June 2016 • Issue 74The monthly newsletter of the Pennsylvania Independent Oil & Gas Association

(Continues on page 22)

(Continues on page 3)

Each time DEP, via the Environmental Quality Board, adoptsnew regulations, the House and Senate committees have anopportunity to review the rules. A disapproval vote from a stand-ing committee does not stop the regulations from moving for-ward, but it does start the process of allowing the legislature totake the formal step of moving a disapproval resolution if theIndependent Regulatory Review Commission approves a regula-tion, which the commission did on April 21 (May PIOGA Press,page 1).

As is obvious from reading the email, Quigley couldn’t brookanything but total support for the Chapter 78 regulations—despite the many problems that have been highlighted with therules and the rulemaking process. When a few Democrats brokeranks and environmental groups didn’t show up to support theregulations, he went ballistic. The it’s-got-to-be-my-wayapproach characterized many of the dealings the industry andDEP’s oil and gas advisory committees had since Quigley was

Revelations of an explicative-laced private email sent byJohn Quigley to environmental groups in the wake of leg-islative hearings on the

Chapter 78/78a regulations inmid-April apparently were thelast straw for the Wolf adminis-tration, leading to his quick res-ignation as secretary of theDepart ment of EnvironmentalProtection late last month.

Replacing Quigley as actingsecretary is Patrick McDonnell, a DEP veteran who most recent-ly oversaw the agency’s regulation and policy developmentprocesses.

On May 19, the news service Capitolwire reported that theWolf administration was looking into a private email in whichQuigley criticized environmental groups for not doing enough tosupport DEP’s proposed oil and gas regulations and new green-house gas regulations. Not long after Quigley sent the email, theNatural Resources Defense Council ran radio ads critical of twoDemocratic senators who had expressed reservations about theChapter 78 regulations.

Quigley resigned after a brief meeting on May 20 withGovernor Wolf. An anonymous source quoted in one news reportsaid, “This guy had soured so many relationships with so manypeople, it had become impossible for him to do his job.”

A copy of the email (reproduced on page 22) surfaced a fewdays later . It was sent the day after the House and SenateEnvironmental Resources and Energy Committees held hearingson the controversial Chapter 78 (conventional) and 78a (uncon-ventional) regulations and used their oversight authority to voteto disapprove the rules. In both committees, a handful ofDemocrats joined the Republican majorities to pass the motionto disapprove the regulations.

DEP resignation offers new hope for Chapter 78 regs

PIOGA committee meets withPUC commissioners in HarrisburgBy Joyce Turkaly, Director, Natural Gas MarketDevelopment

The Pipeline and Gas Market Development (PGMD)Committee held a collaborative meeting on June 2 withthree of the four members of Pennsylvania Public Utility

Commission (PUC)—a first for a PIOGA committee meeting. Pennsylvania regulations affecting downstream markets are

highlighted as part of the monthly PGMD agenda; however, theimportance of initiating a dialog with the commissioners first

hand was extremely helpful and neces-sary, given that natural gas has becomea dominant fuel source for electricitygeneration across the PJM footprint.PJM is a regional transmission operatorthat directs the high-voltage transmis-sion grid and wholesale electricity mar-ket within a 13-state service area.

During a slide presentation entitled“Gas and Electric GenerationChallenges,” PGMD members wereable to participate in a robust discussion

Photo review: PIOGA Summer Outing . . . . . . 4Air quality compliance training . . . . . . . . . . . . 6PIOGA tours natural gas power plant . . . . . . . 7PGMD networking event . . . . . . . . . . . . . . . . . 7Corps of Engineers issues PASPGP-5 . . . . . . 9Creditor rights in bankruptcy proceedings . . 10Bankruptcies and gathering agreements . . . 14OSHA finalizes recordkeeping rule . . . . . . . . 17PIOGA’s Safety Committee wants you! . . . . 17EIA releases new Utica play maps . . . . . . . . 18DRBC sued over drilling moratorium . . . . . . 19

Shell cracker plant is a go. . . . . . . . . . . . . . . 20Shale gas contest winners . . . . . . . . . . . . . . 20PIOGA member news . . . . . . . . . . . . . . . . . . 20Oil & Gas Trends. . . . . . . . . . . . . . . . . . . . . . 24May Spud Report . . . . . . . . . . . . . . . . . . . . . 26Calendar of Events . . . . . . . . . . . . . . . . . . . . 27PIOGA contacts . . . . . . . . . . . . . . . . . . . . . . 27

Page 2 The PIOGA Press

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PUC meeting: Continued from page 1

that elevated the importance of outdatedemergency curtailment tariff language,capacity performance and associated non-performance penalties, demand response,unintended policy outcomes, and the CleanPower Plan’s impact to the future genera-tion fleet.

All participants acknowledged anunderstanding and appreciation for con-cerns that were highlighted and agreed tocontinuing talks. Commissioner JohnColeman noted that he represents the PUCas part of the Organization of PJM States,Inc. (OPSI), an intergovernmental organi-zation of utility regulatory agencies in 14jurisdictions. OPSI activities include coor-dinating data and issues that impact policyrelated to PJM’s operations, itsIndependent Market Monitor and relatedFERC activities.

Thanks go out to Corey Reeder andJames Dougherty of McNees, Wallace andNurick Harrisburg’s energy law practicefor hosting this event. Anyone who wouldlike to be part of this ongoing discussionshould contact Bob Eckle, PGMD Com -mittee chair or Joyce Turkaly, PIOGA. ■

PUC Chairman Gladys Brown (top left) addresses PIOGA’s Pipeline and Gas MarketDevelopment Committee at a meeting this month in Harrisburg.

Page 4 The PIOGA Press

Thanks to our sponsors!Title/Picnic Sponsor:

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Above: Thanks go out to Ted Cranmer (right) for all his hardwork that makes the event a success year after year. Below: Thehappy 50-50 winner.

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Another valuable PIOGAtech trainingheld on air quality compliance

The second technical seminar of the 2016 PIOGAtechseries was held on May 25, and this one focused on thevery timely topic of air quality compliance. With the

increased attention on air emissions in the oil and gas industry,this technical seminar was very well attended by PIOGA mem-bers and guests, with over 45 participating in the training.

Topics included an overview and update of federal andPennsylvania air quality regulations, demonstrating compliancewith 40 CFR Part 60, Subpart OOOO, a guide to Subpart OOOOtesting, RICE compliance requirements and a field guide toRICE testing, and a demonstration of LDAR tools of the trade.

Our thanks go out to the presenters from ALL4, Inc. andClean Air Engineering for putting together a very relevant pro-gram and for providing their expertise on this important topic forour members. Stay tuned for the announcement of the nextPIOGAtech Series topic! ■

February 2014 Page 7June 2016 Page 7

On May 12, PIOGA’s Pipeline and Gas MarketDevelopment Committee and guests visited what will beone of the world’s most efficient power plants, the natu-

ral-gas-fired Panda Patriot facility outside Williamsport inLycoming County.

Larry Gill, Panda site manager, provided a detailed presenta-tion on the design of the plant and its construction—includingthe many challenges of getting huge components to the site.Among the facts he communicated:

• The combined-cycle plant uses two natural gas turbinespaired with steam generators. It will be able to generate 829megawatts, which can power 800,000 to 1 million homes innortheast Pennsylvania.

• The design is unusual in that each of the units run on a sin-gle shaft, with the gas turbine at one end, the steam turbine at theother and the generator in the middle, connected to the turbinesby clutches.

• The facility will run at 60 percent efficiency, making it oneof the most efficient power plants in the world.

• It is a closed-loop, air-cooled system that will typically useonly 8,000 gallons of water per day. During hot weather, wateruse is expected to run as high as 80,000 gallons/day as watercooling augments the air cooling. Water is delivered via the localmunicipal utility and then filtered extensively before use.

• The plant will burn up to 7,000 Dth/hour (6,800 Mcf/hour)of Marcellus Shale gas. A 12-inch, 8.1-mile-long pipeline wasconstructed to connect the facility to UGI’s system. A 1.4-mileelectric transmission line connects with PPL.

• The plant will employ 27 full-time and needs as few as threepeople to operate it on a 24-hour basis.

• Ground was broken in December 2013. At the time of thevisit, the plant was on schedule to “go commercial” at the begin-ning of June. A sister plant in Towanda was undergoing finaltesting and was about two weeks ahead of the Patriot facility.

After the presentation, the approximately 40 people in atten-dance broke into small groups to walk through the facility. Pandapersonnel took all the time necessary to explain the plant’s oper-ation and answer questions.

PIOGA’s Pipeline and Gas Market Development Committeeheld its first networking mixer of the year last month atWoodville Plantation in Heidelberg. The historic home that issituated on the plantation was built in the late 1700s byJohn Neville, a landowner and American military officer orig-inally from Virginia who served in the French and IndianWar, the Revolutionary War and later became an inspectorof revenue to collect the excise taxes on whiskey. PIOGAmembers and guests were invited to a social hour followedby a tour of the Neville house, John Neville’s second homebuilt less than a mile away from his first home Bower Hillthat was burned to the ground during the WhiskeyRebellion. Guests toured the central passage, dining room,parlor, two bedrooms and detached log kitchen. It wasadded as a national historic landmark in 1983, given that itis one of the oldest houses in Allegheny County restoredand preserved in its original condition. In the photo,committee chair Bob Eckle (left) holds up a house artifactand invites guests to guess its origins.

