GUEST ARTICLE: Pennsylvania Approves Unconventional Gas Fee

On February 13, 2012, Pennsylvania Governor Tom Corbett signed House Bill No. 1950 into law, approving major changes to the Pennsylvania Oil and Gas Act, most notably an impact fee on unconventional drilling operations. Along with the impact fee, the receipts of which will be distributed among local governments, state agencies and several new programs, the new legislation also increases the administrative powers of the Public Utility Commission (“PUC”) and the Department of Environmental Protection (“DEP”). The following sets forth highlights of the new legislation.

Unconventional Gas Well Fee

While the legislation does not contain a severance tax sought by some groups, it does contain an impact fee on unconventional wells drilled in the Commonwealth. The legislation does not provide for a fee for conventional or shallow wells. The impact fee delegates numerous responsibilities to the county where the well is located, including whether or not that county will impose an impact fee. The governing body of a county containing spud unconventional gas wells may elect whether to impose a fee on each unconventional gas well spud in that county. A well is considered “spud” the moment that the drill bit hits the ground. A county electing to impose the fee must pass an ordinance within 60 days after the legislation becomes law. If the county does not pass an ordinance imposing the fee, it cannot share in the funds collected by the state. If the county elects not to impose the fee, the fee may still apply in that county if at least half of the municipalities within that county, or municipalities representing at least 50% of the population of the county, vote to impose the fee, and the fee will then be imposed on a county-wide level.

The fee will apply regardless of when the well was drilled. An unconventional well will be assessed an annual fee which will be based on the average price of natural gas and adjusted on a year-to-year basis. The legislation sets forth specific formulas for the fee for years one, two and three of the well’s life, for years four through 10 and for years 11 through 15 of the well’s life. For example, for the calendar year in which a well is spud, the fee could range from $40,000 if the average annual price of natural gas is not more than $2.25 per million Btu (MMBtu) to $60,000 if the average annual price of natural gas is more than $5.99 per MMBtu. The fees are reduced in year two and in subsequent years – the fee in “year two” (which is defined as the calendar year following the year in which the well was spud) range from $30,000 if the average annual price of natural gas is not more than $2.25 per MMBtu to $55,000 if the average annual price of natural gas is more than $5.99 per MMBtu. For years 11 through 15, if the average annual price of natural gas is below $3.00 per MMBtu, the fee for each of these years will be $5,000, while if the average annual price of natural gas for this same period is greater than $3.00 per MMBtu, the fee for each of these years will be $10,000.

The fee for a vertical unconventional well will be 20% of the fee amounts set forth in the legislation. Also, if a spud unconventional gas well begins paying the fee but is subsequently capped or produces low quantities of natural gas within two years of paying the initial fee, then the fee shall be suspended. Beginning on January 1, 2013, the PUC shall annually adjust the fee amounts to reflect any upward changes in the Consumer Price Index for all urban consumers in Pennsylvania, New Jersey, Delaware, and Maryland.

If a county elects to charge an impact fee, the PUC will collect that fee. The fee will be deposited in the state treasury. The fee will be distributed to numerous agencies, departments, programs, counties and municipalities, with 60 percent of the fee earmarked to go to local governments and 40 percent to go to environmental initiatives statewide. The funds are designed to maintain and repair infrastructure, sewer and water systems; fund first responders; fund conservation programs; provide some tax relief and replenish local capital fund budgets. Gas wells spud before 2011 shall be considered to have been spud in 2011 for purposes of imposing the fee.

Payment of the Fee

The fee is due to the PUC by April 1 each year, commencing in 2013. For wells spud before January 1, 2012, the fee imposed by this legislation shall be due by September 1, 2012. The producer will have to submit a report indicating the number of spud wells in each municipality within each county that has imposed a fee and the date that each well was spud or ceased production. The PUC may impose an annual fee of $50 per well to cover costs for its increased administrative responsibilities. The PUC will now have the authority to make all inquiries and determinations necessary to calculate and collect the fees. The PUC will send a written notice of deficiency if a producer fails to make a timely payment of the fee and will also notify the DEP.

A penalty of 5 percent of the amount of the outstanding fee shall be assessed if a producer fails to pay the fee. The PUC has the power to issue orders to enforce the new legislation. Producers who fail to diligently comply with a PUC order could be guilty of contempt. For violations, the PUC can assess a civil penalty not to exceed $2,500 per violation. The PUC is also empowered to consider the willfulness of the violation. The statute of limitations for the PUC to bring an action against a producer is three years.

A producer must keep records and reports for the PUC and provide the PUC access to those records when requested. The PUC can examine any employee of a producer, under oath, concerning the severing of natural gas subject to the fee or with respect to any matter regarding the enforcement of the new legislation. The PUC will prepare an annual report and all counties and municipalities which receive impact funds will report on the use of the funds in an annual report to the PUC.

Increased DEP Responsibilities

The DEP, upon request from the PUC, will provide a list of all spud unconventional gas wells that received a drilling permit. This list must be updated monthly. A producer subject to the fee must notify the PUC within 30 days of spudding an unconventional gas well, the start of production at an unconventional gas well and the removal of an unconventional gas well from production. The DEP will also confirm whether a producer has paid all fees owed for an existing well prior to issuing any permit, and no permit will be issued if fees owed are not paid.

