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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Kenai Landing, Inc. v. Cook Inlet Natural Gas Storage, LLC.; Kirkpatrick-Walkowski-Watkins Trust and Chere D. Kaas (5/24/2019) sp-7364

Kenai Landing, Inc. v. Cook Inlet Natural Gas Storage, LLC.; Kirkpatrick-Walkowski-Watkins Trust and Chere D. Kaas (5/24/2019) sp-7364

           Notice:   This opinion is subject to correction before publication in the P                    ACIFIC  REPORTER.  

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                       THE SUPREME COURT OF THE STATE OF ALASKA                                      

KENAI  LANDING,  INC.,                                           )  

                                                                 )    Supreme  Court  No.  S-16737  

                                Appellant,                       )  


                                                                 )    Superior Court No. 3KN-11-00252 CI  

           v.                                                    )  


                                                                 )    O P I N I O N  


COOK INLET NATURAL GAS                                           )  



STORAGE ALASKA, LLC;                                             )    No. 7364 - May 24, 2019  

KIRKPATRICK-WALKOWSKI-                                           )  


WATKINS TRUST; and CHERE D.                                      )  

KAAS,                                                            )  


                                Appellees.                       )  




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


                     Judicial District, Kenai, Carl Bauman, Judge.  


                     Appearances:                Bruce  E.  Falconer,  Boyd,  Chandler   &  


                     Falconer,  LLP,  Anchorage,  for  Appellant.                                  Donald  W.  


                     McClintock,  Eva  R.  Gardner,  and  Matthew  T.  Findley,  


                     Ashburn & Mason, P.C., Anchorage, for Appellee Cook Inlet  


                     Natural  Gas  Storage  Alaska,  LLC.                             No  appearance  by  


                     Appellees            Kirkpatrick-Walkowski-Watkins                            Trust        and  


                      Chere D. Kaas.  


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


                      and Carney, Justices.  


                     MAASSEN, Justice.  

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



                    A public utility filed a condemnation action seeking the land use rights  


necessary to construct a natural gas storage facility in an underground formation of  


porous rock.  The utility held some rights already by assignment from an oil and gas  


lessee.  The superior court held that because of the oil and gas lease, the utility owned  


the rights to whatever producible gas remained in the underground formation and did not  


have to compensate the landowner for its use of the gas to help pressurize the storage  



                    The court held a bench trial to determine the value of the storage space.  


The landowner appeals the resulting compensation award.   It argues that it retained  


ownership of the producible gas in place because the oil and gas lease authorized only  


production, not storage.  It also argues that it had the right to compensation for gas that  


was discovered after the date of taking.  But we conclude that the superior court did not  


err in ruling that the landowner's only rights in the gas were reversionary rights that were  


unaffected by the utility's non-consumptive use of the gas during the pendency of the  



                    The  landowner  also  challenges  several  findings  related  to  the  court's  


valuation  of  the  storage  rights:               that  the  proper  basis  of  valuation  was  the  storage  


facility's maximumphysical capacity rather than the capacity allowed by its permits; that  


the valuation should not have included buffer area at the same rate as area used for  


storage; and that an expert's valuation methodology, which the superior court accepted,  


was flawed.  We conclude that the superior court did not clearly err, and we therefore  


affirm its judgment.  

                                                               -2-                                                        7364

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

II.            FACTS AND PROCEEDINGS            

               A.            Facts  

                             Cook Inlet Natural Gas Storage Alaska, LLC ("CINGSA"), is a private                                                                             


company building a natural gas storage facility on the Kenai Peninsula.                                                                                                        

                                                                                                                                                                    The facility  


stores natural gas collected from other sites by injecting it into a mostly depleted rock  


formation nearly a mile underground - the Sterling C Reservoir - so that it can be  


withdrawn in wintertime when the demand for natural gas exceeds what local production  


can immediately supply.  


                             To  ensure  the  efficient  extraction  of  gas,  the  facility  must  maintain  a  


minimum amount of pressurization, which in turn requires that it retain a minimum  


amount of gas in storage.  This is called "base gas" (or "cushion gas").  In the Sterling  


C Reservoir, part of the need for base gas was satisfied by gas left in the reservoir at the  


time CINGSA acquired it; such gas left in the ground is known as "native gas." Any gas  


in the reservoir in addition to the base gas is called "working gas," since that gas moves  


in and out of storage according to demand.  


                             The storage facility's "safety, pressure limitations, and other operational  


matters" were subject to regulation by the Alaska Oil and Gas Conservation Commission  


(AOGCC), and its "financial and economic matters and relationships with its customers"  


were regulated by the Regulatory Commission of Alaska (RCA).  The RCA granted  


CINGSA a certificate of public convenience and necessity in 2011, and CINGSA, as a  

               1             We recently described CINGSA's storage of natural gas in underground                                                                 

porous rock formations in                                City of Kenai v. Cook Inlet Natural Gas Storage Alaska, LLC                                                                         ,  

373 P.3d 473, 475 (Alaska 2016).                             

                                                                                            -3-                                                                                    7364

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

regulated public utility, proceeded to use the power of eminent domain to acquire the                                                                            


property rights necessary for the storage facility's operation.                                                         

                          Kenai  Landing,  Inc.  owns  a  parcel  of  land  overlying  the  Sterling  C  


Reservoir.  Kenai Landing acquired the property subject to an existing oil and gas lease  


- the "Wards Cove Lease" - entered into in 1978 by C.W.C. Fisheries and Union Oil  


Company. The Wards Cove Lease, committed to the Cannery Loop Unit,3 provides that  


it will not terminate as long as gas is being produced anywhere in the unit.   When  


CINGSA filed its condemnation action, the royalty rights under the Wards Cove Lease  


were held by Wards Cove and the production rights were held by Marathon Alaska  


Production Company. CINGSA negotiated separate agreements with both Wards Cove  


and Marathon, acquiring their rights as lessor and lessee, respectively, under the lease.  


