Thursday, June 22, 2017

Shale Law in the Spotlight: Pennsylvania Supreme Court Takes Expansive View of State Environmental Rights Amendment, Strikes Down Use of Oil and Gas Revenue for Non-Conservation Purposes

Written by Patrick Stickney, Research Assistant for Professor Lara Fowler

On June 20, 2017, the Pennsylvania Supreme Court reaffirmed the view, first expressed in the Court’s plurality decision in Robinson Township v. Commonwealth (2013), that the state’s Environmental Rights Amendment should be given a more expansive construction than has been accorded to the Amendment previously by the courts. In Pennsylvania Environmental Defense Foundation v. Commonwealth (PEDF), the Supreme Court rejected the test formulated by the Commonwealth Court shortly after the passage of the Amendment in the 1970s. Along with reaffirming a more expansive construction of the Amendment, the Court struck down amendments made to the state’s Fiscal Code which transferred all but up to $50 million a year in royalty money from oil and gas leases on state lands from the Pennsylvania Department of Conservation and Natural Resources to the state’s general fund, because those funds were not used for the conservation or maintenance of public natural resources. Additionally, the Court remanded the question of whether, distinct from royalty payments, rental payments made as part of the lease are payments that should also be considered part of the trust, in the view that they should if they were made as “consideration for the oil and gas that is extracted.” Even so, the decision still leaves many aspects of the Environmental Rights Amendment open, including the question of exactly how much of the Robinson Township plurality decision has become affirmed by the Court. 

Two years after the Pennsylvania legislature passed the Environmental Rights Amendment, the Commonwealth Court articulated a three-part test for the public trust doctrine portion of the Amendment in Payne v. Kassab. The Payne test asked:
  • Was there compliance with all applicable statutes and regulations relevant to the protection of the Commonwealth's public natural resources?
  • Does the record demonstrate a reasonable effort to reduce the environmental incursion to a minimum?
  • Does the environmental harm that will result from the challenged decision or action so clearly outweigh the benefits to be derived therefrom that to proceed further would be an abuse of discretion?
Between the articulation of the test and the Supreme Court’s decision in Robinson Township, state courts had found the test to be controlling. The Robinson Township plurality upended the conventional formulation of the Amendment, relegating the Payne test to be applied only when a claim is made that an action by the government fails to comply with a statute that the legislature passed to further advance the goals of the Environmental Rights Amendment. However, its status as a plurality decision raised questions as to whether an expansive construction of the Amendment would replace the exclusive use of the Payne test; the Commonwealth Court itself continued to apply the Payne test because Robinson Township was not a majority decision. 

The Court’s Decision
Instead of relegating the Payne test to a portion of the analysis under the Amendment as the plurality in Robinson Township did, the Court rejected it entirely in PEDF, stating that the analysis should be controlled by the plain language of the Amendment and state private trust principles in effect at the time of the Amendment’s passage. The Court rejected the Payne test by stating that, although the Court upheld the Commonwealth Court’s decision in Payne, it did so without adopting the test. 

The Court affirmed the Robinson Township plurality’s explanation that state trust principles give the duties of prudence, loyalty, and impartiality to the state. Additionally, the Court explained the state has the “duty to prohibit the degradation, diminution, and depletion” of public natural resources, whether through state or private action, and the state must affirmatively act through legislation to protect the environment. Because state trust law requires that trust assets cannot be used for purposes outside the scope of the trust, including the revenue from the sale of those assets, legislative action allowing funds from state oil and gas leases to be used for non-conservation purposes were a violation of the state’s duties under the Amendment. The Court explained that this revenue did not need to stay in the fund established for this lease revenue, but if it is transferred, the funds must be used for the conservation and maintenance of public natural resources. 

The Court’s majority decision in PEDF has opened up new ground for Environmental Rights Amendment litigation, and it will be key to pay attention to how the Commonwealth Court decides the issue on remand and follows the judgement of the Supreme Court. The Court’s decision in PEDF could serve as a foundation on which greater limits on state action in this area could be established, or the effect of the Court’s decision could be limited through subsequent decisions.

