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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. State, Dept. of Natural Resources v. Alaskan Crude Corporation (8/31/2018) sp-7283

State, Dept. of Natural Resources v. Alaskan Crude Corporation (8/31/2018) sp-7283

           Notice:   This opinion is subject to correction before publication in the P                    ACIFIC  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@akcourts.us.  



                       THE SUPREME COURT OF THE STATE OF ALASKA                                       



STATE  OF  ALASKA,                                               )  

DEPARTMENT  OF  NATURAL                                          )          Supreme  Court  Nos.  S-16308/16417  

RESOURCES,                                                       )          (Consolidated)  

                                                                 )  

                                                                                                                                       

                                Appellant and                    )          Superior Court No. 3AN-10-04671 CI  

                                Cross-Appellee,                  )  

                                                                                                

                                                                 )          O P I N I O N  

                      v.                                         )  

                                                                                                                   

                                                                 )         No. 7283 - August 31, 2018  

                                    

ALASKAN CRUDE CORPORATION )
  

                            

and JAMES W. WHITE,                                              )
  

                                                                 )
  

                                                   

                                Appellees and                    )
  

                                Cross-Appellants.   )
  

                                                                 )
  



                                                                                                               

                      Appeal from the Superior Court of the State of Alaska, Third  

                                                                                                        

                      Judicial District, Anchorage, Charles W. Ray, Jr., Judge.  



                                                                                                          

                      Appearances:  John C. Hutchins, Assistant Attorney General,  

                                                                                                                 

                      and   Jahna   Lindemuth,   Attorney   General,   Juneau,   for  

                                                                                                           

                      Appellant  and  Cross-Appellee.  James  W.  White,  pro  se,  

                                                                                                                   

                      Houston, Texas, Appellee  and Cross-Appellant.  James B.  

                                                                                                                   

                      Gottstein, Law Offices of James B. Gottstein, Anchorage, for  

                                                                                                          

                      Appellee  and  Cross-Appellant  James  W.  White  (limited  

                                                                                                         

                      appearance for oral argument).  No appearance by Appellee  

                                                                                  

                      and Cross-Appellant Alaskan Crude Corporation.  



                                                                                                           

                      Before:  Stowers, Chief Justice, Winfree, Maassen, Bolger,  

                                                           

                      and Carney, Justices.  



                                            

                      MAASSEN, Justice.  


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

I.        INTRODUCTION
  



                    An oil and gas lessee conducted drilling activity on the last day of the lease  

                                                                                                                            



term; the lease provided that such activity would extend the term.   Two days later,  

                                                                                                                            



however, the Department of Natural Resources (DNR) sent the lessee a notice that his  

                                                                                                                         



lease had expired. The lessee suspended drilling activities and asked DNR to reconsider  

                                                                                                                    



its decision and reinstate the lease.  

                                             



                    DNR  reinstated  the  lease  several  weeks  later.                          The  lessee,  however,  

                                                                                                                     



contended that the reinstatement letter added new and unacceptable conditions to the  

                                                                                                                               



lease, and he pursued administrative appeals. Six months later DNR terminated the lease  

                                                                                                                            



on grounds that the lessee had failed to diligently pursue drilling following the lease's  

                                                                                        



reinstatement.  



                    The superior court reversed DNR's termination decision, ruling that DNR  

                                                                                                                            



had materially breached the lease by reinstating it with new conditions.  Both DNR and  

                                                                                                                              



the lessee appealed to this court. DNR asks us to affirm the termination of the lease, and  

                                                                                                                              



the lessee asks us to remand to the agency for a determination of his damages.  

                                                                                                         



                    We  conclude  that  although  DNR  breached  the  lease  in  its  notice  of  

                                                                                                                                



expiration, it cured the breach through reinstatement.  And DNR's subsequent decision  

                                                                                                                       



to terminate the lease is supported by substantial  evidence that the lessee failed to  

                                                                                                                                



diligently pursue drilling activities following reinstatement.  Finally, we conclude that  

                                                                                                               



neither DNRnor the superior court erred in failing to address the lessee's damages claim.  

                                                                                                                                     



We  reverse  the  superior  court's  decision  reinstating  the  lease  and  affirm  DNR's  

                                                                                                                        



termination decision.  

                   



                                                               -2-                                                         7283
  


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

II.         FACTS AND PROCEEDINGS     



           A.          Facts  



                       On  January  1,  2002,  DNR  and  an  individual  lessee  entered  into  a  

                                                                                                                                                  



competitive oil and gas lease identified as ADL 389922, covering a 4,800-acre parcel  

                                                                                                                                           

near Cook Inlet.  The lessee later assigned the lease to James W. White.1   The lease had  

                                                                                                                                               



a primary term of seven years, but it also identified circumstances in which the term  

                                                                                                                                             



could be extended.  

                                  



                       On the leased land was a plugged and abandoned well.  It was White's  

                                                                                                                                       



intent to reenter and test this well, but reentry was prohibited by spacing regulations of  

                                                                                                                                                  



the Alaska Oil and Gas Conservation Commission (AOGCC) because of the well's  

                                                                                                                                          



proximity  to  a  property  line.                      The  AOGCC  granted  White  an  exception  from  the  

                                                                                                                                               



regulations, and in March 2005 it granted White a permit to reenter and test the well.  

                                                                                                                                                     



                       White began  drilling  in  June  2007,  but he soon  suspended  operations  

                                                                                                                                   



following the announcement that a fertilizer plant, his only prospective buyer, was about  

                                                                                                                                            



to close.   On December 31, 2008, the last day of the seven-year lease term, a DNR  

                                                                                                                                            



inspector observed signs of activity at the drill site:   the presence of a drill rig, the  

                                                                                                                                                



assembly of a blowout preventer, and completion of the initial reentry of the well plug.  

                                                                                                                                                       



            B.         Agency Actions And Proceedings  

                                                              



                       On January 2, 2009, DNR mailed White a notice of expiration, informing  

                                                                                                                                    



him"that in accordancewiththeleaseagreement,ADL389922 expired on December 31,  

                                                                                                                                                



2008," and "[t]he case file has been closed in this office."  White suspended operations  

                                                                                                                                   



and moved his equipment from the drill site.  But on January 15 he wrote the Director  



            1          White is the President of Alaskan Crude Corporation, the operator of the                                                 



lease.   Alaskan Crude participated in the administrative and superior court appeals but                                                        

does not participate in this appeal.                         



                                                                        -3-                                                                 7283
  


----------------------- Page 4-----------------------

of the Division of Oil and Gas, asking him to clarify whether the expiration notice had                                                                                                                   



been sent in error. White called the Director's attention to paragraph 4(c)(1) of the lease,                                                                                                          



which allowed extension of the lease if drilling had "commenced as of the date on which                                                                                                             

the lease otherwise would expire";2                                                                                                                                                             

                                                                                       White asserted that he was drilling on the last day  



                                                                                                                                                                                                            

of the lease term, as witnessed by the DNR representative at the site. He claimed that the  



                                                                                                                                                                                               

expiration notice was "a direct breach of [the] lease contract" and damaged his interests  



                                                                                                                                                                                                   

as lessee.  He asked DNR to "please correct [the notice] and advise me by email before  



                                                                                                                                                                                     

2:00PM Friday, January 16th that the lease is still in effect."  DNR did not immediately  



                                                

respond to White's letter.  



                                                                                                                                                                                                    

                                 On  January  20  White  appealed  the  expiration  notice  to  the  DNR  



                                                                                                                                                                                                            

Commissioner, seeking "reinstatement of the lease term" or an acknowledgment that the  



                                                                                                                                                                                                                     

lease had not expired.  White sent another letter to the Commissioner on January 26.  



                                                                                                                                                                                                    

Urging the Commissioner to make a decision, he asserted that DNR had "received ample  



                                                                                                                                                                                           

documentation of prior well boring activities, along with video, eye witness testimony  



                                                                                                                                                                                  

and photos of . . . setting the blowout preventer on December 31, 2008."  



                                                                                                                                                                                                         

                                 On  January  27  the  Commissioner  retracted  the  expiration  notice  and  



                                                                                                                                                                                                           

reinstated the lease.  The Commissioner found that White's documented activity on the  



                                                                                                          

last day of the lease term was "drilling" as defined in paragraph 34(4) of the lease and  



                                                                                                                                                                                                          

extended the lease under paragraph 4(c)(1).  But the Commissioner advised White that  



                2                Paragraph 4(c)(1) provides in full:                                       



                                 If the drilling of a well whose bottom hole 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, this lease will continue in effect until 90 days after                                                                      

                                 cessation   of   that   drilling  and   for   so   long   as   oil   or   gas   is  

                                produced in paying quantities from the leased area.                                                               



                                                                                                      -4-                                                                                             7283
  


----------------------- Page 5-----------------------

the well had to be completed "within 90 days of this decision" or the lease would be  

                                                                                                                                 



automatically terminated.  The Commissioner added:  "After 90 days from the date of  

                                                                                                                                 



this letter, April 27, 2009, we will review your progress to determine whether continued  

                                                                                                                      



lease extension is warranted."  The Commissioner summarized:  

                                                                                                    



                     [T]he continued extension of the lease is contingent upon  

                                                                                                        

                    (1) continued drilling of the well; (2) completion of the well  

                                                                                                          

                    by April 27, 2009; (3) valid permits for all operations; and  

                                                                                                           

                    (4)  sustained  production  within  90  days  following  the  

                                                                                                           

                    cessation of drilling. The failure to comply with any of these  

                                                                                                         

                    conditions will result in the automatic termination of this  

                                                                                                          

                    lease.  

