The Agricultural Law Resource and Reference Center Prof

The Agricultural Law Resource and Reference Center Prof. Ross H. Pifer, J. D. , LL. M. , Director The Impact of Drilling on Surface Owner Rights PBI - Best of OGL Colloquium January 25, 2011

The Agricultural Law Resource and Reference Center Overview of Presentation • • • Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation PBI - Best of OGL Colloquium January 25, 2011 2

The Agricultural Law Resource and Reference Center Overview of Presentation • • • Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation PBI - Best of OGL Colloquium January 25, 2011 3

The Agricultural Law Resource and Reference Center The Agricultural Law Center • Established by Pennsylvania General Assembly on January 29, 1998 • Collaborative enterprise of: – Penn State Dickinson School of Law – Penn State College of Agricultural Sciences – Pennsylvania Department of Agriculture PBI - Best of OGL Colloquium January 25, 2011 4

The Agricultural Law Resource and Reference Center Purpose of The Agricultural Law Center • Section 2205 – “to serve as a resource on agricultural law and related issues for farmers and agribusinesses, attorneys, officials at all levels of government, community groups, and the public. ” PBI - Best of OGL Colloquium January 25, 2011 5

The Agricultural Law Resource and Reference Center Dissemination of Information • • • Presentations Educational Programs Publications The Agricultural Law Brief Web site – www. law. psu. edu/aglaw PBI - Best of OGL Colloquium January 25, 2011 6

The Agricultural Law Resource and Reference Center The Agricultural Law Brief • Monthly e-newsletter • Addresses 5 legal developments from prior month that impact food and agricultural law in Pennsylvania • Addresses 1 or 2 natural gas legal developments per month – with emphasis on case law • Subscription link available on Web site PBI - Best of OGL Colloquium January 25, 2011 7

The Agricultural Law Resource and Reference Center Overview of Presentation • • • Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation PBI - Best of OGL Colloquium January 25, 2011 8

The Agricultural Law Resource and Reference Center Surface Impacts Generally • General Propositions – Natural gas extraction necessary involves some disturbance of the surface estate. – Differing interests of parties • Well operators must have some use of surface estate. • Landowners may desire limitations on the use of surface estate for drilling operations. PBI - Best of OGL Colloquium January 25, 2011 9

The Agricultural Law Resource and Reference Center Surface Impacts Generally • Marcellus wells vs. traditional wells – Larger well pad sites • Increased use of water • Multiple wells on single well pad – Fewer well pad sites • Use of horizontal drilling • Surface use not necessary on all parcels. PBI - Best of OGL Colloquium January 25, 2011 10

The Agricultural Law Resource and Reference Center Surface Impacts Generally • Severed Estates – Not all surface owners own the corresponding oil and gas rights. – Impact of oil and gas ownership on value of land. – Protections afforded surface owners of severed estates in relation to those afforded to owners of intact estates PBI - Best of OGL Colloquium January 25, 2011 11

The Agricultural Law Resource and Reference Center Surface Impacts Generally • Definition of Surface Owner Rights – Lease agreement provisions – Statutes and regulations • Oil and Gas Act – Court opinions PBI - Best of OGL Colloquium January 25, 2011 12

The Agricultural Law Resource and Reference Center Overview of Presentation • • • Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation PBI - Best of OGL Colloquium January 25, 2011 13

The Agricultural Law Resource and Reference Center Protections in Lease Agreement • Generally – The lease agreement governs nearly all aspects of relationship between lessor and gas company. – Surface owner of severed estate likely will receive no protections. PBI - Best of OGL Colloquium January 25, 2011 14

The Agricultural Law Resource and Reference Center Protections in Lease Agreement • Limitations on Operations – – – No Surface Rights Lease Approval of well site and access roads location Limit drilling to defined area Specifically define facilities Installation of security measures Restrict transportation of foreign gas PBI - Best of OGL Colloquium January 25, 2011 15

The Agricultural Law Resource and Reference Center Protections in Lease Agreement • Compensation for Damages – Appropriately address various types of damage that can occur – Valuation of damages – Protect other business relationships PBI - Best of OGL Colloquium January 25, 2011 16

