Pennsylvania May Tighten Environmental Rules, Impose New Taxes on Oil & Gas Producers

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Oil & Gas companies are opposing Pennsylvania Governor Tom Wolf's efforts to tighten environmental regulation of drilling in the Keystone State and enact a new extraction tax on natural gas to fund education. But the measures are playing well with the public, according to local news media reports, suggesting they may well become law before too long.

Pennsylvania began considering revising rules governing Oil & Gas extraction in 2011. In late 2013, the state's Department of Environmental Protection (DEP) (Harrisburg, Pennsylvania) released a proposed set of rules, which drew more than 24,000 public comments. Those draft rules were modified earlier this year following the election last November of Wolf as governor. The proposals, contained in Chapter 78 and Chapter 78a in Title 25 of the Pennsylvania Code, would apply to conventional drilling and unconventional drilling. The proposals would tighten regulations for noise, drilling near schools and playgrounds, reporting, and groundwater protection.

Three open houses were held in late April and early May to gather public comment on the proposed regulations. The public comment period ends May 19, and DEP officials predict the rules will be finalized by 2016.

The proposed changes include tougher limits on noise and a requirement that drilling permit applications analyze how the proposed new well could affect drinking water sources, schools and playgrounds.

The biggest changes to the rules concern how the state handles the estimated 1.8 billion gallons of hydraulic fracking wastewater produced each year. As drafted, the regulations would ban the use of temporary waste storage pits and require drillers to have centralized wastewater impoundment ponds permitted through more stringent residual waste regulations. Existing impoundments will have to be shut down or re-permitted within three years.

Oil & Gas interests have opposed the proposed rules as unnecessary and overly costly. But tougher regulation of drillers is playing well at the public hearings, where some attendees expressed concern about environmental impact of hydraulic fracturing. Some attendees also noted that leaks from impoundment ponds resulted in a $4.15 million settlement last September with Range Resources Corporation (NYSE:RRC) (Fort Worth, Texas) as well as a $4.5 million lawsuit filed against EQT Corporation (NYSE:EQT) (Pittsburgh, Pennsylvania).

Oil & Gas Industry officials objected to the substance of the proposed new rules as well as the manner in which they were drafted. "I'm not going to go all 'Al Pacino' here, but this whole proceeding is out of order," Kevin Moody of the Pennsylvania Independent Oil and Gas Association told the DEP. "What is being proposed by DEP raises more questions than answers," said Dave Spigelmyer, president of the Marcellus Shale Coalition (MSC). "These duplicative regulations, including those related to noise, have the potential to create an enormous amount of operational disruption without providing any meaningful environmental benefits."

Aside from tougher drilling regulations, Wolf wants to enact a natural gas extraction tax to invest in the state's schools, which he said have "suffered from $1 billion in funding cuts in recent years forcing school districts to increase class sizes, lay-off teachers and other staff, and make serious program cuts that make it more difficult for students to get a strong education in Pennsylvania's public schools."

"We can get Pennsylvania back on track, and we can start by passing a commonsense severance tax that will help fund our schools--an idea with bipartisan support," Wolf said February 11 in announcing his severance tax plan. "The commonwealth ranks 45th in the nation in percentage of state.

Wolf said his proposal, the Pennsylvania Education Reinvestment Act, enacts a "reasonable" 5% severance tax plus 4.7 cents per thousand feet of volume on natural gas extraction, which is expected to generate over a billion dollars in fiscal year 2017 prior to exemptions. He said it is modeled on neighboring West Virginia's severance tax plan.

Pennsylvania sits atop the Marcellus Shale formation, one of the largest deposits of natural gas in the world. Other natural gas producing states, including Texas and Oklahoma, levy a similar--and in some cases higher--tax on extraction to fund key priorities and initiatives, the governor noted.

In his memorandum to state lawmakers, Wolf wrote, "Pennsylvania is currently the only major gas producing state in the country that does not charge a tax on oil and natural gas extraction--and we're failing to tax this resource at a time when our schools need more funding. If states like Texas, West Virginia, and Oklahoma are able to charge a severance tax to fund key priorities, it is long past time Pennsylvania does too."

Labor leaders, small businesses and local government officials have been quoted in news articles as worrying the proposed extraction tax, which could go into effect July 2016, could hurt the state's economy. Spigelmyer of the Marcellus Shale Coalition said. "Pennsylvanians are looking to their elected officials to help create new jobs, not higher energy taxes."

Wolf has campaigned for the extraction tax at a series of public events in recent weeks. The tax faces an uphill battle in the state legislature, where both houses are controlled by Republicans who have opposed similar measures in the past. If the tax is to get enacted, it must be passed by June 30 so that school districts can include the new funding in their school budgets.