1. The Agricultural Law Resource and Reference Center Prof. Ross H. Pifer, J.D., LL.M., Director The Impact of Drilling on Surface Owner Rights

2. PBI - Best of OGL Colloquium January 25, 2011 2 Overview of Presentation Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation The Agricultural Law Resource and Reference Center

3. PBI - Best of OGL Colloquium January 25, 2011 3 Overview of Presentation Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation The Agricultural Law Resource and Reference Center

4. PBI - Best of OGL Colloquium January 25, 2011 4 The Agricultural Law Center Established by Pennsylvania General Assembly on January 29, 1998 Collaborative enterprise of: –Penn State Dickinson School of Law –Penn State College of Agricultural Sciences –Pennsylvania Department of Agriculture The Agricultural Law Resource and Reference Center

5. PBI - Best of OGL Colloquium January 25, 2011 5 Purpose of The Agricultural Law Center Section 2205 –“to serve as a resource on agricultural law and related issues for farmers and agribusinesses, attorneys, officials at all levels of government, community groups, and the public.” The Agricultural Law Resource and Reference Center

6. PBI - Best of OGL Colloquium January 25, 2011 6 Dissemination of Information Presentations Educational Programs Publications The Agricultural Law Brief Web site – www.law.psu.edu/aglawwww.law.psu.edu/aglaw The Agricultural Law Resource and Reference Center

7. PBI - Best of OGL Colloquium January 25, 2011 7 The Agricultural Law Brief Monthly e-newsletter Addresses 5 legal developments from prior month that impact food and agricultural law in Pennsylvania Addresses 1 or 2 natural gas legal developments per month – with emphasis on case law Subscription link available on Web site The Agricultural Law Resource and Reference Center

8. PBI - Best of OGL Colloquium January 25, 2011 8 Overview of Presentation Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation The Agricultural Law Resource and Reference Center

9. PBI - Best of OGL Colloquium January 25, 2011 9 Surface Impacts Generally General Propositions –Natural gas extraction necessary involves some disturbance of the surface estate. –Differing interests of parties Well operators must have some use of surface estate. Landowners may desire limitations on the use of surface estate for drilling operations. The Agricultural Law Resource and Reference Center

10. PBI - Best of OGL Colloquium January 25, 2011 10 Surface Impacts Generally Marcellus wells vs. traditional wells –Larger well pad sites Increased use of water Multiple wells on single well pad –Fewer well pad sites Use of horizontal drilling Surface use not necessary on all parcels. The Agricultural Law Resource and Reference Center

11. PBI - Best of OGL Colloquium January 25, 2011 11 Surface Impacts Generally Severed Estates –Not all surface owners own the corresponding oil and gas rights. –Impact of oil and gas ownership on value of land. –Protections afforded surface owners of severed estates in relation to those afforded to owners of intact estates The Agricultural Law Resource and Reference Center

12. PBI - Best of OGL Colloquium January 25, 2011 12 Surface Impacts Generally Definition of Surface Owner Rights –Lease agreement provisions –Statutes and regulations Oil and Gas Act –Court opinions The Agricultural Law Resource and Reference Center

13. PBI - Best of OGL Colloquium January 25, 2011 13 Overview of Presentation Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation The Agricultural Law Resource and Reference Center

14. PBI - Best of OGL Colloquium January 25, 2011 14 Protections in Lease Agreement Generally –The lease agreement governs nearly all aspects of relationship between lessor and gas company. –Surface owner of severed estate likely will receive no protections. The Agricultural Law Resource and Reference Center

15. PBI - Best of OGL Colloquium January 25, 2011 15 Protections in Lease Agreement Limitations on Operations –No Surface Rights Lease –Approval of well site and access roads location –Limit drilling to defined area –Specifically define facilities –Installation of security measures –Restrict transportation of foreign gas The Agricultural Law Resource and Reference Center

16. PBI - Best of OGL Colloquium January 25, 2011 16 Protections in Lease Agreement Compensation for Damages –Appropriately address various types of damage that can occur –Valuation of damages –Protect other business relationships The Agricultural Law Resource and Reference Center

