CITY OF KENAI v. COOK INLET NATURAL GAS STORAGE ALASKA LLC (2016)

OPINION

I. INTRODUCTION

This case involves competing claims of right to the pore space in a large limestone formation about a mile underground. Cook Inlet Natural Gas Storage Alaska, LLC (CINGSA) has leases with the holders of the mineral rights—the State of Alaska and Cook Inlet Region, Inc. (CIRI)—that allow it to use the porous formation as a reservoir for storing injected natural gas. But the City of Kenai, which owns a significant part of the surface estate above the reservoir, claims an ownership interest in the storage rights and sought compensation from CINGSA. CINGSA filed an interpleader action asking the court to decide who owns the storage rights and which party CINGSA should compensate for its use of the pore space. On summary judgment CINGSA argued that CIRI and the State own the pore space and attendant storage rights because of the State's reservation of certain subsurface interests as required by AS 38.05.125(a). The superior court granted CINGSA's motion. The City appeals both the grant of summary judgment and the superior court's award of attorney's fees to CIRI.

We affirm, concluding that the State and CIRI own the pore space and the gas storage rights and that the superior court's award of attorney's fees to CIRI was within its discretion.

II. FACTS AND PROCEEDINGS

A. Facts1. The Cannery Loop Sterling C Reservoir Gas Storage Facility

The Cannery Loop Sterling C Gas Reservoir is located approximately a mile below the Kenai River. The reservoir began producing natural gas in 2000; gas was extracted from the “microscopic spaces between or within rocks” in the reservoir and from natural pools contained by “[s]urrounding formations of denser, nonporous rock.” The reservoir's gas supply was eventually depleted.¹

Once gas is extracted from sedimentary rock, the emptied pore space—“microscopic spaces between or within rocks”—can be used to store “non-native gas,” gas that has been extracted elsewhere. This method of gas storage can help stabilize supply and accommodate seasonal fluctuations in demand; utilities can store non-native gas in the summer and withdraw it in the winter when demand is higher. When the Sterling C Reservoir had been economically depleted, CINGSA, a public utility, proposed to convert the gas field into a storage facility for non-native gas owned by other gas and electric utilities in Southcentral Alaska.

CINGSA first had to acquire the necessary property rights from the owners of different interests in the surface and subsurface. It acquired many of those rights through negotiation and, where necessary, the process of eminent domain, available to CINGSA as a public utility. The only surface estate at issue here is that belonging to the City of Kenai, amounting to approximately 576 acres .² The rights to minerals underlying the property belong to the State of Alaska and Cook Inlet Region, Inc. because of mineral reservations required by the Alaska Land Act.³ CINGSA concluded that the State and CIRI held title to the pore space because they owned the mineral rights, and in 2011 it therefore sought and obtained leases from those entities.

2. Ownership of the surface and mineral estates

a. The surface estate

The City of Kenai received a patent for the relevant surface acreage in 1964, subject to the reservation of rights to the State required by AS 38.05.125(a) for all conveyances of State land.⁴ The mineral reservation in the patent recites the statutory language almost verbatim.

In 1973 the State granted oil and gas leases in the property and other surrounding lands to Marathon Oil Company. The leases reserved the State's right to dispose of the surface estate,⁵ as well as the State's “right [as the Lessor] to authorize the subsurface storage of oil or gas ․ in order to avoid waste or to promote conservation of natural resources.”

b. The mineral estate

CIRI received its rights to the subsurface estate under a three-way agreement with the State and the federal government pursuant to the Alaska Native Claims Settlement Act (ANCSA).⁶ The ANCSA-related land transfers, which took place in 1980, had as a predicate step the State's reconveyance to the United States of “all of the [State's] right, title and interest, to the subsurface estate” in the property. A few months later the United States conveyed “the subsurface estate” of the property to CIRI. Both deeds—first from the State to the federal government, then from the federal government to CIRI—were subject to “all valid existing rights therein, if any,” specifically listing the Marathon oil and gas leases.

