Pipeline Safety Alert: Reauthorization Bill Provides PHMSA with Significant New Authority

On June 22, 2016, the President signed into law the PIPES Act, reauthorizing the Pipeline and Hazardous Materials Safety Administration’s (PHMSA) federal pipeline safety program through fiscal year 2019.  Among several amendments to the Pipeline Safety Laws, the PIPES Act provides PHMSA with significant new authority to issue industry-wide emergency orders and requires PHMSA to develop underground gas storage standards.  Babst Calland’s Pipeline and HazMat Safety team has prepared a Pipeline Safety Alert offering observations on some of the key provisions in the PIPES Act.

 

Governor Signs the Pennsylvania Grade Crude Development Act

On June 23, 2016, Governor Tom Wolf signed the Pennsylvania Grade Crude Development Act (S.B. 279), which abrogates the Environmental Quality Board’s revisions to the Chapter 78 regulations concerning conventional oil and natural gas wells.  The Act provides that any future EQB rulemakings concerning conventional oil and natural gas wells must be undertaken “separately and independently” of those applicable to unconventional wells and must include a regulatory analysis form submitted to the Independent Regulatory Review Commission that is restricted to the subject of conventional wells.  The Act also creates the Pennsylvania Grade Crude Development Advisory Council (“PGCDAC”), which will consist of 17 members, including representatives from the Pennsylvania Independent Oil and Gas Association, Pennsylvania Grade Crude Oil Coalition, and the Pennsylvania Department of Environmental Protection.  The PGCDAC is tasked with, among other items:  (1) examining and making recommendations regarding certain existing technical regulations; (2) reviewing and commenting on the formulation and drafting of all technical regulations promulgated under the Oil and Gas Act; and (3) exploring the development of a regulatory scheme that provides for environmental oversight and enforcement specifically applicable to the conventional oil and natural gas industry.  The Act takes effect immediately.

BLM Hydraulic Fracturing Rule Struck Down by Federal Court

On June 21, 2016, the U.S. District Court for the District of Wyoming (“District Court”) set aside the U.S. Department of the Interior, Bureau of Land Management’s (“BLM’s”) “Hydraulic Fracturing on Federal and Indian Lands” rule, finding that the rule exceeded BLM’s statutory authority.  Challengers to the rule previously succeeded in obtaining a preliminary injunction in September 2015, pending a final decision on the merits of the case.  In the merits decision issued this week, the District Court held that “Congress has not delegated to the Department of Interior the authority to regulate hydraulic fracturing.”

The BLM rule would have, among other requirements, mandated that operators planning to conduct hydraulic fracturing on federal and Indian lands:  (1) submit detailed information regarding the proposed operation, including wellbore geology information and the estimated length of fracture propagation; (2) design and implement a casing and cementing program that meets certain best management practices and performance standards; (3) manage recovered fluids in rigid enclosed, covered, or netted and screened aboveground storage tanks, with very limited exceptions; and (4) disclose the chemicals to be used in hydraulic fracturing to BLM and the public, with limited exceptions for trade secrets.

BLM is expected to appeal the District Court’s decision to the U.S. Court of Appeals for the Tenth Circuit.

Issuance of PHMSA Corrosion Control Advisory Bulletin (ADB-2016-04) (PHMSA-2016-0071)

On June 15, 2016, the Pipeline and Hazardous Materials Safety Administration (PHMSA) issued an advisory bulletin to pipeline operators related to the effectiveness of coating and corrosion control measures on buried, insulated pipelines.  PHMSA’s advisory bulletin responds to a recent pipeline failure and oil spill in California.  The failure involved a buried oil pipeline coated with coal tar urethane and covered with tape wrapped foam insulation.  The pipeline was insulated because it carried high-viscosity crude that required heat in order to transport.  PHMSA found that the pipeline ruptured because of external corrosion that occurred under the pipeline’s coating system.  PHMSA also found that this corrosion was facilitated by wet dry cycling.  PHMSA’s Failure Investigation Report is here.

PHMSA indicates that corrosion under insulation (CUI) is an integrity threat that is difficult to address through conventional cathodic protection systems and can lead to accelerated corrosion and stress corrosion cracking.  PHMSA recommends that operators review their operating, maintenance, and integrity management activities to ensure that their buried, insulated pipelines have effective coating and corrosion control systems.  PHMSA recommends that operator procedures consider the need for corrosion control systems that prevent moisture buildup, coatings that avoid cathodic protection “shielding,” advanced ILI data analysis to account for CUI, ILI data analysis and excavations to accurately assess corrosion as outlined in API Standard 1163, and additional or more frequent reassessment intervals for pipelines with known susceptibility to moisture retention.

For more information please contact Jim Curry, Keith Coyle or Brianne Kurdock of our Pipeline and HazMat Safety Practice.

The 2016 Babst Calland Report Has Been Released

Babst Calland today released its sixth annual energy industry report called, “The 2016 Babst Calland Report –   An Unprecedented Time for the Oil & Gas Industry: Price Down, Supply Up, Reform Ahead; 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 on shale development in the Appalachian Basin and beyond with a focus on issues, challenges, opportunities and recent developments relevant to producers and operators. In general, the shale industry is challenged more than ever to operate smarter through efficiencies, improvements in technology and prudent business strategies in order to protect margins and profitability. With production of natural gas in the United States reaching record highs at the beginning of this year, and with the price of gas generally at a five-year low, natural gas producers, particularly in the Appalachian Basin, face significant challenges.