Monday, June 19, 2017

Shale Law Weekly Review - June 19, 2017

Written by Torin Miller - Research Assistant

The following information is an update of recent local, state, national, and international legal developments relevant to shale gas.

Oil and Gas Operations: Pennsylvania Commonwealth Court Rules That Well Under Oil Refinery Is Not ‘Abnormally Dangerous’
On June 12, 2017, the Pennsylvania Commonwealth Court ruled that a permit issued by the Pennsylvania Department of Environmental Protection (DEP) is valid under the law even where the permit would allow the drilling of a well underneath an oil refinery. The Warren, Pennsylvania, refinery objected to the well, citing concerns of large fires or explosions, as well as the potential for leakage from old oil wells on the site. The court held that “hydraulic fracturing is not an abnormally dangerous activity under Pennsylvania law,” and that the permit is thus valid and legal.

Production Reports: Ohio Shale Gas Production Rises While Oil Falls
On June 9, 2017, the Ohio Department of Natural Resources (ODNR) issued its first-quarter production report for 2017. In comparison to the first-quarter report from 2016, this quarter’s natural gas production is up 12.86% while oil production is down 28.82%. Of the 1,613 unconventional wells listed in the report, 1,560 were producing gas or oil this quarter with an average oil production of 2,503 barrels and an average natural gas production of 238,411 Mcf.

Economic Development: Report Cites $50 Billion Investment in Ohio’s Marcellus and Utica Shale Formations in Recent Years
A May 2017 report released by Cleveland State University found that an estimated $50.4 billion was invested in Ohio’s Marcellus and Utica upstream, midstream and downstream markets between 2011 and 2016. Upstream investments constituted $38.8 billion of total investments, with the largest portion of that being attributed to investments in undeveloped land and drilling. Chesapeake Exploration LLC had nearly three times as many wells drilled, being drilled, and producing in that time period than the nearest upstream company.

Pipelines: Public Hearing Focuses On Ohio Pipeline Safety Issues
On June 15, 2017, the Ohio Power Siting Board (OPSB) held a public hearing regarding a 13-mile Hamilton County natural gas pipeline proposed by Duke Energy, according to a media report. According to the report, more than a 100 citizens attended the hearing with the majority citing safety concerns from the construction of a pipeline in a highly-populated area. The OPSB ultimately will make the decision on whether Duke Energy may proceed with the $86-112 million project.

Methane Emissions: EPA Delays Methane Emission Standards By Two Years
On June 13, 2017, the United States Environmental Protection Agency (EPA) issued a press release proposing a two-year delay of the New Source Performance Standards set by the EPA in 2016. The proposal comes a week after the EPA issued a 90-day delay. Specifically, the two-year stay affects “fugitive emissions, pneumatic pump and professional engineer certification requirements in the rule while the agency reconsiders issues associated with these requirements.” The Bureau of Land Management (BLM) is also following suit in delaying the implementation of requirements, according to a media report.

Pipelines: Judge Says Dakota Access Pipeline Needs New Environmental Impact Assessment
On June 14, 2017, the United States District Court for the District of Columbia ruled that the United States Army Corps of Engineers “did not adequately consider the impacts of an oil spill on fishing rights, hunting rights, or environmental justice, or the degree to which the pipeline’s effects are likely to be highly controversial.” The court noted, “To remedy those violations, the Corps will have to reconsider those sections of its environmental analysis upon remand by the Court.” However, the court also noted that whether the pipeline must cease to operate presently is a separate question to be determined in the near future.  

Public Lands: BLM Generates $4.7 Million In Oil And Gas Leases
On June 14, 2017, the United States Bureau of Land Management (BLM) issued a press release announcing that it had leased a combined 87 parcels in three states totaling nearly 68,000 acres and over $4.7 million. Proceeds from the sale, which included parcels in Colorado, Oklahoma and Texas, will be distributed among the three states and the federal government. “These oil and gas lease sales go a long way toward fueling America’s economy and supporting good-paying energy sector jobs,” BLM Acting Director Michael D. Nedd said in the release.

