Content Updated Friday, March 12 2010

February 2010 Industry Digest

Pennsylvania Governor Seeks Severance Tax For The Second Time

HARRISBURG, PA.–On the heels of a successful state-land lease sale, Pennsylvania Governor Edward Rendell again is proposing a natural gas severance tax, the Pennsylvania Oil & Gas Association reports.

Last year, Rendell proposed a 5.0 percent severance tax on the value of gas produced in the state, plus 4.7 cents an Mcf. However, when the tax failed to gain traction in the state legislature, the governor accepted a budget that called for the Department of Conservation and Natural Resources to contribute $60 million to the fiscal 2009-10 general fund from leasing state forestlands (The Reporter, December 2009, pg. 17).

On Jan. 14, two days after five companies submitted high bids totaling $128.4 million for 31,967 acres located in the Elk, Moshannon, Sproul, Susquehannock and Tioga state forests in Cameron, Clearfield, Clinton, Potter and Tioga counties, Pa., POGAM says Rendell sent a letter to the Pennsylvania General Assembly, proposing a tax on natural gas produced from the Marcellus Shale. The governor did not provide any specifics for the proposed tax, POGAM adds, implying he would elaborate in his scheduled Feb. 9 budget address.

In his letter, Rendell comments that after he proposed to tax Marcellus gas last year, “Based on information from the industry, I pulled back . . . with the intent of giving the industry a year to get its sea legs and embed itself in Pennsylvania. We have seen tremendous activity . . . with (the Department of Environmental Protection) issuing 1,984 Marcellus Shale drilling permits, and . . . operators reporting 763 Marcellus wells drilled. The industry has informed DEP that it expects it will seek to permit 5,200 Marcellus wells in 2010.

“This week’s auction results . . . are further proof of how well the industry is doing,” Rendell’s letter adds.

A news release announcing the lease sale results notes that the 2009-10 budget agreement allowed DCNR to decide how much state forestland to offer for lease. In the release, Rendell declares, “We received proof positive that our careful planning and preparation to minimize the number of acres put out to bid was the right approach.”

Although the governor later states his belief that “we must view natural gas exploration as a unique economic opportunity and as a critical part of America’s strategy to decrease our dependence on foreign oil and cut our carbon emissions,” he also expresses, “We have taken–and will continue to take–a responsible approach to limiting exploration on state forestland.”

In one other legislative development, POGAM says it has been advised that state Representative Camille “Bud” George, D-Clearfield, who carried the governor’s severance tax proposal last year, has announced his intention to file what he has titled the Land and Water Protection Act during the 2010 session.

According to POGAM, the bill would:

Require the DEP to inspect Marcellus Shale well sites during each phase of drilling operations;
Extend to 2,500 feet from 1,000 feet, an operator’s presumed liability for damaging a drinking water supply;
Require full disclosure of the chemical constituents of fracturing fluids;
Update bonding requirements; and
Clarify local governments’ authority to “reasonably” regulate oil and gas activities.

Kansas Producers Eye State’s Budget Situation

TOPEKA, KS.–The 2010 Kansas legislative session could be the longest and toughest in recent memory, warns Edward Cross, president of the Kansas Independent Oil & Gas Association, with the state’s budget deficit likely to be the defining issue. The state’s shortfall could top $500 million in fiscal year 2011, he says.

State officials are saying there is no more fat to cut in the budget, so Cross reports Governor Mark Parkinson has proposed a three-year, 1 percent sales tax increase as well as a 79-cent a pack cigarette tax jump.

“A lot of lawmakers said they would be looking at alternatives to meet the state’s financial crisis other than raising taxes,” Cross notes. “They view the governor’s proposal as a last-ditch solution if they cannot find more ways to cut spending or raise revenues in other ways.”

The Department of Revenue is proposing to repeal many tax exemptions, Cross says. It also encourages examining specific property tax exemptions, including low-production oil wells, refining facilities, pipelines and wind farms. As legislators search for ways to close the budget gap, he predicts several tax and tax exemptions could be scrutinized.

“Those property tax exemptions are something that have caught our attention,” Cross observes. “KIOGA will be looking at how other tax exemptions could impact the industry, and we will defend our interests.”

The association also continues to monitor the state’s efforts to revise its crude oil purchaser bankruptcy laws, Cross reports. Kansas rewrote its regulations in 2005 to create a priority interest for oil and gas producers, but he says the SemGroup bankruptcy revealed how inadequate their efforts were.

