California Governor Jerry Brown Signs Strict Hydraulic Fracturing Law

Stating that the measure “establishes strong environmental protections and transparency requirements for hydraulic fracturing and other well stimulation operations,” Governor Jerry Brown signed California S.B. 4 into law on September 20, 2013.

This new law, which takes effect on January 1, 2014, sets out tough restrictions on the use of hydraulic fracturing and other acidizing processes.

Oil and gas companies will be required to:
  1. apply for and obtain permits before starting fracking and other well stimulation operations, 
  2. notify near-by landowners of these activities, 
  3. disclose all chemicals used, and 
  4. monitor groundwater and air quality. See California Closer to Having Hydraulic Fracturing Regulations, Norton Rose Fulbright's Hydraulic Fracking Blog, September 17, 2013. 
The new law makes clear that the California Department of Conservation’s Division of Oil, Gas and Geothermal Resources (“DOGGR”) will regulate fracking with its permit requirements while the state’s Natural Resources Agency will complete an independent scientific study on the potential hazards of fracking by January 2015.

The governor urged the Department of Conservation to set up a program that would group similar applications based on known geologic conditions and environmental impacts, while allowing for more particularized review when necessary.

Both environmentalists and oil and gas companies have criticized the new law, with the industry groups claiming that the requirements are too burdensome and the conservation groups arguing that the provisions are too weak to protect the environment.

Of particular concern to the oil and gas companies is the requirement to identify in the permit application what chemicals will be used and then, after the stimulation is complete, to disclose what chemicals were actually used during the fracking procedure.

Industry representatives have expressed concern that the law specifically states that certain information is not a trade secret, namely:
  1. the identities of the chemical constituents of additives, including CAS identification numbers;
  2. the concentrations of the additives in the well stimulation treatment fluids.; and 
  3. the chemical composition of the flowback fluid.
The Center for Biological Diversity and other environmental groups are uncertain as to how these regulations will affect their pending litigation against the DOGGR for allegedly failing to apply the California Environmental Quality Act in the permitting process. Moreover, these groups object to taking “grouping” short-cuts to approve permits and would prefer an outright ban on hydraulic fracturing.
This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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Alaskan Oil & Gas Agency Proposes Regulations of Hydraulic Fracturing

On September 23, 2013, the Alaska Oil and Gas Conservation Commission (AOGCC) held a public hearing on proposed regulations for the hydraulic fracturing of oil and gas wells in the state.

While hydraulic fracturing has been used for decades in Alaska, Alaskan oil and gas production is entirely from conventional porous rock sources, so hydraulic fracturing is not used to the same degree as elsewhere in the United States.

The proposed regulations will incorporate Alaska’s current wellbore integrity rules, but seek to increase oversight and make more information available to the public.

Specifically, the regulations would require the approval of state regulators before hydraulic fracturing is conducted, notification of landowners prior to hydraulic fracturing, and the full disclosure of chemicals found in the hydraulic fracturing liquids to be used. 

The regulation also requires operators to test all water wells within a half-mile radius of the oil or gas well, both before and after hydraulic fracturing occurs. The sampling and testing parameters include pH, dissolved methane, and other compounds.

The proposed regulations seek to define hydraulic fracturing as “the treatment of a well by the application of hydraulic fracturing fluid under pressure for the express purpose of initiating or propagating fractures in a target geologic formation to enhance production of oil and/or natural gas.” 

The term is currently undefined under Alaskan state law.

Within 30 days from the public hearing, the AOGCC will decide whether to adopt the proposed provisions addressing hydraulic fracturing, to revise the regulations and submit for further public comment, or to take no action on them.

This article was prepared by Lauren Brogdon (lauren.brogdon@nortonrosefulbright.com or 713 651 5375) from Norton Rose Fulbright's Energy Practice Group.
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Highland Park New Jersey bans hydraulic fracturing

On September 17, 2013, the governing council of Highland Park, New Jersey, a borough of nearly 14,000 citizens, passed the first local ordinance in the state that bans hydraulic fracturing within its borders. This ordinance was passed even though there has been no natural gas drilling or hydraulic fracturing within the borough or, for that matter in New Jersey.

The ordinance sets out concerns about the fluids and chemicals used in fracking causing adverse health effects and environmental impacts, that these chemicals contain radioactive elements and other toxic components, and that “there have been more than 1,000 documented cases of water contamination near fracking sites.”