                               



                    On February 11 White sought reconsideration of the reinstatement letter.  

                                                                                                                                      



He  asserted  that  the  letter's  conditions  on  reinstatement  were  in  fact  attempts  to  

                                                                                                                                 



unilaterally modify the original lease, and he asked the Commissioner to "remove any  

                                                                      



and all extra conditions included in [his] decision."  Taking particular issue with the  

                                                                                                                                



requirement that he complete the well by April 27, White warned that he could not drill  

                                                                                                                              



once winter was over and would not "risk further capital and resources if the lease will  

                                                                                                                               



expire if [he does] not finish the drilling operations before the arbitrary deadline."  

                                                                                                                               



                    OnFebruary 18 the Commissioner granted reconsideration and gaveWhite  

                                                                                                                            



the  opportunity  "to  submit  additional  written  material  or  request  a  hearing."                                       The  

                                                                                                                               



Commissioner advised Whitethatduringreconsiderationthereinstated lease"remain[ed]  

                                                                                                                   



in effect for [White] to pursue continued drilling operations."  White declined a hearing  

                                                                                                                          



but  submitted  another  letter  explaining  his  position  in  detail.                                 On      June  10  the  

                                                                                                                               



Commissioner  reaffirmed  the  January  27  reinstatement  letter,  explaining  that  the  

                                                                                                                               



language White deemed a modification was simply a departmental interpretation of lease  

                                                                                                                              



paragraph 4(c)(1) and governing law - AS 38.05.180(m) and 11 AlaskaAdministrative  

                                                                                                              



Code (AAC) 83.125.   The Commissioner wrote that the April 27 deadline was his  

                                                                                                                                



                                                                -5-                                                         7283
  


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

interpretation   of   the   lease   requirement   that   drilling   be   completed   with   reasonable  



diligence and that it had been calculated by trebling the 30-day estimate White gave in                                                                                                                                                



his own original plan of operations.                                                              Responding to White's argument that DNR "could                                                                          



not require that he bring the completed well into production within 90 days after drilling                                                                                                                              



ends," the Commissioner stated that "the 90 day requirement is clearly set forth in                                                                                                                                                   



                                                                                              3  

AS 38.05.180(m) and [the] lease."                                                                 



                                                                                                                                                                                                                                  

                                     Six weeks later, by letter from the Director of the Division of Oil and Gas  



                                                                                                                                                                                                                                

dated July 23, 2009, DNR terminated White's lease for "two independent reasons": first,  



                                                                                                                                                                                                                                  

because "according to the AOGCC, Mr. White [did] not have a valid drill permit"; and  



                                                                                                                                                                                                                

second, because "White did not continue to diligently drill after the lease was re-instated  



                                                                                                                                                                                                                      

on January 27, 2009."   The Director explained that DNR had attempted to confirm  



                                                                                                                                                                                                                                 

White's drilling activities and permit status following the reinstatement.  DNR had sent  



                                                                                                                                                                                                                                               

Whiteletters, and Whitehad responded but without answeringDNR'sspecificquestions.  



                                                                                                                                                                                                                                     

DNR eventually learned that the AOGCC had terminated White's drilling permit, an  



                                                                               

action White was appealing.  



                                                                                                                                                                                                                          

                                    White appealed the termination of his lease to the Commissioner, asking  



                                                                                                                                                                                                                                 

that it again be reinstated.  After some procedural delay not relevant here, White was  



                                                                                                                                                                                                                          

granted an administrative hearing presided over by the Deputy Commissioner.  White  



                                                                                                                                                                                                                                  

asked                for           "reinstatement                               of         ADL                 389922                    lease              terms,                 or         alternatively                           an  



                                                                                                                                                                                                                              

acknowledgment from DNR that the lease term did not expire as stated in a letter dated  



                  3                 See  AS 38.05.180(m) ("If drilling, including operations such as redrilling,                                                                                                 



sidetracking, or using other means necessary to reach the originally proposed bottom                                                                                                                                    

hole location, has commenced on the expiration date of the primary term of the lease and                                                                                                                                           

is continued with reasonable diligence, the lease continues in effect until 90 days after                                                                                                                        

drilling   has   ceased   and   for   so   long   thereafter   as   oil   or   gas  is  produced   in   paying  

quantities."); lease 4(c)(1), quoted                                                             supra  note 2.                        



                                                                                                                  -6-                                                                                                          7283
  


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

January   2nd,  2009,   and   also   an   order   dated   July   23rd,   2009."     The   Deputy  



Commissioner's decision affirmed termination of the lease.                                                                                                                                                                                                



                                                        White appealed to the superior court. The                                                                                                                                 court ordered a remand for a new  



administrative hearing on the ground                                                                                                                   that DNRviolated White's dueprocess rights when                                                                                                                                            



one of its attorneys, having initially advised DNRon White's administrative appeal, then                                                                                                                                                                                                                                                               



advised the Deputy Commissioner in her role as hearing officer.  To provide guidance                                                                                                                                                         



on remand the superior court also addressed the terms of the January 2009 reinstatement                                                                                                                                                                                                                         



letter   and   the AOGCC permit.                                                                                                        The superior                                                 court directed                                                  DNR that                                         it  could   not  



terminate White's lease based on the permit's validity before the AOGCC had finally                                                                                                                                                                                                                                                         



decided   that   issue.     As   for   the   reinstatement   letter,  the   court   interpreted   its   four  



conditions as not imposing "new conditions or unilateral amendments . . . .                                                                                                                                                                                                                                          Instead,  



DNR appears to be reminding White of his obligations under the lease."                                                                                                                                                                                                                                                     The court   



directed   the   agency   on   remand   to   review   White's   efforts   after   reinstatement   "to  



determine if he continued drilling with reasonable diligence" based on the totality of the                                                                                                                                                                                                                                                                  



circumstances, stressing that failure to meet the April 27 deadline alone was insufficient                                                                                                                                                                                                                               



to show a lack of reasonable diligence.                                                                                                                             



                                                        On remand, following a second administrative hearing before a different                                                                                                                                                                                                



hearing officer, the Commissioner again upheld DNR's termination of the lease.                                                                                                                                                                                                                                                                        The  



Commissioner explainedthat                                                                                               White"didnot                                                 demonstratethat[he]continued                                                                                                       todrill with                 



reasonable diligence or . . . failed to drill for reasons demonstrating reasonable diligence                                                                                                                                                                                                                                      



within the totality of the circumstances."                                                                                                                                 



                                                        White again appealed to the superior court, where the case was heard by a                                                                                                                                                                                                                                  



                                                                                                                            4  

different superior court judge.                                                                                                                                                                                                                                                                                                            

                                                                                                                                   After briefing and argument, the court ruled that DNR's  



                            4  

                                                                                                                                                                                                                                                                                                                                               

                                                        The  appeal  before  remand  was  heard  by  Superior  Court  Judge  Mark  

                                                                                                                                                                                                                                                                                                                 (continued...)  



                                                                                                                                                                               -7-                                                                                                                                                                                     7283  


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

January 2009 notice of expiration was a material breach:                                                                                     "An unjustified, outright                 



cancellation of a contract cannot be other than a 'material breach.' "                                                                                          The court further         



determined, contrary to the court's analysis in the first appeal, that the breach was not                                                                                                         



cured by DNR's reinstatement of the lease 25 days later; the court reasoned that the                                                                                                    



reinstatement letter's requirement for "sustained production within 90 days following                                                                                              



cessation of drilling" fundamentally conflicted with paragraph 4(d) of the lease, which                                                                                                     



allows a lessee at least six months after notice to bring "a well capable of producing oil                                                                                                          



                                                                                                    5  

or gas in paying quantities" into production.                                                                                                                                        

                                                                                                        The court interpreted the lease as requiring  



                                                                                                                                                                                    

"reasonablenessanddiligence, not deadlines,"especially deadlinesresultinginautomatic  



                                                                                                                                                                                                   

termination if not met.  The court held that DNR's material breach relieved White of his  



                                                                                                                                                                                                      

own  lease  obligations,  and  it  therefore  ordered  that  the  lease  be  reinstated  for  a  



                                                                                                                                                                                                    

reasonable  time  for  White  "to  resume,  and  then  diligently  continue,  drilling  in  



                                                                                                                                                                                         

accordance with the Lease."   The court declined to address White's damage claims,  



                                                                                                                                                                                                        

noting that "[w]hether other remedies are in order was not addressed by the parties."  



