this deferral and whether the lessees met
the conditions.
In January 1992 the lessees presented the department with
their plans to seek deferral of contraction until September 1,
1993; they also sought expansion of the PBU to include the Pt.
McIntyre reservoir. On February 28, 1992, the lessees asked the
department for a second deferral pursuant to 11 AAC 83.356(b).
On March 25, 1992, the director stated that the
department would "delay a decision on the contraction request"
until it had the opportunity to review the additional well data.
The lessees informed the department that, due to technical
problems, they were unable to provide the department with the
requested well data until September 1992. The department indicated
that it would "further delay a decision to defer contraction of the
Prudhoe Bay Unit . . . until September 30, 1992." Continuing
technical problems caused Arco to ask for a further postponement of
its deadline to provide the well data. The department responded
that it was "unwilling to delay a decision regarding the original
deferral of contraction request beyond the first quarter of 1993."
On March 1, 1993, the lessees requested that the
department establish the Pt. McIntyre participating area. On March
18, 1993, the lessees petitioned the department to expand the PBU
to include the Pt. McIntyre reservoir. The first sentence of that
letter suggested that the authority to expand the PBU was based on
the PBUA and the department's regulations: "Pursuant to the
provisions of Section 5.3 and Section 9.1 of the Prudhoe Bay Unit
Agreement and 11 AAC 83.351 and 11 AAC 83.356, ARCO Alaska, Inc.,
for itself and on behalf of Exxon Corporation and BP Exploration,
Inc., hereby petitions the Department of Natural Resources to
expand the boundaries of the Prudhoe Bay Unit . . . ."
(Parentheticals omitted.)
On March 31, 1993, the lessees petitioned for further
deferral of contraction of the PBU. By 1993, the lessees claimed
to have spent more than $287 million to develop the Pt. McIntyre
and West Beach reservoirs for production.
In two separate decisions the director denied the
lessees' requests to defer contraction and to expand the PBU. [Fn.
11] On April 14, 1993, the director denied the lessees' request to
defer contraction of the PBU. Because of the delays and based on
the criteria of 11 AAC 83.303, the director contracted tracts 5, 6,
7, and 8 from the PBU effective April 1, 1993.
On August 18, 1993, the director denied the expansion of
the PBU. He applied 11 AAC 83.303 and considered factors including
the environmental costs and benefits, the geological
characteristics and previous exploration, the lessees' plans for
development, and the economic costs and benefits to the state. A
large portion of the decision focused on field costs.
The lessees appealed both decisions to the commissioner.
The lessees negotiated with the director and developed an
amended application to expand the PBU to include the Pt. McIntyre
reservoir, which the director granted. In the amended application,
BP and Arco withdrew their appeals of the director's contraction
and expansion decisions and waived any right to a field cost
deduction except for production attributable to the small portion
of the Pt. McIntyre reservoir that underlay the original boundary
of the PBU. Exxon did not agree to waive its rights to a field
cost deduction on Pt. McIntyre production. However, Exxon did
agree to forego the deduction pending the final resolution of the
issue, subject to later recoupment from the department. The
amended application expressly noted Exxon's right to appeal or
commence litigation in the superior court and specifically limited
Exxon's arguments on appeal. The parties dispute exactly what
arguments Exxon waived by this agreement.
On November 12, 1993, the commissioner upheld the
director's decision to contract the PBU. He initially focused on
the lessees' substantial delays in developing tracts 5, 6, 7, and
8. The commissioner interpreted the director's actions prior to
the director's decision to contract the PBU as delaying the
decision to contract rather than granting a deferral of
contraction. He found the authority to delay contraction under 11
AAC 83.356(b), which, he concluded, required him to consider the
criteria specified in 11 AAC 83.303. The commissioner noted that
unitization of the Pt. McIntyre leases was generally in the public
interest, but the public interest in conservation of natural
resources could be equally served by deferring contraction of the
PBU or by contracting the PBU and forming a new unit that used the
PBU's excess processing capacity. The commissioner then concluded
that deferring contraction of the PBU was not in the public
interest based on environmental costs and benefits, geological and
engineering considerations, prior exploration activities, and
economic costs and benefits to the state. Because the commissioner
found that any deferral of the contraction was not in the public
interest, he decided that the original request for deferral should
have been denied and denied the deferral retroactive to April 2,
1992.