According to a council member, “the intent is to have other municipalities follow suit” and ban hydraulic fracturing municipality by municipality since the state legislature has not been able to pass laws regulating the process.

 The municipality of New Brunswick has already taken up the call. A proposed ban on hydraulic fracturing has been read in council and will be discussed at a public hearing in New Brunswick on October 2, 2013.

In January 2012, Governor Chris Christie vetoed a ban on hydraulic fracturing within the state, opting to sign a one-year moratorium. Efforts to renew the moratorium which expired in January 2013 have failed. 

Moreover, in a separate veto, Gov. Christie refused to sign legislation that would ban treatment and disposal of fracking wastes in New Jersey, claiming that it would not withstand legal review under the U.S. Constitution’s dormant commerce clause.

This veto has not yet been overturned. The Governor pointed to the “undisputed fact” that fracking is not occurring and is unlikely to occur in the state even though the U.S. Geological Survey has identified some gas resources in the South Newark Basin (located in New Jersey and eastern Pennsylvania).
This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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Pennsylvania State Senator proposes moratorium on hydraulic fracturing

On September 18, 2013, Pennsylvania State Senator Jim Ferlo (D-Allegheny) proposed a Senate Bill 1100 that would impose a moratorium on new hydraulic fracturing permits until the seven-member Well Drilling Study Commission established in the bill can review and analyze a wide range of issues, including water source protection, air quality regulations, disclosure of chemicals used in fracking and the permitting process.

This Natural Gas Drilling Moratorium Act would allow the current permits to stand while the commission investigates the agricultural, economic, environmental and social impacts of the hydraulic fracturing process. The commission members would be representatives from a non-profit environmental group, an academic, a geologist, a medical or public health experts, a representative of the oil and gas industry, the secretary of the Pennsylvania Department of Environmental Protection, and the secretary from the Department of Conservation and Natural Resources. The commission’s report would be expected in January 2017.

The Senator stated that he “introduced this bill because Pennsylvanians and gas field residents all over the county have been forced to stand by and watch [damage caused by oil and gas drilling companies], and we must take a step back to deliberately and thoughtfully direct our path in the future.

 A member of the Pennsylvania House of Representatives intends on filing a similar bill. Already in Pennsylvania there are small pockets of land where natural gas drilling has been halted:

  1. in Wayne County where the Delaware River Basin Commission has imposed a moratorium, and 
  2. in the state’s forest and park lands.

This Natural Gas Drilling Moratorium Act will face stiff opposition in both chambers of Pennsylvania’s General Assembly where Republicans control the votes and from Gov. Tom Corbett, who supports of the energy industry.
This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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Class certification in Pennsylvania royalty lawsuit

On September 16, 2013, in Pollock, et al v. Energy Corporation of America, Case No. 2:10-cv-1553, in the U.S. District Court for the Western District of Pennsylvania, U.S. Magistrate Judge Robert C. Mitchell issued a Supplemental Report and Recommendation in which he granted class certification to two of three subclasses of plaintiffs.

This decision vacates Judge Mitchell’s August 5, 2013 ruling in which he denied class certification for all groups of plaintiffs due to no proof that the class would exceed 40 members and there was no commonality of claims.

After reconsideration requested by plaintiffs, Judge Mitchell determined that two subclasses of plaintiffs met class certification requirements:


  1. landowners who allegedly had interstate pipeline charges withheld from their royalty payments and 
  2. landowners who allegedly had marketing fees deducted after the gas had been sold. 
Defendant Energy Corporation of America (ECA) now has the opportunity to challenge these findings.

This lawsuit was originally filed by ten landowners on November 22, 2010 and was amended as a class action on March 4, 2011. In January 2013, the Court partially granted ECA’s motion for summary judgment by dismissing plaintiffs’ claims that ECA used the wrong gas prices, took excessive or unauthorized expense deductions, and underpaid oil and gas royalties. As for plaintiffs’ motion for summary judgment, the Court ruled that ECA improperly deducted charges for interstate transportation costs incurred after ECA sold and transferred title to the gas.

