Marcellus, Utica Shale Plays Account for 41 Percent of U.S. Natural Gas Output
The 2018 Babst Calland Report – Appalachian Basin Oil & Gas Industry: Forging Ahead Despite Obstacles; Legal and Regulatory Perspective for Producers and Midstream Operators, the firm’s annual review of shale gas development activity in the Appalachian Basin, acknowledges an ongoing rebound despite obstacles presented by regulatory agencies, the courts, activists, and the market. To request a copy of the Report, contact info@babstcalland.com.
In this Report, Babst Calland attorneys provide perspective on issues, challenges, opportunities and recent developments in the Appalachian Basin and beyond relevant to producers and operators.
According to the U.S. Energy Information Administration’s May 2018 report, the Appalachian Marcellus and Utica shale plays account for more than 40 percent of U.S. natural gas output, compared to only three percent a decade ago. Since then, the Appalachian Basin has become recognized in the U.S. and around the world as a major source of natural gas and natural gas liquids.
The industry has been forging ahead amidst relatively low natural gas prices, infrastructure building, acreage rationalization and drilling plans that align with business expectations. The policy landscape continues to evolve with ever-changing federal and state environmental and safety regulations and tax structures along with a patchwork of local government requirements across the multi-state region.
Joseph K. Reinhart, shareholder and co-chair of Babst Calland’s Energy and Natural Resources Group, said, “This Report provides perspective on the challenges and opportunities of a shale gas industry in the Appalachian Basin that continues to enjoy a modest rebound. While more business-friendly policies and procedures are emanating from Washington, D.C., threats of trade wars are raising concerns about the U.S. energy industry’s ability to fully capitalize on planned exports to foreign markets.”
He added, “In a sustaining low price natural gas environment, operators in the Appalachian Basin continue to reduce operating costs and maximize capital and operating budgets by increasing efficiencies, employing new technologies and consolidating operations. As a result, drilling activity and production continue to be strong compared to a year or two ago. All indicators suggest continued growth prospects for Appalachian Basin shale despite the lingering obstacles facing the industry.”
The 84-page Report contains five sections, highlighted below, each addressing key challenges for oil and gas producers and midstream operators.
Business Outlook: Growth Prospects Continue
The U.S. Energy Information Administration predicts that U.S. energy consumption and production is most likely set for modest growth over the next 30 years. Henry Hub spot prices for natural gas rebounded modestly in 2017 and have tracked reasonably close in the first half of 2018. Given relatively-flat price projections, Appalachian operators’ ability to keep costs down, improve efficiency, and pursue attractive transactions remains critical. The energy industry turnaround is evidenced by the significant slowing of bankruptcy filings, from 70 in 2016 to just 24 in 2017.
Oil and Gas Regulations Continue to Evolve, Reform and Persist
Federal and state courts, legislatures and regulatory agencies are addressing various oil and gas issues and reforms. Pennsylvania’s Environmental Rights Amendment (ERA) poses a new and significant legal and novel constitutional issue for operators in the Commonwealth. Recent court challenges include a sharp rise in the total dollar amount of assessed penalties based on how PADEP calculates fines and civil penalties. West Virginia’s Governor Jim Justice issued a series of executive orders that seek broad regulatory reform.
Pipeline Outlook Positive, But More Public Pressure
The pipeline industry is continuing to experience increased scrutiny from regulators at all levels of government. Much of this scrutiny is being driven by public interest groups and environmental advocacy organizations becoming more active in the pipeline permitting process and resorting with greater frequency to litigation as a means of advancing policy initiatives that are not favorable to the energy industry. The Pipeline and Hazardous Materials Safety Administration (PHMSA) continued to make progress in finalizing the Gas Transmission and Gathering Final Rule with the intention to divide the content of the proposed rule into three separate final rules with the hope of issuing the rules by the end of 2019.
Local Government Regulation Continues to Spawn Debate and Legal Challenges
In Robinson Township, the Pennsylvania Supreme Court invalidated two sections of Pennsylvania’s updated Oil and Gas Act (Act 13) that limited the authority of local governments to regulate oil and gas operations. This was based on a reinvigorated interpretation and application of the Article I, Section 27 of the Pennsylvania Constitution, commonly known as the Environmental Rights Amendment (ERA). On June 1, 2018, the PA Supreme Court published its long-awaited Gorsline opinion. In a 4-3 decision, the majority reversed the Commonwealth Court’s decision affirming the granting of a conditional use approval for an unconventional natural gas well pad. West Virginia’s Lincoln and Fayette counties have enacted forms of “nuisance ordinances” that could potentially be used to target oil and gas related operations. As Ohio Courts heard and decided several cases regarding the extent of local authority to regulate oil and gas development, anti-fracking groups pursued an alternative route to regulation through local ballot initiatives.
Litigation Trends
West Virginia continues to see private nuisance suits filed against both upstream and midstream companies. In the last few years, civil suit filings alleging property contamination and nuisance claims from unconventional natural gas development have diminished significantly in Pennsylvania. Articles related to claims of alleged health effects from unconventional natural gas development continue to be published in scientific journals and in the media in even greater numbers, resulting in increasing controversy and polarization.
Many of the current opportunities and challenges facing the industry are described in the pages of this Report. Babst Calland’s multidisciplinary team of energy attorneys have chronicled the legal and regulatory landscape to help inform the energy industry operating in the Appalachian Basin.