                                                                                                                6  

                                                                                                                    

                               Both parties appealed to this court. 



                4              (...continued)  



                                                                                                                                                                                      

Rindner. The appeal following the second administrative hearing was heard by Superior  

                                                                              

Court Judge Charles W. Ray, Jr.  



                5              Paragraph 4(d) provides: "If there is a well capable of producing oil or gas  

                                                                                                                                                                                                   

in paying quantities on the leased area, this lease will not expire because the lessee fails  

                                                                                                                                                                                                

to produce that oil or gas unless the state gives notice to the lessee, allowing a reasonable  

                                                                                                                                                                                

time,  which  will  not  be  less  than  six  months  after  notice,  to  place  the  well  into  

                                                                                                                                                                                                

production, and the lessee fails to do so.  If production is established within the time  

                                                                                                                                                                                               

allowed, this lease is extended only for so long as oil or gas is produced in paying  

                                                                                                                                                                                         

quantities from the leased area."  

                                                                             



                6              White filed a motion for reconsideration of the superior court's order,
  

                                                                                                                                                                                           

arguing that the issue of damages should have been remanded to the agency.   The
  

                                                                                                                                                                                               

                                                                                                                                                                           (continued...)
  



                                                                                                  -8-                                                                                         7283
  


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

III.       STANDARDS OF REVIEW               



                                                                                                                                              7  

                      We "independently review                     the merits of an administrative determination."                               



                                                                    

                      We have "recognized four principal standards of review for  

                                                                                                             

                      administrativedecisions:(1) thesubstantial evidencestandard  

                                                                                                             

                      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  

                                            [  ]  

                                            8 

                      regulations."             



                      "Questions of contract interpretation generally raise questions of law that  

                                                                                                                                          

we review de novo."9                    "Under this standard, we exercise our independent judgment,  

                                                                                                                               



substituting  it  'for  that  of  the  agency  even  if  the  agency's  [interpretation]  ha[s]  a  

                                                                                                                                              

reasonable basis in law.' "10  We will "adopt the rule of law that is most persuasive in  

                                                                                                                                             



           6          (...continued)  



                                                                                                                                     

superior court denied reconsideration after White filed a motion asking that it refrain  

                                                                           

from ruling until we decided DNR's appeal.  



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

                                                                                                                                     



           8          Alaskan Crude Corp. v. State, Dep't of Nat. Res., Div. of Oil & Gas , 261  

                                                                                                          

P.3d 412, 419 (Alaska 2011) (quoting Pasternak v. State, Commercial Fisheries Entry  

                                                                                                                                       

Comm'n, 166 P.3d 904, 907 (Alaska 2007)).  

                                                                            



           9          Id. (quoting Beal v. McGuire, 216 P.3d 1154, 1162 (Alaska 2009)); Exxon  

                                                                                                                                      

Corp. v. State, 40 P.3d 786, 792 (Alaska 2001) ("Interpretation of a contract is a question  

                                                                                                                                  

of law that is not within the department's special expertise or skill.").  

                                                                                                       



           10         City of Valdez v. State, 372 P.3d 240, 246 (Alaska 2016) (alterations in  

                                                                                                                                             

original) (quoting Tesoro Alaska Petroleum Co. v. Kenai Pipe Line Co., 746 P.2d 896,  

                                                                                                                                         

903 (Alaska 1987)).  

                      



                                                                      -9-                                                              7283
  


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

light of precedent, reason and policy."                                                  11  



                                                                                                                                                                                                   

                               However, notwithstanding the usual substitution of judgment standard for  



                                                                                                                                                                                                    

questions of contract interpretation, we have applied the reasonable basis standard of  



review to agency interpretations of specialized contract terms derived from statutes or  

regulations.12  



IV.	           DISCUSSION  



                                                                                                                                                                                      

                               DNR appeals the superior court's decision that it must reinstate White's  



                                                                                                                                                                               

lease, arguing that neither the January 2009 notice of expiration nor the subsequent  



                                                                                                                                                                                                  

reinstatement letter was a material breach of the lease.  White's appeal argues that the  



                                                                                                                                                                                                      

superior court erred by failing to remand the issue of his damages to the agency for a  



                                                                                 

determination of what he is owed.  



                                                                                                                                                                               

               A.	             The  Commissioner  Did  Not  Err  In  His  2013  Decision  Affirming  

                                                                                

                               Termination of the Lease.  



                                                                                                                                                                                          

                               We agree with the superior court that DNR's January expiration notice  



                                                                                                                                                                                                 

materially  breached  the  lease,  but  we  conclude  that  the  breach  was  cured  by  the  



                11	            Thoeni v. Consumer Elec. Servs.                                             , 151 P.3d 1249, 1253 (Alaska 2007).                                                     



                12             See Alaskan Crude Corp.                                       , 261 P.3d at 419 (applying reasonable basis                                                    



standard when interpreting force majeure clause because force majeure was defined in  

                                                                                                                                                                                                     

DNRregulations); ConocoPhillips Alaska, Inc. v. State, Dep't of Nat. Res., 109 P.3d914,  

                                                                                                                                                                                               

920-21 (Alaska 2005) (applying reasonable basis standard when interpreting royalty                                                                                                      

rights clause subject to administrative process defined in regulations);                                                                                          N. Alaska Envtl.         

Ctr. v. State, Dep't of Nat. Res., 2 P.3d 629, 633 n.12 (Alaska 2000) ("[W]here the  

                                                                                                                                                                                                 

agency interprets technical or esoteric terminology, we have applied reasonable basis  

                                                                                                                                                                                             

review." (citing Pan Am. Petroleum Corp. v. Shell Oil Co., 455 P.2d 12, 20-22 (Alaska  

                                                                                                                                                                                       

 1969))). "Examples of such terms we have deemed to be non-technical include 'adjacent  

                                                                                                                                                                                    

to,' 'local authorized planning agencies,' 'disposal,' 'interest in land,' and 'revocable.'                                                                                  

" City of Valdez, 372 P.3d at 247 (first quoting State v. Aleut Corp., 541 P.2d 730, 736- 

                                                                                                                                                                                              

38 (Alaska 1975); and then quoting  N. Alaska Envtl. Ctr., 2 P.3d at 633).  

                                                                                                                                                                             



                                                                                                -10-	                                                                                        7283
  


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

reinstatement letter. Thereafter, White continued to have the contractual duty to engage                                                                                                                                                                                            



in drilling operations with reasonable diligence; the Commissioner's decision that he                                                                                                                                                                                                               



failed in that duty is supported by substantial evidence.                                                                                                      



                                               1.                     The expiration notice breached the lease.                                                                                                                



                                              Paragraph 4(c)(1) of the lease obligated DNR to extend the lease if White                                                                                                                                                                



was engaged in drilling operations on December 31, 2008.                                                                                                                                                      DNR does not dispute that                                                         



White satisfied this condition and that it was therefore obligated to extend the lease. But                                                                                                                                                                                                     



DNR sent White a letter on January 2, 2009, announcing without further explanation that                                                                                                                                                                                                         



the lease had expired.                                                       DNR argues both that the expiration notice was not a breach and                                                                                                                                                    



that, if it was, the breach was not material.                                                                        



                                              DNR contends that the expiration notice could not be a breach because it                                                                                                                       



"had   no   language   suggesting   that   the   [S]tate   would   not   perform."     We   conclude,  



however, that any other reading of the notice is unreasonable.                                                                                                                                                             "When performance is                                                        



due, . . . anything short of full performance is a breach, even if the party who does not                                                                                                                                                                                      



fully   perform   was   not   at   fault   and  even  if   the   defect   in   his   performance   was   not  



                                            13  

                                                                                                                                                                                                                                                                                                

substantial."                                      The expiration notice stated perfunctorily that the lease had "expired" and  



                                                                                                                                                                                                                                                                                                    

DNR had closed its "case file."  The notice clearly contemplated no further action by  



                                                                                                                                                                                                                                                                                

DNR.   The hearing officer at the second administrative hearing found that White's  



                                                                                                                                                                                                                                                                                                         

actions in response to the notice - removing his equipment "from the drilling site to a  



                                                                                                                                                                                                                                                                                          

different, presumably off-lease site location" - were "not unreasonable . . . in the sense  



                                                                                                                                                                                                              14  

                                                                                                                                                                                                                                                                                    

of vacating a lease which had apparently been terminated."                                                                                                                                                             And DNR's later actions  



                       13                     RESTATEMENT   (SECOND)   OF   CONTRACTS    235 cmt. b (A                                                                                                                                                     M. L            AW   INST .  