PIOGA thanks the Panda Power team for their hospitality aswell as Sandy Spencer of Appellation Pre Fab for coordinatingthe visit. ■

PIOGA tours Panda natural gas power plant

Panda’s Larry Gill answers a question during the tour of thepower plant outside Williamsport.

Page 8 The PIOGA Press

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Corps of Engineers issues PASPGP-5By Paul Kanouff, Civil & Environmental Consultants, Inc.and Matt Benson, PIOGA

The U.S. Army Corps of Engineers has issued an updatedversion of a Section 404 permit that grants federal author-ization to conduct activities in streams, wetlands and other

waterbodies (waters of the U.S.) in Pennsylvania. The newPennsylvania State Programmatic General Permit 5 (PASPGP-5)takes effect July 1, replacing the expiring PASPGP-4. ThePASPGP program allows the Pennsylvania Department ofEnvironmental Protection (DEP) and county conservation dis-tricts (CCD) to issue federal authorization on behalf of theCorps. The purpose of the program is to reduce duplicativereviews, needless paperwork and permitting delays.

Generally, projects that result in the loss of one acre or less ofwaters of the U.S. are eligible to receive authorization under thePASPGP; otherwise, the project must obtain an IndividualSection 404 permit. Under the PASPGP program, a Chapter 105permit application is submitted to DEP or a county conservationdistrict. The DEP or CCD then decides whether a project is con-sidered a reporting activity or a non-reporting activity. (UnderPASPGP-4, projects were considered to be either Category I, IIor III activities. Essentially, Category I and II activities are nowconsidered non-reporting activities and Category III activities areconsidered reporting activities.) Reporting activities must be for-warded to the Corps for a separate, concurrent review. Non-reporting activities do not require a separate Corps review, andthe DEP or CCD can issue the PASPGP authorization on behalfof the Corps.

The changes on the whole are beneficial to the oil and gasindustry. For example, threshold calculations to determine if anactivity is reporting or non-reporting are based on the impacts ofa single and complete project and not on the cumulative impactsof the overall project, as was utilized under the PASPGP-4. Thismeans that for linear projects such as pipelines, the thresholdamounts will apply to each individual crossing as opposed to thecumulative total of all of the crossings of the overall project.

Some other notable changes include required monitoring oftemporary wetland impacts and the inclusion of most activitieswaived at 25 PA Code § 105.12(a)(2) (Waiver 2 activities) asnon-reporting activities; previously, all Waiver 2 activities wereconsidered Category III activities.

Taking advantage of the opportunity to file comments on therevised permit late last year, PIOGA was supportive of thechanges, but raised two issues:

• PIOGA recommended that General Condition 23, Monitor -ing of Temporary Wetland Impacts, be clarified to pertain toreporting activities only. The Corps responded that monitoring oftemporary wetland impacts of greater than 0.10 acre is requiredfor both reporting and non-reporting activities under PASPGP-5,and that monitoring efforts by the Corps has revealed that suc-cessful restoration of temporarily impacted wetlands is notdependent on the type of permit review process. The requirementto monitor provides for consistency across all activities, theCorps said, and ensures that temporarily impacted wetlands havebeen successfully restored.

• PIOGA also recommended clarification on whether thesame General Condition 23 pertains to 0.10 acre of cumulativeimpacts or 0.10 acre of a single and complete project. The Corps

indicated that the 0.10-acre monitoring threshold pertains to asingle and complete project (each crossing) and not the cumula-tive temporary impacts associated with the overall project. Thisclarification is a significant “win” for the industry, as it isuncommon for a single crossing to impact that much wetland.

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Understanding rights,opportunities as a creditoror asset purchaser inbankruptcy proceedingsThis article is an excerpt of the 2016 Babst Calland Report –“An Unprecedented Time for the Oil & Gas Industry: PriceDown, Supply Up, Reform Ahead, Legal and RegulatoryPerspective for Producers and Midstream Operators.”

In 2015, 42 North American oil and gas exploration and pro-duction companies filed for bankruptcy protection. At leastanother 29 have filed in 2016, and continuing price pressure

may result in more bankruptcy filings. Given this state of affairs,companies operating in the oil and gas sector should understandhow their rights and obligations are affected when their contrac-tual counterparties become bankruptcy debtors, and how to takeadvantage of business opportunities presented through the bank-ruptcy process.

Assumption or rejection of contractsOne of the main purposes of the Bankruptcy Code is to afford

a commercial debtor the opportunity to rehabilitate and reenterthe stream of commerce as a productive enterprise. One toolafforded to debtors is the right under Section 365 of theBankruptcy Code to determine which of its “executory contracts”dating from prior to the bankruptcy filing are beneficial, andwhich are burdensome, and to reject those that are burdensome,thereby relieving the debtor of the obligation to perform burden-some contracts going forward. The Bankruptcy Code does notdefine the term “executory contract,” but the term is generallyunderstood to encompass those contracts where the obligationsof both parties are unperformed to the degree that the failure ofeither party to complete performance would constitute a materialbreach. Section 365 also permits a debtor to reject its unexpiredleases.

The question of whether a debtor can reject particular sorts ofcontracts can hinge on issues determined under state law. Morespecifically, the treatment of oil and gas leases, gathering agree-ments and transportation agreements can vary, depending on thetreatment of those agreements under the state law governingthose agreements.

Major developments in this area occurred in late 2015, andare continuing to develop this year.

Oil and gas leases Under the law of certain states, including Pennsylvania and

West Virginia, an oil or gas lease is not a true lease, but instead isthe conveyance to the lessee of a real property interest in the oilor gas in place for its extraction and development. Upon termina-tion of the lease, the interest reverts to the lessor. The interestconveyed to the lessee is referred to as a fee simple determinablewith right of reversion. Prior to November 2015, cases interpret-ing Pennsylvania law generally held that, regardless of the lan-guage of the lease, an oil or gas lease was a conveyance of legaltitle to the oil or gas in place that vested when the property wasbrought into production. Those cases also held that prior to pro-duction an oil or gas lease was subject to rejection under Section

365 of the Bankruptcy Code because the conveyance of legaltitle to the oil or gas in place had not yet vested.

In November, 2015, the U.S. District Court for the MiddleDistrict of Pennsylvania, in the case of In re Mark Powell andPowell Development Company, Inc., determined on appeal thatthe underlying bankruptcy court, and indeed most courts that hadexamined the issue under Pennsylvania law to date, misinterpret-ed Pennsylvania law to the extent they based their rulings on theprinciple that an oil and gas lease, as a matter of law, conveystitle that is inchoate and vests only when oil or gas is produced(and, therefore, is subject to rejection prior to when oil or gas isproduced), regardless of the language used in the lease. Instead,the district court ruled that the language of the specific oil or gaslease must be examined to determine if it grants a fee simpledeterminable. If that language is in the traditional form (that is,“the lessor hereby grants and conveys to the lessee…”), the courtheld that the lease constitutes the conveyance of a fee simpledeterminable that is not subject to rejection, even before oil orgas is produced.

This decision in the Powell case binds lower federal courts inthe Middle District of Pennsylvania, including the bankruptcycourt in that district. It remains to be seen how other courts willrespond to this decision, but if it is followed by other courts(which certainly is likely), it represents a potentially significantchange in law concerning Pennsylvania oil and gas leases.

Gathering and transportation agreements The rejection of gathering and transportation agreements has

taken center stage in several major bankruptcy cases involvingdebtor exploration and production companies. The agreementssought to be rejected generally provide for lengthy fixed termsand have minimum throughput-or-pay provisions that, whenviewed in a depressed price and decreased production environ-ment, present onerous burdens on the debtor producer.

Whether a debtor producer may avoid the burdens of a gather-ing or transportation agreement through rejection has come toturn on whether the agreement “runs with the land.” Non-debtorgatherer/transporters have argued, historically and in recentcases, that their contracts, which include provisions that say thecontract “runs with the land,” are not susceptible to rejection, or,if they may be rejected, create property rights on the part of thenon-debtor gatherer/transporter that survive rejection becausethey amount to an interest in real property that has been con-veyed to the non-debtor counterparty rather than a mere contract

David W. Ross,Esq.

Gregory D.Cribbs, Esq.

Authors:

Erica K.Dausch, Esq.

February 2014 Page 11June 2016 Page 11

right. Non-debtor gather/transporters also have argued that thelanguage in their contracts dedicating acreage, or the productionfrom specified acreage, to the contract also prevents them frombeing rejected or also creates property rights that survive rejec-tion. Debtor producers have argued that the mere inclusion ofrunning with the land or dedication language is not dispositive,and more specific requirements to be determined under state lawmust be satisfied.

These issues were presented in several recent bankruptcycases, including In re Sabine Oil Gas Corporation, In reQuicksilver Resources, Inc. and In re Magnum Hunter ResourcesCorporation. [Editor’s note: An accompanying article exploresthe issue in more depth.]

