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White v. State, Dept of Natural Resources (8/13/99) sp-5156
Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the attention of
the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone
(907) 264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
JAMES W. WHITE, )
) Supreme Court No. S-8089
) Superior Court No.
v. ) 3AN-93-3762 CI
STATE OF ALASKA, DEPARTMENT )
OF NATURAL RESOURCES, ) O P I N I O N
Appellee. ) [No. 5156 - August 13, 1999]
Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Anchorage,
Eric Sanders, Judge.
Appearances: Robert C. Ely, Ely & Havelock,
Jody P. Brion, Brion, Edgren & Goff, LLC, Anchorage, for Appellant.
Lawrence Z. Ostrovsky, Assistant Attorney General, Anchorage, Bruce
M. Botelho, Attorney General, Juneau, for Appellee.
Before: Matthews, Chief Justice, Eastaugh,
Fabe, and Bryner, Justices. [Carpeneti,
Justice, not participating.]
MATTHEWS, Chief Justice.
The Tucson Group leased land from the State of Alaska for
possible oil and gas exploration. The Tucson Group later assigned
the lease to James White. The Department of Natural Resources
(DNR) did not approve the assignment because it concluded that the
lease between the Tucson Group and the State had expired. The
Commissioner of DNR affirmed this decision.
The lease contained numerous provisions that would
automatically extend its term provided that certain conditions were
met. White argues that he was entitled to a hearing concerning
whether he met the conditions of one of these automatic extension
provisions. We agree and remand for a hearing on that particular
issue. We affirm the Commissioner's decision on all other grounds.
II. FACTS AND PROCEEDINGS
In 1962 Unocal drilled a 14,940 foot oil well on an
onshore, privately owned tract of 117 acres of land (the "McCoy
property"). The well did not go straight down; rather, it was a
directionally drilled well that deviated into adjacently located
state land offshore. The well was not developed, and Unocal
plugged and abandoned it in 1962. It was plugged at the following
depths: 3,718 feet; 7,400 feet; 10,350 feet; and 12,600 feet.
On December 1, 1983, DNR issued oil and gas lease 359242,
an offshore tract adjacent to the McCoy property; it contained
approximately 2,433 acres. The lessees were Simasko Production
Co., Paul Gavora, James Thurman, and Tucson Ltd. (collectively the
"Tucson Group"). This lease had a seven-year term, which expired
at midnight on November 30, 1990. Paragraph 4 of the lease
contained provisions for automatic extensions that were contingent
upon certain conditions.
In 1985 White's company, Far North Oil and Gas ("Far
North"), received the rights to develop the previously abandoned
onshore well located on the McCoy property. The Alaska Oil and Gas
Conservation Commission (AOGCC) granted White permission to "re-
enter the [McCoy] well to explore for hydrocarbon production." Far
North applied for and was granted a permit to reenter the well to
a depth of 3,850 feet. On November 30, 1990, the last day of the
lease between the State and the Tucson Group, a company associated
with White, Conquest Petroleum, submitted the next year's rental
payment on the Tucson Group's lease.
The lease expired at midnight on November 30, 1990. On
December 17 DNR sent a notice to the Tucson Group that the lease
had expired. None of the members of the Tucson Group appealed this
determination. Nevertheless, between December 12, 1990 and January
4, 1991, the members of the Tucson Group attempted to assign their
rights to the lease to White. White applied for DNR approval of
these assignments on March 7, 1991, but DNR denied his application
because the "oil and gas lease [between the State and the Tucson
Group] expired on November 30, 1990." In a June 20, 1991 letter,
the Director of DNR's Division of Oil and Gas confirmed the denial
of the assignment of lease rights to White because the lease
expired on November 30, 1990, and because White was "neither the
designated operator nor an owner at the time of expiration." The
rent that had been submitted on November 30, 1990, to cover the
following year's rental payment was then returned to White's
attorney by DNR. In 1987 and 1992 the AOGCC requested completion
reports from Far North concerning its work on the McCoy well as
required by AAC 25.070, but White did not submit these reports
until January 4, 1993.