The  Department  of  Natural  Resources  (DNR)  then  agreed  to  sever  the  Sterling  C  


Reservoir from the Cannery Loop Unit so that it could be used for storage purposes.  


                          Sometime   after   CINGSA   commenced   its   condemnation   action,   it  


discovered "a pocket of gas" referred to as the "isolated reservoir."  CINGSA's drilling  


brought this "new gas" into contact with the gas already known to be in the reservoir; the  


new gas, thus, increased the volume of native gas overall, including that underlying  


Kenai Landing's property.  


             2            See  AS 42.05.631.   



                          Unitization allows the joint operation of a producing reservoir by different  


interest holders.  See White v. State, Dep't of Nat. Res., 984 P.2d 1122, 1125 n.5 (Alaska  

 1999) ("A 'unit agreement' is '[a]n agreement or plan of development and operation for                                                                          


the recovery of oil and gas made subject thereto as a single consolidated unit without  


regard to separate ownerships and for the allocation of costs and benefits on a basis as  

defined in the agreement or plan.' " (quoting H                                               OWARD   R. W              ILLIAMS   & C            HARLES   V.  

    EYERS, 8 OIL AND GAS LAW  1315 (1992))).   


                                                                                 -4-                                                                         7364

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

          B.        Proceedings  

                    In March 2011 CINGSA filed a complaint against Kenai Landing and  


others to condemn the rights to the Sterling C Reservoir that it had not been able to  


acquire through negotiation.  It sought to condemn (1) an easement for gas storage, to  


include  the  underground  formations  in  the  Sterling  C  Reservoir  plus  an  adjoining  


geological zone for use as a "buffer"; and (2) an easement in the mineral interests, which  


would allow CINGSA the use of "all gas, oil, or other minerals . . . located within the  


Sterling C Pool and the correlative buffer geological formation," including the use of  


native gas as "base gas for the storage facility."  


                    CINGSA moved for partial summary judgment, asking for a ruling that  


Kenai Landing had no right to compensation for any of the native gas in the Sterling C  


Reservoir because CINGSA owned this gas as assignee of the Wards Cove Lease. Kenai  


Landing countered that the lease had been terminated, either by the condemnation itself  


or by DNR's severance of the Sterling C Reservoir from the Cannery Loop Unit, and that  


ownership of the minerals had therefore reverted to Kenai Landing.  The superior court  


decided that the Wards Cove Lease was still in effect and granted summary judgment on  


this issue in CINGSA's favor.  


                    The parties agreed that Kenai Landing had a right to compensation for the  


use of its property for underground gas storage.4   A hearing to value these storage rights  


was held in June 2013 before a master, who determined that Kenai Landing was entitled  


to $125,000 in compensation. Kenai Landing requested a trial de novo, and the superior  


court held a bench trial over seven days in May 2016.   Each side presented expert  


          4         Theparties also stipulated that CINGSA's storageeasement did not include  


any rights to use the surface of Kenai Landing's property.  


                                                               -5-                                                             7364  

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

testimony by appraisers and petroleum engineers. Finding CINGSA's expert testimony                                                                                                                                

more credible, and declining to defer to the master's determination of value, the superior                                                                                                                            

court concluded that Kenai Landing was entitled to $65,000 for the gas storage rights.                                                                                                                                                         

Adding $23,677 for the stipulated value of the non-producible minerals under Kenai                                                                                                                                         

                                           5  the total compensation award to Kenai Landing was $88,677.  Kenai  

Landing's land,                                                                                                                                                                                                            

Landing now appeals.  


III.              STANDARD OF REVIEW  


                                    We review a decision on summary judgment de novo.6  


                                                                                                                                                                                            "We will affirm a  


grant of summary judgment if there are no genuine issues of material fact and if the  



movant is entitled to judgment as a matter of law."                                                                                          Whether the superior court applied  


the correct legal standard in an eminent domain proceeding is a question of law which  




we also review de novo. 


                                    The proper amount of compensation to be paid for a taking is a factual  

                         9   "We review the factual findings of a trial court for clear error, 'a standard that  


                  5                 The "non-producible minerals" are those that will remain in the subsurface                                                                                                 

after the lease expires, including some gas that will never be removed from the Sterling                                                                                                                               

C Reservoir because it is not technologically or economically feasible to produce it.                                                                                                                                                          

CINGSAcompensatedKenaiLanding for theseminerals by stipulation onthetheory                                                                                                                                                       that  

it   is   "industry   custom"   to   compensate   the   landowner   for   the   nominal  value   of   the  

easement over the non-producible minerals.                                                     

                  6                 Alakayak v. B.C. Packers, Ltd., 48 P.3d 432, 447 (Alaska 2002).  


                  7                 Id.  


                  8                 State v. Alaska Laser  Wash, Inc., 382 P.3d 1143, 1150 (Alaska 2016).  


                  9                 See Triangle, Inc. v. State, 632 P.2d 965, 968 (Alaska  1981) ("It is only  



                                                                                                                  -6-                                                                                                          7364

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

is met if, after a thorough review of the record, we come to a definite and firm conviction                                         


that a mistake has been made.' "                              

IV.	        DISCUSSION  


                       Kenai Landing raises five issues on appeal. First, it argues that the superior  


court erred by failing to compensate it for CINGSA's use of the native gas remaining in  


the Sterling C Reservoir as base gas.   Second, it argues that it was also entitled to  


compensation for its proportionate share of the new gas CINGSA discovered after the  




                       Kenai Landing's other three claims relate to the superior court's valuation  


of the gas storage space.  It argues that the court erred by failing to consider the "highest  


and best use" of the land and the "fullest extent" rule; that the court erred by giving equal  


value to the storage space and the surrounding buffer zone; and, finally, that the court  


erred by relying on the valuation testimony of one of CINGSA's expert witnesses, who  


Kenai Landing contends applied the valuation methodology improperly.  


