Annual review of shale gas development activity

In this report, Babst Calland attorneys provide perspective on issues, challenges, opportunities and recent developments in the Appalachian Basin and beyond relevant to producers and operators.

In general, the oil and gas industry has rebounded during the past year through efficiency measures, consolidation and a resurgence of business opportunities related to shale gas development and its impact on upstream, midstream and downstream industries. As a result, many new opportunities and approaches to regulation, asset optimisation and infrastructure are underway. Increased spending during the past year has led to a significantly higher rig count in the Appalachian Basin enabling growth in the domestic production of oil and gas as other shale plays across the country experience reductions.

The shale gas industry continues to provide the tri-state region with significant economic opportunities through employment and related revenue from the development of well sites, building of pipelines necessary to transport gas to market, and new downstream opportunities being created for manufacturing industries due to the volume of natural gas and natural gas liquids produced in the Appalachian Basin. Shell's progress from a year ago to construct an ethane cracker plant in Beaver County, Pennsylvania represents just one example of the expanding downstream market for natural gas. Many other manufacturing firms are expected to enter the region and establish businesses drawn by the energy and raw materials associated with natural gas and natural gas liquids from the Marcellus and Utica shales.

The report also highlights changes that have occurred during the past year in the political landscape that are expected to affect the energy industry. The Trump administration is signaling a fundamental shift in the energy policies established by the Obama administration. New executive orders and policies have been issued that promise to lead to more pipeline development, reduced federal oversight of the oil and gas industry and increased access to oil and natural gas reserves.

Joseph K. Reinhart, Shareholder and Co-Chair of Babst Calland's Energy and Natural Resources Group, said: "This report provides perspective on the challenges and opportunities of a resurging shale gas industry in the Appalachian Basin, including: the divergence of federal and state policy that creates more uncertainty for industry; increased special interest opposition groups on new issues and forums despite their lack of success in the courts; and the expansion from drilling to midstream development and now to downstream manufacturing that demonstrates the emergence of a more diverse energy economy."

The 74 page report contains six sections, highlighted below, each addressing key challenges for oil and gas producers and midstream operators:

• Business issues: adapting to the new price environment as natural gas producers continue to focus on reducing costs and improving efficiencies. Recently, the number of natural gas producers in the Appalachian Basin has contracted through select merger and acquisition activity. With efficiency of operations in mind, natural gas producers continue to focus on consolidating their activities geographically. The oil and gas industry faced significant financial stress over the past year, and 2016 will go down as one of the more dramatic years in the United States' oil and gas history. In the 2016 calendar year, primarily due to low commodity prices, 70 North American oil and gas exploration and production companies filed for bankruptcy protection.
• State and federal governments remain active in a changing regulatory landscapes as developments in the state environmental standards for enforcement, air, water and waste management in Pennsylvania, West Virginia and Ohio, as well as anticipated initiatives from non-governmental organizations (NGOs), will continue to have an effect on production and midstream operations. Separately, the impact of the Trump administration on various federal regulatory initiatives from the Obama era promises to be significant. President Donald Trump's 28 March 2017 Executive Order was directed towards the development of the country's natural resources. The order, among other things, requires agencies to review regulations that may burden the development or use of domestic energy resources.
• Pipeline safety legislative and regulatory developments continue to shape the industry through the US Department of Transportation's Pipeline and Hazardous Materials Safety Administration's (PHMSA) pipeline safety programme. It is unlikely that there will be a dramatic shift in PHMSA's enforcement policy in 2017. ‘Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2016’ (PIPES Act) was signed into law last year with a provision allowing PHMSA to issue emergency orders if an unsafe condition or practice constitutes, or is causing, an imminent hazard. These emergency orders can impose industry-wide operational restrictions, prohibitions, or safety measures without a prior hearing.
• Litigation trends including a number of alleged nuisance claims continue to travel through West Virginia, Ohio and Pennsylvania courts. Materials discussing alleged health effects from unconventional natural gas development continue to be disseminated at a record pace by industry opposition groups. A casual review of the material could lead to the erroneous conclusion that air emissions have not been tested; this is not, however, the case. The air quality data collected by a variety of objective parties using established monitoring and testing protocols around shale development in northeastern US over the last six years demonstrate that shale operations are safe.
• Local government law and regulations continue to spawn debate and legal challenges, which continue to increase throughout the Appalachian Basin. However, the industry has successfully challenged overly restricted ordinances. In contrast to municipalities that have adopted ordinances that permit reasonable oil and gas development, some local governments continued in 2017 to test their regulatory authority by enacting strict regulations for uses ancillary to well site development. Operators impacted by these regulations likewise continued to push back on these local regulations that severely impede, if not entirely prohibit, development or operation.
• Downstream opportunities include exciting developments for production and midstream companies with new emerging markets for consumption of natural gas and natural gas liquids, such as power generation, export, and the petrochemical and related manufacturing industries. The US petrochemical industry is undergoing tremendous growth, including the Northeast which is a prime target for more niche markets, and an opportunity to repurpose industrial assets for this regionalised growth.

As market conditions evolve for the oil and gas industry in the Appalachia Basin and throughout the US, Babst Calland's multidisciplinary team of energy attorneys continues to stay abreast of the many legal and regulatory challenges currently facing producers and midstream operators.