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June 2010
EPA Announces Plans to Regulate Coal Ash The proposed regulations will regulate the disposal of coal combustion residuals, commonly known as coal ash, which are byproducts of the combustion of coal at power plants. Coal ash is typically disposed of in liquid form at large surface impoundments, and in solid form at landfills. Coal combustion residual impoundments can be found in almost all states, most often on the properties of power plants, with close to 900 landfills and surface impoundments nationwide. The new rules will regulate not only the environmental effects of coal ash disposal, but also the structure of coal ash impoundments. Facilities, including pre-existing facilities, will be required to install and/or retro-fit protective control devices, such as liners and groundwater monitoring devices, or potentially face closure. The regulations will leave in place the Bevill exemption, which exempts coal ash that is recycled for beneficial uses from regulation. Large quantities of coal ash are recycled as components of products such as concrete, cement, and wallboard. Such uses typically minimize the public's exposure to unsafe coal ash contaminants, such as mercury, cadmium, and arsenic. The EPA believes that the new rules will promote environmentally safe and desirable forms of recycling coal ash, known as beneficial uses, and force power companies to assess alternative means for coal ash disposal. The two proposed regulations will be open for public comment for a period of 90 days from the date of publication in the Federal Register. For more information, please visit the EPA's website at: http://www.epa.gov/wastes/nonhaz/industrial/special/fossil/ccr-rule/index.htm. Environmental Groups Seek to Delay Keystone Pipeline On April 23, 2010, a number of environmental groups, including the National Wildlife Foundation, National Resources Defense Council and Dakota Rural Action, launched their latest attack against the TransCanada Keystone tar sands pipeline by drafting a letter to Secretary of State Hillary Clinton. In the letter the groups argue that an expansion in the tar sands production will impact low income communities and result in increased greenhouse gas emissions and refinery pollution. The Keystone Pipeline is a massive pipeline project that, upon completion, will transport heavy crude oil extracted from the tar sands region in western Canada to terminals and refineries located within the United States. The initial capacity of the 2,148 mile pipeline will be 435,000 barrels per day, with an expanded capacity of up to 590,000 barrels per day. Since the project's inception, environmental groups have been opposed to it and have sought to delay its development. The letter requests that the Secretary of State suspend the presidential permit issued by the U.S. State Department. The groups assert that the permit was issued without appropriate consideration of the pipeline's impacts on climate change. They want the State Department to apply the White House draft version of the Council on Environmental Quality guidelines to the environmental assessment of the pipeline project. In addition, the groups also seek a comprehensive life-cycle assessment of greenhouse gas emissions for tar sands oil in order to fully comprehend the environmental impacts of the pipeline. The April 23 letter is simply the latest attack on the Keystone pipeline project. In August 2008, the National Resources Defense Council and Dakota Rural Action filed a lawsuit seeking to halt the pipeline's construction and revoke the presidential permit issued by the U.S. State Department. The suit alleged that the State Department's decision to issue the permit was based on an incomplete and inadequate environmental impact statement that did not comply with the National Environmental Policy Act. The U.S. District Court for the District of Columbia summarily dismissed the lawsuit in September 2009. In its decision, the court held that the executive branch action in support of the pipeline could not be reviewed under an abuse of discretion standard, or under the Administrative Procedures Act. Senate Climate Bill Proposes Carbon and Drilling Limits On May 12, 2010, Senators John Kerry (D-Mass.) and Joe Lieberman (I-Conn.) revealed comprehensive climate change legislation setting mid- and long-term carbon emission reduction goals. The legislation offers incentives to increase domestic production of fossil fuels and alternative clean energy sources, while using a cap and trade program to reduce carbon emission levels 17 percent below 2005 levels by 2020, 42 percent by 2030, and 83 percent by 2050. The Kerry-Lieberman proposal, titled the American Power Act, is somewhat narrower in scope than the cap-and-trade scheme in the Waxman-Markey bill passed by the U.S. House of Representatives in 2009, and would cover only 7,500 factories and power plants. It would restrict EPA's authority to regulate greenhouse gases under the Clean Air Act while also preempting state or regional greenhouse gas regulations. Producers and importers of refined petroleum products, while not subject to cap and trade under the proposed bill, would be required to purchase allowances at a fixed price. The bill includes several political compromises, such as $54 billion in loan guarantees for the nuclear energy industry, a $2 billion fund for carbon capture and sequestration technology, and increased protection to states. Most notably, states will gain veto power over any drilling activity that takes place within 75 miles of their coastlines, as well as receiving a share of the revenue from any expanded offshore drilling for oil and natural gas bordering their coastlines. Kerry has predicted that within a year, the Senate will gather the 60 votes necessary to pass this legislation, yet much skepticism remains as to whether it will actually become law. Experts indicate that several obstacles stand in the bill's way: upcoming midterm elections, the Senate's packed agenda, and indifferent responses from both environmental and industry leaders. Lieberman commented that releasing this version of the bill opens up the next negotiating process, suggesting that the legislation could undergo many changes before reaching its final product. FERC Steps Up Reporting Rules for Intrastate Pipelines The Federal Energy Regulatory Commission (FERC) has issued a final rule establishing more stringent reporting requirements for intrastate natural gas pipelines providing services across state borders as well as Hinshaw pipelines, which receive natural gas from out-of-state for consumption solely within the state. Rather than reporting semiannually or annually, these pipelines will now have to report detailed information quarterly. The rule, which FERC says is intended to increase transparency in the natural gas