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Gas owners have duty to Alaska: North Slope lessees must make efforts to market our gas

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Posted: Saturday, October 20, 2012 12:00 am | Updated: 11:39 am, Mon Jan 21, 2013.

I write in response to Andrew Halcro’s opinion piece (News-Miner, Sept. 23) criticizing my presentation at the Valdez LNG conference in which I suggested the state should take control of gas pipeline development.

Specifically, Halcro asserts Alaska does not have the legal right to demand development of its gas resources over the objection of the current North Slope leaseholders, ExxonMobil, BP and ConocoPhillips. Halcro states “the only tools the state has when it comes to the North Slope producers are taxes and permitting” and that because “Alaska contractually assigned the right to develop the oil and gas resources to its tenants” the state has “no other option besides waiting until legal leaseholders deem the project economical.” Based upon my years of experience working in this area of law, which includes a familiarity with the state’s oil and gas leases and the other North Slope contractual arrangements, such as the unit and operating agreements, I respectfully disagree.

The Statehood Compact allowed the state to select for ownership *103 million acres to provide a natural resource revenue base that would fund our fledgling state treasury. Part of the deal was that the state could not divest the mineral rights to that formerly federal land even if it sold the surface estate to private parties. Thanks to the foresight of Gov. Bill Egan, we selected and thus own the land on which most of the producing North Slope fields are located. The Alaska Constitution provides the state holds those lands in trust for the maximum benefit of its people.

Because the state owns the North Slope fields, it wears two hats. It not only acts as the government regulator, but also as a trustee-landowner with the obligation to develop its resources for the maximum benefit of its beneficiaries, the people of Alaska. At first blush this distinction may appear academic, but it has very real consequences in terms of the state’s role and rights.

When the state wears its government hat, it has the four principal powers sovereign governments have over private land in the Anglo-American system, which include police power, taxation, eminent domain and escheatment. In that capacity, Halcro’s statement that Alaska’s powers over development relate to “taxes and permitting” is not far off, although his characterization of police power as permitting does understate that authority which also includes, for instance, criminal and antitrust enforcement and rate regulation.

However, where Halcro misses the mark relates to the state’s rights when it wears its landowner hat. Alaska holds the major North Slope fields in fee, less the extraction right we have leased to energy companies. That is, as a lessor (landlord), the state has contracted the right to companies as lessees (tenants) to extract oil and gas. Part of those leases is that we the landowner are entitled to a share of production, called a royalty interest.

Every oil and gas lease, whether the lessor is the state of Alaska or a rancher in Texas, creates certain rights to the landowner to ensure that royalty interest is protected. An oil and gas lessee cannot act opportunistically towards the lessor, but instead must act as a reasonably prudent operator in protecting the landowner’s financial interests.

As this relates to gas pipeline development, the critical concept is that the North Slope lessees have a contractual obligation to market Alaska’s gas. A leading treatise puts it that “there is an implied duty on the part of the lessee to make diligent efforts to market the production in order that the lessor may realize on his royalty interest.” The Texas Supreme Court holds, “Without the exercise of reasonable care to market the gas, there could be no compliance with the assignee’s obligations to proceed with the development reasonable and necessary to bring the lease to a normal stage of development.” More succinctly, the New Mexico Supreme Court requires, “Obviously production without disposition of the product is futile. Thus the courts have developed the implied covenant to make diligent efforts to market the production in order that the lessor may realize on his royalty interest.”

Alaskans are not the first landowner to be held hostage by self-interested companies that refuse to market natural gas from a leasehold. The law recognizes the problem and provides the remedies of damages for lost royalty and equitable termination of the lease.

Asian buyers are willing and able to purchase North Slope gas at the wellhead and finance the construction of a gas pipeline and LNG export facilities. If ExxonMobil, BP and ConocoPhillips continue to refuse to allow Alaska’s gas to go to market in order to extract financial concessions from the state on oil, we should exercise those remedies.

Craig Richards is a lifelong Alaskan who grew up in Fairbanks and now practices oil and gas law in Anchorage at Walker & Richards, LLC.

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