Kentucky Oil & Gas Modernization Act of 2015

Transcription

1 Kentucky Oil & Gas Modernization Act of 2015 Follow Steptoe & Johnson on Twitter: ALSO FIND US ON Steptoe & Johnson PLLC. All Rights Reserved.

2 Today s Presenters J. Kevin West Columbus, OH Lexington, KY Sarah M. Lange Charleston, WV

3 Kentucky Oil & Gas Modernization Act of

4 Effective June 24, 2015 A workgroup consisting of representatives from the following organizations dedicated numerous hours toward the collaborative development of a package of consensus reforms for Kentucky s oil and gas industry: The Kentucky Oil and Gas Association The Kentucky Resources Council Kentucky Farm Bureau The Kentucky Division of Water The Kentucky Division of Oil and Gas The Kentucky Department of Natural Resources The Kentucky Chamber of Commerce The Kentucky Environmental Quality Commission The Secretary s Office of General Counsel

5 Effective June 24, 2015 Work on the bill began in July 2014, when Energy & Environmental Cabinet Secretary Len Peters appointed a Working Group of state officials and representatives. These were introduced in the 2015 Kentucky General Assembly as HB 386 and SB 186. Both were unanimously approved and signed into law by Governor Steve Beshear on March 19, 2015.

6 What is The Purpose of This Legislation? It was intended to modernize and strengthen Kentucky s oil and gas regulations, by promoting investment and jobs, while enhancing the industry s commitment to environmental protection. Many of Kentucky s statutes and regulations were out of date and did not properly address recent advances in technology, industry practices and the state s need for regulatory certainty.

7 The Legislation s Major Topics 1. Important terms defined 2. Permitting and Bonds 3. The unitization, pooling, drilling and hydraulic fracturing of deep wells 4. Notice to Surface Owner for High-Volume Hydraulic Fracturing 5. Establishes a water-quality testing protocol and reclamation bonding for deep wells 6. Requires FracFocus disclosure for high-volume horizontal well fracturing 7. Requires Best Management Practices for oil and gas well site reclamation 8. Establishes an Abandoned Storage Tank Program to begin the process of reclaiming abandoned tank battery facilities

8 New Statutes and Statutes Impacted by Legislation New & updated definitions - KRS Permits, Fees, Bonds - KRS Deep Wells, Drilling Units, Pooling - KRS and KRS Notice to Surface Owner for High-Volume Hydraulic Fracturing - KRS Baseline Water Testing - KRS FracFocus Disclosure & Trade Secrets - KRS to KRS Operations and Reclamation Plans - KRS The KY Abandoned Storage Tank Reclamation Program - KRS to KRS

9 805 KAR 1:100 The Regulations Commission s rules of procedure; spacing of deep well drilling; wildcat wells and pooling of interests 805 KAR 1:130 Administrative Regulation to Casing, Cementing, Plugging, Gas Detection and Blow-Out Prevention in Oil and Gas Wells 805 KAR 1:140 Directional and Horizontal Wells 805 KAR 1:170 Content of the Operations and Reclamation Plan

10 KRS Key Definitions (9) A pool has been amended to also include an area established by the commission as a pool. (15) Shallow Well - is now 6,000 feet or less Except: East of Lat/Lon 84 degrees 30, it is less than 6,000* ft or above the base of the lowest member of the Devonian Brown Shale, whichever is deeper. ***This has changed from 4,000 feet*** (16) Deep Well - is now 6,000 feet or more Except: East of Lat/Lon 84 degrees 30, it is more than 6,000* ft or below the base of the lowest member of the Devonian Brown Shale, whichever is deeper. ***This has changed from 4,000 feet***

11 KRS Key Definitions (25) Horizontal Well - A well, the wellbore of which is initially drilled on a vertical or horizontal plane and which is curved to become horizontal or nearly horizontal, in order to parallel a particular geologic formation and which may include multiple horizontal or stacked laterals (26) Vertical Well - A well, the wellbore of which is drilled on a vertical or directional plane into a formation and is not turned or curved horizontally to allow the wellbore additional access to the oil and gas reserves in the formation (27) Prevailing Royalty - The royalty rate or percentage that the commission determines is the royalty most commonly applicable with regard to the tract or unit in the issue. The royalty set by the commission shall not be less than one-eighth (1/8) or twelve and one-half percent (12.5%)

12 KRS Key Definitions (39) High-volume Horizontal Fracturing Treatment - The stimulated treatment of a horizontal well by the pressurized application of more than 80,000 gallons of water, chemical, and proppant, combined for any stage of the treatment or 320,000 gallons in the aggregate for the treatment used to initiate or propagate fractures in a geologic formation for the purpose of enhancing the extraction or production of oil or natural gas (42) Trade Secret - Information concerning the volume of a chemical or relative concentration of chemicals used in a hydraulic fracturing treatment that: Is known only to the hydraulic fracturing treatment s owners, employees, former employees, or persons under contractual obligation to hold the information in confidence As been perfected and appropriated, giving the owner a competitive advantage; and Is not required to be disclosed under any federal or state law

