National news story highlights MWCD oil and gas lease environmental safeguards

November 30, 2012

A big Utica landowner demands safety protections from driller -- and gets them

Published: Wednesday, November 21, 2012

Last year, Gulfport Energy Corp., a front-runner in the race to develop Utica Shale gas in Ohio, agreed to drilling and fracking safety rules on a 6,486-acre site south of Canton. The rules went beyond state regulations that Ohio calls among the most stringent in the nation.

Gulfport was obliged to agree to the terms because the landowner, the Muskingum Watershed Conservancy District, had the heft and bargaining power to insist.

As the state's custodian of recreational lakes prized by people in eastern Ohio, the district has a special interest in safe oil and gas operations on its land. Elsewhere in the state, Ohio officials have the discretion to work with drilling companies like Gulfport in setting well-by-well safeguards designed to prevent gas leaks or chemical contamination of land and water.

The Muskingum District's Gulfport lease goes further, explained Cleveland attorney David Nash, spelling out the requirements for things such as the use of blowout-preventer valves that protect drilling crews from erupting gas or oil.

The district and other large landowners have negotiated protections that go above and beyond what the oil and gas companies propose and what state regulations provide, Nash said. The leases say, "We agree you will also do this, and this and this and this," he said.

And in Ohio, the district's terms have expanded the debate about safety measures needed to eliminate or minimize the risks of drilling and fracking accidents that could threaten public water supplies.

Safety benchmarks or overkill?

Do the Muskingum District terms set new benchmarks for "best practices" for shale gas development, adding important detail and documentation to safeguards? Or do they represent costly overkill that exceeds reasonable precautions as industry and state regulators see it? Or do they codify what happens in most cases anyway?

Further, whatever the safety merits of the Muskingum District's terms, does their specificity add to public confidence that high standards are being met, at a time when shale gas development still faces public fears about possible health and pollution risks?

Nash and colleague Suzanne Fisher-Edwards contend that the explicit provisions in the lease set a higher standard that could be a benchmark for the industry. On behalf of the Muskingum District, Nash and Fisher-Edwards said they negotiated a five-year lease with Gulfport covering acreage surrounding Clendening Lake in eastern Ohio, about 50 miles south of Canton. Gulfport declined to comment on the lease negotiations and results.

The area is dead center in the Utica Shale's "wet gas" play, where developers are looking for "dry" pipeline gas mixed with ethane and other valuable gas liquids. Gulfport's six initial Utica Shale wells appear so prolific, according to the Oklahoma-based company, that it announced plans to spend $225 million next year to drill 50 more wells there. The Utica Shale is a "once-in-a-lifetime plan," Gulfport CEO James Palm said in a teleconference this month.

Nash and Fisher-Edwards pointed to specifics they were able to get into the district's lease with Gulfport. There's language about blowout preventers, storage of fracking liquids and wastewater from drilling and a requirement that new steel be used in well casings to isolate deep fracking zones from aquifers higher up.

Spelling out the rules

In Ohio, a blowout preventer might be required when companies drill in urban areas, or elsewhere, at the discretion of the chief of the Ohio Department of Natural Resources' oil and gas division. The DNR division chief may also decide that blowout preventers are not required on a case-by-case basis.

The DNR permit for Chesapeake Energy Corp.'s Burgett well in Ohio's Carroll County says simply, "blowout preventer required," without further detail.

State regulations "don't specify what type of BOP is required," said Ohio DNR inspector Tom Hill. His division and its inspectors determine what is needed, he said. "That's our call."

Gulfport's lease with Muskingum, on the other hand, requires installation of "two remotely controlled, ram-type blow-out preventers (one equipped with blind rams and the other with pipe rams)." The specific standard replaces inspector discretion.

"Depending on your point of view as a stakeholder, you might be in favor of flexibility by the field inspector or think it's irresponsible. You can argue it both ways," Nash said.

Industry representatives say a single, mandated level of protection doesn't make sense, given the varying conditions that drillers encounter. Sometimes a double set of remote-controlled rams isn't needed, said Andrew Paterson, executive vice president of technical and regulatory affairs for the Marcellus Shale Coalition, which represents the shale gas industry working the Marcellus Shale play centered in Pennsylvania.

Records from drilling in the Marcellus Shale formation indicate that blowout prevention is working, Paterson asserted. "I'm not feeling there is a deficiency there," he said. The Muskingum District regulations might represent "an extra degree of safety. It doesn't imply that other steps are deficient. It just is a more conservative design."

Blowout preventers are tested regularly, said Arthur, the Tulsa consultant. "They work. Could one fail? Yeah. Could two? Probably, at lesser odds." Bolts can fail, too. Steel casing can fail. "You can come up with an unlimited number of things that can happen," he said. So some landowners demand redundancy that improves the safety outlook, but only marginally, he said. "Is it worth it? I don't know."

Operators have no incentive to cut corners on effective safety measures that are required to protect against risks, he said. "They would be destroying their own asset. It wouldn't make sense," Paterson said.

In Ohio, the explicit protections sought and won by the Muskingum District reflect its size and bargaining power. "If landowners have enough acreage as leverage, they can negotiate their own regulatory system inside the lease," Nash said. "You can put best practices in there," Fisher-Edwards added. "If you have 50 to 100 acres, you don't have the leverage to insist on the steps."

The Muskingum District does have unusual leverage. In addition to its underground mineral rights, acquired when the district was created, the district controls vast amounts of excess water that is released through its dams in the fall and winter to manage lake levels.

Muskingum District sold nearly 8 million gallons of water from Clendening Lake to Gulfport earlier this year for fracking operations and has agreed to make additional sales. Meanwhile, it is awaiting results from a U.S. Geological Survey analysis of water availability at several other reservoirs before deciding whether to approve a growing number of requests for water by other drilling companies, said district spokesman Darrin Lautenschleger.

Members of Food & Water Watch and the Freshwater Accountability Project oppose the water sale. Muskingum District has responded by saying the water sales would amount to a fraction of the water released from its lakes as a flood control strategy.

The Gulfport lease provides for a signing bonus of $2,400 per acre on slightly more than 6,000 acres of property at Clendening Lake. It also includes a 16.5 percent share of royalties.

Nash said his firm has worked with oil and gas engineers to find a level of enhanced security for landowners that does not thwart development.

"Do the state and fed regulations meet our clients' goals?" he asked. "To the extent they don't, what can we do consistent with best industry practices that are reasonable to meet the client goals and the goal of the industry partners to get the resource out of the ground? We don't want to ask for pie in the sky, or something that is uneconomic."

Gulfport and other energy companies didn't find the additional lease requirements onerous, "or they wouldn't have signed them," Nash said.

END

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