American Oil and Gas Reporter - May 2020 - 73

IssuesUpdate: Kentucky Oil & Gas Association

KOGA Keeps Supporting
Kentucky's Industry
By Dan Larson
Special Correspondent

HENDERSON, KY.-Although pandemic realities have forced them to cancel
their group's annual meeting, leaders of
the Kentucky Oil & Gas Association are
moving ahead with plans to stay in touch
with members, at least virtually, and to
support their operations as the economy
begins to recover.
Over the years, they say, the Bluegrass
State has been fortunate to have proenergy leaders at the capital who appreciate
and understand the value of Kentucky's
fossil fuel industries, especially during
the global health crisis. KOGA leaders
say the group continues to monitor and
maintain a vigilant watch for issues and
opportunities that protect the state's oil
and gas industry.
In March and April, KOGA's Board
of Directors held virtual meetings on several occasions to consider the coronavirus's
wide-ranging industry impacts. "It always
gets back to how to best serve our members, whether it's employment and small
business loans, keeping track of the legislature or simply a matter of how we
can help," reflects KOGA President Mark
Hughes, president of Hughes Land LLC
in Henderson.
Rolling With The Punches
As crude oil prices dove in early March,
Kentucky's Illinois Basin oil producers
found themselves looking at prices that
were worse than half of February's averages, Hughes observes. On top of that,
virus-related restrictions on gatherings of
more than a handful of people left KOGA's
Board of Directors with little choice: First,
it cancelled the spring meeting set for
April 8, and then it began to plan for a
postponement or cancellation of the annual
meeting scheduled for early June. By
early May, the association decided that
convention had to be cancelled too.
"It really is a perfect storm of factors,"
acknowledges KOGA Executive Director
Ryan Watts. "We are reviewing options
for what we can do for our members in
the meantime."
The interests of KOGA membership

will remain in the forefront, Hughes assures. An independent landman for more
than four decades, Hughes notes that
commodity prices always fluctuate, but
it remains essential for the industry to
remain united and able to count on the
support of a dynamic trade association.
KOGA, he says, has always "stood behind
the hardworking producers and service
providers operating in the Appalachian
and Illinois basins' oil and gas fields."
That made the initial decision to cancel
the conventions especially difficult, he
says. "Our proactive measures to prevent
the spread of COVID-19 shows we stand
in solidarity with our commonwealth
while being mindful of our members'
business needs and constraints.
"Our strong-knit community has survived numerous economic setbacks and
tough operating environments," Hughes
continues. "It may take some time and
an abundance of patience, but we will rebound with a robust, energetic spirit."
An industry rebound will be better
supported by operators who plan for market swings and are ready to respond,
KOGA's April newsletter points out.
Strengthening a balance sheet, containing
costs and identifying which operations
provide the best margins can help operators
weather the storm, it advises.
Similarly, it advises operators to lay
the groundwork, including predrilling
tasks such as geology, engineering, well
design and permitting, to be ready when
prices rally.
Meanwhile, Watts reports, KOGA continues to consider a number of initiatives,
including a webinar series on topics of
interest and the possibility of increasing
its newsletters' publication frequency.
Deciding to cancel KOGA's annual convention was a tough call, Hughes admits.
Complicating the decision is how the "goalposts keep moving," Watts notes, adding,
"We are unsure of when some of the mass
gathering restrictions will be lifted."
Kentucky Governor Andy Beshear has
been recognized by the national media
for his early, aggressive COVID-19 responses, Watts notes, but the absence of
key rites of spring still takes an emotional

toll. "When the Kentucky Derby is postponed and the NCAA tournament is cancelled, that is a stab in the heart for Kentuckians," he acknowledges.
A Flawed Formula
In the meantime, the association has
been helping identify and resolve an issue
with state property tax assessments, Watts
reports. KOGA stepped up late last year
when the state sent operators annual oil
property tax bills that relied on a revised
formula that significantly increased producers' obligations. For some operators,
the increase was enough to negate a full
year of oil income, he adds.
"When operators opened their tax bills,
they were hit with exponential increases,"
Watts describes. "The average increase
was about 24%. Any increase is difficult
in these times, but this was extreme."
Once it ascertained the problem's scope,
KOGA sent notices to its members advising
them to protect their interests by filing
protests with the state's Department of
Revenue. The association then held a series
of discussions with the department about
the revised valuation method.
The root of the matter stretched back
to meetings KOGA attended at the department's invitation in early 2018 that
considered updates to the state's valuation
formula and its capitalization rate, Watts
recounts. The 17% capitalization rate and
other variables had not changed in many
years and both sides agreed on the need
for updates, he says.
According to KOGA, participants recognized that the valuation formula, which
had been in use for more than 20 years,
was designed with the understanding that
the input variables would reflect fluctuations in prices of oil and gas and operating
costs. Those variables had never been
modified, however, and KOGA recognized
that the formula's variable needed to be
updated to reflect market conditions.
However, KOGA successfully convinced
the department that the overall structure
of the oil valuation formula did not need
to be changed. "This better reflected market conditions and minimized the impact
of this tax increase," recalls KOGA Treasurer John Henderson.
MAY 2020 73

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