Articles, Alerts & Perspectives Archive

Commenters Raise Questions About EPA’s Methane, VOC Proposal

The American Oil & Gas Reporter

The U.S. Environmental Protection Agency’s highly anticipated November 2021 Clean Air Act proposal regulating methane and volatile organic compound emissions from the oil and gas sector has drawn a reported 400,000 individual comment submissions. EPA seeks to use the methane proposal to expand VOC and methane emissions regulations that apply to new, modified and reconstructed sources within the crude oil and natural gas production sector, which the agency promulgated in 2012 and 2016. In addition, the methane proposal includes the first nationwide methane emissions guidelines for existing oil and gas sector sources.

It is no surprise EPA’s proposal has received a significant number of comments, especially considering the agency’s relatively brief and tumultuous history of regulating oil and gas methane emissions under the CAA. Feedback on the proposal differs considerably. Many commenters, primarily those representing the oil and gas industry and certain states, have raised serious legal concerns and question the proposal’s technical aspects and the propriety of several of its key components.

On the other hand, commenters from other states, local governments and environmental groups urge EPA to impose even more stringent requirements, beyond those included in the methane proposal. Several key themes and legal issues emerge from these comments and it seems worthwhile to highlight some of the potentially pivotal legal issues raised by commenters, including those related to EPA’s proposed community-based monitoring program.

Legal Issues

The numerous legal issues commenters raise about the methane proposal range from foundational questions about whether the CAA allows EPA to regulate methane emissions from the oil and gas in this manner to legal concerns about the way EPA proposes to regulate specific sources.

In particular, several commenters assert that the proposal compounds EPA’s previous error in failing to make the CAA-required findings to regulate methane emissions from the oil and gas sector and establish EPA’s legal authority to regulate emissions from sources in the transmission and storage segment.

The legal issues surrounding EPA’s addition of methane to the code of regulations, 40 CFR Part 60, Subpart OOOOa and the transmission and storage segment to Subparts OOOO and OOOOa, were raised previously when EPA promulgated Subpart OOOOa in 2016 and in subsequent legal challenges that are currently stayed.

Notably, the Trump administration finalized a rule in September 2020 that removed methane from Subpart OOOOa and the transmission and storage segment from Subparts OOOO and OOOOa, but Congress used its Congressional Review Act authority to rescind this rule in June 2021. The U.S. House of Representatives issued a report that accompanied its disapproval of the Trump administration’s rule. Notably, the House’s report openly disagreed with the CAA interpretation the Trump administration advanced to support its decision to remove methane from Subpart OOOOa.

Some methane proposal commenters, however, suggest that the House’s report is of limited import and the sole effect of Congress’ action is limited to rescinding the Trump administration’s rule and preventing EPA from promulgating a substantially similar rule in the future. In other words, these commenters state that EPA must still meet the CAA requirements for regulating methane emissions from the oil and gas sector, suggesting that these longstanding legal issues are unlikely to resolve themselves.

Several commenters also raise three additional legal issues with the methane proposal that may prove critical. One such concern focuses on due process and fair notice. Many commenters take issue with the listed applicability date of Nov. 15, 2021 for the methane standard’s new CAA § 111(b) performance standards. EPA published the methane proposal without any proposed regulatory text for the proposed new performance standards or emission guidelines for existing sources. Therefore, several commenters question the legal import of EPA’s use of the Federal Register publication date, given the importance of the proposed regulatory text in understanding proposed legal obligations and governing statutory language.

Commenters also take issue with EPA’s proposed source-specific definitions of “modification” for the new proposed requirements for centralized production facilities, tanks and tank batteries, and well liquids unloading. Section 111 of the CAA defines a “modification” as “any physical change in, or change in the method of operation of, a stationary source which increases the amount of any air pollutant emitted by such source or which results in the emission of any air pollutant not previously emitted.” EPA, however, proposes to promulgate source-specific “modification” definitions for the above-referenced sources or facilities that, some commenters argue, are inconsistent with the CAA’s definition of “modification.”

Then there is the matter of “legally and practicably enforceable limits.” On page 92 of the 154-page methane proposal, EPA proposes to create a new definition to “clarify” the term “legally and practicably enforceable limits” as it relates to the regulation of storage vessels in the oil and gas sector. This term embodies the long-established and applied concept of allowing sources to account and take credit for emission reductions when assessing applicability of air regulatory requirements. This concept is used across several major CAA stationary source programs and is not specific to EPA’s oil and gas CAA regulations. Several commenters urge EPA to issue a broad-based rulemaking should it wish to clarify this key term by regulation.

Although many commenters have raised critical threshold legal concerns about EPA’s methane proposal, other commenters–particularly those from certain states and environmental groups–not only express support for the underlying legal interpretations EPA advances in the proposal, but encourage the agency to expand the proposal further to impose more stringent requirements and regulate additional sources of methane and VOC emissions.

Community-Based Monitoring Program

EPA’s methane proposal directly solicits input and comments on how to design and implement a program through which communities can use methane detection systems to identify large emissions events and provide that information to facility owners and operators. According to EPA, data and information collected in this community-based monitoring program will be used to require operators to investigate emissions events that exceed a defined emissions threshold, conduct a root cause analysis and take appropriate action to mitigate the emissions.

EPA’s proposed community-based monitoring program is novel. We are unaware of any other CAA regulations that expressly allow and authorize third parties to monitor and measure emissions and use this data and information to force action by the regulated facility.

Although some states and environmental groups voice support for the proposed program and offer implementation suggestions, comments from industry groups, in particular, raise several legal concerns. One industry group questions EPA’s authority to directly allow, by regulation, the proposed community-monitoring program, noting that the information-gathering authority the CAA provides EPA is limited to certain types of entities, none of which cover third-party community members. Other commenters note that EPA’s proposed community-monitoring program encourages trespass and unsafe practices, as well as raises significant data validation concerns.

Conclusion

The widely divergent views about the legality of EPA’s methane proposal suggest that future litigation is inevitable.

Because EPA has indicated that it will release a supplemental proposal, which is expected to include the proposed regulatory text, stakeholders should know soon whether EPA will change or alter course to subdue potential challengers.

Note: The author acknowledges the contributions of Christina M. Puhnaty, who assisted with the research and drafting of this article.

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Republished with permission from the April issue of The American Oil & Gas Reporter.

DEP Seeking Public Comments on Revised Environmental Justice Policy by May 11th

Environmental Alert

(by Sean McGovern and Evan Baylor)

On March 12, 2022, the Pennsylvania Department of Environmental Protection (Department) shared an updated draft of the Environmental Justice Policy (Draft EJ Policy) for public comment. Among the many changes, the Draft EJ Policy expands the role of the Office of Environmental Justice (OEJ), creates new requirements for unconventional oil and gas, and creates new enforcement priorities for the Department. The Department is accepting comments on the Draft EJ Policy through May 11th.

Pennsylvania’s Environmental Justice Policy

The OEJ oversees environmental justice initiatives and policies in the state. The primary goal of the OEJ is to increase communities’ environmental awareness and involvement in the Department’s permitting process. In 2004, the Department created the Environmental Justice Public Participation Policy (EJ Policy) to provide citizens in environmental justice communities enhanced public participation opportunities during certain Department permit application processes. The EJ Policy is a critical part of the Department’s environmental justice initiatives, providing guidelines for the Department’s approach to public engagement for permit application reviews in environmental justice areas as defined under the current EJ Policy.

In 2018, the Department circulated a draft revision to the current EJ Policy for public comment. Ultimately, the Department withdrew the proposed draft revisions after public comments were received, and the current 2004 version of the EJ Policy remained in effect. The Department continued to evaluate revisions to the EJ Policy and, in 2021, the Department proposed to update the policy by incorporating, refining, and expanding upon the withdrawn 2018 revisions. On March 12, 2022, the Department released the Draft EJ Policy for a 60-day public comment period with several public meetings and informational webinars.

Significant Revisions and Additions to the Draft EJ Policy

The Draft EJ Policy proposes to make significant changes to the current EJ Policy. Below are some of the most significant changes recommended by the Department:

