The U.S. Environmental Protection Agency (EPA) Office of Inspector General (OIG) recently released a report entitled, “Enhanced EPA Oversight and Action Can Further Protect Water Resources From the Potential Impacts of Hydraulic Fracturing.” The report evaluates how EPA and state agencies have used existing authorities to address the potential impacts of hydraulic fracturing on water resources, and also recommends two areas for EPA improvement. First, the OIG recommends that EPA improve its oversight of Underground Injection Control (UIC) permit issuance for the use of diesel fuels in hydraulic fracturing. Second, the report recommends that EPA develop an action plan to address public comments submitted in response to the agency’s May 2014 advance notice of proposed rulemaking (ANPR) related to possible federal chemical disclosure requirements. The OIG found that EPA does not have a plan for responding to the comments submitted in response to the 2014 ANPR, nor for making a final determination on whether to proceed with a formal rulemaking.
The Ohio Department of Natural Resources (ODNR), Division of Oil and Gas Resources Management has adopted rules requiring the approval of plans for horizontal well sites prior to the construction or material modification of the sites. The rules, codified at OAC 1501:9-2-01, 1501:9-2-02, and 1501:9-12-01, became effective on July 16, 2015.
The rules require the electronic submission of an application for approval of the well site (consisting of the well pad, access roads, areas altered to install ponds and other water control components, storage facilities, and other areas altered for drilling and production operations), and provide that construction or material modification of the site may not commence without first obtaining a permit from the Chief of the Division. The rules prescribe the information to be provided in the application, including detailed drawings of all features within the well site boundary prepared and certified by a professional engineer, a sediment and erosion control plan, a dust control plan, a geotechnical report, and a stormwater hydraulic report.
The applicant and a representative of the Chief must meet at the site within 15 days of notification by the Chief that the application is complete. The applicant must submit certification by a professional engineer after completion of the well site that the site has been constructed in conformity with the approved application. The text of the rules, a discussion of the rules’ contents, and forms prescribed by the Chief are available on the Division’s website.
On July 9, 2015, Governor Tomblin announced the formation and appointment of members to the West Virginia Commission on Oil and Natural Gas Industry Safety. Publicized during Governor Tomblin’s State of the State address in early 2015, the Commission is charged with “reviewing current federal and state oil and natural gas workplace safety regulations and provid[ing] recommendations for improving workplace safety” according to the State Journal. The Commission is comprised of secretaries of the DEP, Dept. of Commerce, Dept. of Transportation, and Public Safety, among others, as well as members of the natural gas industry and labor representatives. The Commission is to issue its first report on or about November 16, 2015.
Ohio’s biennial budget legislation, House Bill 64, signed by the Governor on June 30, 2015, includes changes and additions to Ohio’s oil and gas regulatory program appearing in Chapter 1509 of the Revised Code. The changes and additions take effect on September 29, 2015. The more significant enactments are the following:
- A new section requiring the Chief of the Division of Oil and Gas Resources Management to create a program for the electronic submission of EPCRA reports to the Chief; state and local agencies required by EPCRA to receive the reports will have access to that database (Section 1509.231);
- A new section requiring the reporting of fires and explosions and certain releases of oil, gas, brine, or other substances to the Chief by telephone within thirty minutes of the event, unless such reporting is “impractical” (Section 1509.232);
- New language authorizing the Chief to include land owned by the Ohio Department of Transportation in drilling units approved by the Chief under Section 1509.28;
- An increase in the maximum civil penalty that may be imposed for certain regulatory violations from $4000 per day of violation to $10,000 per day of violation (Section 1509.33(A)); and,
- A significant expansion in the scope of regulatory violations for which the violator is liable to persons affected by the violation for the payment of damages and “the actual cost of rectifying the violation and conditions caused by the violation” (Section 1509.33(G)).
On June 29, 2015, the New York State Department of Environmental Conservation issued its Findings Statement which officially prohibits high-volume hydraulic fracturing to develop natural gas resources in the Marcellus Shale. The issuance of the Findings Statement concludes a nearly seven-year endeavor by the Department to evaluate the environmental impacts of hydraulic fracturing under the State Environmental Quality Act. The Department relied upon information in the Supplemental Generic Environmental Impact Statement, issued by the Department on May 13, 2015, and more than 260,000 public comments in making the determination that hydraulic fracturing should be banned statewide. Specifically, the Department found that “there are no feasible or prudent alternatives that would adequately avoid or minimize adverse environmental impacts and that address the scientific uncertainties and risks to public health from” hydraulic fracturing. As a result, the Department concluded that prohibiting high-volume hydraulic fracturing “is the best alternative based on the balance between protection of the environment and public health and economic and social considerations.”
