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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. AVCG, LLC v. State of Alaska, Department of Natural Resources (4/7/2023) sp-7645
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, email
corrections@akcourts.gov.
THE SUPREME COURT OF THE STATE OF ALASKA
AVCG, LLC, )
) Supreme Court No.: S-18170
Appellant, )
Superior Court No.: 3AN-20-06625 CI
)
v. )
) O P I N I O N
STATE OF ALASKA, DEPARTMENT )
OF NATURAL RESOUCES, ) No. 7645 - April 7, 2023
)
Appellee. )
Appeal from the Superior Court of the State of Alaska, Third
Judicial District, Anchorage, Herman G. Walker, Jr., Judge.
Appearances: Louisiana W. Cutler, Joan M. Travostino, and
Siena M. Caruso, Dorsey & Whitney LLP, Anchorage, for
Appellant. David A. Wilkinson, Senior Assistant Attorney
General, Anchorage, and Treg R. Taylor, Attorney General,
Juneau, for Appellee.
Before: Winfree, Chief Justice, Maassen, Carney,
Borghesan, and Henderson, Justices.
BORGHESAN, Justice
INTRODUCTION
Alaska Venture Capital Group, LLC (AVCG) owned interests in oil and
----------------------- Page 2-----------------------
1
gas leases on state lands on the North Slope. AVCG sought the State's approval to
2
create overriding royalty interests on the leases. The Alaska Department of Natural
Resources, Division of Oil and Gas denied AVCG's requests, explaining that the
proposed royalty burdens jeopardized the State's interest in sustained oil and gas
development. AVCG appealed. Five years later the DNR Commissioner affirmed. The
superior court then affirmed the Commissioner's decisions. AVCG now appeals to us.
AVCG's primary argument is that the decisions improperly adopted a new
regulation that did not undergo the rulemaking procedures of Alaska's Administrative
Procedure Act (APA). AVCG maintains that DNR's reliance on specific factors - in
particular, the fact that the proposed ORRIs would create a total royalty burden of over
20% on the leases - amounted to adopting a regulation. But applying existing statutory
and regulatory standards to the particular facts of the case and explaining the importance
of those facts in the analysis did not amount to a new regulation. The 20% figure was
a standard developed through a series of past adjudications, not a new standard that
required rulemaking.
1
Several agencies and agents of the State are involved in this appeal: the
Alaska Department of Natural Resources (DNR); the Division of Oil and Gas
(Division), a sub-agency of DNR; and the DNR Commissioner (Commissioner). The
Division i s tasked with processing applications for new overriding royalty i nterests.
The Commissioner is responsible for adjudicating appeals of Division decisions. We
use "DNR" when referring to the Division and the Commissioner collectively, or to the
agency in general.
2
"[A]n overriding royalty interest (ORRI) . . . entitles [the holder] to a
percentage of royalties from the oil and gas produced by the lease at the surface, when
and if the lease becomes productive." See PLC, LLC v. State, Dep't of Nat. Res., 484
P.3d 572, 574-75 (Alaska 2021); see also Gottstein v. State, Dep't of Nat. Res., 223
P.3d 609, 611 n. 3 (defining "overriding royalty interest"); Allen v. Alaska Oil & Gas
Conservation Comm'n, 1 P.3d 699, 700 n.1 (Alaska 2000) (same). ORRI owners
receive a fraction of proceeds from a lease without contributing to development or
operations. Kimberlee Cagle et al., Rekindling the Flame: Oil and Gas Securitizations,
20 PRATT 'S ENERGY REP. 81, 83 (2020).
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AVCG also argues that the decisions lacked a reasonable basis in fact and
law and that, for some of its leases, no agency approval was required at all. We reject
both arguments. The decisions to deny ORRIs had a reasonable basis, especially in
light of missed production deadlines for some leases and the developmental stage of
others. AVCG's argument that it did not need approval to create ORRIs on some leases
is inconsistent with the language of and policy behind the applicable regulation.
Finally, AVCG raises constitutional claims. It argues that delay and an
"ad hoc" decision-making process violated its procedural due process rights. But
AVCG fails to establish prejudice arising from the delay, and the case-by-case exercise
of discretion is both appropriate and required by regulation. It also argues that the
denials constituted an uncompensated taking. Because AVCG's right to create ORRIs
was expressly conditioned on DNR approval, lawfully denying this approval did not
deprive AVCG of any property interest.
We affirm the superior court on all issues.
FACTS AND PROCEEDINGS
A. Oil And Gas Security Interests
This matter concerns three types of oil and gas security interests.
Landowners that lease their lands for hydrocarbon production, including the State,
3
typically reserve a royalty interest in production. Royalty interests are independent
from the costs of production.4 The royalty owner receiv es a set fraction of the gross
revenue the lessee receives from producing oil and gas.5
3
See Cagle et al., supra note 2, at
82.
4
Id.
5
Id.
-3
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----------------------- Page 4-----------------------
The lessee typically has a working interest, an ownership share that
conveys the right to explore, drill, and produce oil on the leased lands.6
The owner of
a working interest receives a share of production revenues that remain after royalties
7
are paid.
Finally, an overriding royalty interest (ORRI) is an additional royalty
8 The owner of an ORRI is entitled "to a
carved out from a lessee's working interest.
percentage of royalties from the oil and gas produced by the lease at the surface, when
and if the lease becomes productive."9 Like royalty interest owners, ORRI owners
receive a fraction of proceeds from a lease without contributing to development or
operations.10 Adding an ORRI to an existing royalty interest reduces working interest
holders' net revenue without decreasing production costs, increasing the ratio of risk to
11 If a high royalty burden siphons too much profit from
reward for developing a lease.
working interest owners, then they may lack adequate incentive to develop the prospect
6
11 Alaska Administrative Code (AAC) 88.185(37) (2023).
7
See Cagle et al., supra note 2, at
82-83.
8
Id. at 83.
9
PLC, LLC v. State, Dep't of Nat. Res., 484 P.3d 572, 574-75 (Alaska 2021)
(citing Gottstein v. State, Dep't of Nat. Res., 223 P.3d 609, 611 n.3 (Alaska 2010)).
10
Id.
11
See John K. H. Akers, Jr., Overriding Royalty Interests: Pitfalls,
Precedent, and Protection, 50 Rocky Mt. Min. L. Inst. 21-1, 21-2 (2004) ("An
adversarial relationship, the result of conflicting economic interests, exists between the
operating and nonoperating interest owners in an oil and gas lease. . . . Owners of the
latter, consisting of overriding royalty interests . . . expect their allotted share of oil and
gas free of the expense of exploration, development, and operation - 'freeloaders' as
perceived by the burdened operating interest owners.").
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----------------------- Page 5-----------------------
or to continue production when recovery becomes more expensive, especially in the
event of changing economic conditions.12
The legislature has created a program of leasing state lands for oil and gas
production, providing that "the people of Alaska have an interest in the development of
the state's oil and gas resources to (A) maximize the economic and physical recovery
of the resources; (B) maximize competition among parties seeking to explore and
13
develop the resources; and (C) maximize use of Alaska's human resources." Pursuant
to this program, the Division may approve transfers of interests in state oil and gas
14
leases, including transfers that entail the creation of ORRIs. However, "[n]o transfer
of an interest in a lease, oil and gas exploration license, or permit, including assignments
of working or royalty interest, operating agreements, and subleases, is binding upon the
15
state unless approved by the commissioner." The Division will approve transfers
"unless the commissioner makes a written finding that the transfer would adversely
16
affect the interests of the state." Once the Division approves a new ORRI, the owner
17
of that ORRI may transfer it to others without seeking further approval.
