Shale gas regulation and reaction - for Facing the Oil Crisis (Doran)

8/3/2019 Shale gas regulation and reaction - for Facing the Oil Crisis (Doran)

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Shale gas regulation and reaction, a survey of the Marcellusexperience with a view towards the future

by: James Stranko

for: Facing the Oil Problem: U.S., Canada, OPEC and the World

with: Prof. Charles Doran


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Shale gas, the fuel of the future unearths problems of the past

Shale gas regulation has trailed private sector exploration and development and public

opinion. At the same time, early-stage state regulation approaches have diverged (most

notably in the attitude towards Marcellus Shale projects in New York and Pennsylvania)

and many wildcat developers have come and gone before the development of

comprehensive legislation. This has caused environmental degradation, including

watershed pollution through spills, local air pollution through truck and machine traffic as

well as underground particle escape, and land subsidence through poor well planning. It

has also raised a number of legal questions around land control, mineral rights, and

jurisdictional capacity to govern and regulate. It is becoming evident that irresponsible

management of these early shale plays are fouling public opinion and provoking regulatory

constraints to future development, limiting the economic development and energy security

potential of shale gas and oil. Few people doubt the potential of shale if developed

responsibly. Yet the timeframe that developers and regulators have to get the process right

is shrinking and states and local governments are passing laws that will shape the makeup

of the industry for years to come.

New York State has taken the most aggressive stance against shale development, placing

a moratorium on all drilling while officials review the environmental consequences of

hydraulic fracturing (fracking). This has left Pennsylvania as the state that has gained the

most from shale gas development but also has been most susceptible to the inherent risks

and challenges in the young industry. Other states in the Marcellus Shale play, including

Ohio, West Virginia, Maryland and New Jersey, have less to gain from smaller reserves in

their territories, but nonetheless are involved in negotiations around watersheds and

environmental questions of regional importance.

Stranko 1


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This patchwork of legislation, cascading from the state down to the municipal level, and

then further complicated by proposed federal rules, has created a sort of jurisdictional

chaos. This disorder in some places, like New York and New Jersey, helped solidify

support for a moratorium until broader issues could be considered. Inothers like

Pennsylvania, Ohio and West Virginia, drillers and developers have seized the opportunity

to establish operations before the municipality or the state government could begin

regulating and supervising them. Neither approach has been entirely successful at

addressing the new issues that shale gas and fracking bring to policymakers. But this

policy environment is also serving as national conversation on how to regulate a growing

domestic industry and a promising source of national energy security.1

Stranko 2

1 Energy Information Agency


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The United States, and particularly Pennsylvania, has an unparalleled opportunity to

establish best practice in the supervision and regulation of shale gas activity. Developers

and state and federal regulators alike, however, have an interest in assuring these early

projects do not provoke the ire of local residents or officials, thereby creating challenges to

gain licenses to operate. This paper will concentrate on the main issues that states in the

Marcellus play are dealing with are shaping the landscape that the shale industry will face

around the country and the world, including land control/mineral rights, groundwater

protection, jurisdiction of regulation/oversight; and taxation. It will also discuss the drivers

behind legislation in Pennsylvania, (and to a lesser extent New York, Maryland, New

Jersey and West Virginia). It will and will explore the appetite in the private (both major

producers and smaller producers) sector and various levels of government for more

comprehensive regulation. Finally, it will touch upon the challenges the industry is facing in

ramping up production while incorporating the demands of the communities they work in

all in service of fulfilling shales potential as a revolutionary fuel source.

Background: How did we get here so fast?

Shale gas and oil development has entered the national consciousness at breakneck

speed. In less than a decade, shale development and hydraulic fracturing have made their

way from the distant, desolate fields of Texas and the Western United States to population

centers on the Eastern Seaboard. Politicians at all levels of government and on both sides

of the aisle believe that shale will simultaneously solve domestic energy supply issues,

lower costs, and help curb Americas overall CO2 emissions.

Some major challenges have arisen, though, including market-based, technological and

environmental issues. On the market side, gas prices have been hovering at low levels for

several years now due to a glut of global supply and a flurry of LNG processing

Stranko 3


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construction. Since what comes out of shale is essentially gas and the price does not

discriminate between conventional and non-conventional production, the non-conventional

and more expensive production method remains subject to a tough price environment.

