Posted by Dale A. Tice on February 22, 2012

Pennsylvania Passes Marcellus Shale Impact Fee Legislation

By Attorney Dale A. Tice, Marshall, Parker & Associates

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.

Posted by Dale A. Tice on February 14, 2012

Natural-Gas Fee May Be Too Late

This is an article that recently appeared in the Opinion section of the Philadelphia Inquirer. It was written by Arthur Sterngold, an associate professor of business and former director of the Institute for Management Studies at Lycoming College in Williamsport, Pennsylvania.  He's written several articles about the misuses of economic impact studies and market analyses.  Before pursuing an academic career, Sterngold worked as a government economist and advertising account manager.  He earned a B.A. degree in economics from Princeton, MBA from Northwestern, and Ph.D. from Penn State.

I have met Dr. Sterngold and respect his opinion.

With natural-gas drilling booming in Pennsylvania's Marcellus Shale region, state lawmakers might seem to have chosen the perfect time to impose an impact fee on gas producers. The new fee has been projected to generate $191 million in retroactive 2011 fees, $220 million in 2012, and larger amounts over time.

Unfortunately, though, the legislature may have procrastinated for too long. Natural-gas prices have plummeted from their lofty levels of a few years ago, squeezing industry profits and forcing producers to start scaling back their activity. As a result, the impact fees may generate less revenue than expected and induce some cash-strapped drillers to shift resources to other states.

After years of avid promotion of natural-gas development by the Marcellus Shale Coalition, the industry's chief lobby, it's hard to imagine a slowdown in drilling. As part of its campaign to win public approval, the coalition funded a series of economic impact studies by Penn State researchers. The three studies, released in 2009, 2010, and 2011, forecast increasingly larger jumps in employment, incomes, and tax revenues as a result of shale exploitation. In the most recent study, released last summer, the authors concluded that "the outlook for Marcellus production is remarkable."

While the Penn State researchers were preparing their reports, however, evidence was mounting that the industry was in trouble. From an average of $8.85 per million British thermal units in 2008, natural-gas prices fell sharply to $4.39 in 2010, and $3.94 in 2011. Last month, prices dropped below $2.50, and they are expected to stay under $5 for another decade.

Signs of a slump

Lower gas prices mean smaller profit margins. So it's no surprise that gas producers are scaling back their Marcellus Shale drilling, putting growth on hold, or moving resources to states with lower costs and more deposits rich in oil and other liquid fuels. The companies doing so include Talisman Energy, EQT Corp., Consol Energy, and Occidental Petroleum Corp. Chesapeake Energy, which has the largest Marcellus Shale holdings in the state, has announced the most drastic cutbacks in Pennsylvania and elsewhere.

In a recent Inquirer op-ed, Louis D. D'Amico, president of the Pennsylvania Independent Oil & Gas Association, explained that "low natural-gas prices are bad for producers, many of whom can't continue to spend money on wells that aren't profitable under current and foreseeable conditions. In the coming months, Pennsylvanians can expect to see fewer ... wells drilled."

There have been signs of a coming correction for years. In May 2010, energy consultant Andrew Weissman observed in the American Oil and Gas Reporter that falling natural-gas prices had already caused markets to tumble, warning: "Current price levels will inevitably lead to further cutbacks in drilling." A year later, the Wall Street Journal reported, "With natural-gas profit margins all but disappearing, companies are cutting back on new gas drilling."

The 2009 Penn State study noted that "a prolonged slump in prices could dampen" Marcellus Shale activity. By the time last year's report was released, the slump was obviously in progress, but the researchers made their most optimistic forecast to date. They should have made the possibility of a lull clearer - even if that's not what the Marcellus Shale Coalition wanted to hear.

Boom and bust

It's too early to say how long a gas slowdown could last or how it will affect drilling impact fees. But even if natural-gas development grows at a slower rate than anticipated, people may suffer from having overinvested. Rural residents who decided to fix up family farms rather than move to smaller homes may be hard-pressed if their gas leases aren't renewed. Small-business owners who expanded their operations to serve gas companies may find they can't pay their bills. Let's hope the Marcellus Shale Coalition's relentless boosterism didn't exacerbate a climate of overspeculation and make the pain worse.

In the long run, natural-gas development may be good for Pennsylvania, especially compared with the economic stagnation we lived through before the drilling started. But industries that grow too quickly and then pull back painfully create a toxic boom-and-bust cycle. Pennsylvania needs an energy industry that is economically and environmentally sustainable, guided by academics who provide prudent advice and careful analysis. That would do more to safeguard our communities and natural resources than any amount of impact fees.

