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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Alaska Crude Corporation v. State, Dept. of Natural Resources, Division of Oil and Gas (10/7/2011) sp-6606

Alaska Crude Corporation v. State, Dept. of Natural Resources, Division of Oil and Gas (10/7/2011) sp-6606, 261 P3d 412

        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, email 
        corrections@appellate.courts.state.ak.us. 

                THE SUPREME COURT OF THE STATE OF ALASKA 

ALASKAN CRUDE                                 ) 
CORPORATION and JAMES W.                      )       Supreme Court No. S-13708 
WHITE,                                        ) 
                                              )       Superior Court No. 3AN-08-09865 CI 
                       Appellants,            ) 
                                              )       O P I N I O N 
        v.                                    ) 
                                              )       No. 6606 - October 7, 2011 
STATE OF ALASKA,                              ) 
DEPARTMENT OF NATURAL                         ) 
RESOURCES, DIVISION OF OIL                    ) 
AND GAS,                                      ) 
                                              ) 
                       Appellee.              ) 
                                              ) 

               Appeal from the Superior Court of the State of Alaska, Third 
               Judicial District, Anchorage, William F. Morse, Judge. 

               Appearances:       Brian    J.  Stibitz,  Reeves    Amodio      LLC, 
               Anchorage, and Heather L. Gardner, Shortell Gardner LLC, 
               Anchorage,      for  Appellants.     Jeffrey   D.   Landry,    Senior 
               Assistant     Attorney    General,   Anchorage,     and   Daniel    S. 
               Sullivan, Attorney General, Juneau, for Appellee. 

               Before:   Carpeneti,   Chief   Justice,   Fabe,   Winfree,   Christen, 
               and Stowers, Justices. 

               FABE, Justice. 

----------------------- Page 2-----------------------

I.      INTRODUCTION 

               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 and gas lease that is part of the 

Arctic Fortitude Unit.   Alaskan Crude's unit agreement with the Department of Natural 

Resources set work obligation deadlines that Alaskan Crude was required to meet to 

continue operating the Arctic Fortitude Unit.         In July 2008 the Department of Natural 

Resources      Commissioner      found   that  Alaskan    Crude    had  failed  to  meet   its  work 

obligations, gave notice that Alaskan Crude was in default under its unit agreement, and 

specified that the Arctic Fortitude Unit would be terminated if Alaskan Crude did not 

cure the default by a new set of deadlines. 

               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 

                                                 -2-                                          6606
 

----------------------- Page 3-----------------------

unit   made   up   of   three   individual   leases   located   near   Deadhorse.1 Alaskan   Crude 

Corporation is the operator of the Unit, and James W. White is one of the leaseholders 
as well as the president of   Alaskan   Crude.2       One of the leases included in the Unit 

contains a pre-existing well known as Burglin 33-1. 

                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.3       The contingency plan requirements are based primarily on the number of 

        1      See generally Gottstein v. State, Dep't of Natural Res., 223 P.3d 609, 611 

n.4 (Alaska 2010) (noting regulations defining "unit" and "unit agreement"). 

        2      We refer to the appellants collectively as "Alaskan Crude." 

        3      AS 46.04.030(b). AOGCC is an "independent quasi-judicial agency of the 

state" created by the Alaska Oil and Gas Conservation Act.  AS 31.05.005(a).  AOGCC, 
which has authority over all land subject to the state's police power, regulates to prevent 
waste, insure greater recovery, protect correlative rights and underground water, and 
further   public   health   and   safety. See   AS   31.05.027;   AS   31.05.095;   AS   31.05.100; 
                                                                                     (continued...) 

                                                 -3-                                          6606
 

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barrels of oil per day that the exploration facility should be prepared to contain in the 
event of a spill; that number is known as the response planning standard.4                 Gas-only 

wells, however, are exempt from these requirements.5 

                When   the   Unit   was   formed,   Alaskan   Crude   seemed   to   suggest   that   it 

intended to use the Burglin 33-1 well to explore for both oil and gas.             Almost one year 

after the Unit's formation, Alaskan Crude requested an 85% reduction in the response 

planning standard for the Burglin 33-1 well, neither requesting a declaration that the well 

was a "natural gas exploration facility" nor mentioning the rules exempting gas-only 

wells.   DEC   approved   the   reduction   on   AOGCC's   recommendation   but   also   noted 

AOGCC's determination that it would be inappropriate to classify the well as a gas-only 

well.   Alaskan Crude requested reconsideration, citing the statutory exemptions for gas- 

only wells and arguing that the 85% reduction was insufficient. 

