Do UK regulatory changes signal large-scale shale gas exploitation?

The 14th onshore licensing round closes on October 28, 2014 for both conventional and ‘unconventional’ oil and gas exploration, including shale gas. The UK Department of Energy and Climate Change (DECC) expects about 50-150 unconventional licences to be awarded in the round.

There is general consensus across industry and Government that a more streamlined regulatory regime and improved land access rights would facilitate shale gas projects. DECC has recently considered proposed changes regarding land access and sub-surface rights to reduce barriers to shale gas development in the UK.

Petroleum Exploration and Development Licences (PEDLs) allow companies to pursue a range of activities involving energy reserves, including unconventional gas, subject to necessary drilling/development consents and planning permission. Some companies drilling mainly for conventional oil and gas are now drilling deeper than they might have to investigate the shale potential in their licenced areas (“coring” is foreseen in these cases but no fracking is currently involved).

Changes in planning permissions

Proposals for shale gas exploration or extraction (like all other reserves) are subject to approval by the Minerals Planning Authority (MPA) for the area where the reserve is located. Since January 2014, the requirement to notify individual owners and tenants of land where only underground operations will take place has been removed; only those where aboveground work is planned must be served notice.

In addition, although “material considerations” may be allowed in planning permission decisions, the Supreme Court held that issues such as loss of property value, loss of view and opposition to the principle of development are not “material” considerations. The MPA local planning authorities also have greater freedom to act on oil and gas extraction projects than they normally would because the Government excluded these projects from the aegis of the National Planning Policy Framework, the major infrastructure planning regime in the UK.

Proposed land access reforms

In the 2010 landmark Bocardo case[1], the Supreme Court found that an oil and gas company had committed trespass by drilling and installing pipelines under the landowner’s land, even though the deepest well was 2,800 ft below the surface.

The case confirmed that any activity on or under a landowner’s land, even deep underground, will constitute trespass. Under the current regime, coming to an agreement for access with multiple landowners or pursuing so-called ancillary rights under statutory law, can cause long delays. The Government’s proposed changes include:
  • granting automatic underground access rights to shale gas operators for horizontal drilling at least 300m below the surface;
  • a voluntary community payment of £20,000 for each unique horizontal well that extends more than 200m laterally (for projects benefitting the community);
  • public notification of drilling proposals and details of the voluntary payment.
The proposal does not apply to any work above 300m depth; therefore, access for the drilling pad itself will be subject to negotiation with the landowner or the ancillary rights regime.

Still it appears that legislation will be put before Parliament to implement a more streamlined system and rights of access. With the exploration licenses expected in the current licensing round, the outlook is positive for greater shale gas exploration and production in the UK.

Sources
[1] Bocardo SA v Star Energy [2010] UKSC 35


This post was written by Lucy Bruce Jones (lucy.brucejones@nortonrosefulbright.com or +44 20 7444 5159) from Norton Rose Fulbright's Energy Practice Group.

Revisions to proposed fracking regulations in California

California recently circulated its third version of S.B. 4., a bill passed last year that sets forth rules regarding well stimulation operations. The California Department of Conservation’s Division of Oil, Gas and Geothermal Resources received over 100,000 comments from the public regarding the first version of S.B. 4. The second version of the bill also received a significant number of comments.

The third version of the bill features several changes from the previous versions. For example, the threshold for reporting seismic activity occurring near wells has been increased to require a magnitude of at least 2.7. In addition, whereas well operators initially had to apply for a water permit before applying for a fracking permit, operators may now apply for both permits simultaneously. The twenty-day deadline for requesting water quality testing has also been amended to permit residents to request testing irrespective of whether twenty days have passed since the resident received notification that well stimulation would occur. If the twenty-day period has passed, however, the resident would be responsible for paying for the testing.

Multiple groups have expressed displeasure with the bill. Some environmentalist groups have argued that the state should not permit fracking. Even members of the oil and gas industry have noted that aspects of the bill are problematic. The public has fifteen days to submit any comments on the bill.

Read S.B. 4.


This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713 651 3662) and Johnjerica Hodge (johnjerica.hodge@nortonrosefulbright.com or 713 651 5698) from Norton Rose Fulbright's Energy Practice Group.

