In 1859, “Colonel” Edwin L. Drake struck oil near Titusville, Pennsylvania, an event that launched America’s oil and gas industry.1 As early as 2005, horizontal drilling and hydraulic fracturing techniques were in use in Pennsylvania to unlock natural gas deposits2 from Pennsylvania’s significant oil and gas basins, including the Devonian (Ohio), Utica, and Marcellus Shale Formations.3
Statutory and Regulatory Framework
The Office of Oil & Gas Management in Pennsylvania’s Department of Environmental Protection (DEP) regulates oil and gas development and production pursuant to the Oil and Gas Act, the Coal and Gas Resource Coordination Act, and the Oil and Gas Conservation Law.4 DEP also enforces the Commonwealth’s environmental protection laws that impact oil and gas activity, including the Clean Streams Law, the Dam Safety and Encroachments Act, the Solid Waste Management Act, the Water Resources Planning Act, and the Community Right to Know Act.5
As part of a major overhaul of the state’s oil and gas law, the Pennsylvania legislature passed Act 13 in 2012 after years of deliberation.6 Also known as the impact fee law, Act 13 imposes an impact fee on every unconventional well drilling for gas in the Marcellus Shale formation.7 So far, fee collection has brought in more than $850 million in revenue to Pennsylvania.8 Sixty percent of that revenue is distributed to local governments, with the remaining forty percent going to various state agencies and to a Marcellus Legacy Fund for environmental and infrastructure projects.9 Other provisions in Act 13 included a preemption and zoning scheme that placed restrictions on the authority of local governments to regulate oil and gas activities.10
As explained in more detail below, Act 13 has been subject to extensive litigation since its passage. While significant portions of the law remain intact, some aspects of the law, most notably the Act’s preemption of oil & gas regulation by local government, have been invalidated by the Pennsylvania Supreme Court. Other provisions remain caught up in litigation.
Pennsylvania’s oil and gas regulations are found in Chapter 78 of the Pennsylvania Code.11 Currently, these regulations do not distinguish between conventional and unconventional drilling.12 The Chapter 78 regulations generally address, among other things, permitting obligations;13 the protection of water supplies;14 standards for pits and tanks;15 waste disposal;16 well construction, operation, and plugging;17 reporting;18 and bonding.19 In addition to state laws and regulation, two federal interstate compact commissions—the Susquehanna River Basin Commission (SRBC)20 and the Delaware River Basin Commission (DRBC)21 —have authority over specified water uses within their basins, which cover parts of Pennsylvania.22 Under their respective authorities, both the SRBC and the DRBC have asserted review and approval authority over unconventional natural gas development. Note that in addition to complying with SRBC23 and DRBC24 regulations, projects in both basins must still comply with DEP regulations.
In the Susquehanna River Basin, the SRBC began issuing water withdrawal approvals for natural gas well development in June 2008.25 Under these approvals, operators must comply with various requirements, including (1) monitoring and reporting of water withdrawals, (2) submission of well completion reports, and (3) posting of signage at withdrawal sites and drilling pads.26 The SRBC also conducts site inspections to ensure that water users, including natural gas well operators, are in compliance with SRBC regulations.27
As explained further below in the Recent News and Developments section, the DRBC has not issued regulations for natural gas operations within its jurisdiction as of the time of this writing. As a result, the DRBC has indefinitely postponed consideration of natural gas projects, effectively halting natural gas drilling in the Delaware River Basin.28
Pennsylvania’s Guaranty Minimum Royalty Act of 1979 mandates that landowners receive a one-eighth (12.5%) royalty on any oil or natural gas drilled on their property.29 Whether royalties actually constitute 12.5% of the gas’ value, however, is in dispute because some leases allow drillers to share certain post-production costs (i.e., the costs of processing and transporting gas) with landowners.30 Accordingly, drillers deduct a portion of those costs from royalty checks to landowners.31 In recent years, landowners filed lawsuits arguing that such lease provisions do not comply with the statutory 12.5% minimum royalty requirement.32 The Supreme Court of Pennsylvania ultimately upheld the practice of using such lease provisions in 2010, relying on industry’s customary definition of the word “royalty” because it is not defined by the statute.33 As discussed further below, this issue remains controversial and could lead to further legislation.