 

Posted by Dale A. Tice on December 29, 2011

Pipeline Regulation in Pennsylvania

The Corbett administration had an ambitious legislative agenda scheduled for 2011. There has been heavy press coverage of the failure to make progress on a number of initiatives, but the issue that has received the greatest attention has been the stalled negotiations on the proposed impact fee and regulation of natural gas drilling.

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.

Posted by Dale A. Tice on December 09, 2011

Impact Fee Update

In a recent post I suggested that some form of a Marcellus Shale impact fee was on its way. Although there are significant differences between the House and Senate versions of the bills that have been passed, I was nevertheless optimistic that our Pennsylvania legislators would agree on a compromise. It’s beginning to appear that my prediction may have been overly-optimistic.

There are a number of issues that will need to be addressed in reconciling the competing versions of the bills. For instance, the amounts that will be collected by the impact fee vary considerably. Here is a link to an article which includes a chart that nicely summarizes the key differences in the amounts collected and the allocation of the proceeds.

The more critical difference may be regarding who is responsible for collecting the fee; while Governor Corbett and the House agree that the individual counties should asses the fee, the Senate version of the bill gives that duty to the state Public Utility Commission.  

Discussing the Marcellus Shale legislation, the Pittsburgh Post Gazette concludes that “large question marks still loom regarding whether that measure will find its way to the governor's desk by the end of the year”.

The Pennsylvania legislature has been considering some type of severance tax or impact fee since the Marcellus boom began. Whether or not it will happen this year remains to be seen – with only three session days left for the Senate in 2011, our legislators are certainly taking it down to the wire.



Posted by Dale A. Tice on December 01, 2011

Impact Fee Legislation and Local Zoning Restrictions

It was interesting to watch the local impact fee bills make their way through the Pennsylvania General Assembly earlier this month. Although Grover Norquist has published an open letter to Pennsylvania lawmakers calling the impact fee a tax, competing versions of the impact fee were nevertheless passed by the Republican-controlled Pennsylvania Senate and House. There are still significant differences between the House and Senate bills that will need to be reconciled before a final version can be presented for the Governor’s signature, but it appears that some form of an impact fee is on its way.

One area in which the House and Senate bills agree is in placing restrictions on the ability of local municipalities to regulate where in the municipal boundaries oil and gas development activities may occur. Despite the opposition of municipal officials  to language in the proposed bills that would place limits on local zoning control over gas drilling, both bills include significant limitations on municipal regulation of oil and gas operations and it seems very likely that these restrictions will appear in the final version of the impact fee bill.

Pennsylvania Supreme Court Decisions

Disputes over municipal regulation of oil and gas development are nothing new. There has been considerable litigation over the attempts by municipalities to regulate drilling activity, with two cases decided by the Pennsylvania Supreme Court in 2009 setting forth the current state of Pennsylvania law on these issues. In Range Resources v. Salem Township the Court reviewed an ordinance that attempted to enact a comprehensive regulatory scheme relating to oil and gas development, including specific regulations governing drilling operations. The Court noted that the regulations paralleled and in some cases conflicted with the state regulations in the Oil and Gas Act, and concluded that the local regulations were invalid because they were preempted by state law.

In contrast, in Huntley & Huntley v. Borough of Oakmont the Court held that a zoning ordinance which restricted oil and gas drilling in residential districts was not preempted. The Court noted that municipalities have unique expertise in designating where different uses should be permitted in a manner that accounts for the community's development objectives and character.

As a result of these decisions, it seemed clear that although a municipality could not regulate how drilling operations were conducted, it could enact zoning rules restricting where drilling activities could occur, at least in residential districts. That may soon no longer be the case.

Impact Fee Bills

The Pennsylvania Senate passed SB 1100 on November 15, 2011. Section 3303 of the bill provides that a local ordinance shall provide for the reasonable development of minerals within the local government. The bill then lays out the provisions that must be included in a local ordinance to allow for reasonable development:

§ 3309.  Provisions of local ordinances

In order to allow for the reasonable development of oil and gas resources, a local ordinance must, in addition to complying with this chapter, Chapter 32 (relating to regulations) the Oil and Gas Act, the MPC and judicial decisions of the Commonwealth:

(5)  Authorize oil and gas operations, other than activities in or at impoundment areas, compressor stations and processing plants, as a permitted use in all zoning districts.

(6)  Authorize impoundment areas used for oil and gas operations as a permitted use in all zoning districts, provided that the edge of any impoundment area shall not be located closer than 300 feet from an existing building.