Accordingly, CIRI received the lands subject to the City's preexisting interest in the surface estate. As successor lessor of the Marathon leases, CIRI received royalties from the gas Marathon extracted.

3. The City of Kenai's claim that it owned the gas storage rights in the property

After CINGSA secured its leases of gas storage rights in the Sterling C Reservoir from the State and CIRI, the City asserted its own claim to the ownership of those rights. But the City allowed the storage project to go forward pending negotiations, granting CINGSA a conditional right of entry in the meantime. The right of entry provided that should “either the City of Kenai or CINGSA, in its sole discretion,” determine that the parties were not making progress in negotiations, CINGSA would file an action in eminent domain and allow the courts to decide the ownership issue.

B. Proceedings

The parties were unable to resolve their disagreement about gas storage rights, and CINGSA filed a complaint against the City in March 2012, seeking alternative forms of relief. In the first count of its complaint, CINGSA sought to acquire by condemnation “a gas storage easement and an easement upon the mineral interests” owned by the City in the Sterling C Reservoir. In another count, CINGSA interpleaded CIRI and the State as defendants in order “[t]o prevent double or multiple liability” given the “overlapping claims for compensation by CINGSA for use of the [property] for natural gas storage,” and it asked the court to decide the party or parties CINGSA owed compensation. CINGSA also sought a “declaratory judgment confirming that the City [held] no property interest in the [gas storage rights]”; an alternative judgment that if the City did hold those rights CINGSA should be granted an easement by condemnation, with just compensation to the City; and—as an alternative to condemnation if the City held those rights—reformation of CINGSA's leases with the State and CIRI so that CINGSA was not obliged to pay those entities for rights that were legally the City's.

1. Summary judgment

CIRI and the City cross-moved for summary judgment on whether the City owned the gas storage rights. The State and CINGSA joined CIRI's motion, endorsing CIRI's position that the storage rights belonged to the State and CIRI rather than the City. The superior court granted summary judgment in favor of CINGSA, the State, and CIRI. It concluded that “the State reserved to itself the mineral estate, which includes the underground storage rights,” and that “[t]he rights the City received [from the State] regarding the property in question were surface estate rights.”

CINGSA and the City filed a stipulation—later approved by the superior court—to resolve all remaining condemnation issues “regarding authority and necessity, possession and just compensation and entry of final judgment against the property rights held by the City.” The superior court entered final judgment in favor of CINGSA, the State, and CIRI.

2. Attorney's fees

CIRI moved for an award of attorney's fees against the City, seeking 20% of its reasonable actual fees under Alaska Civil Rule 82(b)(2). The City opposed the motion, arguing that CINGSA had initiated the suit, bringing in CIRI as a party “in its sole discretion,” and that the City had not alleged any claims against CIRI that could make the City liable for CIRI's fees. But the superior court concluded that CIRI was entitled to attorney's fees under Rule 82(b)(2) because it prevailed on the main issue in the case: “that CIRI owns the subsurface gas storage pore spaces in dispute.” The superior court found that the amount of work done by CIRI's attorneys was reasonable, but it awarded an amount less than the scheduled 20% because it found that CIRI's Anchorage-based attorneys charged at rates higher than those customarily charged in Kenai Peninsula communities.

The City appeals the superior court's decision on summary judgment and its award of attorney's fees and costs to CIRI.

III. STANDARDS OF REVIEW

“We review a superior court's decision on summary judgment de novo, drawing all inferences in favor of, and viewing the facts in the record in the light most favorable to, the non-moving party.”⁷ We review “a superior court's determination of prevailing party status and attorney's fees for abuse of discretion.”⁸ We will find an abuse of discretion “if the award is ‘arbitrary, capricious, manifestly unreasonable, or stemmed from improper motive .’ “⁹ “We review the interpretation of Alaska Civil Rules governing the award of costs and attorney's fees de novo.”¹⁰

IV. DISCUSSION

The central issue in this case is the ownership of the pore space when the mineral and surface estates have been severed, as they commonly are under Alaska's mineral reservation statute, AS 38.05.125, a provision of the Alaska Land Act.¹¹ There is a notable lack of consensus in the courts and among legal scholars on the issue of pore-space ownership.¹² This is our first opportunity to address the issue; we do it in the unique context of Alaska's land laws.

