Pennsylvania Court Fights

The fight in Pennsylvania over its oil and gas laws moved to the courts this week.  In Robinson Township v. Commonwealth, the Commonwealth Court stayed for 120 days the specific provisions of recently enacted Pennsylvania Act 13 which limit the ability of local municipalities to label oil and gas development as a “non-permitted use” or to require it to receive a special exception or permit.  Act 13, which substantially revises the Pennsylvania Oil and Gas Law of 1984, is the comprehensive rewrite that the Commonwealth passed in February, to take effect April 16.  The action by Judge Keith Quigley came in a lawsuit filed by seven municipalities who fear their local zoning laws will be invalidated by the Act.

Elsewhere in Pennsylvania, the State Supreme Court agreed to hear arguments in Butler v. Powers Estate, which involves the state’s peculiar “Dunham Rule”.  This case involves an 1881 deed that reserved “half the minerals and petroleum oils”.  There was no mention of natural gas.  Under the State’s “Dunham Rule”, if natural gas is not specifically mentioned it is not conveyed, even if the deed conveyed all the minerals and mineral rights.

Following that rule, the Butlers won in Pennsylvania Court of Common Pleas, which decided that natural gas is not a mineral right.  The Commonwealth Court on appeal, however, instructed the Court of Common Pleas to take testimony from scientific experts as to whether natural gas should be considered a mineral right.  While this case was still active, the Butlers appealed to the Pennsylvania Supreme Court.  In an unusual move, the Supreme Court agreed to hear the case, but will not listen to the scientific testimony.  Instead, it will try to determine what the families originally intended in 1881.  If the Supreme Court vacates the Dunham Rule, it could change dramatically the historically-thought rights to minerals and natural gas in Pennsylvania.   

The “Title Triangle”

The controversy over mineral and gas rights in the Pennsylvania Dunham Rule highlights a larger issue that I call the “Title Triangle”.  In most large shale oil and gas transaction there are basically three parties: the property owner, the energy producer and the title company.  The producer wants to know if the property owner has the rights to the subsurface minerals (and natural gas, etc.).  The property owner turns to the title company to provide this information. 

Two matters that I’ve worked on recently show the issues and pitfalls.  First, most of the title searches don’t go back far enough to determine the subsurface owner, or the extent of the rights conveyed.  The normal title search will go back 50-70 years, but the mineral and gas rights, especially in places with historic production (such as North Central Pennsylvania and Appalachia) may have been excepted out over a century ago.  One need only look above to the Butler case to see a deed in 1881 that’s at issue now.

Second, it’s not just the language in the deed exceptions (and remember, these generally are legal “exceptions”, not “reservations”) that are at issue.  Large industrial tracts currently often involve parcels that have been pieced together over time.  Trying to ascertain historical title information on all the parcels that at one time were separate can be a challenge.  Sometimes the legal descriptions refer not to feet and inches but chains and rods, leading to an oak tree that was cut down 80 years ago on the boundary line of lands of a person who died 90 years ago.

All sides have to be realistic in doing future oil and gas deals, especially in places that haven’t seen them much over the last century.  Producers can’t expect sophisticated landowners – certainly of large tracts – to give full title representations, and the landowners have to provide as much information as they can to the producers.  Savvy landowners might also set aside a certain reserve if the title search leaves unanswered questions about old oil, gas and mineral rights.

­The EPA Embarrassment

The United States Environmental Protection Agency has been struggling to define its role in the hydraulic fracturing debate.  Hamstrung by legal limitations in some cases and limited knowledge in others, the EPA has been trying to figure out where it fits in.  Unfortunately, certain recent moves have proved embarrassing. 

Two weeks ago, the EPA announced that it was dropping its December 2010 “Imminent and Substantial Endangerment Order” against Range Resources pertaining to the drinking water in Parker County, Texas.  The EPA had claimed that Range’s drilling activities had contributed to the contamination of at least two water wells.  It ordered Range to remediate by providing drinking water, methane gas monitors, etc.  This EPA Endangerment Order subsequently was opposed by the Texas Railroad Commission, which regulates drilling in that State.  Following its own investigation, the Railroad Commission called the EPA’s Order “unprecedented” and determined that Range was not responsible.  The EPA has now relented.