As indicated in the areas underlined (by the author) above, in order to allow for reasonable development, a local ordinance must allow oil and gas operations and construction of impoundments in all zoning districts. It should be noted that the bill would allow municipalities to regulate limits on lighting and noise relating to oil and gas operations as long as the restrictions are no more stringent than existing rules for industrial operations. The bill also specifies setbacks for well pads, impoundments and compressors.

What if there is a dispute as to what constitutes reasonable development? Section 3304 appoints the state Attorney General as the arbiter of such disputes:

§ 3304.  Review by Attorney General.

(a)  Request of owner or operator.‑‑ An owner or operator of an oil and gas operation, or any person having the right to royalty payments under a lease of oil or gas mineral rights, may request the Attorney General to review a local ordinance to determine whether it allows for the reasonable development of oil and gas resources in accordance with the provisions specifically addressed in this chapter, Chapter 32 (relating to regulation), the MPC and judicial decisions of the Commonwealth.

If the Attorney General determines that the ordinance does not allow for reasonable development of oil and gas resources, the local government will be immediately ineligible to receive any funds collected under the impact fee. With the standard as to what constitutes reasonable development stated right in the statute, there might not be much room for argument.  The Attorney General is also authorized to bring an action against a local government to invalidate a local ordinance that does not allow for the reasonable development of oil and gas resources.

What’s Next?

The House version of the bill, HB 1950, includes provisions regarding local ordinances that substantially mirror those in SB 1100. This iteration of the House bill is considered a significant improvement over a previous version that completely preempted all local ordinances. While there is agreement on the zoning provisions, there are still considerable differences between the bills in terms of the amounts that will be collected by the impact fee. It may be assumed that there are closed-door negotiations proceeding now in an attempt to reconcile the bills.

The zoning restrictions in these bills may be understood as an attempt to strike a compromise that will allow limited municipal regulation of drilling activities while facilitating development of oil and gas resources. Landowners who favor reasonable development and look forward to royalties will appreciate this legislation. Local municipalities may find, however, that there isn’t much practical distinction between a bill that completely preempts local zoning and one that requires authorization of drilling operations as a permitted use in all zoning districts.

Posted by Dale A. Tice on October 06, 2011

Legislative Considerations in a Forced Pooling Law

Posted below is an article that I wrote for the most recent edition of the PENNROAR - the newsletter for the Pennsylvania chapter of the National Association of Royalty Owners. Please note that forced pooling was not included in the recent legislative proposal from PA Governor Tom Corbett.

Oil and gas leasing and Marcellus development are often perceived as controversial and divisive issues in Pennsylvania. While the large majority of landowners in the Marcellus fairway have been amenable to leasing their property for gas drilling, there is a vocal minority of landowners who vehemently oppose Marcellus development and have refused to proceed with an oil and gas lease for their property.

Readers of the PENNROAR (or this blog) are by now familiar with the operation of the pooling provision found in the gas leases used by Marcellus operators. It is readily apparent that these holdout landowners will make it difficult or impossible for the gas companies to proceed with development of a production unit in the area where the un-leased land is located. For the gas companies, the solution to this problem has been forced pooling – also sometimes referred to as “statutory pooling” or compulsory integration.

Pennsylvania has previously enacted a forced pooling law known as the Oil and Gas Conservation Law, but the current law does not apply to the Marcellus shale. As a result, there has been an ongoing, heated discussion among the various stakeholders about the possibility of drafting a new version of the Conservation Law that would allow compulsory integration of the Marcellus. At this time, it appears that forced pooling may be such a hot topic that legislators will refuse to touch it, but the issue is likely to resurface in future legislative sessions.

It is not the purpose of this article to advocate for adoption of a new forced pooling law in the Commonwealth. Rather, the discussion below highlights a number of issues that should be addressed in the legislative discussion about a forced pooling law, in the event that such legislation is introduced in Pennsylvania.

Good Faith Offer

Texas has enacted a forced pooling law. However, the law requires that the oil and gas company first make a good faith lease offer to a holdout landowner before proceeding with a forced pooling proceeding. As a result, the forced pooling law has been rarely used in Texas. Pennsylvania legislators may consider including such a requirement in any forced pooling proposal.

Minimum Leased Acreage

Some states with forced pooling laws have included a requirement that the operator have a certain minimum amount of acreage leased in the area of the proposed pooled unit. This type of requirement forces the gas company to lease some percentage of the landowners in the area intended for drilling before proceeding with compulsory integration. The percentage of land required to be leased may vary anywhere from 51% to 95%. Obviously, as the minimum percentage required increases, it will be increasingly difficult for the gas company to utilize forced pooling.

