In an earlier post on this blog I had expressed confidence that the Pennsylvania legislature would enact a Marcellus drilling impact fee. Although the legislative negotiations have taken longer than I had anticipated, the Pennsylvania House and Senate have now passed House Bill 1950 and the bill was signed by Governor Tom Corbett last week. The legislation imposes an annual impact fee on each natural gas well drilled into an unconventional formation such as the Marcellus or Utica shale, and also significantly updates the existing Oil and Gas Law.

Reaction to the bill that was passed has been mixed. Some organizations with an environmental agenda have labeled the legislation a gift to the oil and gas industry. Other commentators have suggested that the new fee structure, coupled with current low natural gas prices, will drive oil and gas development elsewhere. Aside from the actual impact fee, perhaps the most controversial aspect of the new law is a limitation on the ability of local municipalities to regulate drilling activity and enact zoning ordinances.

An interesting twist added by the legislature is tying the revenue that will be generated to the current price of natural gas. For instance, if the price of natural gas averages less than $2.25, the impact fee will be $40,000 for the first year of the well. On the other hand, if the annual average price of natural gas is $6.00 or more, the first year impact fee will be $60,000. With the recent rock-bottom prices for natural gas, it seems likely that the revenue from the impact fee will be on the lower end of the scale. Sixty percent of the revenues will be distributed to counties and municipalities where wells are located, with the remainder going to the state.

One of the more divisive issues regarding the legislation was who would have the authority to levy the fee. The final version of the legislation requires that the fee be adopted by individual counties, rather than the state government. If a county should choose to not enact the fee, an affirmative vote by fifty percent of the municipalities in the county will override the decision. The legislators’ efforts notwithstanding, Grover Norquist still calls the fee a tax.

Viewed from the perspective of the local landowner, some of the more important provisions in the new legislation are as follows:

Setbacks

The previous regulations require that oil and gas wells be located at a minimum distance of 200 feet from an existing building or water source. Section 3215 of H.B. 1950 increases the minimum setback to 500 feet for an unconventional well, unless the owner of the property consents to a reduced distance. Unconventional wells must also be located at least 300 feet from any spring or other body of water.

H.B. 1950 does, however, provide an exception to the minimum distance requirement when the owner of the building or water well does not give consent and the distance restriction would deprive the owner of the oil and gas underneath the property of the right to share in production. A similar exception appeared in the previous version of the Oil and Gas Law, which provided that a well operator may be granted a variance from the distance requirement upon submission of a plan with additional measures to protect the property. But while the previous regulation states that the well operator may be granted a variance, H.B. 1950 provides that the operator shall be granted a variance. Time will tell whether the change from the permissive “may” to the mandatory “shall” will prove to be significant.

Water Testing

As anyone who even casually scans the news is aware, there have been ongoing concerns about the potential impact on water supplies from Marcellus drilling. Pennsylvania has provided an important protection for landowners with a presumption that a well operator is responsible for water pollution if the water well is within one thousand feet of drilling and the pollution occurred within six months of the completion of operations.

H.B. 1950 significantly adds to this protection by extending the presumption to water wells within 2,500 feet of unconventional drilling operations and increasing the period in which the presumption applies from six months to one year.

Hydrofracturing Disclosure

In an effort to allay concerns about hydraulic fracturing some operators in the oil and gas industry have moved to voluntarily disclose the contents of fracking fluids. H.B. 1950 now requires that a well operator disclose the identity of the chemicals used in hydraulic fracturing on a public chemical disclosure registry. This legislative mandate that the industry disclose the details of fracturing fluids is one of the provisions in the new law that has received the most positive media attention.

But the legislature has also provided the industry with an exception to the rule requiring disclosure if “the specific identity of a chemical or the concentration of a chemical, or both, are a trade secret or confidential proprietary information.” In that case, the operator need only disclose the chemical family or similar description associated with the chemical.

It may be hoped that the oil and gas operators in Pennsylvania will see the public relations benefit from transparency in hydraulic fracturing operations and will not take advantage of the exception to the disclosure rule generously provided to the industry by the Pennsylvania legislature.

