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Kentucky Resources Council, PO Box 1070, Frankfort, KY 40602 Phone [502] 875-2428

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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

House Bill 386 Updates Oil and Gas Laws And Extends Protections For Landowners  Posted: February 20, 2015

Regulation of oil and gas production on private lands is fundamentally a matter of state, rather than federal law. Unlike coal extraction, which is regulated under a state-delegated program that is required to meet minimum federal standards under SMCRA, much of the state law is derived from the model legislation developed by the Interstate Oil and Gas Compact Commission. Kentucky is a signatory to the Oil and Gas Compact.

The legislation developed by the IOGCC was intended to "conserve" the oil and gas resources, after a ruinous period during which wildcat oil and gas drilling depleted many formations. The law has basic requirements for spacing of wells and production, and for the drilling and completion of oil and gas wells. Ironically, water is considered a pollutant, but the effect of the regulation is the same - isolating the producing formation from water-bearing zones.

KRS 353.500 to 720 are the statutes governing oil and gas production and conservation. They date back to 1960, and have been modified several times to provide some modicum of protection for landowners. Among the changes that have been made are these:

* A requirement that an operation and reclamation plan be provided where surface and mineral estates are severed, was added in 1994. Current law does not require such a plan for leasehold situations, so that absent an obligation in the lease for reclamation to occur and for equipment to be removed, the landowner has no right to insist on either. The landowner in a severed-mineral situation will receive notice of proposed well drilling because the landowner must either approve the plan, which is required for any permit to drill, deepen, or reopen a well, or the matter goes to mediation, in which case the landowner must pay $100.

* KRS 353.595 provides for notice to a landowner in a severed estate situation who has not consented to the drilling of a new oil or gas well, prior to commencement of drilling, and also requires compensation to the landowner for any damage, and requires reclamation of all disturbed areas. It predated the requirement for a reclamation plan, and was adopted in 1990.

* KRS 353.597 requires replacement of water supplies damaged by oil or gas operations, and was adopted in 1994.

There have been no changes since 1994 to extend any new protections to landowners, despite several efforts to do so over the years by different interest groups, including the Kentucky Farm Bureau, KRC, and others.

In 2003, in response to an effort by Letcher County Judge Executive Carroll Smith to have enacted an ordinance drafted by KRC and regulating gathering lines (those lines that run from gas wells to compressor stations), the Kentucky oil and gas industry succeeded in having KRS 353.500 amended to preclude any local government regulation of any aspect of oil and gas production, transportation, gsthering and transmission, except for local government powers under KRS Chapter 100, which is the chapter allowing for zoning and planning by cities and counties.

As part of the negotiations on the bill, the Energy and Environment Cabinet (as it is now known) was to develop regulations on gathering lines within six months, which they did, and were also to promulgate regulations relating to all aspects of oil and gas exploration, production, and transmission in order to "assure efficient oil and gas operations and to protect the property, health, and safety of the citizens of the Commonwealth[.]" No deadline was set for the development of these regulations.

KRC has, for the 12 years since that statute was enacted, attempted to push the Cabinet to develop those regulations. Finally, in April of 2014, the Cabinet convened a work group comprised of representatives of the state oil and gas association and of various-sized oil and gas operations, KRC, a representative of a farm bureau chapter in western Kentucky that has been very active on these issues, a former Conservation Commissioner, and environmental attorney Reggie Van Stockum.

KRC began negotiations with them by providing a letter expressing my thoughts on what was needed by way of reforming current law, which is posted elsewhere on the website.

The group largely operated by consensus, and intends to continue to work after this session on a number of issues, including those in the KRC letter. The product of this consensus, which reflected many hours of research, drafting and negotiation, is House Bill 386. The bill is not the end of the process, but, with due respect to the negative reaction that some have expressed, contains a number of very significant improvements over current law, and the first such improvements in 21 years:

* A fund is established to provide for removal of abandoned tank batteries (above ground tanks associated with oil and gas production where saline "produced" water is separated from oil or gas production). Since this is an off-budget year, there is no funding appropriated, but the structure of the fund is established so that funding can be sought next year.

* A mechanism is created to require the owner of tank batteries to respond to an agency notice that the tank battery is abandoned, and to bring the tank battery up to active maintenance, including implementartion of a spill prevention, control, and countermeasure plan.

* Reclamation of the tank battery will include removal of contaminated soil and referral to the Division of Waste Management if there is contamination below 3 feet in depth.

* An additional notice requirement is established for all property owners within 1,000 feet of any well proposing to use high-volume horizontal fracking, which uses significant volumes of water under pressure rather then nitrogen. This notice is in addition to the notice that landowners will already have received in the form of a proposed reclamation plan where there is a severed estate.

* Prior to commencing a high-volume horizontal fracturing treatment for a deep well, water quality testing must be offered to all landowners who are within 1,000 feet of the proposed well location whose water is supplied by groundwater, and any downgradient water impoundments. Recognizing that there is an ambiguity in the language, there will be a committee substitute that will clarify that each water supply within that radius must be tested. There is also follow up testing required to be done between 3 and 6 months later, which would allow time for any curing of cement in the well annulus to reveal any pathways of leakage, and would consider the time needed for any groundwater contamination through primary flow to manifest itself within the 1,000-foot radius. The list of parameters is extensive, and includes radionuclides as well as surfactants and oil and gas-related constituents.

* For the first time, any high-volume horizontal fracking operation must complete a chemical disclosure form containing information concerning the well completion and treatment, which will be publicly available. Unlike a number of other states that allow the specific chemical identities to be held in confidence, the only trade secret that can be claimed is the mixture of the chemicals in the fracking fluid, and all chemicals and their CAS number must be disclosed. If there is an emergency situation, such as a spill or release, the responsible party is already obligated under KRS Chapter 224 to report on the volume and composition of the release.

* Permitting fees and bonding amounts for deep wells are increased. Deep horizontal wells are already allowed under state law, but there have been no applications for deep wells for several years. The bill, recognizing that the surface disturbance associated with deep horizontal wells is much greater than that typically associated with shallow wells, requires that the bond cover both the closure of the well and reclamation of all disturbed areas.

* The number of deep wells that can be covered under a blanket bond is capped.

* The requirement for a reclamation plan is extended to include all wells, rather than just those on severed estate lands, so leased operations will be required to file a reclamation plan with any proposed permit application.

* The contents of a reclamation plan are improved, including a clear requirement for a description of best management practices to be employed to prevent pollution, erosion, and sedimentation.

* The $100 mediation fee is made waivable by the Cabinet for those for whom paying the fee would constitute a hardship.

While there remains much to be done, HB 386 is a significant step forward, and one that is a consensus product that greatly improves the possibility of passage. KRC supports the progress that HB 386 represents.

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