Recent News and Developments
Current Drilling Restrictions and Moratoria
As explained above, the DRBC governs water quality and water withdrawals from the Delaware River Basin, about one-third of which lies above the Marcellus Shale natural gas deposits.34 The DRBC began expressing concern over natural gas production in the basin as early as June of 2008 due to the impact from fracking on water quality, as well as the amount of water withdrawals needed for drilling.35 In May of 2009, the DRBC announced that project sponsors could not extract natural gas in the basin without Commission approval.36 This assertion of regulatory authority laid the groundwork for a de facto moratorium in 2010 on drilling in the basin, which includes Pennsylvania’s Wayne and Pike counties.37 At a May 5, 2010 meeting, DRBC commissioners unanimously approved a resolution to postpone consideration of all natural gas projects in the basin until after the Commission had adopted regulations for natural gas drilling in the basin.38 Because the Commission had previously asserted that drilling could not move forward without its approval, the May 2010 resolution had the effect of halting all drilling in the basin.39
As of September 2016, the DRBC has not adopted regulations and the de facto moratorium remains in place.40 The DRBC initially published draft regulations in December 2010 and revised regulations in November 2011, after reviewing nearly 69,000 public comments on the draft rules.41 Despite scheduling a meeting to vote on the regulations that November, the DRBC cancelled the meeting after strong opposition from New York and Delaware state officials.42 More than four years later, it has yet to revisit the issue.43 On its website, the Commission has stated that “there is no timeframe for when the draft regulations will again come up for vote,” explaining that “[t]he scientific and policy questions that the commission must resolve in the course of preparing natural gas regulations are extremely complex.”44 In May of 2016, landowners in Wayne County sued the Commission in federal court in an effort to lift the moratorium, arguing that the DRBC does not have authority under the Delaware River Basin Compact to review natural gas projects.45 This lawsuit is ongoing.
In addition to the moratorium in the Delaware River Basin, Pennsylvania Governor Tom Wolf signed an executive order in January 2015 that reinstated a 2010 moratorium on new oil and gas development in state parks and forest land.46 The moratorium applies exclusively to land currently unavailable for development – it leaves untouched the 673,000 acres that are currently open to oil and gas development.47
Act 13 Litigation
As explained above, Act 13 has been caught up in litigation since its passage. In March 2012, several provisions were challenged in state court by a coalition of municipalities, an environmental organization, and several citizens.48 Most notably, the suit called into question the Act’s zoning scheme, which would have restricted local governments’ ability to zone and regulate natural gas drilling.49 Other challenged aspects of the law included:
- a provision that allowed DEP to grant waivers to well-location restrictions;
- an eminent domain provision, which would allow privation corporations to use a state’s eminent domain power to take private property for the storage of natural gas; and
- a provision referred to as the ‘gag rule,’ which would require health care professionals to sign a non-disclosure agreement when they receive information about chemicals used by drilling companies in order to treat patients for exposure to those chemicals.50
In December 2013, the Pennsylvania Supreme Court affirmed a lower court’s ruling that the zoning and preemption scheme – as well as several other provisions – were unconstitutional.51 The Court’s decision was sharply divided. Joined by two Justices, Chief Justice Castille wrote for the plurality to find the preemption of local oil and gas regulations violated the Environmental Rights Amendment, which provides that the people of Pennsylvania “have a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment.”52 Justice Baer concurred in judgment, but found that Act 13 was unconstitutional based on narrower substantive due process grounds.53 Two justices dissented.54 In addition to the zoning and preemption provisions, the Court also struck the provision that would have allowed DEP to grant waivers to setback requirements.55
While this settled the controversy over the law’s treatment of local regulations, the Court did not issue a final ruling on all of the challenged provisions. Instead, it remanded the case to the lower court for further consideration of several issues, including:
- whether the strike of zoning provisions rendered remaining zoning-related provisions invalid;
- whether the statute’s gag rule on health professionals was constitutional; and
- whether the statute’s eminent domain provisions were constitutional.56
On remand, the lower court threw out most of the remaining challenges to the rule, upholding both the gag rule and the eminent domain provisions.57 The remaining zoning-related provisions were held to be invalid, however.58 Those provisions would have allowed the Public Utility Commission to review local zoning ordinances and withhold impact fee money from municipalities if those ordinances did not comply with Act 13’s requirements.59 The lower court held that because the Pennsylvania Supreme Court had invalidated the other zoning provisions, the Public Utility Commission does have authority to review local zoning ordinances.60
In October 2015, the Pennsylvania Supreme Court announced that it would hear appeals of the lower court’s latest decision.61 The Court heard oral arguments in March 2016,62 but has not yet issued a decision.
