Today, it is clear that the United States recognizes natural gas as a key part of the energy independence bridge between foreign oil
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reliance and strategic energy independence through domestic nonrenewable energy sources and/or renewable energy sources such as wind and solar energy. Consequently, Pennsylvanians are pushing to seize the benefits of the Marcellus shale opportunity, the largest unconventional natural gas reserve in the world. Now they face critical questions about balancing risks related to the proper conduct and rights of various stakeholders with the need to realize potential economic, environmental and strategic rewards.
According to one study the Marcellus gas industry in Pennsylvania generated $2.3 billion in total value added, more than 29,000 jobs, and $240 million in state and local taxes during 2008. Some analysts estimate that the 2009 Marcellus gas industry in Pennsylvania grew by as much as sixty five percent. Additionally, Energy companies have bid $128,400,000 million, twice the revenue the state budgeted, to secure drilling rights on 31,967 acres of rural Pennsylvania public lands. By 2020 the Marcellus industry could be generating $13.5 billion in value added and almost 175,000 jobs. Also, one study shows, between now and 2020, the Marcellus industry could add another $12 billion in state and local taxes.
The pace of development of the Marcellus gas industry in Pennsylvania has many citizens, municipalities, regulators and environmental groups very concerned. We are quickly reaching a critical juncture for the future play of Marcellus shale. The issue is quite simple “how will Pennsylvanians balance the potential economic benefits with the potential adverse impacts to the various stakeholders?” Past experience has taught us that, if this issue is not addressed properly then it could lead to unnecessary expenditures of time and resources, often resulting in expensive protracted litigation. Avoiding this scenario is critical to all involved and it starts with mastering the stakeholder conduct question, early in the development process.
The Pennsylvania Marcellus shale stakeholder conduct question has begun to surface in northeastern Pennsylvania. Earlier this month Greenfield Township in Lackawanna County issued a violation notice to Exco Resources Inc. (Exco). The notice alleges that Exco violated a local zoning ordinance. Apparently state regulators issued Exco a permit to drill near the Skyline Public Golf Course, which is zoned for commercial recreation. The Township maintains that gas drilling is not allowed in that area, although it could be allowed in rural areas that make up about 80 percent of the township and in industrial districts. This case is among the first in what may become a long line of avoidable controversy.
To fully realize the potential of the Pennsylvania Marcellus shale gas opportunity savvy stakeholders must understand the governing laws, regulations and commercial documents. Today we will briefly address the dynamics of the governing law. In Pennsylvania, the law has settled on three separate estates in land: the surface area, the minerals below, and the surface support. Schuster v. Pa. Turnpike Comm’n, 395 Pa. 441, 447, 149 A. 2d 447, 449 (1959); Machipongo Land & Coal Co., Inc. v. Commonwealth, Dept of Envtl. Res., 719 A.2d 19, 28-29 (Pa. Comwlth.1998). It is also well settled that each estate can be held separately by different owners and generally can be encumber, occupied, or transferred separately for the other. City of Erie v. Pub. Serv. Comm’n, 278 Pa. 512, 521, 123 A. 471, 475 (1924). This legal dynamic along with the characteristics of natural gas to meander freely beneath the earth’s surface as well as the use of hydraulic fracturing technology for horizontal drilling has the potential to lead to unprecedented challenges and litigation which could severely chill investment and stunt economic growth.
To avoid unnecessary setbacks to development the owner of the mineral estate, the developer (typically the lessee drilling company) and the regulators (local, state and federal) must appropriately address the conduct expectations of the lessee drilling company early in the development process.
In the next article we will cover the importance of the lease and how this commercial document affects lessee conduct as well as the rights and expectations of other impacted stakeholders.
By Michael Corbin, Esq.
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