This has also meant that

only smaller companies with

lower cost structures have

been able to exploit shale

resources for commercial

gain. The bright spot is that

the Mid-Atlantic region,

where the Marcellus play is

located, has some of the

highest prices for gas

nationwide, although the

recent additional supply has

caused the price to fall. 2

And while major

international oil companies

(IOCs) have made attempts to develop shale oil and gas resources, more agile specialty

firms have cornered large parts of the market. This is partially due to the low margins that 3

gas production can expect in this price environment and partially due to the institutional

inertia in large IOCs towards meaningfully branching out from their core businesses. And

where the majors have gotten involved, it has been through strategic acquisitions of

Stranko 4

2 Deloitte, 2

3 Chart from Pittsburgh Post-Gazette with information from the PA Dept. of Environmental Protection


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smaller, more entrepreneurial market leaders, like in the case of Exxons acquisition of

XTO.4

But the entry of the major IOCs into the shale market presents difficulties for existing

operators. Large companies, particularly those that also explore for oil at home and

abroad, have different standards of safety and of environmental stewardship than smaller

oil and gas companies. The risks of litigation are higher for them, the ability to go bankrupt

and fold are nil, making the political consequences of mismanagement more acute. Also,

even majors that have invested in the sector like Exxon have put strict contingencies into

the contract that allow for divestiture if shale gas regulations make operations impossible.

In Exxons case, the clause, which was part of the filings to the Securities and Exchange

Commission, allows Exxon to void the $41 billion deal with XTO if Congress passes a law

making fracking illegal or "commercially impracticable.5 This shows that they are

concerned about the tenor and direction of the regulatory debate, and want to make sure

their interests are covered in a field where they are not the ones necessarily establishing

best practice and directing the industry stance towards regulators.

What makes fracking so different?

Hydraulic fracturing is a process involving drilling into shaleformations in a complex way

so as to extract trapped natural gas deposits from tight spaces. The process is water-

intensive and incorporates a fracking solution that consists of a mix of sand and

chemicals. The high pressure water, along with the sand and chemicals, blasts into the

rock and fractures it between 6,500 and 8,500 feet beneath the surface (and up to a mile

Stranko 5

4 McCarthy (Globe and Mail), full text

5 Exxon Can Void Deal to Buy XTO (Dallas Morning News)


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aquifers and wells as a result of subsurface seepage or leakage. But there have been

issues from spills of effluent once it had reached the surface. The worst episode of

atmospheric contamination from fracking runoff occurred though a surface spill in April on

a Chesapeake Energy drilling site near Canton, PA, which released thousands of gallons

of fracking fluid onto surface land, with some of the liquid reaching a local creek. The PA

DEP, as a result, levied the largest fine in state history against an oil or gas company

nearly $1 million partly because of the water effects from this spill and partly due to an

unrelated explosion at a well site in Washington County, PA.8

Evidence of methane contamination of groundwater supplies is greater, and a recent study

by scientists at Duke published in the Proceedings of the National Academy of Sciences

found that 58 of the 68 water wells the group tested in Pennsylvania and upstate New York

had some amount of methane contamination.9 And while the gas industry has long argued

that methane existed naturally in wells close to drilling sites due to the geology and history

of the subsurface, the team found that within 3,000ft (1km) the concentration spikes

upward sharply, and the chemical makeup more closely resembles the deep shale gas the

companies are producing. It continued to note that the average level found within a

kilometer of drilling -- 17 times higher than non-drilling areas -- is higher than the level at

which federal coal mine regulators recommend immediate action, such as ventilating the

area, and possible changes to the water supply.10

Stranko 7

8 Reuters, Chesapeake handed record fine

9 Duke University Study, Hydrofracking Changes Water Wells

10 Ibid.


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Pennsylvania, finding a path to regulation based on science,not emotion

A state made for shale

Pennsylvania, with the largest proven shale reserves in the Marcellus play and the fastest

growing production footprint in the United States, stands at the center of the emerging

regulatory, environmental and social debates around shale gas production and more

specifically fracking. Given the Commonwealth was the birthplace of the American oil

industry (in the northwestern town of Titusville), Pennsylvania has a long history of

hydrocarbon production and a wealth experience with energy booms and busts.

