Marcellus Regulatory Update

PITTSBURGH, PA.–Business opportunities are developing rapidly across the Appalachian Basin, and the region has the potential to evolve from enormously successful resource extraction activities to reclaim its historical title as a manufacturing juggernaut.

However, along with all the opportunities for producers, midstream operators, manufacturers, and consumers, numerous regulatory and legal challenges and implications accompany the rapid growth of Marcellus and Utica development. In fact, the challenges have only multiplied for producers and midstream companies as growth has progressed. The next chapter in Appalachian shale development will be shaped by political influences, regulatory and local government developments, property rights challenges, and workforce safety.

Any discussion of governmental impact on unconventional shale development in Appalachia has to start with the Pennsylvania Supreme Court’s landmark decision in Robinson Twp. v. Commonwealth of Pennsylvania. The dividing line between the regulatory jurisdictions of state versus local governments over the oil and gas industry has been the subject of heated political and legal debate throughout the country. In Robinson Twp., the court declared unconstitutional several key provisions of Act 13, the Pennsylvania Legislature’s comprehensive 2012 update to the state’s Oil and Gas Act.

In addition to invalidating a key section of Act 13 that limits the regulatory authority of local governments, the court’s ruling also struck down a number of the legislation’s well location restrictions administered by the Department of Environmental Protection. The primary basis for the court’s plurality ruling, the Pennsylvania Environmental Rights Amendment, promises to be the subject of future litigation.

The industry faces increased budgetary and operational challenges from recent legislative sessions. While Act 13 aimed to comprehensively address the open issues associated with pre-emption, among other topics, the Robinson Twp. decision has shifted issues such as municipal regulatory consistency in the judicial system. Landowners are further defining their rights and developing their voices, and environmental interests continue to call for new requirements on the industry.

Leasing state land has re-entered the debate as well, with $75 million in the proposed 2014-15 state budget projected to come from new lease funds, further linking the politics, policy and fiscal story lines.

The Aboveground Storage Tank Act was passed during the 2014 West Virginia legislative session, along with a requirement for emergency regulations. The oil and gas industry is working with the West Virginia Department of Environmental Protection to promulgate rules under this program that are effective, yet practical for the industry.

Statutory pooling has been a priority for West Virginia’s oil and gas industry during the past few legislative sessions. Although legislation imposing new pooling requirements has not yet been successful, the industry continues to promote this issue for shallow horizontal wells.

Other factors in the political landscape will affect the industry. One of the many critical operational considerations involves water management, an issue tailor-made for political intrigue. The Appalachian industry faces a dynamic landscape for managing the politics associated with flow back and produced water.

For example, despite somewhat similar geology, underground injection control programs have developed quite differently in Pennsylvania, West Virginia and Ohio, which have 10, 571, and 203 permitted and active Class II-D injection wells, respectively. Ohio and West Virginia maintain primacy for injection well permitting, while the U.S. Environmental Protection Agency regulates Pennsylvania’s injection wells. Emerging, politically driven developments continue to impact the prospects for new and existing injection wells, ranging from new seismic testing requirements to public objections, to pending permit applications.

The positioning of the Pennsylvania Environmental Rights Amendment in the Pennsylvania Supreme Court’s ruling on Act 13 in Robinson Twp. creates new avenues for opponents of many types of development, and will certainly continue to bring a wide range of industry representatives to the same table. Of course, the federal regulatory overlay also has significant impact on the industry’s challenges and opportunities in Appalachia.

Fluid Regulatory Issues

A strikingly large number of regulatory issues remain fluid, requiring constant industry attention to developments and details across a spectrum of subjects, including reporting, permitting, well site construction, impacts to species, and unique standards for water and air quality. These regulatory developments vary among Pennsylvania, Ohio and West Virginia.

Well site construction requirements in Ohio and West Virginia are becoming more stringent. For instance, in February, the Ohio Department of Natural Resources’ Division of Oil and Gas Resources Management issued for public comment, preliminary draft rules to impose requirements for constructing well sites (including pads, access roads, and associated production facilities and equipment) used for horizontal drilling. The draft rules require operators to submit to ODNR detailed engineering, geotechnical, stormwater control and other information on planned well sites. ODNR’s approval would be required prior to constructing the well site.