Farmout agreements The characterization of farmout agreements under the

Bankruptcy Code is also an important issue in the context of anoil and gas exploration and production company bankruptcy.Farmout agreements may be considered executory contracts sub-ject to acceptance or rejection under Section 365; however, ananalysis of the specific terms of the farmout agreement and what,if any, obligations remain to be performed by the parties at thetime of the bankruptcy filing must be performed. Depending onthe status of the specific farmout, it may be considered a per-formed agreement establishing interests in real property, whichinterests are not subject to assumption or rejection. Additionally,Section 541(b)(4) of the Bankruptcy Code contains a safe harborprotection for non-debtor farmees where the debtor-farmor seeksto reject a farmout agreement after the farmee has performed itscontractual obligations, but before the required conveyance of the

working interest has been recorded. If the Section’s criteria aremet, rejection does not impact the rights of the farmee withrespect to any interest it earned prior to the petition date. Suchinterests are generally considered to be the non-debtor farmee’sseparate property, as opposed to a claim against the debtor far-mor. While there are very few cases interpreting this Section ofthe Bankruptcy Code, it is available in the proper circumstances.

Master agreements Section 365 of the Bankruptcy Code requires the assumption

or rejection of a contract in its entirety. A debtor may not pickand choose which elements of a contract to assume and which toreject. Sometimes, multiple contracts comprise a single, integrat-ed agreement. For example, a master agreement may contain thegeneral terms and conditions that govern a series of similar trans-actions to be entered into overtime. Where a debtor seeks toreject some, but not all, of the related agreements, the non-debtorcounterparty will argue that the agreements are so interrelated asto form an integrated whole, and therefore all of the interrelatedcontracts must be assumed or rejected together.

This fact pattern is present in the Magnum Hunter case, wherethe debtor has agreements with a gatherer and is seeking to rejectsome, but not all, of its agreements with the counterparty.Specifically, the debtor and the gatherer are parties to a masteragreement and several subsidiary agreements, or confirmations,that support a pipeline network of multiple lateral segments andtransportation lines. The gatherer argues that these segments arenot individually viable, and are instead maintained as compo-nents of an integrated system. As with so many critical issues inbankruptcy, the counterparties argue that the question of whether

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the related agreements constitute an integrated whole must bedetermined under state law. The issue remains to be decided inthe Magnum Hunter case.

Mineral interestsInvestors in the energy sector make their investments in a

variety of ways, including purchasing overriding royalty inter-ests, net profits interests, working interests, production paymentsand other interests. The nature of the interest purchased can havea dramatic effect on the investor’s recovery in a bankruptcy case.

Generally, an overriding royalty interest is an interest in oil orgas flowing from an underlying oil and gas lease that is free ofthe costs of production, similar to the usual landowner’s royalty.A net profits interest is a share of the gross production of a prop-erty measured by net profits from operations. In either case,these interests are often conveyed through documentation reflect-ing the parties’ intent to transfer an interest in real property. Onereason that an investor would want to structure its investment asan interest in real property is that, under bankruptcy law, such aninterest would be excluded from the debtor’s estate, and there-fore not subject to divestment in the bankruptcy case. TheBankruptcy Code specifically excludes from property of theestate “any interest of the debtor in liquid or gaseous hydrocar-bons to the extent that...the debtor has transferred such interestpursuant to a written conveyance of a production payment [asdefined in Section 101(42A)] to an entity that does not partici-pate in the operation of the property from which such productionpayment is transferred....” This language may be read to meanthat the exclusion from property of the estate is only available toassignees that provide financing, as opposed to assignees that

receive production payments as compensation for services ren-dered in the operation of the property. There is little case law onthis issue, though the recent spate of oil and gas bankruptcycases may change that.

By the time a bankruptcy case begins, a debtor productioncompany may owe substantial royalty payments to lessors.Generally, a lessor’s pre-petition royalty claim may be treated asa general unsecured claim. However, a lessor may challenge thistreatment based on specific language in its lease, or based onspecific state law peculiarities. Leases may include language thatallows the lessor to terminate a lease for non-payment of royal-ties. The Bankruptcy Code’s automatic stay notwithstanding,such provisions can be enforced in some states, including Texas.To prevent termination, debtors may seek court approval to payprepetition royalty payments in order to preserve the value of thelease.

Purchase of assets in a Section 363 saleUse, sale or lease of property of the estate. Section 363 of

the Bankruptcy Code sets forth the rights and powers of debtorswith respect to the use, sale or lease of property of the estateother than in the ordinary course of business. Generally, a bank-ruptcy debtor may enter into transactions, including the sale, useor lease or property of the estate, without involvement by thebankruptcy court, so long as such transactions are within theordinary course of the debtor’s business. The use, sale or lease ofproperty of the estate other than in the ordinary course of busi-ness requires notice, a hearing and an order of the bankruptcycourt approving such use, sale or lease.

Advantages and disadvantages of a Section 363 sale. Someof the advantages to a buyer in a bankruptcy sale are the opportu-nity to negotiate a reduced price from a seller whose leverage isimpaired, and the opportunity to be selective about the assets tobe purchased. Perhaps the most compelling advantage of a 363sale, however, is the quality of title that may be acquired. Theorder confirming the sale will provide that the assets are con-veyed free and clear of at least the liens identified in the plead-ings. The order might alternatively provide that the assets areconveyed free and clear of all liens. Section 363(f) authorizessales free and clear of “any interest in such property,” providedone of five criteria is satisfied. This provision is most commonlyunderstood to enable the assets to be transferred free from liensand other similar encumbrances. Even at this most basic level,this feature is a powerful argument for purchasing assets inside,rather than outside, of a Chapter 11 proceeding. Section 363(f),however, has been construed even more broadly by some courts.In the case of In Re Trans World Airlines, Inc., airline workers’employment discrimination claims against a Chapter 11 debtorairline, as well as flight attendants’ rights under a travel voucherprogram that the debtor airline had established in settlement ofsex discrimination actions, both qualified as “interests in proper-ty” under Section 363(f). This case established for the ThirdCircuit that Section 363(f)’s “interest in property” languagemeans more than in rem interests, such as liens.

There may also be disadvantages to a sale under Section 363.Although an auction process is not mandated by the BankruptcyCode, the prospective purchaser should assume that the transac-tion will be subject to higher and better offers where the assets tobe acquired are material to the debtor. Also, the timing of aSection 363 transaction can be problematic, particularly if the

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bankruptcy case has not yet been commenced. In either case, thebankruptcy proceeding adds an additional layer of cost to thetransaction. An acquired business or business unit may also haveimpaired relationships with its customers, vendors and employ-ees. Finally, the differing interests among the debtor, the securedcreditors and the unsecured creditors’ committee can complicateand delay the deal-making process.

Special considerations for Section 363 agreements of sale.The negotiation of an agreement of sale where the seller is aChapter 11 debtor involves some unique considerations, includ-ing the following:

Although the preferred goal of Chapter 11 is for the debtor toemerge from bankruptcy as a reorganized, viable business, it isentirely possible that the Chapter 11 debtor/seller will notemerge as a business at all. Accordingly, representations andwarranties that serve to shift risk in non-bankruptcy transactionscan be meaningless in Chapter 11 transactions. Instead, mattersthat might typically be addressed in such representations andwarranties in non-bankruptcy transactions (e.g., the condition ofthe assets and required consents) should be viewed merely asconditions to closing.

Assuming the Chapter 11 debtor/seller will not emerge frombankruptcy as a viable business, the buyer might be inclined tonegotiate special price concessions, hold backs or escrows toaddress potential claims. Such mechanisms, however, may not befavored by creditors of the seller who have little interest in wait-ing for additional payments to be distributed at some point in thedistant future, if at all.

The increased likelihood that the prospective buyer will beunsuccessful in a Chapter 11 sale, whether because of competi-tive bidding or otherwise, suggests that extensive efforts shouldnot be devoted to due diligence while the Chapter 11 saleremains uncertain. The debtor/seller’s status, however, puts evenmore pressure than normal on the due diligence process. Oneway to address this concern is to include an expense reimburse-ment feature in the sale procedures, whereby the unsuccessfulbidder may recoup at least its out-of-pocket expenses (i.e., attor-neys’ fees).

The assignment and assumption of significant contracts is animportant component of the acquisition of any on-going busi-ness. Chapter 11 sales, however, involve a number of additionalconcerns relating to the assignment and assumption of contracts.Pursuant to Code Section 365(f), the debtor/seller has the right toassign most contracts without the consent of the counterparty,even if the contract being assigned requires such consent. Thebuyer/assignee, however, must be prepared to provide adequateassurance of future performance. In addition, all monetary de -faults must be cured before an executory contract can be as -sumed and assigned in a Chapter 11 case. The buyer should beprepared to bear those costs where the debtor/seller is liquidat-ing.

