An Analysis of Unconventional Gas Well Reporting under Pennsylvania’s Act 13; Miscounted gas wells could have cost state millions

Report DEP didn’t count all wells under Act 13 by Rachel Morgan Calkins, January 9, 2013, Ellwood City Ledger
How did Gehman get his numbers? Gehman said the amount of money he estimates is being forfeited by under-reporting the state’s wells was calculated taking into account the price of gas, whether the wells are horizontal or vertical and also taking into account that the impact fees currently enacted through Act 13 ($50,000 for each horizontally drilled well and $10,000 for vertical well) may change. Coming up with the impact fee number per well is a bit more complicated that just a blanket fee for each type of well, he said. “You take the number of wells and multiple that by the ratio of vertical and horizontal wells and multiply that by the price of gas,” he said. What’s a spud, anyway? According to Act 13, a well becomes a spud with the “actual start of drilling of an unconventional well.”

What’s a stripper well? Act 13 says a stripper well is an unconventional well incapable of producing more than 90,000 cubic feet of gas per day during any calendar month, including production from all zones and multilateral well bores at a single well, without regard to whether the production is separately metered.

The Pennsylvania Department of Environ-mental Protection didn’t report all the state’s natural gas wells under Act 13, which could result in the loss of hundreds of millions of dollars, a recent report says. The report estimates 15,300 to 25,100 unconventional gas wells were left off the DEP’s Act 13 report for last year. This means the state, county and municipal governments are forfeiting from $205 million to $303 million in fees in 2012 and $750,000 milllion to $1.85 billion over these wells’ lifetime, says the report, “An Analysis of Unconventional Gas Well Reporting under Pennsylvania’s Act 13 of 2012.”

It was written by Joel Gehman, a professor at the Alberta School of Business at the University of Alberta in Edmonton, Canada; Diego Mastroianni, a doctoral student at Desautels Faculty of Management at McGill University in Montreal, Canada; Angela Grant, a graduate student of Bioresource Engineering in Agricultural and Environmental Sciences at McGill University; and Dror Etzion, a professor in the Desautels Faculty of Management at McGill.

But DEP spokesman John Poister said Wednesday that those wells not reported did not meet the criteria of Act 13. “We are confident that all wells eligible for the fee have been included in the list of data provided to PUC for their response,” Poister said. “The wells he believes should be included do not meet the requirements of the legislation to be considered for the impact fee — they do not come from unconventional formations, were not produced using high-volume hydraulic fracturing, and or do not produce more than 90 mcf/day (thousands of cubic feet per day).”

The two sides appear to be interpreting the law differently. Gehman believes that there are 10 other shale formations that should fall under Act 13’s umbrella as unconventional formations and subsequent impact fees. “With what we believe is an objective interpretation of (Act 13), and based on what we currently know about the geology of Pennsylvania, there are 12 formations that meet the requirements of the act as an unconventional formation,” Gehman said. This number includes both the Utica and Marcellus shale formations, he said. Act 13 defines an unconventional formation as “a geological shale formation existing below the base of the Elk Sandstone or its geologic equivalent stratigraphic interval where natural gas generally cannot be produced at economic flow rates or in economic volumes except by vertical or horizontal well bores stimulated by hydraulic fracture treatments or by using multilateral well bores or other techniques to expose more of the formation to the well bore.”

In its definition of an unconventional formation, Act 13 does not mention the Marcellus or Utica shale formations specifically. Act 13 also required drillers to pay impact fees of $50,000 for each horizontally drilled well and $10,000 for each vertical well. The state collected more than $204.2 million in impact fees. Gehman said that there were 1,524 spud unconventional gas wells omitted from the DEP’s Act 13 report. The rest of the omitted wells came from wells prior to 2002, the report says. These numbers came within 1 percent of data released by the Carnegie Museum of Natural History, which reported 6,503 unconventional wells as permitted, drilled, or producing in 2011, the report said. “What needed to be done was a complete analysis of drilling in Pennsylvania and it’s clear that (the DEP) has not done that or it has not been made public,” Gehman said.

