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City of Kenai v. Cook Inlet Natural Gas Storage Alaska, LLC

Supreme Court of Alaska

May 6, 2016

CITY OF KENAI, Appellant,

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

         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. [Fabe, Justice, not participating.].


         MAASSEN, Justice.


         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.


         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 Southcentral 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 the patent recites the statutory language almost verbatim.

         In 1973 the State granted oil and gas leases in the property and other surrounding lands to Marathon Oil Company. The leases reserved the State's right to dispose of the surface estate,[5] as well as the State's " right [as the Lessor] to authorize the subsurface storage of oil or gas . . . in order to avoid waste or to promote conservation of natural resources."

         b. The mineral estate

         CIRI received its rights to the subsurface estate under a three-way agreement with the State and the federal government pursuant to the Alaska Native Claims Settlement Act (ANCSA).[6] The ANCSA-related land transfers, which took place in 1980, had as a predicate step the State's reconveyance to the United States of " all of the [State's] right, title and interest, to the subsurface estate" in the property. A few months later the United States conveyed " the subsurface estate" of the property to CIRI. Both deeds -- first from the State to the federal government, then from the federal government to CIRI -- were subject to " all valid existing rights therein, if any," specifically listing the Marathon oil and gas leases.

         Accordingly, CIRI received the lands subject to the City's preexisting interest in the surface estate. As successor lessor of the Marathon leases, CIRI received royalties from the gas Marathon extracted.

         3. The City of Kenai's claim that it owned the gas storage rights in the property

         After CINGSA secured its leases of gas storage rights in the Sterling C Reservoir from the State and CIRI, the City asserted its own claim to the ownership of those rights. But the City allowed the storage project to go forward pending negotiations, granting CINGSA a conditional right of entry in the meantime. The right of entry provided that should " either the City of Kenai or CINGSA, in its sole discretion," determine that the parties were not making progress in negotiations, CINGSA would file an action in eminent domain and allow the courts to decide the ownership issue.

         B. Proceedings

         The parties were unable to resolve their disagreement about gas storage rights, and CINGSA filed a complaint against the City in March 2012, seeking alternative forms of relief. In the first count of its complaint, CINGSA sought to acquire by condemnation " a gas storage easement and an easement upon the mineral interests" owned by the City in the Sterling C Reservoir. In another count, CINGSA interpleaded CIRI and the State as defendants in order " [t]o prevent double or multiple liability" given the " overlapping claims for compensation by CINGSA for use of the [property] for natural gas storage," and it asked the court to decide the party or parties CINGSA owed compensation. CINGSA also sought a " declaratory judgment confirming that the City [held] no property interest in the [gas storage rights]" ; an alternative judgment that if the City did hold those rights CINGSA should be granted an easement by condemnation, with just compensation to the City; and -- as an alternative to condemnation if the City held those rights -- reformation of CINGSA's leases with the State and CIRI so that CINGSA was not obliged to pay those entities for rights that were legally the City's.

         1. Summary judgment

         CIRI and the City cross-moved for summary judgment on whether the City owned the gas storage rights. The State and CINGSA joined CIRI's motion, endorsing CIRI's position that the storage rights belonged to the State and CIRI rather than the City. The superior court granted summary judgment in favor of CINGSA, the State, and CIRI. It concluded that " the State reserved to itself the mineral estate, which includes the underground storage rights," and that " [t]he rights the City received [from the State] regarding the property in question were surface estate rights."

         CINGSA and the City filed a stipulation -- later approved by the superior court -- to resolve all remaining condemnation issues " regarding authority and necessity, possession and just compensation and entry of final judgment against the property rights held by the City." The superior court entered final judgment in favor of CINGSA, the State, and CIRI.

         2. Attorney's fees

         CIRI moved for an award of attorney's fees against the City, seeking 20% of its reasonable actual fees under Alaska Civil Rule 82(b)(2). The City opposed the motion, arguing that CINGSA had initiated the suit, bringing in CIRI as a party " in its sole discretion," and that the City had not alleged any claims against CIRI that could make the City liable for CIRI's fees. But the superior court concluded that CIRI was entitled to attorney's fees under Rule 82(b)(2) because it prevailed on the main issue in the case: " that CIRI owns the subsurface gas storage pore spaces in dispute." The superior court found that the amount of work done by CIRI's attorneys was reasonable, but it awarded an amount less than the scheduled 20% because it found that CIRI's Anchorage-based attorneys charged at rates higher than those customarily charged in Kenai Peninsula communities.

         The City appeals the superior court's decision on summary judgment and its award of attorney's fees and costs to CIRI.


          " We review a superior court's decision on summary judgment de novo, drawing all inferences in favor of, and viewing the facts in the record in the light most favorable to, the non-moving party." [7] We review " a superior court's determination of prevailing party status and attorney's fees for abuse of discretion." [8] We will find an abuse of discretion " if the award is 'arbitrary, capricious, manifestly unreasonable, or stemmed from improper motive.'" [9] " We review the interpretation of Alaska Civil Rules governing the award of costs and attorney's fees de novo." [10]


         The central issue in this case is the ownership of the pore space when the mineral and surface estates have been severed, as they commonly are under Alaska's mineral reservation statute, AS 38.05.125, a provision of the Alaska Land Act.[11] There is a notable lack of consensus in the courts and among legal scholars on the issue of pore-space ownership.[12] This is our first opportunity to address the issue; we do it in the unique context of Alaska's land laws.

         A. The Superior Court Properly Granted Summary Judgment To CIRI, The State, And CINGSA Because AS 38.05.125(a) Reserves The Natural Gas Storage Rights To The State.

         The City contends that as the owner of the surface it also owns the underlying pore space or natural gas storage rights. According to the City, the superior court erred when, in granting summary judgment to the other parties, it reasoned that (1) determining ownership of the storage rights is a question of statutory rather than deed interpretation; (2) the reserved rights under AS 38.05.125(a) include natural gas storage rights; and (3) the " American rule" -- by which the surface owner owns the rights to underground spaces that have been depleted of their minerals -- did not apply.

          1. The superior court properly addressed the ownership of storage rights as a question of statutory interpretation.

         The State patents conveying the land at issue to the City recited verbatim the reservation of mineral rights that AS 38.05.125(a) generally requires. The City argues that the superior court, when determining whether the parties intended to convey or to reserve the pore-space rights, should have interpreted these reservations using rules of deed interpretation rather than statutory interpretation. We interpret the language of a deed using a three-step process: We first " look at the four corners of the document to see if it unambiguously presents the parties' intent" ; if it is ambiguous, we next " consider 'the facts and circumstances surrounding the conveyance' to discern the parties' intent" ; and finally, " [i]n the event that the parties' intent cannot be determined, we rely on rules of construction." [13] As ...

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