Between 2009 and 2011 alone, the industry claims to have contributed 44,000 jobs and

$3.5bn in land revenue to the Commonwealth alone. The economic impact has been felt

particularly in counties that were previously rural or had a long history of economic

depression resulting from the deindustrialization process that began in the 1970s and

1980s. And in a way, the legacy of oil and coal exploration in the state, along with the

subsequent industrial rise and decline in the areas of shale gas production, has made the

booming industry fit well with regional identity. In Washington County, a rural county

bordering West Virginia just south of Pittsburgh, wages in 2010 were up more than four

percent from 2009, and rank in the top 20% of the state. Average oil and gas sector wages

in the state now are above $60,000, which is more than 50% higher than the state

average.11 Still, many jobs can be temporary as the lifespan of shale wells is much shorter

than of conventional wells and production peaks and declines quickly after the wells have

begun pumping. Also, as a trainer from Western PA vocational school in Consol Energys

hometown of Canonsburg (WATCT) put it, theres a lot of talk about the pick-up trucks

Stranko 8

11 National Geographic, A drive for new jobs through energy.


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with Texas and Oklahoma license plates12 and a sense that out-of-state employees with

shale know-how have been the greatest beneficiaries of the PA boom. Still, for a state that

has suffered significant economic stagnation and a western region that has seen its main

industry disappear in a span of 25 years, any prospect for a new industry centered out of

PAs rural and poor communities seems welcome by the state and by local residents.

Bradford County near the border with New York State, where the most wells have been

drilled this year, unemployment is down a full percentage point to 7.5 percentthe

second-lowest rate in the state. In Washington County, south of Pittsburgh, the next most

active drilling area and birthplace of the states shale boom, wages are up 4 percent over

last year and rank in the top fifth in the stateunusual for a rural county. It is impossible

to predict the impact of workforce needs for any one specific location, the MSECT study

said, because work at each drill site takes just a month, and companies move crews from

site to site, depending on prospects and the land leases they happen to hold (which expire

if drilling doesnt begin within a certain time frame). For landowners the shale discoveries

have been even more a boon, with shale gas development companies paying up to

$17,000 per acre (when Chesapeake Energy shaled out $17,000 an acre in early 2010

for a piece of the Marcellus play in Pennsylvania. Prices have since receded, and one of

the largest recent purchases has involved Exxon paying close to $5,000 an acre for two

existing drillers Phillips Resources and TWP, assets spanning Pennsylvania, New York

and West Virginia.13

Stranko 9

12 Ibid.

13 Deloitte: Rising demand making shale gas dominant US source


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The Political Landscape

As ever in Pennsylvania, party affiliation does not necessarily predict policy outcomes.

While Republicans tend to support shale exploration more fervently than Democrats, there

are Democrats that have been vocal supporters of the shale gas industry as economic

opportunity for their mainly depressed districts. Similarly, there are Republicans that view

the states attempt to regulate the entire industry from Harrisburg as a ploy to infringe on

longstanding local control of property rights. As Brian Coppola, the chairman of a Board of

Supervisors in a wealthy suburb of Pittsburgh said in a recent New York Times article: Im

a conservative Republican, and this goes against all my principles. He added that House

Bill 1950 is an enormous land grab on the part of the industry and that local property

rights are being trampled.14

The real political debate now lies at the center of two competing proposals from

Pennsylvanias Republican-controlled house and Democrat-controlled Senate. Both

proposals advanced different structures for impact fees instead of previously-proposed

severance taxes. The House proposal adopts Governor Tom Corbetts language to impose

a fee of $40,000 that declines to $10,000 per well over a ten-year period. The Senate

proposals fees are higher, and the levy is 20 years versus 10 in the house. The House

measure also delegates more revenue to the local level, with 75% of revenue while the

Senate plan would only return 55% of revenue to local governments.15

But they both agree on key contentious provisions, namely that the revenue returned to

counties would be on a participation basis only, that is that counties that did not host

drilling would not receive revenue. In addition, given many municipalities have used zoning

Stranko 10

14 As Gas Drilling Spreads, Towns Stand Ground Over Control, New York Times

15 PA House Bill 1050, Senate Bill 1100


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restrictions to prevent shale

development, the bill requires

local governments to allow

drilling in all zones, provided all

legal requirements for

production are met. They also

have nearly identical language

that require municipalities to

provide for the reasonable

development of minerals,16

and give the state attorney

general the ultimate jurisdiction

over whether local ordinances

are reasonable. Although this

position has backtracked from

language in original bills that

preempted and superseded

local ordinances on

unconventional exploration, the

bill still takes significant power

away from local governments to

zone, tax or otherwise make life

difficult for drillers.