“The SemGroup bankruptcy judge viewed the Kansas law as a nonconforming amendment to the Uniform Commercial Code,” Cross reports. “Since it was not a conforming statute in all states, the judge viewed it as only applying to companies incorporated in Kansas. Therefore, he concluded, the case would be resolved using the UCC law in the state where the bankrupt company was incorporated, which was Delaware.”

KIOGA and the Eastern Kansas Oil & Gas Association met in December with the Southwest Kansas Royalty Owners Association and the Eastern Kansas Royalty Owners Association to explore options for strengthening the industry’s position in regard to crude oil purchasers, Cross says. The coalition agreed to jointly prepare legislation to repeal the UCC language and create a producer statutory lien.

KIOGA also remains involved in a group of stakeholders seeking the return of money swept from four special state funds in 2009. Cross says the group filed suit in Shawnee County District Court in late January. The oil and gas industry wants Kansas to return $1.9 million that was taken from the Conservation Fee Fund, he says, adding there has been speculation that legislators could seek to withdraw another $500,000 from the fund this session.

California Law Trips New Severance Tax Bill

SACRAMENTO, CA.–The California Independent Petroleum Association reports it successfully turned away the latest threat to increase the state severance tax on oil and gas.

AB 656, sponsored by Assemblyman Alberto Torrico, D-Fremont, would have imposed a 12.5 percent tax on the gross value of oil and natural gas produced in California, reports Blair Knox, CIPA’s director of public affairs. Projections suggested it would have raised $2.5 billion, to be dedicated to higher education.

The bill passed the State Assembly’s Revenue and Taxation Committee on a party line vote in mid-January, but Knox says Proposition 98 made the measure impractical.

“In California, Prop 98 says 40 percent of all revenues to the state have to go to K-12 education,” Knox reports. “So, if they are going to raise $2 billion for higher education, someone is going to have to make up another $800 million for K-12. That would have to come out of the general fund, and the general fund already is $20 billion in the hole.”

Knox says Torrico decided to convert the measure into a study bill to gauge the impact of such a severance tax.

The legislative battle over severance taxes is not done yet, Knox cautions. Assemblyman Pedro Nava, D-Santa Barbara, is sponsoring AB 1604, which seeks to impose a 9.9 percent tax on oil produced in the state. The bill dedicates all its revenues to the state’s general fund, which eliminates one roadblock, Knox says. AB 1604 has been referred to the Revenue and Taxation Committee, Knox observes.

By Late January, California’s general fund deficit for 2010 was forecast to hit $19.9 billion, Knox reports, thanks to already programmed salary and cost-of-living increases, and payments for state debts and bonds, although he notes, “Big numbers usually get bigger.”

The association continues to monitor the impact of 2008’s AB 1960, sponsored by Nava, CIPA Chief Executive Officer Rock Zierman reports. The legislation is the result of a series of oil spills.

According to Nava’s office, AB 1960 requires the California Division of Oil, Gas and Geothermal Resources to set minimum maintenance standards for oil facilities. If an oil operator fails to meet those standards, the bill authorizes the division to close the facility until it does. AB 1960 targets spills by requiring oil production facilities with a history of negligence to pay into a bond fund controlled by DOGGR. Nava’s office says the fund will pay for spill prevention efforts and to decommission oil wells and tanks.

CIPA is working on the proposed regulations, Zierman says.

“The proposed regulations seem onerous,” he assesses. “One example is DOGGR wants to redefine a spill as 10 barrels of produced water within containment, which is real problematic in the sense that the bill also gives authority to the state supervisor to deem somebody as a high-risk offender, based on history. That is why we are more sensitive to these varied low thresholds without documentation of how spilling water within containment and cleaning it up is somehow an oil spill.”

CIPA has participated in all four public hearings and submitted two comment letters, the second of which is 28 pages long, Zierman reports.

“The problem is those hearings are one-way. They hear from the public, including us, but they don’t give you any feedback,” Zierman points out. “DOGGR did revise the draft regulations and took some of our suggestions, but there are big questions remaining. CIPA thinks it would be more profitable if there was a two-way dialogue, where the division could explain its thinking. Maybe it has good reasons, but maybe those are based on faulty information.”

The division’s initial plans called for implementing AB 1960’s provisions quickly, but Zierman says state officials have since indicated the regulatory process could take at least six months.

