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Gottstein v. State, Dept. of Natural Resources

Supreme Court of Alaska

January 22, 2010

Law Offices of James B. GOTTSTEIN, Appellant,
v.
STATE of Alaska, DEPARTMENT OF NATURAL RESOURCES, Division of Oil & Gas, Appellee. Monte J. Allen and Daniel K. Donkel, Appellants,
v.
State Of Alaska, Department of Natural Resources, Division of Oil & Gas, Appellee.

Page 610

James B. Gottstein, Law Offices of James B. Gottstein, Anchorage, for Gottstein, Appellant.

Christopher M. Brecht and William M. Bankston, Bankston Gronning O'Hara, P.C., Anchorage, for Donkel and Allen, Appellants.

Richard J. Todd, Senior Assistant Attorney General, Anchorage, Talis J. Colberg, Attorney General, Juneau, for Appellee.

Before: FABE, Chief Justice, EASTAUGH, CARPENETI, WINFREE, and CHRISTEN, Justices.

OPINION

WINFREE, Justice.

I. INTRODUCTION

Interest holders in an oil and gas lease appealed to the superior court from three final agency decisions relating to the lease. The superior court affirmed the agency decisions and the interest holders separately appealed to us, arguing that: (1) they were wrongfully denied an agency hearing on the first agency decision; (2) the first agency decision is insufficient for appellate review and otherwise lacks sufficient findings or a reasonable basis; (3) the other agency decisions should be set aside because of the deficiencies in the first agency decision; and (4) the superior court should have conducted a trial de novo on the agency decisions. We consolidated the separate appeals and now address the appellants' contentions below, affirming the superior court's decision to uphold the agency decisions without a trial de novo.

II. FACTS AND PROCEEDINGS

A. Facts and Administrative Proceedings

This case arises from a Cook Inlet oil and gas lease issued by the State of Alaska, Department of Natural Resources (DNR), Division of Oil and Gas (DO & G), designated ADL 369116.

In 1964 DO & G certified a well on what later became ADL 369116 as capable of producing gas in paying quantities. Rather than comply with an order to place the lease in production, the lessee instead plugged and abandoned the well and let its lease expire.

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DO & G issued another lease for the area in 1981, but that lessee relinquished the lease after three years.

After competitive bidding, DO & G awarded ADL 369116 to Danco Inc. effective September 1, 1986. The lease gave Danco " the exclusive right to drill for, extract, remove, clean, process, and dispose of oil, gas and associated substances" for " an initial primary term of 10 years...." [1]

In 1988 Danco assigned one hundred percent of the working interest [2] in ADL 369116 to Amoco Production Company, subject to a reserved overriding royalty interest.[3] In 1990 Danco assigned a portion of its overriding royalty interest to Monte Allen. Also in 1990, Amoco assigned its entire working interest in ADL 369116 to Union Oil Company of California (Unocal). In 1994 Unocal assigned the entire working interest in ADL 369116 back to Danco. No actual exploratory or development efforts were undertaken on ADL 369116 between 1986 and 1994.

In 1995, about one year before the expiration of ADL 369116's August 31, 1996, primary term, Danco and Unocal agreed to create a working unit [4] covering ADL 369116 and Unocal's adjacent lease ADL 17595.[5] As a part of this agreement Danco re-assigned its entire working interest in ADL 369116 to Unocal. By this time portions of Danco's overriding royalty interest had been assigned not only to Allen, but also to Danco's president, Daniel Donkel, and other individuals in varying proportions. All of the assignees consented to the proposed unit agreement. In June 1996 Unocal proposed a standard-form unit agreement [6] to combine the two leases into the North Middle Ground Shoals Unit (NMGS Unit), except that the term of the proposed unit agreement was two years instead of the standard five years.

On August 30, 1996, the day before ADL 369116's primary term was due to expire, the

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DNR Commissioner (Commissioner) approved the formation of the NMGS Unit.[7] This indefinitely extended the lease term for the life of the unit agreement.[8] Under the NMGS Unit's initial plan of development, Unocal committed to (1) continue existing production from ADL 17595, and (2) drill, by August 31, 1998, an exploratory well from the Baker Platform on ADL 17595 to determine whether the Shallow Tyonek Formation gas reserve extended to ADL 369116, which would indicate that ADL 369116 might contribute to gas production in paying quantities.

