Opinion ID: 2599092
Heading Depth: 3
Heading Rank: 2

Heading: The Department of Natural Resources Has the Authority to Deny Expansion of the PBU Under the PBUA.

Text: While the parties dispute numerous aspects of the expansion and contraction decisions, [19] we find one issue dispositivewhether the department had the authority to consider the state's best interests in making a decision on expansion of the PBU. Exxon argues that the department has no discretion to determine unit expansion; rather, Article 9 of the PBUA controls. Exxon interprets the PBUA to give itself a unilateral right to expand the PBU so long as the lands to be added contained a reservoir that was partially within the PBU. If this geologic condition was met, Exxon argues, the department had no discretion to deny expansion. The state argues that the department has discretion to consider the public interest when deciding to expand the PBU under the PBUA and department regulations. We first consider the text of the PBUA. We then look at extrinsic evidence.
Article 9.1 of the PBUA discusses possible expansion of the PBU: The Unit Area may be enlarged from time to time so as to include any additional lands reasonably determined to be within any Reservoir any portion of which is within the Unit Area. The lands to be included shall be based on such subdivisions of the public land surveys as may be approved by the Director, but not less than the area approved by the well-spacing order affecting such lands for such Reservoir.... Exxon argues that the first sentence indicates that Exxon may enlarge the unit area, so long as the additional lands meet the condition. The state argues that the first sentence is ambiguous, but the rest of the PBUA indicates that the department has the power to expand the PBU. The state is correct that the language is ambiguous. The passive voice can be ambiguous. [20] The text alone does not indicate whether Exxon or the department has the authority to expand the PBU. However, the subsections following the contested statement help to clarify it. Subsections (a) through (d) indicate the process for expansion of the PBU. The final step indicates that after due consideration of all pertinent information, the Director shall render his decision. This text, and the absence of text indicating that Exxon was meant to have the right to expand, strongly favors the state's interpretation that the director has the authority to decide expansion of the PBU. Both sides argue that the use of the permissive may supports their interpretation. Exxon argues that the permissive had to be used to preserve Exxon's option of expansion. If the mandatory shall was used, Exxon would have been required to expand the PBU if the condition was met. The state contends that use of the permissive indicates the department's discretion. The state notes that in four other articles of the PBUA, Articles 4.4, 5.4, 16.4, and 18.1, when the agreement intended to create a right that could be exercised by the lessees, it used the language shall have the right or shall be entitled to. The state's interpretation is the most logical. In interpreting a contract, courts should interpret the contract in a manner that makes the contract internally consistent. [21] Exxon's interpretation that Article 9.1 creates a right to expansion with the language may conflicts with other portions of the PBUA that use shall have the right or shall be entitled to to create a lessees' right. Finally, the state notes that Article 12.1 of the PBUA expressly indicates that the PBUA shall be subject to all valid applicable federal and state laws, rules, regulations and orders. Former 11 AAC 83.340 and former 11 AAC 83.345, state regulations in effect at the time the parties entered the PBUA, required the director's approval, based on a determination of necessity or advisability in the public interest, for a modification of an approved unit agreement. [22] Accordingly, the state argues that the PBUA required the director's approval for any modification of the agreement. Exxon has no response to this. This express statement also favors the state's interpretation that the department has discretion to deny expansion of the PBU. In sum, the text of the PBUA strongly indicates that the department had discretion to deny expansion as specified by its own regulations.
Extrinsic evidence provides substantial support for the commissioner's decision. The parties' course of performance of the PBUA and the existence of departmental regulations that are inconsistent with Exxon's view of the PBUA strongly support the conclusion that the department had discretion to deny expansion of the PBU.
The state argues that Exxon's and the department's course of performance of the PBUA shows that Exxon understood that the department retained discretion. Exxon offers no argument in response. The conduct of the parties is properly considered as evidence of the parties' intent. [23] In the course of performance of the PBUA, Exxon has previously requested contraction of the PBU and corresponding expansion of another unit. Exxon's application for the change in the PBU requested the director's approval under provisions including 11 AAC 83.301-.395 and argued that the change was in the public interest in accordance with AS 38.05.180(p) and 11 AAC 83.303. Exxon has also requested expansion of the PBU and contraction of another unit. In both cases, the director's decisions to grant the change included an analysis of the best interests factors listed in 11 AAC 83.303. Furthermore, Exxon's application for the Pt. McIntyre expansionthe denial of which forms the main issue hererequested the director to expand the PBU pursuant to the provisions of Section 5.3 and Section 9.1 of the [PBUA] and 11 AAC 83.351 and 11 AAC 83.356. The application expressly noted that the expansion meets the criteria of 11 AAC 83.303 and listed three reasons. Exxon's and the department's prior course of performance of the PBUA contradicts Exxon's current position and strongly indicates that the department had discretion to deny expansion.
Exxon argues that the department's own regulations allow the department to enter contracts that differ from existing regulations and provide that later-enacted regulations will not apply to preexisting contracts. [24] It also notes that the department has no statutory authority to alter a unit agreement without consent by the contracting parties. [25] Exxon claims that it drafted the PBUA to eliminate the department's discretion. Why, Exxon asks, would it draft an agreement that simply restates the department's regulations? We disagree with Exxon's first contentionthat the department can agree to contract terms that violate its regulations. The only authority cited for this proposition is 11 AAC 83.301(b), which states that the department's regulations apply to an existing oil and gas lease or approved unit agreement where not inconsistent with the lease or unit agreement or regulations in effect on the effective date of the lease or unit agreement. This merely applies the department's later-enacted regulations as default rules to existing leases or unit agreements when there is no conflict. Subsection .301(b) does not make existing department regulations inapplicable to new unit agreements. Former 11 AAC 83.340 and .345 existed before the approval of the PBUA. Former section .345 stated that [a]ny modification of an approved unit agreement is subject to the director's approval in the same manner and upon the same determination as the original unit agreement. [26] Former section .340 required that [a] unit agreement will be approved by the director if he determines that the agreement is necessary or advisable in the public interest, is for the purpose of more properly conserving natural resources, and adequately protects all parties in interest including Alaska. [27] Thus, 11 AAC 83.301(b) does not affect the applicability of the best interests analysis for expansions of the PBU according to former 11 AAC 83.340 and .345. [28] Moreover, 11 AAC 83.301(b) does not confer authority for the converse: to contract outside of the department's regulations. To allow such activity would be arbitrary; parties contracting with the department would not be held to the same regulations that non-contracting parties were required to comply with. And the department should never need to contract in violation of its own regulations, because it has the authority to change its regulations so long as the new regulation has a reasonable basis and is within the scope of the legislature's delegation of power to the department. [29] Because we conclude that 11 AAC 83.301(b) does not allow the department to contract outside of its regulations, Exxon's argument that the department contracted away its regulatory discretion fails. In sum, the text of the PBUA and the extrinsic evidence support the conclusion that the department had discretion to deny expansion. The department did not, and could not, contract away its discretion to consider the state's best interests in approving expansions of the PBU. Exxon did not have a unilateral right to expansion under the PBUA.