One week later, on April 6, the EPA announced that contrary to its prior statements, the drinking water in Dimock, Pennsylvania does not show contamination levels that “present a health concern based on risk assessments.”  This contradicted a January 19, 2012 EPA letter demanding immediate action to clean up the water, which itself was an about face from a December 2, 2011 EPA email to Dimock residents that the water appeared safe.

All of this occurs when the EPA’s well-publicized testing of water in Pavilion, Wyoming is under fire for potentially improper procedures.

As the EPA sorts itself out, it must move cautiously, stick to the facts and avoid as best as possible becoming a tool in anyone’s political agenda.

The Drama Out West

To many of us, Inglewood, California is known mostly for being the home of the Fabulous Forum, where Magic Johnson and Kareem Abdul-Jabbar made history.  But it is also the home to the Inglewood Oil Field, which has been producing oil since the 1920’s.  Earlier this year, the current owner, Plains Exploration and Production, completed a major hydraulic fracturing operation within three miles of homes to 300,000 people. 

The shale oil and gas movement is coming, quickly, to the state with the largest amount of shale oil in the country – California.  It is also a state woefully prepared for the issues, and so in the dark that most of its residents didn’t even know that hydraulic fracturing happens from Inglewood to Monterey.  The Monterey Shale Basin extends from the Inglewood area up through the central coast and the agriculture rich San Joaquin Valley.  As the Los Angeles Times reported, the California State Legislature is desperately playing catch-up, with bills introduced that would require the disclosure of fracking chemicals and the notification to adjacent landowners of imminent operations.

And it’s not just California.  All over Kansas energy companies are racing to obtain land to drill for shale oil.  While Williston, North Dakota remains perhaps the country’s biggest boom town, twenty miles to the West in Montana there is controversy over whether that State’s regulation is hurting development in Eastern Montana, or whether in fact North Dakota is simply a better place to drill.  We’ve been concentrating on Pennsylvania, New York, West Virginia and Ohio, but what is happening here will be replicated, with even more intensity, in many corners of the country.  As it does, local, state and federal agencies as farfetched as the US Bureau of Land Management, Texas Railroad Commission and FAA will try to keep up.  Good luck to all.

For more information, contact Dan Markind at 215-241-7772.

For those unfamiliar with the peculiarities of the New York Court system, the Supreme Court is not the highest court in the State, but the lowest (the highest being the Court of Appeals).  These decisions then are the decision of the trial court, and by no means the final word.

The plaintiffs in these two cases attacked the zoning ordinances under the supersession language in the New York State Environmental Conservation Law (ECL) (specifically mentioned in Middlefield), of  which the New York State Oil, Gas and Solution Mining Law (OGSML) (specifically mentioned in ­Dryden) is a part.  Each plaintiff argued that the supersession language prohibited the municipality from banning hydraulic fracturing.

The supersession language reads:

“The provisions of this article shall supercede all local laws and ordinances relating to the regulation of the oil, gas and solution mining industries, but shall not supercede local government jurisdiction over local roads or the rights of local governments under the real property law.”

This language is similar to the supersession language in the New York State Mined Land Reclamation Law (MLRL), which also is part of the ECL and was at issue in 1987 in the Court of Appeals decision in ­­Matter of Frew Run Gravel Products v. Town of Carroll.  The Frew Run case, along with the 1996 Court of Appeals decision in ­Matter of Gernatt Asphalt Products v. Town of Sardinia, was used as key precedent in the opinions of the two Judges upholding the restrictive zoning ordinances of Dryden and Middlefield.

In Frew Run, the Court of Appeals held that the Town of Carroll could designate a zoning district within the Town where sand and gravel operations were not a permitted use.  The Court held that the MLRL did not preempt this enactment.

Going beyond Frew Run nine years later, the Court of Appeals in Gernatt held that the Town of Sardinia could enact an ordinance declaring all mining to be a non-permitted use.  The ordinance did not affect mining operations previously established, which would be lawful non-conforming uses. 

Writing in Gernatt, the Court ruled that:

“(a) municipality is not obligated to permit the exploitation of any and all natural resources within the town as a permitted use if limiting that use is a reasonable exercise of its police powers to prevent damage to the rights of others and to promote the interests of the community.”