The Report also highlights key business opportunities emerging, including the long-awaited announcement by Shell Chemical on June 7, 2016 that it will construct an ethane cracker plant near Monaca, Pennsylvania, a positive development for the U.S. chemical industry and for downstream business opportunities resulting from shale development.

PIPES Act Sent To President For Signature

On June 13, the U.S. Senate unanimously approved the Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2016 (PIPES Act) legislation that reauthorizes the Pipeline and Hazardous Materials Safety Administration’s (PHMSA) federal pipeline safety program through fiscal year 2019 and contains a number of amendments to the Pipeline Safety Act.   The U.S. House of Representatives passed the PIPES Act last week, and the bill will now be sent to the President for his signature.

Among the more noteworthy provisions, Section 12 of the PIPES Act requires PHMSA to develop underground gas storage standards within two years and authorizes the collection of user fees from operators of these facilities.  Section 16 also provides PHMSA with significant new authority to issue industry-wide emergency orders if an unsafe condition or practice results in an imminent hazard, meaning a substantial likelihood that death, serious injury, severe personal injury, or a substantial endangerment to health, property or the environment may occur.  PHMSA may use emergency orders to impose operational restrictions, prohibitions or safety measures.  While PHMSA can issue these emergency orders without a prior hearing, the legislation provides for an expedited process of administrative and judicial review.

Stay tuned for further updates once the PIPES Act of 2016 is signed into law.

Court Invalidates Fayette County (W.Va.) Ordinance Banning Underground Injection Well

On June 10, 2016, the U.S. District Court for the Southern District of West Virginia issued a Memorandum Opinion and Order invalidating those parts of a Fayette County (W.Va.) ordinance that prohibit the use of underground injection wells for the disposal of produced water, and regulate the handling and storage of produced water at conventional oil and gas well sites.  The court held that those provisions are preempted by state and federal law, and also struck down a provision that would have allowed local residents to bring enforcement actions under the ordinance. EQT Production Company v. Wender, et al. Civil Action No. 2:16cv290 (S.D.W.Va.).

Shell Officially Announces it will Build Ethane Cracker Plant in Beaver County, PA

After first acquiring an option agreement in 2012 for a 340-acre site, and then purchasing the site in 2014, Shell Chemical Appalachia has officially announced that it will build a multi-billion dollar ethane cracker plant on the site of the former Horsehead zinc smelter in Beaver County, Pennsylvania.  The site will consist of the cracker, two units that will convert ethylene into polyethylene pellets, a natural gas-fired power plant, a loading dock, and a wastewater plant.  It is estimated that constructing the plant will employ approximately 6,000 workers.  Thereafter, the plant will permanently employ about 600 workers. The plant is expected to consume approximately 105,000 barrels of ethane per day and Shell has reportedly secured supplier commitments from at least 10 oil and gas operators in the region.  Primary construction on the site is expected to start in approximately 18 months. 

 

District Court Upholds Primacy of Lease’s Change of Ownership Clause

On May 20, 2016, the Middle District of Pennsylvania granted summary judgment in favor of Babst Calland’s client in Montrose Hillbillies II, LLP v. WPX Energy Keystone, LLP and Stern Marcellus Holdings, LLC , a case involving the extension of the primary term of an oil and gas lease.   The plaintiff, a successor lessor, filed a quiet title action to strike the extension of an oil and gas lease where the extension payment was tendered to the prior owner of the property, rather than to the plaintiff.  The plaintiff asserted that the payment was insufficient to extend the lease.  The defendant lessee maintained that the primary term of the lease was properly extended pursuant to the lease terms because neither the plaintiff nor the prior lessor provided the lessee notice of the ownership change, and it was the lessor’s duty to do so under the lease.  The District Court held that the defendants’ payment to the prior owner fulfilled any extension obligation under the lease, as the plaintiff admitted that the defendants were not notified of the ownership change.

The District Court rejected the plaintiff’s argument that it was not bound by the extension provision and notice of ownership change provision because such terms were not disclosed in the memorandum of oil and gas lease filed of record in place of the actual lease.   The memorandum contained the basic terms of the lease but did not provide all the provisions of the agreement between the lessor and lessee.  The plaintiff asserted that it was a bona fide purchaser without constructive notice of the unrecorded provisions, including the extension provision and notification requirement for ownership change, and was entitled to rely solely on the recorded memorandum of lease.  The District Court held that there is a duty under Pennsylvania law for a purchaser to undertake a reasonable inquiry into the title of the property being purchased before being considered a bona fide purchaser.  The Court held that due diligence by the purchaser includes both an examination of recorded documents and an inquiry of the possessor or other parties where there is reason to believe such persons may know facts related to the title of the property.   Under the circumstances of the case, the Court found that the plaintiff had notice of the lease and it was reasonable for it to have requested a copy of the full lease to become aware of each of its provisions.

PA DEP Secretary Quigley Resigns

Pennsylvania Governor Tom Wolf announced on Friday that he accepted the resignation of John Quigley as Secretary of the Department of Environmental Protection.  The Governor thanked Mr. Quigley for his service to the commonwealth and stated that, effective immediately, Patrick McDonnell will serve as Acting Secretary of the DEP.  Most recently, Mr. McDonnell was the DEP’s director of policy.