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A field access problem
Court order appealed over permit for Oil Search use of Kuparuk River road system
Alan Bailey for Petroleum News
On Dec. 17 the Alaska Superior Court issued an order cancelling a state permit that would have allowed Oil Search (Alaska) LLC free use of ConocoPhillips' Kuparuk River unit road system for access to the Pikka oil field for the construction and operation of the field. The Pikka field lies to the west of the Kuparuk River field. And on Dec. 23 and 24 Oil Search and the Alaska Department of Natural Resources filed requests with the Alaska Supreme Court, asking the Supreme Court to stay the Superior Court decision, pending an appeal of that decision.
Oil Search has been using Kuparuk River roads free of charge for access to the Pikka oilfield region for exploration and pre-development activities. But, given the much more extensive activity involved in field development and operation, ConocoPhillips wants to charge Oil Search for its future use of the road system. ConocoPhillips has testified to the court that it cost more than $1 billion to construct the road system and that maintenance of the system costs $10 million to $20 million per year.
The companies had been trying to negotiate a commercial agreement for the use of the roads, but these negotiations stalled, with the companies unable to agree on an acceptable fee structure for the road use. Subsequently, in February 2022 Oil Search applied to the Alaska Department of Natural Resources for a miscellaneous land use permit that would allow Oil Search free use of the Kuparuk River unit roads. In March 2022 DNR issued a permit that would grant Oil Search free use of 75.5 miles of roadway. Subsequently on Dec. 30, 2022, ConocoPhillips appealed the permit decision in the Superior Court. Hence the court decision cancelling the permit.
Access to state land Under state laws and regulations the operator of oil and gas leases has the right of access to the leased land across state land, regardless of whether the land that needs to be crossed is leased to another entity. The key question at the core of the legal arguments in the court case is whether this right of access includes access both to the land and any improvements to the land, such as roads, that the other entity has constructed. Does DNR have the authority to exercise control over private leasehold improvements? And would the state approval of Oil Search's free use of Kuparuk River roads violate the U.S. and state constitutions, as a consequence of a government "taking" of private property without appropriate compensation?
In canceling the state permit the court argued that the DNR does not have the authority to control access to ConocoPhillips' private leasehold improvements. Moreover, any reference to the state's right to enter and use state land only refers to the land itself, and not to any improvements to the land, the court wrote.
"Because DNR did not reserve the right to grant third-party use of CPAI's improvements, the permit must be revoked on this basis alone," the court wrote.
Land and land improvements are different Moreover, none of the state statutes that relate to the issuance of the miscellaneous land use permit consider the land itself and improvements to the land to be the same entities, the court argued. And the court dismissed a DNR claim that state regulations would enable the agency to grant third party use of a facility constructed by a lessee on state land.
The court also argued that there is no evidence that ConocoPhillips has impeded Oil Search's actions and that, in addition to allowing Oil Search to use the Kuparuk River roads while the court case progresses, ConocoPhillips has been seeking a commercial agreement for road use. Moreover, while granting uncompensated use of the Kuparuk River road system would amount to an unconstitutional take of private property, there is an eminent domain process for dealing with this type of situation, the court said.
Based on the court's ruling, and in the absence of a commercial agreement for Oil Search's use of the Kuparuk River roads, Oil Search would presumably need to build its own road for access to Pikka, at considerable cost and with the environmental impacts of road construction.
Requests for a stay Subsequent to the court decision, Oil Search and DNR have requested the state Supreme Court to stay the Superior Court decision pending an appeal. DNR argues a precedent that in 1982 the state permit for the construction of an oil field road to Oliktok Point on the Beaufort Sea coast had included a condition that the state could approve other uses of the road as long as this did not involve unreasonable interference with the original purpose of the road. And the miscellaneous land use permit for Oil Search's use of the Kuparuk River roads includes terms and stipulations to protect ConocoPhillips' interests, DNR wrote.
ConocoPhillips has opposed the stay request, arguing that the commercial terms that it had offered for the use of its road system were reasonable and that ConocoPhillips had no desire to prevent Oil Search from using the Kuparuk River road system. In its latest proposal ConocoPhillips has offered Oil Search's use of the Kuparuk River unit roads at a cost of $7 million per year, which is a fraction of the $3-$4 million that Oil Search claims it spends per day on the Pikka Unit, ConocoPhillips told the court. Moreover, Oil Search has not countered ConocoPhillips' offers for more than a year, ConocoPhillips told the court.
In a filing in the Superior Court case Oil Search claimed that ConocoPhillips unreasonably wants to use a road use "access fee" to recover unspecified road-related capital costs dating back as far as 40 years. Oil Search told the court that it is committed to paying its proportional share of the operation and maintenance costs, and a share of future capital improvements. In another court filing ConocoPhillips told the court that in the course of negotiations, ConocoPhillips had offered to reduce its road use fees to around 50% of the market price that Oil Search wants to charge for the use of its own roads.
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