By Kensie Hamilton
Growing up, many of us were engrained with the belief that honesty is the best policy. Since we at West Virginia Executive believe this is a vital principle by which to live and work, we have decided to step outside our typical editorial requirements and run a story without bylines in order to bring our readers the real facts that lie within West Virginia’s natural gas industry from the CEOs and presidents themselves.
In the past, we have asked business owners, CEOs and presidents within West Virginia’s energy industry to talk honestly with us about the challenges that arise because of regulatory agencies and permitting, as well as other issues that have a major impact on the industry. The response we have always received is that speaking too honestly could have a negative effect on the energy company of the contributor, as well as its business. We would never want to negatively impact anyone’s business, and yet we find it of the utmost importance to bring to light the real challenges of this industry so West Virginia can plan for the future. For this year’s annual energy issue, we have been able to work with a group of natural gas industry leaders in the Mountain State who are willing to share this sensitive information. These leaders will remain nameless to protect their livelihood. It is our hope some honest feedback from the energy industry in West Virginia will help shine a light on the hurdles that not only hinder the Mountain State’s energy success but also stand in the way of America’s energy independence.
Natural Gas Regulatory Agencies
With the advent of new technologies that allow drillers to access tremendous amounts of natural gas in the Marcellus Shale, oil and gas exploration has undergone a huge transformation in West Virginia. Along with that new development comes new regulations to address the changing aspects of the exploration, drilling and production of this popular fossil fuel.
Not too many years ago, authorities at West Virginia Division of Environmental Protection (WVDEP) Office of Oil and Gas deservedly bragged about their one-stop shopping approach to the permitting of new wells. Oil and gas operators could apply for permits and have all their regulatory concerns addressed at one office while citizens concerned about drilling and production operations could contact the same office to talk to a regulatory personnel member who was intimately involved with the operations. It was a good system that worked efficiently for many years.
Unfortunately, this model of regulatory efficiency is now a thing of the past. As Marcellus development has progressed, almost every regulatory body imaginable now has their hands in the permitting process. And with rig rates running approximately $30,000 per day, any glitch in the complicated permitting process that shuts a rig down can quickly add up to significant expense. Add to that the cost of all the ancillary equipment rendered inactive during a delay, and an operator is quickly exposed to costs nearing $75,000 for each day he is shut down.
One new regulation requires that before an operator can apply to the WVDEP for a drilling permit, he must detail a plan to maintain and repair the state roads he will utilize, and he must obtain
a permit from the Department of Highways (DOH). Between engineering designs and field meetings with DOH representatives, this process can take well over one month to complete. It also requires the operator to purchase a significant surety bond—up to $1 million—to protect the state.
Once the DOH approves the plan, the operator goes to the Office of Oil and Gas, which still maintains the primary responsibility for the permitting of drilling activity. At this point, the county gets involved. The operator must obtain a flood plain permit before beginning construction activities, even if construction is not in a designated flood plain. Because each county determines its own flood plain ordinance, the operator has to become familiar with potentially 55 different sets of rules. There is also a fee involved with this permit along with the expense of engineering the flood plain design.
Let’s not forget about the federal government. Both the Army Corps of Engineers and the Environmental Protection Agency (EPA) get involved when it comes to “waters of the state.” And just because you can’t sail a boat on it doesn’t mean they don’t regulate it. Even some of the smallest drainage ditches that don’t even carry water year-round require special permits or complete relocation of the planned activity. It may also be necessary to obtain air permits from both the EPA and the DEP Division of Air Quality.
To round out the list, the planned activity may require an additional municipal permit and a DEP Water Resources permit, and now there is even a proposal for a permit to ensure against the disturbance of graveyards.
I’m not saying all these regulations are unwarranted and unnecessary. Our industry supports reasonable regulation of our activities, and West Virginians deserve comprehensive safety and environmental protections. At the same time, our lawmakers and regulators need to remember that unnecessary delays and permitting confusion cost not only the industry but the communities and employees. They should make every effort to simplify and streamline these processes and not stifle the one bright spot on West Virginia’s economic outlook.
