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Shale Era Still Has Pennsylvania DEP Playing Defense, Pushing Change

After nearly a year under the direction of a new administration, the Pennsylvania Department of Environmental Protection's (DEP) job hasn't gotten any easier.

As it works to push through what it calls "long-overdue" updates to the state's oil and gas regulations, expedite an infrastructure buildout to get more gas to market and bring its outdated technologies into the 21st century, it continues to catch fire from the industry, drilling opponents, the news media and the political world.

Regulating energy is a monumental task in Pennsylvania. The state is one of the country's leading energy exporters; second in energy generation, nuclear power generation and natural gas production; fourth in coal production and 12th and 16th in solar and wind capacity, respectively. For a decade now, the agency also has had to keep pace with the breakneck speed of technological advancements in oil and gas drilling. More companies have turned their attention to the Appalachian Basin's multiple horizons and returned to the state's backyard to do business, drawing attention from residents and outsiders who can't agree on the boom's benefits.

The oil and gas industry, it would seem, has been singled out from the state's prolific energy pack, and the DEP too has been scrutinized along with it. As the debate over oil and gas drilling goes, right and wrong answers can be hard to find; there is rarely a middle ground among the industry's supporters and opponents. But for more than a decade now, the DEP has been stepping up its oversight of the industry and plans to do more under its latest governor and secretary.

"The level of regulatory overreach is unprecedented. It fails by all metrics of the common sense litmus test. The comments this industry has made on these [proposed] Chapter 78 regulations; the hundreds of billions of dollars in additional regulatory costs, are not going to improve the environment," said an industry source, referring to the department's four-year overhaul of the state's oil and gas environmental regulations. "This is a political football. We have more field regulators than we ever had. That's been financially shouldered by the operators through these increases in permitting fees. How many rigs are running today? It's like having more cops out with speed guns when no one is on the road."

Not everyone sees it that way, however. Democratic Gov. Tom Wolf took office in January, elected on a campaign platform to tax the state's natural gas industry, better protect the environment, get Pennsylvania's fiscal house in order and reform public education and property taxes for the better (see Shale Daily, Nov. 5, 2014). His election ended former Republican Gov. Tom Corbett's sole term on a mandate for change after what some viewed as a status quo administration. From the start, sources said Wolf would be a different kind of governor for the state and the oil and gas industry (see Shale Daily, Jan. 16).

The Marcellus Shale's growth has been staggering, with production going from just 1.7 Bcf/d in 2010 to 15.9 Bcf/d in November of this year, according to the Energy Information Administration (EIA). The state is home to more than 7,000 unconventional wells.

Eleven Months

"We didn't talk about shale gas; we didn't talk about the Chesapeake Bay; we didn't talk about climate change, pipeline infrastructure, Chapter 78 or any of the other million things that DEP handles every day," DEP Secretary John Quigley told reporters last month about his job interview with Wolf, who appointed him in January. "Gov. Wolf and I only talked about transparency and integrity."

Since January, both Wolf -- and under some of his policies -- the DEP, have stirred the ire of the industry (see Shale Daily, April 8). Quigley himself once served as a special adviser to PennFuture, an environmental advocacy group that has at times been critical of the industry (see Shale Daily, Jan. 14). Wolf proposed a 5% severance tax on natural gas, plus a 4.7 cent volumetric fee that he later scaled back to 3.5% in the face of a state budget impasse that continues today with no clear end in sight (see Shale Daily, Oct. 7; Feb. 11).

The governor formed a pipeline task force that consists of 48 members focused on expediting pipeline infrastructure build-out (see Shale Daily, Nov. 16; May 28). The industry -- despite its place at the table -- has at times characterized the task force as another layer of bureaucracy to deal with on top of existing state and federal entities. The task force was formed to help facilitate collaboration on pipeline development among the industry, the state and other stakeholders.