In non-bankruptcy transactions, the agreement of sale usuallycontains various conditions to the parties’ respective obligationsto close. One of the most common is a financing contingency. Inbankruptcy sales, however, such conditions can severely hamperthe prospective purchaser’s prospects for success, either becausea competitive bid might not include such conditions (and mighttherefore be a “better” if not “higher” offer), or because theinclusion of such con ditions will lose the support of creditorsand other parties-in-interest for the proposed transaction.

Stalking horse issues and other sale procedures The prospective buyer who enters into an agreement of sale

with a Chapter 11 debtor/seller where the sale is subject to com-petitive bidding at a court-ordered auction is referred to as a“stalking horse.” A stalking horse bidder bears the risk of losingthe desired assets to a higher or better bid. Accordingly, the firstdecision any prospective purchaser of assets in a Chapter 11 salefaces is whether to become the stalking horse bidder, or whetherto wait to let another prospective purchaser do the initial heavylifting—getting the deal put together and mustering the supportof the various parties-in-interest for a transaction—then bid atthe ensuing auction. Based on the theory that the interests of theestate and its creditors are served by encouraging someone tostep up and begin the bidding process, bankruptcy law and prac-tice affords some protections for the stalking horse bidder,including the opportunity to establish the procedures by whichthe sale will be conducted, and the opportunity to collect a fee orbe reimbursed for expenses if the stalking horse bidder is not thesuccessful purchaser. ■

For more information, contact David W. Ross (dross@babst-calland.com or 412-394-6558), Gregory D. Cribbs (gcribbs@babstcalland.com or 412-394-5405) or Erica K. Dausch(edausch@babstcalland.com or 412-773-8706). A full copy ofThe 2016 Babst Calland Report is available by writinginfo@babstcalland.com.

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Page 14 The PIOGA Press

Since the beginning of 2015, approximately 50 explorationand production companies in the United States and Canadahave filed for bankruptcy, with the combined debt of these

companies approaching $20 billion. As the challenging commod-ity price environment continues to exert pressure on explorationand production companies and others in the production chain,understanding the possible rights and obligations that could beimpacted or modified by a bankruptcy filing, or the threat ofsuch a filing, is important for all parties involved. One such obli-gation at the heart of numerous ongoing energy industry bank-ruptcy proceedings, and at the center of the relationship betweenexploration and production and midstream companies, is thegathering and transportation agreement defining the terms andcost to flow oil and natural gas from wellhead to market.

In the ongoing bankruptcy proceedings of several explorationand production companies, this issue has taken center stage asthe companies attempt to reduce costs by trying to reject whatthey deem are above-market gathering and transportation agree-ments with their pipeline providers. These gathering agreementsare typically for lengthy fixed terms and, outside of the financingthat exploration and production companies obtain to run theirdrilling programs, are often one of the company’s largest long-term expenses. Therefore, in an effort to reorganize or sell theirassets as part of a bankruptcy proceeding, exploration and pro-duction companies are motivated to reject these gathering agree-ments to reduce their costs and obligations going forward afterreorganization, or to threaten such rejection to gain leverage innegotiating a lower rate.

The determination of whether a producer may avoid the bur-dens of a gathering agreement through rejection in a bankruptcyproceeding has boiled down to whether the agreement “runs withthe land.” A contract establishing a covenant running with theland may not be susceptible to rejection under Section 365 of theBankruptcy Code, or may create property rights that surviverejection. As such, bankrupt exploration and production compa-nies burdened with above-market gathering agreements contendthat the agreements do not run with the land and are subject torejection as executory, while midstream companies argue that thegathering agreements do run with the land and either cannot berejected by producers in bankruptcy or create enforceable proper-ty rights that will survive rejection.

On March 8, 2016, the U.S. Bankruptcy Court for theSouthern District of New York in the Sabine Oil & Gas bank-ruptcy case found that exploration and production companySabine could reject three midstream agreements for gas and con-densate gathering services as part of its bankruptcy proceeding.See In re Sabine Oil & Gas Corp., No. 1511835, Doc. No. 872(Bankr. S.D.N.Y Mar. 8, 2016). The bankruptcy judge agreedwith Sabine that its rejection of the contracts was a reasonableexercise of its business judgment and that Sabine satisfied thestatutory standard for rejection. The court, however, for bank-ruptcy procedural reasons, did not officially decide the issue ofwhether the gathering agreements ran with the land pursuant toTexas law. After stating that it was not deciding the “runningwith the land issue,” the court then proceeded to issue a nonbind-ing analysis, concluding that the gathering agreements at issue

did not run with the land under Texas law.There has been litigation on this same

issue in the bankruptcy cases of explorationand production companies QuicksilverResources and Magnum Hunter. See In reQuicksilver Resources, Inc., No. 15-10585(Bankr. D. Del.); In re Magnum Hunter, No.15-12533 (Bankr. D. Del.). Because a keyissue in all of these cases where a bankruptexploration and production company seeksto avoid the burdens of a gathering agree-ment is whether the agreement runs with theland under relevant state law, this articleanalyzes the law in certain mineral-produc-ing states regarding when an agreement runswith the land.

How the issue plays out in bankruptcycourt

What is and is not an executory contractsubject to assumption and rejection can bethe basis of litigation, as has occurred in theSabine, Quicksilver and Magnum Huntercases. A debtor’s assumption or rejection ofexecutory contracts is governed by Section365(a) of the Bankruptcy Code. Section365(a) provides that the debtor may assume or reject any execu-tory contract or unexpired lease of the debtor, subject to thebankruptcy court’s approval. The Bankruptcy Code does notdefine what constitutes an executory contract, but it is generallyaccepted to mean a contract under which the obligations of boththe bankrupt party and the other party are so far unperformedthat the failure of either to complete performance would consti-tute a material breach, excusing the performance of the other.

With respect to covenants that run with the land, courts havefound that express covenants that run with the land cannot berejected under Section 365 because they represent an interest inreal property, as opposed to contract rights. See, e.g., Gouveia v.Tazbir, 37 F.3d 295, 299 (7th Cir. 1994). Midstream playerstherefore can be expected to assert that their gathering agree-ments include covenants that run with the land that either pre-clude rejection or would survive rejection.

Another provision of the Bankruptcy Code that may implicatethe contract rights of the parties to gathering agreements isSection 363, which governs the use, sale or lease of the debtor’sproperty. Section 363(b) permits the debtor to use, sell or leaseproperty of the debtor’s estate outside the ordinary course ofbusiness after notice and a hearing. Section 363(f) provides thatthe trustee may sell property free and clear of any interest in theproperty if any one of five conditions are met: (1) applicablenon-bankruptcy law permits the sale of the property free andclear of such interest; (2) the entity consents; (3) such interest isa lien and the price at which such property is to be sold is greaterthan the aggregate value of all liens on such property; (4) suchinterest is in bona fide dispute; or (5) such entity could be com-pelled, in a legal or equitable proceeding, to accept money satis-

Drilling deeper:The intersection of producer bankruptcies and gathering agreements

Michael G.Connelly

David M.Fournier

•Pepper

Hamilton, LLP

Authors:

June 2016 Page 15

faction of the interest. In addition to the substantive provisions of the Bankruptcy

Code that may impact the contractual rights of the parties, oneprocedural issue is also noteworthy. As noted above, the Sabinecourt did not make a binding determination as to whether thecovenants under the gathering agreements at issue run with theland. The court found that it could not make a binding determi-nation on the issue because—although rules 6006 and 9014 ofthe Federal Rules of Bankruptcy Procedure provide that a pro-ceeding to reject an executory contract is a contested matter—Second Circuit precedent holds that contract rejection proceed-ings are summary proceedings and should not be used for theprolonged adjudication of disputed legal and factual issues. TheSabine court therefore found that it could not make a bindingdetermination as to whether the covenants at issue run with theland, but did offer nonbinding analysis that they do not.Although the court did not offer express guidance as to the nextsteps the midstream companies or the debtors would need to takeon the issue, it did suggest that an adversary proceeding or a sep-arate contested matter would be required to determine the sub-stantive legal dispute.

The debtor in Magnum Hunter appears to have heeded theSabine court’s procedural warning by very recently filing both amotion to reject a gas purchasing agreement and an adversarycomplaint seeking a declaratory judgment that certain covenantscontained in the agreement do not run with the land.

Common terms in gathering agreementsThe terms of each agreement governing the gathering, pro-

cessing and transportation of oil and natural gas between theexploration and production company and the pipeline companywill determine whether the agreement itself is an executory con-tract subject to rejection in bankruptcy. The terms of each suchagreement will, of course, be different and will require analysisby all parties long before a bankruptcy filing is imminent orthreatened. Nevertheless, there are certain terms that are typicalof such agreements, as demonstrated by the terms of the gather-ing agreements in Sabine.

In Sabine, at issue were three gathering agreements with twopipeline companies, all with similar terms. The gathering agree-ments provided that Sabine would dedicate all gas produced in adesignated area and deliver that gas to the pipeline company,which agreed to construct, at its cost, a gathering system to pro-vide the necessary transportation services. The gathering agree-ments contemplated a separate and subsequent conveyance fromSabine to the pipeline company of a mutually agreed tract ofland in connection with its construction and operation of thegathering system. Sabine also agreed to deliver a certain mini-mum amount of gas. If Sabine failed to deliver the minimumamount of gas, it was subject to a deficiency payment. The gath-ering agreements had 10-year terms and were governed by Texaslaw, and memoranda of the gathering agreements were recordedin the relevant counties. Lastly, the agreements contained aclause stating that they were covenants running with the landwithin the designated areas and that they were enforceableagainst affiliates, successors and assigns.

