Appellant Alaskan Crude Corporation operates an oil and gas unit near Deadhorse known as the Arctic Fortitude Unit. Appellant James W. White is the president of Alaskan Crude and a leaseholder of an oil
Alaskan Crude appealed the Commissioner's decision to the superior court, arguing that a pending judicial decision in a separate appeal qualified as a force majeure under the unit agreement, preventing Alaskan Crude from meeting its work obligations. It also argued that the Commissioner's proposed default cure was an improper unilateral amendment of Alaskan Crude's unit agreement. The superior court affirmed the Commissioner's findings and decision and Alaskan Crude appealed. We conclude that (1) the pending judicial decision in Alaskan Crude's separate appeal did not trigger the force majeure clause of the unit agreement; and (2) the Commissioner's proposed default cure was not a unilateral amendment of Alaskan Crude's unit agreement. We thus affirm the decision of the superior court upholding the decision of the Commissioner.
II. FACTS AND PROCEEDINGS
In June 2006 the Department of Natural Resources (DNR), Oil and Gas Division approved the formation of the Arctic Fortitude Unit (the Unit), an oil and gas unit made up of three individual leases located near Deadhorse.
Since the formation of the Unit, Alaskan Crude has been involved in two separate but closely related disputes with several state agencies. The first dispute, with the Department of Environmental Conservation (DEC) and the Alaska Oil and Gas Conservation Commission (AOGCC), concerns whether an oil spill contingency plan is required for the Burglin 33-1 well. That dispute is the subject of a separate appeal before this court. The second dispute, which involves the DNR Oil and Gas Division (the Division) and is the subject of this appeal, concerns Alaskan Crude's work obligations under its unit agreement and whether the pending appeal in the first dispute created a force majeure preventing Alaskan Crude from meeting those obligations. A discussion of both disputes is necessary to understand the issues underlying this appeal.
A. The Dispute Concerning Alaskan Crude's Oil Spill Contingency Plan.
The operator of an oil exploration facility must develop a contingency plan in case of an oil spill and obtain approval of that plan from DEC in consultation with AOGCC.
When the Unit was formed, Alaskan Crude seemed to suggest that it intended to use the
After a hearing (which the parties did not attend), AOGCC reaffirmed its earlier determination that Burglin 33-1 was not a gas-only well and further reduced the response planning standard based upon new computer modeling of the well's potential flow rate. Alaskan Crude then indicated that it was now planning to test the well at a shallower depth than it had previously intended—a depth which would not be "capable of unassisted flow to the surface"—and requested that AOGCC reconsider its decision on this basis.
AOGCC treated Alaskan Crude's request as a new application for a recommended response planning standard based upon the shallower depth and further reduced the response planning standard to 115 barrels of oil per day. Alaskan Crude did not seek agency rehearing of this determination; instead, it appealed to the superior court pursuant to AS 22.10.020(d), arguing that the well is gas-only and is exempt from oil spill contingency planning.
B. The Dispute Concerning Alaskan Crude's Work Obligation Deadlines And The Force Majeure Clause.
While Alaskan Crude was disputing whether it was exempt from an oil spill contingency plan, it was also having difficulty meeting the work obligations outlined in its plan of exploration. DNR regulations provide that to form an oil and gas unit, lessees must propose a unit agreement and a plan of exploration.
Under Article 20 of Alaskan Crude's unit agreement, failure to comply with the terms of the unit agreement or the plan of exploration because of "force majeure" is not a default. Force majeure is defined by DNR regulations as "war, riots, acts of God, unusually severe weather, or any other cause beyond the unit operator's reasonable ability to foresee or control and includes operational failure to existing transportation facilities and delays caused by judicial decisions or lack of them."
The initial plan of exploration for the Unit contained several work obligation deadlines.
On June 26, 2007, a year after the initial plan of exploration was approved, Alaskan Crude sent a letter to the Division requesting a modification of the Stage 2 work obligations. The letter alleged that although Alaskan Crude had "diligently pursued permits and required authorizations," "winter tundra travel equipment shortages and summer tundra travel restrictions" made it impossible to meet the work obligations by October 1, 2007. Alaskan Crude requested that the deadline for these obligations be changed to October 1, 2008.
The Division denied this request on June 28, 2007. The Division explained that Alaskan Crude's summer tundra travel plans had been delayed because Alaskan Crude had not submitted the proper permit application or requested a permitted contractor and that Alaskan Crude had been given sufficient time to schedule winter equipment deliveries. The Division reminded Alaskan Crude that the Unit would automatically terminate if the work obligations were not met and notified Alaskan Crude of its right to appeal the decision to the DNR Commissioner. Alaskan Crude appealed the denial of its modification request on July 17, 2007 and requested a hearing. The hearing was held on September 28, 2007, but Alaskan Crude did not attend.
On November 6, 2007, Alaskan Crude and the Division settled the appeal by agreeing to an amended plan of exploration. The amended plan of exploration changed the deadlines for the Stage 2 work obligations, requiring Alaskan Crude to deliver the necessary drilling equipment to the Burglin 33-1 well pad by May 15, 2008 and to re-drill the well by October 1, 2008.