Stranko 11

16 Section 3303 of PA House Bill, S. 1100 (2011). Print.

Mercyhurst Center for Applied Politics: Antelling snapshot of public opinion

According to a study and survey conducted byMercyhurst Center for Applied Politics (of Erie, PA),Pennsylvanians have a sophisticated understanding

of the risks and tradeoffs of the Marcellus Shale.One statistic that stands out, though, is the generalmistrust of the corporations doing business in theCommonwealth.

Pennsylvania residents opinions on extractinggas from the Marcellus Shale formation throughthe process commonly known as frackingreflect uncertainty about the practice and thestates regulatory response to the developingshale gas industry. While Pennsylvanians aregenerally supportive of gas extraction throughfracking, they have concerns about where itoccurs and the regulatory framework thatensures it is done safely. Pennsylvaniansbelieve the potential economic benefits of gasextraction from the Marcellus Shale formationare substantial, but are evenly divided on thepotential costs of the activity for the environmentand human health.

Pennsylvanians are uncertain about the effectsof fracking to extract gas from the MarcellusShale formation. A clear majority ofPennsylvanians (60%) say that they dontbelieve corporations extracting gas from theMarcellus Shale formation truly care aboutprotecting the environment and that moreregulations are needed (67%). Pennsylvaniansare evenly divided on the question of whetherfracking poses a significant threat to ourenvironment generally (43% saying it does

pose a significant threat and 42% saying that itdoes not), but roughly a majority (54%) indicatethat they believe it poses a significant threat toour water resources. A plurality (44%) ofPennsylvanians say that fracking to extractgas poses a threat to human health, while 37%said that it does not.


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And while the debate rages on in Harrisburg, local governments are looking at ways to fill

in the costs they are bearing as a result of shale gas development. In a recent New York

Times article detailing some of the complaints from affluent townships in the Pittsburgh

area, municipalities showed concern that litigation brought by gas companies had a

chilling effect, discouraging towns and cities from enacting regulations because they

cannot afford to defend them in court.17 The Commonwealth, meanwhile, argues that

state-level legislation makes it easier for lawsuits to be settled with better government

resources. Either way, both Democrats in the Senate and Republicans in the House and

Governors office do not want municipalities to exert the control they have in the past.

Rendell vs. Republicans in a contentious Commonwealth

In a recent speech to a Marcellus Shale Coalition meeting, former PA governor Ed Rendell

lambasted the industry as privileged polluters that fail to pay their fair share of taxes. In his

first major speech to an industry coalition after leaving office, pointed out easy points the

shale drilling industry could score through voluntary transparency measures and increased

taxation. Rendell told an audience of hundreds of gas executives in Philadelphia, the

industry continues to screw up," continuing "you have screwed up so bad there are

protesters everywhere you go.

He continued to rail against his failure to implement greater taxation on the industry before

leaving office, particularly at a time when the recession has caused the Commonwealth to

slash funds in sensitive areas like education. And given that the current governor received

hundreds of thousands of dollars in campaign donations from the gas industry, the

bitterness is particularly acute for Rendell and Democrats "These are not whackos; these

are not militants," Rendell continued. "They are people who care about their libraries and

Stranko 12

17 "Learning Too Late of Perils in Gas Well Leases." New York Times


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that industry activites are raising fears, not just of a few militants, but of every

Pennsylvanian. As a parting shot, he scolded the audience: "you've been a

disappointment to me."18

Ed Rendells ideological foil, perhaps, is U.S. Representative Bill Shuster, a Republican

from West Central Pennsylvania, who has been one of the most vocal critics of EPA

involvement in Marcellus Shale activity. In response to the EPAs consultation on frackings

impact on groundwater, Shuster retorted It's like these people in EPA think we people in

Pennsylvania either don't care about clean water for our citizens, or are too stupid to figure

it out. A recipient of more than $300,000 in campaign contributions from the energy and

pipeline industry, Shuster has also been an natural advocate for a low regulatory burden

on shale development and representative of how lobbying has helped entrench partisan

positions in the Commonwealths politics.19

Rendell is, of course, one of Pennsylvanias most outspoken democrats, and was governor

as the beginning of the shale gas boom in the Commonwealth. His attempts to institute a

severance tax were met with fierce opposition from the industry and from Republicans in

Pennsylvanias State House. But even Ed Rendell has changed tacks several times since

his term in office. From a lukewarm reception to calls from his party for high barriers to

shale licenses to this public excoriation of the industry for their behavior, one of PAs most

prominent Democrats may be more representative of Pennsylvanians than his

contradictory opinions may reflect.

