Since 2007, there has been unprecedented interest by oil & gas exploration and production (E&P) companies in the Marcellus Shale, a 54,000-square mile geologic formation running from the southern tier of New York State, down the Delaware River Valley, across all of northeast Pennsylvania and into the Appalachian Basin. Geologists estimate that the entire Marcellus Shale formation contains between 168 trillion to 516 trillion cubic feet of natural gas throughout its entire extent. To put this into context, New York State uses about 1.1 trillion cubic feet of natural gas a year.
While natural gas prices have retreated from their July 2008 highs, its proximity to the high-demand markets along the East Coast makes the Marcellus Shale an attractive target for energy development. Development and commercial activity there remains high. As recently as last month, Atlas Pipeline Partners L.P. and Williams Companies, Inc. announced the formation of a $127.5 million pipeline and processing joint venture to speed the flow of natural gas from the Marcellus Shale. Further opportunities associated with the development of the Marcellus Shale are abundant.
Along with these opportunities come numerous concerns, particularly in those areas that have not previously been the subject of large scale drilling and excavation activity. In particular, the extraction of natural gas from low-permeable shale formations entails the injection of large quantities of water and other agents deep into the rock formation, a process known as "high volume hydraulic fracturing", or "fracing". In addition to addressing the technical challenges of engaging in such extraction in both a safe and cost-effective manner, there are issues relating to: environmental protection; water withdrawal, transportation and disposal; the impact of the use of chemical additives in the fracing process; surface and land use rights, including noise, visual and air quality considerations; oil & gas leasing terms; and financing alternatives under current credit conditions, including the granting of security interests on oil & gas leaseholds.
The legislatures and agencies of Pennsylvania and New York State have chosen to address certain of these issues and have recently taken action to clarify the rights and obligations of E&P companies, landowners and the public in E&P activities. For example, Governor Paterson recently approved a bill that extends uniform gas well spacing rules and establishes boundary setbacks to protect the interests of adjacent property owners. In addition, concerns about the possible impacts of the fracing process on groundwater and other resources prompted New York State to begin the process of preparing a supplemental generic environmental impact statement (SGEIS) relating to drilling in the Marcellus Shale and other low-permeability gas reservoirs. Only once this SGEIS is finalized will permits for gas well development using the fracing process be issued. It is anticipated that a draft SGEIS will be issued this spring.
Many landowners in the Marcellus Shale, whether holding hundreds of acres or only a few, are being approached by E&P companies and land aggregators to sign oil & gas leases or similar agreements. Typically under these leases and agreements, in exchange for the owners granting the right to drill for and take from their land oil & gas and other hydrocarbons, they receive (a) upon signing, a per acre "bonus" payment and (b) thereafter, a royalty percentage of the proceeds of production from their own acreage and adjacent pooled lands. These leases are highly technical agreements that cover a broad range of rights, obligations, liabilities and risks for both the landowner and the E&P company. In certain cases, landowners are coming together to increase their leverage in negotiating the financial terms of these lease arrangements as well as to fight for increased protections and rights.
Riker Danzig assists clients with oil & gas purchases and dispositions, field development, mineral leasing, and commodity-based financing transactions, making it one of the limited number of law firms in the northeast U.S. to have a broad-based oil & gas practice. Riker Danzig represents independent oil & gas exploration and production (E&P) companies, drilling enterprises, field equipment suppliers, and owners of hydrocarbon producing properties.