Incorporation of PA Executive Order on EJ
The Draft EJ Policy cites and incorporates the requirements Governor Tom Wolf ’s Executive Order on Environmental Justice (Executive Order 2021-07), which was issued in October 2021 and formally established the OEJ. This contextualizes the Draft EJ Policy into the broader effort to address environmental justice across the state executive agencies and federal EJ initiatives. The Draft EJ Policy has been altered throughout to ensure OEJ will meet the requirements of the Order. For more information on the Executive Order, please read our November 2021 Environmental Alert: Governor Wolf’s Executive Order and Pennsylvania Legislature Emphasize Environmental Justice.
OEJ Expanded Roles and Responsibilities
The Draft EJ Policy describes the purpose and responsibilities of the OEJ, which was formally established by the recent Executive Order. The Draft EJ Policy gives the Department new roles and responsibilities and dictates how OEJ will engage with stakeholders and communities going forward. This marks a large expansion of the responsibilities of the OEJ, including coordinating an interagency council on environmental justice for the Commonwealth. By way of example, OEJ will provide training to Department staff, maintain and reassess every two years the EJ Area Viewer, issue an annual report, develop strategic plans every five years, and help create and implement a Language Access Plan for the Department.
The Department Maintains Broad Discretion on Opt-In Permits
While listed trigger permits automatically trigger the application of the current policy, the Department maintains the broad discretion to apply the requirements of the Draft EJ Policy to any permits they believe “warrant special consideration,” even if beyond the area of concern. The Draft EJ Policy provides additional guidance to what permits the Department will likely consider an opt-in permit, including a list of permits in Appendix A. However, the Draft EJ Policy further specifies that projects with permit applications that warrant special consideration based on their “reasonably anticipated significant adverse cumulative impacts” may trigger the application of the policy. The Department uses the phrases (1) “reasonably anticipated significant adverse cumulative impacts,” (2) “reasonably anticipated cumulative impacts,” and (3) “anticipated cumulative impacts” in the Draft EJ Policy. None of these three iterations of “cumulative impacts” are defined by the Department in the Draft EJ Policy. The Department has indicated that it has evaluated federal and other state environmental justice law and policy in scoping this Draft EJ Policy. Notably, the Department evaluated the recent New Jersey Environmental Justice Law, which became effective on September 18, 2020 (NJ EJ Law). Under the NJ EJ Law, applications that may “cause or contribute to adverse cumulative environmental or public health stressors” shall be denied a permit. The NJ EJ Law does not define “cumulative environmental or public health stressors.” Without a definition of “cumulative impacts” in the Draft EJ Policy, or under Executive Order 2021-07, it is unclear whether the Department will interpret that phrase similar to the NJ EJ Law. However, the Department’s broad discretion under a subjective standard (“warrant special consideration”) and an undefined cumulative impacts standard make the applicability of the opt-in permit process hard to predict.
Updated Definitions of “EJ Area” and “Area of Concern”
EJ Area
Under the current EJ Policy, an EJ Area was defined as census tract with 30 percent or greater minority population or 20 percent or greater population below the poverty line. The Draft EJ Policy defines an EJ Area as “the geographic location where Department’s EJ Policy applies.” Further, it states that the methods for identifying EJ Areas will be specific outside the policy for easier amendment. Because the definition of an EJ Area will live outside the policy, it will be more frequently amended to reflect recent data and definitions used in other agencies and community groups. Thus, the Draft EJ Policy’s application and scope are not clearly defined or entirely predictable.Area of Concern
The Draft EJ Policy simplifies the current definition. The Area of Concern is defined as the area within a half-mile of the proposed permit activity. The Draft directs applicants to use the new EJ Area Viewer mapping tool to determine if whether a project is in an EJ Area and the project’s Area of Concern.
Unconventional Oil and Gas Now Included
Oil and gas unconventional well permits (and change in use) are now considered trigger permits and the Draft EJ Policy includes new, specific provisions for unconventional oil and gas public engagement. Under the Draft EJ Policy these permits will automatically trigger the policy requirements. Unconventional well permits are included in the Draft EJ Policy’s list of trigger permits, at Appendix A. While permits listed in Appendix A trigger Sections II (“Permit Review Process”) and III (“Community Input”) of the Draft EJ Policy, unconventional well permits will only trigger the application of Section IV (“Oil and Gas Public Engagement”). The Draft EJ Policy’s Section IV proposes unique public participation requirements for unconventional oil and gas operations. The requirements of Section IV will apply retroactively to unconventional well permits already issued by the Department and create continuing obligations such as annual reports on active and anticipated drilling operations—even though such operations are not subject to an actual permit application submitted to the Department.
EJ Areas Viewer Mapping Tool
The Draft EJ Policy requires the use of the new EJ Areas Viewer, which is available at: pa.gov/EJViewer. The EJ Areas Viewer is an interactive mapping tool that contains environmental and demographic indicators, which can be updated and modified by the Department at any time based on new environmental justice related data. Along with other mapping tools, the Department should use the EJ Areas Viewer to assist in decisions regarding all aspects of environmental justice, including determining if a potential opt-in permit should fall under the Draft EJ Policy. Overall, the use of this and other mapping tools will allow the Department and OEJ to consider much more data—environmental, demographic, health, etc.—than under the existing policy.
Climate Initiatives
New requirements will push OEJ and the Department to harmonize the environmental justice initiatives with climate change initiatives. This focus will cut across the Department: programs; rulemaking; policies; and enforcement. The Department commits in the Draft EJ Policy to ensure climate-related initiatives will consider and prioritize communities disproportionately impacted by climate change. The Department will also ensure the Climate Action Plan addresses environmental justice and the impact of climate change on EJ Areas. Further, the Department will implement strategies for outreach and engagement with environmental justice and climate change vulnerable communities.

What’s Next?

As stated above, the Department will be accepting written comments on the Draft EJ Policy until May 11, 2022 and conducting three public hearings in April. For more information on this public comment period, visit the Department’s website.

Babst Calland will be tracking the Draft EJ Policy as the Department responds to comments and moves to finalize the policy this year. If you have any questions about the environmental justice developments described in this Alert, please contact Sean McGovern at 412-394-5439 or smcgovern@babstcalland.com or Evan Baylor at 202-868-0538 or ebaylor@babstcalland.com.

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PHMSA Publishes Final Rule with New Valve Installation and Rupture Detection Requirements for Gas, Hazardous Liquid, and Carbon Dioxide Pipelines

Pipeline Safety Alert

(by Keith Coyle and Chris Kuhman)

On April 8, 2022, the Pipeline and Hazardous Materials Safety Administration (PHMSA) published a final rule in the Federal Register introducing new valve installation and rupture detection requirements for certain onshore gas, hazardous liquid, and carbon dioxide pipelines (the Final Rule). PHMSA issued the Final Rule in response to National Transportation Safety Board recommendations and congressional mandates from the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 (2011 PIPES Act), as well as related studies prepared by the Government Accountability Office and Oak Ridge National Laboratories. Below is a summary of the key changes that the Final Rule makes to PHMSA’s regulations.

Rupture Mitigation Valves

The Final Rule prescribes new rupture mitigation valve (RMV) installation requirements for certain onshore gas and hazardous liquid transmission and gathering pipelines. An RMV is defined as an automatic shut-off valve (ASV) or remote-control valve (RCV) “that a pipeline operator uses to minimize the volume of gas released from the pipeline and to mitigate the consequences of a rupture.”

Operators are required to install RMVs on certain pipeline segments with diameters of six inches or greater that are constructed or “entirely replaced” after April 10, 2023. “Entirely replaced” is defined for these purposes as replacing two or more miles, in the aggregate, of any contiguous five miles of pipeline during a 24-month period. However, the RMV installation requirements only apply to entirely replaced pipelines if the addition, replacement, or removal of a valve is part of the replacement project. The RMV installation requirements also do not apply to any gas pipeline segments in Class 1 or Class 2 locations that have a potential impact radius (PIR) of 150 feet or less.

An alternative equivalent technology can be used to satisfy the RMV installation requirements if it provides an equivalent level of safety, and if the operator obtains authorization from PHMSA by using the 90-day notification and no-objection process. Operators can also use the no-objection process to request an extension of a compliance deadline for installing an RMV. An operator requesting use of manual valves as an alternative equivalent technology must include in the notification submitted to PHMSA a demonstration that installation of an RMV would be economically, technically, or operationally infeasible.

Valve Spacing

The Final Rule prescribes new valve spacing requirements for gas and hazardous liquid and carbon dioxide pipelines. An exception from the existing valve spacing requirements is provided for replacements of gas transmission and regulated gas gathering lines if the distance between each point on the replaced pipeline and the nearest valve does not exceed certain class-location-based mileage thresholds. Newly constructed or “entirely replaced” hazardous liquid and carbon dioxide pipelines installed after April 10, 2023, are also subject to new valve spacing requirements of 15 miles for segments located in or that could affect high consequence areas (HCAs) and 20 miles for non-HCA segments.

A more stringent, 7.5-mile valve spacing requirement applies to highly volatile liquid (HVL) pipelines in a high population area or other populated area that are constructed or entirely replaced after April 10, 2023. Operators can use PHMSA’s 90-day notification and no-objection process to increase the maximum valve spacing requirement for covered HVL pipelines by 1.25 times, or up to 9.375 miles, subject to a lifetime recordkeeping requirement.

Class Location Changes

The Final Rule includes new valve spacing requirements for class-location-related gas pipeline replacements that are necessary to comply with PHMSA’s maximum allowable operating pressure (MAOP) requirements. For class location changes that occur after October 5, 2022, and which result in the replacement of two or more miles of pipe, in the aggregate, within any five contiguous miles during a 24-month period, operators are required to comply with the valve spacing and RMV installation requirements. For replacements of less than two miles within five contiguous miles during the 24-month period, however, operators have the option of complying with the valve spacing requirements or installing RMVs or equivalent technologies to protect the replaced segment. The latter requirements do not apply to pipeline replacements that are less than 1,000-feet within any single continuous mile during any 24-month period.

Valve Shutoff Requirements for Rupture Mitigation

The Final Rule prescribes new valve shut-off requirements for certain new or “entirely replaced” onshore pipeline segments with diameters of six inches or greater that are installed after April 10, 2023. The valve shut-off requirements apply to covered gas transmission and gathering line segments in high-consequence areas (HCA) or Class 3 or Class 4 locations, except for segments in Class 1 or Class 2 locations that have a PIR of 150 feet or less, and to covered hazardous liquid or carbon dioxide pipeline segments that are located in or which could affect an HCA. Operators of covered segments are required to make RMVs or alternative equivalent technologies operational within 14 days of placing of a new or replaced pipeline into service. Additional requirements for maximum spacing between RMVs or alternative equivalent technologies also apply, as well as provisions for using manual valves or alternative equivalent technologies to meet the shut-off requirements.

Notification of Potential Rupture and Response to Rupture Identification

The Final Rule requires operators that are notified, by their own personnel or otherwise, of a potential rupture to take certain actions. “Notification of a potential rupture” is defined as receipt of notification or observation of an unintentional or uncontrolled release of hazardous liquid or gas from a pipeline. This observation may be any of several events, such as an unanticipated pressure loss greater than 10 percent in 15 minutes (with some exceptions), an unanticipated flow or pressure change, or a fire or explosion in the vicinity of the pipeline. An operator’s procedures should establish how and when it receives notice or observes a potential rupture event. Upon notification, the Final Rule requires operators to identify the rupture and isolate the ruptured segment as soon as practicable but within 30 minutes.

Valve Maintenance

The Final Rule requires operators to conduct certain valve maintenance activities. Each RMV, or alternative equivalent technology, must be able to achieve the 30-minute response time. If the 30-minute response time is not achieved, the operator must revise its response efforts as soon as practicable but no later than 12-months after the test. Similarly, if an operator finds that any valve is inoperable, it must repair or replace the valve as soon as practicable but no later than 12 months and designate an alternative valve acting as an RMV within seven calendar days. The rule requires periodic testing, by partial operation, of RMVs on hazardous liquid pipelines at least twice each calendar year and on gas pipelines at least once annually. Some of these requirements may vary depending on whether the RMV is an ASV or RCV. Operators are also required to randomly select a valve serving as an alternative equivalent technology in lieu of an RMV for an annual 30-minute response time validation drill. Operators are not required to close the valve fully during the drill. A minimum 25 percent closure is sufficient to demonstrate compliance. Operators’ written procedures must include the method used to randomly select which alternative equivalent technology is tested.

Integrity Management

For certain new or entirely replaced hazardous liquid and carbon dioxide pipelines six-inches or greater in diameter and placed into service after April 10, 2023, emergency flow restricting devices (EFRD) used to mitigate potential ruptures must meet the RMV requirements in the Final Rule. The Final Rule requires gas transmission operators to conduct a risk assessment and, if that assessment shows that an RMV is an efficient means to protect an HCA, install the RMV. The Final Rule provides several factors to consider in making that determination including timing of leak detection and pipe shutdown capabilities, the type of gas being transported, operating pressure, the rate of potential release, pipeline profile, the potential for ignition, and location of nearest response personnel.