12
See id.
13
AS 38.05.180(a)(1).
14
11 AAC 82.605(a) (2018).
15
11 AAC 82.605(b).
16
11 AAC 82.605(c).
17
11 A AC 82.605(b) ("When t ransfers of overriding royalty are made after
the initial separation from the working interest of the lease, executed or image copies
of these transfers must be transmitted to the department without charge for filing in the
appropriate case file. However, the commissioner will take no action and official status
records will not be posted to reflect these transfers.").
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----------------------- Page 6-----------------------
B. AVCG's Proposals
In August 2014 AVCG and other working interest owners asked the
Division to approve two agreements concerning two sets of oil and gas leases on the
North Slope. Five leases jointly operated as the Southern Miluveach Unit (SMU)
comprised AVCG's first set of working interests. AVCG also held full or partial
working interests in 34 undeveloped leases. Each agreement proposed (1) assigning
working interests to a group of purchaser entities and (2) creating ORRIs that AVCG
and others would retain as partial compensation for the working interest transfer.
The Division asked Brooks Range Petroleum Corporation (Brooks
Range), another developer that operated the SMU leases on behalf of AVCG and other
working interest holders, to share details that would inform the Division's response to
the proposed ORRIs. In an email to Brooks Range, the Division noted that the requested
18
ORRIs would reduce the working interest holders' net revenue interest to 77.5% for
the SMU leases. The Division requested "an explanation as to how approving the
ORRIs will not adversely affect the interests of the state, particularly with regards to
the ability of working interest owners to explore and develop the leases."
Brooks Range responded to the Division's queries with a brief email and,
later, a letter recommending that the Division approve AVCG's ORRI application.
Brooks Range's initial email suggested that O RRIs already existing on the SMU leases
would not burden the exploration and developments of those leases and that the
proposed additional ORRIs would not hinder development because the entities that
would hold the ORRIs also owned working interests. A more comprehensive set of
arguments followed in Brooks Range's October 2014 letter. The October letter
reiterated that the ORRIs already burdening the SMU leases did not preclude
18
"Net revenue interest" is a working interest owner's share of oil and gas
production after deducting all burdens, such as royalties and overriding royalties. Cagle
et al., supra note 2, at 83.
-6- 7645
----------------------- Page 7-----------------------
exploration and stated that the purchasing parties had accounted for the proposed
additional ORRIs in their economic models. Brooks Range asserted that the proposed
ORRIs would promote state interests by permitting the sellers to agree to a lower up-
front cash payment - leaving the purchasers extra capital with which to develop the
leases.
C. The Division's Decisions
The Division issued a decision regarding the SMU leases in October 2014
and a decision on the 34 undeveloped leases in March 2015. For both sets of leases the
Division approved working interest transfers but denied the proposed ORRIs. The
Division issued a detailed memo explaining each decision.
When the Division rejected AVCG's application to create new ORRIs on
the SMU leases, it emphasized that the "specifics of the application[] and the activity
in the unit" would drive its analysis. The Division explained that the proposed ORRIs
"would leave current and future [working interest owners] with only 77.5% of the
production revenue while bearing 100% of the costs of exploration and development."
The proposed ORRIs, if approved, would "persist as long as the leases exist."
Therefore, the Division explained, even if the current working interest holders were
willing to operate under a high royalty burden, new ORRIs could discourage future
assignment of the working interests. The Division also chronicled the applicants'
exploration activities prior to their ORRI application. It pointed out that that the
developers had failed to drill any wells during the unit approval period despite multiple
deadline extensions and that the applicants had failed to provide required
documentation.
The Division also responded to points in Brooks Range's letter. The
Division noted that the applicants failed to address the long-term impacts of new ORRIs
and their effect on the possibility of future assignments to new working interest owners.
The Division concluded that "the likelihood that, in the long-term, an ORRI burden of
this magnitude would discourage exploration and development of these leases, and that
-7- 7645
----------------------- Page 8-----------------------
the economic limit would be reached prematurely, creates a risk that is great enough to
adversely affect the state's interests."
The Division also denied proposed ORRIs on A VCG's 34 undeveloped
leases. Additional ORRIs, the Division wrote, would drop the working interest owners'
net revenue interest from a range of approximately 78.3% to 83.3% across the leases to
a range of 75.8% to 79.8%. As with the SMU leases, the Division found that this low
net revenue interest, compounded by other concerns about the leases' long-term
economic viability, would harm state interests.
D. The Commissioner's Decisions
AVCG appealed the Division's two ORRI denials to the Commissioner.
Over five years later, in May 2020, the Commissioner affirmed both decisions. The
Commissioner explained that when the Division determines whether to approve an
application under 11 AAC 82.605(c), it "undertakes an analysis of the facts and
circumstances underlying a transfer request, with the requested ORRI burden
percentage in relation to the resulting total overall royalty burden . . . as an important
primary consideration." The Commissioner elaborated upon her reasoning:
Generally, the Division has viewed a total royalty burden of
20% or greater as excessively burdening a lease and
adversely affecting its economic life. The disapproval of a
transfer request application that would result in a 20% or
greater total royalty burden is not a bright line rule. Rather,
the total royalty burden is a critical variable analyzed by the
Division. That is, depending upon the size and production
profile of the field, an ORRI may be tolerated without
significant impact to the economic life of the field. But in
instances where, as here, a field has marginal reserves,
requires more technical recovery methods, or has higher
operating costs (amongst other circumstances), the Division
has calculated that an excessive ORRI burden will most
likely shorten economic field life inconsistent with the best
interests of the State.
-8- 7645
----------------------- Page 9-----------------------
The Division had declined "most" ORRI requests resulting in a revenue burden over
20%, the Commissioner wrote, although she noted that the Division had previously
approved a lease with a royalty burden above 20%. This discrepancy, she asserted,
"only demonstrate[s] that . . . the Division does not employ a 'bright line rule,' " but
rather conducts a case-by-case analysis.
The Commissioner also addressed other factors that the Division considered.
These factors included "an appraisal of the financial fitness of the lessees, an evaluation
of the reserves associated with the project, an understanding of the State's investment
level and exposure, and the development of an overall commercial profile of the
project." The Division had found that the assignees' funding structure would render
the project financially viable without additional ORRIs and that the proposed ORRIs
would result in 173,000 barrels of lost oil production, the Commissioner explained. The
proposed ORRIs could therefore trigger a loss of over $1 million to the State. The
Division also found that the missed production deadlines and request for additional
ORRIs suggested the working interest owners were undercapitalized and "financially
brittle," meaning that "development and sustained production were potentially at risk."
This concerning behavior, in addition to the proposed total royalty burden of over 20%,
led the Commissioner to uphold the Division's decision and deny AVCG's application
to create new ORRIs for the SMU leases.