Natural Gas Forced Pooling
Historically, oil and natural gas were produced in West Virginia by drilling vertical wells and completing each potential producing formation with a single hydraulic fracturing treatment. Today’s wells in the Marcellus Shale formation are drilled vertically for 6,000-7,000 feet and then for a mile or more horizontally. The horizontal well is then completed with multiple hydraulic fracture treatments, and the resultant production can be 15 times greater than the traditional one-stage, one-formation vertical well of previous years.
The Marcellus Shale is being developed under an antiquated legal rule: the rule of capture. Under this rule, the owner of the oil and gas receives all the revenue from production of a well drilled on his property. If hydrocarbons from an adjacent property are drained, the courts have determined that the adjacent property owner should have drilled and captured the oil and gas under their property from their own well.
Since West Virginia land tracts are usually small, a horizontal well must traverse multiple tracts or land leases. However, crossing multiple leases with the horizontal portion of the well is not legally permitted unless all tract owners agree to be pooled or combined for the purposes of calculating and paying royalty payments. When pooling is allowed to occur, tracts too small for horizontal drilling can be combined to allow for more efficient spacing of wells and more resource development, and more royalty owners receive a greater amount of income than they may have received otherwise. Without statutory pooling, unwilling, unknown or owners who can’t be located can prevent or block drilling, meaning that a small fraction of unwilling owners can prevent drilling of the horizontal well and the resulting benefits from the overwhelming majority of their fellow owners.
Forced pooling for horizontal wells solves these problems. This is the process where majority owners can force the minority to share income or sell their interest. The result is the most efficient development of the reservoir: optimizing the production with the fewest wells drilled. In West Virginia, forced pooling exists and is effective in deep well drilling, shallow secondary recovery development and drilling coal bed methane wells. The forced pooling procedure is a process that gives formal notice to interested parties, allows owners to sell or lease their interest and provides a formal hearing process should they disagree. Forced pooling will optimize the development of the Marcellus Shale and other future formations developed with horizontal technology. The result will be greater royalty payments to all those participating in the drilling unit, more employment in the state and more severance taxes paid to benefit the state. If the state does not implement forced pooling, West Virginia will not be able to maximize the efficient development of oil and natural gas deposits.
Natural Gas Permits
At this time last year, shale developers were rightfully upset by the length of time required to obtain a drilling permit. Many permits were taking well over 100 days. The developer’s frustration was aggravated by the fact that application fees had increased from $650 to $10,000, an increase they were told would be used to add staff to expedite the issuance of permits, which was not happening.
While permitting times have improved as the result of the actions of WVDEP Cabinet Secretary Randy Huffman and his staff, there is still much room for improvement, especially for the processing and issuance of permits for conventional wells. Some producers have indicated that permitting for conventional shallow wells can take as long as 60 days, which is unacceptable.
What can be done? For starters, there should be changes made to the process used to review permit applications. While registered professional civil engineers must prepare many of the critical materials, the clerical staff—and not professional engineers—handle the review of those materials by the WVDEP.
It seems unlikely they are qualified for this task, which leads to an inefficient process that could lead to problems if an untrained clerk were to overlook something of significance.
For the last several years, there has been significantly more horizontal shale activity in Pennsylvania than in West Virginia. Pennsylvania solved its permitting problems by requiring that certain critical elements of the permit application be prepared under the direction of a registered professional engineer who would certify to the commonwealth that the plans and designs meet or exceed the requirements of any and all Pennsylvania statutes or regulations. As a result, permits are issued in Pennsylvania in a timelier manner. Moreover, Pennsylvania’s permit application fees are about half of what West Virginia charges. Obviously the applicant’s engineering expenses are higher, but when rig costs are more than $30,000 per day, most developers don’t complain if the added costs result in the quicker receipt of a permit.