It was that sentence that lay at heart of each of the Dryden and Middlefield decisions, along with the statement that “…(z)oning ordinances…have the purpose of regulating land use generally.  Notwithstanding the incidental effect of local land use laws upon the extractive mining industry, zoning ordinances are not the type of regulatory provision the Legislature foresaw as preempted…”

As stated in Middlefield,  each Court determined last month that the OGSML and the overall ECL dealt with “… the activity of the industry, i.e., method and matter of drilling and the like, rather than the broader component of the development of this natural resource.”  To this end,  “..(t)he state maintains control over the “how” of such procedures while the municipalities maintain control over the “where” of such exploration.”

Each decision has its peculiarities.  In Middlefield, Judge Cerio wrote that the preemption language in the ECL “…does not apply to local regulations addressing land use which may, at most, “incidentally” impact upon the “activities” of oil, gas and solution drilling or mining.”  It is hard to imagine how a complete ban has an “incidental” impact.

In Dryden, Judge Rumsey cited as precedent for his opinion the Huntley case in Pennsylvania and the Bowen/Edwards case in Colorado, each of which has been discussed here previously and each of which ruled the opposite way.  Judge Rumsey determined, however, that because the New York Court of Appeals had decided in Gernatt that “…a total ban on the extraction of natural resources is permissible where the Legislature has not restricted municipal authority to regulate permissible uses of land…” these cases were precedent for his ruling.

Finally, the Garnett Court noted that the Sardinia ordinance, which made mining a nonconforming use throughout the town,  but allowed preexisting mining to remain as a lawful, nonconforming use, did not have the effect of totally banning the process in the municipality.  Thus, the Court refused to allow the plaintiff to argue that the effect of the ordinance was to rob the plaintiff of its ability to use DEC permits it had obtained previously.  Reacting to that, Judge Rumsey in Dryden struck down one provision of the Town’s ordinance, which stated that:

“(n)o permit issued by any local, state or federal agency, commission or board for a use which would violate the prohibitions of this section or of this Ordinance shall be deemed valid within the Town.”

Does this mean, for example, that notwithstanding the Dryden zoning ordinance, the DEC could grant a permit to hydraulically fracture a well in Dryden and that act would supersede the Town ordinance?

Given the political climate in New York, it is unlikely that the State will enact comprehensive legislation in the near future that might answer these questions.  As such, the Courts will be the front lines as New York fights its battles over the extent to which local municipalities, through zoning and land use laws, can control or even supersede state policy regarding shale gas and oil exploration.

 For more information, contact Dan Markind at 215-241-7772. 

Indubitable Equivalency

Most controversially, the bill permits each affected county to decide whether or not it will impose a “local impact fee”.  The fee would last for 15 years per well, and varies according to the average price of natural gas.  If the price of natural gas is between $3 and $5, the fee would be $310,000 per well over 15 years. That fee would decrease if the price falls below $3, and would increase if the price rises above $5.  Beginning in 2013, the fee also would be linked to the rate of inflation.  If a particular county decides against imposing a fee, the fee can be forced upon the county by the vote of over half of its municipalities, according to population.

On the issue of land use, the law prohibits municipalities from banning drilling in any areas, even those designated residential.  Further, it prevents shale drilling from even be listed as a “conditional use”, a land use designation that theoretically permits an endeavor but in truth provides the municipality with broad power over its actual implementation.  Municipalities remain permitted to apply zoning restrictions on issues such as lighting and noise.

Much of the legislative wrangling in the last few weeks involved how the tax (impact fee?) money would be allocated.  When the dust settled, 60 percent of the proceeds will go to localities directly affected by drilling.  The other 40 percent will go to statewide projects, many of them environmental.  Ironically, that means that Southeastern Pennsylvania, which includes Philadelphia and its surrounding counties and which does not have shale drilling, still will receive considerable funds.

In New York, which will certainly look at the Pennsylvania Law and go beyond it, the Department of Environmental Conservation continues to review over 60,000 public comments to its proposed Supplemental Generic Environmental Impact Statement.  Speaking at a legislative budget hearing, DEC Commissioner Joseph Martens testified that he has 60 people working through the comments, and that if hydraulic fracturing comes back to New York the DEC would need 140 new staffers  There was much speculation when Governor Cuomo, in his proposed state budget, failed to allocate funds for regulation of the process.  Commissioner Martens stated that nothing should be read into this, as the State’s decision is still months away.

In Maryland, where no hydraulic fracturing is likely to start until at least 2014, if at all, a sharp disagreement is brewing over the extent over a statewide mineral extraction tax.  On Friday, two Democratic Assemblymen introduced a bill for a 15% extraction tax.  This compares to a rate of 2.5% proposed by a Garrett County Republican.  The extent of the difference raises questions over whether a compromise can be reached.

