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ConocoPhillips Alaska, Inc. v. State, Dept. of Natural Resources (01/28/2005) sp-5864
ConocoPhillips Alaska, Inc. v. State, Dept. of Natural Resources (01/28/2005) sp-5864
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,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
CONOCOPHILLIPS ALASKA, INC., )
EXXON MOBIL CORPORATION, ) Supreme Court No. S-11131
EXXONMOBIL ALASKA )
PRODUCTION INC., and FOREST ) Superior Court No.
OIL CORPORATION, ) 3AN-01-10283 CI
)
Appellants, )
)
v. ) O P I N I O N
)
STATE OF ALASKA, )
DEPARTMENT OF NATURAL ) [No. 5864 - January 28, 2005]
RESOURCES, )
)
Appellee. )
)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Donald D. Hopwood, Judge.
Appearances: Joseph J. Perkins, Jr., Guess &
Rudd, P.C., Anchorage, for Appellants.
Leonard H. Herzog, Assistant Attorney
General, Anchorage, and Gregg D. Renkes,
Attorney General, Juneau, for Appellee.
Before: Bryner, Chief Justice, Matthews,
Eastaugh, Fabe, and Carpeneti, Justices.
BRYNER, Chief Justice.
I. INTRODUCTION
ConocoPhillips Alaska, Inc., Exxon Mobil Corporation,
ExxonMobil Alaska Production Inc., and Forest Oil Corporation
(the corporations) applied to reduce the rate of lease royalties
they owed the State of Alaska under a state lease initially
executed in 1965. They claimed that they were entitled to a
discovery royalty rate because they were the first producers to
discover oil in a new geologic structure, the Midnight Sun
Reservoir. The Commissioner of Natural Resources denied the
application, finding that the Midnight Sun Reservoir belonged to
a known geologic structure, the Kuparuk C sandstone formation.
We affirm the commissioners decision, holding that it is
supported by substantial evidence and correctly construes the
terms of the lease according to the law in effect when the lease
was signed. We also hold that the commissioner improperly
barred the corporations counsel from participating in the
administrative hearing, but we conclude that this error was
harmless because the corporations have failed to show substantial
prejudice.
II. FACTS AND PROCEEDINGS
A. Background
1. The discovery royalty program
In 1959 the legislature enacted the Alaska Land Act.1
A provision of the Act formerly codified as AS 38.05.180(a)
established a reduced royalty rate for state leaseholders making
the first commercial discovery of oil in a geologic structure:
the holder of a lease who shall drill and
make the first discovery of oil or gas in
commercial quantities in any geologic
structure shall pay a royalty on all
production under the lease of 5 per centum
for ten years following the date of such
discovery and thereafter the royalty rate
shall be not less than 12 per centum.[2]
This discovery royalty encouraged the exploration and rapid
development of Alaskas oil resources. Between 1959 and 1964, the
Department of Natural Resources adopted regulations implementing
the discovery royalty statute.3 Among these regulations was the
DL-1 competitive oil and gas lease form.4 The DL-1 lease
included a discovery royalty clause nearly identical to the
provisions of subsection .180(a), and also provided that its
terms would be interpreted according to regulations in force at
the time the lease was entered.5
The regulations established a process allowing lessees
to apply for discovery royalties and set the guidelines for the
department to determine whether an award was warranted.6 The new
regulations required applicants to provide the department with
data to determine the geologic structure from which the oil
and/or gas is being produced7 a requirement echoing subsection
.180(a)s language authorizing the department to award discovery
royalties only for the first discovery of oil . . . in a geologic
structure . . . .8
As then defined in 11 AAC 505.741(b), geologic
structure meant any structural and/or stratigraphic entrapping
mechanism containing one or more intervals, zones, strata,
formations, or fault blocks which has the necessary physical
characteristics to accumulate and prevent the escape of oil
and/or gas. The regulation further stated: It is intended that
the meaning shall be similar to that as used by the United States
Geological Survey in the administration of the Federal Mineral
Leasing Act of February 25, 1920.9
The Federal Mineral Leasing Act10 uses the geologic
structure concept to differentiate types of oil and gas leases
before leasing occurs. If the Secretary of the Interior
determines that government lands are not within a known geologic
structure of a producing oil or gas field11 they may be leased
without competitive bidding.12 As of 1959, the United States
Geological Survey (USGS) defined the Acts term known geologic
structure as the trap, whether structural or stratigraphic, in
which an accumulation of oil or gas has taken place. The limits
of such structure include all acreage that is presumptively
productive.13
In 1967 and 1969 the Alaska legislature curtailed and
then repealed the Alaska Land Acts discovery royalty provisions.14
The departments regulations implementing the discovery royalty
program were repealed in 1979.