17. PBI - Best of OGL Colloquium January 25, 2011 17 Protections in Lease Agreement Restoration of Well Sites –Requirements in excess of statutory mandates –Impact of multiple wells on single well pad The Agricultural Law Resource and Reference Center

18. PBI - Best of OGL Colloquium January 25, 2011 18 Protections in Lease Agreement Termination of Lease Agreement –Renewal clauses –Initiation and termination of secondary term –Force majeure clause –Pooling / unitization The Agricultural Law Resource and Reference Center

19. PBI - Best of OGL Colloquium January 25, 2011 19 Overview of Presentation Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation The Agricultural Law Resource and Reference Center

20. PBI - Best of OGL Colloquium January 25, 2011 20 Statutory Protections - Notification Permitting Requirement –Permit from DEP must be obtained prior to drilling. –Plat must be included with permit application. –Prior to submission of permit application, plat must be sent, via certified mail, to surface owner of drilling site. –Similar notice must be provided for water supplies within 1,000 feet of proposed well location. The Agricultural Law Resource and Reference Center

21. PBI - Best of OGL Colloquium January 25, 2011 21 Statutory Protections - Notification Objections to Grant of Permit –Surface owner has right to object to grant of permit. –Bases for objection: Siting in violation of locational restrictions Information in permit is untrue –Must be filed within fifteen days of receipt of plat –Request for conference The Agricultural Law Resource and Reference Center

22. PBI - Best of OGL Colloquium January 25, 2011 22 Statutory Protections - Notification Renewal of Permit –Can be renewed for additional year –Request for renewal must be provided to surface owner and owners of nearby water supplies. The Agricultural Law Resource and Reference Center

23. PBI - Best of OGL Colloquium January 25, 2011 23 Statutory Protections - Notification Commencement of Drilling –24 hours notice must be provided to surface owner, political subdivision, and DEP. –Notice not required to be provided to owners of nearby water supplies. The Agricultural Law Resource and Reference Center

24. PBI - Best of OGL Colloquium January 25, 2011 24 Statutory Protections – Well Locations Distance from Buildings –200 foot set-back from existing buildings –Minimum set-back can be waived by building owner. –Minimum set-back can be waived by DEP upon showing of additional protective measures. The Agricultural Law Resource and Reference Center

25. PBI - Best of OGL Colloquium January 25, 2011 25 Statutory Protections – Well Locations Distance from Water Wells –200 foot set-back from existing wells –Minimum set-back can be waived by well owner. –Minimum set-back can be waived by DEP upon showing of additional protective measures. Distance from Watercourses –100 foot set-back from streams, springs, etc. –Minimum set-back can be waived by DEP. The Agricultural Law Resource and Reference Center

26. PBI - Best of OGL Colloquium January 25, 2011 26 Statutory Protections – Well Locations Restrictions in Oil and Gas Conservation Law –330 foot minimum set-back from property boundary where spacing order not issued. –330 foot minimum set-back from unit boundary where voluntary unit established. –Minimum set-back can be waived by DEP. The Agricultural Law Resource and Reference Center

27. 27 The Oil and Gas Conservation Law and the Marcellus Shale The Agricultural Law Resource and Reference Center Image by: Robert Milici and Christopher Swezey, 2006, Assessment of Appalachian Basin Oil and Gas Resources: Devonian Shale–Middle and Upper Paleozoic Total Petroleum System. Open-File Report Series 2006-1237. United States Geological Survey. Depth of Marcellus Shale Depth of Onondaga Horizon The Oil and Gas Conservation Law does not apply to wells that do not penetrate the Onondaga horizon, meaning wells drilled into the Marcellus Shale are not covered by this law.

