Marcellus Shale Watch

The Pennsylvania Senate unanimously passed an amended version of Rep. Matt Baker’s bill, House Bill 344, on December 13, 2011. The bill now goes back to the Pennsylvania House for concurrence.

The bill as passed by the Senate grants the Pennsylvania Public Utility Commission the power to register, assess and inspect natural gas and hazardous liquids pipelines and facilities, but not those that are under the exclusive jurisdiction of the Federal Energy Regulatory Commission. The Commission may enact regulations, but those regulations “shall not be inconsistent with or greater or more stringent than the minimum standards and regulations adopted under the Federal Pipeline Safety Law.”

The bill does not address the siting of pipelines or pipeline facilities and specifically states that “[n]othing in this Act grants the Commission additional authority to determine or regulate a pipeline operator as a public utility as defined in 66 Pa.C.S. §102 (relating to definitions) or as a natural gas supplier or natural gas supply services as defined in 66 Pa. C.S. §2202 (relating to definitions).” The Commission has decided in at least one case that a midstream natural gas operator who provides services only to natural gas producers is a “public utility.” Although that application was eventually withdrawn by the operator, the Commission refused to rescind its order containing that decision. That question is on appeal to the Pennsylvania Commonwealth Court and is at issue in at least two other cases currently pending before the Commission.

For further information about the regulation of natural gas and hazardous liquids pipelines in Pennsylvania, whether regulated by the Federal Energy Regulatory Commission or the Pennsylvania Public Utility Commission, please contact Elizabeth Witmer.

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On November 12, 2011, the Pennsylvania Department of Environmental Protection will publish a new technical guidance document regarding the permitting of total dissolved solids (TDS) discharges from wastewater treatment plants. An advance copy of the 31-page guidance document is available here.

The purpose of the new policy is to assist the Department’s permitting staff in implementing the new TDS effluent standard for discharges of treated natural gas wastewater. The Department’s TDS regulations were recently amended to require new or expanded sources of natural gas wastewater to treat the wastewater to less than 500 milligrams per liter of total dissolved solids, which is the federal drinking water standard, prior to discharge. A plain-language summary of the regulatory revisions is available here.

The new policy also highlights existing legal obligations, such as the requirement for certain wastewater treatment plants to develop and implement a Radiation Protection Action Plan to monitor for any radiation associated with wastewater from natural gas operations. The Department addresses the details of this and other aspects of the new policy in its Comment-and-Response Document, available here.

Although the new policy does not have the force of law, it establishes the framework that the Department will likely exercise its administrative discretion moving forward. That said, the new guidance will increase the costs of monitoring and recordkeeping for wastewater treatment plants that do not currently have a Radiation Protection Action plan, radiation monitoring equipment, or properly trained and qualified radiological personnel. For some plants, the cost to implement could be over $100,000 in the first year, along with additional annual operation costs of over $20,000.

The Department’s November 3, 2011 press release announcing the forthcoming guidance is available here.

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Feel that aftershock a few weeks ago? That was the collective shudder of oil and gas lawyers when the Pennsylvania Superior Court remanded a Susquehanna County case for a hearing on whether gas from the Marcellus Shale formation was, or was not, transferred in an 1881 deed that reserved
“[o]ne half the minerals and Petroleum Oils”. See Butler v. Charles Power Estate, 2011 WL 3906897. How can gas be reserved if it is not mentioned? How can gas not be reserved if scientists, and even school children, can agree it is a mineral? The “Rule in Dunhams’ Case” has held since 1882 — in Pennsylvania — that a deed that reserved “minerals” but did not mention gas was bound by a rebuttable presumption that the grantor did not intend to reserve gas. This was not based on the scientific definition of “mineral” but on the common understanding of the term at the time (circa 1882). However, this Rule having been in use by conveyancers for many years, it has been since upheld as a general presumption and rule. After all, if all conveyancers follow a particular rule enunciated by the Supreme Court, wouldn’t a change of that rule also upset the intent of many subsequent conveyances who followed the rule? Among the arguments posed by the challengers to the application of Dunham’s Rule in this case are: (1) this deed was done in 1881 without the benefit of the Rule in Dunham’s Case which was decided a year later and (2) Marcellus Shale is a rock formation and, following the rule for gas embedded in coal, if the rock was reserved then so too was the gas contained in it. The Superior Court stated that it did not have a sufficient understanding of whether “Marcellus shale gas constitutes the type of conventional natural gas contemplated in Dunham and Highland.” Does this statement put “the rabbit in the hat”? Marcellus Shale gas is not conventional gas and could not be removed in 1881. Did Dunham and Highland apply only to conventional gas? It seems we will find out. The Court concluded that “the parties should have the opportunity to obtain appropriate experts on whether Marcellus shale constitutes a type of mineral such that the gas in it falls within the deed’s reservation.” The appellant’s argument has some very profound obstacles to overcome. But, for now, all eyes are on Susquehanna County. George Asimos, Esq.