                       We conclude that none of these issues involves legal error or a clearly  


erroneous finding of fact, and we therefore affirm the superior court's judgment.  


            A.	        The Superior Court Did Not Err In Deciding That Kenai Landing Was  


                       Not  Entitled  To  Compensation  For  CINGSA's  Easement  In  The  


                       Native Gas.  


                       Kenai Landing argues that the superior court erred when it concluded that  

            9          (...continued)  


when a trial court concludes that the landowner has presented a valid claim that the case  


is submitted to the jury for a determination of the extent of the taking and the amount of  


compensation that must be paid.")  

            10         Beeson v. City of Palmer, 370 P.3d 1084, 1088 (Alaska 2016) (quoting  


Rausch v. Devine, 80 P.3d 733, 737 (Alaska 2003)).  


                                                                        -7-	                                                                 7364

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

Kenai Landing owned at most "a reversionary interest in the native gas in place." Kenai                                                                                                                                                                                                                                                                                                                                                         

Landing   argues   that   the   only   interest   in   native   gas   that   its   predecessor-in-interest  

transferred to Marathon under the Wards Cove Lease was the right to extract it.                                                                                                                                                                                                                                                                                                                                                               Kenai  

Landing   argues   that   the   rights   transferred  under  the   lease   "relate   exclusively   to  

production and do not include the right to make use of the native gas as Base Gas," a                                                                                                                                                                                                                                                                                                                                                                                      

right which "is instead part of the rights the lessor retained and belong to the property's                                                                                                                                                                                                                                                                                                                               

 fee simple owner,                                                                                    [Kenai Landing]."                                                                                            Kenai Landing                                                                               argues that its perspective is                                                                                                                         

 supported   by   the language of the lease,                                                                                                                                                                                     "which   the   superior   court utterly failed                                                                                                                                                                                      to  


                                                                        We do not find the lease language to be as "straightforward" as Kenai                                                                                                                                                                                                                                                                                                   

Landing characterizes it.                                                                                                              The granting clause is broad:                                                                                                                                    "[The] lessor . . . has . . . leased                                                                                       

 . . . exclusively unto the lessee the hereinafter described land . . .                                                                                                                                                                                                                                                                       for the purpose of the                                                                                             

 drilling, mining, and operating for, producing, and saving all of the oil [and] gas . . . ."                                                                                                                                                                                                                                                                                                                                                                                           

A later paragraph provides that "[t]he lessee shall have the right to use, free of cost, gas                                                                                                                                                                                                                                                                                                                                                                   

 .   .   .   found   on   said   land   for   its   operations   thereon   .   .   .   ."     The   lease   specifically  

 contemplates that it will remain in effect even if not producing, as long as it is part of a                                                                                                                                                                                                                                                                                                                                                                              

unit on which some production is occurring and the lessor is being paid royalties on the                                                                                                                                                                                                                                                                                                                                                                         

unit's production.                                                                                

                                                                        Citing cases, Kenai Landing argues that "it would be unusual to interpret                                                                                                                                                                                                                                                                                  

 a production lease like the Wards Cove Lease to include the right to store non-native gas                                                                                                                                                                                                                                                                                                                                                                      

                                                                                                                                                                                                                                                                                                                                                  11            That may be true, but  

 absent specific language conferring that right upon the lessee."                                                                                                                                                                                                                                                                                                                                                                                               

                                     11                                 SeeMason                                                   v. RangeRes.-Appalachia LLC                                                                                                                                          ,120                      F. Supp.3d 425, 440 (W.D.                                                                                      

Pa. 2015) ("[The] granting clause [of a typical oil and gas lease] generally conveys to the                                                                                                                                                                                                                                                                                                                                                                       

lessee the right to use the property to drill for and produce oil and gas, and in the case of                                                                                                                                                                                                                                                                                                                                                                          


                                                                                                                                                                                                                                  -8-                                                                                                                                                                                                                    7364

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

"the   right   to   store   non-native   gas"   is   a   separate   issue;   Kenai   Landing   is   being  

compensated for CINGSA's storage of gas in Kenai Landing's pore space, though it                                                                              

disputes the amount.                    What concerns us here is the use of the native gas, not the storage                                         

of non-native gas.                  Kenai Landing concedes that both Marathon and CINGSA, as the                                                           

assignee of Marathon's production rights, had the right to                                                  produce  all the native gas if  

                                     12   The lease contains no clear stipulations as to ownership and use  

they chose to do so.                                                                                                                                       

rights if the native gas is not produced but is kept in the ground instead.  


                         Relying on general principles of oil and gas law (applied by some but not  


all jurisdictions), CINGSA contends that when it "acquired the native gas under [Kenai  


Landing's] property by virtue of acquiring the Wards Cove Lease, it acquired ownership  


of this gas for any and all purposes."13                                  Kenai Landing argues, on the other hand, that  


"[a]bsent specific language in the lease conveying the minerals in place to the lessee, the  


             11          (...continued)  


a 'dual purpose' lease also conveys the right to use the property for the storage of gas.");  


Ellis v. Ark. La. Gas Co., 450 F. Supp. 412, 420-21 (E.D. Okla. 1978) (concluding that,  


in absence of express language, production lease does not convey "injection, storage or  


occupation rights").  

             12          Kenai Landing concedes that "[w]ere CINGSA at some future date to  


abandon its storage operation, and then seek to produce the remaining native gas, it  


would have that right . . . ."  


             13          See Comm'r v. P.G. Lake, Inc., 356 U.S. 260, 261 n.1 (1958) ("An oil and  


gas lease ordinarily conveys the entire mineral interest less any royalty interest retained  


by the lessor."); Nat. Gas Pipeline Co. of Am. v. Pool, 124 S.W.3d 188, 192 (Tex. 2003)  


("When an oil and gas lease reserves only a royalty interest, the lessee acquires title to  


all of the oil and gas in place, and the lessor owns only a possibility of reverter and has  


the right to receive royalties.").  


