Opinion ID: 2520305
Heading Depth: 4
Heading Rank: 1

Heading: The discovery royalty program

Text: In 1959 the legislature enacted the Alaska Land Act. [1] A provision of the Act formerly codified as AS 38.05.180(a) established a reduced royalty rate for state leaseholders making the first commercial discovery of oil in a geologic structure: the holder of a lease who shall drill and make the first discovery of oil or gas in commercial quantities in any geologic structure shall pay a royalty on all production under the lease of 5 per centum for ten years following the date of such discovery and thereafter the royalty rate shall be not less than 12½ per centum.[ [2] ] This discovery royalty encouraged the exploration and rapid development of Alaska's oil resources. Between 1959 and 1964, the Department of Natural Resources adopted regulations implementing the discovery royalty statute. [3] Among these regulations was the DL-1 competitive oil and gas lease form. [4] The DL-1 lease included a discovery royalty clause nearly identical to the provisions of subsection .180(a), and also provided that its terms would be interpreted according to regulations in force at the time the lease was entered. [5] The regulations established a process allowing lessees to apply for discovery royalties and set the guidelines for the department to determine whether an award was warranted. [6] The new regulations required applicants to provide the department with data to determine the geologic structure from which the oil and/or gas is being produced [7]  a requirement echoing subsection .180(a)'s language authorizing the department to award discovery royalties only for the first discovery of oil ... in a geologic structure.... [8] As then defined in 11 AAC 505.741(b), geologic structure meant any structural and/or stratigraphic entrapping mechanism containing one or more intervals, zones, strata, formations, or fault blocks which has the necessary physical characteristics to accumulate and prevent the escape of oil and/or gas. The regulation further stated: It is intended that the meaning shall be similar to that as used by the United States Geological Survey in the administration of the Federal Mineral Leasing Act of February 25, 1920. [9] The Federal Mineral Leasing Act [10] uses the geologic structure concept to differentiate types of oil and gas leases before leasing occurs. If the Secretary of the Interior determines that government lands are not within a known geologic structure of a producing oil or gas field [11] they may be leased without competitive bidding. [12] As of 1959, the United States Geological Survey (USGS) defined the Act's term known geologic structure as the trap, whether structural or stratigraphic, in which an accumulation of oil or gas has taken place. The limits of such structure include all acreage that is presumptively productive. [13] In 1967 and 1969 the Alaska legislature curtailed and then repealed the Alaska Land Act's discovery royalty provisions. [14] The department's regulations implementing the discovery royalty program were repealed in 1979.