In one of his first significant moves after taking office, Wolf signed an executive order reinstating a moratorium on oil and gas leases in state forests and parks at a time when operators were cutting budgets and reducing land acquisitions in response to a commodity downturn that it still faces (see Shale Daily, Jan. 29). In March, after four years of work to update the state's oil and gas regulations particularly those related to environmental protections, Quigley said they would be made even tighter, geared toward addressing the concerns of operators, landowners and the general public (see Shale Daily, March 9). The rule changes deal with buttressing everything from waste storage and water resources to stronger rules for drilling near schools and playgrounds

Quigley said last month that after 12 public hearings and more than 30,000 public comments, the agency is on track to deliver the final regulation to the state's Environmental Quality Board in January and have them vetted by the Independent Regulatory Review Commission by April. In addition to proposing a severance tax, Wolf's initial budget proposal also included $10 million for additional inspection and oversight of oil and gas operations; $200 million for energy efficiency, renewable power and clean energy market development, and a 6% general fund increase to restore some of the funding DEP has lost over the last decade.

Quigley said the proposal was "a down payment on restoring our ability to not only meet our mission...but also to respond better to the regulated community."

The moves come at a time of industry retrenchment, with stagnant oil and gas prices having led to job cuts, office closures and a slowdown in development (see Shale Daily, June 19). In some ways, they’ve put the industry at odds with the administration, as well.

"Pennsylvania is already well recognized for having among the nation's strongest and most effective environmental standards, which the industry has worked hard to modernize," said Marcellus Shale Coalition President David Spigelmyer. "...The governor's regulatory overreach, taken together with the threat of a highest-in-the-nation energy tax, as well as persistently low global commodity prices, severely discourages investment and job creation in the commonwealth."

In response, DEP spokesman Neil Shader said the agency's "mission is to protect Pennsylvania's air, land and water from pollution and to provide for the health and safety of its citizens through a cleaner environment." One way the agency is doing that, he added, is "making long-overdue updates to the oil and gas drilling regulations to improve transparency, public health and environmental protection. These updates are informed by the industry's performance and the facts that we've encountered on the ground."

The Wolf administration and the DEP have also stressed that a critical part of their work is about finding a better balance between strong environmental protections and responsible development of the state's natural resources.

"The Wolf administration has pursued a balanced policy of reviewing regulatory requirements to make sure they match best practices and enforcing those requirements while continuing to support increased production and use of natural gas in Pennsylvania," said Wolf spokesman Jeffrey Sheridan. "In addition, the administration created a pipeline task force to support efforts to build necessary infrastructure to get natural gas to markets.

"The administration has proposed a commonsense severance tax to bring Pennsylvania in line with all other gas producing states that already have a severance tax."

All of this, combined with more than a decade of shale development, likely prompted a widely criticized series that was published by a Southeast Pennsylvania newspaper in October that alleged the unconventional industry has been under-regulated for years. It was praised in some corners for highlighting the problems the industry has had in developing the play, but the claim is nothing new in Pennsylvania or elsewhere. The series dredged up the issue again and drew staunch criticism from the industry and its supporters.

The DEP moved to quickly distance itself from the series, defending its current actions and saying a number of the challenges it is facing and trying to address were overlooked. But strengthening the state's regulatory policies has been an ongoing task that never stopped or left the industry with a license to do what it pleased, according to data obtained by NGI's Shale Daily, interviews with sources and a review of the state's regulatory actions to date.

The Early Days

Range Resources Corp. drilled the first Marcellus well in 2004. While the regulators were inexperienced with unconventional technology, the operators acquiring land and delineating the play had no prior experience working in Pennsylvania or dealing with regulators there. Some of the early regulatory issues that arose from Marcellus development -- such as water withdrawals and how tax-privileged agricultural land was being used for development -- demonstrated how microscopic and complex the task of regulating the fast growing shale industry would be.

"I always thought it was really 2005 when the gas was first extracted. The first few years, there were very few wells, then, in the 2008 to 2010 range, they began to rapidly increase," said Ross Pifer, a professor at Penn State University, who also serves as director of the school's Center for Agricultural and Shale Law. "From my view, from a regulatory standpoint, it was 2008 that the government agencies really started to recognize that there possibly needed to be a different set of rules on shale development, or to state it differently, when they realized this development was different than what we had in the past with conventional development."

Since then, as drilling has accelerated, the state passed into law Act 13 of 2012, an omnibus bill to update the state's Oil and Gas Act of 1984, which the DEP had essentially been regulating under until 2013 when the new law's implementation began (see Shale Daily, Feb. 15, 2012). According to data obtained from the DEP by NGI, the state issued 10,965 violations to both conventional and unconventional producers alone between 2012 and December of this year, during a stretch of heavy development drilling when the play was in full swing.