                                                                              -9-                                                                      7364

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


lessor   retains   title   to   same,   so   long   as   they   remain   under   the   land."                                                  Whether   a  

landowner owns the minerals in place under its land - or only the right to own the                                                                            

minerals once they are brought to                                    the surface and "captured" - is a longstanding                        

                                                                                                                                  15   Our decision is  

question of natural resource law that we do not need to answer here.                                                                                             

governed  instead  by  the  principles  we  use  to  determine  "just  compensation"  in  


condemnation cases.  


                         "In Alaska, the fundamental goal of 'just compensation' is to make the  


property owner whole."16                           "[T]he property owner should be placed as fully as possible  


in the same position as he [or she] was in prior to the taking of his [or her] property."17  


These principles determine the measure of "just compensation":  "[J]ust compensation  


is determined by what the owner has lost and not by what the condemnor has gained."18  


The court's task, therefore, is to determine what the condemnee has lost by virtue of the  


             14          See Miller v. Ridgley                   , 117 N.E.2d 759, 761 (Ill. 1954);                              Rist v. Toole Cty.               ,  

 159 P.2d 340, 343 (Mont. 1945).                                

             15          The majority rule is that the landowner owns the minerals in place (in the  


ground). See, e.g., McDonald v. Unirex, Inc.,718 P.2d 316, 317 (Mont. 1986); U.S. Steel  


Corp. v. Hoge, 468 A.2d 1380, 1383 (Pa. 1983); Stephens Cty. v. Mid-Kan. Oil & Gas  


Co., 254 S.W. 290, 292 (Tex. 1923).  A minority holds that minerals in place are not  


capable of ownership; they are not owned until extracted, i.e., "captured."  See, e.g.,  


Halbert v. Hendrix, 95 N.E.2d 221, 223 (Ind. App. 1950); Sunray Oil Co. v. Cortez Oil  


Co., 112 P.2d 792, 793 (Okla. 1941).  


             16           City of Kenai v. Burnett, 860 P.2d 1233, 1242 (Alaska 1993).  


             17          Ketchikan Cold Storage Co. v. State, 491 P.2d 143, 150 (Alaska 1971).  


             18           Gackstetter v. State, 618 P.2d 564, 566 (Alaska  1980); see also State v.  


Teller Native Corp., 904 P.2d 847, 849 (Alaska 1995).  


                                                                              -10-                                                                        7364

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


 condemnation.                                                                                     Here, assuming for discussion purposes that Kenai Landing has title to                                                                                                                                                                                                                                                                                                                                            

the native gas in place subject to the Wards Cove Lease, what has Kenai Landing lost by                                                                                                                                                                                                                                                                                                                                                                                                                          

virtue of CINGSA's condemnation of an easement in that gas for the duration of the                                                                                                                                                                                                                                                                                                                                                                                                                          


                                                                               We must conclude that the answer is "nothing."                                                                                                                                                                                                                                                  The Wards Cove Lease                                                                                         

 gave the lessee production rights - which CINGSA had by assignment - and gave the                                                                                                                                                                                                                                                                                                                                                                                                                            

 lessor a royalty interest - which CINGSA also had by assignment.                                                                                                                                                                                                                                                                                                                                                           As the superior                                 

 court explained, "[Kenai Landing] does not have the current right to produce or receive                                                                                                                                                                                                                                                                                                                                                                                             

royalties on any portion of the native gas in place . . . as long as its ownership is subject                                                                                                                                                                                                                                                                                                                                                                                        

to the Wards Cove Lease because the production rights belong to the lessee . . . ."                                                                                                                                                                                                                                                                                                                                                                                                               And  

 "[Kenai Landing] had no ability to stop gas production in the Sterling [C], which could                                                                                                                                                                                                                                                                                                                                                                                                       

have continued until economically depleted." Marathon could have extracted the native                                                                                                                                                                                                                                                                                                                                                                                                       

 gas and sold it as its own, and CINGSA, as Marathon's assignee, had the same right, as                                                                                                                                                                                                                                                                                                                                                                                                                            

Kenai Landing recognizes.                                                                                                                                              It is only if the Cannery Loop Unit as a whole ceases                                                                                                                                                                                                                                                            

production that there will occur "the collateral effect of terminating the Wards Cove                                                                                                                                                                                                                                                                                                                                                                                                          

Lease, and the full [Kenai Landing] fee interests will thereupon be held by [Kenai                                                                                                                                                                                                                                                                                                                                                                                                   

Landing], including its reversionary interests in the oil and gas aspects of the mineral                                                                                                                                                                                                                                                                                                                                                                                         


                                                                               Until    that    time,    and    however    Kenai   Landing's    current    interest    is  

 characterized, its right to the gas may fairly be called reversionary:                                                                                                                                                                                                                                                                                                                                               it has no                                                  current  

right to extract native gas, to block its production, or to use the native gas in place for                                                                                                                                                                                                                                                                                                                                                                                                                   

                                        19                                      Teller Native Corp.                                                                                                 , 904 P.2d at 849.                                                          

                                                                                                                                                                                                                                                     -11-                                                                                                                                                                                                                                           7364

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


any purpose.                                    CINGSA's non-consumptive use of the gas in place for the duration of                                                                                                                                                          

theWards                         CoveLeasedoesno                                                damage to Kenai Landing's property rights,which remain                                                                                                          


                                           Notably, Kenai Landing focuses its argument on appeal not on what it lost                                                                                                                                                   

by the condemnation but rather on what CINGSA gained:  the use of the native gas as                                                                                                                                                         

base gas. Kenai Landing writes, "Using native gas as Base Gas saved CINGSA the cost                                                                                                                                                                                     

of acquiring, transporting and injecting gas into the Sterling C Pool for this purpose from                                                                                                                                                                           

another source."                                       Kenai Landing argues that "there is nothing novel or untoward about                                                                                                                                         

requiring payment of compensation for such use."                                                                                                                 But "just compensation" is payment                                                       

                                                                                            21       CINGSA, by condemning the easement, gained the use  

for what the condemnee lost.                                                                                                                                                                                                                                              

of the native gas as base gas, but Kenai Landing did not lose anything it already had.  