2. History of the lease before the discovery well
The corporations predecessors-in-interest purchased ADL
28299, a DL-1 form lease, in 1965. Like others of its kind, the
lease includes a discovery royalty clause that is nearly
identical to former AS 38.05.180(a) (1965).15 Moreover, according
to paragraph 43 of the lease, As used in this lease words which
are defined in the regulations have the meaning assigned by such
definition except where the context clearly requires a different
meaning. And paragraph 42 provides that in this lease
regulations mean the applicable and valid oil and gas leasing
regulations of the Commissioner of the Department of Natural
Resources in effect on the effective date of this lease unless
otherwise specified.
The corporations lease contains approximately four
square miles, divided into four sections. The North Prudhoe Bay
bounding fault transects the leased land. Three of the lease
sections, those south of the fault, overlay the Prudhoe Bay
reservoir. The northeast section, section 30, lies north of the
fault and outside the Prudhoe Bay reservoir. In 1977 the
sections south of the fault were committed to the Prudhoe Bay
Unit Agreement.16
While oil development was concentrated south of the
fault in the Prudhoe Bay reservoir the largest accumulation of
oil in North America discoveries at Niakuk and Pt. McIntyre in
1985 and 1988 proved that the Kuparuk C sandstone north of the
fault was also a source of commercial quantities of oil. These
discoveries were not within section 30 of the lease. The Kuparuk
sands do not form a continuous layer north of the fault, but
rather a series of depositions in noncontiguous geographic
depressions.
In 1997 the corporations drilled the Sambuca No. 1
well, which aimed at land north of the fault in section 30. The
target of Sambuca 1 was Ivishak sandstone, but it tapped
quantities of oil in an intervening layer, a geographically
discrete bed of oil-bearing Kuparuk C, the Midnight Sun
Reservoir.
B. Proceedings
Based on this find, the corporations began the
application process for a discovery royalty, applying formally
for certification of the Midnight Sun Reservoir discovery royalty
in 1999. The Department of Natural Resources Director denied the
application, finding that the Reservoir was not a newly
discovered geologic structure as defined by former 11 AAC
505.741(b) (1965).
The corporations appealed the directors decision to the
commissioner under 11 AAC 02.030.17 In accord with 11 AAC
02.030(b), they submitted additional materials in support of
their appeal, including: a fifty-six-page legal brief, a fifteen-
page expert report, a list of discovery royalty statistics, an
affidavit, and research supporting an old discovery royalty
application.
Under 11 AAC 02.050(b) (2004),18 the commissioner set
the following hearing procedure: the Division of Oil and Gas was
allowed two and one-half hours to explain the directors decision
denying the application; then the corporations technical
personnel were allowed thirty minutes to question the divisions
technical personnel; followed by a two-and-one-half-hour
presentation by the corporations and thirty minutes of
questioning by the divisions technical personnel. The
commissioner described his goal as to allow [the corporations] to
present all relevant facts about North Slope geology that could
assist me in determining whether the Sambuca No. 1 well was the
first discovery of oil or gas in commercial quantities in a
geologic structure.
The corporations objected to the commissioners choice
of procedures by letter. They asked that the commissioner
reconsider his requirements that no attorney be allowed to make
a presentation or to question any of the persons presenting
information during the hearing and that questions not be posed in
the form of cross-examination. The commissioner declined to
alter the hearings procedural rules, stating, [t]he facts will be
most helpful to me if presented by the geologists, engineers, and
other persons with technical expertise bearing on these facts,
rather than by attorneys.
