Marcellus/Utica Update

PITTSBURGH–Despite challenges, a maturing shale industry is poised for growth as natural gas and oil producers have slashed the costs of production, concludes the law firm of Babst Calland in its 10th annual energy industry report.  

The 2020 Babst Calland Report–The U.S. Oil & Gas Industry: Federal, State, Local Challenges & Opportunities; Legal and Regulatory Perspective for Producers and Midstream Operators covers topics ranging from the industry’s business outlook, regulatory enforcement and rule-making to developments in pipeline safety and litigation trends, Babst Calland says, adding that its attorneys’ collective legal experience and perspectives on these and related business developments are highlighted in the report.

“The U.S. natural gas and oil industry has experienced tremendous growth and change since we first published this report in 2011,” comments Joseph K. Reinhart, shareholder and co-chair of Babst Calland’s Energy and Natural Resources Group. “Fast forward to an unprecedented 2020 with a pandemic, a corresponding economic slowdown, and an oversupply of natural gas and crude oil. With increased public and government pressure, sustained low prices, and less-reliable financing options, resiliency will continue to be the driving force of a dynamic energy market that continues to evolve.”

Reinhart says the past decade clearly has demonstrated the energy industry’s resilience amid price fluctuations, increasing regulation, opposition from nongovernmental organizations and policy changes. He says the industry has improved efficiencies, even as lower commodity pricing has squeezed margins, while also seeking new markets.

According to the Energy Information Administration, Reinhart cites, the United States exported more natural gas in 2019 by pipeline than it imported for the first time since 1985, mainly because of increased pipeline capacity to send natural gas to Canada and Mexico.

“Perhaps a more fossil fuel-friendly federal government and the promise of a predictable federal regulatory landscape helped boost capital spending and the prospects of growth through 2019,” Reinhard poses. “However, despite federal predictability over the last few years, states continue to independently regulate, legislate and take judicial actions that at times challenge natural gas development.”

A Changing Market

U.S. energy production appears poised to continue to outstrip domestic consumption, in some measure because of increased consumption efficiency along with the obvious ramifications of the natural gas revolution, The 2020 Babst Calland Report concludes.

It notes the global economic slowdown coupled with an oversupply of natural gas and crude oil has thrown the U.S. energy production landscape into near-term turmoil. Each company has its own set of opportunities and challenges to navigate based on its financing, debt, shareholder goals, and operations and infrastructure footprint.

Nonetheless, Babst Calland says, America’s plentiful supply of natural gas and oil is expected to continue to fuel its economic future and support national security.

“After a relatively productive 2019, a new decade began with oversupply and a falloff in resource use resulting from the pandemic,” the report points out. “With increased public and government pressure, sustained low prices, and less reliable financing options, resiliency will continue to be the driving force of a dynamic energy market that continues to evolve.”

From a workforce standpoint, the report continues, COVID-19 conditions, and other wage and hour regulations, amendments to the Family Medical Leave Act, and expanded unemployment benefits under the CARES Act, have had an impact on companies across the country.

Legislation And The Courts

In numerous locales, Babst Calland says, companies are encountering land-use and zoning challenges. These increasing headwinds have resulted in slowing new permitting activity, as well as ongoing challenges and ordinance restrictions. Cooperation between operators and local government will become even more essential in the future, given that municipal finances, which depend on property and income taxes, are in a precarious state.

Among the key legislative and legal developments cited in The 2020 Babst Calland Report:

• In Pennsylvania, Act 85 of 2019 took effect in January and defines the conditions in which oil and gas producers may drill lateral wellbores that cross between two or more pooled units.
• Last year, Ohio’s lower courts clarified some aspects of both the Ohio Dormant Mineral Act and the Marketable Title Act, but these decisions also highlight a need for further guidance. The Ohio Legislature passed HB 166, which amended the state’s unitization statute.
• The Texas Supreme Court affirmed the duties executive interest mineral owners owe to nonparticipating royalty interest owners.

Elsewhere, Babst Calland goes on, courts in the Appalachian Basin have clarified the rights of oil and gas operators, lessors and adjacent landowners on a host of matters including timeliness of claims, health effects, forced pooling and related lease rights.

“Although 2019 saw renewed claims of adverse health impacts allegedly associated with unconventional natural gas development, support for such claims continues to be limited,” the firm comments.

Regulatory Developments

Today’s regulatory environment, Babst Calland observes, largely focuses on climate change, reducing emissions, water quality developments and enforcement.

“Enforcement, penalties and increased volumes of written agency guidance continue to challenge the industry across the nation,” The 2020 Babst Calland Report states. “Climate change issues are continuing to garner significant attention, as is an increasing focus on emerging contaminants.”

Among significant developments, Babst Calland outlines, the Environmental Protection Agency has finalized a major overhaul of National Environmental Policy Act regulations, and the U.S. Supreme Court issued a landmark opinion regarding liability for groundwater discharges that reach surface water.

Meanwhile, citizen groups continue to actively challenge any federal or state initiatives designed to expand natural gas or oil development, creating delays or uncertainties, the firm adds. Operators still seek to install new or replace existing pipelines while advocacy groups aggressively oppose many projects, Babst Calland notes.

At the federal level, the Pipeline and Hazardous Materials Safety Administration continues to respond to increased public and congressional pressure by initiating and finalizing new or revised safety regulations.

Technological Advances

Despite the pandemic and its impacts, The 2020 Babst Calland Report says unmanned aircraft systems (UAS) have emerged as essential tools for the energy industry to conduct complex inspection and monitoring of difficult-to-access infrastructure and locations.

Market reports indicate annual growth rates as great as 25% for UAS applications in the energy market. But this growth also comes with challenges in evolving technology, Federal Aviation Administration regulations, rogue drone operations, and threats to cybersecurity and privacy rights, Babst Calland cautions.

Those factors lead The 2020 Babst Calland Report to conclude, “The natural gas and oil industry continues to expand its reach and impact on U.S. energy supply and independence. The nation’s plentiful supply of natural gas and oil is expected to continue to fuel its economic future and to support national security.

To request a copy of the report, contact info@babstcalland.com.