It has collected $15.4 million in fines since the beginning of 2012. If a record setting fine against Range Resources proposed this year by the agency is finalized, it would collect more than $12 million this year alone (see Shale Daily, June 16). While there are far fewer wells in Ohio and West Virginia, the number of violations issued and fines collected from producers in those states during that time was far less than in Pennsylvania.

Between 2012 and 2015, the West Virginia Department of Environmental Protection issued 638 notices of violation to producers, which do not impose fines, but require some form of corrective action. It issued 49 consent orders, has another holding and 28 that were pending as of this month. The state has collected roughly $1.1 million in fines. In Ohio, where the Department of Natural Resources does not have the authority to impose fines, that agency issued 6,287 notices of violation over the four-year period.

Around May 2008, former DEP Secretary Kathleen McGinty called a summit for 150 industry personnel to discuss how the agency would begin taking action to ensure that any economic benefits from Marcellus extraction would not come at the expense of the environment. That conference, Pifer said, set the tone for DEP's approach in the Marcellus era. It came after the agency was forced to halt water withdrawals from streams and rivers because operators had not received a permit from the Susquehanna River Basin Commission (SRBC).

"Up until that time, the SRBC was mostly an invisible entity. Out-of-state companies weren't used to dealing with a river basin commission; it's not a traditional state, federal or local government agency, but the commission had some regulatory authority," Pifer said. "That issue, the issue of water withdrawals was really one of the first legal issues that arose in Pennsylvania on shale development. While Act 13 wasn't going to be passed for another four years, there was a legal response to development that began in 2008."

Pifer called it a "reactive approach" that demonstrated how the industry's relationship with regulators has been in constant flux since the beginning of the shale era. The industry has had problems, being cited for spills, well fires, discharges, water contamination, landslides and sediment and erosion control problems under state law, but so too have other industries early on in their development when regulations and know-how were still shaping-up, Pifer said.

"Look at North Carolina, where there's no shale development, but that state has been undergoing a process to develop a regulatory framework if it does happen," he said. "Is that a better approach? It may be, if and when shale development happens, but it might not be if it happens in a way that wasn't anticipated. Maybe those regulations aren't going to address the issues that arise. You can't develop regulations until you know what the issues are going to be or until you have development."

After the McGinty summit, for the first time since 1984, the DEP increased fees for obtaining a natural gas permit. It also required operators to submit more information in their permit applications. The new fee structure, promulgated in 2009, enabled the DEP to expand staffing levels from 64 to 202 employees. Many of the new employees were assigned to engineering and permit/inspection related work.

"The Pennsylvania Department of Environmental Protection is highly regarded throughout the country," said Interstate Oil and Gas Compact Commission spokeswoman Carol Booth. "The agency is continuously looking to strengthen its programs and services for the protection and health of its state and the public without hindering development."

Measuring Up

After four previous reviews, The State Review of Oil and Natural Gas Environmental Regulations (STRONGER), found in 2013 "that the Pennsylvania [regulatory] program is over all, well managed, professional and meeting its program objectives." It recommended that the agency improve its standardized data for tracking violations, the way it regulates technologically enhanced radioactive materials from drilling operations, better protections for fresh groundwater and enhancing pre-drill sampling.

While some of those issues have since been addressed, STRONGER also found that the DEP had adequately increased its staff levels to address an increase in permitting, inspections and enforcement activities that were needed with the shale boom. It also found that the state's standards for well casing and cementing had significantly improved well control and helped mitigate gas or other fluids from migrating into groundwater.

That report came before the state's auditor general in July 2014 released a scathing 158-page report criticizing the DEP for failing to keep pace with the rate of oil and gas development (see Shale Daily, July 22, 2014). The auditor proposed dozens of fixes to improve regulatory oversight.

Despite its progress, Quigley told reporters last month during an update of the agency's operations that it continues to conduct its work with outdated technologies.

"Our [information technology] budget this year is $16 million, so it's less than half of what it was 11 years ago, when you factor in inflation. We have 1990s technology and we have got to reinvest in the agency," he said. "This agency has been chronically underfunded for a long time. Over the last 10 years, the average commonwealth agency lost 6% of its workforce. In that same period of time, the DEP lost 14%. We bore a disproportionate share of the burden in meeting the state's fiscal responsibilities and it shows."