                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 

        3(...continued) 

AS 31.05.110; AS 31.05.030. 

        4       18 Alaska Administrative Code (AAC) 75.434 (2004). 

        5       AS 46.04.050(c). 

                                                 -4-                                            6606
 

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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.6        The superior court upheld AOGCC's determination on 

December 8, 2010.7       That decision is the subject of a separate appeal to this court. 

        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.8               Failure to comply with the 

terms of the approved unit agreement or the plan of exploration is a default under the unit 
agreement.9     When a default occurs the DNR Commissioner must provide notice to the 

unit operator and a demand to cure the default by a specific date.10             If the default is not 

cured   by   the   specified   date   the   Commissioner   has   discretion   to   terminate   the   unit 

             11 
agreement. 

        6       Alaskan Crude Corp. v. State, Alaska Oil & Gas Conservation Comm'n , 

No. 3AN-07-11471 CI (Alaska Super., Dec. 8, 2010). 

        7	      Id. 

        8       11    AAC     83.306   (requiring    a  proposed    unit   agreement     as  part  of  an 

application for DNR approval of an oil and gas unit); 11 AAC 83.341 (requiring a unit 
plan of exploration to be filed as an exhibit to the proposed unit agreement). 

        9       11 AAC 83.374(a). 

        10      11 AAC 83.374(b). 

        11      11 AAC 83.374(c)-(d). 

                                                  -5-	                                            6606
 

----------------------- Page 6-----------------------

                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."12            White's oil and gas 

lease also provided that "[i]f the state determines that the lessee has been prevented by 

force majeure, after efforts made in good faith, from performing any act that would 

extend the lease beyond the primary term, this lease will not expire during the period of 

force majeure." The language defining force majeure in the lease is identical to the DNR 

regulations. 

                The     initial  plan  of  exploration     for  the  Unit   contained     several   work 

obligation   deadlines.      The   deadlines   at   issue   in   this   appeal   are   the   "Stage   2   work 

obligations"; specifically, that Alaskan Crude move a drilling rig onto the Burglin 33-1 
well pad and re-drill the well.13      The initial plan of exploration required Alaskan Crude 

to complete the Stage 2 work obligations by October 1, 2007.                 The plan of exploration 

also provided that if Alaskan Crude missed its work obligation deadlines the Unit would 

automatically terminate. 

                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 

        12       11 AAC 83.395(3). 

        13      At the time the Unit was formed, the Burglin 33-1 well was "suspended," 

meaning      plugged    with   the  option    to  later  re-enter  and   re-drill  the  well.   See    20 
AAC 25.990(70) (defining suspended well); 20 AAC 25.110 (outlining the procedures 
for suspending a well). 

                                                   -6-                                             6606
 

----------------------- Page 7-----------------------

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 

                                                 -7-                                           6606
 

----------------------- Page 8-----------------------

Division saw no cause for delays in the work obligations.14               On February 2, Alaskan 

Crude sent a letter notifying the Director of the Division that it was "appealing" the 

decision made in the January 16 email to deny Alaskan Crude's request "to have the 

Arctic Fortitude Unit contract and associated plan of exploration obligations be placed 

in force majeure status due to the unforeseen delay in the ability of [Alaskan Crude] to 

permit the re-entry of the Burglin 33-1 well."  Alaskan Crude repeated its assertion that 

AOGCC was refusing to communicate with Alaskan Crude about its contingency plan. 

                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.15           But the Division Director also   said   that he would 

consider the letter an original request to toll Alaskan Crude's work obligations so long 

as Alaskan Crude provided further information within seven days about "the specific 

nature   of   the   alleged   force   majeure   and   whether   it   is   ongoing"   and   "which   work 

commitments [Alaskan Crude] want[s] tolled and for how long." 

