In a major and surprising ruling, the Kansas Corporation Commission ruled in Docket No. 07-CONS-155-CSHO that a lessee who takes a a new oil and gas lease does not, without more, thereby become responsible for plugging existing wells on the leased premises. The July 16, 2008 order In the Matter to Show Cause … with regards to responsibility under K.S.A. 55-179 for plugging abandoned wells … was a pleasant surprise to operators who, motivated by $100+ oil, have been scrambling to lease up properties with expired leases. They will be responsible for existing wells they rework, as this will fall under the “exercising control” criterion of the statute. However, this was always to be expected. However, the July 16 order represents a virtual reversal of the Commission’s long standing but unofficial policy of holding operators responsible for old wells drilled or operated under a previous lease regardless of whether they were operated under the new lease.
The case started out on a more narrow issue. The old wells on the property in question were oil wells and the new lease was for gas only. The lessee argued that since its new lease did not cover oil, it was not responsible for plugging the old oil wells. This is a logical argument that I thought likely to be persuasive. In past years, when clients got a new lease on property with old wells, we’d sometimes craft the legal description to exclude the well spacing acreage (essentially 2.5 acres in Eastern Kansas, 10 acres in Western) around each old well. If the KCC sought to assert liability, the argument would be that they were not covered under the new lease and, therefore, the client had no liability and, indeed, no right to plug the wells. I never had to test this argument, as the Commission never sought to impose plugging liability on a client with such a lease. But, drafting a lease with this sort of legal description was a pain in the rear end and, frankly, raised other interesting (in an academic way) issues. The issues in the recent case, however, expanded so that the “gas only” lease defense turned out to be unnecessary. It appears that the Commission’s public policy rationale is that the ruling will motivate operators to report old wells they “discover” on their “new” leases, so the State can get a handle on these abandoned wells and take appropriate measures to protect against pollution of groundwater and other potential problems posed by these old unplugged wells.
You can download the order as a pdf file here.