Law in mineral-producing states when a contract “runs withthe land”

Bankruptcy courts deciding the issue of whether gathering

agreements run with the land will be interpreting state law to doso. The applicable state law will be determined by choice-of-lawprovisions in the gathering agreements or by choice-of-law prin-ciples focused, mostly, on the location of the gathering pipelinesat issue. The following are factors that courts in various mineral-producing states analyze in determining whether an obligationruns with the land, an inquiry that will be the focus of bankrupt-cy courts facing this issue. Although many of the states havesimilar ways to determine if an agreement runs with the land, itis not uniform by any means.

■ Pennsylvania. Pennsylvania law provides that a realcovenant is one that runs with the land and is enforceable againstwhomever holds title to the real property. Real covenants arethose so closely connected with the realty that their benefits orburdens pass with it to subsequent owners. See DeSanno v.Earle, 117 A. 200, 202 (Pa. 1922). The test for whether acovenant runs with the land is governed by the intention of theparties, as ascertained from the words of the covenant read in thelight of the surroundings of the parties and the subject of thegrant. See Philadelphia Fresh Food Terminal Corp. v. M. Levin& Co., 361 A.2d 886, 890 (Pa. Super. Ct. 1976). The require-ments for a covenant running with the land are that the covenanttouch and concern the land itself, that it be certain and definite,that it is for the benefit of the dominant estate and must havebeen intended as such, and that there must be privity of estate.See Elec. City Land & Improv. Co. v. W. Ridge Coal Co., 41 A.

Page 16 The PIOGA Press

458, 500 (Pa. 1898). No formal or specific technical language is required to set

forth a covenant running with the land in Pennsylvania, nor is itrequired that the covenant be expressed as such. Typically, acovenant creating an easement, lien or charge generally runs withthe land. See Birchwood Lakes Cmty. Assocs. v. Comis, 442 A.2d304, 307 (Pa. Super. Ct. 1982) (covenant providing for an annualhomeowners’ association charge is binding on successors to thetitle); Muzzarelli v. Hulshizer, 30 A. 291 (Pa. 1894) (a covenantconcerning light and air restrictions runs with the land).

■ Ohio. In Ohio, the determination of whether the covenantruns with the land depends on whether the covenant is real orpersonal. A covenant is determined to run with the land when theliability to perform it or the right to take advantage of it passes tothe assignee of the land. Lone Star Steakhouse Saloon of Ohio v.Quaranta, 2002 Ohio App. LEXIS 7282 (Ohio Ct. App. 2002)(citing 35 OHIO JURISPRUDENCE 3d (1982)). A three-part testexists to determine whether a covenant runs with the land inOhio: (1) the intent of the original grantor and grantee must havebeen that the covenant run with the land; (2) the covenant musteither “affect” or “touch and concern” the land in question; and(3) there must be privity of estate between the party claiming thebenefit of the covenant and the party who is called on to fulfill it.See LuMac Dev. Corp. v. Buck Point Ltd. P’ship, 573 N.E.2d681, 683 (Ohio Ct. App. 1988).

In determining whether the restriction “affects” or “touchesand concerns” the land in question, Ohio courts must determineif the property was made more useful or valuable by thecovenant. LuMac Dev. Corp. 573 N.E.2d at 684. A personalcovenant can still be enforceable against a subsequent purchaser

and valid in equity on a purchaser taking the estate with notice.See Counts v. Baltimore & O S.R.R. Co.,177 N.E.2d 606, 609(Ohio Ct. App. 1961). The covenant is not binding on a succes-sor merely because he stands as an assignee of the party whomade the agreement, but because he has taken the estate withnotice of a valid agreement concerning it, which he cannot equi-tably refuse to perform. Id.

■ New York. In New York, every instrument creating, trans-ferring, assigning or surrendering an estate or interest in realproperty must be construed according to the intent of the parties,so far as such intent can be gathered from the whole instrumentand is consistent with the rules of law. Real Prop. Law § 240(3).The statute guides us in determining whether, in a deed, the par-ties have, or have not, created covenants running with the land.See Neponsit Prop. Owners’ Assn. v. Emigrant Indus. Sav. Bank,15 N.E.2d 793 (N.Y. 1938).

New York courts have held that a party claiming the benefit ofa covenant could only enforce its rights against a successive pur-chaser where (1) the original grantee and grantor intended thatthe covenant run with the land, (2) there was privity of estatebetween the party claiming the benefit of the covenant and theright to enforce it and the party upon whom the burden of thecovenant is to be imposed and (3) the covenant “touches andconcerns” the land. Id. at 795. In ascertaining intent at the timethat the covenant was created, New York courts first look to thelanguage of the deed. See Brody v. St. Onge, 563 N.Y.S.2d 251,252 (N.Y. App. Div. 1990). “[A] covenant should be held totouch or concern the land, to run with the land, if it affects ‘thelegal relations—the advantages and the burdens—of the partiesto the covenant, as owners of particular parcels of land and notmerely as members of the community in general, such as taxpay-ers or owners of other land.” Neponsit at 796. Significantly,“whether a particular covenant is sufficiently connected with theuse of the land to run with the land, must be in many cases aquestion of degree.” Id.

ConclusionThe issue of whether gathering agreements are subject to

rejection in bankruptcy as executory contracts and whether cer-tain provisions of those agreements run with the land and surviverejection will not only impact the ongoing bankruptcy proceed-ings of producers, but it will impact negotiations of financiallychallenged producers that may attempt to use the Sabine andrelated rulings as a sword in order to renegotiate existing gather-ing agreements. Importantly, the applicable state requirement ofwhen an agreement runs with the land will not only determinethese bankruptcy disputes, but will also inform the negotiation offuture gathering agreements, including what language andrequirements companies will want to include in those agreementsto afford the greatest level of protection in any future bankruptcyproceeding. ■

Spread the word!••••••••••••••••••••Shouldn’t you be advertising your products and services here?Contact Matt Benson (814-778-2291, matt@pioga.org) formore information.

February 2014 Page 17June 2016 Page 17

Safety Committee CornerSafety Committee Corner

OSHA finalizes workplacerecordkeeping and reporting rule

The Occupational Safety and Health Administration(OSHA) finalized its “Improve Tracking of WorkplaceInjuries and Illnesses” rule this week. The rule requires

employers to electronically submit records of workplace injuriesand illnesses to OSHA for inclusion on the agency’s website,prohibits employers from retaliating against employees forreporting such incidents, and ensures that businesses have proce-dures for reporting workplace injuries that do not discourageemployees from filing reports.

Existing law requires covered employers to collect and recorddata on injuries and illnesses in the workplace, and OSHAalready has an online database of such records for more than240,000 work sites. The new rule makes electronic reporting ofthese records mandatory for covered businesses with 250 ormore employees, and for smaller businesses (those between20–249 employees) that operate in certain industries, includingagriculture, construction and manufacturing. Moreover, despiteprivacy and due process concerns raised in public comments,OSHA makes it clear in the preamble that it intends to post theinformation on its website.

According to a blog post by Deputy Labor Secretary Chris Lucoinciding with the announcement of the final rule: “OSHA’sfinal rule will modernize the current system by taking establish-ment-specific injury information that is already collected byemployers and making it available to the public once it iscleaned of personally identifiable information.” The agencyhopes that the new rule will “encourage employers, workers,researchers, the public and OSHA to work together to preventwork-related injuries and illnesses.”

Despite Secretary Lu’s comments, there are concerns that thenew rule imposes onerous requirements on many employers.Among other things, the final rule takes a somewhat novelapproach to OSHA’s rulemaking authority by authorizing OSHA(under § 1904.35) to cite employers for taking what OSHA per-ceives to be retaliatory action against employees for reportinginjuries or illnesses, even if the employee has not filed a claim ofdiscrimination under Section 11(c) of the OSH Act.

OSHA received over 1,800 comments on its proposal duringthe rulemaking process. According to one industry study, compli-ance costs for covered businesses may exceed $1.1 billion. Notsurprisingly, OSHA’s economic analysis estimates far lower com-pliance costs.

There is no question that businesses need to prepare not onlyfor these new reporting requirements—which will be phased instarting January 1, 2017—but also for increased enforcementactivity resulting from these enhanced obligations. ■

If you have questions on this topic, contact Daniel Wolff atCrowell & Moring, 202-624-2621 or dwolff@crowell.com. TheOSHA rule and related information can be found atwww.osha.gov/recordkeeping/finalrule.

PIOGA’s Safety Committee wants you!

With a new chairman at the helm, PIOGA’s SafetyCommittee is taking a fresh look at how it functionsand what it can do to help make operations safer for

the association’s members. Wayne Vanderhoof of RJR Safety,Inc., chairing his first meeting on June 8, described it as anopportunity to “reboot” the committee.