The Commissioner took a different approach to evaluating the 34
undeveloped leases. She described the leases as too early in the exploration phase for
the Division to conduct its usual analysis. Because these leases remained in an
exploratory phase, the Commissioner wrote, "a high ORRI burden posed a specific risk;
it may take a decade or longer from the first exploration well to production, and
circumstances can change greatly over that long of a time period." "Essentially, the
requested transfer promised a percentage of undeterminable future earnings, a
percentage that would persist until lease expiration, and therefore it possessed the
potential to depress project economics to the point that [working interest owners] would
-9- 7645
----------------------- Page 10-----------------------
not sanction the project." The Commissioner upheld the Division's decision to deny
new ORRIs for the 34 undeveloped leases.
E. Superior Court Appeal
AVCG appealed the Commissioner's decisions to the superior court,
advancing several arguments. First, AVCG argued that the decisions denying its
applications to create new ORRIs for the SMU leases and the 34 undeveloped leases
had unlawfully created a regulation. AVCG asserted that the purported regulation
established a 20% royalty threshold at which the burden shifted to the applicant to show
the ORRIs would be in the State's interest. AVCG also argued that "ad hoc decision-
making" and the long delay before the Commissioner issued her decision violated
AVCG's due process rights; that the decisions rested on "speculation" about the future;
and that some of the ORRIs did not require agency approval. The superior court
rejected these arguments and affirmed the decisions.
AVCG appeals.
DISCUSSION
A. DNR Did Not Unlawfully Adopt A Regulation.
AVCG argues that the decisions reflect a new, uncodified rule: ORRI
applications that would produce a total royalty burden exceeding 20% shift a burden
from DNR to the applicant to show that additional ORRIs would not harm state
interests. According to AVCG, this uncodified regulation also includes a set of factors
that steer DNR's best interests analysis: the financial fitness of the lessees, the
sufficiency of reserves associated with the project, the recovery methods and costs
required to develop those reserves, the State's investment level and exposure, and
compliance with past field commitments. Because DNR did not promulgate a
regulation under the APA, AVCG argues, DNR's reliance on this supposed rule to deny
AVCG's applications is invalid.
Among the APA's key requirements is the duty to adopt regulations
through a formal rulemaking process that provides notice and an opportunity for public
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----------------------- Page 11-----------------------
19
involvement. "An agency should not have unfettered discretion to vary the
requirements of its regulations at whim. . . . [T]his invites the possibility that state
actions may be motivated by animosity, favoritism, or other improper influences."20
We must balance these concerns with the practical realities of administrative
governance. Agencies are called on to apply statutory rules to particular and sometimes
21
novel factual situations in the context of individual, case-by-case adjudications.
"[A]gencies must have some freedom to apply relevant statutes without the burden of
22
adopting a regulation each time they do so," in part because "[p]roblems may arise in
a case which the administrative agency could not reasonably foresee, problems which
must be solved despite the absence of a relevant general rule."23
"A requirement that
each . . . interpretation be preceded by rulemaking would result in complete ossification
24
of the regulatory state."
We balance these competing policy goals - notice, consistency,
flexibility, and efficiency - by distinguishing regulations from mere interpretations.
The Alaska legislature has defined a regulation as "every rule, regulation, order, or
standard of general application or the amendment, supplement, or revision of a rule,
19
See AS 44.62.180-44.62.290 (describing process for adopting
administrative regulations, including notice of proposed action and opportunity for
public comment).
20
Jerrel v. State, Dep 't of Nat. Res., 999 P.2d 138, 144 (Alaska 2000).
21
See AS 44.62.330-44.62.630 (establishing procedures for adjudication by
administrative agencies).
22
Chevron U.S.A., Inc. v. State, Dep 't of Revenue, 387 P.3d 25, 36 (Alaska
2016).
23
Marathon Oil Co. v. State, Dep 't of Nat. Res., 254 P.3d 1078, 1086
(Alaska 2011) (quoting A lyeska Pipeline Serv. Co. v. State, Dep't of Env 't
Conservation, 145 P.3d 561, 573 (Alaska 2006)).
24
Id. (quoting Alyeska , 145 P.3d at 573).
-11- 7645
----------------------- Page 12-----------------------
regulation, order, or standard adopted by a state agency to implement, interpret, or make
specific the law enforced or administered by [the agency]."25
"The label an agency
places on a policy or practice does not determine whether that rule falls under the
26
APA." Instead we consider substance.
An agency effectively adopts a regulation when it (1) implements,
interprets, or makes specific a statutory directive that (2) impacts the agency's dealings
27
with the public. An agency does not meet the first prong of this test if it merely adopts
28
a commonsense interpretation of existing requirements. But if the agency's
interpretation adds "requirements of substance," interprets the statute in an
unforeseeable way, or represents a change in course, then it must use the APA's
29
rulemaking process. "Whether an agency action is a regulation is a question of law
that does not involve agency expertise, which we review applying our independent
30
judgment."
Our analysis of whether DNR promulgated a de facto regulation proceeds
in two parts. First, we conclude that DNR did not adopt a regulation when it identified
the economic factors that inform its best interest analyses. DNR's focus on these factors
was a commonsense and foreseeable application of the existing statutory and regulatory
standard to the matter before it, and AVCG does not show that DNR's approach has
changed. Second, we conclude that DNR did not adopt a new regulation when it
25
AS 44.62.640(a)(3).
26
Jerrel v. State, Dep 't of Nat. Res., 999 P.2d 138, 143 (Alaska 2000).
27
Id. ; see also AS 44.62.640(a)(3).
28
Chevron U.S.A., Inc. v. State, Dep 't of Revenue, 387 P.3d 25, 36 (Alaska
2016).
29
Id. at 36-37.
30
Id. at 35 (quoting State, Dep't of Nat. Res. v. Nondalton Tribal Council,
268 P.3d 293, 299 (Alaska 2012)).
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----------------------- Page 13-----------------------
explained that a total royalty burden over 20% is typically contrary to the State's
interests. Because DNR appears to have distilled this guideline from a series of past
adjudications, it did not adopt a new rule that requires rulemaking.
1. DNR did not effectively adopt a regulation when it identified
the factors supporting its decision.
a. Identifying and discussing the factors supporting the
decisions did not add requirements of substance to
existing laws.
As noted above, an agency's interpretation of an existing statute or
regulation requires rulemaking if it adds requirements of substance, is unforeseeable,
or changes the agency's approach.31
The factors that proved determinative in this
matter - the total royalty burden, the financial fitness of the lessees, the project's
reserves and overall commercial profile, and the State's investment level and exposure
- do not bear these hallmarks of rulemaking.
Agencies add requirements of substance when they invent "specific
criteria or values that clarif[y] the existing statutory or regulatory standard and require[]
32
the public to comport with precise criteria not specified in existing rules." In contrast,
agency actions do not add requirements of substance if they merely "interpret[] a broad
33
phrase" or apply a statutory standard to the facts of a particular case. Our past
decisions illustrate the difference between new criteria and commonsense
interpretations of existing rules.
On the one hand, we have ruled that agencies must undertake rulemaking
before imposing precise numeric requirements not specified in existing rules. Jerrel v.
State, Department of Natural Resources concerned 11 AAC 60.070, which provided
31
Id. at 36-37.
32
Id. at 37.
33
Id. at 38.
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----------------------- Page 14-----------------------
that "[a]ll livestock permitted on a state grazing lease shall be properly identified . . . .