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Click here for an Update and analysis by Elizabeth U. Witmer, Esq. of Saul Ewing, LLP on the August 25, 2011 decision by the Pennsylvania Public Utility Commission in the Laser Northeast Gathering Company, LLC case. The PUC clarified its prior decision which found that Laser, as provider of a natural gas gathering/midstream pipeline, is a public utility.

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Thirty-day public comment period to close on September 6, 2011

By Andrew T. Bockis, Saul Ewing, LLP

On August 6, 2011, the Pennsylvania Department of Environmental Protection published notice of a proposed General Permit that authorizes the processing and transfer of oil and gas wastewater from wells producing gas from unconventional formations such as the Marcellus Shale. The proposed General Permit would also authorize the storage of processed oil and gas wastewater in an impoundment prior to reuse for further hydraulic fracturing. In short, oil and gas wastewater that is processed under the proposed General Permit would not be considered a waste once the terms and conditions of the General Permit are satisfied.

The proposed General Permit would consolidate and replace three currently existing General Permits into a new General Permit. Many of the conditions in the proposed General Permit are borrowed from the three currently existing General Permits. However, the proposal includes a few important additions. Specifically, the proposed General Permit:

• Adds a definition for “oil and gas wastewater” (meaning tophole water, spent drilling fluids, flowback and produced water generated during the development and operation of oil and gas wells);

• Adds a definition for “dewaste” (meaning a determination made by the Department of Environmental Protection that a material is no longer a waste);

• Establishes minimum sampling and treatment concentrations for the storage of oil and gas wastewater in tanks and open impoundments prior to reuse in fracturing;

• Establishes the method to demonstrate compliance under the General Permit in order to store processed oil and gas wastewater in an impoundment prior to reuse in fracturing.

The proposed General Permit is subject to a 30-day public comment period, which runs through September 6, 2011. Instructions for submitting comments are included in the Department’s August 6, 2011 Pennsylvania Bulletin notice.

Given the extent that oil and gas production companies are recycling flowback and produced water from wells in the Marcellus Shale region, the proposed General Permit will likely be widely used. That said, oil and gas production companies would be wise to review the proposed terms of the General Permit, and submit comments or suggested revisions by September 6, 2011.

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On May 13 Governor Corbett signed legislation amending the Coal and Gas Resource Coordination Act, 58 P.S. §§501-518, the purpose of which is to reconcile competing interests between coal mining and natural gas extraction activities. The key elements of the amendments are as follows:

The definition of “active coal mine” is expanded by deleting current text covering projected and permitted mines plus 1000 feet beyond those boundaries and focusing instead on the workable coal seam shown on the five-year timing map submitted to DEP in connection with new, amended or renewed permits and which is contiguous to the permit area of an operating coal mine. The five year timing map is to include the area of a workable coal seam which may reasonably be expected to be mined during the five year period beyond the projected completion of mining in the currently permitted area.

Timing maps are to be considered confidential except that DEP is required to provide a copy upon request of any person who already operates one or more oil or gas wells or holds a valid permit to drill an oil or gas well and can document a valid existing right to develop the oil or gas under any portion of the timing map.

At currently permitted mines, the mine operator is to provide the current five-year timing map to the department within thirty days after the effective date of enactment. Since the act is effective immediately, the deadline is June 12.