A. The Superior Court Properly Granted Summary Judgment To CIRI, The State, And CINGSA Because AS 38.05.125(a) Reserves The Natural Gas Storage Rights To The State.

The City contends that as the owner of the surface it also owns the underlying pore space or natural gas storage rights. According to the City, the superior court erred when, in granting summary judgment to the other parties, it reasoned that (1) determining ownership of the storage rights is a question of statutory rather than deed interpretation; (2) the reserved rights under AS 38.05.125(a) include natural gas storage rights; and (3) the “American rule”—by which the surface owner owns the rights to underground spaces that have been depleted of their minerals—did not apply.

1. The superior court properly addressed the ownership of storage rights as a question of statutory interpretation.

The State patents conveying the land at issue to the City recited verbatim the reservation of mineral rights that AS 38.05.125(a) generally requires. The City argues that the superior court, when determining whether the parties intended to convey or to reserve the pore-space rights, should have interpreted these reservations using rules of deed interpretation rather than statutory interpretation. We interpret the language of a deed using a three-step process: We first “look at the four corners of the document to see if it unambiguously presents the parties' intent”; if it is ambiguous, we next “consider ‘the facts and circumstances surrounding the conveyance’ to discern the parties' intent”; and finally, “[i]n the event that the parties' intent cannot be determined, we rely on rules of construction.”¹³ As for statutes, we interpret them “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.”¹⁴

We conclude that statutory reservation language in an instrument of conveyance is governed by the rules of statutory interpretation. “A patent cannot convey what has been reserved by law.”¹⁵ Because patents “are to be given effect according to the laws and regulations under which they were issued,”¹⁶ courts have consistently applied rules of statutory interpretation to determine the scope of contractual reservations required by statutes.¹⁷ Accordingly, mineral reservations required by federal statutes are interpreted in light of the apparent intent of Congress, not the intent of the parties to the instrument.¹⁸

The language of AS 38.05.125(a) relevant here—that “[e]ach contract for the sale, lease, or grant of state land, and each deed to state land, ․ is subject to” the statutory reservation—is mandatory.¹⁹ A court attempting to discern only the parties' intent with regard to the meaning of the reservation of rights could well fail to effectuate the legislative purpose behind the statute that requires that reservation.²⁰ We must therefore consider AS 38.05.125(a) in determining the scope of the rights reserved in the State's patent to the City.

2. Interpreting AS 38.05.125(a) to include the reservation of natural gas storage rights is consistent with the statute's plain language and purpose.

Alaska Statute 38.05.125(a) requires that”[e]ach contract for the sale, lease, or grant of state land, and each deed to state land, properties, or interest in state land” be made subject to the State's reservation of the rights to listed natural resources: “all oils, gases, coal, ores, minerals, fissionable materials, geothermal resources, and fossils of every name, kind or description, and which may be in or upon said land above described.” The statute also requires the reservation of rights of entry for exploration and the extraction of minerals, the reservation of surface rights necessary to support extraction, and a catchall reservation of “generally all rights and power in, to, and over said land, whether herein expressed or not, reasonably necessary or convenient to render beneficial and efficient the complete enjoyment of the property and rights hereby expressly reserved.”²¹

The City contends that gas storage rights are unambiguously outside the scope of the statutory reservation because the statute reserves only “specific, identified natural resources” and the “various rights that facilitate exploitation of those [identified] natural resources.” The City argues further that use of the pore space to store non-native gas does not further “exploration, development or removal of oil, gas, coal or other minerals reserved by the State.” In short, according to the City, the statute reserves only “specifically identified natural resources in the land and the right to make use of the land to aid in the development and extraction of those resources,” not “a place or location—the ‘subsurface’ “—that would include non-mineral pore space.²²

