JurisdictionUnited States
Development Issues in the Major Shale Plays
(Dec 2010)


Russell L. Schetroma
Steptoe & Johnson PLLC
Meadville, Pennsylvania

RUSSELL L. SCHETROMA is a member of Steptoe & Johnson in Meadville, Pennsylvania. He focuses his practice in the areas of energy and oil and gas law. Mr. Schetroma has represented oil and gas exploration and production companies in all aspects of their Pennsylvania operations including lease and other document design, negotiations, permitting, administrative proceedings, joint operating agreements, farmouts, acquisitions, dispositions, due diligence reviews, title examination and reporting, financing and litigation in state and federal courts for more than 35 years. From 1972-2010, he practiced with the law firm of Culbertson, Weiss, Schetroma and Schug, P.C. He is a Trustee, Energy and Mineral Law Foundation; Chair, Land Title Standards Committee, Crawford County Bar Association; and Board Member, Municipal Law Section of the Pennsylvania Bar Association. He has received numerous awards and recognitions, including a listing in The Best Lawyers in America®; Recipient, John L. McClaugherty Award for distinguished service to the legal profession, the natural resources industry, and the Energy and Mineral Law Foundation (2007); Super Lawyers®; Service Award, Meadville-Western Crawford County Chamber of Commerce (2000); Recipient, Outstanding Service Award, Greater Meadville Board of Realtors (1996-97); Recipient, President's Award, Eastern Mineral Law Foundation (1993); and Recipient, Pennsylvania Bar Association Award for extraordinary contribution to pro bono service (1989-1990). Mr. Schetroma graduated cum laude from Dickinson School of Law, and cum laude from Elon College. He has published and spoken on numerous occasions for a number of different organizations.

State Oil and Gas Conservation Agency Experience One State's Unique Experience

The Pennsylvania Statutory Oil and Gas Conservation Experience1

In August of 1859, Edwin L. Drake proved that commercially valuable quantities of oil could be produced through drilling wells specifically targeted at that resource near Titusville, Pennsylvania. At the time there was no legal infrastructure of any type available to resolve fundamental questions of the ownership of the resource or to suggest any core relative rights among the owners of properties from which the resource was produced. As a consequence, each owner of property in an oil producing area perceived the need to obtain Wells near all borders of his or her property and to produce those Wells vigorously so as to avoid the drainage from neighboring Wells and, if possible, oil from those adjacent lands. An unfortunate consequence of this situation was the loss of formation pressure which eventually made the Pennsylvania initial oil fields nonproductive despite the presence of what is estimated to be millions of barrels of unproduced oil.

The development of Pennsylvania oil and gas law was hampered by the discovery of far more productive fields in western and midcontinent states not long after Drake's well produced its first oil. In 1901, the famous "Lucas Gusher" was attained establishing the Spindletop field near Beaumont Texas. Spindletop was so prolific and the impact of the excessive production of the Pennsylvania fields was so severe that the nation's oil focus shifted to the west. Texas officials were wise to learn from the Pennsylvania experience and to suggest the need for regulation of oil production in order to avoid a repetition of the reservoir damage experienced in early fields such as those in Pennsylvania. Over time, the conservation movement spread to most states and then interstate compact was developed among those states by which each promised to the other the adoption of appropriate legislation to end wasteful production practices.

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Pennsylvania joined this compact in 1941.2 In joining the compact, Pennsylvania committed as follows:

.... each state hereby agrees that within a reasonable time it will enact laws ... to accomplish within reasonable limits the prevention of--

a.) ....

b.) ....

c.) ....

d.) the drilling, equipping, locating, spacing or operating of a Well or Wells so as to bring about physical waste of oil or gas or the loss and the ultimate recovery thereof;

e.) the inefficient, excessive or improper use of the reservoir energy and producing any well.

In addition, Pennsylvania promised that "... it will within a reasonable time enact statutes. . . providing in effect that oil produced in violation of its valid oil and/or gas conservation statutes or any valid rule, order or regulation promulgated thereunder shall be denied access to commerce and providing for stringent penalties for the waste of either oil or gas."

Pennsylvania was slow in implementing the Interstate Compact to Conserve Oil and Gas. It did not adopt a conservation act until 1961.3 The Pennsylvania Oil and Gas Conservation Law was to be administered by a dedicated "commission" and it was clearly a state of the art conservation law for 1961. The act specifically, however, follows the majority of producing states in avoiding granting the Commission any right to "limit the production of oil or gas for the purpose of stabilizing or fixing the price thereof or create or perpetuate monopoly or to promote regimentation, . . ."4 The compacting states especially limited their

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purpose to ". . . conserving oil and gas and preventing the avoidable waste thereof within reasonable limitation."5

The Pennsylvania legislature limited the operation of the Act to formations below the top of the Onondaga formation.6 For the purposes of the current major shale play occurring in Pennsylvania, this fact is critical because the Onondaga lies below the Marcellus shale. The Pennsylvania Oil and Gas Conservation Law, therefore, does not apply to operations in the Marcellus.

The Pennsylvania Act has been rarely used. The author has only been able to identify sixteen proceedings under the Act since its adoption in 1961. Those proceedings were largely limited to Wells drilled into the Oriskany formation. The last of those proceedings was held decades ago. Although it is impossible to tell from a glance at the Pennsylvania statutory reporter, the Oil and Gas Conservation Commission has been disbanded and the authority under the Oil and Gas Conservation Law once entrusted to the Commission is now in the hands of the Pennsylvania Department of Environmental Protection. That agency appears to be less than excited about the potential to be asked to implement this Act.

The Pennsylvania Oil and Gas Conservation Law of 1961 cannot be simply rendered applicable to the Marcellus Shale through a change in the jurisdictional trigger depth. The Act presents several inadequacies that would make such action simply inappropriate:

• The Act is a creature of its time and does not comprehend modern technology or social and political conditions.

• The Act does not comprehend "tight" formations let alone "unconventional" formations such as the shales.

• The Act predated any serious use of hydraulic fracturing and does not comprehend the impact of this technology upon court conservation issues.

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• The Act provides no meaningful spacing regime but rather provides only a uniform lease line set back for all Wells subject to its jurisdiction.

• The Act does not comprehend modern horizontal drilling and the unique spacing and interest integration challenges presented by the modern horizontal well seeking production from unconventional formations.

Pennsylvania presents a unique situation in which the rule of capture is the dominant theory of oil and gas property law. Correlative rights can be argued only to apply under the Oil and Gas Conservation Law if an application under that law for spacing, and possibly interest integration, is made.

The lack of proceedings under the Act also result in a total lack of meaningful case law in Pennsylvania concerning statutory spacing and unitization. There is no guidance concerning how...

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