 1981).  



                       14                     See   58   C.J.S.   Mines   and   Minerals     337,   Westlaw   (database   updated  



                                                                                                                                                                                                                                                               (continued...)  



                                                                                                                                                -11-                                                                                                                                        7283
  


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

in "retract[ing]" the expiration notice and "reinstat[ing]" the lease would not have been                                                                                                             



necessary had DNR actually viewed the lease as continuing in effect.                                                                                                     



                                DNR asserts that the expiration notice was only an "anticipatory breach,"                                                                                     



not "sufficiently positive" to show that DNR had no intent to perform its obligations as                                                                                                                     



                                      15  

they came due.                                                                                                                                                                                                

                                              The law of anticipatory breach applies when a party repudiates a  



                                                                                                                                                                                                              16  

                                                                                                                                                                                                                    

contract, evidencing the intent to breach the contract before the party needs to perform. 



                                                                                                                                                                                             

As  factors  weighing  against  a  finding  of  repudiation,  DNR  points  to  the  notice's  



                                                                                                                                                                                    

language, the fact it was signed by a junior employee (a "Natural Resource Specialist"),  



                                                                                                           

and the lessee's contractual right to appeal.  



                                                                                                                                                                                                           

                                As noted above, we conclude that the notice's language -advising that the  



                                                                                                                                                                                               

lease had "expired" and that "[t]he case file has been closed" -"[is] sufficiently positive  



                                                                                                                                                                                      17  

                                                                                                                                                                                                         

to be reasonably interpreted to mean" that DNR was not extending the lease.                                                                                                                 This was  



                14               (...continued)  



                                                                                                                                                                                                         

Mar. 2018) ("[R]epudiation of an oil and gas lease by a lessor relieves the lessee of any  

                                                                                                                                                                                                     

obligation to conduct any operation on the land in order to maintain the lease in force  

                                                                                                                                                                    

pending a judicial resolution of the controversy between the lessee and the lessor over  

                                                                                                                                                                                                

the validity of the lease." (citing Teon Mgmt., LLC v. Turquoise Bay Corp., 357 S.W.3d  

                                                                         

719, 730 (Tex. App. 2011))).  



                15              See K & K Recycling, Inc. v. Alaska Gold Co., 80 P.3d 702, 715 (Alaska  

                                                                                                                                                                                               

2003) ("To be a repudiation, 'a party's language must be sufficiently positive to be  

                                                                                                                                                                                                           

reasonably interpreted to mean that the party will not or cannot perform.' " (quoting  

                                                                                                                                                                                           

RESTATEMENT  (SECOND) OF  CONTRACTS    250 cmt. b (A                                                                                      M. L      AW. I   NST . 1981))).   



                16              Repudiation,    BLACK 'S    LAW    DICTIONARY    (10th   ed.   2014)   (defining  



"repudiation" as "[a] contracting party's words or actions that indicate an intention not                                                                                                                 

to perform the contract in the future; a threatened breach of contract");                                                                                                        see Drake v.                

 Wickwire,   795   P.2d   195,   198   (Alaska   1990)   (quoting   RESTATEMENT   (SECOND)   OF  

CONTRACTS  253(1) (A                                       M. L      AW. I   NST . 1981)).   

                                



                17              See   K   &   K   Recycling,   Inc.,   80   P.3d   at   715   (quoting   RESTATEMENT  



                                                                                                                                                                                 (continued...)  



                                                                                                    -12-                                                                                              7283
  


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

"a clear, unequivocal challenge to [White's] title to an interest in the lease" and thus a                             

repudiation.18  



                                                                                                                                                                                               

                                The fact that the notice was signed by a junior employee does not change  



                                                                                                                                                                                                        

this conclusion.   Indeed, DNR does not argue that the signing employee lacked the  



                                                                                                                                                                                                           

necessary authority.  Arguing that White should nonetheless have viewed the notice as  



                                                                                                                                                                                                       

something  less  than  final,  DNR  points  to  lease  paragraph  24,  which  identifies  the  



                                                                                                                                                                                                          

Director  of  the  Division  of  Oil  and  Gas  as  the  authorized  agent  "for  purposes  of  



                                                                                                                                                                                                          

administering  this  lease."                                         But  "[a]  notification  given  by  an  agent  is  effective  as  



                                                                                                                                                                                                         

notification given by the principal if the agent has actual or apparent authority to give the  



                                19  

notification."                                                                                                                                                                                               

                                     "Apparent authority to do an act is created as to a third person when a  



                                                                                                                                                                                                         

principal's conduct, reasonably interpreted, 'causes the third person to believe that the  



                                                                                                                                                                                                         

principal consents to have the act done on his behalf by the person purporting to act for  



                 20  

                       

him.' " 



                17              (...continued)  



(SECOND)  OF  CONTRACTS   250 cmt. b (A                                                            M. L       AW. I   NST . 1981));                      Expire, B              LACK 'S  LAW  

DICTIONARY  (10th ed. 2014) ("Expire" means "to be no longer legally effective; to                                                                                                                         

                                 

become null at a time fixed beforehand").                          



                18              See 58 C.J.S. Mines and Minerals, Westlaw (database updated Mar. 2018)  

                                                                                                                                                                                                  

(citing Atkinson Gas Co. v. Albrecht , 878 S.W.2d 236, 239 (Tex. App. 1994)).  

                                                                                                                                                                           



                19              RESTATEMENT  (THIRD) OF  AGENCY    5.02(2) (A                                                                       M. L      AW. I   NST . 2006).   



                20              Airline Support, Inc. v. ASM                                       Capital II, L.P.                    , 279 P.3d 599, 604-05 (Alaska                         



2012) (quoting                        Askinuk Corp. v. Lower Yukon Sch. Dist.                                                              , 214 P.3d 259, 264 (Alaska                       

2009)).     "We   consider   three   factors   when   evaluating  apparent   authority:   '(1)   the  

manifestations of the principal to the third party; (2) the third party's reliance on the                                                                                                               

principal's manifestations; and (3) the reasonableness of the third party's interpretation                                                                                      

of the principal's manifestations and the reasonableness of the third party's reliance.' "                                                                                                                        

Id.  at 605 (quoting                          Askinuk Corp.                      , 214 P.3d at 264).                           



                                                                                                   -13-                                                                                             7283
  


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

                                        The expiration notice was sent on DNR's official stationery; it was sent                                                                                                                                    



following DNR's on-site inspection of White's drilling activity on December 31, 2008;                                                                                                                                                          



and most importantly, as the second hearing officer found, it was "not unreasonable" for                                                                                                                                                               



White to rely on the notice when he ceased drilling and removed his equipment from the                                                                                                                                                                 



well site.                  The hearing officer's unchallenged finding leads us to the conclusion that the                                                                                                                                             



DNR employee who signed the expiration notice had at least the apparent authority to   



do so.               



                                       Finally, DNR argues that the expiration notice could not be an anticipatory                                                                                                           



                                                                                                                                                                                                                  21  

breach because the lease provided that such a notice could be appealed.                                                                                                                                                                           

                                                                                                                                                                                                                          But the right  



                                                                                                                                                                                                                                            

to appeal does not change the nature of the act from which the appeal is taken. A breach  



                                                                                                                                                       

can be cured, but that does not mean it was never a breach.  



                                                                                                                                                       

                                        2.                 DNR's breach was material.  



                                                                                                                                                                                                                                                      

                                       Whether DNR's breach was material is another question.  Although the  



                                                                                                                                                                                                                   

agency  hearings  were  the  only  forums  for  fact-finding  in  these  administrative  



                                                                                                                                                     

proceedings, they resulted in no specific findings on materiality.  On the first superior  



                                                                                                                                                                                                                                                 

court appeal, however, the court assumed that DNR had materially breached the lease  



                                                                                                                                                                                                                                                      

before going on to consider whether DNR cured the breach through reinstatement.  On  



                                                                                                                                                                                                    

the second superior court appeal, the court expressly decided that "DNR's breach was  



material. . . .  An unjustified, outright cancellation of a contract cannot be other than a  



                                                          

 'material breach.' "  



                    21                  Paragraph   25(c)   of   the   lease   allows   White,   as   the   first   step   in   the  



administrative appeal process, to appeal a notice within 30 days of its receipt.                                                                                                                                                          See   11  

AAC   02.010(e)   (incorporating   appeal   period   "set   by   11   AAC   02.040");   11   AAC  

02.040(a) (setting appeal deadline of 20 days "unless another period is set by . . . [an]                                                                                                                                                     

existing contract").   