On December 2, 1994, the commissioner affirmed the
director's denial of PBU expansion. He expressly did not adopt two
points: that the state would never allow a field cost deduction,
and that PBU expansion should be denied in part because the state
has paid more under the 1980 settlement than it ever intended to
pay. He noted that, while under some circumstances a field cost
deduction might be allowed, it depended on the public interest
analysis. The commissioner also stated that using the state's
discretionary powers to recoup perceived losses under prior
agreements was not good public policy and expressly disclaimed
reliance on this rationale for denying expansion of the PBU.
The commissioner specifically concluded that Exxon did
not have an absolute right to expansion for two reasons. First,
the geologic requirements of the PBUA were not met. The PBUA
requires that any additional lands to be incorporated into the PBU
contain a reservoir, any portion of which is within the PBU. No
part of the Pt. McIntyre reservoir was within the PBU on March 18,
1993, because the contraction decision previously removed tracts 6,
7, and 8 from the PBU effective April 1, 1992. Second, the
department had discretion to deny expansion of the PBU in the
public interest according to state statute and the PBUA. In
considering the public interest, the commissioner first generally
stated "that the public interest with respect to non-economic and
even some economic matters would be served at least as well if not
better by the creation of a new unit as it would by expansion of
the PBU to include the [Pt. McIntyre reservoir]." He then
specifically noted that the field cost allowance under the 1980
settlement exceeded Exxon's likely actual field costs and concluded
that allowing Exxon to make a profit at the state's expense was not
in the public interest. The commissioner also noted that the
public interest favored treating Exxon like the other lessees of
the Pt. McIntyre area, who were not permitted a field costs
deduction.
Exxon appealed both of the commissioner's decisions. The
appeals were consolidated before Superior Court Judge John E.
Reese. On May 19, 1999, Judge Reese affirmed the commissioner's
decision. Exxon appeals the following issues: (1) whether the
department retained discretion under the PBUA to deny expansion of
the PBU; (2) whether the department breached the PBUA by
contracting the PBU; (3) whether the decision to deny expansion
violated the 1980 settlement; (4) whether the department violated
Exxon's constitutional rights; and (5) whether the department was
equitably estopped from denying expansion or ordering contraction
of the PBU.
III. STANDARD OF REVIEW
When the superior court acts as an intermediate court, we
directly review the administrative agency decision under
consideration. [Fn. 12]
We apply a substitution of judgment standard of review
for agency decisions on questions of law where no expertise is
involved. [Fn. 13] Interpretation of a contract is a question of
law that is not within the department's special expertise or skill.
"Where . . . there is no conflict in extrinsic evidence, the
interpretation of contract is a question of law."[Fn. 14]
But when the finder of fact must determine the meaning of
a contract based on extrinsic evidence that raises conflicting
inferences, "our inquiry is limited to determining whether the
trier of fact's choice of inferences is supported by substantial
evidence."[Fn. 15] In this case, almost all of the extrinsic
evidence raises conflicting inferences. Thus, we review the
commissioner's choice of inferences for substantial evidentiary
support.
IV. DISCUSSION
Exxon's arguments on appeal are based on one critical
contention: that the PBUA abrogated the department's discretion to
deny expansion and to order contraction of the PBU. Exxon's
additional claims that the department breached the 1980 settlement,
unconstitutionally impaired the PBUA contract, unconstitutionally
worked a taking, and should be equitably estopped all derive from
the department's exercise of discretion in making the contraction
and expansion decisions. The state disputes Exxon's view that the
PBUA destroyed its power over expansion and contraction. As
discussed in greater detail below, our conclusion that the
department had the discretion to deny expansion of the PBU in the
public interest and in accord with state law is dispositive of this
matter.
A. Exxon Did Not Waive the Argument that the Pt. McIntyre
Reservoir Was Partially within the Boundaries of the PBU.
As a preliminary matter, we address the state's
contention that Exxon waived its right to make certain arguments on
appeal. The state argues that in the amended application for PBU
expansion Exxon agreed to present its position as if the geologic
condition -- that the Pt. McIntyre reservoir was at least partially
within the boundaries of the PBU -- was not met. Exxon argues that
the state's interpretation of the amended application is incorrect
because it would render Exxon's express right to appeal
meaningless, because Exxon can prevail on appeal only if it can
prove that the geologic condition was met. Neither side disputes
that a small portion of the Pt. McIntyre reservoir actually
underlies the original PBU and thus meets the geologic condition.
The amended application for PBU expansion summarizes the
parties' positions and agreement as follows:
Exxon disagrees with the State regarding their
respective rights. To allow production of the Pt. McIntyre
Participating Area to begin while preserving Exxon's rights and the
State's rights, the Applicants propose the following procedure:
. . . .
iii. Exxon may appeal to or commence
litigation in (or both) the Alaska Superior Court, and/or may
appeal to the Commissioner, to contend among other things that the
Commissioner's Contraction Decision (assuming he affirms the
Contraction Decision) and other DNR decisions concerning the Pt.