In January 1998 Unocal requested an extension of the August 31, 1998, deadline for completing the exploration required under the NMGS Unit agreement. Unocal had drilled the required exploratory well from the Baker Platform in 1997, but was concerned that it could not test the well nor justify allocation of production to ADL 369116 by the August 31, 1998, deadline. Unocal agreed that in exchange for the extension, it would acquire a three-dimensional seismic survey of the NMGS Unit by August 31, 1998, and, by December 31, 1999, drill an exploratory well on ADL 369116 to determine whether the Hemlock Formation oil reserve extended under that lease area.

In February 1998 the extension was granted with the specific conditions that if the seismic survey of the NMGS Unit was not completed by the deadline, or the new exploratory well on ADL 369116 was not drilled by the deadline, ADL 369116 would be terminated and eliminated from the NMGS Unit. DO & G allowed Unocal to complete its testing program for the exploratory gas well from the Baker Platform and to apply to establish a gas participating area [9] with production allocated to ADL 369116, but DO & G expressly advised Unocal that those actions would " not satisfy the obligation to drill the exploratory well" on ADL 369116.

Unocal claimed it completed the required NMGS Unit seismic survey by August 31, 1998. In October 1998 Unocal applied to DO & G to form the Shallow Tyonek Gas Reservoir Participating Area. The application proposed a participating area covering both leases in the NMGS Unit. In June 1999 DO & G approved the application for a participating area that included portions of ADL 17595 but excluded all of ADL 369116. DO & G found the presented data failed to support Unocal's contention that gas reserves under ADL 369116 could be reached by wells from the Baker Platform on ADL 17595. DO & G noted that if Unocal fulfilled its commitment to drill the exploratory well on ADL 369116 by December 31, 1999, it might acquire additional gas reserves information justifying expansion of the participating area to cover some or all of ADL 369116. DO & G also stated that if Unocal failed to meet its drilling obligation by December 31, 1999, ADL 369116 would " expire and be eliminated from" the NMGS Unit.

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In July 1999 Unocal appealed DO & G's decision to exclude ADL 369116 from the participating area to the Commissioner. In August 1999 Unocal proposed an amended plan of exploration for the NMGS Unit, requesting more time to evaluate the three-dimensional seismic survey and to drill the exploratory well on ADL 369116. DO & G denied the request in early September 1999. DO & G explained that (1) despite Unocal's October 1998 representation that it had completed a NMGS Unit seismic survey, Unocal failed to include a survey interpretation in its October 1998 participating area application, and (2) in the August 1999 request to amend the plan of exploration, Unocal claimed it lacked access to that seismic survey and needed three additional years to " obtain and evaluate the seismic data and drill the exploratory well on ADL 369116." DO & G concluded by stating that " [t]he lease has now been in effect for thirteen years with no evaluation of its hydrocarbon reserves" and " DNR is not willing to extend the lease term to more than fifteen years without exploration of the lease area." DO & G reiterated the critical date, December 31, 1999, by which Unocal was required to drill an exploratory well to maintain ADL 369116 as part of the NMGS Unit and avoid ADL 369116's expiration.

In early November 1999 Unocal again applied to amend the NMGS Unit plan of exploration and extend the term of ADL 369116. Unocal again asserted that it had fulfilled its seismic survey obligation under the 1998 amendment and extension agreement for the NMGS Unit. But Unocal admitted it had not met, and would not meet, the December exploratory well deadline due to " [c]hanging economic, logistical and current events, which were beyond Unocal's control...."

Unocal explained that when it asked in 1998 for an extension of ADL 369116's term, it was relying on another company's plan to bring a " jack-up rig" to Cook Inlet and conduct " an extensive seismic program" in the inlet. Unocal stated it had planned to participate in the seismic program and, subject to analysis of its seismic survey, had been prepared to use the jack-up rig to drill the required exploratory well on ADL 369116. Although Unocal did not explain why the jack-up rig had not materialized, it stated that given advances in technology another platform method of drilling might better suit the area, that the other company planned to use this new platform method elsewhere in Cook Inlet, and that until the new platform method of drilling was tested it would " be unwise for Unocal to commit to another platform for [the NMGS Unit]." Unocal proposed yet another extension framework:

Unocal proposes that the Division of Oil and Gas approve a revised Plan of Exploration with the following terms and conditions. If Unocal fails to meet any of the following conditions, Unocal will surrender ADL-369116, on the date that Unocal fails to meet the condition.
1. Unocal will complete a post-stack merge and re-migration of Baker 3D and NMGS 3D seismic by December 31, 2000, to improve the imaging and regional understanding of the geology.
2. Unocal or its co-working interest owner, Forcenergy, will by December 31, 2000, set a new exploration platform at the Redoubt Shoals Unit to test the new platform application in Cook Inlet.
3. Unocal and Forcenergy, will by December 31, 2001, commit to either the orderly procurement of a new platform, or move the Osprey platform, or other Cook Inlet Platform to the [NMGS Unit]. We will however, through this time period, continue to analyze the application, availability and viability of using a jack-up or floating vessel.

In January 2000, after giving Unocal several opportunities to provide additional information about gas reserves under ADL 369116, the Commissioner (then John Shively) affirmed DO & G's decision to exclude ADL 369116 from the participating area. Without specifically responding to Unocal's November 1999 extension request, DO & G issued a notice terminating ADL 369116 and the NMGS Unit.

Unocal did not appeal to the superior court from the Commissioner's final decision on the participating area, but Donkel and other overriding royalty interest holders in ADL

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369116 did, arguing that (1) they were entitled to, but did not receive, notice and an opportunity to be heard prior to the Commissioner's decision, and (2) there was insufficient evidence to support the decision to exclude ADL 369116 from the participating area. Because the ultimate consequence of the Commissioner's decision was the termination of ADL 369116 and because DNR indicated it intended to include that lease area in an upcoming lease sale, Donkel and the other overriding royalty interest holders moved for and received from the superior court a stay of the Commissioner's decision.

In August 2000 DO & G violated the superior court's stay order by including a portion of ADL 369116 in a competitive oil and gas lease sale. In April 2001 DO & G issued a partially conflicting lease to Richard Wagner. After realizing its error, DO & G revoked Wagner's lease in June 2001. Wagner gave the Commissioner a one-page notice of appeal, stating an " intent to submit additional written material to the Department within 20 calendar days after the filing of this appeal." Wagner never filed additional materials and his putative appeal lay dormant.

In March 2002 the superior court decided the appeal in favor of Donkel and the other overriding royalty interest holders on the issue of notice, remanding the case to DO & G to " reconsider whether the ... Participating Area originally proposed by Unocal should be approved." The parties then reached a settlement agreement that was approved by the superior court in December 2002.

The settlement agreement specifically required DO & G to reinstate ADL 369116 and to redefine the NMGS Unit to include both ADL 17595 and ADL 369116, which it did effective December 2, 2002. ADL 369116's lease term was therefore extended, but Unocal was required to: (1) commit to drilling an exploratory oil well on ADL 369116 by October 31, 2003; (2) begin drilling that well by December 31, 2004; and (3) " complete, suspend, or abandon" that well by December 31, 2005. If either the commitment to drill or the commencement of drilling did not occur by the stated deadlines, Unocal was to transfer its working interest to Donkel and others. If the ultimate drilling deadline was not met, ADL 369116 was to terminate on December 31, 2005.

In August 2003 Unocal submitted to DO & G its revised NMGS Unit plan of development and operations for June 2003 through May 2004 (2003 POD). Unocal stated that the NMGS Unit " has reached its economic limit and is depleted." Unocal further stated its " intention to remove the drilling rig from the [Baker Platform,] shut in all producing wells, clean the surface equipment ... leave all producing and water injection wells shut-in as is, and light house the facility by October 2003." [10] Unocal described its past efforts to market the Baker Platform and related facilities and stated that additional development was unwarranted based on this experience. Unocal did state that it was continuing " to analyze and explore the feasibility of mobilizing a drill ship" for the test well still required for ADL 369116, which it acknowledged " must occur for Unit maintenance." DO & G approved Unocal's 2003 POD in late August 2003.

In October 2003, in accordance with the 2002 settlement agreement, Unocal notified DO & G that it would not commit to drilling on ADL 369116 and that its working interest in that lease was being assigned to Donkel, Robert Bolt, and George Kasper. Unocal noted that it was aware of both the drilling deadline for ADL 369116 and the prospective December 31, 2005, termination of ADL 369116 if drilling did not occur, and further represented that it was providing this information to its working interest assignees. ADL 369116 remained a part of the NMGS Unit and Unocal retained both its status as the NMGS Unit operator and its working interest in ADL 17595.