Following the hearing, the commissioner issued a
written decision affirming the directors ruling. Initially, the
commissioners decision found that whether the Midnight Sun
Reservoir was a previously undiscovered geologic structure
depended on former 11 AAC 505.741(b)s definition. The
commissioner discussed the USGSs 1959 definition of the federal
Acts reference to a known geologic structure which focused on
the presence of a trap . . . in which an accumulation of oil or
gas has taken place19 but found it unhelpful. Noting that
[e]xperts could validly differ on the
boundaries of a [known geologic structure],
depending on their view of geology and
terminology. . . . [T]he regulatory reference
to the old federal laws is of limited
assistance in finding the precise definition
of geologic structure that was intended by
the Alaska statute and regulations.
The commissioner thus opted for a more recent approach emerging
from the departments own royalty decisions. Relying on this
precedent, the commissioner found that the Midnight Sun Reservoir
was not a newly discovered geologic structure, in part because it
shared an entrapping mechanism with other discoveries of
commercial oil in the Kuparuk C formation.
The commissioner explained that the Midnight Sun
Reservoir exhibited the same entrapping mechanism as the
previously discovered Kuparuk formation, in part, because they
shared the same stratigraphic elements: [They] are all overlain
by Gamma Ray Shale[,] . . . [which] acts as a seal and is part of
the stratigraphic trap that makes the Kuparuk sands a reservoir.
Also, the Midnight Sun shared structural characteristics with the
previously discovered Kuparuk sands, since the controlling faults
fit a pattern, and all of the Kuparuk accumulations are part of
an apparent trend north of the Prudhoe Bay bounding fault. The
commissioner noted that this finding was consistent with much of
the evidence presented by the corporations, and while the
corporations expert arrived at a different conclusion, [his]
argument . . . is one of several working hypotheses regarding the
timing of depositional topography, erosional truncation, and
faulting in the area, and is not determinative of whether the two
are on different geologic structures.
The commissioner went on to reject the corporations
contention that the Midnight Sun Reservoir automatically
qualified for a discovery royalty because it was separate. He
reasoned that although the Midnight Sun is a separate reservoir,
it is not trapped by a geologically different entrapping
mechanism. In the commissioners view, the corporations narrow
approach would prove unworkable:
The broader interpretation of the term
geologic structure that is adopted here is
the most sensible because it avoids the
unreasonable outcomes that could result from
Lessees interpretation, outcomes that were
not intended by the Legislature. That is, it
could be that innumerable pockets, or
accumulations, are isolated from other
reservoirs on the North Slope; each cannot be
considered a separate geologic structure, or
scores of small pockets of oil would qualify
under the program. That was not the programs
intent, and interpreting the term that way
now would simply lead to incongruities, both
from the regulatory and fiscal standpoint of
the state.
Applying the broader approach he gleaned from the
departments prior decisions, the commissioner described the scale
of this [geologic] structure as the Kuparuk C sands north of the
Prudhoe Bay bounding fault . . . [including] Kuparuk C sands at
West Beach, Niakuk, Pt. McIntyre and Gwydyr Bay. While
recognizing that this broader approach might lead the department
to reach different results now than it reached in the past, the
commissioner justified the differing outcomes by emphasizing that
[o]ur increased knowledge and ability to incorporate new
information has led us to a more sensible view of the geology and
of the role that the discovery royalty program should play in
North Slope exploration. The commissioner pointed to advances in
data collection (e.g., 3-D seismic technology), to the
establishment of industry infrastructure that makes drilling
wells easier, and to the general development of the North Slope
as a mature oil province in the years since the program was
established.