White appealed the Director's decision to the DNR
Commissioner. White argued that the lease between the State and
the Tucson Group had not expired because the conditions of at least
one of the automatic extension provisions in paragraph 4 of the
lease had been met. Therefore, White claimed, the Tucson Group had
the authority to assign its lease to him. White also requested a
hearing so that the Commissioner could determine the factual issues
relating to his case. In particular he sought a hearing to
determine the bottom hole location of the McCoy well.
Without granting a hearing, the Commissioner affirmed the
Director's denial of White's application for assignment of the
Tucson Group's lease to him. After analyzing each of the automatic
extension provisions claimed by White, the Commissioner concluded:
"The lease, ADL 359242, expired at the end of the primary term, on
November 30, 1990. None of the provisions of Paragraph 4 of the
lease would apply to automatically extend the term of the lease."
The Commissioner then articulated each of the lease extension
provisions he had rejected:
The lessees of record did not apply for
unitization of the lease nor did the state prescribe unitization.
The lessees had not commenced drilling a well prior to the
expiration date of the lease[, and] there was no well capable of
producing in paying quantities on the lease. The assignment
applications were submitted after the lease expired.
White appealed this decision to the superior court, which
affirmed the Commissioner's decision. He now appeals the superior
A. Standard of Review
In an appeal from a judgment of a superior court acting
as an intermediate court of appeal, we independently and directly
review the agency decision. [Fn. 1] We review an administrative
agency's findings of fact for substantial evidence, which is "such
relevant evidence as a reasonable mind might accept as adequate to
support a conclusion."[Fn. 2] "[W]here the questions at issue
implicate special agency expertise or the determination of
fundamental policies within the scope of the agency's statutory
function,"we use the rational basis standard of review. [Fn. 3]
"The rational basis approach merely determines whether the agency's
determination is supported by the facts and is reasonably based in
B. Was the Lease Automatically Extended by a "Unit Agreement
Approved or Prescribed by the State"?
Paragraph 4(b) of the lease states that "[t]his lease
will be extended automatically if it is committed to a unit
agreement[ [Fn. 5]] approved or prescribed by the state, and will
remain in effect for so long as it remains committed to that unit
agreement."The Commissioner found that it "was simply not the
case"that the lease was committed to a unit agreement because no
such agreement was "approved or prescribed"by the State. We
"Unit agreements"are "executed by the State of Alaska,
working-interest owners, and royalty owners creating the unit."
[Fn. 6] Paragraph 4(b) of the lease expressly requires a unit
agreement to be "approved or prescribed by the state." Contrary to
White's assertions, unit agreements do not arise "automatically"
without the State's involvement. In this case, the State never
approved or prescribed a unit agreement. Therefore, White's
argument that the McCoy property and the State's lease were
committed to a unit agreement is without merit.
We also reject White's related claim that the lease
extension provision of paragraph 4(d) applies because there was a
well "on the leased area." This argument is premised on the
assumption, rejected above, that there was a unit agreement
existing between the leased property and the McCoy well property,
creating "a single unit"property. In fact, the McCoy well is
located on property that is separate and distinct from the leased
property. Accordingly, we agree with the Commissioner that the
lease extension provision of paragraph 4(d) does not apply because
there was not a well "on the leased area."
C. Was White Entitled to a Hearing on the Issue of whether
the McCoy Well's Bottom Hole Was Located in "the Leased Area"?
Paragraph 4(c)(1) of the lease allows for the automatic
extension of the lease "[i]f the drilling of a well whose bottom
hole[ [Fn. 7]] location is in the leased area has commenced as of
the date on which the lease otherwise would expire and is continued
with reasonable diligence." White argued to the Commissioner that
the bottom hole of the McCoy well did extend under the State lease.