Local Municipal Regulation

As discussed above, the restriction on the ability of local municipalities to enact zoning ordinances that regulate where oil and gas drilling activities may occur is probably the most controversial aspect of H.B. 1950. The bill explicitly preempts all local ordinances regulating oil and gas operations and requires that all such ordinances allow for reasonable development of oil and gas resources.

The oil and gas industry has consistently argued that it needs uniformity in terms of regulation across the state; adapting to a patchwork of varying regulations from different municipalities would significantly add to the cost of operations and may drive the industry to shift development to areas with lower operating costs. Governor Corbett and the legislature clearly take this concern seriously and the result is that Section 3304 of H.B. 1950 requires that local ordinances allow oil and gas activities, other than activities at impoundment areas, compressor stations and processing plants, as a permitted use in all zoning districts.

Section 3304 also provides that a municipality may not impose requirements or limitations on oil and gas operations that are more restrictive than those placed on other industrial activities.

The final version of this legislation appoints the state Public Utility Commission as the arbiter of disputes between local governments and operators as to whether an ordinance violates the requirements of Section 3304.

The bill appears to be designed to discourage such disputes. Section 3307 provides that a court can award attorney fees and costs if it finds that a municipality enacted an ordinance with willful disregard for the requirements in H.B. 1950. The municipality will also be ineligible to receive funds collected under the impact fee until it amends or repeals the ordinance.

Conclusion

Pennsylvania has been considering some form of a severance tax or impact fee since the Marcellus boom began. H.B. 1950 is the product of extensive negotiations and reflects a compromise between the various competing interests. Though the legislation leaves room for improvement, in the opinion of this Commentator it is nevertheless a significant step in the right direction.

@NY1weather: Hot in the city? Since 1996, we've broken only 1 record low at Central Park while setting 48 record highs.

Though it’s not my intention to jump into the climate change debate, this struck me as interesting fact which highlights the importance of reducing greenhouse gas emissions. And this naturally leads an oil and gas attorney to reflect upon the advantages of using natural gas for energy production, rather than coal.

Those who follow issues related to Marcellus development are probably familiar with the conventional wisdom that use of natural gas for electricity production results in about fifty percent less greenhouse gas emissions than the use of coal. Aside from the reduction in emissions of mercury, sulfides and soot from coal, the substantial improvement in terms of climate impact has been touted as one of the important benefits resulting from development of domestic natural gas resources.

Or so we thought, until the release of a study by Robert Howarth from Cornell University which reached the surprising conclusion that unconventional natural gas had a larger greenhouse gas footprint than coal. This study looked at the lifetime emissions resulting from a hydraulically fractured gas well and was based on a series of assumptions, including a projection that up to eight percent of the methane from an unconventional gas well leaks into the atmosphere. That would be a very significant factor in the analysis because methane is a more potent greenhouse gas than carbon dioxide.

The Howarth study was widely reported in the news media. Robert F. Kennedy Jr., a prominent environmental activist, has cited the study as a reason for backtracking on his previous endorsement of natural gas development. The study may even form the basis for policy decisions as Howarth has provided testimony for the European Parliament and the New York state legislature.

Now it appears that the Howarth study may have missed the mark. A number of subsequent reports refute the conclusions of the Howarth study and affirm that natural gas is a cleaner fuel than coal. This includes studies by Carnegie Mellon University, the National Energy Technology Laboratory, IHS-CERA and the University of Maryland. The former Secretary of the Pennsylvania Department of Environmental Protection, John Hanger, has summarized these studies nicely on his blog.

The final nail in the coffin may have been driven home by a different team of Cornell researchers in a paper that was recently published online. Characterizing the Howarth study as “misleading,” these researchers conclude that shale gas has a greenhouse gas footprint that is half and perhaps even a third that of coal.

These studies refuting the Howarth report are encouraging for those of us who are concerned about climate change and see hope in the development of domestic shale gas that can reduce dependence on foreign energy supplies while substantially reducing greenhouse gas emissions.

As anyone who even casually scans the news is aware, there are other potential environmental concerns associated with Marcellus development besides green house gas emissions. For landowners who have not yet signed an oil and gas lease, the ideal way to address many of those concerns is by working with a qualified attorney who can negotiate protections for the landowner in the lease. This may include provisions such as an environmental indemnity clause and restrictions on the right to use the property for drilling or disposal of wastewater. The gas planning team at Marshall, Parker & Associates is always committed to helping landowners protect their family and their property in the gas leasing process and also in dealing with the various issues that may arise after signing the lease.