“Operating coal mine” is redefined as that portion of a workable coal seam which is covered by an underground mining permit. The prior definition included expansive text that included coal mines to be established or reestablished as operating coal mines within one year.

“Workable coal seam is redefined as a coal seam in fact being mined or a coal seam which, in the judgment of DEP, can reasonably be expected to be mined by underground methods. The prior definition focused exclusively on coal seams identified by DEP’s Topographical and Geological Survey..

Section 6 has been expanded to address well completion in addition to permit applications and now requires gas well operators, within 60 days of completion of drilling operations, to supply to the coal owner a copy of the portion of any well bore deviation survey between the surface and a point below the deepest known coal seam encountered during drilling. In addition, permit applications under the Oil and Gas Act for gas wells that will penetrate an operating coal mine must include the written consent of the coal mine operator to the proposed well location. If coal rights have been severed from the surface where the well is to be drilled, the applicant must forward a copy of the plat to the coal owner via certified mail regardless of whether the seam is workable.

Section 7 revises the 900 foot minimum distance between a gas well and a workable coal seam to allow the coal operator to consent in writing to a lesser distance. Also, a 2,000 foot minimum distance between well clusters is established. That too can be reduced by written agreement. Wells within the same cluster are not subject to the minimum distance.

“Well cluster” is defined as an area within a well pad intended to host multiple horizontal wells and which comprises an area no greater than 5,000 square feet. The Environmental Quality Board is authorized to promulgate regulations modifying the maximum area of a well cluster based on the Pillar Study update noted below. If the permit applicant and the owner of a workable coal seam can not agree on the spacing of well clusters, either may invoke dispute resolution. If a well cluster will penetrate a workable coal seam that is not part of an active coal mine, the gas well applicant must provide the coal owner with a copy of the plat, and the owner of the coal seam has 15 days to provide recommendations on the location of the new cluster.

The law calls for two studies. The first is a comprehensive evaluation and update of the Joint Coal and Gas Committee Gas Well Pillar Study commissioned in 1956. The second is an independent study to be commissioned by DEP within 60 days of the effective date (approximately July 12) to assess the appropriate pillar size around an active well, an inactive well, a well-cluster, an inactive well-cluster, a plugged well cluster or a plugged well necessary to ensure the integrity of the well, to furnish adequate protection to the workable coal seam and to ensure the safety and protection of coal miners. The study is also to address additional criteria or standards that should be considered by DEP when considering approval of pillars around an oil or gas well which penetrates a workable coal seam. The independent study is to be submitted to DEP within 240 days of May 13 and published in the Pennsylvania Bulletin.

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On January 4, 2011 the Superior Court of Pennsylvania ruled in Hite v. Falcon Partners that an oil and gas exploration lease’s indefinite delay rental provision was void.

In 2007 Falcon Partners acquired the rights to several oil and gas leases dating to 2002 and 2003.  The leases contained the following clause: 

“Lessee has the right to enter upon the Property to drill for oil and gas at any time [within one] year from the date hereof and as long thereafter as oil or gas or either of them is produced from the Property, or as operations continue for the production of oil or gas, or as Lessee shall continue to pay Lessors two ($2.00) dollars per acre as delay rentals, or until all oil and gas has been removed from the Property, whichever shall last occur.”

Exploration and production never started, but the lessee paid the delay rental.  Impatient with the lack of production, and lack of royalties, and pressed by the interest of other potential exploration and production companies, the land owners attempted to terminate the lease and demanded that Falcon record a release.  Falcon refused and the owners filed suit in the Court of Common Pleas of Cambria County.  The lower court granted summary judgment in favor of the owners, terminating the lease.  The Superior Court affirmed on appeal. 

The disputed issue between Plaintiffs and Falcon was whether Plaintiffs were permitted to terminate the leases, despite a provision in the leases that allowed Falcon to continue to pay $2 per acre, per year as delayed rental.  Delay rental is often used to extend an oil and gas lease where no production is occurring and therefore no royalties are being paid. 

Early oil and gas lease forms generally contained an expressed or implied obligation on the part of the lessee to immediately develop the property or terminate the lease.  Lessees who wished to avoid termination for non-development incorporate delay rental clauses into leases, which relieve them of their obligations to immediately begin production.  However, courts often interpreted delay rentals to be limited to initial lease terms.  Jacobs v. CNG Transmission Corp., 332 F.Supp.2d 759, 785 (W.D.Pa.2004) and not indefinitely. 