Looking further south, Virginia continues to struggle with its first proposed shale gas well, in Rockingham County.  Originally proposed two years ago, the Commonwealth still has not made a decision on whether and under what conditions to permit it.

Meanwhile, as the Pennsylvania bill was generating its final passage in the Pennsylvania legislature, a fascinating story appeared in the Philadelphia Inquirer about the State’s largest proposed solar farm, to be located in Caln Township, Chester County (southwest of Philadelphia).  Spearheading the opposition to turn this 46-acre parcel into a field of solar panels is the Brandywine Conservancy, one of the area’s leading environmental and land preservation groups.  The Conservancy is most concerned about storm water runoff, which would be increased by the impervious foundations needed to erect the panels and could destroy vital wildlife habitats.

The key point is that just because an energy source is defined as “renewable”, it does not mean it is environmentally friendly.  All energy sources, including solar and wind, have downsides to them. 

For wind turbines, the same storm water runoff issues apply, together with the substantial destruction they cause to migratory birds.   The American Bird Conservancy estimates that between 75,000 and 275,000 birds are killed each year by turbines.   Other estimates are substantially higher.  

In addition, both solar and wind require large tracts of land to make them commercially feasible in an industrial sense.  Six years ago in New Jersey, Acting Governor Richard Codey ordered a 15 month wind-power moratorium on the New Jersey shore, with a desire to protect Atlantic vistas.  It’s not just hydraulic fracturing that has been the subject of enforced governmental suspension. 

Nor is it just hydraulic fracturing that is the subject of “loopholes” in laws and regulations, such as the so-called “Halliburton Exception” to the Safe Drinking Water Act.  In New Jersey, state law exempts solar panels from the calculation of impervious coverage under a number of state laws, including storm water management and coastal and waterfront development laws.   

None of this is to say that we should not continue with a program of research and investment into solar and wind energy.  We should continue.  It is to say, however, that there really is no free lunch, and there is no energy source that we now know of or have the current technological capacity to harness that comes without some element of environmental degradation.

For more information, contact Dan Markind at 215-241-7772.

In his State of the Union Address, President Obama said that the United States could be the Saudi Arabia of shale gas.  We are not the only country, however, with huge deposits of natural gas trapped in shale, shale oil and oil shale (not the same thing).

China may have more natural gas reserves than the United States, with proposed development centered around the western city of Changqing.  Chinese exploration is in its infancy, however.  It is limited currently by a lack of expertise and technology, difficult terrain and poor infrastructure.  It is also limited by the fact that unlike in the West, the State owns all of the resources.  Therefore, every contract must go through the governmental bureaucracy

For the Chinese, as for the United States, alternative energy sources are a matter not just of economic opportunity but of national security.  China is the hungriest nation on earth for energy, the majority of which must be imported.  To do so, it seeks to maintain good relations with oil producing countries like Iran.  As shown by last week’s vote at the UN, this puts China in an unfamiliar situation diplomatically – isolated. Extracting its natural gas, and building the infrastructure to harness it, would dramatically improve China’s social/political/military situation.  The Chinese are off to a slow start in shale exploration, and their cumbersome system will be a drag, but having made a governmental policy decision to dramatically increase shale exploration, few doubt they will throw massive resources at it quickly.

In Europe, Poland has some of the largest shale deposits, but initial results from exploration have been disappointing.  Ireland also has substantial deposits.  Given Ireland’s recent boom and tragic bust, the economic/environmental questions about shale development are being hotly debated.  Germany possesses nearly one trillion cubic meters of gas resources, of which nearly 80% is termed “unconventional”.  But pressures from environmental groups questioning the ecology of hydraulic fracturing are very strong.  This could delay Germany’s entry onto the shale development playing field.

