Pennsylvania Overhauls Oil & Gas Act

"After extensive and lengthy debate among members of the General Assembly, stakeholders and the general public, the first comprehensive overhaul to the Pennsylvania Oil and Gas Act in over 25 years has finally been passed by both houses of the General Assembly. House Bill 1950 was signed by Governor Tom Corbett on February 14, 2012. Except for the impact fee provisions, which go into effect immediately, the new law will take effect on April 14, 2012. The new law repeals the 1984 Oil and Gas Act, but also reenacts many of its current provisions.

The 174-page legislation is very complex and detailed, but the areas regulated may be summarized as affecting three basic aspects of Pennsylvania unconventional gas well operations:

Impact fee provisions;
Upgraded environmental regulation; and
Local ordinance preemption and restrictions

This advisory summarizes these key areas and provides analysis of the expected impacts of some of the new provisions on the oil and gas industry in Pennsylvania. The law imposes new environmental obligations on natural gas producers, but also clearly establishes standards for local ordinances by granting a measure of relief for natural gas producers and operators of gathering lines from local zoning and land development ordinances."

As the new law begins to be implemented by the Department of Environmental Protection (DEP), the Pennsylvania Public Utility Commission (PUC), other affected agencies and municipal entities, new policies, procedures and regulations will be promulgated. The Energy Section at Buchanan Ingersoll & Rooney will be following this ongoing implementation, and will provide additional advisory alerts as agency guidance and regulations unfold.

Impact Fee

Impact fees apply to unconventional gas wells, and begin when the operator initially spuds the well. The fee applies to each unconventional natural gas well that has been spud in the Commonwealth, regardless of when the well was drilled. A “clawback” provision requires all wells spud before 2011 to be considered spudded in 2011 for purposes of determining the fee. The fee will apply for 15 years following local approval.

The retroactive effect of this provision, wherein it applies to all unconventional gas wells regardless of how long ago they were drilled, raises questions. Because well ownership may change over the years, a new owner may be required to pay the 2011 fee, a cost that could not have been anticipated when the sale price for the well or lease was negotiated. Moreover, some older unconventional wells (particularly vertical-only or dry gas wells) may be producing much less gas by quantity or otherwise be less commercially viable than would be expected for newer wet gas wells, to the point where payment of the fee would make the well no longer financially viable, forcing the producer to abandon the well sooner than would otherwise be the case.

It is also important for producers to recognize that the fee is due upon the spudding of the well. If the well does not produce enough gas to make it financially viable, the fee paid is non-refundable. Due to this clawback language, a careful review is warranted of existing lease obligations and the current well production records, coupled with gas pricing shut-in scenarios.
Counties must authorize imposition of the fee within their jurisdictions, and have 60 days to adopt an implementing ordinance. If the County fails to authorize the fee, 50 percent or more of the county population or 50 percent of the municipalities in the county may override the county decision, and the fee will then be imposed. Counties that do not approve of the fee will not receive the county’s share.

The Pennsylvania Public Utility Commission (PUC) is responsible to collect and distribute the funds generated under this Chapter. The PUC is given authority to issue orders necessary to enforce the provisions of the statue relative to payment of fees. In addition, civil penalties in the amount of $2,500 per violation may be imposed by the PUC on any producer failing to comply with the fee provisions of the statue.
The fee per well for the first year will be between $40,000 and $60,000, based on a calculation considering the average price of natural gas for the year. The sliding scale fee amounts are reduced to between $30,000 and $55,000 for year two and will continue to be reduced thereafter as follows: year three between $25,000 and $50,000; years four, five, six, seven, eight, nine and 10 between $10,000 and $20,000; years 11, 12, 13, 14 and 15 between $5,000 and $10,000.

For each new well, the producer will be required to pay the fee at the year one rate, such that as a producer drills new wells it will be necessary to track which wells are in which year of the fifteen-year cycle. Well producers will need to develop comprehensive tracking systems for all wells. Permits may be transferred to new owners who will then, presumably, be liable to pay the ongoing fee.
If an unconventional gas well which is spud is subsequently capped or does not produce natural gas in quantities greater than that of a stripper well (one that does not produce more than 90,000 cubic feet of gas per day during any calendar month) within two years after paying the initial fee, then the fee is suspended. If production goes up and the well begins to produce gas in quantities greater than a stripper well, then the fee is reimposed.

