CINGSA wins rights to storage space

The Alaska Supreme Court has decided that Kenai has no claim to the gas storage rights used by Cook Inlet Natural Gas Storage Alaska, a company which injects natural gas into a porous sandstone formation lying below city property in and around the mouth of the Kenai River.

In an opinion issued Friday, the Alaska Supreme Court justices acknowledged the difficulty of the case, writing that “there is a notable lack of consensus in the courts and among legal scholars on the issue of pore-space ownership.”

This lack of consensus allowed Kenai to claim a right to the underground storage space as the owner of the surface above it, and for CINGSA to claim the storage space for the holders of the mineral rights — itself and its co-defendants, the state and Native Corporation Cook Inlet Region, Inc. CINGSA began operating in 2012, storing gas belonging to other utilities in a porous underground sandstone layer for withdrawal during the higher-demand winter season. Kenai, owner of approximately 1,100 acres of land above the CINGSA storage area, claimed it should be compensated for storage beneath 576 of those acres. In March 2012 CINGSA brought the disagreement to Kenai’s superior court, where Judge Carl Bauman decided in favor of CINGSA and the mineral rights holders, giving no compensation to Kenai and ruling that the city pay CIRI $22,916 in court fees.

Kenai appealed both decisions to the Alaska Supreme Court, where the case was heard on Sept. 17, 2015.

Arguing on behalf of Kenai, attorney Bruce Falconer made a case for the city’s gas storage rights based on the Alaska statute by which the state reserves for itself mineral rights — listed in the statute as “all oils, gases, coal, ores, minerals, fissionable materials, geothermal resources, and fossils of every name, kind, and description.”

Falconer argued that this specific list does not include pores, which as empty spaces within a mineral body could not themselves be minerals.

Because gas storage takes place within the pores of a sandstone formation rather than in the stone itself, the rights to storage could not be reserved for the state as a mineral and were therefore not covered by the statute. Citing a precedent called the “American Rule,” Falconer argued that the question of gas storage rights relied instead on the deed giving the land’s surface to Kenai from the state.

Originating in hard-rock mining law, the American Rule gives vacant caverns from which minerals have been extracted to the owners of the land above, rather than to the mineral right owner.

Before being used for storage by CINGSA, the formation below the Kenai River had been a producing gas field owned by Marathon Oil, until it was depleted. Falconer argued that this made it similar to the 1978 Oklahoma district court case Ellis v. Arkansas Louisiana Gas Company,” in which a surface owner was given compensation for subterranean gas storage based on the American Rule.

In its Friday opinion, the Alaska Supreme Court rejected Falconer’s points, ruling that gas storage is a mineral right covered by the statute rather than a right belonging to the deeded surface owner via the American Rule.

In addition to the unclear concept of gas storage rights, the Supreme Court’s opinion points out another ambiguous term: “mineral.”

“’Minerals’ are not defined by the Alaska Land Act,” the justices wrote. “Nor have we defined the term in the context of (the mineral reservation statute), though we have stated that the question of what is a mineral is a vexatious one. Other courts have concluded that that the meaning of ‘minerals’ is ambiguous and have interpreted the term broadly…”

In the absence of a clear definition, the justices wrote that they defined the “minerals” referred to in the mineral reservation statute by reading the statute according to its intent.

“To establish the meaning of a statute, we examine both its text and its purpose,” the justices wrote in their opinion. “We give statutory language a reasonable or common-sense construction, consonant with the objectives of the legislature.”

The justices cite another rule in their reading of the statue.

“We also apply the rule of statutory interpretation that ambiguities in the public land grants are resolved strictly against the grantee and in favor of the government,” the justices wrote in their opinion.

With this principal, the justices rejected the idea that the state’s mineral rights do not include pore space as “too simplistic.”

“The matrices that create pore space and give it form — such as dolomite, limestone, lignite, and sandstone — are certainly mineral,” the justices wrote in their opinion. “Without these minerals, the pore space would not exist.”

The justices accepted this pore-inclusive definition of mineral rights as “supported by the (mineral reservation) statute’s apparent purpose.”

“We have recognized that the overall purpose of the Alaska Land Act is to maximize revenue for the state and have interpreted sections of it as intended to provide for orderly oil and gas leasing that maximizes state return on its oil and gas resources… CIRI and the State thus argue that interpreting “minerals” to include pore-space rights better serves various legislative goals: pore space itself is a valuable State resource, its ownership is unnecessary to the full enjoyment of the surface estate, and treating pore space differently from the rest of the mineral estate would be problematic for purposes of planning, leasing, and management.”

CINGSA v. City of Kenai was the Supreme Court’s first ruling on a gas storage rights case. Kenai city attorney Scott Bloom said it was precedent-setting.

“The law in Alaska is now that pore space belongs to the mineral estate,” Bloom said.

 

Reach Ben Boettger at ben.boettger@peninsulaclarion.com.

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