In West Virginia, oil and gas construction activities that are not covered under a well work permit now must be permitted under the new General Water Pollution Control Permit No. WV0116815. Although the EPA and states are not authorized to require National Pollutant Discharge Elimination System permits for uncontaminated stormwater discharges from oil and gas activities, West Virginia has issued this permit pursuant to its Water Pollution Control Act (an appeal of the permit filed by the Independent Oil and Gas Association of West Virginia before the West Virginia Environmental Quality Board has resulted in several revisions to the applicability and obligations of the general permit).

In February, the Pennsylvania DEP sent a formal notice to all operators with information about new well integrity inspection and reporting forms to be used for all quarterly inspections. These forms require more information than specified in 25 Pa. Code Section 78.88, and create new burdens on small conventional operators and operators with hundreds of wells. It remains to be seen whether alternatives–which have been requested by individual operators and trade associations on their behalf–will be provided for small businesses.

Federal agencies have proposed listing more species as endangered or threatened while Pennsylvania legislators attempt to clarify the state’s listing process for species and wild trout streams. The construction of well sites, pipelines, and associated oil and gas facilities will be increasingly affected by the consideration and mitigation of impacts to more species, and not to threatened and endangered species only.

Over the past year, the U.S. Fish & Wildlife Service has proposed listing the northern long-eared bat as endangered. The Pennsylvania Game Commission (PGC) and the Pennsylvania Department of Conservation and Natural Resources (PADCNR) are developing an application for a USFWS incidental take permit for the Indiana bat (including a habitat conservation plan for all state lands in Pennsylvania). And the Pennsylvania Environmental Quality Board has proposed revisions to 25 Pa. If adopted as drafted, Code Chapter 78 would require consideration of impacts to “special concern species” before well permits are issued. Further, the Pennsylvania Fish and Boat Commission (PFBC) has proposed an amendment to PFBC’s regulations to make it easier to add stream segments to its wild trout stream list.

Each of these actions, with outcomes to be seen in the year ahead, has the potential to limit and constrain the locations available for Appalachian oil and gas operations.

Pennsylvania legislators also have introduced a bill (HB 1576) that would revise the process by which state agencies could list threatened or endangered species in an effort to introduce greater transparency and accountability. However, the bill faces concerted opposition by environmental groups.

Injection Well Permitting

Concerns about seismic activity continue to influence EPA injection well permitting in Pennsylvania and drilling permit requirements in Ohio. In March 2013, the EPA Environmental Appeals Board remanded a proposed Class II-D injection well permit in Pennsylvania to EPA’s Region III UIC program because it was not clear whether EPA adequately considered potential seismic impacts. As a result, EPA supplemented its review of Class II-D injection well permit applications to evaluate the risk of any induced seismicity that could result from the proposed construction and operation of the injection well in Pennsylvania.

After multiple small earthquakes were detected in March in Mahoning County, Oh., the DOGRM ordered the operator to cease drilling production wells in the area of the earthquakes, pending an investigation. The ODNR also has delayed issuing approvals to commence injecting waste fluids into injection wells constructed in the Youngstown area as it considers whether the wells pose a risk of causing additional seismic events.

In early April, in response to the seismic events in Mahoning County, ODNR announced tougher permit conditions for drilling horizontal wells near faults or areas of past seismic activity. The impact of these additional seismic conditions on the timely issuance of permits has yet to be determined.

On April 21, the EPA and U.S. Army Corps of Engineers jointly issued a proposed rule that would significantly expand the scope of waters under their jurisdiction. The proposed rule could result in drainage ditches, freshwater impoundments, and other previously excluded features being considered as jurisdictional waters under the federal Clean Water Act.

The much anticipated rule would affect various CWA programs by subjecting more areas to federal spill reporting requirements; expanding locations required to implement Spill Prevention, Control and Countermeasure plans; and requiring more Section 404 permitting for stream and wetland impacts.

In February, EPA released a final guidance document on UIC well permitting for hydraulic fracturing using diesel fuel. The recommended practices for incorporating regulatory requirements for injection wells into permits for hydraulic fracturing using diesel fuel will be implemented by state authorities for Ohio and West Virginia, and by EPA in Pennsylvania. Moving forward, it remains to be seen how this new guidance may impact the industry, and whether it will be implemented uniformly by federal and state agencies.

