CHAPTER 15 HOUSE BILL No. 2826 An Act concerning oil and gas; relating to unitization and unit operations; amending
K.S.A. 55-1304, 55-1308 and 55-1312 and K.S.A. 1999 Supp. 55-1305 and repealing
the existing sections.
Be it enacted by the Legislature of the State of Kansas:

      Section  1. K.S.A. 55-1304 is hereby amended to read as follows: 55-
1304. The commission may make an order providing for the unitization
and unit operation of such pool or part thereof sought to be unitized, if,
upon application of any working interest owner and after notice and hear-
ing in accordance with the provisions of the Kansas administrative pro-
cedure act, the commission finds all of the following conditions exist:

      (a)  (1) The primary production from a pool or a part thereof sought
to be unitized has reached a low economic level and, without introduction
of artificial energy, abandonment of oil or gas wells is imminent; or (2)
the unitized management, operation and further development of the pool
or the part thereof sought to be unitized is economically feasible and
reasonably necessary to prevent waste within the reservoir and thereby
increase substantially the ultimate recovery of oil or gas;

      (b) that the value of the estimated additional recovery of oil or gas
substantially exceeds the estimated additional cost incident to conducting
such operations; and

      (c) that the proposed operation is fair and equitable to all interest
owners.

      Sec.  2. K.S.A. 1999 Supp. 55-1305 is hereby amended to read as
follows: 55-1305. The order providing for the unitization and unit oper-
ation of a pool or a part thereof shall be upon terms and conditions that
are just and reasonable and shall prescribe a plan for unit operations that
shall include:

      (a) A legal description in terms of surface area of the pool or a part
thereof to be so operated, termed ``the unit area'';

      (b) a statement of the nature of the operations contemplated;

      (c) an allocation to the separately owned tracts in the unit area of all
the oil and gas that is produced from the unit area and is saved, being
the production that is not used in the conduct of operations on the unit
area or not unavoidably lost. The allocation shall be in accord with the
agreement, if any, of all interest owners. If there is no such agreement
as to the allocation, the commission shall determine the relative value of
the separately owned tracts in the unit area, exclusive of physical equip-
ment, for development of oil and gas by unit operations, and the produc-
tion allocated to each tract shall be the proportion that the value of each
tract so determined bears to the total value of all tracts in the unit area;

      (d) a provision for the credits and charges to be made in the adjust-
ment among the working interest owners in the unit area for their re-
spective investments in wells, tanks, pumps, machinery, materials and
equipment contributed to the unit operations;

      (e) a provision providing how the costs of unit operations, including
capital investments, shall be determined and charged to the separately
owned tracts and how said such costs shall be paid, including a provision
providing when, how, and by whom the unit production allocated to a
working interest owner who does not pay the share of the cost of unit
operations charged to such owner, or to the interest of such owner, may
be sold and the proceeds applied to the payment of such costs;

      (f) a provision whereby a nonoperating working interest owner, upon
request shall be furnished, but not more often than once a month, shall
be furnished reasonably detailed information regarding the nature and
amount of the various items of costs and expenses, including capital in-
vestments, chargeable against the interest of the nonoperating working
interest owners;

      (g) a provision for carrying any nonoperating working interest owner
on a limited, carried or net-profits basis, payable out of production, upon
terms and conditions determined by the commission to be just and rea-
sonable, or otherwise financing any nonoperating working interest owner
who elects to be carried or otherwise financed or who does not meet the
owner's financial obligations with the unit and a provision for establishing
a reasonable rate of interest and a penalty on all unpaid expenses, in
amounts established by rules and regulations adopted by the commission,
not to exceed:

      (1) One hundred percent of the unpaid portion of the owner's share
of the cost of aboveground surface equipment beyond the wellhead con-
nection, including, but not limited to, stock tanks, separators, treaters,
pumping equipment and piping, plus 100% of the unpaid portion of the
owner's share of the cost of operation of the unit, all subject to the rate
of interest established;

      (2) three hundred percent of the unpaid portion of the owner's share
of the costs and expenses of drilling wells in the unitized area, including
staking, well site preparation, rigging up, or drilling, and reworking, deep-
ening or plugging back, testing and completing wells; and

      (3) three hundred percent of the unpaid portion of the owner's share
of the costs and expenses of underground pipeline systems, expenses for
injected substances and any other nonrecoupable expenses incurred. All
interest and penalties prescribed under this subsection shall be paid from
the nonpaying interest owner's share of production;

      (h) a provision for the supervision and conduct of the unit operations,
including the selection, removal, or substitution of an operator from
among the working interest owners to conduct the unit operations;

      (i) a provision for a voting procedure for the decision of matters to
be decided by the working interest owners in respect to which each work-
ing interest owner shall have a vote with a value corresponding to the
percentage of the costs of unit operations chargeable against the interest
of such owner. However, in no event shall the vote of a single working
interest owner control unless a single working interest owner is liable for
all the cost;

      (j) the time when the unit operations shall commence and the manner
in which, and the circumstances under which, the unit operations shall
terminate and for the settlement of accounts upon such termination;

      (k) a provision specifying the particular records the unit operator shall
keep and the detailed accounting procedure that the unit operator shall
follow. A plan of unitization shall not be considered fair and reasonable
if it contains a provision for operating charges which include any part of
district or central office expense other than reasonable overhead charges;
and

      (l) such additional provisions that are found to be appropriate for
carrying on the unit operations and for the protection of correlative rights.

