Development of the Marcellus Shale Reserves Continues

January 8, 2010
Client Alert Newsletter Forecast 2010

The effort to extract natural gas from the Marcellus Shale geologic formation is expected to continue to generate controversy in the Commonwealth of Pennsylvania and neighboring states. The Pennsylvania Department of Environmental Protection ("PADEP") and the Basin Commissions are trying to establish workable regulatory programs building on the basic legal requirements that have been in place for decades. Applying the traditional compliment of environmental laws and regulations, including the relevant permit programs, has spawned a new set of regulatory norms. The expansive nature of the overall gas extraction effort has led to the creation of federal and state "tip" lines that enable the public to police the activities of the industry. Meanwhile, the industry presses on, looking for meaningful dialogue on regulatory standards that are both protective of the environment and compatible with the urgency to tap into a natural resource that is viewed as an important part of the nation's efforts to achieve energy independence.

PADEP recently promulgated a draft regulatory package that would substantially impact natural gas drilling operations in the Commonwealth. PADEP proposes to amend its regulations for the construction of oil and gas wells (25 Pa Code Section 78) by imposing new casing and cementing requirements in an effort to increase protection of both public and private water supplies. Specifically, the new regulations would bolster well construction specifications and hold drillers responsible for restoring or replacing water sources contaminated by drilling operations to the standards set forth by the Pennsylvania Safe Drinking Water Act. In addition, new notification requirements would require drillers to promptly inform PADEP if wells are over-pressurized, if casings are defective or if gas has migrated into drinking water sources. New inspection requirements would mandate quarterly checks on the integrity of existing wells in operation to ensure that there is no evidence of gas escaping from wells and to determine whether there is evidence of progressive corrosion or other signs of deterioration. Operators will be required to submit annual reports to PADEP identifying compliance status associated with these inspections.

Pennsylvania is also moving to expand oversight of Marcellus Shale drilling operations by increasing the number of employees in the Bureau of Oil and Gas Management. PADEP recently announced it was adding 68 new employees to oversee drilling operations. By way of comparison, in 2008, Pennsylvania had just 35 employees to oversee 74,774 wells. By 2009, enforcement staff increased to 76. This fourfold increase in the number of inspectors over a two year period represents a significant commitment by PADEP to carefully monitor drilling operations in Pennsylvania and underscores the need for drillers to proactively implement and carefully document environmental compliance measures.

In addition to the foregoing, we expect considerable regulatory activity under the air, water (both supply and discharge) and waste programs; enforcement by the agencies and citizen groups; and litigation among private parties on a myriad of potential claims. We also expect the state legislature to renew its effort to enact a tax in some form on gas extraction leases and/or proceeds. The Marcellus Shale play is likely to be one of the most important economic initiatives in the Commonwealth and will continue to draw attention this year and in the years to come.