KCC Killer Kops

The Kansas Corporation Commission (KCC) is the regulatory agency with administrative authority over oil and gas operations in Kansas. For many, many years the KCC had a reputation of being “operator friendly”. In other words, it tended to be nice to the oil and gas lease operators in the state. In practice, this meant that when they found an operator who was in violation of state laws or regulations, they would give the operator a reasonable time to get compliant and, if they did so, that would be the end of that particular incident. Things began to change around the turn of the millennium. The United States Environmental Protection Agency (EPA) was at the height of its power at that time, and took a very broad view of its jurisdiction. EPA people started showing up at leases to see if any birds had fallen into any of the tanks, and started making operators crazy with rules requiring them to put netting over them. This got the KCC in a bit of a tizzy, as they viewed the EPA as stepping on their toes or, perhaps more accurately, stepping on their turf. So, the KCC and the EPA met and hashed out some sort of agreement giving the KCC “exclusive” jurisdiction, but there were strings attached. One of the strings pertained to abandoned injection wells. To appease the EPA, the KCC started stretching the interpretation of who’s responsible for plugging abandoned injection wells, and hammering any operator they could find to tap with responsibility and make them either plug the wells or pay hefty fines.

As time went by, word “came down from the top” setting new policy that appeared to have the goal of eradicating the “operator friendly” reputation. The KCC began to bend over backwards to show it wasn’t operator friendly any more. This seemed partly a matter of show for the non-industry public that was beginning to clamor about fracking and earthquakes and environmental change. But to many in the industry it appeared calculated to appease the EPA so that it would stay out of the KCC’s back yard, so to speak.

The new policy was pursued with escalating intensity, if not a vengeance. Operators who had owned a lease 20, 30, 40 years ago started getting notices to plug abandoned wells they’d had nothing to with in decades. How could this be? The regulations required filing a form called a “T-1 Change of Operator” any time there was a change of ownership of an injection well, water supply well, or disposal well. Such wells had to have administrative approval and the order granting approval was given a docket number which had to be referred to in the T-1. If a lease didn’t have any injection or disposal wells, just producers, the regulations did not require filing a T-1 when there was a change of ownership. Suddenly, however, as part of the new policy, the KCC decided to require a T-1 any time there was a change of ownership of any well, whether injection, disposal, water supply, or producer. As part of the appeasement of the EPA, the KCC undertook a campaign to identify abandoned wells that had not been plugged, and order operators to plug them. If you were the operator who originally drilled the well, they were able to identify you. No matter how many times the lease and wells had changed hands afterwards, unless a T-1 had been filed that specifically identified a well as passing to a different operator, you were the last operator of record and, therefore, responsible for plugging the well. Failure to do so resulted in substantial monetary penalties and even loss of one’s operator license. If you could find some subsequent operator of the well and get them to sign a T-1 accepting responsibility for the well, you could avoid the plugging responsibility. But, what operator would be willing to sign a T-1 under the circumstances? It didn’t matter if you could show the KCC the recorded assignments showing the legal transfer of ownership of the lease and its wells, unless a T-1 on file with the KCC showed a different operator, you were stuck. It also didn’t matter that during those decades there was no requirement to file a T-1 when producing wells changed hands. This new policy served as a great example of “ex post facto” liability. Although there was no liability that attached for decades, we now had a new policy that was given retroactive effect to impose retroactive liability for wells an operator had not touched in decades.

The new policies identified many, many abandoned wells and there were two things that could happen. One, the KCC could tag some operator with responsibility, and get the well plugged; or, two, the KCC could tag some operator with a penalty for not plugging the well. This served to both appease the EPA and to bring cash to the KCC to monetize the state’s plugging fund. If no solvent operator could be forced to plug a well, the KCC could hire a contractor to plug it, the costs of which were to be paid from the state’s plugging fund. For a time, the salvage value of the abandoned equipment was sufficient to cover the cost of plugging. A contractor who plugged a well was, by law, entitled to a lien on the equipment. Over the course of the last decade, however, the cost of plugging a well has outstripped the salvage value of equipment that may have been abandoned on the leased land. Despite the accumulation of cash in the state’s plugging fund, the KCC remained loathe to actually spend it. Consequently, contractors lost incentive to plug wells, and the KCC became even more incentivized to tag unfortunate past operators with liability. It is doing little to diminish the inventory of unplugged abandoned wells with which to tag unsuspecting operators. Many farmers wait years for abandoned wells on their land to be plugged by the state which seems loathe to actually spend any of the funds it collects by licensing and fining operators.

Besides abandoned wells, the KCC also escalated its enforcement activities with regard to oil and water spills and compliance with other regulations. During the time when the KCC was “operator friendly”, it was relatively lenient about imposing penalties if the responsible operator was seen to be making a good faith effort to comply. Over the past decade, however, that leniency has disappeared. No matter that the ground is too soggy or muddy to get the necessary equipment to a well for clean-up or plugging, if you don’t get it done by the deadline they impose, you get penalized. Want a little extension of time? Good luck these days!

And then we got the pandemic and the price of oil plummeted further and operators couldn’t generate the cash to cover maintenance, repairs, clean-ups, or plugging. This, however, has not softened the KCC’s attitude toward operators. They are being hit with penalties sufficient to put them out of business at a time when they were already trying to figure out how to operate with balance sheets running in the red.

We’ll possibly edit and revise this diatribe as time goes by. What you see for now has been a “stream of consciousness” from a person who is witnessing the death of the oil industry in Kansas. We have on the books somewhere a legislative statement that it is the policy of the State of Kansas that the oil in the natural reservoirs beneath the surface of the state should be recovered through drilling and operation of wells. However, rather than attempt to revitalize this policy during a period of economic hardship, the KCC is driving the nails into the coffin of the oil industry in Kansas, assuring that those recoverable reserves will be lost. Indeed, it appears that whoever it is that is really pulling the strings from above has decided it’s time to put an end to an industry that has energized the country and supported some state economies for over a century. The KCC appears to have gotten the word.