Marathon Oil Co. v. State

• Decision Date: 10 June 2011
• Docket Number: No. S–13771.,S–13771.
• Citation: 254 P.3d 1078
• Parties: MARATHON OIL COMPANY, Appellant,v.STATE of Alaska, DEPARTMENT OF NATURAL RESOURCES, Appellee.
• Court: Alaska Supreme Court

254 P.3d 1078

MARATHON OIL COMPANY, Appellant,

v.STATE of Alaska, DEPARTMENT OF NATURAL RESOURCES, Appellee.

No. S–13771.

Supreme Court of Alaska.

June 10, 2011.

Rebecca S. Copeland, Kyle W. Parker, and David J. Mayberry, Crowell & Moring LLP, Anchorage, for Appellant.Martin T. Schultz, Assistant Attorney General, Anchorage, and Daniel S. Sullivan, Attorney General, Juneau, for Appellee.Before: CARPENETI, Chief Justice, FABE, WINFREE, and STOWERS, Justices.

OPINION

FABE, Justice.I. INTRODUCTION

Gas producers that lease land from the State of Alaska must pay royalties calculated on the value of the gas produced from the leased area. This royalty payment can be calculated under one of two methods: (1) “higher of” pricing or (2) contract pricing. “Higher of” pricing is the default. Computing the royalty owed under “higher of” pricing involves sophisticated calculations using market data and the prices of other producers. The Department of Natural Resources (DNR) usually does not calculate the royalty payment under “higher of” pricing until years after the time of production, once an audit can be completed. In order to pay royalties under contract pricing, the lessee must first request that form of payment calculation from DNR. Under contract pricing, the lessee's price at which it sells gas is used to determine the lessee's royalty payment.

Marathon Oil Corporation (Marathon) began production in the Ninilchik gas field in 2003. In 2008, before completion of the audit to determine the “higher of” royalty payment for 2003–2008, Marathon requested contract pricing from DNR. Marathon requested contract pricing for the period of 2008 onward and sought retroactive application of contract pricing to the 2003–2008 period. DNR approved Marathon's request for contract pricing from 2008 onward but denied the request to apply contract pricing to production prior to 2008. Marathon appealed to the superior court, which affirmed DNR's ruling. Marathon appeals.

Marathon has three arguments. First, Marathon argues that the statute that governs contract pricing—AS 38.05.180(aa)—permits retroactive application of contract pricing and that DNR was wrong to deny Marathon's request. We conclude that the statute is ambiguous, and because DNR's interpretation is longstanding and has a reasonable basis in the statute, we defer to its interpretation. Second, Marathon argues in the alternative that even if DNR's interpretation of the statute is valid, DNR was obliged to promulgate its interpretation as a regulation before applying it to any party. We conclude that DNR's interpretation is a rule of internal agency procedure and therefore did not have to be issued as a regulation. Third, Marathon argues that DNR's treatment of Marathon violated due process. We conclude that Marathon's due process rights were not violated. We therefore affirm the superior court's decision upholding DNR's order.

II. FACTS AND PROCEEDINGS

Marathon leases land from the State of Alaska for the purpose of producing natural gas. Marathon has many natural gas leases on the Kenai Peninsula, including one at Ninilchik.

Gas lessees must pay a royalty to the State in the amount of 12.5% of the value of the gas produced in the leased area. Determining the value of the gas produced for the purpose of calculating this royalty is usually done through “higher of” pricing. The value of the gas produced is deemed to be the highest of four possible prices.¹

Lessees must deliver royalty payments on or before “the last day of the calendar month following the month in which the oil, gas, or associated substances are produced.” But the four values needed to calculate the royalty under “higher of” pricing are usually not determined until several years after the time of production, after DNR performs an audit. After the audit, a lessee's royalty liability is often “re-adjusted upward.”

In 1986 the legislature amended the royalty statute.² The amendments, codified in AS 38.05.180(aa) and AS 38.05.180(bb), allowed lessees to request contract pricing rather than the default “higher of” pricing. Contract pricing permits lessees to use the price at which they sell gas to Alaska utilities as the price on which royalties will be calculated. The stated purpose of the 1986 amendments was to benefit utility consumers.³ The contracts between gas producers like Marathon and gas-purchasing utilities had historically allocated the risk of higher royalty payments to the utilities. That is, producers sold gas to utilities under a long-term contract with a fixed price for gas. If the market price of gas rose above the contract price, producers had to pay higher royalties. Under the terms of their contracts with utilities, they could pass on this added expense to utilities. Utilities would then pass the expense along to their consumers. The 1986 amendments allowed lessee-producers to use their contract price as the royalty price, thus avoiding this possible increase in consumers' utility bills.