DOJ and Pipeline Operator spar over the proper way to calculate a Clean Water Act penalty

On October 8, 2014, the U.S. Department of Justice (the “DOJ”) filed a motion regarding the proper way to calculate a Clean Water Act (“CWA”) penalty.  The dispute turns on whether the penalty for a prohibited discharge of oil should be based simply on the amount of oil discharged or instead on the amount of discharged oil that makes its way into a navigable body of water.  In its motion, the DOJ argues that the plain language of the CWA calls for penalties based on the amount of oil “discharged” without any requirement that the oil reach a navigable body of water.  The pipeline operator has previously argued in court filings that such a measure improperly extends the CWA beyond its terms and would represent a Congressional overstep of the Federal government’s Commerce Clause authority.

While at its heart the dispute is a matter of statutory interpretation and constitutional law, its result may well have major impacts on the rest of the litigation.  If the court determines that the DOJ’s reading of the CWA is correct, proving the amount of oil discharged may not be too complicated.  The DOJ could prove the amount by, for example, showing the volume of oil pumped into the pipeline and the volume of oil that reached its intended destination, with the difference approximating the amount of oil discharged.  However, if the court follows the pipeline operator’s reading of the CWA, the DOJ will likely be presented with significant evidentiary challenges, because once the oil was discharged, it likely dispersed in complex, difficult-to-track ways.

The dispute is currently before the U.S. District Court for the Eastern District of Arkansas.


This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713 651 3662) and Jim Hartle (jim.hartle@nortonrosefulbright.com or 713 651 5695) from Norton Rose Fulbright's Energy Practice Group.

Middle District of Pennsylvania holds lessor is bound by change of ownership provision, lessee properly extended lease

In a case of first impression in Pennsylvania, Judge Matthew Brann of the United States District Court for the Middle District of Pennsylvania held that an extension payment made by a predecessor-in-interest of the lessee to a predecessor-in-interest of the lessor was sufficient to extend the lease, where the lessee did not have notice of the change in ownership as required by the lease.

In Danko Holdings, LP v. EXCO Resources (PA), LLC, the lease at issue provided that the lessee was not bound by a change in ownership “until furnished with such documentation as Lessee may reasonably require.”  The original parties to the lease made several assignments of interest, but neither the lessors nor their successors provided the lessee or its successors with notice of the change in ownership.  The plaintiff, Danko, was a successor of the lessor.  Danko sought a declaration that the lease had expired by its own terms because the predecessor of defendant EXCO made the extension payment to the original lessors who, at the time of the payment, had already assigned their interest.
Judge Brann held that because EXCO and its predecessors had not been provided with notice of the change in ownership, the payment made to the original lessors was sufficient to extend the lease under the change in ownership provision.  As the issue was novel under Pennsylvania law, Judge Brann relied on authority from other state and federal courts, as well as prominent oil and gas treatises, to conclude that change of ownership clauses are valid features of oil and gas leases and are strictly construed.  Moreover, Judge Brann held that constructive or actual notice of the change in ownership will not obviate a change of ownership clause.  The plain language of the lease required Danko or its predecessors to provide documentation of the change in ownership.

Judge Brann's opinion.


This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713 651 3662) and Michael Gaetani (michael.gaetani@nortonrosefulbright.com or 724 416 0400) from Norton Rose Fulbright's Energy Practice Group.

Pennsylvania Department of Environmental Protection proposes changes to oil and gas enforcement policies

On October 4, 2014, the Pennsylvania Department of Environmental Protection (“PADEP”) published notice of a draft policy titled "Standards and Guidelines for Identifying, Tracking, and Resolving Oil and Gas Violations" (the “Proposed Policy”).  The Proposed Policy contains new processes and revises existing guidelines and will have an impact on how operators interact with the PADEP.

The Proposed Policy introduces a new, detailed process for how the PADEP will handle water supply contamination complaints.  The Proposed Policy contemplates that an onsite investigation will be conducted within 4 business days of receiving the complaint, and a final determination made within 45 calendar days, unless there are extenuating circumstances.  The PADEP may order the operator to provide temporary water supplies to the complainant either before or after the final determination on contamination is made, depending on whether the water supply is located within the “rebuttable presumption area” (1,000 feet for a conventional well and 2,500 feet for an unconventional well).  If a final positive determination of contamination is made, the PADEP shall issue a notice of violation (“NOV”) to the operator and, after allowing an opportunity for the operator to respond, shall issue an administrative order to replace or restore the affected water supply unless (1) the water supply has already been replaced or restored, (2) the investigation request has been withdrawn, (3) the operator and water supply owner have reached an agreement, or (4) the water supply is no longer contaminated or diminished.