Water And Public Resources

Well permitting in Pennsylvania could become a more lengthy and expensive process under proposed revisions to 25 Pa. Code Chapter 78. The revisions would require notification to PGC, PADCNR and PFBC, above and beyond the current Pennsylvania Natural Diversity Inventory (PNDI) process for the protecting species, when a well site has the potential to affect any of several listed “public resources” (including state parks, rivers, natural historic landmarks, and public drinking water supplies).

The state agencies would be invited to suggest mitigation measures for impacts to such public resources, but Act 13 expressly requires the Pennsylvania DEP to consider the property rights of oil and gas owners and the optimal development of oil and gas resources before imposing well permit conditions. After the Pennsylvania Supreme Court decision in Robinson Twp., the legal status of this section of the proposed rulemaking is not entirely clear.

The public comment period for Pennsylvania’s Chapter 78 amendments closed on March 14. The DEP is expected to confer with its Oil & Gas Technical Advisory Board this summer to provide the status and next steps for the rule making, which could be finalized in 2015. Under the Regulatory Review Act, the final regulation must be submitted by March 2016, or the DEP would need to republish it as a proposed regulation with a new public comment period.

In addition, companies operating in Pennsylvania could face a unique requirement to replace impacted water supplies under proposed revisions to 25 Pa. Code Chapter 78, if adopted as drafted, would mandate operators replace water supplies to at least Safe Drinking Water Act standards or better, if the predrill samples showed the supply was better than SDWA standards before drilling activities.

This interpretation is contrary to standard oil and gas, as well as other industry, practices, which typically require a replacement water supply to meet SDWA standards or lower, if the water supply did not meet the SDWA standard before being impacted. The interpretation could create practical problems where even public drinking water sources cannot meet the obligation that would be imposed.

On another front, since early 2013, the Pennsylvania DEP has been conducting a comprehensive study of technologically enhanced, naturally occurring radioactive materials, including sampling and analyzing flow-back waters, treatment solids, drill cuttings, drilling equipment, and other equipment used in developing oil and gas resources. The DEP is expected to publish the final TENORM study by the end of the year, and it is likely that various other regulatory authorities (both state and federal) will review the results closely.

Additionally, the Marcellus Shale Coalition and Pennsylvania Independent Oil & Gas Association have opted to conduct a parallel TENORM study to complement DEP’s study.

Ohio enacted legislation (HB 59, effective in June 2013) that imposed regulatory requirements regarding NORM and TENORM. Under new Section 1509.074 of the revised code, Ohio oil and gas operators must conduct radiological tests on materials resulting from the construction and operation of horizontal wells, unless an exemption applies to the material.

Exemptions include material consisting only of drill cuttings, material that is reused at that well or another horizontal well, and material disposed lawfully in an injection well. Material that is tested may not be disposed of in municipal landfills, if it exceeds a prescribed level of radiological activity.

Emission Controls

In March, the White House directed the EPA to continue its study of methane sources in the oil and gas sector, and to complete any additional regulations by the end of 2016. EPA has since released for peer review and comment five technical white papers on methane and volatile organic compound emissions in the industry.

The U.S. Supreme Court heard oral arguments in February in Utility Air Regulatory Group v. EPA, which challenged EPA’s authority to subject stationary industrial sources to certain air quality permit requirements, based on their greenhouse gas emissions. However, the Supreme Court’s pending decision is not expected to undermine EPA’s overall authority to regulate greenhouse gases.

On the federal rule-making front, EPA published revised requirements in September 2013 for storage vessels subject to oil and gas sector New Source Performance Standards (Subpart OOOO) after learning that significantly more storage vessels would be affected by the rule than the agency estimated. EPA also proposed changes to 40 CFR Part 98, Subpart W of its GHG reporting rule in March that potentially will affect the reporting requirements for petroleum and natural gas systems.

The Pennsylvania DEP issued a final, revised general source installation and operation permit (GP-5) for natural gas compression and/or processing facilities in 2013, and later made significant revisions to its air quality permit exemption list; specifically, exemption 38, pertaining to oil and gas exploration, development and production facilities, and associated equipment and operation. Unconventional well operators now must choose between obtaining a plan approval and satisfying the stringent criteria of exemption 38 (conventional wells remain unconditionally exempt).

In April, the Pennsylvania DEP proposed revisions to its reasonably available control technology standards for major sources of nitrogen oxides and VOCs, which could obligate hundreds of facilities in the commonwealth to install control technology in an effort to combat ozone.