The court determined that it was the parties’ original intention to accomplish certain drilling operations on the landowners’ properties within the first year of the lease — not for the properties to sit idle for six to seven years.  The court reasoned that if the parties originally intended for a lease to extend indefinitely for $2 per acre per year, there would be little need for the parties to agree to the initial one-year lease term in addition to the delay rental.  Furthermore, the Superior Court stated that since the intention of a delay rental is to “spur the lessee toward development,” it would be contradictory to the opinion of the courts of Pennsylvania to allow Falcon to pay delay rental indefinitely.

Hite v. Falcon Partners may have a significant impact on present and future oil and gas leases for Marcellus Shale drillers and landowners alike.  Lessees who have not initiated exploratory or drilling operations, and who are beyond an initial lease term, may be in jeopardy of losing their property rights if owners are successful in terminating leases before production commences.  Lessors and lessees that intend to use a delay rental provision to extend their lease term must take this ruling into account when drafting their new agreements, explaining clearly their intentions, to avoid an unintended termination.  Lessees may also consider drilling sooner, rather than later, to preserve their gas rights.  The case may be subject to appeal to the Pennsylvania Supreme Court.

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Background

In Fiorentino v. Cabot Oil & Gas Corp., No. 09-CV-2284, 2010 WL 4595524 (M.D. Pa., Nov. 15, 2010), the United States District Court addressed a variety of issues in the first ruling to arise from a tort claim for personal injuries and property damage from Marcellus Shale Gas drilling. This case arises out of the allegations in Dimock, Pennsylvania that drilling for Marcellus Shale gas by the defendant, Cabot Oil & Gas Corp., caused property damage and personal injuries to residents. As has been highlighted both in a documentary movie and on 60 Minutes, drinking water supplies have been alleged to contain methane, natural gas and other toxins and allegedly have been released onto plaintiff’s land. Plaintiffs brought suit seeking an injunction prohibiting future natural gas operations, seeking compensatory and punitive damages, the cost of future health monitoring, attorneys’ fees and other unspecified relief.
The plaintiffs’ complaint alleged the following claims against the defendant: 1) Hazardous Sites Cleanup Act, 35 P.S. §§ 6020.101 et seq. (“HSCA”); 2) negligence; 3) private nuisance; 4) strict liability; 5) breach of contract; 6) fraudulent misrepresentation; 7) medical monitoring trust funds; and 8) gross negligence.
The defendant filed a motion to dismiss the claims brought pursuant to HSCA, strict liability, medical monitoring and gross negligence. The defendant also filed a motion to strike a number of allegations largely related to the claims they were seeking to dismiss, as well as negligence per se and attorneys’ fees. The ruling by Judge John E. Jones, related only to the motion to dismiss these claims and the motion to strike. For the most part, in his ruling, the Judge sided with the plaintiffs.
Issues

Whether the court should dismiss claims against a natural gas drilling company relating to HSCA, strict liability, medical monitoring and gross negligence.
Whether the court should strike allegations relating to punitive damages, negligence per se and attorneys’ fees.
Rulings