                                                                                                                          -14-                                                                                                                   7283
  


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

                                         Weagreewith the superior courts' viewthat DNR'sbreach was                                                                                                                                      necessarily  



material.   DNR correctly points out that whether a breach is material is a question "of                                                                                                                                                                        



degree, centering on the reasonable expectations of the parties, and a material breach is                                                                                                                                                                            



one that will or may result in the other party not receiving substantially what that party                                                                                                                                                                



                                               22  

bargained for."                                                                                                                                                                                                                                             

                                                         And ordinarily the question of materiality must be left to the fact- 



                    23  

finder.                                                                                                                                                                                                                                           

                            But in some cases the breached provision is so obviously central to the purpose  



                                                                                                                                                                                                             24  

                                                                                                                                                                                                                                                               

of the contract that materiality can be determined as a matter of law.                                                                                                                                               We conclude that  



                     22                  See  RESTATEMENT  (SECOND)  OF  CONTRACTS   241 (A                                                                                                                  M. L          AW  INST . 1981)   



                                                                                                                                                                                                                                                       

(listing circumstances that are "significant" to "determining whether a failure to render  

                                                                                                                                                                                                                                                               

or to offer performance is material," including "the extent to which the injured party will  

                                                                                                                                                                                                                                                                

be deprived of the benefit which he reasonably expected"; "the extent to which the  

                                                                                                                                                                                                                                                                 

injured party can be adequately compensated" for the lost benefit; the extent to which the  

                                                                                                                                                                                                                                                           

non-breaching party "will suffer forfeiture"; the likelihood that the non-breaching party  

                                                                                                                                                                                                                                         

"will cure his failure, taking account of all the circumstances including any reasonable  

                                                                                                                                                                                                                                                                    

assurances"; and "the extent to which the behavior of the party failing to perform or to  

                                                                                                                                                                                                                                     

offer to perform comports with standards of good faith and fair dealing").  



                     23                  See Wirum & Cash, Architects v. Cash, 837 P.2d 692, 708 (Alaska 1992)  

                                                                                                                                                                                                                                                        

(remanding for superior court to "enter additional findings and conclusions as to whether  

                                                                                                                                                                                                                                                  

 [partner's] various breaches [of fiduciary duties] were material breaches of the parties'  

                                                                                                                                                                                                                                                   

contract" excusing other partner's performance); 14 RICHARD  A. L                                                                                                                                            ORD, W                  ILLISTON ON   

                                                                                                                                                                  

CONTRACTS   43.6, at 627 (4th ed. 2012) ("[W]hether a nonperformance is sufficiently                                                                                                                                                  

material [to suspend or discharge the other party's duty to perform] is ordinarily an issue                                                                                                                                                                 

of fact.").   



                     24                  See 23 L                  ORD,  supra  note 23,  63.3, at 485 ("Nevertheless, the materiality                                                                                                  

                                                      

of a breach of contract is not always a question of fact, even if the issue is disputed; thus,                                                                                                                                                              

if there is only one reasonable conclusion, a court must address what is ordinarily a                                                                                                                                                                                 

factual question as a question of law.");                                                                                   cf. Gilbert v. Dep't of Justice                                                            , 334 F.3d 1065,  

 1071-72 (1st Cir. 2003) (explaining that whether breach is material is mixed question of                                                                                                                                                                           

law (what contract requires) and fact (what breaching party did); so that "[w]here, as                                                                                                                                                                              

here, the facts are undisputed, the determination of whether there has been material non-                                                                                                                                                                   

compliance with the terms of a contract, and hence breach, necessarily reduces to a                                                                                                                                                                                   

                                                                                                                                                                                                                                 (continued...)  



                                                                                                                               -15-                                                                                                                        7283
  


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

the breach at issue here, resulting in termination of the lease and prompting White to                                                                                                                                                                        



reasonably suspend his own performance while awaiting reinstatement, affected rights                                                                                                                                                              



so central to the parties' reasonable expectations that it could only be viewed as material.                                                                                                                                                                           



                                        3.                  Reinstatement of the lease cured the breach.                                                                          



                                        The Commissioner retracted the expiration notice and reinstated the lease                                                                                                                                    



in his January 27, 2009 letter.                                                                 White asserts that the reinstatement letter added new                                                                                                  



conditions to the lease, amounting to another breach. It is true that "language that clearly                                                                                                                                                    



manifests   an   'intention   not   to   perform   except   on   conditions   which   go   beyond   the  



                                                                                                 25  

                                                                                                                                                                                                                                                   

contract' " may be a repudiation.                                                                        A demand that new conditions be met, even if based  



                                                                                                                                                                                                                          26  

                                                                                                                                                                                                                                  

on "an alleged 'contract interpretation,' " may be an anticipatory breach. 



                                                                                                                                                                                                                                                        

                                        In support of this argument, White refers to the letter's paragraph that  



                                                                                                                                                                                                                                                                       

begins "in summary" and lists four conditions for "the continued extension of the lease":  



                                                                                                                                                                                                                                                     

"(1) continued drilling of the well; (2) completion of the well by April 27, 2009; (3) valid  



                    24                  (...continued)  



                                                                                                                                                                                                                                                        

question of law"); Alaska Interstate Constr., LLC v. Pacific Diversified Invs., Inc. , 279  

                                                                                                                                                                                                                                                            

P.3d  1156,  1173  (Alaska  2012)  (recognizing  rule  "that  fraud  and  other  forms  of  

                                                                                                                                                                                                                                           

intentional wrongdoing constitute material breaches of contract as a matter of law").  



                    25                  K & K Recycling, Inc. v. Alaska Gold Co., 80 P.3d 702, 715 (Alaska 2003)  

                                                                                                                                                                                                                                                  

(quoting RESTATEMENT  (SECOND)  OF  CONTRACTS   250 cmt. b (A                                                                                                                                      M. L         AW  INST . 1981));   

                            

                                       OHN E. MURRAY, JR., CORBIN ON CONTRACTS  54.15, at 200 (Joseph M.   

see also 10 J                                                                                                                               

Perillo ed., rev. ed. 2014) ("If one party to a contract, either willfully or by mistake,                                                                                                                                                 

demands of the other a performance to which he has no right under the contract and                                                                                                                                                                      

states definitely that, unless his demand is complied with, he will not render his promised                                                                                                                                             

performance,   an   anticipatory   breach   has  been   committed.     Such   a   repudiation   is  

conditional in character, it is true; but the condition is a performance to which the                                                                                                                                                                    

repudiator has no right.").                                                     



                    26                  Snow v. W. Sav. & Loan Ass'n, 730 P.2d 204, 210 (Ariz. 1986) (en banc)  

                                                                                                                                                                                                                                                   

(quoting United Cal. Bank v. Prudential Ins. Co. of Am., 681 P.2d 390, 430 (Ariz. App.  

                                                                                                                                                                                                                                                     

 1983)).  

                        



                                                                                                                            -16-                                                                                                                     7283
  


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

permits for all operations; and (4) sustained production within 90 days following the  

                                                                                                                                



cessation of drilling."  White contends that the first condition - "continued drilling of  

                                                                                                                                  



the well" - conflicts with lease paragraph 4(e), which gives the lessee a reasonable time  

                                                                                                                              



to recommence "operations or production" if the State "directs or approves in writing a  

                                                                                                                                   



suspension of all operations on or production from the leased area" and then lifts the  

                                                                                                                                



suspension.  But White sought and was granted the extension under paragraph 4(c)(1),  

                                                                                                                         



not paragraph 4(e). And we read paragraph 4, subsections (a) through (f), as addressing  

                                                                                                                     



usually distinct circumstances:  

                         



                     * Subsection (a) provides automatic lease extensions while oil or gas is  

                                                                                                                                  



being produced in paying quantities.  

                                         



                     * Subsection (b) provides automatic lease extensions for leases committed  

                                                                                                                     



to State-approved unit agreements.  

                                    



                     * Subsection (c) provides automatic lease extensions under two scenarios:  

                                                                                                                                      



(1) if drilling has commenced "as of the date on which the lease otherwise would expire  

                                                                                                                           



and is continued with reasonable diligence"; and (2) if the lease was producing "oil or  

                                   



gas in paying quantities," production ceases, but "drilling or reworking operations are  

                                                                                                                                



commenced . . . within six months after cessation of production and are prosecuted with  

                                                                                                                              



reasonable diligence."  

                  



                     * Subsection (d) addresses leases with wells "capable of producing oil or  

                                                                                                                                 



gas in paying quantities"; leases encompassing such wells will not expire despite the lack  

                                                                                                                               



of production unless the State gives the lessee notice "allowing a reasonable time, which  

                                                                                                                            



will not be less than six months after notice, to place the well into production."  

                                                                                                      



                     *  Subsection  (e)  addresses  leases  subject  to  State  orders  to  suspend  

                                                                                                                  



operations or production; lessees have "a reasonable time, which will not be less than six  

                                                                                                                                 



                                                               -17-                                                         7283
  


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

months after notice that the suspension has been removed, to resume operations or                                                                                                                                                                                       



production."  