                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 

        14      Due to the appeal to the superior court regarding the response planning 

standard, see supra Part II.A, AOGCC had determined that counsel needed to be present 
during any discussions with Alaskan Crude or its consultants.  The Division of Oil and 
Gas described this not as a refusal of AOGCC to communicate with Alaskan Crude, but 
instead as "reasonable procedural guidelines under which those discussions could take 
place." 

        15      See 11 AAC 02.900(4) (defining "decision" as "a written discretionary or 

factual determination by the department specifying the details of the action to be allowed 
or taken"). 

                                                  -8-                                            6606
 

----------------------- Page 9-----------------------

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."16  The Division Director observed that AOGCC 

had granted Alaskan Crude's original request for a reduction in the response planning 

standard and that "the appeal of the gas-only determination is entirely within [Alaskan 

Crude's] control; you can't create your own force majeure through litigation."  Finally, 

the Division Director also found that "the dispute and litigation with the AOGCC" was 

not preventing Alaskan Crude from meeting its work obligations because Alaskan Crude 

was not required to have an approved contingency plan to move a drilling rig to the well 

pad. 

        16      See 11 AAC 83.395(3) (" '[F]orce majeure' means 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."). 

                                                  -9-                                               6606 

----------------------- Page 10-----------------------

                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.17   The Commissioner also decided that there was "no basis to determine a force 

majeure exists" under either the Unit's oil and gas leases or the unit agreement.  The 

        17      Alaskan Crude does not appear to have challenged the Commissioner's 

factual findings in either the superior court or this appeal. 

                                                  -10-                                               6606 

----------------------- Page 11-----------------------

Commissioner cited the same reasons provided by the Division Director: that Alaskan 

Crude's litigation with AOGCC was not beyond its ability to foresee or control because 

Alaskan     Crude    agreed    to  the  amended     deadlines    after   receiving   AOGCC's   initial 

determination; and that the litigation did not prevent Alaskan Crude from meeting its 

work obligations because contingency plan approval was not required to move a drilling 

rig to the well platform. 

                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, 2008.18     The Commissioner set out a default cure demand that required Alaskan 

Crude to move a drilling rig to the well by March 31, 2009 and re-drill the well by 
October   1,   2009;19    this   default   cure   had   "the   practical   effect   of   granting   [Alaskan 

Crude's] requests to delay its work obligations" under the amended plan of exploration. 

                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 

        18      See 11 AAC 83.374(a) ("Failure to comply with any of the terms of an 

approved unit agreement, including any plans of exploration . . . is a default under the 
unit agreement."); 11 AAC 83.374(b) ("The commissioner will give notice to the unit 
operator and defaulting party . . . of the default."). 

        19      See 11 AAC 83.374(b) ("The notice will state the nature of the default and 

include a demand to cure the default by a specific date, which . . . will be a date not less 
than 90 days after the date of the commissioner's notice of default."). 

                                                  -11-                                             6606
 

----------------------- Page 12-----------------------

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."20                 The superior 

court therefore affirmed the DNR Commissioner's findings and decision on October 27, 
2009.21   Alaskan Crude appeals. 

        20      Article 20 of Alaskan Crude's unit agreement sets out the same procedures 

for   default,   notice  of   default,   and  cure  of  the   default   that   are  contained  in  DNR 
regulations.    See 11 AAC 83.374. 

        21      The superior court also held that DNR had not interfered with Alaskan 

Crude's performance under its lease and unit agreement. Alaskan Crude does not appeal 
this part of the decision. 

                                                  -12-                                            6606
 

----------------------- Page 13-----------------------

III.    STANDARD OF REVIEW
 

                "When   the   superior   court   acts   as   an   intermediate   appellate   court   in   an 

administrative      matter,   we    independently      review    the  merits   of  the   administrative 
decision."22   We have "recognized four principal standards of review for administrative 

decisions:   (1)   the   substantial   evidence   standard   applies   to   questions   of   fact;   (2)   the 

reasonable basis standard applies to questions of law involving agency expertise; (3) the 

substitution   of   judgment   standard   applies   to   questions   of   law   where   no   expertise   is 

involved;     and   (4)  the  reasonable     and   not  arbitrary   standard    applies   to  review    of 
administrative regulations."23  We apply the reasonable basis standard "[w]hen reviewing 

an agency's interpretation of its own regulation."24          Under this standard, we "defer to the 

agency      unless   its  interpretation    is  plainly    erroneous    and    inconsistent    with    the 
regulation."25    "Questions of contract interpretation generally raise questions of law that 

we review de novo."26 

                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 

        22      Button     v.   Haines   Borough,   208    P.3d   194,   200   (Alaska   2009)   (citing 

Lakloey,   Inc.   v.   Univ.   of   Alaska,   157  P.3d   1041,   1045    (Alaska    2007);  Gunter   v. 
Kathy-O-Estates, 87 P.3d 65, 68 (Alaska 2004)). 