Emergency Response

The Final Rule prescribes new emergency response and post-accident procedures. Operators must establish and maintain adequate means of communication with appropriate public safety answering points (i.e., 9-1-1 emergency call center), investigate failures to minimize the possibility of recurrence, and develop and implement lessons learned following an incident. All operators must amend their procedures to require immediate and direct access to 9-1-1 call centers or coordination with government officials.

If the failure involves the closure of an RMV, or alternative equivalent technology, the operator must conduct an analysis of the factors that may have impacted the release volume and implement measures to minimize the consequences of a future incident. Operators must also develop a post-failure and accident summary within 90 days, signed by a senior executive officer, and kept for the useful life of the pipeline.

Effective Date and Deadlines for Further Review

The effective date of the Final Rule is October 5, 2022. Any interested person may file a petition for reconsideration of the Final Rule with the Associate Administrator for Pipeline Safety within 30 days of publication in the Federal Register, or by no later than May 8, 2022. The deadline for submitting a petition for judicial review of the Final Rule is 89 days from the Federal Register publication date, or July 6, 2022.

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Court Continues to Reject Validity Challenges to Oil and Gas Development

Legal Intelligencer

(By Anna S. Jewart and Blaine Lucas)

In 2013, the Pennsylvania Supreme Court rendered its ground-breaking decision in Robinson Township v. Commonwealth, (Robinson II), in which a three-justice plurality relied on the Pennsylvania Environmental Rights Amendment, Article I, Section 27 of the Pennsylvania Constitution (ERA) to invalidate certain provisions of Act 13 (the General Assembly’s 2012 comprehensive update to the former Oil and Gas Act) limiting the authority of local governments to regulate oil and gas development. This decision triggered a wave of challenges from objectors who argued local ordinances are substantively invalid where they fail to place sufficient restrictions on oil and gas uses or allow them in allegedly incompatible zoning districts. To date, these types of claims have been consistently rejected by local zoning hearing boards, the Common Pleas Courts and the Commonwealth Court. Extensive case law following Robinson II makes it clear that where oil and gas development occurs is squarely within the purview of local zoning authority, while how it occurs is a state regulatory matter. The Supreme Court’s decisions in Gorsline v. Fairfield Township, 186 A.3d 375 (Pa. 2018), and Robinson IV, 147 A.3d 536 (Pa. 2016), and several Commonwealth Court decisions including Frederick v. Allegheny Township Zoning Hearing Board, 196 A. 3d 677 (Pa. Cmwlth. Ct. 2018), Delaware Riverkeeper Network v. Middlesex Township Zoning Hearing Board, No. 2609 C.D. 2015 (Pa. Cmwlth. 2019) and Protect PT v. Penn Township, No. 1632 C.D. 2018 (Pa. Cmwlth. Nov. 14, 2019), appear to have laid to rest any lingering doubts concerning a municipality’s authority to allow oil and gas uses within its boundaries. The Pennsylvania Supreme Court has declined to hear appeals in Frederick, Delaware Riverkeeper or Protect PT.

The Commonwealth Court recently reiterated these principles in Murrysville Watch Committee v. Municipality of Murrysville Zoning Hearing Board, No. 579 C.D. 2020 (Jan. 24, 2022). On Jan. 24, the court issued an opinion and order affirming the decisions of the Westmoreland County Common Pleas Court and the Murrysville zoning hearing board, denying the objectors’ challenge to the oil and gas regulations in the municipality’s zoning ordinance. The 48-page opinion, authored by Judge Patricia McCullough, comprehensively rejected the substantive, procedural, and evidentiary arguments raised by the objectors, relying heavily on its prior decisions in Frederick and Protect PT. On Feb. 23, the objectors in Murrysville Watch filed a petition for allowance of appeal with the Supreme Court.

The Murrysville Watch decision offers an opportunity to revisit treatment by the courts of zoning ordinances which permit oil and gas development in any, or all, zoning districts. Although the objectors in Murrysville Watch alleged the ordinance at issue does not sufficiently limit oil and gas development, the restrictions placed on those uses are more stringent than those upheld in cases like Frederick, Delaware Riverkeeper or Protect PT.

Frederick involved a validity challenge to the Allegheny Township, Westmoreland County zoning ordinance, which allowed oil and gas wells as a use by-right in all zoning districts, subject to certain additional requirements. Although the ordinance did not contain a provision requiring an enumerated setback for oil and gas development, application of the state-mandated 500-foot setback between a well-head and an existing building left less than 50% of the township land mass available for oil and gas development. Objectors brought a validity challenge, which was denied by both the local zoning hearing board and the lower court. The en banc Commonwealth Court affirmed on appeal, rejecting the objectors’ contentions that the ordinance violated substantive due process and the ERA.

In analyzing the ERA claim, the Commonwealth Court in Frederick addressed the Supreme Court’s 2017 ruling in Pennsylvania Environmental Defense Foundation v. Commonwealth, 161 A.3d 911 (Pa. 2017), wherein the Supreme Court ruled that challenges raised under the ERA should be decided in accordance with its text. Acknowledging that the precise duties imposed upon local governments by the first sentence of the ERA are by no means clear, the Commonwealth Court ascertained the relevant standard to be whether the governmental action “unreasonably impairs” the environmental values implicated. However, the Commonwealth Court found the Supreme Court’s holding in Robinson II did not give municipalities the power to act beyond the bounds of their enabling legislation and that they lack the power to replicate the environmental oversight that the General Assembly has conferred upon the Department of Environmental Protection and other state agencies.

The Commonwealth Court reached a similar result in Delaware Riverkeeper. There, the Middlesex Township, Butler County zoning hearing board denied a validity challenge to an ordinance allowing oil and gas well site development as a use by-right in some zoning districts and as a conditional use in other zoning districts. Although oil and gas well development is textually authorized in most zoning districts in the township, the board accepted the testimony of an expert witness who testified that, when other ordinance limitations are applied, less than 30% of the township is available for drilling. After a complicated procedural history, the Commonwealth Court affirmed the decisions of the zoning hearing board and the trial court in an unpublished opinion. The Commonwealth Court quoted liberally from its earlier decision in Frederick, and similarly concluded that the ordinance violated neither substantive due process nor the ERA.

In Protect PT, the Commonwealth Court relied on Frederick to uphold the validity of the Penn Township, Westmoreland County zoning ordinance, challenged in part on ERA grounds. Objectors contested the validity of the ordinance’s creation of an overlay district in which natural gas operations were authorized by special exception. The overlay district covered 55% of the township’s land mass and, after the application of setbacks, left 9.64% of the township available for development. The challengers argued that unconventional natural gas drilling was a heavy industrial use incompatible with the underlying agricultural and residential zoned areas, rendering the zoning ordinance invalid. On appeal, the Commonwealth Court held the objectors failed to establish that unconventional natural gas development posed any substantial actual risk to the environment or health of township residents. The court found the trial court properly determined that the ordinance, which permitted oil and gas development in specific and targeted areas of the township that are rural and not densely populated, did not violate the ERA or due process.

With these cases as a backdrop, in Murrysville Watch the Commonwealth Court addressed the objectors’ claims that the ordinance there violated due process, the ERA and equal protection. The challenged ordinance in Murrysville Watch authorized oil and gas wells as a conditional use in an overlay district, which encompassed portions of, but not all, the rural residential zoning district. The ordinance also imposed a setback of 750 feet from the edge of a well pad to “protected structures.” Application of these geographic limitations, along with the ordinance’s steep slope restrictions, left only five% of Murrysville’s land mass available for unconventional oil and gas development.

The objectors asserted that the ordinance violated substantive due process because unconventional oil and gas drilling allegedly is an industrial land use incompatible with the stated purpose of the underlying residential zoning district. In a related argument, objectors contended that the overlay constituted an unconstitutional spot zone because certain portions of the residential zone were included in the overlay, while other portions were not. Relying heavily on both Frederick and Protect PT, the Commonwealth Court rejected these claims, concluding that the objectors failed to introduce any evidence of incompatibility. Instead, the Court observed that the municipality, through the multi-year efforts of a task force, had balanced the goal of economic development with its obligation to protect the health, safety and welfare of property owners within the overlay district. The court further noted the extensive additional substantive regulations and review processes applicable to oil and gas development mandated by the challenged ordinance.

For similar reasons, the court denied the objectors’ ERA claim, again citing extensively to Frederick and Protect PT, concluding that the objectors did not prove that the challenged ordinance “unreasonably impairs” citizens’ rights under the ERA. Finally, the objectors asserted that the overlay violated the equal protection rights embodied in Article III, Section 32 of the Pennsylvania Constitution, on the basis that only the oil and gas industry was granted an overlay in residentially zoned areas and that residents of the rural residential district are not treated equally. The court rejected this claim, finding that the municipality had a rational basis for creation of the overlay district, based on available acreage and population density. The Commonwealth Court also found that the objectors failed to demonstrate the challenged ordinance violated the Pennsylvania Municipalities Planning Code, 53 P.S. Sections 10101, or that it was inconsistent with the municipality’s comprehensive plan.

Blaine A. Lucas is a shareholder in the public sector services and energy and natural resources groups of the Pittsburgh law firm of Babst, Calland, Clements & Zomnir. Anna S. Jewart is an associate in the firm’s public sector services group and focuses her practice on zoning, subdivision, land development, and general municipal matters. Contact them at blucas@babstcalland.com and ajewart@babstcalland.com.

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Bruce Rudoy Elected to the Fellows of the American Bar Foundation

Babst Calland is pleased to announce that Bruce F. Rudoy has been elected a Fellow of the American Bar Foundation (ABF). Membership is limited to just one percent of lawyers licensed to practice in each jurisdiction. Members are nominated by their peers and selected by the ABF Board.

The ABF Fellows is a global honorary society that recognizes attorneys, judges, law faculty and legal scholars whose public and private careers have demonstrated outstanding dedication to the highest principles of the legal profession and to the welfare of their communities. ABF Fellows hail from nearly 40 countries and hold a wide variety of influential roles.

