Marcellus Shale Update – 4.18.2018

It has been nearly two weeks since Judge Musmanno, writing for the Pennsylvania Superior Court, ruled in the case of Briggs v. Southwestern Energy Company that the Pennsylvania “Rule of Capture” does not apply to hydraulic fracturing situations, and confusion still reigns.

For the layman, the law in Pennsylvania regarding oil and gas production has been known as the “Rule of Capture”.  It goes back to the late 1800’s.  This means that whomever has the right to drill for the oil and gas into a pool can do so and “capture” the gas without having to ascertain from where the oil or gas actually originated, or therefore to pay the landowner from where the gas originated any royalty fee.  This is because of the “fugitive nature” of oil and gas which tends to migrate into a pool.

The Superior Court ruled that hydraulic fracturing situations are different.  It said that unlike conventional oil or gas drilling, the oil or gas in hydraulic fracturing situations would stay trapped within the rock for millennia without the purposeful shaking that constitutes the hydraulic fracturing process.  Therefore this activity is more analogous to mining for other static minerals than it is to conventional oil or gas drilling.  As a result, Southwestern Energy, by purposely causing the gas to migrate from the Briggs’s land, can be guilty of a trespass.

Judge Musmanno wrote that “while we are cognizant that establishing the occurrence of a subsurface trespass determining the value of natural gas drained through hydraulic fracturing presents evidentiary difficulties…, we do not believe that such difficulty, by itself, is a sufficient justification for precluding recovery.”

Southwestern already has asked the full Superior Court to reconsider the decision.  This ruling both has some logic to it yet will result in huge problems from a legal and evidentiary standpoint.

The situation calls for action from the Pennsylvania State Legislature to define how this compensation process should work.  That is likely where things are headed.  If so, the industry will face problems as it has cultivated only one side of the aisle.  Those of us who speak to both sides have a huge advantage here, but the industry approach has been to pick a political champion from one side.  We shall see if once again it boomerangs on them.

What makes the industry approach so baffling is that overall it has a good story to tell.  On Friday the Pennsylvania Department of Environmental Protection released data on the soundness of oil well structures.  According to DEP Secretary Patrick McDonnell, the agency’s Mechanical Integrity Assessment Program “is the most rigorous routine well integrity assessment program to protect groundwater in the United States.”  It showed that for 2014, the first year data was collected, less than 1% “of operator observations indicated the types of integrity problems, such as gas outside surface casing, that could allow gas to move beyond the well footprint.”

That is very positive news for the industry.  The question is can they get the news disseminated out here in the Southeast, where we don’t see the wells and don’t hear much good news about hydraulic fracturing.

Finally, I’ve written numerous times about the interstate battles between Pennsylvania, New York, New Jersey and the New England states concerning pipeline construction and access to gas.  You should know that an even nastier fight is happening in Western Canada between the provinces of Alberta and British Columbia.

Alberta is the main oil and gas province in Canada.  It’s western neighbor, British Columbia, is the main environmentally-activist province.  BC has prevented Kinder Morgan from completing a pipeline expansion that would allow KM to expand its Trans Mountain pipeline to bring oil sands bitumen from Northern Alberta to the Pacific coast.  This is infuriating Alberta.  It is threatening to give itself the power to restrict fossil fuel shipments outside of the province, in effect declaring an embargo on BC.  That move would send fuel prices skyrocketing in Vancouver and bring about the Canadian equivalent of a constitutional crisis.

Alberta’s Premier (the equivalent of our Governor) Rachel Notley threatened to implement this provincial legislation, and BC Attorney-General David Eby immediately responded that if he determines the Alberta bill to be unconstitutional his province will sue Alberta.  “If there is anything in this legislation that even suggests the possibility of discrimination against British Columbians, we will take every step necessary to protect the interests of British Columbians because it will be completely illegal.”  Now, neighboring Saskatchewan has joined in, saying it too will embargo BC.  So nasty is this fight that the political fortunes of Canadian Prime Minister Justin Trudeau may hinge on its result.

Stay tuned.  The battle up North may be the precursor to the battle down here.

Questions? Let Dan know.

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