28. PBI - Best of OGL Colloquium January 25, 2011 28 Statutory Protections – Restoration Requirements Surface Restoration –General restoration requirement –Required compliance with Erosion and Sediment Control Plans –Restoration of permitted site where well not drilled – 30 days after expiration of permit The Agricultural Law Resource and Reference Center

29. PBI - Best of OGL Colloquium January 25, 2011 29 Statutory Protections – Restoration Requirements Restoration after Completion of Drilling –Well site must be restored and equipment removed within nine months –Surface owner can provide written consent for equipment to remain after nine month period. –Nine month period can be extended for additional six months. –When is drilling completed? The Agricultural Law Resource and Reference Center

30. PBI - Best of OGL Colloquium January 25, 2011 30 Statutory Protections – Restoration Requirements Restoration after Plugging of Well –Well site must be restored and equipment removed within nine months –Nine month period can be extended for additional six months. The Agricultural Law Resource and Reference Center

31. PBI - Best of OGL Colloquium January 25, 2011 31 Statutory Protections – Restoration Requirements Restoration of Water Supplies –Requirement to restore or replace water supplies affected by pollution or diminution –Request for DEP investigation –Presumption of responsibility Well located within 1000 feet of well Pollution occurs within 6 months of completion of drilling Rebuttal presumption Does not encompass diminished water supplies The Agricultural Law Resource and Reference Center

32. PBI - Best of OGL Colloquium January 25, 2011 32 Statutory Protections – Restoration Requirements Restoration of Water Supplies –Requirement to provide auxiliary equipment and facilities necessary for utilization of water supply –Bottled water or tank trucks as temporary restorative measure –Landowner not precluded from seeking remedies beyond those provided by DEP. The Agricultural Law Resource and Reference Center

33. PBI - Best of OGL Colloquium January 25, 2011 33 Overview of Presentation Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation The Agricultural Law Resource and Reference Center

34. PBI - Best of OGL Colloquium January 25, 2011 34 Case Law Addressing Use of Surface Estate Belden & Blake v. DCNR (Pa. Apr. 29, 2009) –Facts Belden & Blake had rights to extract oil and gas within Oil Creek State Park. DCNR would not permit surface access without coordination agreement. Belden & Blake filed suit, claiming implied easement to use surface estate. The Agricultural Law Resource and Reference Center

35. PBI - Best of OGL Colloquium January 25, 2011 35 Case Law Addressing Use of Surface Estate Belden & Blake v. DCNR (Pa. Apr. 29, 2009) –Supreme Court Ruling DCNR could not require Belden & Blake to execute coordination agreement. The Agricultural Law Resource and Reference Center

36. PBI - Best of OGL Colloquium January 25, 2011 36 Case Law Addressing Use of Surface Estate Belden & Blake v. DCNR (Pa. Apr. 29, 2009) –Supreme Court Opinion Subsurface estate is dominant over surface estate. –Chartiers Block Coal Co. v. Mellon (Pa. 1893) Subsurface owner entitled to reasonable use of surface estate. Burden is on surface owner to challenge reasonableness of use. Government holds no greater rights than private landowner re: surface estate. The Agricultural Law Resource and Reference Center

37. PBI - Best of OGL Colloquium January 25, 2011 37 Case Law Addressing Use of Surface Estate Minard Run Oil Co. v. Forest Service (W.D. Pa. Dec. 15, 2009) –Facts Industry plaintiffs challenged terms of settlement agreement entered in prior litigation. Under settlement agreement, Forest Service was to perform environmental review of proposed drilling sites within Allegheny National Forest. Plaintiffs argued that environmental reviews were beyond Forest Service’s authority. The Agricultural Law Resource and Reference Center

38. PBI - Best of OGL Colloquium January 25, 2011 38 Case Law Addressing Use of Surface Estate Minard Run Oil Co. v. Forest Service (W.D. Pa. Dec. 15, 2009) –Ruling Forest Service did not have authority to require environmental review. Forest Service had some ability to prevent degradation of surface estate. As holder of servient estate, Forest Service had right to seek judicial intervention to protect rights. The Agricultural Law Resource and Reference Center

39. PBI - Best of OGL Colloquium January 25, 2011 39 Case Law Addressing Use of Surface Estate Minard Run Oil Co. v. Forest Service (W.D. Pa. 1980) –Facts Minard Run held oil and gas rights within Allegheny National Forest. Due to concern about impact on surface estate, Forest Service sought to restrain surface activities. The Agricultural Law Resource and Reference Center

40. PBI - Best of OGL Colloquium January 25, 2011 40 Case Law Addressing Use of Surface Estate Minard Run Oil Co. v. Forest Service (W.D. Pa. 1980) –Ruling Court granted requested injunction, prohibiting certain activities unless notice was provided. Operator cannot determine whether drilling operations will unreasonably impair surface estate. Thus, reasonable advance notice is required. The Agricultural Law Resource and Reference Center

