[1995/oagheade.htm]

OAG 95-9

March 17, 1995

Subject: Oil and Gas Bonding Requirements for pre-June 16, 1960 Wells

Written by: John S. Gillig

Requested by: Hon. Eugene D. Attkisson, General Counsel, Department of Mines and Minerals

Syllabus: An oil or gas well which was already in production on June 16, 1960, the effective date of the Oil and Gas Conservation Act (KRS 353.500-.720), is subject to bonding requirements of the Act.

Statutes construed: KRS 353.010(9), 353.180(1), 353.500-.720

OPINION OF THE ATTORNEY GENERAL

This opinion considers the applicability of the well bonding provisions of KRS 353.590 to a well drilled before June 16, 1960 ("pre-1960 well"), but whose current operator acquired its interest in the operation of that well after June 16, 1960, the date KRS 353.590 became effective.

It is the opinion of this Office that KRS 353.590 is applicable to a successor in interest ("successor") to a pre-1960 well. This opinion is consistent with and compelled by statutorily expressed public policy, the plain language of the statutes themselves, and recent caselaw.

The Oil and Gas Conservation Act

KRS 353.500 to 353.720 were enacted in 1960 as the Oil and Gas Conservation Act ("Act"), part of a comprehensive effort to encourage the conservation of Kentucky's oil and gas resources. Smith v. Rogers, Ky., 702 S.W.2d 425, 427 (1986). KRS�353.500 sets forth this public policy of conservation, prohibition of waste, and "maximum recovery of oil and gas from all deposits thereof now known and which may hereafter be discovered .�. . ." This expression of public policy by the Kentucky General Assembly in 1960 encompassed not only future oil and gas exploration and development, but those oil and gas deposits already existing (i.e., discovered prior to 1960). In furtherance of these ends, the provisions of KRS 353.500-.720 are to be liberally construed to give effect to this public policy. KRS 353.500.

A permit is required to produce oil or gas from any well in the Commonwealth, and a well is required to be spaced a certain distance from other wells, "except that this subsection shall not prohibit the continuation of production of oil or gas from a well producing oil or gas on June 16, 1960." KRS 353.520(3). Thus oil and gas production from a well operating on June 16, 1960, may not be prohibited by the permitting process and spacing requirements for post-1960 wells may not be enforced. A similar reference to the effective date of the Act occurs in KRS 353.570, which provides that no person shall drill or deepen a well, reopen a plugged well, inject any gas or fluid into an oil or gas producing formation, drill or deepen a water supply well or drill test holes after June 16, 1960, without a permit. However, nothing in either of these sections or other parts of the Act exempts pre-1960 wells from the general requirements and public policy expressed in KRS�353.500-.720.

For example, KRS 353.520(2) states emphatically that "[t]he waste of oil and gas is hereby prohibited." It then provides some examples of waste as that term is generally understood in the industry. No distinction between pre-1960 and post-1960 wells is made, nor would such a distinction advance the purposes of the Act.

An important part of the Act is the bonding requirement set out in KRS 353.590. In general, bonding is necessary to supplement the well operator's obligation to plug a well that is

no longer in active operation. If a well is left unplugged, oil or gas may escape, wasting the resources and reducing underground pressures that might allow greater production from other wells. An unplugged oil well may allow oil to migrate to the surface or between various underground strata causing additional waste and damage to underground sources of drinking water. If a gas well is left unplugged, there is also the danger of fire or explosion. Therefore, as part of the permitting process, an applicant for a permit must provide a bond. The amount of the bond varies according to the depth of the well, increasing as the depth of the well increases. KRS 353.590(5). This is consistent with the conservation purpose of the Act, since the money obtained from the forfeiture of bonds is to be used to plug abandoned wells, KRS�353.590(9), and this grows more expensive as the wells go deeper. The bonding requirement is the Commonwealth's assurance that some money will be available to plug an abandoned well and fulfill the operator's obligation under the Act. Even pre-1960 wells are required by law to be plugged by the operator when taken out of production. KRS 353.180(1) (abandoned wells shall be plugged); KRS 353.560 (Department of Mines and Minerals "shall regulate: (1) The drilling and plugging of all wells" [Emphasis added]); 805 KAR 1:070 (eff. 6-11-75) (well no longer used must be plugged).