The Agricultural Law Resource and Reference Center Protections in Lease Agreement • Restoration of Well Sites – Requirements in excess of statutory mandates – Impact of multiple wells on single well pad PBI - Best of OGL Colloquium January 25, 2011 17

The Agricultural Law Resource and Reference Center Protections in Lease Agreement • Termination of Lease Agreement – – Renewal clauses Initiation and termination of secondary term Force majeure clause Pooling / unitization PBI - Best of OGL Colloquium January 25, 2011 18

The Agricultural Law Resource and Reference Center Overview of Presentation • • • Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation PBI - Best of OGL Colloquium January 25, 2011 19

The Agricultural Law Resource and Reference Center Statutory Protections Notification • Permitting Requirement – Permit from DEP must be obtained prior to drilling. – Plat must be included with permit application. – Prior to submission of permit application, plat must be sent, via certified mail, to surface owner of drilling site. – Similar notice must be provided for water supplies within 1, 000 feet of proposed well location. PBI - Best of OGL Colloquium January 25, 2011 20

The Agricultural Law Resource and Reference Center Statutory Protections Notification • Objections to Grant of Permit – Surface owner has right to object to grant of permit. – Bases for objection: • Siting in violation of locational restrictions • Information in permit is untrue – Must be filed within fifteen days of receipt of plat – Request for conference PBI - Best of OGL Colloquium January 25, 2011 21

The Agricultural Law Resource and Reference Center Statutory Protections Notification • Renewal of Permit – Can be renewed for additional year – Request for renewal must be provided to surface owner and owners of nearby water supplies. PBI - Best of OGL Colloquium January 25, 2011 22

The Agricultural Law Resource and Reference Center Statutory Protections Notification • Commencement of Drilling – 24 hours notice must be provided to surface owner, political subdivision, and DEP. – Notice not required to be provided to owners of nearby water supplies. PBI - Best of OGL Colloquium January 25, 2011 23

The Agricultural Law Resource and Reference Center Statutory Protections – Well Locations • Distance from Buildings – 200 foot set-back from existing buildings – Minimum set-back can be waived by building owner. – Minimum set-back can be waived by DEP upon showing of additional protective measures. PBI - Best of OGL Colloquium January 25, 2011 24

The Agricultural Law Resource and Reference Center Statutory Protections – Well Locations • Distance from Water Wells – 200 foot set-back from existing wells – Minimum set-back can be waived by well owner. – Minimum set-back can be waived by DEP upon showing of additional protective measures. • Distance from Watercourses – 100 foot set-back from streams, springs, etc. – Minimum set-back can be waived by DEP. PBI - Best of OGL Colloquium January 25, 2011 25

The Agricultural Law Resource and Reference Center Statutory Protections – Well Locations • Restrictions in Oil and Gas Conservation Law – 330 foot minimum set-back from property boundary where spacing order not issued. – 330 foot minimum set-back from unit boundary where voluntary unit established. – Minimum set-back can be waived by DEP. PBI - Best of OGL Colloquium January 25, 2011 26

The Agricultural Law Resource and Reference Center The Oil and Gas Conservation Law and the Marcellus Shale The Oil and Gas Conservation Law does not apply to wells that do not penetrate the Onondaga horizon, meaning wells drilled into the Marcellus Shale are not covered by this law. Depth of Marcellus Shale Depth of Onondaga Horizon Image by: Robert Milici and Christopher Swezey, 2006, Assessment of 27 Appalachian Basin Oil and Gas Resources: Devonian Shale–Middle and Upper Paleozoic Total Petroleum System. Open-File Report Series 2006 -1237. United States Geological Survey.