[T]he director may require that the livestock be tagged, dyed, or otherwise marked . . .
in accordance with the annual operating plan."34
DNR informally ordered ranchers to
mark their horses with marks "plainly distinguishable from a distance of 20 feet" and
35
repeatedly rejected the ranchers' solutions as insufficiently permanent or visible. We
agreed with the ranchers that the 20-foot visibility requirement was a regulation because
it added specific criteria with which the ranchers were made to comply.36
In Estrada v. State the Department of Fish & Game announced that it
would reduce the harvest limit for Kanalku Lake sockeye from 25 to 15 fish.37 Relying
on Jerrel , we explained that the 15-fish limit "made specific a statutory requirement"
and should have been adopted through rulemaking.38
And in Burke v. Houston NANA, LLC, the Alaska Workers' Compensation
Board developed through adjudication a discovery rule that required an injured
employee to request a reemployment eligibility evaluation within 90 days of when he
34
999 P.2d 138, 140 & n.3 (Alaska 2000).
35
Id. at 140.
36
Id. at 143-44.
37
362 P.3d 1021, 1022 (Alaska 2015).
38
Id. at 1024, 1026. See AS 16.05.251(a)(3) ("The Board of Fisheries may
adopt regulations it considers advisable in accordance with AS 44.62 (Administrative
Procedure Act) for . . . setting quotas, bag limits, harvest levels, and sex and size
limitations on the taking of fish . . . ."); AS 16.05.258(b) ("The appropriate board shall
determine whether a portion of a fish stock or game population identified under (a) of
this section can be harvested consistent with sustained yield. If a portion of a stock or
population can be harvested consistent with sustained yield, the board shall determine
the amount of the harvestable portion that is reasonably necessary for subsistence
uses . . . .").
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----------------------- Page 15-----------------------
39
knew or should have known that he might not be able to return to his job. This
discovery rule "modif[ied] the requirements employees must meet in order to qualify
for an eligibility evaluation."40
As in Jerrel and Estrada, the Board's adjudication
introduced specific, inflexible requirements that would govern the public's access to
41
agency services.
On the other hand, agencies do not need to promulgate regulations when
they merely apply an existing statutory or regulatory standard to the facts before them.42
Chevron U.S.A., Inc. v. State, Department of Revenue concerned a dispute over the
agency's discretion to aggregate production from different oil fields to determine
43
whether the fields were "economically interdependent" for taxation purposes. An oil
company challenged the agency's application of this standard to particular fields,
44
arguing that the agency should have promulgated a regulation. The Department of
39
222 P.3d 851, 868 (Alaska 2010).
40
Id. ; see AS 23.30.095(c) (detailing the information that a healthcare
provider must supply in order for an injured worker to receive payments for continuing
treatment).
41
Id.
42
See Alaska Ctr. for the Env 't v. State, 80 P.3d 231, 242-44 & n.40 (Alaska
2003) (holding agency's determination that regulation governing "major energy
facilities" did not apply to airport expansion was commonsense interpretation of
regulatory definition); Alyeska Pipeline Serv. Co. v. State, Dep 't of Env 't Conservation,
145 P.3d 561, 563, 573 (Alaska 2006) (holding that agency did not enact regulation
when it decided whether certain costs were among those agency could recoup from
regulated party).
43
Chevron U.S.A., Inc. v. State, Dep 't of Revenue, 387 P.3d 25, 29 (Alaska
2016) (applying AS 43.55.013(j) (repealed 2006) (permitting the Department of
Revenue to aggregate two or more fields for taxation purposes "when economically
interdependent oil or gas production operations are not confined to a single lease or
property")).
44
Id. at 34.
-15- 7645
----------------------- Page 16-----------------------
Revenue's decision defined "economically interdependent" as operations that are "so
integrated as to be reasonably treated as an economically unitary activity."45
The
agency then explained the policy considerations underlying its decision, reasoning that
there was " 'little reason to believe ' that declining to aggregate [the fields in question]
46
. . . 'would promot[e] additional development.' " Finally, the Department of Revenue
focused on particular factors that led it to conclude the fields in question were
economically interdependent: "the use of common production facilities, the
coordination of well production to deal with constrained capacity in shared production
facilities, the use of backout volume and compensation arrangements, and the allocation
47
of production to wells without exact metering." We reasoned that the Department of
Revenue's attempt at defining the phrase "economically interdependent" did not "do
much to clarify the [underlying statute] until that interpretation [was] applied to the
48
specific facts of [the] case." And we concluded that the mere act of explaining why
the particular facts of the case satisfied the statutory standard "did not add any specific
criteria to the term 'economically interdependent' that went beyond the scope of the
49
[statute's] existing language." Rather, the Department of Revenue's explanation
"served only to clarify whether the broad term 'economically interdependent' covered
50
the specific situation."
The present case is more like Chevron than like Jerrell , Estrada, or Burke .
The legislature tasked DNR with deciding whether the creation of new ORRIs on these
45
Id. at 37.
46
Id. at 34.
47
Id.
48
Id. at 38.
49
Id.
50
Id.
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----------------------- Page 17-----------------------
leases was contrary to the State's interest. As DNR pointed out in both the initial and
final decisions, t he legislature expressly described the nature of the State's interests in
oil and gas leasing in statute: maximizing "economic and physical recovery of the
resources," "competition among parties seeking to explore and develop the resources,"
and "use of Alaska's human resources."51
Focusing on the first factor, DNR concluded
that new ORRIs would undermine State interests because of facts specific to these
leases: the total royalty burden with the proposed ORRIs, the financial condition of the
working interest owners, the commercial profile of the projects (including progress and
development stage), and the financial impact on the State. These factors were not
mandatory, precise criteria with which all applicants must comply, like the 20-foot
visibility requirement in Jerrel or the 15-fish limit in Estrada . Instead, they are akin to
the factors that the Department of Revenue discussed in Chevron when deciding
whether oil fields were economically interdependent. AVCG's position that an agency
can never apply an existing statutory standard to the particular facts of a case without
first identifying the key facts in rulemaking is neither supported by our precedent nor
workable in practice.
b. It was foreseeable that DNR would focus on the
particular factors discussed in its decisions.
The factors that DNR considered were also foreseeable in light of the
overarching statutory scheme. AVCG argues that the case-by-case approach to ORRI
applications renders the process inscrutable and unpredictable. Because prior ORRI
decisions are difficult to access, AVCG contends, regulated entities may not anticipate
the factors that are central to the ORRI analysis. But AVCG's focus is too narrow.
51
AS 38.05.180(a)(1).
-17- 7645
----------------------- Page 18-----------------------
We determine whether an agency 's interpretation of statute is foreseeable
by considering the statutory framework and its underlying purpose.52
With oil and gas
leasing, the legislature found that "the people of Alaska have an interest in the
development of the state's oil and gas resources to . . . maximize the economic and
53
physical recovery of the resources." 11 AAC 82.605(c), in turn, requires the
Commissioner to approve a lease transfer "unless . . . the transfer would adversely affect
"
the interests of the state.
