Opinion ID: 2520305
Heading Depth: 3
Heading Rank: 2

Heading: The Commissioner's Decision

Text: We begin our review of the commissioner's decision that the Midnight Sun Reservoir was not a newly discovered geologic structure by examining the terms of the lease and applicable regulations. Paragraph 12 of the lease states that the lessee will be entitled to a reduction in royalties owed the state upon making the first discovery of oil or gas in commercial quantities in any geologic structure. Paragraphs 42 and 43 make it clear that the terms of the lease should be defined according to applicable regulations in effect on the effective date of this lease. The corporations argue that the commissioner's decision is contrary to Alaska statutes, the lease provisions, and applicable regulations. According to the corporations, the decision failed to apply the federal known-geologic-structure test, and instead proceeded in an ad hoc manner to create and apply several new tests for `awarding' discovery royalties that were more in keeping with his views of what current agency policy should be. [25] But the Alaska regulations in place when the lease was signed made it clear that the department was not confined to a mechanical application of the known-geologic-structure test. The then-current version of 11 AAC 505.741(b) set out a detailed definition of geologic structure and stated that this definition was intended to be  similar to  the one used  in the administration of the Federal Mineral Leasing Act. [26] The regulation qualifies its reliance on the federal standard. The Alaska definition of geologic structure need only be similar to the federal definition. And the regulation's express directive that Alaska's use of geologic structure was intended to have a similar meaning to the one used in  the administration of  the federal standard  rather than to the federal standard itself  strongly suggests that the department viewed the federal standard as an ongoing administrative process that was broad enough for agency discretion and flexible enough to evolve over time. Further evidence supporting this flexible view of the Alaska regulation defining geologic structure can be gleaned by comparing its purpose to the one served by the Federal Mining and Land Act's known-geologic-structure requirement. Alaska's system of discovery royalties was designed to allow royalty reductions to be granted case by case in future administrative proceedings commenced after commercial quantities of oil and gas were actually found on lands already under state lease. [27] As exemplified by this case, these proceedings might occur decades after a lease was signed and would almost certainly require evaluation of detailed information that would not have been known, or even knowable, at the time of signing. In the context of this forward-looking regulatory process, it would seem unrealistic for the parties signing the lease to expect that geologic structure would be defined in a static way that could not adapt to changes in best available techniques and technology. By contrast, as used in the federal act, the known geologic structure test is designed for an immediate determination  one that classifies prospective lease lands before they are put up for lease. Given the federal act's narrower, present-tense focus, it would seem reasonable to expect that the federal system would use a more concrete test: a test that would be practical to apply based on already available facts and would not need to adapt to future events. But as the state correctly points out, even given the federal system's diminished need for flexibility, the federal test has never actually been set in stone. Under the federal test, areas within a known geologic structure are subject to expansion and consolidation with advances in geologic knowledge. [28] In fact, even the publication that the corporations rely upon acknowledges that known-geologic-structure boundaries are not to be taken as absolutely and accurately showing the extent in each instance of the geological structure producing oil or gas, but they may later be extended or reduced to accord with the facts. [29] Moreover, decisions of the Department of the Interior Board of Land Appeals construing the federal definition of a known geologic structure recognize that a geologic structure may be composed of multiple accumulations that are physically separate yet share structural characteristics, such as entrapping mechanisms: Delineation of a [known geologic structure] recognizes the existence of a continuous entrapping structure, on some part of which there is production, or of numerous related, but nevertheless independent, stratigraphic or structural traps. [30] And pre-drilling risk may also be a consideration under the federal known-geologic-structure analysis. [31] Despite the corporations' contrary assertions, then, the commissioner's method of determining geologic structure in the present case was similar to the federal test. The commissioner looked at three basic factors: whether the Midnight Sun Reservoir was a physically separate accumulation of oil; whether it had a structurally distinct entrapping mechanism; and whether its discovery entailed commercial risk. The commissioner's finding that the Midnight Sun Reservoir belonged to the already known Kuparuk C geologic structure thus is consistent with the federally