If environmental issues curtail production and exploration, Germany will join Bulgaria and France, which have declared moratoria on hydraulic fracturing.  Rightist politicians in Bulgaria currently are trying to overturn the ban.  They say it plays into the hands of the Russian energy giant Gazprom, which supplies much of the energy for Eastern Europe.  Last week, Gazprom admitted that recently it has curtailed some of its distribution, even as Europe shivers through a deadly cold snap.  The cutback possibly relates to Russia’s vulnerability to other nations’ shale gas and oil development.  Through its resources and pipelines, Russia exerts influence over its neighbors and much of Western Europe.  Any diminishing of that limits Russian power worldwide.  It could not have been happy when last week Ukraine and Azerbaijan agreed to cooperate on natural gas development and supply.  Expect Russia to do what it can to limit the success of any unconventional gas development in its region.  Without power to control energy sources and distribution, Russia’s influence, like its population, will continue to shrivel.

In Australia, deposits are found in immense quantities in an area known as the Copper Basin.  Plans already are underway to connect this by pipeline to the East Coast and cities like Sydney, as well as north to terminals where gas can be shipped to China, Japan and South Korea.  As the area with the natural resources is generally in the Outback, the location increases the logistical difficulties but decreases the population that could be affected by potential environmental issues. 

Canada of course has huge shale deposits.  The debate in New York, Pennsylvania and Ohio is matched by the debate in Canadian provinces like Quebec and New Brunswick.

Of all the areas with large shale potential, the most intriguing is Israel.  Recently, it reached agreements with Cyprus to explore off-shore deposits northwest of Israel and southeast of Cyprus.  Both Lebanon and Turkey have cried foul, and Turkish President Tayyip Erdogan even was quoted as saying the Turkish navy would prevent such development.  Expect fireworks here.  In addition, by some estimates Israel may possess the world’s third largest reserves of oil shale, which is not a liquid and not extracted by hydraulic fracturing.  Located in the Valley of Elah (where David fought Goliath), oil shale extraction requires intense heat thousands of feet below the earth’s surface for extended periods of time.  There are major environmental issues involved in this process also, but given advances in technology those issues may be overcome within the next decade.

The prospect of massive new sources of energy is alarming to OPEC.  For the first time in forty years, countries like Saudi Arabia, Iran and Venezuela do not hold the whip hand regarding the world’s energy supplies.  To stop alternative energy development, expect Venezuela’s Hugo Chavez, Iran’s Ayatollah Khamenei and Saudi King Abdullah to become some of the world’s leading environmentalists. It will not be surprising in the next few years if traditional environmental organizations find large funding offers can be traced back to places like the Riyadh and Caracas.

With tension rising over Iran’s nuclear program and its threat to close the Straits of Hormuz, another energy shock could occur at any time.  Not only will this increase the price of oil, it will do the same for natural gas.  Programs already on the drawing boards to roll out systems of natural gas filling stations for automobiles will be accelerated.  As a result, while the large energy companies are shifting westward in the Marcellus Region towards Western Pennsylvania and Ohio, don’t expect them to abandon the East.  Energy prices ebb and flow over time, and it will be foolish to expect that early 2012 price trends will remain in 2013, or even late 2012.  The international situation is too fluid.

Nationally, the President is certainly correct about our country’s centrality in the future energy market.  We now have the resources, technology and opportunity to turn ourselves from a net energy importer to an exporter, and indeed the most important player in the world on the energy front.  Areas like the Middle East no longer will have the significance to our national interest that they once did, freeing us in the foreign policy arena.  No longer will our need for energy cause us to pay what in effect is a terror tax to countries where our money often finds its way to unsavory organizations that mean us ill.  In fact, if handled correctly, the marriage of American resources, technology and industriousness could usher in another golden age for the American economy.

For more information, please contact Dan Markind at 215-241-7772

The first event means that the focus of shale development is likely to shift westward, from the dry gas of the eastern Marcellus Shale Basin (approximately Central Pennsylvania east) to the wet gas of the western Marcellus Shale Basin.  In addition, development will increase in the Utica Shale Basin, which contains more oil as opposed to natural gas.  Combine the two, and you focus one place – Ohio. 

Who would have thought that within five years Cleveland might be included among energy boom towns?  The Ohio Oil and Gas Law  has been amended and re-amended substantially, most recently as of March 31, 2010.  It likely will be amended again soon, as Republican Governor John Kasich now presides over the State as opposed to Democrat Ted Strickland, who held the State House in 2010. 

Any question about where Governor Kasich’s administration stands on shale development was answered earlier this month when, following the earthquakes in Youngstown, the Kasich administration announced that while the specific injection wells associated with the earthquakes would be shut, production in Ohio will continue.