He specifically requested a hearing before the Commissioner so that
he could determine "[t]he location of the bottom hole drilled on
McCoy Prospect No. 1 with reference to [the State's leased
Without explanation, the Commissioner did not grant White
a hearing. The Commissioner also rejected White's argument that
the McCoy well's bottom hole was located under the leased property:
[P]aragraph 4(c)(1) requires that the "bottom
hole"of the well be in the leased area. Again, such was simply
not the case. It is irrelevant that there was a well [the McCoy
well] originally drilled nearby whose bottom hole [in 1962] did
underlie the Lease. In fact, the reentry upon which Mr. White lays
his foundation for extension of the primary term of the lease did
not penetrate and remove the plugs which had long since sealed off
that original bottom hole.
White argues that DNR's failure to grant him a hearing
violated his right to due process guaranteed by the Alaska
Constitution. We agree.
To prevail in an action for the violation of due process
rights, a plaintiff must prove two things: "state action"and "the
deprivation of an individual interest of sufficient importance to
warrant constitutional protection."[Fn. 8] Both of these
prerequisites are met in this case. The Commissioner's denial of
the assignment of the Tucson Group's lease to White constitutes
state action, and the rights to the lease of which White was the
assignee are "of sufficient importance to warrant constitutional
protection"in this case.
Nevertheless, we have held that although a hearing
is normally one of the basic components of due
process, it is subject, at least in the area of administrative law,
to the exception that one need not hold a hearing if there is
nothing to hold a hearing about; or, more precisely, "there is no
requirement, constitutional or otherwise, that there be a hearing
in the absence of substantial and material issues crucial to (the)
determination."[ [Fn. 9]]
Citing 11 AAC 02.050(a), which provides that "[DNR] will,
in its discretion, hold a hearing when questions of fact must be
resolved,"the State argues that the Commissioner "did not abuse
his discretion by not holding a hearing since there were no
outstanding issues of material fact"in the case. We disagree.
With regard to the automatic extension provision of paragraph
4(c)(1) of the lease there was an important factual dispute -- the
depth to which White had reentered the McCoy well and whether this
was deep enough to put the bottom hole of the well under the leased
property. The Commissioner, apparently relying upon an internal
memorandum to the DNR Director who made the initial ruling in
White's case, concluded that the McCoy well's bottom hole did not
underlie the lease. The internal DNR memorandum stated:
We pulled a mineral estate status plat in
an effort to determine if the bottom hole location [of the McCoy
well] reached in 1985 went anywhere near ADL 359242. It did not.
The surface location we plotted was 143.7 feet from the S line and
1429 feet from the E line of T. 1S, R. 13W, S.M. White's bottom
hole location in 1985 remained on the [McCoy] fee lease very near
the surface location because of the relatively shallow 3500 foot
depth that he re-drilled -- it is only about 175 feet west from the
surface location. It appears that the interval that White tested
on the fee lease was about 500 feet from the edge of ADL 359242.
White claims that the bottom hole location is much closer to the
state lease -- in the range of 50 feet. We have not tried to
survey or measure the exact bottom hole location relative to the
state lease. At best it could be very close to the lease line but
not over it.
At 3,500 feet, White would not have drilled through the
first plug in the well which was at 3,718 feet. White argues,
however, that he reentered the McCoy well to 3,840 feet, beyond the
first plug in the well. He therefore claims that the "well bore
was, at that point opened to the second cement plug at a depth of
7,400"feet, which extended under the lease. Thus, according to
White, an "open well bore thereafter ran from [the McCoy well] out
into the State offshore lease,"resulting in the bottom hole of the
McCoy well being "in"the State's leased property.
These differing accounts of the extent to which White
reentered the McCoy well represent a factual dispute that is
material to the issue of whether the automatic extension provision
of paragraph 4(c)(1) applies to this case. As such, this issue
warranted a hearing. [Fn. 10] The State argues, however, that
White raises the theory of breaching the first plug in the well for
the first time on appeal, and therefore we should decline to
consider it. We do not read White's previous arguments before the
Commissioner so narrowly. In his filings before the Commissioner,
White stated that he would "present testimony that a 3,500 foot
hole drilled in the [McCoy] well could just as well be 43 feet
under the State lease as 43 feet short of it." Thus, it is true
that White, on one hand, seems to be arguing that he drilled only
to 3,500 feet. But he also argued that "the 'bottom hole' of the
re-entered well was not where drilling stopped at 3,500 feet but
rather at the next Union plug hundreds of feet further down." This
argument before the Commissioner is consistent with White's
contention on this appeal -- mainly, that his drilling breached the
first plug and therefore he should be deemed to have reached the
depth of the second plug.
