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Pay Attention to the States, Shale Contractor Says

If operators and service companies want to succeed in shale plays, they should keep an eye on state regulators, even in states far from where they plan to operate, "simply because those regulations tend to get passed around," said a contractor active in shale plays.

"Any good idea that a state comes up with, other states are likely to copy," David Alleman, a senior environmental manager with the consulting firm All Consulting LLC, said at the Marcellus Shale Gas Environmental Summit in Pittsburgh on Tuesday.

That message is quite different from the macro-level debate between states and the federal government, or the micro-level debate about regulation at the local level, but Alleman said industry often underestimates the importance of tracking regulations and often passes off the responsibility to advocacy groups that may not have expertise.

"In many cases, agencies really want to get industry comments," Alleman said, either because those agencies need "technical rebuttals" to combat political additions or "technical feedback" for proposed regulations. "Typically, these agency personnel are not active oil and gas employees. They may not have extensive experience in the industry. Any comment you can give them can be really helpful to that regulatory process."

That idea could mean that while Pennsylvania and New York often snipe at each other, operators in the more southerly state should pay attention to its northern neighbor. While New York chose to delay permitting until it changed its regulatory structure to anticipate the changes required by shale, Pennsylvania chose to use its existing regulatory structure to reflect those changes, experts from both states said.

The current permitting delay in New York is the result of state regulators supplementing the generic environmental impact statement (GEIS) that has governed all oil and gas development since 1992, said John Martin, president of JP Martin Energy Strategy LLC and the former head of the New York State Energy Research and Development Authority.

"If you follow the discussion about New York, it sounds like we never had these things," Martin said at the conference, referring to environmental regulations for oil and gas development. "We always had these things."

That puts the slog to supplement the GEIS for shale development into perspective, Martin said (see Shale Daily, Sept. 29). "It's not madness. It's how we regulate in New York. It's an ugly, open process. Keep in mind the first GEIS took 12 years." While that process might be the norm, it causes problems, Martin said.

The revised draft GEIS currently out for review tried to please all stakeholders, Martin said. "They basically succumbed to anybody that had a bone to pick about an issue. They banned it...But they also succumbed to industry because industry wants to issue permits and they just want this done. So they rushed it through and they banned everything."

That is creating uncertainty in New York, he said. For instance, while the state estimates the GEIS would restrict drilling in 20% of New York, the industry believes that figure is closer to 40%, and "tightrope regulations" that might allow the state to pull all the permits issued to a operator if the operator fails to implement a single measure, he said.

Issues like those will make development slow and expensive in New York, Martin said.

He believes companies looking to invest in shale plays will likely go to other states before New York, and companies already in New York "are going to have to make a decision about whether they want to stay." That may be the way New York wants it, though, Martin said, noting that the industry feels the state is crafting regulations that push small operators out of the play in order to get "an ExxonMobil level of safety."

If the strategy is to drive out smaller players, it appears to be working. Norse Energy Corp. ASA, which had been the first company in line for an unconventional drilling permit in New York's portion of the Marcellus and Utica shales, recently announced it was putting most of its leasehold up for sale. The Norwegian company said it has fallen into millions of dollars of debt waiting for the state to enact shale gas regulations (see Shale Daily, Oct. 25).

The delay in New York is fine with Pennsylvania state Rep. Garth Everett, a Republican from Lycoming County, one of the most prolific and active counties in the Marcellus Shale. "We thank the state of New York every day for their moratorium," he said.

Pennsylvania felt that waiting while it crafted regulation could keep shale development from getting off the ground and lead to lawsuits from companies that held leases on state land. It instead chose to use "an evolutionary approach to the industry," Everett said, using existing oil and gas regulations as a foundation and revising as shale issues arose.

So while companies have been able to drill into shale formations in Pennsylvania for years, they have also had to negotiate numerous regulatory changes in recent years and potential statutory changes on the horizon as the Pennsylvania lawmakers consider the recommendations of the Marcellus Shale Advisory Commission (MSAC).

Based on those recommendations, Gov. Tom Corbett is proposing to increase setbacks, bonding and presumptive liability, among other changes (see Shale Daily, Oct. 4).

While hesitant to comment on specific changes before legislation is introduced, Everett said, "Generally, I think those are good." He said lawmakers have additional changes and said he wanted to see legislation for the unitization process on private land.

The Pennsylvania method allows companies to drill where they can't in New York, but those frequent changes create problems for companies as well, Alleman said. "Recently, states all across the U.S. have revised their regulations. We've had Pennsylvania, West Virgina, Ohio, Texas, Oklahoma, Wyoming, Colorado, all these states that have been revising their regulations. It seems to have become an ongoing process," he said. "They revise regulations, and before the ink is dry, there are new changes being proposed."

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