The Agricultural Law Resource and Reference Center Statutory Protections – Restoration Requirements • Surface Restoration – General restoration requirement – Required compliance with Erosion and Sediment Control Plans – Restoration of permitted site where well not drilled – 30 days after expiration of permit PBI - Best of OGL Colloquium January 25, 2011 28

The Agricultural Law Resource and Reference Center Statutory Protections – Restoration Requirements • Restoration after Completion of Drilling – Well site must be restored and equipment removed within nine months – Surface owner can provide written consent for equipment to remain after nine month period. – Nine month period can be extended for additional six months. – When is drilling completed? PBI - Best of OGL Colloquium January 25, 2011 29

The Agricultural Law Resource and Reference Center Statutory Protections – Restoration Requirements • Restoration after Plugging of Well – Well site must be restored and equipment removed within nine months – Nine month period can be extended for additional six months. PBI - Best of OGL Colloquium January 25, 2011 30

The Agricultural Law Resource and Reference Center Statutory Protections – Restoration Requirements • Restoration of Water Supplies – Requirement to restore or replace water supplies affected by pollution or diminution – Request for DEP investigation – Presumption of responsibility • • Well located within 1000 feet of well Pollution occurs within 6 months of completion of drilling Rebuttal presumption Does not encompass diminished water supplies PBI - Best of OGL Colloquium January 25, 2011 31

The Agricultural Law Resource and Reference Center Statutory Protections – Restoration Requirements • Restoration of Water Supplies – Requirement to provide auxiliary equipment and facilities necessary for utilization of water supply – Bottled water or tank trucks as temporary restorative measure – Landowner not precluded from seeking remedies beyond those provided by DEP. PBI - Best of OGL Colloquium January 25, 2011 32

The Agricultural Law Resource and Reference Center Overview of Presentation • • • Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation PBI - Best of OGL Colloquium January 25, 2011 33

The Agricultural Law Resource and Reference Center Case Law Addressing Use of Surface Estate • Belden & Blake v. DCNR (Pa. Apr. 29, 2009) – Facts • Belden & Blake had rights to extract oil and gas within Oil Creek State Park. • DCNR would not permit surface access without coordination agreement. • Belden & Blake filed suit, claiming implied easement to use surface estate. PBI - Best of OGL Colloquium January 25, 2011 34

The Agricultural Law Resource and Reference Center Case Law Addressing Use of Surface Estate • Belden & Blake v. DCNR (Pa. Apr. 29, 2009) – Supreme Court Ruling • DCNR could not require Belden & Blake to execute coordination agreement. PBI - Best of OGL Colloquium January 25, 2011 35

The Agricultural Law Resource and Reference Center Case Law Addressing Use of Surface Estate • Belden & Blake v. DCNR (Pa. Apr. 29, 2009) – Supreme Court Opinion • Subsurface estate is dominant over surface estate. – Chartiers Block Coal Co. v. Mellon (Pa. 1893) • Subsurface owner entitled to reasonable use of surface estate. • Burden is on surface owner to challenge reasonableness of use. • Government holds no greater rights than private landowner re: surface estate. PBI - Best of OGL Colloquium January 25, 2011 36

The Agricultural Law Resource and Reference Center Case Law Addressing Use of Surface Estate • Minard Run Oil Co. v. Forest Service (W. D. Pa. Dec. 15, 2009) – Facts • Industry plaintiffs challenged terms of settlement agreement entered in prior litigation. • Under settlement agreement, Forest Service was to perform environmental review of proposed drilling sites within Allegheny National Forest. • Plaintiffs argued that environmental reviews were beyond Forest Service’s authority. PBI - Best of OGL Colloquium January 25, 2011 37

The Agricultural Law Resource and Reference Center Case Law Addressing Use of Surface Estate • Minard Run Oil Co. v. Forest Service (W. D. Pa. Dec. 15, 2009) – Ruling • Forest Service did not have authority to require environmental review. • Forest Service had some ability to prevent degradation of surface estate. • As holder of servient estate, Forest Service had right to seek judicial intervention to protect rights. PBI - Best of OGL Colloquium January 25, 2011 38

The Agricultural Law Resource and Reference Center Case Law Addressing Use of Surface Estate • Minard Run Oil Co. v. Forest Service (W. D. Pa. 1980) – Facts • Minard Run held oil and gas rights within Allegheny National Forest. • Due to concern about impact on surface estate, Forest Service sought to restrain surface activities. PBI - Best of OGL Colloquium January 25, 2011 39