There is no evidence that the fair market value of its reversionary rights was affected in  


any way by CINGSA's use of the gas for a non-consumptive purpose.22  We therefore  


affirm the superior court's holding on summary judgment that Kenai Landing was owed  


no compensation for the producible native gas remaining in the Sterling C Reservoir at  


the time of the taking.  


                     20                    See Collins v. Chappell                                                      , 333 P.2d 578, 583 (Okla. 1958) (lessor with a                                                                                                          

reversionary interest "can only hope that the present lease will terminate before the                                                                                                                                                                                     

minerals in the land are exhausted" (quoting 3A S                                                                                                         UMMERS, O                               IL AND               GAS  311 (Perm. ed.                                  


                     21                    Teller Native Corp., 904 P.2d at 849.  


                     22                    See  City  of  Kenai  v.  Burnett,  860  P.2d  1233,  1241  (Alaska  1993)  


(explaining that proper measure of damages for taking of easement is difference in  


property's fair market value before and after taking).  


                                                                                                                                    -12-                                                                                                                              7364

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

              B.	            The Superior Court Did Not Err By Deciding That Kenai Landing                                                                             

                             Was Not Entitled To Compensation For The Newly Discovered Gas.                                                                                     

                             Kenai   Landing's   second   claim   involves   what   is   termed   the   "isolated  


reservoir" of native gas, discovered after the date of taking.                                                                                                                  

                                                                                                                                            As the superior court  


described it, the isolated reservoir is "a geologic strata/formation" which is "not directly  


underneath [Kenai Landing's] property" but which, as "the direct result of CINGSA's  


work on the larger gas storage project," came into "pressure communication" with Kenai  


Landing's pore space, meaning that the newly discovered gas can circulate through the  


entire  reservoir,  including  the  strata  underlying  Kenai  Landing's  property.                                                                                           Kenai  


Landing argues first that the superior court's ruling - denying compensation for the  


newly discovered gas for the same reasons it denied compensation for the native gas  


already known to be in place - was erroneous because "use of native gas as Base Gas  


is not related to production and thus not something the Wards Cove Lease granted to the  


lessee; it is instead a right retained by [Kenai Landing] as fee simple owner . . . ."  Like  


the  superior  court,  we  conclude  that  our  decision  of  Kenai  Landing's  claim  for  

compensation for the native gas in place disposes of Kenai Landing's claim regarding  


the new gas as well.  


                             KenaiLandingseparately argues against thesuperiorcourt's relianceonthe  


"scope of the project" rule, which holds that enhancements to the condemned property's  


value, arising after "it becomes likely that the property will be condemned," do not  

              23             The   parties   stipulated   to   March   11,   2011,   as   the   date   of   taking.     The  

superior court referred to the interior reservoir as a "post-taking discovery" and quoted                                                                                    

the RCA as stating that "CINGSA was not aware of the existence of the 14.5 Bcf [billion                                                                                     

cubic   feet]   when   it   acquired  the   reservoir."     The   relevant   facts   thus   appear   to   be  


                                                                                         -13-	                                                                                  7364

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


benefit the condemnee.                                                   Generally, a landowner is only entitled to the value of the land                                                                                                       


as it exists on the date of the taking.                                                                                                                                                                                                          

                                                                                                                       Kenai Landing relies on an exception to this  


general rule:  A landowner should be compensated for features of the property (such as  


minerals) that were unknown on the date of taking but discovered before valuation  



                                       But the exception is inapplicable here. Gas from the isolated reservoir was  


not  just  undiscovered  as  of  the  date  of the  taking,  it  was  not  present  under  Kenai  


                    24                 See City of Valdez v. 18.99 Acres                                                               , 686 P.2d 682, 689 (Alaska 1984) (" 'If                                                                     

the condemned land was probably within the scope of the governmental project for                                                                                                                                                                   

which it is being condemned at the time the Government became committed to that                                                                                                                                                                 

project, then the owner is not entitled to any increment in value occasioned by the                                                                                                                                                               

Government's undertaking the project.' . . . The rule thus prevents property owners from                                                                                                                                                      

receiving many unjustified windfalls, as when, for example, formal condemnation of                                                                                                                                                                   

property which everyone knows will be taken is delayed." (quoting                                                                                                                                           United States v.                          

320.0  Acres of Land                                        , 605 F.2d 762, 781-82 (5th Cir. 1979))).                                                      

                    25                 AS 09.55.330 ("For the purpose of assessing compensation and damages,  


the right to them accrues at the date of issuance of the summons, and its actual value at  


that date is the measure of compensation of the property to be actually taken . . . ."); State  


v. Hammer, 550 P.2d 820, 828 (Alaska 1976) ("The measure of value of property taken  


is the fair market value as of the date of taking, not the value of the property to the state  


at any time, nor the value at a time after condemnation." (footnotes omitted)).  


