Brief⁽¹⁾

H.B. 2419 would amend four sections of existing law to clarify unlawful actions and change penalties with respect to the production of oil and gas.

Specifically, the bill would amend K.S.A. 55-708, concerning the production and conservation of natural gas by increasing the current fine from not exceeding $500 to not exceeding $5,000 and reducing the imprisonment in the county jail from not exceeding six months to not exceeding 30 days.

K.S.A. 55-904 would be amended to clarify that it is unlawful to "knowingly and willfully" dispose of salt water produced in conjunction with oil or gas production except in a lawful manner or to dispose of any substance not exempt under 40 CFR 261.4 (4)(5) in a class II disposal or injection well. The bill would change the penalty for violation of this section of law and would make it a severity level 9 nonperson felony. A second or subsequent offense under this section would be changed to a severity level 8, nonperson felony. In addition, the definition of "salt water" is clarified to mean water containing more than 5,000 milligrams per liter chlorides and "produced in conjunction with the production of oil or natural gas."

The bill would make the violation of K.S.A. 55-1004 (the section of law making it unlawful to dispose of oil field waste in a disposal well at a pressure in excess of the maximum pressure established by the State Corporation Commission) a severity level 9, nonperson felony. The bill also would amend this section to clarify that it would not be a violation when noncompliance with the established pressure is due to a cause beyond the control of the operator and the operator takes immediate and reasonable steps to gain prompt and full compliance with appropriate rules and regulations and statutes.

The bill also would clarify K.S.A. 55-1005 to make it a violation of law for a person to "knowingly and willfully" dispose of salt brines or other oil field wastes which do not meet the requirement for minimum depth established by rules and regulations of the Corporation Commission. The violation of this section of law would be changed to a severity level 9, nonperson felony.

In addition, the bill would prevent any fine or other penalty from being imposed by the State Corporation Commission, pursuant to statutes or rules and regulations relating to regulation of oil and gas production, sale, or conservation, except after notice and an opportunity for a hearing in accordance with the Kansas Administrative Procedure Act. The exception to this provision would be cease and desist orders of the Commission for which a hearing is provided for in law.

The bill also would allow a nonrefundable income tax credit for any taxable year commencing after December 31, 1997, for expenditures made for the purpose of plugging any abandoned oil or gas well. The plugging would have to be in accordance with rules and regulations of the State Corporation Commission and the well would have to have been drilled prior to January 1, 1970. The credit could not exceed 50 percent of the expenditure for plugging. The credit could be carried forward indefinitely if the credit could not be completely used in one tax year. The total amount of the credit allowed statewide could not exceed $250,000 in any fiscal year and would be allowed to those who first apply for the credit. The provision establishing the tax credit would expire July 1, 2000.

In addition, the bill would prevent first sellers of natural gas from maintaining any action against royalty interest owners in order to obtain refunds of reimbursements for ad valorem taxes ordered by the Federal Energy Regulatory Commission. The bill would declare that: the period of limitation of time for commencing civil actions to recover these taxes for the years 1983 through 1988 has expired; first sellers of natural gas would be prohibited from using billing adjustments or other set-offs as a means to recover these taxes; and first sellers of natural gas took every opportunity to protect their rights involving ad valorem tax reimbursements attributable to royalty interest owners. This provision of the bill would provide that if any court or governmental authority having jurisdiction would require first sellers to make refunds of reimbursements for ad valorem taxes for the years 1983 through 1988 notwithstanding this act or if the bill is determined to be unconstitutional, then nothing in the bill would be construed to have altered the laws of Kansas, including those applicable in any action of a first seller against a royalty owner to obtain the refund. Under this provision of the bill, royalty owners would include overriding royalty interest owners and royalty interests include overriding royalty interests.

Background

This bill was introduced during the 1997 Legislative Session. Testimony before the House Environment Committee occurred during the 1998 Session and consisted of a spokesperson from the State Corporation Commission speaking in favor of the bill and a spokesperson from the Kansas Independent Oil and Gas Association speaking in opposition.

The Acting Chairperson of the House Environment Committee assigned the bill to a subcommittee. The subcommittee report contained the provisions adopted by the full House Committee on Environment.

The fiscal note on the original bill states that the State Corporation Commission indicates that there would be no fiscal impact to its operations associated with the passage of H.B. 2419.

The House Committee of the Whole added the provision making it a requirement that notice and an opportunity for a hearing must be provided by the State Corporation Commission before any fine or penalty is imposed.

The Senate Committee on Energy and Natural Resources amended the bill by adding the provision allowing the tax credit for plugging of abandoned oil or gas wells.

Total credits for oil well plugging could not exceed $250,000 and would be a reduction in income tax receipts to the State General Fund. The reduction would be spread mostly over fiscal years 1999, 2000, and 2001.

The Senate Committee of the Whole amended the bill to add the provision which would prohibit any first seller of natural gas from maintaining any action against royalty interest owners to obtain refunds of reimbursements for ad valorem taxes attributable to royalty interests, ordered by the Federal Energy Regulatory Commission. The Senate Committee of the Whole also amended most of the provisions of the bill to make them effective on July 1, 1998.

1. *Supplemental notes are prepared by the Legislative Research Department and do not express legislative intent. The supplemental note and fiscal note for this bill may be accessed on the Internet at http://www.ink.org/public/legislative/fulltext-bill.html.