Mr. Rudoy is a shareholder and co-chair of Babst Calland’s Energy and Natural Resources and Renewables groups and Land and Energy Title Department. Mr. Rudoy concentrates his practice in the areas of Oil and Gas, Renewable Energy, and the associated business transactions, corporate and real estate law. He counsels various clients on title, transaction and regulatory matters. Those matters are diverse and include title issues and opinions, purchase and sale of assets and equity, due diligence examination and analysis. Transactional matters related to energy contract matters include Joint Ventures, Farm-Outs and Farm-Ins, Power Purchase Agreements, Equipment Supply Agreements, EPC Contracts, Offtake Agreements, leases and licensing, secured lending, and litigation related to all of the foregoing. Mr. Rudoy is also a member of the Firm’s board of directors.

Mr. Rudoy is admitted to practice in Pennsylvania, Alaska, Kentucky, New Mexico, North Dakota, Ohio, Oklahoma, Texas, West Virginia and Wyoming. He is also a member of the bar associations in each of those states. He graduated from Pennsylvania State University in 1987 with a B.S. in Finance. He attended the London Metropolitan University (formerly City of London Polytechnic) in London, England in 1986 where he studied law and economics. Mr. Rudoy received his J.D. from Cleveland-Marshall College of Law in 1992. During law school, he served on the Cleveland-Marshall Journal of Law and Health. Mr. Rudoy was also a visiting student at the University of Pittsburgh School of Law.

Mr. Rudoy is past chair of the Oil and Gas Committee of the American Bar Association Section on Environment, Energy and Resources and a current member of the Environment and Energy, Business Law, Real Property, and Probate & Trust Law sections of various states’ bar associations. He is a Trustee-at-Large on the Trustees Council and serves on the Programs Committee of the Foundation for Natural Resources and Energy Law (fka Rocky Mountain Mineral Law Foundation). He is also a member of the Energy & Mineral Law Foundation (EMLF), National Association of Division Order Analysts (NADOA), American Association of Professional Landmen (AAPL) (including the Michael Late Benedum Chapter of the AAPL), Houston Association of Professional Landmen (HAPL), Permian Basin Landmen’s Association (PBLA), New Mexico Oil & Gas Association (NMOGA), Independent Petroleum Association of America (IPAA), Pennsylvania Independent Oil and Gas Association (PIOGA), Ohio Oil and Gas Association (OOGA), Northern Appalachian Landman’s Association (NALA), Energy Bar Association, Solar Energy Professionals, Solar Energy Network, Smart Electric Power Alliance (SEPA) and Solar Energy Industries Association (SEIA).

Mr. Rudoy has been listed by BL Rankings in The Best Lawyers in America^© in the Mergers and Acquisitions Law Section since 2012 and Corporate Law Section since 2013. He was elected a Fellow of the American Bar Foundation in 2022. Mr. Rudoy was selected to the 2015-2016 Pennsylvania Super Lawyers (Thomson Reuters) lists for Energy & Natural Resources. He has also been named in the Pittsburgh Business Times Who’s Who in Energy.

About the ABF Fellows

Notable Fellows include Supreme Court Justice Ruth Bader-Ginsberg, Associate Justice of the Supreme Court Sonia Sotomayor, Chief Justice of the United States John Roberts, Former United States Secretary of State Hilary Rodham Clinton.

The ABF Fellows serve as stewards of the American Bar Foundation, an independent, nonprofit research organization which conducts short- and long-term socio-legal research projects. The ABF’s mission is to serve the legal profession, the public, and the academy through empirical research, publications, and programs that advance justice and the understanding of law. The ABF’s research falls under one of three categories: learning and practicing law; protecting rights and accessing justice; and making and implementing law. The Foundation is committed to broad dissemination of research findings to the organized bar, scholars, and the general public. For more information about ABF Fellows, contact: Nina Darner at ndarner@abfn.org or (312) 988-6512.

Pennsylvania is one step closer to joining RGGI

PIOGA Press

(By Kevin Garber and Gina Falaschi)

On April 4, 2022, the Pennsylvania Senate failed by one vote to reach the two-thirds majority vote needed to override Governor Tom Wolf’s January 10th veto of Senate Concurrent Regulatory Review Resolution 1, which was intended to block the Pennsylvania Department of Environmental Protection’s regulation to join the Regional Greenhouse Gas Initiative (RGGI). However, the following evening, April 5, the Commonwealth Court issued a stay preventing the Legislative Reference Bureau from publishing the regulation as a final, immediately-effective rule in the Pennsylvania Bulletin and scheduling a hearing for May 4, 2022 on litigation that DEP initiated in February to force publication of the final regulation.

RGGI is the country’s first regional, market-based cap-and-trade program, designed to reduce carbon dioxide emissions from fossil-fuel-fired electric power generators with a capacity of 25 megawatts or greater that send more than 10 percent of their annual gross generation to the electric grid. Regulated sources must hold allowances equal to their CO₂ emissions over a three-year compliance period. Each allowance is equal to one short ton of CO₂. Regulated sources may purchase state-issued allowances at quarterly auctions or through secondary markets and can use allowances issued by any RGGI state to comply. Regulated sources may also use offsets awarded for certain environmental projects to meet a maximum of 3.3 percent of their allowances.

If the rule is published in the Pennsylvania Bulletin before July 1, 2022, the partial year emissions cap for Pennsylvania would be 40.7 million tons of CO₂ for the remainder of 2022. The total annual emissions cap would gradually decline to 58 million in 2030. Affected units would need to start monitoring emissions on July 1, 2022 to be able to purchase allowances for CO₂ emitted on or after that date.

RGGI operates on a three-year compliance schedule whereby only partial compliance is required within the first two years, and then full compliance is required after the end of the third year. The current RGGI three-year compliance period began in 2021, so 2021 and 2022 are interim compliance years while 2023 is a full compliance year. If the regulation is published before July 1, 2022, regulated sources must acquire 50 percent of the necessary CO₂ allowances by March 1, 2023 and acquire 100 percent of their allowances by March 1, 2024. The allowance price was $13.50 at the last RGGI auction on March 11, 2022.

Litigation to challenge the regulation is expected after it is published in the Pennsylvania Bulletin, which cannot occur until after the May 4 hearing following the Commonwealth Court’s April 5 stay of publication.

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Reprinted with permission from the April 2022 issue of The PIOGA Press. All rights rese

Biden administration, CISA, FBI and NSA respond to cybersecurity threats to critical infrastructure posed by Russia

PIOGA Press

(By Justine Kasznica and Ember Holmes)

On March 21, President Biden issued a statement in response to evolving intelligence that Russia is exploring options for malicious cyberattacks against the United States. The statement highlights the measures taken by the administration to strengthen cyber defenses within the federal government and, to the extent that it has authority, within critical infrastructure sectors.

Additionally, President Biden called on private sector critical infrastructure owners and operators to accelerate and enhance their cybersecurity measures, urging them to take advantage of public-private partnerships and initiatives, including those administered by the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA). Appended to President Biden’s statement was a Fact Sheet (www.whitehouse.gov/briefing-room/statements-releas- es/2022/03/21/fact-sheet-act-now-to-protect-against- potential-cyberattacks), which outlines specific steps that companies can take to bolster cybersecurity across the nation, and refers readers to various resources compiled by CISA, as part of a cybersecurity campaign. In November, the Biden administration began ramping up its cybersecurity and defense measures in response to Russian President Vladimir Putin’s escalating aggression toward Ukraine. On January 11, CISA, the Federal Bureau of Investigation (FBI) and the National Security Agency (NSA) issued Alert AA22-011A, “Understanding and Mitigating Russian State-Sponsored Cyber Threats to U.S. Critical Infrastructure” (www.cisa.gov/uscert/ncas/alerts/aa22-011a) which provided an overview of Russian state-sponsored cyber operations; commonly observed tactics, techniques and procedures (TTPs); detection actions; incident response guidance; and mitigations. The administration, CISA, FBI and NSA continued to monitor the level of risk posed by Russia, which recently escalated based on intelligence indicating that Russia is planning cyberattacks against the United States in response to economic sanctions that the United States has imposed.

What is Shields Up?

Shields Up is a cybersecurity campaign formed out of the combined eﬀorts of CISA and the FBI to help organizations prepare for, respond to and mitigate the impact of cyberattacks by Russia. Although the campaign is focused on critical infrastructure, CISA has emphasized that all organizations, regardless of sector or size, must be prepared to defend against and respond to disruptive cyber incidents.

On March 22, CISA hosted an Unclassified Broad Stakeholder Call to brief attendees on the escalating threat of cybersecurity attacks by Russia. Jen Easterly (Director of CISA), Matt Hartman (Deputy Executive Assistant Director of Cybersecurity of CISA) and Tonya Ugoretz (Deputy Assistant Director of the FBI Cyber Division) addressed attendees, focusing their comments on the Shields Up campaign and highlighting most important actions that organizations can take to prevent, detect and respond to possible cyberattacks. A condensed list of these actions includes:

Familiarize yourself with your networks and actively patrol systems, including informational and operational technology, for perceived threats or unexpected events (identified TTPs, malware signatures, etc.).
Regularly scan public-facing programs, systems and software for vulnerabilities.
Secure your systems and credentials by using complex passwords, two-factor authentication, encryption, patching, etc.
Maximize resilience to cyberattacks by strengthening security of operating systems, software and firmware, and by scheduling automatic updates of these systems.
Prepare a cyber incident response plan that includes FBI contact information for reporting, as well as contact information for an incident response firm and outside legal counsel.
Report any incidents immediately and maintain a low threshold for reporting.

In addition to the foregoing broad, categorical guidance and advice, the Shields Up website (www.cisa.gov/shields-up) has valuable resources to assist those in the private sector with the development and implementation of enhanced security measures. These resources include technical guidance, a catalog of known exploited vulnerabilities, a catalog of free cybersecurity services and tools provided by the federal government, a catalog of free cyber hygiene services, a ransomware guide, and many other preparedness and response resources.

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Several critical legal issues emerge from comments on EPA’s methane proposal

PIOGA Press

(By Gary Steinbauer and Christina Puhnaty)

The U.S. Environmental Protection Agency’s highly anticipated November 2021 Clean Air Act (CAA) proposal regulating methane and volatile organic compound (VOC) emissions from the oil and gas sector drew a reported 400,000 individual submissions. Through the methane proposal (Standards of Performance for New, Reconstructed, and Modified Sources and Emissions Guidelines for Existing Sources: Oil and Natural Gas Sector Climate Review, 86 Fed. Reg. 63,110 (Nov. 15, 2021)), EPA seeks to expand the current VOC and methane emissions regulations that apply to new, modified, and reconstructed sources within the crude oil and natural gas production sector that were promulgated by EPA in 2012 (40 C.F.R. Part 60, Subpart OOOO) and 2016 (40 C.F.R. Part 60, Subpart OOOOa). In addition, the methane proposal includes the first nationwide methane emissions guidelines for existing sources within the oil and gas sector.