As the Safety Committee begins the process of making itselfmore relevant and valuable, the group has a message for otherPIOGA members: We want you to be involved.

Safety, of course, can have a huge impact on a company’sbottom line in terms of productivity, healthcare expenses, work-er’s compensation and legal costs—not to mention the public’snegative perception of the industry when incidents occur. ThePIOGA Safety Committee has concentrated on best practices,information sharing, training and education as ways of improv-ing the safety performance of other PIOGA member companiesand Pennsylvania’s oil and gas industry in general. One of thecommittee’s more visible efforts is to ensure there is a safety-related article in The PIOGA Press each month.

As part of its reboot, the committee will be seeking guid-ance from the PIOGA Board of Directors and the membershipon what they want from the committee. During the June 8brainstorming session, committee members felt strongly aboutusing the committee’s resources to problem-solve and come upwith practical solutions for making operations safer. They alsohope to provide more training opportunities and to attract par-ticipation not only from producers and service companies, butalso from pipeline and midstream companies as these types ofoperations become more active in Pennsylvania.

In the meantime, the committee strongly urges other mem-bers to become involved. The group currently meets every othermonth on the second Wednesday at the Regional LearningAlliance in Cranberry Township. If you would like to partici-pate or learn more, please email Tracy Zink attracy@pioga.org.

Page 18 The PIOGA Press

EIA releases new maps of Utica play

The U.S. EnergyInformationAdministration

(EIA) recently publisheda Today in Energy articlethat features new EIAmaps designed to showthe structure, thickness,and geologic setting ofthe Utica Shale play andthe location of produc-tion wells. Key pointsinclude:

• The Utica playspans about 60,000square miles acrossOhio, Kentucky, WestVirginia, Pennsylvaniaand New York.

• Production of oiland natural gas from theUtica play has increasedsince 2011, with morethan 1,700 wells drilledas of January 2016. TheUtica play includes boththe Utica formation andthe deeper Point Pleasantformation, each with its own charac-teristics.

• The Utica formation is thickestin western Ohio and the northwestcorner of Pennsylvania at 200-300feet and thins to 50 feet or less insouthern Ohio and northernKentucky. The Point Pleasant reach-es a thickness of more than 200 feetin central Pennsylvania and thins toless than 20 feet in the eastern halfof Kentucky.

• The combined thickness ofUtica and Point Pleasant is less than100 feet in the area where Ohio,West Virginia and Kentucky meet.The thickness reaches more than 300feet in northwest and centralPennsylvania, and in northeast andcentral Ohio. Most producing wellsare located where the formation hasa thickness of 150 feet or more.

• The Point Pleasant is deepest insouthwest Pennsylvania, reachingsubsea depths of more than 13,000feet, and it is shallowest at the junction of Ohio, Indiana and Kentucky. The Utica reaches subsea depths of up to 12,500 feet in anortheast arc though Pennsylvania and is also shallowest at the junction of Ohio, Indiana and Kentucky. The most productive wells inthe Utica formation are found at subsea depths ranging from 5,000 to 11,000 feet.

The full article and maps can be found at www.eia.gov/todayinenergy/detail.cfm?id=26052. ■

February 2014 Page 19June 2016 Page 19

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Landowner sues DRBCover drilling moratorium

ANortheast Pennsylvania landowner seeking to drill a gaswell on property in Wayne County has sued theDelaware River Basin Commission (DRBC) over a de

facto moratorium preventing any natural gas development withinthe basin.

Wayne Land and Mineral Group, LLC filed its suit May 17 inthe U.S. District Court for the Middle District of Pennsylvania.Represented by PIOGA member Overstreet & Nestor, LLC, thecompany argues that the DRBC lacks authority under theDelaware River Basin Compact to review and approve a naturalgas well pad, gas well and related facilities, and associated activ-ities.

The DRBC was created in 1961 to protect the Delaware Riverwatershed and is made up of New York, Pennsylvania, NewJersey, Delaware and the federal government. As unconventionalgas development ramped up across Pennsylvania, the commis-sion decided in 2009 that no drilling would be allowed in thebasin until it adopted rules governing the activity. The regula-tions subsequently were written but never acted on, resulting in ade facto moratorium.

The lawsuit charges that the commission is “seeking to pla-cate those state governments and special interest groups opposedto natural gas development” and has declared all gas well padsand related facilities as projects it will review.

“The commission, purporting to interpret and rely on Section3.8 of the compact, claims discretionary authority to review,

approve and thereby regulate nearly all forms of human activityin the basin, including the use of private land for residential,commercial and industrial purposes,” the lawsuit states. “In addi-tion to asserting that well pads and related facilities are projectsthat it must approve before they are constructed, the commissionhas announced that it will not review applications for well padsand related facilities, and associated activities, until it adoptsgoverning regulations.

“This moratorium…amounts to a ban on the lawful use ofland that cannot be remedied at the ballot box.”

According to the suit, the company acquired 180 acres inWayne County—75 of which are in the Delaware basin—lastyear with the intent of exploring for and producing natural gas.The company wants to build an access road and well pad andthen drill an exploratory well. All of the facilities and activities“will be designed, built, operated and carried out for the explo-ration, extraction and development of natural gas and not for theconservation, utilization, control, development or management ofwater resources,” the suit declares, noting that all water used inconnection with the project will come from “properly licensedand approved sources owned and operated by persons or entitiesother than WLMG, will be managed and delivered to the wellpad in accordance with all applicable laws and regulations andany applicable fees will be paid…. All wastewater generated inconnection with the well pad on the property will be managed byproperly licensed and/or permitted entities other than WLMG inaccordance with all applicable laws and regulations.” ■

Page 20 The PIOGA Press

After many months of speculation, Shell ChemicalAppalachia confirmed this month it is building a petro-chemical plant in northwestern Pennsylvania that will

create up to 6,000 construction jobs and 600 permanent jobs atthe plant once it begins production early next decade.

The company has been acquiring various rights and property,including a former zinc smelting site in Potter Township, BeaverCounty, where the plant will be built.

The plant will process ethane from Marcellus and Utica shalegas to create 1.6 million tonnes annually of polyethylene, a plas-tic used in everything from food packaging to auto parts.

“As a result of its close proximity to gas feedstock, the com-plex and its customers will benefit from shorter and moredependable supply chains, compared to supply from the GulfCoast,” Shell said in a June 7 announcement. “The location isalso ideal because more than 70 percent of North American poly-ethylene customers are within a 700-mile radius of Pittsburgh.”

Shell says construction will begin in the next 18 months, withthe goal of bringing the plant online early in the 2020s.

PIOGA responded in a statement: “The decision by Shell tobuild this state-of-the-industry facility in Beaver County willhave huge long-term benefits for our entire region, and is goodnews for the natural gas industry and great news for Penns -ylvania’s economy. This plant will attract manufacturers in the

HalenHardy among 2016 Shale Gas InnovationContest winners

Member company HalenHardy, LLC was among fourcompanies taking home checks of $20,000 apiece aswinners in the 2016 Shale Gas Innovation Contest last

month. Ben Franklin’s Shale Gas Innovation &Commercialization Center (SGICC) gives out the awards annual-ly to a company that as Bill Hall, SGICC director, explains,“show the diversity of ideas being brought to the table by entre-preneurs and small companies in the region to help advance theshale energy play.” This year there were 12 finalists.

HalenHardy’s winning entry was its SPILLTRATION™ prod-uct line made from post-consumer and post-industrial materials,engineered to absorb and contain oil-based leaks and spills whileallowing clean water to filter through, and for the products to bereused after oil is removed for recycling. Other winners were:

• Aridea Solutions for developing an on-demand, pneumatic-actuated valve system operated through a proprietary softwareinterface via the Internet, allowing remote control at hard-to-access midstream sites.

• Compass Natural Gas, building compression stations toaccess significant volumes of natural gas to produce CNG fordelivery via truck/trailer to all sizes of transport, agricultural,commercial, municipal and other customers in the region thatcurrently don’t have access to pipeline gas.

• Epiphany Water Solutions, providing a well-pad-based,hybrid-powered (solar, natural gas or hard-wired) produced waterremediation solution housed in 20-foot shipping containers thatuses a proprietary crystallizing chamber where contaminants inthe water drop out, leaving a pure steam that can be further evap-orated for zero discharge.

At the May 18 awards event, Joe Frantz, vice president ofengineering technology for Range Resources, provided a keynoteaddress in which he discussed some of the incredible advance-ments that have been made recently by companies to improvetheir performance. He also noted, “What I like about theInnovation Contest process is that I always see several new tech-nologies that might help Range further improve our operations. Itake the new ideas back to the office and meet with other staff tosee where they might fit in.”

This year the contest also included a poster session showingoff some of the cutting edge research and technologies underdevelopment by four universities in the region. Three posterswere chosen as winners of $500 prizes:

PIOGA Member News

Great news: Shell cracker plantis green-lighted

plastics and consumer goods sectors that will convert polyethyl-ene into thousands of products we use every day and providegood jobs to thousands of people. This announcement is furtherevidence that natural gas production from shale in the Appala -chian Basin is going to drive positive change for our the future ofour nation. PIOGA looks forward to working with Shell andelected officials in southwestern Pennsylvania to capitalize onthe opportunities created by the construction of this facility.” ■

ATTENTION:PIOGA’SSAFETY

COMMITTEEWANTS YOU!