Alaska Governor Seeks Tax Credit Expansion

JUNEAU, AK.–Alaska Governor Sean Parnell says he will seek to revise the state’s production tax and Exploration Incentive Credit (EIC) programs in an effort to create more jobs and incentives to invest in Alaska’s oil and gas development.

The governor’s office reports the state’s tax code offers a 30 percent tax credit for exploratory wells more than three miles from existing ones. Parnell’s proposal would expand that credit for all drilling and well work expenses.

In addition, the office notes, the revised EIC program:

Allows all companies to enjoy the entire benefit of their capital credits in the year they are earned, rather than have to spread the credit over two years;
Eliminates the double standard applied against new explorers by allowing the state to pay for capital credits earned by explorers regardless of their future spending levels; and
Allows for waiving interest charges on late payments resulting from retroactive application of new regulations.

In his state of the state speech on Jan. 21, Parnell predicted his tax proposal would lead to more employment.

“My oil tax credit proposals are just that, because companies must invest here in Alaska, create Alaskan jobs and drill more wells before qualifying for these new tax benefits. I don’t support giving tax breaks without an Alaska work commitment,” he says.

The governor’s office reports Parnell will propose legislation to implement the recommendations in the first weeks of the legislative session, which opened Jan. 22.

NMOGA Files Lawsuit To Stop State Agency From Regulating GHGs

SANTA FE, N.M.–The New Mexico Oil & Gas Association has filed a lawsuit in Lea County, N.M., District Court, seeking to enjoin the New Mexico Environmental Improvement Board from capping greenhouse gas emissions in the state. The suit asks the court to stop EIB from considering a rule-making petition filed in December 2008 by New Energy Economy (NEE).

EIB concluded at an April 2009 hearing that greenhouse gases qualified as air pollutants under the New Mexico Air Quality Control Act (AQCA), and that it had the authority to regulate GHGs as well as trade emission credits (The Reporter, May 2009, pg. 24). However, EIB delayed action on NEE’s petition at that time. But at a Jan. 11, 2010, prehearing conference, NMOGA says, EIB announced a rule-making schedule that began with nontechnical testimony on March 1 and ran through a hearing on the merits on June 21.

NMOGA notes that NEE’s petition asks EIB to cap GHG emissions in New Mexico at 25 percent below 1990 levels by 2020. All facilities that have air permits issued by the New Mexico Environment Department and that emit the equivalent of 10,000 metric tons or more of carbon dioxide a year would be required to comply with the emissions cap, the association adds.

In its complaint, NMOGA points out that the AQCA authorizes EIB “to attain and maintain national ambient air quality standards” and “to prevent or abate air pollution.” However, the association argues that the U.S. Environmental Protection Agency has not adopted a national air quality standard for GHGs, nor has EIB determined the quantity and duration at which GHGs would become “air pollution” under the AQCA. Because EIB has not established an ambient air quality standard for GHGs, it “has no authority to adopt the regulations proposed in the rule-making petition,” NMOGA contends.

Joining NMOGA as plaintiffs in the lawsuit are the Dairy Producers of New Mexico, El Paso Electric Company, New Mexico Rural Electric Association, Public Service Company of New Mexico, the Tri-State Generation and Transmission Association, New Mexico Farm and Livestock Bureau, New Mexico Petroleum Marketers Association, state Senators Carroll Leavell, R-Jal, and Gay Kernan, R-Hobbs, and state Representative Donald Bratton, R-Hobbs.

New Mexico County OKs Drilling Moratorium

SANTA FE, N.M.–The San Miguel County Commission has unanimously approved a one-year moratoria on issuing oil and gas permits, while approving creating a task force to study the issue.

Karin Foster, executive director of the Independent Petroleum Association of New Mexico, says the task force appointed her to represent the oil and gas industry.

“The county committion has been approached by Drilling Santa Fe, the same group that approached Santa Fe County, N.M., and it put the fear of God in those commissioners, saying operators were going to use all the water and damage everything,” Foster reports.

“I opposed the moratoria befor the commissioners,” Foster says. “I said because there was no drilling occurring in San Miguel County, let us take the time now. Instead of rushing into this issue headlone, let’s educate each other and talk about the issues like adults, instead of being all emotional about this.”

No companies have yet expressed interest in drilling in the county, New Mexico Oil & Gas Association President Bob Gallagher points out, but producers have expressed interest in neighboring Santa Fe and Mora counties. San Miguel County’s actions follow similar drilling restrictions imposed in Rio Arriba and Santa Fe counties (The Reporter, September 2009, pg. 147). Gallagher notes commissioners rejected a total drilling ban in January.