Over the last seven years, Quigley said, the DEP has lost 671 positions, 411 of those, he added, were "on the ground inspectors and permit writers." Without a state budget and some of Wolf's financial proposals, Quigley said the agency remained in a "status quo situation."

The Future

World leaders are gathering in Paris for the United Nations' conference on climate change, where they're working toward a deal to cut global emissions by 3.6 degrees fahrenheit -- or 2 degrees Celsius -- above pre-industrial revolution levels. Larry Schweiger, who was appointed PennFuture president in July, said the dialogue about what the DEP and the industry have done in the past, and what they're doing now, needs to shift toward the future.

"I think there's a more fundamental question that should be posed. We are about to have the Paris conference, where the countries of the world are coming together to discuss targets to achieve a 2 degree cap. In my view, the [oil and gas] industry -- the entire fossil fuel industry -- has a real hard stop and that hard stop is coming on rapidly," he said late last month during an interview. "...What role does gas or oil have in helping us avoid this catastrophic climate change? Gas without methane controls has no role because methane is such a powerful greenhouse gas."

The DEP's job could get thornier in the coming years. It's preparing to adhere to the Obama administration's Clean Power Plan, which would cut emissions from the nation's power plants (see Daily GPI, June 2, 2014). The federal government has also proposed a suite of new rules to cut methane emissions from new and modified oil and gas industry sources (see Shale Daily, Aug. 18). From 2007 to 2014, carbon dioxide emissions fell 20% in Pennsylvania, Quigley said.

"Why did that happen? First of all, the Great Recession. Secondly, some federal requirements for the mercury air toxics standard had some impact," he added. "But third and fundamentally, the predominant influence has been the shift from coal to gas. Cheap shale gas has displaced coal as a fuel, and if indeed there is a war on coal, it's being waged by natural gas and natural gas is winning."

Still, a Penn State University study released this year warned that the state remained on track for one degree fahrenheit warming per decade from 2000 to 2050. While Quigley might have plugged gas as a bridge fuel, he said the agency's mission was more important now than it ever has been, adding that the agency supports the federal government's proposed emissions cuts.

Moreover, the EIA has said that renewables continue to account for a growing share of the nation's power generation (see Daily GPI, Nov. 19). In 2005, renewables like wind and solar accounted for 87.33 million MWh, or 2% of total generation. In 2014, renewables accounted for 281.06 million MWh, or 7% of total generation.

In Pennsylvania, hydroelectric power, biomass and other renewables still account for the smallest share of consumption. The state's alternative energy portfolio standards require 18% of electricity sold by 2021 to come from approved renewable or alternative sources. As those sources gain more grid parity, Schweiger said, the industry should fall more closely in line with tighter environmental controls.

"This administration in Harrisburg is trying for more methane controls on existing sources and it's finding resistance. And in that regard, I think the industry is hurting itself because without it, there's no role in the clean carbon economy," Schweiger said. "The industry needs to be aware of the fast approaching condition where a lot of their investments could be stranded.

"Secretary Quigley, the governor and this administration are doing everything they can to move the needle," he added. "On the other side of the coin, the department and governor are working to expedite pipelines. That's an effort to win support from the gas industry, but I don't see the gas industry reciprocating. They've been pushing back pretty hard at various meetings and opposing these modest requests."

An EPA report released earlier this year, however, shows the oil and gas industry has been making strides to reduce its emissions. Methane emissions from natural gas production have fallen about 38% since 2005, but emissions from processing increased by about 38% since that year and rose about 11% from gas transmission and storage sources. Methane from hydraulically fractured natural gas wells, meanwhile, has declined by about 79% since 2005, the report said.

It's unclear what the next three years will bring for the industry. It's representatives feel as though they're facing more scrutiny now than they have in the past. But "funding is crucial to any state agency," the IOGCC's Booth said. The state remains without a budget and a more than $2 billion  deficit still looms. While the current administration has utilized its resources and plans to continue beefing up regulations, for the most part, legislation, its policies and the regulatory framework have not yet changed significantly.

"It might be too soon to really evaluate that. We haven't had a new statute, or any major regulatory revisions," Pifer said, when asked what the industry can expect and how dramatically things have changed under the new administration. "You should be able to tell the difference after 11 months. There hasn't been any one, or a lot of tangible developments. By looking at their actions you can clearly see they're trying to change course from how the Corbett and previous administrations proceeded."

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