Recently a $7.5 million class action settlement agreement relating to royalty payments was filed for approval in the U.S. District Court for the Middle District of Pennsylvania. See prior blog dated September 9, 2013, “$7.5million settlement reached in Pennsylvania class action regarding deductions of post-production costs from royalty payments.”

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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Pennsylvania Legislators Propose New Statutes Relating to Forced Pooling and Royalty Payments

Since it was signed by the Governor in July 2013, Pennsylvania’s new law allowing drillers to pool leased properties into one unit for horizontal wells, as long as the oil and gas contracts in effect do not prohibit these combinations, has met with much criticism. See prior blog dated September 10, 2013, “Pennsylvania State Representative wants to repeal new gas pooling law.”

 Representative Jesse White (D-Washington) has now introduced House Bill 1700 which would ban the “forced pooling” of natural gas leases. Rep. White refers to forced pooling as “eminent domain for drillers” because it would allow operators to drill under property even if the landowner does not want to lease his land.

He wants to ensure that lessors who agreed to shallow drilling are not inadvertently drawn into having deeper, Marcellus Shale wells drilled on or under their property. The proposed statute provides that the “rule of capture” still applies, and a driller is not precluded “from extracting gas that has seeped onto an adjacent property, for which a valid lease exists.”

House Bill 1684 and House Bill 1650 both would limit what can be deducted from royalty payments. H.B. 1684 provides that a lease cannot allow any deductions for “severance or other production taxes or costs associated with producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, marketing or other marketing enhancements to be deducted from any royalty payable to a lessor if such deductions result in a royalty of less than one-eighth calculated under the first marketable product doctrine.”

Under H.B. 1650, the “lessee shall compute and pay oil and gas royalties…on the gross proceeds received by the seller based on the fair market value at the point of sale.” The lessee cannot deduct severance taxes, impact fees, and post-production costs (gathering, dehydration, compression, treatment, processing, marketing and transportation costs).
This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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Pennsylvania landowners allege new pooling provision violates their constitutional rights

In July 2013, a new law went into effect in Pennsylvania allowing drillers to pool leased properties into one unit for horizontal wells, as long as the oil and gas contracts in effect did not prohibit these combinations.

Shortly thereafter, using the new statute, EQT Corporation sued more than 60 Allegheny County individuals, accusing them of blocking the company from conducting surveys on their land to determine where to drill for shale gas. See prior blog dated August 2, 2013, Pennsylvania Landowners Sued Under New Pooling Law.

The defendants have now answered EQT’s Complaint, alleging that the pooling law “constitutes an unconstitutional taking of…private property for non-public use and without just compensation…” and deprives them of “rights to acquire, possess, and protect property in violation of” the U.S. Constitution and the state’s constitution.

Defendants argue that the new law should not be applied retroactively to their leases, the majority of which do not contain pooling provisions, and that the leases are invalid to the extent that EQT has not made the required payments under the leases to store natural gas on their property.

In addition, defendants argue that EQT “does not have the right to enter…[their] property to conduct operations, including but not limited to seismic testing, because Plaintiff has not complied with local, state, and/or federal laws and regulations to obtain the necessary permit(s)…”
This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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Three year ban on gas drilling sought by Pennsylvania County Councilwoman

Allegheny County Councilwoman Barbara Daly Danko proposed legislation that would create a three-year hold (ending on January 1, 2017) on the development of natural gas beneath county parks in order to investigate concerns and prepare “a comprehensive study” about who holds the rights to the subsurface minerals.

At present, according to the motion submitted to the Council, “it is unclear whether or not the County owns the mineral rights to all County park land and if restrictive covenants exist which bear on the ability to lease those rights leaving the County at risk of a lengthy and costly legal entanglement that could render any royalty revenue moot.”

This request comes after county officials discussed the possibility of allowing drilling in the 1,200-acre Deer Lakes Park. Matt Drozd, another councilmember, has proposed an ordinance that would allow the voters to decide whether or not to have drilling for natural gas under the county’s parks.

These proposed ordinances come after CONSOL Energy Inc. announced in late August its plans to construct nearly 50 natural gas wells on the grounds of the 10,000-acre Pittsburgh International Airport.

In February, CONSOL signed a contract worth an estimated $1 billion with the Allegheny County Airport Authority. CONSOL stated that it would begin construction on six well pads, impoundments and pipelines in the spring of 2014 in preparation for the drilling of two vertical wells in July.