It is no surprise that EPA received a significant number of comments on the methane proposal, especially considering the relatively brief and tumultuous history of the agency’s regulation of methane emissions from the oil and gas sector under the CAA. The commenters’ views on the proposal diﬀer considerably. Many commenters, primarily those representing the oil and gas industry and certain states, raised serious legal concerns and also questioned the technical aspects and propriety of several key components of issues with the proposal. On the other hand, commenters from other states, local governments and environmental groups urged EPA to impose even more stringent requirements, beyond those included in the methane proposal. Several key themes and legal issues emerged from these comments. This article highlights some of the potentially pivotal legal issues raised by commenters, including those related to EPA’s proposed community- based monitoring program.

Comments addressing legal issues related to EPA’s methane proposal

Commenters raised numerous legal issues with the methane proposal, ranging from foundational issues on whether the CAA allows EPA to regulate methane emissions from the oil and gas in this manner to legal concerns about the way EPA is proposing to regulate specific sources in the proposal. In particular, several commenters assert that the methane proposal compounds EPA’s previous error in failing to make the requisite findings required by the CAA to regulate methane emissions from the oil and gas sector and EPA’s legal authority to regulate emissions from sources in the transmission and storage segment.

The legal issues surrounding EPA’s addition of methane to Subpart OOOOa and the transmission and storage segment to Subparts OOOO and OOOOa were raised previously when EPA promulgated Subpart OOOOa in 2016 and in subsequent legal challenges that are currently stayed. Notably, the Trump administration finalized a rule in September 2020 removing methane from Subpart OOOOa and the transmission and storage segment from Subparts OOOO and OOOOa, but in June 2021 Congress rescinded this rule using its Congressional Review Act authority. The House of Representatives issued a report that accompanied its disapproval of the Trump administration’s rule. Notably, in the House’s report, it openly disagreed with the interpretation of the CAA advanced by the Trump administration to support the removal of methane from Subpart OOOOa.

Commenters on the methane proposal, however, suggested that the House’s report is of limited import and the sole eﬀect of Congress’ action was limited to rescinding the Trump administration’s rule and preventing EPA from promulgating a substantially similar rule in the future. In other words, these commenters state that EPA must still meet the CAA requirements for regulating methane emissions from the oil and gas sector, suggesting that these long-standing legal issues are unlikely to resolve themselves.

Several commenters also raise three additional legal issues with the methane proposal that could prove to be critical:

Due process and fair notice. Many commenters took issue with the listed applicability date of November 15, 2021, for the new CAA § 111(b) performance standards included in the methane proposal. When EPA published the methane proposal it did not provide proposed regulatory text for the proposed new CAA § 111(b) performance standards or CAA § 111(d) emission guidelines for existing sources. Therefore, several commenters questioned EPA’s use of the Federal Register publication date as having any legal import, given the importance of the proposed regulatory text in understanding proposed legal obligations and governing statutory language.
Modification definitions. Commenters also took issue with EPA’s proposed source-specific definitions of “modification” for the new proposed requirements for centralized production facilities, tanks and tank batteries, and well liquids unloading. Section 111 of the CAA defines a “modification” as “any physical change in, or change in the method of operation of, a stationary source which increases the amount of any air pollutant emitted by such source or which results in the emission of any air pollutant not previously emitted.” 42 U.S.C. § 7411(a)(3). EPA, however, proposes to promulgate source-specific “modification” definitions for the above- referenced sources or facilities that, some commenters argue, are inconsistent with the CAA’s definition of “modification.”
“Legally and practicably enforceable limits.” On page 92 of the 154-page methane proposal, EPA proposes to create a new definition to “clarify” the term “legally and practicably enforceable limits” as it relates to the regulation of storage vessels in the oil and gas sector. This term embodies the long-established and applied concept of allowing sources to account and take credit for emission reductions when assessing applicability of air regulatory requirements. This concept is used across several major CAA stationary source programs and is not specific to EPA’s CAA regulations for the oil and gas sector. Several commenters urged EPA to issue a broad- based rulemaking should it wish to clarify this key term by regulation.

While many commenters have raised critical threshold legal concerns with EPA’s methane proposal, other commenters, particularly those from certain states and environmental groups, not only expressed support for the underlying legal interpretations advanced by EPA in the proposal, but encouraged EPA to expand the proposal further to impose more stringent requirements and regulate additional sources of methane and VOC emissions.

Comments on the proposed community-based monitoring program

In the methane proposal, EPA directly solicits input and comments on how to design and implement a pro- gram through which communities could use methane detection systems to identify large emissions events and provide that information to facility owners and operators. According to EPA, data and information collected in this community-based monitoring program would be used to require operators to investigate emissions events over a defined emissions threshold, conduct a root cause analysis and take appropriate action to mitigate the emissions. EPA’s proposed community- based monitoring program is novel. We are unaware of any other CAA regulations that expressly allow and authorize third-parties to monitor and measure emissions and use this data and information to force action by the regulated facility.

While some states, including Pennsylvania, and environmental groups voiced support for the proposed program and oﬀered implementation suggestions, industry group commenters in particular raised several legal concerns with the conceptual program. One industry group questioned EPA’s authority to directly allow, by regulation, the proposed community-monitoring program, noting that the information-gathering authority provided to EPA in CAA § 114 is limited to certain types of entities, none of which would cover a third-party community-member. Other commenters noted that EPA’s proposed community-monitoring program would encourage trespass and unsafe practices, as well as raise significant data validation concerns.

Conclusion

The widely divergent views on the legality of EPA’s methane proposal suggest that future litigation is inevitable. Because EPA has indicated that it will release a supplemental proposal, which is expected to include the proposed regulatory text, stakeholders should know soon whether EPA will change or alter course in an eﬀort to subdue potential challengers.

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Legislative & Regulatory Update

The Wildcatter

(By Nikolas Tysiak)

There is much to report in Leg/Reg land this go around! Let’s dive right in…

PENNSYLVANIA

Murrysville Watch Committee v. Municipality of Murrysville Zoning Hearing Board, 2022 WL 200112 (Comm. Ct. Pa. January 24, 2022). The Murrysville Watch Committee sued appealing a decision of the Zoning/Hearing Board on the validity of the municipality zoning ordinances relating to oil and gas development. Specifically, the MWC alleged that the use of property zoned as residential for oil and gas development was improper – oil and gas development should have been reserved for industrial zoned property, indicated that allowing oil and gas development in residential zones was unconstitutional “spot zoning” (the “unreasonable or arbitrary zoning classification of a small parcel of land, dissected or set apart from surrounding properties, with no reasonable basis for the differential zoning . . .”), and that the allowance of oil and gas development in residential districts violated the Environmental Rights Amendment to the Pennsylvania Constitution (“ERA”). The Commonwealth Court found that the MWC failed to introduce evidence to establish that the oil and gas drilling was incompatible with the “uses or overall character” of the residential zoning districts in question and failed to adduce competent evidence that the ordinances at issue were unreasonable. The court further found that the MWC failed to present any credible evidence that the zoning ordinance violated the rights established under the ERA. The Commonwealth Court accordingly affirmed the decision by the Zoning/Hearing Board and denied the MWC’s legal challenges to the zoning districts.

OHIO

French v. Ascent Resources-Utica, L.L.C., 2022-Ohio-869 (March 24, 2022). In this case, the Ohio Supreme Court determined that a suit seeking the determination that an oil and gas lease expired by its own terms is a controversy “involving the title to or the possession of real estate” and therefore is exempt from arbitration clauses as a matter of Ohio law, overturning a decision of the 7th District Court of Appeals, and affirming a trial court case on the issue. The French family had executed a lease (as amended) containing an arbitration clause and sought to have the lease invalidated. Citing numerous cases, the Supreme Court determined that oil and gas leases clearly involve the use and title to real estate, and concluded that arbitration was not required, even if called for in the lease document.

Peppertree Farms, L.L.C. v. Thonen, 2022-Ohio-395 and 2022-Ohio-396 (February 15, 2022). It appears that the Ohio court system split the matter in controversy into two separate decisions. The first decision addresses the question of whether a reservation without language of inheritance creates merely a life estate benefiting the reserving party, or a “fee interest” in the real estate interests reserved. The second decision applies the Ohio Marketable Title Act (“MTA”) to the land in question. Landowners conveyed the land in question in 1916, excepting and reserving a portion of the oil and gas rights without words of inheritance benefitting the Landowners.

The Court in Peppertree I found that the interest retained by the Landowner in the 1916 deed was inheritable, because the interest she held prior to the deed reservation was already inheritable – the Landowner kept an interest in the same nature that she owned at the time of the conveyance. Nevertheless, in Peppertree II the court determined that the interest so reserved was not preserved in the Landowner’s separate chain of title. The only document at issue was a will executed by the successor to the original Landowner/reserving party from 1961. The will did not expressly devise the reserved oil and gas interest and did not include a residuary clause. Consequently, while any residual interests (including the reserved oil and gas in question) did pass by intestacy due to the failure of the will, the intestate succession at issue was not recorded within the necessary 40-year period, which was also required by the statute. Therefore, the surface owner was able to prevail on its claim that the MTA operated to his benefit and effectively divested the reserved oil and gas interest.

Siltstone Resources, L.L.C. v. Ohio Public Works Commission, 2022-Ohio-483 (February 23, 2022). The Ohio Public Works Commission (“OPWC”) oversees and administers a state environmental conservation program seeking to maintain green spaces within Ohio. As part of that program, the OPWC sometimes transfers land to county development corporations for the same purpose. In so doing, the OPWC places certain restrictions on the use and transfer of the properties to ensure that they are used in a manner consistent with the goals of the conservation program. In this case, OPWC conveyed land subject to various restrictions to a development corporation in Belmont County, OH (“CDC”). These restrictions included anti-transfer clauses and a restriction on the use and structures to be located on the land. The CDC subsequently leased the land for oil and gas production and conveyed out mineral interests from the land to other third party mineral purchasers. Upon realizing there were covenants on the land restricting its use, the oil and gas lessees and owners became concerned and sought a declaratory judgment as to their acquired oil and gas rights. The trial court found that the oil and gas rights so acquired did not violate the covenants and restrictions. On initial appeal, the 5th District overturned the trial court decision and found the covenants and restrictions did prevent oil and gas development. The Supreme Court analyzed the OPWC deed and determined that the 5th District was correct – the transfer of oil and gas rights by lease and by deed violated their restrictive covenants and were effectively nullified. The Court also found that the OPWC had statutory and contractual rights of damages from the parties that violated the restrictive covenants. The case was remanded for further consistent proceedings.