“To establish the meaning of a statute, we examine both its text and its purpose.”²³ We give statutory language a “ ‘reasonable or common sense construction, consonant with the objectives of the legislature.’ The intent of the legislature must govern and the policies and purposes of the statute should not be defeated.”²⁴ We “presume[ ] that the legislature intended every word, sentence, or provision of a statute to have some purpose, force, and effect, and that no words or provisions are superfluous.”²⁵ We also apply the rule of statutory interpretation that “[a]mbiguities in public land grants are ‘resolved strictly against the grantee and in favor of the government.’ “²⁶ This interpretive rule again highlights the distinction between statutory and deed interpretation: “Public legislation is construed broadly in favor of the government which made the grant; no rights pass by implication,” while “[c]onversely, ambiguities in private deeds reserving mineral rights are construed strictly against the grantor, who is also normally the draftsman.”²⁷

Examining the text and purpose of AS 38.05.125(a), we reject the City's argument that rights to the pore space were not reserved to the State. We conclude that pore space is mineral and therefore within the express reach of the statutory reservation of “all ․ minerals ․ of every name, kind or description.” And storage rights in a “specific[ ] identified natural resource [ ]” are included by the statute's further reservation “generally [of] all rights and power in, to, and over said land, whether herein expressed or not, reasonably necessary or convenient to render beneficial and efficient the complete enjoyment of the property and rights hereby expressly reserved.”

“Minerals” are not defined by the Alaska Land Act. Nor have we defined the term in the context of AS 38.05.125(a), though we have stated that “[t]he question of what is a mineral is a vexatious one .”²⁸ Other courts have concluded that the meaning of “minerals” is ambiguous and have interpreted the term broadly,²⁹ an approach consistent with the breadth of AS 38.01.125(a) generally.³⁰

“Pore space” is defined as “microscopic voids within rocks that are unoccupied by solid material”;³¹ pore space alone might thus be thought of not as mineral but as “the absence of something—a void constituted by surrounding structures.”³² But such an interpretation is too simplistic. Pore space is defined by and an inextricable part of the rock strata in which it is found: “The matrices that create pore space and give it form—such as dolomite, limestone, lignite, and sandstone—are certainly mineral in character. Without these minerals, the pore space would not exist.”³³ Because porous rock formations are mineral, the parts that make them up are also mineral, including the microscopic pore space that constitutes much of these formations.³⁴ And because AS 38.05.125(a) broadly reserves “all ․ minerals,” it reserves the constituent parts of those minerals.

Such an interpretation is supported by the statute's apparent purpose. We have recognized that “the overall purpose of the Alaska Land Act is to maximize revenue for the state”³⁵ 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.”³⁶ The State identifies other statutory directives that imply a legislative concern with managing surface and subsurface uses for the maximum development of each use with minimal interference from the others.³⁷ 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 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.³⁸ We agree that these are relevant statutory purposes and that they are better served by interpreting the term “mineral” to include the pore space in rock formations.

As CIRI points out, a number of federal cases have interpreted the term “minerals” in the context of statutory mineral reservations. In Watt v. Western Nuclear, Inc., the United States Supreme Court held that gravel found on lands patented under the Stock–Raising Homestead Act (SRHA) was a “mineral” reserved to the United States by statute.³⁹ The Court began its analysis by observing that “the word ‘minerals' is ‘used in so many senses, dependent upon the context, that the ordinary definitions of the dictionary throw but little light upon its signification in a given case.’ “⁴⁰ The Court recognized narrow, broad, and potentially unlimited definitions of the term that would lead to absurd results in the context of the SRHA.⁴¹ Ultimately, it concluded that the term's definition could only be determined by reference to congressional intent.⁴² It observed that “Congress' underlying purpose in severing the surface estate from the mineral estate was to facilitate the concurrent development of both surface and subsurface resources,” and that “[w]hile Congress expected that homesteaders would use the surface of SRHA lands for stockraising and raising crops, it sought to ensure that valuable subsurface resources would remain subject to disposition by the United States, under the general mining laws or otherwise, to persons interested in exploiting them.”⁴³ It concluded that “Congress could not have expected that stock-raising and raising crops would entail the extraction of gravel deposits from the land”; therefore “the congressional purpose of facilitating the concurrent development of both surface and subsurface resources is best served by construing the mineral reservation to encompass gravel.”⁴⁴