                                          *  Subsection (f) addresses leases on which operations or production have                                                                                                                                              



been "prevented by force majeure."                                               



                                          The   circumstances   of   White's   lease   extension   fall   squarely   within  



paragraph 4(c), which is why he adamantly - and successfully - argued to DNR for                                                                                                                                                           



that provision's application.                                                             White was conducting drilling activities on December 31,                                                                                                                    



2008, the date the lease would otherwise have expired, and his lease term therefore                                                                                                                                                               



extended automatically as long as his drilling activities were "continued with reasonable                                                                                                                                                     



diligence." He did not suspend operations because of a written DNR order that he do so,                                                                                                                                                                                



as contemplated by paragraph 4(e).                                                                               Another lease provision gives DNR an apparently                                                                              



broad   authority   to   "from   time   to   time   direct   or   approve   in   writing   suspension   of  



production or other operations under this lease."                                                                                                                 But a suspension implies a mere                                                              



                                                                                                                                         27  

interruption in performance, not an end to it,                                                                                                                                                                                               

                                                                                                                                               and fitting this case within the framework  



                                                                                                                                                                                                                                                

of paragraph 4(e) thus cuts against White's central argument that the January expiration  



                                                                                                                                                                                                                                                                   

notice terminated his lease.   Indeed, White argues inconsistently on this appeal that  



                                                                                                                                                                                                                          

"DNR did not suspend operations on [the lease], they terminated it."  



                                                                                                                                                                                                                                                

                                          Moreover, subsections 4(c) and (e) cannot reasonably be read as governing  



                                                                                                                                                                                                                                           

the same situation simultaneously.  Paragraph 4(c) requires that the lessee "continue[]  



                                                                                                                                                                                                                                                                

with reasonable diligence" the drilling activities engaged in on the last day of the lease  



                                                                                                                                                                                                                                             

term (emphasis added); paragraph 4(e) allows the lessee "not . . . less than six months  



                     27                   "Suspend" means "[t]o interrupt; postpone; defer," or "[t]o temporarily                                                                                                                         



keep (a person) from performing a function . . . or exercising a right or privilege."                                                                                                                                                                                             

BLACK 'S  LAW  DICTIONARY  (10th ed. 2014).                                                                           



                                                                                                                                  -18-                                                                                                                          7283
  


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

 after   notice"   to   resume   such  activities,   having   discontinued   them   because   of   the  



 suspension order.   



                                       Addressing   the   second  condition   in   DNR's   reinstatement   letter   -  



 "completion of the well by April 27, 2009" - White contends that it conflicts with the                                                                                                                                                          



 language of paragraph 4(c)(1) that automatically extends the lease for as long as the                                                                                                                                                          



 lessee continues drilling activities "with reasonable diligence."                                                                                                                     The State counters that                                 



the reinstatement letter "simply voiced a reasonable interpretation of when drilling with                                                                                                                                                    



 'reasonable diligence' would be complete as provided in the lease"; in other words,                                                                                                                                                  



 diligent    effort    that    fails    to  complete    the    well    by    April    27    could    not,    in    the  



 Commissioner's view, be "reasonable."                                                                                  We agree with White that a fixed deadline                                                                



 seems inconsistent with a flexible, fact-based completion standard like the contractual  



term "with reasonable diligence"; a lessee acting "with reasonable diligence" could fall                                                                                                                                                         

 short of a fixed deadline for a variety of reasons.                                                                                         28  



                                                                                                                                                                                                          

                                       On the other hand, we must give some deference to the Commissioner's  



                                                                                                                                                                                                                                                           

 decision as to what constitutes "reasonable diligence" in this highly specialized context.  



                                                                                                                                                                                                                               

Although the interpretation of a contract presents a question of law, we review questions  



                                                                                                                                                                                                                                   

that necessarily involve agency expertise under the "reasonable basis" test, "giving  



                                                                                                                                                                                           29  

                                                                                                                                                                                                 

                                                                                                                                                            

 deference to the agency's specialized knowledge and expertise." 



                    28                 See   Diligence,   BLACK 'S   LAW   DICTIONARY   (10th   ed.   2014)   (defining  



 "reasonable   diligence"   as   "[a]   fair   degree   of   diligence   expected   from   someone   of  

 ordinary prudence under circumstances like those at issue").                                                                                            



                    29                Alaska Fish &Wildlife Conservation Fund v. State, Dep't of Fish &Game,  

                                                                                                                                                                                                                                       

Bd. of Fisheries, 289 P.3d 903, 912 n.31 (Alaska 2012) (quoting Alaska Exch. Carriers  

                                                                                                                                                                                                                                 

Ass'n v. Regulatory Comm'n , 262 P.3d 204, 208-09 (Alaska 2011)).  

                                                                                                                                                                                 



                                                                                                                       -19-                                                                                                                 7283
  


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

                                                Here, the Commissioner explained his interpretation of the "reasonable                                                                                                                                                   



diligence"   standard   in   his   June   10,   2009   decision   on  White's   request   that   DNR  



reconsider the reinstatement letter. The Commissioner recited White's description of the                                                                                                                                                                                                                  



activities he had already done to prepare the well for drilling, including completion of   



a "120 foot water well with a pump to provide water" and the staging of "the workover                                                                                                                                                                                             



rig, blow out preventer, mud tanks, drill pipe and other major equipment necessary and                                                                                                                                                                                                                  



incidental to reach the proposed bottom hole location."                                                                                                                                                  The Commissioner noted his                                                                       



reliance on paragraph 4(c)(1) of the lease and the legal sources from which it was                                                                                                                                                                                                                   



derived,   AS   38.05.180(m)   and   11   AAC   83.125,   as   well   as   the   lease's   expansive  



definition of "drilling." He explained that the April 27 deadline - 90 days from the date                                                                                                                                                                                                             



of the reinstatement letter - had been extrapolated from "White's Plan of Operations,                                                                                                                                                                                      



                                                                                                                                                                                                                                     30  

which stated that it would take 30 days to complete this well."                                                                                                                                                                                                 

                                                                                                                                                                                                                                                The Commissioner  



                                                                                                                                                                                                                                                                                                      

trebled White's own estimate.  This interpretation, the Commissioner summarized, was  



                                                                                                                                                                                                                                                                                 

based on "the lease language consistent with the terms set forth in state law, in paragraph  



                                                                                                                                                                                                                                                        

4 of the lease and Mr. White's own representations about his plans."  



                                                                                                                                                                                                                                                                         

                                                The Commissioner correctly observed that the contractual "reasonable  



                                                                                                                                                                                                                                                                                                 31  

                                                                                                                                                                                                                                                                                                        

diligence"standard is drawn directly fromstatuteand regulation: AS38.05.180(m)                                                                                                                                                                                                                          and  



                        30                      The lease required that the plan of operations set out "the sequence and                                                                                                                                                                               



schedule of operations to be conducted[,] including the date operations are proposed to                                                                                                                                                                                                                       

begin and their proposed duration," and that the plan be submitted and approved "before                                                                                                                                                                                                   

any operations may be undertaken."                                                                                                  



                        31                      "If drilling, including operations such as redrilling, sidetracking, or using  

                                                                                                                                                                                                                                                                                                 

other  means  necessary  to  reach  the  originally  proposed  bottom  hole  location,  has  

                                                                                                                                                                                                                                                                                                       

commenced on the expiration date of the primary term of the lease and is continued with  

                                                                                                                                                                                                                                                                                                     

reasonable diligence, the lease continues in effect until 90 days after drilling has ceased  

                                                                                                                                                                                                                                                                                             

and   for   so   long   thereafter   as   oil   or   gas   is   produced   in   paying   quantities."  

                                                                                                                                                                                                                                        

                                                                                                                                                                                                                                                                     (continued...)  



                                                                                                                                                   -20-                                                                                                                                            7283
  


----------------------- Page 21-----------------------

                                      32  

 11 AAC 83.125.                             In  Alaskan Crude Corp. v. State, Department of Natural Resources,                                                              



Division   of   Oil  &   Gas,  we   considered   what   standard   of   review   applied   to   the  



                                                                                              33  

interpretation of a force majeure clause.                                                                                                                                           

                                                                                                      The parties disputed whether the agency  



                                                                                                                                              

applied the force majeure clause from the oil and gas lease or the unit agreement:  if it  



                                                                                                                                                                     

was from the lease it was subject to de novo review as a matter of contract interpretation,  



                                                                                                                                                                                

but  if  it  was  from  the  unit  agreement  it  was  subject  to  deference  as  the  agency's  



                                                                                 34 

                                                                                                                                                                                         

interpretation of its own regulation.                                                  We concluded that the agency applied the force  



                                                                                                                                                                                    

majeure clause fromthe unit agreement and its decision was subject to deference because  



                                                                                                                                                                                       

"[t]he  definition  of  force  majeure  [in]  the  unit  agreement  is  contained  in  DNR  



                             35  

regulations."                                                                                                                                                                                  

                                   In this case, similarly, we conclude that the Commissioner strived in his  



                                                                                                                                                                            

reconsideration  decision  to  interpret  the  contractual  term  "reasonable  diligence"  



                                                                                                                                                                                   

consistently with its sources in statute and regulation.  We conclude that, as in Alaskan  



                                                                                                                                                                                              

 Crude, theCommissioner'sinterpretationofthe"reasonablediligence"standard was "an  



               31              (...continued)  



                                                                  

AS 38.05.180(m) (emphasis added).  