                    26                 See, e.g., City of Little Rock v. Moreland, 334 S.W.2d 229, 230 (Ark. 1960)  


 ("It would be a harsh rule to say that the State . . . could take private property containing  


a deposit of diamonds and pay therefor the price of land having very little value because  


at the very moment of the taking it was not known that the diamonds were there."); see  


generally 4 JULIUS  L. S                                             ACKMAN, N                          ICHOLS ON                       EMINENT  DOMAIN    12A.07[2] (3d ed.                                                                      


2018) ("[I]f appropriated land contains a valuable deposit, which is unknown at the time                                                                                                                                                       

of the taking, but discovered prior to the time when just compensation is determined, the                                                                                                                                                          

owner   (to   be   indemnified   for   the   thing   taken),   must   have   the   value   of the                                                                                                                                     deposit  

included in a reckoning of his or her award.").                                                             

                                                                                                                        -14-                                                                                                                 7364

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

Landing's property at all. The superior court found, and Kenai Landing does not dispute,  


that the gas came into pressure communication with the gas underlying Kenai Landing's  


property  only  after  CINGSA  accidentally  tapped  into  the  isolated  reservoir  while  


working on the project. Even if Kenai Landing were otherwise entitled to compensation  


for CINGSA's use of the native gas as base gas, the scope of the project rule would  


preclude recovery based on the additional gas released from the isolated reservoir, as it  


was not a part of Kenai Landing's property when condemnation proceedings began.  


          C.	       The  Superior  Court  Did  Not  Clearly  Err  In  Finding  That  The  


                    "Highest And Best Use" Of The Property Was An 11 Bcf Facility And  


                    Properly Refused To Apply The "Fullest Extent" Rule.  


                    Kenai Landing's remaining arguments concern the value of the pore space  


rights, the subject of the seven-day bench trial.   Kenai Landing first argues that the  


superior court undervalued these rights by failing to consider the "highest and best use"  


of the pore space.  


                    Kenai  Landing's  expert  appraisal  witness,  Kenneth  Gain,  "based  his  


analysis on the assumption that the CINGSA facility would operate at a working gas  


capacity of 19.54 Bcf, and would cycle 100% of the stored gas each year for 60 years."  


But the court credited the testimony of CINGSA's expert, Richard Gentges, that there  


were "technical problems, engineering problems, and market demand problems" that  


would have to be overcome before such a working gas capacity could be realized.  It  


found Gain's value analysis - "based on assumed revenues on a hypothetical gas  


storage facility" - to be  unreliable and "not grounded in fact," finding instead that the  


reservoir's  capacity  was 11  Bcf  - the limit set by  CINGSA's "current regulatory  




                                                              -15-	                                                        7364

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

                                                 Kenai Landing argues that this finding of fact leads to an unfair result,                                                                                                                                                                       

because the reservoir could conceivably hold 19.54 Bcf, and CINGSA, regardless of its                                                                                                                                                                                                                           

 current intentions and regulatory approvals, "now has the right to make use of the pore                                                                                                                                                                                                                

 space's maximum capacity. That is what it obtained, and that is what it should pay for."                                                                                                                                                                                                                                   

 Kenai Landing relies on the "fullest extent rule," which presumes that "the appropriator                                                                                                                                                                                   

 will exercise [the rights acquired] and use and enjoy the property taken to the full                                                                                                                                                                                                                      

                             27        Kenai Landing faults the superior court for ruling that the fullest extent rule  


 applies only when determining the effect of a taking on the property retained by the  


 landowner following condemnation, a circumstance not present here.28  


                                                 We need not address that argument, because the superior court reached an  


 alternative holding as well:  "Even if the fullest extent rule were not limited to the realm  


 of severance damages," applying it in this case would conflict with Alaska law on just  


 compensation. The court explained that while Kenai Landing "seeks to value its storage  


 rights based on themaximumpossibleworkinggascapacity CINGSAcould theoretically  


 create,assumingextensive expensive investments ininfrastructure,"thecorrect standard  


 was "what price a market buyer would have paid for the pore space as it existed on the  


 date of taking."  


                         27                      Coos Bay Logging Co. v. Barclay                                                                                           , 79 P.2d 672, 677 (Or. 1938).                                                       

                         28                      See SACKMAN, supra  note 26,  14A.02[3] ("In considering the effect of the                                                                                                                                                                                  

 taking on the remainder, the after value must take into account the proposed use of the                                                                                                                                                                                                                     

project and the effect of that use on the remainder.                                                                                                                                  The landowner is entitled to assume                                                                     

 . . . that the taking authority will make the full use 'physically possible of any easement                                                                                                                                                                                           

 or land described in the taking certificate.' " (internal citation omitted) (quoting                                                                                                                                                                                                   2,953.15  

Acres of Land v. United States                                                                                 , 350 F.2d 356, 360 (5th Cir. 1965))).                                                                   

                                                                                                                                                     -16-                                                                                                                                              7364

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

                       In   Martens   v.   State   we   examined   how   a   change   in   zoning   laws,   and  

consequently a possible change in the property's "highest and best use," might affect its                                                         



value.         We recognized that when there is "a 'reasonable probability' of a change 'in the  


near  future'  in  the  zoning  ordinance  or  other  restriction,  then  the  effect  of  such  


probability upon the minds of purchasers generally may be taken into consideration in  



fixing present market value."                          If it was "reasonably probable" that zoning laws would  


change to allow a more valuable use of the property, a finder of fact could consider the  



change when determining just compensation. 


                       Regulatory approvals limited CINGSA's use of the Sterling C Reservoir  


to the storage of 11 Bcf of gas. Assuming that the reservoir could hold 19.54 Bcf of gas,  


CINGSA, like the builders in Martens, could not use the property in that way without  


first getting  permission  of the regulators.                                 The superior  court  recited  testimony  by  



Gentges, CINGSA's expert witness -whomthecourt specifically found to be credible 


-  minimizing  the  likelihood  that  CINGSA  would  ever  have  reason  to  seek  that  


regulatory approval:  

            29         554 P.2d 407, 409 (Alaska 1976).                



                       Id. (quoting Long Beach City High Sch. Dist. v. Stewart, 185 P.2d 585, 588  


(Cal. 1947) (en banc)).  