McIntyre Participating Area and the Contracted Acreage[ [Fn. 16]]
were incorrect. Any such appeal or litigation is collectively
referred to as the "Contest."
In the Contest, . . . Exxon shall not
challenge the legality of DNR's established procedures or DNR's
power and authority to act and make decisions concerning the
contraction or expansion of the PBU, the Pt. McIntyre Participating
Area, or the Contracted Acreage, but may claim, for example, that
the established procedures were not followed or that the DNR
decisions or actions are not consistent with applicable law. Also,
Exxon shall not claim that the DNR is disqualified from acting
because the State could realize a gain as a result of the DNR's
actions.
. . . .
iv. Exxon must present its position in the
Contest as if the Contracted Acreage were not in the PBU . . .
until Exxon obtains a final, non-appealable ruling that the
Contracted Acreage should not have been contracted out of the PBU.
If Exxon obtains such a ruling, it may use the ruling in presenting
its position in the Contest. Exxon, however, shall not at any time
. . . argue or claim that it is entitled to field costs or any
other costs or relief because . . . the Pt. McIntyre Participating
Area [is] in the PBU as a result of granting this Amended
Application or the Production Application. Exxon recognizes and
agrees that such an argument would be "bootstrapping."
. . . .
vi. By filing this Amended Application and
pursuing any relief permitted by it, Exxon does not waive any
rights which it may have to field and other costs under the terms
of the Pt. McIntyre Participating Area leases. . . .
vii. All appellate rights of the State and
Exxon, if any, are preserved.
The commissioner interpreted the "no bootstrapping"paragraph as a
waiver of Exxon's argument that the geologic condition was met,
because Exxon had to present its position as if tracts 5, 6, 7, and
8 were not in the PBU. If tracts 6, 7, and 8 are not in the PBU,
the geologic condition cannot be met.
We think the commissioner read the waiver too broadly for
two reasons: first, the parties intended to preserve the status quo
on the field costs issue while simultaneously allowing development
of the Pt. McIntyre reservoir; second, the state's interpretation
eviscerates Exxon's right to appeal the field costs issue. Our
goal when interpreting contracts is to "give effect to the
reasonable expectations of the parties."[Fn. 17] The relevant
section of the agreement begins with a statement of intent: "To
allow production of the Pt. McIntyre Participating Area to begin
while preserving Exxon's rights and the State's rights." The
express intent of the amended agreement was to avert an impasse by
isolating the field costs issue for separate resolution on appeal.
Moreover, we have repeatedly noted that "[a] court should
not interpret an agreement in a manner which would give meaning to
one part of an agreement at the cost of annulling another part."
[Fn. 18] Exxon expressly retained a right to "appeal to or
commence litigation in (or both) the Alaska Superior Court."
Interpreting the "no bootstrapping"paragraph as a general waiver
of an argument required for Exxon to prevail on appeal effectively
eliminates Exxon's right to appeal. Instead, we read the agreement
to give Exxon a meaningful right of appeal while preserving the "no
bootstrapping"provision. Accordingly, Exxon may argue in this
appeal that the geologic condition was met because the facts so
indicate but not because the state approved the amended application
for expansion.
B. The Department of Natural Resources Has the Authority to
Deny Expansion of the PBU Under the PBUA.
While the parties dispute numerous aspects of the
expansion and contraction decisions, [Fn. 19] we find one issue
dispositive -- whether the department had the authority to consider
the state's best interests in making a decision on expansion of the
PBU.
Exxon argues that the department has no discretion to
determine unit expansion; rather, Article 9 of the PBUA controls.
Exxon interprets the PBUA to give itself a unilateral right to
expand the PBU so long as the lands to be added contained a
reservoir that was partially within the PBU. If this "geologic
condition"was met, Exxon argues, the department had no discretion
to deny expansion.
The state argues that the department has discretion to
consider the public interest when deciding to expand the PBU under
the PBUA and department regulations.
We first consider the text of the PBUA. We then look at
extrinsic evidence.
1. The text of the PBUA
Article 9.1 of the PBUA discusses possible expansion of
the PBU:
The Unit Area may be enlarged from time to
time so as to include any additional lands reasonably determined to
be within any Reservoir any portion of which is within the Unit
Area. The lands to be included shall be based on such subdivisions
of the public land surveys as may be approved by the Director, but
not less than the area approved by the well-spacing order affecting
such lands for such Reservoir. . . .