Today the U.S. Environmental Protection Agency and the U.S. Army Corps of Engineers published in the Federal Register a joint final rulemaking to redefine “waters of the United States” and the scope of the federal agencies’ jurisdiction under the Clean Water Act. This final rule will be effective on August 28, 2015. For more information, read our Administrative Watch regarding the Clean Water Rule.
This week the U.S. Environmental Protection Agency (EPA) sent a highly-anticipated proposed rule to the White House Office of Management and Budget (OMB) for interagency review that would address methane emissions in the oil and natural gas sector. Earlier this year, EPA announced its plan to initiate such a rulemaking as part of its methane reduction strategy. A second proposed rule was also reportedly sent to OMB for review this week – EPA is working on new definitions for certain regulatory terms associated with permitting sources in the oil and gas industry, in order to assist permitting agencies in making major stationary source determinations. Both of the proposed rules are expected to be published in the Federal Register in August.
In a unanimous decision, the Ohio Supreme Court held that under the 2006 Dormant Mineral Act (“DMA”), the filing of a claim to preserve a mineral interest from being deemed abandoned is sufficient to preserve the mineral interest if it was recorded within 60 days following the notice of abandonment. Under this guidance, even if there are no otherwise qualifying savings events during the 20-year period preceding the notice of abandonment, the mineral interest can still be preserved by claim the timely filing of the claim to preserve.
The Ohio Supreme Court specifically noted that the parties to the underlying lawsuit did not dispute whether 1989 or 2006 version of the DMA applied so the court applied the 2006 DMA, as amended. The issue of which version applies will be decided in Corban v. Chesapeake Exploration, L.L.C. and Walker v. Shondrick-Nau, which are pending before the Court. Corban v. Chesapeake Exploration, L.L.C. was argued to the Court on May 6, 2015 and Walker v. Shondrick-Nau is scheduled for oral argument on June 23, 2015.
Horsehead Holding Corp. (Horsehead) announced Monday that it closed on the sale of its former zinc smelter to Shell Chemical (Shell), which is the proposed site for an ethane cracker plant in Beaver County. Although Shell has not made a final decision on whether to build the cracker plant, it has been considering the Horsehead property as a site for the plant, which would convert ethane, a component of natural gas, into polyethylene. Shell is moving forward with developing the site, having demolished the smelter plant and relocated power lines. Shell indicated that this is a necessary step in the plans to acquire permits and continue development of the site.
Energy Transfer Partners LP announced that it will invest $1.5 billion for a new pipeline system and processing facilities to serve the Marcellus Shale in and around Butler County, Pennsylvania. The new facilities are expected to be operational by mid-2017. Natural Gas Intelligence reported that the pipeline and facilities are part of a long-term natural gas gathering agreement between ETP and EdgeMarc Energy to serve EdgeMarc’s active wells in the region, but the facilities are also expected to accept third party gas in the future. The project plans include over 100 miles of high pressure pipeline and a cryogenic gas processing plant that will be located in western Pennsylvania near Butler County, providing an additional 440 MMcf/d of gathering capacity in the area. The plant will deliver gas to ETP’s Rover pipeline, which is expected to deliver gas to markets in the Midwest, Great Lakes and Gulf Coast regions beginning in 2017. ETP’s pipeline will also deliver natural gas liquids to the Marcus Hook Industrial Complex on the Delaware River, which is being repurposed for natural gas liquid storage, processing and distribution to foreign and domestic markets.