The Act is silent on whether the well will resume paying based on the year it was suspended, or whether the fee is based on the number of years since the well was spud.
The above fee schedule is subject to an annual adjustment beginning January 1, 2013 to reflect upward changes in the consumer price index for all urban consumers for the Pennsylvania, New Jersey, Delaware and Maryland area in the proceeding 12 months. Payments of the fee shall cease when the producer certifies cessation of production, and the well has been plugged according to the regulations established by DEP.
Upon adoption of the fee ordinance, the first fee for calendar year 2011 shall be due September 1, 2012, for wells spud before January 1, 2012. The fee is due on April 1 each year thereafter.
Vertical unconventional gas wells also pay a fee, but the fee is 20 percent of the fee established for other unconventional wells and applies for 10 years.
The statute establishes a fund in the State Treasury known as the Unconventional Gas Well Fund to be administered by the PUC. All fees imposed and collected under this Chapter of the statute will be deposited into that fund, and are appropriated for distribution to County Conservation Districts, municipalities, the Marcellus Legacy Fund, Department of Environmental Protection (DEP), the PUC and other agencies.

The formula for distributing the money from these fees is very detailed, comprehensive and varied. A brief summary of the fee distribution and key state programs to be funded follows.¹
Marcellus Legacy Fund:Subsequent to the distribution of the above funds, 40 percent of the remaining revenues will be deposited into a Marcellus Legacy Fund and distributed by the PUC according to the allocations provided in Section 2315. The fund will provide monies for natural gas energy development projects as follows:

20 percent will go to the Commonwealth Financing Authority for the following eligible projects:

Acid mine drainage, abatement and cleanup, with priority for projects which recycle and treat water for use in drilling operations
Orphan or abandoned oil and gas well plugging
Compliance with the Pennsylvania Sewage Facilities Act
Planning, acquisition, development and repair of greenways, recreational trails, open space, parks and beautification projects
Programs to establish baseline water quality data on private water supplies
Watershed programs and related projects
Flood control projects

10 percent to the Environmental Stewardship Fund
25 percent to Highway Bridge Improvement Restricted Account (to fund replacement or repair of locally owned at-risk deteriorated bridges).
25 percent for Water and Sewer Projects (Pennsylvania Infrastructure Investment Authority and H2O PA Program).
25 percent for Counties (to fund planning, acquisition, development, rehabilitation and repair of greenways, recreational trails, open space, natural areas, community conservation and beautification projects, community and heritage parks and water resource management. Funds shall be distributed to counties proportionally based on population.
5 percent to Department of Community and Economic Development (remaining funds relating to projects to provide for the planning, development, remodeling, remediation and construction of projects relating to oil, gas, natural gas or other chemical substances.

The operator is prohibited from passing the impact fee onto the landowner or lease holder as an obligation or liability.

Upgraded Environmental Regulation

Notice of unconventional well permit applications must be given to landowners, water purveyors, and coal owners/operators within 3,000 feet from the well [was previously 1,000 feet]. Notice must also be given to host municipalities and adjacent municipalities.
Setback distances for wells are increased from 200 feet to 500 feet from buildings and water wells. A new 1,000-foot setback requirement from water supply extraction points is established. The setback from bodies of water is increased from 100 feet to 300 feet, and a 100 foot setback requirement is provided from the edge of a disturbance to any body of water.

These well location restrictions should be interpreted as applying only to new wells. To apply these more stringent restrictions to existing wells would likely be viewed as an unconstitutional taking of property without compensation. How to treat wells for which a permit has been issued but which are not yet drilled is a closer question, but retroactive application to previously permitted wells would also be inequitable and unreasonable. Gas well producers with permit applications pending that are within the new distance restrictions should aggressively seek to secure permit issuance by DEP within the next 60 days. Promulgation of revised regulations or policy by DEP is anticipated to address these issues.