The Agricultural Law Resource and Reference Center Case Law Addressing Use of Surface Estate • Minard Run Oil Co. v. Forest Service (W. D. Pa. 1980) – Ruling • Court granted requested injunction, prohibiting certain activities unless notice was provided. • Operator cannot determine whether drilling operations will unreasonably impair surface estate. Thus, reasonable advance notice is required. PBI - Best of OGL Colloquium January 25, 2011 40

The Agricultural Law Resource and Reference Center Case Law Addressing Use of Surface Estate • Minard Run Oil Co. v. Forest Service (W. D. Pa. 1980) – Court Opinion • Mineral owner has unquestioned right to enter upon property. • Prevent unnecessary surface disturbance • “reasonable use justifiable to related activities essential to orderly removal of the mineral rights” • Parties should attempt to reach reasonable accommodation. • Tests to measure extent of surface use • Appropriateness of injunctive relief PBI - Best of OGL Colloquium January 25, 2011 41

The Agricultural Law Resource and Reference Center Case Law Addressing Use of Surface Estate • Gates v. Exco Resources (W. D. Pa. Apr. 8, 2010) – Facts • Landowners executed lease agreement and pipeline rights of way • Landowners sought damages for devaluation of property due to improper reclamation after installation of pipelines. PBI - Best of OGL Colloquium January 25, 2011 42

The Agricultural Law Resource and Reference Center Case Law Addressing Use of Surface Estate • Gates v. Exco Resources (W. D. Pa. Apr. 8, 2010) – Ruling • Court found that 20 acres was “rendered almost unable to be used again. ” • Court awarded $16, 000 in damages due to diminution of property value. • Court did not rely upon contract as basis for recovery. • Court awarded damages despite evidence that devalued land was typical of gas production activities. PBI - Best of OGL Colloquium January 25, 2011 43

The Agricultural Law Resource and Reference Center Case Law Addressing Use of Surface Estate • P. G. W. Assocs. v. Lago de Vita, Inc. (Westmoreland Co. 1991) – Facts • One acre of trees removed pursuant to lease agreement. • Landowner sought damages based upon replacement value of trees. – Ruling • Court awarded damages based upon timber value. PBI - Best of OGL Colloquium January 25, 2011 44

The Agricultural Law Resource and Reference Center Case Law Addressing Use of Surface Estate • Unresolved Questions: – What is Reasonable Use? – How Does Horizontal Drilling Impact Determination of Reasonable Use? – What Damages, if any, are Required for Exercising Right to Reasonable Use of Surface Estate? PBI - Best of OGL Colloquium January 25, 2011 45

The Agricultural Law Resource and Reference Center Overview of Presentation • • • Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation PBI - Best of OGL Colloquium January 25, 2011 46

The Agricultural Law Resource and Reference Center Recent Legislation • Dormant Oil and Gas Act (2006) – Does not vest surface owner with title to oil and gas rights that have been severed from the surface estate – The Dormant Oil and Gas Acts of some states do reunite the surface estate with the subsurface estate under specified conditions. PBI - Best of OGL Colloquium January 25, 2011 47

The Agricultural Law Resource and Reference Center Recent Legislation • Coal Bed Methane Review Board – House Bill 1847 enacted into law on Feb. 1, 2010. – Establishes three member board to resolve disputes relating to surface activities associated with coal bed methane extraction. PBI - Best of OGL Colloquium January 25, 2011 48

The Agricultural Law Resource and Reference Center Recent Legislation • Coal Bed Methane Review Board – Process • • • Notification Objections Conference Resolution Appeal PBI - Best of OGL Colloquium January 25, 2011 49

The Agricultural Law Resource and Reference Center Recent Legislation • Surface Owners’ Protection Act – House Bill 1155 introduced on March 31, 2009. – No activity after Sep. 11, 2009. – Basic provisions • Compensation requirements • Surface use and compensation agreement PBI - Best of OGL Colloquium January 25, 2011 50

Agricultural Law Resource and Reference Center Governments’ Roles in Natural Gas Development Contact Information The Agricultural Law Resource and Reference Center Phone: (814) 865 -3723 Email: rpifer@psu. edu Web: www. law. psu. edu/aglaw PBI - Best of OGL Colloquium January 25, 2011 51