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Lario Oil & Gas Co. v. Kansas Corporation Commission

Court of Appeals of Kansas

August 23, 2019

Lario Oil & Gas Company, Appellant,
v.
Kansas Corporation Commission, Appellee, and Cholla Production, LLC, Intervenor/Appellee.

         SYLLABUS BY THE COURT

         1. The Kansas Unitization Act, K.S.A. 55-1301 et seq., gives the Kansas Corporation Commission the jurisdiction to permit the grouping of oil and gas leases into a single unit.

         2. The legislative purpose of the Kansas Unitization Act is to prevent waste, to further the conservation of oil and gas, and to protect the correlative rights of persons entitled to share in the production of oil and gas.

         3. There are four factors which the Kansas Corporation Commission must consider before it can order unit operations: (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; (3) that the value of the estimated additional recovery of oil or gas substantially exceeds the estimated additional cost incident to conducting such operations; and (4) that the proposed operation is fair and equitable to all interest owners.

         4. Waste is defined as both economic and physical waste resulting from the development and operation separately of tracts that can best be operated as a unit. K.S.A. 55-1302(d).

         5. Pool is defined as an underground accumulation of oil and gas in one or more natural reservoirs in communication so as to constitute a single pressure system so that production from one part of the pool affects the pressure throughout its extent. K.S.A. 55-1302(b).

         6. According to K.S.A. 2018 Supp. 77-621(d), in reviewing the evidence in light of the record as a whole, a court shall not reweigh the evidence or engage in de novo review.

          Appeal from Scott District Court; Ricklin Pierce, judge.

          Amy Fellows Cline and Timothy E. McKee, of Triplett Woolf Garretson LLC, of Wichita, for appellant.

          Michael J. Duenes, assistant general counsel, of Kansas Corporation Commission, for appellee.

          Diana Edmiston, of Edmiston Law Office, LLC, of Wichita, for intervenor.

          Before Hill, P.J., Standridge, J., and Neil B. Foth, District Judge, assigned.

          HILL, J.

         This case deals with the unitization of oil and gas wells. Sometimes described as "unit operation," unitization means the joint operation of all or some part of a producing reservoir. Unitization is often desirable in secondary recovery operations where the location of input wells, the freedom to flood out parts of the reservoir, and the sharing of costs are vital to the success of the program. See 6 Williams & Meyers, Oil and Gas Law, § 901 (2018). In Kansas, unitization is regulated by the Kansas Corporation Commission.

         The Commission refused to allow Lario Oil & Gas Company to unitize several oil and gas leases and operate them as a single unit. Lario appealed to the district court. The court, in a thorough and thoughtful opinion, affirmed the Commission's ruling. The company turns now to this court. Having examined the three points raised by Lario, we decline the invitation to reweigh the evidence and because we see no legal errors by the Commission, we affirm.

         Using the Kansas Judicial Review Act, K.S.A. 77-601 et seq., Lario makes three claims:

• The Commission misinterpreted the Kansas Unitization Act by using a too narrow definition of the term "pool," which improperly increased what it had to prove in order to show that the leases can be operated as a common unit;
• the Commission's orders were unsupported by substantial competent evidence; and
• the Commission acted unreasonably, arbitrarily, and capriciously.

         The controlling statute and some legal definitions provide context.

         Enacted in 1967, the Unitization Act, K.S.A. 55-1301 et seq., sometimes called the Compulsory Unitization Act, gives the Commission the jurisdiction to permit the grouping of oil and gas leases into a single unit. The legislative purpose of the Act is to prevent waste, to further the conservation of oil and gas, and to protect the correlative rights of persons entitled to share in the production of oil and gas. See K.S.A. 55-1301.

         There are four factors which the Commission must consider before it can order unit operations. Under K.S.A. 55-1304, the Commission must look at production, feasibility, costs, and fairness to all:

"(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) the value of the estimated additional recovery of oil or gas substantially exceeds the estimated additional cost incident to conducting such operations; and
"(c) the proposed operation is fair and equitable to all interest owners."

         Addressing one of the purposes of the Act, "waste" is defined in K.S.A. 55-1302(d) as "both economic and physical waste resulting from the development and operation separately of tracts that can best be operated as a unit."

         Finally, an important term here-"pool"-is defined in K.S.A. 55-1302(b) as "an underground accumulation of oil and gas in one or more natural reservoirs in communication so as to constitute a single pressure system so that production from one part of the pool affects the pressure throughout its extent." Communication is at the heart of this appeal. The Commission was unpersuaded that this pool was a single pressure system and therefore denied the application.

         General background shows production and planning for the future.

         Lario owns and operates the working interests in several wells producing oil from the Shawnee, Lansing, Kansas City, Marmaton, Cherokee, Morrow, Basal Penn, and Mississippian formations in the Feiertag Unit in Scott County. Lario applied for unitization and unit operations for the Feiertag Unit "to enhance the ultimate recovery of liquid hydrocarbons therefrom."

