New York Formally Bans High-Volume Hydraulic Fracturing to Develop Marcellus Shale

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.”

Federal Agencies Publish Final Rule to Redefine Waters of the United States

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.

OMB Begins Review of EPA Proposals to Curb Methane Emissions, Define Major Source

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.

Ohio Supreme Court Rules on Dormant Mineral Act Issue

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.

Shell Closes On Purchase Of Proposed Cracker Plant Site

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 to Invest $1.5 Billion for Marcellus Shale Midstream Project in Pennsylvania

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.

ODNR Releases First Quarter 2015 Utica Shale Production Data

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.

 

Intrastate Pipeline Under Construction in West Virginia

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.”

Ohio Appeals Court Finds Forfeiture Is Not Appropriate Remedy for Breach of Oil and Gas Lease

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.

Babst Calland Report Focuses on Legal and Regulatory Challenges Facing Appalachian Basin Oil and Gas Producers, Midstream Operators

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.