Water Quality: Wyoming Officials To Appear In Pavillion Water Contamination Litigation
On June 14, 2017, the United States District Court for the District of Wyoming ruled that Jerimiah Rieman, former energy advisor to Wyoming Governor Matt Mead, could be deposed in a case “that alleges a natural gas company's operations contaminated the drinking water of a Wyoming family,” according to a media report. This litigation follows an extensive investigation into potential water contamination in the Pavillion area. In November 2011, the United States Environmental Protection Agency (EPA) published a draft report stating that “inorganic and organic constituents associated with hydraulic fracturing have contaminated ground water at and below the depth used for domestic water supply” and that “gas production activities have likely enhanced gas migration at and below depths used for domestic water supply and to domestic wells in the area of investigation.” However, the EPA never finalized their report. On June 20, 2013, the State of Wyoming announced it would continue the Pavillion investigation, and it subsequently found that no connection between Encana’s operations and the contamination existed. Mr. Rieman facilitated the transfer of the investigation from the EPA to the state of Wyoming.

Natural Gas Production: North Dakota Reports Record Production in April
The North Dakota Industrial Commission (NDIC) released its latest production report on June 13, 2017. The report shows that a record number of 13,717 wells were producing gas in April 2017. Of these wells, about 86% were producing from unconventional plays, and gas production reached an all-time high of 1,836,308 MCF/day.

Wildlife: Report Finds that Overlap Between Energy Development and Grouse Habitat Is Not Significant
On June 9, 2017, Backcountry Hunters and Anglers released a report analyzing the overlap between key habitat areas of sage-grouse and areas of existing and potential energy development throughout the western United States. The report concludes that there is only a 4% overlap between key habitat and “existing coal and oil and gas leases on federal lands.” Additionally, “[t]he majority of federal lands within the [key habitat] have zero to low assumed potential for oil and gas development based on existing data sources.” Further, the report concluded that “[t]he majority of federal lands and minerals identified as assumed medium or high development potential for oil and gas are located outside of the [key habitat].”

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Friday, June 16, 2017

Global Shale Law Compendium: Shale Governance in Argentina

Written by Chloe Marie – Research Fellow

The Global Shale Law Compendium series addresses legal developments and other issues related to the governance of shale oil and gas activities in various countries and regions of the world. In this article, we will highlight governance actions taken by Argentina to develop policies specific to shale gas development.

Argentina holds an estimated 308 Tcf of technically recoverable shale gas reserves located within the Neuquen basin in the Vaca Muerta formation. Several local and international energy companies have already begun exploration work, including American Energy Partners, Dow Chemical Company, Chevron, Exxon Mobil, Apache Corporation and Americas Petrogas, most of which partnered with Argentina’s state-owned company Yacimientos Petroliferos Fiscales (YPF).

On January 14, 2016, American Energy Partners, an Oklahoma-based company, signed a joint venture agreement with YPF to drill exploration wells at the Bajada de Anelo block covering 200km2 in the Neuquen province. The project is scheduled for completion in 2018. As for Dow Chemical Company, it entered into a $118 million joint venture agreement with YPF in September 2013 to drill wells at the Ol Orejano block in Neuquen province. In December 2015, YPF and Dow announced that they would commit an additional $500 million investment to exploit shale gas. On July 16, 2013, subsidiary Chevron Argentina S.R.L. signed a $1.24 billion agreement with YPF for the development of shale oil and gas resources from the Neuquen basin. ExxonMobil Exploration Argentina S.R.L. invested $200 million to explore the Neuquen basin and now holds working interest in the Bajo del Choique and La Invernada blocks with provincial state-run oil company GyP Neuquen. On August 30, 2011, Americas Petrogas, a Canadian company, entered into a farm-out agreement with ExxonMobil Exploration Argentina S.R.L. for the exploration and potential exploitation of Los Toldos blocks in Neuquen province. Finally, Apache Corporation, a Houston-based company, partnered with YPF in the exploration of shale gas but, in February 2014, agreed to sell its Argentina energy assets to YPF for $800 million in cash due to financial difficulties.