The Commissioner's alternative ground for affirming the
Director's decision does not alter our conclusion that White was
entitled to a hearing in this case. The Commissioner appears to
have concluded that even if White had reentered the McCoy well to
a depth below the State lease, the reentry would have been
In addition, the permits granted to perform
the reentry work prohibited work in the deeper portions of the well
bore. Further, in spite of the failure of the operator who
performed the first re-entry in 1985 to complete the paperwork
necessary to close out the work, any new re-entry to accomplish
that breech [sic] of the plugs sealing the lower extremities of the
well would be a new re-entry, and not an extension of the first.
On appeal, the State similarly argues that "even if White had
removed the first well plug, he had no authority to enter the
We do not question the legal premise underlying this
conclusion. [Fn. 11] However, the record indicates that there is
a factual dispute as to whether White was granted the authority to
drill under the State lease.
One could read White's drilling permit, which authorizes
him to "re-enter [the] well to 3,850 feet,"as a limitation on the
depth of his drilling activities. However, this depth is beyond
the first plug, so by allowing White to drill to 3,850 feet, White
may have been effectively granted permission to open the well to
the second plug, which is at 7,400 feet. Moreover, the
Commissioner's factual conclusion that White's permits "prohibited
work in the deeper portions of the well bore"is not supported by
the record. None of the permits granted to White contains such an
express prohibition. Indeed, DNR itself, in its internal memoran-
dum to the Director, stated, "[t]here is no reason why White could
not deepen the well he has re-entered -- but he hasn't tried to do
this to date." Thus, assuming that White actually reentered the
McCoy well to such a depth that its bottom hole was under the State
lease, there is a factual dispute about whether White was actually
authorized to do so.
White is entitled to a hearing on the issue of whether he
meets the requirements of the automatic extension provision of
paragraph 4(c)(1) of the lease. We REMAND to the Commissioner on
this issue only. [Fn. 12] In all other respects, we AFFIRM the
decisions of the Commissioner and the superior court.
See Cook Inlet Pipe Line Co. v. Alaska Pub. Utils. Comm'n,
836 P.2d 343, 348 (Alaska 1992).
Handley v. State, Dep't of Revenue, 838 P.2d 1231, 1233
(Alaska 1992) (quoting Keiner v. City of Anchorage, 378 P.2d 406,
411 (Alaska 1963)).
Hammer v. City of Fairbanks, 953 P.2d 500, 504 (Alaska 1998)
A "unit agreement"is "[a]n agreement or plan of development
and operation for the recovery of oil and gas made subject thereto
as a single consolidated unit without regard to separate ownerships
and for the allocation of costs and benefits on a basis as defined
in the agreement or plan." Howard R. Williams & Charles V. Meyers,
8 Oil and Gas Law 1315 (1992).
11 AAC 83.395(8).
A "bottom hole"is "the lowest or deepest part of a well."
Petroleum Extension Service, A Dictionary of Petroleum Terms 497
(Jodie Leecraft ed., 3d ed. 1983).
Estate of Miner v. Commercial Fisheries Entry Comm'n, 635 P.2d
827, 829 (Alaska 1981) (citations omitted).
Id. at 834 (quoting NLRB v. Bata Shoe Co., 377 F.2d 821, 826
(4th Cir. 1967)).
Obviously, when regulation 11 AAC 02.050(a), which grants DNR
the discretion to hold a hearing, conflicts with the requirements
of the state due process clauses, the former must give way to the
See, e.g., 20 AAC 25.005(i) ("A drilling permit is not valid
at a location where the applicant does not have a right to drill
for, produce, and remove oil and gas.").
Although we agree with the State's argument that White's well
completion report was filed too late for the Commissioner to have
initially considered it, we see no reason why White may not utilize
the report as evidence to support his case before the Commissioner