It is foreseeable that DNR would focus on a project's total royalty burden
and other economic factors when evaluating an ORRI application. If a high royalty
burden siphons too much profit from working interest owners, then they may lack
adequate incentive to develop the leases or to continue production when recovery
54
becomes more expensive. The other economic factors mentioned are foreseeable for
similar reasons. High royalty burdens are more likely to chill development of projects
with fewer reserves (due to smaller economies of scale) or that require more difficult
and expensive extraction methods. It also makes sense that DNR, tasked with
protecting state interests, would exercise additional caution before permitting ORRIs
that expose the State to losses. A reasonable developer should have foreseen that DNR
might reject new ORRIs for projects that were already burdened with existing royalty
52
Chevron, 387 P.3d at 39 ("DOR's Decision to interpret 'economically
interdependent' such that 'economic substance . . . prevail[ed] over form' should
therefore have been foreseeable in light of the ELF tax regime and the well-known
purposes behind it; DOR 's Decision was consistent with the legislature's intent."
(alteration in original)).
53
AS 38.05.180(a)(1)(A).
54
See Akers, supra note 11, at 21-2 (explaining that working interest owners
may perceive overriding royalty interest owners as "freeloaders").
-18- 7645
----------------------- Page 19-----------------------
interests and had already missed development targets - or were so early in
development that future prospects were hard to evaluate.
AVCG argues that if DNR does not need to establish the factors upon
which it relies for ORRI decisions through rulemaking, then other, more detailed
regulations are superfluous. Not necessarily. We need not decide in this case whether
the APA required that the content of various existing regulations - such as the coal
55
permitting regulation AVCG cites - be adopted through rulemaking. But we observe
that the need for rulemaking depends in part on the clarity with which legislative policy
is expressed in statute.
For example, the nature of the State's best interest is not clearly defined
56
by statute for coal leasing and permitting. Therefore a regulation setting forth the
factors that must be considered when evaluating a coal prospecting application may be
necessary to provide the public and regulated parties with foreseeability and
consistency. Whether to allow coal exploration and production on a given parcel of
land is an open-ended decision that entails balancing economic returns against the social
and environmental effects of coal mining.
Whether to approve an overriding royalty interest on an oil and gas lease
is a much narrower and more technical question. And the State's interests in this context
are well-defined in statute: "maximiz[ing] the economic and physical recovery of the
55
11 AAC 85.200 (2018) (describing factors agency must consider when
determining whether coal lease sale or prospecting permit is in State's best interests).
56
See AS 38.05.035(e) (providing that agency may "approve contracts for
the sale, lease, or other disposal of available land, resources, property, or interests in
them" upon written finding that State's interests will be best served); AS 38.05.145(a)
(providing that coal deposits on state land are "subject to disposition under regulations
. . . adopted by the commissioner"); AS 38.05.150(b)-(c) (providing that commissioner
"may . . . offer the land or deposits of coal for leasing" and "may issue to qualified
applicants prospecting permits" without describing how discretion to be exercised).
-19- 7645
----------------------- Page 20-----------------------
57
resources." This policy shapes DNR's analysis of when assignments of interests in
oil and gas leases are consistent with the State's best interests. And, as explained above,
this express policy makes the agency's focus on the particular factors highlighted in this
case foreseeable.
c. AVCG does not show that the factors discussed in the
definition reflect a changed interpretation of state
interests.
Finally, AVCG has not shown that the Division's consideration of these
factors represents a changed interpretation of state interests when deciding whether to
approve ORRIs under 11 AAC 82.605. The mere fact that an agency decides one case
differently than past cases does not necessarily indicate a change in the governing
standard. The different result may instead reflect different underlying facts and
circumstances. For example, in Chevron the Department of Revenue reviewed its
administrative precedent and, concluding that its past decisions arose from different
58
factual scenarios, distinguished those decisions. We rejected the argument that the
Department of Revenue had departed from its previous interpretation of statute,
explaining that although the agency "may have changed the way it exercised its
discretion[,] . . . its analysis in the Decision was not inconsistent with related, but not
59
entirely analogous, precedent."
57
AS 38.05.180(a).
58
See Chevron, U.S.A., Inc. v. State, Dep 't of Revenue, 387 P.3d 25, 41
(Alaska 2016) ("After closely reviewing past precedent, DOR concluded that 'while the
guidance provided by past administrative precedent is sparse, the applicable generality
. . . seems to be that economic interdependence is shown by or associated with unified
or integrated operations or enterprise encompassing the several leases or properties in
question.' Rather than disavowing precedent, DOR looked to its past decisions and
interpretations of the Aggregation Statute and determined that its interpretation of
'economically interdependent' . . . did not conflict and was consistent with its prior
decisions." (first alteration in original)).
59
Id.
-20- 7645
----------------------- Page 21-----------------------
Here too it appears that DNR's decisions reflect the particular facts of
AVCG's application rather than a change in agency policy. AVCG fails to show that
DNR did not consider these factors in past ORRI decisions.
AVCG argues that the decisions departed from previous applications of
11 AAC 82.605 because the decisions stated that "past decisions to approve ORRIs [do
not] have a bearing on future decisions." AVCG appears to misunderstand the point.
This statement was a response to the argument (made in Brooks Range's October 8,
2014 letter) that the SMU leases "were already burdened with an ORRI" that had not
diminished the project's development potential. The decisions acknowledged this
argument. The language AVCG highlights - that past ORRI decisions do n ot have a
bearing on future ones - appears to be a response to that argument. And it is a
reasonable response. Deciding that the project can support one ORRI does not mean
that the project can support an additional ORRI creating a higher total royalty burden.
Instead DNR can reasonably focus on "the specifics of the application" and the most
up-to-date facts in making its decision.
2. DNR's numerical guideline does not violate the APA.
a. The numerical guideline is a permissible result of
adjudication, not a product of unlawful rulemaking.
DNR's reliance on a 20% total royalty burden guideline raises a distinct
question : when reliance on numerical standards requires rulemaking. Although the
Division did not cite the 20% figure in its initial decisions, the Commissioner gave
significant weight to the fact that AVCG's proposed ORRIs would create total royalty
burdens that exceed 20%. "Generally," the Commissioner explained, "the Division has
viewed a total royalty burden of 20% or greater as excessively burdening a lease and
adversely affecting its economic life." Although the Commissioner labeled the total
royalty burden a "critical variable," she clarified that 20% "is not a bright line rule."
"[D]epending on the size and production profile of the field," she stated, "an ORRI may
be tolerated without significant impact to the economic life of the field. But in instances
-21- 7645
----------------------- Page 22-----------------------
where . . . a field has marginal reserves, requires more technical recovery methods, or
has higher operating costs (amongst other circumstances) . . . an excessive ORRI
burden will most likely shorten economic field life inconsistent with the best interests
of the State."
AVCG likens the 20% figure to the specific values at issue in Jerrel and
Estrada - values that did not "simply implement . . . general requirements, but [made]
60
them specific and [brought] them to bear on the public." According to AVCG, when
the Commissioner applied the 20% guideline she adopted a new standard that
implemented and made specific 11 AAC 82.605. DNR, in contrast, characterizes a
lease's total royalty burden as a "commonsense consideration." Describing its concern
over total royalty burdens exceeding 20% as an "internal guideline" rather than a bright
line rule, DNR asserts it is only one of several variables used to forecast the impact of
proposed ORRIs on an individual project.