In January 2008 Alaskan Crude sent an email to the Division stating that Alaskan Crude was unable to communicate with AOGCC regarding the development of a contingency plan and that this inability was "delaying [its] ability to obtain a [contingency plan] and forcing work into a force majeure situation." The email asked for the Division's advice. The Division responded on January 16 that Alaskan Crude's claim was "incorrect," that Alaskan Crude was "in control of the process," and that the Division saw no cause for delays in the work obligations.
The Division Director responded on February 15, 2008. The Division Director informed Alaskan Crude that it could not process the letter as an "appeal" because the January 16 email was simply informal advice and not a decision capable of appeal under DNR regulations.
Eleven days later, on February 26, Alaskan Crude sent a fax to the Division Director purporting to provide the requested information. The fax stated that Alaskan Crude "asks again for a declaration of force majeure for an extension of the ... work commitment deadlines commensurate with the period of the force majeure caused by AOGCC actions." It alleged that "[t]he period of force majeure has been 90 days so far and is still continuing.... The AOGCC is holding [Alaskan Crude] hostage in this matter because of [a] pending appeal [Alaskan Crude] has with the AOGCC on [an] entirely separate and unrelated matter."
On March 24 the Division denied Alaskan Crude's request to invoke the force majeure clause and toll its work obligations. The Division Director stated that there was "no evidence" that AOGCC had delayed Alaskan Crude's ability to prepare and submit a contingency plan and that "AOGCC did not refuse to discuss matters involving the well with [Alaskan Crude] or its consultant." The Division Director found that Alaskan Crude "is requesting to delay its ... work commitments solely because it is dissatisfied with the AOGCC's determination that the Burglin 33-1 well is not a gas-only well" and that AOGCC's determination and Alaskan Crude's subsequent appeal were "not force majeure events" because they were not beyond Alaskan Crude's "reasonable ability to foresee or control."
On April 10, 2008, Alaskan Crude appealed the Division's decision to the DNR Commissioner. Alaskan Crude asserted that "from the beginning" it had intended to explore Burglin 33-1 as a gas-only well, that AOGCC's determination was thus "clearly unanticipated" and "out of [Alaskan Crude's] ability to control," and that Alaskan Crude had been "forced" to file a superior court action "to obtain the necessary determination." The appeal concluded that the pending judicial action regarding the gas-only exemption was a force majeure because it "will directly affect [Alaskan Crude's] proposed actions" and "it is not prudent to execute the work obligations ... until this issue is decided."
While the appeal to the DNR Commissioner was pending, DNR reminded Alaskan Crude that its work obligations remained in place. Alaskan Crude then made two additional requests to the Director of the Division, on April 24 and May 5, to amend the plan of exploration and push back the work obligation deadlines. Alaskan Crude suggested new deadlines of March 31, 2009, for moving a drilling rig to the Burglin 33-1 well, and October 1, 2009, for re-drilling the well. These requests were not acted upon, and on May 15, 2008, Alaskan Crude defaulted on its work obligation to deliver a drilling rig to the Burglin 33-1 well.
On July 16, 2008, the DNR Commissioner issued findings and a decision regarding the force majeure appeal. The Commissioner made several factual findings, including that Alaskan Crude had agreed to the amended plan of exploration and the May 15 deadline after AOGCC had determined that Burglin 33-1 was not a gas-only well.
The Commissioner also gave notice that Alaskan Crude was in default under its unit agreement because it had failed to move a drilling rig to the well by May 15, 2008.
Alaskan Crude appealed the Commissioner's findings and decision to the superior court, arguing that the Commissioner erred in determining that there was no basis to invoke the force majeure clause and that the Commissioner's proposed default cure was an impermissible unilateral amendment of the plan of exploration. The superior court affirmed the Commissioner's decision that Alaskan Crude could not invoke the force majeure clause but used slightly different reasoning. The Division, and the DNR Commissioner, analyzed Alaskan Crude's "dispute and litigation with the AOGCC" as a single event and concluded that it was not a force majeure because it was within Alaskan Crude's ability to foresee or control and did not prevent Alaskan Crude from fulfilling its work obligations. The superior court analyzed AOGCC's determination and the lack of a decision on the appeal from that determination as separate events. First, the superior court concluded that the AOGCC determination itself was not a "judicial decision" covered by the force majeure clause because AOGCC "is a quasi-judicial, as opposed to judicial, body." Second, the superior court concluded that although the lack of a judicial decision on appeal from the AOGCC determination could fall within the clause, it had not prevented Alaskan Crude from fulfilling its work obligations—it only made those obligations more expensive than Alaskan Crude had hoped. The superior court did not specifically address whether the lack of a judicial decision was within Alaskan Crude's ability to foresee or control, but it did comment that when Alaskan Crude entered the amended unit agreement, it knew that "the lack of exemption [as a gas-only well] was a certainty, at least pending the outcome of a lengthy appeal."
The superior court also held that the DNR Commissioner's proposed default cure did not unilaterally amend Alaskan Crude's unit agreement because the unit agreement "itself sets out the procedure for issuing demands to cure."
