Kentucky Oil and Gas Overview: Concerns

Contact: Brandon Nuttall

Regulatory Concerns

Coalbed methane (CBM): Kentucky is a "capture" state: that is, the law of capture applies to oil and natural gas. The guidelines established by the National Energy Policy Act of 1992 are in effect. As such, under Federal guidelines, the ownership of coalbed methane may be vested with the owners of the oil and gas rights as opposed to the coal owners. No Kentucky statute or court decision directly addresses this issue, however.

Production data: Production data analysis ("decline curves") is a primary tool for valuation of petroleum-producing properties and predicting future well performance. In addition, modeling production data is essential to compiling resource estimates. Without publicly available historic production data, potential investors have little confidence in unsupported claims of well performance. Investment capital for financing exploration and development activities is difficult to attract. Regulations are needed: (1) to increase compliance with the current reporting requirements, (2) to solicit and enable collection of historic production data, and (3) to provide a consistent base for cross-checking information between the Kentucky Revenue Cabinet Severance and Property Tax divisions and the Division of Oil and Gas.

Incentives: Other nations (not the United States) largely control the price of oil and gas. The expense of finding and producing oil and gas is increasing. This leads to the situation where Kentucky's oil and gas producers face a shrinking profit margin in a market where they cannot rely on a stable price. As a result, many marginal wells are being abandoned and a known energy resource may become inaccessible. Tax relief and incentives may be needed to keep marginal wells in operation. For tar sands and deep gas resources, the expense of enhanced recovery technology and drilling may be offset by incentives to attract industry. The cost of these incentives could be recovered by the corresponding increase in severance tax revenue generated by increased production.

Theft: As the price per barrel of oil increases, oil will become an increasingly attractive target for theft. Stolen or illegally sold oil generates no revenue for the owners or the State. Enforceable laws and publicly available production data are required and are essential for economic development.

Natural gas storage and transportation: The increasing reliance on natural gas depends on adequate supply. Continued exploration and development is a way to meet these needs. Another method is to store natural gas, ensuring a reliable supply during times of peak demand. Gas storage is economic only if the storage site is local to the end user, however. Storage may be anticipated in three categories:

Research is required to identify and develop more storage reservoirs. Incentives may be needed to ensure this type of development.

Coal test holes: There are no regulations for the proper plugging and abandonment of wells drilled by coal companies on their mineral holdings for the purpose of evaluating coal resources.

Environmental Concerns

Abandoned wells: For the protection of fresh water and underground sources of drinking water, wells not in production after a specified period are required to be properly plugged and abandoned. Many wells, however, have been improperly plugged, illegally abandoned (since 1960 with the adoption of KRS 353), or orphaned. The Kentucky Division of Oil and Gas has a program to identify and plug these wells. That program should be vigorously supported and adequately funded.

Oil field wastes: Drilling, production, and abandonment of wells and leases generate a variety of oil field wastes that must be reused, recycled, or discarded. In particular, long-term secondary and enhanced recovery operations may generate low-level radioactive wastes known as technically enhanced naturally occurring radioactive materials (TENR or NORM). Guidelines for transportation and disposal need to be adopted.

Resource sterilization: Initiatives to preserve or enhance the environmental quality of the Commonwealth are necessary and must continue. These programs should be reviewed with respect to the taking of privately owned resources without compensation or limiting access between resources and potential markets (pipeline right-of-ways and others). These considerations might include provisions for using horizontal drilling to exploit reservoirs from a remote location or multilateral wells in areas with limited or environmentally sensitive drill sites.

CO2 sequestration: Future regulations may mandate reduction of CO2 emissions, and CO2 capture will necessitate its disposal. Regulations could also establish a credit system for recovery of carbon from waste streams and its disposal. Carbon producers, transporters, and consumers will need regulatory guidance to ensure environmentally benign practices. In turn, regulators will require science-based information to support their decisions.

[Strengths] [History] [Production] [Resource Estimates] [Future] Concerns [Back to Overview]

© 2002 Kentucky Geological Survey, University of Kentucky
Created 8-Jul-2002