A related issue that has received less attention, but is nevertheless significant, has been regulation of the network of natural gas pipelines that is being constructed to transport natural gas from the Marcellus to the market. The Philadelphia Inquirer has published an excellent series of articles, drawing public attention to the notable lack of regulatory oversight of pipeline construction in the Commonwealth. A link to the series of articles can be found here.

Pipeline regulation is one area where the Governor and our state legislators have recently made progress: Act 127, introduced by State Representative Matthew Baker, was signed by Governor Corbett on December 22, 2011. The Act remedies a significant shortfall in pipeline regulation by giving the state Public Utility Commission (PUC) authority over pipeline regulation that matches the current oversight by the federal Pipeline and Hazardous Materials Safety Administration (PHMSA). An article discussing this pipeline measure can be found here.

PUC involvement with pipeline regulation is nothing new, but prior to Act 127 the PUC only regulated those pipelines also subject to regulation by the Federal Energy Regulatory Commission. These are generally the large, interstate transmission lines that are regulated as public utilities and have eminent domain powers. The only entity that had any regulatory control over the many miles of gathering lines that transport the gas from the wells to the transmission lines in Pennsylvania was the PHMSA. Unfortunately, that oversight has been less than complete as the PHMSA has lacked the resources to fully regulate those many miles of pipelines.

This missing piece of the regulatory puzzle is what was fixed with Act 127; now, the PUC will have the authority to regulate gathering lines in the Commonwealth. To meet its new responsibilities under the Act, the PUC plans to hire 12-15 new pipeline inspectors – good news for the residents of those areas where pipeline construction is taking place.

But one very large piece of the puzzle is still missing. As discussed above, the PUC now has authority over those pipelines currently regulated by the PHMSA. However, the federal regulations break down the locations where pipelines are placed into four classes, from Class 4 high-population areas to the rural areas with low-density population categorized as Class 1. And the federal regulators apparently made the decision that the risks posed by pipelines in the low population areas didn’t justify the added costs of regulation. So, pipelines in Class 1 areas are not subject to regulation by the PHMSA and will thus not fall under the new regulatory requirements of Act 127.

A significant percentage of the new pipelines being constructed to transport Marcellus shale gas are being placed in the rural Class 1 areas. For that reason, the oil and gas industry in Pennsylvania may view Act 127 as more bark than bite. Representative Baker predicts that the federal regulations could be strengthened in two to three years, placing pipelines in Class 1 areas under federal oversight. Pennsylvania could also choose to extend PUC authority, but uncertainty about expanded regulation remains.

The natural gas industry naturally views additional regulation as unnecessary, suggesting that self-policing is adequate. Certainly, the industry has every incentive to ensure that pipelines are constructed in a safe manner. Nevertheless, it’s safe to say that the landowners in rural areas where these gathering lines are placed would prefer to see expansion of PUC regulatory oversight to include Class 1 areas sooner, rather than later.

A link to a live blog following the meeting can be found here.

The debate that we have seen in the Commonwealth over the last year regarding a severance tax and the proposed impact fee has received national attention. Last month the Governor signed a state budget with the impact fee endorsed by leading state republicans noticeably absent. At the time, Corbett stated he intended to wait for the report from the Advisory Commission. That wait is now over as the final report will be released next week and will include the Commission’s recommendation that the state adopt some form of an impact fee. Debate over the details may continue, but it is apparent to this Commentator that an impact fee is on its way.

As contentious as the impact fee has been, this controversy will pale in comparison to that we will see over the Commission’s recommendation that the state adopt a forced pooling law. Whether the state will adopt this recommendation is less clear – it would involve some back-pedaling from the Governor, who has previously stated that he opposes forced pooling.

We can also expect debate over the Commission’s vote to allow further leasing of state forests for natural gas drilling.

It will be interesting to follow the discussion of these issues over the coming weeks and months – stay tuned.