        23      Pasternak v. State, Commercial Fisheries Entry Comm'n, 166 P.3d 904, 

907 (Alaska 2007) (citing Handley v. State, Dep't of Revenue, 838 P.2d 1231, 1233 
(Alaska 1992)). 

        24      Id. (citing Simpson v. State, Commercial Fisheries Entry Comm'n, 101 P.3d 

605, 607 (Alaska 2004)). 

        25      Id. (internal citations and quotation marks omitted). 

        26      Beal v. McGuire, 216 P.3d 1154, 1162 (Alaska 2009) (citing Norville v. 

Carr-Gottstein Foods Co., 84 P.3d 996, 1000 n.1 (Alaska 2004)). 

                                                  -13-                                             6606
 

----------------------- Page 14-----------------------

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.27              Thus, the 

failure to meet work obligations   under the unit agreement due to a force majeure is 

governed by Article 20 of Alaskan Crude's unit agreement, which simply states that the 

"failure to comply [with the unit agreement] because of force majeure is not a default." 

The definition of force majeure for purposes of the unit agreement is contained in DNR 
regulations.28   The DNR Commissioner's decision that a force majeure did not exist was 

thus an interpretation of the agency's own regulations and the deferential reasonable 

basis standard applies. 

        27      Default will not lead to termination if the unit operator cures the default by 

the date demanded by DNR.           See 11 AAC 83.374(b).        Even if the default is not cured, 
DNR must provide notice and an opportunity to be heard before terminating the unit. 
See 11 AAC 83.374(c). 

        28      11 AAC 83.395(3). 

                                                 -14-                                            6606
 

----------------------- Page 15-----------------------

IV.	    DISCUSSION 

                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."29          The DNR Commissioner concluded that 

Alaskan Crude's dispute with AOGCC was not a force majeure because Alaskan Crude 

had agreed to the May 15, 2008 deadline after it received AOGCC's final determination 

that Burglin 33-1 was not a gas-only well.  We agree with this conclusion and hold that 

AOGCC's decision and Alaskan Crude's appeal of that decision were not force majeure 

events because they were not beyond Alaskan Crude'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.' "30         This rule remains applicable when the 

        29	     Id. 

        30      Goldstein v. Lindner, 648 N.W.2d 892, 899 (Wis. App. 2002) (quoting 

                                                                                       (continued...) 

                                                 -15-                                              6606 

----------------------- Page 16-----------------------

alleged force majeure is a decision made by a governmental body:  "A government order 
predating the lease execution has never been held to be a force majeure event."31               And 

in this case, the government action that Alaskan Crude claims created a force majeure 

-   AOGCC's   decision   that   Burglin   33-1   was   not   a   gas-only   well   -   predated   the 

amended plan of exploration that set the deadlines at issue in this case. 

                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 

        30(...continued) 

Atkinson Gas Co. v. Albrecht, 878 S.W.2d 236, 241 (Tex. App. 1994)); see also Joan 
Teshima, Annotation, Gas and Oil Lease Force Majeure Provisions: Construction and 
Effect, 46 A.L.R. 4th 976  2(a) (1986) ("A force majeure clause . . . does not excuse a 
lessee's nonperformance where the condition alleged to constitute force majeure either 
was within the lessee's actual or presumed knowledge or was reasonably expectable by 
the lessee."). 

        31      Teshima, supra note 30; see also Erickson v. Dart Oil & Gas Corp., 474 

N.W.2d 150, 155 (Mich. App. 1991) (citing Hughes v. Cantwell, 540 S.W.2d 742, 745 
(Tex. Civ. App. 1976)) ("Where governmental action is alleged to be the cause of delay, 
the   parties  to  the  lease  are  presumed     to  have   contracted   with   knowledge     of  any 
preexisting law that could have caused delay."). 