Exxon argues that the first sentence indicates that Exxon
may enlarge the unit area, so long as the additional lands meet the
condition. The state argues that the first sentence is ambiguous,
but the rest of the PBUA indicates that the department has the
power to expand the PBU.
The state is correct that the language is ambiguous. The
passive voice can be ambiguous. [Fn. 20] The text alone does not
indicate whether Exxon or the department has the authority to
expand the PBU. However, the subsections following the contested
statement help to clarify it. Subsections (a) through (d) indicate
the process for expansion of the PBU. The final step indicates
that "after due consideration of all pertinent information, the
Director shall render his decision." This text, and the absence of
text indicating that Exxon was meant to have the right to expand,
strongly favors the state's interpretation that the director has
the authority to decide expansion of the PBU.
Both sides argue that the use of the permissive "may"
supports their interpretation. Exxon argues that the permissive
had to be used to preserve Exxon's option of expansion. If the
mandatory "shall"was used, Exxon would have been required to
expand the PBU if the condition was met.
The state contends that use of the permissive indicates
the department's discretion. The state notes that in four other
articles of the PBUA, Articles 4.4, 5.4, 16.4, and 18.1, when the
agreement intended to create a right that could be exercised by the
lessees, it used the language "shall have the right"or "shall be
entitled to."
The state's interpretation is the most logical. In
interpreting a contract, courts should "interpret the contract in
a manner that makes the contract internally consistent."[Fn. 21]
Exxon's interpretation that Article 9.1 creates a right to
expansion with the language "may"conflicts with other portions of
the PBUA that use "shall have the right"or "shall be entitled to"
to create a lessees' right.
Finally, the state notes that Article 12.1 of the PBUA
expressly indicates that the PBUA "shall be subject to all valid
applicable federal and state laws, rules, regulations and orders."
Former 11 AAC 83.340 and former 11 AAC 83.345, state regulations in
effect at the time the parties entered the PBUA, required the
director's approval, based on a determination of necessity or
advisability in the public interest, for a modification of an
approved unit agreement. [Fn. 22] Accordingly, the state argues
that the PBUA required the director's approval for any modification
of the agreement. Exxon has no response to this. This express
statement also favors the state's interpretation that the
department has discretion to deny expansion of the PBU. In sum,
the text of the PBUA strongly indicates that the department had
discretion to deny expansion as specified by its own regulations.
2. Extrinsic evidence
Extrinsic evidence provides substantial support for the
commissioner's decision. The parties' course of performance of the
PBUA and the existence of departmental regulations that are
inconsistent with Exxon's view of the PBUA strongly support the
conclusion that the department had discretion to deny expansion of
the PBU.
a. Exxon's and the department's course of
performance
The state argues that Exxon's and the department's course
of performance of the PBUA shows that Exxon understood that the
department retained discretion. Exxon offers no argument in
response.
The conduct of the parties is properly considered as
evidence of the parties' intent. [Fn. 23] In the course of
performance of the PBUA, Exxon has previously requested contraction
of the PBU and corresponding expansion of another unit. Exxon's
application for the change in the PBU requested the director's
approval under provisions including 11 AAC 83.301-.395 and argued
that the change was in "the public interest in accordance with AS
38.05.180(p) and 11 AAC 83.303." Exxon has also requested
expansion of the PBU and contraction of another unit. In both
cases, the director's decisions to grant the change included an
analysis of the best interests factors listed in 11 AAC 83.303.
Furthermore, Exxon's application for the Pt. McIntyre
expansion -- the denial of which forms the main issue here --
requested the director to expand the PBU "pursuant to the
provisions of Section 5.3 and Section 9.1 of the [PBUA] and 11 AAC
83.351 and 11 AAC 83.356." The application expressly noted that
the expansion "meets the criteria of 11 AAC 83.303"and listed
three reasons. Exxon's and the department's prior course of
performance of the PBUA contradicts Exxon's current position and
strongly indicates that the department had discretion to deny
expansion.
b. The department's inability to contract around
its regulations
Exxon argues that the department's own regulations allow
the department to enter contracts that differ from existing
regulations and provide that later-enacted regulations will not
apply to preexisting contracts. [Fn. 24] It also notes that the
department has no statutory authority to alter a unit agreement
without consent by the contracting parties. [Fn. 25] Exxon claims
that it drafted the PBUA to eliminate the department's discretion.
Why, Exxon asks, would it draft an agreement that simply restates
the department's regulations?