The commissioner also found that drilling the Sambuca 1
did not present the same commercial risk as earlier discoveries
in the Kuparuk. Pointing to the risks that the companies
undertook and how that risk might further the policies behind the
discovery royalty program, the commissioner explained that, since
the program was created when Alaska was young as an incentive to
encourage companies to explore for and develop our resources,
this decision must consider whether those inducements would be
promoted by granting the application. The commissioner noted
that the Sambuca 1 well had been drilled from an existing pad in
a well-developed and densely-drilled area of the North Slope on a
lease that had been included in the Prudhoe Bay Unit for 20
years. While acknowledging that the Kuparuk sands were not the
wells primary target, he stressed that seismic information showed
the Lessees that something else was present they tailored their
directional drilling plan to evaluate the anomaly on the way to
the wells primary Ivishak objective. Because Ivishak was
relatively low risk, the commissioner reasoned that the
corporations decision to drill had not actually been motivated by
the possibility of obtaining a discovery royalty. Given these
circumstances, the commissioner concluded:
[I]t would be neither wise nor fair, nor in
keeping with the Departments policies, to
reward drilling a well for which the
potentially lower royalty rate was apparently
not considered, and which would have been
drilled regardless of this accumulation. The
discovery royalty was intended to reward
companies for taking risks, not for a routine
evaluation of additional formations en route
to a formation known to be productive.
Because the discovery royalty provided no
incentive to the drilling of the Sambuca No.
1 well, the Lessees should not be rewarded
with an incentive payment.
The corporations appealed the commissioners decision to
the superior court and requested a trial de novo, arguing that
the departments appellate procedures were unconstitutional and
inadequate for resolving a contract dispute in which the
department was an interested party. Superior Court Judge Donald
Hopwood declined to conduct a de novo hearing, finding no showing
that the department had been biased or that evidence had been
improperly excluded. The superior court thus treated the case as
an ordinary administrative appeal, reviewing the commissioners
decision deferentially.
The superior court later issued a decision affirming
the commissioners ruling. The corporations appeal.
III. DISCUSSION
A. Standard of Review
When the superior court acts as an intermediate court
of appeal in an administrative matter, we directly review the
merits of the agencys decision.20 We apply a four-part standard
to review the merits of the agencys ruling, using (1) the
substantial evidence test for questions of fact, (2) the
reasonable basis test for questions of law involving agency
expertise, (3) the substitution of judgment test for questions of
law involving no agency expertise, and (4) the reasonable and not
arbitrary test for review of administrative regulations.21
Here, the corporations devote a considerable portion of
their arguments to protesting the superior courts reliance on a
deferential standard of review. They argue that the
commissioners decision should be reviewed de novo because their
royalty rights arise under their lease, not under the departments
regulations. Since the terms of the lease became fixed when it
was originally signed, the corporations insist, the leases
original meaning must now be determined and enforced under
conventional principles of contract interpretation, which treat
the issue as a pure question of law.
This argument seems unobjectionable as far as it goes,
but it stops short of completely covering the matter at issue.
The corporations are certainly correct in describing the lease as
a contract, in insisting that its terms must be given their
original meaning, and in observing that contractual
interpretation generally presents a question of law. Yet these
observations beg the key question of what measure the original
lease adopts for determining the existence of first discovery
rights.
As already mentioned, the lease unambiguously requires
the lessees royalty rights to be determined through an
administrative process in which the department must apply a
specified regulatory standard one that gives the term geologic
structure a meaning similar to that as used by the United States
Geological Survey in the administration of the Federal Mineral
Leasing Act of February 25, 1920.22 The crucial question, then,
is whether this standard describes a fixed and immutable test or
a more flexible process one grounded in the departments exercise
of discretion and expertise and having the capacity to evolve as
contemporary scientific knowledge advances. If the test was
fixed and certain when the lease was signed, then Midnight Suns
status as a new discovery might well present a pure question of
law to be decided de novo; conversely, if applying the test
required agency expertise and discretion, then judicial review of
the commissioners ruling would need to be appropriately
deferential. The corporations separately argue that they
deserved a de novo hearing because the department had a
proprietary interest that prevented it from acting without bias,
because the commissioners hearing was procedurally flawed, and
because his decision conflicted with the departments prior
rulings. These points involve issues of procedural due process
raising questions of law that we review de novo.
Last, in some of their arguments, the corporations ask
us to review the commissioners factual findings and legal
conclusions. Where the question involves more than the choice of
law, we will review these aspects of the commissioners decision
under the reasonable basis test.23 This accords with both our
usual deference to agency decisions and with the terms of the
lease that make the award of a discovery royalty contingent upon
an agency decision.24
B. The Commissioners Decision
We begin our review of the commissioners decision that
the Midnight Sun Reservoir was not a newly discovered geologic
structure by examining the terms of the lease and applicable
regulations. Paragraph 12 of the lease states that the lessee
will be entitled to a reduction in royalties owed the state upon
making the first discovery of oil or gas in commercial quantities
in any geologic structure. Paragraphs 42 and 43 make it clear
that the terms of the lease should be defined according to
applicable regulations in effect on the effective date of this
lease.