Risk Penalty

When an oil and gas company drills a well, there is always some risk that the well will be unproductive and the operator will be unable to recoup its drilling costs. The amount of risk will vary from well to well and will also vary depending on the target formation being drilled.

The concept of the “risk penalty” recognizes that the non-participating landowner who is being forced-pooled should share in the risks involved in drilling. Forced pooling laws accomplish this risk sharing by providing that the non-participating landowner will not receive gas production payments until the gas company has recouped the landowner’s proportional share of the costs to drill the well, plus some additional percentage of the costs as compensation to the operator for undertaking the risk of drilling.

Pennsylvania’s current Conservation Law sets the risk penalty at 200% of the landowner’s proportional share of the drilling costs. Until the gas company recoups double the landowner’s share of the costs, the un-leased landowner will receive a royalty payment of 1/8 (12.5%) of his or her proportional share of production. After 200% of the landowner’s share of costs is recovered by the gas company, the non-participating landowner is then entitled to his or her entire proportional share of the total gas production.

Legislators may also address the specific types of drilling costs that may be charged against the landowner’s share.

The most recent forced pooling proposal discussed here in Pennsylvania set the risk penalty at 400%. It may be questioned whether the risks involved in Marcellus drilling justify a risk penalty in that range.

Landowner Surface Protection

A forced pooling law should explicitly provide that the surface of the land of a non-participating landowner may not be used for drilling operations. Legislators may also consider a provision requiring that the operator provide compensation to the landowner in the event that there is some inadvertent impact on the un-leased landowner’s property or water supply.

Conclusion

This commentator does not intend to suggest that forced pooling is either good or bad for Pennsylvania landowners. But clearly, Pennsylvania royalty owners must understand that when evaluating any future forced pooling proposal, the devil is in the details.

Posted by Dale A. Tice on September 02, 2011

Eminent Domain for Pennsylvania Pipelines?

Anyone who has recently travelled to Towanda is aware that the gas companies are actively drilling in the Marcellus. According to the Penn State Marcellus Center for Outreach and Research, over 3,400 Marcellus gas wells have been drilled in Pennsylvania through August 1, 2011. The PA Department of Environmental protection reports that natural gas production from the state has increased by 60% in the first half of 2011.

Along with increased natural gas production comes an increased need for gas pipelines. Landowners throughout the Marcellus region of Pennsylvania have been approached with pipeline right-of-way agreements, as the midstream companies work to increase takeaway capacity. The gas companies’ need for pipelines places the landowner in a good position to negotiate. And unless the landowner has already given the gas company a right-of-way under the terms of an oil and gas lease, the landowner has the ultimate right to say no to the pipeline.

That may be changing here in the Commonwealth in the near future. The Pennsylvania Public Utility Commission has recently denied two petitions for reconsideration of its June 14, 2010, order which found that pipeline company Laser Northeast Gathering is a public utility. This is very relevant because if Laser Northeast is granted a certificate of public convenience, the company will have eminent domain powers as a public utility.

There are some pipeline companies that have eminent domain authority today. Transmission lines that transport gas from the natural gas producing regions to the consumer are regulated by the Federal Energy Regulatory Commission and classified as public utilities. In contrast, gathering lines that move natural gas from the wellhead to the transmission lines have typically not been considered as serving the public need and thus not been granted the power of eminent domain.

In the PUC order denying the petitions for reconsideration, a request for clarification of the previous order was granted. The clarification consists of a 4-part test that was used to determine whether the proposed pipeline qualified as a public utility service:

-       Laser will be transporting or conveying natural or artificial gas by pipeline or conduit for compensation. 

-       Laser will serve any and all potential customers needing to move gas through the pipeline system.  

-       Laser intends to utilize negotiated contracts to secure customers; contracts are not meant to be exclusionary, but rather to establish technical requirements, delivery points, and other terms and conditions of service. 

-       Laser has made a commitment to expand its capacity, as needed, to meet increased customer demand.

As noted by another respected Commentator, attorney Elizabeth U. Witmer of Saul Ewing, this is an extremely broad test that appears to rely entirely on the stated intent of the applicant. Despite the vigorous dissent from Commissioner James H. Cawley, it seems likely Laser Northeast Gathering will ultimately be granted a certificate of public convenience. Presumably the same broad test will be used in evaluating the two other pipeline cases currently pending before the PUC.

Even if the gathering pipeline companies are granted eminent domain authority, it may be hoped that it will be utilized only as a last resort after negotiations break down. However, landowners will be in a poorer position to negotiate and will no longer have the final say regarding placement of a pipeline on their land, with the gathering companies holding the eminent domain trump card.