We disagree with Exxon's first contention -- that the
department can agree to contract terms that violate its
regulations. The only authority cited for this proposition is 11
AAC 83.301(b), which states that the department's regulations
"apply to an existing oil and gas lease or approved unit agreement
where not inconsistent with the lease or unit agreement or
regulations in effect on the effective date of the lease or unit
agreement." This merely applies the department's later-enacted
regulations as default rules to existing leases or unit agreements
when there is no conflict.
Subsection .301(b) does not make existing department
regulations inapplicable to new unit agreements. Former 11 AAC
83.340 and .345 existed before the approval of the PBUA. Former
section .345 stated that "[a]ny modification of an approved unit
agreement is subject to the director's approval in the same manner
and upon the same determination as the original unit agreement."
[Fn. 26] Former section .340 required that "[a] unit agreement
will be approved by the director if he determines that the
agreement is necessary or advisable in the public interest, is for
the purpose of more properly conserving natural resources, and
adequately protects all parties in interest including Alaska."[Fn.
27] Thus, 11 AAC 83.301(b) does not affect the applicability of
the best interests analysis for expansions of the PBU according to
former 11 AAC 83.340 and .345. [Fn. 28]
Moreover, 11 AAC 83.301(b) does not confer authority for
the converse: to contract outside of the department's regulations.
To allow such activity would be arbitrary; parties contracting with
the department would not be held to the same regulations that non-
contracting parties were required to comply with. And the
department should never need to contract in violation of its own
regulations, because it has the authority to change its regulations
so long as the new regulation has a reasonable basis and is within
the scope of the legislature's delegation of power to the
department. [Fn. 29] Because we conclude that 11 AAC 83.301(b)
does not allow the department to contract outside of its
regulations, Exxon's argument that the department contracted away
its regulatory discretion fails.
In sum, the text of the PBUA and the extrinsic evidence
support the conclusion that the department had discretion to deny
expansion. The department did not, and could not, contract away
its discretion to consider the state's best interests in approving
expansions of the PBU. Exxon did not have a unilateral right to
expansion under the PBUA.
C. The Commissioner's Decision To Deny Expansion Because of
the Excessive Field Cost Allowance Did Not Violate the 1980 Royalty
Settlement Agreement.
Exxon argues that the department's failure to expand the
PBU violated the 1980 settlement because the 1980 settlement's
resolution of field costs expressly applied to all lands covered by
the PBUA "and, in addition, all other land to which the [PBUA] may
hereafter be extended as therein provided."
Exxon's argument is premised on its interpretation of the
PBUA that Exxon had a unilateral right to expand the PBU if the
geologic condition was met. If the department had the
discretionary authority to deny expansion, Exxon had no right to
force application of the 1980 settlement to lands outside the PBU,
and the argument fails. Consistent with our previous conclusion
that Exxon had no unilateral right to expansion of the PBU, we
conclude that the commissioner did not breach the 1980 settlement.
Exxon argues further that the department breached the
implied covenant of good faith and fair dealing of the 1980
settlement because the department's failure to allow expansion
deprived Exxon of the benefit of its bargain and rendered the
settlement a nullity. Exxon argues that for the commissioner to
decide as he did "solely because these [field cost] deductions will
apply"deprives it of the benefit it bargained for in the 1980
settlement. (Emphasis in original.) But the commissioner's
decision does not support Exxon's argument that was denied solely
because field cost deductions applied. The commissioner first
stated "that the public interest with respect to non-economic and
even some economic matters would be served at least as well if not
better by the creation of a new unit as it would by expansion of
the PBU to include the [Pt. McIntyre reservoir]." The commissioner
expressly disclaimed both that field costs would never be allowed
and that the amount paid under the 1980 settlement was a
permissible consideration. Rather, the commissioner appeared to be
concerned that Exxon would unfairly profit by overcharging field
costs. According to his calculations, Exxon's actual field cost
expenses were in the range of six to seventeen cents per barrel,
far less than the seventy-nine cents per barrel allowed by the 1980
Royalty Settlement Agreement. The commissioner requested that
Exxon justify the magnitude of the field cost, but Exxon did not
respond. Presumably, if Exxon could show special production costs
that warranted the substantial field costs, a deduction may have
been allowed. The commissioner also noted the unfairness of
allowing Exxon, but not other similarly situated lessees, a field
cost deduction. The commissioner did not deny PBU expansion solely
because the field costs would apply.