The corporations argue that the commissioners decision
is contrary to Alaska statutes, the lease provisions, and
applicable regulations. According to the corporations, the
decision failed to apply the federal known-geologic-structure
test, and instead proceeded in an ad hoc manner to create and
apply several new tests for awarding discovery royalties that
were more in keeping with his views of what current agency policy
should be.25 But the Alaska regulations in place when the lease
was signed made it clear that the department was not confined to
a mechanical application of the known-geologic-structure test.
The then-current version of 11 AAC 505.741(b) set out a detailed
definition of geologic structure and stated that this definition
was intended to be similar to the one used in the administration
of the Federal Mineral Leasing Act.26 The regulation qualifies
its reliance on the federal standard. The Alaska definition of
geologic structure need only be similar to the federal
definition. And the regulations express directive that Alaskas
use of geologic structure was intended to have a similar meaning
to the one used in the administration of the federal standard
rather than to the federal standard itself strongly suggests
that the department viewed the federal standard as an ongoing
administrative process that was broad enough for agency
discretion and flexible enough to evolve over time.
Further evidence supporting this flexible view of the
Alaska regulation defining geologic structure can be gleaned by
comparing its purpose to the one served by the Federal Mining and
Land Acts known-geologic-structure requirement. Alaskas system
of discovery royalties was designed to allow royalty reductions
to be granted case by case in future administrative proceedings
commenced after commercial quantities of oil and gas were
actually found on lands already under state lease.27 As
exemplified by this case, these proceedings might occur decades
after a lease was signed and would almost certainly require
evaluation of detailed information that would not have been
known, or even knowable, at the time of signing. In the context
of this forward-looking regulatory process, it would seem
unrealistic for the parties signing the lease to expect that
geologic structure would be defined in a static way that could
not adapt to changes in best available techniques and technology.
By contrast, as used in the federal act, the known geologic
structure test is designed for an immediate determination one
that classifies prospective lease lands before they are put up
for lease. Given the federal acts narrower, present-tense focus,
it would seem reasonable to expect that the federal system would
use a more concrete test: a test that would be practical to apply
based on already available facts and would not need to adapt to
future events.
But as the state correctly points out, even given the
federal systems diminished need for flexibility, the federal test
has never actually been set in stone. Under the federal test,
areas within a known geologic structure are subject to expansion
and consolidation with advances in geologic knowledge.28 In fact,
even the publication that the corporations rely upon acknowledges
that known-geologic-structure boundaries are not to be taken as
absolutely and accurately showing the extent in each instance of
the geological structure producing oil or gas, but they may later
be extended or reduced to accord with the facts.29 Moreover,
decisions of the Department of the Interior Board of Land Appeals
construing the federal definition of a known geologic structure
recognize that a geologic structure may be composed of multiple
accumulations that are physically separate yet share structural
characteristics, such as entrapping mechanisms: Delineation of a
[known geologic structure] recognizes the existence of a
continuous entrapping structure, on some part of which there is
production, or of numerous related, but nevertheless independent,
stratigraphic or structural traps.30 And pre-drilling risk may
also be a consideration under the federal known-geologic-
structure analysis.31
Despite the corporations contrary assertions, then, the
commissioners method of determining geologic structure in the
present case was similar to the federal test. The commissioner
looked at three basic factors: whether the Midnight Sun Reservoir
was a physically separate accumulation of oil; whether it had a
structurally distinct entrapping mechanism; and whether its
discovery entailed commercial risk. The commissioners finding
that the Midnight Sun Reservoir belonged to the already known
Kuparuk C geologic structure thus is consistent with the
federally defined standard.