            31         Id.  

            32         We grant "[p]articular deference . . . to the superior court's credibility  


determinations."  Gold Dust Mines, Inc. v. Little Squaw Gold Mining Co., 299 P.3d 148,  


 166 (Alaska 2012); see also AAA Valley Gravel, Inc. v. Totaro, 325 P.3d 529, 531  


(Alaska 2014) ("[T]he trial court makes the credibility findings and weighs the evidence,  


not this court . . . .").  


                                                                       -17-                                                                  7364

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


                     For  [a  capacity  of  19.54  Bcf]  to  be  realized,  an  operator  


                     would  have  to  overcome  technical  problems,  engineering  


                     problems, and market demand problems.  Gentges testified  


                     about  those  problems,  which  include  the  fact  that  the  


                     feasibility of expansion had not yet been studied by or for  


                     CINGSA; the need to invest in infrastructure to increase both  


                     storage  and  deliverability;  well-pad  limitations;  and  the  


                     complexity of drilling in an area already riddled with existing  




                     . . . .  


                     Gentges testified that he was unaware of any evidence of  


                     demand for a working gas capacity beyond 11 Bcf, and that  


                     an  expansion  to  that  level  may  not  be  physically  or  


                     technologically  possible  or  feasible.                     The  actual  storage  


                     activity under the comparable leases after the date of taking  


                     gave no evidence of unmet demand.  


The evidence recited by the superior court supported its finding that a change in the  


approved storage capacity was not reasonably probable in the near future, as required in  


Martens for that change to affect value. Kenai Landing cites no evidence to the contrary;  


indeed, its expert witnesses at trial simply assumed the possibility of expanded use and  


did not explore its likelihood.  


                     Because the superior court did not clearly err when it found that a change  


in the property's current storage capacity was not reasonably probable in the near future,  


it properly declined to apply the fullest extent rule as urged by Kenai Landing.  


          D.	        The Superior Court Did Not Clearly Err By Including The Buffer  


                     Area When Valuing The Condemned Property.  


                     Kenai Landing also argues that the superior court erred when it calculated  


Kenai Landing's percentage of the condemned area - and thus its percentage of the  


area's value - based not only on the area of the Sterling C Reservoir itself but also  

                                                               -18-	                                                         7364

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

 including 722 acres of buffer zone.                                                                                                                                                Kenai Landing argues that by "assign[ing] equal                                                                                                                                                                                

value to land not used to store gas (i.e., the Buffer Zone) as though it were so used," the                                                                                                                                                                                                                                                                                                                                     

 court's analysis "dilutes the value assigned to the actual pore space" and "punishes                                                                                                                                                                                                                                                                                                        

 [Kenai Landing] based on CINGSA's arbitrary determination as to how much non-pore                                                                                                                                                                                                                                                                                                                

buffer area to include within its proposed 'storage boundary.' "                                                                                                                                                                                                                                                         

                                                                   The court included the buffer zone for valuation purposes based on the                                                                                                                                                                                                                                                                     

testimony of CINGSA's expert witnesses, whomthe court specifically found credible on                                                                                                                                                                                                                                                                                                                                                

this issue as on others.                                                                                         The court cited expert testimony that the only commercial value                                                                                                                                                                                                                                     

 of Kenai Landing's pore space was for gas storage, and "in reality, it had no use until                                                                                                                                                                                                                                                                                                                                

 someone put all of the necessary elements for a gas storage project together."                                                                                                                                                                                                                                                                                                                             Those  

necessary   elements   included   a   buffer   zone.     Three   of   CINGSA's   experts   testified  

 consistently that a buffer zone is "required for prudent operation" of a gas storage field,                                                                                                                                                                                                                                                                                                                          

that it is "important to the integrity of a gas field," and that "in the industry no difference                                                                                                                                                                                                                                                                                               

 is made in the leasing rates applicable to surface land over the reservoir area versus land                                                                                                                                                                                                                                                                                                                               

 located over                                                     the buffer                                              area."     As the superior                                                                                                  court recognized,                                                                             the   fact-finder   in  

 eminent domain proceedings has flexibility in determining the appropriate valuation                                                                                                                                                                                                                                                                                                           

                                                                                                                                                                    33            We cannot say that the court acted unreasonably in  

method under the circumstances.                                                                                                                                                                                                                                                                                                                                                                                                       

relying in large part on industry practice as described by witnesses it deemed credible.34  


                                  33                               See Babinec v. State                                                                                , 512 P.2d 563, 570 (Alaska 1973) ("[I]n partial taking                                                                                                                                                                                   

 cases, no rigid rules can be prescribed.                                                                                                                                                           The facts and circumstances of each case must                                                                                                                                                                      

be considered to determine the applicable formula." (quoting with approval                                                                                                                                                                                                                                                                                                           Territory of   

Hawaii v. Adelmeyer                                                                                       , 363 P.2d 979, 985 (Haw. 1961))).                                                                                                    

                                  34                               See United States v. Silver Queen Mining Co., 285 F.2d 506, 510 (10th Cir.  


  1960)  ("Some speculation  is inherent in  the ascertainment  of  value of all resource  


property, be it mineral, oil, gas or otherwise, and if the quality of proof of value follows  



                                                                                                                                                                                                               -19-                                                                                                                                                                                                     7364

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

                           Kenai Landing contends that industry practice cannot "dictate a rule that                                                                      

assigns the same value to [a] non-productive buffer zone as to the land that creates the                                                                                   

value - the productive pore space." In support of this proposition, Kenai Landing cites                                                                                 

                                                                                                                      35   in which it contends "the  

one case,            Consumers Power Co. v. Allegan State Bank                                                       ,                                                   

acquiring entity offered landowners much more (in excess of two and a half times as  


much)  to  acquire  rights  'in  the  productive  zone'  than  in  the  'buffer'  zone."                                                                                  But  


Consumers  Power  did  not  purport  to  apply  a  rule  requiring  different  values  for  


"productive" and "buffer" zones; the relevant portion of the decision only describes what  


the utility company offered.  And even that does not support Kenai Landing's position.  