As reported by the Wheeling Intelligencer, the Ohio Department of Natural Resources (“ODNR”) recently released production data for the first quarter of 2015 for oil and gas wells drilled in Ohio’s Utica Shale formation. The report found that natural gas production during the first three months of the year, which totaled 183.5 billion cubic feet, nearly tripled from the first quarter of 2014, when Utica Shale wells produced only 67.3 billion cubic feet. The state’s most productive natural gas wells are Rice Energy’s “Blue Thunder” wells drilled in Belmont County, which produced a combined 1.41 billion cubic feet during the first quarter. The ODNR’s first quarter data also shows that oil production in the Utica Shale, which totaled more than 4.4 million barrels, is up from the 1.95 million barrels reported during the first quarter of 2014. The state’s most productive oil well is American Energy Partners’ “Shugert Daddy” well drilled in Guernsey County, which produced 40,683 barrels during the first quarter.
Despite the increase in both oil and gas production from the Utica Shale, Ohio has experienced a slowdown in new drilling operations and many existing wells have been shut-in due to a lack of pipeline infrastructure. Shawn Bennett, Senior Vice President of the Ohio Oil and Gas Association, stated that “[m]ore pipelines are integral to the success of the Utica” and suggested that Ohio is still a few years away from having all necessary pipelines in place.
Marcellus.com reports that an intrastate pipeline is under construction in northern West Virginia. The Stonewall Gas Gathering pipeline will connect Doddridge and Harrison counties to the Columbia Transmission interstate pipeline that runs through Braxton County, West Virginia. Wisconsin-based Precision Pipeline has been contracted to build the pipeline, which plans to hire approximately half of the necessary employees from local areas. The pipeline will help to fill the need for new infrastructure from gas producing areas in West Virginia to other markets. Charlie Burd, executive director of the Independent Oil and Natural Gas Association of West Virginia, stated that “[c]ustomers and producers are ready and waiting for pipelines that connect gas wells to markets.”
In Hoop v. Kimble, the Seventh District Court of Appeals upheld a trial court ruling that forfeiture was not an appropriate remedy for the breach of an anti-assignment provision in an oil and gas lease. In the case, the original lessee of the lease died and left his entire estate, including the family business, to his wife. She in turn assigned the subject oil and gas lease to herself and then formed a new legal entity. The lease contained a “trade-sale clause” which provided that the lease shall not be traded or sold without the permission of the lessor.
The property owners sought forfeiture and cancellation of the lease and argued that the assignment of the lease breached the trade-sale clause. The trial court found that the trade-sale clause was breached by the assignment, but did not order forfeiture. The appeals’ court agreed and noted that forfeiture is an appropriate remedy only in certain, limited circumstances. To establish that forfeiture is appropriate the lease must specifically so provide and the legal damages resulting from the breach must be inadequate. Neither of these elements were present in the case, so the appeals court did not order forfeiture of the lease.
Despite Economic and Regulatory Climate, Marcellus and Utica Shales among Most Productive in U.S.
The law firm of Babst Calland recently released its fifth annual energy industry report called, “The 2015 Babst Calland Report – Appalachian Basin Oil and Gas Industry: Rising to the Challenge; Legal and Regulatory Perspective for Producers and Midstream Operators.” This annual review of energy and natural resources development activity acknowledges the continuing evolution of this industry in the face of economic, regulatory, legal and local government challenges. To request a copy of the Report, contact info@babstcalland.com.
In this Report, Babst Calland attorneys provide insights into Marcellus and Utica shale issues, challenges and recent developments most relevant to Pennsylvania, Ohio and West Virginia. In general, a significant challenge ahead for shale developers in the current price environment is for operators to continue to be productive and active in finding land and drilling wells while effectively delivering the natural resource to market.
According to the U.S. Energy Information Administration, regional and national natural gas production reached an all-time high at the end of 2014. Thus far in 2015, the oil and gas industry’s rig count in the Appalachian Basin and elsewhere is down substantially compared to the previous two years. Although Marcellus shale development is leading the way in the U.S. natural gas production by producing 17 million cubic feet per day of gas, persistently low gas prices are forcing producers to curtail capital expenditures, adjust staffing and wring cost savings from their respective supply chains.
Joseph K. Reinhart, shareholder and co-chair of Babst Calland’s Energy and Natural Resources Group, said, “This Report identifies the many challenges faced by the oil and gas industry, including commodity pricing, efforts to impose or increase taxes, pipeline capacity, vocal opposition, environmental and litigation challenges, impacts of local regulation, and the growing importance of due diligence in asset transactions.”
The 44-page Report contains five sections, each addressing key challenges for Appalachian Basin oil and gas producers and midstream operators.
