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National Energy Conference 2011

Drilling Down on Regulatory Challenges: Balancing Preservation and Profitability in the Development of Shale Gas Resources - October 28-29, 2011

Representatives of the Marcellus Shale natural gas recovery industry pledged cooperation in arriving at new, fair and effective regulations to protect public safety.

A spokeswoman for the environmentalists' perspective warned of the dangers of the hydraulic fracturing process used to recover natural gas from the Marcellus Shale play but was" heartened" by the pledges from the industry to cooperate on new regulations to address those dangers.

A legal representative of surface owners affected by hydraulic fracturing operations expressed frustration with the culture, history and politics in West Virginia that he said works against property owners' efforts to seek protections. He promised court action in the future.

A member of the West Virginia Legislature explained the difficult path toward effective state regulations governing hydraulic fracturing regulations.

Industry representatives presented information they hoped would debunk what they saw as mythology surrounding the Marcellus Shale boom.

Those speakers and a dozen other presenters were a part of a day-long forum for discussion of issues associated with natural gas recovery in the Marcellus Shale play sponsored by West Virginia University's Center for Energy and Sustainable Development, based at the University's College of Law.

The event, funded through a grant from WVU's Advanced Energy Initiative, was titled "Drilling Down on Regulatory Challenges" and drew a near capacity crowd of concerned citizens, lawyers, law students, environmentalists, energy researchers, educators, energy industry executives, government regulators and journalists to the Marlyn E. Lugar Courtroom at the College of Law. 

The energy industry is a cornerstone of the West Virginia economy," WVU College of Law Dean Joyce McConnell said. "WVU is helping to shape the energy and environmental policies that go with that economic potential. That is why we created the Center for Energy and Sustainable Development at the WVU College of Law and that is why we are proud of this effort to bring an unbiased discussion of natural gas recovery issues to the people who can best use that information."

Here are key points from each segment of the day of discussions in the order of their presentation. The entire Drilling Down on Regulatory Challenges is available on line.

Perspective of state regulators:

*Stuart Gruskin,* former executive deputy commissioner of the New York State Department of Environmental Conservation said:

• New York State gathered 14,000 public comments on a first draft of sweeping new regulations, and has a new draft out for public review and completed regulations are expected to be ready for implementation in  January leading to 2012 horizontal Marcellus operations

*Randy Huffman,* secretary of the WV Department of Environmental Protection noted:
• West Virginia faced with the challenge of dealing with a new drilling methods and a stampede of permit applications has been getting by with existing rules until new regulations are hammered out by the legislature. 

Elizabeth Nolan, assistant counsel with the PA Department of Environmental Protection observed that: 

• In Pennsylvania, the Governor appointed a Marcellus Shale Advisory Commission that developed 96 separate new recommendations for regulating the growing industry. Some of the regulations include increasing the required "set-back" for drilling pads from other structures; increasing penalties for regulation violations; and provision of new mechanisms for revoking issued permits.

Armando Benincase of Steptoe & Johnson PLLC said:

• In Ohio, where there are relatively few Marcellus Shale operations, officials have had the benefit of observing the proceedings in surrounding states in preparing for the next shale play development – the Utica Shale. Existing requirements call for the industry to register for water withdrawals in excess of 100,000 gallons and for all brine water to be disposed of through underground injection.

Federal role in regulation of shale gas production

Marcia E. Mulkey,regional counsel with EPA Region III said:

• EPA has a role to play through researching technologies related to natural gas recovery• One reason the agency studies hydraulic fracturing is because the process is exempted from some federal regulations. The Safe Drinking Water Act says that the act of hydraulic fracturing, the injection to fracture, is exempted from the otherwise applicable UIC requirements. • EPA keeps a close eye on industry activity on wetlands.• EPA should be a partner in interactions with state regarding establishment of national standards and oversight of state regulations.

West Virginia legislative update on Marcellus Shale regulations

Del. Tim Manchin, co-chair of the legislature's Joint Select Committee on Marcellus Shale offered the update. Manchin noted:

• Work on regulatory legislation began nearly three years ago and eventually resulted in House passage of a bill but the effort stalled in the Senate• The House legislation served as the cornerstone for the Governor's recently issued emergency rules• The Joint Committee is charged with melding the original House version with ideas from the Senate for a comprehensive bill that should be adopted in a special session of the Legislature. • Twenty-two amendments have been considered to the legislation dealing with qualifications for inspectors, KARST considerations for specific WV counties and mechanisms for additional surface owners' input. Comments were collected on the amendments via a special web site. • Legislators have considered amendments dealing with how to determine pre-drilling highway conditions and assigning the Department of Highways the ability to withdraw drilling permits if post drilling highway damage is determined; impoundment regulations implications for when companies drill six to eight wells on a single pad; distance of pads from roadways; replacement of water used from aquifers; and noise studies.• Legislators continue to ask the industry to agree to ways to determine how many new drilling jobs are held by West Virginians and what steps can be taken to help prepare West Virginians to assume employment opportunities. He said he is confused by the industry's reluctance to accept the approach.• Other issues still being debated as part of the process include public hearing requirements for new drilling; permit fees that will allow the Department of Environmental Protection to hire additional staff.• The Legislature is working to "take the fear out of the process for the public."

Experience from other shale regions

Christopher Koulander, an assistant law professor from Texas Tech University spoke on work in his state related to shale gas recovery regulations and processes and noted:

• The Eagle-Ford Shale play is a significant energy development in the State of Texas and regulations are enforced in the state by the Texas Railroad Commission.• A web site – FracFocus.org - http://fracfocus.org/ - which allows the public to learn about frac water contents by searching by state, county and well site, is a key part of the state's efforts to ensure transparency.• Texas requires operators to estimate air emissions before new permits for Barnett Shale permits are issues.• The Eagle Ford Shale Task Force was formed by the Texas Railroad Commission to analyze issues in South Texas related to the development of the Eagle Ford shale play. The task force is composed of community leaders and elected officials, oil and gas industry representatives, clean energy representatives, landowners, environmental group representatives and others.  The task force was designed to seek consensus on future regulation needs and issues.

Joshuha Fershee, associate dean for academic affairs and research at the University of North Dakota School of Law spoke on experiences in North Dakota by noting:

• Gas recovery efforts in the Bakken Shale Play created a boom situation in the state with more than 200 drilling permits issued so far in 2011 compared to just 54 in all of 2009.• Key societal issues related to traffic, housing, safety and crime remain to be effectively addressed.• North Dakota is not properly staffed to address many issues related to the situation.• State regulatory legislation amounts to: "We really really like fracking. Please leave us alone."• Short term focus on issues could lead to long term problems because one single fracking accident could set the industry back. A comprehensive approach is needed to address development issues.
Model Regulatory Framework for Hydraulic Fracturing

Matt Watson, senior energy policy manger with the Environmental Defense Fund made these points:

• The real issue concerning hydraulic fracturing is well integrity.• He and co-presenter Mark Boling of southwestern Energy worked together on an idea for model regulatory frameworks that serves as a blueprint states could use in well regulations.• They put together a group of stakeholders from both sides and followed three principles in creating a model for regulations: that the framework should be as environmentally protective as possible, that it should recognize the important role of natural gas with regard both to the economy and the environment, and that it should acknowledge interim progress and variation among states' regulations.• The framework was reviewed by gas producers who provided feedback.• Arkansas, Pennsylvania and Ohio used the jointly-crafted framework in regulation considerations and it could be helpful to West Virginia as well.

Mark Boling, executive vice president and general counsel for Southwestern Energy presented an industry perspective and said:

• Well integrity is the key issue to focus on in regulations because at 100 percent of the cases he looked at, the problem was with well integrity.• Ensuring well integrity should incorporate four steps: evaluate stratigraphic confinement; observe quality well construction standards; and evaluate internal and external mechanical integrity of the well before hydraulic fracturing begins• Industry needs to earn the trust of the people by telling them everything they need and want to know about the hydraulic fracturing process.• The model framework is still in draft form and runs about 40 pages.

Keynote Speakers

Dave McCurdy, president and CEO of the American Gas Association made these points during his talk:•

Local benefits of the booming Marcellus Shale gas recovery situation include increased employment, improved economies and higher state revenues. • National benefits include a revitalized chemical industry and reduced dependence on foreign oil. Adding natural gas to vehicle-fueling infrastructure and switching the trucking fleet to natural gas would cut foreign oil imports by half and cost less than the $10 billion to $14 billion.• There are two major concerns looking forward: pipeline safety and hydraulic fracturing. • The U.S. Senate recently passed a pipeline reauthorization bill that advances pipeline safety that is under consideration by the House.Perspective of the Natural Gas Industry

Jerry Richey, executive vice president for corporate affairs and chief legal officer of CONSOL Energy Inc., presented the perspective and made these points:

• The West Virginia, Pennsylvania, Ohio region is on the verge of becoming the energy capital of the nation.• The industry supports strong government regulation• Fracking presents no threat to the water table but all wells need to be done right. More than one million wells have been drilled in 27 states and there is no evidence of the practice affecting ground water. It is the responsible of the industry to keep it that way.• There are no chemicals used in fracking that don't already exist in homes under the kitchen sink.