market, is expected to take effect April 1, 2011. The rule's new reporting procedure includes a new form on which pipelines must report the rates they charge under each contract, receipt and delivery points covered by each contract, the amount of natural gas the shipper is permitted to transport, store and deliver; length of contract; and whether the pipeline and shipper are affiliated. The reports will be made public by FERC and cannot be filed with privileged or redacted information. In exchange for the increased reporting, FERC says it will review rates charged by these pipelines every five years, rather than every three as is now the practice. Supreme Court of Pennsylvania Construes Statute to Allow Royalty Value Calculation at Wellhead In the case of Kilmer, et al. v. Elexco Land Services, Inc., 990 A.2d 1147 (2010), the Supreme Court of Pennsylvania has construed Pennsylvania's Guaranteed Minimum Royalty Act (GMRA) to allow natural gas producers to calculate the minimum one-eighth royalty based upon the value of the gas at the wellhead. The GMRA requires that producers pay at least a one-eighth royalty of all oil, natural gas or gas of other designations removed or recovered from the subject real property; however, it does not specify whether the royalty is to be calculated based upon prices at the well-head or after processing. Seizing this ambiguity, several landowners filed suit, including the landowners in Kilmer, to invalidate leases, in which the royalties were calculated at the well-head, in order to renegotiate their leases in light of the better terms now available to landowners. In Kilmer, the plaintiffs' lease provided for royalty payments to be calculated as one-eighth of the sale price of the gas minus one-eighth of the post-production expenses incurred in processing and transporting the gas from the wellhead to the point of sale. The plaintiff mineral owners brought an action in the Court of Common Pleas of Susquehanna County seeking a declaratory judgment seeking to invalidate their 2007 lease based upon its alleged violation of the GMRA. The subject lease in Kilmer permitted the deduction of post-production expenses before calculation of royalty. The trial judge rejected this argument observing that the GMRA did not prohibit the inclusion of post-production costs and accordingly, the parties to the lease free to negotiate how the royalty is to be calculated and granted summary judgment in favor of the gas company defendants. The Plaintiffs timely appealed to the Pennsylvania Superior Court, but because more than seventy cases involving the same issue were pending in Pennsylvania's state and federal courts, the Supreme Court also granted the gas companies' motion for extraordinary jurisdiction to immediately issue a definitive interpretation of the GMRA. Among other things, the mineral owners argued that, by relying upon dictionary definitions, the ordinary meaning of royalty should be interpreted as a compensation or portion of the proceeds paid to the owner of a right, as a patent or oil or mineral right where proceeds are defined as the total amount derived from a sale or other transaction. They further contended that a century-old case placing an implied duty to market upon gas companies requires Pennsylvania to adopt the "first marketable product doctrine" and impose on the gas companies all expenses necessary to get the gas to the point of sale. The gas companies argued that the plain language of the GMRA, which states that the royalty shall be one-eighth of natural gas removed or recovered from the subject real property, means that the calculation should be based upon its value at the wellhead because the gas cannot be removed or recovered downstream from the point it exits the ground. Moreover, they pointed out that in 1979, when the GMRA was enacted, gas was typically sold at the wellhead, and the Legislature can be presumed to have acted consistently with that fact. The gas companies also pointed out that measuring the value of gas at the wellhead effectively standardizes royalties; to do otherwise would result in different royalties being paid depending upon the point of sale as each point of sale involves different levels of post-processing. They also counter the Plaintiff's reliance upon the first marketable product doctrine by arguing that the implied duty to market is nothing more than an implied duty to market gas if it could be extracted in sufficient quantities. Relying upon the Statutory Construction Act, which instructs that technical words and phrases shall be construed according to their peculiar and appropriate meaning, the court noted that the term "royalty" has been defined in the oil and gas industry as [t]he landowner's share of production, free of expenses of production where the expenses of production relate to the costs of drilling the well and getting the product to the surface, but do not encompass the costs of getting the product from the wellhead to the point of sale, as those costs are termed post-production costs. The court was also concerned by the possibility that neighboring land owners could receive dramatically different royalties on the same quantity and quality of gas depending upon the amount of post-processing and the proximity of the point of sale to a high-demand area. The court observes that the use of the net-back method would eliminate this concern. Accordingly, the court holds that the GMRA should be read to permit the calculation of royalties at the wellhead, as provided by the net-back method in the Lease. Pennsylvania Senator Asks EPA to Investigate Hydraulic Fracturing United States Senator Bob Casey (D-PA) requested that the EPA investigate the impact of hydraulic fracturing on water sources in Pennsylvania. In his April 26 letter, Casey asked that the EPA determine whether it could investigate and respond to groundwater contamination. Hydraulic fracturing or hyrdofracking is a process used by many developers of natural gas in the Marcellus Shale. It involves injecting chemicals into rock formations to release gas. In certain situations, these chemicals can leak and contaminate local water supplies. Hydrofracking has fallen under increased scrutiny since Cabot Oil and Gas Corp. recently settled a matter with Pennsylvania authorities relating to contamination of drinking wells in northeastern Pennsylvania. In an unrelated incident, approximately 7,000 gallons of hydrofracking fluid leaked from a pipe near a drill site in Susquehnna County, Pennsylvania. Additionally, in Washington County Pennsylvania, the EPA is currently investigating claims of suspected underground water contamination. In light of these incidents, Senator Casey has also proposed legislation that would require oil and gas companies to disclose the chemicals used in the fracking process.
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