"The label an agency places on a policy or practice does not determine
61
whether that rule falls under the APA . . . ." Whether described as a threshold or a
guideline, the 20% figure is a meaningful standard. Had DNR simply adopted this 20%
guideline based on policy rationales, it would have been an invalid act of rulemaking,
just as in Jerrel and Estrada . Giving a specific numerical value critical importance in
a best interests analysis is adopting a standard of general application, even if that
62
is, of course, the very
standard is flexible. A "standard of general application"
definition of a regulation. And a standard in the form of a precise numerical value is
not foreseeable based on the text of 11 AAC 82.605 or the definition of state interests
in AS 38.05.180.
60
Estrada v. State, 362 P.3d 1021, 1025 (Alaska 2015).
61
Jerrel v. State, Dep't of Nat. Res., 999 P.2d 138, 143 (Alaska 2000).
62
AS 44.62.640(a)(3).
-22- 7645
----------------------- Page 23-----------------------
Yet agencies may consider numerical values in their decisions without
first adopting each value through rulemaking. Agencies "have the discretion to set
policy by adjudication instead of rulemaking."63
Indeed, agencies are required to
64
conduct a reasoned analysis based on the facts and figures presented to them. In this
context it is reasonable and foreseeable that DNR would consider a lease's total royalty
burden, along with other economic factors, when deciding whether a proposed ORRI is
in the State's best interests. For example, if calculations showed that a project with a
proposed total royalty b urden of 25% would be profitable only at a price per barrel
consistently above long-term projections, then DNR could reasonably conclude that the
project is too marginal to bear the proposed ORRIs. We do not discourage agencies
from using facts and figures to inform their decisions.
Moreover, agencies can and should look to their past decisions for
65
guidance. Agencies can sometimes discern a line or standard from past decisions -
each based on reasoned analysis of particular facts - and trace that line forward to the
present matter. Discerning a line and then deciding the present case in a consistent
manner is not adopting a new standard; it is pointing out a standard that already exists.
Applying standards that already exist does not require formal rulemaking because it
does not present the dangers that the rulemaking process is designed to prevent: lack
63
Marathon Oil Co. v. State, Dep't of Nat. Res., 254 P.3d 1078, 1086-87
(Alaska 2001) (quoting Amanda Hess Pipeline Corp . v. Alaska Pub. Utils. Comm'n,
711 P.2d 1170, 1178 (Alaska 1986)).
64
See Sagoonick v. State, 503 P.3d 777, 803 (Alaska 2022) ("For questions
of law involving agency expertise, we apply the reasonable basis standard and 'must
confirm that the agency has genuinely engaged in reasoned decision making and must
verify that the agency has not failed to consider an important factor in making its
decision.' ") (alterations in original) (quoting Alaska Ctr. for the Env 't v. State, 80 P.3d
231, 241 (Alaska 2003)).
65
See Chevron, U.S.A., Inc. v. State, Dep 't of Revenue, 387 P.3d 25, 41
(Alaska 2016) (approving agency's attempt to reconcile past decisions with matter at
issue).
-23- 7645
----------------------- Page 24-----------------------
of notice and inconsistent treatment. Past decisions provide regulated entities with
notice of the agency's expectations and allow courts and the public to verify that the
agency's decision-making is consistent across parties and over time. Therefore, when
an agency applies a standard distilled from previous adjudications to the facts of the
matter before it, it need not adopt that standard through rulemaking.
Accordingly, we must decide whether the 20% total royalty guideline is a
standard adopted by fiat - an act of unauthorized rulemaking - or a standard
developed over the course of past adjudications. There are facts in t he record to support
both views. But because DNR represents that it developed the standard through
adjudicating past ORRI applications, and because AVCG has not shown otherwise, we
conclude that the 20% guideline is not a product of impermissible rulemaking.
Some facts suggest that adopting the 20% guideline amounted to
unauthorized rulemaking. The Commissioner cited several other jurisdictions that
promulgated a similar threshold through regulation, suggesting that the 20% value was
developed by looking to other state agencies rather than to its own past decisions. The
Commissioner cited only one specific past ORRI decision - an approval of a new
ORRI for which the total royalty burden would exceed 20%. And the Commissioner
described the focus on total royalty burdens over 20% as a "growing concern,"
suggesting that this figure has emerged as a discernible line only with more recent
adjudications.
But other facts in the record support DNR's interpretation of events. First,
AVCG never refuted the assertion that DNR has denied most ORRI separation requests
resulting in a total royalty burden over 20%. Second, we presume that an adequate
record exists of those past denials because DNR must issue a written rationale when it
-24- 7645
----------------------- Page 25-----------------------
66
denies an ORRI application. Therefore DNR must have recorded past ORRI denials
and the reasons behind them. "Where no evidence indicating otherwise is produced,
the presumption of regularity supports the official acts of public officers, and courts
67
presume that they have properly discharged their official duties."
AVCG complains
that prior ORRI decisions are difficult to access. But AVCG also claims to have sought
discovery into past decisions and did not represent that DNR declined to share those
68
Third and finally, the extensive record in this case,
records or that they do not exist.
including DNR's calculations of the effects of proposed ORRIs on economic field life,
supports the inference that the Division engaged in similar reasoned analyses of past
applications. Together, this evidence suggests that DNR derived its 20% guideline from
past adjudications and that those decisions were available for regulated parties to
examine.
Policymaking through adjudication has limits. An agency may derive a
standard through adjudication only by connecting the dots of previous adjudications,
each based on individual analyses of particular facts. If an agency pens a standard
freehand in the course of a single adjudication, that is an improper act of rulemaking.
If the standard articulated by the agency is inconsistent with past adjudications, then it
is a new rule that requires rulemaking. If there are no past decisions - or if those
decisions are not available to the public - then the standard is likewise a new rule as
66
11 AAC 82.605(c).
67
Wright v. State, 501 P.2d 1360, 1372 (Alaska 1972) (quoting Gallego v.
United States, 276 F.2d 914, 917 (9th Cir. 1960)); see also Pub. Safety Emps. Ass'n,
AFSCME Local 803, AFL-CIO v. City of Fairbanks, 420 P.3d 1243, 1252 (Alaska 2018)
(requiring findings of fact to overcome the presumption of regularity).
68
Some data underlying past decisions may be confidential. See
AS 38.05.035(a)(8) (requiring agency to keep certain files and information confidential
upon request, including geological data and financial information). But AVCG has not
represented that the agency's decisions are not available to review or unintelligible
without confidential data.
-25- 7645
----------------------- Page 26-----------------------
far as the public is concerned, and rulemaking is required. Finally, even when
policymaking through adjudication is permissible, agencies may prefer rulemaking to
give the public clear guidance and obviate the risk that courts will deem their standard
an unauthorized regulation.
In this case the 20% figure is a standard derived from a series of
adjudications, not an act of rulemaking. DNR's reliance on this figure when evaluating
AVCG's applications therefore did not violate the APA's rulemaking procedures.
b. The agency did not adopt a "burden-shifting" rule.
