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Appalachian Operators Face Long List of Challenges, Report Says

In its fourth annual report examining the rapid pace at which oil and gas development is occurring across the Appalachian Basin, Pittsburgh-based law firm Babst Calland acknowledges that the list of challenges confronting the industry in Ohio, West Virginia and Pennsylvania is growing longer by the month.

The shale gas industry in each state "is entering a period of transition -- from its start-up years to an era of production efficiencies and a manufacturing renaissance ahead," the report said.

The report details the major challenges the industry faces across the region from the political and regulatory environment, to the local opposition and workforce safety issues that still remain a top concern.

Joseph Reinhart, co-chairman of the energy and natural resources group at Babst Calland, one of the region's leading law firms with offices in each of the three states, primarily representing industry interests, said chief among the concerns are water resources, land-use and the timeliness of permitting.

In particular, he said, operators in Pennsylvania are virtually back to where they started in the Marcellus Shale after the state Supreme Court in December struck down key provisions of Act 13 -- a major piece of legislation that updated the state's oil and gas laws in 2012 (see Shale DailyFeb. 15, 2012) -- by returning to municipalities their right to enforce or change local zoning ordinances (see Shale DailyDec. 20, 2013).

In areas of opposition, the firm's report said it could send operators back to a time when oil and gas development was classified as a conditional use activity, requiring time-consuming public hearings and a prolonged approval process that could slow development in some areas.

"Act 13 dealt with the land-use issues and it dealt with the impact fee," Reinhart said. "The industry thought an understanding was reached and now they're sort of back to where they were before in dealing with municipalities on all these levels."

Centralized regulation is also threatened in Ohio, where that state's Supreme Court heard oral arguments in February over a challenge to the Ohio Department of Natural Resources exclusive authority to site and permit wells (seeShale DailyDec. 30, 2013).

Reinhart added that as unconventional development in the basin continues to grow, it faces continued pressure from the public and regulatory agencies that have long been accustomed to energy extraction. But as the industry becomes more complex, he said, so too do the regulations and the amount of state, federal and local bureaucracy involved in crafting them.

"With regard to water, there's a common issue of where you get it and how you get rid of it. There's just as many problems in a place where water is abundant, compared to a place where water is scarce," he said. "Government agencies are going to have to decide how much is too much and we're going to need a lot."

The permitting of pipelines, oil and gas wells, underground injection wells and the authorizations to extract water are taking longer than they once did in nearly every state, with perhaps the exception of Ohio, where Reinhart said regulators have learned from earlier development in West Virginia and Pennsylvania.

Meanwhile, more uncertainty is likely ahead for operators in Appalachia as general elections draw near in all three states in November, the report said.

In Ohio, five state government executive offices are facing potential changes along with one half of the state Senate and all of the state House of Representatives. A race for governor appears to be favoring Republican incumbent Gov. John Kasich (see Shale Daily, March 4), but lawmakers have taken steps in recent weeks to increase the oil and gas severance tax, which he supports (see Shale DailyMay 15).

In Pennsylvania, Republican Gov. Tom Corbett is widely considered to be vulnerable and two recently released polls from Quinnipiac University and Rasmussen have shown his Democratic Challenger, Tom Wolf, who has been critical of Corbett's handling of the oil and gas industry (seeShale DailyMay 21Jan. 28), ahead by about 20 points. In West Virginia, 65 statewide races will be taking place as lawmakers keep trying unsuccessfully to allow forced pooling at shallower depths that would help to better facilitate Marcellus Shale development (see Shale DailyJune 13, 2011). The state also made regulatory changes that will require strict above ground storage standards for hydraulic fracturing waste (see Shale DailyFeb. 14).

However, Reinhart said that the kind of challenges confronting operators in Ohio, West Virginia and Pennsylvania are no different than those unfolding in state's across the country that are home to other leading onshore basins.

"As the rigs get bigger and the water volumes get larger we're starting to see the dynamics changing and there's more to deal with," he said. "Most of these state's have a history of oil and gas development and they want it to happen, there's likely going to be more agencies and more scrutiny involved.  It's no different here than it is elsewhere."

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