Other Democrats, like blue dog Jason Altmire (D-4th District) whose district comprises

suburban Pittsburgh and areas of strong shale exploration, concentrates on the economic

Stranko 13

18 Rendell Angers Drillers, Philadelphia Inquirer

19 Top U.S. Lawmaker on Pipeline Rules, Philadelphia Inquirer


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opportunity in the industry. At a town hall meeting in mid-2011, he called shale gas

development the greatest economic opportunity we have ever had, with maybe the

exception of the steel industry," and continued "we need to take advantage of the fact we

have this huge economic opportunity."20

Other states in the Marcellus play - cautiously optimistic but invery different places

New York, the empire strikes back

A recent Quinnipiac poll that mirrored many of the questions of the Mercyhurst poll in

Pennsylvania found New Yorkers evenly split on the issue as well. While New Yorkers

support shale exploration by a thin margin (45 to 41% in favor), and claim that economic

benefits outpace the environmental costs, upstate voters are more wary, with 47%

opposed on the grounds of potential environmental contamination.21

Unlike in Pennsylvania, however, environmental groups, with strong pockets of financial

and logistical support in New York City, have been able to organize more resistance

amongst those worried about shales resource footprint. Also, state lawmakers have

observed issues around Pennsylvanias land ownership and control with caution, and even

more conservative members of the Senate like Sen. Greg Ball (R-Brewster) thought that

the state shouldnt rush into anything. In an interview with Long Islands Newsday on

November 27th, Sen. Ball said he did not want to see what happened on farms and with

private property owners in Pennsylvania happen in New York State.22 As a result, he is

Stranko 14

20 Altmire, Marcellus Shale Gas Coalition Conference

21 New York State Poll (Quinnipiac)

22 Neighbor vs. Neighbor, Newsday


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advocating for legislation which would increase property protections and award certain

damages in the case of long-term harm to a parcel of land.

But energy companies and counties alike are looking towards the loosening of the

restrictions as a way to unlock land value and tax revenue. Also, for as many residents that

see the contentious regulatory process occurring in Pennsylvania there are residents that

see royalty and job opportunities for long-stagnating upstate New York areas. A study for

New Yorks Department of Environmental Conservation, albeit sourced from industry

projections, estimated that gas extracted through fracking could provide 6,200 to 37,000

jobs in the peak production, and generate $31 million to $185 million in state personal

income taxes aside from the royalty, corporate and licensing tax possibilities.23 The jobs

angle, as it has developed in Pennsylvania, is emerging in New York as a key component

of the push to overturn that states moratorium.

Governor Cuomo has been more sanguine about the possibilities of developing shale

resources that do not put New Yorks water supply or other upstate environmental

concerns at risk. In July of 2011 he prefaced the release of a Department of Environmental

Conservation report by saying he believes fracking can be done safely and that New

Yorks approach would be a balanced one. He has been insistent that science and facts

make the determination, not emotion and not politics and that the states guidelines are

strictly based on rigorous testing, research, facts and science, not politics or ideology on

the issue. Cuomos support, given his strong position in state decisionmaking, along with

the supportive views of members from the states High-Volume Hydraulic Fracturing

Advisory Panel, will prove crucial to the moratorium being lifted in the state. Still, New

Stranko 15

23 Drilling for Jobs, The Public Policy Institute of New York State


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Yorks waiting game has allowed the state to make more informed decisions based on

experience elsewhere.

Ohio, a poisoned well

Ohio has taken a different approach, and in the past three years permits for shale drilling

have increased from one in 2009 to two in 2010 to more than 140 by December of 2011.24

Many of these allow fracking, and more than 20 fracking wells have been drilled in Ohio

since exploration began. But this does not mean that the government is not aware of the

risks inherent in shale development.