In September 2015, YPF announced that it was in negotiations with Gazprom to develop shale gas projects in the Neuquen region. In addition, Royal Dutch Shell announced in September 2016, that it could invest $300 million in Argentina through 2020 for shale gas exploration in the Neuquen basin.

The Argentine Constitution provides for a federal union of provinces: 23 provinces and one autonomous federal district, Buenos Aires. Provinces are fully autonomous with their own Constitution, laws and judicial system, and local governments organization. They, however, must not contradict the national Constitution. Provinces also hold all the power that they chose not to delegate to the federal government. With regard to the energy sector, the National Secretariat of Energy and the Ministry of Federal Planning, Public Investment, and Services represent the enforcement authority for the hydrocarbon regime and set general rules for the oil and gas industry. Provincial governments, however, retain the power to issue exploration permits and exploitation concessions and set tax and royalty regulations. Under the Hydrocarbons Law, provincial governments own the surface above oil and natural gas resources. As for the national government, it owns offshore oil and gas fields. The extracting companies own the minerals underneath the surface once extracted.

In order to overcome the acute imbalance between energy supply and demand, the government of Cristina Fernandez de Kirchner adopted law no. 27.007 in October 2014 reforming the prior hydrocarbon law no. 17.319, which dated back to 1967. Under the so-called New Hydrocarbon Law, the Argentine government implemented two main changes: (1) unconventional oil and gas development has been integrated into the hydrocarbon regulatory framework, and (2) the powers of provincial governments over the oil and gas sector have been restrained.

Before the 2014 New Hydrocarbon Law, fixed price energy tariffs and utility rates along with tough taxation dramatically discouraged foreign direct investment. Thus, in an effort to encourage new investments, the Fernandez government agreed on loosening up taxation, royalty and duration of E&P provisions while standardizing concession agreements, bidding process and getting rid of the carrying system.

In that respect, companies investing more than $250 million over a three-year period would receive tax exemptions and would be allowed to export 20% of onshore production and 60% of offshore production free from export taxes. In addition, the government set a standard royalty rate equal to 12% with possibility for the provincial governments to increase it by 3% on each concession extension. This 3% increase is subject to a maximum cap at 18%. Furthermore, prior to the New Hydrocarbon Law, each provincial government could include their own financial and legal requirements in the concession contract. To avoid confusion among the investors, and in collaboration with the provincial governments, the Energy Secretariat worked on the standardization of concession agreements with common requirements.

The Energy Secretariat eliminated the so-called “carrying system” by which foreign exploration companies were required to partner with state-owned companies, and the Fernandez government created a nationwide standardized bidding process preventing each province from undertaking its own licensing round. Under the New Hydrocarbon Law, all companies must go through the national bidding process. Provincial governments are no longer permitted to assign new areas for development. Finally, time periods for exploration and production have been extended for conventional exploration permits (up to 11 years) and for unconventional exploitation concessions (up to 13 years), and the Fernandez government reduced oil export tariffs to limit the influence of low oil prices on production.

At the beginning of 2016, President Mauricio Macri, newly elected in December 2015, indicated that he wanted to attract “$20 billion in foreign investment this year from energy to infrastructure as he tries to persuade global investors that this time is different for Latin America’s third-largest economy.” His plan to attract new foreign investment includes tax incentives for foreign investment, access to international financial markets, decreasing reliance on imported gas while developing trade, relaxing foreign currency controls, devaluing the peso to reflect its real value, making exports more competitive, and updating prices and tariffs to end subsidies.

Interestingly, on April 27, 2017, Total, the French giant energy company, announced it launched the first phase of shale gas development in the Vaca Muerta shale play. A company executive declared that such project “is a key milestone in the development of the giant Vaca Muerta shale play. Total is also increasing its interest in the eastern part of the Aguada Pichana concession where the results of pilot wells drilled to date have been excellent.”

Prior articles in the Global Shale Law Compendium series:
·       France (March 30, 2017)
·       England (April 6, 2017)
·       Germany (April 28, 2017)
·       Poland (May 5, 2017)
·       Algeria (May 26, 2017)