CONSOL is preparing an environmental assessment which must be approved by the Federal Aviation Administration before the project can begin.
This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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California Closer to Having Hydraulic Fracturing Regulations

On September 11, 2013, the California State Assembly passed Senate Bill 4 bill which would regulate hydraulic fracturing operations and require disclosure of the chemicals used in the process to the Division of Oil, Gas, and Geothermal Resources in the Department of Conservation.

This bill now returns to the State Senate (where it was originally approved in May 2013); and, if this amended version is passed by the Senate, the bill will be sent to Gov. Jerry Brown for signature.

Additional provisions include:
  • On or before January 1, 2015, the Natural Resources Agency must conduct and complete an independent scientific study on well stimulation treatments, such as hydraulic fracturing and acid well stimulation.

    The scientific study is to evaluate potential risks from these treatments, including groundwater contamination, surface water pollution, greenhouse gas emissions, air quality, induced-seismic activity, and effects on wildlife, plants and habitat.
  • On or before January 1, 2015, the Division would be required to adopt rules specific to well stimulation, including governing the construction of wells and well casings and the full disclosure of the composition and disposition of well stimulation fluids.
  • A well owner or operator must apply to the Division for a well stimulation permit prior to performing a treatment.

    Within 5 business days of approving the one-year permit, the Division must post the permit on a publicly accessible portion of its internet web site.
  • At least 30 days prior to well stimulation, the operator must provide a copy of the approved permit to specified tenants and property owners “whose property line location…is (i) within a 1,500 foot radius of the wellhead [or] (ii) within 500 feet of the horizontal projection of all subsurface portions of the designated well to the surface.”

    The operator must provide notice to the Division at least 72-hours prior to the actual start of well stimulation in order for the Division to witness the treatment.
  • The supplier of the well stimulation treatment must provide the operator within 10 days of the process certain information regarding the fluids used.

    Within 60 days of the completion of the stimulation, the operation must post or cause to be posted to a publicly accessible web site the fluid information.

    The Division would be required to begin development of its own web site for this information (to be completed by January 1, 2016).

    Until then, an alternative website can be used (i.e., FracFocus.org), but the Division must obtain the information posted to the alternate web site and make it available to the public electronically within 15 days of the alternate posting.

    A supplier claiming a trade secret must disclose the composition to the Division and substantiate its claim by identifying the extent to which the information is known by its employees, the measures taken to protect the trade secret, the value of the trade secret, and the cost of developing this information.

    The Division would not disclose trade secret information except in specific situations, including medical emergencies.
  • Chemical information to be disclosed includes: list of names, Chemical Abstract Service (CAS) numbers, and maximum concentration in percent by mass of each chemical constituent; the trade name, the supplier, concentration, and a brief description of the purpose of each additive contained in the fluid; total volume of base fluid used; the source, volume, and specific composition and disposition of all water used as a base fluid and all water recovered; and the specific composition and disposition of all well treatment fluids.

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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University of Michigan's Technical Reports on Hydraulic Fracturing in the State

On September 5, 2013, the University of Michigan released seven technical reports concerning hydraulic fracturing. 

These Michigan-focused reports conclude the first phase of a two-year University project entitled Hydraulic Fracturing in Michigan Integrated Assessment. Public comment on these reports may be submitted through October 7, 2013.