                                                -16-                                           6606
 

----------------------- Page 17-----------------------

amended  deadlines.32       It was also reasonably foreseeable at the time Alaskan Crude 

agreed   to   the   amended   deadlines   that   if   Alaskan   Crude   chose   to   appeal   AOGCC's 

decision, that appeal would not be resolved before the deadlines arrived.  Alaskan Crude 

filed its notice of appeal to the superior court less than six months before the May 15, 
2008 deadline and did not seek expedited review.33            The DNR Commissioner's decision 

that a force majeure did not exist was therefore not plainly erroneous or inconsistent with 

the   regulation   defining   force   majeure,   and   we   affirm   the   superior   court's   decision 

upholding the Commissioner's decision. 

                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.34                  If a unit operator 

could toll its work obligations simply by appealing any unfavorable decision from the 

        32      The superior court held that AOGCC's decision could not trigger the force 

majeure clause because it was not a "judicial decision" but rather the decision of a quasi- 
judicial administrative body.  We need not decide today whether the decision of a quasi- 
judicial   body   can   be   a   force   majeure   as   defined   in   DNR   regulations.  We   simply 
conclude that even if such a decision could be a force majeure as a general matter, it is 
not one in the present case. 

        33      Ultimately, Alaskan Crude's opening brief in that appeal was not filed until 

January 15, 2009 - eight months after the May 15, 2008 deadline had lapsed. 

        34      See, e.g., Exxon Corp. v. State, 40 P.3d 786 (Alaska 2001) (appealing the 

denial of a request to DNR to expand the area covered by a unit agreement); Conoco, 
Inc. v. State, Dep't of Natural Res., Mem Op. & J. No. 668, 1993 WL 13563632 (Alaska, 
June   9,   1993)   (appealing   the   denial   of   a   request   to   DNR   to   reduce   the   royalty   rate 
contained in a unit agreement); Gottstein v. State, Dep't of Natural Res., 223 P.3d 609 
(Alaska 2010) (third-party appeal of DNR's approval of a plan for development); White 
v. State, Dep't of Natural Res., 984 P.2d 1122 (Alaska 1999) (appealing the denial of a 
request to DNR to assign a state land lease). 

                                                  -17-                                             6606
 

----------------------- Page 18-----------------------

State, however minor or foreseeable, and claiming that the appeal was a force majeure, 

development could be stalled indefinitely over routine disagreements.                   This does not 

diminish the right to appeal an unfavorable decision; if a unit operator wishes to appeal, 

it can always request that the superior court stay any intervening deadlines during the 
pendency of the appeal.35 

                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.36        Finally, it could have requested a stay from 

the superior court until the appeal was decided.37           Although there is no guarantee that 

these requests would have been granted, they would have been subject to the regular 

administrative review and appeal process and could have addressed Alaskan Crude's 
concerns without relying on the force majeure clause.38 

                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 

        35      AS 44.62.570(f). 

        36      Alaskan     Crude   did   eventually   make   two   such     requests,   but   not   until 

April 24 and May 5, 2008, while the DNR Commissioner's decision regarding the force 
majeure clause was pending. 

        37      AS 44.62.570(f). 

        38      See, e.g., Exxon Corp., 40 P.3d 786; Conoco, Inc., Mem. Op. & J. No. 668, 

1993 WL 13563632. 

                                                  -18-                                            6606
 

----------------------- Page 19-----------------------

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 Commissioner will give notice to the Unit Operator and 
                the Working Interest Owners of the default.  The notice will 
                describe the default, and include a demand to cure the default 
                by a certain date.   The cure period shall be at least thirty days 
                for a failure to pay rentals or royalties and ninety days for any 
                other default.[39] 

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 

        39      Similar    default   and    cure   provisions    are  also   contained    in   DNR's 

regulations.   11 AAC 83.374(b). 

                                                 -19-	                                            6606 

----------------------- Page 20-----------------------

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. 

V.      CONCLUSION 

               For the foregoing reasons, we AFFIRM the decision of the superior court 

upholding the decision of the DNR Commissioner. 

                                               -20-                                          6606
 
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