Friday, January 26, 2018

Global Shale Law Compendium: Shale Governance in Pennsylvania – Fiscal Code Legislation from 2009 to 2017

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 focus on the legal, policy, and governance issues related to shale gas development in the United States, and more specifically in the state of Pennsylvania.

In prior articles, we reviewed statutes applicable to unconventional oil and gas development that were enacted in Pennsylvania during the time period from 2010 through 2012, and from 2013 to 2016. This article will address shale-related legislation that was included within fiscal code legislation enacted from 2009 to 2017.

2017-2018 legislative session

The legislation amended provisions relating to the Oil and Gas Lease Fund and provided that the Fund remained a Special Fund in the Pennsylvania Treasury. Revenue generated from leasing of Commonwealth land is to be deposited in the fund. These funds are to be used as appropriated by the General Assembly. Beginning in fiscal year 2017-18, money in the Fund is to be annually distributed as following: $20,000,000 to the Marcellus Legacy Fund for distribution to the Environmental Stewardship Fund; and $15,000,000 to the Marcellus Legacy Fund for distribution to the Hazardous Sites Cleanup Fund.

The legislation also amended a provision relating to oil and gas operations in the South Newark Basin. In Act 87 of 2012 [see below], the General Assembly prohibited DEP from issuing any permits for drilling in the South Newark Basin until this Basin had been studied more fully. At that time, the prohibition on DEP permitting for the South Newark Basin extended until January 1, 2018. The 2017 Fiscal Code repeals this expiration date, and thus, continues the permitting ban indefinitely.

In addition, the Fiscal Code added new provisions addressing the “temporary cessation of oil and gas wells.” According to the legislation, an oil and gas lease will not terminate based on non-production if the lessor accepts a royalty payment after production has recommenced. Where more than one year has elapsed since prior production, the first royalty check must contain a disclaimer indicating that by accepting the royalty, the lessor acknowledges that the lease remains valid. Furthermore, a lease will remain valid if the operator gives the lessor notice of an intention to drill a new well and the lessor fails to object within 90 days.

2015-2016 legislative session

The General Assembly expanded the exclusion to the Oil and Gas Conservation Act to provide that the law does not apply where an operator drills a well that unintentionally penetrates the Onondaga Horizon formation and does not intentionally produce oil or gas from it.

In addition, the Amendments stipulated that $20,000,000 should be distributed to the Environmental Stewardship Fund from the Marcellus Legacy Fund in fiscal year 2016-2017.

The 2016 Omnibus Amendments provided that $12,000,000 should be allocated to the Natural Gas Infrastructure Development Fund in fiscal year 2015-2016 in order to support projects expanding natural gas access to the community through grants, including hospitals, businesses, economic development organizations, municipalities, counties, and school districts.

The General Assembly also declared that $20,000,000 would be allocated to the Marcellus Legacy Fund for distribution to the Environmental Stewardship Fund, which purpose is to improve environmental restoration and conservation. In addition, the General Assembly specified that certain funds appropriated to the Department of Community and Economic Development “shall be used for independent research by a not-for-profit entity, which partners with higher education institutions, to identify, characterize and manage issues related to the economic and environmental impact of Pennsylvania Marcellus Shale development.”

2013-2014 legislative session

The Pennsylvania General Assembly authorized the transfer of funds from the Oil and Gas Lease Fund and declared that “the Department continually updates and employs best management practices when managing oil and gas activities on State forest lands to ensure that shale gas activities are consistent with the recreational and ecological uses of State forest.” Furthermore, the General Assembly encouraged the DCNR to pursue its efforts in developing shale gas monitoring program activities in order to evaluate and report the impacts of shale gas activities in State forest.

The General Assembly also directed the Environmental Quality Board to develop and promulgate separate regulations, respectively relating to the regulation of conventional oil and gas wells and unconventional gas wells.

The Pennsylvania General Assembly provided that funds from the Oil and Gas Lease Fund would be allocated to the DCNR for the fiscal year 2013-2014. Moreover, the Amendments stipulated that $150,000 from the money received by DEP for environmental program management would be used for independent research regarding natural gas drilling.

2011-2012 legislative session

According to a USGS report issued in 2012, the South Newark Basin, which underlies Southeastern Pennsylvania, holds approximately 876,000,000,000 cubic feet of total undiscovered natural gas resources. The General Assembly determined that the basin characteristics deserve more study before allowing the issuance of drilling permits by DEP in the basin. Additionally, the Department of Conservation and Natural Resources (DCNR) was commissioned to assess the practical resource recovery implications of the USGS report as well as the fiscal impact of oil and gas operations on the South Newark Basin.

In addition, the Amendments provided for oil and gas well bonding amounts for conventional development. The legislation stated that “the bond amount for conventional oil or gas wells shall be $2,500 per well or a blanket bond of $25,000.” Also, the Amendments commissioned the Environmental Quality Board to conduct a review of the existing bonding requirements for conventional oil and gas wells.

2009-2010 legislative session

In the 2010 Omnibus Amendments to the Fiscal Code, section 4 stated that “it is the intent of the House majority leadership and Senate majority leadership to pass legislation that raises revenue from the extraction of Marcellus shale natural gas by October 1, 2010, with an effective date for implementation no later than January 1, 2011.” Furthermore, the Amendments stated that the revenue raised from shale gas extraction would be divided by a ratio to be determined by future legislation between the Commonwealth, counties and municipalities, and environmental initiatives.

The 2009 Omnibus Amendments to the Fiscal Code provided that up to $50,000,000 should be appropriated to the Department of Conservation and Natural Resources (DCNR) from the Oil and Gas Lease Fund for conservation and recreational purposes, including land acquisition, improving infrastructure, and supporting the Department’s operating activities. The Oil and Gas Lease Fund was established in December 1955 through the enactment of Act 256 (P.L. 865) and is used as a depository for money received from oil and gas leases on state forest lands, except for lands owned by the Pennsylvania Game or Fish and Boat Commissions.

In addition, the Amendments also specified that the Pennsylvania General Assembly may allocate some money from the Oil and Gas Lease Fund to municipalities impacted by Marcellus wells.  

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