AVCG argues that the 20% total royalty guideline operates as a threshold
that shifts a burden to the ORRI applicant to "affirmatively prove that its ORRIs are in
the best interest[s] of the State." This shift, AVCG contends, permitted DNR to deny
AVCG's ORRI applications when the developers failed to provide sufficient evidence
of economic viability. AVCG acknowledges that DNR also uses other factors,
discussed above, to evaluate ORRI applications. But AVCG suggests that DNR only
considers these other aspects of economic viability when proposed ORRIs exceed the
20% threshold. According to AVCG, DNR assigned ORRI applicants the burden of
proving that additional ORRIs would not harm state interests and thereby engaged in
improper rulemaking.
This characterization of the decisions is inapt. A total royalty burden over
20% does not shift a burden of proof from DNR to the applicant. 11 AAC 82.605 does
not saddle DNR with the burden to prove that an ORRI will harm the State's interests.
The regulation merely requires DNR to state its reasons for denying an application. The
69
courts then review that decision under a deferential reasonable basis standard. In these
69
Davis Wright Tremaine LLP v. State, Dep 't of Admin., 324 P.3d 293, 299
(Alaska 2014) (describing reasonable basis test as "whether the agency's decision is
supported by the facts and has a reasonable basis in law, even if we may not agree with
the agency's ultimate determination").
-26- 7645
----------------------- Page 27-----------------------
proceedings the Division, observing that the requested ORRIs would reduce the
working interest holders' net revenue interest to 77.5% for the SMU leases, asked
Brooks Range to explain "how approving the ORRIs will not adversely affect the
interests of the state." But this exchange did not shift a nonexistent burden of proof.
Rather, the question gave interested parties an additional opportunity to fortify their
application.
AVCG also mischaracterizes the relationship between the 20% total
royalty guideline and other factors that DNR considered. DNR described a lease's total
royalty burden as a primary consideration, but also stated that it appraises the financial
fitness of the lessees, the reserves associated with the project, the State's investment
level and exposure, and a project's overall commercial profile for each application. The
record does not suggest that DNR considers other factors only when a proposed total
royalty burden exceeds 20%.
B. DNR's Decision-Making Procedure Was Lawful.
1. DNR's decisions were supported by facts and had a reasonable
basis in law.
AVCG next argues that DNR violated its own regulation by issuing ORRI
denials that "lack evidence." According to AVCG, the decisions were too vague,
especially where DNR conceded knowledge gaps around the 34 exploratory-phase
leases. AVCG also proposes two additional factors that DNR should have considered:
whether the proposed transaction, viewed as a whole and relative to alternatives,
supports the State's goal to encourage development on the leases and whether the
prospective ORRI holders are also working interest owners.
We "apply the reasonable basis standard to questions of law involving
'agency expertise or the determination of fundamental policies within the scope of the
-27- 7645
----------------------- Page 28-----------------------
70
agency's statutory functions,' " including for disputes where, as here, "an agency's
adjudication of a regulated party's claim 'requires resolution of policy questions [that]
lie within the agency's area of expertise and are inseparable from the facts underlying
71
the agency's decision.' "
When applying the reasonable basis test, "we seek to
determine whether the agency's decision is supported by the facts and has a reasonable
72
basis in law, even if we may not agree with the agency's ultimate determination."
The challenged decisions easily pass muster. When evaluating the SMU
leases, DNR used the information at its disposal about the size and production profile
of the SMU field to estimate the State's financial exposure. Notably, when DNR
initially approved the SMU lease aggregation in October 2011, it characterized many
of the reserves as "[m]arginally economic." Brooks Range, which operated the SMU
leases on behalf of AVCG and other working interest holders, repeatedly failed to meet
development benchmarks. Brooks Range had promised that it would meet production
deadlines by 2012. DNR granted the operator a two-year extension, but later discovered
that the leases would not produce oil by the extended deadlines.
On appeal the Commissioner cited additional reasons to affirm the
decisions. The Commissioner found that the project would be financially viable without
additional ORRIs, that the proposed ORRIs would result in 173,000 barrels of l ost oil
production - amounting to a loss of over $1 million to the State - and that the working
interest owners appeared to be undercapitalized and "financially brittle." In light of
these factors it was reasonable to conclude that permitting an additional ORRI - which
if assigned would make the project less profitable for working interest owners - would
70
Id. (quoting Marathon Oil Co. v. State, Dep't of Nat. Res. , 254 P.3d 1078,
1082 (Alaska 2011)).
71
Marathon Oil, 254 P.3d at 1082 (quoting Earth Res. Co. v. State, Dep 't of
Revenue, 665 P.2d 960, 964 (Alaska 1983)).
72
Davis Wright Tremaine, 324 P.3d at 299 (quoting Tesoro Alaska Petrol.
Co. v. Kenai Pipe Line Co., 746 P.2d 896, 903 (Alaska 1987)).
-28- 7645
----------------------- Page 29-----------------------
likely undermine the goal of maximizing oil production (and with it, the State's royalty
revenues).
The Commissioner acknowledged the uncertainty in the analysis of the 34
undeveloped leases. For example, the Commissioner concluded that the undeveloped
leases "possessed the potential to depress project economics to the point that [working
interest owners] would not sanction the project," in part because "it may take a decade
or longer from the first exploration well to production, and circumstances can change
greatly over that long of a time period, including pricing, the understanding of the
resource, and the associated costs." Although AVCG characterizes this reasoning as
speculative, it is just as easily characterized as prudent and conservative. Given the
uncertainty, it was reasonable to deny a transaction that could diminish the project's
long-term profitability for working interest owners.
AVCG also argues that DNR should have considered whether the
proposed transaction, viewed as a whole and relative to alternatives, supports the State's
goal to encourage development on the leases and whether the prospective ORRI holders
are also working interest owners. DNR did analyze the two factors that AVCG
suggests; it merely reached a different conclusion than AVCG would have liked. DNR
acknowledged that because the ORRI applicants were also working interest owners, the
ratio of risk to reward for working interest holders would not immediately increase upon
separation. In other words, separating ORRIs would not change working interest
holders' financial incentive to develop a lease if the working interest owners themselves
held the new ORRIs. But DNR went on to explain that ORRIs, once approved, could
be freely transferred to other entities for the remaining term of the lease. DNR also
acknowledged that the deals were structured to provide greater up-front capital,
concluding that this arrangement "appeared to contradict the project's financial
viability" and could signal that working interest owners "were undercapitalized and
financially brittle." DNR was under no obligation to accept the purchasers' economic
forecasting. Although AVCG may disagree with DNR's interpretations of the parties'
-29- 7645
----------------------- Page 30-----------------------
incentives, the financial structure of the deals, and the purchasers' modeling, DNR's
analysis was reasonable in light of the facts before it.
2. AVCG was required to obtain DNR's approval to create the
ORRIs.
In the alternative, AVCG argues that it need not obtain DNR's approval
for new ORRIs on leases that are already burdened with existing ORRIs. This argument
misreads the applicable regulation, which provides that "[w]hen transfers of overriding
royalty are made after the initial separation from the working interest of the lease . . .
73
the commissioner will take no action." As DNR explained, this provision applies only
when a developer wishes to transfer an existing ORRI to a new owner, not when it seeks
to create a new ORRI. A new ORRI carves out a royalty interest from a working
interest, and therefore constitutes an assignment that is not binding on the agency
74
without approval.