- Regulatory Shifts and Impacts, such as the current proposed amendments to Chapter 78 rules in Pennsylvania, will impose significant new regulatory burdens and create tremendous shifts in how companies manage their conventional and unconventional assets. Also, the focus on potential impacts of hydraulic fracturing and deep well disposal on seismic events may create sweeping changes to what operators will need to install and monitor these facilities. These and other impacts will increase administrative burdens and may create increased legal burdens and business considerations.
- Environmental Challenges, resulting from the proposed Chapter 78 amendments, including waste rules, NORM requirements, retention ponds, storage tanks, noise, public resources, stream and wetland buffers, orphaned and abandoned wells, and clean-up standards, among others. Most industries do not confront this many critical environmental issues in one decade, yet the oil and gas industry in the Appalachian Basin is facing these challenges all at once.
- Litigation Challenges will remain part of the industry’s landscape given the large number of unresolved regulatory and legal issues. Industry will be required to litigate interpretations of statutes and rules by federal and state regulators and environmental groups and continue to face issues related to the validity of leases and royalty payments. Property owner claims of personal injury and property impact from oil and gas development activities will likely continue, fueled by claims of ground water contamination and adverse health effects of shale development.
- Local Government Regulatory Landscape Varies Significantly in Appalachia with each of the primary states providing its unique system of local regulatory authority in the oil and gas industry. Pennsylvania continues an uncertain evolution in the aftermath of the Pennsylvania Supreme Court’s decision in Robinson Twp. vs. Commonwealth of Pennsylvania (Act 13).In addition to the expected increase in local ordinance activity resulting from the Act 13 ruling, anti-industry activists are challenging the validity of zoning ordinances. By contrast, West Virginia and Ohio are far more restrictive in the authority afforded to local government to regulate the natural gas industry.
- Negotiation of Transactions Requires Comprehensive Due Diligence in Title, Environmental, Land Use, Litigation and Lease Review particularly given the number of companies that are trading assets and/or entering or exiting operations in the Appalachian Basin. Title Due Diligence continues to play a major role in transactions. Cotenancy issues are addressed differently in each state. Pennsylvania acquisitions should include the proposed new Chapter 78 and 78a requirements moving forward, as it is likely that it will take both the oil and gas industry and Pennsylvania’s agencies a significant amount of time to fully implement these changes. Possessing clear title and all necessary environmental permits will be of little value if local ordinances, including zoning and traffic restrictions or construction requirements, do not allow certain activities. Identifying and analyzing a seller’s pending suits and threatened claims and a familiarity with recent case law and pending cases that may adversely affect the oil and gas industry is also a significant aspect of due diligence for oil and gas transactions.
Commenting on this year’s Report, Kathryn Z. Klaber of The Klaber Group said, “The Babst Calland Report is a compilation of current facts and challenges with legal and regulatory perspective relevant to the interests of the Appalachian Basin oil and gas industry.”
As market conditions evolve for the oil and gas industry in the Appalachia Basin, Babst Calland’s Energy and Natural Resources Group continues to stay abreast of the many current legal and regulatory challenges facing producers and midstream operators.
To stay on top of these developments, periodic update articles, news and regulatory information can be found on babstcalland.com or at the Firm’s Shale Energy Law Blog shaleenergylawblog.com. Subscribe to receive regular updates.
Note: The Babst Calland Report is provided for informational purposes only to our clients and friends, and is not intended to constitute legal advice.
On May 27, 2015, the United States Environmental Protection Agency (EPA) and the United States Army Corps of Engineers (Corps) released the long-awaited final rule redefining the extent of the agencies’ jurisdiction over “waters of the United States” (WOTUS) under the Clean Water Act. The Final Rule, known as the “Clean Water Rule,” abruptly changes (i.e., within 60 days of publication in the Federal Register) the types of waters that will be regulated under numerous federal programs, including NPDES permitting, wetland and watercourse (i.e., dredge and fill) permitting, spill response planning, and spill reporting. The Final Rule will affect all types of industries, real estate development, construction activities, and other entities by increasing the types and extent of waters that will be regulated under the Clean Water Act and introducing a new analysis for evaluating whether a water is jurisdictional.
For more information, read our Administrative Watch regarding the Clean Water Rule.