Defendants argued that the plaintiffs were required to file a written notice 60-days prior to commencing an action under HSCA. Such notices are required by provisions contained in HSCA. The court ruled that since the HSCA claim was brought under Sections 507 and 702 for response costs, no 60-day notice was required. Such a notice would be required, however, “in citizen suits for property damage and actual or potential bodily injury.” The court followed Judge Caldwell’s ruling in Two Rivers Terminal, L.P. v. Chevron, USA, 96 F.Supp.2d 426 (M.D. Pa. 2000).
The court noted that strict labiality does not apply in Pennsylvania in actions involving underground storage of petroleum products and operation of petroleum pipelines. The court ruled however, that “Pennsylvania courts have yet to address whether the conduct at issue sub judice, gas-well drilling, is an abnormally dangerous activity that is subject to strict liability under Pennsylvania law.” The court felt it would be improvident to “extend the reasoning to drilling activities without more thorough consideration.” Thus the court denied the motion to dismiss and suggested that the defendants could reassert the issue in a motion for summary judgment after the record had been more fully developed.
The plaintiffs had also made a claim for medical monitoring expenses, to which the defendant filed a motion to dismiss. In denying the motion, the court quoted from the Pennsylvania Supreme Court’s ruling in Redland Soccer Club, Inc. v. Dept. of the Army, 696 A.2d 137 (Pa. 1997), to lay out the criteria for a claim for medical monitoring. The court held that while the plaintiffs may not have set out their claim in the precise manner endorsed by the Pennsylvania Supreme Court, the District Court held that, viewed as a whole, the complaint had sufficiently stated a plausible common law claim for medical monitoring to allow discovery to proceed.
The court did dismiss the plaintiffs’ claim for gross negligence without any objection by the plaintiffs other than they were not abandoning their claim for punitive damages.
The court refused to strike the allegations relating to attorneys’ fees at this time, preferring to wait to see if there were circumstances where such an award would be appropriate.
Finally, the court held that the claim for negligence per se, which would establish two of the four required elements of a negligence claim (duty and breach), was appropriate to this case.
Commentary

There have been many reports of damages actions having been filed relating to a variety of alleged personal injuries and property damages claims. This is the first one to have reached the level of a reported opinion. In particular, the ruling on the HSCA claim and medical monitoring may be of great significance when reviewed by other courts.
DEP and the news media have reported a settlement of a claim by DEP and Cabot Oil & Gas, in which Cabot has agreed to pay $4.1 Million in damages for the loss of water to a number of plaintiffs. See “Dimock Residents to Share $4.1 Million, Receive Gas Mitigation Systems Under DEP-Negotiated Settlement with Cabot Oil and Gas,” DEP New Release (Dec. 16, 2010). The settlement also requires Cabot to pay for whole house methane mitigation systems for 19 affected homes. This settlement, however, relates to a separate claim brought by DEP against Cabot, not to this case. Thus, the claim for personal injuries will continue.

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Case summary by Ross Bruch, Esquire, Saul Ewing LLP

Cabot Oil & Gas Corp. v Jordan, 698 F. Supp. 2d 474 (M.D. Pa., Feb. 12, 2010) (Conaboy, J.)

Summary: Due to a conflict in Pennsylvania law, the United States Court for the Middle District of Pennsylvania refused to consider a declaratory judgment to resolve a dispute between an operator and a landowner over alleged deficiencies in an oil and gas lease and in negotiations.

            In November of 2009, Cabot Oil & Gas Corporation (“Cabot”) filed a claim seeking a declaratory judgment with the United States District Court for the Middle District of Pennsylvania following an oil and gas lease dispute between Cabot and Carol Manning Jordan, a Susquehanna County, Pennsylvania landowner.  Ms. Jordan claimed her lease with Cabot was invalid because (1) the individual who notarized the documents was an agent of Cabot whose fee was contingent on the Lease being entered into, (2) Cabot’s representatives made false representations to Ms. Jordan which induced her to enter into the agreement, and (3) the lease’s bonus payment was not timely and was not in the proper amount.  Ms. Cabot conceded that the notarization was not invalid; therefore the false representation and bonus payment issues went before the court.

            Ms. Jordan claimed that Cabot stated it would not pay any more than a 1/8^th royalty to Susquehanna County landowners, that no landowner would be offered more than $500 per acre signing bonus, and that if Ms. Jordan did not enter into the lease, the gas under her property could be captured and removed via activity on neighboring properties.  Cabot assumed these arguments to be true for the purposes of argument and asserted they do not render the lease invalid for two reasons.  First, Cabot claims, any evidence of the alleged misrepresentations are barred by the parol evidence rule and the integration clause contained in the lease documents.  Second, the alleged statement regarding the “rule of “capture” would not have been misrepresentation under Pennsylvania law.

            The court declined jurisdiction over this declaratory judgment action.  In doing so, the Court refused to engage in discussions of Pennsylvania law on the parol evidence rule, the integration clause contained in the lease documents, and the rule of capture because it found the applicable law to be unclear and unsettled.  The court  held that “any decision about corporate practices and/or landowner responsibility has potential broad impact on the matters of state law presented and the state courts should make such vital determinations.”  Cabot Oil & Gas Corp. v Jordan, 698 F. Supp. 2d at 479.

