Gov. Tom Corbett has signed into law a measure that makes what some lawyers have called “wholesale” changes to Pennsylvania’s Oil and Gas Act, including imposing “impact fees” on Marcellus Shale wells and limiting local governments’ ability to regulate drilling.
The legislation has been a political hot point, particularly since Corbett entered office last year.
HB 1950, passed the week of Feb. 6 by the House and Senate and signed by Corbett on Monday, represents a compromise between the two legislative chambers, which had each previously drafted a separate version of a bill amending the Oil and Gas Act.
As is the case with most compromises, attorneys said, not everyone is totally satisfied with the outcome, but many are relieved to at least have some guidelines in place.
“No one’s going to be thrilled, but now we can move to the next stage,” said Ivan S. DeVoren, an environmental and oil and gas lawyer in Houston-based Burleson’s Pittsburgh-area office. “Companies can plan, municipalities can be more thoughtful and people relying on leases they’ve signed and royalties they expect have a little more certainty to protect small family acreages or farms, where their economy has been depressed for years, if not decades.”
Still, attorneys said, while the amendments have brought some aspects of oil and gas law into sharper focus, there remains plenty of potential for new legal questions to arise.
Kevin Garber, a shareholder in the environmental, health and safety, and natural resources groups of Babst Calland in Pittsburgh, said a number of people he’s spoken to in the oil and gas industry found the impact fees to be higher than expected and were surprised by how far the legislation’s “reach-back” extends.
Under HB 1950, impact fees will apply to gas wells spud — the industry term for the commencement of drilling — “in this commonwealth regardless of when spudding occurred.”
Garber said this could prove costly for a lot of companies.
“What that means is, come September [when the first fee payments are due to the Public Utility Commission], companies that have many wells in the ground will have to pay a significant impact fee as a one-time payment under the statute,” Garber said, adding that there’s a good chance the oil and gas industry will challenge the fairness of a fee.
“Probably with the impact fee, one question that’s certainly bound to come up — and I don’t profess to even know the answer to it — is whether the reach-back is constitutional,” Garber said.
Another issue that drillers and producers may raise is whether an industry can be singled out and made to pay a fee for its impact to areas in which other industries also operate, Garber said.
“The question in passing has been: ‘Coal trucks and timber trucks and other heavy construction vehicles use the same roads as gas companies, so how can that be fair?’” he said.
The Senate passed HB 1950 on Feb. 7 by a 31-19 vote and the House followed on Feb. 8 by a 101-90 vote.
Under the bill, the annual impact fee per well will rise and fall with the price of natural gas and would be set each year by the PUC, so that, in the first year of a well’s life, if the average price of gas is not more than $2.25 per 1,000 cubic feet, the fee for the well would be $40,000, but if the average gas price was above $5.99 per 1,000 cubic feet, the fee would be $60,000.
In the well’s second year, the fee would be anywhere from $30,000 to $55,000 depending on gas prices, and in the third year, the fee would drop again to between $25,000 and $50,000.
After that, from years four through 10, the fee would level off to between $10,000 and $20,000 and from years 11 through 15, the fee would decrease to between $5,000 and $10,000.
Those numbers add up to between $190,000 and $355,000 per well over a 15-year period, depending on how much or how little gas prices fluctuate annually.
Under the bill, eligible counties will have 60 days to decide whether to impose an impact fee.
Garber said that while the legislature did not leave much room for interpretation regarding which wells would have a fee attached to them, the fact that the amount of the annual fee per well is contingent on the rise and fall of gas prices could lead to disputes between drillers and lessors.
“If the fee begins to accrue when you drill and the gas price is low, there is an incentive not to drill just yet,” Garber said. “However, many leases have five-year primary terms in them that, in order to hold the lease, may dictate that a company go out and drill sooner than it would want to.”
The potential for legal issues arising from the Oil and Gas Act amendments extends beyond just impact fees, attorneys said.
One major area of contention may be the new section of the law prohibiting local municipalities from enacting zoning ordinances aimed at banning drilling, according to municipal lawyer Charles M. Means of Pittsburgh-based Goehring Rutter & Boehm.
Means said that almost immediately after the General Assembly passed HB 1950, he received feedback from municipal leaders who are “not happy with the overriding of local zoning authority and feel that even in other situations not involving oil and gas this is not a good precedent from the perspective of local government.”
Michael K. Vennum, a zoning and land use lawyer at Burleson, said it appears that, under the new amendments to the Oil and Gas Act, local governments “are losing a lot of their ability to regulate the oil and gas industry.”
According to Vennum, many municipalities have attempted to thwart hydraulic fracturing by requiring drillers to cordon off well sites using fences or vegetative buffers, as well as by imposing their own setbacks.
HB 1950, however, prohibits local governments from placing a greater burden on oil and gas companies than it does on other industries, he said.
Still, DeVoren said HB 1950 does allow municipalities to enact “certain specific restrictions” on drilling. For example, HB 1950 provides that a local ordinance “may prohibit, or permit only as a conditional use” wells in a residential district if the wellhead cannot be placed at least 500 feet from any existing building.
“But it can’t be, ‘Thou shalt not frack,’” DeVoren added.
Means said municipalities and their attorneys will now have to focus on what they can control.
“The provisions in there that cover local zoning do still leave some tools in the toolbox for municipalities and that’s what we need to look at more closely,” he said. “The areas where we still have authority and to what extent we have authority and what kinds of conditions and setbacks are going to be allowed — that’s where the inquiry will be concentrated.”
Means said many of the questions he’s already received from clients have centered on the provision of HB 1950 that allows a local municipality to submit a proposed ordinance to the PUC, which then issues an advisory opinion regarding whether the ordinance would violate the Municipalities Planning Code.
“We’re going to have to figure out: ‘How do we bring what we have into compliance with the restrictions that have now been placed on local zoning authority?’ That’s the challenge for a lot of municipalities that I’m hearing from,” he said, adding that municipalities appear to be primarily concerned with protecting their roads. “I think they will be very vigilant to do that because of the investment they have in those roads.”