On January 6, 2016, the Pennsylvania Department of Environmental Protection (DEP) forwarded to the Environmental Quality Board (EQB) DEP’s proposed final rulemaking package that would revise the oil and gas regulatory program applicable to conventional oil and gas operations (Chapter 78) and create a separate chapter applicable to unconventional drilling (Chapter 78a) in Pennsylvania. As the Marcellus shale gas play has enabled Pennsylvania to overtake Louisiana to become the second largest domestic natural gas producer (behind only Texas in 2013 according to the U.S. Energy Information Administration), DEP has spent the last several years trying to develop a more robust regulatory program. 

In DEP’s news release, DEP Secretary John Quigley explained:

These regulatory changes are balanced, incremental and appropriate; protecting public health while enabling responsible drilling to proceed. These rules are a long time coming — more than 4 years — and were written with an unprecedented amount of public participation and transparency.  We’ve worked hard to ensure that the health and safety of our citizens are protected, and the needs of industry are being met.

DEP summarized the thrust of the regulatory amendments as being an effort to:

• Improve protection of water resources, • Add public resources considerations, • Protect public health and safety, • Address landowner concerns, and • Enhance transparency and improve data management.

DEP projected costs for the conventional industry to be as much as $634,500 initially and almost $29 million annually. For unconventional operators, DEP estimated initial costs during the first three years could exceed $73.5 million and thereafter operators would incur up to $31.1 million in annual costs. Industry trade groups asserted that the costs would be much higher.

As you might expect, gas producers disagree with DEP as articulated by Louis D’Amico, President of the Pennsylvania Independent Oil and Gas Association (PIOGA), in their statement released on January 6, 2016:

The development of these regulations over the past four years has been flawed to the point of being fraudulent. The modernization of environmental controls was required by Act 13 for the unconventional industry and yet, despite working on these regulations since 2011, DEP has still not explained or shown the need to make them applicable to the conventional industry.…

Repeated references by this administration to whatever it proposes as ‘commonsense’ cannot magically transform any of them, especially these rulemakings.  We look forward to pressing on with our fight against this abuse of process and extreme regulatory overreach these rulemakings represent.

Mr. D’Amico’s reference to “pressing on with our fight” relates to PIOGA’s challenge to DEP’s policy of relying on certain “public resources” provisions of Pennsylvania’s oil and gas law known as Act 13 (upon which the proposed regulatory amendments are based) which PIOGA alleges the Pennsylvania Supreme Court ruled to be unconstitutional in Robinson Township v. Commonwealth, 83 A.3d 901 (Pa. 2013) (plurality). On December 29, 2015, the Commonwealth Court of Pennsylvania overruled DEP’s preliminary objections to PIOGA’s petition seeking declaratory relief which will enable the court to take up PIOGA’s challenge to DEP’s policy.   Pennsylvania Independent Oil and Gas Association v. Commonwealth of Pennsylvania, et al., Case No. 321 M.D. 2015 (unreported opinion by Judge Cohn Jubelirer filed December 29, 2015).

In addition to PIOGA’s challenge, DEP’s proposed regulatory amendments face potential hurdles from the General Assembly. Senate Republicans included a provision in the Fiscal Code bill, House Bill 1327 (Peifer-R Pike), in early December 2015 which would invalidate DEP’s proposed regulations as they pertain to conventional oil and gas production. The fate of this effort to derail DEP’s regulatory amendments is uncertain.

The EQB must review the regulatory package consisting of more than 2,800 pages of documents including a comment and response document reflecting DEP’s disposition of the nearly 28,000 comments DEP received. If the EQB adopts the rules as a result of its review expected on February 3, 2016, the final step in the rulemaking process will be the review expected to take place this spring by the Independent Regulatory Review Commission (IRRC) which must evaluate the rulemaking under specific standards set forth in the Regulatory Review Act. If the EQB and IRRC approve the rulemaking, the rules should become final (and ripe for challenge by stakeholders) this summer.

As we move forward into 2016, natural gas producers in Pennsylvania will continue efforts to extract hydrocarbons under challenging regulatory, political and economic conditions. While the fate of DEP’s rulemaking is unclear, it is almost certain that some stakeholders will not be happy and further legal and political challenges should be expected.