               32              "If drilling, including redrilling, sidetracking, or other means necessary to                                                                                     



reach the originally proposed bottom hole location, has commenced on or before the                                                                                                            

expiration date of the primary term of the lease and is continued through that date with  

                                                                                                                                                                                           

reasonable diligence                            , the lease will continue in full force until 90 days after the drilling                                                            

has ceased and for so long after that date as oil or gas is produced in paying quantities."                                                                                                           

 11  AAC  83.125(a)  (emphasis  added).  



               33              261 P.3d 412, 419 (Alaska 2011).  

                                                                                             



               34             Id.  



               35             Id. (citing 11 AAC 83.395(3)).  

                                                                                                       



                                                                                              -21-                                                                                        7283
  


----------------------- Page 22-----------------------

interpretation   of   the   agency's   own   regulations   and   the   deferential   reasonable   basis  

standard applies."            36  



                                                                                                                                           

                      Relatedly, we have also applied the reasonable basis standard to terms that  



                                                                                                                                           

are flexible and evolving rather than immutable and subject to one fixed definition, and  



                                                                                                                                    

thus more susceptible to determination as a matter of law.  In ConocoPhillips Alaska,  



                                                                                                                                            

Inc. v. State, Department of Natural Resources, we held that "the crucial question" for  



                                                                                                                                         

us in  interpreting a regulatory  standard  incorporated  into  an  oil and gas lease was  



                                                                                                                                         

"whether this standard describe[d] a fixed and immutable test" - which "might well  



                                                                                                                                     

present a pure question of law to be decided de novo" - or whether it described instead  



                                                                                                                                          

"a more flexible process . . . grounded in the department's exercise of discretion and  



                                                                                                                             

expertise  and  having  the  capacity  to  evolve  as  contemporary  scientific  knowledge  



                                                                                                                                             37  

                                                                                                                                                  

advances," in which case our review "would need to be appropriately deferential." 



                                                                                                                      

Finding that the standard was flexible and evolving, we deferred to the Commissioner's  



                                38  

                                                                                                                                       

interpretation of it.                 The concept of "reasonable diligence" in the context of well- 



                                                                                                                                  

drilling activities strikes us as flexible enough to require similarly deferential review.  



                                                                                                                                          

                      In  support  of  the  Commissioner's  interpretation  we  note  that  the  



                                                                                                                                  

reinstatement letter advised White not only that he had an additional 90 days to complete  



                                                                                                                               

the well or face "automatic termination of this lease" but also that after 90 days DNR  



                                                                                                                                        

would "review [White's] progress to determine whether continued lease extension [was]  



           36         Id.  



           37          109 P.3d 914, 920 (Alaska 2005).              



           38         Id. at 921-23.  

                                 



                                                                     -22-                                                              7283
  


----------------------- Page 23-----------------------

                            39  

warranted."                       We note also that White continued to have the protection of the force                                                                                           



majeure clause in paragraph 4(f) of the lease, by which he could seek further extensions                                                                                              



if his failure to meet the April 27 deadline was due to causes "beyond [his] reasonable                                                                                  



                                                                     40  

ability to foresee or control."                                                                                                                                                          

                                                                            Under our deferential standard of review, we conclude  



                                                                                                                                                                                                         

that the Commissioner's decision that White could complete drilling within 90 days -  



                                                                                                                                                                                                        

by April 27, 2009 - if he exercised "reasonable diligence" has a reasonable basis in the  



                                                                                                                                                                     

facts, the terms of the lease, and the law; we therefore do not disturb it.  



                                                                                                                                                                                                

                                White also challenges the reinstatement letter's third condition - "valid  



                                                                                                                                                                                       

permits for all operations" - as allowing DNR to terminate the lease "on the erroneous  



                                                                                                                                                                                                      

basis that the Lessee [does] not have a valid drilling permit."  But he does not argue that  



                                                                                                                                                                                              

a requirement of "valid permits" is  inconsistent  with  the lease; indeed,  any  permit  



                                                                                                                                                                                                  

required by statute or regulation is also required by the lease, which is expressly made  



                                                                                                                                                                                              

"subject to all applicable state and federal statutes and regulations in effect on  the  



                                                                                                                                                                                                     

effective date of this lease" and, "as is constitutionally permissible," laws enacted later  



                    

as well.  



                                                                                                                                                                                                

                                Finally, Whitechallenges thelast condition -"sustainedproductionwithin  



                                                                                                                                                                                                 

90 days following the cessation of drilling" - as contrary to lease paragraph 4(d), which  



                                                                                                                                                                                            

allows a lessee "a reasonable time, which will not be less than six months after notice,"  



                39              See K & K Recycling, Inc. v. Alaska Gold Co.                                                                  , 80 P.3d 702, 715 (Alaska          



2003) ("[T]o be an anticipatory breach based on a request for additional conditions, 'the                                                                                                             

request   must   be   coupled   with   an   absolute   refusal   to   perform unless                                                                                        the   request  is  

granted.' " (quoting 17A A                                       M. J   UR. 2d             Contracts   738, at 752 (1991))).                         



                40              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.").  



                                                                                                   -23-                                                                                            7283
  


----------------------- Page 24-----------------------

to place into production "a well capable of producing oil or gas in paying quantities."  

                                                                                                                                      



But as explained above, the subsections of paragraph 4 address different circumstances,  

                                                                                                              



and White's circumstances, as he argued consistently himself, fit paragraph 4(c)(1): that  

                                                                                                                                



is, as long as his drilling activities were "continued with reasonable diligence, [the] lease  

                                                                                                                             



[would] continue in effect until 90 days after cessation of that drilling and for so long as  

                                                                                                                                  



oil or gas [was] produced in paying quantities."  Paragraph 4(d) addresses wells that are  

                                                                                                                                



already "capable of producing oil or gas in paying quantities."  A lessee with such a  

                                                                                                                                   



well, but who is not producing, has at least six months to commence production once  

                                                                                                                             



DNR gives notice that production is required.  But White has no such well under the  

                                                                                                                                



lease here at issue.   A lessee like White - who extends the lease term by drilling  

                                                                                                                         



activities  on  the  last  day  of  the  term  -  must  continue  drilling  "with  reasonable  

                                                                                                                    



diligence," must commence production within "90 days after cessation of that drilling,"  

                                                                                                                       



and  will  maintain  the  lease  only  "for  so  long  as  oil  or  gas  is  produced  in  paying  

                                                                                                                          



quantities." The reinstatement letter's fourth condition merely restates the requirements  

                                                                                                                 



of lease paragraph 4(c)(1), the provision governing White's extension.  

                                                                                             



                    We conclude that the Commissioner did not err when he decided that the  

                                                                                                                                



reinstatement letter did not impose new conditions on DNR's continued performance  

                                                                                                                 



under the lease but rather interpreted or applied the lease's terms.  

                                                                                           



                    3.	       DNR's termination of the lease was supported by substantial  

                                                                                                                   

                               evidence.  

                                               



                    Because  we  conclude  that  DNR's  January  2009  breach  was  cured  by  

                                                                                                                      



reinstatement, we next consider whether DNR was justified in terminating the lease in  

                                                                         



July.  White argues that DNR's justifications for termination - lack of both a valid  

                                                                                                                             



drilling permit and drilling activity - were flawed.   In White's first superior court  

                                                                                                                            



appeal, the court agreed with White about the valid drilling permit, concluding that it did  

                                                                                                                                



                                                               -24-	                                                        7283
  


----------------------- Page 25-----------------------

not justify termination as long as the validity was the subject of a pending administrative                                                                                                                                 



appeal with AOGCC. But on remand the Commissioner relied solely on White's failure                                                                                                                                                                  



"to drill with reasonable diligence."                                                                               On  appellate review, our task is to determine                                                                      



whether the Commissioner had substantial evidence to support the finding that White did                                                                                                                                                                       



                                                                                                          41  

not drill with reasonable diligence.                                                                             



                                                                                                                                                                                                                                                                           

                                         We conclude that the Commissioner's decision is adequately supported.  



