Each June, our firm publishes a report on the state of the Appalachian Shale industry from a regulatory and legal standpoint. From our perspective, thus far in 2018, the shale industry in Pennsylvania, Ohio and West Virginia is successfully forging ahead despite regulatory, permitting, activist, and pricing obstacle

Joseph K. Reinhart

According to the U.S. Energy Information Administration’s May 2018 report, the Appalachian Marcellus and Utica shale plays account for an impressive 41.4 percent of U.S. natural gas output. Following a downturn in 2015-2016, the Appalachian shale industry continues to enjoy a modest rebound. 

Seven Key U.S. Shale Gas and Oil Regions

With more business-friendly policies and procedures being issued out of Washington, D.C., natural gas operators in the Appalachian Basin continue to reduce operating costs, drive efficiencies, and employ new technology amid consolidation and increased capital spending.  As a result, drilling activity and production continue to be strong compared to a year or two ago.  At the same time, crude oil prices are steadily increasing, which has benefited those shale operators with oil interests, even as natural gas prices have been slow to recover. However, the energy policy and politics of trade wars are raising concerns about the U.S. energy industry’s long-term ability to reach foreign markets.

Across Appalachia, environmental regulatory agencies in each state, in one way or another, are addressing oil and gas permitting reforms, but whether or not the state and local permitting process will become more or less efficient remains to be seen. The Environmental Rights Amendment (ERA) is a significant constitutional issue for Pennsylvania operators. In a ruling nearly a year ago, Pennsylvania’s Supreme Court focused greater attention on the scope of the ERA and provided activists with a new path to challenge energy projects. Also, federal permitting actions related to the National Environmental Policy Act (NEPA) could require pipeline operators and other major energy developers to conduct extensive research to assess potential climate change impacts associated with the project.  

Growth Prospects Are Good

The manner in which fines and civil penalties are calculated by state environmental agencies has been the subject of recent court challenges, since the amounts of these penalties have rapidly increased. Importantly, this spring, the Pennsylvania Supreme Court decided that the Clean Streams Law does not authorize the Pennsylvania DEP to impose daily penalties for ongoing, continuing presence of pollutants in waters of the Commonwealth if the source of the pollutant has been addressed. 

The West Virginia DEP is taking a similar reform approach, as Governor Jim Justice is seeking to expedite processing of permits and approvals for new shale development projects. 

The Ohio Department of Natural Resources plans to develop draft rules on well spacing, as well as oil and gas waste management facilities. Ohio Governor John Kasich’s eight-year term is nearly complete, along with its focus on jobs in energy and a business-friendly shale climate.  While this has been an industry-friendly state in recent years, the gubernatorial election outcome could change priorities in the state. 

Significant ongoing issues for operators in the Appalachian Basin include the use of natural gas liquids (NGLs), and the growing need for pipeline construction that continues to be stalled by conflicting environmental legislative agendas between federal and state governments and challenges by non-governmental organizations. 

At the same time, the Pipeline and Hazardous Materials Safety Administration (PHMSA) continues to report that pipeline transmission is the safest way to transport natural gas. PHMSA expects to issue a final rulemaking later this summer that proposes extensive changes to the safety standards and reporting requirements for gas transmission and gathering lines. Meanwhile, southwestern Pennsylvania is leading the way in being prepared for more Utica and Marcellus shale development and the use of NGLs with the current development of Shell Polymer’s petrochemical plant in Beaver County – the first to be built outside of the Gulf Coast in more than 20 years. 

All indicators suggest continued growth prospects for Appalachian Basin shale despite the lingering obstacles facing the industry. Coverage of these issues, as well as an in-depth summary of key legal and regulatory developments, is addressed in the 2018 Babst Calland Report – Appalachian Shale Industry: Forging Ahead Despite Obstacles. For more information visit www.babstcalland.com.