A bill recently introduced in the state House of Representatives would amend the Oil and Gas Conservation Law to clarify landowner and environmental protections during drilling in the Marcellus Shale.
Rep. Sandra Major (R-Bridgewater Township) sponsored the bill, which would change the law so it consistently applies to Marcellus Shale wells. The bill also excludes production costs from royalty payments and ensures that horizontal drilling does not take place under any properties not controlled by a natural gas lease.
Currently, the Oil and Gas Conservation Law only applies if a driller penetrates the Onondaga Horizon- a geological strata often below the Marcellus Shale- or reaches a depth of 3,800 feet, whichever is deeper.
When the Conservation Law is not in effect (as it rarely is with Marcellus wells), an operator is free to fracture the shale from a well on a leased property and pull gas from fractures that run under a neighboring, non-leased property (this is the "rule of capture"). The operator would not be compelled to pay that neighbor anything for the gas pulled from the well. When the Oil and Gas Conservation Law is in effect, though, the rule of capture no longer applies. Instead, the law regulates the spacing between wells and the size of a "pooled" area of land under which natural gas is produced, so that all affected landowners share the royalties.
The law also determines that royalty owners have a one-eighth interest (or a 12.5 percent royalty) in the gas produced at a well. Under Ms. Major's revisions, the dollar amount of that one-eighth interest has to equal "the current market value of all gas... as measured at the well head when produced," not the value of the gas minus the costs the operator incurs in pulling it from the shale (which is how some operators in the state have interpreted the statute). The revised bill is also careful to note that a landowner can negotiate a royalty that is greater than the mandated 12.5 percent.
The revised bill also requires operators to demonstrate on the permits they file with the Department of Environmental Protection that "any anticipated horizontal drilling shall not be conducted under or through any lands where an oil and gas lease does not exist between a landowner and an operator."
The full text of the bill is here.
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