Perspectives of other Stakeholders

Hannah Chang, associate attorney with Earthjustice observed:

• State regulations on fracking are inconsistent and often inadequate. The EPA should play a role in researching and creating y baseline measures that states could then choose to exceed. • The public and industry lack long-term data on the potential hazards and impacts of fracking.• Even properly constructed well casings can deteriorate over time.• Well pads, access lines, water supplies and roads are all disrupted by Marcellus Shale development• It is true that benzene, lead and formaldehyde are in some homes, "but do you really want them in your house?" • Attention must be given to issues related to potential spills, leaks and flowbacks that affect water supplies. Traditional wastewater plans are not equipped to handle the waste water from the fracking process.• There is no peer reviewed research on the long=term affects of methane in drinking water.• Until there are answers to these and other questions development should proceed slowly.

Attorney David B. McMahon, co-founder of the West Virginia Surface Owner's Rights Organization noted:

• West Virginia fails to be proactive about problems and often, state residents have a passive, company town mentality.  The West Virginia Department of Environmental Protection has little power and is handcuffed by money, our culture and policy."• The WVSORO has been proposing specific regulations for incorporation into the legislation being developed including increasing the distance from a Marcellus Shale pad to 625 feet from an existing building.• Surface owners are not represented on the board that determines the qualifications of inspectors even though a vacancy has existed for years.• The state legislature approves funding for additional inspectors but will not do so as long as the industry lobbies against it.• Money, culture and politics will prevent an effective bill from coming out of the legislature which leaves court action as the next step for those wishing to arrive at reasonable regulations.

Local Regulation of Hydraulic Fracturing

Former Morgantown Councilman Don Spencer talked about his city's recent experience in trying to limit fracking within one mile of the city limits and made these observations:

Morgantown has paid the price of environmental damage in the past from abandon coal mine operations. The city saw the problems in other communities associated with fracking and wanted nothing to do with the process.• While authority for most regulation is centralized with the state, Morgantown believed that a safety value provision existed in the state code that gives cities the power to take action when a nuisance situation is involved.  But, that theory was overturned in circuit court.• More research is needed not just on the geology and energy aspects of the industry but also on the cumulative impacts on society and the environment from fracking.

James A. Walls of Spillman Thomas and Battle, PLLC represented the industry in the Morgantown case and stated:

• Morgantown was mistaken to pass a ban on fracking and, instead, should have sought an injunction based on immediate and irreparable harm to the city, with no adequate remedy of law. • Local bans are "a solution in search of a problem ... fueled by fear, not facts."• Lisa Jackson, EPA administrator has said that she knows of no case where fracking has adversely affected water.       

Economic Benefits of Hydraulic Fracturing

Tom Witt, director of WVU business school's Bureau of Business and Economic Research, reviewed economic impact studies on the possible Marcellus impact on the state and noted:

• Anywhere from 6,600 to 19,600 new jobs could be created in West Virginia in 2015, depending on growth in industry activity.• Job increases from the industry could bring in $400 million to $890 million in wages.• The gas industry offers plenty of new jobs — not just job shifts, and not fly-by-night openings.

Thomas Kinnaman, an economist with Bucknell University in Pennsylvania, disagreed with many of the projections and said:

• Marcellus activity may simply shift workers from other jobs — dairy truckers become gas rig truckers, for instance — rather than create new jobs.• West Virginia could stem the tide of out-of-state workers coming in by training native workers, but those native workers will follow the industry when it moves to other fields.• This forecast could be wrong if the state can balance regulation with economic and social benefits. One good thing to do is to find the right tax rate, and raise the optimal amount of income while the industry lasts.

The Center for Energy and Sustainable Development is an energy and environmental public policy and research organization at the WVU College of Law. The Center focuses on promoting practices that will balance the continuing demand for energy resources—and the associated economic benefits—alongside the need to reduce the environmental impacts of developing the earth's natural resources.

The Advanced Energy Initiative at West Virginia University coordinates and promotes University-wide research in science, technology and public policy. AEI brings together a network of more than 100 energy researchers from four colleges and more than twenty centers for energy research advances.  AEI seeks to enable West Virginia to create new energy technology opportunities though discovery, engagement and innovation.