The law firm of Babst Calland has released its sixth annual energy industry report called, “The 2016 Babst Calland Report – An Unprecedented Time for the Oil & Gas Industry: Price Down, Supply Up, Reform Ahead; Legal and Regulatory Perspective for Producers and Midstream Operators.” This annual review of energy and natural resources development activity acknowledges the continuing evolution of this industry in the face of economic, regulatory, legal and local government challenges.
The 68-page report contains six sections, each addressing key challenges for oil and gas producers and midstream operators.
- Business Issues: Front and Center in a Tough Commodity Price Environment, such as the increasing number of transactions and operational challenges, an update of developments in the law regarding ownership of mineral estates, and the validity and interpretation of oil and gas leases, the rights of creditors in bankruptcy proceedings and the opportunities and risks of acquiring assets from bankruptcy debtors. According to industry sources, 70 North American oil and gas exploration and production companies filed for bankruptcy protection since the beginning of 2015. The insolvency of some production companies is likely to present good opportunities for new players to enter the market. Also, the industry continues to confront workforce issues in the areas of employee health and safety, wage and hour regulation, and employee classification.
- Pipeline Safety Developments noted focus on the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration’s (PHMSA) pipeline safety program. On April 8, 2016, PHMSA issued a long-awaited notice of proposed rulemaking asserting new safety and regulatory requirements for energy operators in response to congressional mandates. More than four years in the making and published against the backdrop of dramatic changes in the natural gas industry, the comment period for these proposed rules is scheduled to end in July. Early in 2016, Babst Calland opened an office in Washington, D.C. where its national pipeline safety practice is led by three Former PHMSA attorneys.
- State and Federal Governments Revise, Expand Environmental Regulatory Requirements including the Pennsylvania Environmental Quality Board’s anticipated Chapter 78 and Chapter 78a regulations that remain the focal points of an increasingly stringent regulatory landscape for the oil and gas industry in Pennsylvania. Also, during the past year, significant changes have been made or proposed to federal and state environmental protection standards concerning air, water, and waste management that will affect significant aspects of production and midstream operations.
- Local Government Regulation continues to increase throughout the Appalachian Basin. Municipalities in Pennsylvania continued to take advantage of the Pennsylvania Supreme Court’s invalidation of Act 13’s statewide zoning limitations by enacting more expansive stringent local oil and gas development regulations in 2015. In West Virginia, industry prevailed in a significant federal court case ruling on June 10, 2016, that an ordinance enacted by the county commission preventing the disposal of oil and gas wastewater through underground injection, is preempted by state and federal law and therefore unenforceable. In Ohio, courts continued to restrain local government regulation of oil and gas production.
- Energy Litigation Developments are more important than ever given the unprecedented economic challenges facing the industry. While Pennsylvania and Ohio have seen a plateau in new suits being filed claiming nuisance and contamination from gas development activities, West Virginia has seen an increase in the number of nuisance suits filed against both upstream and midstream companies. Issues around lease interpretations, forced pooling, and pending royalty cases remain active in the Appalachian Basin. Pipeline construction projects present significant potential exposure in high-stakes construction disputes between project owners, contractors, and suppliers.
- Looking Forward – Our Perspective anticipates that cost control and operational efficiency are likely to remain critical to upstream success in the near term given significant gas reserves in the Appalachian Basin and a significant inventory of gas in storage across the U.S. Pipeline build-out is critical to the Appalachian Basin while downstream opportunities emerge in electricity generation, manufacturing and ethylene production, including the recent announcement of the development of the ethane cracker plant near Monaca, PA, with others under consideration in Ohio and West Virginia.