The Pennsylvania Supreme Court has ruled that several critical provisions of Act 13, the General Assembly’s 2012 comprehensive update to the former Oil and Gas Act, are unconstitutional. In addition to invalidating a key section of Act 13 placing limits on the regulatory authority of local governments, the Court’s ruling also struck down a number of the legislation’s well location restrictions administered by the Department of Environmental Protection (DEP).
The Commonwealth Court, in a 4-3 decision, had declared the limits on the authority of local governments in Section 3304 unconstitutional on the grounds that they violated substantive due process, holding that it allowed incompatible uses in zoning districts, was inconsistent with municipal comprehensive plans, did not protect the interests of neighboring property owners, altered the character of the neighborhood, and made irrational classifications. The Supreme Court affirmed, albeit on different grounds. The majority opinion held that the limits on local governments violated Article 1, Section 27 of the Pennsylvania Constitution, commonly known as the “Environmental Rights Amendment.” The Supreme Court also invalidated Section 3303 of Act 13, which provided that “environmental acts” are of statewide concern and preempt local regulation of oil and gas operations regulated by such acts. Sections 3305 through 3309 were enjoined to the extent that they enforced any section of Act 13 found to be invalid.
Additionally, the Commonwealth Court held Section 3215(b)(4) to be null and void because it gave the DEP insufficient guidance to waive setback requirements and allowed the DEP to make legislative policy judgment. Upon review, the Supreme Court affirmed. However, the Supreme Court held that all of Section 3215(b), including the setbacks from waters of the Commonwealth, is invalid because the waiver provision was not severable from the remainder of that section. The implications of this are unclear, as the DEP and well permit applicants now have no defined setbacks from surface waters or wetlands under Act 13 or any other statute. The Supreme Court also found that Section 3215(d), which allowed the DEP to consider comments from municipalities in its permitting decisions, were invalid and that Sections 3215(c) and (d) are invalid to the extent that they enforce Sections 3215(b) and (d).
For a more in-depth analysis, see Babst Calland’s recent Administrative Watch.
On December 12, 2013, several Pennsylvania state representatives announced their plan to introduce a bill creating a severance tax on unconventional natural gas extraction. The proposed tax, which would replace Act 13’s existing impact fee, would be 4.9% of the value of natural gas sold from an unconventional well. Of the proceeds, 40% would be distributed to the impacted municipalities, and the remaining 60% would fund various statewide programs such as basic education (40%), the Growing Greener environmental stewardship fund (10%), investment in public lands (10%), programs for adults with special needs (8%), drug and alcohol programs (8%), the human services development fund (5%), behavioral health programs (5%), solar energy-Pennsylvania Sunshine Program (4%), the Homeowner’s Emergency Mortgage Assistance Program (3%), rape and domestic violence programs (2%), industry partnerships (3%), and veterans’ homes (2%). The sponsors of the proposal include Representatives DiGirolamo, Murt, DeLissio, and Readshaw.
Today, the Pennsylvania Department of Environmental Protection (DEP) issued a press release to announce the opening of the public comment period for its long-awaited proposal to revise the oil and gas regulations at 25 Pa. Code Chapter 78 (environmental protection standards). The comment period will open this Saturday when the official notice is published in the Pennsylvania Bulletin. Comments will be accepted through February 12, 2014.
During the public comment period, the Pennsylvania Environmental Quality Board (EQB) will host seven public hearings across the Commonwealth. Persons wishing to present testimony at a hearing must contact the EQB at least one week in advance. In addition to the EQB hearings, DEP will host two informational webinars on Thursday, December 19th from 2:30 – 3:30pm and Friday, January 3rd from 9:30 – 10:30am. DEP will answer questions about the rulemaking during the webinars.
Earlier this week, the Senate of Pennsylvania unanimously confirmed Ellen Ferretti as Secretary of the Department of Conservation and Natural Resources (DCNR), and in a 42-8 vote, also confirmed Chris Abruzzo as Secretary of the Department of Environmental Protection (DEP). Abruzzo’s background is mainly in prosecution but he also worked as Deputy Chief of Staff to Governor Corbett and in the drug enforcement section of the Pennsylvania Attorney General’s office. Ellen Ferretti previously served as DCNR’s Deputy Secretary for Parks & Forestry and has worked on environmental issues both in and out of government. Both nominees have already been serving in their respective positions; Abruzzo since April, and Ferretti since June.
The Marcellus Shale Coalition has announced the newly elected officers of its 2014 Executive Board. K. Scott Roy, Range Resources Corporation’s Vice President of Government and Regulatory Affairs, was elected as the chairman. Heather Lamparter (Vice President, Legal, Exco Resources (PA), LLC), Mark Hager (Senior Government Affairs Representative, Williams) and Gary Smith (Vice President and General Manager, EOG Resources) were elected as vice chair, treasurer and secretary, respectively.
