KRC Outlines Priorities For Reform Of Oil And Gas Laws And Regulations

KRC Outlines Priorities For Reform Of Oil And Gas Laws And Regulations  Posted: July 3, 2014
July 1, 2014

To: Commissioner Steve Hohmann
Members, Oil and Gas Workgroup

From: Tom FitzGerald, Director,
Kentucky Resources Council

Re: Recommendations for Workgroup Priorities

I appreciate the opportunity to present these suggestions regarding revisions and improvements to the existing regulatory framework for oil and gas under Kentucky law.

KRC approaches this process with the hope that, was the case in the development of the 2004 coalbed methane regulatory program now codified at KRC Chapter 349, a collaboration among interests will produce a regulatory framework that adequately protects the correlative interests of surface and mineral owners, addresses environmental concerns, and provides for orderly development, storage, and transportation of oil and gas resources in the Commonwealth.

One of the workgroup members asked, during the initial meeting, ?Why are we here?” It is a legitimate question, and one that the Council believes has several compelling and sufficient answers. Initially, KRS Chapter 353 is in need of updating in order to address changes in technology, in our common understanding of the effects of oil and gas production on natural resources and the environment, and changing expectations of landowners and the public concerning the prevention and mitigation of environmental and health consequences of oil and gas development. Beyond that, we stand on at the beginning of a potentially significant influx of new companies seeking to produce from the Berea and New Albany Shales, using hydraulic fracturing rather than the traditional nitrogen foam fracing that has been used in Kentucky since the 1970s. Issues associated with hydraulic fracturing using water, particularly in the Berea formation, should be anticipated and addressed before, rather than in response to, this anticipated development.

Finally, the Cabinet is under two legislative mandates to develop a comprehensive regulatory program. In response to the effort by Letcher County Judge Executive Carroll Smith to address property and roadway damage caused by gas exploration in Letcher County associated with gathering lines in 2002-3, the General Assembly amended KRS 353.500 in order to preempt local governments from regulating oil and gas development, except as those activities might be affected by comprehensive plans and zoning regulations under KRS Chapter 100.

Specifically, the Cabinet was tasked with developing gathering line regulations within six (6) months of enactment, and then to develop the remainder of the regulatory program after that time. As one of the handful of individuals who was present during the negotiations, it was clear to all involved that preemption of local government regulation over aspects of the oil and gas industry would occur in return for a commitment by the Cabinet and a mandate from the General Assembly for timely development of a comprehensive state regulatory program over oil and gas development.

Specifically, the General Assembly found and mandated that:

"[G]overnmental responsibility for regulating all aspects of oil and
gas exploration, production, development, gathering, and transmission
rests with state government. The department shall promulgate regulations relating thereto and take all actions necessary to assure efficient oil and gas operations and to protect the property, health, and safety of the citizens of the Commonwealth in a manner consistent with KRS Chapter 353, and to the exclusion of all other nonstate governmental entities except as provided in KRS Chapter 100."

KRS 353.500(2) (2003).

This mandate is in addition to the broad general authority given to the Cabinet by KRS Chapter 353, which is recognized in KRS 353.550. The General Assembly declared the policy for KRS 353.500 to 353.720 to be
"
to foster conservation of all mineral resources, to encourage exploration for such resources, to protect correlative rights of land and mineral owners, to prohibit waste and unnecessary surface loss and damage and to encourage the maximum recovery of oil and gas from all deposits thereof now known and which may hereafter be discovered; and to promote safety in the operation thereof. To that end, KRS 3253.500 to 353.720 is enacted and shall be liberally construed to give effect to such public policy."

KRS 353.500(1).

The department (now Cabinet) is “authorized and it shall be its duty to administer and enforce KRS 353.500 to 353.720” and is given “authority and jurisdiction over all persons and property necessary for such purposes.” The general authority of the Cabinet is recognized at several junctures, including KRS 353.550 and 353.560, which are prefaced with the phrase “[w]ithout limiting its general authority[.]” Where the General Assembly has not enacted specific provisions establishing obligations on producers, the Cabinet retains broad “gap-filling” authority to assure that the public policy of KRS 353.500(1) is implemented.

The Cabinet thus has two independent and sufficient mandates to develop, modify, and revise existing regulations and to develop such new regulations as are needed to carry out the public policy of KRS 353.500(1) and the mandate of KRS 353.500(2).

KRC believes that the preferred approach to improving the Kentucky oil and gas laws and regulations is a collaborative one, and is committed to working towards implementation of these public policies and goals.

