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Kenai v.Cook Inlet Natural Gas Storage Alaska, LLC

Supreme Court of Alaska

May 6, 2016

CITY OF KENAI, Appellant
v.
COOK INLET NATURAL GAS STORAGE ALASKA, LLC; STATE OF ALASKA, DEPARTMENT OF NATURAL RESOURCES; and COOK INLET REGION, INC., Appellees.

Appeal from the Superior Court of the State of Alaska, Third Judicial District, Kenai, No. 3KN-12-00338 CI Carl Bauman, Judge.

Appearances: Bruce E. Falconer and Patrick W. Munson, Boyd, Chandler & Falconer, LLP, Anchorage, for Appellant.

Matthew Findley and Eva R. Gardner, Ashburn & Mason, P.C., Anchorage, for Appellee Cook Inlet Natural Gas Storage Alaska, LLC.

John C. Hutchins, Assistant Attorney General, and Craig W. Richards, Attorney General, Juneau, for Appellee State of Alaska, Department of Natural Resources.

Jahna M. Lindemuth and Katherine E. Demarest, Dorsey & Whitney LLP, Anchorage, for Appellee Cook Inlet Region, Inc.

Before: Stowers, Chief Justice, Winfree, Maassen, and Bolger, Justices.

OPINION

MAASSEN, Justice.

I. INTRODUCTION

This case involves competing claims of right to the pore space in a large limestone formation about a mile underground. Cook Inlet Natural Gas Storage Alaska, LLC (CINGSA) has leases with the holders of the mineral rights - the State of Alaska and Cook Inlet Region, Inc. (CIRI) - that allow it to use the porous formation as a reservoir for storing injected natural gas. But the City of Kenai, which owns a significant part of the surface estate above the reservoir, claims an ownership interest in the storage rights and sought compensation from CINGSA. CINGSA filed an interpleader action asking the court to decide who owns the storage rights and which party CINGSA should compensate for its use of the pore space. On summary judgment CINGSA argued that CIRI and the State own the pore space and attendant storage rights because of the State's reservation of certain subsurface interests as required by AS 38.05.125(a). The superior court granted CINGSA's motion. The City appeals both the grant of summary judgment and the superior court's award of attorney's fees to CIRI.

We affirm, concluding that the State and CIRI own the pore space and the gas storage rights and that the superior court's award of attorney's fees to CIRI was within its discretion.

II. FACTS AND PROCEEDINGS

A. Facts

1. The Cannery Loop Sterling C Reservoir Gas Storage Facility

The Cannery Loop Sterling C Gas Reservoir is located approximately a mile below the Kenai River. The reservoir began producing natural gas in 2000; gas was extracted from the "microscopic spaces between or within rocks" in the reservoir and from natural pools contained by "[s]urrounding formations of denser, nonporous rock." The reservoir's gas supply was eventually depleted.[1]

Once gas is extracted from sedimentary rock, the emptied pore space - "microscopic spaces between or within rocks" - can be used to store "non-native gas, " gas that has been extracted elsewhere. This method of gas storage can help stabilize supply and accommodate seasonal fluctuations in demand; utilities can store non-native gas in the summer and withdraw it in the winter when demand is higher. When the Sterling C Reservoir had been economically depleted, CINGSA, a public utility, proposed to convert the gas field into a storage facility for non-native gas owned by other gas and electric utilities in South central Alaska.

CINGSA first had to acquire the necessary property rights from the owners of different interests in the surface and subsurface. It acquired many of those rights through negotiation and, where necessary, the process of eminent domain, available to CINGSA as a public utility. The only surface estate at issue here is that belonging to the City of Kenai, amounting to approximately 576 acres.[2] The rights to minerals underlying the property belong to the State of Alaska and Cook Inlet Region, Inc. because of mineral reservations required by the Alaska Land Act.[3] CINGSA concluded that the State and CIRI held title to the pore space because they owned the mineral rights, and in 2011 it therefore sought and obtained leases from those entities.

2. Ownership of the surface and mineral estates

a. The surface estate

The City of Kenai received a patent for the relevant surface acreage in 1964, subject to the reservation of rights to the State required by AS 38.05.125(a) for all conveyances of State land.[4] The mineral reservation in ...


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