In 1995 DNR leased lands in the Ninilchik Unit on the Kenai Peninsula to Marathon for the purposes of gas production. Marathon began production on this land in 2003. In 2008 Marathon requested contract pricing from DNR, both for future production and for past production between 2003 and 2008. DNR approved Marathon's request for contract pricing from 2008 forward but rejected the request for the 2003–2008 period. The commissioner stated that he “decline[d] to grant retroactive approval under the terms of the statute.” Marathon requested reconsideration, arguing that AS 38.05.180(aa) permitted retroactive approval. DNR affirmed its earlier decision, reasoning that “AS [3]8.05.180(aa) does not authorize the Department of Natural Resources to grant retroactive approval.” Marathon appealed, and the superior court affirmed DNR's order. Marathon appeals.

III. STANDARD OF REVIEW

We interpret statutes “according to reason, practicality, and common sense, taking into account the plain meaning and purpose of the law as well as the intent of the drafters.” ⁴ We decide questions of statutory interpretation on a sliding scale: “[T]he plainer the language of the statute, the more convincing contrary legislative history must be.” ⁵ We use one of two standards to review agency interpretations of statutes.⁶ We apply the reasonable basis standard, under which we give deference to the agency's interpretation so long as it is reasonable, when the interpretation at issue implicates agency expertise or the determination of fundamental policies within the scope of the agency's statutory functions. ⁷ We apply the independent judgment standard, under which “the court makes its own interpretation of the statute at issue, ... where the agency's specialized knowledge and experience would not be particularly probative on the meaning of the statute.” ⁸ We give more deference to agency interpretations that are “longstanding and continuous.” ⁹

It is DNR's job to manage the state's resources and to collect royalties from gas lessees.¹⁰ We have explained that the reasonable basis standard is appropriate when an agency's adjudication of a regulated party's claim “requires resolution of policy questions which lie within the agency's area of expertise and are inseparable from the facts underlying the agency's decision.” ¹¹ The question whether to allow retroactivity lies within DNR's expertise. Allowing retroactivity could have important consequences for how royalties are assessed and paid. The state royalty and audit system is complicated, and DNR has expertise in deciding when retroactive application makes sense within that system.¹² In Alaska International Construction v. Earth Movers of Fairbanks, we explained that “ ‘the comparative qualification of court and agency to decide the particular issue’ [is] the most important factor for whether a court should substitute its judgment for that of an agency's.” ¹³ Here, where the question implicates “special agency expertise” and is not “merely ... a question of statutory interpretation,” we use the reasonable basis standard.¹⁴

IV. DISCUSSIONA. DNR's Interpretation Of AS 38.05.180(aa) Is Reasonable.

In 1959, shortly after statehood, the legislature passed the Alaska Land Act and gave DNR the responsibility for managing state- owned land. ¹⁵ The Alaska Land Act provided that state lands were open to oil and gas development and gave DNR the power to lease state lands for that purpose. ¹⁶ The Alaska Land Act required that DNR, when it leased state land, collect a royalty of at least 12.5% of the value of all oil and gas produced. ¹⁷ To determine a lessee's royalty obligation, DNR must calculate the value of the oil and gas produced by the lessee. To determine the value of the oil and gas produced by a lessee, DNR historically has not used the price at which the lessee actually sold its oil or gas. Rather, DNR has used an approximation of market price. In its lease agreements, DNR has obligated lessees to pay 12.5% of the “higher of” four different values.¹⁸ These four values are designed to estimate the market price of oil and gas. The goal of “higher of” pricing is to ensure the state's royalty is not based on a below-market sales price.

The 1986 amendments to the Alaska Land Act allowed lessees to calculate their royalty obligations using a different, potentially more favorable method. The amendments permitted lessees to use the price at which they contracted to sell gas to Alaska utilities as the basis for calculating the state's royalty. ¹⁹ To use this “contract” price, the lessee must apply and receive permission from DNR.²⁰

The question presented is whether a lessee must apply for contract pricing before production actually occurs. For at least ten years, DNR has interpreted the 1986 amendments as permitting DNR to approve contract pricing only for future production. Thus, a lessee can apply to have contract pricing used to calculate its royalties for future production, but...