Left open, of course, is the question of what to do with the wastewater?  For the past few years copious amounts of water from Pennsylvania and West Virginia have ended up in injection wells in Ohio.  Now, with earthquake fears manifesting and Ohio production slated to increase, the disposal question becomes more acute.

To the northeast, New York State’s public comment period on its Supplemental Generic Environmental Impact Statement ended January 11.  According to a “Dot Earth” post in the New York Times, the New York Department of Environmental Conservation has received over 40,000 comments.  The Times piece mentioned that one of the most interesting comments came from the United States Environmental Protection Agency, which it described as “concerned but supportive”.  The EPA did not advocate an outright ban or a continued moratorium on hydraulic fracturing.  Instead, it made specific, pointed comments to items in the SGEIS, with an eye toward implementing effective regulations if and when the moratorium is lifted.

While the EPA’s reaction may have disappointed some environmentalists, it was reinforced by President Obama’s State of the Union message last week.  The President endorsed natural gas as a bridge fuel over at least the next decade, and mentioned the amount of jobs it has helped and will help create.  Curiously, this endorsement came only a few days after the President killed the Keystone XL pipeline, raising questions about what exactly is  the President’s energy policy?  Yesterday, The Hill  reported that Interior Secretary Ken Salazar is getting closer to issues rules relating to hydraulic fracturing on federal land.  The same day, the Pittsburgh Post Gazette ran an article arguing  that the State of the Union speech was clearly aimed at Marcellus Shale voters in Pennsylvania, a state the President cannot win re-election without carrying.  Despite the continued controversies, and the ceaseless bashing of Pennsylvania’s environmental regulations in places like, incidentally, the New York Times, shale drilling remains solidly popular in Pennsylvania.

Against this backdrop the battle is being joined over no more than 20 landowners in the little township of Dimock, outside of Scranton in the far Northeast corner of Pennsylvania.  The EPA is engaged in testing wells in the Dimock area.  This involvement is straining its relations both with the Pennsylvania Department of Environmental Protection and a number of Dimock residents.

The backdrop is that in September 2009 hydraulic fracturing fluid from a Cabot Oil and Gas well site spilled in Dimock, contaminating the wells of approximately 19 landowners.  Over two years later, and despite the payment of compensation by Cabot and the supply of new water treatment systems, the status of water in Dimock remains controversial.  Partly, this is due to Cabot’s initial response, which was  adversarial and confrontational, and partly this is due to the subsequent reaction of environmental activists, who saw an opportunity to score political points using Dimock as their hook.  Into the fray jumped the EPA, which issued seemingly inconsistent statements on the current status of Dimock water and the continuing obligations of Cabot. 

The dirty little secret in Dimock, and much of Northeastern Pennsylvania and the Southern Tier of New York, is that many of the water wells are contaminated naturally,  Methane, arsenic and numerous other chemicals occur naturally and seep into the water wells dug by the residents.  For the unscrupulous, the actions of Cabot give them a perfect foil from which to profit above and beyond any damage the company might have caused.  For others, the actions of the EPA constitute an unnecessary and unwanted intrusion into their local affairs.  For the rest, the preference is to get legitimate, non-politicized environmental information to use as a baseline.  In a political year, the EPA has to walk a tightrope to make sure it is fulfilling its function, not overstepping its grounds and not playing into the hands of anyone’s political agenda.  It will be interesting to see how well it does.

On the legislative front, West Virginia’s Horizontal Well Act has now taken effect.  In New York, the State awaits the reaction of the DEC to the public comments.  In Pennsylvania, which failed in 2011 to enact broad mineral extraction legislation,  six Republican State Representatives announced they will not support a current legislative proposal as it centralizes too much control at the State level at the expense of the municipalities.  As discussed many times in these posts, this continues one of the overall themes of the shale drilling issue – the extent to which the citizens of a state are willing to relinquish control locally over traditional land use laws while maintaining an overall pro-development statewide policy.  That, the scope and extent of an extraction tax, and the specifics of forced pooling, remain hot buttons wherever you go.

We shall now see what February brings.

For more information, please contact Daniel Markind at 215-241-7772

Since March, approximately 11 small earthquakes have hit the same area, which is close to a well in which D & L Energy has been placing brine approximately 9,200 feet below the surface.

In response to the tremors, the Ohio Department of Natural Resources has stopped further use of the injection well, pending future studies. It also has put four other wells in a five‐mile radius under study.