The corporations nevertheless dispute the commissioners
finding that the Kuparuk C sands comprised a single geologic
structure; they claim that this finding conflicts with the plain
language of former 11 AAC 505.741(b) by indiscriminately
combining oil traps and non-trapping rocks. But former 11 AAC
505.741(b) specifically defined a geologic structure to include
any structural and/or stratigraphic entrapping mechanism
containing one or more intervals, zones, strata, formations, or
fault blocks.32 Because this definition allows a trapping
mechanism (such as the mechanism common to the Kuparuk C sands)
to contain multiple accumulations of oil, it does not
automatically require the department to award a discovery royalty
to every newly discovered trap in the same entrapping mechanism.
It follows that the commissioners decision does not
conflict as a matter of law with the definition of a geologic
structure set out in former 11 AAC 505.741(b). The commissioner
found that the Midnight Sun Reservoir did not have a geologically
different entrapping mechanism from other Kuparuk C oil
accumulations; a geologic structure is defined by the regulation
primarily as an entrapping mechanism. The fact that such an
entrapping mechanism may contain multiple geologic features and
formations does not make it any less a single structure. The
plain text of the regulation does not demand that each one of the
structures intervals, zones, strata, formations, or fault blocks
contain oil. The commissioners decision thus falls within the
limits defined in former 11 AAC 505.741(b).
The corporations also contend that the commissioners
decision cannot be reconciled with the departments own decisions
in other discovery-royalty cases involving the Kuparuk C sands
specifically the Niakuk and Pt. McIntyre decisions. But the
commissioner fully considered department precedent in his
decision. He distinguished the Niakuk award from the present
case, noting that the department was not bound to recognize the
Midnight Sun as a new discovery simply because its location had
been omitted from the area that the Niakuk decision described as
the Niakuk structure. This finding appropriately recognizes
that, under Alaskas regulations and federal law alike, the
boundaries of a given geologic structure may expand or contract
with advances in knowledge and technique.
The commissioner distinguished the Pt. McIntyre
decision on slightly different grounds, observing that the Pt.
McIntyre well involved substantial commercial risk. As we have
already indicated, commercial risk is a permissible factor to
consider in determining whether a particular discovery lies
within an already known geologic structure.33
Accordingly, we conclude that the commissioner did not
base his decision on a flawed legal standard. We turn next to
the corporations additional criticisms of the commissioners
decision.
The corporations argue that the commissioners failure
to designate the Midnight Sun Reservoir as a separate geologic
structure conflicts with the departments actual treatment of the
area before and after the discovery well was drilled.
Specifically, the corporations contend, no information existed
before drilling that would have allowed Midnight Sun to be
included in any recognized participating area; yet after the
discovery, the department approved Midnight Sun as its own
participating area. But this argument conflates distinct rules
governing discovery and participation. Participating areas are
defined by regulation to include only lands that are reasonably
estimated . . . to be capable of producing . . . hydrocarbons in
paying quantities.34 As the state explains, unit and participation
areas are created by multiple developers with access to the same
reservoir; their purpose is to maximize production from
individual reservoirs without waste.35 Because the criteria for
participating areas differ in purpose and definition from those
for awarding discovery royalty rights, a locations exclusion from
or approval as a participating area does not determine its status
as a separate geologic structure.
The state additionally points out that prior decisions
by the department and federal decisions under the known-geologic-
structure standard have denied discovery royalty awards to
isolated reservoirs that are nonetheless part of the same
geologic structure. The record supports the states point,
establishing that the departments present application of the
known-geologic-structure standard is consistent with its
historical interpretation of that standard. Here, the
commissioner similarly found that Midnight Sun was a separate
accumulation included within the larger Kuparuk C structure. He
noted that all the Kuparuk C sands share the same stratigraphic
elements and structural characteristics. Because these
determinations incorporate factual findings, we must affirm the
commissioners decision as long as it is supported by substantial
evidence.36 For as we recognized in Exxon Corp. v. State, 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 facts
choice of inferences is supported by substantial evidence. 37 On
reviewing the record here, we find that substantial evidence
supports the commissioners decision.
