CHAPTER 4 CHALLENGES TO CONSERVATION AGENCIES IN THE TWENTY-FIRST CENTURY

• Jurisdiction: United States

Onshore Pooling and Unitization
(Jan 1997)
CHAPTER 4
CHALLENGES TO CONSERVATION AGENCIES IN THE TWENTY-FIRST CENTURY
Timothy E. McKee
Kansas Corporation Commission
Topeka, Kansas

First let me tell you that I'm not so presumptuous to know or predict the problems that oil and gas conservation divisions will experience in the next century. However there is one problem that I do not think we will be faced with in Kansas. As an illustration of this problem, I refer you to an excellent paper delivered to the Foundation meeting in 1985 by Professor Robert E. Sullivan.¹ Professor Sullivan referenced the Interstate Compact Commission and pointed out that the laws in effect in Texas and Oklahoma between 1920 and 1933 "...were not adequate to cope with the glut of oil that followed the..." the discoveries of the Oklahoma City and East Texas fields. In fact both Governor Murray of Oklahoma and Governor Sterling of Texas issued orders temporarily shutting down production from all wells in certain of the fields because of the glut of ten cent per barrel oil. Although we have recently seen the dissapating of "gas bubble", we are not likely to have a glut of oil or gas in Kansas and presumably not in other producing states.

This effort at humor is a poor attempt to illustrate the fact that we are unable to predict the rise and fall of product and prices that our industry has experienced throughout its history. With an understanding that we cannot predict, but a hope that we can anticipate somewhat the problems of the future, let me outline the challenges for conservation agencies that I see ahead.

1. Declining resource base results in declining revenues for conservation.

For those states whose agency financing is tied to production, conservation funding continues to shrink with the declining resource base.

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As in Kansas, the funding of most conservation agencies is a function of fees tied to production volumes.² There is a need for such agencies to evolve with the changes in the industry structure such as changes in production marketing or other changes which may have outstripped the tools for agency funding. For example in Kansas, the Severance Tax imposes on the first purchaser the burden of collection and remittance of the tax and the conservation fee which in part funds the Corporation Commission.³ However, as purchasing procedures and practices have changed together with the changes in federal natural gas regulations, a first purchaser may now well be a foundry in Pittsburgh, Pennsylvania, which may have no knowledge of the Kansas tax obligation and has no connections with Kansas other than the delivery to its doors of Kansas produced natural gas. This has resulted in the production and sale of an unknown amount of gas in Kansas which has avoided all Severence Tax and conservation fee.

As a result there will soon be introduced in the Kansas Legislature an amendment to the Kansas Severance Tax Statute (Kan.Stat.Ann. §79-4217) to correct this problem and impose upon all gas operators in the state the obligation to collect and remit the Severance Tax and conservation assessment. Hopefully this amendment will restore to some measure of support for conservation activity.

As the costs associated with the exploration and production have seemingly increased in recent history and the reserves found by those efforts have declined, overseas exploration appears more attractive. As a result the mature producing states may well see not only a decline in the activity of large producers but in...