Brief ⁽¹⁾

HB 2826 would amend existing law pertaining to unitization and unit operations of oil and gas pools. Unit operation of oil and gas pools involves the consolidation or merger of one or more oil and gas leases for operation as a single unit. A unit operator will be designated. The ability to "unitize" separate leases is vital for the secondary and tertiary recovery of oil. Secondary and tertiary recovery of oil depends upon the ability of operators to extract oil from the entire field operated as a unit. These forms of recovery occur after primary production has been completed and the energy source initially used to move the oil to a well bore has been depleted or reduced to a very small amount. Such recovery may involve a waterflood operation (water introduced into the producing formation through existing well bores or new injection wells specifically drilled for this purpose). In addition, such recovery may involve the injection of gas into a reservoir or the use of a carbon-dioxide process. All these recovery mechanisms are commonly referred to as "artificial energy," and are most effective when applied on a pool-wide basis.

Under existing law, any working interest owner may file an application with the Commission requesting an order for the unit operation of the pool. The applicant would have to submit to the Commission, as part of the application, a copy of the proposed plan of unitization. (Working interest owners are responsible for the cost of operating and developing drilling wells and receive their shares of the proceeds or profits from production only after all the royalty owners get their shares.)

The bill would amend certain requirements governing that plan to:

• �Require that nonoperating working interest owners be furnished information pertaining to costs and expenses chargeable against that owner's interest. Under existing law, the owner would need to request that information from the operator as a precondition for receipt.

• �Delete language allowing a working interest owner who is liable for the entire cost of the production operation to veto a unitization plan.



• �Reduce the required threshold for working interest owners and royalty interest owners who must approve a plan for unitization as a necessary precondition for an order to be issued by the Commission providing for proposed unit operations. Under existing law, the threshold is a minimum of 75 percent of working interest owners and 75 percent of royalty interest owners.

Specifically, the bill would reduce that threshold to a minimum of 63 percent of working interest owners and 63 percent of royalty interest owners (excluding overriding royalty interest and other interests) if artificial energy necessary for secondary and tertiary recovery will be injected into the reservoir. However, if artificial energy will not be injected, the threshold would be a minimum of 63 percent of working interest owners and 75 percent of royalty interest owners (excluding overriding royalty interest and other interests). The effect of this amendment would be to facilitate unitization.

The bill also would amend the law to:

• �Provide the Commission with flexibility to assign to owners a higher amount of royalty interest than the percentage authorized by law if those higher interests are granted to landowners as the prevailing industry practice in certain areas of the state; and



• �Clarify the statute pertaining to assessment and taxation of property of working interest owners.

Finally, the bill would take effect upon publication in the Kansas Register.

Background

HB 2826 was requested by the Kansas Independent Oil And Gas Association (KIOGA) to modernize the law concerning unitization and unit operations. The work of KIOGA stemmed from a seminar on field-wide unitization and from model legislation developed by the Interstate Oil and Gas Compact Commission. That Commission is an organization of 30 oil and gas producing states, including Kansas. Spokespersons for KIOGA and the Kansas Petroleum Council, as well as the General Manager of Murfin Drilling Company, testified in support of the bill. The Executive Secretary of the Southwest Kansas Royalty Association provided written testimony in support of the bill. There were no opponents.

The House Committee amended the bill to have it take effect upon publication in the Kansas Register.

1. *Supplemental notes are prepared by the Legislative Research Department and do not express legislative intent. The supplemental note and fiscal note for this bill may be accessed on the Internet at http://www.ink.org/public/legislative/bill_search.html