In late 2013, the West Virginia DEP issued a new Class II general permit (G70-A) for oil and gas production facilities located at the well site. The West Virginia Oil & Natural Gas Association and IOGAWV appealed G70-A to the West Virginia Air Quality Board shortly thereafter. The appeals remain unresolved.

In April, the Ohio EPA issued revised model general permits for well sites (GP 12.1 and GP 12.2), and for unpaved roadways and parking areas (GP 5.1). It is anticipated a revised permit-by-rule for flow-back operations will be available in 2015.

Water Storage Standards

Tougher standards are looming for water storage units also. Pennsylvania operators who use freshwater impoundments, centralized impoundments, tanks or pits for storage will face a heightened regulatory burden if proposed revisions to 25 Pa. Code Sections 78.56, 78.59b, and 78.59c are adopted as drafted by the EQB in its December 2013 rule-making proposal. Proposed revisions to Section 78.56 require prior DEP approval for aboveground storage tanks containing regulated substances, as well as increased monitoring (or fencing) and signage.

Pits also would be subject to new construction standards. Proposed Section 78.59b would require freshwater impoundments to be 20 inches above the seasonal high groundwater table, and would impose restoration requirements. Proposed Section 78.59c would impose many new requirements for centralized impoundments, including location restrictions, enhanced design standards (with oversight by professional geologists and engineers), water quality monitoring requirements, and restoration standards.

In Ohio, HB 59 (effective June 30, 2013) directed the Ohio DOGRM to adopt rules for issuing permits for facilities that store, recycle, treat, process or dispose of waste fluids from oil and gas wells, except for disposal wells that are currently regulated. The legislation is intended to regulate facilities located away from a well pad, such as central impoundments.

Such facilities are required by the legislation to have an ODNR permit or a temporary ODNR order authorizing operation of the facility by Jan. 1, 2014. ODNR has not completed a draft of the rules for formal public comment, but has circulated a preliminary draft for stakeholder input that would impose significant requirements, such as synthetic liners for impoundments.

In West Virginia, SB 373 was signed into law on April 1, establishing new aboveground storage tank requirements and stricter permitting obligations. Oil and gas industry representatives will be involved in the DEP’s rule-making process aimed at implementing the new statutory requirements.

Expanding Local Regulation

In addition to expanding federal and state legislative and regulatory requirements, local government regulation of the industry is expanding as well. In light of decisions such as the Pennsylvania Supreme Court’s ruling on Act 13 in Robinson Twp., the industry can expect an exponential increase in regulatory impediments and disputes at the local level. And county and city governments may be tempted to overreach on oil and gas matters as well.

Although local regulation is likely to increase in Pennsylvania, any trends in local land use ordinances probably will not be evident until late this summer, at the earliest.

Even in Ohio, where the statutory pre-emption language is relatively straightforward, the line between state and local control still is being tested. In February, the Ohio Supreme Court heard arguments in State ex. Rel. Morrison v. Beck Energy Corporation (Case No. 2013-0465), addressing whether the city of Munroe Falls could enforce its home-rule oil and gas-drilling ordinances and related zoning regulations in light of the state’s designation of the DMRM as having the “sole and exclusive authority to regulate the permitting, location, and spacing of gas wells.” This decision will determine whether local governments or state agencies have the final decision regarding drilling in Ohio.

Moreover, a myriad of unresolved property rights, royalty disputes and land-related issues are pending in state courts or on the dockets of legislative and regulatory bodies. Producers in Ohio, West Virginia and Pennsylvania are facing a continuously evolving environment concerning property rights and land use. For example, operators have gained additional rights in various areas, including unitization, but are encountering increased limitations to surface use and proposed changes in how royalty payments are calculated.

The oil and gas industry has achieved tremendous success in safely developing vast oil and gas resources across the Appalachian Basin. The next step in the transition is a rebirth of regional manufacturing capacity, and the economic rewards of a manufacturing renaissance across Appalachia could match or even exceed the impact of the resource extraction itself.

However, oil and gas operators still face considerable hurdles on the regulatory and legislative fronts that could significantly impact the industry’s ability to develop resources in the Marcellus and Utica shale plays.

Editor’s note: The preceding article was adapted from a report highlighting regulatory and legal issues facing the oil and gas industry in the Appalachian Basin. To request a copy of the full report, contact info@babstcalland.com.