State Legislatures Finally Recognizing New Drilling Technology

by Tucker Arensberg, P.C.

In the old days, operators had to find flat ground in order to drill vertically in the hopes of finding a pocket of trapped oil or natural gas, as well as constructing infrastructure in the form of a well on that location, and bringing the substance to the surface over time.  Typically, only small parcels needed to be leased and exploration and production companies pursued areas with unambiguous ownership.  Of course, there were exceptions to this general rule.  But, due to the low cost of drilling an oil or gas well and the amount of production achieved from each well, companies were discouraged from pursuing property in areas with

  • Complex ownership scenarios
  • Difficult legal issues affecting a given location
  • Topographical inhibitors such as access, waterways, and hillsides.

Now, horizontal drilling technology allows companies to drill downwards as far as twelve thousand feet, then turn the drill bit and drill horizontally.  This technology  enables the drill bit to move, not in a straight line, but to twist and turn following various geological formations deep within the earth.  Operators can now drill sideways for miles, and also multi-directionally, freeing hydrocarbons that are trapped within porous shale formations that are then brought to the surface as oil, gas, as well as a variety of liquid natural gases (LNGs)which are actually multiple hydrocarbons, and now a separately traded commodity by investors.  This radically different technology requires multiple leases to be developed simultaneously with one down hole, or “pad site”. New seismic technology determines the length and thickness of formations deep within the earth, and requires additional regulators to keep track of all the new activity.

State Legislatures and Courts, especially in the Appalachian Basin, have not kept pace with the technology.

The current well permitting process was designed to regulate vertical wells, and compliance with regulations was monitored by a limited number of oil and gas inspectors who occasionally visited well sites.  Now, the Marcellus Shale and Utica Shale boom has prompted action by both Pennsylvania and West Virginia.

The Pennsylvania Legislature recently passed a reformulated version of the Oil and Gas Lease Act of July 20, 1979.  Under this Act, old leases are automatically held to have pooling or unitization clauses; that allows operators to develop contiguous leases without re-negotiating with landowners.  This law prevents the “holdout” phenomenon, where one or more landowners either refuse to allow their leases to be put into a larger unit or demand outrageous sums of money to do so.

In Pennsylvania, operators are now free to develop shale plays continuously for miles, as long as they have the leasehold rights, unless the lease expressly prohibits pooling; then permission must be obtained.

This statute does the same thing for seismic testing.  Unless a lease expressly prohibits such testing, aspiring operators are now allowed to go onto land they have under lease in order to use seismograph technology to determine the thickness of shale formations within the earth, and assess their commercial viability by determining thickness, length, porosity, and other factors.  The philosophy behind this statute is that it benefits everyone to promote development. But, when old leases were negotiated the parties did not anticipate new technology and, the legislators believed, the law should not be structured so as to inhibit additional development.

Also in 2013, The West Virginia Legislature put in place a thorough regulatory scheme for horizontal wells called “The Horizontal Well Act”.  This sweeping legislation settles confusion regarding notification to owners of other assets such as coal, surface, water, and other minerals; it sets forth the permitting procedure for horizontal wells.  Furthermore, the fee for a horizontal well permit was raised substantially to $10,000, in part to pay for more oil and gas inspectors to oversee compliance with environmental concerns.  The statute requires transparency via disclosure and notification in the well permitting process.  Matters such as water, and fracking fluid origin and usage, spacing and locations, as well as dumping and reclamation protocol are concisely delineated.  This comprehensive statute allows operators to know where they stand with regard to most issues; once a permit is issued they are largely protected against costly and work -topping litigation.

Overall, there appears to be a legislative trend in the Appalachian Basin that recognizes the benefits of horizontal drilling generally and shale plays specifically, which should allow operators to profitably and safely make use of the abundant resources beneath our feet.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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