The new law contains a unique mandatory waiver which requires DEP to waive the well setback requirements even in the absence of consent by the affected person, if the distance restriction would deprive the owner of oil/gas rights for an unconventional well, and if the oil/gas rights owner provides additional measures to ensure safety and protection of affected persons and property. The previous law contained the standard waiver language that DEP may grant a waiver in such instances, whereas the new law states that DEP shall grant such waiver. The new language limits DEP discretion in this area, but provides some degree of discretion as to the adequacy of measures proposed to ensure protection of persons and property. In theory, this new standard will reduce the scope of departmental discretion by requiring waiver adoption where the operator demonstrates some level of additional operational design measures that enhances environmental protection.
The rebuttable presumption of liability for pollution of water supplies is increased from 1,000 feet to 2,500 feet.
Production reporting is now required for all unconventional gas wells [previously applied only to Marcellus wells].
New hydraulic fracturing chemical disclosure requirements are established, but trade secrets can be protected from disclosure to the public.
New record requirements are added for transportation of wastewater fluids.
There are new increased bonding amounts from the previous amount of $2,500 per well, or $25,000 blanket bond. The amount of the bond will now be set at between $4,000 per well, up to a maximum blanket amount of $600,000, depending on the number of wells and their total bore length.
Penalties: Both criminal and civil penalty provisions for violations of the law are significantly increased. Fines for criminal violations are increased from up to $300 to up to $1,000. Civil penalties increase from up to $25,000 plus $1,000 per day to $75,000 plus $5,000 per day. Also, civil penalties may now be assessed directly by DEP instead of the Environmental Hearing Board.

Local Ordinance Restrictions

Section 3302 of the Act clearly preempts all local ordinances which impose any operational or environmental requirements on the same features of oil and gas operations as regulated by Chapter 32 of the new Act, or by any other Pennsylvania environmental acts. “Oil and gas operators” is defined to include the construction, installation, use, maintenance and repair of oil and gas pipelines, natural gas compressor stations, natural gas processing plants, as well as the construction, installation, use, maintenance and repair of all equipment directly associated with such activities. In addition, any local regulation or restriction must allow for the “reasonable development of oil and gas resources.” The Act then goes on to further define "reasonable development" as follows:

Local ordinances must allow well and pipeline location assessment operations, including seismic operations and related activities, which activities are otherwise conducted in accordance with applicable federal and state laws.
Ordinances may not impose restrictions on the construction of oil and gas operations that are more stringent than restrictions imposed on construction activities for other industrial uses within the geographic boundaries of the local government.
Ordinances may not impose conditions on the height of permitted structures, screening, fencing, lighting or noise relating to oil and gas operations that are more stringent than those requirements imposed on other industrial uses within the boundaries of the local government.
Any local ordinance affecting oil and gas operations must have a review period for permitted uses that does not exceed 30 days for complete submission and does not exceed 120 days for conditional uses.
Oil and gas operations other than activities at impoundment areas, compressor stations and processing plants must be authorized as a permitted use in all zoning districts.
The Act also provides, however, that notwithstanding the foregoing regarding well location restrictions, ordinances may prohibit or permit only as a conditional use, wells or well sites within a residential district if the well site cannot be placed so that the well head is at least 500 feet from any existing building. With regard to restrictions in residential districts, well sites may not be located so that the outer edge of the well pad is closer than 300 feet from an existing building other than the placement use and repair of oil and gas pipelines, water pipelines, access roads or security facilities.
Impoundment areas used for oil and gas operations must be authorized as a permitted use in all zoning districts provided that the edge of any impoundment area shall not be located closer than 300 feet from an existing building.
Natural gas compressor stations must be authorized as a permitted use in agricultural and industrial zoning districts, and as a conditional use in all other zoning districts provided that the natural gas compressor building is located 750 feet or more from the nearest existing building or 200 feet from the nearest lot line, unless waived by the owner of the building or adjoining lot, and the noise level does not exceed a noise standard of 60 dbA at the nearest property line, or applicable standard imposed by federal law whichever is less.
Local ordinances must authorize natural gas processing plants as a permitted use in industrial zoning districts and as a conditional use in agricultural zoning districts based on 750 feet setback from existing buildings or 200 feet from property lines, provided the noise level does not exceed 60 dbA or other applicable federal standard.
Finally, ordinances may not increase setback distances established in the new Act, but may impose setback distances that are not regulated by the Act if the setbacks are no more stringent than those for other industrial uses.

These detailed local ordinance restrictions substantially improve the prior law, which left much to be interpreted by the courts as to the extent of municipal authority to regulate oil and gas operations and facilities, particularly gathering lines, natural gas compressor stations and related facilities. The new law recognizes that some room remains for court interpretation where local ordinances go too far in the name of zoning regulation under the guise of the Municipalities Planning Code (“MPC”). The new mechanisms for review of contested ordinances (summarized below), give interpretive authority to the PUC and Commonwealth Court, bypassing County courts. This is likely to assist in the development of more consistent interpretive ruling on this critical issue.