Against that background, KRC suggests these priority areas for improvement:

I. SURFACE OWNER – PRODUCER RELATIONSHIP

1. Leasehold Reclamation

The current regulatory framework has significant gaps in protection of landowners and the environment. While regulations have been developed to implement the requirement of KRS 353.5901(1) that an operator submit an operations and reclamation proposal for tracts where there has been a complete severance of the surface to be disturbed, no comparable set of regulations has been developed to assure that in leasehold situations or where the oil or gas operator owns the land in fee, damage to air, land and water resources is minimized and reclamation of the land occurs.

2. Public Notice and Participation

The transparency of the regulatory process is critical to successful development of oil and gas resources. The level of public fear or anger is often a direct correlative to the degree to which the public feels excluded from the process by which development decisions are made. In order to better inform and educate the public, KRC suggests these common-sense improvements:

a. Public notice of intent to seek a permit to explore or drill, both mailed to the surface landowner and adjoining neighbors, and published in a local paper of general circulation a notice describing the project, the expected timeline for completion, and a map showing the affected areas. This notice shall be published at least once a week for three (3) consecutive weeks before commencement of any site disturbance.

b. Submission of proof of ownership or other legal source of right of entry onto the property on which the well is to be constructed or operated. Where the right-to-enter is contested, the agency should await an adjudication by a court of competent jurisdiction of the validity of the instrument(s) upon which right-of-entry is alleged to rest.

c. Notice to the surface landowner in the event that transfer of a well is proposed, since the authority to conduct such operations may be personal to the permittee, and further because the landowner should have the right to review and determine the sufficiency of the transfer documentation.

d. Notice to and coordination of line location and equipment and pipeline crossing of public roads with local governments.

e. Clarification of right of aggrieved individuals to administrative and judicial review of permitting decisions.

3. Reclamation Plan Contents And Bonding

For both leasehold and severed mineral situations, an operations and reclamation plan should be submitted including these components:

a. A narrative description of the location of all areas to be disturbed, including the location of all well sites, roads, waste management areas, tank batteries and gathering lines. Accompanying this narrative description shall be a map in sufficient detail and certified by an appropriate qualified engineer, geologist or land surveyor, depicting the location of the land of all of these disturbances or facilities and prominent natural features;

b. A description of the methods to be employed to protect surface and groundwaters and to prevent contamination of land resources from all potential environmental consequences oil and gas operations, including the construction, use, conversion and closure of oil and gas exploration and production operations, and all related facilities, including pipelines, compressor stations, wellhead areas, tank batteries, oil/water separators, holding, drilling and production pits, and other areas on which are sited structures or facilities or where the land surface is disturbed incident to such operations;

c. A proposal to prevent erosion and sedimentation from all disturbed areas, and for management and disposal of all fluids used or generated from the drilling;

d. The plan should include a discussion of all known and suspected pollutants or contaminants (constituents of concern), and how those wastes, pollutants and contaminants will be managed to protect human health and the environment.

e. The construction, operation and maintenance practices for all pits and tanks should be included within the operations and reclamation plan, and the operator should describe that distance from the pit bottom to the seasonal high groundwater table, and those measures to be taken to assure that the pit contents do not adversely impact ground or surface waters.

f. A plan to coordinate the timing of the operation to accommodate seasonal uses of the land by the surface owner;

g. A plan to minimize the impact on the other uses of the land by the surface owner, including the use of timber, houses, barns, ponds, crops, and other improvements,

h. A revegetation plan addressing restoration of disturbed areas to pre-operation levels of productivity, and of a diverse, effective, permanent vegetative cover.

i. A description of measure to be taken to control airborne emissions of hazardous air pollutants, including methane during well stimulation and production;

j. A performance bond to guarantee successful completion of reclamation, including removal of all surface structures and facilities, including tanks, pumps, pits, etc.

k. A requirement that at all times during the construction, and operation of oil or natural gas wells, the person owning or operating such wells shall at its own expense maintain in force a general comprehensive liability insurance policy. The coverage represented by such a policy or policies shall cover any bodily injury, death and property damage due to the activities of the operator.

4. Improvement of on-line access, including publicly-accessible database on well completion and description.

II. PRODUCER – COMMONWEALTH RELATIONSHIP

1. Revise compliance and enforcement framework to provide Cabinet with sufficient array of tools to address violations and imminent harm situations, including issuance of notices of violation and cessation, civil penalties, cessation orders for emergency situations and for drilling without a permit.

2. Clarify rights to administrative review of Cabinet enforcement decisions.

3. Revisions to technical standards, pooling and unitization to address horizontal drilling.

4. Requirement of submission of mechanical integrity test for all new or enlarged wells.

5. Submission of cement bond logs to assure that cement in the well annulus has completely isolated producing zone(s) from other zones, including USDWs.

6. A requirement that each operator shall submit for approval and implement a continuous program of emergency response preparedness and training, including spill control and countermeasures planning.

---