KRS 353.651: Vertical and horizontal deep wells -- Establishment and regulation of

drilling units -- Pooling of interests -- Exceptions.

The following provisions of this section and the administrative regulations promulgated

pursuant thereto shall apply to any vertic al deep well and any horizontal deep well as

indicated:

(1) Drilling units for vertical deep wells:

(a) The commission shall, after notice and a hearing, to be conducted in

accordance with KRS Chapter 13B, regulate the drilling and location of

vertical dee p wells in a pool and the production therefrom so as to prevent

reasonably avoidable net drainage from each developed unit (that is, drainage

which is not equalized by counterdrainage) so that each owner in a pool shall

have the right and opportunity to re cover his or her fair and equitable share of

the recoverable oil and gas in the pool;

(b) For the prevention of waste, to protect and enforce the correlative rights of the

owners in a pool, and to avoid the augmenting and accumulation of risks

arising from the drilling of an excessive number of wells, the commission

shall, after notice and a hearing, to be conducted in accordance with KRS

Chapter 13B, establish drilling units for vertical deep wells in each pool. The

spacing of vertical deep wells in proved oil and gas fields shall be governed by

administrative regulations promulgated for that particular field or other

administrative regulation promulgated by the commission. Vertical deep wells

drilled in areas not covered by special field administrative reg ulations shall be

governed by statewide administrative regulations promulgated by the

commission or orders of the commission issued after a hearing;

(c) Each vertical deep well permitted to be drilled in any drilling unit shall be

drilled in accordance with:

1. The administrative regulations promulgated by the commission; and

2. A spacing pattern fixed by the commission for the well or the pool in

which the vertical deep well is located, as applicable, with any

exceptions that may be reasonably necessary wh ere it is shown, in

accordance with administrative regulations promulgated by the

commission, that the unit is partly outside the pool or for some other

reason a well otherwise located on the unit would not be likely to

produce in paying quantities, or top ographical conditions are such as to

make the drilling at the location unduly burdensome, or other similar

cause. Whenever an exception is granted, the commission shall take

action as will offset any advantage which the person securing the

exception may ha ve over other owners by reason of the drilling of the

well as an exception;

(d) No drilling unit established by the commission shall be smaller than the

maximum area which can be drained efficiently by one (1) vertical deep well

so as to produce the reason able maximum recoverable oil or gas in the area,

unless an exception is granted in accordance with administrative regulations

promulgated by the commission; and

(e) An order establishing a drilling unit for a vertical deep well may be modified,

altered, ex tended, amended, or vacated by the commission after notice and

hearing as prescribed above.

(2) Drilling units for horizontal deep wells:

(a) For the prevention of waste and for the protection and enforcement of the

correlative rights of the owners in a po ol, the commission shall, after notice

and hearing conducted in accordance with KRS Chapter 13B and with the

administrative regulations of the commission, establish drilling units for

horizontal deep wells. Drilling units shall be based on the information

provided to or requested by the commission;

(b) Each horizontal deep well permitted to be drilled on a drilling unit established

by the commission shall be drilled in accordance with the administrative

regulations promulgated by the commission and any orde rs of the

commission; and

(c) The establishment of any horizontal deep well unit shall be on terms that are

fair, reasonable, equitable, and which are necessary or proper to protect and

safeguard the respective rights and obligations of the working interest owners

and the royalty owners based on the evidence before the commission.

(3) Pooling of interests in drilling units:

(a) When two (2) or more separately owned tracts are embraced within a drilling

unit, or when there are separately owned interests in all or a part of a drilling

unit, the interested persons may pool their tracts or interests for the

development and operation of the drilling unit. In the absence of voluntary

pooling and upon application of any operator having an interest in the drilling

unit, and after the commission has given notice to all persons reasonably

known to own an interest in the oil or gas in the drilling unit, and after a

hearing conducted in accordance with KRS Chapter 13B, the commission

shall enter an order pooling all tracts or interests in the drillin g unit for the

development and operation thereof and for the sharing of production

therefrom. Each pooling order shall be upon terms and conditions which are

just and reasonable;

(b) All operations, including, but not limited to, the commencement, drilling , or

operation of a deep well, upon any portion of a drilling unit for which a

pooling order has been entered, shall be deemed for all purposes the conduct

of those operations upon each separately owned tract in the drilling unit by the

several owners ther eof. That portion of the production allocated to a

separately owned tract included in a drilling unit shall, when produced, be

deemed for all purposes to have been actually produced from the tract by a

deep well drilled thereon;

(c) Any pooling order under the provisions of subsection (3) of this section shall

authorize the drilling and operation of a deep well for the production of oil or

gas from the pooled acreage; shall designate the operator to drill and operate

the deep well; shall prescribe the time and manner in which all owners of

operating interests in the pooled tracts or portions of tracts may elect to

participate therein; shall provide that all reasonable costs and expenses of

drilling, completing, equipping, operating, plugging, and abandoning the deep

well shall be borne, and all production therefrom shared, by all owners of

operating interests in proportion to the acreage in the pooled tracts owned or

under lease to each owner; and shall make provision for payment of all

reasonable costs there of, including reasonable charge for supervision and for

interest on past due accounts, by all those who elect to participate therein.

Upon the application of any operator having an interest in the drilling unit, the

person or persons selected to drill and operate the deep well shall be

determined by competitive bids;

(d) Upon request, any pooling 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 the drillin g of a deep well may elect to surrender his

interest or a portion thereof to the participating owners on a reasonable basis

and for a reasonable consideration, which, if not agreed upon, shall be

determined by the commission; or to participate in the drill ing of the deep

well on a limited or carried basis on terms and conditions which, if not agreed

upon, shall be determined by the commission to be just and reasonable;

(e) If an operator owning an interest in a pooled drilling unit elects not to

participate in the risk and cost of drilling of a deep well thereon, and another

operator owning an interest therein, shall drill and operate, or pay the costs of

drilling and operating a deep well as provided in the commission's order, then

the operating owner shall be entitled to the share of production from the tracts

or portions thereof accruing to the interest of the nonparticipating owner,

exclusive of any royalty or overriding royalty reserved in any leases,

assignments thereof or agreements relating thereto, o f the tracts or portions

thereof, or exclusive of the prevailing royalty of the production attributable to

all unleased tracts or portions thereof, until the market value of the

nonparticipating owner's share of the production, exclusive of any royalty,

overriding royalty or the prevailing royalty of production, equals three (3)

times the share of the costs payable by or charged to the interest of the

nonparticipating owner; and

(f) If a dispute shall arise as to the costs of drilling and operating a deep w ell, the

commission shall determine and apportion the costs, within ninety (90) days

from the date of written notification to the commission of the existence of

such dispute.

(4) This section shall not apply to wells drilled, deepened, or reopened for the injection

of water, gas, or other fluids into any subsurface formation.