"`Unit operation' means not only the process of placing a number of oil and gas leases together, centralizing management, pumping the wells and dividing the royalty proceeds according to schedule, it also means the good faith operation and prudent development of the unit." Parkin v. Kansas Corporation Comm'n, 234 Kan. 994, Syl. ¶¶ 4, 6, 677 P.2d 991 (1984). See Veverka v. Davies Co., 10 Kan. App. 2d 578, Syl. ¶ 3, 705 P.2d 558 (1985) ("Unitization is a means of consolidating development of property overlying a mineral reservoir into a single production unit."); Klippel v. Beinar, 222 Kan. 681, 685, 567 P.2d 867 (1977).
Mesa speculates that a ground upon which Magnolia might attempt to cancel the leases is breach of Mesa's "implied obligation to prudently develop the unit. Parkin v. Kansas Corporation Comm'n, 234 Kan. 994, Syl. ¶ 6 and 7, 677 P.2d 991 (1984)."
This court has consistently followed the rule, asserted in Wilson v. Holm, that the instrument which creates a defeasible term mineral interest is controlling on the question of whether the interest has terminated. See Parkin v. Kansas Corporation Comm'n, 234 Kan. 994, 677 P.2d 991 (1984); Short v. Cline, 234 Kan. 670, 676 P.2d 76 (1984); Classen v. Federal Land Bank of Wichita, 228 Kan. 426, 617 P.2d 1255 (1980); Friesen v. Federal Land Bank of Wichita, 227 Kan. 522, 608 P.2d 915 (1980); Klippel v. Beinar, 222 Kan. 681, 567 P.2d 867 (1977); Smith v. Home Royalty Association, Inc., 209 Kan. 609, 498 P.2d 98 (1972); Stratmann v. Stratmann, 204 Kan. 658, 465 P.2d 938 (1970); Dewell v. Federal Land Bank, 191 Kan. 258, 380 P.2d 379 (1963); Shepard, Executrix v. John Hancock Mutual Life Ins. Co., 189 Kan. 125, 368 P.2d 19 (1962); Baker v. Hugoton Production Co., 182 Kan. 210, 320 P.2d 772 (1958); and Wagner v. Sunray Mid-Continent Oil Co., 182 Kan. 81, 318 P.2d 1039 (1957). While the foregoing cases cover a multitude of factual situations and establish numerous principles of law, one common thread that permeates the opinions is that the extent and duration of a term mineral interest is ordinarily controlled by the provisions of the document creating the interest.
Akandas, Inc. v. Klippel, 250 Kan. 458, Syl. ¶ 4, 827 P.2d 37 (1992); see Parkin v. Kansas Corporation Comm'n, 234 Kan. 994, Syl. ¶¶ 4, 6, 677 P.2d 991 (1984) ("Unit operation of oil and gas leases involves the consolidation or merger of one or more oil and gas leases and the designation of one or more of the parties as operator."); Lario Oil &Gas Co. v. Kansas Corporation Comm'n, 57 Kan.App.2d 184, 185, 450 P.3d 353 (2019) ("Sometimes described as 'unit operation,' unitization means the joint operation of all or some part of a producing reservoir."). Whether an oil and gas lease is being operated under a unitization agreement is important in part because "[p]roduction from any part of a consolidated or pooled oil and gas unit perpetuates all leases within the unit, even as to unitized acreage, unless the leases provide to the contrary."
Kansas has long recognized the prudent-operator rule. See K.S.A. 55-223; Parkin v. Kansas Corporation Comm'n, 234 Kan. 994, 1009, 677 P.2d 991 (1984) (noting the prudent-operator rule or test to be of longstanding in Kansas and citing numerous cases recognizing it); Rush v. King Oil Co., 220 Kan. 616, Syl. ¶ 3, 556 P.2d 431 (1976). Essentially, a lessee must take those steps a prudent operator would employ to develop the oil and gas interests "for the common advantage of both lessor and lessee."
Unitization refers to the consolidation of mineral or leasehold interests in oil or gas covering a common source of supply. 1 B. Kramer P. Martin, The Law of Pooling and Unitization § 1.02 at 1-3 (3d ed. 1989); see Parkin v. Corporation Comm'n of Kansas, 234 Kan. 994, 677 P.2d 991, 1002 (1984). Unitization resulted from state legislatures' efforts to modify the rule of capture which had previously been applied to oil and gas law.
The Kansas Supreme Court, citing Christmas, has held that the implied covenant exists even if there are unitized operations. Parkin v. State Corporation Commission of Kansas, 234 Kan. 994, 1007-09, 677 P.2d 991, 1002-03 (Kan. 1984). Kansas's conservation statutes, unlike Arkansas's, define "waste" to include economic waste.
The Kansas Supreme Court has already addressed the limited scope and effect of the Nichols Pool Unitization Agreement underlying the KCC order at issue in this case. In Parkin v. Kansas Corporation Commission, 234 Kan. 994, 1007, 677 P.2d 991 (1984), the court said: The original Plan of Unitization [of the Nichols Pool] was not a contract between all of the royalty and mineral interest owners and all of the working interest owners.
The Kansas Supreme Court has cited to the statute without further comment as authority for the proposition that the prudent operator standard applies to implied covenants. Parkin v. Kansas Corporation Commission, 234 Kan. 994, 677 P.2d 991 (1984). The court, therefore, concludes the prudent operator standard remains the law in Kansas under the Deep Rights Act.
Ascribing a limited effect to the fourth paragraph conditions becomes more compelling when one considers that the lease provision is not the only means whereby the subject land could have been unitized. Pursuant to K.S.A. 55–1301 et seq., referred to as “the Kansas compulsory unitization law,” Parkin v. Kansas Corporation Comm'n, 234 Kan. 994, 995, 677 P.2d 991 (1984), and specifically under K.S.A. 55–1304, the KCC can compel the unitization of land after making certain findings of necessity, economic feasibility, and fairness. Nothing in the statute requires the unit to comply with any lease conditions before the KCC orders unitization.