Additional Development Regulations

• The legislation will increase notice requirements from 1,000 feet to 3,000 feet and the notice will be provided to landowners, water purveyors, coal owners, and municipalities within 3,000 feet of a planned unconventional well.
• The DEP can deny permits for failure to pay the impact fee or failure to submit a water management plan that does not include a reuse plan for fluids that will be used to hydraulically fracture a well.
• Unconventional well operators must provide the DEP 24 hours notice prior to cementing all casing strings, conducting pressure tests of the production casing, stimulation of a well, and abandoning or plugging a well.
• A company that wishes to conduct operations of an abandoned or orphaned well must first obtain a permit from the Environmental Quality Board (EQB).
• The DEP must approve a producer’s water management plan and the plan must explain any impact on water quality.
• The new legislation extends setbacks, which include:
  • Increased setback distances from 200 feet to 500 feet from existing buildings or water wells and a 1,000 foot setback from a water supply extraction point. The producer can petition for a variance.
  • The new legislation extends setback distances from 100 feet to 300 feet from any stream, spring, body of water, or wetland greater than one acre in size.
  • Well pads must also maintain a setback of 100 feet from the edge of disturbance and any stream, spring, body of water or wetland greater than one acre in size.
• The DEP is permitted to increase the current nine-month well site restoration requirement up to an additional two years if the extension will result in less disturbance and site restoration cannot be achieved within nine months.
• The DEP will establish a toll-free telephone number for reporting cases of water contamination and publish on the DEP website cases of water contamination caused by hydraulic fracturing.
• The legislation increases the distance of the rebuttable presumption of pollution from 1,000 feet to 2,500 feet from the water supply and the timing of such presumption is increased from six months to 12 months following the last drilling activity.
• Upon notification of a spill, the DEP will notify any public drinking water facility that could be affected.
• Producers are required to provide a containment plan to the DEP.
• Producers are required to maintain transportation records regarding the movement of wastewater.
• In addition to being able to pursue remedies at law and in equity for a violation of the legislation, the DEP may, after a hearing, assess a civil penalty for violation of the statute regardless of whether the violation was willful. The penalty shall not exceed $25,000 plus $1,000 for each day during which the violation continues or, in the case of a violation arising from the construction, alteration or operation of an unconventional well, $75,000 plus $5,000 for each day during which the violation continues.
• DEP is now empowered to enter into contracts with well control specialists to provide emergency services and the producer may be responsible for covering the costs of the emergency responders.
• The legislation provides enhanced hydraulic fracturing chemical disclosure requirements and enhanced well reporting requirements, including production data.
• Bonding amounts are increased and may be adjusted every two years. The highest bond amount set forth in the legislation is $600,000 for operators with more than 150 wells with a well bore length of at least 6,000 feet.
• Producers must now submit to the DEP a course report identifying and quantifying actual air contaminant emissions, with the report due by March 1 for air contaminant emissions during the preceding calendar year.
• The DEP can now revoke a permit for any well in continuing violation of state law if the likely result of the violation is an unsafe operation.

Local Ordinances

The new legislation supersedes all local ordinances that regulate oil and gas operations, except with respect to zoning ordinances. There are also guidelines for local municipalities to allow and facilitate the reasonable development of oil and gas resources. Specifically, the local municipality shall allow seismic operations, shall not treat the oil and gas industry differently from other industries, and municipalities are permitted to set restrictions in residential areas based on population density.

A municipality may, prior to the enactment of a local ordinance, request in writing that the PUC review a proposed ordinance to issue an opinion as to whether it violates the Oil and Gas Act, and the PUC will issue this non-appealable advisory opinion within 120 days of receiving the request. Likewise, an owner or operator who is aggrieved by the enactment or enforcement of a local ordinance may request that the PUC review the local ordinance to determine whether it violates the Oil and Gas Act or the Municipal Planning Code. An order issued by the PUC under this section shall be subject to de novo review by the Commonwealth Court, and a petition for review must be filed with the Commonwealth Court within 30 days of the date of service of the PUC’s order.

Any producer or party aggrieved by any local ordinance can bring an action in the Commonwealth Court to invalidate or enjoin enforcement of that ordinance. Such a lawsuit can proceed without first obtaining a review by the PUC. The Court can order a local government to pay reasonable attorneys’ fees and costs if the local government enacted or enforced a local ordinance with willful or reckless disregard for state law. The Court can also order a plaintiff to pay reasonable attorneys’ fees and costs if the action by the plaintiff was frivolous or was brought without substantial justification. If the PUC, the Commonwealth Court, or the Pennsylvania Supreme Court issues an order that a local ordinance violates this chapter or the Municipal Planning Code, the municipality acting or enforcing the local ordinance shall be immediately ineligible to receive any funds collected under the unconventional gas well fee and shall remain ineligible to receive such funds until the local government amends or repeals its ordinance. A local government that has enacted a local ordinance relating to oil and gas operations prior to the effective date of this chapter shall have 120 days from the effective date of the legislation to review and amend an ordinance in order to comply with this law.

About the Author

Mike Connolly leads Spilman Thomas and Battle PLLC’s litigation practice in Pennsylvania, and he is a leader of the firm’s Marcellus and Utica Shale practices.  Mike’s litigation practice focuses on representing energy and financial services companies in complex commercial litigation in state and federal courts in Pennsylvania and elsewhere. Mike also represents and advises companies involved in exploration and production and midstream operations in the Marcellus and Utica Shale and plays on a wide array of operational issues.  Spilman Thomas & Battle is a full-service law firm with more than 140 attorneys. Founded in 1864, Spilman has offices in Charleston, Morgantown, and Wheeling, W.Va.; Harrisburg and Pittsburgh, Pa.; Winston-Salem, N.C.; and Roanoke, Va. For more information please visit www.spilmanlaw.com.