III. STANDARD OF REVIEW
"When the superior court acts as an intermediate appellate court in an administrative matter, we independently review the
The parties dispute the proper standard of review because they dispute which force majeure clause—the clause contained in White's oil and gas lease or the clause contained in the unit agreement—applies to Alaskan Crude's work obligations. Alaskan Crude argues that the applicable clause is contained in the oil and gas lease and thus should be reviewed de novo as a matter of contract interpretation. DNR responds that the applicable clause is contained in the unit agreement, with the definition of force majeure provided by DNR regulations, and thus DNR's decision that a force majeure did not exist in this case was an interpretation of its own regulations that should be given deference.
We conclude that DNR is correct. When Alaskan Crude missed the May 15, 2008 deadline for its work obligations, it defaulted on the unit agreement. But the default itself had no consequences for the individual oil and gas leases. By entering the unit agreement, the original terms of the individual leases were automatically extended for the duration of the unit's existence. Therefore, only termination of the unit—not default—could lead to expiration of White's lease term and create the need to save the lease from expiration by invoking the lease's force majeure clause.
Alaskan Crude appeals the same aspects of the DNR Commissioner's decision that it challenged in the superior court. First, Alaskan Crude argues that the AOGCC's determination that Burglin 33-1 was not a gas-only well, and the pending appeal of that determination, were force majeure events that prevented Alaskan Crude from meeting its work obligations. Second, Alaskan Crude argues that the Commissioner's proposed default cure was a unilateral amendment of its unit agreement.
A. Alaskan Crude's Pending Appeal Of The AOGCC Decision Was Not A Force Majeure.
The definition of force majeure that applies to Alaskan Crude's unit agreement requires the alleged force majeure to be "beyond the unit operator's reasonable ability to foresee or control."
The requirement that a force majeure event be unforeseeable is a common characteristic of force majeure clauses in oil and gas leases. "Force majeure clauses extend [mineral] leases only when the nonperformance is `caused by circumstances beyond the reasonable control of the lessee or by an event which is unforeseeable at the time the parties entered into the contract.'"
Alaskan Crude received Other Order No. 51, AOGCC's final decision that Burglin 33-1 was not a gas-only well, on October 1, 2007. Alaskan Crude requested reconsideration of the order on October 11, and AOGCC denied reconsideration on October 24. On November 6, 2007, Alaskan Crude then agreed to an amended plan of exploration that included the deadlines of May 15, 2008, for moving drilling equipment to the well pad, and October 1, 2008, for re-drilling the well. After agreeing to those deadlines, Alaskan Crude filed an appeal of AOGCC's decision in superior court on November 19, 2007, without seeking expedited review.
AOGCC's decision was thus incapable of being an unforeseeable force majeure because Alaskan Crude already knew of the decision when it agreed to the amended deadlines.
Moreover, policy considerations support the conclusion that the AOGCC decision and Alaskan Crude's appeal of that decision did not create a force majeure. Unit agreements and plans of exploration for oil and gas development will often result in disagreements between unit operators and regulatory agencies.
Indeed, if Alaskan Crude believed that it could not complete its work obligations until the appeal of the AOGCC decision was resolved, it had several other options available rather than invoking the force majeure clause. The most obvious course of action would have been for Alaskan Crude, after learning of the AOGCC decision, to attempt to negotiate different deadlines for the amended plan of exploration that would accommodate the appeal. But even after agreeing to the new deadlines, Alaskan Crude could have requested that DNR amend the plan of exploration once again after the notice of appeal had been filed.
Because we affirm the superior court's decision upholding the DNR Commissioner's decision on the ground that the delay in resolving the appeal was foreseeable, we need not address whether the unresolved appeal actually prevented Alaskan Crude from meeting its work obligations.
B. The DNR Commissioner's Proposed Default Cure Did Not Unilaterally Amend Alaskan Crude's Unit Agreement.
Alaskan Crude also appeals the default cure proposed by the DNR Commissioner, arguing that it constitutes an improper unilateral amendment of the unit agreement. The superior court rejected this argument, observing that "the Unit Agreement itself sets out the procedure for issuing demands to cure and minimum cure periods" and that the DNR Commissioner had complied with those procedures.
We agree with the superior court and conclude that the proposed default cure was in accordance with the terms of the unit agreement and was not an improper unilateral amendment. Article 20.02 of the unit agreement specifies that in the event of a default:
The DNR Commissioner found that Alaskan Crude was in default and provided notice of that default on July 16, 2008. The Commissioner included a demand to cure the default by moving a drilling rig to the well by March 31, 2009 and re-drilling the well by October 1, 2009. This cure period was significantly longer than the 90-day minimum required by the unit agreement; in fact, the dates demanded by the DNR Commissioner were the same dates proposed by Alaskan Crude in its additional requests to amend the plan of exploration on April 24 and May 5, 2008. We conclude that the default cure was in accordance with the unit agreement and had the practical effect of granting Alaskan Crude's own request. It was not a unilateral amendment of the agreement and the decision of the superior court is affirmed.
For the foregoing reasons, we AFFIRM the decision of the superior court upholding the decision of the DNR Commissioner.