Governor John Kasich’s office stated that this will not affect shale gas production in Ohio, despite calls from certain lawmakers such as Democrat Robert Hagan, who represents Youngstown, for a moratorium on hydraulic fracturing and injection well activity.

In 2010, after similar small tremors struck the Dallas area, a joint research team of the University of Texas and Southern Methodist University concluded that the use of injection wells for the disposal of the residue from hydraulic fracturing may have had an impact in those earthquakes. This past July, the Arkansas Oil and Gas Commission banned wastewater injection wells from a 1,150 square mile area overlaying key shale deposits because of increased earthquake activity it believes is related to the disposal wells.

The concern is not with the hydraulic fracturing itself, but with the deeper injection wells. According to the Christian Science Monitor, the “disposal well aimed to flush those fluids into a broad, deep sandstone formation, where the fluids could spread in all directions. But drillers reportedly overshot the formation and sank the well some 300 feet into the basement rock, where the faults lurk.”

Injection wells remain a preferred method of disposal of the United States Environmental Protection
Agency.

For more information, please contact Dan Markind at 215‐241‐7772.

West Virginia

Potentially a huge winner in 2011. The signing by Governor Earl Ray Tomblin of the Horizontal Well Act on December 23 gives this state the first comprehensive set of rules relating to mineral extraction in the Marcellus Shale Basin. We don’t know for some time if the law’s setback requirements, well pad fees and state/local limitations on regulation will prove to provide the proper balance, nor will we know whether the State Department of Environmental Protection, which has had an immense amount of responsibilities and obligations placed on it, will be up to the task. Still, the fact that West Virginia has completed this process and come up with a viable, defensible structure that provides some element of cost and regulatory certainty bodes well for the State.

Pennsylvania

Unlike West Virginia, Pennsylvania’s legislature did not pass a comprehensive mineral extraction law in 2011. It must try again in 2012. For now,, there will continue to be no statewide fee and no local impact fee assessed against producers in the Commonwealth.

Pennsylvania will continue to move strongly forward with Marcellus Shale development in 2012, and to that end the State’s unemployment rate and budget will benefit. The failure of its politicians to reach an agreement on the overall statute, however, prolongs the uncertainty and does not make the State look good. As previously discussed, the prospect of local impact fees instead of a statewide assessment fulfills certain political promises, but seems self‐defeating in the long run. Such a structure gives more influence to the local politicians whose influence the State would like to limit, forces the producers to spend extra money learning each municipality’s regulations, increase the risk of a “race to the bottom” resulting in statewide fees far below what they otherwise could be, and increases the potential for acrimony at the local level. Hopefully, the new year will give the Pennsylvania State Legislature a chance for a rethink.

New York

2011 will go down as the year New York State began to try. As expected, the public comment period issued by the Department of Environmental Conservation was extended, most recently through January 11, 2012. Governor Andrew Cuomo has some excellent people in place at the DEC, and they held four public hearings on the proposed Supplemental Generic Environmental Impact Statement. At the last hearing in Lower Manhattan, an all‐star team of anti‐hydraulic fracturing activists came out and the crowd generally shouted down anyone who supported it. Still, despite this and the extraordinary antipathy of the New York Times and much of the State’s liberal wing, the New York State public remains evenly split on the issue. As Wall Street struggles, New York State’s fiscal situation becomes even more untenable. With that as background, it remains to be seen how long the anti‐development forces can prevent the State from at least trying limited production. This could stimulate economic activity in areas that haven’t seen it for a century while putting money in the State’s coffers. New York already has declared off limits to development the New York City and Syracuse watersheds, as well as

State‐owned lands. Under the circumstances, expect New York to slowly and fitfully inch toward development.

Ohio

Until this year, Ohio was an afterthought in the Marcellus Shale story. It possesses some Marcellus, but not nearly the extent possessed by New York, Pennsylvania or West Virginia. In fact, Ohio’s chief function had been as the repository of wastewater from other states.

That changed in 2011. The cause was not Marcellus, but the discovery of massive amounts of Utica Shale about 3000 feet below the Marcellus formation. Quickly, Ohio moved from afterthought to potential dominant player. So rapidly have this State’s fortunes changed, that the rewrite of the State’s Oil and Gas Law which took place in 2004, was already outdated. As with Northeastern Pennsylvania, the Southern Tier of New York State (potentially), and much of West Virginia, rustbelt Ohio cities like
Zanesville and Youngstown saw opportunities that hadn’t existed for generations. As with New York and
Maryland, Ohio oil and gas law is almost a blank slate. Expect the next few years to be good ones for the Ohio oil and gas legal community. This is especially true If Ohio can get its legislative act together quickly. With major players like Chesapeake Energy making multi‐billion dollar investments in Ohio, the State could siphon off much of the development that otherwise would have gone to Pennsylvania and New York.