Fonzi v. Brown, 2022-Ohio-901 (March 24, 2022). Another Dormant Mineral Act (DMA) case. Here, surface owners argued that the 2006 amendments to the DMA actually created to separate ways to enforce the law. They could either go through the notice and administrative procedures or file a quiet title action. The administrative procedures give the severed mineral owners time to respond and preserve their severed minerals, while filing a quiet title action effectively would not. The Supreme Court rejected the argument of two parallel ways to utilize the DMA, finding that only the administrative procedural route is called for under the statute. Therefore, that method of enforcement is the only valid method under Ohio law. Applying this standard, the court concluded that the surface owners failed to meet the required notice requirements under the DMA and upheld the previous court’s decision to find title to the oil and gas at issue remained vested in the severed oil and gas owners.

WEST VIRGINIA

Significant legislative changes have arisen in West Virginia. The state house and senate passed Senate Bill 694. While it contains several changes to the West Virginia Oil and Gas laws, the biggest change would be the addition of Section 22C-9-7a to the West Virginia Code, entitled “Unitization of interests in horizontal well drilling units.” This new section establishes procedures and methodologies to created production units for all horizontal oil and gas wells, even in the face of opposition, recalcitrant, or unknown oil and gas owners. The law allows an operator to file for a unitization order with the West Virginia Oil and Gas Commission, after meeting various initial requirements.

First, the applicant must secure the consent or agreement to pool/unitize from at least 75% of the net acreage in the formation targeted for production. Second, the operator must control 55% of the operating interests in the proposed unit. Third, the operator must have made good faith offers and negotiated in good faith with all known and locatable royalty owners and operators to obtain the necessary consents to unitize and operate jointly. The application must include a significant amount of title information for all tracts in the proposed unit, whether controlled by the operator, controlled by other operators, or owned or controlled by unknown or unlocatable parties, including the names and last known addresses of all known or unknown royalty owners and operators. The application must include information relating to the proposed operator’s attempts to identify and unknown or unlocatable owners and must include a list of proposed allocation between all relevant owners. The Commission is also empowered to select an “independent third party” to perform an evaluation of the economic factors included in the application for completeness and accuracy. The new statute establishes that unknown or unlocatable royalty owners are to be treated as being leased upon approval of the unit application, and unknown working interest owners will be treated as having elected to participate in the well or wells within the unit. The statute also provides an avenue for surface owners to acquire the interests of unknown or unlocatable oil and gas owners whose rights underlie their surface land. The bill was sent to Gov. Jim Justice of West Virginia on March 15th. At the time of writing, he has not signed the bill, but it is anticipated that he will do so.

Senate Bill 650 also passed both houses on March 5, 2022. This bill would amend the Co-Tenancy Modernization and Majority Protection Act that was enacted in 2019. For those unfamiliar, the prior act serves to provide a way to operate for oil and gas on lands with uncooperative, unknown, or unlocatable oil and gas owners without the fear of committing statutory waste under West Virginia law. West Virginia is unique in that it has traditionally provided no avenue toward production for oil and gas operators who are unable to obtain appropriate leases from 100% of the owners of the oil and gas under any given tract of land. This law was designed to provide the opportunity for such production without 100% lease right acquired under certain limited circumstances, including control of at least 75% of the “royalty owners”, when there are 7 or more of such owners. The amendment under SB 650 eliminates the need for 7 royalty owners before the statute can be applied. In all other respects, the Co-Tenancy law would remain the same.

That sums it all up.

Regards,

Nik Tysiak – Legislative and Regulatory Committee Chair

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Pennsylvania is One Step Closer to Joining RGGI

Environmental Alert

(By Kevin Garber and Gina Falaschi)

If you would like further information about RGGI, please contact Kevin Garber at 412-394-5404 or kgarber@babstcalland.com or Gina Falaschi at 202-853-3483 or gfalaschi@babstcalland.com.

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EQB Seeks Public Comment on Drinking Water Rules for 2 ‘Forever Chemicals’

The Legal Intelligencer

By Matthew Wood and Mackenzie Moyer

On Feb. 26, the Environmental Quality Board (EQB) took another meaningful step toward finalizing Pennsylvania’s first state-established maximum contaminant levels (MCLs) for regulating contaminants in drinking water. On that date, the EQB published a proposed rule to amend 25 Pa. Code Ch. 109 (Safe Drinking Water) to establish MCLs for perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS), two of the most common PFAS. PFOA and PFOS are just two of a group of thousands of PFAS, manmade chemicals used in various consumer, commercial and industrial manufacturing processes since the 1940s. PFAS have commonly been used to imbue products with water-, stain-, and heat-resistant properties and as ingredients in aqueous film forming foams (AFFF) used to extinguish flammable liquid fires (e.g., those that might occur on airports or military bases). PFAS do not break down naturally in the environment and have thus been called “forever chemicals.” Due to these properties and their ubiquitous nature, PFAS have been found in various environmental media, such as groundwater (including drinking water), plants, animals, and in humans, and evidence suggests that PFAS exposure can lead to adverse health effects. In the absence of definitive federal action to regulate PFAS, many states, including Pennsylvania, have in recent years taken steps to investigate, understand, and regulate PFAS.

Pennsylvania’s proposed rule is the result of years of investigation and evaluation. In 2018, Gov. Tom Wolf established by executive order (2018-08) Pennsylvania’s PFAS action team, which he tasked with the broad functions of, among other things, ensuring safe drinking water and managing environmental PFAS contamination. In June 2019, the Pennsylvania Department of Environmental Protection (PADEP) began sampling public drinking water systems within a half mile of potential PFAS sources such as manufacturing, fire training and military facilities. That sampling effort concluded in March 2021 and the final results were posted to PADEP’s PFAS webpage in June 2021.

Informed by those sampling results and other factors, the proposed rule sets maximum contaminant level goals (MCLGs) and MCLs for PFOA and PFOS. The proposed MCLGs— nonenforceable levels developed solely from health effects data that act as a starting point for determining MCLs—are 8 parts per trillion (ppt) for PFOA and 14 ppt for PFOS. The proposed rule sets MCLs—developed by considering factors outside of health effects data, including technical limitations and costs that could affect the feasibility of achieving the MCLGs—of 14 ppt for PFOA and 18 ppt for PFOS. As part of the MCL development process, PADEP considered other PFAS—PFNA, PFHxS, PFHpA, PFBS, and HFPO-DA—but decided not to propose MCLs for these at this time, primarily due to a lack of occurrence data and incomplete cost/benefit data and analysis. If finalized, Pennsylvania’s MCLs will apply to all 3,117 community, nontransient, noncommunity, bottled, vended, retail, and bulk water systems in the commonwealth and potentially affect other PADEP programs (e.g., groundwater cleanups under Act 2).

Pennsylvania’s proposed PFOA and PFOS MCLs are similar in concentration to their counterparts established in other states. For example, in 2018, New Jersey became the first state to adopt a drinking water regulation for any PFAS when it set a MCL of 13 ppt for perfluorononanoic acid (PFNA). New Jersey subsequently established MCLs for PFOA (14 ppt) and PFOS (13 ppt) and has designated all three of these PFAS as hazardous substances under state law. Other states, including Massachusetts, Michigan, New Hampshire, New York and Vermont have all established MCLs for one or more PFAS at similar concentrations.

Among the reasons states developed their own PFAS MCLs is the federal government’s delay to do so at the national level. Currently, the only federal drinking water guidance for PFAS is a Health Advisory Level (HAL) of 70 ppt for PFOA and PFOS combined, set by the U.S. Environmental Protection Agency (EPA) in 2016. EPA’s HAL is intended to identify the concentration of PFOA and PFOS in drinking water at or below which adverse health effects are not expected to occur over a lifetime of exposure. The HAL, however, it is not an enforceable standard and is considered by critics to be out-of-date and not sufficiently protective. In Pennsylvania, EPA’s HAL has served as the standard at which exceedances require public water systems to take certain actions, e.g., monitoring, notifying consumers and installing treatment technologies.

While states continue to establish their own PFAS regulations, the federal government has charted a path to address PFAS at the national level. On Oct. 18, 2021, the EPA announced its “PFAS Strategic Roadmap: EPA’s Commitments to Action 2021-2024,” (roadmap) which highlights EPA’s “whole-of-agency” approach to addressing the PFAS lifecycle, following three central directives: Research, restrict and remediate. The roadmap is available here. Among its goals, the EPA determined in March 2021 to regulate PFOA and PFOS and is currently in the process of developing National Primary Drinking Water Regulations for each, intending to publish a proposed rule in fall 2022 and a final rule in fall 2023. Consistent with the roadmap, the EPA also published the fifth unregulated contaminant monitoring rule (UCMR 5), which will require sampling for 29 PFAS in certain public water systems between 2023 and 2025. The EPA believes that the sampling data will “ensure science-based decision-making and help prioritize protection of disadvantaged communities.” See 86 Fed. Reg. 73131, 73132 (Dec. 27, 2021), available here. Under the roadmap, the EPA also intends to designate PFOA and PFOS as hazardous substances under CERCLA and build the technical foundation to address PFAS in air emissions.

EQB is currently accepting written comments on Pennsylvania’s proposed rule, and from March 21 through March 25, held five virtual public hearings on the proposed rule. Commenters ranged from members of environmental groups, to private citizens, to state and federal representatives. While many of the commenters supported PADEP’s actions toward establishing PFOA and PFOS drinking water regulations, most thought that PADEP’s efforts fell short, coalescing around three main points. First, because the proposed rule does not regulate private water wells throughout the commonwealth, a significant portion of Pennsylvania’s population will continue to be harmed by PFAS. Second, commenters believe that PADEP must regulate the PFAS “family” of constituents beyond PFOA and PFOS. Finally, many commenters criticized the MCLs as not low enough. Although opinions varied, the most consistent comment was that the MCLs should be no greater than 6 ppt for PFOA, 5 ppt for PFOS, and 13 ppt for PFOA and PFOS combined. Interested parties may submit written comments through April 27, using the methods outlined in PADEP’s announcement of the proposed rule.