In February 2004 Unocal submitted to DO & G its proposed NMGS Unit plan of development and operations for the period from

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June 2004 through May 2005 (2004 POD). Unocal noted that no development activity occurred in 2003, the Baker Platform was " decommissioned" and " presently in lighthouse mode," and it did " not intend to perform any development activities during the plan period." Unocal stated that the entire working interest in ADL 369116 had been assigned to Donkel, Bolt, and Kasper, and that they were advised of the December 31, 2005, drilling deadline. Unocal concluded by stating that " the new working interest owners ... have not advised the Operator (Unocal) of any plans to drill the Initial Test Well during this Plan period." [11] In May 2004 DO & G approved Unocal's 2004 POD for the NMGS Unit, reminding Unocal: " If the Initial Test Well is not drilled as specified in the Court Order, the NMGS Unit Agreement and ADL 369116 will automatically terminate effective December 31, 2005."

In June 2004 attorney James B. Gottstein wrote a letter to the Commissioner (then Thomas Irwin) on behalf of Donkel, Bolt, and Kasper: (1) complaining that DO & G's letter had not been sent to the new working interest holders of ADL 369116; (2) stating that if the termination reminder was a final decision on the termination of ADL 369116, the working interest holders were appealing that decision; and (3) alleging past bad faith by DO & G in failing to correct its lease of a portion of ADL 369116 to Wagner. As to the Wagner lease issue, Gottstein further stated:

The problem is real because it is my understanding a company decided against a drilling program in Cook Inlet to include ADL 369116 because of the cloud on title created by the Division. My understanding is that not only was ADL 369116 affected, but that drilling of another lease is not occurring because of the continuing cloud on ADL 369116's title created by the Division.[[12]]

In August 2004 DO & G responded to Gottstein at the request of the Commissioner. DO & G clarified that (1) its May 2004 decision was an approval of Unocal's 2004 POD for the NMGS Unit, not a termination of ADL 369116, and (2) notice of the approval was given only to Unocal because Unocal was the NMGS Unit operator and therefore represented the other working interest holders in the NMGS Unit.[13] DO & G also reminded Gottstein that it had revoked Wagner's lease in June 2001 after DO & G became aware of its mistake. Later that month the Commissioner issued Wagner a letter formally upholding DO & G's 2001 revocation of his lease and giving notice of the right to appeal to the superior court within thirty days. Wagner took no further action.

In October 2004 Unocal requested that the Alaska Oil and Gas Conservation Commission (AOGCC) approve the abandonment of wells from the Baker Platform on ADL 17595.[14]

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Unocal noted that oil and gas production from the Baker Platform had been suspended since August 2003 and that alternatives for returning the wells to production had been unsuccessful. Unocal proposed a formal abandonment plan. AOGCC replied that the formal plan appeared to comply with relevant regulations, but encouraged Unocal to explore options to transfer the facilities to another operator.

In February 2005 Unocal submitted to DO & G its proposed plan of development and operations for the NMGS Unit for the period from June 2005 through May 2006 (2005 POD). Unocal stated that there had been no developmental drilling in the NMGS Unit during the 2004 plan year, Unocal did not intend to perform any development activities during the 2005 plan year, and the Baker Platform had been decommissioned during the 2002 plan year and was in lighthouse mode. After noting the December 31, 2005, deadline for drilling the exploratory well on ADL 369116, Unocal stated that the three working interest holders of ADL 369116 had " not advised the Operator (Unocal) of any plans to drill the Initial Test Well during this Plan period." [15] Unocal stated that it had been unable to find an operator or purchaser for the Baker Platform and related facilities and that it intended to follow its abandonment plan, ultimately removing the Baker Platform if necessary.

DO & G approved Unocal's 2005 POD for the NMGS Unit in late March 2005. DO & G reiterated the 2002 settlement agreement term requiring the initial test well on ADL 369116 to be completed by December 31, 2005, or ADL 369116 and the NMGS Unit would terminate effective that date. But DO & G expressly acknowledged that if Donkel, Bolt, and Kasper fulfilled the drilling commitment by December ...


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