A brief description of each report follows.
  • Technology: In view of the currently low price of gas, the high price of drilling deep shales, and the absence of new discoveries, it is unlikely that there will be significant growth of the oil and gas industry in Michigan. Hydraulic fracturing has not found widespread application in Michigan, except for a few exploratory wells in the Utica/Collingwood shale where considerable reserves of natural gas are believed to exist.
  • Geology and Hydrogeology: Currently there is minimal drilling activity within Michigan that qualifies as high-volume hydraulic fracturing. There are fewer than 60 existing permits or permit applications for hydraulic fracturing. However, there has been a recent increase in mineral rights acquisitions, suggesting anticipated potential growth in unconventional reservoir production via hydraulic fracturing potential growth in unconventional reservoir production via hydraulic fracturing. “Michigan is thus in a unique position to assess the future of high-volume hydraulic fracturing before the gas boom begins and learn from experiences in other states like Pennsylvania.’
  • Environment and Ecology: Shale oil gas development, if not properly managed, could adversely affect water quality due to surface water and groundwater contamination as a result of
    1. spills and releases of produced water, chemical, and drill cuttings, 
    2. erosion from ground disturbances, or 
    3. underground migration of gases and chemicals.
  • Public Health: Possible environmental hazards include impaired local and regional air quality, water pollution, and degradation of ecosystem services. Possible hazards in nearby communities include increased traffic and motor vehicle accidents as well as road degradation and a strained healthcare system.
  • Policy and Law: State regulations govern hydraulic fracturing. Michigan requires disclosure of the chemical constituents in hydraulic fracturing fluid within 60 days of well completion. Operators need not disclose trade secrets.
  • Economics: Hydraulic fracturing may lead to greater disparity in property values. The gas extraction industry creates employment and income, but the effects are modest compared to other industries. This analysis suggests that Michigan may enjoy stronger job creation by encouraging the rework of existing as wells rather than by drilling new wells.
  • Public Perceptions: A slight majority of Michigan citizens believe that the benefits of hydraulic fracturing outweigh the risks.

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Michigan couple file lawsuit to prevent BLM lease auction

The Department of Interior’s Bureau of Land Management (BLM) plans to hold a competitive oil and gas lease auction of approximately 27,000 acres in the Allegan State Game Area in Michigan on September 12, 2013. Plaintiffs who reside on 40-acres in Allegan County adjacent to the Game Area, created “a conservation easement on their property in order to protect groundwater springs, three spring-fed streams, the headwaters of Bear Creek (a tributary of the Kalamazoo River), a wetland, a significant vernal pool, 22 bird species designated by the Michigan Department of Natural Resources…, 70 other bird species, and state-designated threatened reptiles.” In their Complaint for Declaratory and Injunctive Relief (see attached Complaint), the Plaintiffs allege that the two Environmental Assessments (EA 634 and EA 1662) prepared by the BLM and the Findings of No Significant Impact “are based, in part, on inaccurate assumptions, serious misconceptions and erroneous information.” Among the issues raised are:
  • The EAs rest on the faulty assumption that oil and gas development in the Game Area will never occur on surface lands.
  • The EAs fail to analyze likely impacts from the forecast of up to 300 million gallons of water used in probable fracking operations.
  • The EAs fail to analyze where the water will come from and where the waste water will be disposed.
  • There is no discussion on any environmental effects of these withdrawals and disposals.
  • “Neither EA discusses the probable scenario of the need for using over 20 million gallons for each lateral leg of fracking production wells, which can result in cumulative water consumption of more than one billion gallons of water permanently withdrawn from the water cycle for each fracking production well.”
  • There is no discussion on effects on existing water wells used for residential and agricultural purposes.
  • The withdrawal assessment tool used does not consider the cumulative effects of high volume withdrawals.
  • The EAs were not made available to the public before finalization of the Findings of No Significant Impact.
The Plaintiffs further claim that the BLM violated the National Environmental Policy Act (NEPA) by authorizing the lease sales without preparing an Environmental Impact Statement (EIS).

The Center for Biological Diversity started its own legal effort to stop the leasing by filing a 60-day notice letter with the BLM, claiming that the BLM did not consider how fracking and drilling could harm endangered and threatened species in the Allegan State Game Area (see attached Notice). The Center for Biological Diversity was recently successful in a similar case in California. On March 31, 2013, in Center for Biological Diversity and Sierra Club v. The Bureau of Land Management and Ken Salazar, Secretary of the Department of the Interior, No. CV-11-06174 (N.D. Cal., December 8, 2011), the Court ruled that the BLM failed to conduct the “hard look” analysis required by NEPA by dismissing any development scenario involving hydraulic fracturing when used in combination with technologies such as horizontal drilling. The EA and the finding of no significant impact were found to be erroneous as a matter of law. See prior blog entitled “BLM Violated NEPA by Granting Leases without Evaluating Fracking Risks,” dated April 10, 2013.