         In its application, Lario described the reservoir it sought to operate as "the interval between the top of the unitized substances in the Topeka Formation at 3, 570 feet through the Oread, Lansing-Kansas City, Marmaton, Millrich, Morrow and St. Louis formations at 4, 700 feet." It also alleged that the unitized management, operation, and further development of the Feiertag Unit was "economically feasible and reasonably necessary to prevent waste within the reservoir and thereby increasing substantially the ultimate recovery of oil and gas." It estimated the value of the additional recovery of oil and gas substantially exceeded the estimated additional costs of conducting the unitized operations. Lario noted that the proposed plan had been approved in writing by 92.64 percent of the working interest holders and by 95.53 percent of the royalty owners. But not everyone approved.

         Cholla Production, LLC, an oil and gas exploration and production company, owned and operated oil-and-gas-producing properties both within and next to Lario's proposed unit boundary. Cholla filed a protest to Lario's application and asked to intervene. Cholla alleged that Lario's proposed plan would cut through Cholla's contiguous producing acreage and would take over two of Cholla's wells. It further asserted that Lario's proposed plan did not meet the requirements of K.S.A. 55-1304 because

• the plan was flawed geologically;
• the allocations to property owners were unfair and inequitable;
• the plan would substantially and irreparably harm Cholla's correlative rights;
• the plan would cause waste in violation of K.S.A. 55-601; and
• the plan would unduly violate Cholla's property rights contrary to the Kansas and United States Constitutions.

         Lario denied those allegations but did not object to Cholla's intervention. The Commission allowed Cholla to intervene and scheduled an evidentiary hearing on Lario's application.

         The Commission proceeding.

         Because Lario claims that the Commission's findings are unsupported by substantial evidence, we must review extensive portions of the record on appeal. We note that it is a common practice in these technical proceedings before the Commission for the parties to file testimony of some witnesses before the actual hearing. This case was no exception.

         Before the hearing, the parties submitted prefiled testimony from several witnesses.

Lario's witnesses

Commission Staff witness

Cholla's witnesses

Brenten E. Birk

John P. Hastings

Jim Hemmen

William T. Goff

Emily M. Hundley-Goff

         We begin with Lario's witnesses-Birk and Hastings. Both spoke in favor of granting the application. Brenten E. Birk, an operations engineer with Lario, testified that he had been employed as a petroleum engineer for 11 years after obtaining a Bachelor of Science degree in mechanical engineering. Birk testified that Lario's proposed unitization plan would create a pretax net income of nearly $42 million after the payout of capital investment; that the proposed operations were economically feasible and necessary to prevent waste and protect correlative rights; and that unitization would substantially increase the ultimate recovery of oil from the proposed unit. Birk advised that the proposed unit area had produced 1.4 million barrels of oil under primary production. Birk believed that the proposed unit could produce another 1.5 million barrels of oil over 37 years that would otherwise be abandoned if the unit was not approved. Birk stated that the proposed unit agreements were fair and equitable to all working interest and royalty interest owners.

         Birk testified that the proposed unit would cover the Topeka, Oread, Lansing-Kansas City, Marmaton, Cherokee, Morrow, Millrich, and St. Louis intervals. Birk stated that these formations were in pressure communication and acted as a single-pressure system or one common pool. That means that production from one part of the pool affected pressures throughout. Birk said that the proposed unit would have 15 producing formations, and Lario proposed to waterflood 11 of the formations. He described a five-stage waterflood process by which Lario would waterflood two or three formations at each stage.

         Birk gave his estimates because he wanted to show that the value of the estimated additional recovery of oil or gas substantially exceeded the estimated additional cost incident to conducting the operations. In Birk's opinion, the total cost for all five stages would be $4.185 million. For the life of the waterflood, the total cumulative net cash flow for working interest owners he estimated at $26, 986, 900 and $14, 930, 440 for royalty interest owners. Birk recommended that the Commission grant Lario's application for unitization.

         Next for Lario, John P. Hastings, a petroleum geologist, testified that he had worked as a petroleum geologist for 36 years after obtaining a Bachelor of Science degree in geology and math. Hastings stated that Cholla operated two oil wells and one SWD well, collectively known as the Metzger Lease. Hastings said that the oil wells were separate and distinct from each other by proximity to and distance between two distinct oil accumulations. Hastings testified that the Metzger 2-16 well was in Lario's proposed Feiertag Unit, while the Metzger 1-16 oil well was not. Hastings believed that Lario's application for unitization was economically feasible and necessary to prevent waste of oil within the reservoir and to increase the ultimate recovery of oil.

         We turn now to the testimony of the Commission staff witness, Jim Hemmen. He expressed some doubts about the application. He is a research analyst with the production department of the conservation division of the Commission. He had worked for the Commission since 1982. Hemmen stated that he had concerns about whether Lario's proposed unit constituted a "pool," or a single-pressure system, as defined in K.S.A. 55-1302(b). Hemmen did not see any indications of natural or artificially induced pressure communication, and stated that he would like to see more evidence from Lario containing bottom-hole reservoir pressure data from all 11 formations at issue before he would be comfortable affirming that the formations compromised part of a pool.

         Hemmen testified that he had ...


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