The condemning authority  valued  storage rights equally in the buffer land and the  


storage  land;  the  difference  in  values  depended  on  whether  the  land  also  included  


minerals that were being acquired at the same time.36  


              34           (...continued)  


the custom of the industry, is the best available, and is sufficient to allow the jury or  


court to make an informed estimate as to the fact of value, such proof is sufficient to meet  


the burden.").  

              35            174 N.W.2d 578 (Mich. App. 1969).  


              36           Id. at 585-86 (excerpting testimony that utility witness calculated $200 per  


acre offered for land in productive area based on $7.50 per acre for storage rights and  


$192.50 per acre for producible gas, while $25 per acre offer in nonproductive area was  


likewise based on $7.50 for storage rights but only $17.50 for any minerals; and that  


even when value for nonproductive area was negotiated to higher rate of $75 per acre,  


change came from value of minerals rather than storage rights).  


                                                                                    -20-                                                                               7364

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

                                  We see no clear error in the superior court's finding that, consistent with   

industry practice, its valuation should include the buffer area at the same rate as the land                                                                                                                        

including the useable pore space.                                                    37  


                 E.	              The Superior Court Did Not Commit Clear Error When It Chose To  


                                  Credit An Expert's Valuation Methods.  


                                  Kenai Landing'sfinalargumentisthatoneofCINGSA's valuation experts,  


Louis Petho, did not properly carry out the "income" approach to valuation he claimed  


to be using.  Petho looked at comparable leased properties, determined the revenue they  


generated for the lessors, and divided the revenue by the number of leased acres to  


determine an annual per-acre lease rate, which he then applied to Kenai Landing's  


property to reach a total value of $47,500.  Kenai Landing faults this method because  


"[t]he leased properties in question[] were not leased on an annual-per-acre lease rate;  


they generally included only a very nominal per acre payment, and generated the bulk  


of their revenues from storage and injection fees paid." Kenai Landing argues that these  


revenue histories "tell us nothing about the probable revenue the Sterling C Pool, and  


 [Kenai Landing's] interest in same, can generate from gas storage."  


                                  The superior court found Petho's testimony "credible and reliable" and that  


he was "the most experienced in the valuation of gas storage rights" of the three expert  

                 37               The superior court also credited testimony that seismic data made available                                                                                           

to CINGSA after the condemnation showed that in fact there was "little usable pore                                                                                                                                

space below [Kenai Landing's] property," and "part or all of [Kenai Landing's] property                                                                                                                  

more likely than not lies outside the zero gas line" demarcating the boundary between   

productive and buffer areas. Because                                                           we affirmthe                      superior court's choice of a valuation  

method, we need not address the issue of whether Kenai Landing's interest inside the                                                                                                                                  

productive zone was in fact negligible, as one of CINGSA's experts characterized it.                                                                                                                                             

                                                                                                          -21-	                                                                                                   7364

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

appraisers who testified at trial.                                                                                                             But the superior court did not rely entirely on Petho's                                                                                                                                                          

testimony.   CINGSA called a second appraiser, Bernie Shaner, who identified what he                                                                                                                                                                                                                                                                                                    

considered to be problems with Kenai Landing's estimate of value.                                                                                                                                                                                                                                              Shaner "approved   

Petho's methodology, testifying that it is the one he uses and has seen used throughout                                                                                                                                                                                                                                                          

his  career,   [but]   he   did   not   approve   Petho's   analysis   wholesale."     Rather,   Shaner  

"conducted his own appraisal of [Kenai Landing's] interests, using all the comparable   

data relied on by both of the other appraisers" - Petho and Kenai Landing's expert,                                                                                                                                                                                                                                                                                

Gain.    After making some adjustments to Petho's numbers, Shaner came up with "a total                                                                                                                                                                                                                                                                                         

value of $64,754 for [Kenai Landing's] three parcels, which he rounded up to $65,000."                                                                                                                                                                                                                                                                                                               

                                                            The superior court observed that "Petho, Gentges, and Shaner all testified                                                                                                                                                                                                                         

that Petho's method is the one actually used by the market throughout the natural gas                                                                                                                                                                                                                                                                                              

storage industry," whereas the method proposed by Gain - a "discounted cash flow                                                                                                                                                                                                                                                                                             

analysis"that                                               assumed certainhypothetical                                                                                                       injectionandwithdrawal                                                                                       rates for                            CINGSA's  

stored gas - "is a novel approach that is not in use in the storage industry."                                                                                                                                                                                                                                                                       The court   

found "that Petho's method is the appropriate method to value the subject property and                                                                                                                                                                                                                                                                                            

further accept[ed] Shaner's review adjustment of his opinion to find $65,000 as just                                                                                                                                                                                                                                                                                             

compensation for the gas storage easement . . . ."                                                                                                                                                                             

                                                            Again, we note the fact-finder's flexibility in determining the appropriate                                                                                                                                                                                                        

                                                                                                                                                                                                                                                                           38  the relevance of industry  

valuation methodology under the circumstances of the case,                                                                                                                                                                                                                                                                                                    

custom,39  and the deference we give to the superior court's credibility determinations.40  


                              38                            See Babinec                                            , 512 P.2d at 570.                                        



                                                            See Silver Queen Mining Co., 285 F.2d at 510.  



                                                            Gold Dust Mines, Inc. v. Little Squaw Gold Mining Co., 299 P.3d 148, 166  


                                                                                                                                                                                         -22-                                                                                                                                                                                7364

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

We conclude that the superior court did not clearly err when it relied in part on Petho's                                                                                                                                                                              

methodology in crafting its valuation.                                                       

V.                    CONCLUSION  

                                            We AFFIRM the judgment of the superior court.                                                                                                   

                         40                  (...continued)  


(Alaska 2012).  

                                                                                                                                          -23-                                                                                                                                  7364  

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