Exxon also argues that the department's consideration of
field costs in the denial of expansion rendered the 1980 settlement
a nullity. If the 1980 settlement only concerned field costs
deductions for production from expansions of the PBU, the problems
of illusory contracts and lack of consideration might arise as
Exxon argues. But the 1980 settlement applies primarily to
existing PBU production, and Exxon has enjoyed a substantial and
continuing benefit from the 1980 settlement -- a field cost
deduction of seventy-nine cents per barrel of oil produced from the
PBU. Exxon's claim that "no rational settling party would agree"
to the 1980 settlement if its field cost allowance were limited to
the existing PBU is quite unpersuasive given the facts that the
legislature expressly declared that paying field costs was not in
the best interests of the state, [Fn. 30] that most unit agreements
did not allow for field costs deductions, [Fn. 31] and that Exxon's
co-lessees for the disputed tracts waived their rights to any field
cost deductions. Accordingly, we conclude that the department
breached neither the express terms of the 1980 settlement nor its
implied covenant of good faith and fair dealing by exercising
discretion to consider the public interest in denying expansion of
the PBU.
D. The State Did Not Violate Exxon's Constitutional Rights.
Exxon argues that the department's regulations
unconstitutionally impair the obligations of contracts. This
argument is premised on its interpretation of the PBUA. Because
the department bargained away its discretion to change the PBU in
the PBUA, Exxon argues, applying regulations that reinstate that
discretion impairs the PBUA.
In addition, Exxon argues that the department's
requirement that Exxon waive its right to field cost deductions
under the PBUA for Pt. McIntyre production is an unconstitutional
taking. Again, this argument is premised on Exxon's interpretation
of the PBUA. For there to be a taking, Exxon must have a property
interest in the field cost deduction for production from lands that
may be added to the PBU. [Fn. 32] In turn, this requires that
Exxon have a right to expansion of the PBU to include these lands.
The state argues simply that the department did not
violate any of Exxon's contractual rights because the department
has discretion to deny expansion and order contraction under the
PBUA. First, because the department did not bargain away its
discretion to change the PBU, it has not impaired the contract by
using its discretion to deny the changes to the PBU. Second, Exxon
has no right to expansion under the PBUA; thus, it has no property
right in a field cost deduction from lands that only might be added
to the PBU.
As we determined previously, the state has the
discretionary authority under the PBUA to approve changes to the
PBU. Exxon's constitutional arguments therefore fail.
E. The Department Is Not Equitably Estopped from Denying
Expansion or Ordering Contraction of the PBU.
Exxon argues that the state should be estopped from
ordering contraction and denying expansion of the PBU because Exxon
detrimentally relied upon the department's alleged agreement in the
PBUA to expand and contract the PBU based solely on geologic
factors and without exercise of its discretion. The state argues
that the commissioner found the evidence insufficient to establish
estoppel and that his finding is supported by substantial evidence.
We have stated that estoppel may apply against the
government and in favor of a private party if four elements are
present: "(1) the governmental body asserts a position by conduct
or words; (2) the private party acts in reasonable reliance
thereon; (3) the private party suffers resulting prejudice; and (4)
the estoppel serves the interest of justice so as to limit public
injury."[Fn. 33] Whether estoppel applies in any given situation
is a legal conclusion. [Fn. 34]
Like Exxon's constitutional arguments, its estoppel
argument hinges on its interpretation of the PBUA. Because we
conclude that the department has discretion under the PBUA, Exxon
has not been prejudiced by the department's use of its discretion
to deny the expansion to the PBU. Thus, estoppel does not apply
here.
V. CONCLUSION
The commissioner had discretionary authority to deny
expansion of the PBU. For that reason, and because the decision to
deny expansion did not violate the 1980 Royalty Settlement
Agreement, the decision did not violate Exxon's constitutional
rights, and the department was not equitably estopped from making
that decision, we AFFIRM in all respects.
FOOTNOTES
Footnote 1:
Appendix A contains a map that marks the various lease
parcels, the Pt. McIntyre reservoir, and the Prudhoe Bay Unit.
Exxon and Arco obtained the rights to Alaska Division of Lands
leases 34626, 34627, 34624, 28297, 28298, and 34622. We adopt the
parties' shorthand reference of "ADL"followed by the lease number.
Tracts 5, 6, 7, and 8 correspond to those portions of ADLs 34626,
34627, 34624, and 28297, respectively, that were within the
original PBU boundary. Tracts 115 and 116 correspond to ADLs 28298
and 34622. BP later acquired ADL 365548 (tract 117).
Footnote 2:
Field costs are all of the costs of production incurred from
the wellhead to the custody transfer meters into the Trans Alaska
Pipeline. Field costs generally include gathering, separation,
cleaning, dehydration, compression, and other handling costs.
