KANSAS POOLING AND UNITIZATION PRACTICE

• Jurisdiction: United States

Onshore Pooling and Unitization
(Jan 1997)
CHAPTER 5D
KANSAS POOLING AND UNITIZATION PRACTICE
Evan J. Olson ^*
Mobil Business Resources Corporation
Midland, Texas

TABLE OF CONTENTS

SYNOPSIS

I. INTRODUCTION

II. STATE CONSERVATION STATUTES AND REGULATIONS

A. Rule of Capture

B. Conservation Statutes

C. Conservation Rules and Regulations

D. Standard Spacing Units

E. Special Spacing and Unitization Orders

F. Compulsory Pooling and Unitization

1. Unit Development

2. Development within Cities

III. EFFECT ON PRIVATE PROPERTY RIGHTS

A. Pooling and Unitization Clauses

B. Unit Production

C. Fractional Undivided Mineral Interests

D. Free Gas Rights

IV. CONCLUSION

REFERENCES

APPENDIX

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I. INTRODUCTION

The practice of pooling and unitizing is a vital part of the past, present and future of the oil and gas business in Kansas. Unlike other major producing states, however, Kansas has relied to a greater extent upon voluntary agreements to pool and unitize oil and gas interests. Kansas did not enact any compulsory unitization legislation until 1967, relatively late when compared to neighboring states, and the measures enacted are narrowly drawn.

The materials which follow are intended to summarize significant aspects of both voluntary and compulsory pooling and unitization practices in Kansas. The treatment is not exhaustive, but is prepared to provide a working knowledge of the subject.

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II. State Conservation Statutes and Regulations.

A. Rule of Capture.

Kansas has long recognized and followed the common law rule of capture. Zinc Co. v. Freeman, 68 Kan. 691, 696, 75 P. 995 (1904) (ownership rights lost when oil and gas moves beyond surface boundaries); Carlock v. Krug, 151 Kan. 407, 99 P.2d 858 (1940) (landowner owns all oil produced from wells located on the land; adjoining tracts must protect against drainage by offset development); State Corp. Comm'n v. Wall, 113 F.2d 877, 881 (10th Cir. 1940) (title acquired when oil and gas "captured"); Republic Natural Gas Co. v. Baker, 197 F.2d 647, 648 (10th Cir. 1952) (Kansas follows rule of capture); Anderson v. Beech Aircraft Corp., 237 Kan. 336, 699 P.2d 1023 (1985) (rule applied to gas which escaped from private gas storage field).

As the Kansas Supreme Court recently noted, however, the rule of capture promotes excessive drilling and production, and can result in economic waste and damage to reservoirs. Mobil Exploration & Producing U.S. Inc. v. State Corp. Comm'n, 258 Kan. 796, 800, 908 P.2d 1276, 1280 (1995).

Kansas does not recognize a common law of correlative rights. Pierce, Kansas Oil and Gas Handbook, §3.04, p. 3-5.

B. Conservation Statutes.

In 1935, Kansas, along with several other oil and gas producing states, ratified and enacted into law the "Interstate Compact To Conserve Oil and Gas." Kansas Statutes Annotated ("K.S.A.") 55-801, et seq. The act called upon the Governor to appoint a representative to meet with representatives of other oil and gas producing states to formulate and recommend uniform "conservation measures and tax laws" for the voluntary regulation of production in order to prevent waste and conserve oil and natural gas resources.

In 1939, Kansas enacted conservation laws consistent with the goals of the Interstate Compact. Those laws remain the foundation for the regulation of oil and gas production in the state today. The general statutes pertaining to the production of oil are found in K.S.A. 55-601, et seq. The general statutes pertaining to the production of gas are found in K.S.A. 55-701, et seq. The Kansas conservation

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statutes are somewhat unique in that oil and gas are treated separately. David E. Pierce, Kansas Oil and Gas Handbook, §3.07, p. 3-8.

The State Corporation Commission (hereinafter "Commission") is given exclusive jurisdiction and authority to regulate oil and gas production activities in Kansas. K.S.A. 74-623. The Commission's authority is limited to that conferred by statute. Bennett v. State Corp. Comm'n, 157 Kan. 589, 596, 142 P.2d 810 (1943). The Commission's statutory mandates are to prevent waste and to protect correlative rights, while assuring that production is maintained at a level sufficient to meet market demand. Specifically, the oil statute authorizes the Commission to:

...regulate the taking of crude oil ... from any pool ... to prevent waste therein or, independently of waste, to prevent the inequitable or unfair taking of crude oil therefrom by any person and to prevent unreasonable discrimination among the common owners.

K.S. A 55-603 . The statutory language is similar for natural gas. K.S.A. 55-703.

"Waste" is broadly defined by these statutes to include economic waste, underground waste, surface waste, waste of reservoir energy, and production in excess of transportation or marketing facilities or reasonable market demand. K.S.A. 55-602 (oil); K.S.A. 55-702 (gas).

C. Conservation Rules and Regulations.

The Commission is charged with the responsibility to make rules and regulations for oil and gas production. K.S.A. 55-604 (oil); K.S.A. 55-704 (gas). The Commission's Conservation Division is the agency which carries out that responsibility.

The General Rules and Regulations for the Conservation of Crude Oil and Natural Gas are found at Kansas Administrative Regulations ("K.A.R.") 82-3-100, et seq. Like the statutes, the general rules and regulations separately address oil and gas production. The general rules and regulations pertaining to the production of oil are found in K.A.R. 82-3-200, et seq. The general rules and regulations pertaining to the production of gas are found in K.A.R. 82-3-300, et seq.

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K.A.R. 82-3-101(21) defines "correlative rights" broadly to mean:

...the privilege of each owner or producer in a common source of supply to produce from that supply only in a manner or amount that will not:

(A) injure the reservoir to the detriment of others;

(B) take an undue proportion of the obtainable oil or gas; or

(C) cause undue drainage between developed leases.

D. Standard Spacing Units.

The "standard drilling unit" for oil and gas wells is 10 acres and the well shall be located at least 330 feet from any lease or unit boundary, absent special orders issued by the Commission. K.A.R. 82-3-207 (oil); K.A.R. 82-3-312 (gas). The standard daily production allowable for an oil well drilled on a standard drilling unit varies by the depth of the well from 100 to 300 BOPD...