The Pittsburgh Business Times reported yesterday that Rice Energy Inc. is planning for an initial public offering sometime during the first quarter of 2014. Rice confirmed that it filed a Form S-1 with the Securities and Exchange Commission. Pipeline reports that Rice’s registration statement will be made public in a few weeks. The Business Times further reports that Alpha Natural Resources will be selling its 50 percent stake in a joint venture, Alpha shale Resources, to Rice for $300 million. A portion of the payment for that transaction will include stock from the upcoming IPO.
The Pennsylvania Superior Court recently held in Southwestern Energy Production Company, et al. v. Forest Resources, LLC, et al. that an “assignment back” clause that results in a lessor’s net royalty being less than one-eighth violates the Pennsylvania Guaranteed Minimum Royalty Act (GMRA). The GMRA requires oil and gas leases to provide a minimum one-eighth royalty. Under the terms of a lease, the lessor in Southwestern Energy was to receive the statutory minimum one-eighth royalty. The parties subsequently amended the lease, modifying the royalty provision so that the lessor retained 50% of the royalty and assigned the remaining 50% of the royalty to the lessee to pay for marketing costs. Although the court found little authority regarding the technical requirements for compliance with the GMRA, it found that the intent of the statute was to clearly protect the lessor. It reasoned that the GMRA applies to both leases and other agreements, including amendments, and that it compels a “guarantee” of at least a one-eighth royalty. Accordingly, it concluded that a lease that contains an assignment back clause that does not guarantee the statutory minimum royalty violates the GMRA.
On November 26, 2013, the Pennsylvania Supreme Court declined to hear an appeal of the Superior Court’s decision in Caldwell v. Kriebel Resources Co., which held that an oil and gas lease does not contain an implied duty to develop all strata. The Superior Court opinion was previously covered here.
On August 26, 2013, Hilcorp Energy Company (Hilcorp) filed a complaint and application requesting that the Pennsylvania Environmental Hearing Board (PAEHB) issue an order to establish well spacing and drilling units pursuant to the Oil and Gas Conservation Law of 1961 for a 3,267 acre reservoir of natural gas in the Utica-Point Pleasant formation beneath Mercer and Lawrence counties, known as the “Pulaski Accumulation”, since Hilcorp was unable to obtain leases from all property owners in this parcel. After conducting a prehearing conference and considering legal memoranda by the Pennsylvania Department of Environmental Protection (PADEP) and Hilcorp regarding whether the PAEHB had original jurisdiction to issue well spacing and drilling unit orders under the Oil and Gas Conservation Law, the PAEHB’s Chief Judge Renwand issued an opinion and order on November 20, 2013 dismissing Hilcorp’s well spacing and drilling unit application because the PADEP, and not the PAEHB, has original jurisdiction to issue well spacing and drilling unit orders under the Oil and Gas Conservation Law. Chief Judge Renwand’s opinion noted that the Oil and Gas Conservation Commission, the since-abolished entity established by the Oil and Gas Conservation Law to issue well spacing and drilling unit orders, “was a very specialized and technical agency” with the “power to file enforcement actions”, issue permits, hold public hearings, and conduct other regulatory type actions. According to Chief Judge Renwand, these powers, duties, and responsibilities of the former Oil and Gas Conservation Commission are analogous to the current powers, duties, and responsibilities of the PADEP and not related to the PAEHB’s role “as an independent quasi-judicial agency” that is “completely independent of the [former, now PADEP] Department of Environmental Resources.” Judge Mather wrote a concurring opinion noting that the PADEP currently has “effective and binding regulations” at 25 Pa. Code Chapter 79 that implement the Oil and Gas Conservation Law and direct the PADEP “to issue orders establishing well spacing and drilling units, in the first instance, that can then be appealed to the Board.”
On November 18, 2013, the Third Circuit affirmed a summary judgment ruling out of the Middle District of Pennsylvania in favor of Shell Western Exploration and Production, LP (Shell) in a case captioned as George W. Linder, et al. v. SWEPI, LP, a/k/a Shell Western Exploration and Production, LP; Case No. 13-1674 (3d Cir. November 19, 2013). The plaintiffs conveyed their oil and gas rights for 338 acres to Shell’s predecessor-in-interest via a lease (the Lease). The Lease had a primary term of ten years and, by its terms, would continue in effect past the primary term if productive activity continued on the leasehold. Shell’s predecessor-in-interest unitized an area of 526.94 acres, which included 137.81 acres of the plaintiffs’ 338-acre leasehold. The primary term of the Lease expired in September 2010, but the parties agreed that the Lease continued in effect because Shell continued to engage in productive activity on the leasehold. However, the plaintiffs demanded a delay rental payment for the non-unitized portion of the Lease based on the Lease’s Unitization Clause which provided: “If the total unitized Leasehold acreage is less than 50 percent of the total Leasehold acreage, Delay Rental will continue to be paid on the non-unitized acreage.” Shell agreed to pay the delay rentals for the non-unitized acreage. Both parties then changed their positions a number of times as to whether the Lease remained in effect for the 200.19 acres that were never unitized. The plaintiffs ultimately filed a lawsuit in state court seeking a declaratory judgment that the Lease expired as to the non-unitized acreage. Shell removed the case to the United States District Court for the Middle District of Pennsylvania, and moved for summary judgment in its favor. The District Court granted summary judgment finding that, as a matter of law, the Lease did not expire with respect to the non-unitized acreage.
