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PA's Struggling Legacy E&Ps Plan to 'Fight Like Heck' Against Regulatory Fate

It isn't clear when the Pennsylvania Department of Environmental Protection (DEP) will begin again with an overhaul of environmental regulations for the state's ailing conventional industry after the General Assembly approved legislation last month to scrap a package that took more than five years to draft.

In a deal to push through new regulations for the state's larger shale producers that were written in tandem with those for the conventional industry, lawmakers voted for SB 279, which requires the DEP to restart the rulemaking process for smaller, “traditional” exploration and production companies (see Shale DailyJune 15June 8). The agency started drafting regulations for both industries in 2011. Gov. Tom Wolf's administration pledged to tighten them last year through a more rigorous rulemaking process (see Shale DailyMarch 9, 2015).

With no clear answer about when the regulations will be rewritten or how long that might take, legacy producers that were brought to their knees by the commodities downturn are left facing even more uncertainty.

"It took them more than four years the first time, and we're gonna fight like heck," said Mark Cline, president of the Pennsylvania Independent Petroleum Producers Association (PIPP). "They never showed a need to change the regulations. That's one of my biggest concerns. Anytime you write up regulations, you have to show a compelling need. We're going to fight them every step of the way. Even the unconventional guys are fighting hard. They're saying they weren't created in the right way."

Shale producers have expressed concerns about the DEP's failure to consider the cost of the regulatory overhaul. The new shale regulations are currently being reviewed by the state Attorney General's (AG) office. Once the review is complete, they would be published in the state bulletin and become effective, but DEP spokesman Neil Shader said he wasn't sure how long that process would take.

"Pennsylvania is already well-recognized for having among the nation's strongest and most effective environmental and enforcement standards, which the industry has worked hard to modernize," said Marcellus Shale Coalition President David Spigelmyer. “Unfortunately, the DEP failed to consult with the industry regarding its comprehensive comments, as well as to better understand the cost of compliance with this rulemaking as they had done with the initial proposal in 2013."

The larger and better-financed shale drillers continue to keep an eye on the regulations as they move closer to implementation. As lawmakers worked to finalize the 2016-2017 budget in recent weeks, there was language to roll back some of the new rules in companion bills and separate legislation that failed (see Shale DailyJuly 22). The industry had a close eye on those developments, but now that the rules are under review by the state's top watchdog, it's largely been sidelined.

"The ball's in the AG's court, we can't lobby the AG,"  said one source close to shale producers operating in the state who remained anonymous to discuss the process openly.

Before the conventional rules were voted down, they had included separate standards for the conventional and unconventional industries to reduce impacts on public resources, such as schools and parks, help prevent spills, strengthen waste management and require stronger well site restoration standards. All of the producers, however, would have been required to adhere to some of the same rules, such as closer regulatory scrutiny for wells near public resource protection zones. All operators would have been required to conduct reviews of abandoned and active wells near their pads prior to drilling, among other things.

Lawmakers on both sides of the aisle accused the DEP of ignoring Act 126 of 2014, which required the agency to adopt separate regulations for both industries. Trade organizations and producers accused the agency of drafting similar regulations for two very different industries. The DEP maintained that the process was a transparent and balanced one that attracted tens of thousands of public comments and persisted through three different administrations.

"I do not believe these changes need to be made," state Sen. Scott Hutchinson told NGI's Shale Daily. Hutchinson represents a five-county district in the Northwest part of the state that has long been home to the 150-year-old conventional industry. "No one has made a case as to why they need to be updated. When you hear the stories and some of the things that have been talked about and that have happened, those violations are covered under current regulations and the parties have been fined under those. This is a highly regulated industry and rules are in place to catch the bad guys."

Legacy operations in the state have come to a standstill. From January to June, no conventional vertical wells were spud in the state. Vertical natural gas production in 1Q2016, according to DEP data, declined by about 10% year/year to 9.1 Bcf. Shale production was up 12.8% during the same time, mainly due to wells that were spud in 2014.

"It's bad. Almost every company has laid off everyone but those that own it or run it. In Bradford alone, we've had three different [oilfield service] companies this year and last that closed up their doors. People are struggling big time," Cline said of what the price collapse has meant for one township in McKean County and the surrounding region. "They've gone out of business, there's been a lot of auctions. There's so much equipment and nobody's buying it. Even the big guys can't get rid of it."

Hutchinson agreed, saying now is not the time for the industry to absorb costly regulations.

"When I go out and talk to these guys, they're doing odd jobs to get by because the companies are laying people off," he said. "Some are driving trucks on the side, others are timbering and it goes on and on. They're just trying to weather the storm because there really isn't much new activity going on, and if you add stifling regulations on top of those low prices, there's a risk these guys could be gone forever."

The state's omnibus energy law, Act 13 of 2012, required the DEP to update environmental protection standards for oil and gas producers. Cline noted that nowhere in the law are conventional producers and the smaller vertical wells they develop mentioned or defined. While he's correct, the law stipulated that new regulations would have to be promulgated to meet its requirements, which indirectly extends to legacy producers.

"Act 13 contains provisions that clearly apply only to unconventional wells, like site containment and water management plans," Shader said. "But it also contains provisions that apply equally to both conventional drillers and unconventional drillers like water supply replacement standards and corrosion control for buried metal structures like tanks."

Shader added that "documented cases of surface and groundwater contamination from conventional oil and gas operations are a clear indication that updated rules are necessary to protect the people and the environment."

PIPP represents more than 350 independent producers and supply companies across the state. Cline said he's been told by lawyers that the DEP can't restart the rulemaking process until the shale regulations are published in the state bulletin and implemented because they were drafted at the same time as the conventional rules. Shader said that's not the case.

Instead, the DEP can't begin the process until the Pennsylvania Grade Crude Development Advisory Council is established to advise and assist the DEP in crafting those regulations. SB 279 mandates the creation of that advisory council. Hutchinson -- who introduced the legislation -- said the council would consist of cabinet secretaries, lawmakers, academics and officials from various industries. He added, however, that the bill does not require a certain date for the council to be established and working, saying only that the process is underway to form it.

Complicating matters is the DEP's Conventional Oil and Gas Advisory Committee, which already serves a similar purpose. Shader said the agency is currently evaluating how those two groups would work together throughout the rulemaking process.

PennFuture’s Larry Schweiger, president of the environmental advocacy organization, said the situation has eroded the public's confidence in the DEP's ability to get new regulations for oil and gas producers on the books. He said that was especially true after the General Assembly intervened in the process and scrapped the conventional package.

"The current rules for these guys were drafted a long, long time ago," Schweiger said, referring to the state's Oil and Gas Act of 1984. "We have a set of practices, a new approach in Pennsylvania that's not consistent with the way things were done in the old days. To be painfully blunt, the [regulations] need updated. We're talking about decades here."

Schweiger worked as the executive secretary of the General Assembly's Joint Conservation Committee in the 1970s and early 1980s. In the early 1980s, as the country was in a recession and the beginnings of an oil glut that led to a downturn later in the decade were underway, legislators were talking about new rules for oil and gas producers.

"The pushback is traditional. They worked very hard against that bill in 1983," Schweiger said of legacy producers. "And that legislation was watered down quite substantially from what we knew needed to happen. The industry itself has changed quite dramatically since then, and we need better order to protect the public and future generations."

Schweiger said his organization is also concerned about how long it might take to draft the new regulations.

"The regulatory process is an extensive thing itself," Hutchinson added. "It's going to take a while before we get things worked out."

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