Alaska Supreme Court to decide CINGSA versus Kenai case

The Alaska Supreme Court will decide whether Kenai should be compensated for gas stored beneath its land by the Cook Inlet Natural Gas Storage Alaska, LLC.

Kenai’s Supreme Court appeal of its lawsuit with the natural gas company, CINGSA, had an oral argument last month and is now awaiting a judge’s decision, which Kenai City Attorney Scott Bloom said he expects to be released within six months to a year.

CINGSA has its above-ground address on Kenai’s Beaver Loop Road, but the bulk of the facility lies 6,690 feet below the Kenai River flats in a sandstone slab. During the summer, CINGSA stores natural gas for the high-demand winter period by pumping it into the microscopic pores of the sandstone, which sprawls beneath approximately 560 acres of land and is hedged with a 722 acre buffer zone. Approximately 1,100 of those acres are owned on the surface by the City of Kenai. In a Sept. 17 hearing, Kenai’s lawyer Bruce Falconer argued that as a surface landowner, Kenai can also claim the subterranean pore space and deserves compensation alongside the land’s two mineral right holders — the state of Alaska and the Native Corporation Cook Inlet Region, Inc. (CIRI). Lawyers representing the state, CINGSA, and CIRI argued that Kenai had no claim to the pore space.

CINGSA’s sandstone formation — known as the Cannery Loop Sterling C pool — previously contained naturally-occurring gas extracted by Marathon Oil.

Marathon sold its lease on the formation to CINGSA after it believed that gas within was depleted beyond the point of economic recovery. The 2012 discovery of 14.5 billion cubic feet of unextracted native gas within the CINGSA reservoir is the subject of a different pending case before Alaska’s Regulatory Commission — the body that regulates the state’s utilities — to determine the ownership of this gas.

In a March 2015 letter to the Regulatory Commission, Kenai City Manager Rick Koch wrote that the city may have an interest in this new gas.

CINGSA first brought the question of compensation for storage to the Alaska Superior Court in April 2012, asking for a decision of whether Kenai was owed compensation, and if so, how much.

In July 2014 the court ruled in favor of CIRI, the state, and CINGSA with a judgement stating “the City of Kenai, as the surface owner, has no interest in the mineral estates, including all gas storage rights.” In addition, the Superior Court ruled that Kenai owes CIRI a $22,916 court fee.

The Sept. 17 hearing in Anchorage was part of Kenai’s appeal of that ruling to the Supreme Court, which began in November 2014. Falconer cited a precedent — which he referred to as “the American Rule” — of giving mineral rights to surface owners. Falconer cited the ruling of a similar gas storage dispute — the 1978 Oklahoma district court case “Ellis v. Arkansas Louisiana Gas Co.” — as a source of the American Rule, which he said originated in hard mineral mining law and was applied by the Ellis court to natural gas storage. According to the Ellis decision, quoted in Falconer’s brief, “the English and Canadian rule is that the cavern which remains in the land after the hard minerals are mined is owned by the mineral interest owner; the American rule is that the cavern is owned by surface owner.” In the Ellis case, a surface owner was given compensation for subterranean gas storage on this basis.

Falconer argued that the caverns and minerals referred to in hard mineral law were analogous, through the Ellis ruling using the American Rule, to the gas and pore spaces in the CINGSA storage facility.

CIRI Lawyer Kate Demerest said the Ellis case and others Falconer referred to were not applicable comparisons because they were based on commercial deeds rather than government statutes.

Assistant Attorney General John Hutchins, representing the state, wrote in his brief that the American Rule as construed by the city was not applicable in Alaska because “it comes from a world in which ownership of mineral rights is not, as a norm, severed from ownership of surface rights and surface owners typically grant temporary mineral development rights to third parties while retaining a reversion” — that is, the mineral right-holders’ claim expires and returns to the surface owner, rather than remaining in the state’s hands “forever,” as stated in Alaska statute. Hutchins wrote that in the Lower 48, mineral-rights owners are more commonly private entities, and their relations with surface owners are therefore governed by deeds rather than by government statutes, as in Alaska.

CINGSA lawyer Matt Findley concluded that “all of the City’s cited decisions only show that some courts in the United States have concluded that specific deeds conveying a specific type of mineral right do not also convey or reserve storage rights. These conclusions provide little guidance here, particularly given that the outcome here is governed not by simple deed language, but by the Alaska Land Act.”

Under Chapter 35 of Alaska statute, the state reserves mineral rights for itself when it grants surface land to municipalities, as it granted Kenai the land within CINGSA’s boundary in 1964 and 1977. The list of rights reserved in Alaska’s mineral estate do not explicitly include gas storage rights. CIRI, CINGSA, and Alaska have argued that gas storage is implied in these listed rights by the context of the statute.

Demerest argued that gas storage rights are included in the state’s reservation by the intent of the 1959 Alaska Land Act, which she said the statute codifies. In a previous case, the Alaska Supreme Court interpreted the Land Act’s purpose to be “provid(ing) for orderly oil and gas leasing that maximizes the state return on its oil and gas resources.” Demerest wrote in her brief that gas storage is included under the statute’s listing in the mineral reservation of “generally all rights and power in, to, and over said land, whether herein expressed or not, reasonably necessary and convenient to render beneficial and efficient the complete enjoyment of the property and rights hereby expressly reserved.”

CINGSA’s lawyer Matt Findley wrote that the reservation of mineral rights statute should be read in context of a later statute provision allowing the state to authorize gas storage. Findley wrote that this authorization “encompasses lands where the State has conveyed the surface and retains only the Reserved Rights,” as is the case in Kenai’s contested land.

Findley wrote that the state has previously treated gas storage as part of its mineral estate, giving a gas storage lease to Marathon Oil Company for the Kenai Gas Field in 2006.

Falconer also argued was that pore space was excluded from the state’s reserved mineral rights by the definition of mineral — which he said cannot include pore space in which minerals are absent.

In response to a question from Justice Peter Maassen, who asked whether Falconer considered the definition of ‘mineral’ to include the sandstone in which CINGSA stores gas, Falconer said that what makes CINGSA’s storage possible is not the sandstone itself but the space within the sandstone. Because this empty space is not a mineral, it is separate from the mineral estate belonging to Alaska and CIRI.

“Sandstone is included (in the state’s reserved mineral rights), and it’s there, but what makes gas storage possible is the absence of what was reserved: a mineral — gas — that’s been removed,” Falconer said. “So it’s the absence of something that allows this activity to occur.”

In opposition to Falconer, CIRI’s lawyer Kate Demerest proposed a less porous definition of “mineral.”

“As many courts have recognized, the term ‘mineral’ is broad and ambiguous and can be interpreted to include everything inorganic. The sands in which natural gas flows, and the gas itself, are plainly “minerals” under any reading of that term,” Demerest wrote in her brief. “Reservation of minerals must include reservation of subsurface sand formations in their entirety, including the tiny spaces within the sands. This is especially true where this pore space is not empty, but rather, still contains native natural gas belonging to the mineral owner… There are never “empty spaces” in the sands.”

Hutchins backed up Demerest’s definition by rejecting the term “pore space” as a misleading description of the sandstone pores, which he wrote contain a mixture of air and gas, a recognized mineral.

Reach Ben Boettger at ben.boettger@peninsulaclarion.com

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