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Forced pooling policies remain unclear in Pennsylvania’s shale plays

The first modern test case of a controversial section of Pennsylvania’s dusty Oil and Gas Conservation Law ended with a fizzle in 2014 when the drilling company that sought to use it withdrew its application.

Hilcorp Energy Co. wanted to use the “forced pooling” provisions of the law to drill and hydraulically fracture the Utica Shale beneath property in northwestern Pennsylvania where a fraction of the property owners had refused to lease their drilling rights.

Observers had hoped the case would clear up critical questions about how the 53-year-old law applies to gas production from the Utica Shale, but the application didn’t get far enough to answer many of them.

The 1961 law is designed to limit excessive drilling and stranded gas by divvying up the land into orderly blocks based on how much area can be drained by a well. It applies only to wells drilled through the Onondaga Horizon, a geologic layer sandwiched between the Marcellus and Utica shales, so it doesn’t factor in Marcellus operations.

Under the Conservation Law, a company must take several steps if it wants to extract gas from properties that have been leased to another operator or not leased at all. The first step — the one Hilcorp took — is to apply to the Department of Environmental Protection for a well spacing order that will define the discrete pool of gas and the fewest number of wells needed to drain it most efficiently.

This first issue is more geological than political. Hilcorp’s spacing order hearing would have featured geologists, petroleum engineers and an energy economist, among other experts, to determine the extractable limits of 3,267 acres of gas-bound Utica Shale in Lawrence and Mercer counties known as the Pulaski Accumulation.

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Only after the spacing units are set can a company or mineral owner within the unit apply for an integration order — a separate step, with a separate hearing, that allows for incorporating unwilling landowners into the unit and setting the terms for compensating them.

Hilcorp had not reached that controversial stage when it withdrew its application, but the company made no secret that it was heading in that direction and dread of forced pooling drove much of the public backlash against the proposal.

The company said when it withdrew that “integration is a legally prescribed remedy for precisely this scenario,” but it pulled the application so that it could end “this protracted process” and move forward with drilling on 99 percent of the acreage in the target area it had under lease.

Terry Engelder, a Penn State geosciences professor who had been tapped to appear as an expert witness at the spacing unit hearing for Hilcorp, said in an email that the case “was going to be an extraordinary opportunity to develop some clarity regarding PA’s conservation laws,” including how it applies to shale reservoirs with very different characteristics than the conventional oil and gas pools the law was written to address. But he said “little of value had evolved” by the time Hilcorp withdrew its application.

“Everyone from top to bottom was disappointed when Hilcorp threw in the towel,” he said.

The spacing and integration order provisions of the Conservation Law have been used only rarely in the past half-century, and no one who still works in DEP’s oil and gas division had ever handled an application. That means crucial issues are unsettled, such as whether a unit should be defined by the maximum area that can efficiently and economically be drained “by one well,” as the law states, or by one well pad, where shale operators can start two or more wells that travel down and through the shale in different directions.

Another question, DEP’s Deputy Secretary for Oil and Gas Management Scott Perry said: “How do you define a pool in an extraordinarily impermeable shale layer that extends geographically for thousands of square miles?”

DEP officials have called for the legislature to remove some of the uncertainty and modernize the law.

“It is clear that the statute absolutely did not contemplate shale gas development,” Mr. Perry said. “It makes it more difficult for us to efficiently administer the statute when we’re trying to answer some of these fundamental questions.”

Kurt Klapkowski, director of DEP’s bureau of oil and gas planning and program management, said the current $1,000 application fee for a spacing order does not come close to covering the department’s expenses for the review process.

“I think we spent that on the first newspaper notice that we did,” he said.

Hilcorp’s application did answer one foundational question: Which agency issues the spacing order? The company initially applied to DEP, which directed the company to apply to the state’s Environmental Hearing Board, which ruled that DEP was the right forum all along.

DEP set up an administrative hearing process and appointed an outside attorney to serve as the hearing officer. The agency also planned to hold a public hearing to complement the administrative one, so that people outside the unit could weigh in.

But the process was delayed several times out of concern that not everyone with a stake in the decision had been directly notified, because of scheduling conflicts, and because landowners who objected to the application challenged the Conservation Law’s constitutionality in Commonwealth Court.

Asked if the application process cleared up any of the murkiness of using the Conservation Law in the shale era, attorney Kevin Colosimo of Burleson LLP, who represented Hilcorp in the application, said the only lesson he learned from the process is not to expect a decision on a petition in 45 days, even though that is what the law requires.

He also said he is unsure whether DEP’s role in the procedure was clarified.

“They seemed to be both a party to the matter and the deciding body, which was an interesting position,” he said.

DEP officials say they expect to use the same administrative hearing process for any future applications for spacing orders, although no one has submitted one yet. Mr. Perry said he hasn’t received any informal inquires either, but he thinks that it won’t be long before the issue comes up again.

In recent weeks, Range Resources Corp. announced that an exploratory Utica Shale well in Washington County had a record-setting initial flow rate that eclipsed Pennsylvania shale wells whose initial production Mr. Perry considered enormous.

“There is going to be much more attention paid to the Utica in Pennsylvania,” he said.

Laura Legere: llegere@post-gazette.com

This article was written by Laura Legere from Pittsburgh Post-Gazette and was legally licensed through the NewsCred publisher network.

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