See Page 17 for more information

June 2016 Page 21

• “Policy Options for the Detection and Abatement ofMethane Emissions from the U.S. Natural Gas System,” submit-ted by Erin Mayfield, PhD candidate, Department of Engineeringand Public Policy, Carnegie Mellon University.

• “Integrating Membrane Distillation with Waste Heat Sourcesfor Affordable Produced Water Treatment in Pennsylvania,”Omkar Lokare, graduate student, Department of Civil andEnvironmental Engineering, University of Pittsburgh.

• “High Efficiency, Low Cost Hybrid System for ProducedWater Distillation and Evaporation,” Dave Snyder, departmenthead, Penn State Applied Research Lab.

For more information on the contest and the SGICC, visitwww.sgicc.org.

Kurdock Joins Babst Calland’s Pipeline andHazMat Safety Practice

Babst Calland announces that Brianne K. Kurdock has joinedthe firm as a shareholder in its Energy and Natural ResourcesGroup and newest member of its Pipeline and HazardousMaterials Safety practice in Washington, D.C. Kurdock comes toBabst Calland from the Interstate Natural Gas Association ofAmerica, the national trade organization for interstate gaspipelines, where she served as the primary regulatory attorney.She is reuniting with her former colleagues, energy attorneysJames Curry and Keith Coyle, all of whom previously workedtogether at the U.S. Department of Transportation’s Pipeline andHazardous Materials Safety Administration, the federal agencythat oversees the safety of the country’s vast network of gas andhazardous liquids pipelines.

At PHMSA, Kurdock handled regulatory, enforcement, andlitigation matters involving the federal regulation of oil and gaspipelines and liquefied natural gas facilities. She also served asregional counsel in administrative enforcement cases and inci-dent investigations. Additionally, Kurdock served as lead attor-ney for special permit applications and rulemaking initiatives and

Donny Beaver (center), CEO of HalenHardy, accepts a winner’scheck from Bill Hall, SGICC director, and Denise Brinley withthe state Department of Commerce and Economic Development.

represented PHMSA in inter-agency meetings with theDepartment of Justice, the Federal Energy RegulatoryCommission, the Environmental Protection Agency and theDepartment of the Interior. Kurdock is admitted to practice inNew Jersey and New York. She received her J.D. from SetonHall University School of Law, and a B.A. in government fromthe University of Virginia.

Larson Design Group announces scholarship drive

Larson Design Group has begun fundraising for the KenLarson Scholarship at Pennsylvania College of Technology.

“Ken Larson was the first CEO of Larson Design Group. Hisvision was to create careers to keep talented engineers, archi-tects, and surveyors in Lycoming County. With the help ofPennsylvania College of Technology, he was able to realize thatvision,” said Chris Keiser, project manager with Larson DesignGroup and chair of the fundraising campaign. “We wanted tocreate a scholarship in his name at Penn College both to honorhis contributions to the company, and to honor the College’s con-tributions as well. Currently, over 80 of Larson Design Group’s300 employees are Penn College graduates.”

The scholarship is part of LDG’s ongoing 30th anniversarycelebration. In order to reach endowment, funds raised mustreach or exceed $25,000. Larson Design Group has pledged tomatch contributions dollar for dollar, and several fundraisingevents are being planned, including a September 3 5K race inWilliamsport. To learn more, visit larsondesigngroup.com. ■

Page 22 The PIOGA Press

Quigley resignation: Continued from page 1

approved as DEP head a year earlier.A former two-term mayor of Hazelton, Quigley served as sec-

retary of the Department of Conservation and Natural Resourcesin the Rendell administration and after that was a consultant tothe environmental advocacy group PennFuture, which reportedlywas among the groups that were the recipients of the email inquestion.

Quigley’s environmental allies may have been MIA when thelegislative committees were signaling their concerns about theChapter 78 rules, but they were quick to try to paint him as amartyr following his departure. In an op-ed, Jan Jarrett, a formerPennFuture leader and colleague of Quigley’s, wrote the DEPsecretary was “was brought down by a vicious, successful smearcampaign aided by shoddy reporting of half-truths and outrightlies that journalists did not bother to verify.”

Myron Arnowitt of Clean Water Act called Quigley’s resigna-tion “a loss for the Commonwealth and the WolfAdministration.”

“Because of John Quigley’s efforts to protect residents fromthe dangers associated with oil and gas extraction, as well asworking to stop pollution that is changing our climate, he earneda number of enemies among industries that resisted these neces-sary changes,” Arnowitt said in a statement. “Quigley’s resigna-tion is an unfortunate result of a long-standing lobbying cam-paign to remove the DEP secretary for speaking out strongly forthe environmental protection policies of the Wolf administra-tion.”

At a Harrisburg news conference inearly June, Representative Greg Vitali, theminority chairman of the HouseEnvironmental Resources and EnergyCommittee, opined: “Secretary Quigleywas forced to resign because he was tooeffective. He helped usher the regulationsthrough the process, which upset manypeople in the drilling industry.”

Interestingly, Quigley’s resignation wasannounced by the administration is a newsrelease simply titled, “Wolf AdministrationProvides Personnel Update at DEP.”

“I thank John Quigley for his service tothe Commonwealth, and I look forward toworking with Patrick McDonnell while heserves as acting secretary,” Wolf was quot-ed as saying in the release.

DEP’s acting secretaryPatrick McDonnell was most recently

the director of policy for DEP, where heoversaw the agency’s regulation and policydevelopment processes. In addition, he ranthe State Energy Office and was chargedwith coordination of renewable energy andenergy efficiency issues. Prior to returningto DEP, McDonnell was executive policymanager for former Commissioner PamelaA. Witmer of the Pennsylvania PublicUtility Commission, focusing on electric,

natural gas and water issues as well as cybersecurity and theimpact of environmental regulation on energy markets.

Previously, he spent 13 years with DEP in a variety of roles.As deputy secretary for administration, he managed the budget,human resources, information technology and oversaw the facili-ties management functions of the agency. He also previouslyserved as policy director and as an assistant to the special deputysecretary. He began his career at DEP working in the StateEnergy Office on energy efficiency, renewable energy and greenbuilding projects.

So what does this mean for the regulations?Quigley’s departure already appears to be helping ease the

way for changes to at least the Chapter 78 regulations for con-ventional oil and gas operations. A May 27 article by Law360said the administration had been frustrated that the former DEPboss “unilaterally refused to endorse proposed amendments at akey meeting to finalize the draft rules in February,” referring tothe meeting at which the Environmental Quality Board approvedthe rulemaking (February PIOGA Press, page 1). At that meet-ing, three lawmakers had offered 15 proposed amendmentsintended to add clarity or consistence to the rules, but Quigley,who chaired the EQB, urged the board to approve the regulationsas they were presented.

A concurrent resolution formally blocking the regulations hasbeen making its way through the General Assembly. If passed,Wolf would be put in the position of vetoing the measure orallowing it to take effect without his signature. The Law360

The (redacted) Quigley email

June 2016 Page 23

report quoted Drew Crompton,chief of staff for Senate PresidentPro Tempore Joe Scarnati as sayingof the administration, “We’re hav-ing conversations now about thejoint resolution to overrule the reg-ulations. They acknowledge thereare some rough edges.” Enactmentof the concurrent resolution wouldforce DEP to start the process overagain, which Crompton suggestedcould be done in far less than thefive years it has taken with the cur-rent rulemaking.

As this newsletter was wrappingup, the House Environmental Resources and Energy Committeeon June 8 approved Senate Bill 279, a measure prohibiting DEPfrom implementing the Chapter 78 regulations applying to con-ventional operations.

According to a report in the Pittsburgh Tribune-Review,Committee Chairman John Maher said he understood Wolfwould support the bill in exchange for a pledge that the fullHouse would not vote on the resolution rejecting the entire pack-age of regulations for both unconventional and conventionalwells.

“I think it’s a nice instance where the legislature and theadministration are working constructively towards a result thatall can applaud,” Maher told the newspaper.

A spokesman for the governor indicated in an email state-ment, “The administration can confirm the unconventional oil

and gas regulations will be published, and we will continue towork with the legislature to reach agreement on the conventionalregulations.”