-       High-volume fracturing would be prohibited in the New York City and Syracuse watersheds, including a buffer zone;

-       Drilling would be prohibited within primary aquifers and within 500 feet of their boundaries;

-       Surface drilling would be prohibited on state-owned land including parks, forest areas and wildlife management areas;

-       High-volume fracturing will be permitted on privately held lands under rigorous and effective controls.

The full report is to be issued today – July 1, 2011.

The public outcry was promptly jump-started by the New York Times with the headline “Cuomo Will Seek to Lift Ban on Hydraulic Fracturing.” 

Politics aside, this is big news for the citizens of New York generally and for New York mineral owners in particular. Prior to the fracking ban, many landowners in the Southern Tier of New York had signed oil and gas leases in anticipation of natural gas royalties. As a result of the moratorium, many of those leases have been extended beyond the initial primary term under the Force Majeure clause found in most gas leases.

A Force Majeure provision will extend an oil and gas lease when the gas company cannot fulfill its contractual obligations due to some “greater force” that could not be reasonably anticipated. Whether the Force Majeure extensions are valid may be decided in the litigation filed by some New York landowners challenging the actions of the gas companies involved.

If the New York fracking ban is lifted, the primary term of the leases that have been extended will begin to run. This means that the gas companies will have to begin drilling on the properties in order to prevent the leases from terminating.

Lifting the moratorium in New York would also impact landowners in Pennsylvania. If the operators are forced to move drill rigs to New York to hold leases, it seems likely that rate of drilling in Pennsylvania may decrease.

Of course, the gas companies have to drill to hold leases in Pennsylvania, too. So, the operators may be faced with the dilemma of holding more expiring leases with fewer drilling rigs. Perhaps the ultimate impact on Pennsylvania landowners will be larger production units to hold more acreage, with smaller royalty checks as the interests of the individual landowners in the unit are diluted.

Compounding the anxiety for landowners are the conflicting claims from those who oppose shale gas drilling and the advocates for responsible Marcellus development. Landowners are left perplexed. Is hydrofracking actually ruining landowners’ water wells? Is disposal of wastewater degrading the quality of drinking water for those of us who live downstream from drilling?

What is often absent from the debate are hard facts that objectively document the impact of Marcellus drilling on individual landowner and public water supplies, as opposed to carefully selected talking-points that support an ideological position, or anecdotal stories. In light of the dearth of hard data, the following news is encouraging, even if not entirely reassuring.

It was recently announced that a team from Mansfield University is studying the impact of gas drilling on private water wells, searching for evidence of water contamination.  After the data is collected and analyzed, it will be published in a peer-reviewed scientific journal and be made available locally. More information on the study is available here.

Penn State researchers are also examining the potential water impacts from drilling. An article in the Towanda Daily Review includes additional information for landowners interested in participating in the well testing program.

When the New York Times article discussed above first appeared, public fears of radioactive drinking water spiked. Those calling for increased water testing included U.S. Senator Bob Casey, who demanded increased inspections of water supplies and an accounting for why sufficient testing hadn’t taken place. The Pennsylvania Department of Environmental Protection responded swiftly, releasing the results of testing that showed water downriver from plants treating Marcellus wastewater met federal drinking water standards.

However, significant concerns about water quality continue. Most recently, research by Carnegie Mellon University and the Pittsburgh Water and Sewer Authority suggests that disposal of drilling wastewater is contributing to elevated levels of bromides in state rivers. Though bromide alone does not pose a health hazard, bromides can combine with chlorine in drinking water treatment plants to form brominated trihalomethanes, which are potentially hazardous. In response, DEP has requested (though not ordered) that companies drilling in the Marcellus stop taking wastewater to treatment plants that do not meet the stricter discharge standards that were implemented last year under the previous Secretary of DEP, John Hanger.

This commentator lives in Danville, a lovely town located on the banks of the Susquehanna River in Central Pennsylvania, downstream from Towanda, Wyalusing and Tunkhannock – ground zero for Marcellus development in Northeastern Pennsylvania. My children and I drink water drawn from the Susquehanna. While I am encouraged by the response of regulators to the reports discussed above, I would add my voice to the chorus of those asking the state to substantially increase water testing and for the operators in the Marcellus Shale to adopt the best industry practices to safeguard water supplies.