Foster reports the task force held its first meeting in mid-February. She observes she is concerned many county goverments are sending the wrong signal to oil and gas producers.

“They are pulling the trigger on industry before they even know the facts,” she holds. “The drilling moratoria sends the wrong message, but at least in contrast to Santa Fe County, San Miguel’s commissioners are letting us educate them. Unlike Santa Fe County, San Miguel goes not have a lot of industry, and it does not have the money that tourism brings.”

Fort Worth Air Quality Passes TCEQ Survey

FORT WORTH–The Texas Commission on Environmental Quality reports a three-day air testing program conducted in December around natural gas production facilities in Fort Worth shows no dangerous levels of pollutants.

“In fact, the majority of the testing during that trip detected no volatile organic compounds at all,” says TCEQ Deputy Director of the Office of Compliance and Enforcement John Sadlier. “At the sites where our monitoring staff detected odors, or our instruments detected the possible presence of VOCs, we collected more sensitive air canister samples. When analyzed, these samples showed either nondetection or VOCs below levels that would cause any short-term or long-term health concerns.”

He adds benzene was one of 22 VOCs for which the agency tested. TCEQ teams surveyed the Fort Worth facilities with infrared cameras that detect VOC emissions invisible to the naked eye, hand-held toxic vapor analyzers, and air sampling canisters.

Mark Vickery, executive director of the commission, says the study was undertaken in response to concerns from North Texas resident over continuing Barnett Shale operations. He says even though no dangerous air pollutants were recorded, TCEQ plans additional monitoring and studies.

The teams surveyed 126 natural gas production areas, including drilling and fracturing processing sites, disposal sites and compressor facilities, TCEQ says. The sites surveyed were selected by a combination of factors, including facility types, proximity to residences, and size of the facility. The commission notes all samples were collected off site, using standard monitoring protocols that took wind direction and other atmospheric conditions into account.

The TCEQ reports it has changed its internal policies to provide quicker response times to complaints. It adds results of the survey will be posted on its Web site, http://www.tceq.state.tx.us/implementation/barnettshale.

North Dakota Proposes Surface Notice Changes

BISMARCK, N.D.–The North Dakota Department of Mineral Resources has proposed regulations expanding operators’ obligations to surface owners, the Northern Alliance of Independent Producers reports. It says the new rules seem not too onerous to industry.

According to NAIP President Robert Harms, the association scrutinized the rules and found them more reasonable than many of the policy proposals emanating from Washington.

“After looking at the rules, we thought the change was pretty modest,” Harms relates. “We have been working hard on federal issues such as the Obama administration’s proposed tax increases on the industry, and have had successful meetings with some moderate senators.”

Published reports indicate the proposed state regulations would require operators to notify surface owners about most accidents affecting their land, as well as provide them with copies of any reports to the North Dakota Industrial Commission concerning those incidents. Press accounts mention as an example of such incidents any spills of oil or saltwater that exceed one barrel. They add that the DMR also proposes to require operators to notify surface owners of any well site reclamation at least 10 days before beginning work.

Harms says the DMR hosted meetings about the proposal with industry representatives in which the Northern Alliance voiced uncertainty about the rules’ interpretation.

“We expressed some concern to department officials,” he recounts. “Some surface owners may get the idea that notice entails an expectation that they will be able to influence the end result or the nature of the reclamation.”

However, Harms continues, NAIP eventually accepted the department’s explanation that reclamation notice was warranted within that time frame.

Media reports indicate the regulations might not take affect until spring 2011. Harms says that timeline recognizes the rule making protocol. “It typically takes at least a year to go through a rule making, and it is not anywhere close to that yet,” he relates.

Pennsylvania DEP Proposes New Controls For E&S, Stormwater

HARRISBURG, PA.–The Pennsylvania Department of Environmental Protection is proposing new erosion and sediment (E&S) control and stormwater management requirements, the Pennsylvania Oil & Gas Association reports.

Although the proposed rules deal in large part with agriculture, POGAM says they appear to incorporate federal Clean Water Act Phase II National Pollutant Discharge Elimination System permit requirements into the state’s E&S control general permit (ESCGP-1) for earth disturbances associated with oil and gas activities.