We defer to an agency's interpretation of its own regulation unless that
"interpretation is plainly erroneous and inconsistent with the regulation."75
DNR's
position that a newly created ORRI is not binding on the State without its approval is
consistent with the regulation's plain language and with its purpose: to protect the
State's interests as the lessor. As described above, new ORRIs may decrease working
interest owners' financial incentive to develop a lease by increasing the lease's total
royalty burden. If a lease produces less oil then the State receives fewer royalties. By
contrast, transferring an existing ORRI does not change the total royalty burden on a
lease and therefore does not affect the State's interests. That is why the regulation does
73
11 AAC 82.605(b) (emphasis added).
74
Id.
75
Kuzmin v. State, Com. Fisheries Entry Comm'n, 223 P.3d 86, 89 (Alaska
2009) (quoting Copeland v. State, Com. Fisheries Entry Comm'n, 167 P.3d 682, 683
(Alaska 2007)).
-30- 7645
----------------------- Page 31-----------------------
not require DNR approval of ORRI transfers "after the initial separation from the
working interests."
AVCG also argues that DNR's explanation was a covert regulation that
should have been promulgated via APA rulemaking. But this decision is an "obvious,
commonsense interpretation" - essentially the plain language of the regulation.76
The
regulation provides that a new ORRI is not binding on the State without DNR approval.
We therefore reject AVCG's argument that DNR approval was not required to create a
new ORRI.
C. DNR Did Not Violate AVCG's Constitutional Rights.
AVCG raises three constitutional claims. First, AVCG argues that the
five-year delay in resolving its initial appeal violated its procedural due process rights.
Second, AVCG characterizes DNR's decision-making process as "ad hoc" and claims
that this procedural deficiency likewise denied due process. Third and finally, AVCG
argues that the decisions constituted a taking of property requiring compensation. We
"review constitutional questions . . . de novo, and . . . 'adopt the rule of law that is most
77
persuasive in light of precedent, reason, and policy.' "
1. The five-year delay in resolving the administrative appeal did
not violate due process.
We have explained that "delay can constitute a violation of due
process . . . in certain civil contexts, if the delay causes the deprivation of a private
76
Chevron U.S.A., Inc. v. State, Dep 't of Revenue, 387 P.3d 25, 36 (Alaska
2016) (quoting Alyeska Pipeline Serv. Co. v. State, Dep't of Env 't Conservation, 145
P.3d 561, 573 (Alaska 2006)).
77
Dennis O. v. Stephanie O., 393 P.3d 401, 405-06 (Alaska 2017) (quoting
Jerry B. v. Sally B. , 377 P.3d 916, 924-25 (Alaska 2016)).
-31- 7645
----------------------- Page 32-----------------------
78
interest." "But we have never held that delay alone, with no accompanying prejudice,
constitutes a violation of the right to due process."79
The five-year gap between
AVCG's initial appeal to the Commissioner and her response is troubling. But we
affirm the superior court's decision that the delay did not violate due process because
AVCG failed to show prejudice.
In Brandal v. State, Commercial Fisheries Entry Commission, the
80
Commission took 22 years to decide a fishing permit appeal. We characterized the
Brandal delay as "inexcusable" and recognized that the applicant stood to suffer
"significant harm" when the Commission denied him a permit required to continue his
commercial fishing career. But we denied the due process claim because the delay itself
81
- over four times the delay AVCG faced here - did not prejudice the applicant.
AVCG, like the claimant in Brandal, conflates the effect of the denial with the effect of
the delay. AVCG contends that the delay interfered with its work on the leases and
commercial relations with other working interest holders. But AVCG failed to specify,
before the superior court or before us, how the delay interfered with its work or
relationships. The Brandal applicant's claim that the delay "lulled him into not learning
another occupation" was unavailing because he had ample notice that the Commission
82
was likely to reject his application, including two initial decisions to that effect. The
Division likewise initially denied AVCG's ORRIs. AVCG therefore had ample notice
that a favorable outcome was not a sure bet. Because AVCG failed to demonstrate to
78
Brandal v. State, Com. Fisheries Entry Comm'n, 128 P.3d 732, 740
(Alaska 2006).
79
Id.
80
Id. at 735.
81
Id.
82
Id.
-32- 7645
----------------------- Page 33-----------------------
the superior court any actual prejudice it suffered as a result of the five-year delay, we
affirm the superior court's ruling that the delay did not deprive AVCG of due process.
2. DNR's decision-making was not so ad hoc as to violate due
process.
AVCG also argues that DNR's case-by-case approach to ORRI approvals,
unconstrained by regulation, is so ad hoc as to violate due process. AVCG contends
that DNR singled out AVCG by applying the analytical factors described in the
decisions. The superior court rejected this argument, reasoning that DNR's
consideration of several variables and its approach to past applications showed it was
not acting in an ad hoc fashion, in contrast to the agency's ad hoc adoption of a new
83
standard in Jerrel .
We agree with the superior court's reasoning. Truly ad hoc decision-
making is impermissible. But to hold that all case-by-case determinations violate due
process would eliminate a cornerstone of administrative law: the delegation of
84
discretionary decision-making to agency experts. In this case DNR reasonably
applied the statutory and regulatory standards to particular facts based on evidence
supplied by the applicant. It also applied a standard derived from and consistent with
past decisions. This approach did not violate AVCG's due process rights.
83
Jerrel v. State, Dep't of Nat. Res., 999 P.2d 138 (Alaska 2000).
84
See Chevron U.S.A., Inc. v. State, Dep 't of Revenue, 387 P.3d 25, 36
(Alaska 2016) ("[N]early every agency action is based, implicitly or explicitly, on an
interpretation of a statute or regulation authorizing it to act." (quoting Alyeska Pipeline
Serv. Co. v. State, Dep't of Env 't Conservation, 145 P.3d 561, 573 (Alaska 2006))).
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3. DNR's decisions did not constitute a taking.
Finally, AVCG argues that the decisions were an uncompensated taking
in violation of the Alaska Constitution.85
AVCG's argument relies on our decision
holding that the State may need to compensate landowners if it publicly states a present
86
and concrete intention to condemn their parcels of land. AVCG does not explain how
that case supports the proposition that denying a lessee's request to separate royalties
from the working interest in a hydrocarbon lease amounts to a taking of the lessee's
interest - especially when the lessee's right to make this kind of assignment is
expressly conditioned on the State's approval.87 The lawful denials of AVCG's ORRI
applications did not deprive AVCG of any property interest to which it had a right.88
V. CONCLUSION
We AFFIRM the decision of the superior court affirming DNR's
decisions.
85
Alaska Const. art. I, § 18 ("Private property shall not be taken or damaged
for public use without just compensation."). AVCG only briefly raised this argument
before the superior court, and the superior court did not address it.
86
See Joseph M. Jackovich Revocable Tr. v. State, Dep 't of Transp., 54 P.3d
294, 295, 298-99 (Alaska 2002).
87
11 AAC 82.605(b) (requiring Commissioner approval of interest
assignments).
88
See Brandal v. State, Com. Fisheries Entry Comm'n, 128 P.3d 732, 739
(Alaska 2006) (explaining that an applicant lacked a "private interest in receiving a
permit to which he is not legally entitled" (quoting State, Dep't of Health & Soc. Servs.
v. Valley Hosp. Ass'n, Inc., 116 P.3d 580, 583 (Alaska 2005))).
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| Case Law Statutes, Regs & Rules Constitutions Miscellaneous |
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