Footnote 3:
See supra n.1.
Footnote 4:
"Participating areas"are portions of the unit "reasonably
known to be underlain by hydrocarbons and known or reasonably
estimated . . . to be capable of producing or contributing to
production of hydrocarbons in paying quantities." 11 Alaska
Administrative Code (AAC) 83.351(a) (1996).
Footnote 5:
No. 77-847 Ci. (Alaska Super., 1st Dist., Juneau, complaint
filed September 2, 1977).
Footnote 6:
No. 77-847 Ci. (Alaska Super., 1st Dist., Juneau, April 6,
1979).
Footnote 7:
See ch. 155, sec. 1, SLA 1978 (currently codified at AS
38.05.180(f)(2)); ch. 160, sec. 16, SLA 1978 (currently codified at
AS 38.05.180(z)).
Footnote 8:
11 AAC 83.356(b) (1996) gives the department authority to
delay contraction of unit under certain circumstances:
(b) 10 years after sustained unit production
begins, the unit area must be contracted to include only those
lands then included in an approved participating area and lands
that facilitate production including the immediately adjacent lands
necessary for secondary or tertiary recovery, pressure maintenance,
reinjection, or cycling operations. The commissioner will, in the
commissioner's discretion, after considering the provisions of 11
AAC 83.303, delay contraction of the unit area if the circumstances
of a particular unit warrant. If any portion of a lease is included
in the participating area, the portion of the lease outside the
participating area will neither be severed nor will it continue to
be subject to the terms and conditions of the unit. The portion of
the lease outside the participating area will continue in full
force and effect so long as production is allocated to the unitized
portion of the lease and the lessee satisfies the remaining terms
and conditions of the lease.
Footnote 9:
11 AAC 83.303 (1996) states the criteria to consider in
determining the public interest:
(a) The commissioner will approve a proposed
unit agreement for state oil and gas leases if he makes a written
finding that the agreement is necessary or advisable to protect the
public interest considering the provisions of AS 38.05.180(p) and
this section. The commissioner will approve a proposed unit
agreement upon a written finding that it will
(1) promote conservation of all natural
resources, including all or part of an oil or gas pool, field, or
like area;
(2) promote the prevention of economic
and physical waste; and
(3) provide for the protection of all
parties of interest, including the state.
(b) In evaluating the above criteria, the
commissioner will consider
(1) the environmental costs and benefits
of unitized exploration or development;
(2) the geological and engineering
characteristics of the potential hydrocarbon accumulation or
reservoir proposed for unitization;
(3) prior exploration activities in the
proposed unit area;
(4) the applicant's plans for exploration
or development of the unit area;
(5) the economic costs and benefits to
the state; and
(6) any other relevant factors, including
measures to mitigate impacts identified above, the commissioner
determines necessary or advisable to protect the public interest.
(c) The commissioner will consider the
criteria in (a) and (b) of this section when evaluating each
requested authorization or approval under 11 AAC 83.301 - 11 AAC
83.395, including
(1) an approval of a unit agreement;
(2) an extension or amendment of a unit
agreement;
(3) a plan or amendment of a plan of
exploration, development or operations;
(4) a participating area; or
(5) a proposed or revised production or
cost allocation formula.
Footnote 10:
The director's decision stated in relevant part:
This approval is conditioned on the following
terms:
(A) A well to delineate the hydrocarbon
reserves underlying [ADL] 34626 and ADL 34627 must be drilled and
completed prior to April 1, 1992; and
(B) A commitment by the lessees to drill a
second well to delineate the hydrocarbon reserves underlying ADL .
. . 28297 and ADL 34624 must be made by April 1, 1992.
Should these leases not be included within an
approved participating area on April 1, 1992, or should the
required well not be completed or the commitment for the second
well not secured by that date, ADLs 28297, 34624, 34626, and 34627
will be contracted out of the Prudhoe Bay Unit as of that date.
Footnote 11:
Exxon had asked that the department consider the expansion and
contraction issues together. At one point, Exxon raised the issue
of whether the director's refusal to consider the issues together
was arbitrary and capricious. Because no further argument of this
issue appears in Exxon's brief, we conclude that Exxon has waived
the issue. See Martinson v. Arco Alaska, Inc., 989 P.2d 733, 737
(Alaska 1999).
Footnote 12:
See Handley v. State, Dep't of Revenue, 838 P.2d 1231, 1233
(Alaska 1992).
Footnote 13:
See id.
Footnote 14:
Leisnoi, Inc. v. Stratman, 956 P.2d 452, 454 (Alaska 1998).