SB 279 requires approval from the full House before it goesback to the Senate for a vote on amendments made in the House.The legislation also creates the Pennsylvania Grade CrudeDevelopment Advisory Council to advise and assist DEP inensuring any new regulations affecting the conventional oil andgas industry are reasonable and appropriate. The council is alsocharged with making recommendations to promote the long-termviability and development of the conventional oil and gas indus-try, including a plan to responsibly increase Penn Grade Crudeproduction to more adequately supply the refineries that dependupon it. ■

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Page 24 The PIOGA Press

$20

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Natural Gas Futures Closing PricesAs of June 9

Month PriceJuly 2016 $2.580August 2.657September 2.690October 2.760November 2.938December 3.228January 2017 3.329February 3.340March 3.267April 2.993May 2.969June 2.990

SourcesAmerican Refining Group: www.amref.com/Crude-Prices-New.aspxErgon Oil Purchasing: www.ergon.com/prices.phpGas futures: quotes.ino.com/exchanges/?r=NYMEX_NGBaker Hughes rig count: phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-

reportsotherNYMEX strip chart: Emkey Energy LLC, emkeyenergy.com

Oil & Gas Trends

10

15

20

25

30

35

40

45

50

Jun Jul Aug Sep Oct Oct Nov Dec Jan Feb Mar Apr May

Pennsylvania Rig Count

Penn Grade Crude Oil Prices

1500 Sycamore Rd., Suite 320Montoursville, PA 17754570-368-3040www.mctish.com

Additional OfficesAllentown, PAPittsburgh, PA

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February 2014 Page 25June 2016 Page 25

Digging Out Potential SavingsDigging Out Potential SavingsDigging Out Potential Savings

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Insurance Brokers & Consultants

Page 26 The PIOGA Press

Cabot Oil & Gas Corp 5 5/3/16 115-22026* Susquehanna Brooklyn Twp5/3/16 115-22084* Susquehanna Brooklyn Twp5/3/16 115-22029* Susquehanna Brooklyn Twp5/3/16 115-22032* Susquehanna Brooklyn Twp5/3/16 115-22033* Susquehanna Brooklyn Twp

Cameron Energy Co 3 5/3/16 123-47955 Warren Sheffield Twp5/19/16 123-47956 Warren Sheffield Twp5/31/16 123-47960 Warren Sheffield Twp

EQT Production Co 8 5/16/16 125-27876* Washington Carroll Twp5/16/16 125-27877* Washington Carroll Twp5/16/16 125-27878* Washington Carroll Twp5/16/16 125-27879* Washington Carroll Twp5/16/16 125-27829* Washington Carroll Twp5/16/16 125-27825* Washington Carroll Twp

5/16/16 125-27826* Washington Carroll Twp5/16/16 125-27828* Washington Carroll Twp

MDS Energy Dev LLC 1 5/11/16 005-31254* Armstrong S Buffalo TwpPennEnergy Resources LLC 4 5/2/16 007-20434* Beaver Marion Twp

5/9/16 007-20435* Beaver Marion Twp5/9/16 007-20432* Beaver Marion Twp5/10/16 007-20433* Beaver Marion Twp

Range Resources Appalachia 7 5/28/16 081-21575* Lycoming Jackson Twp5/28/16 081-21576* Lycoming Jackson Twp5/28/16 081-21577* Lycoming Jackson Twp5/6/16 125-27968* Washington Canton Twp5/6/16 125-27966* Washington Canton Twp5/7/16 125-27967* Washington Canton Twp5/8/16 125-27969* Washington Canton Twp

RE Gas Dev LLC 4 5/9/16 019-22507* Butler Concord Twp5/9/16 019-22488* Butler Concord Twp5/9/16 019-22508* Butler Concord Twp5/9/16 019-22510* Butler Concord Twp

SWN Production Co LLC 2 5/9/16 117-21831* Tioga Liberty Twp5/20/16 117-21832* Tioga Liberty Twp

Talisman Energy USA Inc 1 5/4/16 015-23259* Bradford Wells TwpWeldbank Energy Corp 2 5/2/16 123-47952 Warren Mead Twp

5/10/16 123-47951 Warren Mead Twp

Spud Report:May

The data show below comes from the Department ofEnvironmental Protection. A variety of interactive reports are

OPERATOR WELLS SPUD API # COUNTY MUNICIPALITY OPERATOR WELLS SPUD API # COUNTY MUNICIPALITY

available at www.dep.pa.gov/DataandTools/Reports/Pages/Oil-and-Gas.aspx.

The table is sorted by operator and lists the total wells report-ed as drilled last month. Spud is the date drilling began at a wellsite. The API number is the drilling permit number issued to thewell operator. An asterisk (*) after the API number indicates anunconventional well.

May April MarchTotal wells 37 18 58Unconventional 32 14 55Conventional 5 4 3Gas 32 14 55Oil 5 3 3Combination oil/gas 0 1 0

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PIOGA Board of DirectorsGary Slagel (Chairman), Steptoe & Johnson PLLCSam Fragale (Vice Chairman), Freedom Energy Resources LLCFrank J. Ross (2nd Vice Chairman), T&F Exploration, LPJames Kriebel (Treasurer), Kriebel CompaniesCraig Mayer (Secretary), Pennsylvania General Energy Co., LLCTerrence S. Jacobs (Past President), Penneco Oil Company, Inc.Thomas M. Bartos, ABARTA EnergyStanley J. Berdell, BLX, Inc.Carl Carlson, Range Resources - Appalachia, LLCMike Cochran, Energy Corporation of AmericaMike Colpoys, National Fuel MidstreamDon A. Connor, Open Flow EnergyTed Cranmer, TBC ConsultingJack Crook, Atlas Resource Partners, LPMichael Donovan, Seneca Resources CorporationRobert Esch, American Refining Group, Inc.Michael Hillebrand, Huntley & Huntley, Inc.Jim Hoover, Phoenix Energy Productions, Inc. Ron McGlade, Tenaska Resources, LLCGregory Muse, PennEnergy Resources, LLCBill Polacek, Environmental Tank & Container Stephen Rupert, Texas Keystone, Inc.Jake Stilley, Patriot Exploration CorporationWilliam Stoner, Universal Well Services, Inc.Todd Tetrick, EnerVest Operating, LLCMatt Tripoli, IMG MidstreamBurt A. Waite, Moody and Associates, Inc.Thomas Yarnick, XTO Energy

Committee ChairsEnvironmental Committee

Paul Hart, Fluid Recovery Services, LLCKen Fleeman, ABARTA Energy

Legislative CommitteeBen Wallace, Penneco Oil CompanyKevin Gormly, Vorys, Sater, Seymour and Pease LLP (ViceChairman)

Pipeline & Gas Market Development CommitteeBob Eckle, Appalachian Producer Services, LLCRon McGlade, Tenaska Resources, LLC (Assistant Chairman)

Health & Safety CommitteeWayne Vanderhoof, RJR Safety, Inc.

Meetings CommitteeLou D’Amico, PIOGA

Tax CommitteeDonald B. Nestor, Arnett Carbis Toothman, LLP

Communications CommitteeTerry Jacobs, Penneco Oil Company, Inc.

StaffLou D'Amico (lou@pioga.org), President & Executive DirectorKevin Moody (kevin@pioga.org), Vice President & General Counsel Debbie Oyler (debbie@pioga.org), Director of Member Services and

Finance Matt Benson (matt@pioga.org), Director of Internal Communications

(also newsletter advertising & editorial contact)Joyce Turkaly (joyce@pioga.org), Director of Natural Gas Market

DevelopmentDan Weaver (dan@pioga.org), Public Outreach DirectorDanielle Boston (danielle@pioga.org), Director of AdministrationTracy Zink (tracy@pioga.org), Administrative Assistant

Pennsylvania Independent Oil & Gas Association115 VIP Drive, Suite 210 • Wexford, PA 15090-7906724-933-7306 • fax 724-933-7310 • www.pioga.org

Northern Tier Office (Matt Benson)167 Wolf Farm Road, Kane, PA 16735

Phone/fax 814-778-2291© 2015, Pennsylvania Independent Oil & Gas Association

February 2014 Page 27June 2016 Page 27

PIOGA EventsInfo: www.pioga.org/events

Pig Roast, Equipment Show and Technical ConferenceAugust 23-24, Seven Springs Mountain Resort Champion

Divot Diggers Golf OutingSeptember 22, Tam O’Shanter Golf Club, Hermitage

Industry EventsIPAA Midyear Meeting

June 27-29, Colorado Springs, COInfo: www.ipaa.org/meetings-events

IOGANY Summer MeetingJuly 13-14, Peek’n Peak Resort, Clymer, NYInfo: www.iogany.org/events.php

KOGA 80th Annual MeetingJuly 19-21, Northern Kentucky Convention Center, Covington

Info: koga.memberclicks.net/upcoming-events

IOGAWV Summer Meeting

August 7-9, The Greenbrier, White Sulphur Springs, WV

Info: iogawv.com

OOGA Summer Meeting

August 15-16, Zanesville Country Club, Zanesville, OH

Info: oogasummermeeting.com

IOGAWV Sports Weekend

September 9-10, Lakeview Golf Resort, Morgantown, WV

Info: iogawv.com

Eastern Section, American Association of Petroleum

Geologists

September 25-27, Lexington (KY) Convention Center

Info: www.esaapgmtg.org

IOGANY Annual Meeting

October 19-20, Holiday Valley Resort, Ellicottville, NY

Info: www.iogany.org/events.php

IPAA Annual Meeting

November 9-11, The Cloister, Sea Island, GA

Info: www.ipaa.org/meetings-events

Calendar of Events

➤ More events: www.pioga.org

115 VIP Drive, Suite 210Wexford, PA 15090-7906

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