Indeed Governor John Kasich, a Republican, has said his priority is to make sure we

[Ohio] get this right. In this, he has focused on environmental protection and gaining

assurances that unsavory developers do not gain access to permits, saying the state can't

have wildcatters just coming in here and stripping us of what we have in the state

and leaving. The debate, then, is continuing and the Ohio government is looking closely to

Pennsylvania to help devise ways to regulate and tax development.

Nonetheless, the public relations debate has been tainted in Ohio by a strange but

powerful memo that was purported to come from a landman for West Bay Exploration

Co. The talking points memo was dropped on an Ohio womans driveway after the

executive allegedly came to speak to her about developing shale on her property. The

memo, which is available online, instruct landmen how to best connect to the residents

they visit, and include selective technical talking points including:

to not mention groundwater contamination or lost property values;

Stranko 16

24 Gas Drilling Surges in Ohio, Associated Press


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to downplay natural gas drilling on contracts that are predominantly oil-based but

leave open the possibility of gas exploration (since it is believed to be a greater

environmental threat than oil drilling);

to emphasize to the landowner that drillers "use no radioactive materials" and that

any radioactivity comes from natural sources in the ground and is released by the

process, even though the fracking process is what is releasing it; and

to describe the hydraulic fracturing drilling process as "radioactive free," even

though the memo concedes that is not accurate

The Ohio resident who found the memo uncovered trickier talking points, however,

instructing the landman to remember that:

landowners will "be patriotic Americans" and to make certain you lead with the

selling point that "China bought more oil than the United States last year" and that

"pure psychology" means landmen should always start on a point that they will

agree with;

the lease term is for five years, but that landowners "don't need to know, or discover

through discussions with us" that the lease can extend indefinitely with no

landowner permission as long as oil and gas are being produced; and

men are more likely to sign than women, since women "have more concern for the

environment and will challenge you more often" than men who "don't like to believe

that you know more than they do" and that the husband can sign leases without

spousal permission.25

Stranko 17

25 The Landman Cometh, Associated Press


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West Virginia, wildly, wonderfully pragmatic

West Virginia, after several years of issuing a total of nearly 1,700 drilling permits, has

moved close to implementing the first comprehensive drilling law in the Marcellus Shale.

The regulations, a hybrid of House and Senate proposals, call for a hike in permit fees, an

increase in well buffer zones and a greater level of regulatory oversight of drilling.

Additional provisions under review concern issues around surface land rights and

notification periods and methods before wells are developed.

And although industry is criticizing the bill for its oversight provisions and taxation and

environmental groups are unhappy with what they consider weak provisions, but both

groups welcome clearer rules on a state level. The state government, meanwhile, stands

to receive a windfall in the amount of more than $2 million in additional annual revenue,

which would come from the bills planned rise in permit prices from $400 to $10,000 per

well.26

New Jersey, on the outside looking in

Given the effective eastern border of the Marcellus play is the Delaware River, New Jersey

does not have as much interest in shale exploration as other states in the region.

Nonetheless, the State Assembly and Governor Christie have launched studies into the

safety of fracking in the state. And as a result of doubts over the long-term impacts of

drilling, the State Assembly passed an indefinite ban on hydraulic fracturing that Governor

Christie vetoed. Citing the need for further study of the techniques effects, Governor

Christie instituted a one-year moratorium after vetoing the outright ban. More important,

however, is the states involvement in interstate commissions like the Delaware Valley

Commission. Given that it shares the watershed with Pennsylvania and Delaware, it has

Stranko 18

26 WV House Bill 401


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been able to craft policies that affect how shale is developed in Eastern Pennsylvania and

has been successful at delaying activity in the river watershed until the Authority can

complete more rigorous environmental impact studies. PA has accused its commission

activity, however, of not always been constructive and there have been concerns about the

New Jerseys ability to regulate activity in other states through delaying implementation of

Delaware Valley Commission guidelines on acceptable fracking techniques.27

The federal government, stuck in the middle

Given the newness of shale gas to the national political debate, President Obama has

been the first president to have such intense contact in office with the complicated politics

of shale and fracking. His proclamations on energy, security and environmental issues

have reinforced the value of shale in the national energy matrix. Nonetheless, other

agencies have launched activities that have shaped the growth of shale resources in the

U.S. and inserted the federal government into an area with a strong legacy of state

jurisdiction, particularly under the auspices of the Environmental Protection Agency.