      No order of the commission providing for unit operations upon a find-
ing pursuant to subsection (a)(1) of K.S.A. 55-1304, and amendments
thereto, shall become effective unless and until the plan for unit opera-
tions prescribed by the commission has been approved in writing by those
persons who, under the commission's order, will be required to pay at
least 75% 63% of the costs of the unit operation, and also by the owners
of at least 75% 63% of the production or proceeds thereof that will be
credited to interests which are free of cost such as royalties, excluding
overriding royalties and production payments or other like interests which
are carved out of the leasehold estate, and the commission has made a
finding, either in the order providing for unit operations or in a supple-
mental order, that the plan for unit operations has been so approved. No
order of the commission providing for unit operations upon a finding
pursuant to subsection (a)(2) of K.S.A. 55-1304, and amendments thereto,
shall become effective unless and until the plan for unit operations pre-
scribed by the commission has been approved in writing by those persons
who, under the commission's order, will be required to pay at least 63%
of the costs of the unit operation, and also by the owners of at least 75%
of the production or proceeds thereof that will be credited to royalties,
excluding overriding royalties or other like interests which are carved out
of the leasehold estate, and the commission has made a finding, either in
the order providing for unit operations or in a supplemental order, that
the plan for unit operations has been so approved. If the plan for unit
operations has not been so approved at the time the order providing for
unit operations is made, the commission shall upon application and notice
hold such supplemental hearings as may be required to determine if and
when the plan for unit operations has been so approved. If the persons
owning the required percentage of interest in the unit area do not approve
the plan for unit operations within a period of six months from the date
on which the order providing for unit operations is made, such order shall
cease to be of further force and effect and shall be revoked by the com-
mission, except that the commission may extend the six-month period for
not to exceed 60 days for good cause shown.

      An order providing for unit operations may be amended by the com-
mission in the same manner and subject to the same conditions as are
necessary or required for an original order providing for unit operations,
except that: (a) If such an amendment affects only the rights and interest
of the working interest owners, the approval of the amendment by the
royalty owners shall not be required; and (b) no such order of amendment
shall change the percentage for the allocation of oil and gas as established
for any separately owned tract by the original order, except with the con-
sent of all persons owning oil and gas rights in such tract; no such order
shall change the percentage for the allocation of cost as established for
any separately owned tract by the original order, except with the consent
of all working interest owners in such tract.

      The commission by an order may provide for the unit operation of a
pool or a part thereof that embraces a unit area previously established
either by voluntary agreement or order of the commission. Such order,
in providing for the allocation of unit production, shall first treat the unit
area previously established as a single tract, and the part of the unit pro-
duction so allocated thereto shall then be allocated among the separately
owned tracts included in such previously established unit area in the same
proportions as those specified in the previous agreement or order.

      An order may provide for the unit operation of less than the whole of
a pool where the unit area is of such size and shape as may be reasonably
required for that purpose, and the conduct thereof will have no material
adverse effect upon other parts of the pool.

      Sec.  3. K.S.A. 55-1308 is hereby amended to read as follows: 55-
1308. Property rights, leases, contracts, and other rights or obligations
shall be regarded as amended and modified only to the extent necessary
to conform to the provisions and requirements of this act and to any valid
order of the commission providing for the unit operation of a pool or a
part thereof, but otherwise shall remain in full force and effect. For the
purpose of this act the owner, or owners, of oil and gas rights in and
under an unleased tract of land shall be regarded as a working interest
owner to the extent of a seven-eighths (7/8) 7/8 interest in and to said such
rights and a royalty owner to the extent of the remaining one-eighth (1/8)
1/8 interest therein, except that, if the commission finds that, under the
prevailing industry practice in the area where the unit is located, oil and
gas leases contain a higher amount of royalty than 1/8 royalty interest,
then the owner or owners shall be regarded as a royalty interest owner
to the extent of the royalty interest determined by the commission to be
in accordance with prevailing industry practice and a working interest
owner as to the remainder of the owner's or owners' interest in such tract
of land.

      A one-eighth (1/8) 1/8 part of the production allocated to each tract under
an order providing for the unit operation of a pool or a part thereof, shall
in all events be and remain free and clear of any cost or expense of
developing or operating the unit and of any lien therefor as an unencum-
bered source from which to pay the royalties or other cost free obligations
due or payable with respect to the production from such tract. If a lease
or other contract pertaining to a tract or interest stipulates a royalty,
overriding royalty, production payment, or other obligation in excess of
one-eighth (1/8) 1/8 of the production or proceeds therefrom, then the
working interest owner subject to such excess payment or other obligation
shall bear and pay the same.

      Sec.  4. K.S.A. 55-1312 is hereby amended to read as follows: 55-
1312. It shall be the duty of the unit operator to make and file all necessary
ad valorem tax renditions and returns with the proper taxing authorities
covering all property of each working interest owner used or held by the
operator in the unit operations. All such property of the several working
interest owners shall be assessed and taxed together as a single unit. If
such property is not reported for taxation by the unit operator, assessment
and taxation of the working interest owners' property of the unit shall be
made as a unit by the county assessor. All such ad valorem taxes shall be
paid by the unit operator initially as a part of the costs of unit operations
with each working interest owner's share thereof to be the same as other
costs of unit operations. Each working interest owner shall pay or cause
to be paid all production, severance and other taxes that may be imposed
upon or in respect of the production of that owner's share of the unitized
substances.

      Sec.  5. K.S.A. 55-1304, 55-1308 and 55-1312 and K.S.A. 1999 Supp.
55-1305 are hereby repealed.

 Sec.  6. This act shall take effect and be in force from and after its
publication in the Kansas register.

Approved March 20, 2000.
 Published in the Kansas Register March 30, 2000.
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