The Proposed Policy also addresses existing guidelines and policies.  One of these changes provides for more aggressive issuance of NOVs, which will now be issued for all violations noticed during an inspection, unless the violation is corrected by the end of the inspection visit.  Currently, an NOV will issue only if the violation is not corrected within 14 days of the inspection visit.  Other topics addressed by the Proposed Policy include a revised well inspection schedule, the process for on-site inspections, the issuance of administrative orders, permit suspension and revocation, the imposition of civil penalties, and a 180-day negotiation deadline for certain enforcement documents.

The PADEP is accepting public comments on the Proposed Policy until November 2, 2014. View the Proposed Policy.


This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713 651 3662) and Michael Gaetani (michael.gaetani@nortonrosefulbright.com or 724 416 0400) from Norton Rose Fulbright's Energy Practice Group.

Eighth Circuit refuses to overturn jury verdict despite allegations that verdict was tainted

In Hiser v. XTO Energy, Inc., the Eighth Circuit affirmed a jury verdict against XTO Energy, Inc. (XTO) and rejected XTO’s argument that the district court should have granted its motion for a new trial. The appeal was heard by Judge Duane Benton, Judge Michael J. Melloy, and Judge Bobby E. Shepherd. Hiser involved allegations by the plaintiff that she suffered damages due to XTO’s drilling operations on a neighbor’s property.

During deliberations, the jury asked the district court whether XTO’s drilling operations included fracking or only drilling. The judge responded that the jury could only consider evidence presented by the parties. After XTO moved for a new trial, the parties submitted affidavits from multiple jurors. The jurors stated that they discussed fracking before the court’s instruction; however, those discussions ceased after the court instructed them to only consider the evidence presented at trial.

The jurors disagreed on the extent of their fracking discussion. Whereas one juror stated that they discussed the potential negative effects of fracking on the plaintiff, another juror stated that there was no discussion of the negative impact of fracking. Indeed, another juror stated that they merely discussed fracking generally. The jurors also disputed whether they discussed earthquakes, a topic that was mentioned only briefly at trial.

The Eighth Circuit rejected XTO’s argument that the district court abused its discretion by not ordering a new trial. The panel reasoned that the district court’s instruction adequately reduced any potential risk of prejudice. Moreover, the panel noted that there was no evidence of prejudice. Even assuming that the jury discussed earthquakes before the court’s instruction, the panel concluded that the discussion did not impact the verdict or prejudice XTO. Furthermore, if the jury discussed earthquakes after the court’s instruction, the panel reasoned that there was no prejudice because the discussion did not reference the plaintiff or XTO. Lastly, the panel held that even if the jurors discussed extraneous information, XTO did not demonstrate that it suffered any prejudice or that the verdict was impacted.
 

IPAA response to proposed rule on transportation of crude oil by rail

The Independent Petroleum Association of America (IPAA) and the North Dakota Petroleum Council (NDPC) recently submitted comments regarding the proposed rule concerning the shipping of crude oil by rail. In the rule, the Department of Transportation Pipeline and Hazardous Materials Safety Administration (PHMSA) specified, among other things, that the tanker car fleet currently used must be retrofitted within a two-year period to comply with heightened standards specified in the rule.

The IPAA and NDPC commented that, according to industry experts, at least six years are needed to replace the current fleet. Imposing a two-year phase-out would, in the IPAA and NDPC’s view, hinder oil producers from timely providing the market with crude oil. Additionally, the IPAA and NDPC argued that the PHMSA unnecessarily targeted Bakken crude oil because it does not impose a heightened safety risk. For support, the IPAA and NDPC relied on several reports that Bakken oil is not more dangerous that crude oil in other areas of the United States.

 

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713 651 3662) and Johnjerica Hodge (johnjerica.hodge@nortonrosefulbright.com or 713 651 5698) from Norton Rose Fulbright's Energy Practice Group.