13 Permitting & Bonds Addressed by: The Statute: KRS Application for permit Fees- Plat- Plugging and restoration bonds- Blanket bonds Corporate guarantee- Use of forfeited funds- Oil and Gas well plugging fund Well not included in water supply well The Regulation: 805 KAR 1:140 - This administrative regulation identifies the requirements for permitting directional and horizontal wells

14 KRS Permit Fees A shallow well permit is still $300. No permitting changes for wells 4,000 feet or less A vertical deep well: Less than 7,000 feet $500 More than 7,000 feet $600 A horizontal deep well: Total depth of less than 10,000 feet $5,000 Total depth of more than 10,000 $6,000 $500 for each additional lateral Each additional horizontal deep well on a well pad: o Up to 10,000 feet total depth $3,000 o More than 10,000 feet total depth $4,000

15 KRS Permit Fees The Application must be accompanied by a plat showing well locations and certified by a surveyor. Upon request by any person applying for a permit for a geological or structure test hole, the department shall keep the location and elevation of the hole confidential until the information is allowed to be released by the person obtaining the permit. KRS (25) establishes that a successor to the well operator shall post bond, pay a $25 fee (See Form ED-13) and notify the Department in advance of operation.

16 KRS Individual Plugging and Reclamation Bonds When any person submits a permit, the operator is required to post a bond to ensure plugging and reclamation (unless covered by surety bond) For shallow wells Specified in KRS (7) Vertical deep wells $25,000 or higher if anticipated by the Commission Horizontal deep wells $40,000 or higher if anticipated by the Commission

17 KRS Blanket Plugging & Reclamation Bonds A deep well operator may file a blanket bond: 1-10 vertical deep wells $200, horizontal deep wells $320,000 Non-compliance with proper plugging upon abandonment and submission of records? The Department shall mail notice and specify how the operator has failed. No response in 45 days Bond shall be forfeited

18 Deep Well Drilling, Pooling, Units, Etc. Addressed in: The Statutes - KRS Vertical and horizontal deep wells- Establishment and regulation of drilling units Pooling Exceptions - KRS Unit operation of pool- Procedure

19 Deep Well Drilling, Pooling, Units, Etc. Addressed in: The Regulations KAR 1:100, Sections 1 8 Commission s rules of procedure; spacing of deep well drilling; wildcat wells and pooling of interests KAR 1:130, Sections 1 5 Administrative Regulation to Casing, Cementing, Plugging, Gas Detection and Blow-Out Prevention in Oil and Gas Wells

20 KRS Deep Well Drilling Units After notice & hearing, the Commission shall regulate the drilling & location so as to prevent reasonably avoidable net drainage from each developed unit so that each owner in a pool shall have the right & opportunity to recover their fair and equitable share of the recoverable oil and gas in the pool To prevent waste, to protect the owners rights and avoid risks of too many wells, the commission shall establish drilling units for deep wells. The spacing is governed by the regulations or by special field orders

21 KRS Deep Well Drilling Units These shall be drilled in a spacing pattern fixed by the Commission in accordance to state regulations and with reasonably necessary exceptions showing the unit would not be likely to produce in paying quantities or conditions warrant deviation from the regulations An order for a vertical well drilling unit may be modified or vacated after notice and hearing These shall be on terms that are fair, reasonable, equitable and which are necessary or proper to protect and safeguard the respective rights and obligations of the working interest owners and the royalty owners based on the evidence

22 KRS Deep Well Unit Operation The final pooling order shall provide for the unitization of separatelyowned tracts only after finding that: The order is reasonably necessary for the prevention of waste It will increase the ultimate recovery of oil or gas and will be economically feasible The production can be allocated in a manner to ensure the recover by all owners of their just and equitable share of the production; AND A contract incorporating the unitization agreement has been signed or in writing ratified or approved by owners of at least 75% in interest in the pool. ***Compared to 51% for shallow wells*** After notice & hearing, this order may be amended to enlarge the unit by adding to it when all of the terms in the original order regarding enlarging the unit have been satisfied and 75% of owners have agreed

23 KRS Notice to Surface Owner for High-Volume Hydraulic Fracturing An operator employing high-volume horizontal fracturing shall give notice to each surface owner within 1,000 feet of the surface location of the proposed well Notice must be 20 days prior to commencement of hydraulic fracturing Surface owner - Person assessed by PVA. Required Contents of Notice: Name and Address of Operator Surface location of proposed well AND Name and location of cabinet office where permit & documents may be inspected. If the documents are online, the website as well.