C. Due Process
The companies separately argue that due process
required the superior court to conduct a de novo hearing. Under
11 AAC 02.050(a) (2004), [t]he department will, in its
discretion, hold a hearing when questions of fact must be
resolved. According to 11 AAC 02.050(b), the procedure for such
a hearing will be determined by the department on a case-by-case
basis.38
The corporations argue that they were denied their
procedural due process rights in the hearing before the
commissioner because the commissioner (1) prohibited counsel from
participating, (2) prohibited cross-examination, and (3)
prohibited all parties from presenting post-hearing oral or
written arguments concerning the weight of the evidence. The
corporations note that when a traditional contract dispute is
filed in the superior court, the regular rules pertaining to
discovery, the conduct of trials, burden of proof, and the
interpretation of contracts apply. They also argue that the
balancing test enunciated in Mathews v. Eldridge39 tilts in their
favor. That test requires consideration of three factors:
First, the private interest that will be
affected by the official action; second, the
risk of an erroneous deprivation of such
interest through the procedures used, and the
probable value, if any, of additional or
substitute procedural safeguards; and
finally, the Governments interest, including
the function involved and the fiscal and
administrative burdens that the additional or
substitute procedural requirement would
entail.[40]
Applying this test to the present case, the
corporations maintain that a valuable contract right is at stake,
the procedural constraints created a serious risk of erroneous
deprivation of Lessees valuable contract right, and allowing the
additional argument would have converted the one-day hearing into
only a two-day hearing akin to the limited trial de novo
requested by the Lessees of the Superior Court. As the
corporations correctly claim, the private contract rights at
issue are significant. The cost of a hearing with
representation, cross-examination, and oral argument on the state
would have been relatively small. Furthermore, the value of an
attorneys representation to safeguard due process is certain.
But our review of the record convinces us that the
commissioners failure to allow representation at the corporations
hearing amounted to harmless error. The corporations made no
specific offer of proof to establish potential prejudice below
and have failed to identify any substantial prejudice in their
current briefing. While they advance a general assertion that
the presence of counsel would have enabled them to test the
credibility of witnesses through cross-examination, the case does
not appear to turn on credibility determinations, and the
corporations point to no specific evidence that might have been
susceptible to a different interpretation. Similarly, we fail to
see how the corporations were prejudiced by their inability to
have counsel present at opening and closing arguments
particularly since the commissioner allowed the parties to submit
voluminous legal briefing. On this record, we conclude that the
procedural error was harmless.
IV. CONCLUSION
Because the commissioners decision is supported by
substantial evidence and comports with the lease and governing
Alaska law, and because the corporations have failed to show that
they suffered substantial prejudice from the commissioners
refusal to allow their counsel to participate in the hearing
before the commissioner, we AFFIRM the commissioners order
denying the corporations application for a discovery royalty.
_______________________________
1 Ch. 169, SLA 1959.
2 Former AS 38.05.180(a) (1959) (repealed 1969).
3 See Former 11 Alaska Administrative Code (AAC) 505.74 -
11 AAC 505.748 (1964), (amended and renumbered as 11 AAC 83.200 -
11 AAC 83.230 (1974), and repealed in 1979).
4 Former 11 AAC 517.1 (1960).
5 Id.
6 Former 11 AAC 505.74-.748 (1964).
7 Former 11 AAC 505.744 (1964).
8 Former AS 38.05.180(a) (1959).
9 Former 11 AAC 505.741(b) (1964).
10 30 U.S.C. 181-287 (2004).
11 Id. at 226(b).
12 Arkla Exploration Co. v. Texas Oil & Gas Corp., 734
F.2d 347, 349 (8th Cir. 1984).
13 Emmet A. Finley, The Definition of Known Geologic
Structures of Producing Oil and Gas Fields, U.S. Geological
Survey Circular 419, 1 (1959).
14 See ch. 91, 2, SLA 1967; ch. 65, 1, SLA 1969.
15 Paragraph 12 of the lease states:
12. REDUCTION OF ROYALTY RATES FOR
DISCOVERY. If Lessee shall drill on said
land and make the first discovery of oil or
gas in commercial quantities in any geologic
structure, the royalty rate under this lease
shall, instead of the rates prescribed in
Paragraph 11, be five per cent for a period
of ten years following the date of such
discovery, and thereafter the royalty rates
shall be those prescribed in Paragraph 11.
If this lease is committed to a unit
agreement approved or prescribed by Lessor as
provided in the regulations, the five per
cent royalty rate shall not apply to all, but
only, the production allocated to this lease
under such agreement.
