The following post is a more in-depth discussion of yesterday’s post on forced pooling. Please email Nick with any questions. We are grateful to Bob Donnan of www.marcellus-shale.us for use of the photo of a drilling site near Avella, Pennsylvania which accompanies this post.
In press releases dated March 14 and March 18, 2014, the DEP attempted to alleviate the fears of Pennsylvanians regarding the upcoming hearing on Hilcorp’s spacing order application. The application is seeking the establishment of four drilling units in parts of Lawrence and Mercer counties by an order of the DEP. The units would include leased and unleased properties, and the order would control the placement of wells. Many are concerned because this is seen as the first and most important step toward forced pooling, or private eminent domain of an individual’s gas rights, in Pennsylvania. We have learned that there will now be a second hearing scheduled for the public to comment on Hilcorp’s application, date and time TBD. Individuals are allowed five minutes of verbal testimony. The fact that there will be public participation at all is a positive step, but that does not excuse the legal infirmities of the DEP’s action in setting up this hearing. To understand how we arrived at this point, it is important to provide a bit of background.
The legal basis for forced pooling comes from the archaic Oil and Gas Conservation Law of 1961 (“OGC”). The OGC is a confusing piece of legislation, written decades before horizontal hydraulic fracturing became commonplace within PA. It is particularly confusing because so much has changed since it was drafted. The methods used for resource extraction have changed, and the Oil and Gas Conservation Commission, the entity originally tasked with enforcing the law, is no longer in existence. The OGC does not apply to all wells, but only covers those that penetrate the Onondaga Horizon, which is often below the Marcellus Shale. So Marcellus wells will generally not be covered by the OGC, and therefore not subject to forced pooling. However, drilling in the Utica Shale could be subject to the OGC depending on the outcome of this hearing. There is much confusion because applying the OGC to a shale layer is like fitting a square peg in a round hole. The OGC applies to “pools.” A pool is defined as “an underground reservoir containing a common accumulation of oil and gas, or both, not in communication laterally or vertically with any other accumulation of oil or gas.” 58 P.S. § 402(10). That definition makes sense when applied to a discrete underground deposit of oil or gas. For illustration purposes, picture in your mind an underground “lake” of oil or gas that has precise boundaries, and is separated from other similar “lakes” by rock and earth. That oil deposit could fulfill the definition of a pool under the OGC. However, it is cumbersome to identify a discrete pool when you are dealing with a layer of shale that underlies much of the northeastern United States. Proving that its designated area of the Utica Shale meets the definition of a pool is the principal burden Hilcorp faces. So who decides if Hilcorp has met that burden?
Well, as mentioned above, the commission tasked with enforcing the OGC is not in existence. Since the OGC was never changed to reflect the current governmental structure, it was not clear who the decision-maker would be in the case of spacing orders. The DEP attempted to point the finger at the Environmental Hearing Board (“EHB”). However, the EHB ruled that the DEP has taken the place of the commission. So as it stands, the DEP is now the enforcement entity under the OGC, and therefore is tasked with determining whether the designated area meets the definition of a pool. Since the DEP now has enforcement authority, it has the duties and authority that the OGC provides it with. Under the OGC, when an application for a spacing order is filed, the DEP has to hold a public hearing before ruling on the request. The specific contours and rules of the public hearing are not laid out in the OGC, but the OGC provides that the “commission (DEP) shall prescribe rules and regulations governing the practice and procedure before the commission (DEP).” 58 P.S. § 410(a). However, that authority is limited. The commission (DEP) cannot pass any rules without providing the opportunity for any interested party to be heard. 58 P.S. § 410(b).
Empowered by the OGC, the DEP had the opportunity and obligation to create the rules for spacing order hearings by allowing public participation in that rule-making process. Instead of doing that, the DEP bypassed the OGC and fashioned a process that is a Frankenstein of sorts, borrowing randomly from other parts of the law, while denying public participation in the rule-making process. The final product of the DEP’s efforts resulted in a hearing officer being appointed by the DEP. In order to establish the format of the hearing, including who would be allowed to provide testimony, the DEP and Hilcorp each submitted proposed orders to the hearing officer containing their suggestions.