Attached: (1) Complaint for Declaratory and Injunctive Relief and (2) Center for Biological Diversity’s Notice Letter to BLM

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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Pennsylvania legislator to introduce bill to stop post-production deductions

Michele Brooks, a member of the Pennsylvania House of Representatives, plans to introduce legislation to prevent oil and gas companies from deducting post-production costs from royalties paid to landowners. Currently the state’s Guaranteed Minimum Royalty Act (58 PA. STAT. ANN. § 33 (West 2010) mandates that landowners receive at least 12.5% of the gas produced from a well; however, in reality, the landowners receive payments based on the value of the gas. How the royalty payment is calculated has led to many questions regarding whether post-production costs should be deducted from the royalty checks, with many landowners being upset by the amount of the deductions.

The issue of post-production deductions in Pennsylvania is complicated by the decision in Kilmer v. Elexco Land Services, Inc., et al, 990 A.2d 1147 (Pa. 2010) in which the Court held that the Guaranteed Minimum Royalty Act permits “the calculation of royalties at the wellhead, as provided by the net-back method in the Lease,” which states that “lessor shall receive as its royalty one-eighth (1/8th) of the sales proceeds actually received from the sale of such production, less this same percentage share of all Post Production Costs.” Rep. Brooks’ proposed legislation would end these leases and amend the state’s Oil and Gas Lease Law to specify a “market first” approach to royalties by requiring that the one-eighth royalty to be calculated on the gross value of the gas at the wellhead, without any deductions for post-production costs or severance taxes.

Recently there was a settlement between Chesapeake Energy and more than 1,000 leaseholders, under which the leaseholders would pay the entire cost of transporting the gas from the wellhead to the point of sale and pay 72.5% of all additional post-production costs, including the costs for gathering, dehydrating and compressing the gas, all of which would be deducted from the royalty payments. See prior blog posting “$7.5 Million Settlement Reached in Pennsylvania Class Action Regarding Deductions of Post-Production Costs from Royalty Payments” dated September 9, 2013.
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Proposed hydraulic fracturing moratorium in Los Angeles

Members of the Los Angeles City Council have proposed a motion that would ban all hydraulic fracturing, acidizing, gravel packing and other well-stimulation practices within the city and in any areas that provide drinking water to the city, alleging that these oil and gas operations and the use of waste disposal injection wells ‘threaten to contaminate the City’s imported and local groundwater supplies [and are] inherently dangerous to the long-term safety, health, security and reliability of Los Angeles’ water supplies.” These council members point to “more than 1,000 documents cases of water contamination next to fracking sites,” but they provide no support for this claim. Additional allegations include:
  • Because the chemicals used in the these operations are not disclosed, the Department of Water & Power would be unable to determine whether the water supplies were being contaminated by these chemicals.
  • These operations require large volumes of water and would “jeopardize regional, state, and water supplies needed by the people of Los Angeles.”
  • Treatment of contaminated groundwater is expensive, and identifying the responsible parties for financial liability is not always possible.
  • These operations “seriously undermine the State’s efforts to address the climate crisis by reducing greenhouse gas emissions.”
  • Fracking and injection cause “seismic events.”
The council members request “an ordinance to change the zoning code to prohibit all activity associated with well stimulation…until the City Council is assured that companies conducting fracking within the City of Los Angeles or in areas providing drinking water to the City, can mitigate the effects on climate change, protect environmental quality and natural resources, promote community awareness, allow government access to and testing of chemicals used, anticipate and include related older and emerging extraction technologies such as hydraulic fracturing, acidizing, gravel packing and all wastewater disposal, and require full disclosure and testing of sites, with adequate time for public input.”
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Pennsylvania State Representative wants to repeal new gas pooling law

Pennsylvania State Representative Michele Brooks plans to introduce legislation that would repeal a recent law allowing oil and gas drillers to pool leased properties into one unit for horizontal wells, as long as the oil and gas contracts in effect do not prohibit these combinations. Until the Pennsylvania House added two sentences allowing the forced pooling of leases, this law was simply intended to require natural gas companies to standardize all deductions listed on royalty check stubs. Representative Brooks wants to repeal the law’s pooling language in order to allow individual landowners to re-negotiate their leases.