                                                                                                                                                                                                                             

His decision related the following facts.  On December 31, 2008, DNR's representative  



                                                                                                                                                                                                                                  

at  the  drill  site  observed  some  activities  short  of  "actual  boring"  that  nonetheless  



                                                                                                                                                                                                                                                      

qualified as "drilling activities" sufficient to extend the lease term.  On January 2, 2009,  



                                                                                                                                                                                                                                             

upon receipt of the notice of expiration, White demobilized his equipment and removed  



                                                                                                                        42  

                                                                                                                                                                                                                                               

it from the well site to "hard ground."                                                                                          A few weeks later, in the midst of White's  



                                                                                                                                                                                                                                              

attempts to have the expiration notice retracted, DNR personnel observed other "activity  



                                                                                                                                                                                                                                                

 [at the site] that could be associated with drilling, but did not observe the drill bit actually  



                                                                                                                                                                                                                                                                           

boring in the well or actual operation of the drill rig and systems in the act of drilling."  



                                                                                                                                                                                                                                                                           

The Commissioner noted that by April, White's "drill rig had been located to Kenai."  



                     41                  "We review the agency's factual findings using the substantial evidence                                                                                                                            



 standard.    'Substantial evidence is defined as such relevant evidence as a reasonable                                                                                                                                            

mind might accept as adequate to support [the agency's] conclusion.'                                                                                                                                                   'We determine   

only whether such evidence exists and do not choose between competing inferences or                                                                                                                                                                              

evaluate the strength of the evidence.' "                                                                            Alaskan Crude Corp. v. State, Alaska Oil &Gas                                                                                          

 Conservation Comm'n                                                  , 309 P.3d 1249, 1254 (Alaska 2013) (quoting                                                                                                   Lopez v. Adm'r,              

Pub. Emps.' Ret. Sys.                                             , 20 P.3d 568, 570 (Alaska 2001) (alteration in original))).                                                                                    



                     42                  We note that paragraph 21 of the lease gave White "a period of one year  

                                                                                                                                                                                                                                                          

after the termination, or any extension of that period as may be granted by the state, to  

                                                                                                                                                                                                                                    

remove from the leased area or portion of the leased area all machinery, equipment,  

                                                                                                                                                                                                

tools, and materials."  

                                                                   



                                                                                                                              -25-                                                                                                                       7283
  


----------------------- Page 26-----------------------

                    The Commissioner found that "the 25 days lost [between the expiration  

                                                                                                                     



notice and the lease reinstatement] were not critical to the overall capacity to drill on the  

                                                                                                                                



site."  The Commissioner did note, however, that White had a fairly small window of  

                                                                                                                                 



opportunity between reinstatement and thaw in order to remobilize, but he found that  

                                                                                                                     



White  made  no  productive  use  of  this  window,  choosing  to  focus  his  efforts  "on  

                                                                                                                              



litigation  rather  than  a  resumption  of  activities."                         White  testified  that  "following  

                                                                                                            



reinstatement he did take steps to assess the rental costs of trucking and other costs to  

                                                                                                                                  



move drilling equipment back to the site," as well as the availability of truck drivers for  

                                                                                                                                



that purpose.  But the Commissioner noted that White's decision to focus on litigation  

                                                                                                     



was a "strategic choice" that banked - ultimately unsuccessfully - on the courts  

                                                                                                                           



accepting White's contract-interpretation arguments over DNR's.  The Commissioner  

                                                                                                              



noted further that litigation activity is not a "drilling activity" as defined in the lease.  

                                                                                                                                    



                    White does not dispute that he chose litigation over a resumption of drilling  

                                                                                                                          



activities; he testified that after reinstatement of his lease he "did not perform any further  

                                                                                                                           



work other than the preliminary mobilization process to re-mobilize and transport that  

                                                                                                          



equipment  back  out  .  .  .  ."               We  conclude  that  substantial  evidence  supports  the  

                                                                                                                               



Commissioner's  decision  that  White  did  not  continue  drilling  "with  reasonable  

                                                                                                                   



diligence" when he had the opportunity to do so, and that he therefore failed to satisfy  

                                                                       



the requirements for a continued lease extension under paragraph 4(c)(1).  

                                                                                                                    



          B.        There Is No Agency Decision on Damages For Us To Review.  

                                                                                                            



                    White urges us to hold that the superior court should have remanded the  

                                                                                                                                



case to the agency for a determination of his damages; he urges us to order such a  

                                                                                                                                   



remand.   DNR asks us not to consider White's claim because his cross-appeal was  

                                                                                                         



                                                               -26-                                                         7283
  


----------------------- Page 27-----------------------

                     43  

untimely                 and he waived the issue of damages.                                                    Our holding that the initial breach was                                           



cured by the reinstatement letter moots any claim for damages following reinstatement.                                                                                                                       



But   the   issue   remains   whether   White   is   entitled   to   damages   incurred  between   the  



                                                                                                                                                                   44  

January 2, 2009 expiration notice and the reinstatement 25 days later.                                                                                                    



                                                                                                                                                                                                   

                               However, there is no agency decision on damages for us to review. Oil and  



                                                                                                                                                         

gas  lessees  are  required,  at  least  initially,  "to  pursue"  "all  grievances  through  



                                                             45  

                                                                                                                                                                                                   

administrative remedies."                                           When filing an appeal or request for reconsideration, the  



                                                                                                                   46  

                                                                                                                                                                                                   

appellant must "specify the remedy requested."                                                                             In this case, at every step of the  



                                                                                                                                                                                                  

administrative appeal process White asked only that DNR reinstate the lease.  He had  



                                                                                                                                                                                      

repeated opportunities in the successive administrative proceedings to present evidence  



                                                                                                                                                                                           47  

                                                                                                                                                                                                 

of his damages, or at least to assert a right to a separate hearing on the issue.                                                                                                                 But  



                43             We conclude that the timing of White's pro se cross-appeal indicated a                                                                                                   



good-faith effort to comply with the appellate rules based on reasonable confusion about                                                                                                      

their requirements, and we therefore consider it.                                                                See Conitz v. Alaska State Comm'n for                                              

Human Rights                      , 325 P.3d 501, 506 (Alaska 2014).                                                  



                44             See RESTATEMENT  (SECOND)  OF  CONTRACTS   236 cmt. b (A                                                                                    M. L      AW  INST .  

                                         

                                                                                                                                               

 1981) ("[E]very breach gives rise to a claim for damages.").  



                45  

                                                                                                                                                                                            

                                White v. State, Dep't of Nat. Res., 14 P.3d 956, 960 (Alaska 2000) (citing  

 11 AAC 88.155);                            Danco Expl., Inc. v. State, Dep't of Nat. Res.                                                                 , 924 P.2d 432, 434                    

                                                                                                                                                                                                    

(Alaska 1996) ("Oil and gas lessees and lease bidders which have grievances with the  

                                                                                                                                                                                                             

 State must pursue the administrative procedures provided by 11 AAC 02.010, et seq.").  



                46              11 AAC 02.030(a)(10).  

                                                     



                47             For example, in February 2009 the Commissioner, responding to White's  

                                                                                                                                                                                         

request for reconsideration of the reinstatement letter, invited him to "submit additional  

                                                                                                                                                                                    

written material or request a hearing," but White declined, stating "I do not believe that  

                                                                                                                                                                                                  

an additional briefing or hearing is necessary in order for you [to] decide this issue."  At  

                                                                                                                                                                                                     

the first administrative hearing on the termination, White's counsel stated:  "We do not  

                                                                                                                                                                                                    

                                                                                                                                                                           (continued...)  



                                                                                                 -27-                                                                                          7283
  


----------------------- Page 28-----------------------

although White made references to "being damaged," experiencing "undue financial                                                                                                                                                                          



harm" and "escalating" costs, and losing opportunities to sell gas, he never specifically                                                                                                                                                         



demanded money damages for these alleged harms.                                                                                                                          



                                           It is up to DNR in the first instance to determine whether White has waived                                                                                                                                          



any right to recover damages.                                                                       On the appellate record, however, we see no basis on                                                                                                                       



which to conclude that he was deprived of a right to seek damages in the administrative                                                                                                                                                  



proceeding   or   that   the   superior   court   erred   when   it   failed   to   remand   for  further  



proceedings on that issue.                                       



V.                    CONCLUSION  



                                           We   REVERSE   the   superior   court's   decision   reinstating   the   lease   and   



AFFIRM the Commissioner's decision terminating the lease.                                                                                                                          



                      47                   (...continued)  



                                                                                                                                                                                                                                                               

plan on putting any additional evidence on . . . ."  At the second administrative hearing  

                                                                                                                                                                                                                                                                      

following the superior court's remand, White testified that he could prove the costs  

                                                                                                                                                                                                                                                                   

incurred in demobilizing the well site and the damages from lost opportunities to export  

                                                                                                                                                                                                                                                                                 

gas, but he provided no evidence in support of the claim and waived the opportunity to  

                                                                                

file a post-hearing brief.  



  



                                                                                                                                     -28-                                                                                                                              7283
  

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