Up until recently, the U.S. EPA took a quiet role in the national shale gas development

debate. Under early development and the Bush administration, the agency had a hands-off

approach to regulation, particularly given the limited regional reach of development. Only

under the Obama administration, and increased activity in populated areas in the

Marcellus play, has the EPA taken a stronger stance on the potential groundwater and air

quality effects of shale gas extraction. Wastewater has been a particular area of concern

for the EPA. Given the interstate nature of water flows and their importance to human

health, and the difficulty for one state to exercise jurisdiction over upstream polluters (Ohio

Stranko 19

27 Interview with Patrick Henderson


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and Kentucky for instance for pollution upstream in Pennsylvania or West Virginia), the

EPA has prioritized runoff and wastewater for review. And in a recent statement, the EPA

was concerned that "no comprehensive set of national standards exist at this time for the

disposal of wastewater discharged from natural-gas extraction activities.

As a result, the agency opened a process of research and stakeholder consultation in

October 2011. In an announcement that same month, they state that the report would

develop standards for wastewater discharges produced by natural gas extraction from

underground coalbed and shale formations. To ensure that these wastewaters receive

proper treatment and can be properly handled by treatment plants, we will gather data;

consult with stakeholders, including ongoing consultation with industry; and solicit public

comment on a proposed rule for coalbed methane in 2013 and a proposed rule for shale

gas in 2014.28

And while states are eagerly awaiting the findings and actively contributing during

comment periods, some in state government are wary of federal intentions. At the same

time, they seem unsure of why their involvement is necessary when states have long

taken care of their own issues. Patrick Henderson, PA governor Tom Corbetts energy

secretary, said in an interview that the PA DEP has been very active, meeting with US

Congressional members, and the EPA, among others, making the case that PA should

have primary jurisdiction. He also commented how the federal government thinks PA has

done well as a Commonwealth in regulating the area, particularly given that PA has had

"oil and gas drilling forever". Nonetheless, he is concerned with EPA and federal

overreach, particularly given PAs long history with hydrocarbon exploration. Certainly

Stranko 20

28 EPA 2011


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some of this fear may be partisan but there are serious federalist strains developing as

the states and Washington wrangle over an issue of increasing national importance.

Conclusion: The clock is ticking on fracking

Because of the implications on many aspects of community life, including noise pollution,

local air pollution and water pollution, and the debates this has provoked in populated

areas like Pennsylvania, drillers and policymakers alike have a public relations lesson to

learn from Marcellus. As landowners are better informed about the benefits and drawbacks

of shale, and regulators and politicians begin to see electoral effects of public opinion, the

debate will likely change. The Mercyhurst Public Policy poll shows that Pennsylvanians are

well-informed about the benefits and drawbacks of shale exploration, and are actively

weighing the economic benefits against the perceived environmental costs. Alan Eichler,

the head of oil and gas section of the southwestern division of the Commonwealths DEP,

came to a similar conclusion in an interview. While he didnt see any egregious

environmental concerns with the ways that gas drillers have been operating in

Pennsylvania, he sees how aesthetic concerns and public perception are beginning to

create problems for Marcellus. He has noticed that municipalities with better resources to

fight back have been successful to a certain degree in stopping shale development. Those

that have less resources to do so, or are more sensitive to the economic benefits of the

gas development, have had less success in stopping activity.29

According to Eichler, when you get $4,000 an acre for your property and can become a

millionaire overnight, particularly in areas of longstanding economic depression, the

environmental costs become less pronounced. The complaints from these communities,

Stranko 21

29 Interview with Alan Eichler


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he continued, were principally from those who were not benefiting from the economic boon

of the exploration because their land was not targeted for exploration to more unexpected

reasons like cost of living increases due to so many newcomers in small communities.

Municipalties, particularly those in poorer areas, have suffered under the crush of truck

and pipeline traffic that strains already-underdeveloped infrastructure and accommodating

the families of gas professionals in school systems, social services and hospitals.

In Pennsylvania, as in other states like Texas, mineral rights (or the rights to exploit

hydrocarbon reserves under surface land) are separate from surface construction/use

rights. This means that homeowners and landowners do not necessarily have control over

the subsurface under their property. This has led to complaints by surface owners that they

were unaware of their rights and complaints by county tax commissioners that many

mineral rights owners have left rights to heirs that have moved out of state or lost track of

the assets--and have failed to pay appropriate taxes as a result. Some underhanded

industry practices, like the ones alleged in the landman letter from Ohio above, may end

up undermining legitimate practice by larger or more reputable firms and generating

widespread suspicion.