Citing the new law, natural gas producer EQT Corporation filed a complaint on July 22, 2013, against 70 Pennsylvania landowners who hold old oil and gas leases without pooling provisions. EQT claims that it was barred from entering these properties to do preliminary work for natural gas drilling and that the landowners assert that EQT does not have the right to pool their leases. See previous blog dated August 2, 2013, “Pennsylvania Landowners Sued Under New Pooling Law.”
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$7.5 million settlement reached in Pennsylvania class action regarding deductions of post-production costs from royalty payments

In October 2012, the class action plaintiffs confronted Chesapeake Appalachia LLC  with allegations that Chesapeake violated leases by deducting from their royalty checks post-production costs for gathering, dehydration and compression of the gas taken from their property.  Plaintiffs argued that their leases contained a “Market Enhancement Clause,” which expressly  precluded Chesapeake from charging them for transforming the gas into its “marketable” form or make the gas ready for sale or use, but would allow Chesapeake to deduct a pro-rata share of  these costs after the gas had been placed in a marketable form or is ready for sale or use.  Plaintiffs contended that the gas is not actually “marketable” until it meets the quality and pressure specifications of the interstate pipeline into which it is delivered; and that, by deducting costs that were incurred prior to the gas entering the transmission pipeline, Chesapeake underpaid the royalties due under the lease.  In opposition, Chesapeake contended  that the gas produced or to be produced under plaintiffs’ leases was marketable at the wellhead and thus was entitled to make the deductions.

With an arbitration clause in the leases, the parties hired retired Judge Edward N. Cahn, a mediator with Blank Room LLP, to help settle the questions raised.  Judge Cahn met with the parties on June 18, 2013, and then for more than two months negotiated with each side to reach the proposed $7.5 million settlement.  On August 30, 2013, the plaintiffs filed their Class Action Complaint (attached) and the Unopposed Motion for Preliminary Approval of Class Action Settlement.  The proposed settlement agreement (attached) requires Chesapeake to pay the class action plaintiffs 55% of post-production costs for gathering, dehydration and compression prior to September 1, 2013 and 27.5% of post-production costs until the effective date of the settlement.  After the settlement is approved, Chesapeake will implement a revised royalty calculation methodology that provides a 27.5% reduction in costs for gathering, dehydration, and compression borne by the class action plaintiffs.  These plaintiffs will continue to bear 100%, on a pro-rata basis, of the transportation costs that are incurred after the gas has entered the interconnect point of a transmission pipeline.

Note that, after many discussions in the Pennsylvania legislature, on July 9, 2013,  Governor Tom Corbett signed into law S.B.259 which requires royalty check “transparency.”  Royalty check statements must provide a range of details, including well identification information, the price received per barrel, Mcf or gallon, the net value of total sales after deductions, the owners’ percent of interest  in production and share of the total value of the sales prior to deductions, and the total amount of taxes and deductions permitted under the lease.

Attachments:  (1) Class Action Complaint and (2) Proposed Class Action Settlement

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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Colorado Supreme Court asked to review Appeals Court decision overturning Lone Pine order

On August 29, 2013, the oil and gas company defendants (Antero Resources Corporation, Antero Piceance Corporation, Frontier Drilling LLC, and Calfrac Well Services Corporation) in Strudley v. Antero Resources Corporation, et al, 12CA1251, ___ P.3d ___, 2013 WL 3427901, 2013 COA 106, filed a Petition for Writ of Certiorari with the Colorado Supreme Court requesting review of the Court of Appeals decision which overturned a Lone Pine Order issued by the trial court. See previous blog entitled “Lone Pine order overturned by intermediate Appellate Court in Colorado fracking lawsuit,” dated July 10, 2013. The companies argue that the Court of Appeals decision undermines the trial court’s ability to “take an active role managing discovery” and to streamline discovery as required by the Colorado Rules of Civil Procedure (“CRCP”). The basic tenet of these rules is that litigation be “just, speedy, and inexpensive” (Rule 1).

According to the companies, the Court of Appeals incorrectly interpreted CRCP Rules 1, 16, and 26, which require the trial court to take an active role in managing discovery, allowing for wide discretion to deviate from standard case management orders by showing fact-specific “good cause” and “by customizing discovery based on the unique circumstances and needs of each case, particularly cases involving complex scientific or technical issues.” The companies argue that the Court of Appeals by-passed the deferential standard, instead ruling as a matter of law that the trial court had no discretion “to enter an MCMO [modified case management order, here a Lone Pine Order] requiring toxic tort plaintiffs to come forward with basic evidence of exposure, injury, and causation, even where the plaintiffs failed to proffer that evidence under Rule 26(a)(1)” [requiring parties to make initial mandatory disclosures]. The role of initial disclosures is to streamline costly discovery, but the companies state that this can only be accomplished when all parties make the required information available in the disclosures. The companies complain that the plaintiffs “included no evidence [in their initial disclosures] indicating that [they] had been exposed to or injured by hazardous substances in their air or water attributable to the Companies’ operations.”