Proposed Revisions to Chapter 78 of the Pennsylvania Code
In 2011, DEP and the Oil and Gas Technical Advisory Board began a rulemaking process that proposed wide-ranging revisions to Chapter 78 drilling regulations for oil and gas wells.63 Due to several setbacks and ongoing controversy, these regulations have not yet been finalized.
As a general matter, the proposed revisions addressed four types of issues: (1) permitting requirements related to the protection of public resources; (2) requirements to identify and monitor orphaned and abandoned wells; (3) wastewater storage and containment practices at or near the drilling site; and (4) protection of wetlands, streams, and drinking water resources.64
In December 2013, DEP opened a 90-day public comment period that drew more than 24,000 public comments.65 DEP was forced to revise its proposals in 2014, however, when the Pennsylvania General Assembly slipped language into a budget bill requiring DEP to promulgate separate regulations for conventional and unconventional wells under Chapter 78 and Chapter 78(a), respectively.66
In February 2015, DEP released revised draft regulations with separate provisions for conventional and unconventional drilling.67 Other important changes in that version focused on how the drilling industry stores waste, dampens noise, and affects public water resources, lands, and schools.68 Other specific changes included:
- a prohibition on the use of temporary on-site waste storage impoundments;
- a requirement for new centralized wastewater impounds to be re-permitted as a “residual waste facility,” while existing centralized wastewater impoundments must be closed or upgraded and re-permitted within 3 years of the rule’s effective date;
- a requirement for operators to demonstrate that streams and wetlands will be protected if the edge of the well pad is within 100 feet of the resource;
- a requirement for operators to perform an expanded impacts analysis of public resources located within 200 feet of an area designated as a “wellhead protection area” as part of an approved wellhead protection plan;69
- a requirement for operators to identify inactive (orphaned and abandoned) and active wells within 1,000 feet of the well pad and then submit a report and monitoring plan to DEP at least 30 days prior to drilling;
- a clarification of an existing requirement for operators to restore drinking water supplies to pre-drilling conditions or Safe Drinking Water Act standards, whichever is more protective of water supplies;
- a requirement for unconventional operators to prepare and implement a site-specific noise mitigation plan for drilling, stimulation, and servicing activities.70
The new changes prompted significant criticism from drillers and some lawmakers for a lack of transparency and for failing to sufficiently distinguish conventional and unconventional drilling.71 Nonetheless, the regulations were adopted by the state’s Environmental Quality Board in February 2016 and were approved by the state’s Independent Regulatory Review Commission in April 2016.72
In June 2016, however, half of the regulatory package was scrapped when Governor Wolf signed legislation that eliminated the revisions to regulations that govern conventional wells.73 The remaining half of the package, which focuses on unconventional drilling, is currently under review at the state Attorney General’s office.74
Following the Pennsylvania Supreme Court’s 2010 holding that gas companies can deduct post-production cost from statutory minimum royalties, the issue has remained controversial and could potentially lead to future legislation. Some landowners, for example, continue to complain that the majority of their royalty checks are consumed by such costs.75 As a result, royalty owner advocacy groups have been pushing for legislative change, so far without success.76 While a House committee approved a bill in March 2014 to prohibit the practice of deducting post-production costs from royalties,77 the bill ultimately never made it to the floor for a vote.78 The bill’s sponsor tried again in June of 2015, reintroducing the measure as a new bill with 37 cosponsors.79 Despite several efforts by the bill’s sponsor,80 the relevant House committee has yet to take action on the measure as of September 2016.81
Meanwhile, the Senate passed two bills in early 2015, S.B. 147 and S.B. 148, which both propose various measures granting additional protections and rights to landowners, including the ability to audit oil and gas company records to ensure proper payment82 These remain pending before the House Environmental Resources and Energy Committee.83