The Plain Language of the Statute

The statutory provision which most clearly governs the issue is KRS 353.590(6):

(6) A successor to the well operator shall post bond and notify the department [of Mines and Minerals] in writing in advance of commencing use or operation of a well or wells. The successor shall assume the obligations of this chapter as to a particular well or wells and relieve the original permittee of responsibility under this chapter with respect to the well or wells. It shall be the responsibility of the selling operator to require the successor operator to post bond before use or operation is commenced by the successor and relief of responsibility under this chapter is granted to the original permittee.

(Emphasis added.)

No distinction in the statute is made between wells drilled before or after a certain date, and it appears none was intended. The requirement of the successor to post bond is clear

on its face, and it is the duty of a court to garner the legislative intent from the plain words of a statute and give to the words their ordinary, usual and accepted meaning. See Gateway Construction Company v. Wallbaum, Ky., 356 S.W.2d 247, 249 (1962); Kentucky Association of Chiropractors, Inc. v. Jefferson County Medical Society, Ky., 549 S.W.2d 817, 821 (1977); Thompson v. Bracken County, Ky., 294 S.W.2d 943, 946 (1956); and Young v. Board of Education of Graves County, Ky. App., 661 S.W.2d 787, 789 (1983).

Indeed, nothing in the Act or related statutes exempts even the original owner of a pre-1960 well from the general requirement for bonding or permitting, since the statutory exemption appears to apply only to an action by the department which would "prohibit the continuation of production of oil or

gas from a well producing oil or gas on June 16, 1960." KRS�353.520(3). Requiring a permit to operate or a bond does not in and of itself "prohibit the continuation of production" although enforcing some permitting conditions required of operations commencing after June 16, 1960, such as spacing between wells, might. Proper bonding, however, does not "prohibit" production, and thus is not affected by the exemption under a plain reading of the statutory language.

Recent Caselaw

KRS 353.590(6) was interpreted by the Kentucky Supreme Court in Pro Gas, Inc. v. Har-Ken Oil Co., Ky., 883 S.W.2d 485 (1994). Following Har-Ken's transfer of its interests in certain wells to Pro Gas, Pro Gas failed to replace the bonds and Har-Ken sued. As framed by the Court, the basic question was whether Har-Ken, the original owner and obligor on the bonds, was responsible for plugging the wells at some distant point in the future when Pro Gas was through with them, or whether this obligation had been transferred to Pro Gas when the leases were purchased. Not surprisingly, the Supreme Court ruled that Pro Gas, as the successor, was responsible for proper bonding of the wells and for plugging them at a later date. Key to the Court's decision in Pro Gas was the public policy embodied in the Oil and Gas Conservation Act, the legislature's instructions that the Act be liberally construed, and the plain language of the Act itself. Absent from KRS 353.590(6), the Court held:

is any requirement that the successor actually operate the leases before the obligation begins. To the contrary, it requires the successor to post bond before use or operation is commenced by the successor. The legislature has clearly enacted a requirement that one acquiring an oil or gas lease with existing wells substitute its bond for the existing bond upon transfer and prior to commencing lease operation.

Definitionally, KRS 353.010(9) provides that a "'well operator' means any person who proposes to or does locate, drill, operate or abandon any well." . . . [O]nce Pro Gas purchased from the bankruptcy trustee an assignment of the leases, it had to operate the leases or abandon them. No additional options manifest themselves, as the failure to do anything is but the equivalent of an abandonment. Such acts place appellant within the statutory definition of "well operator," imposing thereon the duty to comply with the bond requirement. Acquiring title to the lease, by design or otherwise, imposes a responsibility.

Id. at 488-89.

Conclusion

Although Pro Gas did not involve a pre-1960 well, its reasoning is compelling and is adopted here. The successor must post bond even if the well in question was "grandfathered" or otherwise protected from compliance with permitting and spacing requirements relating to production which would be unlawful in a well drilled after 1960. Operators of pre-1960 wells are not exempt from all provisions of the Oil and Gas Conservation Act, but in fact are required to plug their wells and exercise other responsibilities relative to their wells despite the fact that the wells were drilled prior to the effective date of the Act. The plain language of the Act, its related statutes, and the intent that these statutes be liberally construed show no indication that the General Assembly wished to exclude successors to pre-1960 wells from one of the most important requirements of the Act, that of bonding to assure proper closure. The legislature, it is apparent, wished to maintain production in pre-1960 wells but not exclude such wells from all aspects of the Act. The department of Mines and Minerals, therefore, is within its statutory authority in requiring a bond of a successor to a pre-1960 well.

CHRIS GORMAN

ATTORNEY GENERAL

John S. Gillig

Assistant Attorney General