Cases cited by the Court of Appeals are discounted by the oil and gas companies as pre-dating the current rules of procedure which require disclosures and active case management to limit unfettered discovery. The companies ask the Colorado Supreme Court to review the appellate decision, stating that
  • The Court of Appeals ruling has “a chilling effect on a Colorado trial court’s efforts to ‘assertively lead the management of cases to ensure that justice is served.’”
  • By barring as a matter of law Lone Pine Orders, the Court of Appeals “undermines the efficacy of Rule 26(a)(1) disclosures and revert[s] to an outdated mode of litigation where evidence is revealed only after lengthy and expensive discovery.”
  • “If allowed to stand, the Court of Appeals’ opinion, which second-guesses a trial court’s first-hand efforts to tailor discovery to the unique needs of a case, will strip trial courts of discretion to use parties’ mandatory disclosures as a basis for determining the proper scope of further discovery.”

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New York Court of Appeals to Consider Local Bans on Hydraulic Fracturing

The New York Court of Appeals has granted Norse Energy Corporation USA leave to appeal the lower court decision in Norse v. Township of Dryden, that New York municipalities have the authority to ban oil and gas development in the state. Since there was no right to appeal, in granting this leave to appeal, the court sends a strong signal that the legal issues will get a fresh look by New York's highest court. The court also gave leave for the Washington Legal Foundation, the American Petroleum Institute, the New York Farm Bureau, and the Associated General Contractors of New York State LLC to file amicus briefs.

Norse Energy seeks to stop the wave of local moratoriums and bans on hydraulic fracturing in more than 150 New York municipalities by asserting that the Oil Gas and Solution Mining Law (OGSML) preempts local rules, an argument rejected by the lower court judges. The four-judge panel from the Supreme Court, Appellate Division, Third Judicial Department held that the OGSML’s preemption provision “insure[s] uniform statewide standards and procedures with respect to the technical operation activities of the oil, gas and mining industries in an effort to increase efficiency while minimizing waste,” not to “usurp the authority traditionally delegated traditionally delegated to municipalities to establish permissible and prohibited uses of land within their jurisdictions.”

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Pennsylvania's proposed natural gas surface operation rules

The Pennsylvania Environmental Quality Board has approved the state’s Department of Environmental Protection’s proposed regulations governing surface operations at and near natural gas drilling sites in the Marcellus Shale. These regulations would require energy companies to minimize pollution stemming from surface activities in four main areas: (1) protection of water resources, (2) protection of public lands and rivers, (3) containment practices, and (4) identification of abandoned and orphaned wells. Some details of these proposed rules include:

  • Appropriate state and federal agencies must be notified if a well site is within 200 feet of a publicly owned park, forest, game land, or wild life area; within 200 feet of a national natural landmark; or within 1,000 feet of a water well, surface water intake, reservoir or other water supply extraction point used by a water purveyor (unconventional wells only).
  • Operators of gas wells or horizontal oil wells must identify any orphan or abandoned wells within 1,000 feet of the vertical and horizontal well bores, prior to hydraulic fracturing.
  • Plugging is required if the fracturing process alters the abandoned well.
  • Open pits may only be used for temporary storage. The pits must have liners of minimum thickness, be compatible with the wastes that will be stored therein, and be fenced in completely.
  • Underground or partially buried tanks cannot be used to store brine unless approved by the DEP. 
  • Operators must employ secondary containment at unconventional well sites (e.g., liners or double walled tanks, etc.) to prevent regulated substances from reaching the state’s waters.
  • Rules for an operator’s response to spills and releases are included.
  • Pipeline construction companies must develop Preparedness, Prevention, and Contingency Plans when performing horizontal directional drilling under a waterway.
  • Operators must restore a well site, including filling pits and removing drilling supplies and equipment within 9 months of completion of drilling.

These proposed rules must be reviewed by the appropriate state offices before being opened up for public comments. After the public comment period ends, final approval from the standing committees in the General Assembly is needed.
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