Anticipated Regulatory Initiatives and Developments for 2011 - Natural Gas Development in the Marcellus Shale

January 7, 2011
by Marc E. Gold and Neil S. Witkes
Client Alert Newsletter Forecast 2011

The Pennsylvania Department of Environmental Protection ("PADEP") amended several regulatory programs in 2010 to regulate more closely the burgeoning Marcellus Shale natural gas play. Newly promulgated total dissolved solids discharge requirements established in 25 Pa Code Chapter 95, combined with cross-cutting changes to the Oil and Gas Wells Regulations in 25 Pa Code Chapter 78, resulted in more prescriptive standards that are intended to provide greater environmental protection in connection with natural gas development activities. PADEP is continuing to identify program element improvements that reach other elements of the regulatory scheme; most notably, PADEP plans to issue final guidance documents that would lift the air permitting exemption currently in place for oil and gas operations and address when commonly owned gas wells and compression facilities should be considered a single source for air permitting purposes, both of which may lead to more stringent controls and burdensome permitting requirements.

While PADEP continues to refine the regulatory requirements applicable to the development of natural gas reserves in Pennsylvania, the Delaware River Basin Commission ("DRBC") has imposed a drilling moratorium that will remain in place until the Commissioners adopt natural gas development regulations. On December 9, 2010, the Commissioners authorized the issuance of draft regulations for public comment. The public comment period closes on March 16 and will include public hearings that are scheduled for February 22 and 24. The DRBC regulations are designed to supplement the state's regulations based on the belief that the unique features of the Upper Delaware River Basin require additional protections. The draft regulations seek to minimize landscape impacts from drilling and infrastructure development, protect ground and surface water quality, and establish leasehold development plans in order to coordinate the overall build-out of the region. While this is an ambitious undertaking, natural gas development cannot proceed until these regulations are finally adopted.

Many of the regulatory concepts adopted by PADEP have application to other industry sectors. For example, PADEP's single source guidance will include the Department's gloss on when industrial activities separated by some physical distance should nonetheless be considered a single source for purposes of air permitting. In addition, the potential for drilling in the Delaware River Basin will raise a series of new issues relating to land use controls, resource management and water quality. We have been involved in these issues on behalf of several clients and are working closely with the Marcellus Shale Coalition in developing and advancing important industry positions. Moreover, we have a very active practice before the DRBC, representing many clients on matters requiring DRBC approvals, which has proved helpful on the issues the DRBC has raised in connection with natural gas development in the Delaware River Basin.

In the litigation context, a significant question is emerging as to whether companies operating in the Marcellus Shale will face strict liability claims related to any alleged environmental harm. In a recent decision, a federal court declined to answer the question of whether the "fracking" of wells constitutes an abnormally dangerous activity, creating strict liability, irrespective of fault, for all damages caused by drilling in the Marcellus Shale. The question was raised at an early stage in the case proceeding, and the court declined to provide an answer until the factual record in the case is more fully developed. However, the court's unwillingness to dismiss the strict liability claim as a matter of law raises the possibility that Pennsylvania courts may be willing to extend liability for damages irrespective of fault and despite compliance with state-of-the-art procedures.

Liability for ultrahazardous activity under Pennsylvania law is generally determined by the court – not the jury. But the court’s determination is based on an evaluation of six factors, including whether there is a high degree of risk of some harm to the person or property of another. Historically, Pennsylvania courts imposed strict liability for abnormally dangerous activity only in limited circumstances involving "blasting." The Pennsylvania courts have been unwilling to extend strict liability to activities not traditionally within its scope. Thus, the Pennsylvania courts have declined to label the following activities as abnormally dangerous: public fireworks; storage of water in a reservoir; handling firearms; application of pesticides; operation of a fire detection system in a high rise office building; and storage of gasoline in underground storage tanks. In a case that perhaps is the closest parallel, a Pennsylvania appellate court refused to label the transmission of gasoline in an underground pipeline as abnormally dangerous, overruling a trial court decision that had labeled the activity as abnormally dangerous. The court relied on the fact, in part, that the pipeline existed before the residential development under which it ran, rather than the nature of the activity itself.

The consequence of labeling "fracking" and other activities as abnormally dangerous could have detrimental impacts on the development of the Marcellas Shale, and bears watching. Pennsylvania case law suggests that courts should not be willing to extend strict liability to "fracking" and other activity relating to the development of the Marcellus Shale.