KRS 353.645: Operation and development as a unit of oil and gas interests in a pool or

pools -- Application for unit -- Hearing -- Unitization order -- Review under

KRS 353.700.

This section applies to any lessee or owner of an oil and gas interest in a proposed unit.

(1) The department, at its own discretion or upon the application of any lessee or owner

of an oil and gas interest in a pool or pools of a proposed unit may, after notice to

all lessees or owners of an oil and gas interest in a pool or pools o f a proposed unit,

issue an order for the operation and development as a unit of any pool or pools, or

any portion thereof, for the production of oil and associated gas in order to increase

their ultimate recovery by unitized operation and development so that each owner in

the pool or pools shall have the opportunity to recover his fair and equitable share of

the recoverable oil and gas in the unit. The department may require a reasonable

application fee from a lessee or owner of an oil and gas interest app lying for a

proposed unit.

(2) The application for a unit shall include the following:

(a) A description of the area to be included in the unit, with a map attached, and a

description of the pool or pools, or portions thereof, to be included within the

unit;

(b) A statement of the nature of the unit operations contemplated;

(c) A proposed allocation of production and reserves among the separately-owned

tracts and interests contributed to the unit. Reserves shall be calculated by

industry standard methods su pported by geological and engineering data, as

determined to be appropriate by the department. The department may require

an independent third party to verify the calculations as to proposed allocation

of production or reserves;

(d) The procedure upon whic h wells and equipment of the separately -owned

tracts and interests are to be used and compensated for in unit operations; and

(e) Documentation that the application is approved by at least fifty -one percent

(51%) ownership in the interests proposed for inclusion in the unit.

(3) After notice in the manner established in this section, the department shall issue a

final order establishing a unit and requiring unit operation and development if it

finds that:

(a) 1. The unitized operation and development of a p ool or pools, or any

portion thereof, for the production of oil and associated gas is reasonably

necessary in order to effectively carry on operations for enhanced

recovery, including but not limited to, increased density drilling, or

secondary recovery op erations by pressure -maintenance, repressuring,

cycling, water flooding, tertiary recovery operations, or any combination

of these, in order to substantially increase the ultimate recovery of oil

and associated gas from the pool or pools within the unit, o r to protect

the correlative rights of affected mineral owners; and

2. The value of the additional recovery of oil and associated gas exceeds

the estimated additional cost incident to conducting the operation; or

(b) The unitized operation of the pool or pools within the unit will prevent waste

and protect the correlative rights of the owners in the pool or pools within the

unit.

(4) Each well permitted to be drilled, deepened, reopened, or converted to an injection

well and operated in a unit shall conform to either the spacing standards established

in KRS 353.610, or to other unit spacing that shall be established by the department.

(5) All unit operations and production shall be deemed, for all purposes, as the condu ct

of operations and production upon each of the separately -owned tracts and interests

in the unit.

(6) A unitization order issued in accordance with this section shall:

(a) Authorize the unit operation of a pool or pools, including drilling, deepening,

reopening, conversion to injection wells, and operation of all wells within the

unit for the production of oil and gas from the unit:

(b) Designate the unit operator of the operation;

(c) Approve a unit operating agreement;

(d) Provide for the allocation of production and reserves among all separately -

owned tracts and interests in the unit;

(e) Provide for the proportionate allocation of all reasonable costs and expenses

of unit operations as these costs and expenses are set out in the approved

operating agre ement. Costs and expenses shall be allocated among all

participating owners of operating interests who elect to participate in the

proportion that the separately -owned tracts and interests share in the

production of the unit; and

(f) Establish the spacing approved for the unit.

(7) Any unitization order shall provide just and equitable alternatives whereby an

owner of an operating interest who does not elect to participate in the risk and cost

of developing the unit may elect to surrender his interest, or a portion of it, to the

participating owners on a reasonable basis and for a reasonable consideration,

which if not agreed upon, shall be determined by the department; or elect to

participate in the development of the unit on a carried basis on terms and co nditions

which, if not agreed upon, shall be determined by the department to be just and

reasonable. If a dispute arises as to the costs of operating and developing a unit,

then the department shall determine and apportion the costs within ninety (90) days

after the date of written notification to the department of the existence of the

dispute; however, any person disputing an actual or proposed expenditure shall file

notice of the disputed costs within one (1) year after notice of the actual or proposed

expenditure was received by the person filing the dispute.

(8) An order establishing a unit may be modified, altered, extended, vacated, or

otherwise amended by the department after notice as prescribed in this section and a

demonstration by affected persons of a significant change of circumstances

supporting the amendment.

(a) An amendment to extend or enlarge the unit area shall be agreed upon in

writing by documented owners of at least a fifty-one percent (51%) ownership

in the interests in the pool or pools in the unit;

(b) An amendment of a unitization order enlarging a unit shall allocate to each

tract or interest in the unit, as amended, a portion of the total production of oil

or gas, or both, from the unit so enlarged, in proportion to the contributio n of

the tract or interest to the unit during the remaining course of unit operations,

and shall supersede and be in lieu of the allocation of production provided for

in any previously -established unit and shall have an effective date provided

for in the order.

(9) Wells drilled, deepened, or reopened for the injection of water, gas, or other fluids

into any subsurface formation shall be governed by applicable state and federal

statutes and regulations.

(10) Any order or final determination of the departmen t under this section shall be

subject to review in accordance with KRS 353.700 and any administrative

regulations promulgated thereunder.