The Act provides three mechanisms for review of local ordinances affecting natural gas operations, as follows:

Advisory Opinion
Prior to enacting a proposed ordinance, a municipality may request the PUC to review it and issue an opinion as to whether it violates the MPC or the Act. After receiving such request, the PUC must then issue its opinion within 120 days. This opinion is advisory only, and not subject to appeal.
PUC Order
After adoption of an ordinance, the oil and gas owners and operators or residents of the municipality who are aggrieved by the enactment or enforcement of the ordinance may request the PUC to determine whether it violates either the MPC or the Act. The PUC then has 120 days to issue an order which will determine whether the ordinance violates the law. The order is subject to de novo review by the Commonwealth Court, provided that a petition for review is filed with the Court within 30 days of the date of service of the Order.
Civil Action
After enactment of an ordinance affecting oil and gas operations, any aggrieved person may file an action directly in Commonwealth Court to enjoin or invalidate the ordinance. Prior review of the ordinance by the PUC is not required. If there was a previous determination of the matter by the PUC, that determination will become part of the record of the civil action.

The court can award attorney fees and costs of litigation against the plaintiff if it determines that the civil action was frivolous or lacked substantial justification. It can also award fees and costs against the municipality if it finds that the ordinance in question was enacted with willful or reckless disregard of the MPC or the Act.

If the PUC, the Commonwealth Court or the Supreme Court finds that the ordinance in question violates the MPC or the Act, the municipality will be ineligible to receive any funds under the Act until the ordinance is amended or repealed, or until the determination is reversed on appeal.

Miscellaneous Provisions

Natural Gas Energy Development Program (Chapter 27): Under the Natural Gas Energy Development Program the following may apply for grants: a Commonwealth authority; a municipal authority; the Turnpike Commission; local transportation organization; nonprofit entity; state-owned or state-related university; or a company. The applicant must demonstrate, among other criteria, a plan to convert five or more fleet vehicles into eligible vehicles or purchase five or more eligible vehicles (dedicated compressed natural or liquefied natural gas vehicles at least 14,000 pounds) or bi-fuel vehicles and an intent to maintain operations in the Commonwealth for a period not less than six years.
The legislation does not change, repeal or otherwise affect the Coal and Gas Resource Coordination Act (Act 214).
Effective dates. The impact fee provisions take effect immediately.² The remainder of the Act takes effect in 60 days.

Conclusion

The new law represents a major milestone in the development of the Pennsylvania natural gas resources for the 21st century and will have far reaching impacts on the natural gas industry in Pennsylvania for years to come. Enactment of the law, however, is only the first major step in implementing these changes. The state agencies given responsibilities under this law must proceed to interpret and implement the new Act with regulations, policy documents, and day to day decisions. The courts and the Environmental Hearing Board will also weigh in with case law to interpret and implement the Act as cases are brought before them.

The Energy and Environmental Lawyers and Government Relations Specialists at Buchanan Ingersoll & Rooney PC will continue to monitor and influence these changes, and will provide insightful analysis on future developments as they occur.
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¹ Distribution of Fees

All fees imposed and deposited into the Unconventional Gas Well Fund will be allocated as follows:

County Conservation Districts: ($2.5 million in 2011; $5 million in 2012; $7.5 million in 2013 and annually thereafter)
Fish and Boat Commission: $1 million for review of applications
Public Utility Commission: $1 million for administration costs
Department of Environmental Protection: $6 million for administration and enforcement costs
Pennsylvania Emergency Management Agency: $750,000 for emergency response planning and training
Office of State Fire Commissioner: $750,000 for training and grant programs and acquisition of specialized equipment
Pennsylvania Department of Transportation: $1 million for rail freight assistance
Natural Gas Energy Development: $10 million in 2011; $7.5 million in 2012; $2.5 million in 2013
Counties and Municipalities: 60 percent of remaining revenues for authorized purposes
Housing Affordability and Rehabilitation Enhancement Fund: $2.5 million from 2011 fees collected; $5 million in 2012 and each year thereafter

² In addition to the impact fee provisions, section 6 [no repeal of Act 214], section 7 [regarding PennDOT policy, certain exemptions and defining “at-risk industry”] and section 9 [effective date section] take effect immediately.