41. PBI - Best of OGL Colloquium January 25, 2011 41 Case Law Addressing Use of Surface Estate Minard Run Oil Co. v. Forest Service (W.D. Pa. 1980) –Court Opinion Mineral owner has unquestioned right to enter upon property. Prevent unnecessary surface disturbance “reasonable use justifiable to related activities essential to orderly removal of the mineral rights” Parties should attempt to reach reasonable accommodation. Tests to measure extent of surface use Appropriateness of injunctive relief The Agricultural Law Resource and Reference Center

42. PBI - Best of OGL Colloquium January 25, 2011 42 Case Law Addressing Use of Surface Estate Gates v. Exco Resources (W.D. Pa. Apr. 8, 2010) –Facts Landowners executed lease agreement and pipeline rights of way Landowners sought damages for devaluation of property due to improper reclamation after installation of pipelines. The Agricultural Law Resource and Reference Center

43. PBI - Best of OGL Colloquium January 25, 2011 43 Case Law Addressing Use of Surface Estate Gates v. Exco Resources (W.D. Pa. Apr. 8, 2010) –Ruling Court found that 20 acres was “rendered almost unable to be used again.” Court awarded $16,000 in damages due to diminution of property value. Court did not rely upon contract as basis for recovery. Court awarded damages despite evidence that devalued land was typical of gas production activities. The Agricultural Law Resource and Reference Center

44. PBI - Best of OGL Colloquium January 25, 2011 44 Case Law Addressing Use of Surface Estate P.G.W. Assocs. v. Lago de Vita, Inc. (Westmoreland Co. 1991) –Facts One acre of trees removed pursuant to lease agreement. Landowner sought damages based upon replacement value of trees. –Ruling Court awarded damages based upon timber value. The Agricultural Law Resource and Reference Center

45. PBI - Best of OGL Colloquium January 25, 2011 45 Case Law Addressing Use of Surface Estate Unresolved Questions: –What is Reasonable Use? –How Does Horizontal Drilling Impact Determination of Reasonable Use? –What Damages, if any, are Required for Exercising Right to Reasonable Use of Surface Estate? The Agricultural Law Resource and Reference Center

46. PBI - Best of OGL Colloquium January 25, 2011 46 Overview of Presentation Background of The Agricultural Law Center Surface Impacts Generally Protections in Lease Agreements Protections in Statutes and Regulations Case Law Addressing Use of Surface Estate Recent Legislation The Agricultural Law Resource and Reference Center

47. PBI - Best of OGL Colloquium January 25, 2011 47 Recent Legislation Dormant Oil and Gas Act (2006) –Does not vest surface owner with title to oil and gas rights that have been severed from the surface estate –The Dormant Oil and Gas Acts of some states do reunite the surface estate with the subsurface estate under specified conditions. The Agricultural Law Resource and Reference Center

48. PBI - Best of OGL Colloquium January 25, 2011 48 Recent Legislation Coal Bed Methane Review Board –House Bill 1847 enacted into law on Feb. 1, 2010. –Establishes three member board to resolve disputes relating to surface activities associated with coal bed methane extraction. The Agricultural Law Resource and Reference Center

49. PBI - Best of OGL Colloquium January 25, 2011 49 Recent Legislation Coal Bed Methane Review Board –Process Notification Objections Conference Resolution Appeal The Agricultural Law Resource and Reference Center

50. PBI - Best of OGL Colloquium January 25, 2011 50 Recent Legislation Surface Owners’ Protection Act –House Bill 1155 introduced on March 31, 2009. –No activity after Sep. 11, 2009. –Basic provisions Compensation requirements Surface use and compensation agreement The Agricultural Law Resource and Reference Center

51. PBI - Best of OGL Colloquium January 25, 2011 51 Governments’ Roles in Natural Gas Development Agricultural Law Resource and Reference Center Contact Information The Agricultural Law Resource and Reference Center Phone: (814) 865-3723 Email: rpifer@psu.edurpifer@psu.edu Web: www.law.psu.edu/aglawwww.law.psu.edu/aglaw