Footnote 15:
Zito v. Zito, 969 P.2d 1144, 1147 n.4 (Alaska 1998) (quoting
Wahl v. Wahl, 945 P.2d 1229, 1232 n.3 (Alaska 1997)).
Footnote 16:
"Contracted Acreage"referred to tracts 5, 6 ,7, and 8.
Footnote 17:
Stepanov v. Homer Elec. Ass'n, 814 P.2d 731, 734 (Alaska 1991)
(quoting Mitford v. de Lasala, 666 P.2d 1000, 1005 (Alaska 1983)).
Footnote 18:
Betz v. Chena Hot Springs Group, 657 P.2d 831, 835 (Alaska
1982); see also Earth Movers, Inc. v. State, Dep't of Transp. &
Pub. Facilities, 824 P.2d 715, 717-18 (Alaska 1992) (interpreting
contract based on document as a whole).
Footnote 19:
Concerning the contraction decision, for example, the parties
dispute: the meaning of the PBUA text; whether the director's
amended 1987 deferral superceded the PBUA contraction provisions;
whether the lessees met the conditions of the 1987 deferral; and
whether the director granted a second deferral.
Footnote 20:
See Plate v. State, 925 P.2d 1057, 1065 (Alaska App. 1996)
(finding evidence rule in passive voice ambiguous and resolving
ambiguity by resort to commentary to rules); see also E.I. du Pont
de Nemours and Co. v. Train, 430 U.S. 112, 128 (1977) (resorting to
other portions of federal statute to resolve ambiguous passive
language).
Footnote 21:
Brobeck, Phleger, & Harrison v. Telex Corp., 602 F.2d 866, 872
(9th Cir. 1979).
Footnote 22:
Former 11 AAC 83.345 (eff. 9/20/74) provided:
Any modification of an approved unit
agreement is subject to the director's approval in the same manner
and upon the same determination as the original unit agreement.
Former 11 AAC 83.340 (eff. 9/20/74) provided in relevant
part:
A unit agreement will be approved by the
director if he determines that the agreement is necessary or
advisable in the public interest, is for the purpose of more
properly conserving natural resources, and adequately protects all
parties in interest including Alaska.
Footnote 23:
See, e.g., Peterson v. Wirum, 625 P.2d 866, 872-74 (Alaska
1981).
Footnote 24:
See 11 AAC 83.301(b) (1996) ("[The unitization regulations]
apply to an existing oil and gas lease or approved unit agreement
where not inconsistent with the lease or unit agreement or
regulations in effect on the effective date of the lease or unit
agreement.").
Footnote 25:
See AS 38.05.180(p) ("The commissioner may, with the consent
of the holders of leases involved, establish, change or revoke
drilling, producing, and royalty requirements of the leases and
adopt regulations with reference to the leases, with like consent
on the part of the lessees, in connection with the institution and
operation of a cooperative or unit plan as the commissioner
determines necessary or proper to secure the proper protection of
the public interest.").
Footnote 26:
Former 11 AAC 83.345 (eff. 9/20/74).
Footnote 27:
Former 11 AAC 83.340 (eff. 9/20/74).
Footnote 28:
When the department repealed 11 AAC 83.340 and .345 on June
28, 1981, the department adopted 11 AAC 83.303, which contained a
similar (but more detailed) consideration of "the public interest"
in approving changes to unit agreements. 11 AAC 83.303 (1996).
Footnote 29:
See United Steelworkers of America Local Union 14534 v. NLRB,
983 F.2d 240, 244-45 (D.C. Cir. 1993) ("An agency may alter its
interpretation of substantive law so long as its new interpretation
does not conflict with the statute, and so long as the agency
supplies a 'reasoned analysis' for 'changing its course.'"
(citation omitted)).
Footnote 30:
See AS 38.05.180(f)(2) (enacted 1978).
Footnote 31:
The department allowed field cost deductions for the Duck
Island Unit ("Endicott"), signed before the 1980 Settlement, and
the Kuparuk River Unit. All other unit agreements did not allow
field cost deductions. See, e.g., the Milne Point Unit; the North
Star Unit; and the Thetis Island Unit.
Footnote 32:
See Bowen v. Public Agencies Opposed to Soc. Security
Entrapment, 477 U.S. 41, 55-56 (1986).
Footnote 33:
Crum v. Stalnaker, 936 P.2d 1254, 1256 (Alaska 1997).
Footnote 34:
See id. at 1258 ("We determine that the Board erred in its
legal conclusion that equitable estoppel is unavailable under the
facts of this case.").