When the proposed rule is finalized, Pennsylvania will have promulgated its first state-level MCLs and will become one of a handful of states outpacing the federal government’s efforts to regulate PFAS in drinking water. The proposed rule will set initial compliance monitoring requirements beginning Jan. 1, 2024, for community and nontransient noncommunity water systems serving a population greater than 350 persons and all bottled, vended, retail and bulk systems, and Jan. 1, 2025, for systems serving fewer than 350 persons.

For the full article, click here.

EPA Proposes Rulemaking to Require Facility Response Plans for Clean Water Act Hazardous Substances

Environmental Alert

(by Lisa Bruderly and Mackenzie Moyer)

On March 28, 2022, the United States Environmental Protection Agency (EPA) published a proposed rule to expand the types of non-transportation-related facilities that may need to develop Facility Response Plans (FRPs) under the Clean Water Act (CWA). 87 Fed. Reg. 17890. At present, FRPs are required for certain facilities[1] that are reasonably expected to cause “substantial harm” to the environment by discharging oil into navigable waters. The proposed rulemaking would require FRPs for facilities that could reasonably be expected to cause substantial harm to the environment by discharging CWA hazardous substances to navigable waters.

Background

The proposed rulemaking is in response to judicial challenges related to EPA’s failure to meet the requirements of § 311(j)(5) of the CWA, which requires the president to “issue regulations which require an owner or operator of a tank vessel or facility . . . to prepare and submit . . . a plan for responding, to the maximum extent practicable, to a worst case discharge, and to a substantial threat of such a discharge, of oil or a hazardous substance.” 33 U.S.C. § 1321(j)(5).

In 2019, the Natural Resources Defense Council filed suit in federal court, claiming that the EPA’s failure to issue the regulations required by § 311(j)(5), was a “failure to perform a non-discretionary duty or act in violation of the [CWA].” Complaint for Declaratory and Injunctive Relief, Environmental Justice Health Alliance for Chemical Policy Reform v. EPA, No. 1-19-cv-02516 (S.D.N.Y. Mar. 21, 2019). The plaintiffs and EPA resolved the litigation through the entry of a consent decree requiring EPA, by March 12, 2022, to sign a notice of proposed rulemaking relating to FRPs for CWA hazardous substances. EPA’s proposed rule reportedly satisfies EPA’s first obligation under the consent decree, with EPA’s second obligation being to sign a notice taking final action within 30 months after publication of the proposal.

Applicability of the Proposed Rulemaking

The proposed rule would apply to onshore non-transportation-related facilities “that could reasonably be expected to cause substantial harm to the environment by discharging CWA hazardous substances into or on the navigable waters, adjoining shorelines, or exclusive economic zone.” EPA proposes two screening criteria and four substantial harm criteria.

First, the facility must determine whether the maximum capacity onsite for any CWA hazardous substance meets or exceeds 10,000 times the reportable quantity (RQ) in pounds. EPA has designated a RQ for each of the approximately 300 CWA hazardous substances (i.e., the quantity above which a discharge to a navigable water of a CWA hazardous substance must be federally reported). The RQ is not the same for every CWA hazardous substance. In many instances, the RQ is 5,000 pounds, but for other substances, the RQ may be as low as 10 pounds (e.g., benzene) or even one pound (e.g., PCBs). Facility owners should determine the RQ of CWA hazardous substances on their sites to determine whether their facilities meet the first screening criteria of the proposed rulemaking.

Second, the facility owner or operator must determine whether the facility is within one-half (0.5) mile of a navigable water or a conveyance to a navigable water. This is an interesting criterion in that the definition of a “water of the United States” (i.e., a navigable water) has been heavily debated for more than a decade, with the Biden administration recently proposing a new definition and the U.S. Supreme Court expected to opine on the appropriate test to evaluate the existing definition during this term. More information on the definition of “waters of the United States” can be found here.

If these two screening criteria are met, the owner or operator of the facility would be required to determine whether the facility meets any of four substantial harm criteria: (1) the ability to adversely impact a public water system; (2) the ability to cause injury to fish, wildlife, and sensitive environments; (3) the ability to cause injury to public receptors; and/or (4) having a reportable discharge of a CWA hazardous substance within the last five years.

If any of these substantial harm criteria are met, the facility would be required to submit a CWA hazardous substance FRP to the EPA. Existing facilities that meet the criteria on the effective date of the rulemaking would be required to submit a FRP to EPA within 12 months of the effective date.

Environmental Justice and Climate Change Considerations

Consistent with the priorities of the Biden administration, EPA is seeking comments on ways to prioritize the needs of communities with environmental justice concerns and considerations related to climate change as part of this rulemaking. EPA stated that the proposed rulemaking was “inherently a climate change adaptation regulation” because it requires planning for worst case discharges in adverse weather conditions. EPA is also seeking comments on “methodologies to take climate change into account in both applicability criteria as well as response plan requirements.” With regard to communities with environmental justice concerns, EPA is proposing to allow “wide authority” to require CWA hazardous substance FRPs for facilities located in these communities.

The EPA is accepting public comment on the proposed rule until May 27, 2022. More information about EPA’s proposed rule can be found on EPA’s website here.

For more information on how the proposed rule may affect your business operations, please contact Lisa M. Bruderly at (412) 394-6495 or lbruderly@babstcalland.com or Mackenzie Moyer at (412) 394-6578 or mmoyer@babstcalland.com.

_________________

[1] A facility meets the “substantial harm” threshold regarding oil discharges if it: (1) has a total oil storage capacity greater than or equal to 42,000 gallons and it transfers oil over water to/from vessels; or (2) has a total oil storage capacity greater than or equal to 1 million gallons and meets one of the four criteria identified in 40 C.F.R. § 112.20(f).

Click here for PDF.

Compressed timelines have deals closing faster than ever

Smart Business

(By Sue Ostrowski featuring Kevin Wills)

As the deal market has heated up, the timeline for transactions has contracted, with deals being negotiated and closed in as few as 30 days.

“Transaction timelines are being compressed, and that has an impact on both buyers and sellers when completing a transaction,” says Kevin T. Wills, a shareholder in the Corporate and Commercial and Emerging Technologies groups at Babst Calland. “Compressed deal timelines are likely here to stay, at least for the foreseeable future, and buyers and sellers must be prepared to hit the ground running when considering a transaction.”

Smart Business spoke with Wills about how deal timelines have shrunk and the impact that is having in the deal-making space.

How have compressed deal timelines impacted buyers?

Buyers have less time to review a deal and conduct due diligence before making a determination with respect to closing, potentially forcing them to take on more risk than they previously would.

It is very much a seller’s market, both in the business and real estate deal space, and sellers are regularly in a position to move on to the next potential bidder if they don’t like the proposed deal terms. Buyers are offering compressed timelines and other concessions to be more attractive to sellers to give themselves a leg up on competitors and secure deals.

In order to mitigate the risk associated with compressed deal timelines, some buyers are starting due diligence while negotiating the purchase agreement, spending money on third-party reports to help manage the timeframe, but those are dollars lost if you can’t come to an agreement.

A risk associated more with real estate transactions specifically is that there are regularly deposits that become nonrefundable at the end of the due diligence period and, if a buyer’s third-party reports will not be completed timely, buyers run the risk of having their deposit become nonrefundable before their diligence is complete, forcing them to decide whether to put their deposit at risk or terminate the purchase agreement.

Buyers can ask for extensions, but that can be difficult if you made your pitch based on an expedited closing. However, sellers may agree to an extension, as opposed to forcing the buyer to terminate the purchase agreement and starting over with a new potential buyer.

Additionally, buyers are offering purchase agreements that are much more middle of the road and taking advantage of the increased availability of representations and warranties insurance in order to streamline negotiations and help shorten deal timelines.

What is the impact of compressed timelines on sellers?

Sellers need to be able to meet the timeline themselves. Sellers must be prepared and have their house in order. The more information a seller can gather in advance, the smoother the transaction will flow.

Compressed deal timelines add additional stress to sellers as well, as they have to wear two hats throughout the process. Sellers have to run the day-to-day operations of the business while also trying to facilitate a sale. The compressed timeline can lead to the seller being inundated with due diligence inquiries and follow-up questions that might have been more spread out with a longer due diligence period — which can lead to deal fatigue setting in faster than it might otherwise.

What role do outside advisers play?

Outside advisers are extremely helpful to both buyers and sellers. Experienced attorneys, accountants and investment bankers/brokers can help a seller determine what it needs to do to prepare the business for sale, determine the transaction structure, clean up its books and records and gather competitive bids. Additionally, an experienced attorney who is familiar with the business and the market is critical for both buyers and sellers in facilitating the transaction process more efficiently.

It can be a risky time to be a buyer, but if you hesitate, the deal may be gone.

To view the full article, click here.

To view the PDF, click here.

WV (finally) gets a unitization mechanism

GO-WV News

(By Mychal Schulz)

After many years of attempting to pass legislation to allow for efficient unitization of mineral interests for production purposes, the West Virginia Legislature passed Senate Bill 694 in the last week of the recent legislation session, which Governor Justice is expected to sign. The legislation represents a compromise between producers, mineral owners, and surface owners, including the agricultural sector.

As technology drove producers towards increased use of horizontal drilling, West Virginia struggled to modernize its code to allow the combination or “pooling” of mineral interests within a defined area (or “unit”) that would allow the efficient drilling for oil or natural gas through horizontal wells. Prior efforts in West Virginia usually foundered upon how to deal with mineral owners who either refused to agree to the “pooling” of their minerals into a larger “unit” or who could not be located. As a result, a single mineral owner could prevent the formation of a larger “unit” for drilling, which drove up costs and resulted in less efficient extraction of the minerals.

Many months of stakeholder negotiations resulted in SB 694, which passed with minimal changes or opposition in the Senate and House.

SB 694 adds a new article to the West Virginia Code beginning at §22C-9-1, which includes a description of the public policy addressed by the legislation. Not surprisingly, the statute declares that the Legislature “finds that horizontal drilling is a technique that effectively and efficiently recovers natural resources and should be encouraged as a means of production of oil and gas[.]” Notably, however, in addition to identifying the “development, production, utilization, and conservation of oil and gas resources by horizontal drilling in deep and shallow formations” as in the public interest, the statute also recognizes the desire to “[s]afeguard, protect, and enforce the property rights and interests of surface owners and the owners and agricultural users of other interests in the land.” See §22C-9-7a(a).