            The court noted that federal district courts have discretion to determine when they will entertain an action under the Declaratory Judgment Act, “even when the suit otherwise satisfies subject matter jurisdiction prerequisites.”  Id. at 476.  One of the bases for denying jurisdiction is when a matter comes before the court that must be decided under state law and “when the state law involved is close or unsettled.”  At 476, quoting State Auto Ins. Co., v. Summy, 234 F.3d 131, 135 (3d Cir. 2001).  In this instance the court found that there are “important issues raised in this action [that] are matters which have not been settled under Pennsylvania law.”  Cabot Oil & Gas Corp. v Jordan, 698 F. Supp. 2d at 476.  The court found that “[w]hile Pennsylvania courts have extensively discussed the operation of the parol evidence rule related to such claims, their pronouncements on the matter are far from clear.”  Id.

            The court examined a number of cases dealing with fraud in the inducement and the parol evidence rule.  It found instances where the Pennsylvania Supreme Court ignored its own precedent (citing Berger v. Pittsburgh Auto Equip. Co., 387 Pa. 61, 127 A.2d 334 (1956)) and instances where Pennsylvania courts cited one Supreme Court determination discussing the parol evidence rule but not the other.  More recently, the court found that the Pennsylvania Supreme Court “provides some clarification of the apparent conflict.”  Cabot Oil & Gas Corp. v Jordan, 698 F. Supp. 2d at 477.  This clarification, however “does not resolve the question of whether claims of fraudulent inducement based on misrepresentation not related to subjects specifically addressed in the written contract are barred by the parol evidence rule.”  Id.

Many Pennsylvania and Federal courts have examined the question of the applicability of the parol evidence rule and have found a way to issue a determination.  In this instance, however, the District Court was sending a message to the courts of Pennsylvania that there is substantial conflicting state authority regarding important issues like fraud in the inducement and the parol evidence.  The court’s ruling reinforces the fact that these conflicting Pennsylvania rulings need to be clarified by the state courts and not left to the Federal courts for a resolution.

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By Andrew T. Bockis

abockis@saul.com

717.257.7520

As many of you know, the Environmental Quality Board proposed regulations back in July that would amend the Department of Environmental Protection’s Oil and Gas regulations set forth in 25 Pa. Code Ch. 78.  A copy of the proposed regulations is available here.  As set forth in the proposals, the EQB:

-          Would update existing requirements regarding the drilling, casing, cementing, testing, monitoring, and plugging of oil and gas wells, and the protection of water supplies.

-          Would update material specifications and performance testing, and revised design, construction, operational, monitoring, plugging, water supply replacement, and gas migration reporting requirements.

-          Would significantly amend casing standards.  The proposed cementing and casing standards would bring Pennsylvania in line with the regulatory requirements of New York, West Virginia, Ohio, Texas, Oklahoma, Louisiana, Kansas and Montana.

-          Would clarify operator responsibilities to restore or replace water supplies.

According to the EQB, the main purpose of the proposed rulemaking is to minimize concerns associated with gas migration. 

The public comment period for the proposed regulations closed on August 9, 2010.  About 260 “unique” public comments were submitted, although this number doesn’t include the several hundred form letters that were submitted.  With the form letters included, DEP’s own Marcellus Shale Examiner puts the count at more than 2,000 comments.

By and large, the comments were in support of the regulations.  Although there were a number of comments from industry, the comments appeared to be focused on technical issues and requests for clarification relating to the proposed casing standards, rather than comments that the proposals are burdensome.  This shouldn’t be much of a surprise, however, as one of the purposes of the proposals was to align the Commonwealth’s regulations with that of other states’ as well as current industry standards.

Moving forward, the Independent Regulatory Review Commission has the option of weighing in with its own comments.  The Department of Environmental Protection would then issue what is known as a comment-and-response document, citing the 2,000+ public comments and its response to them.  Based on prior experience, it’s likely that IRRC’s comments, and DEP’s overall response, will be available before year’s end.

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