POGAM says the proposed rules include new post-construction requirements, including developing a written stormwater management plan; an operation and maintenance schedule; evaluating potential thermal impacts for stormwater discharges; a riparian forest buffer management plan; analytical testing and assessment of soil, geology and other site characteristics; water volume and quality demonstrations for discharges; a hydrologic routing analysis; and a requirement to have a licensed professional on site to implement an approved post-construction stormwater management plan.

DEP also proposes to increase fees to $2,500 for a general permit and $5,000 for an individual permit, which POGAM compares with the $500 now charged for ESCGP-1 permits.

Comments filed jointly by POGAM, the Independent Oil & Gas Association of Pennsylvania and the Marcellus Shale Coalition note that the state’s Oil and Gas Act effectively addresses site restoration and E&S control. The associations’ comments say the proposed rules do not specifically address the continued existence of the ESCGP-1 program, and point out that the federal Energy Policy Act of 2005 exempts stormwater discharges associated with oil and gas activities from NPDES permitting, POGAM says.

IOGA NY Continues To Counter Efforts To Block Gas Drilling

LAKEVIEW, N.Y.–The battle to educate the public about oil and natural gas continues in New York State, reports Brad Gill, executive director of the Independent Oil & Gas Association of New York, with the industry lined up against environmental oppositionists, while consumers remain in between. But, he says the tide is turning and many landowners are increasingly in favor of drilling.

“This ongoing public education battle is getting hotter and hotter,” Gill says. “We are trying to attend all the meetings that we can, and we think it is making a difference. In many areas across New York, we are seeing more support from municipal and county officials. I met with officials from three counties who want to know what they can do to welcome the industry.”

That conflict reached the state capital in late January, Gill reports. A coalition of landowner groups and IOGA NY reacted to news of a rally in Albany by anti-development groups, including the Catskill Mountainkeepers, he says. The landowner groups called on members to attend a pro-industry rally at the same time as the anti-development gathering, he says.

“We told our members we had to have a good showing in Albany because the environmental oppositionists were going to have 100 percent media coverage and have a heyday without us there,” Gill observes. “We had a covered staging area, sound system, signs and banners, and we invited pro-industry groups and legislators, as well as landowners and industry representatives to attend and speak.”

According to information relayed to him, Gill says the pro-industry rally was much better attended than that of its opponents, despite the driving wind and horizontal rain.

The actions of the U.S. Environmental Protection Agency and the New York Department of Environmental Conservation’s own employee union show that such education efforts still are very necessary, Gill reports. The federal agency and the DEC union submitted comments to the DEC regarding the supplemental generic environmental impact statement being written. He says the EPA opposes wells targeting the Marcellus Shale formation within New York City’s watershed, which Gill notes is a major departure from EPA’s typical role in state affairs.

The timetable for issuing the final SGEIS permit remains unclear, Gill observes. The DEC plans to take two to three months to review the 10,000-plus public comments it has received, and staff members will need at least another month to get the final documents written and distributed, which means Marcellus permits will probably not be available before summer, he predicts.

Other examples of the need for more education efforts appear at the city and state level, he notes. A report funded by New York City calls for prohibiting all drilling in the city’s watershed, Gill says. Final Impact Assessment Report prepared for the New York City Department of Environmental Protection, written by the consulting firm of Hazen and Sawyer/Leggette, Brashears and Graham, claims drilling poses unacceptable risks for New York City’s 9 million residents.

At least one IOGA NY member already has decided against drilling in the watershed, he points out, but says any such moves should emanate from business decisions, not political pressure. New York City is seeking ironclad guarantees that no drilling will take place, but Gill insists that stance is incorrect.

“We will not take drilling in the watershed off the table,” he holds. “Every well drilled in the state is drilled in some watershed; New York City is no more important than any other city. The industry has demonstrated that it can drill in watersheds safely.”

At the state level, Governor David Paterson’s budget proposal includes both a recognition of the role of natural gas in New York’s energy picture as well as a proposal to levy a 3 percent severance tax on all gas produced from the Marcellus and Utica shales.

Gill says IOGA NY will be opposing the tax because New York’s natural gas industry is not sufficiently mature to support such a measure. Nevertheless, he notes, legislators are making plans for the revenues even though they have no idea how much such a tax would generate.

Gill points to Pennsylvania as a good example for New York. Its neighboring state has delayed any Marcellus Shale production taxes until the industry has established itself, he notes, a position that he says New York should consider..