Per §22C-9-7a(c), to obtain a horizontal well unit order from the Oil and Gas Conservation Commission, a producer must meet three conditions related to (1) a benchmark of royalty interests, (2) a benchmark of operator interests; and (3) negotiations with all mineral owners within the proposed unit.

First, as to royalty interests, a producer may obtain a unit order upon getting consent from the mineral interest owners of 75% or more of the “net acreage in the target formation to be included in the horizontal well unit[.]” The mineral interest owners include traditional royalty owners, “executive interest” owners, and “unknown and unlocatable interest owners.” Under this formula, therefore, a producer may utilize §55-12A-1, et al., (unknown heirs) or §37B-1-1, et al. (co-tenancy), to add acreage to get to the 75% participation threshold. §22C-9-7a(c)(2)(A).

Second, as for operator interests, a producer must control, by ownership, lease, or otherwise, “55% or more of the net acreage in the target formation proposed to be included in the horizontal well unit,” which threshold applies to both shallow and deep horizontal wells. §22C-9-7a(c) (2)(B).

Finally, the statute requires that a producer make “good faith offers to consent or agree to pool or unitize” to mineral owners and negotiate “in good faith” with all “known and locatable royalty owners having executory interests in the oil and gas” within the proposed unit, even those whose interests are not subject to development under §37B-1-1, et seq. §22C-9-7a(c)(2)(C).

Notably, for purposes of determining if these conditions have been met, the Commission may not consider overriding royalty owners, nonexecutive interest royalty owners, or acreage owned or held by unleased, unknown, and unlocatable interest owners whose acreage is not subject to development per §37B-1-1, et seq. In addition, acreage held by other operators within the proposed unit may not be included in the calculation of the thresholds unless such operators have consented or otherwise agreed to develop their operator interest in the net acreage in the target formation proposed to be included in the horizontal well unit. §22C-9-7a(c)(3).

The statute specifies what must be included in a horizontal well unit order. See §22C-9-7a(f). Perhaps most notably, the statute specifies how non-consenting mineral owners whose minerals will be included in the order must be compensated by the operator. For example, an order must require that non-consenting mineral owners with valid leases, whose minerals are included within the horizontal well unit, must be paid an amount equal to (1) 25% of the weighted average monetary bonus on a net mineral acre basis of the bonuses, and (2) 80% of the weighted average production royalty percentage paid to other executive interest owners of leased tracts within the horizontal well unit. §22C-9-7a(f)(6).

On the other hand, non-consenting mineral owners without a valid lease must be given the choice to either (1) surrender their oil and gas within the tract in the unit in exchange for an amount equal to the weighted average amount paid, per net mineral acre, by the applicant to executive interest owners in the same target formation underlying the horizontal well unit; or (2) elect to participate in the unitization. §22C-9-7a(f)(7)(A) and (B). If the non-consenting mineral owner consents to participation in the unitization, the amounts paid must either be (1) on agreed upon terms, or (2) for a bonus payment equal to the average bonus paid to other mineral owners by the applicant within the unit, and a production royalty equal to the highest royalty rate in any lease to a mineral owner within the unit dated in the previous 24 months. §22C-9-7a(f)(7)(B)(i) and (ii). Notably, in lieu of this method of calculating a production royalty, non-consenting mineral owners without a valid lease may make a one-time election to be paid production royalties for natural gas based on either an index price as of the beginning of a month published in an independent publication or on the weighted average sale price. This election must be made before the Commission issues its unit order. §22C-9-7a(f)(7)(B)(ii). If this election is made, the non-consenting mineral owner without a valid lease must receive production royalties for natural gas liquids calculated, at the election of the applicant, based on either the index price or the weighted average sales price. Importantly, production royalties for natural gas liquids must be calculated “using the sum of the proceeds received at the tailgate of the processing facility for each natural gas liquid product during each month divided by the volume of such natural gas liquid product that was sold during such month and shall not be reduced by post-production expenses.” 22C-9-7a(f)(7)(B)(ii). Finally, any mineral owner who simply refuses to make an election under the statute will be considered to have elected to participate in the unit per §22C-9-7a(f)(7)(B).

The statute also contains provisions related to an operator whose interests are included within the proposed unit, including both consenting and non-consenting operators. §22C-9-7a(f)(9) and (10).

Notably, HB 694 received support from the West Virginia Surface Owners Rights Organization, in part, because it provides a mechanism by which surface owners may acquire the mineral interests of unknown and unlocatable interest owners in oil and gas underlying a horizontal well unit. Specifically, if an action under §55-12A-1, et seq., has not commenced, and the taxes are not delinquent, the applicant must inform the surface owner that the underlying interest of the unknown and unlocatable interest owners may obtained from the applicant pursuant to the process detailed in §22C-9-7a(o).

This article only highlights unique features of the new statute. Any operator or landowner affected by a potential unitization order is urged to carefully consult the statute for further details. For now, however, West Virginia finally has a unitization mechanism in place.

Click here, to view the article online in the April issue of GO-WV News.

SEC Proposes Stringent Environmental Climate-Related Risk Disclosure Obligations for Public Companies

Environmental Alert

(By Kevin Garber, Ben Clapp and Joe Yeager)

In an overhaul of reporting requirements 10 years in the making, the Securities and Exchange Commission on March 21, 2022 proposed far-reaching and controversial climate-related disclosure obligations for publicly-traded companies as part of the Biden administration’s emphasis on climate change. The SEC is proposing to force companies to formally disclose their exposure to and management of climate-related risks that are reasonably likely to have a material effect on their business, operations and financial condition. SEC’s goal is to provide investors with “consistent, comparable, and decision-useful information for making their investment decisions.” If finalized, the rule would require publicly-traded companies to provide climate-related financial references as notes to their audited financial statements and disclose their direct Scope 1 greenhouse gas emissions and their indirect Scope 2 GHG emissions. They also may have to disclose their upstream and downstream Scope 3 GHG emissions if they are material to the business or if they have established a GHG emissions target. Reporting obligations would begin in 2024 for large accelerated filers and be phased in for all covered companies by 2026.

Overview of the Proposed Rule
The proposed rule would add a new subpart to Regulation S-K of the SEC’s regulations (17 CFR Part 229) that would require a registrant to disclose climate-related risk information in its registration statements and periodic reports, such as on annual Form 10-K submissions and quarterly Form 10-Q reports. The proposed rule draws heavily from existing disclosure frameworks including the Task Force on Climate-Related Financial Disclosures (regarding climate-related reporting) and the Greenhouse Gas Protocol (regarding accounting standards). Key areas for disclosure include:

the oversight and governance of climate-related risks by the registrant’s board and management;
how any climate-related risks identified by the registrant have had or are likely to have a material effect on its business and consolidated financial statements;
the registrant’s processes for identifying, assessing and managing climate-related risks, and how to integrate those processes into the company’s overall risk management;
whether the company has adopted a transition plan to deal with climate-related risks and how to measure any physical or transition risks to its operations; and
the effect of severe weather events and related natural conditions on the registrant’s consolidated financial statements, together with financial estimates and assumptions used in the financial statements.

The proposal requires registrants to disclose information about their Scope 1 and Scope 2 greenhouse gas emissions. Scope 1 refers to direct GHG emissions that occur from sources the registrant owns or controls, such as emissions from fuel combustion in the registrant’s boilers, furnaces, vehicles, and manufacturing activity. Scope 2 emissions are indirect GHG emissions from the generation of electricity, steam, heat, or cooling the registrant buys or acquires and consumes in its operations. Scope 2 emissions physically occur at the offsite point of generation but are accounted for in the registrant’s GHG inventory because they result from its energy use.

A registrant also would be required to disclose its Scope 3 GHG emissions from upstream and downstream activities in its value chain if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions. Scope 3 emissions result from activities and assets the registrant does not own or control but indirectly affects in its value chain, either upstream in the form of raw materials it buys to make its products and downstream as emissions from its customers’ use of its products. Sometimes referred to as “value chain emissions,” Scope 3 emissions often represent the majority of a company’s total GHG emissions. As a safe harbor, a Scope 3 emissions disclosure would not be considered to be a fraudulent statement unless it was shown to have been made without a reasonable basis or disclosed other than in good faith. SEC-defined smaller reporting companies (generally those with less than $100 million in annual revenue) would be exempt from disclosing Scope 3 emissions.

Issues for Comment and Clarification
The SEC is asking registrants to do a top to bottom review of their impact on climate, and while not mandating any changes to behavior, the agency apparently anticipates that by making this information available to investors, companies will attempt to reduce their GHG emissions. The SEC acknowledges that using financial statement metrics to estimate and disclose climate-related uncertainties is driven by judgment and assumptions, similar to other financial statement disclosures. Accordingly, for each type of financial statement metric, the proposed rule would require the registrant to disclose contextual information to enable a reader to understand how it derived the metric, including a description of significant inputs and assumptions used, and if applicable, policy decisions the registrant made to calculate the specified metrics.

The breadth of Scope 3 emissions reporting will be a key issue during the public comment period. Despite the safe harbor, it is unclear how companies should determine whether Scope 3 emissions from their upstream supply chain and from their downstream product life are “material” (and in particular which such emissions are material), and how that determination will align with current SEC requirements to disclose other material risks, defined as information a reasonable investor would consider important. The proposed rule also affects privately-held companies who will be asked by their publicly traded customers to estimate or account for their GHG emissions, something likely to be new to many privately-held organizations. Although intended to drive companies to become greener, the new required disclosures may burden companies with increased compliance costs and discourage private companies from going public.

Public Comment Period
The public comment period will be open for 30 days after publication in the Federal Register (which hasn’t happened as of the date of this Client Alert) or May 20, 2022, whichever is later. There is a phase-in period for all registrants as the rules are currently proposed. Deadlines for filing disclosures including Scope 1 and Scope emissions metrics range from filing year 2024 for FY 2023 (for large accelerated filers) to filing year 2026 for FY 2025 (for smaller reporting companies). Both publicly-traded and privately-held companies should review the SEC’s proposed rule and submit comments asking the SEC to revise or clarify the proposed rule as appropriate.

Babst Calland attorneys are closely following these and other climate-related developments. If you have questions or need additional information about SEC’s proposed rule on disclosure requirements, please contact Kevin Garber at 412-394-5404 or kgarber@babstcalland.com; Ben Clapp at 202-853-3488 or bclapp@babstcalland.com; or Joe Yeager at 412-394-5698 or jyeager@babstcalland.com.

To view the PDF, click here.

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