Maryland

Maryland’s shale development is limited to two extreme western counties. Governor Martin O’Malley is moving exceedingly slowly in deciding whether to allow hydraulic fracturing, and under what conditions. At this point, the target date for any real decisions in Maryland is 2014. Expect the events in Marcellus and Utica mineral extraction of the next year – be they positive or negative‐ to have a major impact on Maryland’s timeline.

New Jersey

Similar to Maryland, New Jersey’s shale deposited are limited to one small corner of the State (the Northwest). That didn’t stop Governor Chris Christie from imposing in August a one‐year statewide moratorium on hydraulic fracturing in the State. New Jersey also has an important role to play as one of five votes in the Delaware River Basin Commission (DRBC) on rules governing the process in the Delaware River Watershed. With the 2012 election season already in full swing, and Governor Christie’s name being mentioned as a potential Republican Vice Presidential candidate, his moratorium could factor in the national decision‐making process.

Delaware

Delaware has no shale potential at this time. That didn’t stop Governor Jack Markell from shuffling the Marcellus deck when he announced that he would vote against proposed regulations allowing hydraulic fracturing in the Delaware River Basin. The resulting scramble resulted in a postponement of the meeting of the DRBC on the issue, with no new meeting date scheduled. It also earned him ill will from his northern neighbors in Pennsylvania, who were wholly in support of the regulations. Delaware and Pennsylvania have numerous other issues and interests that they share (e.g.

the Ports of Philadelphia/Wilmington) and it will be interesting to see if Governor Markell’s stance on hydraulic fracturing comes back at him on other issues later on.

There are other states that have Marcellus, Utica or Devonian shale issues (Virginia, Tennessee, North Carolina, Michigan, etc.) but we’ll stop there for now. Suffice it to say that on New Years Day
2012 there is a lot more interest, intrigue and controversy about shale drilling than on New Years Day
2011. So to end the year, we’ll look quickly at potentially a big loser and big winner in the Marcellus
Shale landscape.

Potential Big Loser ‐ OPEC

For the first time since the 1973 Arab Oil Embargo, OPEC’s ability to dominate world energy markets is seriously threatened. Aside from the United States, large shale deposits exist in numerous places throughout the world, such as Poland, China and Australia. Domestically, the United States now knows that energy independence is both possible and foreseeable. The time window for Iran, Saudi Arabia, Russia or Venezuela to bring the world economy down by disrupting crude oil supplies is closing.

Potential Big Winners – Pittsburgh and Philadelphia

The largest City in the Marcellus Shale basin, Pittsburgh is primed for investment, unless the City antagonizes the same people who would do the investing. Already energy producers as well as law
firms and other ancillary industries are opening offices in Pittsburgh. In addition, the metropolitan area is in the running for the construction by Shell of a multi‐billion dollar ethane cracker. That didn’t stop the City Council in 2010 from voting to ban drilling activities within the City limits.

Philadelphia’s opportunity is less intuitive, but no less real. Located in the one part of Pennsylvania without shale, Philadelphia has numerous ways to be one of the biggest beneficiaries. The Port of Philadelphia is a logical terminal for the staging of natural gas exports, Philadelphia International Airport has the best airline connections throughout the Marcellus Shale region (no other city offers
direct flights to Binghamton, Elmira, Williamsport, Pittsburgh, Charleston, and nearly all the major Marcellus Shale centers). Southeastern Pennsylvania’s pharmaceutical infrastructure (Glaxo Smith Kline, Teva etc.) will benefit immensely from the availability and price drops in natural gas, as natural gas is an ingredient in many pharmaceuticals. Finally, as producers begin to establish chains of natural gas
service stations to stimulate and service natural gas‐fueled vehicles, Southeastern Pennsylvania has the proper location and demographics to be a leader here. It will take foresight and commitment, two things the City has not been known for, but with both a city not in the basin could benefit immensely.

For more information, contact Dan Markind at 215‐241‐7772.