24 Addressed in: Baseline Water Testing The Statute - KRS Baseline water quality testing required prior to commencement of a high-volume horizontal fracturing treatment on a deep horizontal well The Regulation KAR 1:100, Section 9 - Testing of Water Sources near Deep Wells Employing High-Volume Horizontal Fracturing

25 KRS Baseline Water Testing Must be conducted 20 days prior to commencement of high-volume hydraulic fracturing on a deep horizontal well Test water quality (by certified lab) of each down-gradient surface water impoundment or water supply from a groundwater source used for domestic, agricultural, industrial,or other legitimate use located within 1,000 feet of the surface location of the proposed well Form ED-40 Submit results to Division within 30 days of analysis results

26 KRS Baseline Water Testing A subsequent test is required from each source between 3-6 months after well completion Water Supply Owner s Consent- A form will be developed to document their permission. Exempt if the water supply owner refuses to grant access despite good faith efforts to gain consent Document these good faith efforts and submit them to the Division Applies ONLY to deep horizontal wells

27 KRS FracFocus A service provider of any high-volume horizontal fracturing shall furnish the operator with the information required no later than 45 days following the treatment Within 90 days of completion, the operator shall publish the required information on FracFocus. Operator s name; Date of treatment; County; API No.; Well name and No.; Longitude & Latitude; Vertical Depth; Each chemical additive used; the maximum concentration (in percent by mass) of each chemical intentionally added to the fluid; and the amount of proppant used.

28 KRS FracFocus Disclosure is not required if: It has been qualified as a trade secret Was not disclosed to operator by a 3 rd party manufacturer Chemical is in trace amounts, is incidental from a reaction or is a constituent of a naturally occurring material

29 KRS Emergency Spill Disclosure of Trade Secret When necessary to assist in responding to an emergency spill or discharge, the director shall order immediate disclosure The information shall not be disseminated further Disclosure of a trade secret under any of these sections does not waive the status as a trade secret or mean that it is publicly available Additionally, a court may order disclosure if circumstances fall outside of these statutes

30 Reclamation Addressed in: The Statute: KRS Operations and Reclamation Plan Contents, distribution and agreement or mediation Mediation report The Regulations: 805 KAR 1:170 - Content of the Operations and Reclamation Plan

31 KRS Operations and Reclamation Plans An operator must file an operations and reclamation plan at the time of applying for a permit. It shall include: The best management practices to prevent pollution, erosion, and sedimentation from the well site and disturbed areas A description of all areas to be disturbed, including the locations of roads, lines, wells sites, tanks, etc. with a plat of all locations Any additional information the dept. requires

32 KRS Operations and Reclamation Plans The minimum requirements: Site plans Construction practices to be used Reclamation methods to be used after completion Maintenance of the reclaimed site Site closure describing plugging, abandonment, and reclamation procedures

33 805 KAR 1:170 - Mediation of Dispute The surface owner may file a request for mediation only: after they have received the proposed operations/plan from the operator AND the operator has filed the mediation request And before the time set forth in the Notice of Request for Mediation. Request Shall include: The mediation fee or a request for waiver of fee Waiver must include: underlying facts stating inability to pay, documentation required Decision in 30 days, not subject to appeal Mediator shall not settle damage claims, but costs incurred by both sides may be considered in recommending placement of roads, pits or other construction and reclamation to have least adverse impact.

34 KRS KRS The KY Abandoned Storage Tank Reclamation Program The Program s Purpose? To reclaim abandoned storage tank facilities in order to return the property to productive use (Removing infrastructure and sources of contamination). This won t affect operations. When is a tank abandoned? When not actively used and maintained, the cabinet sends written notice and the owner/operator does not respond within 30 days.

35 KRS KRS The KY Abandoned Storage Tank Reclamation Program KRS specifies what the funds may be used for KRS addresses the Cabinet s authority to enter property under the Program and the procedural process to do so

36 Points to Takeaway Unprecedented Collaborative Effort Between Industry, Regulators and Traditional Important Legislative Upgrades Necessary to Allow Deep Development Minimal Impact on Conventional Producers

37 Questions? J. Kevin West Sarah M. Lange

38 Material Disclaimer These materials are public information and have been prepared solely for educational purposes to contribute to the understanding of energy and oil and gas law. These materials reflect only the personal views of the authors and are not individualized legal advice. It is understood that each case is factspecific, and that the appropriate solution in any case will vary. Therefore, these materials may or may not be relevant to any particular situation. Thus, the authors and Steptoe & Johnson PLLC cannot be bound either philosophically or as representatives of their various present and future clients to the comments expressed in these materials. The presentation of these materials does not establish any form of attorney-client relationship with the authors or Steptoe & Johnson PLLC. While every attempt was made to insure that these materials are accurate, errors or omissions may be contained therein, for which any liability is disclaimed.