Western Nuclear is instructive to the extent it shows how legislative purpose drives the definition of “minerals” in different statutory contexts.⁴⁵ Like the SRHA, the Alaska Land Act contemplates retained State control over potential mineral wealth even as the surface estate passes to other parties for productive surface uses. Because the statutory text and persuasive authority suggest a broad interpretation of the term “minerals” in AS 38.05.125(a), and because interpreting “minerals” to include pore space is consistent with both the language and the purposes of the statute, we conclude that pore-space ownership is reserved as part of the mineral rights reserved. And use of that pore space as storage, even for non-native natural gas, is reserved as part of the “rights and power in, to, and over said land ․ reasonably necessary or convenient to render beneficial and efficient the complete enjoyment” of the State's other reserved mineral rights.⁴⁶

3. The “American rule” does not apply.

Courts facing the issue of pore-space ownership have considered “two main theories”: the American rule and the English rule.⁴⁷ “[I]n the absence of language in the severing deed dictating a different construction, 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 view is that the cavern is owned by surface owners.”⁴⁸ The City urges us to adopt the American rule. But we agree with the superior court that case law applying the American rule is readily distinguishable and that applying the rule in this case is both unnecessary and inconsistent with AS 38.05.125(a).

The City cites Ellis v. Arkansas Louisiana Gas Co. as illustrating the proper application of the American rule to gas storage rights. But the court in Ellis, with no statutory reservation at issue, looked first and primarily to the intent of the private parties as reflected in “the deeds which effect [ed] the severance” of the mineral estate; the deeds used only words denoting “exploration, production and development,” not injection, occupation, or storage.⁴⁹ The court did cite the American rule as consistent with the parties' intent to reserve to the surface owner everything other than the expressly granted right to prospect for and produce natural gas, but it recognized that the need to apply one of the presumptive rules arose only “in the absence of language in the severing deed dictating a different construction.”⁵⁰ Other cases the City cites in support of the American rule also turned on the specific terms of the particular conveyance.⁵¹

We reject the City's argument that the American rule applies to a determination of the ownership of pore-space storage rights in a case, like this one, involving a reservation of rights to the State under AS 38.05.125(a). Because the rights at issue are governed by the terms of the statutory reservation, and because we interpret that reservation as including pore-space storage rights, the superior court properly determined that those rights belong to CIRI and the State as owners of the minerals rather than the City as owner of the surface estate.

B. The Superior Court Did Not Abuse Its Discretion In Awarding Attorney's Fees To CIRI As A Prevailing Party.

Alaska Civil Rule 82(b)(2) provides that in cases resolved without trial”[i]n which the prevailing party recovers no money judgment,” the court may award the prevailing party 20% of the party's reasonable attorney's fees actually incurred. The superior court in this case concluded that CIRI was a prevailing party and entitled to attorney's fees from the City because CIRI was granted summary judgment on its claim to ownership of the disputed pore-space storage rights, which the City opposed.

The City contends this was error for two reasons. The City first argues that Rule 82 does not apply to this case, but rather Civil Rule 72, which prohibits an award of fees and costs against the condemnee in a condemnation action “[a]s a general rule.” Second, the City maintains that CIRI cannot recover attorney's fees even under Rule 82 because “the City did not assert any ․ claims against CIRI,” which was nominally aligned as its co-defendant in CINGSA's suit to determine the respective rights of all the parties.