defined standard. The corporations nevertheless dispute the commissioner's finding that the Kuparuk C sands comprised a single geologic structure; they claim that this finding conflicts with the plain language of former 11 AAC 505.741(b) by indiscriminately combining oil traps and non-trapping rocks. But former 11 AAC 505.741(b) specifically defined a geologic structure to include any structural and/or stratigraphic entrapping mechanism containing one or more intervals, zones, strata, formations, or fault blocks. [32] Because this definition allows a trapping mechanism (such as the mechanism common to the Kuparuk C sands) to contain multiple accumulations of oil, it does not automatically require the department to award a discovery royalty to every newly discovered trap in the same entrapping mechanism. It follows that the commissioner's decision does not conflict as a matter of law with the definition of a geologic structure set out in former 11 AAC 505.741(b). The commissioner found that the Midnight Sun Reservoir did not have a geologically different entrapping mechanism from other Kuparuk C oil accumulations; a geologic structure is defined by the regulation primarily as an entrapping mechanism. The fact that such an entrapping mechanism may contain multiple geologic features and formations does not make it any less a single structure. The plain text of the regulation does not demand that each one of the structure's intervals, zones, strata, formations, or fault blocks contain oil. The commissioner's decision thus falls within the limits defined in former 11 AAC 505.741(b). The corporations also contend that the commissioner's decision cannot be reconciled with the department's own decisions in other discovery-royalty cases involving the Kuparuk C sands  specifically the Niakuk and Pt. McIntyre decisions. But the commissioner fully considered department precedent in his decision. He distinguished the Niakuk award from the present case, noting that the department was not bound to recognize the Midnight Sun as a new discovery simply because its location had been omitted from the area that the Niakuk decision described as the Niakuk structure. This finding appropriately recognizes that, under Alaska's regulations and federal law alike, the boundaries of a given geologic structure may expand or contract with advances in knowledge and technique. The commissioner distinguished the Pt. McIntyre decision on slightly different grounds, observing that the Pt. McIntyre well involved substantial commercial risk. As we have already indicated, commercial risk is a permissible factor to consider in determining whether a particular discovery lies within an already known geologic structure. [33] Accordingly, we conclude that the commissioner did not base his decision on a flawed legal standard. We turn next to the corporations' additional criticisms of the commissioner's decision. The corporations argue that the commissioner's failure to designate the Midnight Sun Reservoir as a separate geologic structure conflicts with the department's actual treatment of the area before and after the discovery well was drilled. Specifically, the corporations contend, no information existed before drilling that would have allowed Midnight Sun to be included in any recognized participating area; yet after the discovery, the department approved Midnight Sun as its own participating area. But this argument conflates distinct rules governing discovery and participation. Participating areas are defined by regulation to include only lands that are reasonably estimated ... to be capable of producing ... hydrocarbons in paying quantities. [34] As the state explains, unit and participation areas are created by multiple developers with access to the same reservoir; their purpose is to maximize production from individual reservoirs without waste. [35] Because the criteria for participating areas differ in purpose and definition from those for awarding discovery royalty rights, a location's exclusion from or approval as a participating area does not determine its status as a separate geologic structure. The state additionally points out that prior decisions by the department and federal decisions under the known-geologic-structure standard have denied discovery royalty awards to isolated reservoirs that are nonetheless part of the same geologic structure. The record supports the state's point, establishing that the department's present application of the known-geologic-structure standard is consistent with its historical interpretation of that standard. Here, the commissioner similarly found that Midnight Sun was a separate accumulation included within the larger Kuparuk C structure. He noted that all the Kuparuk C sands share the same stratigraphic elements and structural characteristics. Because these determinations incorporate factual findings, we must affirm the commissioner's decision as long as it is supported by substantial evidence. [36] For as we recognized in Exxon Corp. v. State , when the finder of fact must determine the meaning of a contract based on extrinsic evidence that raises conflicting inferences, `our inquiry is limited to determining whether the trier of fact's choice of inferences is supported by substantial evidence.' [37] On reviewing the record here, we find that substantial evidence supports the commissioner's decision.