And this issue is particularly acute because the Marcellus Shale footprint follows along

some of the regions most economically depressed areas. Four of the five counties

(Bradford, Greene, Susquehanna and Tioga) with the highest number of active shale

drilling wells rank in the bottom half of all 67 PA counties by GDP per capita, with two of

the five (Tioga and Susquehanna) ranking in the bottom five. Only Washington County

ranks in the top 50% (17 of 67). The perceived risks from fracking and shale development

in Pennsylvania seem to be more relevant in affluent or urbanized areas and afterwards

that in more rural or depressed areas.30 But Eichler also pointed out that many drillers

Stranko 22

30 Own analysis from PG shale by county report on page 4 and Census 2010 information


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have been shocked by Pennsylvanias level of regulation and the sophistication of the

environmental laws compared to more traditional areas of operations like Texas and

Oklahoma. This is little surprise, given Pennsylvanias history with extractive industries,

and the complicated subsurface rights that resulted from oil and coal exploration, and the

impacts that many communities have felt for more than a century from this development.

The lessons in Pennsylvania are instructive, then, to other states and countries looking to

regulate this burgeoning industry while not spooking investors already pinched from a low

global gas price environment. In the area of taxation, the Commonwealths experience has

shown that reasonable and consistent taxation has the power to incentivize drillers to

invest in long-term commitments while returning sufficient resources to local governments

to offset any adverse effects from shale development. In environmental stewardship, PA

has shown that widespread shale drilling is possible in populated areas without major

short-term environmental degradation. On the question of economic development, PA has

demonstrated that shale can be a large source of employment, particularly in rural areas,

but that better local talent and training is needed so that Pennsylvanians can take full

advantage of the jobs being created.

While every state and provincial jurisdiction possesses different ways of regulating

hydrocarbon production and assessing mineral rights, Canada, the U.S. and Mexico share

federalist systems that present more regulation difficulties than centralist governments.

Whereby France or Bulgaria can easily issue blanket moratoria on shale development, or

Argentina can direct regulators in the provinces and legacy state companies to accept

certain legislation on development, North America presents a more contentious regulatory

process.

Stranko 23


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And while New York may be missing out on the early benefits of shale gas production, it

gets a front row seat to the quarrelsome regulatory process in neighboring Pennsylvania.

While this reticence may be detrimental in the short run as New York gains a reputation of

being hostile to the industry, the waiting may prove valuable in the long run as both

industry and governmental best practice is established in a way that shelters the state from

rookie mistakes. For the federal government, the interstate dichotomy in responses to the

shale boom helps create a forum for which issues are top of mind across regional, income,

and political spectra and which are associated with partisan views.

Patrick Henderson said that the Commonwealth has been a very active representative in

trying to work with other states, along with the Army Corps of Engineers but that it has

been frustrating, particularly with New Jersey because they dont have an interest in shale

development. He said the learning curve has been very high to let them know that the

water isn't running into their streams and rivers, and that drilling is a well-regulated activity

in PA. He thinks PA has an educational job to do to convince other states of the benefits,

and achieve consistency in legislation.

But clearly, shale gas developers took advantage of a gap in regulation and in market

awareness when they began to buy up land from small landowners for drilling purposes.

The reactions by states and municipalities has been piecemeal, but likely not out of

differing levels of sophistication and industry understanding but out of the differing

economic and social realities present in very different jurisdictions. In some ways, the

myriad of regulations that has emerged at a local level is reflective of this early imbalance

of power between developers and communities. It also shows the difficulty in regulating an

industry that, through under-regulation, has generated fear and distrust at the same time

as it has generated industrial jobs, windfalls for landowners, and cheap domestic energy.

Stranko 24


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Developers may be rushing to get state houses to define rules so they they can

standardize their operations, but they are also likely in a hurry because they realize the

repercussions of even minor environmental or social misstep at a time when public opinion

is solidifying. This is why the next few months are crucial to the future of shale exploration,

for cash-strapped governments, concerned citizens, and anxious investors alike.

Stranko 25


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Shale gas regulation and reaction - for Facing the Oil Crisis (Doran)

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