We conclude that Rule 82 governs CIRI's claim for attorney's fees. We have recognized Rule 72 as “creat[ing] a narrow exception” to the general applicability of Rule 82 for “those cases involving ‘the condemnation of property under the power of eminent domain.’ “⁵² But the existence of a condemnation count does not mandate the application of Rule 72. In City of Anchorage v. Scavenius, for example, although we affirmed the superior court's denial of Rule 82 attorney's fees to the City as a condemning entity, we held that the City was properly awarded Rule 82 attorney's fees for its successful defense against a common-law counterclaim.⁵³ In R & Y, Inc. v. Municipality of Anchorage, where landowners asserted an unsuccessful inverse condemnation claim, we concluded that the Municipality was entitled to Rule 82 attorney's fees as the prevailing party.⁵⁴ We have also affirmed awards of Rule 82 attorney's fees for a party's successful defense of issues “unrelated to the eminent domain action.”⁵⁵

In this case, Rule 72 does not supersede CIRI's right to Rule 82 attorney's fees because CIRI's successful defense of the City's claim to ownership of the pore space was “unrelated to the eminent domain action.”⁵⁶ The condemning authority was CINGSA, not CIRI. And other than with regard to minor interests not relevant here, CINGSA's complaint sought to condemn the City's rights to pore-space storage only as an alternative to a declaration that the City did not own those rights at all; the latter claim prevailed.

Even with Rule 82 as the applicable standard, the City contends that CIRI should have pursued attorney's fees “against the party that sued it—CINGSA.” It argues that CIRI cannot be the “prevailing party” because CIRI and the City were codefendants, the City asserted no cross-claims against CIRI, and the City should not be “saddled” with an award of attorney's fees based on CINGSA's “unilateral decision” to name CIRI as a defendant.

But we have rejected the argument that a party cannot be liable for attorney's fees to a party it did not sue. Recently, in BP Pipelines (Alaska) Inc. v. State, Department of Revenue, we reaffirmed the long-established rule that “regardless of how parties are formally arranged, fees and costs may be awarded based on actual adversity of interests.”⁵⁷ In BP Pipelines, owners of the Trans–Alaska Pipeline System and several municipalities brought separate administrative appeals of the State Assessment Review Board's valuation of the pipeline for property tax purposes.⁵⁸ Three subsequent appeals to the superior court, involving different combinations of the pipeline owners and municipalities, were consolidated for a single trial de novo.⁵⁹ The central dispute involved competing valuation methods: the owners argued for one approach and the Department of Revenue, Board, and municipalities argued for another.⁶⁰ No affirmative claims were asserted between the two sides. The superior court agreed with the Department and the municipalities and ordered the owners to pay attorney's fees to them as prevailing parties.⁶¹ We affirmed the attorney's fees award, rejecting the owners' argument that they could not be liable for the municipalities' fees because the owners' appeals were “directed against the Department and the Board, not the[o]wners,” and thus the municipalities could not have been “prevailing parties” as against the owners.⁶² We reasoned that an “adversity of interests” existed between the owners and the municipalities because they were clearly aligned against each other “on every substantive issue․ [They] were not just nominally opposing parties; they were the primary litigants.”⁶³

Here, the City's argument that CIRI should seek attorney's fees from CINGSA lacks merit because the “actual adversity” was between the City and the other parties, not CIRI and CINGSA. After CIRI moved for summary judgment, both CINGSA and the State joined CIRI's motion and aligned with CIRI on all issues, including the primary one of whether the City owned the storage rights. Like the owners and the municipalities in BP Pipelines, CIRI and the City asserted no claims against each other but still acted as the “primary litigants” in arguing opposite sides of the main issue.

We conclude that the superior court did not abuse its discretion in its determination that CIRI was a prevailing party against the City or in its award of attorney's fees to CIRI pursuant to Rule 82(b)(2).

V. CONCLUSION

We AFFIRM the judgment of the superior court.

MAASSEN, Justice.

FABE, Justice, not participating.