In an attempt to appear as a public advocate, the DEP issued its March 14 press release touting its request to the hearing officer for broad public participation. In the release, Deputy Secretary Scott Perry is quoted as saying that the “DEP is advocating for a public input process that is as open, accessible and transparent as possible. This is the first-ever spacing order application for an unconventional shale gas well, and it is very important to DEP that Pennsylvanians have the opportunity to have their voices heard and comments considered.” The fundamental problem with that position is that the DEP was the one with rule-making authority all along. It did not have to nicely request the hearing officer to allow the public the opportunity to participate—the DEP appointed the hearing officer in the first place! Handing off authority and then asking for permission does not entitle the DEP to portray itself as the humble public servant. Now that the format for public participation is decided, the DEP released another press release on March 18. In that release, Scott Perry provides the following quote, “DEP is proud to announce the securing of an additional opportunity for the general public to weigh in on this important matter. We thank the hearing officer for recognizing and affirming the need for all to have their voices heard and comments considered.” In light of Mr. Perry’s statement it is important to analyze how the voices of the public and the affected landowners in the area at issue will be heard.
Regarding the affected landowners, within Hilcorp’s designated area there are currently four properties that have not leased their gas rights, according to the DEP. If the spacing order is approved, and if Hilcorp then takes the next step to apply for an integration order (forced pooling), then the landowners can be forced to allow drilling. The way to save their power of choice is to fight the proposed order. However, they have been placed in an untenable position by the DEP’s construction of this hearing process. From the order of the hearing officer and the controlling regulations, we know that the landowners “shall be given the opportunity to support, oppose and/or present their own plan of development.” What that actually means in the context of this hearing is unclear. So far they have not been given an equal seat at the table in this proceeding. Superficially, the process thus far has been structured as if the parties are adversaries—Hilcorp v. DEP. Those two parties have participated in a pre-hearing conference call, exchanged lists of witnesses and documents, and can submit legal briefs at the conclusion of the hearing. The problems with this arrangement are the fact that the affected landowners have not been parties to those proceedings, and that the DEP is not actually taking an adversarial position. The landowners with the most at stake are left in a second-class role coming into the hearing. Can they present their own witnesses? What documents have the DEP and Hilcorp exchanged? Will the landowners be able to submit briefs? These are some of the unanswered questions. Even if some of the answers are “yes,” how can anyone adequately prepare for an incredibly technical proceeding on such short notice, and without all of the information that the other parties are privy to. Furthermore, and to repeat, the DEP is not taking an adversarial position. That is fine if the affected landowners were afforded the opportunity to assume that role if they chose to, but is completely ridiculous in light of the fact that they have been effectively shut out of the proceedings thus far. As for the public, we are left with the opportunity to provide five minutes of oral testimony. The DEP is currently asking permission from the hearing officer that it appointed to see if the public can provide written testimony as well.
One final point from the March 14 press release that needs to be discussed is DEP’s assertion that it complied with the notice requirements under the OGC. The OGC requires that notice of a hearing regarding a spacing order needs to be published fifteen days before the date of the hearing. 58 P.S. § 407(2). As the press release states, the DEP only gave fourteen days’ notice. While this may seem like a trivial point, when the stakes are this high sufficient notice is essential.
The upcoming hearings are immensely important. If it is decided that a “pool” as defined under the OGC can be carved out of the Utica Shale, that will place the land of Pennsylvanians at risk of this resource extraction form of eminent domain. Even understanding the fact that the resurrection of the OGC is a legal morass, the DEP cannot cobble together this hearing format and then consider the matter finished. This is a precedent-setting matter, one in which the public is entitled to participate. Allowing public input only after the rules of the game are decided is fundamentally unfair. The DEP needs to recognize its errors now, and put a stop to this sham proceeding.