American Oil and Gas Reporter - August 2015 - 142

Kim Collings (left), director of
the Kentucky Division of Oil
and Gas, and Assistant Director Marvin Combs answer
questions about the commonwealth's revised oil and gas
regulations following their
presentation at the Kentucky
Oil & Gas Association's annual
convention, held June 14-16
in Lexington, Ky.

to modernize the commonwealth's deepwell statutes became more evident. Regulations in place did not anticipate nor
adequately regulate horizontal drilling
and were counterproductive to the technology, he asserted.
The commonwealth also needs to update regulations governing compulsory
pooling, Barr recommended. When the
deep well statutes were written, Kentucky
set a preapplication threshold of 50 percent
participation. The 1960s revised statutes
increased that requirement to 75 percent
for deep wells, he said. That is too high
for efficient well operations, Barr held,
describing a situation where the operator,
the commonwealth and 74 percent of the
involved mineral owners can be blocked
by the opposition of 26 percent.
"It is a large number, and as I start to
lay out units for horizontal wells with
long-leg laterals going directionally across
property lines, it gets to be a bigger
issue," Barr posed. "Development will
be curtailed significantly if we leave that
number at 75 percent. Those that would
claim a mineral owner's rights trump the
rights of the majority need to recall that
there are protective devices built into the
compulsory forced pooling statutes."
As the work group prepares for its
next round of deliberations, Van Stockum
said it must tackle seismicity and climate
change. Using data from other states is
the first step in crafting Kentucky's
seismic regulations, he suggested, and a
greenhouse gas initiative should accumulate in-state emission numbers.
"The public is confused about climate
change, and it is foolish for your industry
not to say it is a legitimate issue," Van
Stockum advised. "I am not saying we
pass a law to regulate emissions, but that
we send a message that we understand
that climate change is an important issue.
We need to do the science to find a
position that protects the public. Until
we stop taking an 'us-versus-them' approach, the oil and gas industry is going

to be closeted with other industries with
which it really does not belong."

State Regulators
In her remarks about how the Kentucky Division of Oil and Gas participated
in work group discussions to rewrite the
commonwealth's oil and gas regulations,
division Director Kim Collings and Assistant Director Marvin Combs predicted
most operators would find the rules
workable. As an example of the major
changes, she pointed to a well site reclamation plan requirement for every oil
and gas site.
The rule introduces new definitions
covering spacing requirements for shallow
and deep wells, with 6,000 feet now the
transition point instead of 4,000 feet,
Collings said. Kentucky has new permit
fees, she added. Shallow-well permit
costs remain the same, while vertical
well permits now range from $500 to
$600, depending on depth, and horizontal
wells, based on total measured depth,
will be between $5,000 and $6,000. Multilateral wells have an additional $500
fee for each lateral.
One major change is that bonding
covers plugging for shallow wells, but
extends to plugging and reclamation costs
for deeper wells, Collings detailed.
High-volume hydraulic fracturing treatments are defined as those stimulation
operations using more than 320,000 gallons total or 80,000 gallons a stage, and
operators who exceed those limits must
submit their fracture fluid's chemical
composition to the FracFocus.org website,
she said. Those high-volume fractured
wells now also require notification to all
surface owners within 1,000 feet of the
surface location at least 20 days before
treatment, as well as groundwater testing,
Collings said.
SB 186 also established an abandoned
storage tank reclamation fund, Collings
reported. It will be similar to the commonwealth's abandoned well plugging

142 THE AMERICAN OIL & GAS REPORTER

fund. She added regulators estimated
there were as many as 4,400 abandoned
storage tanks in Kentucky. While the
legislation established the fund, she said
it failed to include a funding source.
Combs pointed out the legislation also
established a well site reclamation plan.
In addition to current requirements, he
said SB 186 mandated best management
practices for all disturbed areas, including
access roads, well pads, gathering lines
and associated storage tanks. Operators
must identify the specific BMPs they
plan to use to prevent erosion and sedimentation, and to limit and control surface
water runoff, as well as submit a proposed
vegetation mixture for reclamation.

Legal Issues
Increasing interest in Kentucky's oil
and gas prospects could threaten leases,
warned Karen Greenwell, a partner with
Wyatt, Tarrant & Combs LLP and chairwoman of KOGA's Legal Committee.
Participating in a panel discussion on
emerging legal issues, Greenwell said
the hunt for acreage and the accompanying
bonuses could prompt mineral owners to
look for ways to trade their existing leases
for new ones.
"In a leasing frenzy, your leases are
vulnerable both to examination to see if
there any defects, and to attempts to terminate them," she said.
There have been reports of mineral
owners signing top leases, which grant
someone other than the lessee rights to
develop the acreage when the existing
lease expires, Greenwell said.
"One reason you would care is because
a top lease affects your lessor's ability to
extend or change the lease. So if you
want your lessor to give you an extension
of the primary term or give you additional
time to drill a well, if there is a top lease,
your lessor may not have that luxury,"
she described.
Harry Callicotte, managing member
with Harry D. Callicotte PLLC, discussed
post-production costs and how leasing
language could alleviate problems with
mineral owners. Many older leases fail
to spell out whether gathering, processing,
transportation or compression are considered post-production costs, he said.
"I recommend you stay away from
the 'at the well' language, and actually
spell out exactly what it is you are deducting and why. Have your landman
explain this to the mineral owner, and
draft transparent and unambiguous leases.
Having good landowner relations also
helps. These are the things that help you
to prevent litigation," Callicotte advised.
J. Kevin West, with Steptoe & Johnson

http://www.FracFocus.org

American Oil and Gas Reporter - August 2015

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