Point Thomson - Where to From Here?

In order to understand the Court’s January 11, 2010 decision, a review of what the court told DNR and the Point Thomson Unit (PTU) Owners in the December 26, 2007 decision is necessary.

In the December 26th opinion the court addressed two issues: (1) the Department’s rejection of the Lessees’ proposed modified 22nd Plan of Development (POD) for the PTU, and (2) the Department’s termination of the PTU.

Regarding the Department’s rejection of the 22nd POD the Court determined that DNR had the authority to administratively decide whether a proposed plan of development should be accepted or rejected and cited Section 10 of the PTUA which states that the POD “shall be as complete and adequate as the Director may determine to be necessary for timely development and proper conservation of the oil and gas resources of the unitized area…” As to the standard of review the Court would apply to DNR’s decision, the court stated that the court’s “review of those determinations ‘would need to be appropriately deferential’ such that the reasonable basis test would apply.”

“Under the reasonable basis standard of review for administrative decisions involving complex issues involving agency expertise, the court is to give deference to the agency’s determination so long as it is reasonable, supported by evidence in the record as a whole, and there is no abuse of discretion.”

What this meant to the PTU Owners is that DNR had broad discretion to accept or reject a POD and if the PTU Owners wanted to have an approved POD they would have to listen to what DNR requested and respond accordingly.

Regarding the Department’s termination of the PTU, the PTU Owners argued that the termination could only occur by bringing action in State Court. The court disagreed and stated that termination could occur through administrative action, but the court then went on to state that Unit termination was just one of the remedies for rejection of a POD and that DNR did not provide the Unit Owners with an opportunity for a hearing on the appropriate remedy to the State upon DNR’s rejection of the proposed 22nd Plan of Development. The Court remanded the matter to DNR to conduct a hearing on the appropriate remedy.

The court provided DNR with two statements of guidance regarding its review of the appropriate remedy for rejection of the POD. The first came in footnote 7 on page 24 of the opinion. There the court stated:

“But see Section 21, second paragraph, of the PTUA as modified in 1985. [R. 794] That revision specifies that the Department may not require any increase in the rate of production or development “in excess of that required under good and diligent oil and gas engineering and production practices.” This section may well have applicability when determining the appropriate remedy when DNR rejects a proposed plan of development. See discussion, infra.”

The second came near the end of the opinion at page 42:

“Accordingly, this matter is remanded to the DNR for the purpose of according to the Appellants a hearing on the appropriate remedy to the State upon DNR’s rejection of the proposed 22nd Plan of Development. On remand, the agency should also consider the import of Section 21 of the PTUA, as amended in 1985, in determining the appropriate remedy.”

A statement like this is comparable to telling DNR they have the right to determine the remedy for a rejection of a POD, and Unit termination is one of those options, but the DNR should apply the standards in Section 21 to make that determination.

Subsequent to the issuance of the above opinion, recognizing what the court said about DNR’s authority to reject a POD and possibly terminating the Unit, the PTU Owners submitted a 23rd POD substantially committing to everything DNR had previously requested: an unequivocal commitment to bring the unit into production.

DNR granted the PTU Owners a hearing and considered Section 21 as the court requested but determined that Section 21 did not apply to its analysis of remedies. DNR then rejected the PTU Owners proposed 23rd POD and terminated the Point Thomson Unit without applying the standards set out in Section 21 of the PTUA.

With the above as background this document will now analyze the January 11, 2010 Superior Court Decision.

The second sentence in the first paragraph provides a concise statement of the next 30 pages of analysis, “…the contractual agreement between DNR and the Appellants precludes termination of the Point Thomson Unit in these circumstances without consideration of good and diligent oil and gas engineering and production practices, …” .i.e., the DNR did not consider the standards set out in the second paragraph of Section 21 as the court told them to do; therefore, DNR may not terminate the Point Thomson Unit.

In its analysis the court found that the interpretation of Section 21 is “dispositive of this appeal.” The PTU Owners argued that DNR was required to comply with the provisions of Section 21 and DNR argued that Section 21 did not apply to its remand proceedings.

If Section 21 does not apply to DNR’s POD decision, then the burden for coming up with an acceptable POD lies with the PTU Owners and DNR is not obligated to propose or identify conditions that would lead to an acceptable POD. If Section 21 applies to DNR’s review of remedies for a rejected POD, then DNR has a burden to identify conditions that would lead to an acceptable POD.

DNR proposed five reasons why Section 21 should not apply to its remand decision and the court systematically disposed of each. The crux of the Court’s decision came with its response to DNR’s fifth reason: an impermissible shift of burden to DNR to determine the appropriate rate of production. The DNR argued that if it were required to comply with the standards set out in Section 21, the agency would be inappropriately “saddled with the burden of designing an adequate POD.” The Court recognized that burden but considered it a reasonable contractual obligation for DNR to meet and in a footnote implied that DNR was not in as bad a position as it supposed and that DNR could probably require the Unit to go into production or be terminated.

The Court then determined that the PTU Owners did not receive a Section 21 hearing and that further proceedings were necessary.

The next issue the Court addressed was a due process concern. The PTU Owners argued that the dispute should be referred to an independent hearing officer or, in the alternative, the Court should grant a trial de novo. DNR argued that the due process concern should be addressed first before the trial de novo decision was made.

The court stated that “An impartial tribunal is basic to a guarantee of due process” and found a due process violation in DNR's process because the attorneys advising the Commissioner were the same attorneys that represented the agency on the first appeal and because Ms. Nan Thomson served as both the hearing officer at the remand proceeding and previously as DNR’s representative when the agency was defending its first decision in the 2007 appeal before the Court.

Once the Court made a finding of a due process violation the only remaining issue was whether the court should remand the matter to DNR for an administrative proceeding in accordance with this decision or retain jurisdiction and conduct a de novo trial. The court then gave both parties 30 days to submit additional briefing on this issue.

This places DNR in the interesting position of arguing to the Court that it should be granted the right to conduct a Section 21 hearing and that it can effectively apply the Section 21 standards to the issues before it when it had previously argued so vehemently that Section 21 standards should not apply. It will be interesting to see if the Court grants DNR the right to hold the hearing or if the Court has lost so much trust in the agency that the court retains jurisdiction and makes the determination itself.

In summary, the Court determined that the Section 21 standards applied to DNR’s decision requiring DNR to identify for the PTU Owners those conditions that the DNR considers necessary for approval of an acceptable POD, and if DNR is granted the right to conduct a Section 21 hearing, it must be conducted by an impartial hearing officer.