## Facts

- Chesapeake Operating, Inc., with support from OXY-USA, Inc. and Anadarko Petroleum Corporation, applied to the Kansas Corporation Commission (KCC) for compulsory unitization and unit operation of the proposed South Eubank Waterflood Unit under the Kansas Unitization Act (K.S.A. 55-1301 et seq.).
- The proposed unit involved an incised channel system producing from the Chester and Morrow formations and contemplated a secondary-recovery waterflood project (injecting water into the Chester formation) to obtain additional oil beyond primary production.
- The Trees Oil Company (Trees) owned and operated a producing well on an 80-acre tract located on the southern edge of the proposed unit and opposed being included in the unit.
- Trees argued that the Chester and Morrow formations were separate reservoirs and that, under the then-existing definition of “pool” in K.S.A. 55-1302 (requiring “a single and separate natural reservoir” with “a single pressure system”), the KCC could not approve a unit that effectively treated multiple reservoirs as one pool.
- Chesapeake presented engineering and geologic evidence that production from the subject wells was commingled and that reservoir pressure communication existed across the proposed unit area, supporting treatment of the producing interval as satisfying the statutory “pool” concept for unitization purposes.
- Chesapeake and the supporting operators also contended that leaving Trees’ tract out of the unit would lead to drainage and an inequitable result by allowing Trees to recover oil migrating from unitized lands without bearing unit costs.
- After an evidentiary hearing, the KCC issued an interim order reopening the record only to address fairness of specified terms in the Unit Operating Agreement, stating the existing record was sufficient to decide the statutory prerequisites for unitization.
- The KCC later issued a final order approving compulsory unitization, including Trees’ tract. Trees sought judicial review under the Kansas Judicial Review Act (K.S.A. 77-601 et seq.); the Haskell County District Court affirmed; Trees appealed to the Kansas Supreme Court.
- During the appeal, the court noted that 2004 amendments to K.S.A. 55-1302 broadened the statutory definition of “pool,” but the dispute concerned the pre-amendment language applied by the KCC and district court.

## Issues

1. Whether, under the pre-2004 definition of “pool” in K.S.A. 55-1302, the KCC could approve unitization for the South Eubank Waterflood Unit where evidence showed commingled production and pressure communication associated with the Chester and Morrow formations.
2. Whether the KCC lawfully compelled inclusion of Trees’ tract in the unit under the Kansas Unitization Act.
3. Whether substantial competent evidence supported the KCC’s findings that unit operation would increase recovery, prevent waste, and be fair and equitable to affected interests.
4. Whether the KCC acted arbitrarily or capriciously by limiting the second hearing to fairness of Unit Operating Agreement terms and refusing additional geological evidence at that stage.

## Decision

- The Kansas Supreme Court affirmed the district court’s judgment and left the KCC’s unitization order in effect.
- The court upheld the KCC’s application of the pre-2004 “pool” definition on the record presented, where the agency found pressure communication and commingled production supporting the unit plan.
- The court upheld compulsory inclusion of Trees’ tract, concluding the statutory unitization requirements were met and the KCC could include a boundary tract to protect correlative rights and avoid inequitable drainage consequences.
- The court held the KCC’s factual determinations were supported by substantial competent evidence and were not arbitrary or capricious under Kansas Judicial Review Act standards.
- The court held the KCC acted within its authority in reopening the record for a limited purpose and declining to receive additional geological evidence at the later, narrowly focused hearing.

## Legal Principles

- Under the Kansas Unitization Act, the KCC may order compulsory unitization and unit operation when statutory findings are made, including that unit operation will materially increase recovery and prevent waste and that the plan is fair and equitable to affected interests.
- Statutory terms in oil-and-gas conservation regulation are construed in light of the Act’s conservation and correlative-rights objectives; courts will uphold a reasonable agency interpretation applied to the record before it.
- On judicial review under K.S.A. 77-601 et seq., courts do not reweigh conflicting technical evidence; they ask whether agency findings are supported by substantial competent evidence and whether the agency acted within lawful bounds and not arbitrarily or capriciously.
- An agency may control the scope of supplemental proceedings when it reopens a record for limited issues, so long as the parties had a meaningful opportunity to present evidence during the original evidentiary phase.
- Economic effects of compulsory unitization, including reduced short-term cash flow for a particular owner, do not invalidate an otherwise lawful unit plan where the owner retains the right to an allocated share of unit production under the approved formula.

## Conclusion

Trees Oil Co. v. State Corp. Comm’n affirmed the KCC’s compulsory unitization of the South Eubank Waterflood Unit, holding that the agency could apply the pre-2004 “pool” definition to approve the unit based on evidence of commingled production and pressure communication, that Trees’ tract could be included to protect correlative rights and avoid inequitable drainage, that the KCC’s findings were supported by substantial competent evidence, and that limiting a reopened hearing to discrete fairness questions was not arbitrary or capricious.


Trees Oil Co. v. State Corp. Comm'n, 279 Kan. 209, 105 P.3d 1269 (2005)