DEP officials say there are a few major factual errors regarding the report’s findings. … “The wells referenced in the report as having been omitted in fact do not meet the basic criteria for the impact fee, and the authors know this. This deliberate misinformation is nothing more than  Gehman also points out in the report that prior to Act 13, Pennsylvania was the only one of the 28 major gas producing states that didn’t impose fees on natural gas drilling. The report also suggests this isn’t the only problem with the regulatory agency. “Rather than an isolated incident, evidence suggests information management is a systemic and recurring problem within the DEP and its predessor agencies,” it says. [Emphasis added]

Miscounted gas wells could have cost state millions by Laura Legere, January 10, 2013, Citizen’s Voice
Pennsylvania governments may have missed out on as much as $303 million in gas well impact fees in 2012 because state regulators undercounted the number of wells covered by the law, according to an article published this month in the journal Environmental Practice.
The Department of Environmental Protection was required by the updated drilling law, known as Act 13, to compile a list of all unconventional gas wells that have been “spud” in the state – the first step of drilling. But in a case of “potentially widespread and systemic omissions,” the department likely left between 15,300 and 25,100 wells off its list because of errors in its own databases and a failure to include early wells drilled deep into rock formations that fit the law’s definition of unconventional wells, researchers at the University of Alberta and McGill University reported in the peer-reviewed paper released late last week.

DEP called the article “fundamentally flawed” in its conclusions and argued against it being published. According to the paper’s authors, the missing wells include more than 1,500 recently spud Marcellus Shale wells the researchers found by comparing five DEP databases that report differing information on the number of wells that have been drilled or inspected or produced waste or gas. The researchers also tallied nearly 9,800 deep wells spud between 1888 and 1991 that pierced the Tully Limestone, a geological formation deeper than shales they said should have triggered the wells’ definition as “unconventional” under the law. And they count about 4,000 wells drilled between 1992 and early 2007 into the Medina Group, a formation they said requires hydraulic fracturing to produce commercial amounts of gas. The authors have identified 15,300 of the wells by name, number and location. Another 9,800 deep wells identified by the state Bureau of Topographic and Geological Survey would also fit the “unconventional” definition, but are considered “missing” from the state’s records, they found.

If all of the known and probable wells identified by the researchers had been levied impact fees in 2012, the state would have collected an additional $303 million – more than double the $204 million the state did collect. In a response to the article, the state disputed the researchers’ interpretations of key terms in the law and argued they ignored its legislative intent and the department’s work to improve the list. A DEP spokesman said the department provided an accurate and complete list of unconventional wells to the state Public Utility Commission, which collects and administers the fee, and the wells the researchers identify as omitted were never subject to the fee. “The authors of this report simply do not understand the criteria for what is and is not eligible for the impact fee, despite having been presented information in the past that clearly explained this to them,” DEP spokesman Kevin Sunday said. “Pennsylvanians are not missing out on any impact fee revenue whatsoever.” The researchers acknowledge their primary goal was less counting the money than highlighting DEP’s “long-standing problem” with information management and offering “rather straightforward” suggestions to address it. [Emphasis added]
THE RESEARCH PAPER: An Analysis of Unconventional Gas Well Reporting under Pennsylvania’s Act 13 of 2012 by Joel Gehman, Diego Mastroianni, Angela Grant and Dror Etzion, Published online: 03 January 2013, Environmental Practice / Volume 14 / Issue 04 / December 2012, pp 262 – 277, Cambridge University Press 2012, DOI:
The authors gratefully acknowledge the financial support of the Social Sciences and Humanities Research Council of Canada (SSHRC Award 410-2009-1259). … Separate from Environmental Practice’s review process, in May 2012 we offered both the Pennsylvania Department of Environmental Protection and the Pennsylvania Public Utility Commission an opportunity to review our findings, but neither agency offered any comments. 

Report Conclusion:
Unconventional shale gas development has become widespread, bringing with it a growing number of concerns.  Critical to untangling these many controversies is better information.  Twenty years ago, the Bureau wrote, “For 125 years oil and gas drillers and producers have had a veritable free hand in Pennsylvania” (Harper and Cozart, 1992, p. 38).  Act 13 of 2012 is simply Pennsylvania’s latest effort to close this gap.  Our analysis of the DEP’s Act 13 reporting suggests that, unfortunately, this “veritable free hand” persists.

Our intention in this article has not been to determine the exact number of unconventional gas well spuds in Pennsylvania, but to assess the extent to which the DEP has fulfilled its Act 13 reporting requirements.  Though clearly more than 4,906 unconventional gas wells were spud by the end of 2011, determining the true number of such wells remains the DEP’s responsibility.  In this regard, we hope that our analysis may prompt the DEP to reconsider its statutory requirements more carefully.  Until these omissions are corrected, the many state, county, and municipal stakeholders impacted by unconventional gas well drilling will not be compensated for the impacts of unconventional gas wells as required by Act 13. [Emphasis added]

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