16 Unit agreements and participating areas are
organizational schemes approved by the Department of Natural
Resources to efficiently extract oil from a common reservoir that
is the subject of multiple leases. See 11 AAC 83.303 (2004).
17 11 AAC 02.030 (2004) provides the procedures for
seeking [a]n appeal or request for reconsideration of a
department decision. Beyond a written request, the regulation
allows the petitioner to include a request for an oral hearing .
. . ; the appellant may include a request for any special
procedures to be used at the hearing; the appeal or request for
reconsideration must describe the factual issues to be considered
at the hearing. 11 AAC 02.030(a)(13). Furthermore, [a]t the time
an appeal is filed, and up until the deadline set out in 11 AAC
02.040(a) to file the appeal, an appellant may submit additional
written material in support of the appeal, including evidence or
legal argument. 11 AAC 02.030(b).
18 11 AAC 02.050 reads, in its entirety:
(a) The department will, in its discretion,
hold a hearing when questions of fact must be
resolved.
(b) The hearing procedure will be determined
by the department on a case-by-case basis. As
provided in 11 AAC 02.030(a)(13), any request
for special procedures must be included with
the request for a hearing.
(c) In a hearing held under this section
(1) formal rules of evidence need not apply;
and
(2) the hearing will be recorded, and may be
transcribed at the request and expense of the
party requesting the transcript.
19 Finley, supra note 13.
20 Alyeska Pipeline Serv. Co. v. DeShong, 77 P.3d 1227,
1231 (Alaska 2003).
21 Jager v. State, 537 P.2d 1100, 1107 n.23 (Alaska 1975).
22 Former 11 AAC 505.741(b) (1964).
23 Tesoro Alaska Petroleum Co. v. Kenai Pipe Line Co., 746
P.2d 896, 903 (Alaska 1987).
24 See Pan Am. Petroleum Corp. v. Shell Oil Co., 455 P.2d
12, 19-24 (Alaska 1969) (where statute suggests no criteria for
discovery in commercial quantities, the departments decision
reviewed for reasonable basis).
25 The corporations also contend that the commissioners
decision is post-hoc contract modification, invalid under the
contract clauses of the federal and state constitutions. See
U.S. Const. art. I, 10, cl. 1; Alaska Const. art. I, 15. The
lease grants the department the authority to determine discovery
royalty awards subject to the regulations. Thus the
commissioners decision does not amount to a legislative
impairment of contract of constitutional dimensions. See, e.g.,
Exxon Corp. v. State, 40 P.3d 786, 789 (Alaska 2001).
26 Former 11 AAC 505.741(b) (1964) (emphasis added).
27 See former AS 38.05.180(a) (1959); former 11 AAC
505.742 (1964).
28 See, e.g., B.A. Wilford, 110 IBLA 154, 169 (1989);
Robert G. Lynn, 61 IBLA 153, 155 (1982) (The initial boundaries
of a [known geologic structure] are not preclusive of the
possibility of future changes.).
29 Emmet A. Finley, The Definition of Known Geologic
Structures of Producing Oil and Gas Fields, U.S. Geological
Survey Circular 419, 1 (1959).
30 Source Petroleum Co., 112 IBLA 184 (1989).
31 Arkla Exploration Co. v. Texas Oil & Gas Corp., 734
F.2d 347, 360-61 (8th Cir. 1984) ([R]elative risk of exploration
and exploration interest lie at the heart of the
competitive/noncompetitive leasing dichotomy in the [Mineral
Leasing Act].).
32 Former 11 AAC 505.741(b) (1964).
33 Arkla Exploration, 734 F.2d at 360-61.
34 11 AAC 83.351(a) (2004).
35 See also Exxon Corp. v. State, 40 P.3d 786, 788 (Alaska
2001).
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.
36 Commercial Fisheries Entry Commn v. Baxter, 806 P.2d
1373, 1374 (Alaska 1991).
37 40 P.3d 786, 792 (Alaska 2001).
38 The full text of 11 AAC 02.050 is set out above in note
18.
39 424 U.S. 319 (1976).
40 Id. at 335.