 

 

Posted by Dale A. Tice on July 15, 2011

Impact Fee and Forced Pooling Recommended by the Marcellus Shale Advisory Commission

This is an important day for everyone who has an interest in Marcellus Shale development. Pennsylvania Governor Tom Corbett’s Marcellus Shale Advisory Commission is completing its final meeting as I type and has unanimously voted to approve a report with a series of recommendations, some of which are destined for controversy.

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.

Posted by Dale A. Tice on July 01, 2011

New York DEC Recommends Lifting Ban on Hydraulic Fracturing

The New York Department of Environmental Conservation has issued a series of new recommendations after completing a scientific review of the process of hydraulic fracturing. The controversial report concludes that hydrofracking should be permitted under specific circumstances, as follows:

-       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.

Posted by Dale A. Tice on February 08, 2011

New Marcellus Shale Legislation for Pennsylvania on the Horizon

Pennsylvania State Senator Eugene Yaw was recently discussing legislation he plans to introduce that will impact Marcellus Shale development.

http://thedailyreview.com/news/sen-yaw-introduces-marcellus-shale-legislation-1.1089334

Of the various legislative initiatives that have been discussed, forced pooling (or “fair pooling” if you work for the oil and gas industry) has been the most controversial. Landowners who oppose natural gas development have been outraged by a proposal that would allow their property to be included in a natural gas production unit without their consent, even though there would be no surface impact on the land and they would be entitled to receive royalties. Although there was no legislation officially introduced, just the mention of forced pooling ignited a vociferous debate.

Senator Yaw has gracefully sidestepped the issue by proposing a forced pooling statute that would only apply to properties already subject to an oil and gas lease. Rather than including un-leased landowners in a production unit, his proposal would facilitate Marcellus development by allowing pooling of multiple properties that are leased to different gas companies. This “company-to company” pooling would solve the problem created when a hold-out gas company with a minority of the leases in an area refuses to cooperate with another company that wants to drill.

A proposal that would allow counties to assess a property tax on producing gas wells may be less popular with constituents in the areas where the gas companies are drilling. Yaw notes, however, that his proposal would generate revenue for the local counties, as opposed to a severance tax that would be funneled through Harrisburg.

In the opinion of this commentator, the other legislative proposals discussed, such as a statutory Pugh Clause and requirements for information provided on gas royalty check stubs, are very favorable for landowners in the Marcellus Shale, though of course the devil is in the details. Hopefully we will see progress on this legislation in the coming months.

Posted by Jeffrey A. Marshall on December 23, 2010

New Estate Tax Rules for Married Royalty Owners

The recently enacted Tax Relief Act of 2010 brings back the federal estate tax with a whimper not a bang. The increased exemption amounts of $5 million for estate tax and gift tax purposes present a golden planning opportunity for next two years.

But one provision, intended to help married couples, may result in new tax complexities for those with uncertain gas wealth.

In general, there is no tax on whatever you leave to your wife or husband. But bequests to children and others are subject to severe federal estate taxes if their value exceeds certain limits. Recently Congress established new limits that will apply to people who die in 2011 and 2012.    

Under the new rules, there will be no estate tax applied to the first $5million dollars of wealth that you leave to your children. This is called the $5 million dollar exclusion. If the deceased was married, any unused portion of this $5 million dollar exemtpion can be passed on to his surviving spouse. By combining the unused exemption with her exemption, a surviving spouse may be able to leave as much as $10 million tax free to the children at her later death. 

With a tax rate of 35%, claiming the unused exemption of the first spouse to die could ultimately save the couple's children $1.75 million in taxes.

Here is the problem. A federal estate tax return must be filed after the first spouse dies in order for the survivor to receive the unused exemption. This tax return will have to be filed even though no tax is due and a return doesn't otherwise have to be filed. 

It seems likely that many spouses will be unaware of the benefit of filing an otherwise unecessary tax return. Even those who are advised to file may decline due to the added burden and expense. Or they may assume that their estates will never exceed $5 million and the unused exclusion will never be needed.

But the recent unanticipated developments in the Marcellus prove how difficult it is to predict the future. A surviving spouse with any significant gas interests should seriously consider filing a federal estate tax return even if her estate is under the current $5million threshold.

The unused exclusion is referred to as the "portablility" provision. It provides a lot of potential tax savings but only if the surviving spouse is wise enough to take the actions needed to preserve it. The survivior must file the necessary tax return soon after the death of the first spouse or the benefit will be lost.  You need to do this even if the entire estate passes to you and no estate administration is otherwise required.