The plaintiffs then appealed to the Third Circuit with their principal argument being that “upon the occurrence of unitization of less than 50 percent of the entire leasehold, there are as a matter of law two leasehold parcels.” The Third Circuit affirmed the ruling of the District Court holding that the plaintiffs’ position is an “untenable reading of the Lease.” In so holding, the Third Circuit relied upon the “obvious reading” of the Lease terms finding that the Lease continues in effect while operations are conducted on the leasehold, and the Lease refers to the leasehold as a single, undivided entity that is 338 acres in size. Moreover, the Third Circuit quickly dismissed the plaintiffs’ argument that the Lease’s Unitization Clause supports their interpretation. In this regard, the Third Circuit held that this language does nothing to separate the unitized and non-unitized acreages—rather, it simply obligated Shell to pay a delay rental on the non-unitized acreage. Additionally, citing to Pennsylvania case law, the Third Circuit held that Shell’s failure to timely pay the delay rental did not constitute a material breach of the Lease because a brief delay in payment where the Lease contains no “time-is-of-the-essence” provision does not amount to a material breach. Lastly, the Third Circuit held that Shell did not surrender the non-unitized acreage by initially agreeing in a letter to do so, because the Lease’s surrender clause requires the recording of a Surrender of Lease as a necessary prerequisite to the legal surrender of any rights. Accordingly, based on what it viewed as the obvious interpretation of the Lease provisions, the Third Circuit affirmed the District Court’s decision to grant summary judgment in favor of Shell.
The Pittsburgh Post-Gazette reports that Allegheny County Council rejected a proposed three-year moratorium on natural gas drilling within county parks. The measure failed 2-9, with four council members abstaining because of conflicts of interest. The bill was originally proposed by Barbara Daly Danko, D-Regent Square, in September.
On October 24, 2013, the U.S. District Court for the Middle District of Pennsylvania denied Columbia Gas Transmission, LLC’s (Columbia) request to use the eminent domain authority provided in the Natural Gas Act to acquire new pipeline easements from certain landowners in York County, Pennsylvania. Columbia filed the request to facilitate its efforts to replace and relocate portions of an existing gas pipeline in order to comply with the Pipeline and Hazardous Materials Safety Administration’s integrity management program requirements in Subpart O of 49 C.F.R. Part 192. Although the company’s efforts obtain the necessary easements through private negotiation had proved unsuccessful, the Court concluded that Columbia had not shown that the Federal Energy Regulatory Commission’s regulations for performing activities under a blanket certificate would allow the easements to be acquired through the use of eminent domain.
The Pennsylvania Public Utility Commission (“PUC”) unanimously approved a settlement that merges Equitable Gas Co. with Peoples Natural Gas Co. and transfers certain pipeline assets from Peoples to EQT Corp., the parent company of Equitable. The PUC approved Administrative Law Judge Mark Hoyer’s Initial Decision, which found the settlement to be in the public interest. The companies filed a joint application for all of the necessary PUC approvals on March 19, 2013.
The Pittsburgh Post-Gazette reports that the number of compressed natural gas stations could double over the next two years. The increase is a result of a number of companies converting their vehicle fleets to run on CNG. Recently, Shale Hotels Inc. and “O” Ring CNG Fuel Systems LP entered into a joint venture to build an undisclosed amount of CNG stations. There are currently five CNG stations in Southwestern Pennsylvania that are open to the public: EQT’s Strip District facility, Giant Eagle’s stations in Crafton and Cranberry, American Natural’s Station Square station and Waste Management’s Clean-n-Green station in Washington County.
On October 23rd, the Middle District of Pennsylvania dismissed Dr. Alfonso Rodriguez’s complaint challenging Act 13’s so-called “Medical Gag Act.” If, during the course of treating a patient, a health professional deems it necessary for an operator to disclose the exact mixture of hydraulic fracturing fluids, Act 13 requires the operator to disclose the information upon a verbal acknowledgement by the health professional that the information will not be used for purposes other than the health needs asserted and must be maintained confidentially.
Dr. Rodriguez is a nephrologist who allegedly treats patients who have been directly exposed to high volume hydraulic fracturing fluid. In his complaint, he alleged that Act 13 violates the First and Fourteenth Amendments of the United States Constitution, and that it requires him to violate his ethical obligations as a physician. The Court dismissed his complaint on the grounds that Dr. Rodriguez never suffered an actual injury and thus, did not have standing. The Court held that the alleged injury was “too conjectural to satisfy the injury in fact requirement of Article III standing” which requires an alleged injury to be “distinct and palpable” rather than “abstract.” In other words, Dr. Rodriguez does not have standing to sue because he has never been in a position “where he was required to agree to any sort of confidentiality agreement under the act.” His alleged injuries are hypothetical.